WTO MC11 Negotiations: Implications for Economic Transformation in Developing Countries

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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

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

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

ODI side event hosted by Supporting Economic Transformation:
Breakout Room 3,  on Wednesday 13 December 2017 at 13:30-15:00*

*The event will be livestreamed on the ICTSD website at 10:30-12:00 GMT.  

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 will unpack 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) 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 register for free to attend the TDS 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

Tanzania Impact Case Study: Supporting Tanzania’s Second Five Year Development Plan (FYDPII)

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 a monitoring and evaluation (M&E) framework to track progress and demonstrate results.

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 a monitoring and evaluation (M&E) framework to track progress and demonstrate results.

SET helped Tanzania’s Planning Commission to prioritise 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.

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 was to design and implement 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.

Impact

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

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, 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

“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, MOFP, GoT

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.

 

 

 

Philip Mpango, Tanzanian Minister of Finance

 

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.

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 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.

“We thank the ODI-SET for its tireless efforts to assist the Government of Tanzania and the citizens of Tanzania.”

 Paul Maduka Kessy, Planning Commission, MOFP, GoT

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.

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.

 Workshop on FYDP implementation strategy, Oct 2016

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

“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

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.

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

For further details on SET’s work in Tanzania please see the following:

Event report from a consultative workshop on the drafting of FYDPII on 6 October 2015:  https://set.odi.org/6-october-2015-shaping-tanzanias-second-five-year-development-plan/

Final full SET study and summary paper for the drafting of FYDPII: https://set.odi.org/supporting-preparation-tanzanias-second-five-year-development-plan-fydpii/

Event report from a consultative workshop on the implementation of FYDPII on 27 October 2016:  https://set.odi.org/27-october-2016-effective-implementation-tanzanias-second-five-year-development-plan-fydpii/

Briefing papers on the Implementation Strategy for FYDPII: https://set.odi.org/tanzanias-second-five-year-development-plan-fydp-ii-briefing-papers/

Blog by Dirk Willem te Velde on practical industrialisation models in Tanzania: https://set.odi.org/fostering-debate-industrialisation-models-tanzania/

A PDF version of this impact study can be downloaded here: SET Impact Case Study – Tanzania

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

 

Kenya Impact Case Study: Promoting industrialisation, manufacturing and job creation

The Supporting Economic Transformation (SET) programme successfully promoted the importance of manufacturing in Kenya, and guided the prioritisation of policy actions targeting policymakers at an opportune time – ahead of the 2017 Kenyan elections, working directly with local research partners, world call academics and a major private sector association. This followed in-depth and high-quality scoping background work which was presented to, and received inputs from, development partners including the World Bank, donors and the Government of Kenya.

Introduction

The Supporting Economic Transformation (SET) programme successfully promoted the importance of manufacturing in Kenya, and guided the prioritisation of policy actions targeting policymakers at an opportune time – ahead of the 2017 Kenyan elections, working directly with local research partners, world class academics and a major private sector association. This followed in-depth and high-quality scoping background work which was presented to, and received inputs from, development partners including the World Bank, donors and the Government of Kenya.

SET collaborated with the Kenya Association of Manufacturers (KAM), a private sector organisation to develop a 10-point policy priority plan around manufacturing, which was used to discuss, and directly influence the content of political party manifestos. Tangible success was demonstrated with a high-profile signing of a commitment to the priorities by two major political parties at a public launch event. The work, and the engagement of political party representatives also generated significant national media coverage and helped to communicate the messages of in-depth research to a wide audience.

The SET work helped to build KAM’s strong networks, and the tangible result was a policy- and action-focused document which they were able to use to engage with (and influence) the Kenyan government.


(From left to right): Neil Balchin, Research Fellow (ODI), Ms. Phyllis Wakiaga, Chief Executive Officer (KAM), Oduor Ong’wen, Executive Director, ODM, National Super Alliance (NASA), Ms. Flora Mutahi, Chairperson (KAM) and Ekuru Aukot, Party Leader, Third Way Alliance Kenya

The Policy Challenge

There is currently a window of opportunity African countries in manufacturing. Rising wages in Asia, rebalancing in China, strong regional growth in Africa and improving policies and institutions are creating positive conditions for manufacturing, and there is significant room to develop manufacturing output. However, the window of opportunity in labour-intensive manufacturing is closing fast (possibly in the next 20-30 years) due to increasing mechanisation and automation. Intense competition from Asian countries (e.g. Vietnam, Cambodia, Bangladesh) who have similar or lower wages, higher productivity, better infrastructure, more skilled labour forces, and higher levels of integration into GVCs is also a major challenge. In order to take advantage of the current opportunities, Kenya needs to act fast to develop its manufacturing sector, as other African countries will be looking to do the same.

It was in this context that KAM approached SET to collaborate on a project aiming to influence politicians and policy-makers to incorporate manufacturing priorities when developing their economic plans in the pre- and post-election periods in 2017. A broader policy challenge was to promote the importance of economic transformation and industrialisation as driving forces behind job creation and poverty reduction. More specifically, the main objective of the project was to position the development of manufacturing and industry in Kenya as a priority for the country’s economic transformation and job creation for the next five years.

What SET did

Leading SET researchers from ODI, local consultant Anzetse Were and KAM consultant Gituro Wainaina worked closely with KAM to develop a policy priority plan around manufacturing. As the target audience for the work was to reach and influence politicians and other policy-makers, the team decided to develop a concise 10-point booklet listing priorities for manufacturing, with corresponding suggested ‘actions’ informed by expert analysis of the current state of the Kenyan manufacturing sector. The 10 points covered issues including land accessibility and ownership, energy, value chains, public-private sector collaboration and labour market skills, and for each a selection of tailored policy solution (actions) were suggested. 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, KEPSA, MSEA, TMEA, ICDC and the KAM Board.

In July 2017, two launch events for the booklet were held in Nairobi. The first was a private meeting for KAM’s member organisations, and the second was a high-profile launch event on 5 July, attended by two major political parties. The aim of the launch was to engage with the major political parties in the upcoming Kenyan general elections (in August 2017) and push for buy-in and cross-party support for the priorities identified in the agenda to transform manufacturing in Kenya. At the event, the Executive Director of ODM (NASA party) and the presidential candidate/leader of Thirdway Alliance Kenya signed a ceremonial commitment to the 10 policy recommendations. This was one excellent example of tangible impact of the SET research; further impacts are discussed below.

Impact

Broadly, the work had demonstrable success towards one of core aims of the SET Programme: supporting the private sector. Through the project, SET supported KAM’s engagement with future policymakers on which policies the private sector believe are needed for high growth and job creation. The event also generated significant media coverage including over 10 hits in national media, reflecting the importance and relevance of the topic to a wide audience.

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

SET contributed to the knowledge around Kenyan manufacturing by carrying out detailed scoping studies by leading experts such as John Page (Senior Fellow, Brookings Institution) and Phyllis Papadavid (Team Leader, International Macroeconomics, ODI). These were presented to a group of stakeholders at a closed roundtable in Nairobi in August 2016 including representatives from African Development Bank, World Bank, TMEA, JICA, DFID Kenya, Government of Kenya, KAM, ACET, private sector and others. These papers contributed to the perceptions of those in attendance, who came to a consensus that manufacturing and industry needed to be the focus of the next administration.

