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Getting Rich the Hard Way

A new generation of business leaders are investing in Africa’s capacity to manufacture cars, process minerals and build equipment. Some governments are now looking for ways to support infant industries without encouraging crony capitalism.

Adding value to a product – whether it is canning tomatoes, turning iron ore into steel or building cars – is difficult. But ultimately, it is what makes a country rich.

If you keep selling pineapples, you will end up with peanuts. “If you look throughout economic history, there is not a single [country] that has got rich without manufacturing, outside a few resource-rich countries in the Middle East – and even they will face an unemployment crisis,” says Hinh Dinh, a senior economist at the World Bank.

A lot of these guys in banking and engineering who lost their jobs were despondent. But at that moment, opportunity started rearing its head here

The continent’s current economic boom, welcome though it is, depends largely on the export of raw materials.

In 2010, two-thirds of Africa’s total exports were oil and minerals. To which one can add soft commodities: coffee, tea, cocoa, sesame, peanuts, bananas, cashews, cotton, livestock and horticultural products.

Manufacturing, outside some honourable exceptions, is scarce in Africa. The total manufacturing output of the continent is just over $150bn, compared to the $2trn in total exports for China in 2012. Cars are made in Morocco and South Africa.

Tunisia and Egypt have some heavy industry, while Zimbabwe and Ghana have factories in various states of decay.

With Africa’s daunting youth bulge about to unleash millions of people onto the job market, turning this situation around becomes an imperative. But how?

Economist Erik Reinert explains: “Rich countries got rich because for decades, even centuries, their states and ruling elites set up, subsidised and protected dynamic industries and services.”

Ironically, the World Bank, itself set up to help poor countries get rich, got caught up in a Cold War-fuelled denial of this historical fact.

In his book How Rich Countries Got Rich … and Why Poor Countries Stay Poor, Reinert says: “If you want to understand the causes of American and European prosperity, study the policies of those who created it, not the advice of their forgetful successors”.

A wayward colony, fed up with being cheated and forced to sell its raw materials to the United Kingdom (UK), rebelled to start a vigorous campaign to have its own industries.

Ghana in the 1950s or Kenya in the 1960s, perhaps? No, this is the United States (US) in 1776. Just 14 years later, Alexander Hamilton was writing about infant industry protection. Between 1816 and 1945, tariffs in the US were among the highest in the world.

Royal Brain Wave

Perhaps the world’s first example of national industrial policy was set in motion by King Henry VII of England in 1485, when he realised that England should be a textile-exporting country rather than exporting raw materials.

He placed tariffs on wool exports and gave tax breaks and monopolies to selected newly established wool manufacturers. The UK and US have enjoyed a fairly good run.

But enough of economists and historians: a small band of industrialists and politicians across Africa are ditching the ideological straightjackets inherited from the World Bank and the International Monetary Fund’s ‘Washington Consensus’ and are adopting the policies and business strategies that have made Japan, South Korea, Taiwan and China rich, and the West before them too.

Daphne Mashile-Nkosi is one of them. Imprisoned by the apartheid regime, she became a political and women’s rights activist, and is perhaps an unlikely candidate for African industrial heavyweight.

Her partners in the Kalagadi Manganese mining project in South Africa, ArcelorMittal, had their reservations.

“They thought, here is a black woman, with no experience, saying she is going to build a sinter plant”, Mashile-Nkosi told The Africa Report.

“Of course, you want to protect your investment, but mostly you don’t believe in her.” Nevertheless, in November 2013, Kalagadi’s plant was officially opened. “Here is a heroine”, said South Africa’s President Jacob Zuma at the launch.

Rather than exporting raw manganese ore, the manganese sinter project refines it to around 48% purity.

The R7bn ($633m) project in the Northern Cape will eventually be accompanied by a smelter at the Coega Industrial Development Zone.

It will produce 320,000tn of high-carbon ferro-manganese alloy annually, a key input for the steel industry.

Proving the economics of the project have good fundamentals, Kalagadi has secured an off-take agreement with the Johannesburg Stock Exchange-listed Metmar.

The logic of beneficiation, or adding value to locally produced raw materials, is clear for Mashile-Nkosi: “It brings more jobs and more skills.

The further down the road to beneficiation, the more you need your metallurgists, your highly skilled artisans. And you can use these opportunities to train and employ people.”

From trade to industry

Africa’s richest and most successful businessman appears to agree. Aliko Dangote, who for many years contented himself with importing refined sugar and cement into Nigeria, has caught the beneficiation bug.

