Does industrialisation matter to the well-being of Africans?

by Francis Mulangu

The notion that African countries should produce goods locally rather than import them emerged from the turmoil of the COVID-19 pandemic.^[1] Policymakers in sub-Saharan Africa (SSA) attempted a wide range of responses to the crisis. These policy measures included subsidising economic activities, offering state guarantees, establishing mandates, and introducing national controls to restrict production or trade of critical health products, to name a few. These stop-gap responses to the crisis raise concerns among observers familiar with Africa’s history with big government programs under the import substitution policies implemented after independence.^[2]

Past experiences suggest that the safest course to efficient market allocation is to minimise policy interference as much as possible. However, some experts campaign for government intervention, especially in response to extreme events such as the ongoing pandemic. They worry that if left to self-correct without government intervention, the crisis will undo the past decade of progress in poverty reduction.^[3] This debate returns the conversation to the core question of the correct relationships among industrial policy, industrialisation, and the population’s well-being.

Industrialisation is a complex development process that involves multiple sectors and many actors. Ideally, it results from an effectively implemented industrial policy, broadly defined as a set of policies pursued by a government with the explicit goal of promoting the expansion, technological upgrading, or international competitiveness of a targeted group of economic activities (Ansu, 2013).^[4] The appropriate industrial policy depends partly on the market imperfections at hand. In Latin America, for example, it took the form of import-substituting industrialisation (ISI), closing domestic markets to international competition. In South Korea and Taiwan, it took the form of incentives to induce export industries’ development. The logic of Rodrik’s (2007)^[5] argument for this variation in policy approach is that one size does not fit all. A successful industrial policy must fit into the specific context or institutions of a country.

SSA experienced three important industrial policy regimes. After achieving independence in the 1960s, many African countries mimicked Latin America by adopting industrial policies based on ISI. By the beginning of the 1980s, severe balance-of-payments problems made sustaining the ISI strategy challenging to nearly every SSA country that attempted it. Country after country turned for help to the International Monetary Fund (IMF) and the World Bank. Such assistance was often contingent on the recipient’s adoption of macroeconomic stabilisation programs with the IMF and structural reform programs with the World Bank. Often referred to as “Structural Adjustment Programs” (SAPs), these joint programs typically shared the following features: fiscal adjustment (to reduce budgetary deficits); exchange rate devaluation; trade (particularly import) liberalisation; privatisation of state-owned enterprises; and reduced government involvement in the production of or support to select economic activities and actors. As with the ISI strategy, outcomes of the SAPs were disappointing (Ansu 2013).^[6]

Recently, a new state-private sector partnership model in industrial policy emerged in the form of “market-oriented industrial policy.” Interpreted broadly, this is a set of guidelines that promote the efficient production and export of a diverse range of technologically upgraded goods and services. These measures focus on a range of sectors (ATR 2014; Whitfield and Buur 2014).^{[7] [8]} This new industrial policy aims for balance in the active collaboration between the state and the private sector. The state’s critical roles in such a partnership are maintaining macroeconomic stability while facilitating the private sector’s efforts to become internationally competitive. As an example, this latter role includes managing subsidies to firms engaged in global rivalries for market share.

Despite this rich history of changes in industrial policies in Africa, we do not know much about the impact of industrialisation across the three industrial policy regimes on Africans’ well-being. A recent report published by the United Nations Industrial Development Organization (UNIDO) demonstrates that industrialisation does improve people’s well-being across the world. The report correlated manufacturing value added per capita (MVA) and the competitive industrial performance index (CIP) against a series of well-being indicators. This paper compares MVA, CIP, and manufacturing outputs as a share of GDP against poverty rates from 1970 to date. The results of these correlations provide the basis for a call to action for potential investors in Africa. Before presenting this, the paper will discuss the three industrial policy regimes in more detail.

History of Industrial Policies in Africa

Africa implemented three industrial policy regimes over the past 50 years. From the 1960s to the early 1980s, governments in many Sub-Saharan countries pursued overtly state-led development under ISI, often regarding markets and private businesses with suspicion and at times trying to suppress them or simply nationalise them. In the 1980s, the pendulum swung to the other extreme. The SAP era cast the state role as an impediment to economic efficiency and growth. The goal was to roll the state back and give room to markets and businesses. Ideally, the unshackled private sector would then propel growth and structural change. The state would confine itself to setting the rules of the game, acting as an impartial umpire and supplying public goods such as education and health care. Neither the ISI nor SAP approach transformed Africa’s economies. In a search for new policy approaches, many Sub-Saharan countries now attempt to occupy a middle ground between the two previous industrial policies. Over the past decade, many governments that adopted a market-oriented industrial policy also turned to a new state-private sector partnership model.