“The KAM launch event was a great example of getting cross-party support on useful reforms”

Daniel Marks, Economic Advisor, DFID Kenya

Tangible evidence of conceptual impact from this project can be seen by the extensive media coverage of the 5 July 2017 launch of the 10-point policy priority plan which gave high visibility and prominence to both the SET programme and the key messages of the manufacturing agenda.

Finally, the work also had conceptual impacts on the political party representatives who were present at the launch meetings, who agreed that a commitment to manufacturing should be a priority for the next administration.

Instrumental impacts

SET also had tangible instrumental impact from this work. One of the most significant was seen following discussions between KAM and the Government of Kenya on the 10 policy priorities: comparisons with party manifestos showed several suggestions were taken on board and incorporated. These included issues such as public fiscal management, the role of SEZs and the importance of improved access to reliable and sustainable energy, and industrialisation was a key focus of the manifestos (where it had not been previously), demonstrating SET and KAM’s possible influence on policy-forming processes.

Evidence of instrumental impact was most powerful at the launch event on 5 July 2017, where representatives from the two political parties in attendance both signed a ceremonial commitment to the 10 points in the policy priority agenda, pledging to incorporate them into future policies. The representatives specified the industrial agenda as central to Kenya’s economic transformation in general terms, with NASA emphasising innovative initiatives, small and medium enterprise (SME) and informal sector, and Jubilee and the Third Way Alliance were more specific about industry related policies in their recommendations.

The work was also influential on the KAM more broadly, as it was presented to KAM’s member organisations at their Annual General Meeting. This ensured the exposure of a wide range of private sector firms to research and policy analysis on the manufacturing sector.

Signing commitment to the 10-point plan on 5 July 2017

 

 

 

 

(From left to right): Ms. Phyllis Wakiaga, Chief Executive Officer, KAM, Oduor Ong’wen, Executive Director, ODM, National Super Alliance (NASA), Ms. Flora Mutahi, Chairperson, KAM

Capacity building impacts

This work significantly supported the KAM with prioritisation related to manufacturing and will be used in the future, beyond the election period, to advocate private sector interests with the government. KAM have already begun further work to develop policy briefs for the purposes of engaging the County Government and other stakeholders at the county level (which was one of SET’s recommendations). This shows a demonstrable and effective SET ‘exit’, with strong local actors taking forward a transformational agenda built on, and following SET research and support.

“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

By engaging local experts including Anzetse Were (development economist and columnist for Business Daily in Kenya) and Gituro Wainana (Professor and KAM consultant) SET has ensured that there will be ongoing engagement on the work.

An example of this is Anzetse Were’s coverage of a major investment by East Africa Breweries Limited’s (EABL) to establish a Sh15 billion brewery in Kisumu, which aligns with the messages of the work (namely that increasing manufacturing is a key part of economic development). This was also discussed at a private roundtable with a private sector firm, Diageo.

As mentioned previously, KAM also used the booklet to secure meetings with political parties ahead of the unveiling of election manifestos, at which they were able to put forward the case for investment in manufacturing.

Connectivity impacts

This work has strengthened networks of stakeholders both in the development and utilisation of the research. The former was reflected by the wide-ranging experts present at the scoping meetings on 29 August, including over 30 representatives from DFID Kenya, the Kenyan Government, the World Bank, and research organisations including the African Center for Economic Transformation (ACET).

In addition, the main launch on 5 July 2017 was a very successful event, generating approximately 10 national media hits, including an independent blog and attracted two major political parties. Examples of media coverage includes The Star, The Standard, Business Daily and KBC News.

Finally, through the process of developing the booklet, SET provided a mechanism for KAM (and its members organisations) to engage with the Kenyan Government and other political parties/coalitions at a critical time for Kenyan politics. The process also facilitated dialogue between DFID Kenya and KAM over the relative weight of various priorities for policy-makers.

What SET learned

SET’s work with KAM and wider work on manufacturing in Kenya highlights successes of working collaboratively with local partners, private and analytical, to translate analytical and in-depth research into actionable, concise policy recommendations, and then communicating these to Government through influential local (private sector) organisations with strong networks.

The importance of timing is also a positive lesson learned; by targeting and meeting with political parties ahead of elections, there was a strong incentive for politicians to engage with the research findings.

Finally, the positive result of a well-thought communications plan was evident in this project – a 10-point easy-to-consume booklet and public launch helped to communicate the messages to both government and media, attracting attention and influencing the thinking of a wide audience.

Useful links

The 10 policy priorities booklet and summary handout can be downloaded here.
For a detailed event report of the public launch on 5 July 2017, click here.
The in-depth background papers and roundtable report on 29 August 2016 can be found here.

A PDF version of this impact study can be downloaded here: SET Impact Case Study – Kenya

This impact study has been prepared by Sonia Hoque, SET Programme & Operations Manager. For further information contact details are available here.

 

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.

DOWNLOAD EVENT REPORT

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

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

DOWNLOAD DATA BRIEFING

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 ©

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

DOWNLOAD PATHWAYS SUMMARY BRIEFING         DOWNLOAD FOUR SECTOR STUDY SUMMARY BRIEFING

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.

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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.

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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.

5 September 2017 | Justin Yifu Lin: How to jump-start developing economies

For decades, low-income countries have been trying to catch up with the economic progress made by industrialised, high-income nations, but few have succeeded. So how can low-income countries jump-start their economies and achieve the structural transformation that can create jobs and improve livelihoods? To discuss this issue, this event hears from leading development economist, former chief economist for the World Bank and advisor to Chinese and African governments, Professor Justin Lin. Exploring themes from two of his recently published books, ‘Beating the Odds: Jump-Starting Developing Economies’ and ‘Going Beyond Aid: Development Cooperation for Structural Transformation’.

 

For decades, low-income countries have been trying to catch up with the economic progress made by industrialised, high-income nations, but few have succeeded. So how can low-income countries jump-start their economies and achieve the structural transformation that can create jobs and improve livelihoods?

To discuss this issue, this event heard from leading development economist, former chief economist for the World Bank and advisor to Chinese and African governments, Professor Justin Lin. Exploring themes from two of his recently published books, ‘Beating the Odds: Jump-Starting Developing Economies’ and ‘Going Beyond Aid: Development Cooperation for Structural Transformation’, Lin seeks to dispel a range of ideas that are commonly thought to be helping or impeding developing economies. ‘Beating the Odds’ explains what is wrong with mainstream development thinking and offers a practical blueprint for moving poor countries out of the low-income trap regardless of their circumstances. ‘Going Beyond Aid’, furthermore, argues that traditional development aid is inadequate to address the bottlenecks for the structural transformation these countries badly need.

Drawing on the successful experiences of countries such as China and South Korea and the new ideas from emerging market economies such as Brazil and India, this event presents a new narrative to broaden the debate around economic development, and the ways in which traditional aid delivery helps or hinders it.

Chair

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

Speakers

Justin Lin – former World Bank Chief Economist

Melinda Bohannon @MelindaBohannon – Deputy Director for Growth & Resilience, UK Department for International Development (DFID)

 

Photo credit: World Bank via Flickr

Sonia Hoque (ODI) | Ethiopia’s economic transformation and job creation: the role of Hawassa Industrial Park

Sonia Hoque (Programme & Operations Manager, ODI)
In the quest for faster industrialisation and economic transformation, governments in Sub-Saharan Africa (SSA) have established a number of special economic zones (SEZs) and industrial parks. At the ACET-ODI Light Manufacturing in Africa Chapter launch on 5 June 2017 (part of the Pan-African Coalition for Transformation, PACT), these zones were a hot topic. Given past stigma around SEZs foreign investors, participants from SSA were keen to learn from each other, and in particular from Ethiopia.

