Labor productivity growth and industrialization in Africa

Margaret McMillan Albert Zeufack

Professor of Economics Chief Economist
Tufts University Africa Region
NBER, IFPRI World Bank

May 5, 2022

Journal of Economic Perspectives—Volume 36, Number 1—Winter 2022

Manufacturing in Africa: the Landscape/Setting
 The work discussed today is about manufacturing in Africa south of the Sahel.
 The timeframe covered is largely 2000-2018.
 This period was one of relatively high growth for many African countries.
 Over this period, manufacturing employment in 18 countries expanded from roughly 6
million to 20 million; and the employment share of manufacturing went from 7.2% to 8.4%
(Economic Transformation Database, 2021).
 Manufacturing exports from African nations have also grown at an annual average of 9.5
percent per year (Signé 2018).
 Employment and value-added shares remain very low in comparison to the rest of the
world (Diao, Harttgen, and McMillan 2017; Nguimkeu and Zeufack 2019).
Roadmap for Today
 Patterns of Labor Productivity Growth and Structural Change
 A Closer Look at the Manufacturing Sector
 Challenges to Expansion of Manufacturing Employment
 Opportunities for Expansion of Manufacturing
 Summarizing the Evidence
 Labor productivity growth decomposition: 18 African Countries
3.0 3.0

2.5 2.5

2.0 2.0

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5
1986-2000 2001-2018

Structural change contribution to economywide labor productivity growth

Within modern sectors contribution to economywide labor productivity growth

Within agriculture contribution to economywide labor productivity growth

Economywide labor productivity growth

Source: Author’s calculations using the Economic Transformation Database and based on 18 African countries: Burkina Faso (BFA), Botswana (BWA), Cameroon (CMR), Ethiopia (ETH), Ghana
(GHA), Kenya (KEN), Lesotho (LSO), Mauritius (MUS), Mozambique (MOZ), Malawi (MWI), Namibia (NAM), Nigeria (NGA), Rwanda (RWA), Senegal (SEN), Tanzania (TZA), Uganda (UGA), South
Africa (ZAF), and Zambia (ZMB).
Negative correlation between structural change Positive correlation between structural change
and within sector productivity growth and within sector productivity growth
Africa Asia

Source: Updated results include 18 African countries through 2018. Original results appeared in Diao, X., McMillan, M. and Rodrik, D., 2019.
 Manufacturing labor productivity growth decomposition
Annual Average Labor Productivity Growth in Percentages, African countries, 2001-2018

1.1 1.1

0.8 0.8
Within contribution to labor
productivity growth in
manufacturing
0.5 0.5

Structural change contribution to

labor productivity growth in
0.2 0.2
manufacturing

-0.1 -0.1 Total labor productivity growth in

manufacturing

-0.4 -0.4

-0.7 -0.7
BFA SEN KEN RWA NGA GHA LSO ZMB CMR NAM ETH TZA MWI BWA ZAF UGA MOZ MUS Average

Source: Author’s calculations using the Economic Transformation Database.

Notes: The 18 African countries Burkina Faso (BFA), Botswana (BWA), Cameroon (CMR), Ethiopia (ETH), Ghana (GHA), Kenya (KEN), Lesotho (LSO), Mauritius (MUS), Mozambique (MOZ), Malawi
(MWI), Namibia (NAM), Nigeria (NGA), Rwanda (RWA), Senegal (SEN), Tanzania (TZA), Uganda (UGA), South Africa (ZAF), and Zambia (ZMB). Data for Mauritius covers the period of 1973 – 2002
its’ period of industrialization. The average is for the 16 low and low-middle income African countries and so excludes Botswana and Mauritius.
 Manufacturing labor productivity growth decomposition
Annual Average Labor Productivity Growth in Percentages, Asian countries, 2001-
2018
2.5 2.5

2.0 2.0

1.5 1.5
From within manufacturing growth

1.0 1.0
From structural change contribution
of manufacturing

0.5 0.5
Manufacturing's total contribution
to economywide labor productivity
growth
0.0 0.0

-0.5 -0.5
NPL PAK LKA KHM LAO VNM BGD IDN TUR THA PHL IND SGP HKG MYS KOR TWN MMR CHN Average

Source: Author’s calculations using the Economic Transformation Database and Groningen Growth and Development Center (GGDC).
Notes: The 17 Asian countries are Bangladesh (BGD), Cambodia (KHM), China (CHN), India (IND), Indonesia (IDN), Korea (KOR), Lao PDR (LAO), Malaysia (MYS), Myanmar (MMR), Nepal (NPL),
Pakistan (PAK), Philippines (PHL), Singapore (SGP), Sri Lanka (LKA), Thailand (THA), and Vietnam (VNM), as well as Hong Kong, China (HKG) and Taiwan, China (TWN). Data for advanced
countries/regions, including Korea, Singapore, Hong Kong, and Taiwan is from GGDC database averaged for the period of 1976-1990. For the rest of countries, data is from Economic
Transformation Database averaged for the period of 2001-2018.
A Closer Look at
Manufacturing employment
in 8 African Countries
• Vertical red lines mark the point of the
beginning of the countries “growth boom”.

