«Policy Research Paper Industrial Policies for the Structural Transformation of African Economies: Options and Best Practices No. 2 Policy Research ...»
An important element in the discussion about trade policy as an industrial policy instrument is the attempt by African countries to increase regional integration.39 The objective is to increase intra-regional trade which is supposed to create better conditions for industrial development and structural change. There is no doubt that intra-African trade holds promise as a driver for African industrialization. Nonetheless, while the number of regional agreements in Africa has enormously increased, their impact on growth, at the moment, is still disappointing.40 In fact, there is currently a great debate on the pros and cons of regional agreements (see World Bank, 2000). In the case of Africa, UNECA (2010b) concludes that too many institutions were created to coordinate cooperation efforts at the sub-regional level and that this caused duplication of efforts and some confusion of mandates. Governments should therefore rationalize the institutional setting and improve its technical, legal and financial capacities. Moreover, several scholars have asserted that the multilateral approach has a number of advantages over regional approaches (see Martin, 2001).
Equally important in terms of its potential impact on the industrialization process is the approach by African countries to Economic Partnership Agreements (EPAs) (UNECA, 2004).
EPAs are an important opportunity but they should be carefully managed. Two things should be considered. First, governments should be aware that countries are very different and thus EPAs cannot be expected to solve different problems at the same time. Second, governments 38 An interesting example of the use of export subsidies is Zimbabwe. In the 1990s, the government actively promoted the horticulture industry through the provision of export financing and an export retention scheme (while foreign exchange was still rationed for the domestic market). Suppliers of inputs were considered as indirect exporters for purposes of foreign exchange allocation. Growth in the industry in turn has stimulated the packaging and paper industry (Nziramasanga; 1995).
39 With the words of the UNIDO Director-General Yumkella “The benefits of enhanced regional integration in Africa include increased production competitiveness through economies of scale and scope, increased trade opportunities through larger markets, increased opportunities for larger investments, and increased bargaining power. Coupled with integration, industrial development will allow African nations to […] accelerate the process of achieving stronger political and economic cooperation.”(Speech delivered at the Africa Industrialization Day, November 18, 2009).
40 There are two main reasons. First, the production and export of most African economies are mostly represented by primary commodities such as minerals, timber, coffee, cocoa, and other raw materials which are mainly directed to developed countries. Second, the infrastructure system is inadequate.
should be careful as EPAs could limit even more the room for decision-making. Grimm and Brüntrup (2006) warns that this process may also reach the point where it will be even more severely restricted than by the individual SAPs of the 1980s. Finally, governments should push for sufficiently long transitional periods and provision of specific measures that take into account the varying needs of each country. To minimize possible adverse effects of EPAs, the status of implementation should be constantly monitored.
Successful country examples There are a number of industrial success stories in the continent. Among these are Mauritius, Tunisia, Botswana, South Africa, Lesotho, Kenya, and others including Ghana, Cape Verde and Mozambique. All these have made significant strides in developing a viable industrial base – thus offering useful lessons on African best practices.
The Mauritius experience has attracted attention since the mid 90s becoming a well-known example of how a well designed industrial policy may bring about structural change, export growth and development. The study by Lall and Wignaraja (1998) shows that part of this success is due to the change in the specialization pattern resulting from a set of dedicated industrial policies.
The quality of the incentive regime and of the policies for FDI promotion, the support for skill, technology and information development and the available physical infrastructures are all above the standards in developing countries. In the last decade, Mauritius has achieved a considerable success in exporting manufacturing products. Notably, this happened through a change in the specialization pattern of the country. To achieve this, the Government has invested in creating export-related skills and information and support institutions. Moreover, the increase in exports is mainly due to domestic producers increasing both quantity and quality of their exports. An efficient system of technology support has largely contributed to induce firms to improve the characteristics of their products. In the country, there are several institutions involved in productivity improvement support and training for SMEs. Among these, is the agency for export firms (EPZIDA) and the SME support agency (SMIDO). In both cases the results of their activities are highly positive. Mauritius’ good governance allowed the country to adopt a non-orthodox trade regime: some relevant import restrictions coupled with the promotion of exports through export processing zones (EPZs). Subramanian (2009) argues that the explanations of the impressive growth experience since the mid-1970s cannot be ascribed solely to openness to trade and FDI. Instead, the peculiar history of the country, its institutional development and the ability of the government to manage the peculiar characteristics of the Mauritius population are all ingredients of this success. Frankel (2009) adds that the high investment in education is another crucial element of this success story.
