Chapter 1 Promoting Competitiveness in Manufacturing in Sub-Saharan Africa

International Monetary Fund
Published Date:
August 2001
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Can Africa ever hope to have comparative advantage in manufactured exports? This question, posed in the following chapter, becomes a theme that reverberates throughout this volume. The ongoing debate among economists about how to answer it and thus give guidance to policymakers pits two fundamental and opposing theoretical views against one another. This book not only discusses the debate, in which the authors duly take their positions, but also tries to break new ground in empirical tests that would support an answer of “Yes!” to the question. As will become evident, however, such an answer depends heavily on supportive policies, resolutely pursued. The final chapter, one of the two that pull together the various contributions in the book, reminds us that “… there is no free lunch”.

This conference volume on policies to promote manufacturing competitiveness in sub-Saharan Africa stems from a meeting held in Johannesburg on 6-7 November 1998, jointly organised by the African Economic Research Consortium, the International Monetary Fund and the OECD Development Centre. Participants included policymakers from African countries, academics and experts from international and regional institutions. The papers presented at the conference, of which this book includes a selection, ranged from cross-country comparisons to country case studies.

The conference took place against the backdrop of resurgent economic activity in sub-Saharan Africa. After a long economic decline, countries in the region were achieving higher real per capita incomes, a significant fall in inflation and a substantial strengthening of their fiscal and external positions—all reflecting, to a large extent, the implementation of sound economic and financial policies coupled with much-needed structural reforms. Yet the economic situation remains fragile. The region still depends on primary commodities for some 80 per cent of its total exports. Growth thus remains vulnerable to swings in the terms of trade, a message driven home by the impact of the fall in oil and most commodity prices in the wake of the Asian crisis.

Moreover, perceptions among international investors of higher risks in emerging markets are not good news for Africa. The continent needs to attract more foreign direct investment, for capital formation, to upgrade its technological capabilities and to strengthen its productive capacity.

The sub-Saharan countries face the challenge of consolidating their recent economic gains through rapid integration into the global economy. Promoting the competitiveness of their manufacturing sectors in open economies will help increase incentives for both domestic and foreign investment in manufacturing, contributing to economic growth and reducing their economic vulnerability. Decisive steps to promote competitiveness become even more essential when several large emerging economies in other developing regions have already made steady progress in manufacturing for export. Against this background, the conference papers focus on three critical policy questions.

  • — What exchange-rate policy will help foster competitiveness in manufacturing?

  • — How can the efficiency of production factors be enhanced?

  • — What roles do institutional and structural reforms play in promoting competitiveness?

Reforming Exchange-Rate Policy

Elbadawi’s cross-country study indicates that substantial misalignments of real effective exchange rates in sub-Saharan Africa have reduced incentives for exporters to increase their penetration of foreign markets. The paper supports a view that competitiveness based on an appropriate real exchange rate is a pre-requisite for a developing country to become a successful exporter of manufactured goods. Econometric work also suggests, however, that high transaction costs—measured by an index of corruption, the length of paved roads, and the number of fax machines—adversely affect manufactured exports. In comparing his results for Africa with East Asia, Elbadawi reaches the conclusion that Africa’s marginalisation in world manufactured exports has resulted in large part from its higher transaction costs and different exchange-rate regimes. He thus argues for African countries to redress both their structural and their macroeconomic policies.

Mwega and Ndung’ u also examine the effect of exchange-rate policy on manufactured exports, in a study of Kenya in the 1980s and 1990s. They conclude that Kenya’ s crawling peg during most of the 1980s and more market-based regime in the 1990s limited the misalignment of the real exchange rate. Although they recognise that their results are not very robust, they judge that, after lacklustre export performance in the 1980s, the depreciating trend of the real effective exchange rate in the 1990s had a positive impact on exports. Like Elbadawi, they also point to other factors that affect manufactured export performance—the availability of finance, the quality and extent of infrastructure, access to external markets and the regulatory environment.

