Can Sub-Saharan Africa Be a Manufacturing Destination? Labor Costs, Price Levels, and the Role of Industrial Policy

Abstract

Our central question is whether, and how, African countries can break into global manufacturing in a substantial way. For many poor countries, labor-intensive sectors based on low-cost production platforms have been the first step on the industrial ladder. Using a newly constructed panel of firm-level data from the World Bank’s Enterprise Surveys, we look at labor costs in a range of low- and middle-income countries in Africa and elsewhere. Using fixed and random effects models, we find that relative to comparator countries at comparable income levels, industrial labor is more costly for firms that are located in Sub-Saharan Africa. This suggests that, if they are to industrialize, most countries will need to seek other paths, whether based on natural resources or on regional integration, or measures to improve their business climates and upgrade their skills to the point that competitiveness improves enough to sustain industry without resorting to low wages. Such a “balanced strategy”—perhaps along the lines of the “matrix” approach advocated for Europe—may be more politically appealing for some countries but in the interim it risks failing to create large numbers of industrial jobs and perhaps foregoing learning opportunities. However, we also find that Africa is not homogeneous: there are a few countries that, on a labor cost basis, and also on the basis of observed purchasing power parity price levels, may be potential candidates for low-wage manufacturing. Ethiopia stands out and appears to be making efforts to position itself as a low-cost manufacturing platform, although it is too early to pronounce on its success. We analyze its policies from a cost-competitiveness perspective, including those related to agriculture, to investor incentives, and to holding down the costs of essential inputs and improving their supply.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3

Notes

  1. 1.

    See also the broad definition of competitiveness recently adopted by the European Economic and Social Committee and the incorporation of targets that go “beyond GDP” to include, for example, environmental sustainability (Aiginger 2016).

  2. 2.

    On the current crisis in globalization, see Aiginger and Handler (2017).

  3. 3.

    On mining, for example, it is not clear whether beneficiation provides for a long-term path towards industrialization and development(Hausmann et al. 2008).

  4. 4.

    For a recent picture of African aspirations, see African Union (2015). For comparable discussions in Europe, including the “matrix” approach with a heavy emphasis on horizontal policies (including technology and innovation) but with a degree of sectoral differentiation, see Aiginger and Sieber (2005).

  5. 5.

    For example, if 100 firms in Afghanistan were interviewed in 2002, in their next round of survey, say 2006, they would contact 50 randomly selected firms from the previous survey round, and if available would survey them again.

  6. 6.

    We do not use other concepts of labor costs, such as the ratio of labor costs to value added or labor costs to sales.

  7. 7.

    An alternative approach could be to directly take an indicator like the GCI to represent the physical, human and institutional capital of the country; this correlates strongly, and approximately linearly, with ln GDP per capita. The approach is less useful here because of the small size of the country sample; various factors can cause sizeable deviations between countries’ income and GCI rankings. The approach also confronts the problem of dualism. South Africa, for example, ranks far higher on the GCI than in terms of GDP/head but its high formal wage levels coexist with unemployment estimated at 27 percent, one of the highest rates in the world. From the perspective of job creation, it is less useful to consider South Africa’s enclave wage levels in relation to its CGI than relative to the broader, income-based, measure of its economic development.

  8. 8.

    Value of 1 ony-axis indicates that country’s median labor cost per worker is equal to the country’s mean wage (defined by the country’s GDP per capita).

  9. 9.

    The 2017 WEF competitiveness rankings for DRC and Malawi are 129 and 134 respectively.

  10. 10.

    Taking a further leaf from China’s playbook, Ethiopia’s government has taken additional steps to woo its large diaspora (Africa News 2018)

  11. 11.

    Hoeffler (2011) reviews agriculture and food policies in Sub-Saharan Africa, noting that, even after heavy discrimination against the sector was reduced with the partial retreat from import-substituting policies in the 1980s, governments were far more attentive to concentrated urban elites than to dispersed rural populations engaged in so-called “backwards” sectors.

  12. 12.

