Tanzania
Aerial view of the industrial area in Dar es Salaam, Tanzania. (Image: MHSKYPIXEL via Envato)  

Africa’s manufacturing puzzle: Evidence from Tanzanian and Ethiopian firms

New evidence offers insights into challenges and opportunities for the creation of high-quality manufacturing jobs in Africa.

By Xinshen Diao, Mia Ellis, Margaret McMillan and Dani Rodrik

Industrialization is at the top of policy making agenda in Africa. “Industrialize Africa” is one of the African Development Bank’s top five priorities for the continent. Late last year, the African Union, together with the United Nations Industrial Development Organization (UNIDO) and other multilateral partners, kicked off its 30th Africa Industrialization Week, which has seen an unprecedented number of industrialization initiatives being launched across the continent. Yet, some economists have called into question the primacy of manufacturing, and asked whether our emphasis on manufacturing as a path to development reflects our lack of imagination in relation to other possible paths.1 Critics have often suggested services as an alternative pathway to development.

Yet, there is no question that fostering industrialization remains a key priority for African policymakers. The reasons for the emphasis on industrialization in Africa are clear. Historically, industrialization has been associated with job creation, poverty reduction and rapid growth in low-income countries. There is no better example of this than China, where formal sector manufacturing employed around 50 million workers in 2014.2 A country like Ethiopia could employ its entire labour force in 50 million jobs. But perhaps more importantly, the countries of Sub-Saharan Africa are rich in natural resources. African people are tired of sending raw materials to rich countries for processing; they want to process these resources on their own turf to the benefit of their own people.

So, how much progress has been made towards industrialization in Sub-Saharan Africa? Prior to the pandemic, countries in Sub-Saharan Africa had already achieved some success. Ethiopia has established an export-oriented garment and footwear sector, with help from foreign investors. Tanzania has built a more resource-intensive manufacturing sector focused on serving domestic and regional markets. And Nigerian businessman Aliko Dangote, the richest person in Africa, is investing in oil refining, food processing and cement manufacturing across the continent.

Recent research suggests that the premature de-industrialization to which the continent had been subject may have ceased or even reversed after the early 2000s.3 As it turns out, however, even the proponents of this relatively upbeat picture of industrialization in Africa point out that the re-industrialization African countries have documented is significantly driven by employment growth in small unregistered manufacturing firms. In our work, we dig more deeply into the performance of the manufacturing sectors of Ethiopia and Tanzania using firm level data.

Industrialization without growth in labour productivity

In a recent paper4, we use the Groningen Growth and Development Center’s (GGDC) Economic Transformation Database (ETD)5 to confirm a negative correlation between growth-promoting, economy-wide structural change and labour productivity growth within non-agricultural sectors in 18 African countries. This pattern also holds for the manufacturing sector where labour productivity has been falling and labour productivity growth has been either close to zero or negative. This result is consistent with previous findings6 and is surprising in so much as we tend to think of manufacturing as a sector exhibiting a particularly high productivity.

Based on statistics from GGDC and UNIDO’s INDSTAT 27 database, we explore the hypothesis that this downward trend in manufacturing’s labour productivity might have something to do with the composition of firms in the manufacturing sector. In the following figures, we compare manufacturing employment trajectories across four economies: China, Taiwan Province; Viet Nam, Tanzania and Ethiopia. We plot three series: (i) total employment reported in the ETD; (ii) formal sector employment which is captured by the UNIDO statistics; and (iii) informal sector employment which we compute as total employment (ETD) less formal sector employment (UNIDO).

China, Taiwan Province

Viet Nam

Source: Diao et al. (2021)

The share of employment in the formal manufacturing sector took off during the growth accelerations8 after 1960 in China, Taiwan Province and after 1993 in Viet Nam. This is in stark contrast to the trajectory in Tanzania and Ethiopia during their growth accelerations after 1998 (Tanzania) and 2000 (Ethiopia).

Tanzania

Ethiopia

Source: Diao et al. (2021)

In Tanzania and Ethiopia, it is the share of employment in small and informal firms that has expanded during the period of growth acceleration.9 To understand whether this pattern is responsible for declining labour productivity in Tanzanian and Ethiopian manufacturing, we turn to firm-level data.

Larger firms do not necessarily create employment at larger scale

Our analysis rests on two newly created panels of manufacturing firms, one for Tanzania covering 2008-2016 and one for Ethiopia covering 1996-2017. In both cases, the panel consists of firms with 10 employees or more. But in the case of Ethiopia, we are able to supplement our analysis with nationally representative surveys of small-scale manufacturing firms employing fewer than 10 workers. Based on these data, we are able to take a fine-grained look at employment and productivity patterns within manufacturing firms and sub-sectors.

Our findings shed light on the nature and sources of manufacturing performance. In both countries, there is a sharp dichotomy between larger firms that exhibit superior productivity performance but do not contribute much to expand employment, and small firms that absorb employment but do not experience any productivity growth. The problem lies not in the productivity performance of the larger firms, which is more than adequate, but in their inability to generate employment opportunities. The labour-absorbing firms, by contrast, are the smaller ones which appear to be on significantly worse productive trajectories.

The role of labour-saving technologies

Standard explanations for the lack of employment growth in the most productive manufacturing firms appear to be inadequate. First, the size distribution of firms in both countries, combined with the fact that smaller firms are considerably less productive than large ones, casts doubt on the idea that financing and other constraints prevent small firms from evolving into large firms that would employ more workers.10 Second, high labour costs in Africa are sometimes cited as a constraint to industrialization in Africa.11 But we find that the payroll share in total value added in both Tanzania and Ethiopia is exceedingly low overall (11-12 per cent), and also in garments and textiles (20-24 per cent).12 And third, explanations based on the weak business environment in Africa are at odds with the dynamism in both countries’ manufacturing sectors captured in our analysis of firm entry and exit. In fact, entry and exit patterns in Tanzania and Ethiopia are not too dissimilar from those in Viet Nam.