Enhancing the Efficiency of Production Factors

The comparative study by Adenikinju, Söderling, Soludo and Varoudakis examines the structural factors affecting manufacturing competitiveness. Their analysis of Cameroon, Côte d’lvoire, Nigeria, and Senegal shows that total factor productivity declined in all four countries in the 1980s and the early part of the 1990s. It identifies inadequate investment in infrastructure, external-sector restrictions and insufficient education as important explanations for this poor performance. The authors argue that liberalised trade to foster openness will not suffice without complementary policies, including an appropriate exchange rate, market and price deregulation, a market-oriented wage policy and, most critical, greater investment in infrastructure and human capital.

In their cross-country study, Hakura and Jaumotte show that technology transfers related to foreign trade become considerably stronger when imports take place in sectors closely linked to production and exports (intra-industry trade). The possibility of using foreign technology in production appears to be greater when a country already produces similar goods on a significant scale. This finding implies that developing countries should adopt domestic policies to promote intra-industry trade actively. Such policies could provide key infrastructure or vocational training to enhance production and exports in new sectors. The authors also suggest that governments, when negotiating trade agreements with industrialised countries, should try from the outset to reduce trade barriers in sectors with a high degree of intra-industry trade. This is contrary to common practice in developing countries that embark on trade liberalisation. They usually try to retain protection in exactly such sectors.

Implementing Institutional and Structural Reforms

The Sievers study examines the institutional factors affecting international competitiveness and foreign direct investment in Africa, based on an index of competitiveness that involves sub-indexes related to openness, government, finance, infrastructure, labour and institutions. Sievers concludes that political and policy stability critically affect investor decisions. Lack of external sector openness and exchange-rate volatility or misalignment influence investors’ perceptions of competitiveness, and Sievers notes positive developments in both these factors in Africa in recent years. On institutional reform, she argues that African institutions have not yet become a propelling force for growth and need continued improvement. She also cites public health and corruption as major concerns. While it varies from country to country, good governance in Africa remains a critical challenge.

Bigsten et al. examine the performance of manufacturing firms in Cameroon, Kenya, Ghana, and Zimbabwe. They find exporting firms more efficient than non-exporting ones. They emphasise, however, that their analysis does not establish causality, and one cannot know from it whether higher efficiency generates exports or exports generate efficiency gains. Nevertheless, they venture that, because exporting firms appear to have improved their efficiency significantly, an export-oriented strategy is a good one for promoting economic growth. They underscore the importance of policies that support an open economy, particularly appropriate trade and exchange-rate policies, human capital formation, the build-up of infrastructure and stable, consistent, credible economic policies.

Pulling the Major Themes Together

A striking consensus emerged during the conference. The two concluding papers by Nsouli and Fosu pull together the major themes. Nsouli points to renewed optimism in sub-Saharan Africa’ s growth and development prospects, but notes that the path ahead is full of pitfalls. The region’ s exports fell from 3.8 per cent of world exports in 1960 to 2.1 per cent in 1985 and 1.3 per cent in 1995, a worrisome trend. To reverse it, Nsouli notes that the papers presented at the conference reveal seven key areas in which more progress is needed to promote productivity and competitiveness in manufacturing:

  • — market-determined exchange-rate regimes;

  • — trade liberalisation;

  • — deeper structural reforms, especially human capital accumulation, building infrastructure and redefining the role of government away from direct involvement in production to the provision of essential public services;

  • — economic security, with better contract enforcement and more effective judicial systems;

  • — improved governance, with increased transparency and accountability;

  • — stronger financial sectors, with reinforced bank supervision, more domestic and foreign competition, and privatisation of government-owned banks;

  • — consistent and comprehensive reform programmes that avoid piecemeal approaches.

Fosu rebuts the view that, in light of Africa’ s endowments, its comparative advantage lies in exporting primary commodities rather than manufactured goods. Drawing on the conference proceedings, he argues that policies designed to reduce transaction costs, improve the efficiency of factors of production and enhance overall competitiveness could, in fact, shift competitiveness in favour of the manufacturing sector. To reduce transaction costs, he calls for improved infrastructure, particularly transportation, more human capital formation, and streamlined regulatory environments. To enhance the efficiency of factors of production, he points to education, training, and openness of the economies. On competitiveness, he underscores the importance of exchange-rate policy and the regulatory environment. He ends with a focus on the responsibilities of the international community: to reduce the debt overhang, engender the best use of aid funds and foster capacity building, which he views as essential to promote and sustain sound economic policies.

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