WORLD BANK POLICY INDUSTRIALIZATION REMAINS VIABLE IN SUB-SAHARAN AFRICA RETHINKING POLICY PRIORITIES IN THE CONTEXT OF GVCs Photo: Wesley Poon/Shutterstock WHO IS THIS POLICY WHY WAS IT PREPARED? BRIEF FOR? To inform discussions by provid- Decision-makers who are con- ing an evidence-based narrative fronting the question of whether on the prospects of industrializa- industrialization remains a viable path to eco- tion and policy actions to harness the poten- nomic transformation in Sub-Saharan African tial of manufacturing in global value chains countries. (GVCs) for economic transformation. This work was conducted against the backdrop of con- Policymakers and economic advisers focused temporary discourse among development re- on job generation, poverty reduction, and sus- searchers and practitioners on the viability of tainable and inclusive growth in Sub-Saharan industrialization as a development strategy for Africa (SSA). sustainable growth for countries in SSA due to emerging global trends in trade, technologies such as automation, and the recent rise of digi- tal services as an alternative or complement to manufacturing. FULL REPORT This policy brief summarizes the full report: Industrialization in Sub-Saharan Africa: Seizing Opportu- nities in Global Value Chains.1 The report comprehensively reassesses the critical role industrialization can play toward shared prosperity in SSA —being less poor or “non-poor” is not enough. The overarch- ing message of the report counters the growing pessimism about the prospects of manufacturing in the region and identifies policies potentially best suited for driving job creation and productivity growth in manufacturing. SUMMARY No Evidence of Premature Deindustrialization accelerate structural transformation, it will require robust manufacturing productivity growth, which puts produc- As a region, SSA has not experienced premature dein- tivity at the core of the policy agenda on industrialization dustrialization. As one measure of industrialization, the and boosting productivity as an integral part of coun- share of manufacturing employment has increased with tries’ economic strategies. the level of income. The region experienced an increase in manufacturing employment from a total of 8.6 million in 1990 to 21.3 million in 2018, an increase of 148 per- GVC Participation in Low-Skill Tasks cent.2 More recent patterns of employment shares ap- The manufacturing GVC participation rate countries in pear to fit the stylized facts of historical development in SSA is above 40 percent, which is reasonably high com- other regions. Within the formal manufacturing sector, pared with benchmark countries such as Bangladesh, the size of the workforce has expanded over recent Cambodia, Indonesia, and Vietnam. Manufacturing firms decades, and this has been driven by new and young that are linked to GVCs are typically relatively large es- firms spurred by low wages. However, the scope for job tablishments (100 or more employees) and have been growth at low wages has diminished, as average wages in operation for five years or longer. They are also more have been rising in recent years. likely to have foreign equity holders or foreign technol- ogy licenses. At the same time, the trajectory of the share of manufac- turing value-added shows a flat or declining trend since The region’s integration into manufacturing GVCs is the 1990s, and recent years have not seen any encour- dominated by exports of primary products. This demon- aging reversal of this trend. This indicates a negative or strates that countries are currently exploiting their com- modest labor productivity growth in manufacturing, and parative advantages in linking to manufacturing GVCs partly explains the observed pace and nature of struc- and are engaged mostly in low-skill tasks. There is the tural change in the region, which is characterized by need, therefore, to move up the ladder to high-skill tasks, agriculture productivity growth accompanied by labor and create comparative advantages in knowledge-in- reallocation from agriculture to services. To sustain the tensive industries as part of a strategy to upgrade in current trend in job creation in manufacturing as well as GVCs and raise productivity. 1 Abreha, Kaleb G., Woubet Kassa, Emmanuel K.K. Lartey, Taye A. Mengistae, Solomon Owusu, and Albert G. Zeufack. 2021. “Industrialization in Sub-Saharan Africa: Seizing Opportunities in Global Value Chains.” Washington, D.C., World Bank. Based on data for 18 countries from GGDC/UNU-WIDER Economic Transformation Database 2 Photo: Simone D. McCourtie/World Bank 2 Industrialization Remains Viable in Sub-Saharan Africa: Rethinking Policy Priorities in the Context of GVCs WHAT IS THE PROBLEM? ? Historical evidence points to industrialization as the most viable path to economic growth and structural transformation. In addition, manufacturing and exporting manufacturing goods have played a predomi- nant role in countries that have registered the largest reductions in poverty. Premature Deindustrialization Narrative play a key role in bringing inclusive economic growth and building resilient economies in an increasingly un- A persistent narrative pertaining to the state of struc- certain global economy. In this regard, it is imperative to tural transformation in SSA is that the region has ex- reassess the potential role of industrialization and man- perienced “premature” deindustrialization, and manu- ufacturing-led policy strategies. facturing has played a limited role in promoting growth during the last six decades. These assertions may have projected a gloomy picture for the prospects of industri- A Changing Global Environment and alization-driven growth in the region. Opportunities in GVCs The breakdown of manufacturing activities across Significant Differences in Prospects Across countries and the evolution of regional and global val- Countries ue chains offer opportunities for countries in SSA to in- dustrialize through specialization in value-added tasks The prospects for successful job creation and a struc- in which they have a comparative advantage. However, tural transformation strategy centered around the man- these countries should also have the foresight to ac- ufacturing sector are bound to differ significantly across commodate the challenges associated with the increas- countries, with some countries better positioned than ing use of advanced digital production technologies in others for this push. The diagnostics at the regional level manufacturing. These technologies are skill-biased with mask key differences along several dimensions includ- a limited scope of substitution for unskilled labor and ing country size, resource endowment, current industrial hence can erode countries’ comparative advantages. base, and comparative advantage. These factors neces- Therefore, there is a need to seize these opportunities sitate a rethinking of industrial strategies in country-spe- in GVCs by exploiting current comparative advantages cific contexts and the current environment of changing in low-skill tasks, while promoting value-addition and technologies and shifting globalization patterns. technological upgrading, and mitigating the challenges posed by digital technology through skill-upgrading. Limited Structural Transformation In the first decade of this century, Africa enjoyed rela- tively robust economic growth, exceeding an annual rate 5 percent higher than the sluggish growth from 1991 to 2000, which averaged about 2 percent. In recent years, economic growth has remained at about half the pace experienced from 2000 to 2011. The growth in most of SSA has not been accompanied by robust job genera- tion or structural transformation of the nature historically observed in now developed economies. Manufacturing employment and output shares have barely changed, and the reallocation of resources from low- to high- pro- ductivity sectors has been slow and weak. Risks to Inclusive Growth and Economic Resilience In the wake of the COVID-19 pandemic, ongoing contain- ment measures, and related socioeconomic crises, eco- nomic growth and poverty reduction in SSA are more at risk. Communities, families, and livelihoods have be- come increasingly vulnerable. Early evidence shows the manufacturing sector is more resilient to the shock of the pandemic. The manufacturing sector, therefore, can Photo: Rob Beechey/World Bank 3 Industrialization Remains Viable in Sub-Saharan Africa: Rethinking Policy Priorities in the Context of GVCs Photo: Dominic Chavez/World Bank A FRAMEWORK FOR POLICY MAKERS The capacity to participate and upgrade in manufacturing GVCs is bound to vary across countries based on resource endowment, geography, and the level of development. Building that capacity, however, will require an appropriate industrial policy package that is designed to exploit current comparative advan- tages while developing capabilities to compete in high-skill and high value-added industries. Dynamic comparative advantage, therefore, must be at the core of policy packages for industrializing along manufacturing GVCs. Emerging megatrends such as changing technologies, shifting globalization patterns, climate change, and global pandemics need to be accounted for in the design of policies to promote industrialization. KEY RECOMMENDATIONS Facilitate the establishment of new firms and growth of young firms, which have been the catalysts to job creation in manufacturing. Strengthen participation in manufacturing GVCs through increasing value-added in exports and strate- gizing to exploit opportunities and upgrade to knowledge-intensive industries. Address severe misallocations within and across firms and industries and promote innovation to drive robust productivity growth needed to counter rising wages and support sustained jobs growth. Leverage the African Continental Free Trade Agreement (AfCFTA) and other trade agreements to expand access to external markets and enhance the gains from GVC integration. 4 Industrialization Remains Viable in Sub-Saharan Africa: Rethinking Policy Priorities in the Context of GVCs Increased job creation, productivity growth, and structural change GVC integration GVC upgrading Impact on GVCs Create comparative advantage • Reduce trade restrictions • Support young firms • Leverage trade agreements • Develop skills • Reduce market distortions • Support Innovation • Enhance digital infrastructure • Exploit comparative • Promote entry of new firms advantage • Build knowledge • Improve physical infrastructure Integrate Compete Upgrade Enable Policies that promote GVC Policies aimed at reducing Policies that promote industrial upgrading participation as well as market distortions to facilitate and facilitate sectoral or within-sector shifts in overall integration into the entry, survival, and employment and value