Statement by the Executive Director at the African Forum for Dialogue
Delivered on 1 July 2014 at the African Forum for Dialogue: African Union Agenda 2063
Industrialisation and Inclusive Development in Africa.
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Thank you to the African Union for inviting the International Trade Centre to contribute to this discussion on industrialisation and inclusive development in Africa.
I am particularly pleased to see these two concepts addressed in tandem. In many instances, in the past, industrialisation was seen as more of a philosophy- even a political agenda- rather than what it is: a critical tool for the economic transformation of a country and for its social progress. This is the vision that can contribute to the Post 2015 Development Agenda.
It is timely that we discuss industrialisation and inclusive development in Africa in the context of its Agenda 2063. This Agenda aims at providing a long-term development vision for the African continent as well as Action Plan to translate this vision into practice.
This Agenda is of great interest to the International Trade Centre since over 60% of our resources are dedicated to sub-Saharan Africa, LDCs, and LLDCs. Supporting Africa’s development efforts is a priority for the ITC and for me as Executive Director. As part of the organisation’s Strategic Plan for the next biennium, we are continuing to focus on the continent and to ramp up our solutions and interventions. We have a significant stake in the continent’s continued economic success. We want to hear your views as we craft our Strategic Plan.
Africa’s rise over the past two decades is now well documented. The continent has witnessed unprecedented economic expansion and resilience. Between 2003 and 2013, the region continued to expand by over 5% a year despite the protracted slowdown in many of its key export markets. At these growth rates, the continent could double the size of its economy before 2030. The African Development Bank is projecting even faster GDP growth of 6.4% this year, while intra-Africa investment is expanding, led by companies such as South Africa’s Massmart and Nigeria’s Dangote Group.
But alongside this optimism is growing disquiet. This is reflected in our discussion today. And the question is one about sustainability: can Africa continue to expand at such rapid growth rates without adequate structural transformation? And by this, is often meant industrialisation.
Let me briefly share with you some considerations about “industrialisation”.
- One, industrialisation is not just about manufacturing
Manufacturing interacts with the rest of the economic fabric both upstream, in energy and raw materials; and also downstream, linking up with services. It is about distribution, logistics, environmental services, financial services and more and more about tourism services. In fact it is becoming difficult to understand where manufacturing ends and where services start. This is what some economists have dubbed “servicification” of our economies. It means that a strong industrial development needs to ensure efficient, cost-effective, and well-regulated and open services markets.
Africa is no exception to this. The services sector accounts for the largest share of GDP in Africa at 58%. Countries in Africa that have rebased their GDP recently have shown that their services sectors are far more important than originally thought. Nigeria's services sector grew to 52% of GDP from 29% when it rebased earlier this year; and services in Ghana grew to 51% from 36% after its rebasing in 2010. Services exports are expanding annually at 12% on average led by growth in modern services exports. Countries like Rwanda, Mauritius and Tanzania perform especially well in terms of exports of modern services especially in tradable business and financial services. The value of these exports in Rwanda has more than doubled to $85 million between 2005 and 2012. In Mauritius, the services sector creates more jobs than agriculture and manufacturing.
Greater attention needs to be paid to creating a conducive environment for services, both at the domestic level, as well as at the regional and multilateral level. And this is why at the International Trade Centre we are boosting our offer in the area of services, to ensure it contributes more and better to the robust development of the economies.
And industrialisation is also about agriculture. It is also about the agro-processing sector, which holds great promise for development in rural areas. Finally, industrialisation is also about developing forward and backward linkages in the extractive industries, so that they can generate more employment.
- Two, industrialisation is not just about big multinational companies
Industrialisation often evokes an image of big conglomerates, multinational plants, in automobiles, planes and machines. But today’s industrial activities increasingly integrate larger corporations with a myriad of micro, small and medium enterprises (MSMEs) along value chains, across sectors and more and more across countries.
Caring about industrialisation means paying greater focus to MSMEs. We know that between now and 2030 around 500 million new jobs will need to be created. And we also know that the bulk of these jobs will be generated by MSMEs.
