Author: G.C

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 (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.

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 ©

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 (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

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.

2. 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. 

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.

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.

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 (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).