    2002–2005: Poverty Reduction Program (SDPRP), 2005–2010: Plan for Accelerated and Sustained Development to End Poverty (PASDEP), 2010-2015: Growth and Transformation Plan I (GTP I), 2015–2020: Growth and Transformation Plan II (GTP II)

  13. 13.

    Weldesilassie et al. (2017) provide a comprehensive review of best practices in developing industrial parks, based on the successes and challenges of Chinese special economic zones.

  14. 14.

    This paper is built on a stated assumption that the tax-incentive policies were not targeted, but other papers in this summary have provided abundant evidence to suggest that they are; for example, Ethiopia has seen the leather products industry as key to its industrialization pathway. Likewise, the focus on the floriculture industry began in the 2005-2010 PASDEP, but the enterprises of that sector are excluded from this analysis for unclear reasons, although it also was a targeted sector. Finally, the growth in manufacturing has accelerated in the years after 2010, which suggests that extending the time horizon of the sample could have yielded different results.

References

  1. Abate GT, Bernard T, de Brauw A, Minot N (2018) The impact of the use of new technologies on farmers’ wheat yield in Ethiopia: evidence from a randomized control trial. Agricultural Economics

  2. Abebe G, McMillan MS, Serafinelli M (2018) Foreign direct investment and knowledge diffusion in poor locations: Evidence from Ethiopia. National Bureau of Economics Research

  3. Abiye Y (2017) Gov’t to absorb fuel prices change due to devaluation. The Reporter

  4. Africa News (2018) Commercial bank of Ethiopia woos diaspora with mortgage loans. Africa news, October 6

  5. African Union (2015) Agenda 2063: The Africa We Want—First Ten-Year Implementation Plan 2014–2023. African Union

  6. Aiginger K (2016) New dynamics for Europe: Reaping the benefits of socio-ecological transition. Synthesis Report. WWW for Europe

  7. Aiginger K, Handler H (2017) Towards a european partnership policy (EPP) with the south and the east. Fostering dynamics, fighting root causes of migration. Policy crossover center: Vienna - europe, Working Paper 3/2017

  8. Aiginger K, Sieber S (2005) Towards a Renewed Industrial Policy in Europe. Prepared as Chapter 1 for the 2005 Background Report of the Competitiveness of European Manufacturing. European Commission

  9. Aiginger K, Sieber S (2006) The Matrix Approach to Industrial Policy. International Review of Applied Economics, vol. 20, no. 5, December

  10. Bachewe F, Headey D (2017) Urban wage behaviour and food price inflation in Ethiopia. Journal of Development Studies

  11. Bachewe FN, Berhane G, Minten B, Taffesse AS (2016) Ethiopia Strategy Support Program II Research Note No. 53. International Food Policy Research Institute

  12. Berg A, Hedrich S, Russo B (2015) East Africa: The next hub for apparel sourcing? McKinsey & Company

  13. Bradsher K (2017) Chinese maker of Ivanka Trump’s shoes looks for cheaper labor. The New York Times

  14. Brautigam D, Mcmillan M, Tang X (2013) The role of foreign investment in Ethiopia’s leather value chain. PEDL Research Note-ERG project

  15. Calabrese L, Gelb S, Hou J (2017) What drives Chinese outward manufacturing investment? a review of enabling factors in Africa and Asia [Background Paper]. Supporting Economic Transformation, Overseas Development Institute

  16. Ceglowski J, Golub S, Mbaye A, Prasad V (2015) Can Africa compete with China in manufacturing? The role of relative unit labor costs. Manuscript, Swarthmore College

  17. Dechassa C, Tolosa T (2012) The contribution of agriculture to development: A critical review in Ethiopian context. The International Journal of Social Sciences

  18. Dijkstra A (2015) Low wages draw international textile companies to Ethiopia. Deutsche Welle

  19. Donnenfeld Z (2017) Downstream costs of the Grand Ethiopian Renaissance Dam. Institute for Security Studies

  20. Eifert B, Gelb A, Ramachandran V (2008) The cost of doing business in Africa: Evidence from Enterprise Survey Data. World Development Report 36(9):1531–1546

