Regional Economic Outlook: Not very encouraging.

Sub-Saharan Africa (SSA) is one of the poorest regions in the world today, with low rates of economic growth and industrialization relative to emerging markets and developing economies in other regions across the globe. Indeed, it features the largest proportion of people living in poverty in the world [1]. In 2018, the average per capita gross domestic product (GDP) of SSA countries was $3,714, compared to $15,691 globally and $10,895 for middle-income countries [2]. Moreover, the per capita GDPs of SSA countries have trended downward relative to those in other regions of the globe. For instance, the ratio of the per capita GDP of SSA countries to that of middle-income countries declined from 63.3 percent in 1990 to 34.1 percent in 2015 [3]. 

SSA’s low-income levels can be partly explained by the primary sector’s (economic activities concerning the direct exploitation of natural resources, such as agriculture and mining) heavy share in economic activity, which results in the region’s dependence on commodity price fluctuations in the global market for economic growth. A study of the breakdown of sectoral contribution to growth in SSA from 2002 to 2007 found that the manufacturing sector accounted for only 9 percent of economic growth in the region [4]. Despite several industrialization attempts, SSA could not achieve a sustained industrialization process, with the share of industry in total value added remaining between 25 to 30 percent for most of the period between 1970 and 2014 [5].

The Textile and Clothing Sector: A Potential Avenue for Development?

Amidst this economic-industrial backdrop, the textile and clothing (TC) sector provides a unique opportunity for initiating the industrialization process in the region, which contributes to income increases for workers and GDP growth. The TC sector has played an important role in the industrialization process of many of the world’s developed countries, including the United Kingdom (UK), the United States of America (U.S.A.), Japan, and South Korea, and is helping to generate a stable flow of revenue for developing countries such as Bangladesh and Cambodia. In the UK, for instance, industrialization began with the textile sector in the late 18th century with the use of machinery in textile manufacturing. Japan also began its path to industrial development in the 19th century by initially exporting clothes and textiles to the Western world using machinery imported from the latter and raw materials from its colonies in Southeast Asia before rapidly manufacturing higher value-added products in the 1900s, such as ships and railways. In all of these countries, industrialization was positively correlated with rises in income, employment, and GDP.

More recent examples of countries using the TC sector to jump-start the industrialization process include Turkey and South Korea. Turkey began its industrialization process soon after the nation’s establishment in 1923 and became a net exporter of textiles by the early 1950s. Starting at this time, Turkey also enjoyed the development of other manufacturing sectors. South Korea, meanwhile, began its industrialization in the 1960s. From 1980 to 1990, even though garments and clothing accounted for the topmost exports from the country, other, higher-value exports also grew. For instance, semiconductors were the country's second most important export item during the 1990s and replaced garments and clothes as the topmost export item from 2000 onwards. Today, Bangladesh and Cambodia are using the TC sector to develop their industries and generate stable flows of gross revenues [6].

SSA specifically possesses enormous advantages in developing an industrial base using the TC sector. First, it has a large, young English- and French-speaking workforce at globally competitive costs, giving it an edge in the international labor market and export services [7]. Second, the region is a major producer of cotton, synthetic fibers, and wool, which are essential industry inputs. Scholars argue that, from a production-integration point of view, an integrated agriculture-textile-clothing sector can make the region highly competitive and scale-efficient [8]. Third, African coasts allow sea shipment of export products to high-income American and European markets in the West and Asian and Middle Eastern markets in the East. Scholars predict that further development of strategic harbors, such as Durban in South Africa, Lagos in Nigeria, and Mombasa in Kenya, through increased textile and clothing exports would also contribute to regional development by increasing merchandise activities [9].

How Does TC Sector Growth Induce Multi-sector Industrial Development?

