What do automation and artificial intelligence mean for Africa?

A technician inspects newly moulded bottles at the Guinness pop-up plant in Accra, July 2, 2014. Picture taken July 2, 2014.  To match Insight CONSUMERS-MANUFACTURERS/AFRICA    REUTERS/Francis Kokoroko (GHANA - Tags: BUSINESS) - GM1EA7411EN01

During the last four decades, manufacturers all over the world have outsourced production to countries with lower labor costs. American, European, and Japanese firms moved a lot of their production to developing Asia and Latin America, first helping countries like Malaysia and Chile, then others like China and Mexico, and then others like Vietnam and Bangladesh. Today, Chile and Malaysia are high-income economies, China and Mexico have become upper-middle, and Vietnam and Bangladesh have reached lower-middle-income. Africa’s turn was supposed to be next.

But the latest round of technologies seems to be dealing Africa’s economic prospects a serious blow. Adidas, the German sporting goods company, has established “Speedfactories” in Ansbach in Germany and Atlanta in the U.S., that use computerized knitting, robotic cutting, and 3D printing to produce athletic footwear. Foxconn—the Taiwanese firm known for producing Apple and Samsung products in China’s Jiangsu province—recently replaced 60,000 factory workers with industrial robots. By reducing the importance of wage competitiveness, robots in “smart factories” can completely change what it takes for a place to be competitive in the global market for manufactures. If high-income economies are reshoring production, this could slow down and even reverse the migration of newcomers from Africa in global value chains. The case of China, which is rapidly automating to address declining wage competitiveness, is potentially even more important given recent expectations of an en masse migration of light manufacturing activities to economies with lower labor costs, such as those in Africa.

Not so fast

The opening plenary session at the Centre for the Study of African Economies (CSAE) conference in Oxford this March discussed what automation and artificial intelligence (AI) mean for Africa’s economic prospects (watch online). I highlighted three reasons why the diffusion of robots in higher-income countries does not spell the end of labor-intensive manufacturing-led development in Africa.

First, automation is not happening across the manufacturing sector, and industries characterized by a low intensity of robot use will remain a feasible entry point. This includes a range of commodity-based manufactures as well as labor-intensive tradable goods such as apparel, leather, and footwear.  Recent foreign direct investment (FDI) patterns in apparel and leather products point to the continued migration of economic activity to lower-wage locations. China and Eastern European countries such as Bulgaria, Hungary, and Romania actually experienced a decline in the number of greenfield FDI projects in 2011–15 compared with 2003–07, while Ethiopia, Indonesia, Serbia, and Vietnam experienced increases. FDI may still be migrating from China to lower-middle-income countries in Asia and Africa and from higher- to lower-income countries in the Europe and Central Asia region.

Second, market size also matters for attracting manufacturing FDI, and the size of African markets is increasing. Large emerging economies such as Brazil, India, Indonesia, Mexico, South Africa, and Ethiopia experienced an increase in the number of greenfield FDI projects in the manufacturing sector during 2011–15 relative to 2003–07. This suggests that the consideration of efficiency-seeking FDI notwithstanding, market-seeking FDI linked to demand considerations will likely continue to thrive. And African countries will stand to gain, given their expanding markets.

Third, manufactures are much more important for trade within Africa, which is indicative of opportunities in lower-price, lower-quality market segments. In 2014, the share of all manufactured products in intra-Africa trade, at 43 percent, was roughly double the share of Africa’s exports to all trading partners. Further, most manufacturing industries have seen large increases in their intra-Africa trade shares between 2000 and 2014, thereby underlying the promise of exploiting this market segment. There is the related opportunity serving low-quality, lower-price market segments in lower-income countries outside Africa.

What to do

As automation and AI raise the bar for what it takes to succeed in export-led manufacturing, the feasibility agenda is at the heart of expanding the set of available opportunities. The broad challenges in this feasibility agenda can be represented by competitiveness, capabilities, and connectedness (3Cs). As new laborsaving technologies reduce the importance of low wages in determining costs, African countries will need to meet more demanding ecosystem requirements in terms of infrastructure, logistics and other backbone services, regulatory requirements, trade restrictions, and so on to make export-led manufacturing a viable growth pathway.

This places a premium on the “competitiveness” of the business environment and the “connectedness” to input and output markets. The alternative—using digital technologies to produce traditional goods—has a higher bar too, in terms of information and communication technology (ICT) infrastructure, skills, management practices, regulatory framework for the data ecosystem, and intellectual property rights. This premium on the country’s “capabilities” to harness the digital economy defines the World Bank Group’s Digital Economy for Africa (DE4A) initiative, which places digital connectivity, skills, and entrepreneurship at its core.

Gather more evidence

In sounding a warning and identifying some opportunities, the opening plenary panel at the CSAE conference highlighted the importance of plugging knowledge gaps in theory, empirics, and policy. This includes, first and foremost, crafting better theories of structural transformation. Is export-led manufacturing the only pathway to growth? Or is the conventional process of structural change from agriculture to manufacturing and then services not as relevant as in the past?

On the empirical side of things, there might be much to learn from firm-level data that go beyond sector boundaries. As the line between manufacturing and services is increasingly blurred, do services constitute an increasingly large share of value added and employment for “manufacturing” firms? What constrains technology adoption by firms across business functions in different sectors?

On questions of policy, there is a need to identify regulatory frameworks, which can enable African countries to leverage labor-intensive production processes while unit labor costs remain low relative to the price of automation technologies.

Predicting the pathway of technology and what it means for Africa’s economic prospects is hard. But this plenary panel at the CSAE conference sounded a note of cautious optimism. Evidence that uncovers new insights and distinguishes fact from fiction can help countries prepare better.