• Employment levels by year decomposed by

formality status – orange is total employment
and, solid green is formal and dashed green
is informal.

• Patterns in South Africa and Mauritius are

somewhat similar to the rest of the
industrialized countries, formal sector
employment is falling (China Shock +
Technology).

• Patterns in the other 6 African countries

show the relatively rapid growth in
employment in informal/small firms not
captured in UNIDO data (or firm censuses
ETH and TZ).
Manufacturing
employment in
four Asian Late
Industrializers
• Vertical red lines mark the point of the
beginning of the countries “growth
boom”.

• Employment levels by year

decomposed by formality status –
orange is total employment and, solid
green is formal and dashed green is
informal.

• In Lao, Sri Lanka and Vietnam,

expansion of formal sector
employment accompanied by
declining employment in
small/informal firms. Not the case in
Bangladesh.
Summarizing the evidence so far
 Labor productivity growth in African manufacturing is very low; this is because the positive
impact of structural change has been offset by negative within sector productivity growth
(also reported in Timmer et al 2015). The question is why?

 Macro trends from the manufacturing sector suggest that issue might be rapid growth in
small and/or informal firms; this has been characterized as demand driven structural
change in previous work (for theoretical framework see Diao et al 2019)

 But there are at least two other possibilities (not mutually exclusive): (i) poor performance
of the formal manufacturing sector, and; (ii) measurement error in national accounts data
and/or employment data.
Formal Manufacturing Sector Performance 2000-2018
Employment growth, 2000- Real output per worker Real value added p.w. Real exports growth, 2000-
growth, 2000- growth, 2000-

Bangladesh1 0.066 0.042 0.011 0.100

Botswana 0.016 0.070 0.044 0.037
Cameroon2 0.038 0.082 0.119 0.089

Eritrea -0.019 0.018 0.040

Ethiopia3 0.065 0.047 0.041 0.093
Ghana 0.086 0.059 0.099 0.073
Kenya 0.019 0.065 0.067 0.056
Lao People's Dem Rep4 0.074 0.072 0.083 0.208
Lesotho5 0.065 0.031
Malawi6
-0.052 0.156 0.109 0.058
Mauritius -0.031 0.027 0.033 -0.012
Nigeria7 0.015 0.133
Senegal 0.025 0.021 0.023 0.030
South Africa -0.005 0.018 0.014 0.025
Sri Lanka 0.049 0.024 0.019 0.024
United Republic of Tanzania 0.036 0.033 0.081 0.134

Viet Nam 0.078 0.063 0.065 0.178

Source: UNIDO INDSTAT 2 Accessed April 29, 2022

 Growth estimates for labor productivity and employment
Firm-level and sector-level, Tanzania (2008-2016)

Notes: The period covered for Tanzania is 2008-2016. This figure presents the estimated growth rates from within-firm and within-sector regressions of ln(value added per worker) and ln(employment) on a year trend and with
interactions of the year trend and firm group of interest—large firms, exporters, foreign firms, and public firms. A small firm is defined as having an average of 10-49 workers in its’ first two years of operation and a large firm is
defined as having 50+ workers also based on average employment in its’ first two years of operation. In the firm-level regressions we include controls for industry and region. For sector-level growth, we consider growth in the
entire sample and in the sample of small firms and large firms separately.
 Growth estimates for labor productivity and employment
Firm-level and sector-level, Ethiopia (1996-2017)

Notes: The period covered for Ethiopia is 1996-2017. This figure presents the estimated growth rates from within-firm and within-sector regressions of ln(value added per worker) and ln(employment) on a year trend and with
interactions of the year trend and firm group of interest—large firms, exporters, foreign firms, and public firms. A small firm is defined as having an average of 10-49 workers in its’ first two years of operation and a large firm is
defined as having 50+ workers also based on average employment in its’ first two years of operation. In the firm-level regressions we include controls for industry and region. For sector-level growth, we consider growth in the
entire sample and in the sample of small firms and large firms separately. For Ethiopia, we also present results from the sector-level growth regressions with SSI data representing firms with <10 workers.
Summarizing
 Growth in real value added per worker in relatively large formal sector firms is positive in
African countries for which we have data; 2000 onwards (UNIDO data).

