Skyline of Johannesburg, South Africa
Skyline of Johannesburg, South Africa (Image: Subodh Agnihotri via iStock Photo)

Can Sub-Saharan Africa break into global manufacturing?

The region’s high labour and capital costs present a serious challenge to its competitiveness.

By Vijaya Ramachandran

The manufacturing sector serves as an entry point for industrialization in many countries. With segments of the industrial value chain being fairly labour-intensive, the cost of labour is a key driver of competitiveness.1 Poorer countries usually have cheap labour; Sub-Saharan African countries should have some of the cheapest labour in the world. The question is  do they, and if so, are their labour costs low enough to compensate for other, less favourable factors? 

Labour costs should not be considered in isolation as a determinant of competitiveness. Policy quality and predictability, administrative capacity, human, institutional and governance capital, physical and financial infrastructure, and location are important indicators for the quality and sophistication of a country’s business environment. Some of these indicators are difficult to measure, and no single index has been able to adequately capture all of them, but many of the indicators are strongly correlated with GDP per capita. One option is to take GDP per capita as a proxy for a country’s physical and institutional capacity and the human capital embedded in its workforce. Labour cost per worker – given its GDP per capita – may provide some indication of whether a country is competitive with regard to manufacturing.

Analysis of 5467 firms in 29 countries and 35 country-year panels assembled from the World Bank Enterprise Surveys shows that the representative African2 firm is younger, smaller, and more likely to be owned by foreigners than the average comparator firm outside the region. The median age does not differ too much; for African firms it is 15 years versus 19 for comparator firms. About 17 per cent of the African firms in the sample are owned by foreigners, compared with only 9 per cent of comparator firms.  The median African firm is also smaller with 37 employees, while the median comparator firm has 45 employees. However, the average proportion of skilled to unskilled production workers in the firms is nearly the same. This could signal that the human capital of African firms is not significantly different than that of comparator firms, and that the level of technology used in production is similar. But it could also mean that African firms have to operate with higher levels of oversight and supervisory staff than firms in other parts of the world.

Engineer in an African factory
Engineer in an African factory (Image: Wavebreakmedia via iStock Photo)

The divergence in terms of productivity and value added is striking. The median African firm generates US$15,615 in sales per worker compared to the median comparator firm’s sales of US$22,335. Value added per worker in the median African firm is US$5,203, compared to US$11,372 for the median comparator firm. Value added accounts for 50 per cent of sales of African firms, nearly the same as comparator firms. Labour costs in African firms account for 25 per cent of value added per worker, and 15 per cent of sales per worker. For comparator firms, the numbers are 35 per cent and 17 per cent, respectively.

Capital costs per worker in African firms are high. The median African and median comparator firm has capital costs of US$5,163 and US$4,218 per worker, respectively, even though the African countries are, on average, far poorer than the comparators. Higher capital cost per worker, lower value added per worker and relatively similar levels of human capital suggest that African firms’ have lower productivity and/or pay a higher premium for technology and access to capital than comparator firms.

African countries have higher labour costs relative to their GDP per capita. While almost all the comparator countries have a ratio that is lower than 1, nearly all African countries are above this threshold.3

Ratio of labour cost per worker to GDP per capita v. GDP per capita

Source: Authors’ calculations, updated from Gelb et al. (2020)

Labour cost per worker in Bangladesh is US$835, almost identical to its GDP per capita. For the four African countries included in our study, labour cost per worker is twice or more than their GDP per capita. Only Ethiopia at US$909 is comparable with Bangladesh.   

The differences in capital costs per worker are even more striking. For Bangladesh, capital costs per worker is US$1,069, only marginally higher than the country’s GDP per capita, and far below the levels found in African countries. Ethiopia’s capital costs per worker is US$6,000, and Kenya’s are nearly US$10,000. Senegal has the lowest capital costs per worker among the four African countries at US$2,421, which is still more than twice its GDP per capita.

Our analysis also suggests that the African premium increases with firm size. While a small African firm is 39 per cent more expensive than a small comparator firm, a medium-sized firm is 52.3 per cent more expensive, and a large African firm is 49.7 per cent more expensive than a large comparator firm. A very large African firm is 54.7 per cent more expensive than a very large comparator firm.

These empirical results do not suggest a particularly bright future for footloose, labour-intenstive manufacturing in Africa. However, African countries differ considerably in terms of costs and endowments. The statistical picture suggests breaking the sample into three groups.

Does African manufacturing have a future?

The first group of African countries consists of solidly middle-income countries, including South Africa and Botswana. Relative to middle-income comparators, South Africa’s labour costs are the highest in the sample, even though the sample includes richer countries. Despite unemployment levels of between 20 and 30 per cent, South Africa’s industrial sector is very capital intensive. Irrespective of whether the cause of this dualism reflects structural factors or restrictive labour laws and high statutory minimum wages, South Africa is unlikely to emerge as a strong competitor in labour-intensive industries in the foreseeable future. The furore over the Newcastle experiment suggests that lowering wage levels to compete with poor countries is politically unacceptable.4

The second group includes leading low and lower-middle-income African countries like Kenya, Tanzania and Senegal  coastal, relatively stable, and with a strong business sector, particularly in the case of Kenya. If any countries were to feature in an African manufacturing take-off, these countries would surely be expected to be in the vanguard. Indeed, there may be some local and regional stimulus from the growth in intra-African trade. Yet, their manufacturing labor appears costly relative to that of Bangladesh, a country with comparable income level and World Economic Forum competitiveness rating. Firms in these countries are also smaller; to the extent that they confront a sharp pay gradient the picture is even more clouded since successful, expanding, firms will probably need to pay still higher wages.

The third group comprises countries at the very low end of the income spectrum, and do not have any real comparators. In the sample, the Democratic Republic of the Congo, Ethiopia and, to a lesser degree, Malawi, appear to fit this bill. The Democratic Republic of the Congo will not be a likely candidate for global manufacturing in the near future. Rich in natural resources, the governance failings that have depressed its business environment and income level leave little opportunity for investors.5 Ethiopia is a different story, however. Though landlocked, it has begun to ease logistics constraints by building road and rail connections; it also has good air connections. The Ethiopian government views manufacturing as a central component of its growth strategy. Ethiopia also has relatively low labour costs and price levels. As measured by purchasing power parity, the general level of prices in Ethiopia is below the level in India and comparable to that of Bangladesh. Overall, Ethiopia appears to be a suitable candidate to break into global manufacturing.

  • Vijaya Ramachandran is a Senior Fellow at the Center for Global Development (CGD), working on business productivity in emerging markets.    

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).

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