How Africa skipped an industrial milestone
‘Innovation curse’ distracted from economic essentials
THE pace of global interconnectedness has been the subject of many a discussion, but perhaps an element that has yet to be explored in depth is its effect on the growth path of several African economies.
A country would traditionally start as an agrarian economy and progress to an industrial one, then mature into a services-led economy. Many African countries, however, did not follow this path — a big part of the industrialisation phase was missed in the quest to compete on a global scale. In fact, sub-Saharan Africa has on aggregate been deindustrialising over the past 15 years.
This is evident from the decrease in the share of manufacturing and industry in total output.
Two economic theories underpin the effect of globalisation on the short-lived industrialisation process, and subsequent deindustrialisation: the Kuznets curve, and comparative advantage in international trade economics.
The Kuznets curve hypothesis states that as an economy undergoes industrialisation — when economic production shifts from agriculture to industrial manufacturing — market forces result in an initial increase in inequality until the benefits have trickled down through the economy, then inequality starts to decline. This may be one of the leading drivers of the growth in inequality in the early industrialisation stages of subSaharan countries.
A country has comparative advantage when it can produce a product at a lower cost than its trading partners can. Many sub-Saharan African countries, however, had no comparative advantage in manufactured goods, only in raw materials and selected soft commodities such as coffee, cocoa and maize.
This meant that many economically developed trading partners had an absolute advantage, which led to subSaharan Africa being a net importer of manufactured goods, making local industry uncompetitive, and ultimately led to factories closing.
A good case study is the textile industry. The World Trade Organisation in 2005 introduced new rules that resulted in the opening of a textile market that had largely been protected for 30 years — by removing a quota system known as the Multi-Fibre Arrangement. That, according to the UN, cost Africa more than 250 000 jobs.
The arrangement was set up in 1974 to protect indigenous textile and clothing industries by putting a cap on imports from other countries. The countries most affected by the removal of the quotas were Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Namibia, Nigeria, South Africa, Swaziland and Zambia. When the arrangement was scrapped, these countries were squeezed by imports, mostly from China and India.
The subsequent deindustrialisation meant that there was no technology transfer to enable the development of research skills, manufacturing methods and productive technologies.
Instead, the continent fell victim to the “innovation curse”. The curse behind necessity-led innovation is that it usually addresses a small problem that is part of a bigger economic deficiency, and may therefore be a distraction from broader issues that need to be dealt with.
To illustrate: the success of mobile technology on the continent was because of poor access to basic infrastructure such as roads, banking, energy and fixed-line telecommunications. The rapid growth in this industry was driven by the fact that it enabled people to communicate more easily and cheaply. But it also meant that economic resources (fiscal and foreign direct investment) followed the momentum of this industry’s growth rather than being used for other, broader needs in an economy, such as building roads.
For Africa to grow sustainably, supported by rising incomes and lower unemployment, investment in innovation-led growth should focus on infrastructure, trade policy and ease of doing business.
In a long-awaited response, the AU Commission, with the New Partnership for Africa’s Development, the African Development Bank and Nepad’s Planning and Co-ordinating Agency, formulated the Programme for Infrastructure Development. This provides a common framework for African stakeholders to build the infrastructure necessary for integrated transport, energy, information and communication technology and transborder water networks to boost trade, spark growth and create jobs.
The 1952 findings of The Economics of Industrialisation are true today — manufacturing tends to play a significantly larger role in total output in richer, more developed countries. Also, higher incomes are associated with a bigger role by the transport and machinery sectors.
The reindustrialisation of sub-Saharan Africa is critical to reduce income inequality and high unemployment, and ensure sustainable economic prosperity for the generations yet to come.
Skenjana has an MSc (finance) from ESADE Business School in Spain and a B.Bus.Sci (finance honours) from the University of Cape Town. He is an independent adviser and research consultant on African industry, financial and capital markets