Manufacturing a COVID-19 Recovery: Why Building Local Manufacturing Capacity Is ...
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Africa, October, 23 2020 - The COVID-19 pandemic is pushing sub-Saharan Africa into negative gross domestic product (GDP) growth rates unseen in more than two decades. The region is not alone in weathering the global pandemic’s economic fallout: Countries around the world are facing strained supply chains and other consequences of the virus and the lockdowns it has necessitated.
However, sub-Saharan African economies are particularly vulnerable because they rely on commodity exports to global markets and imports of finished goods from developed markets. The majority of African countries depend on international imports and exports for around 30% of their GDP. As the continent looks ahead toward resuming economic activities after the pandemic, now is the time to begin to shift these figures – and for policymakers to enact policies that encourage the development of local manufacturing capacity. Doing so will boost local economies, present an opportunity to strengthen regional energy systems, and create higher-paying productive jobs.
DOMESTIC MANUFACTURING CAN HELP COUNTRIES RECOVER FROM COVID-19
African businesses will spend over $660 billion on manufacturing by 2030. In addition to the domestic linkages created by local manufacturing, such as the local supply chain for constructing factories, this figure represents a tremendous recovery opportunity for African economies coming out of the pandemic – and industry stakeholders are starting to recognize this. The Importers and Exporters Association of Ghana, for example, is lobbying the Ghanaian government to make the country’s $6 billion manufacturing sector a crucial part of its recovery plan.
There is particular room for growth in advanced manufacturing, rather than the low-skilled, labor-fueled manufacturing of cheap products that is typically associated with developing markets. For example, African countries import as much as 90% of their pharmaceuticals – an import market worth close to $14 billion. Producing these drugs domestically would recapture some of this value and support industries related to pharmaceuticals, such as healthcare and higher education. As these numbers illustrate, Africa is far from reaching its full manufacturing potential: Despite advancements in productivity, the sector’s share of sub-Saharan African GDP fell from 18% in 1975 to 11% in 2018. COVID-19 has created an opportunity for countries to turn this trajectory around, making manufacturing the cornerstone of their economic recoveries and continued growth.
A GROWING MANUFACTURING SECTOR REQUIRES ENERGY SECURITY
Despite this potential, the high cost of electricity across the continent is holding back Africa’s manufacturing growth. By some estimates, African businesses pay 25% to 100% more for electricity from the grid than similar companies in other regions. This is because businesses must often rely on expensive backup generators as primary energy sources in the face of frequent power outages. One study found that 25% of businesses in Ghana, Nigeria and Angola suffered double-digit losses in sales due to power outages, with some firms losing 31%.
A growing manufacturing sector will require large-scale, reliable and sustainable energy systems. Governments and private investors alike must focus on transmission and distribution projects to reliably deliver power to businesses across African countries. In West Africa, energy portfolios of hydropower, solar and wind have the potential to be significantly cheaper than natural gas by 2030. Off-grid solar projects may also provide manufacturers with an alternative to national power grids. The strengthening of energy systems must go hand-in-hand with the development of the manufacturing sector.
THE MANUFACTURING SECTOR CAN CREATE MILLIONS OF JOBS
COVID-19 has made job creation even more paramount, considering that 20 million Africans are likely to lose their jobs because of the pandemic. The good news is that African countries can capture part of the 100 million manufacturing jobs that will leave China by 2030. With close to 11 million young Africans entering the workforce every year, these manufacturing jobs can easily be the difference between the continent’s unemployment rate reaching double-digits or steadily coming down over the next decade. Replacing pharmaceutical imports by developing domestic manufacturing can create over 16 million African jobs alone. The implementation of the African Continental Free Trade Agreement also can spur manufacturing development and job creation. By incentivizing imports of African-made products, the agreement – which went into effect last year – will support the regional manufacturing sector’s growth by catering to African markets. Intra-continental trade accounts for just 15% of all trade in Africa: Bringing that closer to the 60-70% range seen in Asia and Europe would likely create millions of jobs.
The next step in Africa’s development story must include a robust domestic manufacturing sector. Prioritizing high value-add manufacturing, rather than low-skilled manufacturing, will enable countries to attract job-creating foreign direct investment, sell goods to their African neighbors, and find ways to provide reliable and sustainable energy. Boosting the region’s manufacturing sector can help African economies not only recover from the pandemic, but also become more resilient to future economic shocks.