Dynamics in Manufacturing in East Africa

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This article first appeared in my weekly column with the Business Daily on September 4, 2016

Last week I attended and presented at a roundtable on Manufacturing in Kenya hosted by the Overseas Development Institute (ODI). The roundtable was under ODI’s Supporting Economic Transformation Programme (SET) which is supported by DFID. As part of the roundtable I developed a paper on manufacturing in Kenya and thought it would be useful to share some insights I unearthed during my research on manufacturing in the East Africa region.

At the moment, the manufacturing sector in Kenya is the largest in the East Africa region. However in terms of growth, other countries in East Africa are growing at a faster rate. Data from ODI indicate that the growth of the manufacturing sector in Kenya is growing far slower than Ethiopia, Rwanda, Tanzania and Uganda. If this trend continues, other East African countries will begin to dominate manufacturing in the region. Further, governments in East Africa seem to be putting in more pronounced effort to build manufacturing through the creation of industrial parks in countries such as Ethiopia and making land available for manufacturing particularly for labour intensive manufacturing. Uganda and Tanzania are also determinedly positioning themselves as investment destinations for manufacturing in Africa. This impetus needs to be more strongly echoed in Kenya from the highest levels of county and national government.  Further, while Kenya remains an attractive investment destination for manufacturing, other countries in the region are aggressively courting such investment. And frankly there is a growing sense that the bureaucracy and corruption in Kenya as well as difficulty in getting the right information on requirements linked to building manufacturing plants in the country are hampering investment into the sector.

https://images.enca.com/encadrupal/styles/600_383/s3/WEB_PHOTO_AFRICA_CLOTHING_26082015.jpg (source: https://images.enca.com/encadrupal/styles/600_383/s3/WEB_PHOTO_AFRICA_CLOTHING_26082015.jpg)

That said, the good news from a regional perspective is that the East African Community (EAC) is seeking to position itself as the next global manufacturing destination. This is positive and long overdue because clearly there is room for growth in the sector in the region. According to the African Development Bank the combined manufacturing sector of seven countries in Eastern Africa as a whole is only about one-third the size of the manufacturing sector in Vietnam, which has a population one-third the size of the seven countries. If the East Africa region is to become the ‘go-to’ location for investment in manufacturing in Africa, more coordination of manufacturing policy and activity across the EAC as well as with Eastern African countries outside the EAC is needed.

However, from a Kenyan perspective there are issues within the East Africa region that negatively inform the growth of manufacturing in the country. An on-going issue that adversely affects the uptake of manufactured products from Kenya in the region is pricing. Cost of production in Kenya remains high which makes the end price point of Kenyan manufactured goods high. This cost of production issue essentially promotes the purchase of cheap manufactured imports from India and China that have aggressively entered the regional market and routinely undercut Kenyan manufactured equivalents on price point.

https://i0.wp.com/tinypitch.blob.core.windows.net/tpdata/iV5cJFV3EekeC1mUy9ZgQ/7aOtGsiJU0qlKHujMnvw.jpg(source: http://tinypitch.blob.core.windows.net/tpdata/iV5cJFV3EekeC1mUy9ZgQ/7aOtGsiJU0qlKHujMnvw.jpg)

Another dynamic affecting the growth of Kenyan manufacturing in the region is related to the competition emerging between manufacturing sectors in East Africa. Due to development of manufacturing in neighbouring countries a scenario is emerging where neighbouring countries seem to want to reserve domestic markets for domestically manufactured products. Thus there is a sense that neighbouring countries in the EAC seek to prevent Kenyan manufactured goods from entering their countries because they want to keep domestic markets to themselves. Thus, perhaps EAC markets are not as open as one would hope.

What is clear is that it that challenges exist for the Kenyan manufacturing sector from a regional perspective. At the same time, there is ample opportunity for the region to sell itself as the manufacturing hub of Africa. The question is how to balance national ambitions with regional development goals; perhaps it is time for a candid conversation on this issue.