For a start, the TC sector absorbs large amounts of unskilled labor and turns them into industrial workers [10]. As is characteristic of the first stage of the industrialization process, the budding industry requires imported machinery, which increases labor productivity through capital deepening [11]. As workers become skilled in using the machinery through the process of learning by doing, the industrial skills acquired by the workers are transferred to other industries through managerial, technological, and technical spillovers [12]. The spillovers take place because as the TC sector grows, it consumes large amounts of raw material and employs a larger proportion of the workforce. As a result, the sector begins to source raw materials from multiple agricultural suppliers of raw cotton and synthetic fibers to take advantage of lower costs of inputs and diversify locations of production centers. In SSA countries, this diversification would take place in port areas, providing direct sea access to Western markets and, in turn, enable them to exploit economies of scale, helping solidify the linkages between the agriculture, textile, and clothing industries. As this process continues, the textile sector generates considerable gross revenue and contributes to increasing employment opportunities for the local workforce. These revenues can then be used to invest in developing other high-value industries.

As the textile industry grows and consumes a greater amount of intermediate goods, human resources, and physical capital, more industries arise that provide inputs for the textile industry. Moreover, workers trained in the best textile industrial practices migrate to other emerging industries for higher wage prospects. Such migration becomes more practical through investments in short-duration training programs, greater transferability of skills from the textile industry to other industries, and a greater number of job openings in the latter. As these industries become more sophisticated and generate even higher income returns than the textile industry, the latter may recede in the economic background, as was the case in Japan and South Korea. Or, it may compete with the industries it helped to grow via technological and managerial spillovers and begin to adopt sophisticated machinery and spur innovations over time. This competition is characterized by the shift to technical textile manufacturing and the development of a fast-fashion industry, such as those in the U.S., UK, and Turkey. [13].

Greater inter-industry competition leads to the scramble for more suppliers and product differentiation, forming innovation clusters in industrial regions, driving costs further down, and increasing the global competitiveness of manufactured goods. With significant diversification of industries, upskilling of the workforce, and intensified competition between industries, economies become capable of internationally excellent research and manufacturing and move into high-productive sectors, thereby moving up the value chain in global production networks.

Zebra Model of Supply Chains: An Appropriate Model for the Development of the TC Sector?

If the growth of the TC sector positively influences the growth of other industries, how does the TC sector grow in an underdeveloped region in the first place? While existing literature focuses extensively on the textile sector’s potential to develop other industries, relatively less attention has been given to identifying economically plausible strategies to enable the TC sector to help develop other industries. One answer is the Zebra Model of Supply Chains. This idea draws from Tim Harford’s comparison of the economy to a savannah ecosystem consisting of various trophic levels. Each industry constitutes a trophic level in the ecosystem, wherein a higher number and diversity of supply chains constitute a higher trophic level. Higher trophic levels imply higher productivity and innovation, as an industry with no supply chains will have only one source of innovation (itself), while industries with more supply chains will have more sources of innovation. This theory explains observations seen in different regional economic and industrial sectors; as per the World Input-Output Database on U.S. industries, two-thirds of technological improvements come from outside suppliers, while only one-third are made internally [14].

Harford’s analysis draws on previous research on production networks and economic growth. One study develops a model that demonstrates how production networks amplify the effects of technological improvements as they propagate along chains of production. The study further finds that longer production chains within an industry bias the latter towards faster price reduction, as increases in efficiency along one chain of the production network lead to technological spillovers and changes in price levels along other chains, thereby supporting the idea that more complex supply networks lead to greater efficiency. This spillover mechanism, in turn, implies that longer production chains for a country bias it toward faster growth. The model further demonstrates that technological improvements propagate through the economy and amplify their effects beyond the sector where they originate [15]. 

Complex production networks, therefore, provide a strong potential framework for developing a cost-effective, flexible, and profitable TC sector in SSA. Given the region’s geographical advantages for producing the raw materials required for the sector, a heightened level of primary sector activity, favorable location along global trade networks, and competitively low-price agricultural products, the formation of inter-industry linkages between the agricultural, textile, clothing, merchandise, and export sectors possesses enormous potential to foster innovation clusters across different centers of cross-sectoral industrial and tertiary activity.

