Dirk Willem te Velde (ODI) | Making Firms Work Series | Kenya’s window of opportunity in manufacturing is open: Hela garments

This blog is part of our ‘Making Firms Work’ series. Read other blogs in the series: on textile manufacturer A to Z and Nepalese ICT firm CloudFactory.

Dirk Willem te Velde (SET Programme Director, ODI)

10 April 2018

Over the past two decades, many low-income countries have faced major challenges in developing their manufacturing sector. In much of Africa, the share of the sector in gross domestic product has declined or barely changed in the past two decades (although there are also some examples of success, and in absolute terms manufacturing production doubled in a decade). The value of preferential market access has been under erosion, and jobless industrialisation is increasingly a reality.

However, UK-owned Hela Clothing located in the Athi River Export Processing Zone (EPZ) (close to Nairobi) shows us that it is still possible to establish a major labour-intensive factory in Kenya. They have exported $40 million (equivalent to around 10% of Kenya’s garments exports) within one year and have already created 4,000 jobs directly. We ask- what are the factors behind this success, what the current challenges are and what lies ahead?

Hela in Kenya: Beyond low labour costs and preferential market access

UK-owned firm Hela Clothing is headquartered in Sri Lanka with an annual turnover of $250 million. With demand outstripping the production capacity of their facilities in Sri Lanka and factories upgrading in Sri Lanka, Hela decided to set up subsidiaries in Mexico (to be physically close to the US, where many buyers are located), and also in Ethiopia and Kenya, to benefit from the African Growth and Opportunities Act (AGOA) whilst using labour that is cheaper than in Sri Lanka.

In Kenya, the factory was set up inside a ready-made shed. It has grown remarkably fast, reaching a turnover of around $40 million over the past year. It is likely to meet close to $60 million in the coming year. To keep up with this growth, the factory needs to double its workforce to 8,000. In comparison, the factory in Ethiopia has a turnover of $2 million and employs fewer than 1,000 workers – even though wages are much lower in Ethiopia.

The factory in Athi River is about much more than using low labour costs in the context of preferential market access in the US. Even though wages in the Kenyan subsidiary (somewhat less than $150 a month) are more than double those in Hela’s Ethiopian subsidiary in Hawassa (a little over $50 a month), labour productivity in Kenya is also much higher (efficiency is even higher than in Sri Lanka), product variety is greater and absenteeism is lower, as are ancillary staff-related costs.

In addition, the Athi River factory offers meals for its workers, a crèche for young children of the workers and a development programme for local managers. The number of expats has decreased from 60 to 40 (currently around 1% of staff) since operations started. Hela is regarded as a showcase firm in the Athi River EPZ (opened by Kenya’s cabinet secretary) and works with UK-funded programmes. The firm has also built up excellent relationships with its clients, striking deals with world-class buyers in the US such as PVH, which includes the brands Tommy Hilfiger, Calvin Klein and Speedo, and Vanity Fair.

Challenges for labour-intensive manufacturing as the window of opportunity closes

The example of Hela Clothing is all the more remarkable given that two factors exist that are likely to make it more challenging to embark on labour- and export-intensive industrialisation strategies in the future.

First, the value of preferential access will be eroded. AGOA (under which most of Hela’s garments are exported) is a US unilateral scheme that is expected to run only until 2026. Multilateral trade liberalisation is further reducing the value of the preferences Kenya enjoys, (though all countries may face a protectionist backlash in the future).

Second, recent SET research shows that the digital economy will begin to affect African manufacturing directly or indirectly. Digitalisation, automation, 3D printing and robots will change the nature of production in developed and developing countries. Robots can now undertake some tasks, and responses to rising wages in countries such as China include automation, not just relocation of manufacturing production to low-income countries. At present, capital costs required to invest heavily in digital technology are relatively high compared with labour costs, but this may not continue beyond a further 15 years for some tasks in certain sectors. Some of the automated cutting machines in the AtoZ factory in Arusha already look more modern than the cutting procedures in the Hela firm.

This suggests it is crucial for Kenya to build up industrial capabilities in the coming decade, while it still can. The existence of readily available labour and trade preferences needs to be complemented by high-quality but cheap access to energy, more and better developed economic zones and low transport costs. In addition, developing quality services (e.g. insurance, accounting, logistics) to support Kenya’s manufacturing hub, is critical.

Lessons learned and ways forward

Given its excellent client relationships and building of social capital with key sourcing companies such as PVH, Hela is looking to expand. For example, Vanity Fair (whose orders are currently responsible for just a few production lines in the factory) would like Hela to create a separate factory with a bigger crèche.

Making firms work well requires actively helping to solve problems that individual investors face. For example, a general expansion of production requires finance. Public and private actors will need to work together to fill the finance gap. So far, commercial banks in African countries have shown little understanding of ways to finance the garment industry (e.g. through letters of credit) – we can compare with this the facilitator role played by banks in Sri Lanka and Bangladesh and in Asian garments more generally. The government of Kenya has begun to focus on this, but in the meantime there is an opportunity for development finance institutions (DFIs) such as CDC, Proparco and DEG to provide tailored access to capital. DFIs could set up an East African industrial fund for this purpose.

The relationship between Hela and public agencies is encouraging, suggesting foreign investors with patience and diligence to develop strong networks can expect a return. The firm worked with the Export Zones Processing Authority on importing and exporting licensing, and with the Government of Kenya to obtain affordable access to electricity. Hela is also working with willing partners such as the UK Government (both the Trade and Development Departments) and donor-funded agencies, such as TradeMark East Africa. Together they are working with Hela as an industry-lead to support the Government of Kenya in policy development, reducing trade costs, and identifying new manufacturing locations. For example, a combination of hard and soft infrastructure improvements to Mombasa port are making the area more attractive for export-intensive manufacturing firms.

The UK’s support for Hela and tackling constraints it faces is a good example of the UK’s new trade and investment for development offer. Beyond thinking about the trade, investment, migration and other non-aid policies described in a previous SET blog, UK support is at the centre of the overlapping circles between developing country objectives (developing the manufacturing sector is currently a core priority of Kenya’s president) and UK foreign, and commercial, interests. Working with firms to support peer learning to magnify the results across a sector is also an important way of working which has come out of major DFID-funded research programmes such as DFID-ESRC Growth Research Programme, PEDL, IZA and Tilburg University.

Fostering clusters through development of EPZs and SEZs at appropriate locations could help to increase the impact on Kenya. Hela estimates it imports around 60% (e.g. fabrics) of its turnover, mainly through Mombasa port (although some fabrics may soon come from Arusha), and exports close to 100% of its products, indicating that 60% of Kenya’s export revenues actually go to other countries. Trade costs are therefore an important factor, and the firm is currently searching for additional factory locations around Mombasa so it can reduce these further. The company adds 40% of the value through cutting, stitching, embroidery, washing, putting on buttons, labelling and packaging. Some of its imported products (e.g. belts for Speedo swimming trunks) and services (e.g. business services) could be generated in factories or service providers that could set up in the same zone as Hela, fostering clustering and agglomeration effects. Country-wide, Athi River and Mombasa are not the only possible locations for such clusters. Recently, a Dubai-based firm said it plans to build a garments factory employing 10,000 jobs in Naivasha using locally available geothermal energy. Local firms could supply to and learn from lead firms, thereby increasing value addition in Kenya.

Despite the challenges, firms like Hela Clothing and AtoZ (see the first SET Making Firms Work blog) show that productive, socially responsible, competitive manufacturing firms can thrive and create thousands of jobs in African countries. More firms such as these are needed to take advantage of the window of opportunity that still exists in African manufacturing. In addition to highlighting the challenges of job creation in manufacturing in the future (and helping prepare for a services and digital economy), all actors need to rally behind Kenya’s recently launched Big Four Agenda, which includes an emphasis on manufacturing. Together with the Kenyan Association of Manufactures we developed a 10-point plan to increase the share of manufacturing in GDP from 10% currently, to 15% in five years, and double manufacturing employment. There is also an opportunity for donors to support such efforts, including by developing UK’s post-Brexit trade and investment for development offer in developing countries. Elsewhere, we have estimated that East Africa needs to create 7,000 additional jobs each day until 2030 simply to keep up with demographic developments. That is one Hela each day!

 

Photo credit: Adan Mohamed via Kenyatalk

Stephen Gelb (ODI) | Five priorities to tackle the 7,000 jobs a day challenge in East Africa

Stephen Gelb (Principal Research Fellow – Team Leader, private sector development, ODI)

6 April 2018

Seven thousand new jobs a day for fifteen years!!

This is the daunting challenge East Africa faces if it is to meet the need for work for its young, fast-growing population. In the six countries of the East African Community (EAC) – Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda – an estimated 3.9 million people will be added to the working-age population between 2015 and 2030. This means that 2.6 million jobs must be created in that time. That’s 7000 per day across the region. That number of jobs can’t and won’t be created unless the goods these new workers produce can be sold. And this in turn needs dramatically expanded markets – especially through the creation of a single market across all of East Africa.

SET has assisted the East African Business Council (EABC) – the apex body of business associations in the region – to highlight five policy priorities for governments in the region to boost trade and investment within the EAC and so help meet this jobs challenge. We produced a joint brochure at the EABC’s High Level Conference held in Nairobi on 23 March 2018, to mark the organisation’s 20th anniversary.

The five priorities we identified are as follows:

  • Eliminate non-tariff barriers (NTBs) especially to reduce delays (e.g. at border posts and weighing stations) and to lower the costs of transporting goods within the region. ODI research shows transport and logistics barriers cost between 1.7% and 2.8% of gross domestic product in East Africa.
  • Reform the EAC’s common external tariff (CET) to support industrialisation, especially by ensuring tariffs are levied appropriately through correctly classifying intermediate inputs for production, rather than as final products.
  • Improve regional infrastructure in transport and energy to lower costs and improve quality, supporting profitability for goods producers. Improvements at Mombasa port show what is possible.
  • Liberalise services trade within the EAC to lower business services costs to business users, which has been shown to increase their efficiency.
  • Promote local (intra-EAC) sourcing of productive inputs, to expand markets and encourage investment.

Above: Lilian Awinja and Dr Stephen Gelb

In her report to the event, EABC Executive Director Lilian Awinja discussed progress on the five priorities. There has been improvement on removing NTBs, she said, through better harmonisation of standards, lowered border-crossing times and costs and cooperation by tax authorities. But on CET reform and services trade liberalisation, progress has been much slower. Ms Awinja called for stepped-up dialogue between the private sector and governments.

And on local sourcing, the one priority that businesses can actively implement in their own operations, she endorsed the ban on second-hand clothing imports agreed to (at least initially) by all six regional governments, and issued a call for Fridays to become ‘Wear East Africa’ day, to promote the region’s garment industry. She herself was resplendent in an outfit made from indigenous fabric, as were almost all the women present – a majority in the crowded room at the Kenyatta International Conference Centre.

She was speaking alongside the event’s opening panel: six men, all wearing Western suits and ties, whom she instructed to immediately purchase a locally made shirt from one of the many market stalls just outside. We weren’t able to discover how many of the men obeyed her call. But Dr Ruhakana Rugunda, the Ugandan Prime Minister, who was on the panel, quickly endorsed the idea, saying that President Museveni wanted people to ‘wear East African’ every day, not only on Fridays. The idea of ‘indigenous Friday’ – a step beyond ‘casual Friday’ – felt like something that could just catch on. Of course, local sourcing needs to go beyond the clothing industry to support rapid industrialisation in the region, but ‘indigenous Friday’ may be a start.

Other speakers at the High Level Conference also underlined the five priorities, with addressing NTBs and improving infrastructure probably receiving the most mentions. In her remarks, Patricia Scotland, the Secretary General of the Commonwealth, discussed trade facilitation, but underlined that, to put the ‘wealth’ back into ‘commonwealth’, developing ‘human capital’, particularly women, was critical. This linked in interesting ways to another speaker’s comment about the benefits of intra-African trade by means of informal cross-border exchange, much of it by women traders of course.

Above: Patricia Scotland presenting at EABC 23 March Anniversary 

The ground-breaking meeting in Rwanda just two days earlier, at which 47 African countries signed the Kigali Declaration launching the African Consolidated Free Trade Area (AfCFTA), loomed large over the EABC celebration. Most speakers underlined the opportunities the pan-African market of a billion people offers to accelerate economic integration and increase trade and investment flows within Africa. Prime Minister Rugunda suggested the AfCFTA could renew – in a modern way – an earlier tradition whereby Africans exchanged gifts as neighbours; now they would be helping each other compete with the world in African markets and beyond.

But, as so often in African integration matters, speakers also worried about the gap between ‘talking the talk’ and ‘walking the walk’, and Prime Minister Rugunda enjoined both political and business leaders to live up to commitments signed at multilateral meetings. Many speakers, including Adan Mohammed, Cabinet Secretary (Minister) of the Kenyan Ministry of Industry, Trade and Cooperatives, and Manu Chandaria, one of Kenya’s most prominent business figures, appealed to businesses to end the practice of privately lobbying their own governments for exemptions from policies that businesses had collectively agreed at regional or continental level. Suggesting this was a major reason for the persistence of NTBs, they both argued passionately for solidarity and for promoting the public interest over that of individual businesses. The same level of passion is needed if the region is to meet its 7,000 jobs a day challenge.

Five Policy Priorities to Facilitate East African Trade and Investment

With 3.9 million people predicted to join the labour market each year from now until 2030, there is a huge jobs challenge facing the East African Community (EAC): the creation of 7,000 jobs per day.
SET has worked with the East African Business Council (EABC) to develop a five-point plan for EAC governments to increase investment and intra-EAC trade and in doing so, help tackle the jobs crisis. The plan launches at the EABC’s 22nd anniversary celebrations in Nairobi. 

With 3.9 million people predicted to join the labour market each year from now until 2030, there is a huge jobs challenge facing the East African Community (EAC): the creation of 7,000 jobs per day.

SET has worked with the East African Business Council (EABC) to develop a five-point plan for EAC governments to increase investment and intra-EAC trade and in doing so, help tackle the jobs crisis:

  1. Eliminate non-tariff barriers to trade
  2. Reform the EAC Common External Tariff
  3. Improve regional infrastructure
  4. Fast track liberation of intra-EAC services trade
  5. Promote local sourcing

Further reading:

Balchin, N., Hoekman, B., Martin, H., Mendez-Parra, M. , Papadavid, P., Primack, D. and te Velde, D.W. (2016) Trade in services and economic transformation. SET Report. London: Overseas Development Institute (ODI) (https://set.odi.org/wp-content/uploads/2016/11/SET-Trade-in-Services-and-Economic-Transformation_Final-Nov2016.pdf).

Eberhard-Ruiz, A. and Calabrese, L. (2017) Trade facilitation, transport costs and the price of trucking services in East Africa. ODI Working Paper. London:  ODI (https://www.odi.org/publications/10868-trade-facilitation-transport-costs-and-price-trucking-services-east-africa).

Gasiorek, M., Mendez-Parra, M. and Willenbockel, D. (2017) ‘The costs of logistical and transport barriers to trade in East Africa’. ODI Briefing Paper. London: ODI (https://www.odi.org/publications/10816-costs-logistical-and-transport-barriers-trade-east-africa).

te Velde, D. W. (2017) ‘Supporting Kenya’s industrialisation: Mombasa port, SEZs and targeted development cooperation’. Supporting Economic Transformation (SET) Blog. London: ODI (https://set.odi.org/supporting-kenyas-industrialisation-mombasa-sezs-development/).

UNDESA Population Division (2017) World population prospects: the 2017 revision. DVD Edition.

The East African (2017) ‘Disputes are eroding intra-EAC trade gains’. 11 December (http://www.theeastafrican.co.ke/business/Disputes-are-eroding-intra-EAC-trade-gains-/2560-4223074-nr3bvd/index.html).

 

Photo credit: Salahaldeen Nadir / World Bank. License: CC BY-NC-ND 2.0.

Max Mendez-Parra (ODI) | The African Continental Free Trade Area and economic transformation

Max Mendez-Parra  (Senior Research Fellow, ODI)

22 March 2018

African leaders gathered this week in Kigali to sign the African Continental Free Trade Area (AfCFTA). This is a key step in African efforts to eliminate barriers to trade among countries of the continent and will provide the foundations for smarter and deeper continental integration and implementation of the AU 2063 agenda.

Africa has followed a long road in its endeavours to promote regional integration, with mixed success. For example, the East African Community now constitutes the most successful model of integration on the continent, but other regional economic communities (RECs) have experienced more nuanced outcomes – and the EAC also had its challenges in the 1960s and 1970s. In addition, economic partnership agreements (EPAs) between African groups of countries and the EU have been a challenge to the African regional integration process, as EPAs cut across Africa and African regions.

