Why Is Manufacturing in Africa So Expensive?

In 1960, the per capita GDP of East Asia exceeded that of Sub-Saharan Africa for the first time. That year, the average person in both regions made approximately $1,100 (in 2010 dollars); today, the average East Asian makes 11 times that, but the average Sub-Saharan African only makes 1.4 times as much.

Historically, countries have risen to middle-income status by industrializing. It was the industrial revolutions of the 1700s and 1800s that made the West rich. East Asia is no exception to this rule. In the postwar era, as the share of Americans working in industry fell from nearly 40 to under 10% of the population (a pattern mirrored in Western Europe), industry has grown in countries like Thailand, Indonesia, and China. By nearly every metric, this shift has translated to rising living standards in East Asia.

As Asia has become wealthier, though, Sub-Saharan Africa has not become a manufacturing hotspot. The only Sub-Saharan country to experience an extended period of growth in manufacturing was South Africa during apartheid. As a share of GDP, manufacturing is just less prevalent in Africa than in other regions of the world. It’s in fact lower than it was in the 1970s.

Soap Factory in South Africa

Manufacturing in Africa is just very expensive compared to similar countries. Raw materials are commonly exported (export-to-GDP ratios are often relatively high), meaning that local manufacturing is so expensive it makes more financial sense to pay for shipping to produce elsewhere.

(East) Asia Got There First. Did that Hurt Africa?


One argument for why Africa lags behind other areas hypothesizes that East Asia had a sort of first-mover advantage. 

Traditionally (which is to say when manufacturing moved from the West to East Asia), as countries become rich, some industry remains. Germany, for example, remains a global leader in the production of metal ball bearings. German firms’ historical experience in manufacturing has given them skills that are worth the added cost when products need to be especially sophisticated. These days, countries like the US primarily manufacture goods in high-value sectors like computer technology as opposed to textiles.

Ball bearings are key components used in multiple industries to ensure efficient operation of machinery and systems. These mechanical devices reduce friction between moving parts, enabling smooth rotary motion and even load distribution.

This has happened in Asia. While China began its industrial transformation by manufacturing clothing, furniture, and toys, it now produces computer chips. Unlike the West, however, China continues to produce “unsophisticated” goods in significant amounts—Shein, the world’s largest clothing retailer, is built on a network of Chinese textile factories. Thanks to a combination of technological progress and low labor costs, these goods remain competitively priced; which leaves little room for new countries.

This likely does factor into Africa’s lagging industrialization. It does not fully explain it, though: for one, Sub-Saharan Africa did not keep pace with East Asia even when the economic situation of each region was comparable in the mid-1900s. For another, South Asia, particularly Bangladesh, has managed to industrialize in recent decades despite starting out “behind.” It’s still possible.

South Asia’s industrial powerhouses, India and Bangladesh, only liberalized in the 1990s after East Asia in the 1980s and late 1970s, but they, particularly Bangladesh, have been successful in attracting manufacturers. The region has since surpassed Africa: in 1960, South Asians made only $330 on average, less than a third of Africans, but today they make $400 more.

 

East Asia’s industrialization clearly did not prevent their success. What has prevented Africa from succeeding is multifaceted and underexplored, but we can explore several potential reasons.

African Labor Costs Resemble Labor Costs in Far Richer Nations


Part of the equation is labor. Theoretically, a poor country should attract manufacturers, because wages are far lower than those in a high-income country. As nations become richer, the price of manufacturing goods (which encompasses the price of labor and land) in that country increases, and it becomes more cost-effective to produce elsewhere for less—if the goods in question require relatively little skill to produce, of course, like textiles—even if it adds in new shipping costs. Since 20th-century Asia was poorer than Europe and America, Asia became a manufacturing destination.

For example, to hire one Bangladeshi worker for one year, a firm must pay them about $835 USD per year. But to hire a worker in Senegal, a country with a lower GDP per capita, a firm must pay a comparable worker double that of the Bangladeshi worker. Senegal is not an exception, either; the only Sub-Saharan country with comparable labor costs to Bangladesh is Ethiopia. Production in India, which is marginally wealthier than Bangladesh and where labor is about 55% more expensive, is still cheaper than in most of Africa.  Labor costs in Sub-Saharan Africa overall are comparable to Indonesia, the Philippines, and Vietnam—but those countries are considerably richer. 

The most prominent paper describing the phenomenon admits that they “do not really understand the factors behind prices and costs, whether for industrial labor or, more generally, in terms of purchasing-power parity price levels, and why so many African countries appear to be costly relative to their income levels”; Relatively little research has been conducted trying to explain why is Africa poor and expensive.