Sonia Hoque  (Programme & Operations Manager, ODI)

24 August 2017

In the quest for faster industrialisation and economic transformation, governments in Sub-Saharan Africa (SSA) have established a number of special economic zones (SEZs) and industrial parks. At the ACET-ODI Light Manufacturing in Africa Chapter launch on 5 June 2017 (part of the Pan-African Coalition for Transformation, PACT), these zones were a hot topic. Given past stigma around the quality and attractiveness of these zones to foreign investors, participants from around SSA were keen to learn from each other, and in particular from Ethiopia. The ‘immediate success’ of Huajian Shoe Factory in Ethiopia’s Eastern Industrial Park and sustained high growth in foreign direct investment (up 46% to $3.2bn in 2016, despite a fall of 3% in total in Africa in the same year) has caught the attention of peers in the region.

It is easy to see why – when turning a corner in the developing city of Hawassa, the last thing an unknowing visitor would expect to see is a brand-new modern manufacturing fortress. Boasting over 400,000m² of factory floor space, and expected to generate 60,000 jobs and $1bn in exports by the end of 2018, the flagship Hawassa Industrial Park of the Ethiopian Industrial Parks Development Corporation (IPDC) is a shining example of how to do SEZs well. International investors are attracted to Ethiopia, keen to take advantage of its cheap labour costs and modern technological resources which are needed to produce low-cost, high-quality garments and textiles competitively for export. Hawassa Industrial Park, which was up-and-running in just nine months, offers important lessons on how to set up successful SEZs: namely that financial incentives alone are not enough to attract investors – coordination of various aspects on both practical and institutional levels, by a government committed to a broader vision of industrialisation and manufacturing growth, is key.

Getting the conditions right

Two years ago at the Investing in Africa Forum in Addis Ababa, Minister Arkebe Oqubay, Senior Advisor to the Prime Minister of Ethiopia, stated past SEZs in Africa were “missing the ‘basics’ such as power, water and one-stop services, and were not aligned with national development strategies.” Representatives from government and the private sector in African countries agreed on a number of conditions that need to be met to successfully attract investment, create productive jobs and generate positive spillovers into the local economy. These included a clear strategy integrated with national development goals, careful planning, and high-level leadership and coordination. In Ethiopia, the IPDC has visibly strived to meet these and is rewarded in Hawassa Park with full utilisation of its 52 factory sheds by 17 companies including investors from Hong Kong, China, India, Bangladesh, Indonesia, Spain and the USA. After beginning with 37 sheds, 15 additional sheds were built in response to high demand. Prospective new investors are carefully selected by the Ethiopian Investment Commission (EIC). The demonstration effect is undeniable too – the presence of PVH, a producer of iconic American luxury apparel, signals to other investors that this Park is capable of supporting high-quality light manufacturing.

Hawassa Industrial Park is made up of four main elements which are carefully planned and integrated with 50km of underground piping: factories, housing units for expats, a water treatment plant and a textile mill (currently the largest in Ethiopia) which will eventually supply 100% of the textile needs for the Park’s incumbent companies. The latter is a key aspect of the Government’s plans for vertical integration and will benefit the country’s textile industry overall.

Reliable energy supply continues to be a major challenge for African industrialisation – average downtime in African SEZs is reportedly 11 times higher than non-African ones. To meet energy demands, the Hawassa Industrial Park is currently served by a 19-MW mobile substation, but it will eventually be supplied directly to the Park via a dedicated 200-megawatt (MW) substation (in comparison to the power supply for the rest of the city which totals just 75-MW).

However, modern and advanced facilities are not enough to attract manufacturing companies to African SEZs. At the PACT launch event, Pan Li, COO of the Made in Africa initiative, stated that prospective manufacturing investors want clarity on policies, strong commitment from country governments, and dislike uncertainty. To this end, the EIC is solely responsible for selecting investors and drawing up a strategy for all industries in the Park, and works closely with the Prime Minister’s office, which shows commitment at the highest levels to investors considering Ethiopia as their next manufacturing location. “Investors are attracted by strong institutions in Ethiopia, rather than just financial incentives” stated the EIC’s Deputy Commissioner, Belachew Fikre at the PACT event.

It is also well-known that simpler processes for setting up operations are attractive to foreign investors. Mindful of this, Ethiopia has created a one-stop institutional service with the EIC supporting new companies with banking, visa and immigration facilities, import/export licenses, work permits, and customs clearance, all of which helps speed up decision making and can reduce set-up costs.

Location, location, location

At almost 300km south of Addis Ababa, the selection of Hawassa, a relatively remote city, for an industrial park may be surprising to some. An environmentally-concerned observer may be troubled by the potential for contaminating the adjacent Lake Awassa, but the eco-friendly Park operates a zero-liquid discharge facility and strict conservation principles. Rather, the main pull of the city was the availability of the final factor for production that manufacturers need – labour. With 5 million people living within a 50km radius of the city (mostly of working age), manufacturers setting up in the Park can draw on an abundant supply of labour, something that is often challenging outside of capitals in large, sparsely populated African countries. The Park will generate approximately 60,000 jobs in Phase 1 and approximately 80% of those employed in the Park are women, which is significant from a social development impact perspective.

Challenges remain for investors and factory managers

Perhaps unsurprisingly, under the impressive veneer of the Hawassa Industrial Park, teething problems exist. Foreign factory managers have faced on-going issues with power failures and complain of difficulties sourcing essential supplies locally, such as stationery, instead choosing to import them (potentially at a higher cost). The cost of transport to and from the Park is also high, with one factory manager claiming the cost of transporting goods from the port in Djibouti to Hawassa is twice that of shipping across the Indian Ocean. But perhaps most concerning are the reported labour issues: high absenteeism as workers (reportedly) take unreasonable advantage of labour regulations favouring employees (taking bereavement leave for very distant acquaintances, leave for national exams they are not really sitting etc.), high turnover as workers move to other factories once sufficiently skilled, and even issues with ‘work ethic’ of employees who are unfamiliar with formal working practice and etiquette (‘soft skills’). The biggest qualm seems to be the compulsory hiring process – whereby workers sourced through a government job centre in the catchment area are sent to work in factories, and managers have little or no choice in selection beyond filtering workers by the simple skills ‘grade’ assigned at the job centre. If unaddressed, this presents a real risk to the long-term success of Hawassa Industrial Park – cheap labour may be attractive to garment manufacturers, but workers must also be productive and adequately skilled. The commitment shown by the Ethiopian Government so far must continue to ensure the quality and supply of labour meets the new demand by foreign companies.

The fact remains however, that Ethiopia has demonstrated that coordination and the presence of a long-term vision are important ingredients for building high-quality SEZs quickly. These, in turn, can create high numbers of transformational jobs, whilst also generating crucial positive spillover effects to benefit the local economy. To this end, other governments in SSA could already learn much from the Ethiopian experience to date.

 

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

On 5 June 2017, ODI and ACET convened a meeting on Light Manufacturing in Addis Ababa, Ethiopia. An event report can be viewed online.

