«Policy Research Paper Industrial Policies for the Structural Transformation of African Economies: Options and Best Practices No. 2 Policy Research ...»
There are different explanations for this divergence. Orthodox view explains it as the different result of two development strategies: a state-led ISI strategy in Latin America as opposed to a market-friendly export-led model in East Asia. The “Asian Miracle” is the ‘natural’ result of correctly implemented export-led growth strategies (Krueger, 1990; World Bank, 1993; Pack and Saggi, 2001). In this account, the role of the State in the development process was considered very marginal. The government sets the rules favoring export and allows the markets to work freely: then, automatically, the economy takes-off. In this view, any selective industrial policy would be an obstacle to growth.21 According to the orthodox view, Latin American countries had a bad performance because they implemented the ISI strategy and a number of industrial policies.
21 The orthodox view has long prevailed in the profession. See for instance, Kruger (1990) and Noland and Pack (2002).
As a matter of fact, starting from the end of World War II WWII, governments all around the world have largely used trade policies, subsides, public enterprises, direct credit allocation as instruments to shape comparative advantages and to guide investments and industrialization.
In opposing the orthodox view, a number of scholars have argued that all countries have used industrial policies in their development process (Reinert, 1999) and that the results of the Developmental States have been, obviously with some exceptions, remarkable (Amsden, 1989, 2001;
Wade, 1990). Moreover, most scholars now agree that also the NICs were Developmental States.
In fact, what differentiates NICs and Latin America is a different model of Developmental State.
Similar policies have been implemented in radically different ways. It is by now a shared view that the recipe of the success of the East Asian economies has been the effective combination of incentives with discipline (Amsden, 2001; Hausmann and Rodrik, 2003). The former were provided through subsidies and protection, while the latter was obtained through direct government control and the use of export performance as a selection and monitoring device for both the entrepreneurs and the bureaucrats. According to Lall (2003) the East Asian model’s main
• Strict selectivity and time limitation of government intervention;
• Use of public enterprises to enter risky sectors (for limited periods);
• Massive investment in skill creation and technological and physical infrastructure building;
• Centralization of strategic industrial decisions in competent authorities;
• A highly selective use of FDI.
Three features of the East Asian model made it successful. First, governments provided stable and predictable incentive frameworks that supported investments. Second, they had close and continuous, and, most importantly, ‘strong’ dialogue with the private sector. Indeed, as in all the other developing countries where they have been implemented, industrial policies in East Asian countries also created inefficient firms. However, different from what happened elsewhere, the State was able to withdraw support whenever a firm’s performance was not satisfactory and imposed export-performance standards. Third, governments used simultaneously, import substitution and export promotion policies, combining them in the most efficient way to serve the industrialization need. Moreover, the experiences of the different NICs also feature significant differences. For instance, government intervention was widespread in South Korea and Taiwan but was much less relevant in Singapore and Hong Kong. Both South Korea and Taiwan heavily invested in the development of domestic-innovation capabilities while the main technology policy for Singapore and Hong Kong has always been attracting FDIs (see Lall, 2000).
It is a shared view that the ISI strategy has been much less successful in most of the Latin American countries. One of the reasons is that the ISI implemented in Latin America was very different from that of East Asian. Its main characteristics were:
• An ‘anti-export’ biased version of the ISI strategy;
• Lack of clear performance criteria to evaluate the policies implemented;
• The inexperience and inability of civil servants to implement the different policies;
• The nationalistic ideology that made heavy industries producing for the Army the privileged targets of industrial policies (Katz and Kosacoff, 1998);
• A lower (with respect to the East Asian countries) expenditure on education and science and technology as share of GDP.
As it is clear from this list, there are a number of differences between the Developmental State in Latin America and in the NICs. In particular, Latin American firms received incentives, but faced very little discipline. The common mistake was to ignore efficiency considerations and to assume away capability problems. One additional reason for the divergence is the different learning and adoption capabilities that were present in the two regions when the new technoeconomic paradigm based on the information and telecommunication technology emerged (Dosi et alt., 1994).
The educational and technological infrastructures (results of systematic and well designed education and innovation policies as part of the industrial policy menu) gave East Asian countries a strong advantage with respect to other developing countries in exploiting the opportunities offered by the ICT revolution. The weakness of the Latin American version of the ISI strategy showed up also in the form of the dramatic 1982 financial crisis. That crisis was the result of one of the bottlenecks of the developmental State model, i.e. its inherent over-expansionist nature22.
To up-grade their production, Latin American countries needed to constantly increase their import of more advanced capital goods.
Increasing exports should have been the ‘correct’ way to accumulate the foreign exchange needed to pay imports. The problem was that the Latin American ISI strategy was clearly anti-export biased. In addition, because of domestic ‘excess demand’, there was no incentive for entrepreneurs to commit to exports. A temporary solution was the increase of the foreign debt. But, by early 1980s, Latin American countries were no longer able to keep up with their payments (Alcorta and Peres, 1998). Latin American countries underwent a long period of economic and political turbulence starting from the 1982 debt crisis. Finally, at the beginning of the 1990s, the Latin American countries become the laboratory for the implementation of the most orthodox version of the Washington Consensus policies package (see Stallings and Peres, 2000), the story of which closely resembles the one about African SAPs programmes.
