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«Policy Research Paper Industrial Policies for the Structural Transformation of African Economies: Options and Best Practices No. 2 Policy Research ...»

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The current situation of the industrial sector in Africa is obviously the result of a combination of different factors. Among these, one of the most important is the set of industrialization policies implemented by the African governments between the 1950s and the late 1970s and the SAPs that replaced them in the 1980s. The next section discusses them in turn.

Industrial policies in Africa: a historical overview Since the 1950s African governments have been implementing a number of industrial policies to promote industrialization. The Developmental State has been the main actor of this process which was characterized by an Import Substitution Industrialization (ISI) strategy to development. At the beginning of the 1980s, the SAPs dramatically changed the government approach to industrialization in the continent. In this section, the characteristics of both the Developmental State and of the SAPs in the last decades in Africa are discussed.

Industrial Policy and Role of the State As most of other developing countries in the 1960s and 1970s, African countries started a process of industrialisation through import substitution. (Mkandawire, 2001; Galal, 2008). In most of the cases, governments offered protection to domestic firms with little discrimination, no time limit as well as no requirements for international competitiveness.

There are several reasons why import substitution policies were largely adopted by governments in Africa. One is the belief that industrialization was necessary for development and that to reach this objective, infant industries had to be nurtured behind protective barriers. The idea was that free trade would have increased the dependence on imported manufactures. Governments used a range of policy measures to implement their protectionist trade policies –namely tariff and nontariff barriers, such as quotas and licenses.13 For instance it was very common to grant export monopoly to particular firms; moreover, foreign exchange restrictions frequently imposed large additional taxes on trade.14 Exactly as in all other developing countries, governments of African countries played a leading

role in the industrialization process.15 There was also a widespread public ownership of industry:

public investment was extensive and a number of firms were nationalized. But, as opposed to what happened elsewhere (i.e. East Asia), in most of the cases, governments did not have the necessary financial and managerial capacity to operate the enterprises efficiently (Nziramasanga, 1995). Moreover, the policies designed to direct investment toward industry had a negative impact on agriculture by distorting factor prices and rates of return. The high level of tariff protection on final goods and the subsidized import of foreign capital goods were incentives to expand the consumer goods sector rather than the intermediate input production.

Under these circumstances, knowledge spillovers – which ironically were one of the main reasons to protect the infant industry – could not be generated in the economy. Furthermore, even when foreign firms were nationalized, there was no transfer of technology because the national technical capability to absorb it was very low.16The relation between industry and the innovaThe use of nontariff barriers creates serious problems due to the difficulties associated with its management as well as its opacity in terms of the effect on beneficiaries.

14 The effect of foreign exchange restrictions on current account is an overvalued official exchange rate, coupled with some form of secondary market exchange rate.

15 In some case, such as Ghana and Zambia, government even announced five year plans and very ambitious targets. In Algeria almost the whole economy was nationalized in 1966.

16 As an example, Nziramasanga (1995) cites the Zambian case: the nationalization of the copper mining industry induced a larger use of local inputs but it had no effect on the domestic process of technological knowledge accumulation since the latter tion centres, similar to the Latin American experience (see below), was very weak. In most of the cases, research centres were separated by industry as they were not interested in seeking for solutions to the technical problems of industry, preferring a more isolated existence. Moreover, the research centres were often not isolated in the national political maneuvers (Lall, 1995).

In the African experience of ISI, the state control of the financial sector was central to its development though variations exist across countries. In many cases, it took the form of state ownership of banks and other financial institutions. The reason why the state control of the financial sector has been critical in ensuring the success of selective and industrial/trade policies, and in general of the ISI, is that it provided the state with the power to influence private sector investment decisions and, more importantly, to discipline the non-performers (Soludo et al., 2004).

Governments created industrial development banks to provide foreign exchange loans for imported capital goods and to direct credit loans. For instance, in Morocco the National Bank for Economic Development (BNDE) was established in 1959 with the purpose of providing loans to investment projects in selected industries with preferential access by public enterprises (Nabli et al. 2008). Yet, in most of the cases, the results were quite disappointing.

Another relevant problem was the management of Foreign Direct Investments FDI. In most of the cases, foreign firms were given a number of favorable conditions, namely monopoly restrictions such as exclusive exploration rights, sole supplier contracts and domestic-market exclusivity (Stein, 1992), which had the perverse effect of hindering the process of linkages with the domestic economy. This is not surprising considering that FDI was almost exclusively directed to the primary and raw-materials sectors.17 While the judgment on the ISI experience in developing countries is mixed, there are few doubts that some of the best documented failures in industrialization through the ISI strategy come from sub-Saharan Africa (for instance, Zambia and Ghana). Indeed, no African country generated internationally competitive industries.18 Typically, while there was rapid capital accumulation, the industry which was developed was incredibly inefficient so that total factor productivity was very low.19 In mid the 1980s, the economic situation of most of African countries was very difficult. To deal with this, the IMF and the Wold Bank imposed Structural Adjustment Programmes (SAPs) on African countries. The theoretical premise of SAPs was that markets are efficient while selective government interventions are inefficient because they distort market signals. The government should just manage the macro economy, improve general education and infrastructures while free market would eliminate inefficient firms releasing productive resources for others that are efficient. The SAPs predicted that Africa should expand its agricultural and extractive mineral commodity sectors because those are the sectors in which comparative advantages exist.

was embodied in the expatriate management.