Anzetse Were is a development economist; anzetsew@gmail.com


Manufacturing in Africa is growing faster than assumed

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This article first appeared in my weekly column with the Business Daily on May 1, 2016

Last week the Overseas Development Institute (ODI) published an interesting paper on export-based manufacturing potential in Sub-Saharan Africa (SSA). The report states that contrary to the common view, production, employment, trade and foreign direct investment in the manufacturing sectors has actually increased over the past decade in SSA. Between 2005 and 2014, manufacturing production more than doubled from $73 billion to $157 billion, growing 3.5% annually in real terms; some are higher with Uganda’s manufacturing growing by 5% over 2010-2014, Zambia’s by 6% over 2008-2012; and Tanzania’s by more than 7% in the last decade. Further, SSA countries are increasingly exporting manufactures to each other (20% of total trade in 2005, 34% in 2014), and a great deal of FDI into manufacturing is among and between African countries.

The report states that there are exceptional manufacturing opportunities in garments and textiles, agro-processing and horticulture, automobiles and consumer goods. However, the share of manufacturing in total employment fell from 10% in 1991 to 8.5% in 2013. This is important to note because although manufacturing is growing, the employment creation ability of the sector seems more muted than it used to be. Perhaps factors such as the growing role of technology in manufacturing is important and may reflect the gradual technological deepening in African manufacturing exports over the past decade.


(source: http://www.fashionatingworld.com/images/Textile-industry-Africa.jpg)

The report is very sober in noting the reality that Africa’s (all Africa, not just SSA) share in total world manufacturing exports remains less than 1%, and this has fallen marginally since 2010. Yet the good news is that between 2005 and 2014 exports from Africa as a whole (not just SSA) grew at an average annual rate of 10% or higher in the product groups analysed.

In terms of insights on Kenya, Kenya’s share of manufacturing exports is higher than that of Ethiopia and Rwanda. Further, the intra-African trade share in Kenya was high at 67.5 percent in 2013. But, as the report notes, this figure ought to be considered in the reality that the coastal countries with large ports, such as Kenya, facilitate import and export trade in the region pushing trade numbers up. Top manufacture products from Kenya include apparel, clothing and accessories; perfume, cosmetics and cleansers; iron and steel, and inorganic chemicals. However, compared to the peers in the report, Kenya has a lower share of domestic value-added (DVA)  content of gross exports as a share of total exported value added with DVA standing at a lower than average 62 percent. The most promising sectors in manufacturing in Kenya detailed in the report, in terms of revealed comparative advantage, include automatic typewriters and word-processing machines, self-adhesive paper and paperboard, hair-nets, safety pins of iron or steel, carbonates, flat-rolled products of iron or non-alloy steel, and leather.

As ODI’s Dirk Willem te Velde states, industrial development is crucial for human development and leads to wealth creation, economy-wide productivity change, greater incomes, significant job creation and resilience throughout the economy. As a development economist, there are two keen points of interest for me in terms of informally assessing the development potential of manufacturing. First, is the extent to which manufacturing can absorb low skilled labour given that Kenya’s population’s average years of schooling is 6.5 years. The second issue is the employment creation potential of manufacturing. For too long Africa has been seen to support the jobless growth phenomena where the economy is growing but formal job creation is lacklustre.

(source: http://www.greenconduct.com/wp-content/uploads/2013/07/jobless.jpg)

The report provides some insight on these issues by looking at Tanzania. The highest low-skilled employment potential in Tanzania is in agricultural products; this good news given the importance of agriculture to countries such as Kenya and Tanzania. In terms of employment potential, for Tanzania, agriculture comes out on top again. Agricultural products such as high-value vegetables and fruits, processed grains, processed meat, wood products and leather have high employment potential. Thus, the good news is that it is possible for agriculture, a dominant player in African economies, to be best placed to absorb low skilled labour and have high employment potential. This should provide impetus for Kenya to do a similar type of analysis and closely examine the important role agro-processing can have in reaping development dividends for the country. But bear in mind that the issues of high wages is an overall constraint for the sector. Labour costs in SSA are generally higher (when measured relative to GDP per capita) than in low-and middle-income comparator countries in Asia and Latin America.

Anzetse Were is a development economist; email: anzetsew@gmail.com

The race for Regional Hub status in Eastern Africa

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