State-Led Import Substitution (beginning in the 1960s)

Primary products dominated Sub-Saharan Africa’s exports in the wake of independence. Most exports went to former metropolis countries in Europe. Export activity in the early 1960s focused on a small number of products, mainly crops and minerals.  The region was thus extremely vulnerable to global price volatilities and crises in the former metropolises, with which they maintained strong trade relations.

Latin America’s success with import substitution motivated newly independent African governments to emulate these industrial policies. Given the desperate need to accelerate poverty reduction and transform their economic base from agriculture to industry, many saw import substitution as the most viable policy option. ISI sought to expand and diversify production by replacing an obsolete export structure based on farming and extraction with import substitution.^[9]

ISI policies required the domestic production of many goods that were previously imported. This shift addressed adverse effects from the declining terms of trade and the rising disequilibrium in the balance of payments. Also, shifting the export structure from primary goods to higher-priced goods with lower demand elasticity would encourage foreign investment and bring the new technologies needed to diversify industrial production. ISI would re-orient African economies outwards, expand their export lists, and provide a pathway for them to compete in international manufactured goods markets.^[10]

The ISI period led to the nationalisations of some foreign businesses. Nationalisation reflected emerging dissatisfaction with foreign-owned companies that repatriated profits to their countries of origin instead of reinvesting them locally. The few local jobs created by those businesses was a related sore point. An ideological shift by Tanzania, Zambia, Ghana, and others from the mercantilist and private sector-oriented regimes of the former colonial powers towards a socialist orientation was also an essential factor (Forrest, 1982; Gulhati & Sekhar, 1982; Coulson, 1982).^[11]

Ghai (1991) and Paulson and Gavin (1999) observe that the nationalisation wave led Governments to restructure relationships between public and private domestic capital. They encouraged the latter to participate in forming parastatals with the State.^{[12] [13]} This trend, combined with sentiments to reject management by foreigners, stimulated increased participation by the local population in managing businesses even in Kenya and the Ivory Coast, which had more capitalist orientations.

Structural Adjustment Programs (beginning in the 1980s)

Much ink has been spilt to describe Africa’s experience with SAPs. ISI required capital investment. In most cases, this led to an increasing debt burden. Facing high debt servicing costs that dominated government budgets, many African countries turned to the IMF and the World Bank. In return for loans, these institutions demanded the implementation of free-market programs and policies that undid much of the good achieved by governments during the ISI policy era.

SAP programs involved three main intervention phases. The first rested on policies designed to create economic stability by controlling inflation and reducing government budget deficits. The second phase was the reform of trade and exchange-rate policies to integrate the country into the global economy. These policies lifted state restrictions on imports and exports established during the ISI era and often included currency devaluation. The final phase allowed market forces to operate freely. This required removing subsidies and state controls and privatising the parastatals created during the ISI era.

By the late 1990s, it was quite clear that the results of the SAPs were far from optimal. Increasing criticism led to a change in approach to shift the focus toward poverty reduction and to complement the strategic focus on the private sector by bringing developing-country governments and civil society on board.^[15]

Market-oriented Industrial Policy

Current industrial policies in Africa seek to balance state and private sector interests in promoting economic development. The state provides vision and leadership in consultation with other stakeholders. A transformational economic strategy will provide a business-friendly environment and enable the private sector to access new technologies. Such a policy will need to provide access to new export markets for the products and services needed to become internationally competitive. To achieve this goal, the state must support an institutional environment that nurtures entrepreneurship. State macroeconomic management needs to avoid high inflation and public debt and manage exchange rates to keep exports competitive.

Most African countries seek to apply this new form of industrial policy by adapting it to each country’s history, political system, and institutions and the specific economic challenges and opportunities they face. For any country, the balance will shift over time with changes in the underlying conditions. For example, the ongoing COVID-19 pandemic influenced some African governments to implement industrial policies that mimic their earlier ISI strategy.

Relationship between Industrialisation and Well-being

Manufacturing in Africa

Africa’s economic growth is driven by the resource sector and services today. Economies have experienced growth rates of up to 3.4% per annum over the past ten years, before COVID, benefiting from strong growth in the services sector and the discovery and production of oil and gas in traditionally non-oil producing countries such as Ghana and Cote D’Ivoire. Despite the success of specific sectors of the economy, the manufacturing industry has struggled to compete in the regional and global markets. Figure 1 illustrates the decline of African manufacturing since the early 1990s, accompanied by the growth in the services sector.

Figure 1:  

Manufacturing in Africa is mostly private, smaller in size than ten years ago and contributes less to growth than previously. Most products are for local consumption. Mining, light manufacturing, food processing, and cement are the most significant of Africa’s manufacturing activities. Food and beverages production, textiles, chemicals and pharmaceuticals, and processing of metals and wood products occupy the next tier. Recently, a relatively small glass-making industry emerged.

