Linda Calabrese (ODI) | Four ways to help East African manufacturing

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Linda Calabrese (Senior Research Officer, ODI)

30 June 2017

Manufacturing has finally taken a central place in the policy and economic debate in East Africa. This is an exciting change; not so long ago, industrialisation was largely ignored but it is now widely understood that the manufacturing sector is crucial in creating employment and spurring growth in the region.

The second East African Manufacturing Business Summit in Kigali brought together regional institutions, national governments and private sector bodies from East African Community (EAC) countries to discuss the future of East African manufacturing. The summit provided interesting insights on East Africans’ own views and ambitions for their manufacturing sectors, and how to achieve their goals. Here are four important issues to help East African manufacturing that were discussed at the summit, and my views on some of these.

1. East African manufacturing needs more than protection

Many in the private sector would like to protect the domestic industry through trade policy, especially in the form of high tariffs. As the EAC embarks on a revision of its tariff regime, the Common External Tariff (CET), many feel that the current tariff structure has not supported the industrialisation efforts. The upcoming review of the CET is, therefore, necessary, especially to correct those areas that penalise domestic producers. A case in point is the application of high tariff rates to those products that are used as inputs in domestic production, making the domestic industry uncompetitive. But it is very likely that East African producers will also demand higher tariffs, to protect them from international competition.

It is important that the tariff structure is appropriate. This can be achieved by ensuring that inputs are not taxed excessively; and that industries that have no chances to succeed will not be protected. However, the industrial sector cannot develop and become competitive by relying solely on high tariffs. This was reflected at the summit in the words of the EAC Director of Customs, Mr Kenneth Bagamuhunda, who warned that the East African manufacturing sector should not rely on customs tariffs and regulations to thrive. Instead, countries wishing to promote their manufacturing need to focus on the appropriate policy mix, and to build infrastructure, develop skills and provide proper support to investment.

2. Manufacturing needs to move from an inward orientation to an export focus

A striking feature of the East African manufacturing sector is that it seems to be very inward-focussed. East Africans seem to aim to produce only what they consume, with almost no focus on exports. Yet the East African market is limited in size and most people have limited purchasing power. To achieve economies of scale and make production viable, East African countries need to focus on exporting.

This lack of focus on export is even more surprising given the country models that the EAC seeks to imitate. Vietnam has pursued an export-oriented industrialisation and even China, with a domestic market of one billion individuals, relied on exports to develop. A similar story can be told of South Korea, and other late industrialisers.

In pursuing an export-oriented industrialisation, efforts to promote East African products (such as the ‘Made in Rwanda’ campaign) should focus on promoting products domestically as well as outside of the region. As Minister Kanimba of Rwanda pointed out, ‘Made in Rwanda’ is not about narrowly protecting Rwanda’s industry, it is about making it thrive in a competitive global environment.

Producing for the export market may be more difficult for the East African countries. International markets are tough, and there is competition with producers in more established regions like South East Asia. However, exporting remains the best way to achieve the right scale of production, and to procure the foreign exchange that East African countries need.

3. Ambitious plans require gradual implementation

The East African public and private sectors are very ambitious in their manufacturing goals – they would like to produce many things, and they want to do it now. This level of ambition is commendable and necessary to mobilise resources across the region. However, EAC countries also need to be realistic about what can be achieved, and how quickly.

Take one example: the automotive industry, a sector that East African countries are keen to develop. Some plants are already operating in the region, for example in Kenya, and companies have plans for further expansion; while the region also has some experience of assembling motorcycles. But not all East African countries can produce all types of cars at the same time.

At the summit, car manufacturing experts were clear that some organisation of the production process will naturally take place in the region, with the industry taking off earlier in some countries compared to others. Specialisation is also likely to take place, with different EAC countries assembling different types of vehicles, or producing different components. This model exists in other regions – for example, in Latin America, Brazil and Argentina trade cars, as each country is specialised in producing different models.

Sector experts highlighted the different stages in the production of goods too. At this stage, it is unrealistic for the East African manufacturing sector to enter the market through complex production, or host research and development operations. East African countries wishing to enter this sector typically start with simple assembly, and with time they may move up the value chain as they take on more complex production tasks.

4. Manufacturing investors need to tap new sources of finance

How to mobilise finance for investment in the manufacturing sector was central to discussions at the summit, that included some interesting points on involving the East African diaspora. Yet other important issues such as domestic lending and foreign direct investment (FDI) were barely mentioned.

Our recent study on Rwanda shows how banks are reluctant to lend to the manufacturing sectors, and conversely how FDI into the manufacturing sector is growing. The main question for Rwanda and the wider region is how to channel these funds into manufacturing activities that can promote economic transformation.

Other countries have shown that FDI can be a useful source of finance for industrialisation – again, Vietnam is a good example. Though the benefits from FDI are not a given, it is up to the recipient countries to set up terms and conditions in ways that benefit the domestic economy in terms of employment, exports, learning opportunities and linkages.

What is the future for manufacturing in East Africa?

It is important that East African countries are turning their attention towards industrialisation. However, some of the key elements are missing from the main discussion, or are not quite targeted in the right direction. To remain sustainable in economic terms, it is essential that East African industries become competitive at the international level.

This blog has been released alongside a study on financing manufacturing in Africa which can be found here.

 

Photo credit: UNIDO via Flickr