African Potential: unleashed or unfulfilled?
A strong manufacturing sector can help Africa’s emerging economies escape the poverty trap and build sustainable growth.
With a billion people spread across 54 diverse nations, and rich natural and agricultural resources, Africa is often described as the last true frontier for economic development. Many of its governments are starting to address post-colonial inefficiencies by trying to establish stable democracies, effective legal and tax regimes and realistic economic strategies. These improvements, along with the obvious attraction of a young, growing consumer class, have attracted considerable interest from foreign investors.
Yet success in Africa is by no means assured, with progress held back by bureaucracy, inadequate infrastructure and a deep-rooted nepotism that obliges entrepreneurs to share their wealth and offer jobs to relatives and friends. Business people also have a bias towards trading over production, preferring a quick and easy mark- up on goods to the longer-term challenge of making things.
The contrasting fortunes of two other emerging economies — China and India — provide some useful lessons on how Africa can fulfil its latent potential. Through careful forward planning, China has become the workshop of the world, with a strong manufacturing industry that has brought employment to tens of millions in its plants and factories, and created further jobs in supply, maintenance, logistics, sales and marketing. This success has been founded on a robust supporting infrastructure, flexible working practices and an investor-friendly environment featuring special economic zones offering tax exemptions and incentives.
India, on the other hand, has seen its progress thwarted by red tape and political stalemate, with lack of investment in ports, airports, roads and energy, limited tax concessions, and major restrictions on foreign ownership of assets. Anyone wishing to start up a manufacturing facility has to cope with poor transport connections, an unskilled workforce, constant power cuts and restrictive labor laws, as well as painfully slow processes for resolving any commercial disputes.The thriving outsourcing sector — widely held up as a symbol of the new India — provides work for just a tiny proportion of the 1.1 billion population.
Consequently, China continues to enjoy higher employment levels and a stronger GDP growth rate, while India struggles with poverty and inequality.
Creating an industrial base
Across the African continent, countries face the same hurdles that have held back India. The riches of its resources and agriculture are under-exploited, as most materials and foods are exported in their raw forms, rather than adding value through refining and packaging locally. Meanwhile, government efforts to impose centralized strategies typically face opposition at federal and local levels.
Africa is still not widely perceived as a welcoming place for overseas capital. Only three of its countries made it into the 2014 World Bank’s Ease of Doing Business Index top 50 (Mauritius, Rwanda and South Africa in 20th, 32nd and 41st places, respectively), and African nations occupy most of the bottom rankings. Despite some advances, fiscal systems lack stability, corruption is still a major problem, while concerns remain over the fairness of judicial systems.
In order to build modern economies, Africa’s countries and regions must follow in China’s footsteps and invest in manufacturing, which not only creates jobs, but boosts the balance of trade by reducing reliance on expensive imports.The Ivory Coast supplies a third of the world’s cocoa, and until recently, exported raw beans at a low margin. Its government is now seeking ways to raise the proportion of cocoa processed domestically, through tax breaks and other fiscal tools, mandating that at least 30 percent of the annual harvest is transformed locally.
Africa’s second biggest oil producer Angola is trying to diversify its industrial base, by investing in ports, airports, roads and hydropower. It expects to attract US$4 billion a year in non-oil investments from abroad by 2017, with recent projects such as bottling plants for drinks companies and a US$282 million hotel complex to pep up the country’s tourist sector. General Electric (GE) and Angola-based GLS Holding have formed a new joint venture, with a proposed initial investment of US$175 million to construct a new manufacturing facility.
GE is also investing close to US$1 billion in factories for the energy industry in Nigeria, creating 2,300 jobs in the local economy — as direct hires or through suppliers — and positioning the country as a regional manufacturing hub. And as confirmation of the US-based manufacturing giant’s confidence in Africa, it is planning to establish a medical equipment assembly plant in Ethiopia.
Chinese firm Huajian Shoes employs 600 workers at its factory near Addis Ababa in Ethiopia, but has much bigger ambitions, by investing over US$2 billion in a light manufacturing special economic zone that aims to create 30,000 jobs as part of a ‘shoe city’ producing footwear, handbags and accessories. Huajian is partnering with the China-Africa Development Fund (CADFund), a private equity facility promoting Chinese investment in the continent in agriculture, infrastructure, natural resources and industrial park projects. Other ventures include a power plant in Ghana, a port in Nigeria, cotton farms in Malawi and a US$100 million car plant in South Africa.
Since 2009, special economic zones have been introduced in several African countries including Zambia, Mauritius, Ethiopia, Nigeria, South Africa, Egypt and Algeria, with more in the pipeline, offering exciting prospects for growth and job creation.
In it for the long-term
Having suffered the worst excesses of colonialism in previous centuries, African nations are understandably keen to avoid a repeat scenario and are wary of the motives of foreign companies. By investing in the physical and social infrastructure, and demonstrating a commitment to local communities, investors can be part of the continent’s renaissance.
Effective social programs are an integral part of all multinational organizations’ strategies, whether it is building roads, housing, schools and hospitals, improving sanitation and water supplies, providing vaccinations and health education, offering free broadband and laptops to schools and businesses, or training local workers.
One common barrier is a lack of certain essential skills such as engineering, IT and management. The more enlightened African governments permit foreign companies to bring in their own expatriate workers, on the understanding that these are temporary measures. In Ethiopia, the aforementioned Chinese shoemaker Huajian feels that the new business zone will act as a center of excellence to transfer skills to locals.
Commentators often speak of Africa’s growing population as a ‘demographic dividend’ promising some two billion consumers by 2050. However, without a strong industrial base, this could quickly turn into a demographic time-bomb of the discontented unemployed, fomenting civil disobedience, crime and terrorism. Manufacturing is the key to unlock the continent’s massive potential, transforming countries from mere providers of resources to mature, broad-based economies.
Angola Boosts Infrastructure Spend to Attract Investment, Bloomberg, 3 October 2013.
GE Oil & Gas, GLS Form JV to Support Growth in Angolan Energy Sector, Energy Business Review, 30 January 2013.
Nigeria Wins $1bn General Electric Manufacturing Investment, Financial Times, 31 January 2013.
GE Plans to Establish an Assembly Plant in Ethiopia, The Reporter, 25 January 2014.
Chinese Firm Steps Up Investment in Ethiopia with ‘shoe city’, The Guardian, 30 April 2013.