Africa has attracted manufacturing FDI over the past years. Table 1 maps manufacturing FDI location based on a group of 200 companies selected from a survey of companies from the 2012 Industry Week 1000, an annual ranking of the 1,000 largest public global manufacturers based on revenue. The sample is biased toward large multinational corporations, and likely misses the many medium-size companies now beginning to move to Africa. It shows South Africa as the largest recipient of manufacturing FDIs, and chemicals as the dominant manufacturing FDI in Africa.

Table 1: FDI manufacturing matrix

Industrialisation and manufacturing are often an outcome of industrial policies. As detailed earlier, Africa saw three industrial policy regimes over the past five decades. To compare their impact, we examine the growth of GDP, CIP, and MVA in manufacturing across these policy regimes.

Table 2: MVA per capita, CIP, and Manufacturing GDP

MVA per capita remained low during the first two industrial policies regimes, as illustrated in Table 2. It remained between 20.19 and 36.77 for more than 40 years. However, this metric shot up during the most recent industrial policy regime. MVA per capita in Africa is now at its highest level, at 160.76. However, CIP and manufacturing share of GDP remained roughly constant across all three industrial policy regimes, revealing that Africa’s ability to produce and export manufactured goods competitively is little changed. 

Industrial development and well-being of Africans

The poverty rate serves as our primary measure of well-being. Industrial growth can reduce poverty both through value addition and the creation of employment opportunities. Manufacturing creates jobs that pay higher wages than primary production, such as agriculture. Africa made substantial progress in reducing extreme poverty in recent years, with the share of Africans living on less than US$1.90 a day in 2011 purchasing power parity (PPP) terms declining from 54 per cent in 1990 to 41 per cent in 2015 (Beagle et al. 2019).^[19] Unfortunately, poverty reduction in the rest of the low- and middle-income world during 1990–2015 was faster—and population growth was lower in both East and South Asia. As a result, world poverty increasingly focuses on Africa. About three in five of the world’s poor now live in Africa—up from 15 per cent in 1990.^[20]

Figure 2:  

Figure 2 illustrates the relationship between manufacturing GDP and the poverty rate between 1981 and 2018. We do not have value-added manufacturing data prior to 1980. For this reason, this analysis will omit ISI discussions. During SAP, we note a negative relationship between manufacturing GDP and the poverty rate. The poverty rate grew rapidly during the SAP period, partly due to the IMF-led dismantling of many social protection programs. Manufacturing value added was constant during the 1980s but slid in the 1990s after governments shut down many parastatal manufacturing firms due to their inefficiencies. As inefficient public manufacturing firms closed, many African countries became less industrialised. But under market-oriented policies after 2000, the relationship between manufacturing GDP and poverty is positive. Manufacturing value added continued to shrink along with poverty rates until recently. Manufacturing value added has started to grow again since 2013. This growth is driven mainly by the boom in the construction industry.

Figure 3:  

Figure 3 compares manufacturing value-added (MVA) per capita to poverty rates, providing a clear picture. MVA per capita changed little in the SAPs era but multiplied during the market-oriented era. The rapid growth of MVA per capita during the market-oriented era corresponds with decreased poverty compared to the SAP era. Note that CIP did not vary much over the period.

Figure 4: 

MVA and manufacturing data for Africa before 1980 is limited. Our estimates for the ISI era in figures 4 are an average of data from various UNIDO publications. We conclude that the SAP period had the highest poverty rate and manufacturing GDP of all three. But the MVA per capita, which is the most relevant measure of industrialisation, is highest in the current market-oriented era. Also, the poverty rate is the lowest in the current era. We conclude that market-oriented industrial policy performed the best in ensuring that industrialisation leads to Africans’ well-being. This policy regime is associated with high MVA per capita and low poverty rates. In contrast, ISI policies reflect low performance in MVA and manufacturing GDP, with moderate poverty rates.

Conclusion and implications

Most development economists view a robust manufacturing sector as a path to economic growth and development. However, most African countries have limited factory capacity. This narrow industrial base represents a missed opportunity for economic transformation and quality employment generation to alleviate poverty. Therefore, countries such as Uganda take Churchill’s “never waste a good crisis” quote to heart.   Announcing a lockdown in March 2020, Uganda’s President Yoweri Museveni expressed his hope that the crisis would help build manufacturing capacity, rather than “turning our market into a dumping point for foreign goods”.^[21] Critics are quick to point out that the manufacturing boom following African implementation of ISI policies in the 1970s did not last. We argue that Africa is not attempting to repeat this era, nor should it.

Instead, we see an emergent industrial policy dynamic that motivates governments to strike the right balance between the state and the private sector in promoting economic development. Governments seek to provide leadership in setting a coherent national economic transformation vision and formulating strategy in consultation with the private sector and other key stakeholders. To achieve this, many governments set up offices to form private-public partnerships. Current tendencies to adopt measures similar to ISI do not signal a return to the ISI era. Instead, they are a government response to market conditions created by the pandemic.