Instead, we suggest the problem might lie with the nature of technologies available to African firms. We show that the relatively large firms in Tanzania’s and Ethiopia’s manufacturing sectors are significantly more capital-intensive than what would be expected on the basis of the countries’ income levels or relative factor endowments. This is especially true of the larger, most productive firms, where capital intensity comes near to (or exceeds) levels observed in Czechia, a country that is around 20 times richer. High levels of capital intensity (and possibly of skill intensity as well, though we do not measure it) are an important reason behind the poor employment performance of productive firms.

Why do firms in Tanzania and Ethiopia use production techniques that may not necessarily be appropriate to the local economy? It is possible that they do not have much choice. Two things have happened in recent decades that push firms in that direction. First, manufacturing has experienced significant technological change in advanced economies. Naturally, innovation has taken a direction that responds to relative factor prices in the settings where it has taken place. In other words, it has been markedly labour-saving. Secondly, globalization and the spread of global value chains has had a homogenizing effect on technology adoption around the world. This means that the range of substitution between capital and low-skill labour has likely shrunk. The imperative of competing with production in much richer countries at similar quality levels makes it difficult to undertake any large operational shifts.  

Unlike earlier waves of developing nations, Tanzania and Ethiopia joined the world economy at a point where these two trends were already well-established. Meanwhile, they are still poor and have very low relative capital endowments. This creates a conundrum: competing with established producers on world markets is only possible by adopting technologies, which make it difficult to generate significant levels of employment.

Manufacturing is still key for development

This is not to say that manufacturing cannot play an important role in in the development of these countries. After all, productivity growth in Tanzania’s and Ethiopia’s large manufacturing firms has been impressive and could indirectly create jobs. For example, while the manufacturing of food products is capital-intensive, smallholder farming is labour-intensive. Worker training programmes associated with industrialization strategies, such as Ethiopia’s Technical and Vocational Education and Training School (TVET), could also enhance the capabilities of smaller firms. And the managerial and logistics capabilities of large manufacturing firms could be transferred to other activities through worker turnover or informal networks.13

  • Xinshen Diao is Deputy Division Director and Senior Research Fellow in the Development Strategy and Governance Division of the International Food Policy Research Institute (IFPRI).
  • Mia Ellis is Research Analyst at the International Food Policy Research Institute (IFPRI).
  • Margaret McMillan is Professor of Economics at Tufts University and Senior Research Fellow at the International Food Policy Research Institute (IFPRI).
  • Dani Rodrik is Ford Foundation Professor of International Political Economy at Harvard University.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

References

  1. Gollin, Doug. (2018) Structural transformation and growth without industrialisation. Pathways for Prosperity Commission Background Paper Series No.2. Oxford: Pathways for Prosperity Commission.
  2. Lardy, Nicolas R. (2015) Manufacturing Employment in China. China Economic Watch. Washington, D.C.: Peterson Institute for International Economics.
  3. Kruse, Hagen; Mensah, Emmanuel; Sen, Kunal and de Vries, Gaaitzen. (2021) A manufacturing renaissance? Industrialization trends in the developing world. WIDER Working Paper 28/2021. Helsinki: World Institute for Development Economic Research (UNU-WIDER).
  4. Diao, Xinshen; Ellis, Mia; McMillan, Margaret S. and Rodrik, Dani. (2021) Africa's Manufacturing Puzzle: Evidence from Tanzanian and Ethiopian Firms.National Bureau of Economic Research Working Paper No. 28344. Cambridge, MA: National Bureau of Economic Research.
  5. UNU-WIDER. (2021) ETD – Economic Transformation Database.
  6. Timmer, Marcel; de Vries, Gaaitzen and De Vries, Klaas. (2015) Patterns of structural change in developing countries. In: Weiss, John and Tribe, Michael (Eds.) Routledge Handbook of Industry and Development. Milton Park, Abingdon, Oxon/New York: Routledge.
  7. UNIDO. (2020) Industrial Statistics 2-Digit Level, ISIC Revision 3 (INDSTAT2).
  8. Growth accelerations are defined as periods of sustained growth in output per worker, in line with Diao, McMillan and Rodrik (2019).
  9. See also Oqubay (2018) on Ethiopia’s manufacturing sector. Oqubay notes that Ethiopian manufacturing (until 2016-17) had played a marginal role in employment creation, exports and output, and fell short in stimulating domestic linkages. While Oqubay expresses some optimism about the future of the manufacturing sector, he acknowledges that its disappointing employment performance is likely to be due to a combination of high capital-intensity of firms, intense pressure to increase productivity and the shrinking of public sector enterprises.
  10. Hsieh, Chang-Tai and Olken, Benjamin A. (2014) The Missing "Missing Middle". Journal of Economic Perspectives 28(3), 89-108.
  11. Gelb, Alan; Ramachandran, Vijaya; Meyer, Christian J.; Wadhwa, Divyanshi and Navis, Kyle. (2020) Can Sub-Saharan Africa Be a Manufacturing Destination? Labor Costs, Price Levels, and the Role of Industrial Policy. Journal of Industry Competition and Trade 20, 335-357.
  12. See Naidoo and Ndikumana (2020) for more recent evidence on labour costs in African manufacturing.
  13. Abebe, Girum; McMillan, Margaret S. and Serafinelli, Michel. (2018) Foreign direct investment and knowledge diffusion in poor locations: Evidence from Ethiopia. National Bureau of Economic Research Working Paper Series No. 24461. Cambridge, MA: National Bureau of Economic Research.

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