«Policy Research Paper Industrial Policies for the Structural Transformation of African Economies: Options and Best Practices No. 2 Policy Research ...»
Another remarkable example of best practice in Africa is Kenya. In the last decades, Kenyan firms have sensibly increased their presence in regional markets. This has been possible also because the participation in exports has been facilitated by government intervention through the establishment of the Export Promotion Council (EPC) in 1992. The mission of the EPC is to enhance diversification of export markets and products and to facilitate identification and removal of obstacles to rapid development of the export sector. Another important ingredient of export success has been the activity of the trade associations that form the Kenya trade network such as Kenya Association of Manufacturers, Kenya National Chamber of Commerce and Industry and the Fresh Produce Exporters Association of Kenya. The Government export strategy is based on two objectives: 1) targeting of investment in specific sections; 2) attracting FDI and increasing the output of manufactured exports of higher value added. In order to achieve these objectives, the EPC support export development through a number of activities and instruments (ITC, 2001). These are: 1) Sector Specific Panels. These are fora where people from both the public and private sector elaborate recommendations for the EPC Board of Directors which would then submit them to the relevant authorities. The Panels cover a vast range of topics such as banking and finance, infrastructure, and issues related to specific sectors (i.e.
While these are the most commonly known examples of industrial success stories in the African continent, other countries have also recorded remarkable results in recent years. One of this is Ghana whose success story is described in Fosu (2009). Also the case of Cape Verde and Mozambique are interesting success stories in the context of SSA. Braga de Macedo and Pereira (2009) argue that Cape Verde and Mozambique are two cases of countries which have been able to face globalization by introducing effective changes in both economic policies and institutional arrangements. Notably, both are part of sub-regional cooperation agreements, which show the importance of exploiting the opportunities the regional trade agreements offer to industrialize.
All these case studies show that there are different ways to achieve high growth and structural change. There are a number of African best practice countries in terms of their industrial policy which other countries can emulate in their quest to pursue successful industrialization and sustained economic growth.
Which are the main Industrial PolicyOptions for African Countries?
The industrialization experience of Africa in the last few decades is very different from that of the fast-growing emerging countries. For the latter, the manufacturing sector has become increasingly more important while agriculture still contributes about a quarter of the GDP. Moreover, even if agriculture’s share of GDP decreased during last decade, the share of mining rose by a similar percentage. Thus, instead of a structural change towards other sectors, there has been a shift from one primary activity to another (UNECA, 2010a). While this may have short run positive effects, it certainly did not lay the basis for a more diversified and dynamic economy.
Mineral and other natural resources are non-renewable and commodity prices tend to be highly volatile: both these factors introduce additional elements of uncertainty into the already fragile African growth trajectory. Indeed, if employment is to grow fast enough to absorb the growing labour force in African economies, the structure of these economies will have to be transformed from almost exclusive reliance on growth in natural resource extraction to increased growth in manufacturing, service and agro-industry, where employment elasticities are much higher.
The context for the formulation of industrial policies has changed. The global economy and global industrial production patterns have evolved, and policies therefore need rethinking with a solid anchorage in national circumstances (UNIDO, 2009). Recent research suggests that for most low income countries, long term growth, job creation, and poverty reduction depend on a competitive and increasingly diverse and sophisticated industrial production and export structure. Thus, if structural transformation and diversification is the objective, a set of industrial policies have to be established (UNECA, 2007).
Lall (1995) argues that the poor industrial performance of African countries indicates that some policy reform is necessary. Though, it is clear that the adoption of the ISI strategy is of the past, its limitations within the African context is evidently obvious. 41 Also the new role of the Asian Drivers in the continent calls for a new set of policies and policy measures (see Goldstein et al., 2009).
According to Elhiraika (2008), there are a number of industrial policies that may help the process of production diversification in Africa. Among the most important are measures to promote entrepreneurship skills, in particular management skills and the ability to perceive and take advantage of profitable opportunities. Moreover, providing incentives to risk taking by entrepreneurs would ease the decision to search for technological change and to enter foreign markets. Governments could also promote product diversification by addressing market failures, in particular imperfect information and coordination externalities (Hausmann and Rodrik, 2003;
Rodrik (2004) points out that the key to development is discovery of new activities. For industrial policy to be effective, it needs to have certain characteristics. First, incentives should be provided only to new activities with clear rules to determine successes and failures. Second, 41 Still it is important to note that even if several countries have failed, there also have been some successful cases of government intervention. Acemoglu et al. (2003), for instance, attribute most of Botswana’s success to large public investment in education, health, and infrastructure and efficient and meritocratic bureaucracy during the Developmental State period.
government intervention and public support must be phased out by default to avoid subsidizing failing industries and support should target activities rather than sectors. Third, subsidized activities must have the clear potential of providing spillovers and also a cycle of discovery. Fourth, implementing agencies must have demonstrated competence, be monitored by bodies that have a stake in outcomes as well as political authority at the highest level and in addition, maintain channels of communication with the private sector. Finally, there needs to be mechanisms for correcting the possible mistakes about “picking the loser”.
