The next frontier for African industrial policy

The need for sub-Saharan Africa (henceforth “Africa”) to industrialize is not disputed. But which sectors (besides manufacturing) should be included in this industrialization? What are the obstacles to industrialization, and what kind of industrial policies will work best, if any? This article attempts to briefly answer these three questions and delineate the next frontier for African industrial policy.

How should we conceive of industrialization in Africa?

For some time now, the world has been in the grip of the Fourth Industrial Revolution (4IR) characterized by advanced digitization, data, connectivity and automation. This is blurring the boundaries between manufacturing and services and giving rise to three varieties of industrialization in Africa1:

Acquiring traditional manufacturing capabilities

Some countries or regions that are not yet ready for rapid, complex technological change will continue to slowly industrialize by acquiring traditional manufacturing capabilities in less-technologically intensive sectors such as textiles, furniture and food processing. These countries and regions will need an estimated 15 years to build up the necessary investments and business ecosystems to participate in the 4IR. As this progresses, one would expect employment in these sectors to increase.

Fostering sectors with the characteristics of manufacturing

In some countries or regions, technological innovation is principally driven by services taking the lead in structural transformation. In these places, services are increasingly performing the functions previously expected from manufacturing – what UNU-WIDER has called “Industries without Smokestacks”.2 Examples include the provision of 4th-party transport and logistical services, mobile banking services and tourism. In these countries, one would expect relative employment and value added in the manufacturing sector to decline in favour of services, even as absolute manufacturing value added increases. 

Resurgent entrepreneurship-led industrialization

Entrepreneurship-led industrialization is allowing some African countries to increasingly participate in new and advanced types of manufacturing.3 For example, entrepreneurs are leading the adoption of platform business models, with more than 300 indigenous digital platforms arising in recent years. These can facilitate the integration of even small-scale manufacturers into global value chains. Artificial Intelligence applications are playing an increasing role in agro-business on the continent, and South Africa boasts one of the world’s largest 3D-printers. But shifts to advanced manufacturing have not, as yet, much increased relative valued added or employment; in fact, unless African countries facilitate the uptake of these technologies in small-scale manufacturing, automation will more likely supplant traditional jobs.

Most African countries are, to some extent, experiencing a mix of these three trajectories, which will have varying impacts on economic growth, structural change and job creation. Industrialization in Africa will therefore likely be characterized by increased heterogeneity. How it eventually unfolds will largely depend on the shifting obstacles that industrialization in Africa must contend with.

What are the obstacles to African industrialization?

African countries have long faced significant barriers to industrialization. Some has even argued that the continent is prematurely de-industrializing. Let us scrutinize this claim and consider the factors driving the trends in industrialization.

First, for 18 countries for which good data is available4, the manufacturing value added (MVA) share has declined from 13.6% in 1992 to 9.8% in 2018, while the share of employment in manufacturing about doubled in the same period from about 4% to 8% (see next figure). Given that de-industrialization requires the share of both MVA and employment in manufacturing to decline, one cannot state unambiguously that Africa is de-industrializing.

Second, the broad trends depicted in the figure suggest that industrialization is complex and marked by substantial heterogeneity between countries – echoing the three varieties of industrialization discussed above. The trends in the figure above may therefore reflect that varieties 1 and 2 are largely driving industrialization and that variety 3 has not yet had a notable impact.

To explore the drivers of the trends in the figure in depth, a recent study found that industrialization in Africa has been driven by historical legacies such as colonialism, geographical factors such as rainfall and distance from international markets, economic factors such competition from China, market size and urbanization, as well as technological factors such as digital technology adoption.5 These factors explain why, for instance, the share of MVA may decline while the share of employment in manufacturing rises: The decline in the MVA share, for example, is partly due to distance from markets, lack of urbanization and competition from China. The rise of the employment share is indicative of successful policies (e.g. in Ethiopia) to overcome historical obstacles and promote traditional, labour-intensive industries.

What kind of industrial policies?

The next frontier for African industrial policies needs to grapple with the nature and implications of new digital technologies, as well as the business models underpinning digital platform capitalism. Such policies should avoid being marginalized or captured by other countries’ digital platform strategies. They should appropriately regulate digital platforms and create a supportive environment for homegrown digital solutions to local needs.

Digital platform capitalism poses a dilemma for the labour market. One the one hand, failing to close or narrow the digital divide will erode the capacity of African firms to continue participating in global value chains, especially in higher value adding segments. On the other hand, closing the digital divide will accelerate the automation (i.e. replacement) of low-skilled, low-wage jobs. It will therefore be essential to invest in skills upgrading, in the digital/intangible economy (such as data centers, internet connections, 5G connectivity, reliable and cheap electricity) and in digital entrepreneurship.

Industrial policies will also need to successfully navigate the shifting global order. Current challenges include a return of protectionist trade policies (de-globalization and back-shoring), increasing regulation around the energy transition/green economic growth, and rising energy and food prices.

Moreover, aging populations in the global north and the need for minerals to supply their green industrial policies raise the specter of a new scramble for Africa. As geopolitical strategist Peter Zeihan has warned, “[Africa’s] low level of industrialization means it has far more industrial commodities than it could ever use  […] and that will attract outsiders”.

In sum, African countries must have a say in establishing and policing the market rules for platform capitalism, or risk becoming a pawn in the looming fight for dominance between opposing economic blocs. Managing these challenges will define the next frontier in industrial policy in Africa.