Made in Africa

November 20th marked yet another “Africa Industrialization Day” by the United Nations. There have now been 25 such events, and they seem to have come and gone with relatively little notice. This year may be different: Africa’s failure to industrialize has come to the attention of a growing number of observers, noting with some alarm at the fact that many African countries are de-industrializing while they are still poor, raising the worrying prospect that they will miss out on the chance to grow rich by shifting workers from farms to higher-paying factory jobs.

By any measure Africa’s failure to industrialize is striking. In 2013 the average share of manufacturing in GDP in sub-Saharan Africa was about 10 percent, half of what would be expected from the region’s level of development. Moreover, it has not changed since the 1970s. Africa’s share of global manufacturing has fallen 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.

This lack of industrial dynamism is a growing matter of concern to Africa’s political leaders, as well. Historically, industry is the sector into which resources have first moved in the course of economic development. Industry is the pre-eminent destination sector at early stages of development because it is a high productivity sector capable of absorbing large numbers of moderately skilled workers. Between 1950 and 2006, about half of the catch-up by developing countries to advanced economy levels of output per worker was explained by rising productivity within industry combined with labor moving out of agriculture into manufacturing. 

The objective is clear—Africa needs more industry—but the path forward, remains 'more a marathon than a sprint'. One of the major constraints to Africa’s industrial development is a lack of the “basics”—infrastructure, skills and institutions. While industrialization cannot succeed without these, they are not enough. Three closely related drivers of firm-level productivity—exports, agglomeration and firm capabilities—have been largely responsible for East Asia’s industrial success, and their absence goes a long way toward explaining Africa’s lack of industrial dynamism. For example, in Tanzania, special economic zones (SEZs), which are export-oriented industrial clusters, contain about 40 firms, employing around 10,000 people. Vietnam on the other hand has 3,500 firms in its export processing and industrial zones, employing 1.2 million workers. Putting policies in place that promote manufactured exports, encourage the development of industrial clusters and attract more capable foreign direct investors outside of the natural resources sector are essential first steps in reversing Africa’s industrial decline.

South Africa's Skills Shortage Dilemma

There is no doubt that the conundrum of an acute skills shortage alongside mass unemployment constitutes the most critical issue threatening the future of South Africa. This year the country has recorded a growth rate of 2.7% and the unemployment rate is about 33%, including those who have given up looking for work. Seventy percent of those unemployed are said to be under the age of 35. A woman leaving school in Limpopo stands a one in eight chance of ever getting a job. 

The skills shortage and high unemployment interact with each other in a devastating way. It is insightful to note that SA’s key problem is how it is going to maintain the growth rate it needs to feed its growing population. SA won’t be able to use the method employed by the Southeast Asian ‘tigers’ of using cheap labour to undercut its export competitors while it grows its economy and expands its skills base, because its labour unions will prevent that.

One solution is to develop a skills-training model based on systems that have been used for years in Germany, Switzerland and several Scandinavian countries. This would involve not only vastly improving the education system but also integrating it with a system of apprenticeships. 

The essence of the German education system is that it is channelled into different streams. There are three streams, actually, but for our purposes we need focus only on two — an academic and a vocational stream. Students should be given a choice, after passing, say, grade 9 or 10, whether they want to continue in the academic stream and go on to university, or learn a vocational skill through an apprenticeship programme. 

Those who drop out of high school earlier should also have the opportunity of entering an apprenticeship course. 

These apprenticeships should be wide-ranging, from becoming a skilled baker or hairdresser, to a motor mechanic, a construction worker or an electrician. A student deciding to enter an apprenticeship must find an employer who will take him or her on to train for the career the individual has chosen — which is usually three years. 

During that time, the student will spend part of his time gaining practical on-the-job experience working for the employer, and part of it attending classes at a vocational school. The classes will focus mainly on the technical side of the job; the shop-floor work on the practical side. Running records have to be kept by both the employer and the vocational school instructors so that the training can be co-ordinated. 

The apprentices are paid a small salary throughout the apprenticeship period, which usually goes up a little each year as their skills advance. At the end, they have to write an exam run by the Chamber of Commerce and Industry. When they pass that they are qualified as a skilled professional in the chosen work category — and receive a certificate testifying to that. 

School-leavers in SA today have no craft certification of any sort, which makes getting that critical first-time job in the face of sceptical employers faced with labour regulation requirements cruelly difficult. 

However salary is the thing that troubles the trade unions. 

But the suggestion of how to get around this political problem is to enact a law establishing that the apprenticeship period falls under the Department of Education, not the Department of Labour. 

The Congress of South African Trade Unions actually recognises the need for on-the-job training at lower pay, but it has become so entrenched in its commitment to the principle of "decent work" that it can’t lose face by backing off from it. 