17 On the strategy of FDI in developing countries, see Amsden (2001).

18 Galal and El-Megharbel (2008) and Harabi (2008) show that industrial policy adopted in the early 1960s until the early 1990s produced very poor results in Egypt and in Morocco, respectively.

19 For instance, since 1966, the Algerian government invested heavily in the creation of basic capital-intensive industries (hydrocarbon, steel, plastic and fertilizers) and in industries substituting imports (construction materials, metal products, consumer goods); in less than a decade, Algeria succeeded in creating a strong industrial base. However, this rapid industrialization resulted in severe inefficiencies in the productive capacity of various industries and generated fiscal imbalances in the mid-1970s which constrained Algeria’s ability to continue its expansionary industrial policy (Nabli et al. 2008).

As a consequence, all the ISI apparatus was eliminated. The same happened for all the measures related to protection of the domestic market: tariffs and quantitative restrictions on imports;

price controls and subsidies; credit ceilings. Admittedly, SAPs were successful in liberalizing trade and the financial sector, privatizing public enterprises and inducing massive currency devaluations in most African countries (Ogbu et al., 1995).

There is serious disagreement in the evaluation of the results of SAPs in African countries.20 It is now a shared view that after the SAPs, the African industrial sectors became worse off. According to Lall (1995), over the period, industrial performance became disappointing and many African countries suffered sustained de-industrialization process - i.e. in the 1980s and 1990s. In particular, even in the cases for which there was an initial favorable response of manufacturing to the reforms, this did not lead to sustained growth and diversification (Jalilian et al., 2000). Ogbu et al. (1995) argues that the growing dependence on imported goods eroded the weak industrial base of most African economies. Stein (1996) critically examined the structural adjustment policies used in Africa and concluded that economic reform should have been based on transforming the economy and not retracting the state institutions and policies which he considered necessary in the promotion of industrialization.

According to Riddell (1990), “the structural adjustment policies promoted by the World Bank have been a major force preventing restructuring of industry away from the deep dependent link.” The weakness of the African supply response has been particularly marked in manufacturing industry and manufactured export performance. The de-industrialization impact of SAPs programs in several African countries is also confirmed by the analysis in Stein (1992). Nziramasanga (1995) cites the difficulties of the sugar industry in Kenya and textile industries of South Africa and Zimbabwe in the mid 1990s, as relevant examples. All these sectors reduced output and employment due to competition in the domestic market from imports.

have discussed the possible reasons for the disappointing results of the SAPs. According to some, the main problem with the design of SAPs was that they ignored the issue of capability development (Grimm and Brüntrup, 2007). The SAPs type of adjustment removed inefficient government interventions but did not create the conditions for development. Indeed, SAPs did not solve the numerous market failures present in African economies, characterized by a situation of severe shortage of technical skills and a weak tradition of industrial entrepreneurship.

Moreover, African governments had, often on advice from donors and multilateral development institutions, concentrated on macroeconomic stability and institutional reforms to protect property rights and ensure contract enforcement, with no coherent strategies to address market failures and externalities that constrained economic activity. Finally, while SAPs were supposed to attract foreign capital and through this, ensure the growth of a stable industrial sector for Africa, recent research shows that this did not happen except in the resource-extractive sectors (Elhiraika, 2008).

The SAPs had a particularly negative effect on the process of technological accumulation (Chang, 2009). While performance during the ISI was often poor in terms of innovation and growth, the SAPs in most cases did not produce better results, at least in the short-to-medium run (see for instance Lall (1995) on Ghana). Given these results, it is fair to conclude that macro-economic reforms and SAPs in Africa have not promoted significant changes in technological capability, improvements in skills levels, higher productivity, better manufactured export performance or 20 See for instance World Bank (1994), Elbadawi et al. (1992), Helleiner (1994), Stein (1992, 1994), Mosley and Weeks (1994).

greater value-added in the agro-industry sector, which were the expected responses from the reforms. The weak African industrial structure is at least in part a consequence of these interventions. In most of the cases, industries are yet to recover from the SAPs period and, given the new international context, the task will be increasingly difficult.

Comparative Analysis of Africa with East Asia and Latin America NICs and Latin American Countries In order to better understand the causes of the current economic situation in Africa, it is also useful to consider and compare the experiences of African countries with those of other developing countries. In particular, the development process of East Asian economies (South Korea, Taiwan, Hong Kong and Singapore, the so-called Newly Industrialized Countries (NICs)) and Latin American countries are examined.

Between the 1960s and the 1970s, developing countries, and in particular Latin America and East Asia, recorded high growth rates caused by a process of rapid structural change from agriculture to manufacture. The literature usually refers to this period as one in which these countries were characterized as Developmental States. The ideology of the Developmental State was to sustain economic growth through industrialization. To reach this objective, it employed a number of government interventions, especially in the form of extensive industrial polices (trade policies, sectoral policies, education and innovation policies, etc.). In most of the cases, at least at the beginning, all governments adopted an ISI strategy. The Developmental State was able to do so because it was a “strong state”, i.e. it was (at least partly) autonomous from social forces that opposed such policies and the structural changes that followed.

At the same time, it developed some beneficial interaction between the bureaucracy and the entrepreneurial elite that served the objective of growth through industrialization. In particular, ISI policies were initially quite successful in inducing industrialization in East Asia where the level of industrialization was lower than in Latin America. By the 1980s, a process of differentiation between the two regions began. While East Asian countries continued their rapid growth, Latin American countries entered the decada perdida, a long period of low growth with high volatility.

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