Does Poor Mean Cheap? A Comparative Look at Africa's Industrial Labor Costs

Abstract

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 manufactured goods 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 comparatives 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 comparable 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 sizable residual “Africa effect” after controlling such factors. We cannot test rigorously for the reasons behind these results, but can consider some plausible explanations. We also consider how Africa’s distinctive pattern, in terms of purchasing power parity exchange rates, could affect the results.The paper concludes 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 manufacturing. The paper argues 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.