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The demographic boom and urbanization in West Africa, coupled with growing demand for more inclusive growth, are key drivers of economic transformation in the region. Natural resources exploitation is no longer sufficient in order to meet employment and social inclusion expectations, particularly amongst youth. On the back of such pressure, governments are compelled to foster economic diversification centred on job-creating sectors likely to entail human development. In order to achieve the latter, industrialization, in its manufacturing dimension, is one of the ways forward as detailed in Goal 9 of the Sustainable Development Goals adopted by the United Nations General Assembly in September 2015. In the same vein, the new AfDB President, Akinwumi Adesina, set down industrialization as one of his High Five priorities for Africa.
Industrializing West Africa is a significant challenge. The production base of West African countries is globally weak, characterized by obsolete capital and facilities, and the region is one of the least integrated into the global value chains (GVCs), particularly for processing activities as highlighted in the 2014 African Economic Outlook. This situation is a consequence of the industrial crisis that followed the tariff barriers dismantlement from the 1980s, and the wars and conflicts that occurred in several countries in the region.
In 2014, the rebasing of Nigerian GDP revealed that the country was actually experiencing an industrial renewal. With the new computations, the share of manufacturing industries in GDP sharply increased from 2.4% in 2008 to 9% in 2015. Given the predominance of the Nigerian economy in the West African region, these recent developments reflect an increased contribution of non-extractive industries in the entire region. With Nigeria, the share of manufacturing industry in the regional GDP increased from 5.9% in 2005 to nearly 9% in 2015. However, when excluding Nigeria, that share decreased from 11.2 % to 8.5% over the same period. In other words, the rest of the region is experiencing an industrial decline (see chart below).
More specifically, this trend is less one of deindustrialization than an insufficiently rapid industrialization with regards to the overall growth of economies. Indeed, by volume, the share of industrial value-added has been increasing in the region, from 12 billion in 2005 to nearly 20 billion in 2015 (2000 constant prices). However, apart from Nigeria, where GDP rebasing reversed the trend, industrial growth is much lower than that of other sectors. Without Nigeria, the manufacturing sector in West Africa recorded an average annual growth of only 2%, compared to an overall economic growth of 5% of GDP. In comparison, the services sector recorded an average annual growth of 12%, driven mainly by trade, transportation, telecommunications and financial services.
The boom in services (of which contribution to the regional GDP increased from 29.3% in 2005 to 51.6% in 2015), coupled with the importance of the agricultural sector (22.6% of regional GDP in 2015), has resulted in an imbalance in the structure of the regional economy where manufacturing can be seen as the missing link between agricultural and services activities. This translates into a strong external dependence for manufactured goods, which represent on average 46% of the West African imports according to WTO (2015). The trade balance for these goods reports a wide deficit on a regional scale (see chart below), which penalizes not only economies but importantly the people, who shoulder the costs of importing consumer goods – therefore paving the way to the expansion of poor quality and low cost products in the regional markets.
In addition to narrowing its trade deficit, industrialization would be beneficial to the region for several reasons. First, economic diversification would help consolidate the economies within the region, which remain vulnerable to commodity price volatility. Second, low productive capacities deprive the region of spill-overs resulting from industrial development, such as jobs and enterprises creation, increased foreign investment, transformation of the informal sector, technology dissemination, and increased exports. For now, the lack of manufacturing industries leads to significant losses, as shown with the case of cocoa: West Africa produces and exports 65% of cocoa beans in the world, but because it does not process it into chocolate and only garners between 3.5% and 6% of the final price of a chocolate bar.
To reverse this trend, countries of the region need to remove the obstacles to industrialization as well as domestic and international investments, including the lack of transportation and logistics infrastructures, industrial facilities obsolescence, energy shortages, inadequately qualified workforce for industrial jobs, lack of access to finance, and uncompetitive business environment. They must build together a productive space and a sizable regional market through common policies focused on standard convergence, free circulation of goods and persons, financial integration, and human capital formation. These must be designed so as to strategically position the region within the global industrial landscape, which offers numerous opportunities but is ruled by more and more complex determinants of competitiveness.
Some of the industrial policy options available for the region will be discussed in the next blog post.