Quramo Conference 2016:The Path to an Industrial

AfricaAkintunde Oyebode

April 8, 2016

Outline

1.How Africa compares with the world

2.Africa as an Industrial Opportunity

3.Why Industries succeed 4.How do we Industrialize

Africa?

2

How Africa compares with the rest of the world

Geography • Africa is the second largest continent in terms

of land mass after Asia comprised of 55 countries

• 60% of the world’s uncultivated arable cropland is in Africa

• About a third of Africa's continental countries are landlocked and have no access to the ocean or seas

• Sub-Saharan Africa is the world's tropical region par excellence, with 93 percent of its land area lying within the geographical tropics

4

Population • Africa is the second most populous

continent in the world after Asia • Africa is sparsely populated, with an

average population density of 87 persons per square kilometre (as compared with 246 for Asia and 188 for Europe)

• Africa’s low average population density reflects : • The vast expanses of almost empty

desert • The large areas of sparsely

populated savannahs (with weak agricultural potential)

• Regions of high population density include the coast running from southern Côte d’Ivoire to Nigeria, and the Indian Ocean island economies (e.g., Reunion and Mauritius)

• Low levels of population density in Africa are reflected in correspondingly low levels of urbanization

5

Urbanisation • Only 40 percent of Africa’s population lives

in urban centres

• This contrasts sharply with Latin America’s high level of urbanization (80 percent), but is comparable to Asia's rate (47 percent)

• The largest sub-Saharan African city, Lagos, ranks 19th among the world’s largest cities

• Two main factors, at least, would seem to explain Africa’s very low rates of urbanization: • Low productivity of agriculture - Local food

production cannot support large adjoining urban areas. Many of Africa’s urban areas must be fed, at least in part, from international imports, rather than a local hinterland

• Much of the population is in the highlands or at least away from coasts and navigable rivers, while urbanization is strongly favoured by a coastal (or riverine) location,

6

Infrastructure• Infrastructure plays a central role in improving competitiveness, facilitating

domestic and international trade, and enhancing the continent’s integration into the global economy

•  Africa’s absolute and relative lack of infrastructure points to the existence of untapped productive potential, which could be unlocked through scaling up investments in the sector

•  The estimated financing requirement to close Africa’s infrastructure deficit amounts to USD 93 billion annually until 2020

The State of Infrastructure Supply in Africa• Infrastructure investments in Africa have not kept pace with growth in demand,

creating a huge deficit • Less than 40% of the continent’s population has access to electricity• About 30% of the rural population has access to roads • Only 5% of agriculture is under irrigation• Only 34% of the population having access to improved sanitation and a slightly

better• About 65% of the population have access to clean water

7

Infrastructure – Access to Electricity

8

Transport Infrastructure• Roads

• SSA’s total road network is only 204 km per 1,000 km2 of land area, of which only about 25% is paved

• Compared to the world average of 944km per 1000 km2 of land area• This translates into 3.6 km of road per 1,000 persons for the region,

relative to a world average of about 7 km per 1000 persons• Rail

• Rail networks are the least developed in Africa, with very little additions to the systems developed in the colonial period

• Africa has 69 000 km of rail of which about 55 000 km is operational, mostly in Southern and Northern Africa.

• Thirteen SSA countries have no operational rail networks, while spatial density of operational rail ranges from 1 to 6 per million people

• Ports• Africa operates over 64 ports, with about half of the coastal

countries operating port facilities • Over-the-quay container handling performance is below 20

moves/hour, compared to 25–30 in modern terminals around the world

• n addition, handling costs average 50% more than in other parts of the world

9

Ease of doing business

10

Labor Force

• Latin America, and Central Asia and South Eastern Europe are characterized by higher levels of output per person compared to Asia and Africa. In the first group, capital is typically more abundant relative to labour, creating higher output per worker.

• The levels of productivity in developing Asia at 16% are, on average, twice as high as productivity levels than in Sub-Saharan Africa, were the average was at 8 percent of US levels in 2014

• Both African and Asian economies are generally abundant in labour and scarce in capital, explaining their low starting positions in regards to output per person

11

Africa as an Industrial Opportunity

Strengths

13

1. Wealth of Natural Resources Africa has a significant and under-explored share of global mineral resources The US Geological society ranks Africa as the largest or second-largest reserve of

bauxite, cobalt, industrial diamonds, manganese, phosphate rock, platinum group metals and zirconium

