Industrialize Africa: Agglomeration and Development of Industrial Clusters

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Most African nations are desirous to industrialize given the associated benefits of job creation, economic resilience and technological diffusion. Currently, the outcry for Africa to industrialize is growing louder.

The UN’s Sustainable Development Goal (SDG) 9 aims to ‘build resilient infrastructure, promote sustainable industrialization and foster innovation’. Within the development financing space – the African Development Bank has ranked industrial development as one of ‘top priorities’ whereas, the World Bank Group has sustained its promotion of ‘creating the conditions for a more competitive manufacturing sector’ in Africa as a response to dependence on commodities. Overall, how African countries push the pace of industrialization depends on how well they address the ‘bottlenecks’ at policy, regional and continental levels. This is why it’s very important for policy makers and donors, alike to identify as well as establish right development strategies and related mechanisms to accelerate Africa’s industrialization agenda.    

The Africa Union’s first 10 years of the implementation of the Agenda 2063 focus on regional integration. It advocates for Regional Industrialization Hubs through a framework that supports value chains, business development and services, innovation and incubation, entrepreneurship to create wealth and employment and strengthen informed advancement of the regions private sector; this is in line with the UN’s SDGs:

SDG Goal 8 indicator 8.2 aims at achieving higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors. An additional Goal 9 indicators 9.2 and 9.3 speak to the promotion of inclusive and sustainable industrialization (by increasing manufacturing value added as a proportion of GDP and per capita and manufacturing employment as a proportion of total employment) and increasing the access of small-scale industrial and other enterprises to financial services, including affordable credit, and their integration into value chains and markets.

African industry generates an average of US $700 of GDP per capita, barely one-fifth of East Asia’s US $3,400. According to the Africa Development Bank, Africa’s lack of industries is largely responsible for its low standing in global development. The continent is said to be the weakest link in an interconnected global economy.

Africa’s industrialization strategy has followed a familiar pattern starting with inward looking policies (such as import substitution) post-independence, followed by outward policies that liberalize trade. This pattern led to a boom in state-led/state-owned manufacturing entities and a subsequent destruction of the same as a result of liberal trade policy reforms, leading to job losses and a decline in the share of the sector to GDP in many African countries (see for instance Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Senegal, Tanzania, Uganda). Thus, while closing borders worked for the USA and China, Africa’s gains from a similar strategy were only short-lived. Moreover Africa’s development partners like the World Trade Organisation advocate for open borders. For this reason, Africa needs to accelerate its integration agenda along with the promotion of ‘Boosting Intra-African Trade’ (BIAT) priorities.

So how should Africa industrialize in the new world order? African governments will need new approaches to industrial policy with regional and/or continental dimensions in consideration of the operationalization of African Continental Free Trade Area (AfCFTA).

A recent study by UNU WIDER – Manufacturing Transformation, of developing and developed economies shows that agglomerations and industrial clusters or industrial parks provide a window of opportunity towards closing Africa’s industrialization gap. Evidence from Cambodia, Vietnam and Tunisia suggest that African governments can foster export-oriented industrial agglomerations by concentrating investment in high-quality institutions, social services, and infrastructure in a limited physical area such as an export processing zone (EPZ). Such an industrial agglomeration, UNU WIDER argues, would be designed to serve the global market. Thus, within the framework of trade liberalization, countries should use trade policy to promote the international competitiveness of domestic enterprises; improve export competitiveness of such enterprises; diversify markets and increase exports; and accelerate economic integration.

As instruments to industrial development, industrial parks require long-term investments. This partly implies that the African governments must collectively strengthen and harmonize their public policies to attract long-term investors, including private sector.  Current experimenters like Ethiopia and Senegal who have raised funds for their industrial parks, show that sustainable industrialisation is achievable through a strong link between infrastructure development and inclusive and sustainable industry innovation.

Evidence from Ghana points to the role of the private sector not only for sustainable financing but for industrial production that is driven by the application of science and technology. Researchers argue that the industrial policy should therefore aim at promoting agro-processing, facilitating the development of commercially viable export and domestic market-oriented enterprises in the rural areas, improving agricultural marketing and enhancing access to export markets, and improving the competitiveness of domestic industrial products. At regional level, the Costed Action Plan for SADC Industrialisation Strategy and Roadmap provides an example of possible regional value-chain clusters among countries, a model that could be replicated in other regions on the continent.

Africa can leverage its current endowment to make the industrial clusters or parks model a success. Industrial clusters usually attract ‘specialized trading firms’ – this could benefit small and medium domestic firms thus enabling the very firms access regional and continental markets following the operationalization of AfCFTA.

Africa’s rapidly growing population provides a demographic dividend for labour – the industrial cluster model allows the matching of ‘youthful’ workers to jobs, while learning on-the-job facilitates the diffusion of knowledge. Further, a consumer boom due to a growing middle class, provides a ready market in Africa – the operationalization of the AfCFTA presents a market of 1.2 billion people.

Given the significant benefits from agglomeration, it is important that firms cluster across borders to stimulate the much-needed economic transformation. The actualization of this, according to UNIDO, requires that the continent strengthens its institutions, knowledge of global value chains, value-add to agriculture and mineral beneficiation through manufacture in order to participate in the global value chain, invest in skills development to leapfrog technology and finally, leverage development finance.

 

Dr Lwanga Elizabeth Nanziri is a Senior Lecturer in Development Finance at the University of Stellenbosch Business School (USB). Her research interests include Development Economics, Financial Inclusion for Households and Firms, Behavioral Economics, Gender and Welfare, and Public Policy Analysis.