The road to full implementation of the AfCTFA will be very long. Stage 1 of the negotiations seeks to establish a free trade area within Africa by liberalising nearly 90% of the goods within the continent. For some countries (e.g. Nigeria), reaching such a level of liberalisation constitutes a major effort. The agreement includes a services chapter, aimed at liberalising continental trade in services. This stage of the agreement will enter into force once 15 countries ratify it. It is unclear how long this process may take.

The second stage of the negotiations will aim to address deep integration issues such as investment and competition policies. Later on, there will be the possibility of forming a customs union, but at the moment a decision on this is not possible.

The AfCFTA is set within the aim of the AU and its member states to transform the economic structure of African countries and increase intra-African trade. Economic transformation and the creation of jobs is the most important economic development need in Africa today. Trade and trade facilitation is a key component of economic transformation strategies. Within economic transformation, the development and improvement of the manufacturing sector remains key, and trade can contribute to it. The AfCFTA could contribute to this goal by promoting regional value chains making use of expanded market access in the region.

The AfCFTA should be the basis for a wider and more comprehensive integration strategy. The AfCFTA is likely to be expanded to include additional trade and other cooperation provisions. In particular, the AfCFTA should be used to boost investment in the region to promote infrastructure development and, more importantly, the development of private sector capabilities. Such investment (as in the case of trade) should not be limited to intra-African opportunities; there should also be an effort to bring in capitals and capabilities from the rest of the world.

The AfCFTA on its own is not sufficient to guarantee the transformation process; two complementary factors are also crucial. First, African countries need to improve physical and digital connections among themselves. Without soft and hard infrastructure connecting African countries physically (and virtually), the AfCFTA will not be enough to generate needed trade.

Second, it is unlikely that the AfCFTA at this stage will generate substantial and effective market liberalisation immediately, as much of this has already been achieved through the multiple RECs. It may bring down existing high tariffs between countries that, given distance and lack of connectivity, will not trade even under low tariffs.

Third, Africa needs a substantive boost of investment in its productive capacities that the AfCFTA per se is not expected to bring. African countries need to develop their productive capacities to meet demand from other African countries.

Meanwhile, industrial strategies need to be developed at the national, regional and continental levels. There is a major risk that the AfCFTA will eliminate intra-continental barriers while raising trade barriers with third countries. This strategy, followed by Latin America in the 1960s, has proven extremely costly and inefficient in generating the needed economic transformation. This may harm consumers’ welfare as well as affecting the productivity and competitiveness of African firms. Trade liberalisation is welcomed even at a regional level; however, it needs to be harnessed within a wider and deeper strategy of integration of Africa into the world economy.

In this sense, we should not overestimate the benefits of the AfCFTA and we should not underplay the challenges. The AfCFTA should be a first step in a wider integration and industrialisation strategy. Trade must be considered a tool rather than as an end in itself. The end is to increase trade (regardless of the partner) and to transform African economies to create jobs and raise living standards sustainably. The AfCFTA is not the single most important of the policies that African countries will need to deploy to transform their economies – but it is an extremely welcome one.

In addition, the agreement should aim to promote economic transformation as well as African trade. In this sense, the aim to increase intra-African trade may be misleading, as what African needs is more trade regardless of the partner. Aiming to increase intra-African trade may lead to distortions that will make many sectors inefficient and not competitive.

All this calls to raise awareness of the work that is needed to make a success of the AfCFTA and avoid certain undesirable outcomes. The agreement requires not only more elements of deep integration but also addressing of many of the multiple barriers that affect trade and economic transformation (beyond trade policies at the border). The AfCFTA must thus be welcomed and celebrated as long as the continent is ready to take the necessary steps to make of it a tool to put Africa into the world economy.

Maximiliano Mendez-Parra is a Senior Research Fellow at ODI.

Photo credit: Jonathan Ernst/Reuters 

Digitalisation and the Future of Manufacturing in Africa

Karishma Banga and Dirk Willem te Velde, March 2018

The growing digitalisation of economies and the associated rapid spread of advanced technologies like 3D printers, robots and cloud computing, is having a significant impact on manufacturing production globally. While the digital divide between developed and developing countries (particularly those in sub-Saharan Africa) is still significant, this does not mean developing countries will not be affected in the coming decades. With wages rising even in low-income countries, automation may become an increasingly attractive option to domestic firms, and furthermore, creeping automation of manufacturing in developed countries will have a knock-on effect globally.

Karishma Banga and Dirk Willem te Velde, March 2018

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The growing digitalisation of economies and the associated rapid spread of advanced technologies like 3D printers, robots and cloud computing, is having a significant impact on manufacturing production globally. While the digital divide between developed and developing countries (particularly those in sub-Saharan Africa) is still significant, this does not mean developing countries will not be affected in the coming decades. With wages rising even in low-income countries, automation may become an increasingly attractive option to domestic firms, and furthermore, creeping automation of manufacturing in developed countries will have a knock-on effect globally.

With investment and growth in manufacturing traditionally seen as one of the most promising pathways to industrialisation and economic transformation for developing economies, the question of how governments can prepare for this inevitable change is a crucial one for Africa’s long-term growth trajectory.

This paper presents new empirical analysis of the potential impact of growing digitalisation in manufacturing on Africa, and discusses what policymakers can do to exploit their current window of opportunity, address constraints in traditional manufacturing and prepare for the ‘digital wave’, which will bring with it a whole host of new opportunities and challenges.

Selected media and other coverage

‘US robots set to become cheaper than wages in Kenya’, East Africa Business Week, 16 March

‘Robots and automation: how Africa is at risk’, BBC Africa, 19 March

World Business Report, BBC World Service, 19 March (at 19.30)

Focus on Africa, BBC World Services, 19 March (at 4.18)

‘Selon l’Overseas Development Institute : Les robots seront moins chers que la main d’œuvre africaine à partir de 2034’, L’eral.net, 20 March (in French)

‘Will US robots take over African people’s jobs?‘ Software Testing News, 20 March

‘US robots ‘set to take’ African jobs’, Business Ghana, 20 March

‘US robots set to take African jobs’, Modern Ghana, 20 March

‘I robot e l’automazione dei processi, le nuove minacce per l’economia africana’, La Stampa Economia, 20 March (in Italian)

‘África se encuentra en riesgo en lo que respecta al servicio de automatización’, Blasting News, 20 March (in Spanish)

Infographics

Graphics: SET Programme. All rights reserved.

Photo: Factory workers producing shirts at Sleek Garment Export, in Accra, Ghana on October 13, 2015. © Dominic Chavez/World Bank.
License: CC BY-NC-ND 2.0.

23 March 2018 | Digitalisation and the future of manufacturing in Africa

The growing digitalisation of economies and the associated rapid spread of advanced technologies like 3D printers, robots and cloud computing has a significant impact on manufacturing production globally. While the digital divide between developed and developing countries (particularly those in sub-Saharan Africa) is still significant, implying that low-income countries benefit less from digitalisation, there are important international pathways that affect the future of manufacturing-led development in Africa. Given this, the panel will discuss the major opportunities and threats that the fast-expanding digital economy poses for low and middle-income countries, which have traditionally used manufacturing as a first step towards economic transformation.

Session at the Global Development Network (GDN)’s 18th Global Development Conference: Science, Technology & Innovation for Development (#STI4D)

14.00-15.30 (GMT+5.30), Institute for Studies in Industrial Development, New Delhi (Auditorium, Ground Floor, Block B)

Watch the event below (from 5:27):

The growing digitalisation of economies and the associated rapid spread of advanced technologies like 3D printers, robots and cloud computing has a significant impact on manufacturing production globally. While the digital divide between developed and developing countries (particularly those in sub-Saharan Africa) is still significant, implying that low-income countries benefit less from digitalisation, there are important international pathways that affect the future of manufacturing-led development in Africa. Given this, the panel will discuss the major opportunities and threats that the fast-expanding digital economy poses for low and middle-income countries, which have traditionally used manufacturing as a first step towards economic transformation.

ODI will present new empirical evidence of the impact of digitalisation on labour productivity in low-income and sub-Saharan African countries and discuss the policy implications. An expert panel will then discuss factors driving development in the digital economy, experiences from Kenya on how to become digitally-ready, and what policy makers can do to prepare for the ‘digital wave’ whist also exploiting the current window of opportunity to address constraints and upgrade traditional manufacturing.

With investment and growth in manufacturing traditionally seen as one of the most promising pathways to job creation and economic transformation for developing economies, the question of how governments can prepare for inevitable changes is a crucial one for Africa’s long-term growth trajectory.

Chair

Dirk Willem te Velde  – Principal Research Fellow and Head, International Economic Development Group, ODI @DWteVelde

Speakers

Karishma Banga – Senior Research Officer, ODI @karishma_banga

Anupam Khanna – Former Chief Economist & Director-General for Policy Outreach, NASSCOM

Edward Brown – Director of Country Engagement and Operations, African Center for Economic Transformation (ACET) @AcetforAfrica

Aruna Bolaky – Economic Affairs, Division for Africa, Least Developed Countries and Special Programmes (ALDC), United Nations Conference on Trade and Development (UNCTAD) @arunabolaky

 

For further information on the conference, including a full agenda and how to register to attend, visit the GDN website.

Sonia Hoque (ODI) | Making Firms Work Series | How to create African factory jobs responsibly: from A to Z

This blog is the first in our ‘Making Firms Work’ series. Read the second, on Kenyan garment firm Hela, here.

Sonia Hoque  (Programme & Operations Manager, ODI)

1 March 2018

A to Z Textile Mills Ltd (A to Z) is a remarkable example of how African manufacturing can flourish. A locally owned, diversified, vertically integrated firm with over 7,000 employees, it produces and supplies a large volume and range of goods to domestic markets, and exports internationally. The firm also takes substantial social and environmental responsibility. A to Z has its own recycling plant, housing, childcare and daily meals for its predominantly female workforce, and demonstrates how large manufacturing firms can make a significant development impact.

Can Africa industrialise and move out of poverty?

SET findings from Myanmar show the great potential of the garments industry to create ‘good’ jobs. This stands in opposition to the results of an experiment by Christopher Blattman and Stefan Dercon, which found factory jobs were not an ‘escalator out of poverty’ (as many economists claim). This age-old debate in the development field reflects ideological differences between practitioners and even policy-makers: despite evidence to the contrary, many people are still not convinced that industrialisation and factory/manufacturing jobs really improve the lives of poor and low-skilled workers, arguing that they make them vulnerable to exploitation by capitalist manufacturers. Advocates of this view usually support entrepreneurial (and informal) income-generating activities or improving agriculture as the key to poverty alleviation and development. Blattman and Dercon’s conclusions seemingly supported this view, claiming that difficulties facing factory workers were a result of bad management and the absence of policies providing social protection.

One major factory in Tanzania however, is demonstrating that with vision, careful planning and a socially responsible approach to manufacturing, it is possible to address many problems associated with factory jobs to a large extent. A to Z is a family-owned and -operated company that produces light manufacturing goods including garments, household plastics and long-lasting insecticide-treated bednets. The company stands out for its considered approach to the environment and to its workers’ well-being, and for striving to manufacture goods that not only are in demand but also have a long-term impact on improving and even saving lives. For these reasons, the factory has caught the attention of many high-profile figures (Bono, Will Smith and George W. Bush, to name a few), who have visited to see how a large manufacturing company can have direct and indirect development impacts on some of the poorest people in the world.

An overview of A to Z today

A true start-up success story, A to Z began with a single Indian entrepreneur and a sewing machine in the 1960s, expanding over 50 years to become a group of various companies that export goods to countries including the US, Canada, Japan and South Africa. A to Z operates in two separate locations in Arusha, imports via Mombasa and sells domestically, and to countries in the region (e.g. cement bags to Burundi – a great example of regional value chains).

It is also one of the largest vertically integrated manufacturing plants in East Africa, and the owners pride themselves on ‘innovative manufacturing’, which in this context is not only about improving productivity and using new technology but also about producing goods that contribute to saving lives and minimising negative impacts on the environment. Careful planning by the owners has led to a cluster effect within the factory grounds. This increases productivity, and almost all of the goods and services needed to produce their wide range of products are found on-site.

The factory employs over 7,000 people and takes responsibility for their workers – ensuring safe and comfortable working conditions and providing housing for eligible workers, safe transport for those travelling in, daily meals, classroom training to build skills and even a free on-site clinic, where nurses are available to carry out check-ups for the workers. With women representing over 65% of the workforce, the owners are aware of the responsibilities and challenges facing young mothers, and there is a free on-site crèche for workers with small children.

Creating socially and environmentally responsible transformational jobs

It can be argued that non-wage benefits like the ones mentioned above are becoming increasingly common in factories in low-income countries, particularly in foreign companies, which are under pressure to show they are socially responsible when setting up operations (CSR). For example, British-owned Hela Clothing (another major player in East Africa) provides free meals and a crèche in its Athi River plant, and Hawassa Industrial Park in Ethiopia employs high numbers of women and has a scheme to provide housing where it is needed. On the other hand, workers’ well-being can be linked to productivity – so taking care of them is a win-win.

What makes A to Z remarkable, however, is not only its contribution to Tanzanian economic transformation through the provision of large numbers of ‘good’ productive jobs but also the other socially beneficial aspects of its business model:

  • Producing insecticide-treated bednets and agricultural storage bags: These specialist products help protect against malaria and reduce post-harvest losses. Many donors have supported production and development, including the US Agency for International Development, the UK Department for International Development and the Japan International Cooperation Agency.
  • An on-site recycling plant: This processes waste into plastic pellets, which are then reused in their own production. Rain water is also collected, and waste water is treated and reused.
  • Research and development (R&D): Innovative manufacturing methods, which use science and technology to create products with positive development outcomes, are enhanced by the on-site Africa Technical Research Centre (built by A to Z in partnership with Sumitomo Chemicals), which is a recognised partner in the UN Sustainable Development Goal (SDG) network.

Challenges of being a development-focused manufacturing company 

Unsurprisingly, being a socially and environmentally responsible producer does not come easy. Increasing competition in the region, rising prices of raw materials and transport and other non-tariff barriers all push up the costs of importing inputs, and are putting pressure on the firm’s profitability. Despite this, A to Z reinvests up to 100% of its profits back into the business, to improve productivity using the latest machinery and to fund R&D.

From a wider industry perspective, issues related to recent changes in VAT policies (from zero-rated to exempt status) have directly and severely affected cashflow, and made job losses inevitable. Such unplanned policy changes (which do not appear within the national second Five-Year Development Plan for industrialisation and human development) can have unintended harmful effects on manufacturers that are creating exactly the kinds of jobs needed for successful economic transformation.

A to Z shows us that the private sector can support development goals through manufacturing jobs

A to Z’s operations are in line with many of the SDGs, and a tour of the factory feels like a real-life portrayal of the SDGs in action. By offering large numbers of jobs to young female workers, providing social protection, undertaking environmental impact-reducing activities and numerous community initiatives, the company is showing that industrialists do not always take the purely profit-driven approach that non-industrialists fear will harm workers and the environment in low-income countries. A to Z has acknowledged that industrialisation and manufacturing jobs alone are not enough to address poverty, and has taken steps to maximise positive development impacts in Tanzania, while producing goods that are in demand and create highly productive jobs. One example is its use of laser fabric-cutting machinery that requires 17 people to operate. Although it replaces approximately 25 manual cutters, the machine increases the hourly output rate, quality and volume of cut fabric, and in turn creates more demand for labour downstream (e.g. for stitching stage). This example challenges the growing fear of ‘jobless growth’ in Africa as a result of digitalisation.

Overall, although A to Z is not a typical case of an African or a foreign manufacturing firm, it is an extraordinary example that challenges some of the negative views surrounding industrialisation-led development. As concluded by Calabrese and Gelb (2017), industrialisation is not a choice – the response to the challenges of industrialisation is not to forego it but to do it faster and better. A to Z shows us that socially responsible industrialists do exist, and public (policy) actions to support their growth are essential for productive job creation, and transformation, in developing countries.

 

Sonia Hoque is the Programme & Operations Manager of the Supporting Economic Transformation programme at ODI.

Photo credit (all rights reserved): A to Z, SET Programme, Overseas Development Institute ©

22 February 2018 | How ‘smart’ trade policy can help Africa industrialise

Despite promising signs of economic growth, many African countries are struggling to develop the strong industrial sector required for economic transformation and job creation. Fresh thinking is needed on how to achieve Africa’s industrialisation objectives, with trade and trade policy increasingly being looked to as key tools for the task. Much recent research has explored this idea by analysing the extent to which current trade policies and tariff structures are positively contributing to the content’s industrialisation policy, and providing assessments of what African economies can do to industrialise ‘smartly’ through trade. This event sees an expert panel debate these issues and seeks to put forward concrete policy recommendations for African economies looking to realise their industrialisation ambitions.

