*Industry in Africa In or out? / The Economist 17.09.16*

Should Africa concentrate on serving local or global markets?

Sep 17th 2016 | From the print edition

Too many bottlenecks

DRIVE north-east from Lagos along a potholed highway lined by the shells of
burned-out trucks and, as you approach Ibadan, you can see a few modern
factories sprouting amid the rusted tin roofs. Most produce basic goods for
local markets such as cigarettes or cardboard packaging, rather than the
mobile phones, cars and computers that the government would like Nigeria to
export. Yet a new report from the McKinsey Global Institute (MGI), a
think-tank run by a consulting firm, suggests that these sorts of low-tech
and local products represent a huge opportunity for industrialisation in

McKinsey reckons that Africa’s manufacturing output could double over the
coming decade—a remarkably ambitious forecast, since it would imply a
trebling of the growth rate since 2000. Most of the gain is supposed to
come from making things that would be sold in the region; many would
replace imports. That there is scope for import-substitution is clear.
Africa imports about a third of its processed food and drink, a far higher
share than developing Asia or Latin America; much more of that could be
made locally. It also buys in goods that do not travel well, such as cement
(about 15% of local consumption comes in on ships), milk and cornflakes.

Yet the report also puts its finger on a reason why many African countries
make so little: the paucity of big firms. The authors, who have constructed
a new database of Africa’s big companies, think that the continent has
about 400 companies with annual revenues of more than $1 billion each and
700 with revenues of more than $500m. Those numbers may seem surprisingly
high, even to seasoned investors on the continent—a reflection of how few
African firms have graduated to international capital markets. But once one
excludes South Africa, the biggest and most industrialised economy, the
rest of the continent has some 60% fewer large firms relative to its
economic output than places such as India and Brazil. This meshes with data
gathered by others such as the International Growth Centre (IGC) at the
London School of Economics. It found that Tanzania, for instance, had only
80 manufacturing firms employing more than 100 people and 695 employing
10-99 people.

Acha Leke, of McKinsey, says there is a case for African governments to
adopt industrial policies such as supporting exporters and imposing tariffs
on imports to promote local champions. He cites Nigeria’s Dangote Cement,
which prospered thanks to draconian restrictions on imports. It is
doubtful, however, that ordinary Nigerians have benefited from Dangote’s
near-monopoly of their cement market (it at one point charged double the
international price and still has a 68% market share). The IGC finds that
few if any big African industrial exporters were built on such policies.
Rather they emerged from a range of sources including foreign investments
or local trading companies.

The MGI report will be widely read by African politicians and civil
servants. They will no doubt start drafting new industrial policies aimed
at picking winners and protecting them. That would be a shame. The main
impediments to Africans making and selling more things are rapacious
governments, potholed roads, inefficient ports and power lines without
electricity. How about fixing those things instead?

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