Key message 3 – There are a growing number of successful sectors outside of manufacturing that could offer a new growth path for Africa.
There are several reasons why growth theory has emphasised the manufacturing stage as crucial for development:
Key advantages of the manufacturing sector
- Manufacturing can employ large numbers of low-to-medium skilled workers.
- Its processes can be easily standardised and scaled, which complements economic clustering in cities.
- The sector benefits from technological change and productivity growth, thus exhibiting positive learning and process development opportunities.
- It is tradable, allowing developing countries to tap into global value chains as well as new markets for buying and selling goods.
The question is whether manufacturing is the only sector that exhibits these positive growth externalities. According to recent research coordinated by the United Nations University World Institute for Development Economics Research (UNU-WIDER) and the Brookings Institution, technological change over the last two decades has generated a wide range of new service industries that have many features in common with manufacturing (Newfarmer et al., 2019).
The UNU-WIDER research identifies three sectors that are showing great promise for structural transformation in Africa: Agro-industrial and horticultural value chains; business and traded services (e.g. telecommunications); and tourism.
These are referred to as ‘industries without smokestacks’ (IWSS), given they share the positives of manufacturing but are not associated with the fabrication of tangible goods and its requisite environmental impacts. Preliminary evidence shows that in several African countries, these industries grew more rapidly than non-mineral exports between 2002–2015, gaining prominence in Africa’s export portfolio. This research sits interestingly within an unresolved debate on African development: the question whether certain countries could leapfrog the manufacturing stage altogether. Technological advances have been key support cases for such arguments in the past. For instance, Kenya’s ICT and mobile internet growth over the last 15 years has led to the emergence of globally competitive service markets, even in the face of a relatively low and declining role of manufacturing. Business process outsourcing (KenCall), telecommunications, and mobile payment services (M-Pesa) are prime examples of Kenya’s success across a range of advanced service industries (Hoekman, 2019).
Such cases offer inspiration for African growth, but they shouldn’t be taken to downplay the potential importance of manufacturing (Juma, 2017). Instead, we should recognise that certain services can offer a complementary growth path that also supports broader industrialisation.
For instance, improvements in communications, transport, and energy services make it increasingly possible to trade and deliver services digitally through ICT networks, but they also lower transaction costs and create knowledge spill-overs, which support the manufacturing sector. Similarly, business services, such as accountancy and finance, can improve budgeting and accountability in manufacturing, leading to increased foreign direct investment (FDI).
It’s clearly important to take a broader look at industry and not overemphasise one sector. Another example is the tendency to overemphasise global tradables at the expense of industries that can support regional or domestic trade. As shown by IGC research, the bulk of trade transactions actually happen domestically rather than internationally, so policy would be remiss to neglect internal trade barriers (Donaldson et al., 2017).
Moreover, even low-tech, non-tradable sectors – such as retail, transport, construction, and food services – could have very high growth potential if African businesses adopt the right technologies and production processes needed to increase labour productivity. In this sense, we may have to get past the notion that productivity growth is limited to services that are highly tradable.
Finally, we should note that the distinction between sectors is becoming increasingly blurred. Many industries, such as food processing and distribution, now entail elements along the value chain that are distinctly reminiscent of manufacturing, such as the production and packaging line, as well as those more commonly associated with service delivery, such as the preparation of food in restaurants.
The boundaries between, and the unique features of, industries are often poorly distinguished, affecting not only how sector productivity is recorded but also whether policy is appropriately targeted to support different sectors.
One concern for African cities is that most service industries are nascent, at small-scale, and relatively local in scope, thus neither tradable globally nor regionally. Many of the same factors that stall manufacturing are likely to also stall the development of higher-value service industries. This is the subject of our closing section.