 

 

Photo credit: Hawassa Industrial Park, SET Programme, Overseas Development Institute ©

Tanzania’s Second Five-Year Development Plan (FYDP II): Briefing Papers

Neil Balchin and Dirk Willem te Velde, August 2017
Following extensive work done by the SET Programme on supporting the preparation of Tanzania’s Second Five-Year Development Plan (FYDP II), SET has continued to support the Planning Commission within the Ministry of Finance and Planning (MoFP). The Government of Tanzania launched the FYDP II – Nurturing Industrialisation for Economic Transformation and Human Development in 2016, and is currently finalising the FYDP II Implementation Strategy, for which SET has provided continued support.

Neil Balchin and Dirk Willem te Velde, August 2017

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Following extensive work done by the SET Programme on supporting the preparation of Tanzania’s Second Five-Year Development Plan (FYDP II), SET has continued to support the Planning Commission within the Ministry of Finance and Planning (MoFP).

The Government of Tanzania launched the FYDP II – Nurturing Industrialisation for Economic Transformation and Human Development in 2016, and is currently finalising the FYDP II Implementation Strategy, for which SET has provided continued support.

These three briefings cover:

1)  A summary of FYDP II  published last year

2) A summary of FYDP II implementation strategy including actions and financing, and progress so far

3) A briefing linking FYDP II and the implementation strategies to other important actors (including donors/private sector).

The briefings can also be found on the website for our partner in this study, REPOA, a leading policy research think tank in Tanzania.

 

Photo credit: SET Programme, Overseas Development Institute ©

Zimbabwe: A Roadmap for Economic Transformation and Economic Outlook

Judith Tyson, August 2017
Zimbabwe has suffered from economic decline in the recent past, with a 60% reduction in its gross domestic product over the past two decades. There have been multiple acute crises and a deep structural regression in its economy. This has included deindustrialisation with degradation of capital stock and low capacity utilisation in the manufacturing sector. The paper on ‘A Roadmap for Economic Transformation’ argues that the most viable is a ‘single sector, single agent’ approach – whereby transformation is focused on a single sector with high potential and led by a single reformist agent within government – and this could ‘kick-start’ change.

Judith Tyson, August 2017

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Godfrey Kanyenze, Prosper Chitambara and Judith Tyson, September 2017

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Zimbabwe has suffered from economic decline in the recent past, with a 60% reduction in its gross domestic product over the past two decades. There have been multiple acute crises and a deep structural regression in its economy. This has included deindustrialisation with degradation of capital stock and low capacity utilisation in the manufacturing sector. The agriculture sector has suffered from declining productivity and only the mining sector has thrived, but this is mainly because of the commodity ‘super cycle’ that ended in 2015. Ideally, there would be broad and deep macroeconomic reforms but many commentators see this as unrealistic without significant political change. Instead, new strategies that are feasible in the political economy of Zimbabwe are needed to get the country’s economy back on track.

The paper A Roadmap for Economic Transformation argues that the most viable is a ‘single sector, single agent’ approach – whereby transformation is focused on a single sector with high potential and led by a single reformist agent within government – and this could ‘kick-start’ change. First, Zimbabwe has inherent competitive advantages. These include rich natural endowments in agriculture and extractives, including gold, platinum and diamonds; proximity to key regional markets in South Africa, Zambia and other neighbouring countries; and good levels of education and business skills. These provide Zimbabwe with the potential to develop value-added, export-led manufacturing and processing of its products, with resultant and much-needed formal, higher-wage employment and fiscal revenues.  Second, experiences in comparator countries show that, under such a strategy, there is no need for pre-existing ‘good governance’ for transformation to begin. Conditions such as a well-functioning democracy, transparency, civil society empowerment or the absence of corruption are not necessary. Indeed, there is no need for comprehensive change in institutions and power structures.

In the period from 1999 to 2008, Zimbabwe’s GDP declined by 52%. This ended in 2008 in a period of hyperinflation and dollarisation of the economy. Subsequently, the economy experienced anaemic growth which averaged 2.9% from 2009 to 2016. However, the Zimbabwean economy did more than simply underperform in relation to economic growth on a comparative basis with the region. It underwent a significant structural degeneration, which is characterised by a number of factors, and which are discussed in the Outlook of the Zimbabwe Economy background paper.

 

 

Photo credit: Martin Addison via Flickr

5 July 2017 | 10 policy priorities for Kenyan manufacturing launch

Hosted in partnership with the Kenya Association of Manufacturers (KAM), this launch event saw the introduction to Kenyan policymakers and political leaders of SET and KAM’s recent publication, Ten policy priorities for transforming manufacturing and creating jobs in Kenya. This event featured contributions from Dr Neil Balchin, ODI Research Fellow, KAM’s CEO Phyllis Wakiaga, Vice Chair Sachen Gudka and Chairperson Florence Mutahi, as well as leading economist Anzetse Were. The occasion also saw commitments made by political parties and coalitions to prioritise Kenya’s industrialisation, and the development of the manufacturing sector in particular.

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Hosted in partnership with the Kenya Association of Manufacturers (KAM), this launch event saw the introduction to Kenyan policymakers and political leaders of SET and KAM’s recent publication, Ten policy priorities for transforming manufacturing and creating jobs in Kenya. 

The 10-point policy plan was developed in collaboration with various private and public sector stakeholders, and both examines the current state of Kenyan manufacturing and offers clear, tailored policy solutions to a range of problems, from land ownership to sustainable, clean energy.

This event featured contributions from Dr Neil Balchin, ODI Research Fellow, KAM’s CEO Phyllis Wakiaga, Vice Chair Sachen Gudka and Chairperson Florence Mutahi, as well as leading economist Anzetse Were. The occasion  also saw commitments made by political parties and coalitions to prioritise Kenya’s industrialisation, and the development of the manufacturing sector in particular, whatever the outcome of August’s presidential election.

Media coverage

Business Daily, 5 July

XinhuaNet, 5 July

The Standard, 6 July

Mediamax, 6 July

The Star, 6 July

Coastweek.com, 7 July

KBC Channel 1, 7 July

Liex Consult, 10 July (blog)

Business Daily, 16 July

The East African, 25 July

 

Coordinating Public and Private Action for Export Manufacturing: International Experience and Issues for Rwanda

David Booth, Linda Calabrese and Frederick Golooba-Mutebi, July 2017

One of the keys to economic transformation across Africa today is a greater role for employment-intensive, export-oriented manufacturing. After taking due account of differences in contexts and time periods, international experience – especially in Asia but also in Africa-region leaders such as Mauritius – points to employment-intensive manufacturing as a crucial and indispensable step in the transition from poverty to development.

David Booth, Linda Calabrese and Frederick Golooba-Mutebi, July 2017

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One of the keys to economic transformation across Africa today is a greater role for employment-intensive, export-oriented manufacturing. After taking due account of differences in contexts and time periods, international experience – especially in Asia but also in Africa-region leaders such as Mauritius – points to employment-intensive manufacturing as a crucial and indispensable step in the transition from poverty to development.

Rwanda is – along with Ethiopia – exceptional in Africa in that it has in place a nation-building project centred on the aim of economic transformation. Features of its political economy also mean Rwanda lends itself easily to comparison with the best-documented experiences in Asia. This paper explores the ways in which international experience of success in manufacturing-based economic transformation can provide valuable insight for Rwanda, in the areas of government coordination, engagement with and representation of the private sector, and the experimental learning process.

