Sherillyn Raga (ODI) | Will the US-China Trade War Derail Economic Transformation Prospects in the Poorest Economies?

Sherillyn Raga (Senior Research Officer, ODI)
5 July 2019
Last weekend, the G20 Leaders discussed a range of important global economic issues from innovation to climate change, among many others. Of particular interest to many, however, was how the G20 Leaders might apply political pressure to halt the ongoing US-China trade tension, given its impact in and beyond G20 member countries. This blog examines how a prolonged trade war might spillover to non-G20 low and middle income countries through lower global demand, changes in bilateral trade patterns, possible dumping and changes in relative exchange rate positions, and hence prospects for economic transformation. To address the possible consequences of the trade war, regulators should consider calibrating targeted sectoral interventions and forward-looking policy toolkits, diversifying external trade and investment partners, and building fiscal and balance of payment space moving forward.

Sherillyn Raga (Senior Research Officer, ODI)

5 July 2019

Last weekend, the G20 Leaders discussed a range of important global economic issues from innovation to climate change, among many others. Of particular interest to many, however, was how the G20 Leaders might apply political pressure to halt the ongoing US-China trade tension, given its impact in and beyond G20 member countries. This blog examines how a prolonged trade war might spillover to non-G20 low and middle income countries through lower global demand, changes in bilateral trade patterns, possible dumping and changes in relative exchange rate positions, and hence prospects for economic transformation. To address the possible consequences of the trade war, regulators should consider calibrating targeted sectoral interventions and forward-looking policy toolkits, diversifying external trade and investment partners, and building fiscal and balance of payment space moving forward.

Trade war spillover channels: short-term risks, medium-term implications

While the G20 Leaders Declaration emphasises the importance of a “free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment”, the Leaders were unable to convince Presidents Trump and Xi to end their protracted trade dispute. Given the size of these two economies, persistent trade tensions will inevitably disrupt growth and prospects of economic transformation in the following ways.

Moderated global demand and activity

A worsening of the trade war and an increase in retaliatory tariffs will drive up prices of imports and goods with intermediate imported inputs, consequently lowering US and Chinese consumption. The US and China alone are responsible for 22% of global imports and contribute 40% to global GDP.  Lower US and Chinese consumer demand will thus drive down export production and investments abroad, reducing overall global income and activity. This is reflected by the deceleration in global economic growth which coincided with the imposition of US and then Chinese tariff increases in 2018, from 3.8% in the first half to 3.2% in the second half of 2018.

The IMF estimates that the current trade spat will cost 0.5% of global GDP in 2019. If the planned US-China tariffs are extended to all traded products from both countries, the IMF expects that global output will be further reduced by 0.3% in 2020. Continued weak global performance and outlook can disrupt the momentum in high-productivity exports, foreign direct investment and global value chain (GVC) firms, thereby affecting the process of economic transformation globally.

Change in bilateral trade patterns

While the global economy will lose out in net terms from the US-China trade war, Chart 1 shows some exporters are well placed to gain temporarily. For example, US imports from Vietnam rose by 40% year on year (yy) over the year to January – April 2019, while US imports from China fell by 13% during the same period, according to the Financial Times. In particular, as of the second quarter of 2019, processing of industrial products and manufacturing is Vietnam’s fastest growing sector at 9.15% growth yy, followed by services at 6.9%, and agriculture at 2.9%–an indication of how the trade war is accelerating the movement of Vietnamese resources to high productivity sectors. Overall, the ADB estimated that if the US-China trade war escalates further, Vietnam could potentially gain up to a cumulative of 2% of GDP in the next 3 years primarily because Vietnam exports many of the Chinese products affected by the US tariffs. Cambodia’s garment manufacturers were also assessed to gain from the trade war, and this may have contributed to the 32% yy growth in the value of Cambodian export goods in 2018. While statistics are pointing to gains for Cambodia and Vietnam, analysts suggest these gains may be short-lived because of domestic risks, such as Cambodia’s high labour costs, lack of business-supporting infrastructure and relatively lower productivity as well as the risks surrounding Vietnam’s real-estate boom and higher dependency on foreign capital.

Meanwhile, China’s imports from the US sharply moderated to 0.9% growth in 2018 from 14.2% growth in 2017. China’s tariffs targeted mostly US agricultural products such that trade diversion is evident in the 63% quarter on quarter growth of China’s largely soybean imports from Brazil in the last quarter of 2018. Even prior to the US-China trade war, Brazil was a top global soybean exporter. In anticipation of added demand from China, Reuters reports that Brazil’s soy plantations have expanded by 2 million hectares, while sugar cane land have shrunk by nearly 400,000 hectares. Brazil is consequently at risk of“de-industrialisation” as a result of shifting its resources to agriculture. Since this shift is focused heavily on soybeans, the absence of vertical and horizontal diversification could make the Brazilian economy vulnerable.

China’s export oversupply and dumping in developing countries

If the changing bilateral patterns have led to the sourcing of tariff-affected imports from sources other than China and US, then who will consume American agricultural exports and Chinese intermediate manufactured goods? In the US, soybean prices have become much cheaper and those that cannot be exported are mostly stored. The government has also earmarked US$12 billion to help its farmers weather the fall-out. But what about excess supply from China?

One possibility is to offer China’s excess exports to other markets at very competitive prices, including below the price at which these products could have been sold in the Chinese market (i.e., dumping). Supply of relatively cheaper imports not only increases a country’s trade deficit, but importantly, also pushes consumers away from relatively expensive domestic counterpart products. This depresses prices in the import-competing sector, creating a trigger to lay off employees or shut down operations if firms cannot absorb the impacts of competition. This is already happening in India, where an Indian Parliamentary report from July 2018 estimated that dumping of Chinese solar panels resulted in a loss of 200,000 jobs. The report also suggested that an increase in Chinese import shipments across various sectors has forced several micro, small and medium-sized enterprises to exit the market—a setback to India’s target of stimulating its manufacturing sector to at least 25% of GDP.

Exchange rates and risks of financial market contagion

The US has a trade deficit with China (i.e., US imports more than they export to China). At least by magnitude and in the medium-term, the decline in tariff-affected US imports from China will more than offset the loss in US export revenues due to China’s retaliatory tariffs. This will narrow the US trade deficit and induce dollar appreciation. A stronger dollar will strain payment of foreign-denominated debt, especially for countries that already have high levels of debt. As of May 2019, 6 out of the 7 LICs considered to be in high debt distress and 12 out of 25 LICs considered to be at  high risk of debt distress are in Africa.

Conversely, the Chinese Renminbi (RMB) is expected to weaken with the decline of export receipts from the US. This is reflected by movements in the real effective exchange rates in July 2018 when US and China first began to raise tariffs (Chart 2). A weaker RMB makes Chinese products more competitive compared to the rest of the world[1]. This puts pressure on other emerging market currencies to depreciate, especially value chain suppliers to China and Chinese competitors. Given the high exposure of East Asian countries to China and their relatively flexible exchange regimes, currencies in the region have been able to absorb the shock and closely followed the movement of RMB against the US dollar (Chart 3).

However, if tariffs are extended to all traded products between China and US, further depreciation in East Asian currencies will dampen investor appetite for emerging market assets in general. As investors reallocate their portfolios amidst trade uncertainties, fast-moving capital would first be withdrawn from investments in high-risk markets (mostly in LICs) and moved to safe havens. In the case of South Africa, the stock market index lost more than 3% and the Rand depreciated by 4% month-on-month in May 2018 following the US’ hike in tariffs for US$200bn worth of Chinese imports. If global business optimism continues to decline, capital may also flow out from government bonds and FDIs—investments that are critical for sustaining public services and creating jobs in many LICs.

How to address the effects of the US-China trade war in the poorest economies?

An effective, rules-based international trading system would prevent such trade disputes and unfair practices. But as the G20 Summit outcome suggests, even an economically powerful group such as the G20 leaders can barely put pressure on Presidents Trump and Xi to change their respective sovereign policies on trade. With no strong signal of an end to the trade war in sight, we suggest the following approaches for low and middle income countries:

Calibrate a targeted and forward-looking policy approach. While it is tempting for developing economies to weaken their currencies to counteract possible competition or dumping, caution is important. Apart from raising exports, a weak currency also drives up import prices, and this move can be inflationary for net-food importers, a grouping which includes many countries in Africa. Public policies should support productivity-enhancing exports and manufacturing sectors that are directly affected by the trade war. Such policies could include expanding credit lines or providing incentives to sustain operations and investments in technology and skills amidst the trade war. The use of forward-looking policy toolkits such as macroprudential regulations and capital flow management are targeted approaches that can also reduce specific vulnerabilities in the financial sector.

Diversify external partners. China is increasingly becoming a major trading partner, source of FDI, and creditor to governments in African and less developed Asian countries. For these countries, it is unsurprisingly hard to manoeuvre policy options economically and politically, for example, for Uganda to raise the issue of dumping against China. One solution is to balance sources of growth, capital and trade through other bilateral and regional partners. In the case of Africa, boosting partnerships with countries and groupings beyond the US and China, including the African Union/African Continental Free Trade Area and Commonwealth is a starting point.

Build buffers. Developing countries and LICs are structurally diverse and hence external shocks affect economies differently and through various channels. Moving forward, a very effective strategy to shield a country from the unintended consequences of non-economic disturbances is to have buffers (e.g., ample foreign reserves, healthy fiscal balance position) that provide space for monetary and fiscal policies to support high productivity domestic sectors and ensure economic transformation is not derailed by unfavourable external (and in the case of this trade war, also political) developments.

[1] This scenario is more probable at least in the short-term while traders from both sides are holding decisions (e.g., whether they will relocate, divert trade, or change preferences) and government do not intervene heavily in the foreign exchange market.

Photo: Flags of the G20 nations. CC BY-NC-ND 2.0.

Dirk Willem te Velde (ODI) | Trade, technology and China: opportunities or threats for Cambodia’s economic transformation?

Dirk Willem te Velde (Principal Research Fellow, ODI) 24 April 2019 Unless Cambodia addresses a number of short- and long-term challenges related to the impact of trade, technology and China, future pathways for inclusive economic transformation are at risk. As we discuss at greater length in a new SET scoping note in co-ordination with CDRI and support by Australia’s Department of Foreign Affairs and Trade, Cambodia has been the sixth-fastest growing country in the world over the past two decades.However, Cambodia currently also faces major challenges to its hitherto successful growth model and these need a response. The challenges can be summarised as trade, technology and China.

Dirk Willem te Velde (Principal Research Fellow, ODI)

24 April 2019

Unless Cambodia addresses a number of short- and long-term challenges related to the impact of trade, technology and China, future pathways for inclusive economic transformation are at risk. As we discuss at greater length in a new SET scoping note in co-ordination with CDRI and support by Australia’s Department of Foreign Affairs and Trade, Cambodia has been the sixth-fastest growing country in the world over the past two decades. It has reduced poverty and inequality significantly and it graduated to lower-middle-income country status in 2015. It has achieved remarkable growth in exports of garments, attracted record numbers of tourists, expanded agricultural land leading to significant exports of rice, benefited from high commodity prices and recently witnessed a construction boom. It has also shown signs of diversification into bicycles, footwear and, to some extent, maize, vegetables, sugar and palm oil. Special economic zones (SEZs) have played a crucial role in kickstarting manufacturing. However, Cambodia currently also faces major challenges to its hitherto successful growth model and these need a response. The challenges can be summarised as trade, technology and China. In the coming months, ODI and CDRI will examine the implications of digital technology for Cambodia’s future transformation in greater detail, building on our recent consultations.


