At his swearing in, the new African Development Bank President Akinwumi Adesina set out an agenda for the economic transformation of the continent. Among the five pillars of that agenda—popularly known as the “high fives”—is one that may have surprised many, especially in the donor community: Industrialize Africa.
Why the surprise? Beyond supporting improvements in the “investment climate”—another name for structural reforms—and pushing the Doing Business agenda, the World Bank and the larger donor community have ignored Africa’s industrialization challenge for more than 20 years.
But more than just being a surprise, President Adesina’s emphasis on industrial development is also timely. After more than two decades of sustained economic expansion, growth in sub-Saharan Africa slowed to 3.4 percent in 2015. The growth slowdown reflects lower commodity prices, declining growth in major trading partners, and tightening borrowing conditions. Things, at least according to the International Monetary Fund, don’t look to be getting much better in 2016. With population growth still about 2.7 percent per year, progress against poverty and growth of the emerging African middle class will slow.
Africa’s pattern of exports makes it particularly vulnerable to commodity price shocks. Fuels, ores, and metals accounted for more than 60 percent of the region’s total exports in 2010-14 compared with 16 percent for manufactured goods. Industrial development—broadly defined to include manufacturing, tradable services, horticulture, and agro-industry—can play a vital role in diversifying the region’s economies. Moreover, there is mounting evidence that there is “something special” about industry. Dani Rodrik, for example, has shown that productivity levels in manufacturing converge to global best practice levels, regardless of policies, geography, or institutions. This “unconditional convergence,” which is not found in agriculture or services, can provide a powerful engine of structural transformation and growth, but its significance depends on the pace of industrialization.
That is bad news for Africa. In 2013, the average share of manufacturing in GDP in sub-Saharan Africa was about 10 percent, equal to the level in the 1970s and half of what would be expected from the region’s level of development. Africa’s share of global manufacturing fell from about 3 percent in 1970 to less than 2 percent in 2013. Manufacturing output per person is about a third of the average for all developing countries. And manufactured exports per person, a key measure of success in global markets, are about 10 percent of the global average for low-income countries.
For President Adesina and his colleagues at the African Development Bank, the challenge is how to achieve the high five. Not much creative thinking has come from other international financial institutions or the bilaterals. In the January 2016 Global Economic Prospects report, the World Bank proposes “creating the conditions for a more competitive manufacturing sector” through “structural reforms…to alleviate domestic impediments to growth [and] a major improvement in providing electricity.” Unfortunately, finding policies to assist Africa to overcome its industrial deficit is not as simple as advocating structural reforms and more electrical power.
Over the past five years the African Development Bank, Brookings, and the United Nations University-World Institute for Development Economics Research have jointly sponsored a multi-year, multi-country research project to understand why there is so little industry in Africa. The results of that research are summarized in two books, Made in Africa: Learning to Compete in Industry and the forthcoming Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia.
Our research offers some new thinking on how Africa can industrialize. A major finding is that, in addition to deficiencies in infrastructure and skills, the absence of three closely related drivers of firm-level productivity—exports, agglomeration, and firm capabilities—help explain Africa’s lack of industrial dynamism (interestingly, the abundance of these drivers account for East Asia’s industrial success).
Thus, the traditional focus of Africa’s “development partners” on the investment climate and regulation is not sufficient to address the industrialization challenge. There needs to be a broader strategy that addresses how to make firms more productive and how to attract more productive firms and a more active state. In Made in Africa we spell out how African governments can help existing firms learn to compete and attract new productive investments by pushing manufactured exports, supporting industrial agglomerations, and building firm capabilities.
President Adesina has shown real leadership in parting ways with the World Bank and most donors by stressing industry as one of the central pillars of his vision for Africa’s transformation. As he approaches his first set of Annual Meetings in Lusaka, he may want to reflect on what more is needed to make that vision a reality.