MSMEs are already driving Africa’s increasingly domestic-led growth and resilience. They make up over 80% of private enterprises and are the largest employment generators – particularly for women and youth. We at ITC have long-recognized how trade can help increase the potential of SMEs to drive Africa’s future development. Our experience empowering SMEs in Africa to internationalize demonstrates that trade increases productivity. Exporting firms are more competitive and pay higher wages – a recipe for sustainable development in an increasingly globalized world economy, and domestic poverty reduction. Our experience also shows the importance of SMEs for women economic empowerment and for youth employment.
We also know that regulatory and administrative costs can impact MSMEs up to ten times more than larger companies. Trade facilitation is a case in point here. We must therefore develop policies and regulatory frameworks supportive of small businesses. Where the business environment is complex, taxation systems unfair and red tape abounds, MSMEs will go informal. And we all know that informality means worse working conditions, low innovation and a more limited contribution to national growth and development.
We must also ensure actions aimed at building the capacities of MSMEs to be active members of the industrial community. Lack of skills and capacity is a huge barrier to MSMEs growth. This is a key focus of the International Trade Centre: building the skills of MSMEs to help them internationalise. And we do this with private industry and with leading educational institutions to ensure state-of-the art curricula.
- Three, industrialisation is not a tool on its own, it needs to be blended with other instruments and policies for it to be fully effective
Structural transformation will require blending industrialisation with other key policies on issues such as education, infrastructure development, financial inclusion and innovation.
In education, progress over the last two decades has prepared Africa for the industrial phase of its growth to take-off. The percentage of sub-Saharan Africa’s working age population with a secondary school education has more than quadrupled to around 40% today from 9% in 1975. This is similar to secondary education levels in Mexico and Turkey when they began industrialising in the 1980s. As we know, both countries are now part of the OECD. Africa has taken great steps in building human capital for a successful development. It is education and a more agile business environment, coupled with technology that is driving innovation and creativity in Africa. Just last week I was in Kenya and witnessed first-hand the hundreds of apps that are being developed every month.
On infrastructure development – in particular transportation and energy - I believe that much remains to be done. It is encouraging to see the focus placed by the African Development Bank on this key area. Finally on financial inclusion, our most recent survey of SME sentiment end of last year indicated that access to credit is a major impediment to SME growth and thus to industrialisation. Access to finance can be particularly difficult for SMEs that are too big for microfinance institutions, but still too small to be able to access traditional commercial bank lending. In my view traditional banking instruments will have to be combined with more innovative sources of financing, including venture capital, social investments, to help bridge the existing gap.
- Four, industrialisation need not be synonymous with environmental degradation
The relative late coming of Africa to industrialisation can have the advantage of allowing the continent to leapfrog technology and apply modern eco-friendly production techniques.
The ITC is working with many MSMEs in Africa to adapt production to climate change, to develop manufacturing processes respectful of the environment and to meet sustainable standards. This is an area on which we will be focusing our attention in the future.
In these four elements I have tried to capture what I believe is the essence of industrialisation in Africa today: it is about generating decent jobs through “sustainable productive development” in agriculture, in manufacturing and in services. It is about greater value addition in-country. It is blending a set of domestic policies in support of small and medium entrepreneurship.
And I want to link “productive development” to “internationalisation”. African markets are characterised by their small size and fragmentation. Industrialisation must therefore have an international dimension, starting first and foremost with the regional neighbours. I prefer to speak about internationalisation, rather than exports, because today it is more and more about exports and also imports, and about trade and investment.
Regional integration, more open markets and investment-friendly environments are therefore inextricably linked to Africa’s industrialisation.
This is why we will continue to support Africa’s priorities through our Pan African Programme which aligns itself with the African Union’s Action Plan to boost intra-African Trade. This is also why we are working with the five regional economic communities to help SMEs move up value chains through improved trade and investment climates, international competitiveness and productivity, enhanced performance of Trade Support Institutions and better market intelligence.
As Africa develops its 2063 Agenda, it can be assured of ITC’s partnership for sustainable, inclusive development.