By Dr Ross Harvey, director of research and programmes at Good Governance Africa (GGA)
In 2016, economist Dani Rodrik published a seminal paper called Premature Deindustrialisation. Rodrik identified a phenomenon in which developing countries appeared to be “running out of industrialisation opportunities sooner, and at much lower levels of income, compared to the experience of early industrialisers”.
Rodrik argued that even in relatively wealthy countries, where manufacturing has continued to grow, lower-skilled workers have been left worse off, with concomitant political implications. He noted that the deindustrialisation trend appeared to be more severe in Latin America and sub-Saharan Africa. Given that it was ultimately the bargain between organised labour and elites that gave rise to modern democracy, the absence of a strong organised labour presence through a weak manufacturing sector in African countries does not bode well for the consolidation of democracies and the governance benefits associated with it.
My colleague, Pranish Desai and I recently set out to answer two questions in relation to the above dynamics: First, are there significant differences in regional “deindustrialisation” trends between different regions in Africa? Second, what accounts for these differences if they exist? The Southern African Development Community (SADC) appears to be particularly afflicted by deindustrialisation. In a paper submitted to The Africa Governance Papers, we find that there is good reason to believe that the SADC group of countries is characterised by growing deindustrialisation in both employment and output terms.
Although it is a subject that requires further scholarly inquiry, a related finding that a reliance on oil and mineral rents is negatively correlated with industrial employment and manufacturing output suggests that the Dutch Disease phenomenon may be in effect. Dutch Disease is a two-fold phenomenon in which the natural resource sector attracts physical capital and skills away from other sectors in the economy on one hand, and drives currency volatility on the other, as commodity prices are inherently unstable. Currency value appreciation on the back of demand for commodities can render manufactured products for export uncompetitive. This could be curbing industrialisation prospects in many oil and mineral reliant countries in both SADC and Africa as a whole.
Our core finding has natural implications for the SADC region, particularly with regard to its existing industrialisation strategy, meant to benchmark the region for the period between 2015 and 2063. Current trends indicate that, whether measured in aggregate or average terms, SADC will fail to meet its existing industrial employment and manufacturing output objectives by 2030. Furthermore, even if the region’s dominant economy of South Africa succeeds in revitalising its manufacturing base, policymakers responsible for regional industrial strategy coordination will need to consider the reality that South Africa’s population is ageing at a faster rate than its SADC peers. In re-evaluating SADC’s industrialisation roadmap, these policymakers would also do well to heed existing geopolitical and energy provision realities.
The existing SADC industrialisation strategy is orientated primarily towards structural transformation. It specifically mentions modernisation and closer regional integration and emphasises that the “strategic thrust must shift from reliance on resources and low-cost labour to increased investment and enhanced productivity of both labour and capital”. In our view, the emphasis should not necessarily be on reducing reliance on natural resources per se, but rather the careful harnessing of those natural resources to contribute to appropriate industrialisation pathways that do not lock SADC countries into low-value manufacturing.
Part of the priority also needs to confront Dutch Disease dynamics. As mentioned above, Dutch Disease is a twofold phenomenon. Any industrialisation strategy needs to address these two dimensions explicitly, and they should work in tandem:
First, given that mining will increasingly employ fewer people directly because of technological advances, the focus of the regional strategy should be to provide skills to the labour force that connect to mining either upstream or side-stream (predominantly in technology, research and development). These skills will likely have relevance in multiple sectors, making the investment productively and allocatively efficient.
Second, a regional sovereign wealth fund (SWF) might be considered, though it would have to be independently governed to avoid corruption and inefficient allocation. The benefit of an SWF is that it can direct investments towards building manufacturing capability that initially feeds off natural resource endowments but becomes increasingly independent thereof in the long run. This would help to alleviate currency volatility too. However, the swiftest way to avoid currency volatility and undue devaluation is for countries in the SADC region to avoid corruption, from state capture to rigging elections.