Cambodia faces the removal of trade preferences in the coming year, if the EU decides to withdraw Everything But Arms preferences as a result of human rights considerations. Cambodia’s exports to the EU make up two fifths of total goods exports. Most-favoured nation tariffs in the EU are 12% on garments and between 8% and 17% for footwear, but so far Cambodia faces zero tariffs. Garments support 700,000–800,000 mostly female low-skilled jobs. Anything that affects the garment sector has direct implications for inclusive economic transformation.

Our interviews in Cambodia for the scoping paper suggest that preferences are perhaps not as important as previously considered, at least in the short run. If firms can absorb a change in minimum wages from $60 in 2010 to $182 per month currently, they may also be able to absorb the (smaller) changes in preferences. However, it is likely that a loss in preferences would lead to lower sectoral growth than would otherwise have been the case. Hence, Cambodia needs urgently to improve competitiveness by enhancing skills, improving infrastructure and streamlining regulation and licences (and in addition to improving its human rights record).

Digital technology

The digital economy is advancing rapidly globally, and low- and lower-middle-income countries will not be excluded. Cambodia aims to become a digital economy, although this may take some time. Rather than fearing the labour impact of digitalisation on labour-intensive SEZs and garment activity, Cambodia needs to harness the digital economy for its competitiveness. One core element in this is the importance of ensuring the appropriate skills are available (especially cognitive skills to undertake non-routine tasks).

Our discussions in Cambodia suggested there is no agreed policy framework within which to consider how Cambodia can prepare for a digital economy in a comprehensive way. Cambodia needs to consider the future of specific sectors and activities; who would be the main gainers and losers from this; how skills can be developed to prepare for a digital economy; and especially how the poorest can also benefit from digitalisation. Interviews with manufacturing firms suggest there is still little awareness of the changes that may come sooner rather than later.

Prime Minister Hun Sen recently held a speech at a Cambodia Development Resource Institute conference on digital transformation. He argued that actions to date include the development of the Cambodia Information and Communication Technology Masterplan 2020, the drafting of the Cambodia e-Government Master Plan, the establishment of a Data Management Centre and the promotion of a legal framework for the digital ecosystem. But there are also challenges, such as building infrastructure to support the digital sector; developing an e-payment system and logistics network; creating a digital platform and developing an ecosystem; and promoting government digitalisation, entrepreneurship, digital literacy and open data. The Supreme National Economic Council has established a working group to formulate a digital economy policy framework. Cambodia needs to act urgently to become more engaged in the digital economy.


Cambodia has turned to China in recent years for economic support. On the one hand, this can lead to significant benefits. China brings billions of dollars of investment to Cambodia (responsible for much more than half of foreign direct investment in recent years), catering to 2 million Chinese tourists in Cambodia; investing in hotels and casinos; investing in SEZs whose firms utilise low-cost labour and trade access in the EU and US; and offering a large market for Cambodia’s exports.

But such engagement increases dependencies and may fail to bring significant benefits for Cambodia’s economic transformation. For example, the firms in the Sihanoukville SEZ have few incentives to upgrade, and have few linkages with the local economy, posting questions related to transformation in the future. The casino economy may cater to Chinese tourists, but it is not clear how this helps transform Cambodia’s economy. Complementary policies (e.g. innovation policies, skills development, casino taxes) are crucial to ensure engagement with China supports economic transformation.

The SET programme will in the near future engage around Cambodia’s economic transformation, especially with respect to the opportunities and threats of the digital economy and the implications for policies.

Photo: The Special Economic Zone in Khan Posenchey, Phnom Penh. Chhor Sokunthea/World Bank. License: CC BY-NC-ND 2.0.

Neil Balchin, David Booth and Dirk Willem te Velde (ODI) | How economic transformation happens at the sector level

Neil Balchin (Research Fellow ODI, David Booth (Senior Research Associate, ODI) and Dirk Willem te Velde
(Principal Research Fellow, ODI) 9 April 2019 A new Gatsby Africa-ODI paper detailing sector transformation in eleven African and Asian cases shows how sector dynamics depend crucially on correct identification of the economic opportunities, conducive political-economic conditions at the sector level, credible commitments to investors, reasonably good provision of public goods, specific efforts to tackle investment coordination problems and taking advantage of a moment of unusual opportunity.

Neil Balchin (Former Research Fellow, ODI), David Booth (Senior Research Associate, ODI) and Dirk Willem te Velde (Principal Research Fellow, ODI)

9 April 2019

A new Gatsby Africa-ODI paper detailing sector transformation in eleven African and Asian cases shows how sector dynamics depend crucially on:

      • Correct identification of the economic opportunities;
      • Conducive political-economic conditions at the sector level
      • Credible commitments to investors
      • Reasonably good provision of public goods
      • Specific efforts to tackle investment coordination problems; and
      • Taking advantage of a moment of unusual opportunity.

The paper examines six experiences of successful sector transformation: air transport and logistics services in Ethiopia; the automotive industry in South Africa; the revival of the cocoa sector in Ghana; the staple food revolution in Indonesia; garments in Bangladesh; and sector-based strategies in Mauritius. It also considers five cases where sectors did not transform or where a promising initial transformation was not sustained. These cases of relative failure are cashew nuts in Mozambique; pineapples in Ghana; maize subsidies in Malawi in the years 2005–2008; President Kikwete’s rice initiative in Tanzania; and Malaysia’s faltering manufacturing sector.

What did the research find about the factors behind sector transformation?

Correct identification of economic opportunities is a common feature in all the successful transformation examples, although on a variety of different grounds. These range from successful identification of market access advantages for Bangladeshi garments or opportunities to serve Asian markets through Ethiopian air transport services, to supply opportunities in South Africa presented by the global sourcing strategies of original equipment manufacturers (OEMs). However, economic opportunity factors alone do not make it possible to distinguish successes from failures.

All successful cases exhibited positive political-economic relations, at least at the sector level. But the type of relationship varied across the successful transformation experiences, from centralised economic planning enabling state-led development of an airline in Ethiopia or exceptional democratic unity post-apartheid and an effective alignment of interests facilitated through dedicated sector-specific structures and support organisations around South Africa’s automotive industries, to the development of a consensus view across elites and the wider public and private sectors around a strategic direction for the Mauritian economy.

In the failed or disappointing experiences, these relations soured over time, or were weak or entirely absent. Political-economic causes of failure also took a variety of forms, but in almost all cases these were the most decisive factors, either directly or by weakening the public actions required to stimulate or support the investments. In Mozambique, there was a lack of consensus among different actors about necessary reforms in the cashew nut sector. In Ghana, there was little government interest in pineapple production, leaving pioneer investors in the sector to attempt, ultimately in vain, to address the growing infrastructure and learning requirements of remaining internationally competitive. Similarly, the maize sector in Malawi suffered from weakening political support for maize. In Malaysia, dissolving political conditions after the Asian financial crisis and the politics of ethnicity undermined attempts to improve manufacturing performance.

In several of the successful cases, favourable balances of political and economic interests supported transformation because they resulted in credible commitments to investors. In Ghana, this took the form of cross-party political support for the cocoa sector, and the key sectoral institution. In Mauritius, high-level political backing for a consensus view on the desired future direction of the economy was important. In Ethiopia, state investments in air transport were backed by a long-term policy vision designed by a regime that is relatively secure. In South Africa, multi-year policy visions provided a credible platform for long-term planning in the automotive sector. Technically proficient planning and macroeconomic management provided a predictable investment environment for staple agriculture in Indonesia. In Bangladesh, credible commitments came externally in the form of clear international commitments providing market access for Bangladeshi garments.

In failures, such commitments were typically uncertain, undermining investor confidence. For example, the government’s credibility in the case of cashews in Mozambique was undermined by poor communication, the perception that the policy reforms were World Bank-driven and the knowledge that processing could be profitable only with government protection. In Tanzania, the power of food-importing businesses undermined the credibility of the presidential rice initiative and the East African Community’s tariff rules. Political changes in Malaysia removed support for export processing zones and undermined the credibility of investment incentives.

The success cases often included reasonably good provision of public goods. This ranged from coordinated public infrastructure investments in Ethiopia or investments in the construction of automotive industrial parks and targeted transport infrastructure in South Africa to major investments in rural public works in Indonesia and improved telecommunications and power in Bangladesh and Mauritius. In Ghana, the development of quality control systems helped maintain the international price advantage of domestically produced cocoa.

The absence of adequate public goods provision, or related support, was almost always one of the proximate causes in the cases of relative failure. For instance, poor rural roads and weak extension services affected the maize sector in Malawi, while failure on the part of district governments to maintain medium-size irrigation works hampered the presidential rice initiative in Tanzania.

In the successful cases, specific efforts were made to tackle investment coordination problems. In Ethiopia, there was coordination and sequencing of investment in public infrastructure alongside the airline’s own capital investment in key areas such as cargo and maintenance facilities. The South African government devised well-coordinated policies – including import duty credits and productive asset allowances – for subsidising investment in exporting cars. The Indonesian government had a well-staffed national planning agency, which handled the coordination issues surrounding the uptake of improved rice and the utilisation of oil revenues in an effective way. There was some coordination among garment firms in Bangladesh, for example to capture spillovers from firm-level learning and establish strong links between education institutes and the private sector.

In failures, unsolved coordination problems had deleterious effects. For instance, little effort was made to coordinate investments to boost raw cashew nut production after export liberalisation in Mozambique. In Ghana, there was a lack of coordinated investment in post-harvest handling and other infrastructure to support pineapple production.

In certain success cases, support was provided to investors, and sometimes directed to specific first-mover firms. For example, tax incentives available to all investors and tariffs helped attract OEMs to South Africa, and similar incentives had the effect of attracting foreign investors to export zones in Malaysia. Support was provided to first-mover firms in Bangladesh’s garment sector, while support was provided to whole sectors through targeted support for innovation in Mauritius.

In the failure cases, support was often provided and then withdrawn. In Mozambique, the government removed export restrictions without investing in firm capabilities. In Malawi, subsidies were not sustained long enough, or supported with sufficient complementary measures, to pull off a profitability breakthrough.

The evidence in these cases shows that interventions at sector level, coordinated around a targeted set of activities, in a politically smart way, and set in a competitive framework can be an important driver of economic transformation. Targeting specific sectors that have strong basic conditions for competitiveness and where political economy factors are not going to be strongly detrimental is critical. The development of specific competitive sectors has been key to dynamic growth periods and hence to long-term transformation, even in countries where wider aspects of economic governance have not improved. This implies it is possible to develop dynamic, competitive sectors even when broader conditions in the economy are unfavourable. This insight has implications for actors looking to support economic transformation.

The factors set out above operate primarily as transmission mechanisms, meaning it is the function rather than the form of support at sector level that matters most. They are crucial mechanisms by means of which a favourable or unfavourable political-economic configuration influences the transformation outcome. In other words, once an economic opportunity has been identified, the political economy really matters.

And, finally, what matters about the political economy may be a temporary configuration, a moment of unusual opportunity – and it is also likely to be sector-specific. Transformation breakthroughs can and do occur in systemic contexts that are generally unfavourable. This places a premium on the ability to identify moments and sectors of opportunity in a timely fashion. Given the high level of uncertainty that must accompany such judgements, this also points to the importance of having the flexibility to recognise initial errors and change course when necessary.