Thursday 22 February, 16.30-18.00
Overseas Development Institute
203 Blackfriars Road, London SE1 8NJ

Despite promising signs of economic growth, many African countries are struggling to develop the strong industrial sector required for economic transformation and job creation. Fresh thinking is needed on how to achieve Africa’s industrialisation objectives, with trade and trade policy increasingly being looked to as key tools for the task.

Much recent research has explored this idea by analysing the extent to which current trade policies and tariff structures are positively contributing to the content’s industrialisation policy, and providing assessments of what African economies can do to industrialise ‘smartly’ through trade.

This event sees an expert panel debate these issues and seeks to put forward concrete policy recommendations for African economies looking to realise their industrialisation ambitions.

Chair

Dirk Willem te Velde @DWteVelde – Principle Research Fellow, Overseas Development Institute (ODI)

Panel

David Luke – Coordinator, African Trade Policy Centre at the United Nations Economic Commission for Africa (UNECA)

Linda Calabrese @lindacalab – Research Fellow, Overseas Development Institute (ODI)

Abbi M. Kedir – Senior Lecturer/Associate Professor in International Business, Sheffield University

Chi Atanga @ck_atanga – Founder, Walls of Benin

Photo credit: Jonathan Ernst/World Bank. Licence: CC BY-NC-ND 2.0.

4 December 2017 | Launch event: Adjusting to rising costs in Chinese light manufacturing

On 4 December 2017, the Overseas Development Institute (ODI) and the Center for New Structural Economics (CNSE) at Peking University, Beijing, hosted the launch of the ODI–CNSE joint report, Adjusting to rising costs in Chinese light manufacturing: what opportunities for developing countries?
The report presents the findings of a survey of 640 light manufacturing firms in China’s Pearl River and Yangtze River Deltas, in an effort to understand the pressures facing Chinese light manufacturing firms and such firms’ responses to these challenges, and especially their interest in investing ‘out’ into countries in Africa and the rest of Asia.
Regional launch events were held in Ningbo in the Yangtze River Delta region and in Guangzhou in the Pearl River Delta on 11 and 12 December 2017.

DOWNLOAD EVENT REPORT

On 4 December 2017, the Overseas Development Institute (ODI) and the Center for New Structural Economics (CNSE) at Peking University, Beijing, hosted the launch of the ODI–CNSE joint report, Adjusting to rising costs in Chinese light manufacturing: what opportunities for developing countries?

The report presents the findings of a survey of 640 light manufacturing firms in China’s Pearl River and Yangtze River Deltas, in an effort to understand the pressures facing Chinese light manufacturing firms and such firms’ responses to these challenges, and especially their interest in investing ‘out’ into countries in Africa and the rest of Asia.

Regional launch events were held in Ningbo in the Yangtze River Delta region and in Guangzhou in the Pearl River Delta on 11 and 12 December 2017.

Media coverage

‘Chinese manufacturing may not be moving to Africa all that soon’, Quartz Africa, 5 December

‘China Light Industry Survey Report: Labor costs have become the number one challenge’, Shanghai Securities News, 5 December (in Mandarin)

‘China Light Industry Enterprises “Going Global” Survey: Nearly 30% of shoe companies have plans or have invested abroad’, 21st Century Business Herald, 6 December (in Mandarin)

‘China must focus on innovation in manufacturing as wages rise, says Apple’s Cook’, South China Morning Post, 6 December

‘Costs push shoemakers to set foot abroad’, Global Times, 7 December

‘Labor costs rose, 27% of China’s footwear companies surveyed to be “going out”‘, Yangcheng Evening News, 12 December

‘”Promote economic restructuring – China’s manufacturing enterprises to upgrade and go global research report” successfully released in Guangzhou’, Southern Network, 13 December

‘China’s manufacturing enterprises to upgrade and go out, research report released’, Guangming, 13 December

 

Photo credit: CNSE. All rights reserved.

 

Dirk Willem te Velde (ODI) | Economic transformation and job creation: trends to watch in 2018

Dirk Willem te Velde (SET Programme Director, ODI)

4 January 2018

Job creation has taken centre stage globally as an issue over the past few years. Failure to create jobs in the inland US was key to the presidential victory of Donald Trump, job losses in northern England contributed to the Brexit referendum outcome in 2016 and new promises related to job creation for the young helped lead to electoral outcomes in Ghana in 2016 and Liberia in 2017. Related to this, countries, regions and social groupings need to adjust and transform themselves continuously or risk political upheaval, social unrest and ‘being left behind’. The year 2018 offers a range of global and national opportunities to improve prospects for job creation.

Harnessing the opportunities of technical change

Globalisation and technical change are creating both challenges and opportunities. The debate here is not new. Tinbergen wrote in the 1970s about a race between technology and education. Widening inequality in the 1990s in developed and emerging markets was blamed on trade, foreign investment, skill-biased technology and institutional weakening. In 2018, the reality is that there is not enough technical change or productivity growth in the poorest countries, especially the sort of change that will enhance the job opportunities of the poorest.

We will be asking whether and how technology and manufacturing feature in ever-changing development strategies in low-income countries to create jobs and transform economies. With the African Center for Economic Transformation (ACET), we are exploring which efforts are effective in promoting manufacturing, which is sorely needed in such countries. We will also continue our work on services. A major question, for countries around the world, is whether groups are prepared to use global value chains, import and export opportunities and new technologies for job creation.

Pursuing smart globalisation

Recent political outcomes in the US and the UK remind us we need to tackle the distributional impacts of (any) economic change at the same time as the economic change occurs. Rodrik recently reiterated the economic origins of populist forces and that detailed economic analysis can help us understand resistance to some types of trade deals. Moreover, the failure of recent WTO negotiations to agree anything substantial suggests we need to work more at a plurilateral level. Smart globalisation means (i) advancing globalisation when it matters (and in developing countries both the static and the dynamic effects of trade are still really important) and (ii) globalising only when complementary policies are in place to address those that may gain the least.

A changed global governance

With the US showing little interest in climate discussions, the WTO and the UN, many are looking to China to provide the global public goods the world needs. We noted this trend in 2014. If anything, a period of increasing governance gaps (a hegemon in retreat with others not yet stepping up) is unrolling faster than anticipated. In 2018, we will be looking how cities, the private sector and the world minus-1 will be progressing on climate change discussions, plurilateral trade negotiations and other forms of global cooperation. Trade, investment and migration may see their greatest chance of progress through bilateral and regional deals. Africa’s continental free trade agreement, to be concluded in 2018, may provide impetus for greater cooperation on Africa’s trade, investment and transformation.

Country trends to watch in 2018

ODI’s work often operates at the interface between new development challenges and country realities. In 2018, we will continue to work with local institutions such as ESRF, REPOA, SAWTEE, ACET, UNECA and EAC to provide national governments with the analysis and practical policy suggestions that can turn rhetoric around transformation into evidence-based policies to create jobs.

After Kenya’s second attempt at elections in October 2017, in which the opposition did not take part, will the two sides join hands to develop the economy, creating jobs and manufacturing activity? SET’s 10 policy priorities developed with the Kenyan Association of Manufacturing need a push towards implementation. A serious look at special economic zones (SEZs) fits into this thinking.

After Nepal’s elections at the end of 2017, the new communist government needs to live up to its promises on job creation. SET will follow up on its recent research and use a manufacturing event to promote the creation of quality jobs that aim to dampen the emigration of young and skilled workers.

We will continue to examine Ethiopia’s evolution from an agriculture-led development model towards an industrialisation-led model. The implementation of SEZs such as Hawassa Industrial Park shows progress can be made. Such lessons need to be shared more widely across Africa.

Recent elections in Liberia and upcoming elections in Sierra Leone provide an opportunity for these countries to show they are now fully on the path of inclusive growth, after a difficult period hit by disease. We are supporting Liberia to attract investment, including by organisations such as CDC.

Zimbabwe’s removal of President Mugabe offers some hope for 2018, but, as SET’s roadmap for economic transformation suggests, nothing is easy. Nonetheless, smart interventions have the potential to generate some limited progress.

Tanzania is continuing to grow but there are questions marks on its models of industrialisation. Its share of manufacturing in GDP has been below 10% for a long time, and has declined further in recent years. The question now is how to implement the second five-year development plan (halfway in and with a focus on industrialisation), and in particular how to pursue practical industrialisation models that will not fall into the traps of either laissez-faire or state ownership.

Mozambique is still some way behind Tanzania. Manufacturing’s share of total employment is below 1%. Will the government be able to seize the considerable opportunities for transformation and job creation in 2018? Can it employ positive public action to use a range of mega deals for local industrialisation?

Opportunities for global cooperation in 2018

A range of global opportunities could support job creation in poorer countries in 2018.

Both the G20 and the G7 are prioritising the future of work on their agendas. This will provide impetus for international organisations to bring together their knowledge on the topic and suggest ways forward. Outreach by the G20 towards poorer countries, especially around the G20 compact with Africa, should be continued under the Argentinian presidency.

The IMF and World Bank aim to support economic transformation and job creation globally. They have contributed to a core objective on economic transformation and job creation (one of five) in IDA18; we now need to see how this will be operationalised from 2018 onwards.

The Commonwealth Heads of Government Meeting in the UK in April 2018 will be the largest gathering of heads of government the UK has ever hosted. While UK trade with the Commonwealth is obviously no substitute for weakening economic ties with the EU, the summit is a key opportunity to strengthen trade and investment ties among the Commonwealth, which consists of more than 50 small and large, developed and developing, landlocked and coastal countries. The APPG–ODI inquiry on the Commonwealth and trade, of which I am a member, will report at the beginning of this year.

Brexit itself requires new thinking around the UK’s future trade relations with developing countries. ODI provided a number of insights in this regard in 2017. Whatever the outcomes of the negotiations, the increased importance given to trade, investment and economic development more generally in development debates is a silver lining.

The UK’s development debate may be polarised as a result of the suggestion that, because we do not like to see UK aid tied only to UK interests (which is also not allowed by law), we should not be thinking about UK interests in development at all, and instead that the UK should provide aid grants to health and education (sometimes irrespective of country priorities). However, for countries to transition out of aid, non-grant aid instruments are needed too (e.g. equity and loans through CDC); for countries to develop and pay for their own health and education needs, real economic transformation, trade, investment and private sector development are needed; and countries often like to see more UK trade and investment, not less. Ensuring further integration among aid, trade and investment to support development will be a key UK development policy trend to watch in 2018.

 

Photo credit: Simon Davis/DFID, 2013. License: CC BY 2.0.

Leah Worrall (ODI) | Reducing fishery subsidies to support trade and transformation: where next?

Leah Worrall (Senior Research Officer, ODI)

22 December 2017

There was optimism at the start of the World Trade Organization’s (WTO’s) 11th Ministerial Conference (MC 11) that an agreement on fisheries subsidies would be reached. In the aftermath, Member States’ failure to conclude such an agreement represents a heavy burden, as this was once described as the ‘low hanging fruit’ for the negotiations.

Under the Sustainable Development Goals (SDGs), countries agreed to the elimination by 2020 of fisheries subsidies contributing to overfishing, overcapacity and illegal, unreported and unregulated (IUU) fishing (SDG 14.6). In order to allow countries sufficient time to implement this, the need to reach agreement during MC 11 – or by 2018 at the latest – was acknowledged. The Buenos Aires Ministerial Decision instead notes the need to adopt a fisheries agreement by the time of the Ministerial Conference in 2019.

Subsidies are harmful, from an economic transformation perspective. Capacity-enhancing subsidies reduce global fishing efficiency, with inefficient fishers replacing efficient ones, whilst also enabling fishery production that would otherwise not be economically viable. The global increased production is particularly negative for countries that rely on fisheries for livelihoods, trade and value addition.

Subsidy disciplines

In a recent paper, we argue for the disciplining of fisheries subsidies as a first step in protecting the global commons of fisheries and reducing trade distortions. Developing countries capture more fish than developed nations (52 million tonnes compared with 25 million tonnes in 2015), but developed countries add more value (commodity exports reached $68.9 billion in developing countries and $70.2 billion in developed countries in 2013). Developing countries provide more fisheries subsidies in absolute terms, but only just (2003 data). Publicly available global data on fisheries subsidies are severely out of date, however.

Reduced fishing capacity – as a result of the elimination of capacity-enhancing fisheries subsidies – could be somewhat compensated for by restructuring – which can be described as shifting fishing capacity from inefficient firms (dependent on subsidies) to efficient firms (less dependent on subsidies).

Action in the following two areas could have a disproportionately positive impact in reducing global fisheries capture:

  1. Eliminating subsidies to IUU fishing. The benefit here would arise largely from the enforcement mechanism required to implement such disciplines, and could eliminate up to a quarter of global catches (according to UN Food and Agricultural Organization estimates).
  2. Eliminating fuel subsidies. Fuel subsidies support the rise of distant water fleets, in turn leading to overcapacity. Their elimination would have a strong capacity-reducing effect in fuel subsidy-dependent fishing fleets, as a function of the distant travelled by vessels.

Special and differentiated treatment

Countries are asking for special and differentiated treatment (SDT) provisions in a fisheries subsidies agreement at the WTO – for least developed countries (LDCs) or developing countries, more generally. These include Indonesia, Europe, the ACP Group, the Latin American bloc[1], the New Zealand, Iceland and Pakistan bloc, and China. The SDT provisions in Member State proposals range from exemptions to technical support and extended implementation timelines.

As developing countries may be responsible for a significant proportion of fisheries subsidies, there is a need to focus any SDT provisions on LDCs and other small and vulnerable states. As we note in our recent paper, such subsidies in LDCs may not be efficient and encourage the development of inefficient firms.

Other carve-outs for developing countries may also be warranted. For example, the small-scale fishing sector currently receives only 10% of capacity-enhancing subsidies globally.

Future agreement

If agreement cannot be reached at the WTO – or outside – there remains little hope of meeting the SDG 14.6 target. The WTO and its Member States have rallied to achieve multilateral agreement in the face of increasing doubts before; the 2015 Nairobi Package is one example.

Opportunities remain to pursue fisheries subsidies at the WTO and include the following:

  • The Ministerial Decision on fisheries subsidies aims to reach an agreement by 2019, leaving two years to agree the text. Member States should seek a broad-ranging agreement prohibiting subsidies to IUU fishing, overcapacity and overfishing. Multiple avenues remain, including modelling the text on the Agriculture Agreement (and its green, amber and red boxes). Strong SDT flexibilities may be necessary for buy-in. Some broad flexibilities could be awarded to developing countries on implementation timelines, given the short timescales available. Stronger SDT provisions could be introduced for LDCs, such as in the form of technical and financial capacity support, or exemptions where necessary. This approach could follow that of the Trade Facilitation Agreement, for example.
  • WTO plurilateral negotiations on fisheries subsidies could be launched, drawing on lessons learnt through the Environmental Goods Agreement negotiations (with agreement yet to be reached). This would be a forum for the major players, including major opponents of fisheries subsidy disciplines, to reach consensus. The plurilateral group could include Europe, emerging and developed Asian economies (e.g. China, South Korea, Japan and others) and the US, among others. The aim would be for other WTO Member States to join the plurilateral agreement over time.
  • The Agreement on Subsidies and Countervailing Measures (SCM) could be used to discipline fisheries subsidies through disputes. The US proposal on fishery subsidies recommends improvements in notifications of fisheries subsidies to the WTO under SCM Article 25.3. Fisheries-related cases brought to the WTO’s Appellate Body before include the US-Shrimp and Dolphin-Tuna[2] But challenges remain in adopting this approach. The willingness of Member States to bring cases on fisheries subsidies may be low. The WTO’s Appellate Body has a poor track record of ruling in favour of environmental concerns.[3] The SCM itself does not have the environmental exemption present in other agreements, such as that included in the General Agreement on Tariffs and Trade (GATT) Article XX. The US is meanwhile blocking the appointment (or re-appointment) of judges to the Appellate Body, with negative implications for the long-term functioning of the WTO’s dispute settlement mechanism.

Regardless, Member States should continue to pursue all these avenues to discipline fisheries subsidies. This is pertinent not only to reviving trust in the WTO but also to achieving the SDGs. The WTO’s Negotiating Group on Rules (NGR) should endeavour to reach consensus on fisheries subsidy disciplines. These negotiations will likely touch upon political sticking points. For example, whereas Europe seeks to exclude fuel subsidies from the agreement, the US seeks to include these. This will require consensus-building by the NGR and compromise by Member States.

