A Busted Cycle

By: Larry Zhang, Senior Editor

 

 

Last month, Africa’s Tanzania began the construction of its first industrial park, a result of attracting the attention of what are primarily major Chinese goods firms. This comes at a time when its output has grown by approximately 7.5% each year from 1997-2012, one of the highest rates in all of Africa. Another country, Ethiopia, is also faring well. Its manufacturing output has grown by an average of 10% each year from 2006-2014. The reason? Economist Ha-Joon Chang attributes Ethiopia’s relatively high growth to strengths in the country’s effective policy. The Ethiopian government has focused on infrastructural development, most notably in concentrating efforts in transportation to its industrial parks. Elsewhere, however, growth is meek.

In places like Nigeria, entire stretches of land sit emptily in what was once the country’s industrial megacenter. For textile mills in particular, Nigeria’s has all but collapsed, going from employing roughly 350,000 people to now less than a tenth of that number. This results from the country’s sharp deindustrialization, a reverse of the recent rapid growth from high commodity prices in Africa. In fact, many African countries have completely turned in the opposite direction. Over the past 15 years, Sub-Saharan Africa grew at about 5% each year, largely due to this boom in commodities and the subsequent effects arising from China’s exploding urbanization. However, now that China’s economy has stagnated, prices have dropped in mines as well, known as a “commodity bust.”

This year, the IMF predicts that Africa will grow under 4%, leading to another repeat of the commodity-“fueled” boom and bust cycle. Another source, the UN’s Economic Commission for Africa, believes that from 1980 to 2013, the percentage of Africa’s manufacturing sector within the continent’s total economy dropped from 12% to 11%, the lowest share of any developing region. This is mirrored by the only 6% fraction of manufacturing jobs out of all jobs, a number that has hardly changed over the course of three decades. When compared to Asia, the future looks especially gloom. While Africa has remained more or less stagnant, Asia’s percentage of manufacturing jobs has jumped from 11% to 16% over the same period.

The problem? Africa’s premature deindustrialization comes at a time when much of the continent is still underdeveloped. Most countries deindustrialize as they grow richer, since growth usually shifts from the manufacturing sector to the service sector. However, much of Sub-Saharan Africa has yet to industrialize to the point where the economy would have enough resources and infrastructure to allow for a stronger tertiary-based economy to flourish. Another issue arises from new technologies, which are decreasing demand for labor. This causes growth in factories to stall, leaving African firms with many more obstacles in its quest to create jobs. Countries like Nigeria are also especially vulnerable to deindustrialization because of the lack of robust infrastructure, which increases the costs to manufacture goods.

Energy, for one, lags behind; the African Development Bank found that in 2010, electricity was three times more expensive in Africa than in South Asia. On the transportation side, underdeveloped roads and ports drive up shipping costs, whether for raw materials or finished goods. Another disadvantage is the wide variety of natural resources, also known as “Dutch Disease.” One would think that this would be an advantage, but the cycle starts with greater exports leading to greater exchange rates, which then leads to cheaper imported goods, and then finally, local goods that are harder to produce and export. And lastly, geography plays a role. With Asia’s development, a lead country, Japan, was able to spur growth in the region by shifting manufacturing jobs to Taiwan and South Korea in the 1970s; Africa, however, doesn’t have a “leading goose, a Japan,” as Ngozi Okonjo-Iweala, Nigeria’s former finance minister, puts it. China’s manufacturing has shifted to Bangladesh and Vietnam, not Africa.

In order for Africa to grow, its countries need to shift to more lucrative and productive ventures. Its governments need to prioritize better infrastructural development and incentives for foreign firms to manufacture in Africa, as there is still a significant dearth of secondary sector jobs compared to all the people who currently scavenge for work in cities and another industrial areas. If opportunity continues to be limited to small-scale operations such as restaurants and food markets (which altogether don’t generate too much growth), then another commodity bust is inevitable.