Photo: Young Bangladeshi women being trained at the Savar Export Processing Zone Bangladesh 2016. Dominic Chavez/World Bank. CC BY-NC-ND 2.0.

Karishma Banga (ODI) | Making Firms Work Series | Using digital technology to become globally competitive: Funkidz

Karishma Banga, ODI
18 December 2018
Funkidz, a one-of-a-kind Kenyan small or medium enterprise (SME), has successfully managed to leverage digital technologies to increase its global competitiveness. Founded by a female entrepreneur, Wanjiru Waweru-Waithaka, Funkidz manufactures furniture for children locally. It has successfully embraced digital technology to innovate, diversify and survive in a challenging market place.

Karishma Banga (Senior Research Officer, ODI)

18 December 2018

This blog is part of our ‘Making Firms Work’ series. Read other blogs in the series: on Tanzanian textile manufacturer A to ZNepali ICT firm CloudFactory, Kenyan garment firm Hela and Midal in Mozambique. 

Funkidz, a one-of-a-kind Kenyan small or medium enterprise (SME), has successfully managed to leverage digital technologies to increase its global competitiveness. Founded by a female entrepreneur, Wanjiru Waweru-Waithaka, Funkidz manufactures furniture for children locally. It has successfully embraced digital technology to innovate, diversify and survive in a challenging market place.

Information and communication technology (ICT) is already regarded as a key development pillar in Kenya, and efforts are currently being focused on leveraging the digital economy to expand manufacturing, as one of the ‘pillars’ of the Kenyan government’s Big Four agenda. However, there is still a significant digital divide in access to digital technologies in Kenya compared with other developing economies, as well as a digital divide in use of such technologies within the country’s manufacturing sector. While digitalisation brings with it certain challenges, it also presents new opportunities for economic growth and employment creation. It is crucial for African countries to identify these opportunities and to capitalise on them in order to not be left behind.

The window of opportunity in Kenya’s furniture manufacturing industry

Given the relatively low levels of digitalisation in Kenya, compared with developing countries in Asia, there may still be a window of opportunity for the nation to move into sectors less affected by technology and global changes. But how long will this window of opportunity remain open? With regard to the furniture sector in Kenya, operating a robot becomes cheaper than Kenyan (formal) labour in 2034. Moreover, operating a robot in the US furniture industry becomes cheaper than Kenyan labour in 2033. This indicates that the window of opportunity in the Kenyan furniture sector is around 15–16 years, following which there may be increased automation within the sector, or possible re-shoring of furniture manufacturing to developed economies. This will affect both growth and employment in the sector.

It is also worth noting that the furniture sector is a relatively low-skilled, labour-intensive tradable sector with relatively high robot density. In other sectors with higher robot density, such as automobiles and electronics, the window of opportunity is likely to be shorter; in other sectors, such as garments, it is likely to be longer, given issues related to economic and technological feasibility.

Funkidz: Harnessing digital technologies to become globally competitive

What makes Funkidz different from other furniture SMEs in Kenya is that it has invested heavily in technology, particularly in Computer Numerical Control, or CNC, machinery – that is, the automation of machine tools by means of computers. In modern CNC systems, there are two technologies at play: first, the mechanical dimensions of the furniture parts are defined using computer-aided design (CAD) software; and second, they are translated into manufacturing instructions using computer-aided manufacturing (CAM).

The CNC technology Funkidz has installed, along with large digital printers, enables the multiplication of furniture designs, with exact specifications and high quality. As a result, the beds, desks, cots, etc. manufactured have similar characteristics to what you would find at Ikea – those of good-quality furniture that is flat and packable. The firm’s new range of furniture is in fact completely packable, easier to transport and multifunctional. The company also offers flexibility in price via different customisation options. For example, a bed can be purchased either unpainted or painted, with choices of different prints depending on the customer’s preferences.

Funkidz has also recently launched an augmented reality app – one of the very few in Kenya – that will allow customers to log in from their phone, browse the firm’s e-catalogue for furniture and use 3D modelling and scanning to virtually place it in their house. It is also possible to change the colour of the furniture and its position for a better user experience.

Leveraging digital technologies has allowed Funkidz to increase its global competitiveness by lowering the cost of furniture manufacturing and enabling exact specification mass production that has generated economies of scale. In a span of about five years, the firm has expanded beyond the domestic market of Kenya and is now exporting to Rwanda and Uganda, and since more recently, to the UK.

Finding innovative solutions to manufacturing challenges

One of the biggest constraints the firm faces is lack of relevant skills in the workforce to operate the machinery fitted with digital technologies such as CNC systems. There is a dearth in Kenya, and in Africa in general, of the technicians needed to operate computer-controlled machines, making it necessary to hire expensive engineers to do the job. There is thus a need to retrain workers in new skills and to upgrade education. A subsidiary of Funkidz, known as Funkidz Tech, has partnered with Safaricom to design its own curriculum that provides training on how to make furniture with different specifications and dimensions, and also provides training in CNC numerical cutters.

‘Urban mining’ in furniture production.

While power supply is not the biggest constraint for the firm (the factory receives 3-phase power at rural electrification rates for light industries), rising timber prices, as well as financial and market access, present important challenges to its operations. There is a ban on logging in operation in Kenya at present, which has increased the price of wood drastically; a wooden plank now costs 96 shillings a foot compared with 42 shillings before. To address this problem, the firm has embraced innovative thinking and research and development, and is now making use of ‘urban mining’ – that is, recycling and reusing waste from cities. It has started acquiring pallet wood, one of the easiest and cheapest types of wood waste to recycle, which then undergoes nail removal, finishing and sanding within the firm. Electronic waste such as batteries, electrical circuits, computer hardware, etc. is being used as design components in table tops, showpieces and lamps. Imported second hand clothing, known in Swahili as “Mitumba”, is being used as cushion covers for furniture.

The way forward

To ensure the Kenyan manufacturing sector is able to leverage digital technologies to boost manufacturing and job creation, both the public and the private sector will need to make continuous joint efforts. Targeted policies and effective public–private collaborations are needed to:

  1. reduce the cost of raw materials
  2. increase access to and affordability of internet and ICT hardware such as routers, sensors, computers, etc. for manufacturing firms
  3. retrain the workforce to increase its employability but also to ensure retention of labour once trained
  4. increase absorptive capacity of the workforce to understand, adopt and adapt digital technologies to meet local challenges and needs and
  5. promote advancements in firm-level capabilities and innovation.

Photo: Use of CNC machinery to cut wood, FunKidz factory, Kenya, 2018. Karishma Banga, all rights reserved. 

Phyllis Papadavid (ODI) | Kenya needs to gear up its macroeconomy to boost its manufacturing sector

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

19 July 2018

Kenya needs to gear up its macroeconomy to boost its manufacturing sector

Kenya has a compelling story to tell when it comes to its economic diversification. The country has sizeable agriculture and services sectors, which account for a respective 32% and 45% of total value added in the economy, according to the World Bank. And, with the introduction of its Early Oil Pilot Scheme, it is also now an oil-exporting economy, drawing production from its Turkana region.

At the same time, having been identified as a priority sector under the government’s Big 4 Agenda, manufacturing, and the textiles and apparels (T&A) sub-sector in particular, could be a game-changer for economic transformation and job creation – if close attention is paid to the country’s macroeconomic environment.

The time for diversification is opportune, given the current challenging environment for resource-based economies, owing in part to the commodity price downturn since mid-2014: inward foreign direct investment (FDI) into Sub-Saharan Africa (SSA) declined from $53bn in 2016 to $41bn in 2017. For example, Nigeria’s economy in particular continued to be depressed, with FDI down 21% in 2017 relative to 2016. By contrast, the more diversified economies of East Africa have shown more resilience of late. At $3.5bn in 2017, FDI inflows in Ethiopia continue to be nearly double the level seen in 2014 (Figure 1), and the country is the second largest recipient of investment inflows in Africa, owing in part to its apparel sector.

Figure 1: FDI inflows in selected SSA economies ($mn)







Source: UNCTAD World Investment Report Annex Tables

A conducive macroeconomic environment is key for diversification

Kenya is already the largest exporter of apparels under the African Growth and Opportunity Act, according to the Kenya Association of Manufacturers (KAM), which makes the sector a key one for the future. The country has seen phenomenal growth: US imports of Kenyan apparel products increased 675% between 2000 and 2017. Exports to the US market are also crucial for the sector, given the dominance of textiles compared with other industries. Pursuing further expansion in this largely labour-intensive sector could help reduce Kenya’s youth unemployment rate, which, at 26%, is one of the highest in SSA. Such investment could also catalyse Kenya’s growth at a time when the textiles, clothing and leather sector has doubled its global share of greenfield FDI projects, according to the UN Conference on Trade and Development.

Kenya’s success in diversifying depends in part on its cultivating a conducive macroeconomic environment – and there are three important pathways to follow in this regard (in addition to paying attention to a range of other factors explained in last year’s KAM-ODI booklet):

Three pathways to boost diversification into Kenyan textiles

Complementary industries

Kenya’s information and communication technologies (ICT) sector has seen significant growth, with innovations such as M-Pesa leading its domestic financial services development. In 2017, the economy saw a 71% increase in FDI as a result of inflows into ICT. This owed in part to its investment climate and particularly the construction of Konza Technology City, which has attracted major corporations such as Microsoft and Oracle. Despite this, a digital divide persists: although almost 90% of Kenyan manufacturing firms have computers and internet, only 50% have a web presence, only 40% have an IT policy and only 27% use the internet to sell online.[1] Increased use of ICT will enable both large T&A companies and small and medium enterprises (SMEs) to participate in digital supply chains and function more efficiently.

Meanwhile, when it comes to investment inflows, Kenya can leverage its growing domestic retail sector, and domestic growth in consumer demand, to spur local and international investment. This could be important at a time when the return to FDI has halved in SSA, from roughly 12.3% in 2012 to 6.3% in 2017. Additionally, wages for Kenya’s garment workers are cited as much costlier than those in, for example, Ethiopia. This is notwithstanding Kenya’s labour productivity significantly outstripping Ethiopia’s, when looking at the experience of Hela Garment factories in both countries. Expected retail demand growth could mean that Kenya attracts market-seeking FDI, to serve the domestic market, which would offset any weakness in FDI that targets cheap inputs.

Finally, Kenya’s logistics sector, in transporting and warehousing goods, stands to benefit its T&A sector. In particular, upgrading its railway and transport sector closer to international standards will facilitate greater commerce; Kenya’s logistics ‘giant’, Siginon Group, cites this as an obstacle. Together with Kenya’s industrial and technology parks, this will continue to contribute to Kenya becoming a ‘logistics hub’ and creating more logistics companies through clustering. The emergent knowledge economy will have knock-on effects on T&A, as a result of better support to knowledge uptake by Kenya’s industry. This should be founded on wider partnerships, to include universities. The experience of other success stories suggests that successful economic clustering depends on – among other things – the inclusion of research institutes for enhanced innovation and sophistication of local companies.

