Our central question is whether, and how, African countries can break into global manufacturing in a substantial way. For many poor countries, labor-intensive sectors based on low-cost production platforms have been the first step on the industrial ladder. Using a newly constructed panel of firm-level data from the World Bank’s Enterprise Surveys, we look at labor costs in a range of low- and middle-income countries in Africa and elsewhere. Using fixed and random effects models, we find that relative to comparator countries at comparable income levels, industrial labor is more costly for firms that are located in SubSaharan Africa. This suggests that, if they are to industrialize, most countries will need to seek other paths, whether based on natural resources or on regional integration, or measures to improve their business climates and upgrade their skills to the point that competitiveness improves enough to sustain industry without resorting to low wages. Such a “balanced strategy”—perhaps along the lines of the “matrix” approach advocated for Europe—may be more politically appealing for some countries but in the interim it risks failing to create large numbers of industrial jobs and perhaps foregoing learning opportunities. However, we also find that Africa is not homogeneous: there are a few countries that, on a labor cost basis, and also on the basis of observed purchasing power parity price levels, may be potential candidates for low wage manufacturing. Ethiopia stands out and appears to be making efforts to position itself as a low-cost manufacturing platform, although it is too early to pronounce on its success. We analyze its policies from a cost-competitiveness perspective, including those related to agriculture, to investor incentives, and to holding down the costs of essential inputs and improving their supply.
|Title||Can Sub-Sahara Africa Be a Manufacturing Destination? Labor Costs, Price Levels, and the Role of Industrial Policy|
|Published in||Journal of Industry, Competition and Trade 20, 335-357 (2020)|
|Thematic Area||Labour Markets in Low-Income Countries|
|Project||Are Labor Costs in Africa too High?|