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This working paper shows that high manufacturing labor costs in Africa keep it from competing with low-cost producers such as Bangladesh and concludes with policy implications for Africa. Another related conclusion: Bangladesh could afford to pay a little more to improve worker safety (see the Planet Money podcast and New York Times article featuring Vijaya Ramachandran for more.)
Africa’s industrial progress has been disappointing. With the exception of South African auto components and garments, both of which have benefited from special incentives, Africa exports almost no manufactures that are not based on the processing of raw materials. Despite considerable rhetoric on the need to develop manufacturing as well as support by donors, what limited progress has been made has often been uneven and isolated. Much of Africa’s manufacturing sector is still characterized by a significant economic dualism between a large number of small-scale enterprises in the informal sector and a handful of more efficient large-scale operations in the formal sector.
Following on from previous research on “external costs,” this paper compares labor costs and productivity in selected African countries relative to comparators using data for 25 countries from the World Bank’s Enterprise Surveys. We conclude that industrial labor costs are far higher in Africa than one might expect, given levels of Gross Domestic Product (GDP) per capita. Part of this is an “enclave effect”: both labor costs and labor productivity are far higher in Africa, relative to GDP per capita, than in comparator countries. Another part reflects a steeper labor cost curve; as firms are larger and more productive their labor costs increase more in Africa than elsewhere. But there is still a sizeable residual “Africa effect” after controlling for such factors. We cannot test rigorously for the reasons behind these results but consider some plausible explanations. We also consider how Africa’s distinctive pattern, in terms of purchasing power parity exchange rates could affect the results.
We conclude with some implications for policy. Certainly there is an urgent need to reduce “external costs,” through focused investments (power) as well as a general improvement in the business climate. However, with the exception of a few countries like Ethiopia, it is not clear that Africa’s low-income level automatically translates into a comparative advantage in low-wage basic manufactures. We argue that it is more likely to reside in sectors closely linked with the rich and varied natural resource endowments of the countries, whether supplying or processing industries.