How reliable electricity is transforming manufacturing in sub-Saharan Africa

In Sub-Saharan Africa (SSA), where power outages are a common challenge, reliable access to electricity is proving to be a game-changer for the manufacturing sector. A recent World Bank study titled “Electricity Reliability and Intra-Sector Structural Change in Sub-Saharan Africa” sheds light on how reliable electricity is boosting the export capabilities of medium-sized manufacturing companies, thereby driving economic growth and structural transformation. .

The role of reliable electricity

Electricity is the lifeblood of modern manufacturing. It powers machinery, illuminates work spaces and guarantees the proper functioning of production lines. However, in sub-Saharan Africa the reliability of electricity supply has been a long-standing problem, hampering the productivity and competitiveness of local businesses. This new study reveals that addressing this challenge can have profound economic benefits.

Research shows that for medium-sized manufacturing companies, a 1% increase in reliable access to electricity increases the share of exports in total sales by 6.32 percentage points. This significant export boost comes at the expense of domestic sales, indicating a strategic shift toward international markets enabled by stable energy supplies. This phenomenon is known as intra-industry structural change (ISSC), where companies realign their sales approach due to improvements in infrastructure.

Why medium-sized companies benefit the most

Midsize companies, defined as those with a workforce of between 20 and 99 employees, are in a unique position within the manufacturing sector. They are large enough to have the capacity for significant production volumes, but small enough to remain agile and responsive to market changes. These businesses can benefit the most from reliable electricity because it directly improves their operational efficiency and reduces downtime caused by power outages.

The study concludes that reliable electricity not only increases the export share of these companies but also influences their decision to enter export markets. Midsize companies with reliable power are more likely to explore and expand into international markets, taking advantage of their higher productivity to compete on a global scale. This effect is more pronounced at the intensive margin, meaning that existing exporters can significantly increase their export volumes with higher electricity reliability.

The broader economic impact

The implications of these findings are far-reaching. By enabling medium-sized businesses to boost their export activities, reliable access to electricity contributes to broader economic growth. Exports are a vital component of economic development, providing foreign exchange, creating jobs and stimulating domestic industries.

Furthermore, structural transformation driven by increased export activities can lead to more diversified and resilient economies. When companies focus on exports, they often innovate and improve their processes to meet international standards, which can have positive spillover effects on other sectors and the economy as a whole.

Methodology and key knowledge

The World Bank study uses the entropy balance approach to analyze data from 13,025 manufacturing companies surveyed in 39 countries in sub-Saharan Africa between 2006 and 2022. This robust methodology ensures that the findings are reliable and applicable in different contexts within the region.

The baseline results highlight the significant impact of reliable electricity on the export share of medium-sized companies. The study carefully compares companies with and without reliable access to electricity based on various covariates, such as company size, generator use, electricity losses, GDP per capita, and rule of law growth rate . This comparison process ensures that comparisons are fair and that any observed effects are attributable to the reliability of the electricity.

Policy implications and recommendations

The study’s findings offer several important insights for policymakers. First, improving electricity reliability should be a priority to improve the international competitiveness of medium-sized manufacturing companies. This could involve substantial investments in electrical infrastructure and policies aimed at reducing power outages.

Specific initiatives to help medium-sized businesses access reliable electricity are crucial. For example, governments can offer incentives for companies to invest in backup electricity systems or collaborate with private sector partners to improve the national grid. Additionally, ensuring that new electrical infrastructure projects prioritize areas with a high concentration of medium-sized businesses can maximize economic benefits.

Policymakers should also consider broader economic strategies that can complement improving electricity reliability. Supporting human capital development through training programs focused on advanced manufacturing techniques and international trade can help companies take full advantage of their improved productivity. Additionally, fostering a business environment that fosters innovation and competitiveness will be key to sustaining the growth momentum fueled by reliable electricity.

Looking to the future: the path to sustainable growth

The World Bank study highlights a critical aspect of economic development in sub-Saharan Africa: the importance of reliable infrastructure. While the focus is on electricity, the broader message is clear: infrastructure investments are critical to economic growth and structural transformation.

As countries in sub-Saharan Africa continue to develop, it will be essential to ensure that infrastructure keeps pace with economic needs. Reliable electricity is just one piece of the puzzle. Investments in transportation, telecommunications and water supply are equally important to create an environment in which businesses can thrive.

By prioritizing infrastructure improvements and supporting midsize businesses, SSA can unlock significant economic potential. Transforming the manufacturing sector by increasing export activities can drive long-term growth, create jobs and improve living standards across the region.

Conclusion: empower the future

The World Bank’s study of electricity and manufacturing reliability in sub-Saharan Africa provides valuable insights into how infrastructure improvements can boost economic development. By focusing on midsize businesses and their unique potential, policymakers can harness the power of reliable electricity to transform the region’s economic landscape.

Investing in electricity infrastructure, supporting human capital development and fostering a competitive business environment are crucial steps towards a more prosperous future for sub-Saharan Africa. As the region continues to grow, these efforts will ensure that the benefits of development are widely shared, empowering both businesses and communities.