By Charlotte M.L. Rosalie Consultant at EMSA Emerging Markets Africa
Characterised by accelerating regulatory reforms, plenty of available cheap, young labour and land, and a newly found, self-assertive attitude, Africa is gearing up to transform itself into an economic powerhouse. As Africa’s manufactured output roughly doubled over the last 10 years and talk of rising wealth and accompanying labour costs in Asia builds up, the question arises whether Africa will become the next global manufacturing hub.
Manufacturing is often seen as essential for any country to attain a high standard of living. Hitching the wagon to a services-only economy is not a very effective approach for fighting poverty in the long term. At first sight, this seems to be bad news for Africa, as the service sector in Africa’s 10 largest economies makes up 40 percent of GDP. Africa’s manufacturing sector is confronted by challenges as corruption, red tape and a lack of infrastructure. The latter is partly a consequence of the boom in commodity prices, as governments have neglected industrial needs for roads and electricity. Low productivity has been another issue that has plagued Africa for a long time.
However, recent trends have made manufacturing in Africa increasingly attractive for entrepreneurs and investors. First, African regimes have made serious efforts to improve their business climate and to cut red tape. Coupled with increased investment in infrastructure, this has reduced the cost of doing business. Second, rising consumer demand in Africa draws production facilities to the continent. Combined, the domestic markets in Africa only trail those in China and India. Private consumption is buoyed by an emerging middle class and strong urbanisation.
Third, demographic development means Africa has a growing and young labour force. The World Bank believes that upward wage pressure in East Asia (most notably China), combined with other factors, presents an opportunity for Africa to attract light manufacturing. If Africa’s governments implement supportive policies, companies will look to relocate there, bringing investment and jobs. Companies like Primark, H&M and General Electric have already shifted production to the African continent.
In recent years, manufacturing was responsible for a steady 10 to 14 per cent of Africa’s GDP. This means it has kept pace with the rest of the economy of the fastest-growing continent in the world. Although Africa’s manufacturing output takes a small share of 1.5 percent in global manufacturing, this is still up from 1 percent back in 2000. The most appropriate comparison might be India. India has a comparable sizeable services sector (53% of GDP) and services have long been the backbone and the catalyst of its economy. This has allowed it to build a manufacturing sector from a low base. Becoming the next global manufacturing hub might be a step too far for the countries of Africa, but with the described positive trends in place, Africa can build a competitive manufacturing sector with enormous potential for both the host country and international companies.