Photo credit: UNIDO, 2016 via Flickr

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

Linda Calabrese (Senior Research Officer, ODI)
Manufacturing has finally taken a central place in the policy and economic debate in East Africa. Not so long ago, industrialisation was largely ignored but it is now widely understood that the manufacturing sector is crucial in creating employment and spurring growth in the region. The second East African Manufacturing Business Summit in Kigali brought together regional institutions, national governments and private sector bodies from East African Community (EAC) countries to discuss the future of East African manufacturing.

Linda Calabrese (Senior Research Officer, ODI)

30 June 2017

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

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

1. East African manufacturing needs more than protection

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

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

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

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

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

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

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

3. Ambitious plans require gradual implementation

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

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

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

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

4. Manufacturing investors need to tap new sources of finance

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

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

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

What is the future for manufacturing in East Africa?

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

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

 

Photo credit: UNIDO via Flickr

 

Financing Manufacturing in Africa: Macroeconomic Conditions and Mobilising Private Finance

Phyllis Papadavid and Judith Tyson, June 2017

Since the downturn in global commodity prices in 2015, sub-Saharan Africa’s macroeconomic conditions have deteriorated, with 2016 seeing the worst economic growth in more than two decades. To maintain progress in economic transformation, employment-intensive and higher-productivity sectors need to be developed. Manufacturing – including agricultural processing – offers this opportunity, including through participation in regional and global value chains. In order for the sector to get the investment it needs, the promotion and mobilising of private financing will be crucial.

Phyllis Papadavid and Judith Tyson, June 2017

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Since the downturn in global commodity prices in 2015, sub-Saharan Africa’s macroeconomic conditions have deteriorated, with 2016 seeing the worst economic growth in more than two decades. To maintain progress in economic transformation, employment-intensive and higher-productivity sectors need to be developed. Manufacturing – including agricultural processing – offers this opportunity, including through participation in regional and global value chains. In order for the sector to get the investment it needs, the promotion and mobilising of private financing will be crucial; however, this mobilisation is currently muted and, despite growing in absolute terms in the past decade, is not sufficient to support strong growth in the manufacturing sector.

These two complementary papers explore the current financing environment for manufacturing in sub-Saharan Africa including constraints on both investors and manufacturers, and offer suggestions for how barriers might be overcome with tailored policy solutions. The paper on conditions examines macroeconomic financing constraints in Kenya, Rwanda and Liberia in order to assess why manufacturing growth may have fallen behind services in these three countries at various stages of development. The paper on mobilising financing, meanwhile, looks at disparities between finance flows to the manufacturing sector and to others such as financial services, as well as the disparity between the financing of manufacturing in larger economies such as Ethiopia and Nigeria (which together account for 66% of financing manufacturing in the region) and in fragile and conflict-affected states. Finally, it offers policy recommendations to tackle these issues that include the expansion of impact accelerator funds and the supporting of value chain development.

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

 

Photo credit: Hawassa Industrial Park, SET Programme, Overseas Development Institute ©

Linda Calabrese & Stephen Gelb (ODI) | Are factory jobs good for the poor? Evidence from Myanmar

 

Linda Calabrese (Senior Research Officer, ODI) & Stephen Gelb (Principal Research Fellow – Team Leader, private sector development, ODI)

27 June 2017

Recently The New York Times published an article by Christopher Blattman (Columbia University) and Stefan Dercon (Oxford University and DFID) questioning the poverty-reduction effect of sweatshop work in developing countries. They carried out a randomised experiment, which ended in 2013, with almost 1,000 Ethiopian jobseekers, placing some in factory jobs in one of five factories, providing a second group with some entrepreneurship training and a modest grant, and leaving the rest to find an income however they could. One year down the line, two thirds of the first group had left their manufacturing jobs, while those who remained were working longer hours, earning less and facing more work-related health hazards compared with those in the second group.

Blattman and Dercon conclude that their study shows factory work is not an ‘escalator out of poverty’, saying ‘everything we believed [before the study] would turn out to be wrong’. They argue that the study has shaped their views of factory work: ‘In the short run, workers seem to share few of the benefits but a heavy burden of the risks’ from industry. This is hardly surprising for those who know the industrial sector in developing countries today (remember the Rana Plaza fire in Bangladesh 2013?) or indeed the history of manufacturing in now-industrialised countries (remember Dickens?).

Apart from the well-known methodological problems of Randomised Control Trials (RCTs), as experimental studies are known, we do not think that one study of 1,000 people and five factories in one country can or does tell us nearly enough about the costs and benefits of industrialisation as a development path. And as Blattman and Dercon themselves acknowledge, ‘we simply do not know of any alternative to industrialisation. The sooner that happens, the sooner the world will end extreme poverty.’ They suggest that the difficulties faced by the factory workers in their study resulted from deficiencies in the businesses – bad, or at least very inexperienced, managers – and the absence of policies providing social protection.

Blattman and Dercon’s findings are echoed in our recently published paper on foreign direct investment in Myanmar from China and elsewhere, which examined the clothing and shoe industries amongst others. Myanmar’s income per capita is around double that of Ethiopia. We did not do any experiments, but we conducted several dozen interviews of firm managers, local representatives of clothes buyers such as large European retailers, and NGOs working with management and workers to upgrade business performance.

The clothing industry has expanded rapidly since EU sanctions on imports from Myanmar were lifted in 2012, and further expansion is expected because US sanctions were lifted last September. The industry employs close to 200,000 workers in about 340 firms, of which about 180 are foreign-owned, though many that are officially locally owned have silent or hidden foreign partners.

One of the attractions of Myanmar for the garment industry is that wages are low while productivity is relatively high – not as high as in China, but above most African countries, according to the managers we spoke to. Managers complained to us that high worker turnover was one of their biggest challenges, along with unreliable electricity, bad roads and the difficulty of finding skilled workers. A study conducted on a sample of less than 200 firms showed that in one year, the average firm lost around 40% of its workers – with peaks of 57% in the garment sector.[1] Many workers live in slums outside the industrial areas, with no access to water or electricity.[2] Rural–urban migration flows push many rural dwellers into urban centres.[3]

There are factories with unpleasant working conditions for the predominately female and young workforce – very hot factories, often poor or no drinking water or sanitation facilities, long working hours. But the story is mixed – we also visited a Hong Kong-owned factory supplying garments to the UK and Europe, where workers enjoyed a good working environment including a canteen and on-site medical staff. Since it opened, this factory has experienced very low turnover.

Learning how to manage

Blattman and Dercon point out that their own intervention in the hiring process of the five factories they studied introduced a degree of organisation unknown to the managers. This again is unsurprising – new industries, new factories, so also new managers. In Myanmar, we found the same: foreign factories employ foreign managers almost exclusively, and domestic managerial skills are lacking. Interestingly, in one Asian-owned factory we visited, the managers and technicians were mostly from Madagascar and Mauritius, African countries that have developed successful garment industries and are now exporting their skills.

Scarce management capabilities are undoubtedly one of the major constraints facing development. We recommend in our report that Myanmar prioritise developing technical and managerial skills by setting up tertiary training institutes specifically for the garment industry, as was done in Bangladesh. Foreign managers provide a short-term solution, but in the long run Myanmar and Ethiopia need to develop their own talent pools.