A reduction in the shilling’s real effective exchange rate

Kenya does not fare well in terms of currency developments. Having a fairly priced trade-weighted exchange rate is important to source affordable imports – which Kenya’s T&A manufacturers have consistently cited as a key cost. In particular, for the larger companies, the high cost of imported material is significant. Although the shilling continues to depreciate against the US dollar – a key export market for Kenya – the real effective exchange rate (REER) is historically high, raising questions around Kenya’s competitiveness. Its REER has appreciated by 27% since 2014, putting it roughly 34% above its long-term average and suggesting overvaluation against its trading partners’ currencies (Figure 2).[2]

Figure 2: Kenyan shilling real effective exchange rate






Source: World Bank World Development Indicators, Bloomberg.

Broader access to finance

Elevated overhead costs in the sector and lack of collateral have also restrained access to finance. High interest rates and the short time horizons available for loans are key obstacles, according to KAM. Equally, Kenya’s current interest rate cap has disincentivised banks to lend to SMEs and to small manufacturers, in that they cannot obtain a high enough return to match perceived risk associated with SMEs. The Central Bank of Kenya reports that banks reduced credit provision to the private sector following the cap, with few expectations of a re-acceleration. A silver lining is that domestic banks, rather than foreign banks, are increasingly driving SME lending.

Targeted programmes, such as those of Equity Bank, instituting the Maridadi Business credit facility of between Sh5,000 and Sh100mn for Kenya’s T&A SMEs, fashion designers and tailors, have been encouraging. The facility’s aim of targeting businesses and entrepreneurs along the entire value chain has been lauded as a particularly strong feature, given Kenya’s need to import fabrics. The higher risk profile of smaller SMEs has led other domestic banks to pair with public institutions, such as the International Finance Corporation, to lend to SMEs. Kenya’s second largest bank – the Co-op Bank – has received a $105mn loan for Kenya’s micro, small and medium-sized enterprises.

Kenya’s macroeconomic challenges and opportunities need to be squared with the government’s ambitious plans in its Big 4 Agenda – which include employing 50,000 young adults and women in the T&A sector, increasing revenue exponentially from the textile industry from Sh3.5bn to Sh2tr and creating 500,000 cotton jobs and 100,000 new clothes jobs by 2022. In order to achieve this, the domestic macroeconomic environment will have to be recalibrated to foster increased competitiveness, more affordable access to finance and continued attention to incentivising diversified investment inflows.

[1] Banga, K. and te Velde, D.W. (2018) ‘Digitalisation and the future of manufacturing in Africa’. London: ODI, SET Programme.

[2] Kenyan REER overvaluation is calculated as the percentage deviation of the current REER from its average since 2000. The REER is calculated using the World Bank World Development Indicator database and Bloomberg data.



Photo credit: Brian Snelson via Flickr

Dirk Willem te Velde (ODI) | Sports balls, disruptive change and opportunities for manufacturing production

Dirk Willem te Velde (Principal Research Fellow, ODI)

15 June 2018

The production of footballs, tennis balls, table tennis balls, golf balls and baseballs is highly concentrated in a few countries. However, much production is frequently subject to disruptive change, which involves opportunities – and challenges – in relation to attracting manufacturing production. Understanding how change happens and how it is managed is crucial for those wanting to transform their economy. This blog discusses geographical location in the production of balls, the influence of disruptive change on this and the lessons it offers for managing transformation.

Concentration of production

The 2018 Football World Cup started in Russia this week but not everyone will know that all footballs used at the World Cup have been produced in the city of Sialkot, near the border between Pakistan and India. One Pakistani company, Forward Sports, is the core provider of footballs to this World Cup, producing some 700,000 balls per month and employing 3,000 workers, of whom 900 are women.

Sialkot gained an international brand name in the 1980s when it produced the Tango Ball for the Football World Cup in 1982. Major international brands such as Adidas, Nike, Puma, Umbro, Diadora and others have sourced their supply of footballs from this export-oriented cluster. Pakistan currently earns an annual $1bn from sports goods exports, which includes $350mn–$500mn from footballs, or 10% of Pakistani exports, creating some 200,000 jobs. Around 60-70% of the world’s hand-stitched footballs, or between 40mn and 60mn per year, are made here.

Such significant concentration has also been a factor in the production of table tennis balls for more than a century. Halex used to be the world’s biggest manufacturer, with almost every single table tennis ball in the world made in Highams Park in London.

A similar level of concentration applies to the production of tennis balls. Slazenger Dunlop, a leading UK manufacturer, produces 300mn tennis balls per year, worth nearly £200mn (a fifth of its turnover). Previously produced in the UK, the tennis balls for the Wimbledon tournament have since 2002 come from the special economic zone in Bataan in the Philippines. Before the finished product reaches the UK, inputs come from the US (clay), Greece (silica), Malaysia (rubber), New Zealand (wool) and the UK (felt), with processing taking place in Bataan. A ball travels 50,000 miles, through 11 countries.

A differential picture is thrown up by the production of golf balls and baseballs for US consumption. Some 1.2bn golf balls are produced each year in what is a capital-intensive process, mainly in the US. Companies such as Spalding and Titleist have traditionally dominated production, which has involved significant research activities and creation of patents. Some 40% of the production of golf balls for the US is carried out in New Bedford, Massachusetts. Baseballs, on the other hand, have remained labour-intensive. Rawlings has had an exclusive contract to supply the major leagues with baseballs since 1977. A plant in Costa Rica produces 2.2mn balls a year, worth around $35mn.

Production of sports balls is highly concentrated and it is difficult, but not impossible for poor countries to enter this market.

Managing disruptive change

Disruptive change has had a major impact on the manufacturing of balls. Allegations of child labour and then a change in regulations requiring a move from hand-stitched to machine-stitched footballs have had major implications. The share of Pakistan in football production dropped significantly between 2006 and 2010 (see chart below) in part because orders from Nike to Sialkot were dropped, with the Football World Cup in 2010 sourcing Adidas Jabulani footballs from China. Only after the manufacturers invested in equipment and skills and introduced machine-stitched footballs did Sialkot regain its status as supplier for the 2014 World Cup and again for the 2018 World Cup. The cluster is supported by private infrastructure (e.g. airports) and streamlined border procedures.

Disruptive change in the production of footballs

Note: Share in value of world exports of inflatable balls (950662), which includes mainly footballs.
Source: ITC Trade Map

Changes in the production of raw materials led to the end of table tennis ball production in London. Celluloid balls replaced rubber and cork ones in 1900, but by the 1990s celluloid was being produced only to make table tennis balls. It rapidly became an obsolete material when it was replaced by plastic in most applications except for the production of table tennis balls. Demand for the material decreased and celluloid production ceased in Europe as it became too costly. This left only two Chinese factories producing celluloid, solely for table tennis balls, a material which remained flammable and difficult to transport. In 2014, producers began working with the International Table Tennis Federation to move towards production of plastic balls. This is now dominated by two plastic tennis ball producers in China and one in Germany and in Japan, fighting for official recognition.

Political changes led to the production of baseballs moving from Haiti to Costa Rica. Rawlings came to Costa Rica after a 1986 coup deposed the dictator Jean-Claude Duvalier. Production is still based on hand-stitching, despite efforts as early as 1949 to move to machine-stitching. Production of Wimbledon tennis balls took place in Barnsley for a hundred years until 2002 when the factory moved its equipment to the Philippines because of cost-efficiency reasons.

All this shows that changes can be disruptive (whether for regulatory or economic reasons), relocating all or most of production to other countries. This observation opens up opportunities for other countries that have so far not yet benefitted.


Disruptive change happens and poses major challenges for manufacturing but countries can seize the opportunities by being prepared and working in a targeted way. Pakistan lost market share through a policy change (a change in standards) but then regained the contract to produce World Cup footballs through innovation, supported further by investment in skills and equipment and targeted (privately operated) infrastructure. China used an opportunity presented by a change in the raw material base of table tennis balls, again working with standard setting bodies. Political instability led to the relocation of baseball production from one low-wage location to another (Costa Rica). Some processes, such as the production of golf balls, have remained capital-intensive, located in developed countries (US); meanwhile, baseballs have not caught up yet with mechanisation. But, as disruptive change continues, geographical concentration in the manufacturing of balls may again change considerably in the future (consider e.g. the effects of a change in UK trade policy, or a change in international regulation of say baseballs), offering opportunities for some, challenges for others– and policy and regulation matters for this.

Photo credit: File photo, Ary News

Neil Balchin (ODI) | Making Firms Work Series | Midal and clustering around megaprojects in Mozambique

Neil Balchin (Research Fellow, ODI)

11 June 2018

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

The presence of Midal shows that clustering around megaprojects can help build manufacturing in Mozambique, but very specific factors – including, in this case, Mozal’s decision to sell molten aluminium locally – can play a key role in determining success. Examples such as Midal, with its direct linkages to Mozal (the largest company in Mozambique and one of the country’s most prominent megaprojects), show how megaprojects can support economic transformation and job creation in Mozambique. Transforming the economy will be critical for Mozambique to address short-term macroeconomic challenges and create much-needed jobs in a sustainable way.

The product of an initial $65 million investment, Midal Cables International Limited is a local subsidiary of Midal Cables Limited, a multinational headquartered in Bahrain with a production footprint spanning Saudi Arabia, Turkey and Australia (and now Mozambique). After signing a deal with Mozal in 2013, Midal commenced production in Mozambique in December 2014 and began exporting in January 2015. The company’s 14,500 m2 plant is situated adjacent to Mozal in Beluluane Industrial Park, a duty-free zone in Matola, about 25 km north-west of downtown Maputo.

Midal produces aluminium rods, wire and conductors primarily for export to Europe (Spain and Italy) and Africa (including Kenya, Namibia, Nigeria, South Africa and Tanzania). The company’s current annual total production capacity is in the order of 50,000 metric tonnes. Around 98% of this is exported, with only a small volume going to the domestic market. On average, Midal produces 4,200 metric tonnes of aluminium rods each year, mostly for export to Africa and Europe. The wires and conductors the firm produces are primarily exported to other Southern African Development Community (SADC) countries to support electricity transmission and distribution, with a strong focus on rural electrification.

Midal’s presence is important for economic transformation in Mozambique. It is the first firm operating in the country to add value to the aluminium produced by the Mozal smelter and represents an important step towards higher value-added industrial production. Examples such as this show how private firms can support economic transformation; and in some sectors these contributions can be enhanced through effective public–private collaboration.

More of this is needed to help spur diversification into higher-productivity industrial activity and manufacturing. Despite strong growth of 5–7% annually over the past decade, little progress has been made in altering the structure of the economy and accelerating job creation. Manufacturing still has a peripheral role in the economy, absorbing just 0.6% of the labour force and accounting for less than 10% of total gross value added (down from 29.7% in 1975).

A recent survey shows that, while there are some positive signs of the persistence of Mozambican manufacturing firms, growth among these firms has been limited and some have shrunk over the past five years (particularly those operating in the textiles, wood, metal, machinery, furniture and other manufacturing sectors). Many manufacturers have closed in the face of an increasingly challenging business climate aggravated by political conflict and a subsequent economic crisis. A significant share of the remaining firms are unprofitable, particularly in Tete and Nampula provinces. Very few Mozambican manufacturers are exporting – just 19 out of 520 firms (or less than 4%) surveyed in 2017. Job losses have also been significant, with more than 5,000 shed across the surveyed companies between 2009 and 2017.