 Firm level manufacturing censuses support this conclusion for firms with > 50 employees
in Ethiopia and Tanzania.

 Ethiopian firms with <10 employees and Tanzanian firms with <50 employees have limited
productivity growth and rapid employment growth.

 These results suggest the poor productivity performance of economywide manufacturing

is not a result of subpar performance of large formal sector manufacturing firms.
These Stylized Facts Lead to the Following Questions

“It is the inability of larger firms, those employing more than fifty, to grow in
numbers and employment that needs to be explained, if the inability of Ghana
to produce more productive jobs in its’ manufacturing sector is to be understood.”
Teal, Journal of African Economies, 2021, https://doi.org/10.1093/jae/ejab015

 Why has employment growth in larger more productive manufacturing firms been so anemic in
African countries?
 What are the implications and where are the opportunities?
Why hasn’t employment in large productive firms grown?

 High labor costs

 but payroll shares in value added are low (firm data and UNIDO data)

 High corruption/poor busines environment

 but why do effects show up in employment and not productivity?

 Poor business dynamism or high costs of entry

 entry/exit rates are high during growth booms (comparable to VNM)

 “Excessive” capital intensity of large firms

 where excessive means relative to economywide K/L ratios
Business Dynamism: exit and entry in TZA and ETH (comparable to VNM)

All firms Small firms Large firms

Firms Share of Share of Firms Share of Share of Firms Share of Share of
employment sales employment sales employment sales
Tanzania (2008-2016)
Exiters 0.82 0.78 0.73 0.87 0.84 0.81 0.74 0.78 0.73
Entrants 0.93 0.81 0.76 0.96 0.93 0.92 0.80 0.77 0.73
Ethiopia (2008-2016)
Exiters 0.86 0.82 0.80 0.88 0.82 0.77 0.79 0.82 0.81
Entrants 0.90 0.88 0.82 0.91 0.84 0.80 0.88 0.89 0.83
Ethiopia (2000-2017)
Exiters 0.91 0.90 0.84 0.92 0.90 0.83 0.88 0.90 0.85
Entrants 0.97 0.94 0.93 0.97 0.96 0.93 0.95 0.94 0.94
Ethiopia (2000-2011)
Exiters 0.62 0.62 0.29 0.70 0.65 0.59 0.44 0.34 0.25
Entrants 0.83 0.56 0.54 0.88 0.74 0.76 0.71 0.51 0.50
Vietnam (2008-2016)
Exiters 0.48 0.18 0.16
Entrants 0.75 0.45 0.49
Vietnam (2000-2017)
Exiters 0.75 0.39 0.46
Entrants 0.97 0.83 0.84
Note: The “firms” column displays for exiters the percent of firms that existed in the initial year that did not survive to the final year, and for entrants the percent of firms that existed in the final
year that did not exist in the initial year. For example, 82 percent of firms in the TZA ASIP panel in 2008 did not survive to 2016.
An Alternative Hypothesis: Rising Capital Intensity of Formal Sector Manufacturing

Capital Labor Ratios Manufacturing, Ethiopia, Tanzania and Vietnam

(2012 USD ‘000s, Employment Weighted)

• Synchronous trends reflect “globalization” of technology in large firms; rising trend not news
• Trend makes it tougher for countries that currently have a comparative advantage in low
skilled labor to industrialize
 Capital-intensity in manufacturing is “excessive” relative to factor endowments
• GDP p.c. in TZ and ETH is
roughly 5% of CZE’s GDP

• Economywide K/L in TZ and

ETH is a similarly low share
of CZE’s economywide K/L

• CZE is considerably more

abundant in capital and
skilled labor

• But the K/L ratios in

manufacturing are closer to
50% of the K/L ratios in CZE;
higher for largest firms

• Implication is that
manufacturing not aligned
with poor countries’
comparative advantage in
low skilled labor
 Manufacturing and economy-wide capital-labor ratios
Tanzania, Ethiopia, Czech Republic, and Vietnam

Notes: Capital-labor (K/L) ratios are in $1,000 constant 2011 PPP $. PPP convertors differ for machinery & equipment and buildings & structures, and they are both from ICP. For buildings and structures, the PPP conversion for
construction from ICP is used. 2010 PPP is calculated by using the growth rate between 2011 and 2017 PPPs from ICP, a similar approach used in WDI.
 “Excessive” capital intensity: key points
 While K/L ratios in TZA and ETH manufacturing are lower than in much richer comparator
nations, these ratios are still much higher than would be expected based on their relative
unskilled labor abundance and low per-capita income levels

