Pursuit of African industrialisation: Lessons from manufacturing growth in Ethiopia

The industrialisation agenda remains a critical priority for policymakers across Africa. It is viewed as a pathway to economic transformation, with the potential to improve living standards, reduce poverty, drive economic growth and create jobs, particularly in the manufacturing sector. 

However, manufacturing growth in Africa has been sluggish, with the sector's contribution to GDP either remaining stagnant or declining over the past decade. Africa's share of global manufacturing has dropped from approximately 3% in the 1970s to less than 2% today, with production primarily focused on low-technology products such as textiles, clothing, and footwear.

The high stakes of industrialisation in an evolving global competitive landscape

The global competitive landscape has become increasingly challenging, limiting the effectiveness of traditional industrial policies in Africa. The potential for the classic structural transformation pathway, which relies on industrial and trade policy, to yield similar returns to those seen in regions like South Asia in previous decades is now more limited. In particular, with the rise of China as a manufacturing powerhouse, African economies face significant difficulties in embarking on the same path. After joining the World Trade Organization in 2001, China quickly grew to dominate international markets, becoming the largest exporter in the world by 2009 (Figure 1). 

Figure 1: Total exports by the world’s top exporters

The impact of increased competition with China has been felt globally. Leading economies like the United States, Mexico and France have suffered significant manufacturing job losses as a result of this intensified competition. As these countries imported more goods from China, their domestic manufacturers struggled to compete with the lower-priced Chinese products. This shift led to widespread job losses and economic adjustments as industries either downsized or shut down entirely.

South Africa, one of the more developed economies in Africa, has also recorded similar negative impacts. The influx of Chinese goods led to a decline in local manufacturing and the loss of South African manufacturing jobs. This highlights industries' vulnerability to global market shifts and underscores the challenges African economies face in their pursuit of industrialisation amidst stiff global competition.

A different story in Ethiopia

Interestingly, in response to the same global shock, my recent study documented that Chinese imports have actually spurred manufacturing employment in Ethiopia. While China’s share in Ethiopia’s imports nearly quintupled between 1998 and 2016 (Figure 2), a large segment of Ethiopia’s manufacturing sector recorded higher employment levels. This puzzling outcome raises important questions about the unique dynamics at play in the Ethiopian manufacturing sector.

Figure 2: Total Chinese imports and foreign direct investment to Ethiopia

The key difference lies in the nature of Chinese imports to Ethiopia. Unlike in other countries, where imports compete directly with local goods, Chinese imports to Ethiopia are predominantly inputs for production rather than finished goods (Figure 3). Examples include electrical machinery, mechanical appliances, and clothing accessories, which are critical inputs for industries such as textiles, one of the largest employers in Ethiopian manufacturing.
 

Figure 3: Composition of Chinese imports to Ethiopia

Benefits of cheaper inputs for manufacturing employment

The influx of Chinese inputs has given Ethiopian manufacturers access to cheaper and more readily available resources, raising manufacturing employment (Figure 4). Previously, these inputs were often imported from Europe and America at higher costs. The shift towards importing from China has significantly reduced production costs for Ethiopian manufacturers. This cost reduction has allowed firms to increase capacity utilisation and become more productive, thereby expanding their operations and creating more jobs in the sector.

Furthermore, existing research highlights how technological mismatches between regions can be mitigated through the strategic use of inputs from technologically-closer regions, which can enhance productivity and support economic growth. In Ethiopia's case, this means that the availability of Chinese inputs has not only lowered production costs but also facilitated technological advancements and operational efficiencies in the manufacturing sector.

However, it is important to note that these positive effects are concentrated among larger firms. Large firms, by nature, have better access to international markets and are more adept at managing complex supply chains. They are well-positioned to take advantage of cheaper inputs and scale up their operations. Conversely, smaller firms, which often lack the resources and expertise to navigate international trade, may not experience the same benefits.

Figure 4: Impact of intermediate and final goods on manufacturing employment

Facilitating access to inputs to harness the full potential of industrialisation

To harness the full potential of industrialisation, policymakers in Ethiopia and other African countries need to facilitate better access to intermediate inputs that are needed for domestic manufacturing development. One significant barrier in Ethiopia is the reported difficulty in accessing foreign exchange, which hampers firms’ ability to import necessary inputs. 

Addressing these issues requires targeted policies that improve access to foreign exchange and streamline import processes. Additionally, supporting smaller firms to connect with international suppliers and manage imports effectively could help spread the benefits of cheaper inputs more broadly across the manufacturing sector.

The goal is to create a robust manufacturing sector

The story of industrialisation in Africa is complex and multifaceted. While the global competitive landscape presents significant challenges, it also brings unique opportunities that can be leveraged to drive economic growth. Ethiopia's experience with Chinese imports illustrates how the strategic use of imported inputs can spur manufacturing employment and enhance productivity.

The goal remains clear: to create a robust manufacturing sector that drives economic transformation and improves the livelihoods of millions across the continent. Policymakers must recognise the nuanced impacts of global trade dynamics and tailor their strategies accordingly. By facilitating access to critical inputs, improving foreign exchange availability, and supporting both large and small firms, African countries can navigate the path towards industrialisation more effectively.