Dangote’s cement factories now dot the landscape, and his Dansa Foods is building a $36m food-processing plant in Kano, northern Nigeria. It will turn part of Nigeria’s tomato crop into tomato paste.

The country currently imports more than 300,000tn of tomato paste annually, costing $360m.

Not content with tomatoes, Dangote is also tackling Nigeria’s number one commodity, oil. His company is building an oil refinery with a capacity of 400,000 barrels per day and a polypropylene plant that can produce 600,000tn per day.

With the project cost totalling $9bn, it is a weighty bet against free-market theorists who insist Nigeria’s comparative advantage remains as a commodity exporter rather than as an industrial powerhouse.

The real money is in manufacturing goods.

Clustered around the heavy roller at the Mediterranean Industrial Group (MIG), engineers shout to make themselves heard.

Machines bend a nearly two-inch thick sheet of steel relentlessly into a neat hoop. A shower of sparks engulfs the welding team. Slowly and surely, the mast that will eventually carry a wind turbine emerges from the work yard.

From their base in Sfax, the long-neglected industrial city at the gateway of Tunisia’s greater southern region, MIG represents a manufacturing success story, building metal structures such as telecom masts and energy sector infrastructure.

Bassem Loukil, CEO of Groupe Loukil, which owns MIG, appreciates the 10- 15 years of breathing space the government gave to infant industries in Tunisia.

“Imagine trying to set up a unit like this today without protection, with all the Turkish and Chinese dumping strategies you have in Africa today! We would not have survived.”

More than 3,000km to the south in Nnewi, Nigeria, another workshop hums with life – grimy and less automated, it is a car factory owned by Innocent Chukwuma. “Yes, the government is helping me. The current tariff on imported cars is 10%, but this is going up to 35% in February,” says Chukwuma.

There is a culture of building in Nnewi that stretches back many decades. A cluster of small workshops dot the town. Chukwuma’s company, Innoson, is an echo of Loukil’s and indeed Dangote’s. All of them started off as traders and importers who went into manufacturing.

All had foreign partners at a critical moment of their development. All are trying to climb their way up the technology tree to gain a competitive advantage.

“At the moment, we import the engine blocks from a specific factory in China, but we have ordered a die-casting machine which we should be getting at the end of the year,” says Chukwuma.

Thinking at the World Bank about supporting local companies is evolving.

Its vice-president for Africa, Makhtar Diop, told The Africa Report: “This is a taboo subject, I know, but I would like to look at how to take the trader in Cocody [in Abidjan] and help him move towards manufacturing, investing in the productive sector. How can we help him transition?”

From Jags to riches

There are other ways for governments to boost entrepreneurs, such as requiring local content in government contract tenders – not unlike the Buy American Act of 1933.

And though many laughed at Indian officials forced to drive around in the dowdy first iteration of locally made Tata cars, Tata Motors now owns Jaguar and Land Rover, two former flowers of the UK car industry.

“Anambra State government has ordered 1,000 vehicles,” says Chukwuma. “And the government has announced that local manufacturers will be considered first choice for procurement [deals].”

Nigeria seems to have a taste for industrial policy, which is ironic given that coordinating minister of the economy Ngozi Okonjo-Iweala used to be second-in-command at the World Bank.

At the launch of Nigeria’s Automotive Industrial Policy Development Plan in October 2013, trade and industry minister Segun Aganga, himself a former Goldman Sachs employee, said: “Recognising the strategic effects of the automotive industry in industrialisation, emerging economies like Brazil, China, Malaysia, India, Iran, Indonesia, Thailand and South Africa took deliberate steps to develop their automotive industry between the1960s and1980s.”

So far, so rosy? Let a thousand factories bloom across the continent? It is very easy, particularly for those who naturally swing to the left, to get high minded about US president Ronald Reagan and UK prime minister Margaret Thatcher’s ideological crusades.

But beyond the Cold War, there was a reason why there was such a strong pro-market wave in the 1980s. “We need to learn the lessons of proactive governments in the 1960s and 1970s in Africa,” says Justin Yifu Lin, a former chief economist at the World Bank.

“They introduced all kinds of distortions and wanted to build up large-scale industry in poor agrarian economies. These firms turned out to be not viable,” he explains.

Some of Ghana’s ill-fated companies spring to mind. And Nigeria created an auto sector industrial policy in 1971 to assemble knock-down car kits.

Crony capitalism is a key danger for any government, even those historically recent converts to the free mar- ket such as the US, as regular bust-ups surrounding lobbyists in Washington DC show.

