or most of SSA part of a single trade zone rather than eight non-overlapping zones each of which includes less than half of all African countries.

Undoubtedly, African countries must aggressively pursue industrial opportunities as they materialize – even those of a niche variety - because manufacturing is the established driver of growth and productivity and a fertile source of innovations. However, it is unlikely, even in the best of circumstances, that manufacturing will account for much more than a fifth of GDP and in most African economies; it will likely have a much smaller share. Moreover, if these countries are slow to move up the value chain from processing and assembly type activities into more value adding ones, the contribution of manufacturing would be further attenuated.

The manufacturing sector in the three countries, which are the focus of our study, shares six characteristics (some noted above): (a) already noted is the slow pace of increase in production (e.g. manufacturing output remains below pre-crisis levels in Rwanda as of 2014<sup>76</sup> ), and the role and composition of manufacturing and agribusinesses in the production structure has been shaped by policies followed during colonial times (IGC 2013)<sup>77</sup> ; (b) industry accounts for a minor share of GDP, there is a preponderance of informal activity and a paucity of large firms<sup>78</sup> ; (c) what industry there is tends to specialize in downstream processing and assembly activities and consequently, domestic value added is low; (d) virtually all manufacturing activities are saddled with excess capacity, and capacity utilization frequently averages less than 50 percent<sup>79</sup> in large part because of low levels of working capital, delays in obtaining inputs (few of the raw materials and intermediate inputs required are produced domestically) that are sourced from European countries, China, India, and the Republic of Korea and because a fraction of the installed capacity is comprised of equipment that is obsolete and expensive to operate; (e) most of the production is for the small domestic market that is subject to seasonal fluctuations and any trade is with neighboring countries that also tend to produce similar products; and (f) although African countries have an abundance of labor, adjusted for country effects and firm characteristics, African firms pay a 50 percent wage premium (and unit labor costs are high for small firms also) raising

> 76 The Rwandan manufacturing sector had to be largely rebuilt following the destruction wrought by genocide that swept the country in 1994.

> 77 <u>http://www.theigc.org/project/understanding-rwandas-agribusiness-and-manufacturingsectors/. For example, the production of coffee and pyrethrum in Rwanda was introduced by the</u> Belgians in the 1930s and that of tea in the mid-1950s.

> 78 African firms in every age quintile tend to be smaller than firms in other regions. The vast majority are microenterprises. Iacovone, Ramachandran and Schmidt (2014) <u>https://openknowledge.worldbank.org/handle/10986/16943; Mckenzie (2011) http://siteresources.worldbank.org/DEC/Resources/OxfordPaperDraftv3.pdf. Spreading leftward</u> from a small number of large firms is a long tail of small firms. Many of the larger domestically owned firms are individual or family owned and the owners were originally traders by profession. Large groups and foreign businesses also have a sizable industrial stake especially in Rwanda. (2013) <u>http://www.theigc.org/project/understanding-rwandas-agribusiness-and-manufacturing-sectors/</u> 79 Half of all Rwandan firms interviewed by IGC were operating at below 50 percent capacity. (IGC 2013, p.61) http://www.theigc.org/project/understanding-rwandas-agribusiness-and- <u>manufacturing sectors/</u>

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