1. Light Manufacturing in Africa Targeted Policies to Enhance Private Investment and Create Jobs Hinh T. Dinh, Vincent Palmade, Vandana Chandra and Frances Cossar Roundtable on Industrial Policy, Pretoria, South Africa, July 3- 4, 2012 Vandana Chandra (World Bank)

2. African economic performance at a turning point African GDP grew 5.2% per year and PCI grew at 2% per year (2001 – 2010) Unsustainable growth mainly from commodity exports, manufacturing has declined to <1% Simple, labor intensive manufacturing offers a viable growth path Timing is perfect as real wages rise in China and enterprises seek to move production elsewhere. 2

3. Level of Industrialization in Africa is very low Share of Manufacturing in GDP (%)

4. Top Five Exports from Select Economies in Sub- Saharan Africa and Asia, 1980 and 2009 4

5. Labor Productivity and Average Wage Rates in Chinese Manufacturing (USD) are Rising and Creating an Opportunity for Africa

6. Scope Case studies: Ethiopia, Tanzania, Zambia China as a benchmark; Vietnam as a comparator 6 apparel wood products metal productsagribusiness leather products

7. Approach (1) Feasible, low-cost, sharply focused policy initiatives to increase private investment and jump start a competitive light manufacturing sector in Sub- Saharan Africa. Initiatives would complement progress on broader investment reforms. Growth of light industries should increase share of domestic production in growing markets for light manufactures. Near shoring. Learning by doing will help to access new technology, modern management, and marketing techniques, scale up and improve product quality – lead the way from near shoring to exporting. Policies that encourage foreign direct investment can accelerate industrial development and export expansion. Recent example: in September 2011, the Huajian Group, a Chinese shoe maker, invested in a factory in Ethiopia. In January 2012, hired 550 workers to operate two production lines to export 20,000 pairs of shoes a month. 7

8. Approach (2) Identification of key constraints within each subsector Formulation of specific policies to remove constraints Learning from the experience of other developing countries 8

9. Methods World Bank Enterprise Surveys Qualitative surveys Quantitative surveys Comparative value chain analysis Kaizen study 9 http://econ.worldbank.org/africamanufacturing

10. Monthly Wages in Light Manufacturing by skill level (US $) SkilledChinaVietnamEthiopia Polo shirts311-370119-18137-185 Leather loafers296-562119-14041-96 Wood Chairs383-442181-25981-119 Dairy milk177-206-30-63 Average305-399154-23577-131 UnskilledPolo shirts237-29678-13026-48 Leather loafers237-48878-9316-33 Wood Chairs206-25185-13537-52 Dairy milk118-13331-7813-41 Average197-27878-13135-53

11. Labor Productivity in Light Manufacturing Industries ChinaVietnamEthiopia Polo shirts (pieces per employee per day)18-358-147-19 Leather loafers (pieces per employee per day)3-71-61-7 Wood Chairs (pieces per employee per day)3-61-30.2-0.4 Dairy milk (liters per employee per day)23-512-418-71

12. At a broad level, in the three African countries and across subsectors and sizes, there are six binding constraints to light manufacturing : The Six Major Challenges industrial land finance entrepreneurial skillsinput cost & quality trade logistics worker skills 12

13. Vary by country, sub-sector, and by firm size, so policies to address these constraints have to be specific. Need to target policies to remove specific constraints in specific subsectors. Unlike previous studies, this study points to a small, specific set of key constraints. Past studies of Africas growth potential cite a long list of constraints (infrastructure, education, corruption, red tape, etc.). For government to resolve all at once is difficult, will take too long and is too costly and financial and administrative resources are scarce. Narrowing the analysis can make the reform agenda more manageable and within the financial and human resource constraints of most African countries. The Constraints 13

14. Constraints in Ethiopia By Size of Firm, Sector, and Importance Input industries LandFinance Entrepren -eurial skills Worker skillsTrade Logistics Apparel SmallerImportantCritical Important LargeImportant Critical Leather products SmallerCritical Important LargeCritical Important Wood products SmallerCriticalImportant LargeCriticalImportant Metal products SmallerCriticalImportant LargeCriticalImportant Agribusiness SmallerCritical Important LargeCritical Important Source: Authors Note: Blank cells are not a priority. 14

15. Employs 8,000 workers with $8 million in exports Second largest livestock population in Africa Suffers from a shortage of quality processed leather due to: Poor livestock disease control Lack of quality processing of raw hides and skins Trade policy (import bans) on processed leather Among the solutions: Treat ectoparasites at a very modest cost Allow import and export of leather Technical assistance (e.g. Ramsay shoes) The Leather Industry in Ethiopia 15

16. Cost of Producing Leather Shoes in Ethiopia compared to China (US cents)

17. Cost Of Producing a Polo Shirt in Ethiopia Compared to China (US cents)

18. Policy Implications Because the binding constraints vary by country, by sub-sector, and by firm size, policy makers need to: Identify clearly the most promising manufacturing subsectors, then prioritize and remove the most serious constraints in those subsectors Target policies selectively, in line with comparative advantage and the countrys fiscal, financial, human capital, and institutional capabilities If follow comparative advantage and allow competition, no need for subsidies – a point noted by J. Lin (2010, 2011) in New Structural Economics 18

19. Use a range of policies Some measures require correcting existing policy-related distortions (industrial policy to correct government failure), others require the provision of public goods (industrial policy to offset market failure) Solution to light manufacturing problems is cross-cutting: improving access to manufactured inputs involves backward linkages with agriculture, implications for education, and infrastructure policies. Make use of conventional and some non-conventional policies such as plug-and-play industrial zones Policy Implications (2) 19

20. Developing specific initiatives in partnership with private sector, starting with the identification of market opportunities Mobilize support from development partners and civil society Begin with small-scale pilot studies, evaluate processes and results rigorously and then scale-up/replicate successes and terminate failures. Start now as competition is heating up and other countries are grabbing the opportunities Africa cannot afford to miss another opportunity. Success Factors in Implementation 20