Even amid this turmoil, Midal has managed to grow a manufacturing base and create jobs. The firm currently employs 142 people directly in Mozambique, and it is estimated to generate employment indirectly for more than 1,000 people as service contractors. Creating more jobs is critically important given that Mozambique faces a looming jobs crisis and an ongoing debt crisis. Approximately 420,000 young people enter the labour market each year and formal employment needs to grow substantially if they are to be absorbed into jobs. Generating new employment on this scale will require a different focus towards economic transformation. SET’s Making Firms Work series showcases firms that are generating large-scale transformational jobs in Kenya, Tanzania and Nepal.

Midal, with its linkages to Mozal, offers a model for manufacturing development that can potentially be upscaled and replicated, but it is important to understand the details behind these inter-firm relationships.

A set of four specific circumstances encouraged Midal to establish operations in Mozambique. First, geographical proximity to Mozal’s aluminium smelter – the largest of its kind in Africa – promised ready access to a key input: good quality molten aluminium.

Second, the Midal Group was attracted by strong regional growth in Africa. Locating in Mozambique provided further advantages in terms of supplying major electricity transmission projects within the country and elsewhere across the SADC.

Third, the prospect of exporting duty-free to certain African countries as well as the US (under the African Growth and Opportunity Act) and the EU (through the Everything But Arms initiative) provided further motivation.

Finally, Mozambique also offered electricity and gas (although the reliability of the supply remains an issue), an important factor given the firm’s energy-intensive production processes.

However, since Midal began operations, other aspects of the business environment have proven problematic. Midal believed that proximity and access to Maputo Port would mean it would be able to export cheaply. However, the firm’s initial cost assumptions were overly optimistic and logistics costs associated with the use of Maputo Port remain very high. These costs are said to surge to $800 per container once customs and other expenses have been factored in. The alternative option, using the port in Durban, is equally costly owing to the need to transport products over more than 600 km to get to the port.

Despite these challenges, Midal’s presence in Mozambique is a compelling example of what can be done to grow the country’s manufacturing base. It shows how clustering around megaprojects can help develop local linkages and downstream activity as long as specific business and pricing factors are supportive. This suggests an important role for government, not least in setting up a conducive framework for megaprojects and for locally based upstream or downstream firms to interact effectively with such megaprojects.


This blog has been adapted from a previous version.

Photo credit: Midal cables


Sonia Hoque (ODI) | Women and economic transformation: It’s a win-win if #SheTransforms

Sonia Hoque  (Programme & Operations Manager, ODI)

7 June 2018

It’s no secret that women are key to unlocking the full potential of economies across the developing world. They are not a ‘marginalised group’ (they make up half of the population), but nor should it be assumed they benefit evenly from increased opportunities through economic transformation. Women spend more on their children’s health and education, and bring numerous benefits to employers and business owners. Proposed policies/programmes designed to drive economic transformation should embed a gender lens to enhance women’s access to new jobs and ensure they are not left behind.

Why women are key to economic transformation

Advancing women’s equality could add an estimated $28 trillion to global gross domestic product by 2025, and numerous studies have shown that increasing the numbers of women participating in the labour force has a positive impact on business owners as well as women themselves. For this reason, women’s economic empowerment has always been at the forefront of development debates. For example, the recent SheTrades initiative, led by the International Trade Centre, seeks to connect women entrepreneurs to markets. Women could also contribute to, and benefit from, economic transformation, which occurs when resources (including human resources) shift to more productive uses, which improves the quality of growth and helps sustain job creation.

Discussions on ‘inclusive transformation’ look at the impact of such transformation on women, youth, disabled persons, minority groups, etc. However, women should not be seen just as a marginalised group that needs to be targeted in economic transformation planning simply because of moral drivers (a desire to provide equal opportunities to and empower such groups). Including women makes economic sense. Efforts to increase their participation in the labour force are paying off across some developing countries, and increasing the number of women employees has proved highly productive (think of Bangladesh garments, where approximately 60% of the 3.5m workers are female). Designing policies that support and/or better enable women to take the opportunities brought about by economic transformation is crucial for continued growth, prosperity and broad-based job creation.

Will women get lost in economic transformation?

In a 2016 SET paper, Louise Fox (now USAID’s Chief Economist) explored important questions about the role of gender in economic transformation, emphasising that economic change always brings winners and losers. Economic transformation is defined as the process where resources, including labour, shift from low-productivity activities such as agriculture to higher-productivity ones such as manufacturing and services (productivity improvements within sectors are also counted). Importantly, evidence suggests that, where women can access productive jobs, wage employment in modern enterprises provides higher and more secure income. Louise Fox explores which sectors benefit women’s economic opportunities, and argues the need for complementary policies to increase equality of opportunities when they arise – as it cannot be assumed women will benefit the same way as men.

Increasing the role of women in manufacturing and services sector jobs: a change of mindset

Policies can help bring women into wage employment but some barriers are hard to dismantle. For example, expectations that women will be the primary carers for children, the elderly and the home are still prevalent in many low-income countries. Pressure to stick to traditional roles in what is called the ‘care economy’ mean that women tend to have fewer hours available for waged work. This was also apparent during interviews for a previous SET study on inclusive jobs in Nepal; several (male) firm owners stated that women ‘preferred’ to do care and housework and did not want/have time to work outside.

However, one tourism firm shared a different view: ‘Around 50% of our staff are female. Although they are usually not skilled when they start working here, they are more focused and hard-working.’ This was echoed by the director of A to Z, a major factory in Tanzania that produces light manufacturing goods including garments, household plastics and bednets: ‘We have found that female workers produce higher quality outputs. Their work ethic is better, and they work more efficiently. They are also better at training new people working in the factories.’ This touches on an important finding in a study led by Christopher Woodruff – that training women had supported them to develop managerial skills and increased their chances of promotion in garment factories in Bangladesh.

Studies have shown that increases in income controlled by women lead to greater spending on items that bring more benefits to children. Women invest more in children’s human capital, which has dynamic positive effects on economic growth and future employment prospects. A to Z also supports mothers in particular, as they encourage generations of families working in the factory and see their children as potentially loyal future employees. ‘We like to see families working in the factories and give extra benefits to them for their loyalty, so having mothers working here is a good thing. We also see that those women spend more of their income on their children.

#SheTransforms – Aadila in Tanzania

Aadila grew up on her father’s farm in a rural district near Arusha, Tanzania. With little education beyond primary school level, she had few prospects for work and spent her adolescent years working on the farm with her family.

When local factory A to Z advertised that they were hiring workers in a range of roles, she took the chance to apply. Given her lack of formal education or other skills, she was offered the role of cleaner. With hard work, she worked her way up through a number of roles within A to Z factories, including sewing machine operator, stitcher and office administrator. She is now working in the factory head office in a garment merchandise role, earning 10 times as much as when she was a cleaner and comfortably supporting her family with the additional income.

Although this is an exceptional story, Aadila is not alone as a woman to have gained economic benefits from taking an opportunity to work in a factory. A to Z state that around 90% of their female workers come from rural backgrounds, and embody not only the real-life economic transformation process as they move to more productive employment but also the ability to transform their lives as Aadila has done.

Source: Author interview with A to Z

A to Z is a manufacturing firm with a clear social responsibility approach, but women working in manufacturing firms in other contexts also have spillovers. Heath and Mobarak (2014) examined the Bangladesh garment industry and found spillover benefits to women’s villages – an increase in the age of marriage and first childbirth, health gains and education levels of children.

It’s a win-win if #SheTransfoms

By acknowledging the potential gains at both the individual and the wider societal level that women bring by participating in the labour force, policy-makers have the chance to bring new opportunities to women. While it does not make sense for governments to target industries for development based on whether they tend to employ males or females, policy-makers can ensure programmes and investments are gender-sensitive. This includes making sure females have access to the education and training opportunities needed to compete for new opportunities. Having more women in the marketplace has a positive impact on businesses, which benefit from a larger productive workforce, more competition and, as a result, more choices between better products in all sectors. As mentioned, women spend more of their income on education and health for their children, which can be beneficial for society in the long term. Policy-makers and development partners with the goal of economic transformation should not assume women will benefit evenly from increased opportunities, or see them as a marginalised group. Rather, they are a key force, and any proposed policies/programmes designed to drive economic transformation should contain a gender lens – the cost of not doing so will undoubtedly be higher in the long term.

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

Photo credit: Visual News Associates / World Bank via Flickr



Karishma Banga (ODI) | A globally competitive, locally relevant Africa: managing the new oil, currency and commodities of the digital era

Karishma Banga (Senior Research Officer, ODI)

5 June 2018

An African digital industrial strategy is needed to consolidate a common stance on data governance and control; build digital trust in African countries for regional e-commerce; re-equip workers with suitable skills; and protect digital labour against exploitation.

Africa in the digital era

In March 2018, 44 countries signed the African Continental Free Trade Agreement (AfCFTA), as an important step towards increasing market integration, infrastructure development and industrialisation. It is, however, increasingly important to look at regional trade through a ‘digital lens’. Digitalisation presents important opportunities to boost the historically low intra-Africa trade but also important challenges.

Not only is there a digital gap between African countries and others but also Africa benefits less from digital technologies, once installed (Banga and te Velde, 2018). There are many reasons for this – poor internet access, limited information on e-commerce platforms, lack of e-payment services and cost-effective logistics, lower purchasing power, unreliable power supply and basic infrastructure, poorer ICT infrastructure and skills and an inconducive legal and fiscal framework. Africa thus lags behind in the digital era as a result of a poorer ‘systems infrastructure’.

To leverage the benefits of digitalisation, African countries need to ‘think globally’ but ‘act locally’. Growth in e-commerce has remained low compared with in other regions, and mainly serves foreign demand. If this continues to be the trend, AfCFTA will not be able to deliver on the continent’s much-needed economic transformation. Countries need to address issues pertaining to and develop collective actions on 1) governing data- the ‘new oil’; 2) building consumers’ digital trust – the ‘new currency’ and 3) protecting digital labour – the ‘new commodity’ in the digital economy.

Collective actions on data governance

In recent years, Big Data has emerged as a key aspect of the digital economy, as essential as oil is to the industrial economy. Mined freely from developing countries, it is converted into ‘digital intelligence’ in developed countries, further feeding the power of giant e-commerce platforms- such as Amazon and eBay (and also Alibaba in China). Earlier, these platforms operated on a ‘lean economy’ model – they owned data but not any actual physical assets. However, such models are not sustainable in the long run, and these e-commerce platforms are slowly transforming into ‘intelligent infrastructures’. For example, Amazon has started buying planes and Alibaba is investing in physical stores.

While international rules on e-commerce can help foster trade in the digital era, there has been resistance to some of the recent proposals developed countries have made to the World Trade Organization, on the grounds that these threaten to further increase the control of powerful monopolies. Several common provisions in such proposals aim to create an even more digital and borderless economy. These include:

  • liberalisation or removal of tariffs on digital goods and services and removal of preferential treatment for domestic companies or products and services
  • free cross-border flow of data, which can prohibit countries from ensuring their data remains within their borders (in this case, data is governed not by the country that owns it but by the laws of the country where it is held)
  • removal of localisation laws that require foreign providers to set up in host countries and
  • removal of compulsions on technology transfers – for instance through sharing of source code – from foreign providers to host countries.

Such rules may be detrimental to job creation and infant industries in African economies, and risk deepening the digital divide across countries. They threaten to increase ‘platform capitalism’, making it even more important for African countries to ensure data-sharing arrangements that will increase their competitiveness globally.