In the meantime, countries should pursue unilateral action in disciplining fisheries subsidies – and eliminating subsidies to IUU fishing could be an important first step.

[1] Argentina, Colombia, Costa Rica, Panama, Peru and Uruguay.

[2] These contested restrictions on fishing methods for shrimp and tuna species, using the General Agreement on Tariffs and Trade (GATT) and Technical Barriers on Trade agreements.

[3] This owes in particular to the difficulty in proving environmental measures do not constitute ‘arbitrary or unjustifiable discrimination between countries’ (GATT Article XX). The few successful cases on environmental/health grounds include France–Canada asbestos, Brazil re-treaded tyres and the Canada renewable energy case.

Photo credit: Fisheries by Giulian Frisoni via Flickr

WTO MC11 Negotiations: Implications for Economic Transformation in Developing Countries

The negotiations at the 11th World Trade Organization Ministerial Conference (WTO MC11) have so far failed to conclude with a comprehensive deal on agriculture, non-agricultural market access (NAMA), services and improvements in WTO rules that would make world trade freer, helping the global economy and developing countries in particular. There have, however, been small achievements in past rounds (MC9 in Bali and MC10 in Nairobi). This analysis examines the possible impact of current negotiating proposals in the main areas being discussed in the run-up to MC11 (agriculture, e-commerce, fisheries).

SUMMARY PAPER

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IN-DEPTH PAPERS

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DOWNLOAD E-COMMERCE PAPER

DOWNLOAD FISHERIES PAPER

The World Trade Organization (WTO) Ministerial Conference takes place in Buenos Aires from 10 to 13 December 2017. This will be the 11th Ministerial (MC11) since the start of the WTO and the 7th since the start of the Doha Round of WTO negotiations. The SET programme will host a side event on Trade, Trade Policy and Economic Transformation at the Trade & Sustainable Development Symposium alongside the WTO MC11 on 13th December.

The negotiations have so far failed to conclude with a comprehensive deal on agriculture, non-agricultural market access (NAMA), services and improvements in WTO rules that would make world trade freer, helping the global economy and developing countries in particular. There have, however, been small achievements in past rounds (MC9 in Bali and MC10 in Nairobi). The summary paper examines the possible impact of current negotiating proposals in the main areas being discussed in the run-up to MC11 (agriculture, e-commerce, fisheries).

There is much unfinished business in the Doha Round, as developing countries have highlighted. Further improvements on both market access in agriculture and NAMA remain to be negotiated. However, some key issues central to the interest of developing countries are expected to be at the centre of discussions in MC11. On agriculture, negotiations have been held on domestic support (including a permanent solution to public food stockholding) and the new special safeguard measure. At the same time, new issues, such as necessary new rules on e-commerce and the digital economy, have come up that could benefit from multilateral attention. Discussions are also being held on eliminating trade-distorting subsidies on fisheries. Three background papers by ODI cover each area in detail – agriculture, e-commerce and fisheries:

Balchin, N. and Mendez-Parra, M., ‘Agriculture: The implications of current WTO negotiations for economic transformation in developing countries

Lemma, A. F., ‘E-commerce: The implications of current WTO negotiations for economic transformation in developing countries’.

Worrall, L. and Mendez-Parra, M., ‘Fisheries: The implications of current WTO negotiations for economic transformation in developing countries

Photo credit: Containers in port by stalkERR via Flickr

Adjusting to Rising Costs in Chinese Light Manufacturing: What Opportunities for Developing Countries?

Jiajun Xu, Stephen Gelb, Jiewei Li and Zuoxiang Zhao, December 2017
Chinese light manufacturing has undergone a significant transformation in recent decades. As China progresses towards high-income status, real wage growth in the sector has accelerated, between 2014 and 2016 as high as 11% per annum. While this has made a welcome contribution to poverty reduction, it has also put pressure on firms as they struggle with rising costs – with one potential strategy for tacking this problem being partial or full relocation of production to lower-cost locations abroad.

Jiajun Xu, Stephen Gelb, Jiewei Li and Zuoxiang Zhao, December 2017

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Chinese light manufacturing has undergone a significant transformation in recent decades. As China progresses towards high-income status, real wage growth in the sector has accelerated by 11% per year (2014-2016). While this has made a welcome contribution to poverty reduction, it has also put pressure on firms as they struggle with rising costs. One potential strategy for tackling this problem has been the partial or full relocation of production to lower-cost locations abroad.

Optimists maintain that wage growth in China presents an opportunity for low-income countries (LICs) in Africa and elsewhere in Asia to help drive growth and structural transformation by attracting foreign direct investment and jobs from China. But the positive outcomes for LICs are uncertain. Country-level constraints such as poor infrastructure tend to turn-off foreign investors, Chinese manufacturing firms have developed alternative strategies for coping with rising wage costs, and other low-cost location options within China remain due to significant regional differences in wages.

This research report, which was undertaken in partnership with the Center for New Structural Economics (CNSE) at Peking University, presents the findings of a large-scale survey of 640 Chinese light manufacturing firms in the regions of the Yangztse River Delta and Pearl River Delta across four sub-sectors (garments, footwear, household appliances and toys).

This report was launched on 4th December 2017 at an event at Peking University, Beijing.

Media coverage

‘Chinese manufacturing may not be moving to Africa all that soon’, Quartz Africa, 5 December

‘China Light Industry Survey Report: Labor costs have become the number one challenge’, Shanghai Securities News, 5 December (in Mandarin)

‘China Light Industry Enterprises “Going Global” Survey: Nearly 30% of shoe companies have plans or have invested abroad’, 21st Century Business Herald, 6 December (in Mandarin)

‘China must focus on innovation in manufacturing as wages rise, says Apple’s Cook’, South China Morning Post, 6 December

‘Costs push shoemakers to set foot abroad’, Global Times, 7 December

‘Labor costs rose, 27% of China’s footwear companies surveyed to be “going out”‘, Yangcheng Evening News, 12 December

‘”Promote economic restructuring – China’s manufacturing enterprises to upgrade and go global research report” successfully released in Guangzhou’, Southern Network, 13 December

‘China’s manufacturing enterprises to upgrade and go out, research report released’, Guangming, 13 December

Photo credit: Daniel Foster via Flickr. Licence: CC BY-NC-SA 2.0.

 

13 December 2017 | Trade, Trade Policy and Economic Transformation at the WTO MC11

Economic transformation is crucial for the type of growth that reduces poverty, create jobs and is resilient to shocks. But many low-income countries have failed to transform successfully. Trade has nearly always been a key component in those countries that have transformed successfully. This event unpacks the role that trade has played in the process of transformation in a number of countries and regions and discuss how trade policy provisions such as those currently under discussion at the WTO can further contribute.

Side event at the WTO Ministerial Trade & Sustainable Development Symposium, Bolsa de Cereales, Buenos Aires, Argentina 

Breakout Room 3
Wednesday 13 December 2017, 13:30-15:00

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Economic transformation is crucial for the type of growth that reduces poverty, create jobs and is resilient to shocks. But many low-income countries have failed to transform successfully. Trade has nearly always been a key component in those countries that have transformed successfully. This event unpacks the role that trade has played in the process of transformation in a number of countries and regions and discuss how trade policy provisions such as those currently under discussion at the WTO can further contribute.

The Supporting Economic Transformation (SET) programme at ODI defines economic transformation as the process of moving from low productivity to high productivity activities, either between or within sectors. Trade, or exposure to trade, can increase productivity in existing sectors or firms as well as move resources from inefficient into efficient firms and sectors.

Multilateral trade provisions can help set the right incentives to invest, innovate, produce and trade in sectors with comparative advantage. They can also generate maintain opportunities in new sectors currently affected by global protectionism and other trade distortions. Current discussions at the WTO that might affect ET includes the elimination of subsidies in fishing, tightening disciplines on domestic support of agriculture and further provisions on digital trade and e-commerce.

This event is part of the Trade & Sustainable Development Symposium (TSDS), which is running alongside the WTO MC11 conference in Buenos Aires.

A link to the event page for TSDS can be found online here.

Chair

Dirk Willem te Velde  – Principal Research Fellow and Head, International Economic Development Group, ODI @DWteVelde

Speakers

Dr. Lucio Castro – Secretary for Productive Transformation, Ministry of Production of Argentina @LucioCastro_

Patricia Francis – Former Executive Director of ITC, and former member UN Secretary-General’s High-Level Panel on Women’s Economic Empowerment @patrfrancis

Anabel Gonzalez – Senior Director, The World Bank Group @Gonzalez_WBG

Andrew McCoubrey – Deputy Director for Trade for Development, Department for International Trade, UK

Dr Maximiliano Mendez-Parra – Senior Research Fellow, Overseas Development Institute @m_mendezparra

Impact case study: Supporting Tanzania’s Five-Year Development Plan (FYDP II) 2016/17-2021/22

The Supporting Economic Transformation (SET) programme helped to inform and design Tanzania’s Second Five-Year Development Plan (FYDP II) 2016/17-2020/21 and continues to guide prioritisation and strategic thinking around the country’s economic transformation. The programme also directly supported the preparation of an Implementation Strategy (IS) for the FYDP II, ensuring it was underpinned by relevant principles and factors to achieve successful implementation. SET was also influential in motivating the formation of a monitoring and evaluation (M&E) framework to track progress and demonstrate results.

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Introduction

The Supporting Economic Transformation (SET) programme helped to inform and design Tanzania’s Second Five-Year Development Plan (FYDP II) 2016/17-2020/21 and continues to guide prioritisation and strategic thinking around the country’s economic transformation. The programme also directly supported the preparation of an Implementation Strategy (IS) for the FYDP II, ensuring it was underpinned by relevant principles and factors to achieve successful implementation. SET was also influential in motivating the formation of a monitoring and evaluation (M&E) framework to track progress and demonstrate results.

SET helped Tanzania’s Planning Commission to prioritise the sectors most relevant for economic transformation, identify policy options and ways of working to address binding constraints to transformation, and devise ways to mobilise finance and engage development partners and enlist their support for interventions, as witnessed in the FYDP II. SET also supported the Government of Tanzania (GoT) to adopt a more inclusive and consultative approach to the preparation of the FYDP II and its implementation. To help speed up implementation of the FYDP II, the SET programme supported Tanzania’s Ministry of Finance and Planning to prioritise key projects and identify financing mechanisms and appropriate ways to involve the private sector and other financing actors in implementation.

SET helped to build networks spanning government, businesses and donors in Tanzania. This included direct support for better engagement between the government and the private sector and the facilitation of dialogue between the GoT and Tanzania’s development partners.

The policy challenge

Tanzania has ambitious targets to become a semi-industrialised nation by 2025. Tanzania’s past attempts at industrialisation have not always been successful. Implementation in Tanzania is a very complex issue; a major challenge has been to develop a comprehensive national strategy, and effective national development plans, to guide the economic transformation process, and to generate broad consensus across different stakeholders around an industrialisation agenda. The GoT has also struggled to prioritise interventions to support industrialisation and economic transformation and to implement (and monitor) much-needed interventions effectively. The challenge the SET programme faced was to support the design and implementation of a FYDP II 2016/17-2020/21 that emphasises the importance of industrialisation to generate both sustained economic transformation and human development.

What SET did

SET supported Tanzania’s Planning Commission (located within the Ministry of Finance and Planning) with in-depth analytical work to inform the preparation of the FYDP II and policy advice to guide prioritisation and strategic thinking around the country’s economic transformation. The SET programme also provided direct support to the Planning Commission in the preparation of an IS for the FYDP II.

Following this, SET continued to engage with the GoT and local partners to support the industrialisation agenda in Tanzania, including through: high-level engagement with Tanzania’s Vice-President, Minister of Finance and Planning and key government officials to discuss speeding up the implementation of the FYDP II and financing industrialisation in Tanzania; support to relevant agencies around financing and operationalising special economic zones (SEZs); and support to local partners and private sector organisations to monitor the country’s industrialisation progress.

The SET team meet with Dr Philip Mpango (Minister for Finance and Planning), the Hon. Vice President of Tanzania, Samia Suluhu Hassan and other members of the government, Dar es Salaam, July 2018.

Impact

We consider the impact of the SET programme’s work in Tanzania across four broad types as outlined by DFID-ESRC Growth Research Programme (DEGRP)conceptual impacts (changing perceptions or approaches), instrumental impacts (tangible changes in either policy or practice), capacity-building impacts, and improvements to connectivity across different actors.

Conceptual impacts

SET was influential in shaping the content, thrust and direction of the FYDP II. This included support to key actors in the Planning Commission to identify and prioritise the sectors most relevant for economic transformation in Tanzania. SET also helped the Planning Commission to identify policy options – both horizontal and sector-specific interventions – to address binding constraints to economic transformation. Moreover, SET influenced the GoT’s thinking on ways to engage development partners and mobilise their support for interventions that aid the achievement of the FYDP II objectives in a more coordinated and efficient manner.

SET was also instrumental in helping the GoT to adopt a more inclusive and consultative approach to the preparation of the FYDP II and its implementation. In collaboration with REPOA, SET organised the first ever consultation on the FYDP II in Dar es Salaam in October 2015. The Honourable Dr. Philip Mpango, the then Executive Secretary of the Planning Commission and now Tanzania’s Minister of Finance and Planning, attended the consultation, extending a long-running working relationship with SET that began with discussions in February 2015. The consultation provided an opportunity for Tanzania’s Planning Commission to engage with around 100 stakeholders from both the public and private sectors in Tanzania and facilitated discussion on emerging priority areas and potential implementation mechanisms. This represented a marked improvement over the first five-year development plan, for which little public consultation took place.

“The Government of Tanzania will look to move forward with the same passion that ODI-SET has for the transformation of Tanzania.” – Paul Maduka Kessy, Planning Commission, Ministry of Finance and Planning

The SET programme helped devise key principles for Tanzania to follow for successful implementation of the FYDP II and highlighted relevant lessons from successful experiences in implementing economic transformation policies in other countries. These insights helped the Planning Commission to prioritise issues and activities for successful implementation to nurture an industrial economy.

SET also supported Tanzania’s Ministry of Finance and Planning to speed up the implementation of the FYDP II and think through the respective roles of the public and private sectors, and public-private partnerships (PPPs), in financing industrialisation in Tanzania. This included analytical support to categorise and evaluate priority projects for financing through PPPs and other financing modalities, and to identify appropriate ways to involve the private sector and other financing actors in the implementation of the FYDP II.

Instrumental impacts

SET’s work and its core findings were instrumental in supporting the drafting of the FYDP II and a number of insights fed directly into the Plan published in 2016. For instance, SET’s analytical work on manufacturing exports, labour productivity change, FYDP I progress against targets, and financial flows in Tanzania was cited directly in the FYDP II. SET was also responsible for the Plan’s emphasis on political economy factors and effective ways of working – including the importance of experimentation and problem-driven and flexible approaches to implementation – to make industrialisation and economic transformation a reality.

SET also helped the Planning Commission to devise an implementation strategy and financing plans to guide the implementation of the FYDP II, via direct input in shaping the content of the FYDP II IS. Together with the Economic and Social Research Foundation (ESRF), SET provided backstopping support to assist the Planning Commission to devise action plans for three sectors (cotton-to-textiles, leather and leather products, and pharmaceuticals) and two cross-cutting themes (special economic zones and urbanisation) which will be prioritised in the initial phase of implementation. With this support, the Planning Commission prepared and published a detailed IS comprising four components: (i) an action plan; (ii) a financing strategy; (iii) a communication strategy; and (iv) a M&E framework. SET advocated for the inclusion of the M&E framework to track progress and demonstrate results. This represents an important step towards ensuring effective implementation.

SET also contributed to the establishment of an institutional mechanism to support implementation of the FYDP II. A technical committee comprising officials from different ministries, departments and agencies was established by the Ministry of Finance and Planning as a result of a meeting between the SET team and Tanzania’s Vice President, Minister of Finance and Planning and other high-ranking GoT officials on speeding up FYDP II implementation and making the next steps towards industrialisation. This technical committee subsequently identified and prepared briefs for priority projects boasting potential to attract private sector financing, either directly or via PPPs. The committee now meets regularly to discuss financing and implementation of priority projects and identify ways forward.

“On the 12th July, 2018 H.E. Samia Suluhu Hassan, the Vice President of the United Republic of Tanzania (URT) met with a delegation from the Overseas Development Institute (ODI) led by Dr. Dirk Willem te Velde, the Programme Director for Supporting Economic Transformation (SET)… The Government, in acknowledgement of ODI’s proposal agreed to take the necessary initiatives to ensure that the high-level meeting takes place… the Ministry of Finance and Planning formed a technical committee which constituted officials from different government Ministries, Departments and Agencies. The Committee was tasked to identify development projects [with] potential for implementation under the Public-Private Partnership (PPP) and other financing arrangements.” – United Republic of Tanzania (URT) (2018) Ministry of Finance:  Proposed projects for high-level workshop on development financing.

