As African industrialization progresses and COVID-19’s impact on long supply chains, the idea that African economies should produce more locally is gaining ground. Liam Taylor reports from Kampala
ISevery time a foreign dignitary visits Cipla Quality Chemical Industries Limited (CiplaQCIL), they plant a tree. Visiting presidents show up so often that the grassy edge outside his factory in Kampala will soon become a forest. The drug manufacturer is a flagship of the Ugandan government – a sign that Africa does not have to rely on imports from abroad to meet basic needs.
The Covid-19 pandemic has reinforced the idea that African countries should produce locally, rather than import from abroad. Announcing a blockade in March, Ugandan President Yoweri Museveni expressed hope that the crisis would help build production capacity rather than “transform our market into a dumping ground for foreign goods.”
“Everything you imported, except petroleum products, now you do it here,” he urged.
Cipla, an Indian pharmaceutical company that holds a 51% stake in CiplaQCIL, imported the drugs it sold in Uganda. In 2005, it partnered with Quality Chemicals Industries, its distributor in Uganda, and moved parts of the manufacturing process to Kampala. The active ingredients still come from India and China, but the tablets are quality manufactured and tested in Uganda, explains Nevin Bradford, managing director of CiplaQCIL. It sells HIV, malaria and hepatitis B drugs to the Ugandan government, donor agencies and 19 African countries.
This type of import substitution creates jobs, transfers skills and saves foreign currency, as well as arousing patriotic pride. Bradford sees another benefit as Covid disrupts transportation: security of supply.
“If anything, what Covid did from our perspective was crystallize the minds of healthcare professionals on security of supply,” says Bradford. “It is only when they face disruptions in logistics, imports, air transport, shipping and everything in between that they really appreciate the benefit of having security of supply from an African-based manufacturer.”
This helps Uganda and Africa more broadly, he says: “At the start of the Covid pandemic Botswana was facing an ARV stash. [antiretroviral drugs for people with HIV] because he could not get them from his usual sources of supply in India. So we were able to step in and get a contract worth over $ 6.5 million to provide 1 million ARV treatments. And starting from scratch we were able to do it in 10 weeks “.
Back to the past?
In the 18th century, the founding father of the United States Alexander Hamilton urged governments to erect tariff barriers to protect nascent industries. In the 1950s, Latin American economists argued that import substitution would help developing countries break the grip of economic dependence.
Many African countries have adopted this approach after independence, with some initial success. Manufacturing production grew by 8% annually in Ghana and 10% in Tanzania between 1965 and 1970, rates that have rarely been matched since.
But the boom didn’t last. African countries became more dependent on imports, partly because they still needed to purchase intermediate goods and capital. Industrial enterprises were inefficient and poorly managed after being protected from international competition. In the 1980s, as Africa entered a debt crisis, the IMF and the World Bank pushed governments into exports, privatization and foreign direct investment.
In recent years, import substitution has become quiet again. Chinese growth and Trumpian protectionism are eroding the free trade principles of the “Washington Consensus” and slow industrialization in Africa is reviving interest in alternative policies.
In any case, some import substitution is taking place, stimulated by population growth and increased demand. Surveys of African industrial enterprises by the International Growth Center, a research network at the London School of Economics, found that many started as import-export businesses before venturing into domestic manufacturing. Half of the top 50 industrial companies in Ethiopia in 2010 started as a trader. A similar model applies to foreign companies in Africa. Chinese manufacturers in Africa make 93% of their revenue from local or regional sales, according to a 2017 McKinsey survey.
Import substitution is usually practiced on a national scale, but the growth of regional markets is creating a pan-African equivalent. Regional economic communities are deepening and a continental free trade area is on the horizon. In The business revolution in Africa, a 2018 book, McKinsey consultants predict that “three quarters of the growth opportunities in the manufacturing sector lie in meeting intra-African demand and replacing imports.”
Carlos Lopes of the University of Cape Town says the potential is not uniform. “I think the strategy for the industrialization of Africa will focus on import substitution mainly in the agri-food processing area, but not for other areas. Sectors such as light manufacturing may be more oriented towards world exports. “
In some countries, import substitution has never really gone away. In Nigeria, a large internal market creates economies of scale for the local industry. His “backward integration policy” has helped Aliko Dangote build a domestic cement business – a trick he hopes to repeat in industries ranging from fertilizer to oil refining. At the same time, clumsy import restrictions have raised prices for consumers and encouraged smuggling.
Ugandan politics has taken a more tortuous path. A “ten-point program” developed by Museveni’s rebel army in the 1980s argued that import substitution would stop the “endless bleeding” of national resources. But after he seized power in 1986, he switched to free trade and curtailed state intervention.
“At that time the IMF, the World Bank and the US Treasury were promoting the Washington Consensus and this was a new government, it was broken,” says Ramathan Ggoobi, an economist at the Makerere University Business School. “So they immediately dropped out of the ten-point program. But over the years they have gradually tried to get back to where their original plan was. “
In 2014 Uganda introduced a “Buy Uganda, Build Uganda” policy, which aims to promote the consumption of Ugandan products through branding, public procurement preference schemes and by supporting small businesses to meet supply chain requirements. . Museveni has commissioned new factories and industrial parks, which typically receive tax exemptions. In 2018, it opened a factory run by Goodwill, a Chinese-owned ceramic manufacturer, which today claims to meet 70% of Ugandan demand for ceramic tiles.
Effect of the closure of borders
The Covid-19 pandemic has concentrated minds. “Suddenly every country closes its border and you are at home,” said Emmanuel Mutahunga, Uganda’s foreign trade commissioner. “Either provide for yourself or you die.” The government has increased import duties on agricultural products and some locally produced products.
“Today’s import substitution is developing the ability to compete … We are not talking about banning imports, but rather we are looking at how we use that import substitution drive to make our products more competitive domestically, and therefore in the regional and international markets. “
This is a recognition that import substitution and export promotion are not mutually exclusive. It also reflects the ambivalence in Uganda’s approach. Museveni has yet to sign the National Local Content Bill, approved by parliament in May to promote the role of local companies in sourcing the oil industry. Some parts of the bill were reportedly impractical.
“They seem to be overloading the existing capacities in the country, wanting to do everything from bus assembly to building all kinds of industries,” says Ggoobi.
Risks range from reckless use of tariffs, which could drive up the cost of industrial inputs, to the danger of government insiders using the subsidies to support their private businesses, he says.
The usual challenges of doing business remain. Three years ago CiplaQCIL agreed to supply drugs to the Zambian government. But cash-strapped Zambians stopped paying, sending the company in the red and its share price plummeting. If more companies are to do things in Africa, then it is coherent policy, not patriotic rhetoric, that they need.