Chapter

Epilogue Promoting Competitiveness in Manufacturing: A Continuing Challenge for Improving Sub-Saharan Africa’s Integration into the Global Economy

Author(s):
International Monetary Fund
Published Date:
August 2001
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When the conference which led to this book was held in the autumn of 1998, sub-Saharan Africa (SSA) was already experiencing the fallout from the 1997-98 financial crises. The ripples from Asia, Russia and Brazil had temporarily halted the upturn in the region’s economic growth, which from mid-1990 to 1997 had raised expectations for sustained high long-term economic growth in the region. This epilogue briefly reviews key aspects of sub-Saharan Africa’s recent economic performance. It again highlights the need to promote export diversification by fostering competitiveness in manufacturing. Looking further ahead, the epilogue points to the challenges for promoting competitiveness in view of the recent moves towards regional integration and points to the window of opportunity opened by the dramatic improvement in global information and communication technologies (ICT).

A two-track economic recovery shaped by commodity price swings. In 1998-99, per capita real GDP growth in sub-Saharan Africa slipped into negative figures again (Table E.1). Despite the much lower exposure of SSA economies to volatile short-term capital flows, the region suffered from the 1998-99 financial crisis, mainly because of sharply lower commodity prices from faltering growth in East Asia and the slowdown in world trade. Despite the drag from non-oil commodity prices, which remained near cyclical lows, the region experienced a moderate recovery in 2000, buoyed by the strong rebound in world economic growth.

Table E.1.A Snapshot of Sub-Saharan Africa’s Recent Macroeconomic Performance(Annual growth in percentages)
1990-931994–971998199920001
Sub Saharan Africa2
Real GDP0.64.12.02.12.7
Real GDP per capita-2.11.4-0.6-0.50.2
All developing countries2
Real GDP1.84.71.03.25.3
Commodity prices3
Non-oil commodities-4.06.6-2.9-7.9-7.2
Oil-1.43.3-31.838.355.0
Sources: World Bank, 2001, and IMF, 2000.Notes:

Contrasting changes in the prices of oil and non-oil commodities have spurred a two-track recovery in sub-Saharan Africa, with oil producing countries growing by about 3.5 per cent, thanks to buoyant export receipts and healthy investment. Elsewhere performance was mixed, but most importantly, countries with better policy environments—such as Botswana, Uganda and several CFA zone countries—enjoyed stronger than average growth, with GDP growing by an estimated 5.2 per cent in 2000. By contrast, countries with poor policies, hit by civil strife, continuing war, or major political disruptions—such as Angola, Côte d’lvoire, Democratic Republic of Congo, Ethiopia, Sierra Leone and Zimbabwe—had the weakest performance, with GDP growth remaining flat (World Bank, 2001; IMF, 2000).

Recent fluctuations in activity underscore the continuing vulnerability of SSA economies to primary commodity price swings. Since mid-1997 the prices of most commodities have fallen sharply, reflecting the disruption in demand in the wake of the financial crisis. Even though world economic activity has rebounded since 1999, non-oil commodity prices have not kept pace, remaining well below pre-crisis peaks throughout 2000.

The continued weakness in non-oil commodity prices reflects in part the slow pace at which the supply of these commodities has adjusted to the slump in demand. Sluggish non-oil commodity prices, along with the sharp increase in the price of oil, have reduced growth in a number of SSA countries dependent on such exports, particularly those that only export primary commodities. Indeed, from 1998 to 2000, nearly 15 SSA economies were hit by losses in the cumulative terms of trade of more than 10 per cent of total exports—reflecting lost export revenues and the higher cost of oil imports. In 10 of those countries, the terms of trade loss exceeded 20 per cent (IMF, 2000). Since most of these countries are also among the world’s poorest, these developments further exacerbated rural poverty and made the international targets for reducing poverty in the region even harder to meet (World Bank, 2001).

SSA exports did not keep pace with the rapid growth in world trade. The fast recovery from the financial crisis further boosted world trade, which grew at an estimated rate of 12.5 per cent in 2000. Growth in world trade accelerated at an annual rate of 6 per cent over the 1990s, up from 4 per cent in the 1980s. Developing countries as a whole benefited from this trend, with their exports growing by an average annual rate of 10 per cent during the 1990s—triple the growth seen in the 1980s (World Bank, 2001). Several structural factors helped to improve the integration of developing countries into world trade. Continuing reform of trade regimes and enhanced competition in domestic markets improved the incentives for export market penetration and the search for lower-cost inputs; advances in ICT greatly reduced shipment costs and facilitated marketing and outsourcing of production; and regional and multilateral trade agreements significantly reduced trade barriers.

However, export performance was very uneven across developing countries, with export volumes in sub-Saharan Africa growing at only about 2 per cent a year over the 1990s. Thus, although global market conditions for SSA exports were more favourable in the 1990s compared with those in the previous two decades, the region continued to be marginalised in world trade. Its share in global non-oil exports is now less than half the level in the early 1980s (Ng and Yeats, 1999). Indeed, had sub-Saharan Africa maintained its share of world trade from the late 1960s, its exports and income would be about $70 billion higher today, boosting the region’s GDP by more than 20 per cent and helping to make significant progress in reducing poverty (World Bank, 2000).