The path to better wages and working conditions: pressure from below and from above

Myanmar also shows how the industrialisation path itself can lead to improved wages and working conditions, as political dynamics play out within the garment sector. On the one hand, the large workforce enables organisation and collective action, which presses governments to regulate labour markets better and raise standards. Trade unions were made legal in Myanmar in 2012,[4] and union pressure and workers’ strikes contributed to the introduction of a minimum wage in 2015.[5] At 3,600 kyat (less than $3/£2) per day, the minimum wage level is among the lowest in the region, which is significant for firms’ international competitiveness.[6] Before the introduction of the minimum wage, many – probably most – factories paid their workers much less, and the low wages forced them to work long hours to top up meagre incomes with overtime.[7]

Pressure from workers’ organisation – ‘below’ – is complemented by pressure from ‘above’. The garment sector globally is dominated by large retailers and clothing brands, and many of these buy clothes produced in Myanmar: H&M, Primark, Marks & Spencer and The Gap, for example.[8] In fact, we found that these large buying corporations are often significant in influencing existing suppliers in China or elsewhere in Asia to start up a production operation in Myanmar, so they are contributing to the country’s industrialisation. And the buyers are also very important in influencing supplier factories’ behaviour. The buyers face consumer (and NGO) pressure from their customers in rich countries, who do not want goods made by exploited, unsafe or insecure workers or produced by child labour. Retailers and brands demand in turn that their suppliers maintain good labour standards – and they have the power and influence to monitor and enforce such standards. For example, global retailers supported the introduction of the minimum wage.[9]

Little surprise, then, that a large systematic survey of garment firms (Tanaka, 2017) showed that employment and safety conditions, wages, union recognition, fire safety and health care were better in exporting firms (almost all with official or hidden foreign ownership) than in non-exporters.[10] Turnover rates were also lower in exporting factories, possibly because they offer better labour conditions.

Of course, not all firms are exporters, but exporters show the way by creating an upward pull that, together with worker demands, places pressure on non-exporters, at least those in the same industry. Eventually, as current circumstances in China illustrate, and as Blattman and Dercon acknowledge, these upward pressures force firms to adopt new strategies – to introduce new technology with improved productivity and higher incomes, or indeed to shift to lower-wage locations and start the cycle of improvement there.

Blattman and Dercon do not discuss the broader industrial and political context in which ‘their’ five factories operate in Ethiopia. But we would surmise that Ethiopia is at an even earlier stage on the path than Myanmar, so that some of the dynamics already strongly in play in Myanmar are only just emerging in Ethiopia.

Entrepreneurs out of necessity, or factory workers?

Of course, we recognise that this upward path is not inevitably followed, and neither is progress along it smooth and linear. There are setbacks for workers even in rich countries, as we see with the recent spread of the ‘gig economy’ and zero-hours contracts. And the industrialisation path excludes many people, at least from its direct benefits: the 200,000 employed in Myanmar garments is a large number but not nearly enough to absorb the 56% still working in agriculture[11] or the millions doing informal work in the cities.

Such ‘necessity entrepreneurship’ by people aiming to survive is – realistically – the only option for many, even most, people in developing countries, and will remain so for a long time yet. Blattman and Dercon found that the people in their study who were given a short business training and a small grant had a slightly higher average income at the end of the one-year study than those in the factories. This is positive, but is it enough for a ‘solution’, enough for either poverty reduction or sustained income growth? Industrialisation drives strong growth in incomes and productivity, and we would argue that these benefits are essential to lift informal incomes as well. The need for social protection systems that are adequate in both their levels and their coverage is crucial, as Blattman and Dercon insist. But, to reiterate their conclusion, the sooner industrialisation happens, the better for ending extreme poverty. It is not a choice: the response to the challenges of industrialisation is not to forego it but to do it faster and better.

This blog has been released alongside a briefing and longer study on foreign direct investment and economic transformation in Myanmar which can be found here.

Media coverage

Torino World Affairs Institute, 2 August

Myanmar Times, 9 August

Fibre2fashion, 10 August

Myanmar Times, 18 August

References:

[1] Bernhardt, T., Kanay De, S. and Thida, M.W. (2017) Myanmar labour issues from the perspective of enterprises: Findings from a survey of food processing and garment manufacturing enterprises, ILO, CESD, GIZ.
[2] Theuws, M. et al. (2017) The Myanmar Dilemma: Can the garment industry deliver decent jobs for workers in Myanmar? SOMO, ALR, LRDP.
[3] See, for example, Qualitative Social and Economic Monitoring (2016) A country on the move: domestic migration in two regions of Myanmar. World Bank Group.
[4] Zajak, S. (2017). ‘Trade union building in Myanmar’, Open Democracy, 17 February (https://www.opendemocracy.net/sabrina-zajak/trade-union-building-in-myanmar).
[5] Reuters (2015) ‘Myanmar sets $2.8 daily minimum wage in bid to boost investment’ (http://www.reuters.com/article/us-myanmar-economy-wages-idUSKCN0QY0A620150829).
[6] Bernhardt, T., Kanay De, S., Thida, M.W. and Min, A.M. (2016) ‘Myanmar’s new minimum wage: What’s next? Policy considerations for the way forward’. CESD Labor Market Reform Working Paper No. 1/2016.
[7] Bernhardt T., Kanay De, S. and Thida, M.W. (2017) Myanmar labour issues from the perspective of enterprises: Findings from a survey among food processing and garment manufacturing enterprises, ILO, CESD, GIZ.
[8] Oxfam (2015) ‘Made in Myanmar: Entrenched poverty or decent jobs for garment workers?’. Oxfam Briefing paper no. 209.
[9] Tudor, O. (2015) ‘Burma: Unions, global brands and NGOs back minimum wage for all’. Stronger Unions, 16 July (http://strongerunions.org/2015/07/16/burma-unions-global-brands-ngos-back-minimum-wage-for-all/).
[10] Tanaka, M. (2017) ‘Exporting Sweatshops? Evidence from Myanmar’ (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2938903).
[11] Raitzer et al. (2015) Myanmar’s Agriculture Sector: Unlocking the Potential for Inclusive Growth. ADB Economics Working Paper Series, No. 470.

 

 

Photo credit: NYU Stern BHR via Flickr

Financing Manufacturing in Rwanda

Linda Calabrese, Phyllis Papadavid and Judith Tyson, June 2017

Rwanda is one of Africa’s “rising stars”. The country’s economy has seen solid rates of economic growth since the civil conflict in the mid-1990s. Strength in investment flows has followed in the path of this macroeconomic and institutional stability. As this paper highlights, a large part of Rwanda’s success has been the result of proactive policies undertaken by the government of Rwanda in facilitating a good domestic investment climate, which have been conducive to strong rates of growth in FDI into the economy.

Linda Calabrese, Phyllis Papadavid and Judith Tyson, June 2017

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Rwanda is one of Africa’s “rising stars”. The country’s economy has seen solid rates of economic growth since the civil conflict in the mid-1990s. Strength in investment flows has followed in the path of this macroeconomic and institutional stability. As this report highlights, a large part of Rwanda’s success has been the result of proactive policies undertaken by the government of Rwanda in facilitating a good domestic investment climate, which have been conducive to strong rates of growth in foreign direct investment (FDI) into the economy.

Despite the country’s successes, though, developments in manufacturing have not been as encouraging: the sector’s share of the economy and exports is still small. The report aims to analyse Rwanda’s financial backdrop, and the composition of its investment flows into manufacturing, with a view to exploring constraints and opportunities in manufacturing.

