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


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.

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  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.


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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.

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Correspondence to Vijaya Ramachandran.

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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).

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  • Africa
  • Labor
  • Productivity
  • Competitiveness

JEL Classification

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