Classifying an apprenticeship as part of an individual’s education may be a way around that difficulty, because the labour regulations could remain unchanged and become applicable to the apprentice only after he has graduated from his apprenticeship. 

A further advantage of the German system is that, after successfully completing a full apprenticeship course, a student can continue at the vocational school for another year or two to acquire higher certification as a "master" baker, mechanic or whatever, which rates as the equivalent of matric — thus opening the way to go to university and, beyond that, to a graduate school of business for an MBA. 

SA's graduates would then be able to seek a job in management with the special advantage of knowing what life is like for workers on the shop floor and earning their respect in turn for having that knowledge. 

Flexibility is the essence of any such system, so that German students from the academic stream can also switch to become apprentices after passing matric if they so wish, enabling them to follow the same route to a job in management. 

SA is going to need skilled workers every bit as much as she needs to reduce the unemployment rate. 

Original Article by Allister Sparks: Business Day

Role of the Bank of Industry in Nigeria's Industrialization

Need for Capacity for Value Addition in Natural Resources

We need to build capacity in Africa in order to add value to natural resources. 

In a recent post, we discussed a proposal from African countries to ban exports of natural resources. Tanzania reportedly has in place a ban on the export of raw gemstones. However, in a recent news piece, the Tanzania Government Ministry of Minerals and Energy has proposed to lift the ban on exports of gem stones with a weight of over one gram, due to lack of local capacity to cut stones, stating "as there is no point of people staying with uncut stones while there is no capacity."

The Ministry's Commissioner for Minerals, Dr Peter Kafumu, also stated that the government move was propelled by the fact that the lapidary is still at infant stage and exporters need additional time. He also added "In actual fact we were not ready when we imposed the ban. I think politicians pushed us a bit harder."

It is interesting to note that investors such as TanzaniteOne are pushing for exemption from the export ban while the labour market opposes lifting of the ban, which could reduce employment opportunities locally. What is Government to do?

EU Raw Material Shortages and Elimination of Export Restrictions

According to a European Commission Report, the EU faces shortages of 14 key raw materials used in making cell phones, solar power cells, batteries, and other electronics. The materials that are critical for the EU include: Antimony, Beryllium, Cobalt, Fluorspar, Gallium, Germanium, Graphite, Indium, Magnesium, Niobium, PGMs (Platinum Group Metals), Rare earths, Tantalum and Tungsten.  According to the Report, demand for these metals and minerals could triple over the next 20 years. 

The low global supply of these raw materials is mainly due to the fact that a high share of  worldwide production mainly comes from a handful of countries: China (antimony, fluorspar, gallium, germanium, graphite, indium, magnesium, rare earths, tungsten), Russia (PGM), the Democratic Republic of Congo (cobalt, tantalum) and Brazil (niobium and tantalum). This production concentration is compounded by low substitutability and low recycling rates. Nonetheless, this puts pressure on European nations to maintain strong trade relations with the primary exporters of those materials namely; China, Russia,the Democratic Republic of Congo, and Brazil.

Source: Europe Press Release Rapid

However, as shown above, China is the major source of most of these raw materials.  However she has been accused of restricting the export of certain deposits thereby affecting global supply and prices. A notable illustration of the growing importance of export restrictions, was the establishment of a panel by the WTO Dispute Settlement Body (DSB) in December 2009 to examine complaints brought by the United States, the European Union, and Mexico concerning China’s export restrictions on selected raw materials. Meanwhile Argentina; Brazil; Canada; Chile; Colombia; Ecuador; India; Japan; Korea (Republic of); Mexico; Norway; Chinese Taipei; Turkey and Saudi Arabia have also joined this dispute as third parties. 

According to the USTR, China is the top or near top producer of these materials and these measures skew the playing field against the US and other countries, by creating substantial competitive benefits for downstream Chinese producers, that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products. 

Meanwhile, there has been considerable debate in the WTO, as to whether export taxes actually violate any WTO disciplines, with some arguing that is an area of policy space that was intended to be outside of the multilateral disciplines and hence within Members jurisdiction- especially in low income developing and LDCs.  

However, in the EPA context, the EU has insisted on the elimination of export taxes, even though EPAs are supposed to meet the development needs of the world's poorest countries. Export taxes are used in Africa for industrial or export diversification, revenue, efficient management of resources, environment, job creation, value addition and macro-economic stability. In fact some have advocated that a policy focus on local content, such as available raw materials, is the most sustainable way of ensuring attainment of broader development goals. (see previous post on local content here).

The irony of the matter is that Europe's critical needs are met largely by China- and not Africa. Can the use of such policy measures by African countries be seen to distort world trade or be expected to help Africa move out of poverty and lessen her reliance on donor aid? 

