This article is authored by MOI Global instructor Fred Steiner, managing director at BCCM Advisors.
Fred is an instructor at Best Ideas 2023.
Since 1960, only about a dozen countries out of 150 or so have managed to materially better themselves relative to their peers. About half of the dozen grew from building a manufacturing base and the remaining half comprised of small nations that either attracted beachgoer tourists or got lucky with an abundance of oil and gas or diamonds. What do they all have in common? Exports: Each of these countries experienced more than 10% annual USD export growth since 1960. So, the question is, what are the prerequisites to building an export led growth model? The answer lies primarily in literacy rates and electricity and an interrelated relationship between demographics and geography that can leave some economies hopeless in the pursuit of industrialization.
To date, the only proven way to create sustainable economic growth in developing economies is via exporting manufactured goods. This is because the development of a light manufacturing base employs a significant proportion of the population and foreign exchange revenues derived from the exports can be used to import requisite technology, materials and capital goods inputs to further expand export capacity. In that manner, you get a virtuous cycle wherein exports drive savings, savings enable investment in export capacity, which, if allocated well, translates into further exports (as illustrated in the above chart) and jobs, jobs, jobs. This circular process not only serves demand on a global scale, but also stimulates domestic demand for which capital is attracted to produce products and services that would otherwise not exist. This in turn further stimulates local job creation while diversifying the local economy. This is how an agrarian economy transitions into a successful developing economy and, over a long enough period, a developed economy.
The labour intensive, low-end manufacturing export model is a process of then graduating up the value chain toward higher value capital intensive high-end electronics and light industrial goods to eventually heavy industrial goods. As a nation graduates one stage, other economies compete to take its place. This process, by our count, is on its third major iteration since the 1960s when the Asian Tigers began their industrialization journey. Beginning in the 1980s, China steadily took market share from the Asian Tigers while the latter gradually moved upward in the value-add chain. Today, many of the Tiger Cub economies and Bangladesh are well into the first stage of this industrialization process while China has migrated upwards. In short order, the Tiger Cubs too will be transitioning upward in the value chain, making way for a wave of new entrants.
The gains to be had as one of the new entrants are vast: Much like you often see winner takes most in many industries, the same goes for exporters. Paul Bairoch found that the Asian Tigers, “which represent less than 3% of the Third World market economies’ population, in 1990, provided almost two thirds of the total exports (excluding re-exports) of manufactured goods of the entire Third World.” While this graduation process may be an impossibly long investment horizon in a world obsessed with daily, weekly, and monthly performance, the outputs are surely mesmerizing and tangible: In 1960, Ghana had a greater GDP/capita than Korea, and in 2000 Kenya and Vietnam were equals on the same measure.
The first prerequisite of developing a manufacturing base is for a nation to achieve a 70% literacy rate. Simply put, no economy has grown sustainably below this threshold and any attempt at industrializing prior to achieving 70% literacy rates has been futile. Egypt tried and failed in the 1950s, Ghana in the 1960s and Nigeria in the 70s and 80s.
As noted above, in 1990, the Asian Tigers effectively exported 2/3rds of emerging economies’ total exports. At the time, China’s literacy rates had just surpassed the 70% threshold. Fast forward thirty years and Korea has graduated up the value-added chain with Samsung shipping nearly 300 million mobile phones globally. Meanwhile, China has 25% of the world’s manufacturing exports and has already transitioned away from the sweat shops that might come to mind when thinking about Chinese manufacturing.
The second prerequisite for industrialization is having sufficient power generation and distribution capacity. This is rather obvious: If you do not have a consistent supply of cheap electricity, it is impossible to compete in highly competitive low-margin light manufacturing.
Ironically, what China should have done over the past decade is build power plants and distribution networks in heavily dense cities throughout its One Belt, One Road recipient nations. China grew in large
part by attracting rural population to the cities where they manufactured goods with cheap electricity. Instead, China has built railways, roads and ports to many regions that do not have the export capacity to compete on a globally competitive stage. Ethiopia, for instance, has been a large recipient of Chinese investment, but its manufacturing sector is, contrary to beliefs, exceptionally small. So small that it is less than 5% of GDP. Why? Because despite having a fraction of the labour cost as, say Bangladesh, Ethiopian companies cannot manufacture textiles competitively due to the comparatively high cost of electricity.
Geographic & Demographic Handcuffs
Geography has played an overarching, decisive role in which nations can outperform or are handcuffed. Post-World War II, all the sustained high-growth success stories originated by having land or seafaring access to developed Europe or America, or by being geographically located between Japan and Singapore, which happens to be where almost all the world’s population growth occurred (see diagram in the appendix).
There is little doubt that the next leg in global population and urbanization will occur in Africa. This is a blessing and a curse. For one, as Charlie Robertson argues, countries that bear more than three children per woman will simply be too poor to develop because parents will not have any savings after providing care for their children. But what if your nation has fewer than three children? The answer is there is nothing to get too excited about. Countries with the highest labour growth rates do not necessarily translate into high GDP/capita growth rates. The same goes for nations with low labour growth rates. This is because, on average, labour’s contribution to real GDP growth is about two percentage points, give or take half a point.
Put differently, dispersion across countries’ GDP/capita results are simply too great relative to the minor dispersion in labour growth rates for any given country. Turns out this is how it works with urbanization rates, as well, and it is easier to portray with the twenty most urbanizing countries and region over the past thirty years, according to the World Bank.
