Manufacturing sector can sustain growth

The vast majority of experts agree that a vibrant manufacturing sector can be a source of sustained productivity and growth.

 

There is evidence that a healthy manufacturing sector can help to bridge the gap in income levels between rich and poor countries. But the historical importance of manufacturing in economic growth has led some observers to be sceptical about the sustainability of Africa’s recent and rapid “boom”. Rather than industrialising, many believe that the manufacturing sector in Africa has contracted and that the continent is actually de-industrialising.  Yet a careful scrutiny of the recent facts indicates this is not so.
 
First of all new evidence suggests that the average growth rate for the continent is positive and urban to rural migration is over. Second, a lot of manufacturing employment takes place in the informal sector. Productivity is higher in formal than informal manufacturing. But an overemphasis on this gap misses some important points. One of the reasons that much of modern day manufacturing is so productive is because it demands high capital intensity. In many African economies, where jobs are sorely needed, capital intensive manufacturing might produce growth, but arguably it will not solve the more pressing employment problem. Furthermore, productivity in informal manufacturing is still significantly higher than productivity in subsistence agriculture. 
 
A third reason for the confusion around belief that Africa is de-industrialising is the tendency of researchers to lump all of Sub-Saharan Africa (SSA) together. This is a problem because Mauritius and South Africa are clearly outliers. The share of employment in manufacturing in Mauritius fell from 32 percent in 1990 to 19 percent in 2010, but this decline has been matched by an increase in employment in much higher productivity services. South Africa, meanwhile, which has been far more industrialised than the rest of SSA, faces unique challenges stemming from the legacy of apartheid. By contrast, in the rest of the sub-Saharan region - sometimes referred to as developing Africa - the share of employment in manufacturing increased by a little over 2 percentage points between 2000 and 2010.
 
Alongside the employment numbers, there are other signs that the manufacturing sector in developing Africa is starting to flourish. Between 2000 and 2010, the share of manufacturing exports in goods and services more than doubled from 10 percent to 23 percent; and if we exclude a handful of oil exporters, that share rises to 32 percent. These numbers are not driven by a just a few countries, but based on a group of 34 countries in developing Africa. 
 
The challenge now is figuring out how to ensure that these investments lead to job creation. Given the high degree of informality in manufacturing, it will be important to try to link businesses in the informal sector to those in the formal sector. Such linkages have the potential to raise productivity and wages in the informal sector while at the same time lowering the costs of formal firms by making them less reliant on imported inputs. It was just these kinds of linkages that led to the success of thousands of small firms in China.


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