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January 2021 Newsletter: The cost of manufacturing in Africa

Manufacturing in AfricaWith the launch of AfCFTA on 1st January 2021, there seems to be a strong wave of optimism that the much anticipated African intraregional free trade agreement has finally been activated. According to a World Bank report, AfCFTA will significantly boost African trade, particularly intraregional trade in manufacturing.

The volume of total exports would increase by almost 29 percent by 2035 relative to the baseline. Intracontinental exports would increase by more than 81 percent, while exports to non-African countries would rise by 19 percent. Intra- AfCFTA exports to AfCFTA partners would rise especially fast for Cameroon, the Arab Republic of Egypt, Ghana, Morocco, and Tunisia, with exports doubling or tripling with respect to the baseline.

In this edition of the newsletter, we will be exploring the Cost of Manufacturing in Africa.

Competitive workforce: Africa is an increasingly cost-effective location for manufacturers, especially in light of current demographic trends. The population living on the continent will be larger than that of either India or China by mid-century, with approximately 1.2 billion people. Africa’s share of the global working-age population (15-64 years) is projected to double to roughly 20 percent by 2050 (source Brookings).

The projections above confirm that Africa will ultimately become the most labour-friendly destination to establish manufacturing business in the near future and beyond.

Shipping costs: Radelet and Sachs (1988) in their research findings, concluded that shipping costs play a significant role in a country’s prospects for growth in manufactured exports and overall national economic growth as well. The movement of goods from port of entry into several African countries are disproportionately challenged by bureaucratic red tape, macroeconomic policies and poor infrastructure.

The transport infrastructure impediments have compelled businesses to recover costs by inflating the price on their finished products. However, with the advent of AfCFTA, some African Governments are now making deliberate efforts to improve their transport and other key infrastructures to position themselves as competitive destinations for manufacturing investors.

ICT & Telecoms: The exponential growth in mobile technologies has enabled African businesses to “leapfrog” previous technologies in order to access consumers and improve business-to-business networks.

The mobile ecosystem is estimated to contribute at least 7 to 8 percent to Africa’s GDP in the coming years, as the recent rise of e-commerce, e-banking, and mobile and internet communication is helping to facilitate business-to-business transactions along the supply chain (source Brookings).

The wide spread of GSM technology has also empowered both small and large-scale manufacturers in Africa to successfully launch into global markets outside their local domain.

Special Economic Zones (SEZ): Some Governments in Africa have adopted Special Economic Zones (SEZ) as effective strategy to develop specific manufacturing sector(s) in their country.  The SEZ offer manufacturers attractive incentives such as higher quality infrastructure, tax benefits, import-duty exemptions and duty-free movement of goods among others. Considering that some countries are endowed with abundant natural resources while others have strategic export gateway locations, Government of these countries tactically establish SEZ to take advantage of unique features of a target location.  SEZ has resulted significant growth in specific manufacturing sectors such as automobiles in Morocco and textiles in Ethiopia among others.

The next edition of OctoberFirst Newsletter will feature ManufacturingSupply Networks in Africa.

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