Light Manufacturing in Africa
GRIPS PRESENTATION
Hinh T. Dinh
The World Bank
March 7, 2014

Outline Why industrialization
 Scope of study
 Approach
 Main findings

 The six major constraints
 Illustration with the Ethiopia study
 How East Asian countries have resolved the constraints

 Policy lessons

2

Why industrialization?
 Fastest way to raise per capita income
 No country in the world has become an advanced economy
without going through industrialization, especially the productionof light manufacturing
 Even the resource-based countries need light manufacturing tocreate jobs and prosperity

3How is Africa’s performance inindustrialization?
• Africa’s GDP grew 5.2% per year and per capita income grew at
2% per year
• Unsustainable growth arises mainly from commodity exports,
manufacturing has declined to <1%• Simple, labor-intensive manufacturing offers a viable growthpath• Timing is good because China’s climbing labor costs are pricing
China out of low-end manufactured goods

4Scope of Study
Case studies: Ethiopia, Tanzania, Zambia
China as a benchmark; Vietnam as a comparator

apparelmetal products

leather products5wood products

agribusinessApproach
Methods:
 World Bank Enterprise Surveys
 Qualitative surveys
 Quantitative surveys
 Comparative value
chain analysis
 Kaizen study

http://econ.worldbank.org/africamanufacturing6

Main Findings• Africa does have the potential to create millions of productive jobs:
 Growing labor cost advantage
 Natural resource advantage
 Privileged access to high-income markets for exports
 Growing domestic and regional markets• Current structure of light manufacturing in Ethiopia, Tanzania
and Zambia:
 Few medium or large formal firms; vast number of small, lowproductivity informal firms
 Need to improve productivity of both small and large firms

7• Vicious circle of pervasive poverty and low industrialization:
 Big push model.
 Even under the most optimistic scenarios, most African countries
could only meet the more modest targets in infrastructure needs
after 20-30 years.
 Africa’s infrastructure deficit is huge because of poverty, but also
because of the continent’s characteristics, including low
population density, low rates of urbanization, the large number oflandlocked countries, and the numerous small economies.
• Need to break out of the vicious circle through a targeted
approach8

The Six Major Challenges
At a broad level, six binding constraints to light manufacturing emerge:

input cost & quality

industrial land

financetrade logistics

entrepreneurial skills

worker skills

9The Constraints
Vary by country, by sector, and by firm size, so policies toaddress these constraints have to be specific Need to target policies to remove specific constraints in specific sectors
 Unlike previous studies, this study points to a small, specific, set of key
constraints
 Narrowing analysis can make the reform agenda more manageable

10Constraints in Ethiopia
By Size of Firm, Sector, and Importance
Firm

Input industries

LandFinance

Entrepreneurial
skillsWorker skills

Smaller

Important

CriticalCritical

Important

Important

Large

Important

Smaller

Critical

Large

Critical

Smaller

Critical

Important

Important

Important

Important

Large

Critical

Important

Important

Important

Important

Smaller

Critical

Important

Important

Important

Important

Large

Critical

Important

Important

Important

Important

Smaller

CriticalCriticalCriticalImportant

Large

CriticalCritical

ImportantApparelLeather products

Wood products

Metal products

Important
CriticalCriticalCritical

Important
Important

AgribusinessNote: Blank cells are not a priority.
11

Trade Logistics

Important

The Leather Industry in Ethiopia• Employs 8,000 workers with $8 million in exports• Second largest livestock population in Africa• Suffers shortage of quality processed leather due to: Poor disease control

 Lack of quality processing of raw hides and skins
 Trade policy on processed leather• Among the solutions: Treat ectoparasites
 Technical assistance (Ramsay Shoes) Allow the import and export of leather

12Policy Implications
Because the binding constraints vary by country, by sector,and by firm size, policymakers need to: Identify, prioritize, and remove the most serious constraints
 Target policies selectively, in line with comparative advantage
and capabilities Use a range of policies
 Start small Remember that successbreeds success13

How East Asian countries have resolved thebinding constraints• General solutions: industrial parks, industrial clusters, andtrading companies• Specific solutions: for inputs, through trade reforms; for land,through industrial parks; for finance, through networks andstarting small

14

Policy lessons
 Creating a supportive environment for manufacturing Filling knowledge and financial gaps through foreign direct
investment (FDI) and networks
 Using substitution policies and sequencing
 Starting small and building gradually Establishing islands of success by keeping targeted policies
selective and within a country’s limited resources15

Supportive environment• Public endorsement of private sector initiatives• Tailoring support to the business life cycle and backing
winners: support the private sector• Foster competition• Maintain conducive macroeconomic and trade policies• Neither the private sector nor the public sector can drive theprocess independently: success requires public-private
cooperation

16

Filling knowledge and financial gaps
through FDI and networks• The role of FDI is key not only to supplement domestic
savings, but to provide the expertise, technology, and ideas.
Both FDI and networks play a fundamental role in providing
this knowledge• In general, networks of family and friends allow start-ups tobegin production without funding from the formal financial
sector17

Using substitution policies and sequencing• Industrial parks, industrial clusters, and trading companies
are policy innovations that substitute for first best policies
actually work. Bonded warehouses can offset the difficulties
surrounding the availability of inputs and logistics.
• In most African countries, industrialization begins with theproduction of final goods in the light manufacturing sector
because of the labor-intensity and low-skill requirements.
Later, after firms have established themselves in the markets
for final goods, the focus can shift from final goods tointermediate goods – which call for more capital and greater
skills – linked to the production of the final goods, thus
extending the supply chain.
• Sequencing of trade reforms is important, as the case ofZambia textiles showed.
18

Starting small and building gradually•Starting small and simple works well in low-incomeenvironments. The development of China’s light manufacturing
clusters illustrates the feasibility of a trajectory that begins withthe assembly of simple final products in home workshops.
•Ethiopia’s cut flower industry began on 7 hectares in 2000. The
business turned an immediate profit, and, within two years, thegovernment was seeking to aid expansion. Access to additional
land and finance, tax incentives, and duty-free imports led tothe development of 800 hectares by 2007.

19

Establishing islands of success Production and exports of light manufacturing canexpand without first resolving all the problems of adeveloping country This approach allows governments to design concrete
packages of specific, feasible, and inexpensive policies tojump-start industrialization
 The World Bank’s Light Manufacturing in Africa Project
has applied this targeted approach to Ethiopia, Tanzania,and Zambia.

THANK YOU
http://econ.worldbank.org/africamanufacturing
20