SET’s influence in shaping key policy documents in Tanzania goes beyond the FYDP II and its accompanying IS. Suggestions stemming from SET’s research – including those emphasising the need to combat tax evasion and minimise tax exemptions, introduce more effective taxation of the informal sector, strengthen the collection of property taxes and effectively facilitate electronic payment of taxes – were also reflected in the GoT’s budget priorities and policies for the 2016/17 financial year. In particular, the work helped to influence policies around domestic resource mobilisation and budget structuring, and in relation to supporting priority industries and improving the enabling environment for private sector participation. SET also provided peer review and guidance to the authors (Ali Mufuruki, a renowned Tanzanian business leader, along with Rahim Mawji, Gilman Kasiga and Moremi Marwa) of a recently published book on Tanzania’s Industrialisation Journey, 2016-2056: From and Agrarian to a Modern Industrialised State in Forty Years. The book contains several excellent proposals to drive future industrialisation in Tanzania and makes an important contribution to fostering a debate on the efficacy of different industrialisation models in the country.

Dr Philip Mpango, Minister for Finance and Planning and SET programme Director Dr Dirk Willem te Velde in Dodoma, October 2018.

Capacity building impacts

SET supported a number of Tanzanian institutions and organisations. In addition to the direct support provided to the Planning Commission, SET supported the FYDP II drafting team and worked together with two local research partners, REPOA and the ESRF, to aid the preparation of the FYDP II and accompanying FYDP II IS, respectively. SET also provided a platform for the CEO Roundtable in Tanzania to discuss issues related to the FYDP II in a public setting.

SET also worked with the ESRF and other local research partners to introduce more sustainable monitoring of industrialisation in Tanzania, including through the publication of a SET-ESRF briefing on recent progress towards industrialisation in Tanzania and additional briefings on policies to support industrialisation in Tanzania and progress in the development of SEZs in the country.

Workshop on the implementation of the FYDP II and the role of the private sector, October 2016.

The SET programme held direct discussions on capacity needs with Tanzania’s Export Progressing Zones Authority, which led to SET facilitating a two-day workshop with SEZ-related agencies, potential financiers (including national development banks) and other relevant stakeholders on Financing the development of SEZs in Tanzania. A subsequent SET publication on different models of financing and public policy support for SEZs provides guidance to Tanzanian policy makers looking to finance and operationalise these zones.

“The private sector appreciates the fact that the FYDP II is being conceived through consultation. This is a clear positive in comparison to the previous FYDP.” – Tanzania Private Sector Foundation

Connectivity impacts

SET helped to build networks across the government, businesses and donors in Tanzania. SET supported better engagement between the government and the private sector in the strategic implementation of the FYDP II by organising a private sector consultative workshop in collaboration with the ESRF in October 2016. This played a crucial role in facilitating private sector engagement with the FYDP II for the first time, and raised awareness of the role that the private sector can play in its implementation. The workshop, which was attended by a range of different private sector actors as well as government officials, development partners, civil society organisations, research institutions, think tanks and non-governmental organisations, helped to build consensus around how to approach implementation of the FYDP II and on the core elements that should constitute a strategy and framework to guide the effective implementation of the Plan. In addition, the workshop contributed to developing a shared understanding of the practical roles that different stakeholders – both in the public and private sectors – should play in implementing the FYDP II.

In addition, SET directly facilitated dialogue between the GoT and Tanzania’s development partners (DFID and the European Union) on ways in which donors can support the implementation of the Plan.

SET also helped Tanzania’s Planning Commission to communicate the goals, objectives and priorities of the FYDP II and its plans for implementation to different stakeholders by preparing and publishing a set of three briefings: (i) summarising the FYDP II and its key action points; (ii) summarising proposed actions and financing plans for implementation; and (iii) and outlining options to link government plans with donors and businesses. In relation to the latter, SET also linked donors (including DFID and the European Union) with the GoT after a period in which donors had suspended budget support for Tanzania. These donors are now looking for new ways to support Tanzania. Members of the SET team also published commentary in the Tanzanian media on the GoT’s 2017/18 budget, the country’s remaining economic transformation challenges and the need for Tanzania to form a consensus on how to achieve industrialisation. This has helped to raise awareness of Tanzania’s industrialisation and economic transformation challenges and priorities.

Finally, SET worked with the Ministry of Finance and Planning to hold a high-level workshop in Dodoma, bringing together government officials and other relevant actors to discuss financing implementation of the FYDP II and, specifically, of key FYDP II projects. The workshop, which was facilitated as a technical working session, helped delineate possible next steps to promote effective participation of the private sector in priority projects and ways in which PPPs and other financing modalities can support the realisation of Tanzania’s industrialisation vision.

What SET learned

SET’s work in Tanzania has highlighted the power of coordinating support from the public and private sector and local research institutions around an agreed set of principles, priority areas and interventions to drive industrialisation, economic transformation and human development.

Useful links

This impact study has been prepared by Neil Balchin, ODI Research Fellow. For further information contact details are available here.

 

Impact case study: Promoting industrialisation, manufacturing and job creation in Kenya

The Supporting Economic Transformation (SET) programme has worked in Kenya since 2016. SET work in Kenya has spanned government departments and agencies, DFID Kenya and other donors, private sector actors and civil society, and successfully contributed to the promotion of the manufacturing agenda both ahead of and after the 2017 Kenyan presidential elections. SET has additionally succeeded in influencing the plans and priorities of both government and the private sector.

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Introduction

The Supporting Economic Transformation (SET) programme has worked in Kenya since 2016. SET work in Kenya has spanned government departments and agencies, DFID Kenya and other donors, private sector actors and civil society, and successfully contributed to the promotion of the manufacturing agenda both ahead of and after the 2017 Kenyan presidential elections. SET has additionally succeeded in influencing the plans and priorities of both government and the private sector. The programme’s key activities and contributions are summarised as follows:

  • Convening over 30 senior figures from the Ministry of Industry, Trade and Co-operatives (MITC), DFID Kenya, private associations including the Kenya Association of Manufacturers (KAM), TradeMark East Africa and others, to discuss constraints to and opportunities for manufacturing in Kenya and build a consensus on the role of the sector in the country’s industrialisation plans.
  • Partnering with KAM to develop a comprehensive 10-point policy plan to promote manufacturing and create jobs during the election period, influencing the manifesto development process within political parties and, at the high-profile launch event, securing a ceremonial commitment from politicians to implement the plan if elected as well as significant media coverage.
  • Supporting the Export Promotion Council (EPC) during the review of Kenya’s exports strategy with analysis of Kenya-UK trade and investment trends and offering recommendations to reverse the decline and increase Kenya’s share of the UK market. A high-profile launch hosted by the EPC resulted in widespread media coverage and pick-up of the key messages at the highest levels.
  • Working closely with the MITC to facilitate discussion and relationship-building between small garment, leather and textile firms and Kenyan banks, to ease financing constraints on growth of the manufacturing sector.
  • Supporting the MITC and Executive Office of the Presidency (EOP) with the implementation of the manufacturing ‘pillar’ of President Kenyatta’s flagship ‘Big Four’ agenda by analysing the role of MSMEs in value chains, helping to build a credible framework for reform.

From l-r: Neil Balchin, ODI; Oduor Ong’wen, Executive Director, ODM, National Super Alliance (NASA), Phyllis Wakiaga, KAM; Flora Mutahi, KAM; Ekuru Aukot,  Thirdway Alliance.

The policy challenge

Industrialisation is a crucial factor for job creation and successful economic transformation, but the share of manufacturing in Kenya’s GDP has been in decline for over a decade. There is currently an open window of opportunity for African manufacturing; rising wages in much of Asia, rebalancing in China, strong regional growth and steadily improving policies and institutions across Africa are creating positive conditions for growth in the sector. However, Africa’s window of opportunity is closing fast, and may only last the next 20 to 30 years, due to increasing digitalisation in global manufacturing. Intense competition from Asian countries (such as Vietnam, Cambodia, Bangladesh) which have lower wages, higher productivity, better infrastructure, more skilled labour forces, and higher levels of integration into global value chains than African countries is also a major challenge. In order to take advantage of the current opportunity, Kenya needs to act fast to develop its manufacturing sector, as other African countries will be looking to do the same.

Over the period of SET’s work in Kenya, and in part due to SET (for more on which see section on impact below), manufacturing has moved to the top of the policy agenda. It featured prominently in the presidential election campaign in 2017, and now constitutes one of the ‘pillars’ of President Kenyatta’s flagship ‘Big Four’ agenda. However, much remains to be done to ensure the successful implementation of this agenda; problems remain in securing the involvement of micro-, small- and medium-sized enterprises (MSMEs) (which employ up to 90% of the Kenyan workforce), improving skills and increasing firms’ access to finance.

What SET did

In-country work on the manufacturing agenda commenced in August 2016 with the organisation of a roundtable event in Nairobi, for which three scoping studies were commissioned from Kenyan economist Anzetse Were, John Page from the Brookings Institute and ODI’s macroeconomics lead Phyllis Papadavid.

From the roundtable, attended by policymakers from the Ministry of Industry, the office of the UK Department of International Development (DFID) in Kenya and the Kenya Association of Manufacturers (KAM) amongst others, came a partnership between ODI and KAM to promote manufacturing further up the policy agenda. Leading SET programme researchers, KAM consultant Gituro Wainaina and Anzetse Were worked closely to develop a 10-point policy plan booklet for Kenyan manufacturing, with a foreword from the CEO and Chairperson of KAM. The policy plan covered issues including land accessibility and ownership, energy, value chains, public-private sector collaboration and labour market skills, and for each, tailored policy solutions were offered. In order to be as comprehensive as possible, the content was developed with active inputs from the Office of the President of Kenya, the State Department for the Environment, the State Department for Trade, Kenya Industrial Estates, IDB Capital Kenya, Kenyan Private Sector Association (KEPSA), the Micro and Small Enterprise Authority (MSEA), TradeMark East Africa (TMEA), ICDC and the KAM Board.

The booklet was launched in July 2017 during the presidential election campaign period, firstly at an invite-only event for KAM member organisations, and secondly at a high-profile public event attended by representatives from two major political parties and range of media outlets. At the event, the Executive Director of ODM (NASA party) and the leader (and presidential candidate) of Thirdway Alliance signed a ceremonial commitment to the ODI-KAM policy plan.

“We remain greatly indebted to you for the support. We now have a document that has clearly and concisely elaborated the manufacturing priorities, and which has so far been very well-received by the main political parties we have engaged” – Dalmas Okendo, Head of Operations, KAM

After the election and the announcement of the Big Four policy agenda, SET worked with senior figures in the Executive Office of the Presidency (EOP) to support the implementation of the manufacturing pillar, and specifically work on the MSME agenda within it. This work centred around a piece of in-depth analysis, based on interviews with textile, leather and garment MSMEs and accompanying desk research, on the role of MSMEs in value chains and their place within Kenya’s policymaking for industrialisation, and also involved organising and contributing to meetings and workshops that brought together small firms with senior policymakers in the EOP and Ministry of Industry, Trade and Co-operatives. Alongside this, SET hosted a workshop on the financing of garment manufacturing, with facilitated discussion and relationship-building between Kenyan manufacturing firms and domestic financers such as Barclays and Co-operative Bank.

Over this period, SET also worked with the Export Promotion Council (EPC) on a study of Kenya-UK trade and investment relations, which was launched at a breakfast meeting ahead of Kenya Trade Week in July 2018, with speakers including the Permanent Secretary for Trade, Dr Chris Kiptoo and Peter Biwott, CEO of EPC.

Impact

SET’s activities had demonstrable success towards two of the core aims of the programme: supporting the policies and plans of (i) private sector actors and (ii) the government to become more transformational.

We consider the impact of the SET programme’s work in Kenya across four broad types as outlined by DFID-ESRC Growth Research Programme (DEGRP): conceptual impacts (changing perceptions or approaches), instrumental impacts (tangible changes in either policy or practice), capacity-building impacts, and improvements to connectivity across different actors.

Conceptual impacts

Broadly, SET’s work in Kenya had conceptual impact by increasing the understanding of the importance of and factors for success in manufacturing for the country’s industrialisation and job creation objectives. Firstly, SET contributed to the knowledge base on Kenyan manufacturing through the publication and discussion of its three detailed scoping studies at a closed roundtable  with representatives from African Development Bank, World Bank, TMEA, JICA, DFID Kenya, Government of Kenya, KAM, ACET, private sector and others. The meeting secured a consensus amongst those in attendance that manufacturing and industry needed to be the focus of the next administration, signalling a shift away from a focus on services.

Evidence of further conceptual impact can be taken from the extensive media coverage (including in Business Daily Africa, the Star, KBC Channel and the East African) of the launch of the ODI-KAM 10-point policy plan for Kenyan manufacturing, which gave high visibility and prominence to both the SET programme and the plan’s suggested policy priorities. The work also had an impact on the policy debate space through engagement with political parties ahead of the launch, and the attendance of those politicians at the launch itself.

Finally, further tangible conceptual impact was secured through the Kenya-UK trade analysis undertaken for the EPC. The central picture painted by the analysis, of Kenya’s exports to the UK in decline and facing growing competition from regional rivals in some of its key export products, was seen within the EPC and wider trade and industry policy environment to be a significant wakeup call. The core messaging and recommendations in the report also received widespread media coverage in Kenyan media, and articles were also published in Rwandan and Tanzanian outlets. That the message successfully reached the highest levels was shown when the UK’s Deputy High Commissioner referred to the research in a key speech shortly after launch (see quote below).

“Recent analysis shows that Kenya’s share of the UK market has been declining since 2008… it is mainly due to competition from Kenya’s peers” – Susie Kitchens, UK Deputy High Commissioner to Kenya

Instrumental impacts

Firstly, KAM’s engagement with political parties on the topic of the ODI-KAM 10-point plan for manufacturing, as well as the subsequent high-profile launch, had a significant impact on the policy development process during the election campaign. A comparative analysis of election manifesto commitments on industrialisation and manufacturing showed that a number of ODI-KAM policy recommendations were taken on board and incorporated in parties’ policy promises. Recommendations that achieved pickup in manifestos included those on public fiscal management, the role of special economic zones (SEZs) and the importance of improved access to reliable and sustainable energy.

Evidence of instrumental impact from the 10-point plan was strongest at the launch event, where representatives from two political parties signed a ceremonial commitment to the policy priority agenda, pledging to incorporate them into a potential future administration. The politicians specified the industrial agenda as central to Kenya’s economic transformation in general terms; NASA emphasised innovative initiatives, MSMEs and the informal sector, and Jubilee and the Third Way Alliance were more specific about industry-related policies. The work was also influential on KAM’s policy advocacy work, as it was presented to KAM’s member organisations at their Annual General Meeting, which ensured the exposure of a wide range of private sector firms to research and policy analysis on the manufacturing sector.

SET’s later work with the EOP also achieved instrumental impact on the policy-forming process within government by providing a thorough analysis of the status of MSMEs in value chains from which policymakers could work and facilitating direct engagement between them and small firms. This analysis and engagement has been instrumental for the ongoing reform process. President Kenyatta’s ongoing interest in this agenda continues to be evident, for example in his involvement in the high-profile small and medium enterprise (SME) roundtables initiative.

“You have advanced the SME discourse in a significant way by inter alia providing a credible framework for a reform process and theory of change as well as a baseline from which to take off” – Ruth Kagia, Deputy Chief of Staff, Executive Office of the Presidency

Finally, SET’s Kenya-UK trade work had an instrumental impact on the EPC’s export promotion strategy, currently under review. The in-depth analysis of the potential of various export products to increase Kenya’s exports to and market share in the UK sparked interest in the EPC to commission a series of such studies for Kenya’s other important trade partners, such as the United States.

Signing a commitment to the ODI-KAM 10-point policy plan in July 2017 (from l-r): Flora Mutahi, KAM; Oduor Ong’wen, Executive Director, ODM, National Super Alliance (NASA); Phyllis Wakiaga, KAM.

 

 

 

 

 

 

 

 

“What an impactful study that has really reawaken critical thoughts in the trade relations between Kenya and UK. The study raised the profile of EPC and has triggered interests to undertake such studies for other key economies such as the USA” – Peter Biwott, CEO, Export Promotion Council

Capacity building impacts

SET’s work in Kenya has provided KAM with a significant amount of support to think through and prioritise policies to advocate for in its engagement with government actors. The work on the 10-point policy plan booklet also gave KAM a base from which to develop its own policy briefings with which to engage policymakers and other stakeholder groups at the county level. Digital copies of reports and briefings produced as part of the ODI-KAM partnership are both hosted on the SET programme’s website and the KAM website, demonstrating genuine joint ownership of the project’s outputs and key messages.