addition the regional and global growth of firms and industries economies through trade and • Develop industry-specific • Invest in cross-cutting and investment • Ease licensing and entry training programs to enhance enabling sectors such as requirements to increase entry rate skills for upgrading in tasks digital infrastructure, energy, of new establishments and support within industries finance, and transportation Policy Entry Points • Push for a regional industrial incumbents, especially younger firms and logistics policy, for example, the African • Promote intra- and Continental Free Trade Area (AfCFTA) • Reduce market distortions by interregional migration of • Narrow the infrastructure to bolster scale economies and reforming state-owned enterprises skilled labor to facilitate skill gap by increasing public complementarities in processing high- • Establish labor market regulations and technology transfer and investments and adopting value exports to enhance labor mobility and build capacity in high-skill appropriate public sector entrepreneurship via better hiring and industries management systems • Develop RVCs by reducing trade barriers on inter- and intraregional firing practices, effective training, and • Support firms upgrading • Provide support to improve trade to improve access to imported skills-development programs to new activities within a human resource management inputs • Improve the business environment sector (for example, agri-food practices through easy access to finance, processing) or to a new • Gain market access through favorable • Facilitate learning and the property rights protection, market sector with potential for trade agreements (preferential tariffs, acquisition and transfer of regulation, and a well-functioning upgrading and value addition less restrictive nontariff trade barriers, technological capabilities and simplified rules of origin) legal system • Streamline the fiscal • Strengthen the reliability and incentives framework to efficiency of logistics and other trade encourage the adoption facilitation services, including customs and transfer of production and border management, port technologies efficiency, and transit services • Target entering and expanding activities in high-growth markets (for example, East Asia) 5 Industrialization Remains Viable in Sub-Saharan Africa: Rethinking Policy Priorities in the Context of GVCs Policy Implications Policies to promote industrialization for robust job creation, income growth, and structural transforma- tion should target the following objectives: Facilitate firm entry, survival, and growth in manufac- gional industrial policy much like the African Continental turing and other sectors Free Trade Area (AfCFTA) to bolster scale economies Manufacturing job growth has been driven by the estab- and complementarities in processing and high-value lishment of new and growth of young firms. Thus, poli- exports; gain market access through favorable trade cies should ease access to finance; promote entry rate agreements (preferential tariffs, less restrictive non-tariff of new establishments and investment of incumbents; trade barriers, and simplified rules of origin); and facili- reduce market distortions, for example, by reforming tate trade through investment in infrastructure and trade state-owned enterprises; and enforce labor market reg- logistics. ulations to enhance labor mobility and entrepreneurship via better hiring and firing practices, effective training, Improve productive capacities and strengthen sec- and skill development programs. toral linkages Integration into manufacturing GVCs has generated Boost productivity to ensure job and income growth jobs in closely linked agriculture and services industries. prospects Thus, efforts should aim to facilitate trade and invest- The scope for job growth at low wages has diminished ment by adopting better policies that identify strategic as average wages have been rising. This is an indication industries within those sectors in the provision of incen- that the prospect of industrialization over the long term tive packages; invest in cross-cutting and enabling sec- would depend on productivity growth. To this end, gov- tors such as digital infrastructure, energy, finance, trans- ernments should support research and development portation, and logistics; and invest in the development and encourage innovation efforts of new entrants as of industrial parks. well as incumbents; provide support to improve human resource management practices, and leverage urban- Support inclusive and better job creation ization to establish and bolster economic clusters. Labor market policies should enforce compliance with high standards of worker safety and benefits and devel- Promote participation in GVCs and improve gains op systems of education and training that emphasize through upgrading employability and facilitate the transition from study To the extent that most manufacturing activities occur to work, particularly into GVC-specific jobs. Moreover, across national boundaries, policymakers need to pro- wage suppression should not be a mechanism to attract mote trade liberalization by reducing tariff and non-tariff and keep jobs in manufacturing GVCs. barriers on inter- and intra-regional trade; push for a re- Photo: John Hogg/World Bank 6 Industrialization Remains Viable in Sub-Saharan Africa: Rethinking Policy Priorities in the Context of GVCs