In analysing financial and economic challenges, this paper concludes that high transport and utility costs, the elevated real effective exchange rate and weakness in bank lending are key challenges to be tackled. Looking ahead, special economic zones should continue to be a focus alongside export-oriented investments; prudential measures could target manufacturing finance and disincentivise overly high levels of real estate lending

 

Photo credit: A’Melody Lee / World Bank (Flickr)

Phyllis Papadavid (ODI) | How a weaker US dollar could support economic transformation

 

Phyllis Papadavid (Senior Research Fellow – Team Leader of International Macroeconomics, ODI) 

19 June 2017

Further US dollar weakness

The US dollar rose by 5% in trade-weighted terms following the US election of President Trump in November 2016.[1] Since its peak at the end of December 2016, the dollar has reversed all of its post-election rise (see Figure 1).

The continued erosion of expected growth-enhancing policy reforms means that many financial forecasters now expect the dollar to decline further.[2] This could negatively impact US growth while also dampen US dollar prospects – a financial environment exacerbated if President Trump, or members of his administration, continue to argue that the dollar is ‘too strong’.[3]

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Implications for Africa’s growth prospects

Dollar weakness could have multiple impacts on economic transformation in sub-Saharan Africa (SSA). Some impacts are negative: for example, the value of dollar-denominated reserves held by SSA economies has declined; and SSA’s exports may become relatively more expensive as the dollar depreciates. However, dollar weakness also lowers the value of dollar-denominated debt, which would alleviate some fiscal constraints for highly indebted economies.

Importantly, US dollar weakness is emblematic of a fundamental shift in US growth expectations. This shift could be catalytic for growth and economic transformation in developing countries: if investors’ risk appetite stay resilient, external investment could flow to emerging and developing economies at a time of reduced willingness to hold dollar-denominated investments.

The Overseas Development Institute’s March 2017 Shockwatch Bulletin highlighted the multiple spillover effects already seen in SSA domestic economies, a result of the dollar’s 28% trade-weighted appreciation from 2011 to 2016. These included record SSA currency depreciations against the dollar (including in Ghana, Mozambique, Tanzania and Zambia) and investment outflows, particularly from economies with ‘twin’ deficits in their external current and fiscal accounts (such as in Mozambique and Ghana).

Pathways to catalyse economic transformation

Dollar weakness could catalyse and improve the prospects for economic transformation. First, SSA inflation could moderate and stabilise in certain economies if SSA exchange rates strengthen against the dollar. Lower inflation would also reduce the need for SSA policy rate rises, which could lower firms’ borrowing costs. Ultimately, lower inflation could result in reducing countries’ real effective exchange rates (REERs)[4] – a key measure for facilitating manufacturing export competitiveness in aid of successful economic transformation.

Second, with an uncertain US policy outlook, a reduced willingness to hold US assets could increase investments abroad, particularly in emerging and developing economies offering a higher return. This would benefit SSA economies that have streamlined and transparent investment processes (such as in Rwanda) or resource-related investment prospects targeted to manufacturing growth. Both financial and foreign direct investment inflows could alleviate financing constraints and help to support SSA countries’ economic transformation agendas.

Policy response matters

The impact of a weaker dollar, and potentially weaker US growth prospects, depends on governments’ responses.

In some SSA economies where competitiveness has been problematic – such as in Kenya and Rwanda – cost and price reductions would help facilitate a lower REER. This can be achieved in part through deregulation and ending price subsidies in certain sectors. Undervalued currencies, aided in part by central bank intervention, have typically helped growth.[5] In Ethiopia and Tanzania, there is evidence that a weaker REER boosts exports and diversification.[6] By contrast, currencies that are fixed, or managed at an unsustainable rate by central banks – such as in Nigeria – act as a tax on exports exacerbating progress on economic transformation and reducing countries’ foreign exchange reserves.

Equally, when it comes to inward investment into SSA, investment authorities and ministries of finance could play a greater role in channelling financial inflows to support manufacturing in SSA. Financial liberalisation could lead to lower lending rates for firms amid increased competition. It could also result in more favourable financing rates for SSA economies issuing government and corporate debt supporting strategic sectors in the economy to transform growth. Similarly, domestic incentives could be put in place too by investment authorities for foreign direct investment to flow to new industries. This enables diversification, which is particularly important in economies where growth has been largely linked with extractive industry rather than economic transformation.

 

 

[1] The broad dollar index is a weighted average of the foreign exchange values of the US dollar against the currencies of the US’s largest trading partners. See: https://www.federalreserve.gov/releases/h10/weights/default.htm.

[2] https://www.bloomberg.com/news/articles/2017-05-18/citigroup-says-it-s-time-to-sell-the-dollar-for-the-summer

[3] https://www.wsj.com/articles/trump-says-dollar-getting-too-strong-wont-label-china-currency-manipulator-1492024312

[4] We define the REER as the nominal effective exchange rate multiplied by the ratio of domestic to foreign prices. The nominal effective exchange rate is the country’s trade weighted exchange rate relative to its major trading partners.

[5]Habib, M.M., Mileva, E. and Stracca, L. (2016) ‘The real exchange rate and economic growth: Revisiting the case using external instruments’. Working Paper 1921. Frankfurt: European Central Bank.

[6] Wondemu, K. and Potts, D. (2016) ‘The impact of the real exchange rate changes on export performance in Tanzania and Ethiopia’. Working Paper 240. Tunis: African Development Bank.

 

Photo credit: Staff Sergeant Tom Robinson via Flickr

First published on www.odi.org.

10 Policy Priorities for Transforming Manufacturing and Creating Jobs in Kenya

Anzetse Were, Dirk Willem te Velde and Gituro Wainaina, June 2017

Developed by SET in partnership with the Kenya Association of Manufacturers (KAM), this booklet addresses Kenya’s current economic predicament and makes the case for political and financial investment in manufacturing. The central 10-point policy plan lays out seven policies and regulations that should be enacted to create a conducive environment for manufacturing to flourish, and three further suggestions for how to implement them in practice.

Anzetse Were, Dirk Willem te Velde and Gituro Wainaina, June 2017

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The Kenyan manufacturing sector has the potential to transform the Kenyan economy and kick-start a process of industrialisation that could create hundreds of thousands of jobs and improve livelihoods across the country. However, to make this a reality by 2022 will take a concerted and coordinated effort by both government and the private sector.

Developed by SET in partnership with the Kenya Association of Manufacturers (KAM), this booklet addresses Kenya’s current economic predicament and makes the case for political and financial investment in manufacturing. The central 10-point policy plan lays out seven policies and regulations that should be enacted to create an environment in which the sector can flourish, and three further suggestions for how to implement them in practice.

The 10-point policy plan aims to support Kenya’s manufacturing sector, by presenting seven priorities for public policy and regulation to improve manufacturing competitiveness, and a further three recommendations on implementation explain how to make this happen.

Media coverage

Business Daily, 5 July

XinhuaNet, 5 July

The Standard, 6 July

Mediamax, 6 July

The Star, 6 July

Coastweek.com, 7 July

KBC Channel 1, 7 July

Liex Consult, 10 July (blog)

Business Daily, 16 July

The East African, 25 July

Photo credit: j_cadmus via Visual Hunt  | CC BY 2.0

5 June 2017 | ACET PACT Manufacturing Chapter Launch

Manufacturing is also a key element in the African Development Bank’s Hi-Fives (Industrialize Africa) and a priority area in Goal number two of the African Union’s Vision 2063. ACET in partnership with the Oversees Development Institute (ODI) and the Government of Ethiopia organised the manufacturing chapter meeting of PACT. The aim of the manufacturing meeting was to kick start a continuous conversation for African leaders to shape their countries’ industrialisation issues in the context of Africa’s transformation agenda.

