Manufacturing Sector Study Team proposal

Introduction

The industrial sector is, in general, defined as being composed of manufacturing, mining and construction. However, there is a large literature that suggests that the manufacturing sector is the component of industry that presents greater opportunities for sustained growth, employment and poverty reduction in Africa..

The United Nations Department of Economic and Social Affairs (DESA) defines manufacturing as the physical or chemical transformation of materials, substances or components into new products. The materials, substances or components transformed are raw materials that are products of agriculture, forestry, fishing, mining or quarrying or products of other manufacturing activities. Substantial alteration, renovation or reconstruction of goods is generally considered to be manufacturing.

The strategic role of manufacturing in the development process can be ascribed to a variety of factors. The first is that technology and innovation are crucial for economic development and manufacturing has historically been the main source of innovation in modern economies (Lall, 2005; Gault and Zhang, 2010). The research and development activities of manufacturing firms have been the key source of technological advances in the world economy (Shen, Dunn and Shen, 2007).

Furthermore, manufacturing is a major conduit for diffusion of new technologies to other sectors of the economy. Another advantage of manufacturing relative to other sectors is that there are very strong linkage and spill-over effects associated with manufacturing activities.

For example, it is well known that manufacturing is a critical source of demand for other sectors. In particular, manufacturing firms are important consumers of banking, transport, insurance and communication services. Furthermore, manufacturing provides demand stimulus for growth of the agricultural sector. Consequently, manufacturing has high forward and backward linkages, thereby contributing to domestic investment, employment and output in the development process. Manufacturing is also attractive because, following Engel’s law, the share of agriculture in total household expenditure falls as per capita income rises while the share of manufactures increases. This implies that manufactures offer significant opportunities for export market expansion and therefore is a key driver of growth in merchandise trade. Interestingly, countries that have derived significant benefits from the tremendous increase in merchandise trade over the past three decades are those that have been able to increase their exports of dynamic products, particularly manufactures, with high income elasticity of demand. Consequently, what a country produces and exports matters (Hausmann, Hwang and Rodrik 2007).

Manufacturing also has a higher potential for employment creation relative to agriculture and traditional services. In particular, the existence of diminishing returns to scale in agriculture (due to fixed factors such as land) implies that the opportunities for employment growth in the sector are limited. Consequently, as a country’s population grows and urbanization takes place, there is the need for growth in manufacturing employment to absorb labour displaced from agriculture. Despite the critical role of manufacturing in the development process, it is important that African policymakers do not seek to achieve industrial development at the expense of the agricultural sector because the latter can contribute to industrial development through, for example, the supply of wage goods that enhance the competitiveness of domestic firms in global export markets. Rattso and Torvik (2003) show that discrimination against the agriculture sector could lead to the contraction of industry, through trade linkages. De Janvry and Sadoulet (2010) stress the need for complementarily between agriculture and industry. They also argue that agricultural development can contribute to the creation of competitive advantage in industry.

Furthermore, in the short-to-medium term, the agriculture sector will continue to be an important source of foreign exchange required to import intermediate inputs needed by domestic industries. It is also important to recognize that the provision of producer services also matters for the competitiveness of the manufacturing sector. In this context, the challenge for policymakers is how to create mutually supportive linkages between the industrial and non-industrial sectors of the economy.

Structural transformation of developing countries requires a type of manufacturing sector development that can deliver high-quality employment, that is aligned with the international division of labour, and that would not lead to Economic self sufficiency, or a reversal of global gains in establishing openness in trade. Industrial policy can make valuable contributions in this regard if the lessons of the past and the challenges of the future are sufficiently taken into consideration (Wim and Adam, 2012).

Urban centers are said to be places where division of labour can emerge. Unlike rural parts, the availability of government and municipal services made urban centers attractive for living and this stimulates particularly the rural urban migration. The recent progress of the emerging economies indicates that the rapid expansion of urbanization helps to diversify their economy.

Ethiopia is one of the least urbanized countries in the world though urbanization has been a long time practice. Only 20 percent of the population has been urbanized while the rest is resided in rural areas and derived its means of living from subsistence farming. This clearly indicates the demographic landscape of the country.

When urbanization is properly managed the situations in the cities will be enjoyable and give way for the flourishing of job in encouraging manufacturing and service sectors. According to the World Bank’s recent report even though the urban centers comprise 20 percent of population they contribute 38 percent for growth domestic production and with this we can certainly predict that the role of urbanization in diversifying the economy is immense (Ibid).