Bridge over ocean
1 February 2016 CFA Institute Journal Review

Industrialisation in Africa: More of a Marathon than a Sprint (Digest Summary)

  1. Marc L. Ross, CFA

The current state of industrialization in Africa is not good. The boom in commodity prices took interest away from manufacturing. But now that commodity prices are declining, the lack of manufacturing is stark.

What’s Inside?

African countries must create conditions favorable to the success of industrialization. Nations need to place workers into more productive industries, and governments must create conditions under which businesses can thrive.

How Is This Article Useful to Practitioners?

Over the past 15 years, the sub-Saharan countries expanded at an average rate of 5%. The commodities boom and rapid Chinese urbanization were behind this growth. But China’s growth has slowed and commodities prices are declining, which is seriously affecting Africa’s economies. Unfortunately, manufacturing as a percentage of economic activity on the continent declined from 12% to 11% from 1980 to 2013, according to a forthcoming report from the United Nations’ Commission for Africa.

Deindustrialization may occur for good reasons. Economic growth can reflect an increased demand for services. Advances in technology often result in greater, less labor-intensive manufacturing solutions. In Africa, however, deindustrialization is happening while countries are poor. There is decreased demand for low- and unskilled labor and a greater challenge for African firms to create jobs on the scale of the Asian economic model from the 1970s.

Three phenomena challenge Africa’s industrialization. First, weak infrastructure hinders manufacturing efficiency. The high cost of electricity, bad roads, and clogged ports delay operations and transport. Second, the resource curse is a perverse disadvantage. Strong commodity-driven economies benefit from increased natural resource exports. This economic strength is manifested in a stronger currency that makes the import of such items as automobiles and white goods less expensive. Thus, manufacturers have fewer incentives to produce such items locally. Finally, the continent’s geography does not lend itself to improving industrialization. Unlike in Asia, Africa has no leading paragon of economic success that other nations could follow and under whose guidance it could thrive.

For the most part, export-led manufacturing is not driving Africa’s economic growth. Ethiopia and Tanzania are welcome exceptions. Both countries pursue foreign investors to expand their operations and court manufacturers with ties to local industries.

Nonetheless, Africa has a long haul before it. Factories continue to create too few jobs, and workers tend to find employment in less large-scale productive businesses, such as grocers and restaurants. There need to be more productive industry, better incentives to set up manufacturing, and the necessary infrastructure to let industry run. Until that happens, change will come slowly, if at all.

Abstractor’s Viewpoint

Africa appears stuck in the warp of lost opportunity. The scourge of resource abundance, lack of focused public policy, and an absence of any glide path to manufacturing success and efficiency will doom it to what looks to be an interminable fate of low growth.

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