These resources and its products will feed global demand and drive growth2. Large Market Size Africa is the second most populous continent with a population of about 1.2

billion people Africa has the youngest population in the world, with over 200 million people

between ages 15 and 24. By 2020, consumer spending is expected to reach $1.4 trillion and the number of

African households with discretionary income is projected to reach 128 million – more than the total number of households currently in the United States

3. Abundant Labor Africa has over 500 million working age people (age 15 to 64) This number is expected to double by 2040 resulting in a work force of over 1

billion people, which would make it the largest in the world, surpassing both India and China

Africa’s Wealth of Natural Resources

14

Weaknesses

15

1. Africa’s Accessibility Large distances from major world markets in the northern mid-latitudes (a common plight of the tropics Separation from Europe by the vast Sahara desert (larger in area than the continental United States A very small coastline relative to land area An unusual shortage of natural ports along the coastline Populations generally far from the coast The highest proportion of landlocked states of any continent (and of the proportion of the population within landlocked states) The absence of rivers which are navigable by ocean-going vessels into the interior of the continent (such as the Rhine, the Mississippi, the Amazon, and the Yangtze Rivers, in other continents)2. Political Stability and Policy Inconsistency • Severally, agreed policies are not effectively executed, and in other cases policy executions are not sustained as governments change•  This issue is of key concern to investors who find it difficult to plan their investment programmes and commit to large capital expenditure (expansions or green field) where there is insufficient visibility on government policy

3.

Weaknesses

16

3. Low Industrial skills and Innovation In Africa there are challenges with respect to skills availability for the industrial sector, many industrialists are unable to fill vacancies because of a dearth of skills In many cases, the skills of workers do not match needs of the industry due to obsolete curriculum, old technology etc  More often than firms in Africa are financially and technically not capable of providing in-firm skills development in the same way large-scale firms abroad are able to 4. Consumer Purchasing Power Low purchasing power reduces the effective demand in the African market.  A large segment of Africa’s 1.2 billion strong population about xxx% earn between $ xx- $xx daily  The relatively low purchasing power means more Africans still spend a disproportionate amount of their income on food products5. Infrastructure The short Supply of electric power and the poor transport systems in Africa, constitute a major constraint to productivity of manufacturing firms in Africa  Manufacturers have had to invest in infrastructural facilities, raising the cost of doing business in Africa

Opportunities

1.Intra African Trade Intra-regional trade statistics show

that Africa rates among the lowest, with less than 20 percent of what is produced in the region staying within the region

This, in essence, means that over 80 percent of what is produced in Africa is exported, mainly to the EU, China and the US

Evidently, Africa produces what it does not consume and consumes what it does not produce

By comparison, 60 percent of Europe’s trade is within its own continent, and in North America, the figure is 40 percent.

17

Opportunities

18

2. Export Focused Production rather than import substitution in order to diversify of Foreign Exchange Revenue streams (case study is Korea)

• From the beginning of the first Five-Year Economic Development Plan in 1962, the Korean government has adopted an export promotion strategy rather than an import substitution p01icy

• The government strongly supported exporting firms with various incentive measures, including favorable treatment in the allocation of credit and in the taxation system

• In addition to these incentives, there was also a long list of governmental measures for export activity promotion at the micro level:• the government established the Korea Trade Promotion Corporation (KOTRA) mainly to explore foreign markets

• To assist Korean exporters in effectively filling foreign orders the government also subsidized projects to improve the wrapping and design of products, the expansion of inspection facilities for export goods, the opening of foreign-language training centers, and traveling expenses for delegations to overseas expositions and trade shows

Threats

19

1. Declining Commodity Prices • In terms of export earnings, SSA’s main export goods are crude oil, gold, natural gas, silver, cocoa, and iron ore• Crude oil is the top export of Angola, Cameroon, Chad, Republic of Congo, Gabon, Nigeria, and Sudan. • Extractive industries also play a key role in some of the African economies. For instance, iron ore is the top commodity export in Mauritania, copper is a main commodity export in the Democratic Republic of Congo and Zambia, aluminum in Guinea, and tin in Rwanda. • In other countries, agriculture is very important for the economy. For example, coffee is the main commodity export of Burundi and Ethiopia, cocoa is the top commodity export of Côte d’Ivoire and Togo, and cashews are the principal export of Guinea-Bissau. • Lower Global commodity prices will weigh heavily on exporters of these commodities, putting pressure on current account and fiscal balances• Countries that stand to lose the most are the less diversified oil exporters, such as Angola, Nigeria and the Republic of Congo. Other commodity exporters, such as the Democratic Republic of Congo and Mauritania, are also being negatively affected by lower prices for their main traded commodity. By contrast, net oil importers, such as Kenya and Senegal, are set to see modest gains from cheaper energy prices

