Blog 10

The missing element in Africa’s industrialization agenda

By Degol Hailu, Senior Advisor, UNDP

May 2016

African countries are eager to industrialize rapidly. For instance, in the African Union’s Agenda 2063, Members States cannot wait to see the day “their economies are structurally transformed to create shared growth, decent jobs and economic opportunities for all”. The African Mining Vision (AMV) would like to see “a mining sector that has become a key component of a diversified, vibrant and globally competitive industrializing African economy”.

The United Nations Economic Commission for Africa (UNECA) recently released a Report on how Africa can industrialize. The Report says: “We have a real opportunity to promote economic transformation through the industrialization process, by capitalizing on the continent’s abundant natural resources, adding value to them, while also supporting the development of infant industries.”

The UNECA Report succinctly outlines the policy measures that lead to industrialization. For instance, the Report provides evidence on how today’s rich countries have used industrial policy when they were developing. How emerging countries such as Brazil and Malaysia adopted industrial polices successfully. And how developing countries such as Ethiopia and Vietnam are today pursuing vigorous industrial policies.

The Report argues that, in each of the country cases, active state intervention supported the growth in manufacturing activities. The Report also emphasizes that industrial policy is still relevant, even under proliferating trade agreements and the expansion in global value chains.

However, the Report overlooks a critical element in the industrialization process: agricultural productivity. Which is important for two reasons.

First, at the early stages of industrial takeoff, countries typically embark on low-age (low-cost) manufacturing to compete in the export market. For instance, garments, textile and footwear manufacturing usually receive tax incentives, subsidized credit and trade protection. Nevertheless, to sustain the low-cost advantage, high yields in the production of food crops and cereals must be achieved.

Since a large proportion of workers’ income is spent on food, high food prices increase the demand for higher wages. This affects competitiveness in international trade. The data show that the food price index rose from 91% in 2000 to 201% in 2014. And Africa currently imports over US$35 billion worth of food per year. The inflationary pressure in many countries likewise comes from high food prices. For instance, in the financial year 2011/2012, the food inflation rate in Ethiopia was 42.9%, while the non-food inflation rate was 22.4%.

Second, garments, textile and footwear manufacturing requires inputs such as cotton and rubber. If productivity in these agricultural commodities is low, they have to be imported. For example, cotton imports in Ethiopia increased by 1,100% between 2010 and 2015. The cost of imported commodities impacts on trade competitiveness negatively. Not least the foreign exchange exhausting aspect of rising import levels.

For the last ten years, the average growth in annual agricultural total factor productivity in Africa was under 1%. The growth in Asia and Latin America averaged 1.94% and 1.21%, respectively. Furthermore, less than ten countries reached the target of allocating 10% of public expenditure on agriculture set by the Comprehensive Africa Agriculture Development Programme (CAADP).