Local Content and Joint Ventures

Over at This is Africa, this article proposes that by putting local content policies i.e. import substitution at the heart of development plans, governments in sub-Saharan Africa can make the most of their new found reserves e.g. oil, gas etc. My question; is this principle WTO compatible?

“Local content is the fastest, most sustainable way for the benefits of the oil and gas sector to accrue to a society,” says Kevin Warr, former head of the energy market development team at the US Agency for International Development. It guarantees jobs in the core sector – engineers, geologists, senior managers and the like – and stimulates domestic supply chains delivering everything from chemicals, boats and drills to catering, security and IT. In 2005, Royal Dutch Shell spent $9.2bn on goods and services from low and middle income countries. Chevron’s procurement reached $45bn worldwide in 2008.

Local content is not new to sub-Saharan Africa. South Africa’s post-apartheid Black Economic Empowerment programme, which offered preferential training and employment to black communities, was essentially a local content policy writ large. But formal legislation specific to oil and gas has picked up only recently. In 2003, the Angolan government passed a law requiring procurement of basic oil-related goods and services to be reserved for Angolan companies. A year later, Equatorial Guinea passed its own law addressing equity participation by nationals in international oil companies.

The full article can be assessed here.

Should we refer to this approach as local content, or joint venture policies? For instance China allowed foreign firms access the domestic market in exchange for technology transfer through joint production or joint ventures. In fact, 100% foreign owned firms were a rarity among the leading players in the industry. Most of the significant firms tended to be joint ventures between foreign firms and domestic (mostly state-owned) entities. See previous post on the role of joint ventures and investment in China's economic boom.

2010 Economic Report on Africa Places Priority on Employment Creation

According to the UNECA Economic Report on Africa 2010, African countries must prioritize the creation of decent jobs as a central pillar of macroeconomic policy in order to attain the millennium development goals and eradicate poverty.  Few countries for instance have a ministry of job creation like Jamaica. For most people, gainful employment is the only way out of poverty. This is especially the case for youth and other disadvantaged groups. Unfortunately, unemployment and underemployment rates in Africa are high and continued to rise even during the period of rapid economic growth that came to an end with the global economic crisis in 2008.  In addition, Africa’s growth rates have not been accompanied by employment growth and as a result unemployment rates have remained stubbornly high and in double digits.

The Report also calls for appropriate investment in infrastructure and human capital, renewed and creative efforts at domestic resource mobilization, factor market reforms, incentives to support private-sector employment and efforts to increase productivity and incomes in the informal sector.

The full report can be obtained here

Joint Ventures Key in China’s Export Growth

Foreign investors have played a key role in the evolution of China’s exports of consumer electronics. Over the past few decades, foreign investors in China were found to be the most productive of the producers, they were the source of technology, and they dominated exports. China’s openness to foreign investment and its willingness to create Special Economic Zones (SEZs) where foreign producers could operate with good infrastructure and with minimum hassles must therefore receive considerable credit. But if China has welcomed foreign companies, it has always done so with the objective of fostering domestic capabilities. To that end, China used a number of policies to ensure that technology transfer would take place and strong domestic players would emerge. Early on, reliance was placed predominantly on state-owned national champions. Later, the government used a variety of carrots and sticks. Foreign investors were required to enter into joint ventures using the Law of the People;s Republic of China on Joint Ventures Using Chinese and Foreign Investment with domestic firms (for instance in mobile phones and in computers).

There was also a role for tariffs. Domestic markets were protected to attract market-seeking investors, in addition to those that looked for cost savings. Weak enforcement of intellectual protection laws enabled domestic producers to reverse engineer and imitate foreign technologies. And localities were given substantial freedoms to fashion their own policies of stimulation and support, which led to the creation of industrial clusters in particular areas of the country.

On acquiring technology transfer and building local supply linkages, China’s strategy was clear: It allowed foreign firms access to the domestic market in exchange for technology transfer through joint production or joint ventures. In fact, 100% foreign owned firms were a rarity among the leading players in the industry. Most of the significant firms tended to be joint ventures between foreign firms and domestic (mostly state-owned) entities. A strong domestic producer base has however also been important in diffusing imported technologies and in creating domestic supply chains. Facilitating technology transfer requires a strong focus on Research and Development by the State. Without state support and publicly funded R&D, a company like Lenovo (previously known as Legend) which became large and profitable enough to purchase IBM’s PC business would never have come into being.

In sum, China has benefited both from good fundamentals—low labor and materials costs, “outward orientation” in the form of SEZs, large market size—and from a determined government effort to acquire domestic capabilities and build a modern industry. The large size of the economy has allowed policy experimentation. It also has allowed the government to use the carrot of the internal market to force foreign investors into joint ventures with domestic producers. If China is producing an increasingly sophisticated set of consumer electronics for instance, it would appear that this is due as much to the policy environment as it is to the free play of market forces.

For more on Special Economic Zones see here.