Light Manufacturing in AfricaTargeted Policies to Enhance Private Investment and Create Jobs Hinh

T. Dinh, Vincent Palmade, Vandana Chandra and Frances Cossar

Roundtable on Industrial Policy, Pretoria, South Africa, July 3- 4, 2012

Vandana Chandra (World Bank)

African economic performance at a turning point

• African GDP grew 5.2% per year and PCI grew at 2% per year (2001 – 2010)

• Unsustainable growth mainly from commodity exports, manufacturing has declined to <1%

• Simple, labor intensive manufacturing offers a viable growth path

• Timing is perfect as real wages rise in China and enterprises seek to move production elsewhere.

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Level of Industrialization in Africa is very low Share of Manufacturing in GDP (%)

East Asia Latin America South Asia Africa0

5

10

15

20

25

30

35

19601970198019902000

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Top Five Exports from Select Economies in Sub-Saharan Africa and Asia, 1980 and 2009

Labor Productivity and Average Wage Ratesin Chinese Manufacturing (USD) are Rising and Creating an Opportunity for Africa

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ScopeCase studies: Ethiopia, Tanzania, Zambia

China as a benchmark; Vietnam as a comparator

apparel wood products

metal products agribusiness

leather products

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Approach (1)

• Feasible, low-cost, sharply focused policy initiatives to increase private investment and jump start a competitive light manufacturing sector in Sub-Saharan Africa.

• Initiatives would complement progress on broader investment reforms.• Growth of light industries should increase share of domestic production in

growing markets for light manufactures. Near shoring.• Learning by doing will help to access new technology, modern management, and

marketing techniques, scale up and improve product quality – lead the way from near shoring to exporting.

• Policies that encourage foreign direct investment can accelerate industrial development and export expansion.

• Recent example: in September 2011, the Huajian Group, a Chinese shoe maker, invested in a factory in Ethiopia. In January 2012, hired 550 workers to operate two production lines to export 20,000 pairs of shoes a month.

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Approach (2)

• Identification of key constraints within each subsector

• Formulation of specific policies to remove constraints

• Learning from the experience of other developing countries

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Methods

World Bank Enterprise SurveysQualitative surveysQuantitative surveysComparative value

chain analysisKaizen study

http://econ.worldbank.org/africamanufacturing

Monthly Wages in Light Manufacturingby skill level (US $)

Skilled China Vietnam EthiopiaPolo shirts 311-370 119-181 37-185Leather loafers 296-562 119-140 41-96Wood Chairs 383-442 181-259 81-119Dairy milk 177-206 - 30-63Average 305-399 154-235 77-131

Unskilled Polo shirts 237-296 78-130 26-48Leather loafers 237-488 78-93 16-33Wood Chairs 206-251 85-135 37-52Dairy milk 118-133 31-78 13-41Average 197-278 78-131 35-53

Labor Productivity in Light Manufacturing Industries

China Vietnam EthiopiaPolo shirts (pieces per employee per day) 18-35 8-14 7-19Leather loafers (pieces per employee per day) 3-7 1-6 1-7Wood Chairs (pieces per employee per day) 3-6 1-3 0.2-0.4Dairy milk (liters per employee per day) 23-51 2-4 18-71

At a broad level, in the three African countries and across subsectors and sizes, there are six binding constraints to light manufacturing :

The Six Major Challenges

industrial land finance

entrepreneurial skills

input cost & quality

trade logistics worker skills12

Vary by country, sub-sector, and by firm size, so policies to address these constraints have to be specific.

Need to target policies to remove specific constraints in specific subsectors.

Unlike previous studies, this study points to a small, specific set of key constraints.

Past studies of Africa’s growth potential cite a long list of constraints (infrastructure, education, corruption, red tape, etc.). For government to resolve all at once is difficult, will take too long and is too costly and financial and administrative resources are scarce.

Narrowing the analysis can make the reform agenda more manageable and within the financial and human resource constraints of most African countries.

The Constraints

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Constraints in EthiopiaBy Size of Firm, Sector, and Importance

Input industries Land Finance Entrepren

-eurial skills Worker skills Trade Logistics

ApparelSmaller Important Critical Critical Important Important

Large Important Important Critical

Leather products

Smaller Critical Critical Critical Important

Large Critical Important Important

Wood productsSmaller Critical Important Important Important Important

Large Critical Important Important Important Important

Metal productsSmaller Critical Important Important Important Important

Large Critical Important Important Important Important

AgribusinessSmaller Critical Critical Critical Important

Large Critical Critical Important

Source: AuthorsNote: Blank cells are not a priority.

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• Employs 8,000 workers with $8 million in exports

• Second largest livestock population in Africa

• Suffers from a shortage of quality processed leather due to:

Poor livestock disease control Lack of quality processing of raw hides and

skinsTrade policy (import bans) on processed

leather

• Among the solutions:Treat ectoparasites at a very modest costAllow import and export of leatherTechnical assistance (e.g. Ramsay shoes)

The Leather Industry in Ethiopia

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Cost of Producing Leather Shoes in Ethiopia compared to China (US cents)

Cost Of Producing a Polo Shirt in Ethiopia Compared to China (US cents)

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Policy Implications

Because the binding constraints vary by country, by sub-sector, and by firm size, policy makers need to:

Identify clearly the most promising manufacturing subsectors, then prioritize and remove the most serious constraints in those subsectors

Target policies selectively, in line with comparative advantage and the country’s fiscal, financial, human capital, and institutional capabilities

If follow comparative advantage and allow competition, no need for subsidies – a point noted by J. Lin (2010, 2011) in New Structural Economics

Use a range of policies

Some measures require correcting existing policy-related distortions (industrial policy to correct government failure), others require the provision of public goods (industrial policy to offset market failure)

Solution to light manufacturing problems is cross-cutting: improving access to manufactured inputs involves backward linkages with agriculture, implications for education, and infrastructure policies.

Make use of conventional and some non-conventional policies such as “plug-and-play” industrial zones

Policy Implications (2)

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• Developing specific initiatives in partnership with private sector, starting with the identification of market opportunities

• Mobilize support from development partners and civil society

• Begin with small-scale pilot studies, evaluate processes and results rigorously and then scale-up/replicate successes and terminate failures.

• Start now as competition is heating up and other countries are grabbing the opportunities

• Africa cannot afford to miss another opportunity.

Success Factors in Implementation

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