This demonstrates the sustainability of the work SET has done in Kenya; strong local actors, such as KAM, but also economist Anzetse Were and Professor Gituro Wainaina, will take forward this work and continue to build on the transformation agenda as government policy processes continue. One example of this in action is Anzetse Were’s article in Business Daily Africa, covering a major investment by East Africa Breweries Limited, which aligns with the core messages of SET’s work (namely that investment in manufacturing is crucial for Kenya’s economic transformation objectives).

Connectivity impacts

This work has strengthened networks of stakeholders and facilitated relationship- and trust-building between different stakeholder groups both in the development and dissemination of SET’s research. Initial evidence of this was in the convening of a range of over 30 senior figures from donor organisations such as DFID, government, civil society/research organisations such as TMEA and ACET, and the private sector at the scoping roundtable event in August 2016, at which a consensus was reached regarding the crucial importance of manufacturing for the achievement of Kenya’s industrialisation goals.

The production of, and subsequent public launch event for the ODI-KAM collaborative 10-point policy plan was another example of successful convening of different actors. The development process for the plan facilitated the engagement of KAM with key policy actors during the political manifesto development process, and the launch event strengthened links between these senior political figures and KAM’s leaders and Board. Finally, this project also strengthened links between KAM and DFID Kenya as they engaged over the relative weight that should be given to different policy options.

The last stage of SET’s work in Kenya was successful in facilitating new engagement between both small firms and the government, and small firms and Kenyan banks. The workshop on financing for garment manufacturing not only facilitated dialogue on constraints for both firms and banks, but resulted in a meaningful connection being forged between garment manufacturing firm Hela Clothing and the Co-operative Bank, which was taken forward after the event. The workshop hosted by SET in partnership with the EOP, where MSMEs were invited to speak and put forward their perspectives on past government policy and proposed reforms, marked the first time that small firms had connected with the government on the plans under the Big Four agenda in a meaningful way (a trend which is now continuing in the form of President Kenyatta’s SME Forum initiative).

What SET learned

SET’s engagement on the manufacturing agenda in Kenya highlights the successes of working collaboratively with local partners, private and analytical, to translate research into actionable, concise policy recommendations, and then communicating these to government through influential local (private sector) organisations with strong, established networks.

The importance of timing is also a positive lesson learned; by targeting and meeting with political parties ahead of national elections, there was a strong incentive for politicians to engage with the core messages and policy recommendations in the 10-point policy plan. The positive result of a well-thought communications plan was evident in this project – a 10-point easy-to-digest booklet and a high-profile public launch helped to communicate the messages to both government and media, attracting attention and influencing the thinking of a wide audience.

The ability to be flexible and respond to needs of government departments and actors is also important. SET was able to respond quickly to a request for support from the EOP on the MSMEs agenda, which has resulted in some tangible instrumental and connectivity impacts.

Useful links

 

26 October 2017 | Pathways to Prosperity and Inclusive Job Creation in Nepal

On 26th October 2017, the Overseas Development Institute (ODI) in collaboration with South Asia Watch on Trade, Economics and Environment (SAWTEE) presented new research on job creation and pathways to prosperity in Nepal. This research was launched at a high-profile event in Kathmandu, attended by stakeholders from the four sectors studied, development partners and various private sector associations including the Federation of Nepalese Chambers of Commerce and Industry, the ILO and the Confederation of Nepalese Industries. The Honourable Vice Chairman of the Nepal National Planning Commission, Swarnim Wagle also attended.

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DOWNLOAD EVENT REPORT

On 26th October 2017, the Overseas Development Institute (ODI) in collaboration with South Asia Watch on Trade, Economics and Environment (SAWTEE) presented new research on job creation and pathways to prosperity in Nepal.

Building a consensus view of how Nepal can transform and create jobs in the future is crucial to incentivise policy action. However, there seems to be little or no political debate on job creation. This presented an opportunity to agree a consensus view and unifying, practical vision on how the country can transform and create jobs. A new extensive study carried out in January 2017 examined what can be done to ease Nepal’s constraints to job creation, based on a new firm-level survey in four promising sectors: agro-processing; light manufacturing; information and communication technology (ICT); and tourism. The study examined major constraints to the firm-level growth and the Nepalese labour market in terms of labour market tightness and labour market skills and proposes general recommendations as well as sector-specific policy suggestions.

This research was launched at a high-profile event in Kathmandu, attended by stakeholders from the four sectors studied, development partners and various private sector associations including the Federation of Nepalese Chambers of Commerce and Industry, the ILO and the Confederation of Nepalese Industries. The Honourable Vice Chairman of the Nepal National Planning Commission, Swarnim Wagle also attended.

Media coverage

Leading English dailies (also in print)

Full editorial: Labour issues, Kathmandu Post, 31 October

Nepal to face labour shortage by 2030, Kathmandu Post, 27 October

Stakeholders stress on inclusive job creation, Himalayan Times, 27 October

Nepal to face labour shortage by 2030, Wio News, 27 October

Weight of migration (Editorial), Kathmandu Post, 2 February 2018

National news coverage (from 4:40) Karobar news

 National news coverage (from 22:00): Artha ko Artha

 

DATA BRIEFING | Using SET data to identify economic transformation opportunities in low income countries

Using data available to download from the Supporting Economic Transformation (SET) data portal, this briefing shows that labour and total factor productivity differentials exist at all levels in the economy, both between sectors and with sectors. This suggest there are significant opportunities for promoting economic transformation. This data briefing first discusses productivity differentials between sectors and then productivity differentials between firms within sectors.

Dirk Willem te Velde, October 2017

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Using data available to download from the Supporting Economic Transformation (SET) data portal, this briefing shows that labour and total factor productivity differentials exist at all levels in the economy, both between sectors and with sectors. This suggest there are significant opportunities for promoting economic transformation.

This data briefing first discusses productivity differentials between sectors and then productivity differentials between firms within sectors.

Key messages

  • Data available on the SET data portal show that productivity differentials exist both between, and within sectors in low-income countries, which points to significant opportunities for promoting economic transformation.
  • Data show the recent pattern of economic growth in Africa has involved little structural change across sectors.
  • Labour productivity differentials between sectors decrease as levels of income increase, suggesting further opportunities for economic transformation in LICs
  • Firm-level productivity data suggest large productivity differentials between firms within sectors.

Photo credit: Addis Ababa Market, SET Programme, Overseas Development Institute ©

Karishma Banga (ODI) | The digital industrial revolution: will African countries sink or swim?

Karishma Banga (Senior Research Officer, ODI)
The digital economy is here, and is rapidly growing, ushering in the Fourth Industrial Revolution. Though definitions have evolved over time, it is broadly agreed that the digital economy describes a worldwide network of economic and social activities enabled by digital technologies, including mobile and communication networks, ‘Cloud Computing’, Artificial Intelligence, ‘Machine Learning’, ‘Internet of Things’ and ‘Big Data’. Such new and cutting-edge technologies have led to creation of ‘smart machines’, such as driverless vehicles and cognitive robots, as well as widespread adoption of ‘smart platforms’ like Google, Amazon, Apple, Facebook and Alibaba. Digitalisation of the economy, through the increasing use of digital technologies, is changing the global landscape of manufacturing, presenting both challenges and opportunities in less-developed countries.  Often an alarmist approach is taken while discussing the future of manufacturing-led development in African economies, which have traditionally used manufacturing as a first step towards economic transformation and employment generation.

Karishma Banga (Senior Research Officer, ODI)

13 November 2017

The digital economy is here, and is rapidly growing, ushering in the Fourth Industrial Revolution. Though definitions have evolved over time, it is broadly agreed that the digital economy describes a worldwide network of economic and social activities enabled by digital technologies, including mobile and communication networks, ‘Cloud Computing’, Artificial Intelligence, ‘Machine Learning’, ‘Internet of Things’ and ‘Big Data’. Such new and cutting-edge technologies have led to creation of ‘smart machines’, such as driverless vehicles and cognitive robots, as well as widespread adoption of ‘smart platforms’ like Google, Amazon, Apple, Facebook and Alibaba.

Digitalisation of the economy, through the increasing use of digital technologies, is changing the global landscape of manufacturing, presenting both challenges and opportunities in less-developed countries.  Often an alarmist approach is taken while discussing the future of manufacturing-led development in African economies, which have traditionally used manufacturing as a first step towards economic transformation and employment generation. However, considering that many African countries are yet to industrialise, digitalisation may not directly impact them to the same extent as their developed counterparts. At the same time, it is important to not underestimate the power of technology to bring about disruptive change. It is essential for African countries to not only boost manufacturing but also adapt to the changing nature of manufacturing and prepare for the digital future.

How big is the digital divide?

Internet penetration – that is, the share of population with access to the internet – is often used as a proxy for digitalisation, based on the assumption that internet is the basic and necessary condition to digitalise. Internet penetration has grown by 5% in developed countries, compared to 15-20% in developing countries (World Economic Forum, 2015), and some sub-Saharan African economies have witnessed remarkable growth in internet penetration, particularly Ghana, Nigeria, Rwanda and Uganda. Yet developed countries still dominate the internet economy, with a staggering 78% share overall. In fact, the internet economy’s contribution to GDP in developed countries (3.4%) is more than three times the internet economy’s contribution to GDP in African countries. Moreover, of those countries with less than 10% internet penetration, most are African. These statistics suggest that the capability of African economies to be competitive in digitalised trade is low.

Globally, there is vast disparity in country shares in e-commerce across developed and developing countries: just six countries – China, France, Germany, Japan, the UK and the US – occupy 85% of cross-border e-commerce trade, of which all except China are developed nations. Developing economies are also lagging behind in deployment of ‘Smart Machines’- devices with machine-to-machine and/or cognitive computing technologies. Data from the International Federation of Robotics shows that in 2015, around 75% of robot sales were concentrated in just five markets: China, Germany, Japan, the Republic of Korea and the US. Africa’s share in global robot sales has in fact fallen since 2013, reaching just 0.2% in 2014 – a figure that is almost ten times lower than Africa’s share in global GDP.

Challenges for developing countries

In the race to digitalise, many developing countries (with the exception of China) are clearly falling behind. This is likely due to prohibitive costs of capital in these countries and low ‘digital-readiness’ in terms of infrastructure and skills. Many African countries are still struggling to industrialise, and in some cases lack even basic infrastructure – for instance, a reliable power supply, roads, ports and telecommunication – showing the need to primarily invest in these areas.

While this suggests that the direct impact of the growing digital economy on African countries may be limited, digitalisation can indirectly impact them by affecting global competition and changing the criteria of what constitutes an attractive manufacturing location. The emerging digital technologies may lower the costs of coordination and trading, thereby strengthening global value chains and enabling smaller firms to access international markets. But there are also risks of manufacturing activities being re-shored back to the developed world, as was the case with Phillips shavers and Adidas shoes. Moreover, goods in the digital economy are much more advanced and may require good infrastructure, research and development, and skilled labour at all points along the global value chain, leading to concentration of manufacturing in developed countries, and pressure on wages in less developed economies.

A central concern in the debate on digitalisation is that of a ‘jobless future’. The International Federation of Robotics estimates that that more than 2.5 million robots will be at work by 2019, indicating a 12% growth in deployment of robots between 2016 and 2019. McKinsey’s 2017 report estimates high percentages of jobs in African countries that will be automated away– 52% in Kenya, 46% in Nigeria and 50% in Ethiopia. However, recent case studies suggest that low- and middle-income economies need not be alarmed (Dutz et al., forthcoming); if we break down occupations into tasks, with distinct levels of automatability, then the share of jobs that can be automated away falls to 2-8%, as per Ahmed and Chen’s (2017) estimates. That said, these estimates do not account for the ‘potential’ jobs that may be lost by never being created, and the sizeable number of informal jobs in many developing and less developed countries.

Adapting to the changing nature of manufacturing

  1. Boost manufacturing

Using the window of opportunity in less-automated sectors

The impact of technology depends on the type of technology employed, and varies across countries and sectors. There are some sub-sectors in which technological change has been slow until now – such as food, beverage and tobacco products, basic metals, wood and wood products, paper and paper products, and other non-metallic minerals. These sectors present opportunities for LDCs to undertake local production and regional trade.

Using a dual-track approach to industrialisation

Countries should look to develop agro-processing and attract investment in higher value-added export-based manufacturing activities. A move towards services can also serve as an alternate path to development. Beyond improving the investment climate, effective policies include improving firm capabilities, innovations systems and direct financing opportunities.

  1. Digitalise manufacturing

Become digitally-ready

Emerging SET analysis on the future of manufacturing in Sub-Saharan African countries suggests that both technological progress and digitalisation increases labour productivity. But, while the impact of technological progress is higher in low-income and Sub-Saharan African countries, rendering support to convergence, the impact of digitalisation is lower in these economies. Moreover, the impact of technological progress on productivity increases as a country digitalises, but this impact is also lower for low-income countries and Sub-Saharan African countries. These findings may indicate a significant difference between low-income countries and high-income countries in ‘digital-readiness’; the ability to absorb and utilise digitalisation. Further results confirm that the impact of both technological progress and digitalisation increases as the work-force becomes more skilled, highlighting the importance of becoming digitally-ready by investing in skills development.

Skills for the future

Data is key to examining the sectors into which the labour force should move in the next few years. Previously, skill development strategies focused on moving from agriculture to manufacturing in less developed countries, and from manufacturing to services in more developed economies. On the future of work, Richard Baldwin (Professor, Graduate Institute) discusses that with the rise of digitalisation and consequently ‘tele-migrants’ and robots, soft-skills such as managerial skills, team-building skills and teaching will become more important.  Although the pace of change in adoption of 3D printers has been relatively slow, as 3D printers become more affordable, design capabilities will become important. This can create important opportunities for developing economies to leverage their design and creative skills in the growing digital economy. Spread of 3D printers to developing economies can also lead to de-centralisation of manufacturing and customised production on demand.

With rise and expansion of the ‘digital labour-force’, work may become increasingly precarious. To ensure that workers are not treated as digital commodities, it is important to re-orient social protection in the digital economy to follow people, rather than companies.

 

Photo credit: Andrea Moroni via Flickr. License: CC BY-NC-ND 2.0. 

Private Sector Development in Liberia: Financing Economic Transformation in a Fragile Context

Judith Tyson, October 2017
In recent years, the development community has become focused on how to stabilise fragile and conflict-affected states (FCAS), not only to enhance economic development, but also to safeguard international security and stability. This paper examines Liberia as one instance of a FCAS that, it is hoped, is making this transition. It concentrates on one particular aspect of economic renewal – the revival of private sector growth.
Liberia is of particular interest because, although it remains fragile, it has made significant progress including establishing a stable democratic government. Further, it has set out an economic strategy that is well-grounded in the country’s comparative advantages and has attracted significant donor support. Nevertheless, Liberia remains one of the poorest countries the world and the barriers to moving beyond being a stable but poor country, towards economic prosperity remain significant.

Judith Tyson, October 2017

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In recent years, the development community has become focused on how to stabilise fragile and conflict-affected states (FCAS), not only to enhance economic development, but also to safeguard international security and stability. Political stability and accountability as well as economic stabilisation in FCAS are important in this endeavour. However, relatively few FCAS who have managed to move away from conflict achieve this.

This paper examines Liberia as one instance of a FCAS that, it is hoped, is making this transition. It concentrates on one particular aspect of economic renewal – the revival of private sector growth. Liberia is of particular interest because, although it remains fragile, it has made significant progress including establishing a stable democratic government. Further, it has set out an economic strategy that is well grounded in the country’s comparative advantages and has attracted significant donor support. Nevertheless, Liberia remains one of the poorest countries in the world and the barriers to moving beyond being a stable but poor country, towards economic prosperity, remain significant.

Photo credit: Morgana Wingard/ UNDP. License: CC BY-NC-ND 2.0

Pathways to Prosperity and Transformation in Nepal: A Four Sector Study

Giles Henley, Sonia Hoque, Alberto Lemma, Posh Raj Pandey and Dirk Willem te Velde, October 2017
Building a consensus view of how Nepal can transform and create jobs in the future is crucial to incentivise policy action. However, there seems to be little or no political debate on job creation. This presents an
opportunity to agree a consensus view and a unifying, practical vision on how the country can transform and create jobs. This project examines credible pathways to prosperity and inclusive job creation from a scenario perspective. It discusses the type of sectors that can help grow and transform Nepal to reduce its import dependency and increase its exports and what implications different sectors have for inclusive job creation.

