Ethiopia Can Compete Globally in Light Manufacturing and Spur Economic Growth Says World Bank

March 19, 2012

Justin Yifu Lin launches five-country report during final trip to Africa as Chief Economist

Addis Ababa, ETHIOPIA, March 19 “Light manufacturing can offer a viable path for Ethiopia and other Sub-Saharan African countries as they transform their economic structure and strive for productive job creation,” said Justin Yifu Lin during his final visit to the region as  the World Banks’ Chief Economist and Senior Vice President for Development Economics.

Lin is the institution’s first Chief Economist from a developing country and his term ends on June 1 of this year, after which he will return to direct the China Center for Economic Research in Beijing.

During his stay, Mr. Lin visited the Eastern Industrial Zone; launched a Light Manufacturing in Africa report that covers Ethiopia, China, Tanzania, Vietnam, and Zambia, and; took part in seminars at the AAU School of Business and Economics.

“This light manufacturing study can be a guide for transforming industrial structure and creating productive jobs, including in the leather, apparel, wood, metal and agribusiness sectors in Ethiopia,” said Lin, “This is the first research project based on my theory of New Structural Economics, or NSE. According to NSE, continual growth can only happen with structural changes. For Africa, continued strong performance will require transforming out of agriculture and into areas such as light manufacturing. This thinking is central to my legacy as World Bank Chief Economist.”

The study looks at five subsectors--apparel, leather products, wood products, metal products, and agribusiness in all five countries.  Based on surveys and data sources in each place (including from over 2,500 enterprises), the authors identify specific binding constraints in each of the subsectors relevant for Sub-Saharan Africa (SSA).

Among the major findings:

  • Africa has the potential to create millions of productive jobs because of a growing labor cost advantage, natural resource advantages, privileged access to high income markets for exports, and growing domestic and regional markets.
  • Structural transformation entails improving productivity for a few medium and large firms, but also to a vast majority of small, informal firms providing low-quality products to the domestic market.
  • At a broad level, in the three African countries and across subsectors and factory sizes, six major constraints emerge as the binding constraints to light manufacturing: input cost and quality; industrial land, finance, trade logistics, entrepreneurial capacity, and worker skills.
  • The key constraints to competitiveness vary by country and sub-sector, and by firm size. This helps to considerably narrow down the reform agenda.
  • African countries need to have a clear idea about the most promising manufacturing subsectors and then identify, prioritize, and remove the most serious constraints in those subsectors. They need to keep targeted policies selective, consistent with comparative advantage, and in line with the country’s limited resources and capabilities. They need to make use of conventional and some non-conventional policies such as “plug-and-play” industrial zones (low-cost standardized factory ‘shells’ set up by the public sector to ease entry by new entrepreneurs). In addition, it helps to start small and build up gradually.

With big manufacturing countries like China facing higher costs from land, regulatory, compliance and labor costs, the report comes at a pivotal time for Africa. Indeed, China’s dominance in light manufacturing has begun to erode, thus opening a window of opportunity for the Africa region. Other Asian entrants have also started to line up as light manufacturing and other jobs shift out of China, so moving fast is critical.

After interviewing over 2,500 enterprises and analyzing micro data collected from them, the research team concluded that Africa has the potential to create millions of productive jobs because of  growing labor cost and natural resource advantages, among other factors.  

“This report is refreshing because it proposes simple, practical approaches to industrialization for Africa – such business-friendly pragmatism is appealing to the continent, given its many challenges. In the case of Ethiopia, we believe that job creation through industrialization is critical for its drive to become a middle income country and is consistent with the government’s current Growth and Transformation Plan,” said Guang Z. Chen, country director of the World Bank to Ethiopia.

Like many Sub-Saharan African countries, Ethiopia has ample low-cost labor, giving it a comparative advantage in less-skilled, labor-intensive sectors, and abundant natural resources that can provide valuable inputs for light manufacturing industries serving both domestic and export markets. The country’s resources include cattle for leather; forests for wood; cotton for apparel; and farmland and lakes as inputs for agro-processing industries.

Hinh T. Dinh, Lead Economist, Team Leader and lead author for the report, said “Africans do not need to wait to have perfect investment climates to create millions of productive jobs in light manufacturing.”

“Unlike past studies of Africa’s potential, which tend to come up with a long list of shortcomings including infrastructure, education, red tape, and other obstacles, this approach focuses on binding constraints by subsector, which leads to a smaller, more specific, and sometimes new set of constraints. This makes policy fixes more selective and effective and the reform agenda much more manageable,” said Mr. Dinh.

He explained that efforts to replicate the study’s methodology beyond the initial five countries are already under way and expressed hope that the approach will reveal specific constraints to light manufacturing in other African economies and provide concrete advice to spur the growth of the sector more broadly.


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