To mark Africa Industrialisation Day, four of our experts reflect on the opportunities and challenges of the African Continental Free Trade Agreement (AfCFTA) and how it can boost transformation in the continent.
You can also read the blog from our new Distinguished Fellow Arkebe Oqubay, who draws on new research to explain why industrialisation can take an active part in regional and global value chains.
Frequently asked questions
Dirk Willem te Velde: digitalisation and innovation are vital for African manufacturing
The past year has seen many dynamics around the ratification of the AfCTA. However, better market access alone has little value without developing productive capacities – especially in manufacturing.
Regional demand is likely to increase relatively fast; not only is Africa’s population growth the fastest in the world, but many of the world’s rapidly growing economies are indeed, African. It is better to develop production at home and export to the region (as long as it is competitive) to meet this growing demand, than to import goods and services from outside the region.
Much demand for manufactured products will be around food and beverages, consumer goods, as well as fashion and garments. While these sectors are the least prone to digitalisation, the point at which robots will overtake some production previously done by labour – because it is cheaper to do so than using rising labour costs – will be happening sooner rather than later.
Building up productions capabilities remains essential in the digital era, but even basic assembly functions can now also be done cheaply by robots. This would require African countries to focus on two areas: first, building industrial capabilities and second, innovation and digitalising production. Countries that do the former but not the latter eventually end up in a cul-de-sac.
Our recent consultations in Cambodia suggested that a 750,000 garment workforce (of which 80% are female) for example, is at risk over the coming few decades due to a lack of innovation and upgrading. A new shock, such as a trade shock, could change the situation drastically. Part of this is due to the position of Cambodian garment factories in Chinese dominated value chains. This requires continuous attention. While agriculture technology, digital payments, and transport apps are developing rapidly, it is much less the case in manufacturing.
The good news is that innovation is also linked to greener production, allowing for some leapfrogging opportunities. Also, renewable energy is becoming cheaper. A growing regional market matched by digital advances in manufacturing is a win-win for Africa. The pathways commission and ODI both provide ten steps on how to achieve this. The AfCFTA can advance this, as could others, for example by taking the G20 Initiative on Supporting Industrialisation in Africa seriously, or through the UK-Africa Investment Summit on 20 January 2020.
Frequently asked questions
Linda Calabrese: lessons for Tanzania on value chain integration
With duty-free access to Europe and the United States, direct access to sea routes, and a long history of producing textile, Tanzania has the potential to develop a thriving textile and garment sector.
Tanzania is also the largest cotton producer in East Africa, but despite this, there is limited integration along the value chain. Cotton produced in Tanzania is often exported, and domestic garment producers use imported textiles and yarns.
The government of Tanzania is seeking to address this in many ways, including enhancing value chain integration, ensuring more Tanzanian cotton is processed domestically, and encouraging more garment factories to use locally-produced textiles.
ODI’s comparative study of the development of the textile and garment sectors revealed many countries have struggled with this challenge. In this study, we look at six countries in Africa and Asia and review (among other things) their attempts at improving value chain integration and keeping more of the value produced in country.
Bangladesh started as a garment producer but has increasingly made inroads into producing textiles. This is likely linked to the fact that many investors are Bangladeshi entrepreneurs who are interested in growing their business at home.
Cambodia, on the other hand, is dominated by foreign producers who have limited interest in keeping business locally. Therefore, Cambodian firms have remained very successful at producing garments, but have not managed to capture other segments of the value chain.
This is not a foreign versus domestic firm issue. The experience of Lesotho and Madagascar, for example, shows a stark difference between foreign investors who wanted to grow their business in the country, and those who were merely interested in producing garments at low costs.
The lesson here is that value chain integration is not just something that happens when countries produce cotton and garments at the same time. Rather, it needs to be cultivated and promoted through appropriate policies that encourage the right type of firms to invest, and to produce increasingly more types of goods locally.
Frequently asked questions
Stephen Gelb: lower tariffs are not sufficient for industrialisation
The AfCFTA offers Africa an opportunity to do industrialisation and economic transformation differently.
Industrial growth in South and Southeast Asia during the past three decades has contributed to widespread income poverty reduction, creating millions of jobs with low wages but above poverty levels. But transformation has been much less successful in lifting new industrial workers – and their families – out of poverty from the consumption side. Food, housing and other “basic needs” items have remained expensive (as a share of income), low quality, or both. Many (possibly most) workers are forced to rely on informal markets and/or self-provision. And labour productivity (and business profit) is cut through health-related worker absenteeism and turnover.
Industrialisation in Asia has perhaps been too export-oriented, focused on supplying consumer goods for high-income markets, with domestic markets less profitable and a low policy priority.
Yet, as long recognised, very few African domestic markets are big enough for successful industrial production of low-cost consumer products. The AfCFTA is the latest in a series of multilateral African efforts to create larger regional markets to encourage investment and expansion in these sectors.
Three factors have been significant in past failures:
- Inadequate economic infrastructure (energy, communications, goods and people transport) within and between countries;
- Inadequate cross-border trade facilitation;
- Only a small number of firms are willing (due to risk) and able (due to the low supply of effective managers) to scale up production, distribution and marketing of consumer products to African markets.
Big strides have been taken towards addressing the first of these challenges in recent years, and there has been good progress on the second. The AfCFTA offers the promise of further progress.
The third problem remains very substantial. The AfCFTA must be accompanied by active investment promotion at country level of both foreign direct investment (FDI) and in-migration of entrepreneurs, from within Africa and also Asia. And it must be accompanied by an active industrial policy in consumer products to reduce firms’ risk through shared financing.
Frequently asked questions
Karishma Banga: the digital economy and the AfCFTA
The digital economy presents new opportunities to make the AfCFTA more effective through enabling greater intra-African trade. For instance, digital technologies on the production side have enabled manufacturing firms in Kenya to increase their productivity, diversify into new products and enter into regional markets.
The emergence of smartphones, digital payments and electronic banking have also led to the growth of large business-to-consumer e-commerce platforms in Africa such as Jumia in Nigeria, Takealot in South Africa and Kilimall in Kenya.
For industrialising in the digital age, African countries will need good and reliable internet access, digital skills, and supportive policy and regulatory frameworks. The AfCFTA can be an important vehicle for African countries to leverage the benefits of the digital economy through the development of regional and continental markets, harmonisation of legal frameworks, and sharing of best practices and participation in global negotiations.
Digitalisation can facilitate increased market access and competitiveness, exploitation of economies of scale and efficacy of resource allocation in the continent. To this effect, the African Union Executive Council has mandated the development of the Digital Transformation Strategy for Africa (2020-2030).
But it is key to note that African countries are entering the AfCFTA with varied levels of digital development. For example, currently, Egypt is the only African country that has a national e-commerce policy in Africa.
UNCTAD data further suggests that only 23 African countries have formal legislation on data protection and privacy, seven have draft legislation, while 12 countries have no legislation yet.
The absence of a regulator, even in countries which have data protection laws, is in part caused by insufficient resources. It is becoming increasingly important to map national and regional digital strategies in Africa, which can feed into the digital economy policy negotiations in the AfCFTA to foster inclusive digital transformation.