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Expensive Africa

, April 22, 2014, 5 Comments

Expensive Africa-MarketExpressJust read a paper on why Africa has not industrialized (Alan Gelb, Christian Meyer and Vijaya Ramachandran, Does Poor Mean Cheap? A Comparative Look at Africa’s Labour Costs, Centre for Global Development, Working Paper No 325, revised June 2013).It shows that although wages in African countries are low, output per worker is even lower; consequently, their unit labour costs (wage costs divided by sales) are higher than in non-African poor countries like Bangladesh, Vietnam, Philippines and Turkey; that is why they cannot compete with other poor countries.

The authors should have asked how the African countries’ prices compare with those in other poor countries; it is possible that African wages are high because their price levels, compared at current exchange rates, are high.

If that were so, the question would arise: how can African countries manage in a competitive world if their wages are uncompetitively high? 

The answer would be, they get lots of foreign aid, mainly from the European Union, which regards the ex-colonies of its member countries as its backyard and gives them piles and piles of aid. The resulting increase in the supply of foreign exchange leads to overvaluation of African countries’ currencies; that is what makes them uncompetitive.

India too was uncompetitive from the 1950s till the 1970s, when it received a lot of foreign aid. Then Indira Gandhi had a row with the US, US PL480 aid dried up, and India had to devalue to balance its payments. Once that happened, India’s growth took off in the early 1980s. The high growth rates lasted till 2008.

Then world growth slumped, India was one of the few countries still growing respectably, so foreign investors flocked to India. That led to overvaluation of India’s exchange rate. I think India’s poor performance just now is possibly a case of African disease.

  • Snehal Manjrekar

    Interesting angle presented on the ”cost” aspect of doing business in Africa. There is no doubt about the impressive economic potential of the continent in the next decade or so. However, the continent remains inaccessible to many businesses. Owing to infrastructure deficiencies businesses need to focus not only on product development but also build indigenous roads, power plants, hydro plants, and logistics. In addition to these massive costs factor in in-house training costs as quality of education in many African countries is of sub-standard grade.

    Moreover, Africa is a continent constituted by 54 countries that are hugely diverse and hence businesses with interests in more than one country need to spend a lot more to study consumer preferences that are dissimilar from country to country. A lot of existing businesses in some African countries are building their own data points about key economic, and social indicators thus further increasing the cost of doing business.

    In a nutshell, Africa as a continent is not just a tough place to do business but also a costly destination for businesses. Doing business in Africa is lot more than just dumping products!

    • Ashok Desai

      Snehal is right: the fact that Africa, with a population less than India’s, has dozens of countries with their own currencies, tariffs and customs procedures makes it an expensive region to operate from. So our major foreign investments have gone to industrial countries with efficient governments. But some of them are pretty unfriendly; our ignorance of languages other than English adds to our discomfort with them. So Anglophone African countries are a useful second-best.

  • Anoop

    Great article. However its also remarkable that many Indian services companies have made a beeline to Africa and some of them are doing well too. My employer, for instance, has a significant presence in Africa, including South Africa, Nigeria and Tanzania. But yes, doing business there indeed presents a lot of challenges, as the style of working there is not very different from India.

    • Ashok Desai

      As Anoop says, many Indian companies have entered Africa and are doing well; but it is difficult to find one that has developed exports from there. It is not a region to manufacture and export from.

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