Threats

20

Declining Commodity Prices (year-on-year, as at March, 2016)

Threats

21

2. Climatic Conditions • Droughts, floods, and cyclones are often not the reason why millions in Africa and many other regions are in poverty. But they can be the final blow that takes away their opportunities for progress• In 2015, the El Niño climate phenomenon reached one of its strongest levels in recorded history, leading to intense changes in precipitation throughout the globe• East Africa experienced lower-than-average rainfall from June through September, which in turn, reduced agricultural and pastoral production and increased food insecurity across the region• The effects from El Niño are projected to continue through March 2016, suppressing rainfall in Southern Africa and resulting in above-average rainfall in the Horn of Africa which may also increase the risk of flooding• In Southern Africa, the reduction in precipitation is expected to worsen already acute food insecurity and further curb crop production, which is already below the five year average. • The increasing frequency and intensity of extreme weather events driven by climate change, is a major threat to Africa’s economic growth

Why Industries Succeed?

Learnings from China

23

• China has transformed from a traditional agricultural society to a modern industrialized nation

• China has successfully moved agriculture from about 60% of Gross Domestic Product (GDP) as at 1960 to 35% now

• China embarked on a structured process to ensure that the level of industrial output increased substantially, while the proportion of agricultural output to overall output declined over time

• This has created jobs, wealth and strengthened China’s economy

• Today,  China is the largest producer of inexpensive cotton textiles in the world and exports large quantities of textiles and garments

• Other industrial products include television sets, bicycles, cars, trucks, and washing machines, textiles to railway locomotives, jet planes, and computers

Learnings from China

24

Some key elements of China’s path to Industrialization:• Special Economic Zones (ie. Industrial Cities) - the 14 largest coastal cities were designated as economic development zones. These regions were provided with requisite infrastructure and incentives to promote industrialization.

• Export Oriented Private Investments – China actively sought out new markets and investors which could manufacture in China specifically for foreign consumption

• Investment Promotion – China attracted the largest and most credible industrial companies to produce specific components within the country

• Monetary and Fiscal Instruments – The Chinese used the currency (Yuan) strategically to make China’s exports cheap and imports expensive

• Targeting Specific Parts of Global Value Chains– The Chinese path to industrialization was to build strong footholds in pieces of global value-chains of multinationals, and gradually expand capacity over time.

Learnings from Brazil

25

• Brazil’s economic growth in the post-World War was largely as a result of rapid expansion of industry

• The magnitude of structural change in the post-war years can be seen from : • The share of the industrial sector in the Gross Domestic Product (GDP),

which grew from 24.1 percent in 1950 to 40.9 percent in 1980 • Whereas agriculture declined from 24.3 percent in 1950 to 10.1 percent in

1980

• Rapid industrial growth and structural change in Brazil were stimulated by a diversified mix of economic policies, which included:• Multiple exchange rates,• Quantitative import restrictions,• Direct foreign exchange controls• Tariffs, fiscal and credit subsidies

Learnings from Brazil

26

Some key elements of Brazil’s path to Industrialization:• Financing - Cost of borrowing in Brazil has historically been quite high. The

development bank of Brazil BNDES has therefore played a crucial role in the accessing of finance by the Brazilian industries. BNDES is now bigger than the World Bank in assets and disbursements.

• Industrial Skills and Innovation – Brazil invested heavily in industrial skills, and today has one of the leading technical education schemes in the Brazilian National Industrial Apprenticeship Service (SENAI). Every year about 2.5 million Brazilians enroll for various technical programs in SENAI.

• Local Patronage – The Brazilian government has historically enacted some of the strongest policies on local patronage of “Made in Brazil” goods and services

• A major focus on local demand – While China’s industrialization has been driven by exports; Brazil’s industrialization was driven by its strong domestic market and consumption

• Strategic protection – The Brazilian policy has protected strategic industrial sectors when needed, to provide sufficient time to increase scale.

Learnings from Germany

27

Germany, possessed several of the factors that made industrialization possible:• It had ample iron and coal resources, the basic ingredients for industrial

development• A disciplined and educated work force also helped the economy • a rapidly growing population—from 41 million in 1871 to 67 million by 1914 which

provided a huge home market along with a larger supply of industrial workers Germany's industrialization was in two notable stages:

• First Industrial Revolution. : This started with the building of railroads in the 1840s and 1850s and the subsequent development of coal mining and iron and steel production

• Second Industrial Revolution : This was marked by the growth of the chemical and electrical industries. Germany took an early lead in the chemical and electrical industries. Its chemists became renowned for their discoveries, and by 1914 the country was producing half the world's electrical equipment.

