Poor infrastructure, a lack of access to land and access to finance continue to hold development back, mitigating the comparative advantages provided by low labour costs.
Indeed, Africa’s share of global light manufacturing stands at less than 1 percent today. Despite preferential access to US and EU markets, manufacturing accounts for only about 9 percent of GDP for Africa as a whole, a smaller share than in any other region. As a result, many workers have remained trapped in low productivity jobs in the informal economy. Without a significant transformation of its industrial structure, Africa is unlikely to catch up with more prosperous regions such as East Asia.
Millions of low-skilled, informal workers in East and South Asia have been lifted out of poverty through light manufacturing. Labour-intensive manufacturing is even more important for resource-based economies with large amounts of unskilled workers because the exploitation of natural resources tends to discourage development in job-creating sectors, such as agriculture and manufacturing. Beyond its capacity to stimulate job creation, light manufacturing also has the potential to spur trade.
What these economies need is a focused initiative to inject new elements of prosperity and allow for industrialisation that does not rely on slowly developing infrastructure or wider structural reform. The targeted development of light manufacturing represents a good start for accelerating industrialisation and prosperity in low-income countries.
A positive example of this can be seen in Golden Roses, Ethiopia’s first private rose farm. Started in 2000 on 7 hectares of state-owned land, within a decade it had sparked an industry of close to 100 firms exporting flowers worth over $200 million a year. The success of the rose industry was not due to resolving all the constraints to private sector development in the country. Rather, rose farmers focused on only the most important ones: access to industrial land and finance.
This example from Ethiopia is reminiscent of the Chinese government’s initiative 15 years earlier, when it created four small special economic zones as an experiment in the market economy. These zones benefited from supportive policies that allowed competitive private firms to bypass a host of restrictions and controls, the success of which jump-started China’s wider manufacturing sector.
Both initiatives, from China and Ethiopia, illustrate a phenomenon not often discussed: reforms in specific industries and/or locations can create so-called “islands of success” in an otherwise moribund economy. And with success built upon success, the impact on the general economy can be significant.
This is one of five valuable policy lessons that can be drawn from the East Asian experience in growing light manufacturing, which I discuss in a book[1] recently published by the World Bank. Importantly, none of these policy measures can be initiated and implemented alone by the private sector, hence the need for selective government interventions over and above any economy-wide reforms.
For Africa, the timing of these changes could be critical. Rising labour costs in China mean that China’s comparative advantage in labour-intensive manufacturing will continue to erode, perhaps at an even more rapid rate. These conditions are creating an opening for other low-wage producers if they can learn to compete. Yet these changes have to be done through the establishment of islands of success, one island at a time.
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[1] Tales from the Development Frontier: How China and Other Countries Harness Light Manufacturing to Create Jobs and Prosperity, H. T. Dinh, T.G. Rawski, A. Zafar, L. Wang, and E. Mavroeidi (The World Bank, Washington, DC, 2013).
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