    Article  Google Scholar 

  21. Ethiopian Investment Commission (2017) Industrial Parks in Ethiopia Incentives Package [Brochure]. Ethiopian Investment Commission, Addis Ababa

    Google Scholar 

  22. Finance and Economic Development Ministry FDRoE (2002) Ethiopia: Sustainable Development and Poverty Reduction Program. Ministry of Finance and Economic Development, Addis Ababa

    Google Scholar 

  23. Finance and Economic Development Ministry FDRoE (2006) Ethiopia: Building on progress—a plan for accelerated and sustained development to end poverty (Volume I: Main text). Addis Ababa: Ministry of Finance and Economic Development

  24. Fox L, Thomas A, Haines C (2017) Structural transformation in employment and productivity: What can Africa hope for? International Monetary Fund

  25. Gebreeyesus M (2013) Industrial policy and development in Ethiopia. Manufacturing Transformation, 27. WIDER Working Paper 2013/125

  26. Gebreselassie S (2006) Land, land policy and smallholder agriculture in Ethiopia: Options and scenarios. Discussion Paper No 008. Brighton: Future Agricultures

  27. Gebrewolde TM, Rockey J (2016) The effectiveness of industrial policy in developing countries: Causal evidence from Ethiopian manufacturing firms. Discussion Papers in Economics No 16/07. Leicester: University of Leicester

  28. Gelb A, Diofasi A (2015) What determines Purchasing Power Parity exchange rates? - Working Paper 416. Center for Global Development

  29. Gelb A, Mengistae T, Ramachandran V, Shah MK (2009) To formalize or not to formalize? Comparisons of microenterprise data from Southern and East Africa - Working Paper 175. Center for Global Development

  30. Gelb A, Meyer CJ, Ramachandran V (2013) Does poor mean cheap? a comparative look at Africa’s industrial labor costs - Working Paper 325. Center For Global Development

  31. GlobalPetrolPrices.com (2018) Gasoline prices, liter

  32. Hai H (2016) Why invest in Africa: Markets, know-how and comparative advantage. In: Calabrese L (ed) China-Africa: a Maturing Relationship? Growth Change and Resilience. DFID-ESRC Growth Research Programme, Johhanesburg, pp 13–16

  33. Hansegard J, Vogt H (2013) H&M looks to source clothing from Ethiopia. Wall Street Journal

  34. Hausmann R, Klinger B, Lawrence R (2008) Examining beneficiation. Harvard Kennedy School Working Paper Series

  35. Hoddinott JF, Stifel D, Hirvonen K, Minten B (2018) The impact of large-scale social protection interventions on grain prices in poor countries: Evidence from Ethiopia. International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI)

  36. Hoeffler H (2011) The political economy of agricultural policies in Africa: history, analytical concepts and implications for development cooperation. Q J Int Agric 50 (1):29–53

    Google Scholar 

  37. International Non-partisan Eastern Nile Working Group (2014) The Grand Ethiopian Renaissance Dam: An opportunity for collaboration and shared benefits in the Eastern Nile Basin. MIT Abdul Latif Jameel World Water and Food Security Lab

  38. Mail and Guardian (2013) Minimum wage disputes: Is it worth the fight in Newcastle? Mail and Guardian, 30 May

  39. Manek N (2018) As crude tests begin, Ethiopia touts nascent oil, gas industry. Bloomberg

  40. Mbate M (2016) Structural change and industrial policy: A case study of Ethiopia’s leather sector. J Afr Trade 3(1-2):85–100

    Article  Google Scholar 

  41. McCann J (2017) The history of agriculture in Ethiopia. Oxford Research Encyclopedia of African History

  42. Norton A (2017) Automation and inequality: The changing world of work in the global South. International Institute for Environment and Development

  43. Oqubay A (2018a) Industrial policy and late industrialisation in Ethiopia. African Development Bank No. 303

  44. Oqubay A (2018b) The structure and performance of the Ethiopian manufacturing sector. African Development Bank No. 299

