«Policy Research Paper Industrial Policies for the Structural Transformation of African Economies: Options and Best Practices No. 2 Policy Research ...»
Section 5 takes stock of the analyses in previous sections and proposes policy recommendations for industrial policies necessary to shape the structural transformation of African economies. In particular, two of the most promising approaches to industrialization are discussed here, namely, policies to support industrial cluster creation and policies to up-grade along the agricultural value chains. It is shown that both approaches are indeed quite promising in terms of creation of x the conditions for prosperous growth although their successful implementation poses enormous challenges. This section also provides the new taxonomy of African countries based on their main economic characteristics. Further, the best industrial policy mix to be adopted is proposed for each group of countries. In a nutshell, it is argued that the trade, education and innovation, and sectoral and competition policies should be used in different combinations depending on the characteristics of the specific country. In this way, the peculiarity of each country is taken into consideration and the objective of each industrial policy is clearly targeted.
Section 6 concludes the paper, summarizing the main points of the study. One of the conclusions is that African economies need industrial policy to induce their structural transformation as a key to economic growth. The issue for discussion is about what the best industrial policies to be implemented are and not if governments should intervene or not. This creates the conditions for improved economic management in African countries. Among the elements noted as vital for a successful industrial policy is the understanding of the political equilibrium of a society, of the actors and their interests and the political institutions. The normative analysis of industrial policy should always be complemented by a positive analysis. Finally, it is concluded that once the need for an industrial policy is acknowledged and the political and institutional context is correctly considered, the difficult task of finding the best policy mix begins. This paper aims to be a contribution to this valuable effort.
The recent global economic crisis has made evident as well as exacerbated the persistent weakness of African economies. Africa is indeed increasingly facing more difficulties in catching up with the rest of the world. Global rules and standards of industrial production are changing, new competitors are eroding African market shares and the industrialization process is slowing down.
While the causes of this situation are several, there is an increasing agreement on the need for a change in the approach to development on the continent. The most relevant novelty in this sense is that industrial policy is again at the centre of the public debate after a long period in which it has long been excluded by economists and policy makers alike.
Since the era of independence of many African countries, a number of industrial development initiatives have been proposed at the regional and sub-regional level.2 In recent years, the commitment by African governments to fostering industrialization has been increasing and a number of major initiatives to meet this objective have been taken. Among the most important there is the adoption of Plan of Action for the Accelerated Industrial Development of Africa (AIDA).
The plan, promoted by the African Union Commission (AUC) in collaboration with the United Nations Industrial Development Organization (UNIDO), the United Nations Economic Commission for Africa (UNECA) and other development partners, contains seven Programme Clusters3. The AIDA strategy is based on four elements: 1) to use Africa’s own natural resource endowments (agricultural and mineral) as a basis for industrial transformation and upgrading;
2) to develop the infrastructure system (i.e. energy, communications, transport. etc.); 3) to increase R&D and support the adaptation of technology; 4) to promote private sector development particularly SMEs.
The current study is to be placed within the context of implementation of AIDA. It is a contribution to the general quest to explore ways and instruments to promote industrial development in Africa. The objective of the paper is two-fold. First, it aims at providing a detailed analysis of the current state of industry in Africa and to describe the industrial policy currently pursued by various governments. First, the study tries to give an answer to a set of important questions, namely: Which are the characteristics of the industrial sector in Africa? Which are its difficulties?
Which are the industrial policies currently implemented by African countries? Could they be improved, considering African specificities? What could be learnt from the past industrialization experiences of other developing countries? Second, it attempts to propose a set of policy recommendations and concrete policy options for African countries. The starting point is the country specific nature of industrial policy: decisions on the specific priorities of industrial policy (i.e.
to increase firm performance, to induce change in the specialization pattern, to ease technology 2 In 2001, the New Partnership for Africa’s Development (NEPAD) was created to establish an overall common vision and strategy for the attainment of Africa’s sustainable development. While the Partnership has a strong focus on enhancing agri-culture and infrastructures, its stated objective is to promote diversification of production and export also in the manufacturing sector. In 2004, the African Union and NEPAD adopted the African Productive Capacity Initiative (APCI). The APCI marks a shift in the strategy to development: the focus is on enhancing productive capacity rather than simply increasing trade. Moreover, there is a stronger emphasis on the active participation of the private sector in industrial development and on the identification and promotion of selected value chains. The Plan of Action for Accelerated Industrial Development (AIDA) was adopted in 2008.
3 Industrial Policy and Institutional Direction; Upgrading Production and Trade Capacities; Promote Infrastructure and Energy for Industrial Development; Human Resource Development for Industry; Industrial Innovation Systems, R&D and Technology Development; Financing and Resource Mobilization; and Sustainable Development.
transfer) and on the best policy to adopt to reach the objective. The study asserts that it is not possible to follow a “one size fits all” approach. Thus while industrial policy is necessary for any country, what may be considered the best industrial policy is highly country dependent. This is more so in the case of African countries since they are highly heterogeneous. Because of the dependency on the structural characteristics of the economic structure and factor endowments, the policy to be adopted may vary significantly. The suggested new taxonomy of African countries is presented here and then used to identify the best policy mix for each specific country.
