East Africa has been billed as the next manufacturing hub for global markets. Will our politics allow it?
The South Korean ambassador to Uganda, Park Jong Dae, recently referred me to an article by George Friedman in the online journal, Geopolitical Weekly titled The PC16: Identifying China’s Successors. I became an admirer of Friedman’s work after reading his intellectually stimulating book, TheNext 100 Years; A Forecast for the 21st Century. He has an interesting way of looking at future global trends.
China has enjoyed fast economic growth averaging 10% per annum for over 35 years by making itself the hub for the manufacture of cheap products for global markets based on low wages. However, Friedman believes that China’s growth has reached its zenith and henceforth will be declining. This is because labour costs have started rising in China, thus reducing the competitiveness of her manufactured exports. China’s future growth will come from changing the structure of its economy into high-wage high-value goods hence leaving poorer countries to export cheap manufactures.
As Friedman says, the world is already seeing a continual flow of companies leaving China, or choosing not to invest in China, and going to these countries. “This flow is now quickening,” Friedman argues,“The first impetus is the desire of global entrepreneurs, usually fairly small businesses themselves, to escape the increasingly non-competitive wages and business environment of the previous growth giant. Large, complex enterprises can’t move fast and can’t use the labour force of the emerging countries because it is untrained in every way. The businesses that make the move are smaller, with small amounts of capital involved and therefore lower risk. These are fast moving, labour-intensive businesses that make their living looking for the lowest cost labour with some organisation, some order and available export facilities.”
The PC16 (Post China 16) refers to sixteen countries that Friedman thinks will replace China in the low wage manufactures. Friedman argues that a significant share of the post-China manufacturing activity is going to be based on the Indian Ocean Basin. “The most interesting pattern is the eastern edge of Sub-Sahara Africa: Tanzania, Kenya, Uganda and Ethiopia. To this he adds Sri Lanka, Indonesia, Myanmar and Bangladesh which are also directly on the Indian Ocean. After these come the Indochinese countries of Vietnam, Cambodia, Laos and the Philippines around the South China Sea. These are followed by Peru, Dominican Republic, Nicaragua and Mexico in Latin America.
If we accept Friedman’s assessment as realistic, then our region is sitting on a huge geographical advantage. However, the existence of an opportunity does not necessarily mean that a country or region will take advantage of it. Bad politics can lead to economically destructive public policies as has happened in North Korea over the last 50 years. Its neighbour, South Korea, has transformed from a poor nation into a highly industrialised country. Indeed, bad politics can lead to civil wars and even the dismemberment of a country. So the question is: Is East African well positioned politically to benefit from the changing structure of the Chinese economy?
Let us begin with the basics: a country needs a policy environment conducive for businesses to invest and make money. East Africa already has this since it liberalised and deregulated its economy. Second, we need an educated population that can easily be given skills to produce low value manufactured products like toys, shoes and clothes and assembling cheap mobile phone handsets. Basic education is critical in performing such tasks. Over the last 15 years, free primary and secondary education in this region has produced a large mass of unemployed yet educated youths.
The third basic need is energy and infrastructure. Without affordable and reliable electricity, roads, seaports, airports and railways, a country cannot move its products to markets overseas. Investment in these areas has picked a pace lately. Ethiopia is investing in producing 10.000MW of electricity, building high ways and trains; and Uganda has signed Karuma, Ayago and Isimba with a combined output of about 2.000 MW of hydro power. The leaders of Kenya, Uganda and Rwanda have signed a multibillion dollar contract to build a standard gauge railway linking the three countries leaving Tanzania behind. Rwanda and Uganda are planning new international airports while Kenya has joined them in planning road construction projects on a massive scale. Tanzania is doing the same. All this is good news.
Within the meaning of what is commonly called neoclassical economics, this is all the state needs to do – provide the right market friendly policies and build the public goods necessary for the private sector to operate smoothly and leave the rest to markets. However, transformative projects that drive development in poor countries require capital investments far in excess of what domestic private capital can command. As historical experience shows, international capital does not develop nations precisely because it lacks the necessary social ties with the surrounding society to effectively influence politics to promote and sustain public policies and political institutions that ensure rapid change. It can only lobby for reform.
Therefore poor countries need to develop industrial policies. This involves three elements. First the state has to mobilise long term savings to finance long term transformative investments (that is why pension reform is an absolute necessity). Second, the state needs to reduce risks to private capital holders so that it can entice them to make investments they would otherwise have not made. Picking winners and allocating cheap credit, tax waivers and subsidies is necessary. But it is politically contentious as governments give such benefits to their cronies than the deserving (although the two are not mutually exclusive). Third, the state has to become a venture capitalist by allocating money to sectors it thinks can create what Albert Hischman called “a multidimensional conspiracy in favour of development.”
However the challenge is whether our governments have the audacity to pursue such hard-nosed choices. There would also be domestic opposition as the allocation of cheap credit, subsidies, and tax waivers inevitably go to regime cronies. This makes it seem unfair even when the beneficiaries merit support. Besides, if the state plays the role of venture capital, can it sustain it politically? In venture capital dynamics, if two out of 10 projects turn out successful, that is considered excellent performance. But can our politics allow the state to lose public money on eight investments out of ten? Ethiopia and Rwanda can and are already doing this. But can Tanzania, Uganda and Kenya which are more democratised afford and sustain such policies?