Challenges and Opportunities of Private Sector Development in SSA Stephen Gelb, ODI IDE-ODI-AERC Seminar: Industrialization, Private Sector Development & Economic Transformation Nairobi, 28 August 2016

Presentation outline What is economic or structural transformation? Overview of Africa’s manufacturing performance Industrialisation in SSA: alternative paths The role of the private sector

What is economic or structural transformation? Economic transformation involves the shift of resources (labour) and output from low productivity activities into higher productivity activities which offer more sustainable productivity growth From agriculture into industry Across sectors/activities/firms within manufacturing Into high-productivity services Where does extractive industries fit? Stages of industrialisation Pathways to industrialisation New technologies & innovation Entry of new firms Diversification of production and trade Integration into value chains and upgrading within them

Overview of Africa’s industrialisation performance Overall performance has not been good when viewed in the long run But there are some success stories – countries and sectors And some grounds for optimism based on recent improvement Charts and discussion in recent SET (ODI) papers: Balchin et al., Developing export-based manufacturing in Sub-Saharan Africa, 2016, available at www.set.odi.org

Manufacturing as % of GDP in SSA, 1960-2010 Note: Series excludes South Africa. In constant 2005 US dollars. Sources: UNIDO Industrial Development Database (2015); World Bank Africa Development Indicators

Manufacturing share in GDP falling But real output increasing Note: Charts include South Africa

Manufacturing share in employment falling But absolute employment increasing

Average annual growth in value of manufacturing exports, 2005-2014

Africa’s manufacturing exports by destination Positive developments over past decade Rapid growth in manufacturing real output, employment and exports in SSA 2005-2014 Value of manufacturing production more than doubled: average annual growth 3.5% Manufacturing employment increased: 11 mill to 17.7 mill Value of Africa’s manufacturing exports more than doubled: average annual growth 7.4% Intra-Africa trade is fastest growing amongst regional shares Increased participation in GVCs – garments, footwear, horticulture, vehicles Africa’s manufacturing exports by destination

FDI in greenfield manufacturing, annual inflows ($m)

Industrialisation in SSA: alternative paths Contrasting strategies Focused on natural resources (agricultural & mineral) versus Focused on light manufacturing assembly by unskilled labour These have different implications For policy: trade (imports & exports), enterprise development (& upgrading/innovation), competition, capital markets & FDI, skilled labour/management For services including infrastructure & urbanisation (transactions-intensity) For macroeconomy & BoP Must a ‘choice’ be made between these alternatives? Growth strategy is linked to private sector development potential Sector focus versus generic resources

The private sector and industrial development There are successful firms in African manufacturing, foreign & domestically-owned But cost structure results in ‘missing middle’ of firms Productivity is different - ‘on the shopfloor’ versus ex-factory Linked to ‘incumbency’ ‘Private sector development’ – improving the investment climate – is essential, but not a panacea Need competition from new entries – through FDI and domestic firms – in manufacturing But also in services providing inputs for manufacturing firms Need support for firms’ innovation & capabilities development From public sector agencies and from VC lead firms Need sectoral focus for policy – the importance of clusters Need collective action by firms – business associations – political economy issues

Thank you odi.org set.odi.org