The numbers also reveal that market-oriented industrial policy is good both for promoting industrialisation and for the well-being of Africans. Our analysis reveals that MVA per capita is at its highest level today, far higher than under the previous two industrial policies. The poverty rate is at its lowest level today. The time is ripe for industrial firms considering entry to the African market, with more African governments seeking investors in the manufacturing sector. Today’s African policymaker understands that manufacturing is positively associated with well-being.

What does this mean for potential investors?

An African industrial revolution is underway as manufacturers ramp up the production of everything from processed food to automobiles (Leke and Signe, 2020).  Figures 2 and 3 demonstrate how both MVA per capita and manufacturing value-added have grown since early 2017. This growth corresponds with the trend for African governments to create a shared vision and plans to facilitate private sector investment. For example, Kenya’s vision 2030 seeks to “transform Kenya into a newly industrialising, middle-income country”. To accelerate this goal’s attainment, Kenya’s President initiated the “Big 4 agenda.” One of its objectives was to increase Kenya’s Manufacturing GDP from its current 9.2% to 15% by 2022. Many African countries developed similar blueprints to help speed industrialisation. Uganda Vision 2040 and Botswana Vision 2036 are additional examples. All these visions rest on the principles outlined under the market-oriented industrial policy, with governments pursuing medium-term strategies to encourage private investment in manufacturing.

To underscore their intentions, African governments have taken better control of core functions. Chief among these are sound macroeconomic management to avoid high inflation and excessive public borrowing; policies that encourage innovation and investment; and an exchange rate that keeps export competitive. Except for rising debt in a few countries, macroeconomic stability has become the norm is many politically stable Sub-Saharan African countries.

We should not pretend that Sub-Saharan Africa is an easy place to do business. The fast-growing demand for manufactured products amid the growing middle class requires businesses to draw their Africa strategy carefully. This task will not be easy: the environment features geographic complexities, huge infrastructure deficits, and relatively high political and economic volatilities. 

Potential investors need to learn from businesses that have succeeded in Africa before developing their business strategy to take advantage of government incentives. In a recent book by Leke et al. (2018)^[22] drawn from over three thousand McKinsey consulting engagement across Africa over the past 20 years, the authors developed a strategic guide for prospective investors. The points below reflect the McKinsey findings. 

Investors must map their Africa Strategy.  Investors need to set clear aspirations to guide their entrance and expansion strategy, prioritise markets that matter the most for their business, define how they will attain scale, and identify the ecosystem they need to join. A notable example is that of Indomie in Nigeria and its expansion in Africa. Indomie is a brand of instant noodle produced by the Indonesian company Indofood. When Indomie arrived in Nigeria in the 1980s, consumers received the instant noodle with apprehension and the market for instant noodles was nonexistent. Heavy marketing to identify the brand as a better and affordable alternative to fill the space between a light snack and a solid meal for children paid off, and those kids who grew up eating Indomie became adults that were loyal to the brand. Today, Indomie controls more than 70% of a USD200 million market and has expanded to many parts of Africa.

Investors must recognise Africa’s uniqueness and therefore innovate. This task will require creating products and services that fulfil Africa’s unmet needs; rethinking business models to engage with African consumers truly; getting lean to drive down cost and price points, and harnessing technology to unleash the next wave of innovation. Despite its growing middle class, Africa’s purchasing power remains low. Therefore, innovating products to meet the needs of all income levels is an essential and perhaps unique value proposition for Africa today. In the rural power distribution industry, “pay as you go” options allow subscribers to pay the often-large enrolment and setup fees over an extended period. Such innovative payment options allowed businesses to cater to all classes regardless of their income level.  

Build resilience for the long term. An investor must take a long-term view and ride out short-term volatility; diversify by building a balanced portfolio across countries or sectors; integrate up and down the value chain, and understand the local context and claim a place at the table with governments.  The example of multinational brewing and beverage companies such as the makers of Heineken are examples of firms that invested for the long term and became household names. On the other hand, South African supermarket Shoprite’s early exit from Kenya and Nigeria is perhaps a counterexample of strategic unwillingness to ride out short term volatilities.

Unleash Africa’s talent. Investors need to find smart ways to build vocational skills among entry-level and frontline workers; create robust internal talent-development processes to grow talent within, and harness the power of inclusion. Today Africa desperately needs the skills produced from vocational schools than those from traditional schools/universities. Unfortunately, governments have been slow in supplying vocational training to help meet industry needs for skills.  To fill the gap, private actors have come together to create training centres. A useful example is the vocational training school financed by the Burkina Faso chamber of commerce and industry. This training centre is now a breeding ground for industrial firms to source qualified engineers and technical experts.