Tunisia’s recent growth has been very high in comparison to both African countries and countries at a similar level of development in other parts of the world. Tunisia has successfully implemented the economic reforms started in mid 80s, improving its competitiveness, diversifying its economy, reducing economic volatility and improving living standards. Data on GDP, export and FDI growth all show remarkably positive results. Most importantly, in recent years the industry’s share in GDP increased to almost 30% with more than 80% of total exports being industrial products, 90% of which are manufactured goods. There is little doubt that this is indeed a successful case of industrialization. According to Baliamoune-Lutz (2009), the key to Tunisia success is a development strategy that aimed at increasing the diversification level of domestic production and export. An important element in this strategy has been a strong investment in the development of human capital, particularly of women. Erdle (2009) argues that the good economic performance is the result of a compressive industrial policy which is characterized by several key strategic elements. First, the government has tried to create an attractive and enabling institutional and regulatory environment to favour private enterprises. This primarily meant reducing state intervention and bureaucracy. For instance, the government introduced a single investment code with significant incentives for private investors while maintaining special provisions for strategic sectors. At the same time, there has been an increasing fading-out of government direct intervention in production and a growing adoption of public-private partnership PPP models and practices. Finally, a number of direct and indirect support mechanisms have been designed to facilitate restructuring and upgrading processes and access to foreign markets.
In particular, dedicated credit lines in the Tunisia Export Market Access Fund (FAMEX) supporting exporting activity by domestic firms have shown to be very effective (López-Cálix et al., 2010).
Robinson (2009b) argues that the economic success of Botswana can be explained by the historical development of its political institutions. The peculiar historical evolution of the country created the conditions for a more stable and accountable government than elsewhere in Africa after independence. As a consequence, the Botswana’s government is now characterized by its adoption of exceptionally good economic policies. Robinson derives two main lessons from Botswana’s experience. First, even following simple and orthodox polices may bring positive results if the country’s institutional setting is well functioning. Second, economic development could come from effective policy reforms and the development of efficient institutions. Most notably, as the Botswana case shows, African countries may develop their own version of political institutions as long as they are able to build a national identity and to continually modernize and adapt institutions.
The case of South Africa is interesting because it shows that industrial policy sometimes needs time to bring positive results. Since the end of apartheid in 1994, there has been an effort by the government to foster the country’s industrialization as evidenced by a number of major policy documents, dealing with issues ranging from poverty reduction to stabilization, trade and competition and investment strategies (Lundahl and Petersson, 2009). The current country’s success is the cumulative result of the policy making efforts since the start of the Growth, Employment and Redistribution (GEAR) programme. At the moment, South Africa has a number of instruments and agencies formulating and implementing industrial policies (Hausmann et al., 2008). The industrialization success of the country also depends on the well functioning of these agencies, their actions as well as programmes. Among them, the Motor Industry Development Program (MIDP) plays a central role in providing a wide range of incentives to different sectors.
Particularly effective has been in these recent years, the Department of Public Enterprises which supports the development of local suppliers’ capacity. The Department of Trade and Industry (DTI) administers the Motor Industry Development Program (MIDP) which provides a wide range of incentives to the sector. While there is considerable debate about the extent to which the MIDP has been successful, several indicators suggest that the programme achieved some of its objectives, e.g. exports have increased (Barnes et al., 2003). In addition to these programmes, industrialization has been facilitated by the activity of the Southern African Development Bank.
The Bank has shown that it has the technical expertise, the required knowledge of the producers’ needs, a sufficient degree of autonomy from the political sphere and the financial resources to be able to play an important role in funding the creation of new enterprises. The South Africa case shows that effective industrial policy may be the results of trial and error and could manifest its effects only in the long run.
The case of Lesotho is particularly interesting because looking at its geographical and economic conditions; one would be tempted to conclude that Lesotho is condemned to stay out from international trade. But government intervention made a difference to this situation when, in the early 2000s, in order to exploit the opportunity given by the AGOA, it took a series of actions to support the industrialization of the apparel sector. First, it provided subsides for starting new firms. Second, it developed public-private collaboration to develop internationally acceptable standards on labor rights and wages. It also started programs aimed at improving the skills and capabilities of domestic workers. Third, it developed, again in strict collaboration with the private sector, a number of business and infrastructural services for the apparel value chain, including transport and logistics, and customs procedures. The result of this comprehensive intervention is that the Lesotho apparel industry has grown to the point where it has become an engine of growth in the country’s development process (Shakya, 2010). The impressive growth of the apparel industry - and in particular of its export - has made contributions to employment growth as well as created significant backward and forward value chain linkages. The case of Lesotho’s apparel industry presents some interesting lessons that could be useful for countries with a similar development profile. First, it shows that public-private collaboration is central to any successful industrial strategy. Second, it provides an example of how developing countries may use the opportunities offered by international trade agreements in a strategic way.