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As countries scramble to meet the explosion in demand of medical supplies through locally manufactured alternatives, Kenyans have been wondering why the country even imports. Such optimism misses the fact that such factories are located in protected EPZs rather than across the country (Image of Shona EPZ from Ministry of Health's Twitter Page) |
Of course, manufacturing 90% of all locally consumed products means we would only import 10%. Early in school, we are taught that 1+3=4, and likewise 4-3=1.
Equally, if by manufacturing 90% locally means that we import very little, then the assumption is that importing very little means we manufacture a lot locally. And so, many people call for the banning of imports to promote local manufacturing.
Most governments understand that banning imports is hard, and so what they do is raise taxes on them. But interesting enough, raising taxes on imports does not lead to increased local manufacturing. Instead, it leads to a decrease in local manufacturing.
In 1981, manufacturing contributed to a quarter of sub-Saharan African economic output according to the Brookings’ Institute. This has gradually fallen to 10% today, or less than half of where we were in 1981. This is despite the effort of many African countries to ban imports, or more practically, to tax them out of existence.
So, what is happening - why do efforts to manufacture more lead to less manufacturing?
Well, simply put, banning imports to promote exports or local manufacturing is like deciding that you need to cook better food than your neighbour, but instead of improving your cooking skills, you ban your neighbour from cooking!
Sure, if your neighbour does not cook and you cook, logically, you have made better food than they have by virtue of them not participating in the comparison. But if they are better at cooking and they keep cooking, then your strategy to ban them from cooking becomes hard to implement since you have no control over them.
In turn, African countries should not be focusing on so called “import-substitution” policies, but should rather focus on local manufacturing as an issue on its own.
The problem with local manufacturing is that you can not do it without imports. Looking at the world’s top 20 exporters, only Brazil and Russia fail to feature in the world’s top 20 importers. Brazil is a heavy agricultural producer and Russia exports a lot of minerals, both being raw materials rather than manufactured produce. They are also not far off, featuring in the list of top 30 importers. The world's 4 largest exporters are also the world’s 4 largest importers.
Manufacturing is defined as value addition, rather than local production. So this means that manufacturing involves a lot of taking what already exists, then adding something small to it and you end up with a finished product.
For instance, African countries are obsessed with car manufacturing. Top car manufacturing countries like Japan and Germany happen to import a lot of car parts. Japan, which is a global car manufacturing giant, has cars among its top 10 imports!
In fact, Japan and South Korea are notoriously known as countries that barely fully produce anything locally - they import everything they produce. South Korea makes both the chipsets that run our smartphones and the ships that bring in our oil, but the silicon and iron needed for both are all imported to Korea.
Kenya largely manufactures the cooking oil and soap it consumes, but it relies on crude palm oil imports from Malaysia to manufacture cooking oil. Sure, we can grow oil palms locally, but that would involve either replacing maize or sugarcane as much of Kenya is arid and semi arid. To top that, we still import sugar and maize because we do not produce enough locally.
Kenya is also a leading tea exporter, and in fact we can almost entirely manufacture tea without any imports. But we need to import the ink that prints the tea packages for export, and we need to import the fuel and truck that will transport the tea to Mombasa for loading on a ship. We also need to import the spares for the machines at the tea processing factory.
In short, it is quite difficult to adopt an almost 100% export policy. The more you export, the more you import because of the very many things that are needed in value addition.
Even further proof can be seen in the disruption brought about by the coronavirus that has led to disruption of air and sea freight between countries and the shutting of factories in top exporters like China. With Kenya’s borders almost closed, local manufacturing could never have been easier. Yet, we were almost facing a crisis of items running out if shipping does not resume.
What we are seeing is that even with the shutting of borders and absence of imports, the problems that make manufacturing locally persist.
In Kenya, the Ministry of Health’s Twitter page has been posting images of locally manufactured Personal Protective Equipment. Notably, this manufacturing is taking place in an Export Processing Zone.
All local manufacturing is good, no? Well, The Economist found that most of the investment and benefits of Export Processing Zones(EPZs) do not go to the local economy, save for the jobs created - which are also not so much high paying. EPZs are exempted from paying taxes and therefore much of the revenue and in turn the profit goes back to the investor’s home country or some other country.
More importantly, there is the question why such manufacturing thrives hidden away in EPZs rather than in the rest of the country. Many manufacturers in Kenyan have pointed out that it would be cheaper if their factories were located in other countries and they simply sold the finished product here.
That tells us we have a local manufacturing problem. Much has been documented about it. Electricity prices are high because some of the power producers are expensive, politically connected outfits.
Moving things and setting up a factory is very costly. Everyone from the politicians at the top, to the governor, to the chief, the police and government inspector all want some form of payment to not frustrate you. After all, the fact that you own a factory and dozens of vehicles to transport things shows you are "rich". The general population equally regards any ownership of some form of capital as proof of bottomless riches. This leads to doom if your factory operates in a sector with low profits or if you simply hit a rough patch.
Looking at publicly listed companies, we can equally see that firms in the service sector are consistently more profitable than those in manufacturing.
In a simple analogy, the public can tell how much a cement or beer company is selling based on how many trucks from the company we see around, which we can also stop and demand bribes or taxes from.
It is however very hard to tell how profitable a bank is from looking at its vehicles or how many buildings it has, and therefore it is very hard to extort money out of a bank. The governor can not simply walk into the local bank branch and demand to shut it down and in turn disrupt its operations, but they can do so for a factory.
The cost of delivering a service does not grow proportionally to the quantity you sell. A bank does not consume more electricity or need more trucks to issue more loans, but a factory does. So services are more profitable.
Which then makes you wonder which sane person would invest in manufacturing rather than in services?
It sounds like a cliche, but the extent of corruption is the number one reason why African countries don’t manufacture. Sure, it is cheaper to make toothpicks in China, but it is insanely expensive to attempt to make them in Kenya you would even wonder why you tried.
For African countries to become manufacturing giants, they must address their “eating” problem. As the proverb says, we can’t have our cake and eat it. The more we demand to eat, the lesser the size of the cake. It doesn’t even matter if we ban cake from other countries, our appetite is still too much!
We must decide if local investors need to be supported, or whether they need to be eaten from the way termites slowly eat away your door until it falls off.
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