Addressing manufacturing loopholes in Africa

Manufacturing is a vital engine of economic development, but Africa’s economies overall have underperformed. As Africa’s economies have grown and diversified over the past two decades, there has been a steady increase in manufacturing output — indeed, a rapid increase in Ethiopia and Tanzania, in particular.

By Kudzai Goremusandu

In 2015, Africa’s total manufacturing output was worth around $500 billion and the vast majority of that was focused in five countries — Egypt, Morocco, Nigeria, South Africa and Tunisia
In 2015, Africa’s total manufacturing output was worth around $500 billion and the vast majority of that was focused in five countries — Egypt, Morocco, Nigeria, South Africa and Tunisia

Nevertheless, Africa’s growth in manufacturing value added of 2,5% a year between 2000 and 2015 according to World Bank report, while roughly in line with the global average, lagged far behind Asia’s 7,4%.

In 2015, Africa’s total manufacturing output was worth around $500 billion and the vast majority of that was focused in five countries — Egypt, Morocco, Nigeria, South Africa and Tunisia.

Seventy percent of this production was focused on meeting domestic needs and was consumed in the country of manufacture; some 10% was traded within Africa, and just 20% was exported beyond Africa.

The continent produced just 1,4% of global manufacturing exports in 2014, and its share has remained within the narrow band of 1% to 1,5% since 2000. By contrast, China grew its share of global exports from 4,5% in 2000 to 15% in 2014.

The Africa Leadership Insights Institute estimates that by 2025, Africa could nearly double its current manufacturing output of $500 billion to $930 billion. On current trends, output is set to rise to an estimated $643 billion by 2025.

However, $287 billion could be added to that if African countries take decisive action to create an improved environment for manufacturers. The rewards of accelerated industrialisation would be immense.

There would be a positive step change in national wealth, tax receipts, productivity and skills and balance of payments. An expanded and more productive manufacturing sector could also create six million to 14 million stable jobs over the next decade, an increase of five to 11% from 2015.

Manufacturing activity improved in a few countries (Ethiopia, Kenya, Rwanda and South Africa), but was often constrained by weak export demand and/or power shortages. New investment is expected to boost manufacturing in the coming years in several countries (for example Botswana and Mauritius).

The largest manufacturing opportunity in Africa is in the category of goods as global innovation for local markets, which includes vehicles and chemicals. This opportunity will likely be feasible for only some African countries, primarily Egypt, Morocco, South Africa, and Tunisia.

In these economies, manufacturers have already significantly increased their capacity in these areas. Morocco and Egypt expanded their automotive sectors by around 10% a year in real terms between 2004 and 2014.

While South Africa’s larger automotive sector grew more slowly, it still added nearly $5 billion in incremental revenue over that period, while its chemicals sector added more than $6 billion in incremental revenue.

African manufacturers have an opportunity to supply more local demand and increase their exports in this category. By raising their share in the 10 largest existing export markets to that of the highest quartile, Africa’s four largest manufacturing nations could earn up to $209 billion in additional annual revenue in 2025 — six times what they would achieve if historical growth rates remained in place

Africa can grow the manufacturing sector by addressing challenging in foreign direct investment. Foreign investment into Africa increased by 16% from to $57,5 billion in 2015, according to IMF figures.

Flows to North Africa reversed a downward trend, as investment increased by 20% from $17,2 billion in 2014 to $ 20,7 billion in 2015. East Africa has seen higher FDI since 2010.

In 2015, the figure rose 16% to $ 8,9 billion in 2015 from $7,7 billion the previous year. For West Africa, investment rose from $9,3 billion to $9,7 billion. Central Africa saw a decline from $6,6 billion in 2014 to $5,4 billion. Southern Africa received $12,9 billion of FDI in 2015 against $ 8,7 billion in 2014, and $ 11,4 billion in 2013.

The leading African investment destinations in 2015 were: Egypt ($10,2 billion), Mozambique ($4,7 billion), Morocco ($4,2 billion), South Africa ($3,6 billion), Ghana ($2,5 billion), the Democratic Republic of the Congo ($2,5 billion), Zambia ($2,4 billion), Tanzania ($2,3 billion), Ethiopia ($2,1 billion), Guinea ($1,9 billion), and Kenya ($1,9 billion). Africa has attracted foreign investment from many countries, notably from the United Kingdom, France, the United States and from the emerging economies China, India, South Africa, and the United Arab Emirates.

Today, Africa imports one-third of the food, beverages, and similar processed goods it consumes. By contrast, member states of the Association of Southeast Asian Nations (Asean) import approximately 20% of such goods from outside their region, and the South American countries in the Mercosur trade bloc import about 10%. About 60% of Africa’s supply of global innovation goods, such as cars and chemicals, are imported—twice the level for Mercosur.

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