The easiest answer, that some immaterial cultural or political factors have made Sub-Saharan Africa unique, is plausible, but not particularly easy to explore because culture is so fuzzy. A potential theoretical explanation is as follows: in low-income countries, workers generally choose industry or agricultural jobs. Since mechanization and fertilizer use are relatively rare in Africa (and low-income countries more broadly), agriculture is relatively unproductive. In other words, food production requires more labor, and food costs more. This has two important consequences: workers demand greater wages to cover food costs, and workers are more likely to choose to work in agriculture than industry. Both factors increase labor costs, as companies need to pay more to attract workers and have fewer people to employ.

Generally speaking, as low-income nations transition from subsistence agriculture to manufacturing, the cost of living decreases (before increasing again as people become richer). Africa hasn’t made the jump yet. 

Again, though, this should theoretically affect all low-income countries. But other regions managed to overcome this barrier—why Sub-Saharan Africa has been passed by regions like South Asia remains unexplained. 

Poor Infrastructure Drives up Prices


Another possible explanation for why Africa has struggled is unusually
low-quality infrastructure, which increases the cost of transporting produced goods. This has two relevant consequences, the first of which is that it likely contributes to the cost of labor. If transporting, say, rice, costs more in Senegal than it does in Bangladesh, citizens will need to demand more money in order to feed themselves.

The second consequence is that it makes goods more expensive since shipping costs must be included in final price tags. That’s the opposite of what firms are looking for. Across the continent, shipping alone can increase prices by 75%, per one African Development Bank estimate. Most (approximately 80% of goods and 90% of people) of African transit happens on roads, but 53% of African roads are unpaved and difficult to navigate. In East Africa, shipping containers across land costs nearly double the international norm; in Nigeria, transporting goods costs 5 times what it would in the United States. 

That shipping expense can also deter would-be manufacturers from setting up shop. Even if the labor was marginally cheaper, if transporting the finished goods costs almost as much as making it, there’s no reason not to go elsewhere instead.

Sub-Saharan Africa also lags behind the rest of the world in electricity access. Even in urban areas, electricity coverage sits at only 65%, and it falls to 28% in rural areas. 30% of people have chronic power outages. Intermittent electricity renders manufacturing more difficult, and even when it is available, it is three times as costly as in Europe and America.

Things as simple as concrete to build factories can cost more. Added together, the cost of constructing and running a factory is high. Ignoring wages, while Bangladeshi companies invest about $1070 in capital for each new employee, Ethiopian companies must pay over five times that amount, nearly $6000.

Policy-wise, improving infrastructure is a relatively straightforward way for governments to make their localities more attractive (easier than trying to reduce the cost of labor, at least). Bangladesh’s explosive growth in the 1990s was no accident; it was preceded by a decade of aggressive road construction which enabled goods to flow from factories across the country to ports for export. There have been some recent efforts to create international rail across the continent that, if completed, may ease shipping costs.

Bad Management Hurts Efficiency


It’s difficult to discuss culture as a factor in development (or lack thereof) because culture varies widely across a continent, but, in general, poor business and government practices afflict African manufacturers more than those in other regions.

Firms in Africa have poorer management quality than their competitors in China, India, and Vietnam. What constitutes “poor management” is debatable, but this particular paper measures performance monitoring and improving what happens on factory floors, setting and following targets, and identifying and rewarding the best employees. On these, African firms do worse than Western ones as well as Asian ones. Production is consequently less efficient, and each item costs more to produce. This accounts for around 10% of the gap in productivity between Sub-Saharan Africa and the US, which, while not overwhelming, is significant. Waste is expensive. When considered in conjunction with factors like labor cost, it can make other regions more attractive.

Also, some policies simply make trade more costly. While 1990s Bangladesh grew its textile industry thanks to a lowering of trade barriers, Sub-Saharan African countries often continue to cling to tariffs. The average tariff in the region is 6% (compared to 2.5% globally). Africa is in fact rich in natural resources required for manufacturing—coltan in the Democratic Republic of the Congo, for example, which is used in electronics—but trade barriers reduce the ability of neighboring countries to benefit from each others’ endowments.

The good news insofar as tariffs go is that the 2018 African Continental Free Trade Area, signed by most countries in the continent, will establish a free trade zone over the next decade. Still, trade barriers with countries on other continents remain and are unlikely to benefit industry.

Bureaucracy can also be a barrier. Power corrupts: in some countries, authorities elect to fund pet projects and grant contracts to political allies over investing in industry or infrastructure. Taxes may be evaded with bribes. Pervasive corruption of this sort renders formal law optional, which reduces the ability of governments to enforce all policies and earn the trust of new manufacturers. Some cases are especially egregious like Ghana’s president diverted $400 million to construct a cathedral, but the majority happen on smaller scales.

The effect of government corruption on manufacturing is indirect, but when other countries are investing in bridges, spending on vanity projects makes countries less capable of competing for new factories. Everything—labor, infrastructure, policy—together makes Africa expensive. Becoming competitive will likely require addressing all.

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