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Manufacturing in Africa

The Significance of Manufacturing

The impact of manufacturing on economic development has been widely studied. Very few countries have been able to grow and accumulate wealth without investing in their manufacturing industries, and a strong and thriving manufacturing sector usually precipitates industrialisation. The manufacturing sector is widely considered to be the ideal industry to drive Africa’s development. This is due to the labour-intensive, export-focused nature of the industry. There is a direct correlation between exportation levels and the economic success of a country. By increasingly adding value to products before they are sold, revenues are boosted, thereby raising average earnings per input. Furthermore, the manufacturing sector is also more sustainable and less vulnerable to external shocks than commodities for instance.

Many African economies are based on raw-commodity exports, which make them highly susceptible to global price movements. In most cases, the general population does not directly benefit from the country’s natural resources, with large transnational corporations and the political elite the primary beneficiaries of the resource base.

In contrast, a strong manufacturing industry contributes to the development of the private sector, which increases an economy’s resilience to external shocks. Furthermore, domestic manufacturing improves external accounts by both decreasing imports and diversifying exports. Producing goods to supply the domestic market has a positive impact on the structure of the trade balance, and manufactured exports have a much wider scope and more stable demand than commodity exports.

Africa’s Manufacturing environment

There are significant issues facing the manufacturing sector in African countries, the most critical being lack of access to an effective and efficient labour force, and inadequate infrastructure on the continent. In addition, Africa is seen as a continent of conflict, corruption and instability, none of which is conducive to long-term capital investments. Rising fuel and electricity prices also continue to impact Africa’s manufacturing sector adversely. In most parts of West and East Africa, backup power systems (diesel-powered generators) are used by manufacturing companies as their main energy source. The reliance on higher-priced electricity for production processes inhibits African manufacturing companies from competing effectively with Asian and developed world counterparts. On the other hand, there are several factors driving this growing manufacturing trend in Africa, including the cheap labour force and the abundance of raw materials and low-cost agricultural products. Still, manufacturing still plays a relatively small role in the Sub-Saharan Africa (SSA) region when compared to other regions.

According to a 2012 report by the World Bank titled ‘Performance of Manufacturing Firms in Africa’, manufacturing accounts for only 13% of GDP in SSA, a smaller share than in any other region except the Middle East and North Africa (MENA) region. Given the small size of the manufacturing sector in most countries, it is not surprising that manufacturing exports are not important sources of export earnings in most African countries. According to the World Bank, manufacturing only accounts for around 25% of exports in SSA, lower than any other region except MENA. In comparison, manufacturing exports account for roughly three-quarters of East and South Asian countries’ exports.

For a comparison between manufacturing sectors in various African countries, NKC created a Manufacturing environment index to provide a snapshot of the sophistication and scope of different manufacturing industries. The index is based on data from the World Economic Forum’s (WEF) Global Competitiveness Report 2013-14, and takes into account factors such as the quality and extent of local supply chains, the spread and depth of development clusters, and the breadth of the domestic value chain. The index measures the current state of development of the domestic manufacturing sector, and the ease with which the sector can be expanded in terms of both size and sophistication.

The article is an excerpt from KPMG Africa’s thought leadership on Manufacturing in Africa. Please feel free to download here

 

David Okwara

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