The analytical framework adopted in the study is based on the idea that development requires economic transformation and that industrialization is the key to generate sustained growth. Industrial policy is necessary to achieve these objectives because it induces structural change and foster competitiveness. Moreover, industrial policy can play a critical role in the growth process by favoring diversification and thus reducing the exposure to external shocks. This view is supported by the historical evidence that no newly-developing economy has succeeded by relying on the market alone in inducing structural change and diversification of output and exports. At the same time, industrial policy should promote increased investment levels, build new backward and forward linkages across the economy, and upgrade to the technological capacity that will more benefit Africa’s integration in world trade.
The paper is organized as follows: After the present introduction, which serves as Section I, the next section begins by describing the industry sector in Africa. Section 3 discusses the history of government intervention and industrial policy in Africa since the era of independence. In addition, the experiences of other developing countries, in particular East Asia and Latina America are examined. While government intervened in the sector in various forms, the common element is that the government always played a key role in the development of new industries. In addition, a comparison is made of the experiences of industrial policies across the continent.
Section 4 briefly discusses how globalization and the new rules of world trade have changed in the last decades and how this affects the possibility of the use of industrial policy by African countries to promote growth. Finally, the section describes the set of industrial policies currently being implemented by the various countries on the continent. Here the categorization proposed in Cimoli et al (2009) is adopted: Different types of industrial policies (innovation, trade, education policies etc.) are considered as well as how each instrument has been adopted in different countries. Given the wide differences across countries on the continent, instead of presenting a comprehensive picture of the different country experiences, the section attempts to identify some of the common patterns and features of the various countries in relation to industrial development. Hence, rather than presenting a country perspective, a “policy-focused” approach with a comparative perspective will be proposed to see how the different countries have used the same set of possible actions in different ways.
Section 5 proposes some policy recommendations in terms of industrial policies for the structural transformation of African countries. In particular, two of the most promising approaches to industrialization, namely, policies to support cluster creation and policies to up-grade along the agricultural value chains are discussed. It is shown that both of them are indeed quite promising in terms of the creation of the conditions for prosperous growth, though they pose enormous challenges for successful implementation. Finally, the new taxonomy for industrial policy for African countries is presented. To this end, an original categorization of African countries based on their economic characteristics is proposed. Based on this, for each group of countries, the best industrial policy mix is discussed. Section 6 concludes the paper.
Industry in Africa: some stylized facts
The stylized facts on industry in Africa will be presented by attempting an answer to a number of questions on the subject such as: Why is the African industrial sector not performing well?
What could be learnt from the past industrialization experiences of other developing countries?
Which industrial policies are African countries currently implementing? How could industrial policy be improved considering African specificities?
The first aspect to consider is the dimension of manufacturing production in Africa. The level of manufacturing production in Africa has always been and still is very low. Between 1965 and 2005, the Sub Saharan Africa SSA manufacturing value added did not change much, remaining around 15 per cent of GDP, which is half the value of manufacturing production in East Asia and Pacific countries since the 1970s (UNCTAD, 2008b). Figure 1 shows a slightly declining trend in the ratio of manufacturing value added to GDP for SSA countries from the beginning of the 1990s.
Figure 1: Manufacturing value-added to GDP (%) - 1965-2005: selected regions Source: UNCTAD, 2008b.
Another way to look at the industrialization process in Africa is to consider the share of industry (i.e. manufacturing, mining and construction) in GDP. As shown in Table 1, in Less Developed Countries LDCs in Africa, the increase in the industry share of GDP is mainly associated with the increased share of the mining sector which has been the main engine of industrial expansion.4 This is a very different situation with respect to East Asian countries which have experienced a sustained growth in manufacturing, agriculture, construction and mining since the 1970s, all contributing to their overall industrial expansion (Amsden, 2001).
4 Mining is the sub-sector where Africa’s world market share is the largest – it has also been growing from 4.3% in 2000 to 4.6% in 2006.
Agriculture is still the most important sector in African economies. For instance, the World Development Report (World Bank, 2008) defines all but three SSA countries (Republic of Congo, Zimbabwe and South Africa) as agricultural based, though all countries in the region are net importers of processed food (UNIDO, 2007). While the African relative share of world agricultural exports has declined, the agro-industry value added in African countries is high with great potentials.
The comparative advantage of African countries lies in the climatic differences between the Southern hemisphere and markets in the North. The horticulture industry is quite important in Kenya, Zimbabwe and South Africa. Moreover, both Kenya and Zimbabwe have expanded into related products, such as fresh fruits, nuts and vegetables exports. One of the advantages of horticulture industry is that it is more labour-intensive than that of the traditional crops such as maize or tobacco.
Table 1: African Least Developed Countries (LDCs): Trends in industrial sector composition, 1970–2007(Percentage contribution to GDP)
To better understand the role of manufacturing in African economies, one should also consider its share in total export. African export of manufactured goods has been very low in absolute and relative terms in the last 25 years. As shown in Figure 2, this results in SSA being the region of the developing world with the highest dependence on primary product exports, especially fuel.
This has the negative consequence of exposing African countries to volatile global commodity prices.
Figure 2: Composition of merchandise exports, 1995–2006, averages Source: UNCTAD calculations based on UNCTAD 2008a.
In the 2000–2006 period, the manufacturing export share in total merchandise exports of Africa which averaged 26 per cent is the lowest among all developing regions. Over the same period, in East Asia, South Asia and Latin America, this share was 92 per cent, 56 per cent and 54 per cent, respectively (UNCTAD, 2008). There are, however, some differences across African countries.