  45. Page J (2012) Can Africa industrialise?. J Afr Econ 21(suppl 2):ii86–ii124

    Article  Google Scholar 

  46. Reuters (2008) Ethiopia ends fuel subsidy, increases pump prices. Reuters

  47. Rodrik D (2008) The real exchange rate and economic growth. Brookings Papers on Economic Activity, Fall 2008

  48. Scarano G (2016) H&M commits to 4,000 new jobs in Ethiopia. Sourcing Journal

  49. Schwab K, Sala-i Martín X (2016) The Global Competitiveness Report 2016-2017: Insight Report. World Economic Forum. OCLC, Geneva, p 989119813

    Google Scholar 

  50. Siba E, Söderbom M, Bigsten A, Gebreeyesus M (2012) Enterprise agglomeration, output prices, and physical productivity: Firm-level evidence from Ethiopia. WIDER Working Paper, (2012/85)

  51. Söderbom M. (2003) Are manufacturing exports the key to economic success in Africa? J Afr Econ 12(1):1–29

    Article  Google Scholar 

  52. Söderbom M, Teal F (2000) Skills, investment and exports from manufacturing firms in Africa. CSAE-UNIDO

  53. Söderbom M, Teal F (2004) Size and efficiency in African manufacturing firms: evidence from firm-level panel data. J Dev Econ 73(1):369–394

    Article  Google Scholar 

  54. Staritz C, Plank L, Morris M (2016) Global Value Chains, Industrial Policy and Sustainable Development—Ethiopia’s Apparel Export Sector. International Centre for Trade and Development, Geneva

    Google Scholar 

  55. Tadele N (2014) Bio-fuel development experience of Ethiopia

  56. Tybout JR (2000) Manufacturing firms in developing countries: How well do they do, and why? J Econ Lit 38(1):11–44

    Article  Google Scholar 

  57. Van Biesebroeck J (2005) Firm size matters: Growth and productivity growth in African manufacturing. Econ Dev Cult Change 53(3):545–83

    Article  Google Scholar 

  58. Vandercasteelen J, Tamru S, Minten B, Swinnen J (2016) Cities and agricultural transformation in Africa: Evidence from Ethiopia. International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI)

  59. Weldesilassie A, Gebreeyesus M, Abebe G, Aseffa B (2017) Study on industrial park development: Issues, practices and lessons for Ethiopia. Ethiopian Development Research Institute (EDRI)

  60. Worku IH, Dereje M, Minten B, Hirvonen K (2017) Diet transformation in Africa: the case of Ethiopia. Agric Econ 48(S1):73–86

    Article  Google Scholar 

  61. Young R (2016) Made in Ethiopia. Fashion’s next sourcing hub? The Business of Fashion

Download references

Acknowledgments

The authors are grateful to Karl Aiginger, Tom Bundervoet, Ranil Dissanayake, Louise Fox, Matthew Johnson-Idan, David Lam, Dani Rodrik, Alexis Smallridge, Mallika Snyder, Francis Teal, an anonymous external reviewer, and seminar participants at the DFID-IZA Growth and Labor Markets in Low Income Countries Workshop at Oxford University, the DFID economist seminar series, the World Bank’s Trade and Competitiveness Learning Week, and the Research in Progress series at the Center for Global Development. We owe a special debt to Joshua Wimpey at the World Bank for his guidance regarding the Enterprise Surveys dataset. All errors are, of course, ours alone.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Vijaya Ramachandran.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Gelb, A., Ramachandran, V., Meyer, C.J. et al. Can Sub-Saharan Africa Be a Manufacturing Destination? Labor Costs, Price Levels, and the Role of Industrial Policy. J Ind Compet Trade 20, 335–357 (2020). https://doi.org/10.1007/s10842-019-00331-2

Download citation

Keywords

  • Africa
  • Labor
  • Productivity
  • Competitiveness

JEL Classification

  • R23 — Regional Labor Markets
  • J24 — Labor Productivity
  • L60 — Industry Studies: Manufacturing (General)