African sellers can sell on third-party international e-commerce platforms, but 75% of the time Amazon will push its own product first, and there is also a hefty commission charge in getting on these platforms, sometimes as high as 45%. Domestic or regional ownership of e-commerce platforms is thus important. African countries must take a continental approach and put in place regional strategies ensuring ‘collective rights to collective data’, with AfCFTA as an effective platform to consolidate a common stance on e-commerce rules.

This can also make AfCFTA significantly more effective in boosting regional integration, as it will help countries attain commodity diversificationa long-standing challenge in intra-Africa trade. At present, intra-Africa trade remains  at only about 10%, mainly because of the higher costs of trading within Africa, which means primary products dominate such trade: the share of manufacturing in fact declined from 18% in 2005 to 15% between 2010 and 2015 (AFDB, 2017). If most African countries continue to export raw materials, and not processed goods, regional demand for their products will remain low. Having deindustrialised prematurely, and in the context of the increasing extractive nature of powerful monopolies in developed economies, Africa faces key development challenges related to export diversification and commodity dependence.

In this regard, important lessons can be learnt from Asia. Here, online trade has not only reduced the costs of trading and coordination but also led to successful diversification of exports in some least developed countries. Research by the International Trade Centre looks at demand for e-commerce products on Alibaba in five Asian LDCs – Bangladesh, Cambodia, Lao PDR, Myanmar and Nepal – and finds that products in which these countries have comparative advantage, such as textiles and agriculture, feature prominently in online trade, but that new products are also emerging . For example, in Bangladesh, apparel and clothing dominate offline trade (accounting for 86% of total exports), but online demand is much lower (47%), and the country has diversified into agriculture, food and beverages and consumer electronic products. In Cambodia, e-commerce has enabled diversification into higher value-added segments; fresh mangoes and cashew nuts have replaced cereals as top-demanded agricultural products in online trade.

Collective actions on building digital trust

Domestically or regionally owned e-commerce platforms are not enough; for successful regional integration through e-commerce, African countries also need to boost demand for products sold through online trade. African e-commerce platforms such as Jumia and KiliMall have gained popularity, but the consumer ‘digital trust’ remains a crucial factor constraining growth. For example, privacy concerns in Kenya grew by 19% from 2014 to 2016, which may in part explain why there is still a 40–50% gap between the proportion of Kenyans with access to the internet and that using it for e-commerce.

As transactions become increasingly digital, affecting several aspects of people’s lives, so does the importance of digital trust. Tufts University ascribes four dimensions to digital trust: 1) the trustworthiness of each country’s digital environment, 2) the quality of users’ experiences, 3) attitudes towards key institutions and organisations and 4) people’s behaviour when they interact with the digital world. Countries where digitalisation is highly evolved, or evolving rapidly, typically have strong government/policy support. Again in Kenya, the government is taking steps to build digital trust: government services are increasingly being digitalised to familiarise consumers with using the internet for making payments in a ‘cash-less’ culture. Policy challenges remain context-specific, but all African countries need to develop laws on data protection and privacy.

Collective actions on re-skilling labour and protecting digital labour

If Africa takes no collective actions to address the issues of the digital economy, labour will continue to face a two-pronged threat. Job losses in  manufacturing are likely to increase as tasks are re-shored to the advanced developed economies. Meanwhile, there may be a further fall in the bargaining power of African workers engaged in digital labour platforms.

The possible decline in jobs can, to some extent, be offset if Africa can leverage digitalisation to increase regional integration. As intra-Africa trade increases, so will the demand for skills, since such trade has a higher skill and technology content than does Africa’s trade with others (UNCTAD, 2017). Successfully selling to regional markets through e-commerce platforms will thus require investment in skilling the workforce. This not only can make labour more productive directly but also may increase the impact of internet penetration on labour productivity (Banga and te Velde, 2018). For e-commerce in particular, labour needs to be re-skilled with an ‘e-commerce skills set’, which includes ICT and digital skills but also skills pertaining to strategy, sales and advertising, project management and social media. Collective actions on reorienting curricula in African institutions around STEM subjects and TVET can be effective, along with integrating local knowledge of the private sector within curricula.

In terms of digital labour – labour performing digital tasks that are outsourced online – demand comes mainly from wealthy countries, with workers across the world competing. This distributed supply and concentrated demand have led to a significant increase in competition, and poorer or unfair work. Digital labour is increasingly being treated as a commodity, with online work being re-outsourced under worse conditions. African countries have no compensating mechanisms in place, and thus need to promote unions and social protection for digital labour, and through this workers’ collective bargaining power.


Photo credit: © Arne Hoel / The World Bank. Licence: CC BY-NC-ND 2.0.

Alberto Lemma (ODI) | Making Firms Work Series | Harnessing the power of digital technology in Nepal: CloudFactory

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

Alberto Lemma (Research Fellow, ODI)

4 May 2018

CloudFactory is a remarkable example of a multinational digital firm. Operating from Nepal, it has 2,000 well-paid jobs worldwide, with around 1,300 workers in Nepal itself. This firm shows how digital technology can provide a lifeline and a link to the global economy for some of the most remote places in the world if they have appropriate skills and internet access.

Growing digitalisation is an opportunity for Nepal

Digitalisation is playing and will continue to play a crucial role in Nepal’s economic transformation process. As a landlocked and resource-limited country, Nepal’s economic activities are constrained by limited transport links with India to export its manufactured goods. However, digital goods and services do not have such limitations.

Development of a digital economy requires a stable and fast-enough connection to the internet, a workforce that can speak global languages (e.g. English, etc.) and appropriate skills. Nepal already has these ingredients, which, combined in the right way, can help promote a high-value services sector in the country.

This will not only provide benefits in terms of jobs and exports but also promote productivity across other sectors. For example, a recent SET study on digitalisation and the future of manufacturing highlights the need for developing countries to invest in digitalisation to help their manufacturing sectors improve productivity. If they fail to do this, they will be left behind and face a growing global digital divide, making it harder for them to promote sectors that are increasingly dependent on digital processes.

CloudFactory: harnessing the potential of digital technology

Some Nepalese firms are already taking part in this process. A remarkable example is CloudFactory, an information and communication technology business process outsourcing (ICT-BPO) company that provides services to enterprises worldwide. CloudFactory uses a cloud-based platform (hence its name) to allocate various tasks that firms around the world require to teams of workers based in Nepal and Kenya.

Software developer Mark Sears founded the company in 2008, training young Nepali computer engineers and developing web applications for start-up companies around the world. As the company grew, it seized the opportunity to create a platform to connect the technical routine data-oriented work that various companies demanded with the untapped pools of human capital that Nepal had in supply.

Human resources are crucial. The workforce strategy is based on the traditional assembly lines Ford introduced more than 100 years ago. Rather than having a few highly skilled workers completing one large complex task, the task is broken down into several simple reproducible steps that low-skilled workers can work on. Essentially, CloudFactory has created a virtual assembly line where workers can contribute to tasks that used to be limited to individuals with advanced programming degrees. Each day, CloudFactory employees process over 1,000,000 tasks. These include:

  • Document transcriptions, whereby physical documents such as receipts, business cards and financial statements are scanned and sent to workers to turn into digital files;
  • Recognition work – that is, helping software automatically recognise faces, printed words and inputs for algorithms to improve automatic chat-bots; and
  • Commercial data aggregation and analysis, such as financial report analysis and real estate information aggregation and analysis.

CloudFactory shows great promise for Nepal for several reasons.

The first is the fact that it now employs over 2,000 workers, who are paid, at the least, two and half times the local minimum wage rate. Although these are contract-based staff (hence not permanent employees), the sheer number of them has already made CloudFactory a success story in terms of employment creation in high-value and high-productivity services in Nepal. This is the kind of employment that Nepal needs if it is to grow into a middle-income country, as discussed in a previous SET study on skills in Nepal, which pointed to ICT as a key driver of economic transformation in the country.

Second, the firm plans to expand to open more offices across the country. The fact that its employees could be spread out across the country, requiring only simple infrastructure such as a computer and an internet connection, will eliminate the geographic barriers that limit access to employment for workers in disadvantaged (or resource-constrained) areas. This is very significant for a country with mountainous and remote areas like Nepal. Employing people in remote areas can help stimulate the local economy without putting pressure on larger urban centres such as Kathmandu. Workers also have the freedom to choose their work hours through flexible scheduling that allows them to devote time to other areas of their life, such as education and family. Upskilling is also an important part of the employment process. In 2015, the company provided 837 hours of training to its employees, reporting that 27% of the workforce gained new technical skills and 47% new management skills.

Finally, CloudFactory has become an international organisation. The firm does not operate just in Nepal. In 2013, it expanded its operations to Kenya, with plans to cover other locations too. The company also has a sales office in the US and a new corporate office in the UK. This expansion, five years after it first opened in Nepal, shows that developing country ICT-BPOs can evolve into successful global production networks based on the human resources rather than the physical attributes of the country. These networks benefit Nepal as they foster greater trade flows between countries, further boosting growth and improving the economic resilience of Nepal as it expands into a more diversified export basket.

How Nepal’s ICT sector can be developed 

The ICT sector faces a serious challenge retaining staff in Nepal, with high constant turnover rates, fuelled by employee migration, limiting the capacity of Nepalese ICT firms like CloudFactory to grow. If Nepal is serious about its commitment to the ICT sector, as the Government of Nepal’s Investment Board states, it needs to look at some policy shifts to help local ICT firms further integrate into the global market. While some great strides have been taken to fortify the country’s ICT infrastructure, considering investments in local data centres could help increase data security and access speeds for local firms and improve security perceptions for international investors.

At the policy level, three key moves could help the sector evolve. Reforms to capital account systems could incentivise international investors to set up regional ICT-BPO hubs in Nepal and, at the same time, help local firms strengthen links to the global economy by facilitating international transactions. Allowing more talent into the country can, conversely to logic, help keep workers in the Nepalese market. Some key skills are still in short supply in the Nepalese ICT sector (marketing, high-level managerial skills, etc.); allowing local ICT firms to recruit from abroad can only help strengthen them, promoting firm growth, better wages and the retention of local workers. Finally, the promotion of healthy state–business relations could prove invaluable for the sector. If businesses can promote their growth and employment potential and highlight the challenges they face to the Nepalese government, through business associations such as the Computer Association of Nepal, issues could be rapidly addressed and opportunities harnessed to ensure the ICT sector, like tourism, becomes a pillar of exports for the country.


Photo credit: A Nepalese young man works on a computer in a small photo lab in Kathmandu on May 2, 2011. © ILO/ Pradip Shakya.

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

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

Dirk Willem te Velde (SET Programme Director, ODI)

10 April 2018

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

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

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

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

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

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

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

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

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

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

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

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

Lessons learned and ways forward

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

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

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

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

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

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


Photo credit: Adan Mohamed via Kenyatalk

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

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

6 April 2018

Seven thousand new jobs a day for fifteen years!!

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

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

The five priorities we identified are as follows:

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

Above: Lilian Awinja and Dr Stephen Gelb

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

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

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

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

Above: Patricia Scotland presenting at EABC 23 March Anniversary 

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

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

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

Max Mendez-Parra  (Senior Research Fellow, ODI)

22 March 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Photo credit: Jonathan Ernst/Reuters 

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

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

Sonia Hoque  (Programme & Operations Manager, ODI)

1 March 2018

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

Can Africa industrialise and move out of poverty?