Giles Henley, Sonia Hoque, Alberto Lemma, Posh Raj Pandey and Dirk Willem te Velde, October 2017

Reports

DOWNLOAD PATHWAYS PAPER               DOWNLOAD FOUR SECTOR STUDY PAPER

Sector case study papers

TOURISM SECTOR PAPER          AGRO-PROCESSING SECTOR PAPER

ICT SECTOR PAPER      MANUFACTURING SECTOR PAPER

Summary Briefing papers

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In January 2017, a study was commissioned which examined Nepal’s potential for economic transformation, with an in-depth case study of four sectors with strong potential to drive transformation.

This paper ‘Pathways‘ examines credible pathways to prosperity and inclusive job creation from a scenario perspective. It discusses the type of sectors that can help grow and transform Nepal and what implications different sectors have for inclusive job creation.

The paper ‘Four Sector Study‘ analyses the state of Nepal’s labour market and examines what can be done to ease the country’s constraints to job creation on the basis of a new firm-level survey of over 40 firms carried out in January 2017 in four promising sectors for economic transformation and job creation. It also discusses policy suggestions on how to develop sectors. In addition to informing the government of Nepal, the paper also aims to inform the design of a policy component for the Department for International Development (DFID) Nepal Skills for Employment Programme.

The results of the surveys, for each sector, are presented in greater detail in individual sectoral papers for:

  • Agro-processing
  • Light manufacturing
  • Tourism
  • Information and Communication Technology (ICT)

Two briefing papers are available to download above, summarising the key findings from the main papers.

Media coverage

Leading English dailies (also in print)

Full editorial: Labour issues, Kathmandu Post, 31 October

Nepal to face labour shortage by 2030, Kathmandu Post, 27 October

Stakeholders stress on inclusive job creation, Himalayan Times, 27 October

Nepal to face labour shortage by 2030, Wio News, 27 October

National news coverage (from 4:40) Karobar news

 National news coverage (from 22:00): Artha ko Artha

 

Photo credit: ©Simone D. McCourtie, World Bank via Flickr

The Shift of Manufacturing Employment in China

Jun Hou, Stephen Gelb and Linda Calabrese, October 2017
Chinese manufacturers, in particular in labour-intensive industries, are striving hard for ways to withstand the pressures emerging during the ‘New Normal’ transition– such as slowing economic growth, labour force shortages and rising factor costs. As a result, many are in the process of, or at least considering, relocation of production to other low-cost destinations, or replacing workers with machines by upgrading technological capability levels. The relocation of Chinese manufacturing is forecast to open up major employment opportunities for low-cost regions and countries, with the potential for one to become the new global centre for manufacturing.

Stephen Gelb, Linda Calabrese and Jun Hou, October 2017

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Chinese manufacturers, in particular in labour-intensive industries, are striving hard for ways to withstand the pressures emerging during the ‘New Normal’ transition– such as slowing economic growth, labour force shortages and rising factor costs. As a result, many are in the process of, or at least considering, relocation of production to other low-cost destinations, or replacing workers with machines by upgrading technological capability levels. The relocation of Chinese manufacturing is forecast to open up major employment opportunities for low-cost regions and countries, with the potential for one to become the new global centre for manufacturing.

Light manufacturing offers growth solutions for under-developed regions and economies as it is driven by low-factor costs and an abundant workforce. These background papers, which have informed the direction of a large-scale survey of Chinese firms currently underway and led by SET and the Centre for New Structural Economics, look at light manufacturing in China across four sub-sectors: clothing and footwear, toys, household appliances and information and communication technology. The first paper explores the patterns of the shift of light manufacturing employment within China, focusing on regional and industrial disparities, while the second focuses on the enabling factors in Africa and Asia that are driving this change. The summary paper brings these themes together and concludes that there remain low-cost opportunities for manufacturers within China, and that if other developing countries are to capitalise on the current opportunity, they must seek to address the challenges associated with their location-specific costs, while also engaging directly with Chinese firms in relevant sectors.

Blog

The relocation of Chinese manufacturing companies to Africa (Jun Hou, ODI)

 

Photo credit: ©ILO. License: CC BY-NC-ND 2.0.

Economic Transformation and Job Creation in Mozambique

Neil Balchin, Peter Coughlin, Phyllis Papadavid, Dirk Willem te Velde and Kasper Vrolijk, October 2017
Mozambique’s gross domestic product (GDP) has grown annually by 5–7% in real terms over the past decade, but this has not been accompanied by structural change or sufficient job creation. The country requires a different focus towards economic transformation to address the very challenging short-term macroeconomic situation and create much-needed jobs in a sustainable way. This report on economic transformation and job creation in Mozambique synthesises 30 recent studies to understand commonalities and differences on promising sectors and value chains in Mozambique, binding constraints to developing these activities, and policies that have been suggested to achieve these.

Neil Balchin, Peter Coughlin, Phyllis Papadavid, Dirk Willem te Velde and Kasper Vrolijk, October 2017

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Mozambique’s gross domestic product (GDP) has grown annually by 5–7% in real terms over the past decade, but this has not been accompanied by structural change or sufficient job creation. The country requires a different focus towards economic transformation to address the very challenging short-term macroeconomic situation and create much-needed jobs in a sustainable way.

The SET report on economic transformation and job creation in Mozambique synthesises 30 recent studies to understand commonalities and differences on promising sectors and value chains in Mozambique, binding constraints to developing these activities, and policies that have been suggested to achieve these. Thus, rather than undertaking new analysis, this synthesis paper reflects on existing analyses broadly related to industrialisation and economic transformation in Mozambique in order to provide a base from which to move forward on the specifics of how to transform the economy.

The summary paper outlines the most pressing development challenges facing Mozambique and how they affect prospects for transformation and job creation; discusses the promising sectors for future transformation; and highlights the actions needed to accelerate transformation based on a review of 30 studies in the recent literature on economic transformation. It then discusses next steps for the Government of Mozambique (GoM) and its partners, such as the UK Department for International Development (DFID), around the development models (the what) and institutional capabilities (the how) required to implement a distinctly Mozambican transformation and job creation strategy.

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Mozambique needs to act now to avert a jobs crisis (Neil Balchin, ODI)

Photo credit: Eric Miller/ World Bank via Flickr

Neil Balchin (ODI) | Mozambique needs to act now to avert a jobs crisis

Neil Balchin (Research Fellow, ODI)

16 October 2017

Many countries in Africa are facing a looming jobs crisis. According to the African Development Bank, only one-fifth of the 12 million young people entering African labour markets each year are able to find waged employment. Rapidly expanding working-age populations on the continent only intensify competition for paid work. The International Monetary Fund reckons that by 2035 sub-Saharan Africa will boast more working-age people than all of the world’s other regions combined.

While the promise of a demographic dividend spurred by a burgeoning working-age population can help drive higher growth and accelerate development, it also creates major challenges in terms of sustainable job creation. At their current pace of growth, most African economies are simply not creating enough jobs to absorb their expanding workforces. Researchers at the Tony Blair Institute for Global Change suggest the jobs deficit in Africa could reach 50 million by 2040.

The challenges in Mozambique are similar, though also specific. Despite registering annual growth in the range of 5-7% in real terms over the past decade, Mozambique has not developed structurally or created sufficient quality jobs for inclusive growth. The unemployment rate stands at 27%; among those who are employed, only 6% work in the formal sector and only 3% are active in the private sector. An estimated 420,000 young people enter the labour market in Mozambique each year, adding to the urgency to develop a coherent strategy to address the challenging macroeconomic situation, transform the economy and create more jobs.

Mozambique needs to act now.

In search of a suitable development model

A recent SET study argues an important initial step would be to select, and implement, a suitable development model to promote economic transformation and create jobs. Four possible models could be considered.

Mozambique could look to capitalise on its comparative advantage in land and focus on boosting agricultural productivity and developing agro-processing capacity – with strong backward linkages and multiplier effects to agriculture. This may help Mozambique graduate to other sectors in the future, while growth in agricultural productivity could have strong poverty-reducing effects in the short to medium term.

Alternatively, Mozambique could focus on diversifying away from its current dependence on natural resources, and look to utilise the revenues that come from exploiting these resources to transform the economy. This approach has been effective in Indonesia, which has successfully diversified its natural resource-based economy into manufacturing and services.

Diversification into manufacturing, with a focus on export-oriented manufacturing, could drive Mozambique’s transformation. Experiences in Korea, Mauritius, Singapore and Vietnam show how harnessing trade and openness in manufacturing can drive industrialisation and create much-needed employment. The manufacturing sectors in Ethiopia and Rwanda have experienced rapid growth and thus serve as more recent examples of what is possible in Mozambique.

A cross-country study by SET in 2016 indicated Mozambique was among the most promising African countries in terms of attracting foreign direct investment into export-based manufacturing. Mozambique boasts a number of comparative advantages – including access to a relatively large pool of labour, a long coastline and significant ports, close proximity to regional markets and duty- and quota-free access into the US for a range of manufactured goods – that could support an export-led manufacturing model. Despite these advantages, the recent performance of Mozambican manufacturing has been weak and the sector still has a largely peripheral role within the economy – accounting for just 0.6% of total employment and contributing less than 10% to total gross value added in 2015 (down from nearly 30% in 1975).

The window of opportunity for Mozambique to follow a transformation model based on developing capacity in labour-intensive manufacturing may be closing quickly as manufacturing becomes increasingly capital- and technology-intensive and less employment-intensive, and as developed countries begin to insource. Again, Mozambique will need to act quickly.

Finally, Mozambique could look to services to promote economic transformation and create jobs. Such an approach would need to focus on improving services productivity and moving into high-productivity services sectors in order to avoid agglomeration in low-skill, low-productivity urban and informal services.

The best way forward may lie in a combination of these models. Our SET study suggests Mozambique could follow a combination of agro-processing-based transformation, diversification away from natural resources (in the style of Indonesia) and diversification into manufacturing (as in Mauritius and, more recently, Ethiopia). Underlying all these strategies is a targeted push towards industrialisation.

How to make it happen

We recently engaged with senior policy-makers in Mozambique on how to make this happen. This included discussions with the minister of economy and finance and the deputy minister of industry and commerce. Our discussions emphasised the need for senior policy-makers to work closely with the private sector to develop a shared vision for Mozambique’s economic transformation, grounded in a strong drive for sustainable job creation. Once delineated, this shared vision will need to be built up in a nation-building project.

Developing capacity for implementation will also be key. At present, significant institutional challenges, ranging from inefficiencies in the use of funds to a lack of coordination and integration of development planning, make policy-making and implementation in Mozambique very difficult. There is thus work to be done to build the required institutional capabilities to make Mozambique’s transformation vision a reality. But there is a window of opportunity right now for working with certain ministries and agencies to support implementation around an economic transformation and job creation agenda. Mozambique’s development partners could play a useful role in aiding this process by engaging in institutional support for key ministries and agencies, which may include the National Directorate for Economic and Financial Studies within the Ministry of Economy and Finance and the newly established Agency for Investment and Export Promotion.

More can be done at other levels too. Ongoing SET research is examining how to improve the outcomes of future investment negotiations for megaprojects to make it possible to harness these to stimulate backward and forward linkages from multinational corporations to local small and medium enterprises. Promoting local content and local linkages to large and megaprojects can help facilitate economic transformation and job creation in Mozambique.

More of this sort of analysis, particularly at the firm level, would help policy-makers better understand the constraints to job creation in Mozambique. Estimates suggest the Mozambican private sector creates only around 18,000 new jobs each year. More needs to be done to facilitate the creation of sufficient new jobs for inclusive growth.

The Government of Mozambique’s existing policies – including the recently announced Industrial Policy and Strategy 2016-2025, the National Employment Policy and the current Five-Year Plan – are insufficient on their own to kick-start manufacturing and higher-value added activities in other sectors, transform the economy and create jobs. Mozambique needs to act now to develop a shared vision and strategy for transforming the economy, focused on boosting the quality of economic growth (so it is less skewed and more inclusive), generating sustained increases in productive employment and facilitating a long-term, sustainable and inclusive reduction in poverty.

Photo credit: John Hogg / World Bank. License: CC BY-NC-ND 2.0.

30 October 2017 | The future of manufacturing-led development

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With increasing use of advanced digital technologies in manufacturing, such as 3D printing, robots and cloud computing, the landscape of technology and globalisation patterns is altering. As manufacturing becomes more automated, the criteria of being an attractive production location changes from offering inexpensive labour to lower capital costs and more advanced technology. This suggests that the economic progress in developing countries, who often rely on their comparative advantage in labour-intensive manufacturing, may be at risk.

To discuss how developing countries can adapt to the changing nature of globalisation, this World Bank, DFID, ODI/SET event will hear from Anabel González, Senior Director and Mary Hallward-Driemeier, Senior Economic Advisor in the Trade and Competitiveness Global Practice at the World Bank. The World Bank’s recent report, ‘Trouble in the Making? The Future of Manufacturing-Led Development’ suggests that while emerging technologies may threaten manufacturing as a pathway for low-income countries to develop, it can also present new opportunities given appropriate policy actions. The report explores policy agenda based on three dimensions; competitiveness, capabilities and connectedness.

For further information or to express your interest in attending this event, please contact Karishma Banga at ODI (k.banga@odi.org.uk).

 

Speakers

His Excellency Dr Hailemichael Aberra Afework – Ethiopian Ambassador to the UK

Dirk Willem te Velde – Principal Research Fellow, ODI and Director, SET

Anabel González – Senior Director, Trade and Competitiveness Global Practice at World Bank

Mary Hallward-Driemeier – Senior Economic Advisor, Trade and Competitiveness at World Bank

Nick Lea – Deputy Chief Economist, DFID

Karishma Banga – Researcher, ODI

Simon Maxwell – Senior Associate and former Director, ODI

Jonathan Rosenthal – Africa editor, The Economist

 

Photo credit: © Dominic Chavez/World Bank. License: CC BY-NC-ND 2.0.

Judith Tyson (ODI) | Three priorities for post-Brexit UK policy on private investment in low-income countries

Judith Tyson (Research Fellow, ODI)
In 2017, the UK government put economic growth at the core of its development policy by publishing its first ever economic development strategy. Concurrently, there was greater focus on the post-Brexit agenda of international opportunities for UK trade and investment. A key part of this agenda is increasing UK trade and investment in low-income countries (LICs) with the dual goal of creating positive development impact and greater opportunities for UK companies. To be able to achieve this dual goal, which represents an opportunity for both the UK and LICs, recent ODI work on private finance suggests there are three key areas of focus in the short term.

Judith Tyson (Research Fellow, ODI)

13 October 2017

In 2017, the UK government put economic growth at the core of its development policy by publishing its first ever economic development strategy. Concurrently, there was greater focus on the post-Brexit agenda of international opportunities for UK trade and investment.

A key part of this agenda is increasing UK trade and investment in low-income countries (LICs) with the dual goal of creating positive development impact and greater opportunities for UK companies.

To be able to achieve this dual goal, which represents an opportunity for both the UK and LICs, recent ODI work on private finance suggests there are three key areas of focus in the short term.

1. Infrastructure as the top priority

Poor infrastructure is a critical constraint to investment in many LICs. This can include expensive and under-supplied electricity and underdeveloped transport, with a lack of paved roads and poor-quality sea and air ports.

Investors often see poor infrastructure as the major issue that undermines their investment appetite. While some can overcome infrastructure constraints through special economic zones, many investors simply must have basic infrastructure in place before they will invest. Working with governments and other donors to establish basic infrastructure must thus be a key priority.

In the UK, CDC Group, the country’s development finance institution, already has a dedicated infrastructure team and, with a new injection of £3.5 billion of capital from the development budget over the coming years, it has the scale to make the required investments.

There is also an opportunity for UK financial firms to participate in infrastructure investment, thus increasing its potential scale. In particular, UK insurers and pension funds could be key investors, given their demand for the asset class (especially in combination with risk mitigation from donors), and the UK’s financial sector can provide the financial services to intermediate investment in the sector.

2. DFID support to a broader range of UK businesses

The UK Department for International Development (DFID) has, to date, focused on locally-owned, small- and medium-sized firms. While this approach can deliver useful development impacts, it is less likely to enable UK firms to participate in developing economies or to establish the larger-scale firms needed for LICs to enhance productivity—a key aspect of economic transformation.

Working more closely with UK firms to invest in LICs has the potential to increase development outcomes—such as employment creation and economic deepening and diversification—and provide opportunities for UK firms.

There are two specific aspects of engagement with firms that could be refocused on.

First, large UK companies have established businesses in LICs, most commonly in extractives, agricultural processing, financing and consumer products. Such companies are often among the largest in LICs and provide significant formal employment, tax revenues and benefits to employees (such as housing, healthcare and education).