In addition to addressing Dutch Disease effects, SADC countries need to tap into global value chains that will create efficient manufacturing and service sector opportunities connected to natural resource endowments. However, this has to be fundamentally different to a narrow focus on downstream beneficiation, which remains an underpinning of too many conversations pertaining to industrialisation. The word “beneficiation” is mentioned 17 times in the SADC 2015 strategy alone and is lengthily elaborated on pages 17 and 18. SADC countries are simply not able to directly compete with countries such as China in the realm of producing final manufactured goods such as solar panels. However, there may be opportunities to add value to the required copper locally, for instance, before exporting it as a high-bulk, low-value commodity; this is what the SADC strategy calls “Value Chain Development”.
This should only be pursued if it enhances a country’s comparative advantage, lest it be subject to the deficiencies of post-colonial early independence import-substitution-industrialisation misadventures that left many African countries highly indebted. It also has to be done with a view to the ecological imperatives of the future. As Gatune and Cloete note in a 2022 paper: “For the regional economy to be truly green, waste-tracking and mapping technologies need to be developed, which is the first step in reorganising mining value chains”.
Such opportunities are, nonetheless, connected to energy availability and reliability, which remains a fundamental deficiency across the region. This issue is explicitly addressed in the SADC 2015 industrialisation strategy, which is correct to indicate that “governments should step up the involvement of independent power providers to ease the burden on government investment spending”. It is also correct to note that “alternative sources of energy should be exploited with a particular focus on renewables”. One of the benefits of a focus on the latter is that some of the critical raw materials required to feed global energy and transport revolutions towards lower carbon emissions are mined in southern Africa (lithium, for instance); these can be processed with relatively low-intensity energy, unlike aluminium smelters. Another benefit of pursuing greener renewable technologies is that they typically avoid extensive sunk capital costs (white elephants), such as those associated with the sub-optimal Medupi and Kusile coal power stations built in South Africa, which also offload extensive negative environmental and social externalities onto poor communities.
SADC countries therefore also need to be aware of the climate and stranded asset risks associated with pursuing oil and natural gas. Comparable experience from the continent suggests that oil wealth is more likely to create a resource curse than to provide widespread electrification. To the contrary, solar micro-grids, while relatively expensive, avoid the costs of centralised transmission grids and can largely avoid the unproductive rent-seeking typically associated with oil and gas. The implementation of the SADC strategy has to be laser-focused in executing on delivering renewable energy at speed. Otherwise, industrialisation will remain impractical.
In this regard, we find the view expressed by scholars Naudé and Tregenna in a 2023 paper to be highly relevant: “The establishment of the African Continental Free Trade Area is timely, as it would provide for larger market size, could potentially reduce the burden of distance to the coast for landlocked countries, and raise competitiveness against Chinese imports”. However, as they rightly warn, such benefits would only be realised if infrastructure improvements are executed to ameliorate the negative consequences of adverse geography. Moreover, continued corruption and chaos at border posts within the region constitute a non-tariff barrier to trade that severely undermines the already-limited comparative advantage that exists within the region.
Finally, SADC countries should take note of cutting-edge research pertaining to industrial policy and how it is changing in light of new geopolitical realities. A paper recently prepared for the Annual Review of Economics for instance, notes that the salience of industrial policy has risen greatly as governments have increasingly utilised it to address a variety of problems such as the green transition, supply chain resilience, good job availability and geopolitical competition between China and the United States. The authors argue that the best industrial policy from examples around the world are no longer inward-looking and protectionist, but typically target export promotion. The most successful appear to be those that utilise a broad range of policies that are more effective together than the standard use of subsidies or tariffs (typical of trade policy, for instance).
It is our view that manufacturing comparative advantage will continue to move away from China, and if SADC countries can provide infrastructure, energy and appropriate skills, the benefits of natural resource endowments could still be utilised to both promote industrialisation and, paradoxically, reverse the currently prevalent resource curse dynamics.