Thought leadership: What China’s economic shift means for Africa

The Chinese economy has reached the so-called “Lewis Turning Point” – named after the Nobel Prize-winning economist W. Arthur Lewis. This refers to the gradual shift of a manufacturing sector toward higher-value output that is affected by the cost of production surpassing gains in productivity. The long-term trend of offshoring China’s low-end labor-intensive manufacturing sector is thus now starting to emerge. Whilst China will remain a very competitive manufacturing economy at least over the medium term, rising production costs will encourage and force Chinese firms to relocate their operations abroad. A part of this offshoring could find its way to Africa.

It has been a very disruptive period over the last decade or so for foreign manufacturers that have battled to compete with the Chinese manufacturing machine. South Africa’s own textile and garments industry along with other sectors have undoubtedly felt the pain. Others have benefitted from attracting low value chain manufacturing of textiles. Neighbouring Lesotho for example has built a lower cost and lesser unionised workforce to capture this sunset sector from South Africa. This has been supported by the African Growth and Opportunity Act (AGOA), signed by the US Congress in 2000, serving to boost the small country’s exports to the US market.

China’s labour intensive manufacturing competitiveness is, however, now on the wane. The inevitable result will be the relocation of Chinese low-end manufacturing to lesser-cost developing economy destinations. This can create enormous employment generating opportunities for low-income economies with nascent manufacturing sectors. Lin supports this argument by citing the figure of China’s apparel exports amounting to $107bn in 2009, compared to sub-Saharan Africa’s total apparel exports of just $2bn. The opportunity for Africa to capture a share of this revenue from relocated Chinese factories is indeed enormous.

Manufacturing’s share of GDP in sub-Saharan Africa has held steady at 10-14% in recent years. Industrial output in what is now the world’s fastest-growing continent is expanding as quickly as the rest of the economy.

The most notable example of this trend is in Ethiopia. The sovereign wealth funded China Africa Development Fund (CADFUND) is financing a special economic zone industrial park to the value of $2bn over the next decade to create a light manufacturing zone on the outskirts of the capital city Addis Ababa. The focus is footwear and clothing. The eventual outcome of this could be the creation of 200,000 jobs.

From Asian to African geese?

East Asia’s growth model has been characterised by US academic Daniel Okimoto as a V-shaped flying geese pattern, with Japan as the leading regional economy. By the 1970s, Japan was followed by the Tiger Economies of Hong Kong, Singapore, South Korea and Taiwan. The third tier of Asian geese includes Malaysia, Thailand and most recently Vietnam. But the lead goose is undoubtedly China. Its economy is not so much a flying goose in formation as it is a Boeing roaring past – such has been its disruptive impact on sector dislocation and job destruction in competing economies. On the other hand, its positive contribution to lower inflation through the export trade of low-cost products must also be recognised.

If we apply this model to Africa, can we begin to identify the economies that might become the leading geese on the continent? Nigeria is the largest African economy, following the rebasing of its GDP in April 2014. But South Africa is undoubtedly the most industrialised country in Africa, with the most internationally competitive business sector. However, even with rising production and wage costs, we have not seen South African manufacturing shift to lesser-cost African economies, except perhaps textile and garment production, which has moved to Lesotho. It is unfortunate that regional economies in the Southern African Development Community – a region with a combined population of 285 million – have not done enough to make themselves attractive to South African manufacturing in the way that Asian economies did to attract Japanese manufacturing in the early 1990s.

As there are few states in sub-Saharan Africa that are effectively differentiating themselves from their neighbours – Ethiopia, Ghana and Rwanda stand out as possible exceptions – perhaps the African geese will fall into formation with the Asian model. A key question to consider is which African states will proactively build the required institutions and enabling environments to attract manufacturers into their economies and step up on the bottom rung of the industrial value chain?

Where will Chinese industry – which now accounts for over 20% of global manufacturing – begin to move to? The emerging competitors to Africa’s manufacturing aspirations are all Asian: Indonesia, the Philippines, Thailand and Vietnam all stand out. Their labour costs are becoming relatively cheaper as China’s increase.

According to the Bank of America, these Asian economies are “poised to accelerate, propelling the area’s currencies and fuelling consumer and property booms”. Supported by young populations – the so-called demographic dividend – and high literacy rates, these Asian countries are well-positioned to benefit from the relocation of China’s low-end manufacturing.

Africa did not lay the same foundations for industrialisation that its Asian counterparts did in the 1970s and 1980s. The “latecomer challenge” now lies in building the necessary infrastructure, institutions and skills base to attract the investment.  African states did not foresee the China-driven commodity super cycle of the past decade and thus did not fully leverage the opportunity it presented for its resource sectors. It is imperative that we now recognise the upcoming shift driven by market forces in China’s manufacturing sector to give impetus to African industrialisation and beneficiation ambitions.

Africa’s relationship with China is no longer just about attracting state capital but also about private investment. This key point should increasingly inform the policy of those African states that seek to move beyond resources and diversify their economies by building nascent industries and manufacturing sectors. Structural changes in China thus now hold out enormous development potential for Africa.

This article was first published by the World Economic Forum and was written by Martyn Davies, CEO of Frontier Advisory.