BMI View : As rapid industrialisation causes wages to rise in China, we expect to see the country specialise in higher value goods as it becomes less competitive in labour-intensive production. Some of these low-cost industries will likely move abroad, seeking lower wages in less developed countries. While this shift will have a transformational effect on those markets able to 'capture' this opportunity, BMI believes that Sub-Saharan African (SSA) economies are not as well-placed as Asian ones due to infrastructural deficiencies and less attractive business environments in SSA.
China is rapidly moving into higher end manufacturing with l eading Chinese firms building, and - increasingly - designing , mobile phones, cars, satellites, and jet planes. This transition is coming as wages rise, reducing China's comparative advantage in the low-cost and labour-intensive sectors that powered China's breakout into world markets. BMI predicts that, over the coming years, millions of jobs will be 'exported' from China as industries such as textile s and light manufacturing relocate to lower-wage countries .
We believe, however, that Asian countries (notably Bangladesh, Vietnam, and Indonesia) are better placed to reap the benefit of this than African ones. This is largely due to poor business environment s and massive infrastructure deficit s in Sub-Saharan Africa (SSA) , which we predict will deter manufacturing investment even in cases where the continent has a clear labour cost advantage.
|China - Export Categories By Share Of Exports (%)|
Warning: Turn Ahead
Rising wages in China are not due solely to robust (though slowing) economic growth, but also to a structural change in the country ' s supply of labour. China's manufacturing growth has been supported by the one-time migration of almost 200 million workers to coastal provinces from the less developed interior. While China ' s population is large, it is still finite; and as the supply of willing migrants is depleted the country will soon face a ' Lewis Turning point ' at which supply constraints will kick in and wages will rise.
BMI believes this process is beginning, a view which is supported by rising wage figures in both coastal and interior provinces. Given the size and momentum of the Chinese economy, we stress that this change will be more of a process than a hair-pin turn, but only a severe economic slump will prevent Chinese wages from rising significantly over the coming years, matching the pattern seen in other Asian emerging economies.
Japanese economist Kaname Akamatsu used the term 'Flying Geese' to described the process by which rising wages caused Asian economies to follow each other in close formation; low-wage industries relocated from Japan to Korea and Taiwan, then from there to China and South East Asia. With China ' s GDP per capita (in constant US d ollars) now approaching the level of Japan in 1960 or South Korea in 1980, BMI believes that there is an opportunity for a fourth line of economies to join the formation.
African Geese Not Yet Taking Flight
|Still Tied To The Land|
|Continental Africa - Employment By Sector, 2010 (%)|
Given the huge size of China's economy, the potential is enormous; Justin Lin, a former World Bank chief economist calculates that, if just 5% of China's apparel sector were to move to SSA it would boost the region's total manufacturing production by 92%, creating millions of jobs. BMI doubts, however, that this potential will be realised.
While particular countries may attract some investment we believe that the structural impediments which have hindered the development of Africa's manufacturing sector will remain formidable barriers to the large-scale outsourcing of Chinese production to the continent. Indeed we note that Africa's workforce remains more agricultural than many Asian and Latin American economies were in the 1960s (for more information see July 13 2012 'Manufacturing To Remain Weak Link for SSA Economies' on our online service).
The most important of these barriers will be the region's generally inadequate infrastructure and weak business environments. Collectively, we believe that these factors will almost entirely negate the cost advantage that low wage rates in SSA would otherwise confer and we predict that Asian economies such as Cambodia and Vietnam will profit most from China's industrial modernisation.
|Emerging Markets - World Bank Logistics Performance Index Scores (0-5)|
As we have argued before, poor physical infrastructure in SSA is a serious impediment to the region ' s economic development , especially weak transport connections between states (see 21 September, 2012 ' How Is Africa's Infrastructure Deficit Harming Development? ' on our online service). While South Africa performs quite well on the World Bank ' s logistical performance index , major African economies such as Nigeria and Kenya are ranked as having worse infrastructure connections than land-locked Laos.
|African SEZs: Problems With Power|
|Emerging Markets: Electricity Outages Inside And Outside Special Economic Zones|
This is especially burdensome given that the small size of many African markets would prevent most individual countries from competing against larger Asian economies such as Vietnam or Indonesia. Though regional integration could build economies of scale, c ross-border trade in SSA remains difficult, slow, and expensive, even within the continent ' s many economic communities.
Beyond transport, we highlight power as being a major hindrance to the development of the manufacturing sector . A recent academic study found that firms experienced more power outages in SSA regions designated as 'Special Economic Zones' (which have specially updated infrastructure) than they did when using the national grid in most other emerging markets.
Poor access to physical capital is twinned with a skil ls-s hortage in many key sectors and broadly low productivity in many econom ies . Given that most SSA countries are starting with a weaker manufacturing base than their Asian rivals, we would expect the start-up costs to be significantly higher.
Still An Uninviting Environment
Though BMI has noted that the business environment is improving in certain countries across Sub-Saharan Africa , the region as a whole remains a substantially more difficult place in which to do business than the Asian countries with which it would have to compete for manufacturing jobs (see 28 May 2012 ' Climate Change: The Business Environment In Africa' on our online service) .
|Strangled By Red Tape|
|Emerging Markets: Time Senior Managers Spend Dealing With Government Regulations (%)|
While some countries have enacted laws encouraging foreign investment, most SSA countries have weak legal and regulatory frameworks which are often biased against foreign firms. Figures from the World Bank suggest that senior business managers in the Democratic Republic of the Congo (DRC) spend almost a third of their time complying with government regulations, compared with just 0.4% in Thailand. While the DRC is obviously an exceptional case, regulations in South Africa, Kenya, and Nigeria all take more time to complete than those of Bangladesh.
|Somewhat Competitive On Wages|
|Emerging Markets - Monthly Wage For Unskilled Manufacturing Work, 2012 (US$)|
Low wages are often seen as the advantage of many SSA economies , low er ing the cost of production; even if risks are higher. Wages across much of the region (with exceptions in a few countries, such as South Africa and Gabon) are lower than in China, and have been for several years. We note, however, that they are not substantially lower than wages in other Asian economies, such as Vietnam. This is partially because, despite high unemployment levels many African economies also suffer from severe skills shortages, which push up wages in the manufacturing sector.
An economic survey of SSA manufacturing recently estimated that higher transport costs and the burden of complying with government regulations (which often demand the use of expensive local input goods) mean that indirect costs make up between 18-35% of the cost of production in the region, compared to 8% in China. The high cost of doing business often completely erodes the cost advantage implied by Africa's low wages.
|Cheaper Workers, Expensive Production|
|Ethiopia & China: Cost Difference: Ethiopia compared to China (%)|
A report by the World Bank estimates that higher costs for inputs and trade logistics mean that manufacturing wood products was 125% costlier in Ethiopia despite wages being 17% lower there than they were in China . This was due to the cost of shipping primary produc ts across international borders and the lower productivity of workers who were unused to a production-line environment.
While this is only a single example, and costs will vary across the continent, it is worth noting that Ethiopia is one of Africa's poorest countries ( we estimate GDP per capita currently stands at just US$483) and one where the production of labour-intensive and low-cost goods should be most competitive.
We also stress that this compares wages in one of Africa's poorest states with one of emerging Asia's richest ones; the wage gap between, for example, Vietnam and Zambia will be much smaller. Without substantial improvements in infrastructure and reforms to the business environment, BMI does not believe that rising wages in China are likely to confer a cost advantage on African production in anything but the long term.