In some LICs, these businesses also overcome infrastructure and other constraints by building dedicated power and transport infrastructure, and through close relationships with governments. Such strategies have facilitated the development of large-scale businesses in difficult environments for private sector development.

Greater coordination between such firms, DFID and the Foreign & Commonwealth Office (FCO) could help both maximise the development impact of existing sites and enable the establishment of new ‘greenfield’ sites in LICs where such firms do not currently invest.

Second, LICs need ‘green’ technology transfer to support economic development. For example, there is a need for green power and transport networks.

UK firms are world leaders in such technologies, including in solar- and wind-power generation and battery technologies. However, many such high-tech firms are also medium-sized and lack the finance and capacity to expand their businesses into LICs.

Currently, the Department for International Trade (DIT) offers support for export growth for UK companies. However, for LICs, this support is restricted. For example, the maximum financing available is often small and is subject to restrictive criteria, such as irrevocable letters of credit.

A partnership between DFID and DIT to loosen these criteria and expand the maximum financing for developmentally-important investments by UK companies in LICs is needed. This could include using official development assistance (ODA) to subsidise DIT export finance and insurance, as long as it is not tied aid, and that it is aimed at promoting development.

It could also include DFID using its expertise to advise and partner with UK firms to invest in the difficult business environments in evidence in LICs in ways that also maximise their development impact. The recently announced Invest Africa initiative might offer scope for this.

3. New forums for intra-government coordination are needed

There are many opportunities for ‘win-win’ outcomes for UK firms and LICs. There have already been some excellent UK initiatives to support these; for example, DIT have enhanced investment insurance and increased export finance for South Africa. Such support should be extended to LICs.

In addition, because of the difficult investment environments in LICs, there is also a need for greater alignment and closer coordination between UK government departments (including DFID, FCO and DIT). This should include both high-level coordination on strategy and lower-level processes to drive the ‘nitty-gritty’ required for matchmaking, execution of individual projects and in-country support, as well as ODA-based support to enhance the development impact of UK firms.

Such closer alignment across departments promises to deliver results that are greater than the sum of their parts, for both the UK and for LICs.

Photo credit: Arne Hoel / World Bank. License: CC BY-NC-ND 2.0.

Local Content Policies and Backward Integration in Nigeria

Neil McCulloch, Neil Balchin, Max Mendez-Parra and Kingsley Onyeka, October 2017
Nigeria has experienced rapid but low-quality growth over the past decade. This has been accompanied by limited structural change and little economic transformation. The share of manufacturing in Nigeria’s gross domestic product (GDP) is low relative to that in comparator countries, and the country’s heavy reliance on oil and gas exports has meant little attention has been paid to developing the manufacturing sector or diversifying into more complex products. This report, produced in partnership with the Nigerian Economic Summit Group (NESG) and launched at the Group’s annual Economic Summit in Abuja, analyses the different local policies options to increase backward and forward linkages in the Nigerian manufacturing sector.

Neil McCulloch, Neil Balchin, Max Mendez-Parra and Kingsley Onyeka, October 2017

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Nigeria has experienced rapid but low-quality growth over the past decade. This has been accompanied by limited structural change and little economic transformation. The share of manufacturing in Nigeria’s gross domestic product (GDP) is low relative to that in comparator countries, and the country’s heavy reliance on oil and gas exports has meant little attention has been paid to developing the manufacturing sector or diversifying into more complex products.

There is a clear need for greater diversification of the Nigerian economy to promote quality growth, economic transformation and employment. This can be aided by the development of value chains that facilitate higher-value added processing and manufacturing activities within Nigeria and make greater use of locally produced inputs and services in production through the creation of backward linkages. The latter can have positive effects in terms of stimulating economic development; promoting the development of local industries; creating economic linkages; building local capacity, capabilities and technologies; developing skills within the workforce; boosting employment; and minimising capital flight. Greater use of local content and more extensive backward linkages can also help Nigeria avoid the resource curse.

This report, produced in partnership with the Nigerian Economic Summit Group (NESG) and launched at the Group’s annual Economic Summit in Abuja, analyses the different local policies options to increase backward and forward linkages in the Nigerian manufacturing sector. This includes a review of the legislation that supports local content policies in the country, a literature review to identify how said policies have operated in different sectors in Nigeria as well as international experience in comparable countries such as Brazil and Indonesia, firm data to quantify backward integration in Nigeria, and finally, policy recommendations for the Nigerian government to move forward on this agenda.

Photo credit: ©IFPRI/Milo Mitchell. License: CC BY-NC-ND 2.0.

Dirk Willem te Velde (ODI) | Fostering a debate around practical industrialisation models in Tanzania

Dirk Willem te Velde (Principal Research Fellow, ODI)
ODI recently hosted two book launches, on the importance of industrialisation in Africa and on Tanzania’s future industrialisation. These books, one by Justin Lin and the other by Ali Mufuruki and three fellow Tanzanian authors, reiterate the importance of stimulating a debate around industrialisation in Tanzania.

Dirk Willem te Velde (Principal Research Fellow, ODI)

9 October 2017

The Overseas Development Institute (ODI) recently hosted two book launches, on the importance of industrialisation in Africa and on Tanzania’s future industrialisation. These books, one by Justin Lin and the other by Ali Mufuruki and three fellow Tanzanian authors, reiterate the importance of stimulating a debate around industrialisation in Tanzania.

The need for active but pragmatic approaches to economic development

Justin Lin, former Chief Economist at the World Bank, recently published Beating the odds: jump-starting developing economies (a book co-authored with Celestin Monga, the Chief Economist at the African Development Bank), which discusses how poor countries can master the art of performing economic miracles, with the implication that, regardless of any poor preconditions, any country can develop as long as it does the right thing. This right thing is not necessarily to follow prescriptions such as those on a “good governance” agenda, or to concede that poor preconditions block any chance of progress, but rather to focus on appropriate industries and support structural transformation by overcoming market and government failures and engaging in a process of technological upgrading and learning.

The discussion points to the need for strategic industrial policies and sector approaches that are rooted in the specifics of a country. It supports the development of special economic zones (SEZs), investment in infrastructure and foreign competition, as well as emphasising the importance of political leadership. Pragmatic approaches are key. For example, China learnt to focus on SEZs by looking at experiences in Ireland (Shannon) and Singapore in the 1980s.

The strategic yet pragmatic approach has worked in Brazil, China, Ethiopia, India, Indonesia and Vietnam. Do we see this pragmatic view in Tanzania?

The need for a strong developmental and experimental state in Tanzania

Tanzania’s industrialisation journey 2016-2056: From an agrarian to a modern industrialised state in forty years is an excellent book that will be relevant in supporting a pragmatic debate on industrialisation in Tanzania. The book, written by Ali Mufuruki, Rahim Mawji, Gilam Kasiga and Moremi Marwa, deals with similar issues to Justin Lin’s book but is focused specifically on Tanzania and has come from a very different background. Mufuruki is a renowned Tanzanian business leader, in his position as head of Infosys, a successful information and communication technology company.

The book contains a number of excellent proposals for the future of industrialisation in Tanzania. The key message is that the country needs a strong developmental state, which, for example, actively plans and coordinates improvements to infrastructure and education and develops SEZs and new technology.

Tanzania does not currently have a strong centralised agency that facilitates line ministries to execute plans, as seems to be the case in Ethiopia. Such an agency is essential, for example if the state wants to provide strong signals to the private sector. Mufuruki’s book puts faith in the Planning Commission, with which the SET programme has been working: ‘If our nation is a corporation, this agency is the Office of the CEO.’ The final paragraph of the book suggests we back the Commission but also warns that we need to monitor progress.

Monitoring will indeed be important. Taking into account the complex political economy in Tanzania, we cannot expect everything to happen perfectly at once. So it is refreshing to read Mufuruki’s advice:

‘Therefore starting small and experimenting would enable us to fail fast, learn quickly, and change things around rapidly and as necessary, and after fine-tuning the model over a period of time, we can then scale with higher quality across the nation instead of instantly scaling across the nation perhaps at a lower quality given limited implementation and financial capabilities, being unable to fine-tune and manage efficiently when facing challenges, and thereby ending up with a mess of a national industrialisation programme.’

The advice relates well to what we spoke about during the African Transformation Forum. SET has also written extensively about the need to experiment. The general emphasis in the book on nation-building around the economic transformation project is welcome, but there is also a danger that Tanzania will think only one model can work and, as a consequence, will fail to embrace a pragmatic approach.

Contours of the Government of Tanzania’s approach to industrialisation

Through the Planning Commission, the Government of Tanzania (GoT) has developed two important documents – a second Five Year Development Plan (FYDP II) and an accompanying implementation strategy – to guide the country’s ongoing push towards industrialisation. These are good first steps. However, in order to meet its objectives, Tanzania urgently needs to hold a debate on the practicalities of industrialisation, to monitor how well the objectives are being achieved and to undertake learning and corrective actions where needed.

GoT launched the FYDP II, called Nurturing industrialisation for economic transformation and human development, in 2016. It is a sound document. Based in part on background work by think tanks such as REPOA and ODI, it has a dual focus on growth and transformation, and poverty reduction. The Plan emphasises interventions to promote industrialisation, including establishing SEZs/export processing zones and industrial parks, strengthening research and development, promoting local content, developing capacity and undertaking a number of flagship infrastructure projects (incl. for example railway projects).

Over the course of the past year, GoT has also been discussing an implementation strategy for the FYDP II. This is a promising new step, especially in comparison with progress made under the FYDP I. It prioritises three value chains (cotton to textiles, leather to leather products and pharmaceuticals) on the basis of their employment creation prospects; the opportunities they present to create local value chains with downstream value-added processing; and their potential to supply rapidly expanding markets. It also prioritises SEZs and industrial parks to support industrial production and export-led industrialisation and to boost Tanzania’s competitiveness and urban development management. Attempts have been made to include private sector input in devising the strategy – the ESRF and ODI organised a public consultation to include private sector voices such as the CEO Roundtable.

In search of appropriate industrialisation models

While these government documents express a new level of ambition, they need to be backed by a realistic approach to implementation. Unfortunately, Tanzania is still struggling to find an appropriate model in this regard. Despite earlier plans to grow the contribution of manufacturing to gross domestic product, this share has continued to decline in recent years.

Experience tells us that implementation of an industrialisation plan can be achieved neither through a laissez-faire approach nor by means of complete public control and command. Instead, Tanzania’s industrialisation objectives require actors to work together and coalesce around a number of industrial policy functions. Effective state–business relations are crucial to making industrialisation a reality because most manufacturing investment and jobs are realised sustainably by the (local) private sector. Government can facilitate, regulate and coordinate, actively as is the case in Ethiopia and Rwanda, but should not take control of production or engage in loss-making production. The state needs to lead but should also experiment, learn and adjust. In this regard, the books by Justin Lin and Ali Mufuruki can help Tanzania navigate the next decade of support for industrialisation.

 

Photo credit: Mitchell Maher / International Food Policy Institute (CC license)

Dirk Willem te Velde (ODI) | Supporting Kenya’s industrialisation: Mombasa port, SEZs and targeted development cooperation

Dirk Willem te Velde (Principal Research Fellow, ODI)
The SET programme has highlighted Kenya’s lagging industrialisation, characterised by falling manufacturing to GDP ratios in the past few decades. Nonetheless, there is a real opportunity in the coming few years to get it right, doubling manufacturing output and creating 300,000 manufacturing jobs in the country. This will require implementation of a range of appropriate policies.

Dirk Willem te Velde (Principal Research Fellow, ODI)

29 September 2017

The SET programme has highlighted Kenya’s lagging industrialisation, characterised by falling manufacturing to GDP ratios in the past few decades. Nonetheless, there is a real opportunity in the coming few years to get it right, doubling manufacturing output and creating 300,000 manufacturing jobs in the country. This will require implementation of a range of appropriate policies.

The SET programme worked with the Kenya Association of Manufacturers, in consultation with others, to propose 10 policy priorities, ranging from target investment climate reforms to improved skills, better financing and quality infrastructure. After a successful engagement strategy, political parties signed up to these policies during a meeting in July 2017, and they are expected to carry this initiative forward to the upcoming election.

One specific constraint is the lack of quality transport infrastructure in terms of roads and ports underpinning the transport corridor between Mombasa, Nairobi, Eldoret, Kampala and Kigali. Of course, any concerns should not ignore the considerable progress that has already been made.

For example, with support from the UK DFID-funded (other donors also contribute) programme TradeMark East Africa (TMEA), the port of Mombasa is becoming more efficient and relying more on electronic systems. I myself witnessed the offloading of a DFID-funded crane, which will make the port more efficient and greener. A more efficient port has contributed to an 12% increase in cargo in the first half of 2017 (compared to the same period the previous year).

In the past, CDC, the UK’s development finance institution, invested in Grain Bulk Handlers Ltd through Actis, but it exited this in 2016, citing success including exceeded performance measures.

Supported by TMEA, the Kenya Ports Authority (KPA) is using a dashboard of performance indicators that show, for example, that average port days went from 4 in 2012 to 2.9 in 2016. The average transport costs for a 20ft container from Mombasa reduced by a third from $2.9/km in 2011 to $2/km in 2015.

More can be done to reduce transport costs for a 20ft container to meet the middle-income country average of $1/km and help Kenya industrialise. China has funded the new standard gauge railway, which will start operating freight trains later this year, with possible knock-on effects for capacity and costs along the Nairobi–Mombasa corridor. Japan is financing a road, opening up the area to the south of Mombasa. There are also plans for an expressway between Mombasa and Nairobi (to be constructed in six years by Bechtel with support from UK export finance and with the aim of reducing road travel time from 10 to 4 hours).

There are also planned investments in the port itself. The European Investment Bank with others is considering a $200 million loan to modernise berths, and Japan will be lending $350 million for a second phase around the second container terminal. Much port finance has been leveraged through the efforts of TMEA (which has an office in the port), which has coordinated donors through a donor conference and a resulting port charter. The charter brought together a range of relevant public and private associations and involved a number of performance contracts in the government of Kenya.

A real opportunity (and at the same time a challenge) is to develop export supply capacity to make full use of the lower trading costs. TMEA and the KPA have plans to develop the Dongo Kundul Special Economic Zone around Mombasa to do just this. Increased investment in productive capacity, especially in agro-processing, but also garments and metal engineering, will create jobs, turn Mombasa into an export port and put Kenya on a more transformational footing. The new road infrastructure and increased port efficiency should make export firms more competitive. The KPA has already reserved land for the zone, but coordinating its construction and financing will be a challenge.

There is a further opportunity for UK development cooperation instruments to help. Such assistance could build on successes already achieved, with the UK also benefiting from cheaper imports (directly or indirectly through other countries) and potentially more exports and investment. This is one example how the UK (through aid, development finance and export finance) can lock together the aims of infrastructure development, industrialisation and job creation in Kenya with benefits for the UK and elsewhere.

Photo credit: Kenya Ports Authority (www.kpa.co.ke).

14 September 2017 | A UK-Liberia partnership: investing in infrastructure, energy and agriculture

On 14th September 2017, the Overseas Development Institute (ODI), in partnership with the Foreign and Commonwealth Office (FCO) and the Liberia National Investment Commission (LNIC), hosted a workshop and networking event in London. The event’s aims were two-fold: firstly, to explore the state of Liberia’s economy and the potential opportunities and challenges for foreign investors, and secondly, to facilitate relationship-building between Liberia and UK-based international investors seeking to opportunities to support development in the sub-Saharan African country.

DOWNLOAD EVENT REPORT

On 14th September 2017, the Overseas Development Institute (ODI), in partnership with the Foreign and Commonwealth Office (FCO) and the Liberia National Investment Commission (LNIC), hosted a workshop and networking event in London. The event’s aims were two-fold: firstly, to explore the state of Liberia’s economy and the potential opportunities and challenges for foreign investors, and secondly, to facilitate relationship-building between Liberia and UK-based international investors seeking to opportunities to support development in the sub-Saharan African country.

The ODI was honoured to welcome to the event several members of the Liberian Government,  as well as His Excellency Dr Mohammed Sheriff, the Liberian Ambassador to the UK, and David Belgrove OBE, British Ambassador to Liberia, representatives from CDC and over 30 private investors based in the UK.

Presentations from LNIC and Liberian Government representatives outlined Liberia’s past and current challenges, promising recent economic growth, and the wealth of promising financing opportunities for investors across agriculture and agri-business, infrastructure, water, energy, manufacturing and tourism.

Information on investment opportunities can be found within the event report, available for download above. For further detail, please contact Quinton Tunis at the LNIC (tunisq@gmail.com).

Photo credit: Albert K. Jaja.