Where Does the Money Come From?

The question now remains of how SSA countries can secure initial investment to develop the textile sector and stand out in a tight-knit market dominated by textile giants such as India, China, Mexico, Vietnam, the UK, and the U.S. The solution lies in targeting the right investor market, i.e., impact investors. As per the Global Impact Investing Network (GIIN), “Impact investments are investments made in companies, organizations, and funds, with the intention of generating measurable social and environmental impact, in addition to financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on the circumstances” [16].

To attract impact investors, SSA economies will have to focus on developing a Zebra Model of the economy. Benjamin Rohé, CEO of a German-based IT services and consulting firm focusing on improving institutional integrity, intelligence efficiency, and infrastructure protection called Monarch, explained this concept well [17]. He described the zebra economy as an approach to economic activity where businesses focus on impact investment and undertake projects aimed at earning profit while simultaneously correcting deep flaws in the economy. In this economy, businesses use backcasting to identify assumptions that lead to unsustainable market decisions and use alternative versions of market assumptions to design growth strategies with a purpose. Profits increase through investment in green projects, resilient infrastructure, and research institutions, which benefit the community as a whole. While a selected group of investors and shareholders are the main beneficiaries in unicorn startups—startups that witness exponential growth in stock market valuation and cross the $1 billion mark in a relatively shorter period of time compared to other companies, local communities benefit the most from the presence of zebra companies, which focus on elevating community standards while making a profit. Impact investing provides good financial returns along with delivering positive social and environmental impacts. For instance, a study by Oxford researchers shows that investment in green projects generates more jobs, delivers greater short-term returns, and creates long-term cost savings compared to traditional fiscal stimulus [17].

Currently, the impact investment support ecosystem in SSA is underdeveloped because of several reasons identified by the United Nations Development Programme (UNDP) study, “Impact Investment in Africa: Trends, Constraints and Opportunities” [18]. Overall, these are mainly the lack of appropriate institutions, business networks and infrastructure, financial and physical capital, and general awareness and understanding of the concept. In this regard, the UNDP report, “Impact Investment in Africa: An Action Plan” identifies a seven-outcome plan to develop a vibrant impact investment sector in Africa: “i) Developing a coordinating network/body primarily responsible for implementation of the action plan and co-ordination of relevant stakeholders; ii) Fostering a dynamic advocacy and awareness raising program on impact investment in Africa; iii) Identifying a strong pipeline of viable impact investees that are able to meet financial, social and/or environmental requirements; iv) Enabling a policy and regulatory environment in which impact investment can thrive; v) Encouraging good practice in impact investment by high capacity, skilled and experienced impact investors, investor readiness & mobilization of new investors; vi) Creating appropriate infrastructure and mechanisms to facilitate impact investment deals; vii) Forging consensus on and broad-based adoption of impact measurement standards and metrics to demonstrate social and environmental returns.” [19].

SSA countries have an unusual edge with respect to developing a zebra model for industrial activity in the sense that they are currently at the first stage of the industrialization process [20]. Industries have only developed in discrete pockets to support dominant primary sector activities that contribute to export revenues. Moreover, the law of diminishing marginal returns means the rate of industrial growth in SSA would increase in the short run and provide a lucrative option for investors who wish to secure financial gains over the short to medium term. Since their production networks are not yet well-established, SSA countries can theoretically foster sustainable manufacturing linkages as they initiate their industrial processes. 

In conclusion, Sub-Saharan Africa has immense possibilities for industrial growth, economic development, and Global Value Chain upgradation, the latter referring to an increase in the value-addition activities done within networks of global economic activity. By focusing on a textile and clothing sector-led industrial growth process fueled by supplier differentiation and impact-based manufacturing, economies in the region will be well-positioned to capitalize on their comparative advantage of low-cost labor and resource abundance. This will enable them to effectively contribute to global economic activity while developing their capabilities to pursue higher value-added activities within Global Value Chains.