 Focusing on the largest firms, K/L ratios in TZA and ETH are actually comparable to those in
much richer OECD countries

 K/L ratios have increased much more rapidly in TZA and ETH manufacturing than in the economy
as a whole

 Bottom line is that it is now considerably harder to generate large scale employment gains via
industrialization
 Where does this leave us?
• Need to reframe the dialogue around industrialization in Africa
• Capitalize on country-specific comparative advantages:
• Apparel industry is still relatively labor intensive so locate in countries with relatively
cheap labor (Ethiopia)
• Many African countries are abundant in natural resources so focus on value addition
to natural resources and supplying inputs to these industries (Nigeria, Tanzania)
• Take small businesses seriously; local content laws don’t work when
capabilities don’t exist.
• Identify strategic priorities (pharmaceuticals, green energy use and
production) and what would be required to ramp up production in Africa
 Ethiopia Industrial Parks: Number of Firms and Employees as of 2020/21
# of firms # of workers, annual
All firms Garment All firms % Female Garment Labor Intensive Manufacturing for
Eastern IP Total 91 33 18,075 64 8,110
(Since 2012/13) With 1,000+ workers 1 1 1,381 71 1,381 Export: Ethiopia
Bole Lemi IP Total 12 10 17,169 90 15,723
(Since 2015/16) With 1,000+ workers 3 3 14,004 89 14,004
Hawassa IP Total 21 19 28,721 86 25,712 • Employment in Ethiopia’s Industrial Parks grew rapidly
(Since 2016/17) With 1,000+ workers 10 10 21,589 91 21,589 between 2013 and 2019 (comparable to growth in
Huajian Shoes City IP Total 4 1 4,643 27 393
(Since 2016/17) With 1,000+ workers 1 0 3,699 33 0
employment in foreign firms in Vietnam 1990-2000).
George Shoes IP Total 1 0 584 26 0
(Since 2017/18)
Adama IP
With 1,000+ workers
Total
0
4
0
4
0
10,816
0
52
0
10,816
• 90% of this employment is in foreign firms.
(Since 2018/19) With 1,000+ workers 1 1 4,872 94 4,872
Kombolcha IP Total 4 4 3,126 89 2,166
• 74% of this employment is in apparel firms and 83% of
(Since 2018/19) With 1,000+ workers 1 1 1,924 89 1,924
Mekelle IP Total 4 4 4,410 78 4,410 that employment is in firms with > 1,000 employees.
(Since 2018/19) With 1,000+ workers 1 1 1,168 1,587
Velocity IP Total 1 1,621 79
(Since 2018/19) With 1,000+ workers 1 1,621 79 • 74% of the employees in the apparel firms are female.
Bahir-Dar IP Total 2 2 692 94 692
(Since 2019/20) With 1,000+ workers 0 0 0 0 0
Debre Brehan IP Total 1 1 896 83 896 • Apparel firms tend to hire women with at least a 10th
(Since 2019/20)
Dire-Dawa IP
With 1,000+ workers
Total
0
4
0
0
0
1,017
0
46
0
0
grade education; on average total compensation of
(Since 2019/20) With 1,000+ workers 0 0 0 0 0 these women is roughly 4 times the cost of basic
ICT Park Total 1 0 957 56 0
(Since 2015/16) With 1,000+ workers 0 0 0 0 0
needs.
Jimma IP Total 4 1 953 83 69
(Since 2019/20) With 1,000+ workers 0 0 0 0 0
Total Ips Total 154 79 93,680 74 68,987
With 1,000+ workers 19 17 50,258 83 45,357
An Alternative Strategy: Resource Based Manufacturing
Tanzania’s exports go mostly to its’ neighbours in the region

1,600,000,000
TZ Rest of World
1,400,000,000 TZ SSA
ETH Rest of World
1,200,000,000 ETH SSA

1,000,000,000
US$

800,000,000

600,000,000

400,000,000

200,000,000

-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016

Note: 'Manufactures' defined as SITC sections 5-8, minus 667 (precious/semi-precious stones) and 68 (non-ferrous metals).
Source: Own calculations using data from the BACI International Trade database.
Export Products Tanzania: Not much in GVCs
Share of exports of top 50 manufacturing products in GDP
2.00 (1,000 percent in annual average 2013-2016)

1.75 Other manufacturing

Agriprocessing
1.50
Material intensives
Total 50 export products account for 68% total mfg exports; of which
1.25
50% are agriprocessing and 35% are other material intensive products
1.00

