Sir,
I reply to Hafez Ghanem’s review of my book How Africa Works.
Part of the problem with economic development as a subject is that it is boring. The same optimum pattern of smallholder agriculture, export-oriented manufacturing and financial arrangements that support these two sectors through directed credit and capital controls runs from the United States of the 19th century to the European catch-up states beginning in the late 19th century to the post-Second World War Asian tigers/ dragons/ ‘miracles’. The consistent historical pattern is too dull for economists – and their friends in the aid industry – so they quest assiduously for novel explanations of what is required.
We live today amidst an intellectual ‘new paradigm’ frenzy. The ferment is driven by speculation about digital economies, robotics and artificial intelligence (AI). Mr Ghanem notes in his review that one of the most important development economists of the age, Dani Rodrik, has declared that manufacturing-based development will not occur in Africa.
For those of us who are sceptical of a ‘new paradigm’ – as opposed to incremental technological change – the problem is that the conversation is a very loose one. Those who speak of a robotics and an AI revolution in manufacturing talk only about the technology and do not talk about the cost. Yet cost is the decider in real firms. Robots require outlays of tens and hundreds of thousands of dollars per unit. Meanwhile, labour in African countries now costs US$70 to US120 per month – one tenth to one sixth that in China.
Next comes the issue of flexibility. Robots and AI are sunk, upfront costs. Labour in African countries is something you hire and fire as you need it – just like in Asia in its take-off era. In short, the fact that US$700 a month factory labour and a falling population mean Chinese firms are turning to robotics and AI does not mean they will inevitably be more competitive than African factories and does not mean African factories should do the same thing.
Mr Ghanem highlights Ethiopia as proving the impossibility of African industrialisation. He quotes Dani Rodrik saying an East Asian manufacturing strategy failed in Ethiopia. But did it? A raft of new investment zones had only two years of operations before the 2020-22 civil broke out. Messrs Ghanem and Rodrik should pay a visit today. Investment zones are filling up, import substitution programmes are being completed, plants are increasingly capital intensive – from multiple factories working steel billets to a first integrated steel plant under construction and other new industrial product lines like plate glass. Try telling an Ethiopian minister that manufacturing is not going to happen in their country.
The nation held up as the bellwether by the digital evangelists is India. Certainly, India did well in the past three decades compared with its miserable economic performance between 1947 and 1991. Since then, the country averaged 4.2 percent growth while developing a substantial digital sub-economy and ignoring the traditional requirement for a manufacturing focus. But how impressed should we be? Not very. From 1980, China grew for three decades at more than 10 percent a year and today has an economy four times the size of India’s, largely because of its commitment to manufacturing. When people say the best African countries can hope for is an Indian growth rate, it is a fundamentally racist statement.
Mr Ghanem also references another very loosely employed argument to show that Africa has no manufacturing future – the notion that increasing global protection excludes Africa from overseas markets. But rising protection is not directed at Africa. Protection is tariffs on China and China’s reciprocal response to developed countries outside Africa. African states have only been affected, temporarily, by Trump tariffs. Most African states enjoy tariff free access for a wide range of products in the EU, and in China. Protectionism is not stopping the growth of African manufacturing. Furthermore, a great deal of goods export growth in Africa will come not from sales to other parts of the world, but instead from sales between the continent’s 55 countries.
It won’t be digital revolution or tariff barriers that decide developmental trajectories in Africa, but rather (very varied) state capability in the context of circumstances that increasingly favour African industrialisation. Rising population density, an African GDP growth rate that ticked up markedly since the start of the century and urban markets demanding a full range of consumer goods and construction materials mean that there are attractive manufacturing opportunities in Africa like never before.
To give one example, the price of steel in China, where growth has slowed and steel is in chronic oversupply, has fallen to US$550 per ton. Across Africa, where steel is demanded for infrastructure, for urban real estate and as an input in many downstream businesses, steel fetches between US$850 and US$1,200 per ton. So it is no surprise that Chinese firms are shipping steel plants to Africa. Their local production in turn stimulates more investment in downstream factories that use steel. Large Chinese steel plants have been built in Algeria, Zimbabwe and South Africa and signed in Ethiopia.
According to the firm level FDI database collated by the Financial Times, last year Chinese firms invested US$12.5bn in manufacturing plants in Africa. The main driver was better margins than they could achieve at home. Someone needs to tell these people that manufacturing is not going to work in Africa. There is no doubt that the technological background against which economic development occurs has changed. Since 2000, the services share of global trade increased from 20 percent to about 28 percent. This reflects the raft of new opportunities for developing countries to export services such as business processing outsourcing (BPO), software and other professional services. Governments need to take these opportunities seriously. But that is not the same as ignoring the manufactured goods that still constitute 72 percent of world trade. In my view, anyone who tells African countries to ignore manufacturing is doing the continent a frightening disservice. Fortunately, there is no indication that countries like Ethiopia people are listening.
