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

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  • Alan Gelb
  • Christian Meyer
  • Vijaya Ramachandran

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 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.

Suggested Citation

  • Alan Gelb & Christian Meyer & Vijaya Ramachandran, 2013. "Does Poor Mean Cheap? A Comparative Look at Africa's Industrial Labor Costs," Working Papers 325, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:325
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    References listed on IDEAS

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    1. James R. Tybout, 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 11-44, March.
    2. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    3. Rotunno, Lorenzo & Vézina, Pierre-Louis & Wang, Zheng, 2013. "The rise and fall of (Chinese) African apparel exports," Journal of Development Economics, Elsevier, vol. 105(C), pages 152-163.
    4. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    5. Jeffrey M. Wooldridge, 2003. "Cluster-Sample Methods in Applied Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 133-138, May.
    6. Jacob Mincer, 1958. "Investment in Human Capital and Personal Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 66, pages 281-281.
    7. Hinh T. Dinh & Vincent Palmade & Vandana Chandra & Frances Cossar, 2012. "Light Manufacturing in Africa : Targeted Policies to Enhance Private Investment and Create Jobs
      [L’industrie légère en Afrique : Politiques ciblées pour susciter l’investissement privé et créer des
      ," World Bank Publications, The World Bank, number 2245.
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    Citations

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    Cited by:

    1. Louise Fox & Cleary Haines & Jorge Huerta Munoz & Alun H. Thomas, 2013. "Africa's Got Work to Do; Employment Prospects in the New Century," IMF Working Papers 13/201, International Monetary Fund.
    2. Iacovone,Leonardo & Ramachandran,Vijaya & Schmidt,Martin, 2013. "Stunted growth : why don't African firms create more jobs ?," Policy Research Working Paper Series 6727, The World Bank.
    3. Gelb, Alan & Meyer, Christian J. & Ramachandran, Vijaya, 2014. "Development as diffusion: Manufacturing productivity and sub-Saharan Africa.s missing middle," WIDER Working Paper Series 042, World Institute for Development Economic Research (UNU-WIDER).
    4. Newman, Carol & Page, John & Rand, John & Shimeles, Abebe & Soderbom, Mans & Tarp, Finn (ed.), 2016. "Manufacturing Transformation: Comparative Studies of Industrial Development in Africa and Emerging Asia," OUP Catalogue, Oxford University Press, number 9780198776987.
    5. Alan Gelb, Christian Meyer, and Vijaya Ramachandran, 2014. "Development as Diffusion: Manufacturing Productivity and Sub-Saharan Africa’s Missing Middle - Working Paper 357," Working Papers 357, Center for Global Development.
    6. Louise Fox, 2015. "Are African Households Heterogeneous Agents?; Stylized Facts on Patterns of Consumption, Employment, Income and Earnings for Macroeconomic Modelers," IMF Working Papers 15/102, International Monetary Fund.
    7. Golub, Stephen & Hayat, Faraz, 2014. "Employment, unemployment, and underemployment in Africa," WIDER Working Paper Series 014, World Institute for Development Economic Research (UNU-WIDER).
    8. International Monetary Fund, 2014. "Zambia; 2013 Article IV Consultation," IMF Staff Country Reports 14/5, International Monetary Fund.
    9. Mensah, Emmanuel & Owusu, Solomon & Foster-McGregor, Neil & Szirmai, Adam, 2018. "Structural change, productivity growth and labour market turbulence in Africa," MERIT Working Papers 025, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    10. World Bank Group, 2016. "Kenya Country Economic Memorandum," World Bank Other Operational Studies 24008, The World Bank.

    More about this item

    Keywords

    Africa; manufacturing; private sector; labor cost; productivity; firm survey;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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