• The enormous expansion of coal and steel production and the growth of the chemical industries happened so closely that the country can be said to have experienced the two revolutions almost simultaneously.

• As a result of these developments, Germany became the continent's industrial giant.

How do we Industrialize Africa?

Enablers

29

The 3 key enablers that will unleash productivity by reducing structural impediments to Africa’s industrialization include :1.InfrastructureSpecific emphasis is placed on the availability of transportation and power:Transportation:

• The challenge with regards to transport infrastructure is not only limited to the physical deficit but also lack of linkages between roads and rail lines, and poor connectivity to ports

• As Africa looks at scaling infrastructure investments in the transport sector, the trade impact of such investments will spur growth and development as it will have spillover effects in all other sectors that open further opportunities for private sector investment

• Africa’s realization of the inadequacy of public funds in developing road infrastructure Africa is spurring the quick to toll roadsPower:

• The costs of power outages are significant, with Africa loosing almost 12.5% of production time compared to 7% for South Asia, which is the next worst case • More potential productivity gains from electricity supply, together with the associated income effect point to a market with significant growth potential costs

1.infrastructure. 2.Financing 3.Education

Enablers

30

2.Financing • Africa’s terms on credit facilities are not well suited for industrial development• Available loans have high interest rates, and available tenures are short• As a result, Africa’s credit to the private sector as a percentage of GDP is ~20 percent, as compared with 190 percent in the United States, 130 percent in China

3. Education Specific emphasis is placed on developing industrial skills and creating work opportunities to gain experience and apply newly acquired industrial skills

Developing Industrial Skills: • Curriculum should be streamlined to focus on fewer areas, with increased depth• Entrepreneurial skill set should be encouraged amongst the young after primary education

Creating work opportunities : • Developing a resource map of employees• Leverage technology to consolidate information on trainees and employers • Creating skill set links to available jobs

1.infrastructure. 2.Financing 3.Education

Support Structures

31

The barriers to industrialization are considered systemic in Africa and may therefore require National reformation even beyond the needs of the manufacturing sectors:

1.Policies : • Export promoting policies rather than import substituting policies have been proven to drive industrialization as in

the case of Korea and China2.Customs & Excise :

• Outdated and overly bureaucratic border clearance processes imposed by customs and other agencies can pose great barriers to trade

• The Cumbersome systems, procedures, and poor infrastructure both increase transaction costs and lengthen delays to the clearance of imports, exports, and transit goods

• Such costs and delays make a country less competitive by imposing deadweight inefficiencies that add to costs that raise the price of exports

3. CultureFamily owned businesses:

• The practice of handing over businesses to the first son in Africa is a proven recipe for business failure in Africa• This criteria for the leading the business is not objective and lacks meritocracy

A case for Africa’s Industrialization

32

• Economic growth in most African countries is on a positive trajectory, and the global perception of the continent has evolved to that of sheer optimism• A closer diagnosis of the continent’s performance unmasks one key structural weakness. The impressive growth rates witnessed are largely driven by high

commodity prices• Natural resource revenues have soared over the last decade due to increasing demand from emerging countries. While this has been beneficial in propelling

economic growth, it is problematic on three fronts:

• First, over dependence of commodity exports exposes an economy to volatility in international prices, dwindling prospects for long-term growth• Second, commodities are exhaustible, and cannot be relied on infinitely• Third, commodity production results in foregone income and robs an economy of the potential to become competitive in global markets.

• This is precisely where industrialization comes into play. Establishing a vibrant manufacturing sector is a powerful engine of growth and development

A case for Africa’s Industrialization

33

There are several benefits which accrue to industrialization : • Firstly , Quality and better paying jobs, which translates into a substantial source of income for the continent’s rapidly growing population

• Secondly, income in manufacturing is higher and relatively stable, a noble opportunity to alleviate poverty. Also, given the labor-intensive nature of the sector, higher wages and salaries accrue to a larger population, reducing income inequality

• Thirdly, industrialization results into significant capital accumulation which enhances economic productivity. In other words, investments, both domestic and foreign are bound to increase, and this enhances efficiency in production processes

• Fourthly , prices of manufactured products tend to increase overtime, a classic breakthrough to wealth accumulation and economic competitiveness. Industrialization also enables a country tap into global markets where demand for products thrives

Thank You