In the wake of the global financial crisis, many countries across Africa have sought new development models to bolster their economies and improve the livelihoods of their citizens. In particular, one of the most discussed paths to prosperity is industrialisation. Africa has a long history of industrialisation, which was initially driven by the need to diversify economies and create jobs. The continent’s heavy reliance on natural resource exports placed it at the mercy of global commodity markets, and therefore created a need for enhanced economic diversification. This approach is still relevant today.
Much has changed in the last two decades, however, and Africa’s industrialisation agenda must be updated to reflect those changes. In particular, Africa’s private sector has an important role to play in this process as government-led approaches have historically been unsuccessful. The private sector also has great potential to create jobs, promote innovation and economic growth, as well as to support a more inclusive society and reduce poverty. These benefits have yielded the emergence of new business models that look mostly to the private sector for solutions.
African economies have been undergoing massive transformations in the past two decades based on a number of factors, such as the development of new technologies and expansion of global trade and investment. These developments have created opportunities for Africa’s private sector to play a more important role in economic development, which will be key in addressing poverty and inequality. Industrialisation can ensure that African countries fully benefit from these ongoing transformations. To industrialise successfully, several conditions are needed. These can broadly be divided into three categories: inclusive governance, infrastructure and technology.
Inclusive governance is a fundamental precondition for the development of any economy. It represents the first stage in overcoming poverty and encouraging development. In contrast to the previous decade, when African governments only marginally engaged with regional and global private sector actors, today’s governments are at the forefront of promoting reforms and policies that foster growth and increase inclusion. They are also working to modernise their institutions so as to attract more foreign private investment into their economies.
Infrastructure is another key element for successful industrialisation. This includes not only physical infrastructure, such as roads, telecommunications and energy networks, but also the legal and regulatory framework for business. Investment in infrastructure and regulatory reform are important stepping-stones for industrialization, as both serve to strengthen Africa’s private sector. Mali, for example, has pursued a policy of modernisation with industrialisation as one of its key pillars. Accordingly, it has prioritised investments in infrastructure and pushed to diversify its export base beyond commodities.
Technology is the third and final element that is critical to the development of a country’s industrial base. A country cannot modernise its industry without technological innovation. This is achieved by supporting research and development in the public sector, while creating an environment that encourages innovation and entrepreneurship through policies such as intellectual property rights which protect innovators from counterfeiters.
In addition to the three strategic elements that are critical for a successful Africa industrialisation agenda, other conditions must be met as well. These can be classified into two broad categories: social and macroeconomic.
The first category includes demand for investment in infrastructure, a functioning and reliable legal and regulatory framework, and a level of political stability in the country. These elements are crucial for attracting foreign direct investment (FDI), which can only take place when legal and regulatory frameworks are in force – along with effective anti-corruption measures; stable functioning of markets conducive to investment; access to finance at feasible rates; adequate infrastructure/telecommunication/energy supply, including capacity-building of local companies and institutions.
The second category includes the availability of skilled labour, both in terms of quantity and quality. Management, marketing, and technical know-how are essential ingredients to the success of any industrialisation drive. These will be needed to sustain FDI inflows or to attract new investors. Finally, the domestic market must be large enough to accommodate an upscaling of the national industrial base and a growing economy, in turn creating more jobs for citizens who can now afford more goods.
The manufacturing sector dominates the economies of many African countries and is a crucial element in their industrialisation. This type of industry differs from others in that it has long-term direct customer requirements. The result is that many foreign investors are hesitant to invest in such industries. They prefer to dedicate their capital to activities with less uncertain returns. They also fear the difficulties of managing an operation outside their home-nation due to possible language barriers and unfamiliar cultural practices, as well as living under foreign laws and occupational health standards.
However, manufacturing remains an important sector for Africa since it can be achieved without large foreign investments. The main necessary elements are a robust local private sector and government support to support the industry’s transformation. Government involvement is necessary for encouraging technological innovation, raising the productivity level of small- and medium-sized enterprises, as well as providing incentives, such as tax breaks or subsidies, to encourage manufacturing sector growth.
An African industrialisation strategy requires that Africa’s governments develop policies which attract FDI into manufacturing, particularly for light industries such as textiles and garments. These kinds of industries allow for rapid expansion and can be undertaken with smaller investments. In addition, they provide a base from which other sectors may grow. The core of this strategy should be a focus on small domestic firms. These firms can help kick-start national industrialisation agendas since they create a series of jobs, drawing more people into the workforce and thus raising incomes. They also allow for greater job creation as business expands.
Governments must also focus on upgrading management, marketing and technical skills to ensure that local private businesses have the capacity to meet the needs of both domestic and foreign consumers. At present, many African companies do not have that capacity; as a result, they are unable to effectively serve growing local markets or build export industries that can compete outside the continent.
The industrialisation agenda will only be successful if it is open to all possible business players. The private sector must not only be encouraged but also supported to develop Africa’s manufacturing base. But African governments must also ensure they do not create a rigid, inflexible industrial policy that limits innovation and companies’ ability to adapt to market conditions. This can occur if policies are adopted too early or too soon in the process of industrialisation. Policies can also be misused by corrupt politicians and officials who could use legal loopholes to give themselves greater privileges than citizens.
In order to create a more favourable environment for the manufacturing sector, African governments must deal with infrastructural problems. In the past, most national economies have made progress through the use of natural resources such as oil or minerals. Now, Africa’s leaders are seeking to move their countries beyond their dependence on these raw materials and develop a stronger industrial base that can fuel growth in the coming decades.
Ending Africa’s excessive reliance on imports is the main obstacle to developing a strong manufacturing sector. This can be achieved by establishing a sound and well-functioning regulatory framework. It is also necessary to reduce the level of bureaucracy, which has historically been very high – especially in terms of registering a business and obtaining clearances for new projects.
Doing so often takes months, if not years, given the numerous documents and other requirements that must be submitted. Some African countries have already taken steps in this direction: Mauritius and South Africa have improved their SME support mechanisms with programmes such as small business finance schemes and improved access to government services through simpler procedures, such as one-stop centres for businesses.
Ghana has also improved its business environment with the establishment of industrial parks such as the Dawa Industrial Zone, which is a major industrial base for industries including automotive, pharmaceutical, textiles, technology, steel manufacturing, food processing, warehousing and logistics companies, while Rwanda and Uganda are currently developing similar initiatives.
In summary, Africa’s industrialisation is a crucial path to prosperity that must be updated to reflect the changing global economic landscape. The private sector has a significant role to play in this process, and its success is dependent on several key conditions – including inclusive governance, adequate infrastructure and access to technology. These conditions must be met along with the availability of skilled labour, a robust legal and regulatory framework, and a supportive domestic market.
Manufacturing remains an important sector and African governments should focus on attracting foreign direct investment into this sector, particularly in light industries such as textiles and garments. The success of this strategy depends on a focus on small domestic firms and the upgrading of management, marketing and technical skills to meet the needs of both domestic and foreign consumers.
Additionally, policies must be designed to help small firms grow and expand – and to create an enabling environment for these firms to innovate in order to succeed. African governments must restructure their economies by not only creating a favourable business environment but also making sure their industries are able to compete on the global stage.
The writer is an award-winning financial advisory, trade and transformation consulting professional with almost two decades of enterprise leadership experience across EMEA.