Congressman Frank Lucas, chair of the House of Representatives Agriculture Committee, received more than $744,000 in campaign donations from agribusiness giants for the 2012 US elections.

A clear African example was President Zine el-Abidine Ben Ali’s Tunisia, and there are countless others.

Economists such as South Korea’s Ha-Joon Chang suggest that it is not ‘state’ or ‘market’ that is the issue. After all, Japan and South Korea both created fierce domestic competition between companies for access to export credit, establishing’export discipline’.

Rather, the key is in the management of the transition from initial state protection to an open liberal market – a subject on which there is little research.

Factories first, roads after

Justin Lin dismisses another of the commonly held preconceptions against the drive to boost manufacturing in Africa: the lack of infrastructure.

“I remember driving around the new factories in Shenzhen in the 1980s”, says Lin, referring to the launch site of China’s manufacturing miracle around the Pearl River Delta.

“The roads were nowhere near what you have in Ethiopia.” And even in chronic laggards like Nigeria, new port projects are seeing the light of day.

If African governments choose to go slow on manufacturing, there are plenty of others that are keen to eat their lunch. Explosive wages in Asia are forcing manufacturers of all stripes to look for cheaper production sites.

For Lin, governments need to bulldoze through traditional business handicaps of red tape and bureaucracy by creating export processing zones.

The Chinese government is sponsoring several such zones across the continent.

African governments will have to look long and hard at the Mexican maquiladoras (factories in free trade zones) experience and see if that is for them.

For example, because maquiladora companies import nearly all components and technology, there is very little secondary industry stimulated by the vast export processing zones on the Mexican side of the 3,000km border with the US.

Perhaps China and South Korea’s experiences in pushing for joint ventures and requiring technology transfers would be an interesting model to follow.

Internationally minded manufacturers will first go to countries where they are welcomed by an active government, such as Ethiopia’s, which has been one of the most strident in its rejection of Bretton Woods laissez-faire doctrine.

“I think that there is great potential in sub-Saharan Africa when it comes to production,” H&M chief executive Karl-Johan Persson told Swedish newspaper Dagens Industri in January.

“We have started producing on a small scale in Ethiopia and we will see how it goes.”

Morocco has attracted a Renault production line to the Tanger Med site. The government’s attention to the needs of car producers – in particular the presence of a dense network of secondary and tertiary suppliers – the creation of a bespoke skills institute and a world-class port were critical in attracting the French company.

Rabat has take the industrial baton from Tunis in recent years, and the government runs an effective export promotion agency, called Maroc Export. “We are very jealous about what the Moroccans have, the help and assistance from their government,” says Loukil.

“In fact, that’s what pushed us to buy a company in Morocco – similar to MIG – to get an industrial base in Morocco and take advantage of what it is giving to its industrial units.”

The technopole model

Loukil says that by focusing on skills and education African countries might be able to avoid Mexico’s problems and help to foster local companies that grow up to be serious contenders.

“The technopoles built in Sousse and elsewhere are what the Moroccans have copied today. And it was done with the help of the French. If you go to Toulouse, around the Airbus industry, there are three technopoles, which is what Tunisia itself tried to copy.”

Harnessing the diaspora and those educated abroad was important for China’s stratospheric rise and is also bringing similar strength back into Africa.

Kola Karim, chief executive of Shoreline Natural Resources, a Nigerian oil company, says the global financial crisis actually helped in this regard: “A lot of these guys in banking and engineering who lost their jobs were despondent.

“But at that moment, opportunity started rearing its head here, and they thought, ‘Hey, the salaries are not that bad, and we are at home.’

“That created a wave of talented people heading home to the continent. We have sucked up that expertise and paired them with the local boys to transfer those talents.”

Likewise, MIG Engineering, an affiliate of MIG, helps to bring new ideas and technology into the company and employs graduates from foreign engineering schools. And as the private sector adds skills, governments will need to do the same.

For Helen Hai, who set up the Huajian shoe factory in Ethiopia, the rigours of industrial policy require waking up early in the morning. Even if you have enlightened ministers who want to drive industrialisation, it is important to have support at all levels.

“You need people at the operational level too,” says Hai. “It’s not going to be the minister sitting at the port clearing the goods.”

Ultimately, it in is these practical realities that proactive governments will live and die in their efforts to rekindle Africa’s manufacturing sector.

But a careful combination of slowly phased-out protection, support for local products and an effort to promote upskilling throughout the economy may just help African countries get rich. ?

Photo credits: Pius Utomi Ekpe, IVM, Hichem, Camille Millerand for JA, Jerome Favre/Bloomberg via Getty

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