Below is a viewpoint from Chapter 3 of the Foresight Africa 2019 report, which explores six overarching themes on the triumphs of the past years as well as strategies to tackle the remaining obstacles for Africa. Read the full chapter on harnessing Africa's youth dividend.
Since the 1970s, China has emerged as the main hub of global manufacturing. Production from early-industrialized countries—like European countries and the United States—has increasingly been relocated to China to take advantage of the enormous size of China’s low-wage labor force as well as economies of scale in production and transport. China’s manufacturing boom is still unbroken—growing almost sixfold between 2004 and 2017 (from $625 billion to $3,591 billion) and reaching one-quarter of the world’s manufacturing value-added (per UNIDO database).
Head, Transformation of Economic and Social Systems Programme - German Development Institute
Yet, China’s manufacturing industry is changing. As real wages increased by around 10 percent annually between 2005 and 2014, the skills base improved and internal demand became a major driver of industrial development. China is now moving from light manufacturing for exports toward diversification and higher technology.
For many years, China was so competitive in light manufacturing—garments, shoes, toys, and electronics assembly, for example—that very few other countries managed to compete in such labor-intensive industries. However, this competitive advantage is now eroding, as industrial labor costs are skyrocketing. In fact, Chinese garment and footwear firms see rising labor costs as their main challenge. This could offer great opportunities for other developing regions, notably Africa, which has labor costs that are lower than China’s. Justin Lin, the World Bank’s former chief economist, calculated that if only 1 percent of China’s production of apparel was shifted to Africa “it would boost African production and exports of apparel by 47 percent. A 5 percent shift of Chinese export-related investments in the industry could translate into $5.4 billion in additional exports—a 233 percent increase.”
To take advantage of this shift, Ethiopia started an ambitious industrial parks development program to provide the infrastructure and incentives for investors in light-manufacturing industries. Four parks are already operational, with many others in the pipeline. By 2020, Ethiopia intends to have built 30 industrial parks. So far, parks have successfully attracted foreign investment. Official sources say about 28,000 jobs have been created so far.
Whether this is the beginning of a large wave of industry relocation from China to Africa, however, is far from clear. There are three reasons for skepticism:
First, labor costs in most African countries are not low (Ethiopia being one of the exceptions), especially when looking at unit labor costs. Various Asian countries undercut African unit labor costs.
Second, African countries rank low on a number of other factors that influence investment, such as the overall cost of doing business affected by the quality of roads and ports, the reliability of electricity infrastructure, the degree of political stability, and the level of excessive bureaucracy and corruption. For example, in Ethiopia, high labor turnover and public protests are already challenging the success of the new export industries.
Third, most light manufacturing jobs are likely to be substituted by machines in the near future. Robots are nowadays able to produce garments and other products that could not be fully automated a few years ago. Not everything that is technically feasible, however, is also cost-competitive; but with technological progress and scale economies in deployment, costs of robots are decreasing rapidly. In a decade or so, unit costs from fully automated factories will probably fall below those from traditional labor-intensive manufacturing. Two recent surveys suggest that the vast majority of Chinese garment and other light industry firms prefer to invest in technology upgrades at home or to close down rather than to relocate abroad.
Yet, about 10 percent of firms do see relocation abroad as an option. Even if most of them prefer Asian countries, following Lin’s argument, the remaining small share of Chinese firms can make a big difference to Africa. African policymakers are, therefore, well advised to closely observe the Ethiopian experiment as well as the ongoing trends in factory automation and, above all, undertake steadfast reforms to reduce the cost of doing business.