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Africa’s experience with manufacturing has been mixed. Despite bursts of growth in the 1960s and mid-1980s, Africa currently has less formal manufacturing than any region of the world (lower than 10% share of gross domestic product, GDP, in most countries). In the early days of independence, governments across the continent sought to promote manufacturing with large state-owned enterprises, however macroeconomic instability, competition from exports and rising production costs, led to a decline in the manufacturing share of GDP in many countries.

Manufacturing is among eight core issues identified as vital to Africa’s economic transformation during the African Transformation Forum jointly convened by the Government of Rwanda and the African Center for Economic Transformation (ACET) in March 2016 in Kigali. The main outcome of the forum was the launch of the Pan-African Coalition for Transformation (PACT), a network designed to bring together key stakeholders around shared themes to speed up economic transformation in Africa. PACT identified eight core pathways and drivers to economic transformation.

Manufacturing is also a key element in the African Development Bank’s Hi-Fives (Industrialize Africa) and a priority area in Goal number two of the African Union’s Vision 2063. Africa currently has less formal manufacturing than any region of the world and in order for it to break into the global market; there are a number of interdependent challenges to overcome.

ACET in partnership with the Overseas Development Institute (ODI) and the Government of Ethiopia organised the manufacturing chapter meeting of PACT. The aim of the manufacturing meeting was to kick start a continuous conversation for African leaders to shape their countries’ industrialisation issues in the context of Africa’s transformation agenda. The main objectives of the meeting was to:

  • Develop a shared understanding of the manufacturing landscape in Africa, key challenges and opportunities;
  • Explore practical solutions to key issues by learning from country experiences in six countries Tanzania, Kenya, Uganda, Rwanda, Mozambique and Ghana;
  • Introduce the vision and objectives for the PACT Manufacturing Chapter, understand country priorities and discuss next steps for chapter membership and engagement.

The meeting brought together about 40 industry experts and senior officials from key government ministries, departments and agencies from selected African countries, development partners, civil society organizations, academia and the media.

Follow #PACT2017 #Manufacturing2017 to join the debate and email Freda Yawson (fyawson@acetforafrica.org) for more information on ACET.

Media coverage

Online

Anzetse Were, Business Daily Africa, 11 June 2017

The Reporter Ethiopia, 10 June 2017

All Africa, 15 June 2017

 

 

 

Phyllis Papadavid (ODI) | What ‘stagflation’ means for economic transformation

 

Phyllis Papadavid (Senior Research Fellow – Team Leader of International Macroeconomics, ODI) 

15 May 2017

‘Stagflation’ risks could rise

According to the International Monetary Fund (IMF), recent global manufacturing activity and global trade is showing some signs of recovery. The start of 2017 saw world trade volumes expand by an average 10% annualised rate, compared to only 2% at the start of 2016. Industrial production grew too, at a 5% rate compared to a 0.3% contraction at the start of 2016. Yet the IMF’s recovery forecast for 2017 is likely to be too optimistic, particularly for undiversified emerging and resource-dependent developing economies.

The 20% rebound in oil prices since August 2016 will help commodity exporting countries. However, the current rebound is not sufficient to offset past revenue losses and unlikely to support economic transformation. Inflation pressure has also been heightened, owing to both commodity price developments and domestic factors. At 17%, emerging economies’ producer price inflation has risen even higher than the global average, which stands at 12% year-on-year, according to the IMF. Given this, some economies may see an uptick in both growth and inflation. But for those economies that have not engaged in economic transformation, a combination of slower demand and higher inflation, or ‘stagflation’ could be on the horizon.

Overly loose macroeconomic policies can also create a stagflationary environment. The risks of stagflation are important: it could lead to weakness in much needed productivity-enhancing investments and may indicate an over-optimistic IMF forecast for Africa’s growth prospects more broadly. Commodity exporters, such as Nigeria and Angola look particularly vulnerable. The rise in commodity and oil prices has contributed to better growth; and yet, this is likely to be short-lived given their lack of diversification and economic transformation.

Impact on resource producers

Despite its upbeat global growth outlook, the IMF warned that the risks for lower growth and higher inflation were not necessarily reflected in the moderate upturns forecast for Africa’s larger economies in 2017. The global economy is facing potentially damaging structural and institutional changes through increased protectionism and eroding global institutional coordination. In this uncertain context, emerging markets and developing economies may find themselves operating in a less supportive external environment. Appropriate and timely country-level policy responses will be essential for African economies to successfully engage in and pursue long-term transformative growth.

For commodity exporters, such as Nigeria and Angola, the rise in commodity and oil prices since August 2016 has contributed to a recovery in their revenues. However, these gains are unlikely to offset the past losses, which suggests the period ahead will be one of difficult continued adjustment. The additional challenges of weak external positions, rising debt and depreciated currencies will affect other commodity exporters too, such as Ghana and Zambia, heightening stagflation risks and damaging investment prospects. It is not clear that these price rises, though inflationary, are enough to generate sustained growth and investment to facilitate economic transformation.

Further still, some commodity and oil exporters continue to show a wide gap between their growth and inflation rates. For example, Nigeria has seen its growth rate drop to -1.5% in 2016 from 2.7% in 2015, while Angola saw no growth in 2016 following a 3% growth rate in 2015. Meanwhile, inflation has increased in both Nigeria – from 9.5% in 2015 to 19% in 2016 – and Angola – from 14% in 2015 to 42%, according to the IMF. There has been a recent recovery following the 50% collapse in oil prices between 2014 and 2015. However, the terms-of-trade have not improved substantially, while rising interest rates in response to inflationary currency depreciations suggest weaker growth prospects, rather than a recovery in 2017.

Mitigating difficult global conditions ahead

Significant risks associated with stagflation include the accumulation of unwanted external and domestic liabilities, which culminate from export and revenue losses in the absence of renewed and sustained growth. This would hurt the investment climates in Africa’s emerging and developing economies, given the likelihood of high borrowing costs. Debt accumulation would also hurt the ability of these economies to attract foreign investment to initiate or follow-through with productivity-enhancing investments essential for economic transformation. For economies that have recently increased their sovereign debt issuance significantly, stagflation could even lead to more defaults.

African economies could look to mitigate these risks in a number of ways. Governments could strengthen their institutional frameworks to streamline investment processes. This will enable them to more easily facilitate inward long-term investment, rather than speculative flows. Economies with large current account deficits that are also undiversified and not yet engaged in significant transformation, should look at measures to reduce imports of non-investment goods, albeit temporarily. In economies such as Angola’s, fiscal consolidation is needed more than the current election-related spending pledges. Finally, this series has previously argued strongly for exchange rate flexibility in Nigeria to support exports and mitigate investment uncertainty.

Without these mitigating measures, the slower growth in export and fiscal revenue combined with past borrowing, risks contributing to a poor investment climate. And without attempts to stabilise respective domestic macroeconomies, efforts at economic transformation could slow alongside weaker growth and elevated inflation.

 

Photo credit: Jonathan Ernst/The World Bank via Flickr

First published on www.odi.org.