Historically, the African States are the product of competition between colonial powers for access to the natural resources of the continent. Thus the independence process, which began at the end of the 1950s, had the objective of reducing the interference of external powers in post-colonial Africa in order to foster autonomous development. The post-colonial period of the 1960s and early 1970s was characterized by most sub-African countries building strong governments that took the task of nation-building and development seriously (UNCTAD, 2007).
Similarly, North African countries like Algeria and Egypt and - to a lesser degree - Morocco and Tunisia adopted common strategies including: (a) the rise of dominant single-party political systems; (b) agrarian reform programs; (c) programs for state provision of social services, including education, housing, health care, food subsidies, etc. (Nabli et al. 2008).
The Developmental State was the instrument African countries adopted to achieve their developmental objectives. In the late 1970s, while both African and East Asian countries were largely employing industrial policy and various forms of government intervention, differences in the growth performance between the African and the East Asia models emerged. In particular, Africa showed much lower productivity growth. The sustained growth process that had characterized the beginning of the ISI period ended due to the crisis that hit Africa at the beginning of the 1980s. The origin of the crisis was the combination of a sharp rise in oil prices and a drop in the prices of their major primary commodity exports (UNCTAD, 2007). The crisis was particularly 22 Stiglitz (2003) argues that the Latin American debt had become unsustainable not due to its inner forces, but because of a shock from the outside: the sudden, unexpected and unprecedented increase in interest rates in the United States.
severe due to the countries’ over-specialization in commodities which made them extremely vulnerable to changes in international commodity prices (Sindzingre, 2004).
The dramatic effect of the crisis raised doubts about the strategy pursued by Africa during the Developmental State period. Some scholars posited that the ISI strategy was responsible for the collapse of African economies. The result of the ISI approach to development in Africa has been perceived to be very poor. While there are some reported success stories (such as Mauritius, Botswana, Madagascar and Kenya), in most of the cases, the Developmental State has been a failure.
UNCTAD (2007) discussed in-depth, the reasons for the poor results of the ISI strategy in Africa. Two possible explanations were presented. It was stated that the causes of the failure are first “internal” and second, “external”. The internal explanation is founded on the belief that the Developmental State could not succeed because of the inability of African States to design and implement industrial policies. According to this interpretation, the ISI experience failed due to the corrupt and predatory nature of the governments on the continent.23 Hence, African countries became the paradigmatic example for the critique of the ISI strategy in the developing world. In contrast, the external explanation emphasized that the Developmental State in Africa collapsed due to the inability of the ISI strategy to adjust to the changes in the external conditions, including the breakdown in the Bretton Woods fixed exchange rate system, two major oil shocks, and the commodity boom-and-bust cycles. According to this view, it was not the industrial policies and, in particular, trade policies in use that caused the dismal economic performance (Rodrik, 2001).
The different performances of the ISI strategy in Africa and East Asia could also be explained in terms of differences in the characteristics of the policies adopted and in the initial conditions of the two groups of countries.24 The first element which could account for the difference between the outcome of the Developmental State in the NICs and Africa is the role given in the two models, to innovation and technological change as engine of growth. While Asian NICs considered fostering innovation and technological change as the key to economic growth, African countries dedicated much less resources to this factor. This difference is apparent in the large gap in terms of investment in R&D (input) and patents or product and process innovation (output) recorded by the two regions – in favour of East Asia, since the mid 1960s.
The second difference concerns the specialization pattern and the production structures. Similar to the NICs, the sub-Saharan Africa developmental states were characterized by a high degree of external orientation. Indeed, African countries were highly dependent on external trade to drive their economies, quite unlike the NICs. Another important difference between the African countries and the NICs is that the latter were more diversified in terms of the technological intensity and composition of exports, whilst their sub-Saharan African counterparts relied almost exclusively on unprocessed primary commodity exports. Paradoxically, the inability to respond 23 One may also add the lack of articulation between the ISI strategy and the development of the agricultural sector, the lack of ability to develop industrial capabilities and the inability to combine the ISI with some element of export promotion.
24 For an institutional analysis of the difference between the East Asian and African experiences see Aryeetey and Nissanke (2003).
to the oil-crisis could be read as caused by not having pursed enough structural transformation and through government intervention and industrial policy.
In summary, it can be said that the inability to combine the ISI with some element of export promotion – which was key to the success of the NICs industrialization strategy – and the inability of African countries to develop industrial capabilities are the crucial elements – as far as the differences in the type of polices are concerned - which explain their different performance levels.
Another set of important differences between the two groups of countries concerns the initial conditions. Among these, the most important was the difference in the quality of education and technological knowledge. Human capital is generally regarded as one of the keys to development.
Africa, unlike East Asia, but similar to Latin America, had a very low level of education. Because the take-off of industrialization needs the availability of an educated and skilled workforce, the lack of such condition played a role in hindering the development process in Africa. Finally, the geopolitical context of sub-Saharan Africa and the NICs was also markedly different.25 While the United States of America, USA had a strong interest in the economic development of the East Asian countries, Africa was just a battle field for the Cold War (Arrighi, 2002).