Increasing trade integration and promoting regionally integrated value chains may enhance industrial competitiveness and regional economic transformation and increase production diversification in Africa (UNECA, 2010b). However, the process of liberalization should be gradual.
Moreover it should be accompanied by a strategy of industrial restructuring and upgrading in order to allow firms to prepare for new challenges. In this context, is important to consider that there are clear limitations to what trade policy, or outward orientation, can accomplish (Rodrik, 1999). An excessive emphasis on trade liberalization could divert energies and political resources of government from growth fundamentals (education, capital accumulation, infrastructures, etc.). Economic policy should focus on growth not on trade, since increasing trade should be an instrument not an objective per se.
At the same time, it should be acknowledged that a novelty in recent years has been the role of regional industrial policy formulation. For instance, AIDA interventions have been envisioned at regional and continental levels incorporating the potential roles to be played by the African regional economic communities, and at the continental level, the African Union. In this sense, the establishment of improved networks between states and between the existing RECs is another key element for any successful industrial strategy.
All the strategies previously discussed imply some form of government intervention and thus, pose the question of government failure. Because of the lack of capability, one should be cautious about the ability of government to implement interventions in support of industrialization. Some pre-conditions are required to make government intervention effective. Pietrobelli (2008) argues that the ability of African countries to design and implement policies to support local suppliers and producers is usually very weak and should be supported by international cooperation. Lall (1995) emphasizes that improving government capabilities should be the first objective.
Indeed, without the necessary government capacity, any type of government intervention is doomed to fail. This position remains valid irrespective of whatever policy the government is called upon to design: the (supposedly) market-friendly policies or the more interventionist ones. For this same reason, African governments should not even attempt the kind of pervasive interventions practiced in a country such as South Korea in the 1970s. It also follows that the degree and form of selectivity that each government could sustain depends on the specific country. A clear policy priority is, therefore, to improve capabilities for strategic policy design, formulation and policy implementation. At the same time, governments should explore ways of making the necessary private-public collaboration most effective.
An effective technology infrastructure is invaluable for upgrading the competitive capabilities of industry. This is one of the main lessons from the experiences of East Asian governments, which provide a range of technological and information services to their enterprises. Strong efforts should be also devoted to development of technology infrastructure. Consultancy assistance to firms to obtain quality and standard certification, especially to small and medium enterprises (SMEs) should be provided. Moreover, interventions have to be selective. Efforts should be concentrated on improving services to industries that are of strategic importance in terms of international competitiveness and growth potential.
Industrial policy should be designed to minimize the possibility of rent-seeking, corruption and waste of resources. Elhiraika (2008) suggests that this can be done if the policy focuses on the process rather than the outcomes of industrial restructuring. Sometimes reducing government intervention may help. For instance, in the mid- 1990s, the major constraint for the horticulture industry in Kenya and Zimbabwe was freight charges, related to the inefficiencies of the Stateowned freight airlines. The elimination of the monopoly in freight handling stimulated the sector (Humphrey et al. 2004). Consequently, resources became available to the government, as it engaged in other growth activities.
As mentioned, there are three main measures to support industrial restructuring and upgrading:
a) skills development, (b) technology support, and (c) finance support. In particular, attention should be paid to the quality of training and how it can respond to the needs of industrial technology. Analysis of the current African experience suggests that more selective intervention would be useful in this context. More effort should be concentrated on activities in which countries can become internationally competitive. Policies should provide incentives for firms to increase in-house training and create training institutes. The priority is to solve the technical problems related to provision of inputs to the firms in the industry. This is in line with what Oyelaran-Oyeyinka (2006) suggested should be done first: simple measures such as providing electricity.
In many SSA countries, the environment for business activities is unattractive and constitutes an obstacle to local and foreign investment. The Doing Business Report of the World Bank shows that time spent and the costs associated with regulation is greater for businesses in SSA than in other regions of the world. Business-development services must be provided by the public sector (von Drachenfels and Altenburg, 2006), though the private sector should also offer them. The positive externality stemming from increased entrepreneurship (see also Hausmann and Rodrik, 2003) implies that business-development services should provide targeted training courses, strategic further education particularly at university level and an environment conducive for the inculcation of the entrepreneurial spirit. Innovative ventures require identification of market opportunities with deliberate efforts made to use them.