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

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

An overview of A to Z today

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

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

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

Creating socially and environmentally responsible transformational jobs

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

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

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

Challenges of being a development-focused manufacturing company 

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

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

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

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

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


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

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

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

Dirk Willem te Velde (SET Programme Director, ODI)

4 January 2018

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

Harnessing the opportunities of technical change

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

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

Pursuing smart globalisation

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

A changed global governance

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

Country trends to watch in 2018

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

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

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

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

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

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

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

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

Opportunities for global cooperation in 2018

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

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

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

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

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

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


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

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

Leah Worrall (Senior Research Officer, ODI)

22 December 2017

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

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

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

Subsidy disciplines

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

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

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

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

Special and differentiated treatment

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

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

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

Future agreement

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

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

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

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

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

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

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

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

Photo credit: Fisheries by Giulian Frisoni via Flickr

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

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

Karishma Banga (Senior Research Officer, ODI)

13 November 2017

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

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

How big is the digital divide?

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

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

Challenges for developing countries

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

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

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

Adapting to the changing nature of manufacturing

  1. Boost manufacturing

Using the window of opportunity in less-automated sectors

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

Using a dual-track approach to industrialisation

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

  1. Digitalise manufacturing

Become digitally-ready

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

Skills for the future

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

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


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

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.

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.

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 (

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 (all rights reserved): Hawassa Industrial Park, SET Programme, Overseas Development Institute ©

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


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


[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 (
[5] Reuters (2015) ‘Myanmar sets $2.8 daily minimum wage in bid to boost investment’ (
[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 (
[10] Tanaka, M. (2017) ‘Exporting Sweatshops? Evidence from Myanmar’ (
[11] Raitzer et al. (2015) Myanmar’s Agriculture Sector: Unlocking the Potential for Inclusive Growth. ADB Economics Working Paper Series, No. 470.



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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]
















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:



[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.


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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.


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Dirk Willem te Velde (ODI) | Four entry points for UK policy in Africa’s economic trajectory

Dirk Willem te Velde (Director of SET Programme, Head of IEDG and Principal Research Fellow, ODI) 24 April 2017 (based on a presentation at Chatham House 20 April 2017). This note argues that the UK can offer an appropriate support package using smart aid, targeted development finance, free trade and foreign direct investment (FDI) promotion and temporary (legal) migration policies to help with economic transformation and job creation in Africa.


Dirk Willem te Velde (Director of SET Programme, Head of IEDG and Principal Research Fellow, ODI)

24 April 2017 (based on a presentation at Chatham House 20 April 2017)


An examination of UK–Africa economic relations is timely. Africa’s needs (which vary from country to country) are changing, the UK’s international position is changing and the interaction between foreign powers (such as China, the US and Japan) and Africa is fast changing too. Further, the EU will publish an Africa strategy in early May in the run-up to the EU–Africa summit in November 2017, and the G20 has suggested a compact with Africa.

This note argues that the UK can offer an appropriate support package using smart aid, targeted development finance, free trade and foreign direct investment (FDI) promotion and temporary (legal) migration policies to help with economic transformation and job creation in Africa.

It is crucial to start by focusing on what Africa wants and needs:  

First and foremost, nearly all African countries want and need more and better jobs. In the past decade, job creation efforts have lagged behind working-age population growth by a third. In the coming decade, some 13 million new jobs need to be created each year in Sub-Saharan Africa to address the relatively large increase in the number of young people entering the labour market. With agriculture producing low-quality jobs (or, in the case of natural resources, very few jobs), industrialisation and quality services production is required to sustain job creation into the future. This is what many countries state they want. It is also part of the AU 2063 strategy.

The main challenge for most countries is lack of quality growth, job creation and economic transformation. Africa achieved relatively fast growth over 2000–2014, but, despite some good examples in East Africa (IMF forecast in 2017/18 for Ethiopia (7.5/7.5%), Tanzania (6.8/6.9%), Rwanda (6.1/6.8%), Kenya (5.3/5.8%) and Uganda (5.0/5.8%)), average African growth overall has slowed down considerably owing to commodity dependence in, for example, South Africa and Nigeria.

ODI’s SET programme, which includes current work in close to 10 African countries, examines the what, why, where next and how of economic transformation. It finds that there is little evidence of significant transformation, both within sectors and in terms of movements between sectors; that a general enabling environment needs to be complemented by targeted interventions (such as market-friendly industrial policy using Special Economic Zones) to make things move; and that political economy considerations are really important. Active coordination and leadership around industrialisation are often lacking, beyond public statements (with Ethiopia and Rwanda being exceptions).

How can the UK help?

African countries are in the driving seat, but a targeted UK approach consisting of four pillars can be helpful: (i) smart aid; (ii) targeted development finance; (iii) free trade and FDI promotion; and (iv) temporary migration.

Smart aid. UK bilateral aid to Africa was £2.8 billion in 2015, and a similar amount of UK aid is provided to Africa through other routes (total UK aid was £12.1 billion). The UK could provide politically smart and technically sound analytical capacity and bring together new actors. One example relates to targeted support for trade logistics across borders, along corridors and linked to production capacity (e.g. the sort of aid provided by TradeMark EastAfrica). Our research shows such aid is highly effective in terms of reducing trade costs, promoting exports and diversification. It ultimately pays for itself; it is mutually beneficial (e.g. through cheap imports). In other research we show that UK bilateral aid of £5.1 billion in 2014 led to £1.1 billion in 2014 and the creation of 12,000 jobs in the UK.

Targeted development finance. The portfolio of investments by European Development Finance Institutions (EDFIs) in Sub-Saharan Africa quadrupled between 2005 and 2014 and amounted to €9 billion in 2014. From near obscurity in 2000, the value of DFI investment (including EDFI and IFC) in the region has risen to the equivalent of 16% of FDI and 22% of aid in 2014. Recent announcements around the CDC will increase DFI exposure further. This is good news for Africa: our econometric research shows that, if the DFI/gross domestic product ratio increases by 1% (or by some €10 billion), per capita incomes increase by around a quarter of a percent. DFI finance can be used to fund targeted infrastructure and transformational investments. Increased transfers to DFIs (building up a portfolio) should not come at the cost of other valuable aid (a financial flow).

Free trade and FDI promotion. Annual average UK imports from Africa over 2013–2015 were at £12.8 billion. Annual UK exports to Africa were at £7.6 billion (less than 3% of total UK exports). The stock of UK FDI in Africa averaged £40 billion over 2012–2015 (3.7% of total UK OFDI); the rate of earnings in 2012–2015 was 10.9% (twice that in Europe, for example), although the commodity price slump has taken a toll. Post-Brexit, the UK should offer continued and better preferential access to Africa. New research shows UK–Africa preferences are worth £300 million in reduced duties (taking into account both ad valorem and other tariffs), with all preferences worth £1.6 billion in avoided duties (but this can have significant knock-on economic effects). The UK could go further by offering relaxed rules of origin (either raise the de minimis significantly above 15% or allow full cumulation for least developed countries (LDCs), many of which are based in Africa). It could seek a waiver for Africa wide cumulation, or simply allow full cumulation for all LDCs. This benefits UK consumers and it will not be very costly for UK producers anyway (100,000 garments workers in the UK, probably catering for the high end, compared with 1.7 million (5.7%) EU garment workers – rules can therefore be more liberal than in the EU). Further attention should go to making links between UK companies, especially those in finance, and African ones. Interesting partnerships have emerged, such as that between Standard Chartered and CDC to support fragile countries such as Sierra Leone.

Business travel cards. The UK can use mode 4 – services negotiations to offer two types of benefits: control of migration and use of labour where it is most effective. Such mode 4 agreements (e.g. an ACP business travel card) allow for temporary movement based on economic needs tests, which can be controlled and implemented by and with key stakeholders. (Managed) brain circulation is a win-win.


Photo credit: Russell Watkins / Department for International Development

Phyllis Papadavid (ODI) | How debt sale can aid Ghana’s economic transformation

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

20 April 2017

Ghana’s recent debt sale presents an opportunity

The cost of, and access to, finance is important for economic transformation in developing countries’ manufacturing sectors. However, among some firms in sub-Saharan Africa (SSA), the costs for borrowing are significantly higher than for their counterparts in Asia. Domestically, government crowding out of the banking sector, through public sector deficits or inflation, has driven interest rates higher. This is exacerbated by banking sector inefficiencies boosting yield spreads. Given this, policies promoting greater financial sector depth and breadth, alongside exchange rate and interest rate stability, are key to reducing the cost of finance and thus, encourage smaller manufacturers’ access to finance and greater transformation. These policies can improve the allocation of capital and financial deepening alongside industrial policy for structural transformation.

Recent developments in Ghana indicate that such a turnaround could be possible. Since 2014, Ghana has seen an approximate 80% depreciation of the cedi against the US dollar, which was driven by weaker export revenues as a result of the impact of lower global commodity and oil prices. A consequence of this has been that Ghana has received $918 million of financial assistance from the International Monetary Fund. This is combined with a previously undisclosed debt of $1.6 billion, which has contributed to significant fiscal deterioration and debt servicing costs.

And yet, Ghana’s most recent $2.2 billion sale of domestic bonds was the largest by an SSA economy in one day. Stabilisation in oil and commodity prices means that Ghana’s growth prospects are looking up. This sale could be a turning point for Ghana if the proceeds are used to support the productive economy and diversification away from its resource sector.

Ghana’s twofold challenge ahead

With increased access to global finance, Ghana now faces a twofold challenge. First, Ghana should ensure that its debt-sale proceeds are used to finance productive investments in support of diversification in its domestic economy. This is important for Ghana to build up resilience to future shocks. Ghana is a largely service sector economy, which comprises roughly 50% of its GDP. Outside of this, its top exports are resource-driven: gold, cocoa and crude petroleum, comprising respective export shares of 40%, 18% and 16% in 2015. However, the price outlook for gold, cocoa and crude petroleum is subdued with a risk of further commodity and oil price shocks – all of which reinforces the need for diversification in Ghana’s manufacturing base.

In the past, commodity price shocks have impacted on Ghana’s domestic currency, exacerbating domestic economic volatility – the cedi real effective exchange rate is approximately 33% lower since its 2008 peak. Monitoring the usage of Ghana’s debt sale proceeds is, therefore, crucial and should be a priority for Ghana’s policy-makers.

Ghana’s second challenge is in reducing its domestic cost of finance for entrepreneurs. Lending rates in Ghana have been persistently high, increasing from 26% in 2012 to 38% at the end of 2016. Given past fiscal mismanagement, the government should ensure that the proceeds are not used to finance its fiscal budget deficits, as this could keep interest rates elevated. The 19.75% interest rate recently paid by Ghana for its 15-year and 7-year domestic debt, and the 9.25% paid for its Eurobonds, demonstrate that raising funds is costly – compared to, for example, the 7.85% paid by Nigeria’s Eurobonds. It is vital for these costly efforts to translate into sustained growth returns.

Supporting greater lending capacity

Introducing domestic financial depth in Ghana could increase domestic lending capacity and access to finance for entrepreneurs. However, as we have recommended in the past, developing countries, such as Ghana, can best utilise bond inflows by first stabilising domestic prices as the capital inflow occurs, in order to prevent unwanted currency appreciation or domestic inflation pressure. And, second, by using the debt sale proceeds to plug economic gaps.

