Focusing on Specific Constraints
The report compares potential and opportunity for Ethiopia, Tanzania and Zambia with China and Vietnam, but not on the expectation that the former should quickly catch up with the latter. The initial conditions under which China and Vietnam started on their development path were different and since then have changed substantially. For example, both China and Vietnam started their reforms with a highly-educated workforce and a stable political regime.
Nevertheless, light manufacturing products coming out of Africa would have to compete with Asian products in today's market, and it is important to know what it would take to earn and keep market share.
The main constraints facing the three African countries are: input industries, trade logistics, access to finance, access to industrial land, lack of worker skills, and lack of entrepreneurial skills. China and Vietnam addressed these issues by implementing several practical solutions, explored below.
Plug-and-Play Industrial Parks
In developing plug-and-play industrial parks, China gradually learned to address multiple constraints. Beginning in the late 1970s, special economic zones provided mostly foreign-owned firms with access to industrial land, port facilities, standardized factory shell buildings, worker housing, and duty free import of materials and equipment for export production.
Initial success encouraged the proliferation of industrial parks for domestic firms serving both home and overseas markets. Zone operations subsequently expanded to include training facilities and one-stop shops for business regulations. These initiatives considerably reduced financing costs and risks for the better-managed small firms, allowing them to grow into medium enterprises despite their inability to obtain bank loans.
Proximity first to Hong Kong SAR, China, and later to domestic ports that gradually developed into world-class cargo facilities, enabled China’s special economic zones to help resolve trade logistics issues. Establishing the Shenzhen Special Economic Zone next to Hong Kong SAR, China, transformed a fishing village into a leading light manufacturing city of 8 million people in less than 30 years. The parks also served as the testing ground for difficult reforms: Shenzhen led China’s adoption of a market-friendly land-lease system and many other new institutional and regulatory arrangements.
The key to success is intense competition and cooperation among firms inside and outside the parks. Most parks did not preselect specific light industries, instead letting market forces drive the formation of specialized clusters.
Key Input Industries
China and Vietnam reformed and supported key input industries so they could become competitive. Nationally, both China and Vietnam encouraged foreign direct investment for key inputs (as in machine manufacturers) and developed sustainably managed wood plantations and competitive agricultural sectors. They supported input and output markets through the provision of land and financing, as with the local government-managed Yiwu market in China, now the largest commodity market in the world.
Both China and Vietnam relied on good trade logistics at the outset of their light manufacturing journey by creating manufacturing zones close to ports and then exempting firms in those zones from numerous domestic regulations and tariffs and import restrictions. This approach enabled China and Vietnam to import efficiently the inputs that domestic firms could not produce or supply competitively, allowing firms based in the new zones to gain access to export markets cheaply and quickly. Locating industrial zones next to world-class ports with efficient customs also made a difference, as shown in Shenzhen.
Entrants in new industries typically face high costs and risks. This is especially true in Sub-Saharan Africa, where industrial structure and infrastructure are limited and regulatory and governance risks are high. But the prospect of single entrants serving as catalysts for the rise of competitive new industries is real, as illustrated by Ethiopia’s rose industry, which began with a single firm and quickly grew to more than a dozen firms with direct employment exceeding 50,000 workers (plus further job creation among suppliers of transport, packaging materials, and so on).
In China initial efforts to promote the expansion of low-wage, labor-intensive production have given way to programs offering support to start-ups in more complex sectors, often involving skilled labor and high technology. Support may begin before firms move into the industrial zones, with site selection proposals, project reviews, and licenses for land use and construction. After moving in, firms may obtain technical assistance, technological upgrading, and access to market information through networking to guide the firm and the industry to become nationally competitive.
Our quantitative survey shows that entrepreneurs who receive technical assistance at start-up can deliver significantly better business outcomes. Ethiopia’s Ramsay Shoe Factory shows the importance of technical assistance in raising the quantity and quality of output. Africa’s multitude of small informal firms includes many operators with substantial entrepreneurial talent. The Kaizen study shows that lack of basic management skills limits the capacity of small firms to accumulate assets and expand (Sonobe, Suzuki, and Otsuka 2011).
One way to help entrepreneurs is through Kaizen’s managerial training in three modules: marketing and business strategy, production and quality management (including a brief introduction to workplace housekeeping techniques and other Kaizen activities), and business record keeping.
In China firms first benefited from the knowledge provided by overseas Chinese entrepreneurs and foreign managers at multinational branch plants. Firms then benefited from the transfer of know-how associated with foreign direct investment, which contributed to a new generation of domestic entrepreneurs.
Vocational Training to Improve Workers' Skills
Even with its low-skill workforce, Sub-Saharan Africa could become competitive in some light manufacturing sectors. In the apparel sector, for example, small numbers of managers and technicians can guide hundreds of workers. Specialists report that inexperienced workers can learn to operate sewing machines in no more than two weeks. For the longer term, upgrading to more complex production will require a better-trained workforce than is currently available.
Governments, in partnership with the private sector, can leverage publicly funded programs to turn out technicians who can operate or repair simple machines, read instructions, and use the Internet to communicate and search for information. In addition to good basic education, governments could design technical skills development programs such as those at the Penang Skills Development Centre (Malaysia), which offers a variety of sector-specific short- and long-term certificate, diploma, and degree courses for all levels of the workforce.