We’d wager few would have guessed Haiti coming in the top 10 most urbanizing countries since 1991 (we would have never guessed either!). The message, however, is clear. Take for example, Vietnam. Vietnam’s increase in urbanization ratio was 13 percentage points lower than Cost Rica’s, but its cumulative change in GDP per capita was roughly 5x. Thus, not all urbanization rates or labour growth rates are created equal, and by no means do either imply a positive impact on GDP/capita growth. This makes sense, Nigeria’s population is, on a relative scale, exploding and Lagos has attracted millions of migrants to its city, but many end up living in squalor. It comes down to what a non-geographically handcuffed nation does with those rates of growth and does the nation have the prerequisite literacy rates and electricity capacity to leverage an urbanizing and growing labour force.
This data explains the country level performance, but the regional performance relationship is difficult to refute. As pointed out before, the vast majority of the world’s population growth occurred in Asia, especially along the shipping lanes from Singapore to Japan. We argue, without being able to quantify an amount, this bodes well for Africa as a continent and several of its regions.
Africa’s Lions and Bedouins
The African countries that largely fit the above bill are Morocco, which is well on its way to industrialization, then Ghana and Egypt, followed by East Africa’s Kenya, Rwanda, Tanzania, and Uganda. South Africa has already industrialized, but it is in some respects slipping backwards as our readers will be aware of.
Morocco passes each of Charlie’s three tests. It also has direct access to Europe, where the majority of
its exports are shipped. Today, the country boasts burgeoning aerospace, automotive, electronics and offshoring industries. In the not-so-distant future, Morocco may double its entire existing installed energy generation capacity to send cheap, renewable energy to Europe.
Ghana may well chart the same path as Mauritius did beginning in the 1980s. At the time, Mauritius had recently experienced two major currency devaluations, was dependent on the IMF, and had a debt load that was effectively drowning the country. But it also had begun its transition toward industrialization supported by literacy rates and electricity. Today, Mauritius not only has a well-established textile industry, but also a developed financial services industry. There’s considerable evidence Ghana is well on its way, with USD exports growing ten-fold since 2000. The West African nation is also located in the same neighbourhood as Nigeria, which boasts a population of 200 million. One can easily envision Ghanaian made textiles replacing Chinese and Bangladeshi made garments hawked by street traders.
Egypt also passes the three tests and has the considerable geographic advantage of being able to serve the demand of the Far East as well as developed Europe via the Suez Canal. Further, the population density in the Cairo-Nile delta region is similar to that of the Guangdong-Hong Kong-Macao greater bay area. The North African Nation also has ample cheap electricity. It, currently, however, imports far in excess what it exports. As your manager has written in recent letters, however, the pandemic followed by the Ukraine war are forcing the country’s leadership to address structural changes that should help to grow exports significantly. The country has all the ingredients to be a major success, and quite literally can pave its own destiny.
Lastly, East Africa’s Kenya, Rwanda, Uganda and Tanzania look most alike Korea in the 1960s with literacy rates having surpassed 70% in the past decade. Like Korea at the time, they are all currently mostly agrarian economies, take in significant foreign aid, export very little, and are short of cheap electricity. However, industrialization is a common goal across region and while there have been missteps in building their power generation, each of the countries recognizes the importance of cheap electricity.
And what about the rest of the countries and the role of the internet in breaking down barriers? Without calling out individual names, the good news is nations can go from largely illiterate to literate in a matter of fifteen years as has been shown by Korea and building out an electrical grid takes years, not decades, and that’s to say nothing of solar in rural areas. Then there is the role of the internet economy, which many very bright investors argue could equal the physical economy. We think this is a bit of a stretch and is not as scalable as light manufacturing with regards to absorbing large amounts of labour, but the internet will undoubtably play a major role in absorbing, educating and enriching the lives of whole swathes of Africans.
THEY SAY A PICTURE IS WORTH A THOUSAND WORDS
Since 1960, all of the world’s developing markets that sustainably and dramatically improved GDP/capita did so via manufacturing exports and were located in Asia
The role of education, electricity and fertility in economic development is a topic we have discussed in prior letters and are thankful for Charlie Robertson’s contribution in helping our understanding. His recently published book “The Time Traveling Economist” is a goldmine of supporting data and arguments. Thank you, Charlie.
Taiwan, Hong Kong, Singapore, and Korea
Thailand, Indonesia, Malaysia, Vietnam, Philippines
Charlie Robertson, The Time Traveling Economist
About The Author: Frederick Steiner
As Portfolio Manager of the Blue Clay Pan-Africa Fund, Fred Steiner is responsible for research, security selection and portfolio construction. Prior to re-joining BCCM Advisors, Fred earned an MBA from the University of Minnesota’s Carlson School of Management where he graduated with distinction and was a Curtis L Carlson Scholarship recipient. During the full- time business school program, Fred worked with a multi-family office, Sawmill Management as a Senior Analyst. Prior to business school, Fred served as an Analyst and Associate at BCCM and worked in various roles at Signature Financial Partners. Fred studied at University of Cape Town in 2008, graduated from Union College in 2009 with a Bachelor’s degree in Economics and Minor in History and is a CFA charterholder. Fred is a Board of Trustees member of African Wildlife Foundation and previously volunteered for Soccer 4 Hope while living in Cape Town, South Africa in 2010.
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