Ghana could stabilise domestic prices by supporting its growth through using macroeconomic policies (fiscal, monetary and exchange rate) to smooth the potential impact of increased inflows on inflation (which is at an elevated 13%) and on fiscal expansion. These policies will help counter exchange rate and interest rate rises. If necessary, the Bank of Ghana could also use the extra revenue to intervene to stabilise the cedi, to support manufacturing growth.

To aid diversification in manufacturing, Ghana’s industrial policy should include plans on how to monitor and use the proceeds from its debt sale. It could maximise the potential of short-term equity and private bond flows by supporting technological development in manufacturing and improved infrastructure, to avoid over-concentration of industry in urban areas and promote regional development. Cumulatively, these policies could help ensure that the proceeds of Ghana’s recent and future debt issuances help boost real structural transformation.


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

Rising wages for unskilled workers in China signals that low-cost manufacturing may start to lose its competitive limit. [1] Our own ongoing background work suggests that from 2009 to 2014, China’s real manufacturing wages increased by an annual average of 11.4%, even though this was in the aftermath of the worst financial crisis since the Second World War. Both foreign multinationals located in China and Chinese manufacturers that are engaged in labour-intensive production in China are therefore actively seeking to relocate to new low-cost destinations.

Jun Hou (Senior Research Officer,ODI) 

01 March 2017

Rising wages for unskilled workers in China signals that low-cost manufacturing may start to lose its competitive limit. [1] Our own ongoing background work suggests that from 2009 to 2014, China’s real manufacturing wages increased by an annual average of 11.4%, even though this was in the aftermath of the worst financial crisis since the Second World War. Both foreign multinationals located in China and Chinese manufacturers that are engaged in labour-intensive production in China are therefore actively seeking to relocate to new low-cost destinations. Apart from generating substantial employment opportunities in these destinations, the presence of labour-intensive manufacturing is also expected to foster the inflow of technological and financial resources which will eventually help the host country’s industrial transformation and economic take-off.

To seize the manufacturing relocation opportunity, Ethiopia has taken a proactive approach in recent years, making tremendous effort to attract foreign investors across the world, especially from China, including in the manufacturing sector. For example, the former prime minister ‘head-hunted’ one of the largest Chinese Original Equipment Manufacturers (OEMs, manufacturers who resell another company’s product under their own name and branding) in shoe manufacturing industry, Huajian Group, whilst attending the Shenzhen Universiade in 2011. The company’s representatives travelled to Ethiopia in August of the same year and met with the former prime minister, and a formal investment plan was announced soon after. In less than half a year, production lines opened up for operation near Addis Ababa employing 600 people. Now, five years later, the Huajian International Ethiopia employs over 4200 locals in six production lines and produces nearly 7500 pairs of shoes per day for well-known brands, all of which are exported to European and US markets. [2] Generating USD3 million export value, and making up to more than 50% share of the shoe exporting in the Ethiopia, Huajian International has become the largest exporter in Ethiopia. [3]

Huajian’s success in writing the ‘Sino-Africa’ cooperation story is by no means an accidental opportunity. Transforming ‘Made in China’ to ‘Made in Africa’ requires multiple supporting factors, including the inputs supply and capability of the company, as well as the commitment from both investors and host government.

“Labour costs normally makes up 30% of the total cost in shoe manufacturing. As the second most populous country in Africa, Ethiopia has abundance of cheap labour force, approximately one tenth comparing to the cost of China. Meanwhile, the country is rich in high-quality leather, which provides us adequate supply of raw materials. In addition, economic development and social environment are relatively stable. Government is also committed to accommodate investment-friendly environment. These are the factors attracting us to come and settle down”, Mr. Zhang said.

Unlike other shoe manufacturing FDI, Huajian group puts great effort in training local staff. New workers without experience in manufacturing industries need to participate in a pre-work training programme, and regular on-the-job training sessions are provided to employees. In addition, the company also regularly selects a group of young Ethiopian university graduates (normally several hundred) and sends them to the headquarter in Southern China for training. Back in Ethiopia, some of them will also have the opportunity to take on managerial positions in the company. It is believed that such forms of on-the-job training are vital in removing culture barriers, conveying corporate culture, as well as upgrading local technological and managerial capabilities.

In response to the continuous rising land and labour costs in China, Huajian Group had already started its internationalisation activities back in 2004. The company’s first attempt was to take advantage of the low cost labour in Vietnam. However, it ended unsuccessfully. Due to the lack of skilled workforce and formal training, the quality of the shoes failed to meet the clients’ standards. In addition, the industry chain was incomplete at the time and domestic suppliers were absent. Many raw materials and components needed to be shipped from China, which took extra time and incurred additional transaction costs. “Inadequate ‘going out’ talent, lack of communication with host government, unfamiliar with the local laws and regulations, and several incidences of labour disputes led to our decision to withdraw the investment from Vietnam”, said Mr. Liu, the deputy general manager. [3]

Learning from past experiences, Huajian International Ethiopia has now become the largest shoemaker in Africa. It appears support from Chinese and the host country government, as well as financial institutions were indispensable for the company’s growth and success in a foreign land. [3] In 2015, Huajian Group received a 138-hectare plot from the local government to boost its investment in Ethiopia. Mr Zhang Huarong, the general director of Huajian group, soon announced the Lebu industrial zone plan in the South Western outskirts of Addis Ababa. The project will inject USD 2.2 billion, supported by CAD (China-Africa Development) fund, to develop the shoe manufacturing industry chain (infrastructure, fabrics, leather, chemical, carton manufacturing etc.) in the region, as well as to attract more Chinese investors to support the industrial cluster development across light manufacturing industries including garment, shoemaking, and electronics. [4] By its completion in 2020, the industrial park is expected to create about 50,000 local job opportunities.

Using industrial parks to bring international investors has become a popular strategy adopted by international donors (i.e. DFID) to help low-income countries move away from aid-dependency towards becoming modern middle-income trading nations. Priti Patel, the UK Secretary of State for International Development states ‘creating factories where international investors would create jobs was fundamentally in Britain’s interest and creating jobs is the best way to alleviate poverty’ [5]. With two operational industrial parks and another eight to come, Ethiopia is planning to achieve this goal within the next decade. [6]

China’s outward investment has expanded in an unprecedented speed during the past decades, which also brought nearly 100 Chinese overseas industrial parks across different continents. Yet, only few have been abloom and fruitful. Huajian international Ethiopia is often cited as one of the most well-known stories. [4] Following the ‘The belt, the road’ initiative, Huajian Group is now preparing their next overseas attempt to Bangladesh, another popular low-cost investment destination.



[1]: McKinsey (2013) ‘A new era for manufacturing in China’


Photo credit: Huajian International Ethiopia,


Phyllis Papadavid (ODI) | How the naira can aid Nigeria’s economic transformation

Economic transformation often denotes a move away from low-productivity to high-productivity growth. Promoting economic transformation in the aftermath of shocks is one strategy for developing economies to build resilience to further shocks. This is particularly true for resource dependent economies, given that they are more vulnerable to shocks. Many of these countries are still managing the fallout from multiple economic shocks, including the continued effects of the commodity price downturn. Fuel exporters saw GDP growth fall from 5.7% in 2014 to -1.6% in 2016 and these countries now face the risk of external debt distress.

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

27 February 2017

Economic transformation often denotes a move away from low-productivity to high-productivity growth. Promoting economic transformation in the aftermath of shocks is one strategy for developing economies to build resilience to further shocks. This is particularly true for resource dependent economies, given that they are more vulnerable to shocks. Many of these countries are still managing the fallout from multiple economic shocks, including the continued effects of the commodity price downturn. Fuel exporters saw GDP growth fall from 5.7% in 2014 to -1.6% in 2016 and these countries now face the risk of external debt distress.

Devaluation has long been considered a successful part of industrial policy. It has stimulated growth in both China and India, as well as in Uganda and Tanzania, making them more competitive economies in the long term. A competitive economy engaging in foreign trade can transform the structure of its domestic production. Knowledge transfer is an important element in this transformation. A more inward-looking economy with a large domestic market can hinder or delay this transformation because it can lead to an over-reliance on consumption at the expense of investment and exports.

The real effective exchange rate (REER) is an important metric for a country’s competitiveness. It can determine the degree to which a resource-dependent economy can use its resource rents to achieve transformation through growth in non-extractive sectors. Here, we look at the recent REER experience of Nigeria and compare it with that of Indonesia. Where Indonesia’s currency policy was an important precursor to its transformation, Nigeria has remained largely resource dependent.

Nigeria’s transformation deficit

Nigeria has a ‘transformation deficit’. Growth in its gross domestic product (GDP) per capita and the share of manufacturing have lagged owing, in part, to a low level of investment. At 9%, Nigeria’s share of manufacturing is well below China’s 30% and Indonesia’s 25%. Nigeria’s trade share of GDP has also declined over the past decade to roughly 20%. In comparison, Rwanda and Ethiopia’s almost 40% trade share has been steadily increasing. Additionally, Nigeria has an export basket that remains largely undiversified and continues to be dominated by crude oil and gas-related products.

Following its de-pegging in mid-2016, Nigeria’s naira nominal effective exchange rate is around 77% below its peak in October 2014. Intermittent US dollar selling by the Central Bank of Nigeria (CBN) has led to uncertainty over the timing and extent to which the CBN plans to let the naira fully float. This uncertainty is important. Currently, it is not affecting the ability to tap into markets because of the recent launch of $1 billion Eurobonds that was eight times oversubscribed. However, the continuing lack of clarity regarding Nigeria’s foreign exchange policy could trigger an unexpected reversal in inflows.

Exhibiting ‘Dutch disease’ type symptoms, Nigeria’s economy has been buoyed by oil-related inflows during the oil price boom. Subsequent naira strength has coincided with a stagnant non-oil sector, which has been at the expense of a largely undiversified manufacturing sector. Looking ahead, CBN naira support at the current rate is consistent with overvaluation, further evidence of which can be seen in the approximate 40% gap with the parallel market naira rate.

The naira’s overvaluation functions as a tax on exports and will limit prospects for Nigeria’s manufacturing capacity. This capacity continues to decline due to foreign exchange shortages. Overvaluation will continue to present a challenge to Nigeria’s economic transformation.

Lessons from Indonesia

As an oil producer, Indonesia has faced many of the same shocks as Nigeria. Between 1974 and 1978, amid higher oil prices, the Indonesian rupiah’s appreciation was as pronounced as the naira’s. However, during that period, using the windfall from higher oil prices, Indonesia actively diversified its economy. Following multiple devaluations from as early as the 1970s, rupiah management was aimed at limiting speculation, thus using the REER to support exports.

Indonesia’s foreign reserve position was stronger than Nigeria’s is currently, and such differences create clear points of divergence for Indonesia and Nigeria’s experiences. However, Indonesia’s experience remains relevant for Nigeria. Most importantly, the Indonesian experience shows that extra wealth can be used to invest in capital-intensive industrial projects. This includes agricultural development and manufacturing, with the latter attracting significant foreign direct investment (FDI). In Indonesia, this manufacturing FDI was followed by instrumental FDI into services, which would be a transformative outcome for Nigeria too.

With oil prices expected to recover moderately in the year ahead, Nigeria could pursue a similar policy. Combined with freely floating the naira, which would allow adjustment in its REER, it would aid diversification and export growth (rather than consumption-based growth). This, in turn, would increase Nigeria’s resilience to future shocks in a world where oil prices are unlikely to reach previous highs.

Photo credit: Arne Hoel/World Bank

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