Can Africa Industrialize?

INTRODUCTION

In poor countries structural change—the shift of resources from low productivity to high productivity uses—is a key driver of economic growth. In both theory and history industry has been the sector that leads the process of structural change. The East Asian success story is a manufacturing success story. Chile and India have achieved sustained growth through the rapid expansion of agro-industry and services exports, respectively. These are also ‘industrial’ processes; the organization of production and the Capabilities required of the firm have more in common with manufacturing than with traditional agriculture and services.

Africa has failed to industrialize. After a brief period of industrial growth following independence—largely driven by state investment and import substitution—Africa’s industrial sector entered a quarter century of decline. Today on average manufacturing in Africa’s low-income countries is smaller as a percentage of GDP than it was in 1985, and unlike Chile or India, agro-industry and tradable services have not taken up the space created. As a result, Africa has experienced very little growth enhancing structural change. Indeed, there is some evidence that since 1990 labor in Africa has moved from higher to lower productivity employment (McMillan and Rodrik, 2011).

This paper asks a straightforward but difficult question: can Africa industrialize? Put differently, what will it take for the typical low-income economy in Africa to accelerate the shift of labor from low productivity jobs in agriculture and the informal sector to higher productivity jobs in agro-industry, manufacturing or tradable services? Implicit in such questions is the proposition that structural change is needed.

Section 2 argues the case for structural change. Most African countries have developed national visions that call for achieving a middle-income status by about 2025. To realize this vision, Africa’s economies will need profound changes in their economic structures, but there is little evidence that significant structural change has underpinned Africa’s recent growth (Go and Page, 2008). The region’s 1995–2005 growth turnaround—and its recovery from the 2008–2009 global crisis—was driven primarily by new mineral discoveries, rising commodity prices and the recovery of domestic demand (Arbache et al., 2008; Arbache and Page, 2009). It is doubtful whether in the absence of structural change sufficient growth can be sustained for Africa to reach middle-income levels by 2025.

Section 3 sets out the dimensions of Africa’s industrialization challenge. Africa has ‘deindustrialised’ in three important respects: size, diversity and sophistication. While industry—and manufacturing in particular—has declined in Africa over the past quarter of a century the global industrial economy has undergone major changes. Developing countries—especially ‘factory Asia’—have become major players in global manufacturing and services trade. This means that Africa today faces a very different industrialization challenge from that faced by earlier developing country entrants into manufacturing. Section 4 explores the nature of the challenges faced by Africa in breaking into the global industrial economy.

Sections 5 and 6 turn to policy. Section 5 asks what policies are appropriate for Africa’s late industrializes. It reviews the conventional wisdom that Africa’s failure to industrialize is primarily due to its poor investment climate and puts forward some unconventional wisdom. It recommends three interrelated strategic initiatives—tilting towards exports, encouraging agglomerations and building capabilities—as essential complements to investment climate reforms. Section 6 briefly takes up the practice of industrial policy and Section 7 concludes.

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