A pressing need to remove structural impediments to SSA exports. Slow export growth in sub-Saharan Africa partly reflects the slow growth of world trade in SSA’s export basket because of low income elasticities of demand. However, import barriers in developed economies, especially in textiles, also play a part, as they restrict market access for the exports of the poorest countries (World Bank, 2001).

On the other hand, inflated domestic costs, reflecting poor production efficiency; often appreciated real exchange rates; weak export infrastructure; and high transport costs leave many SSA economies at a competitive disadvantage in export markets. These structural weaknesses, which have been extensively reviewed in this volume, hamper export diversification and impair the export response of SSA economies to reform measures. Structural impediments to competitiveness are reflected in a shrinking market share of SSA exports, which has further reduced growth in export volumes (Figure 1).

Figure 1.Poor Competitiveness has Hurt Sub-Saharan Africa’s Export Market Shares

The poor economic performance and slow growth of primary commodity exports underscores the need for enhancing export diversification as a long-term policy objective. The policy options explored in the conference, aimed at improving the efficiency of production factors, reducing transactions costs and enhancing overall competitiveness, are key to shifting the comparative advantage toward manufacturing, thus bolstering diversification. Some SSA economies have already begun to diversify, becoming more attractive for private sector investment. SSA countries need to continue these reforms to encourage growth (led by the private sector) in manufacturing industries in which they have a comparative advantage.

Promoting export diversification is all the more needed because the long-term decline in non-oil commodity prices is likely to reflect not only the low income elasticities of demand, but also the unfolding structural trends prompted by rapid technological change (Sachs, 2000). For example, because of innovation, copper is likely to be increasingly displaced by fibre optics, while rubber and jute are being displaced by new synthetic materials. Unless the poorest SSA countries manage to broaden the range of their exports, they may be at risk not only of falling deeper into the “technological divide”, but also of seeing their exports lose profitability because of the accelerated pace of technological innovation.

Looking further ahead, two main developments are likely to affect the capacity of SSA countries to diversify their economies, potentially helping to improve their export and growth performance: regional integration and advancements in information and communication technology (ICT).

Can regional integration in sub-Saharan Africa help promote competitiveness in manufacturing? Recently in sub-Saharan Africa, as elsewhere in the developing world, regional trade integration has risen high on the agenda for trade liberalisation.

Regional trade arrangements—as opposed to multilateral trade liberalisation—may not be the best approach to globalisation, since such arrangements have the potential for displacing import supply from countries outside the free trade area in favour of possibly less efficient producers within the area. Regional trade arrangements, however, can still help improve the competitiveness of regional producers by increasing their exposure to competition and providing access to larger markets.

On liberalisation of services, a non-discriminatory approach to liberalisation could be combined with a regional approach to regulation (Subramanian et al, 2000). Possible areas of co-operation include domestic regulation—in sectors such as financial services, telecommunications, power and transport—by pooling resources and expertise and by upgrading and harmonising standards. This would help enhance competition, reduce intermediate input costs to industry, stimulate investment and eventually promote competitiveness.

A window of opportunity from ICT development? Accelerated progress in ICT may act as a key driver of competitiveness and growth, providing an opportunity for SSA economies to bridge their development gap more rapidly. Investing in ICT has the potential for greatly improving efficiency and boosting multifactor productivity across industries (IMF, 2000; OECD, 2000a). By raising labour productivity and helping companies to organise production and distribution better, ICT development allows companies to save on costs, helping to improve competitiveness. The scope for such efficiency gains is likely to be larger in developing countries, as firms often lag far behind best practices in business organisation and supply-chain management. Business-to-business e-commerce is also likely to improve firms’ access to markets operating in sub-Saharan Africa by reducing communication costs between geographically distant partners and by lowering search and marketing costs. Business-to-business e-commerce can also greatly accelerate productivity growth by facilitating technology diffusion (World Bank, 2001).

To take advantage of this opportunity, sub-Saharan Africa needs to intensify efforts to improve telecommunications infrastructure and service pricing, and to promote further emphasis on policies that create an enabling business environment receptive to ICT. Indeed, cross-country evidence suggests that a wide range of complementary policies and institutions are important for ICT development (OECD, 2000b). For example, deregulation of telecommunications markets is a main driver of ICT development since it helps to reduce communication costs. Securing a favourable climate for business fosters a sustained investment effort in ICT, while regulatory reform to enhance competition is an enabling factor, because firms invest in efficiency-enhancing technologies when they can expect sufficient returns from doing so. Enhanced ability of the financial system to mobilise capital for risky projects is also key to promoting restructuring, as new firms in emerging industries typically have limited access to finance. Nevertheless, the main enabling factor of ICT development is a pool of skilled people, which sub-Saharan Africa badly lacks. Policies to increase the average skill level of the labour force are crucial for facilitating the adoption and diffusion of ICT and for helping to absorb the benefits from faster technology transfer.

To help the region meet the complex challenges that lie ahead and to take advantage of the expanding opportunities from technology and globalisation, the international community must continue supporting the reform efforts of SSA economies, through debt relief and by providing better and more focused development assistance. Mobilising funding for technical assistance is particularly important to help upgrade product standards and strengthen trade support services and regulations. Concerted action will also be needed to improve market access for the exports of sub-Saharan Africa’s poorest countries and to help those countries better diversify their economies and position themselves in the global marketplace.

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