Why does Africa’s industrialization matter? Challenges and opportunities?

20/11/2017
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Why does Africa’s industrialization matter? Challenges and opportunities?

The African Development Bank Group (AfDB) will join other organizations to commemorate Africa industrialization day on 20 November 2017.

The objective is to raise awareness on the challenges and opportunities in financing the region’s industrialization, one of the prominent pillars of the Bank’s High5s. It is also an opportunity for the Bank Group to elaborate on how to galvanize support for promoting Africa's industrialization for improved living conditions of Africans.

Africa is a land of opportunity. The continent is well endowed with natural resources necessary for a resource-based industrialization. The continent is sitting on more than US$82 trillion in discovered natural resources, with the potential to contribute US$30 billion a year in government revenues over the next 20 years. Africa also possesses other natural resources – minerals, rivers, forests, fisheries, etc., in vast quantities worth significant amount. The value added of its fisheries and aquaculture alone is estimated to be more than US$24 billion. However, many countries continue to export raw materials with little value addition. For example, Africa exports 69% of the world’s raw cocoa beans but only 16% of ground cocoa, which is typically worth 2-3 times more per ton than raw cocoa. Transforming the agriculture sector in Africa towards agro-allied industrialization could open markets worth more than US$100 billion a year by 2025. Agribusiness can thus be the engine of Africa's structural transformation while creating decent nonagricultural jobs, increasing income, feeding Africa, and alleviating poverty. Therefore, agribusiness can be the engine of Africa's structural transformation while creating decent non-agricultural jobs, increasing income, feeding Africa, and alleviating poverty.

Demand for manufactured goods is growing: Africa recorded the fastest growth in imports of manufactures (141% in absolute terms) with an increase in its share of total world imports by 1 percentage point to 3.2% over 2005–2014. Yet, African economies are remarkably import-dependent for even basic products, ranging from apparel to shoes and electronics.

Infrastructure deficit: Africa faces an acute infrastructure deficit, which are estimated to account for 30% to 60% of productivity losses of firms and 40% to 80% of this is due to the energy sector in half the countries. Poor energy quality imposes additional costs on companies such as idle workers, spoiled materials, lost production, damaged equipment, and restart costs. Between 2010 and 2016 there were on average 8.5 power outages a month, with an average duration of 4.1 hours. The cost of power outages is estimated at 5.4% of annual sales. To deal with these cuts, 51.3% of firms use their own generators for about 13.4% of their electricity consumption, increasing their costs. Preliminary and partial AfDB estimates suggest that Africa’s annual infrastructure investment needs amount to at least US$100 billion.

Investing in human capital: Lack of appropriate skills is one of the main constraints Africa faces for investing in manufacturing activities. The continent boasts only few scientists and engineers in sectors that drive African economic transformation. For example, the share of students in science subjects such as engineering, manufacturing and construction ranges from as low as 3% in Burundi to only 12.8% in Morocco compared with Germany, Austria, Mexico, and Malaysia, all above 20%. By 2060, the African population is expected to reach 1.6 billion, more than 70% of which will be under 30 years of age. This demographic structure can be turned into an economic dividend if this abundant workforce is endowed with the appropriate skills. So, investment in human capital must be a priority for developing countries aspiring to transform the structure of their economies.

Unfavorable business environment: The business environment has improved considerably in recent years in a number of African countries. For example, thanks to consistent reforms, the time needed to start a business came down from 63 days in 2005 to 27 days in 2016, and the cost of business start-up procedures, from 198% of per capita gross national income to 54%. Despite the progress, there is much more to do in regulation, financing, fighting corruption, and securing investments. The business environment can be improved by establishing a single contact point between government and existing or new manufacturing firms.

Inadequate financing for industrial development: Access to affordable credit is one of the most binding constraints in Africa, mainly due to information asymmetries for project profitability and lack of collateral or credit history, underdeveloped financial market, low remittances. In the formal sector, micro, small and medium-sized enterprises face a credit gap in excess of US$ 136 billion. Among other constraining factors, long-term and equity financing is especially rare in Africa. Almost 60% of loans in Africa are short-term and less than 2% of loans are for more than ten years.

Major challenges ahead: bold actions and smart policies needed

Industrialization is pivotal to Africa’s long-term development and broadening and deepening the manufacturing sector will build more resilient economies. Africa is endowed with vast resources – in agriculture, mining, and maritime resources, which if properly harnessed, can stimulate a resource-based industrialization strategy. Industrial development will simultaneously require coordinated actions in various areas of the economy, including the establishment of forward and backward linkages, particularly with the agriculture and mining sectors. Industrial parks and clusters can especially play an important role unleashing Africa’s growth potential. This will require investment in both soft and hard infrastructure, focusing on energy production, transport and ICTs, and improving regulatory environment to stimulate competition.

The Bank’s ‘Industrialize Africa’ represents Africa’s bold vision and ambitious strategy to truly transform the continent. The objective of this industrialization strategy is to facilitate a shift from low to high productivity activities – from agriculture to agro-industries; raw mineral resources to high-value semi-processed/or processed exports. The overarching objective is to help raise industrial GDP by 130% by 2025 (15% per annum) to US$1.72 trillion and drive Africa’s overall GDP from US$ 2.2 trillion to US$ 4.6 trillion. In turn, this will raise GDP per capita growth by 4% per annum. This will require increasing capacity of African firms to compete regionally and globally by building capacity of and increase funding to SMEs. At country level, bold structural reforms are needed to improve the business environment and upgrade labor and entrepreneurship skills as well as production technology.

November 20 was declared Africa Industrialization Day by the 25th Ordinary Session of the Assembly of Heads of State and Government of the Organization of African Unity (OAU), predecessor of the current African Union, in Addis Ababa, Ethiopia, in July 1989. On December 22, 1989, the UN General Assembly also proclaimed this date to be Africa Industrialization Day, first observed on 20 November 1990.

It is a day when African governments and organizations gather to examine various ways to stimulate the industrialization process in Africa. This special day attracts large attention across the world and special seminars, meetings and other types of events are held throughout Africa.

The central theme of this year’s event is “African Industrial Development: A Pre-Condition for an Effective and Sustainable Continental Free Trade Area (CFTA)” (2017)