Africa’s path to riches lies in cheap labour

All low-income countries have the potential for dynamic economic growth. We know this because we have seen it happen repeatedly: a poor, agrarian economy transforms itself into a middle, or even high-income urban economy in one or two generations.

The key is to capture the window of opportunity for industrialisation arising from the relocation of light manufacturing from higher-income countries. That was true in the 19th and 20th centuries, and it remains true today.

Japan seized its opportunity in the years following World War II, using labour-intensive industries, such as textiles and simple electronics, to drive its economy until rising labour costs eroded its comparative advantage in those sectors.

That shift then allowed other low-income Asian economies — South Korea, Taiwan, Hong Kong, Singapore, and to some extent, Malaysia and Thailand — to follow in Japan’s footsteps.

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China, of course, is the region’s most recent traveller along this well-trodden path. After more than three decades of breakneck economic growth, it has transformed itself from one of the poorest countries on earth to the world’s largest economy.

And now that China, too, is beginning to lose its comparative advantage in labour-intensive industries, other developing countries — especially in Africa — are set to take its place.

INDUSTRIAL REVOLUTION

Indeed, ever since the Industrial Revolution, the rise of light manufacturing has driven a dramatic rise in national income. The UK’s economic transformation started with textiles. In Belgium, France, Sweden, Denmark, Italy, and Switzerland, light manufacturing led the way. Similarly, in the US, cities like Boston, Baltimore, and Philadelphia became centres for producing textiles, garments, and shoes.

Until recently, few believed that Africa, too, could become a centre for modern manufacturing. But, with the right policies, there is no reason African countries cannot follow a similar trajectory.

Consider land-locked Ethiopia, which only 10 years ago seemed to be an especially bad bet.

But then the country built an industrial park near Addis Ababa and invited the Chinese shoemaker Huajian to open a factory there. Huajian opened its doors in January 2012 with two production lines and some 600 workers.

LEATHER SHOES

By the end of the year, it had employed 2,000 Ethiopians and doubled the country’s exports of leather shoes. Today, the company has 3,500 workers in Ethiopia producing more than two million shoes a year.

In 2013, spurred by Huajian’s success, the Ethiopian government created a new industrial park, with space for 22 factory units. Within three months, all of them had been leased by export-oriented companies from Turkey, Korea, Taiwan, China, and elsewhere.

Some workers will become managers. They will establish contacts with international investors. And, eventually, some of them will be able to raise capital and start firms of their own — export companies owned and operated by Africans.

Justin Yifu Lin, a former chief economist and senior vice president at the World Bank, is professor and honorary dean of the National School of Development, Peking University, and the founding director of the China Centre for Economic Research. Copyright: Project Syndicate, 2015 (www.project-syndicate.org)