How continent can cash in as China changes
How continent can cash in as Beijing seeks factories in lower-wage countries
An expanding manufacturing sector has been the backbone of economic takeoff everywhere since the industrial revolution. However, prior to World War 2, the production and consumption of manufactured products were bundled together in close geographic proximity due to the costs and convenience of limited transportation and a rudimentary logistics sector.
After World War 2, dramatically improved efficiency in logistics, later to be supercharged by the IT revolution, enabled companies to rapidly globalise their production — choosing locations where they could combine their proprietary know-how with cheap local wages, and ship the products to new markets across the globe.
This unbundling of production from consumption, as described by Richard Baldwin, a professor of international economics, is the economic underpinning that powered the success of the East Asian tigers, followed spectacularly by China, in the past half a century.
The success of the Asian tigers and China is in sharp contrast with the lack of progress in Africa.
Research by Dani Rodrik, newly appointed to President Cyril Ramaphosa’s economic advisory team, has found that between 1990 and 2005, 60% of the differences in output per worker between Asia and Africa can be attributed to the movement of Asian workers out of low-productivity employment such as agriculture and low-end services into more productive manufacturing employment in which workers also earn better wages.
Furthermore, Rodrik found that this inter-sector reallocation of workers has the added virtue of leading to gains in productivity within sectors. As workers leave agriculture for better employment, agriculture itself is transformed. Fewer agricultural workers stimulates investment in better tools and technology and the sector becomes more productive.
As one of us has argued previously (in “We must seize this Vietnam moment”, September 1 2019), there is now a new window of opportunity for Africa to ramp up its manufacturing sector.
China is undergoing a profound transition in which the service sector, driven by increasing domestic private consumption, is becoming the most important growth engine, supplanting industrial production.
In this process, China is sending its low-end labour-intensive manufacturing to lower wage countries. In recent years, countries like Bangladesh, Sri Lanka and Vietnam especially have benefited hugely from this out-migration of manufacturing capacity and jobs from China. According to its General Statistics Office, Vietnam’s manufacturing employment grew by 24% in just two years, between 2013 and 2015, just as manufacturing out-migration from China accelerated.
Can Africa repeat the success of Vietnam?
If rising wages in China are the “push” factor, then we can think of conditions in countries aspiring to capture some of the manufacturing jobs leaving China as the “pull” factors.
In 2013 (the most recent year that consistent data can be obtained for all countries), the average monthly wage in manufacturing in China was $625. Anything below that would offer the opportunity for wage arbitrage, hence a “pull” factor. The latest Chinese monthly manufacturing wage is now over $900 (R12,900), so the “push” factor today is even stronger than that shown in the 2013 data.
Among six African countries — SA, Rwanda, Ethiopia, Ghana, Egypt, and Mauritius — five have monthly wages lower than China’s. SA has a monthly wage that is substantially higher than China’s.
On the basis of wage rates then, Rwanda, Ethiopia, Ghana, Egypt and Mauritius would appear to have a distinct wage advantage in attracting some of the out-migration of manufacturing jobs from China. But it is also interesting to note that three African countries (Egypt, Ghana and Mauritius) have higher manufacturing wages than Vietnam.
A straightforward comparison of monthly wages describes only one of the “pull” factors needed to attract the relocation of manufacturing jobs from China. Equally important is the state of physical infrastructure, and tools and equipment and their associated technology that affect the operations of factories, warehouses, transportation, logistics and communication.
A proxy measure for these “pull” factors is the estimate of capital stock per capita, which has been calculated for the same six African countries alongside China and Vietnam. The capital stock per capita estimates are for 2000 and 2015 (the latest year when data is available), which then allows for the calculation of the growth rate over this period. Capital stock refers to invested assets that enhance an economy’s ability to perform.
Among the African countries, Mauritius has the highest capital stock per capita at $41,408, which is higher than China’s $35,040, and one of the highest growth rates at 72% over the designated period. Ethiopia and Rwanda have the lowest at $2,359 and $2,398 respectively, but have the highest growth rates of 102% and 115% respectively, leaving the other African countries behind. It is apparent that a rapid growth rate of capital stock per capita is important, as seen in China’s 327% and Vietnam’s 263%.
Combining these “pull” factors, the most promising African countries in attracting manufacturing jobs leaving China should then have the widest wage differential with China, the highest capital stock per capita, and the fastest growing rate of capital stock per capita.
A straightforward combining of the scores of the three rankings would provide a rough overall ranking of the six African countries of their “pull” factors in attracting manufacturing jobs that are exiting China (the lower the score the stronger the pull factors). Rwanda ranks first with a score of 8, followed by Ethiopia second with a score of 9. Ghana and Mauritius are both in joint third place with a score of 10, and Egypt is in fourth place with a score of 12. SA comes in last of the reviewed countries with 14.
This analysis of the “pull” factors leaves out other equally important factors like enabling infrastructure, regulations and tax policies, access to finance, skills of the workforce and capabilities of local firms — that is, a functional ecosystem conducive to attracting investment. A fuller analysis is therefore needed to calibrate more precisely Africa’s potential in seizing the new opportunity to ramp up its manufacturing to drive its economic development.
But building an industrial-driven economy does not come about through a simple policy switch. It is a generation-long process during which the infrastructural foundations are laid — and on top of which pragmatic pro-business policies are overlaid.
Policies that spur manufacturing — and their implementation — are perhaps, then, the long-term “secret sauce” for the inclusive growth recipe.
Dr Wong is a visiting scholar at the Lee Kuan School of Public Policy, National University of Singapore, and Dr Davies is dean of the Deloitte Alchemy School of Management