0.75

0.50

0.25

0.00

Source: Own calculations using data from the BACI International Trade database.
Locally Produced for Local
& Regional Markets Twyford Ceramics, TZ
Tile Factory Kenya
Hongyu Steel TZ

Alaska Industries TZ

Hongyu Steel TZ

Dangote Cement Factory TZ

Paperkraft, TZ Bednet Factory ,
Sumitomo Chemicals TZ
Indirect Job Creation Important Important in
Case of Resource Based Manufacturing
• Agri-processing has the potential to create jobs indirectly – agricultural
input suppliers, logistics and packaging companies, restaurants and
hotels
• Doesn’t seem to be much evidence about this in the African context
(important area for research)
• In our paper, we draw on evidence from Sexton et al (2015) for
California, USA
• They find:
• Direct job creation in CA’s food and beverage industry 198,000
• Indirect job creation far greater at 562,000 jobs
• Direct VA 25bn USD, Indirect VA 57 bn
Take small businesses seriously! They are creating jobs.

 Some evidence of renewed emphasis on Small and Medium Sized Enterprises:

o Around 2014 Ethiopian Development Bank & Uganda Development Bank
shifted lending portfolios away from large firms towards Small and Medium
Sized Enterprises (SMEs);
o Business Development Fund Rwanda (2011);
o Vietnam passed SME law in 2018 targeting support to the SME sector (<200
employees);
o Small Business Administration (SBA) in the US, PPP program.
 The recent shift toward SME lending (prior to Covid!) is likely partially a response
to the inability of large firms to create enough jobs.
What are the potential costs of government led efforts to support small
businesses?
 Assumes financing is key constraint; although some of these organizations also
offer technical and business advisory services.
 Training in out-of-date methods by folks without business experience unlikely to
be beneficial.
 Encouragement of unproductive firms; declining economywide productivity
growth.
 Bank insolvency: high default rates on SIDO loans in Tanzania.
Private sector initiatives for supporting small businesses focused on
raising productivity

 What kind of technologies are the small businesses in these countries using?
o MatchMaker Tanzania makes equity investments in small agri-processing focused SMEs
but spends a considerable amount of time working with entrepreneurs to get them
ready to make use of these investments;
o ACET Ghana incubator for SMEs, the SMEs are not in good enough shape yet to accept
equity investments.
 One country which appears to be at the frontier in terms of support to small businesses
is Vietnam.
o Public/private partnerships: Similarly, the Government of Vietnam provides
guarantees to small businesses to enable them to obtain small business loans from
commercial banks; it also subsidizes business training provided by private firm
 Take small firms more seriously!
Employment in small formal firms has grown rapidly in Vietnam
Employment annual growth rate, 2000-2017

• Small firms with employees < 10

or 10-49 both have growth rate 35.0%
<10 10-49 Total
higher than the “Total” that
includes large firms across all 30.0%
sectors
25.0%
• Small formal firms with
employees < 10 grew most
rapidly for the total private non- 20.0%
agriculture as a whole as well as
for most sectors other than 15.0%
mining & utilities combined
10.0%
• The highest growth rate is in
construction for small firms with
employees < 10 5.0%

• The highest growth is in mining 0.0%

& utilities combined for small
firms with employees 10-49
-5.0%
 Rising number of small firms and their employment did not
affect their labor productivity growth in Vietnam
• Level of labor productivity is lower in small firms than in large firms, which is
expected.
• However, labor productivity growth rates are comparable between small and large
firms. In fact, small firms, especially small firms with employees 10-49 as a group
have the highest labor productivity growth rate among the four groups of firms by
firm size.

Labor productivity by firm size, measured in 2010 constant

Labor productivity annual
million dong per worker
growth rate, 2000-2017
120.0

100.0 <10 10-49 250-999 1000+ 9.6%

80.0 8.4% 8.2%

7.1%
60.0

40.0

20.0

-
2000 2002 2004 2006 2008 2010 2012 2014 2016

<10 10-49 250-999 1000+

To add, green energy (solar powered water desalinization)
and pharmaceuticals
What other policy interventions around innovation and
technology use seem promising?

 Interventions that promote locally developed technologies should be a priority:

o Carnegie Mellon Africa Campus – trains engineers from across Africa in new
technologies;
o D-lab MIT – devoted to supporting local entrepreneurs from low-income
countries.
 Skill upgrading in existing relatively low skilled intensive industries like tourism:
o Cornell Business School/Rwanda/Training in Tourism Industry.
 Combining financial support with intensive technical assistance provided by the
private sector could be beneficial (but time consuming and expensive):
MatchMaker Tanzania, ACET Incubator Program.