Industrial Policy and Economic Transformation in Africa

Akbar Noman, Joseph E. Stiglitz

• Publisher: Columbia University Press
• Year: 2015
• ISBN:
  9780231540773
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

The revival of economic growth in Sub-Saharan Africa is all the more welcome for having followed one of the worst economic disasters—a quarter century of economic malaise for most of the region—since the industrial revolution. Six of the world's fastest-growing economies in the first decade of this century were African. Yet only in Ethiopia and Rwanda was growth not based on resources and the rising price of oil. Deindustrialization has yet to be reversed, and progress toward creating a modern economy remains limited.

This book explores the vital role that active government policies can play in transforming African economies. Such policies pertain not just to industry. They traverse all economic sectors, including finance, information technology, and agriculture. These packages of learning, industrial, and technology (LIT) policies aim to bring vigorous and lasting growth to the region. This collection features case studies of LIT policies in action in many parts of the world, examining their risks and rewards and what they mean for Sub-Saharan Africa.

CHAPTER 1

Introduction and Overview

ECONOMIC TRANSFORMATION AND LEARNING, INDUSTRIAL, AND TECHNOLOGY POLICIES IN AFRICA

Akbar Noman and Joseph E. Stiglitz

The revival of reasonably rapid growth in Sub-Saharan Africa of about 5 percent per year for over a decade is all the more welcome for having followed a “lost quarter century”: per capita income for the region, which had started falling toward the end of the 1970s, did not recover to its previous peak level until after the turn of the century. This is an impressive turnaround from what was arguably the longest and deepest economic decline anywhere. In the 2000s, six of the world’s fastest-growing economies were in Sub-Saharan Africa (which we refer to simply as Africa): over about a decade, annual growth averaged more than 7.5 percent in Angola, Chad, Ethiopia, Mozambique, Nigeria, and Rwanda.

There is much promise in the turnaround in Africa. Some talk of “Africa Rising,” a perspective highlighted by the online debate held by The Economist in 2013 titled “Africa’s Rise: How Real Is the Rise of Africa?” Particularly notable are Ethiopia and Rwanda, whose growth has not been based on a natural resource boom. In contrast, oil lubricated the rapid growth of Angola, Nigeria, Mozambique, and Chad.¹ Indeed much of the revival of growth in the region is attributable to a commodity boom.

As we will discuss, while it is difficult to parse the relative roles of different causes of improved growth and there is some controversy on the role of better policies (and which particular ones), there is a consensus that booming commodity prices and mineral discoveries—especially oil—have played a vital role. There is also widespread agreement that improved macroeconomic management—at least avoidance of serious inflation and volatility—and debt relief made significant contributions.

Nonetheless, African countries typically have made little or no progress in transforming their economies, notably with respect to reversing deindustrialization that began in the late 1970s. The share of manufacturing in 2012 barely reached the level of the mid-1970s. Related to this lack of transformation is the woeful inadequacy of generating “decent” jobs, forcing large proportions of the rapidly expanding labor force into very lowproductivity agriculture and the informal sector, which arguably disguise at least as much unemployment as the jobs they reveal.

In the words of an impressive and wide-ranging report of the African Center for Economic Transformation (ACET), one of Africa’s leading think-tanks, “the recent economic growth, while welcome, will not by itself sustain development on the continent. To ensure that growth is sustainable and continues to improve the lives of the many, countries now need to vigorously promote economic transformation” (ACET 2014, 1, italics added).

The main objective of the contributions in this volume is to shed light on how to go about doing so. They emphasize the vital role of industrial policies. It is perhaps noteworthy that the two economies among the fastest-growing in Africa in this century did not rely on an oil boom: Ethiopia and Rwanda pursued to varying degrees deliberate policies of government interventions of the type we label industrial policies. These two countries were consciously and explicitly influenced by the successful experiences with industrial policies of the most successful East Asian countries (see World Bank 1993; Stiglitz and Uy 1996).

We provide a quick overview of Africa’s development experience in the next three short sections in order to provide a context for the two longer ones concerning the main themes of this volume. “Static Efficiency vs. Dynamic Gains: Learning, Industrial, and Technology Policies” examines the need and possibilities of learning, industrial, and technology policies in the region, and the last section provides an overview of the other chapters in this volume and how they contribute to that aim.

AFRICA’S DEVELOPMENT EXPERIENCE

Africa’s “lost quarter century,” along with the economic meltdown of the former Soviet Union and Eastern Europe in the transition to a market economy, possibly ranks as among the worst economic disasters since the Industrial Revolution.² The lost quarter century was a period not just of deindustrialization but also of declining per capita income. After stagnating in the late 1970s, average per capita income fell steadily from 1980 to 1995 and did not recover to its 1974 level until 2004. The share of manufacturing in GDP shrank to such an extent that in 2012 it was lower than what it had been in 1965.

In a region as large and diverse as Africa, averages conceal much. Even before the recent acceleration of growth, there were several successes in the region on assorted dimensions of development in different periods, including GDP growth and managing the resource curse. Some natural resource–abundant economies such as Côte d’Ivoire, Mozambique, and, above all, Botswana (the fastest-growing economy in the world from 1960 to 2000) have experienced significant periods of fairly good growth. Even more impressive was the achievement of growth exceeding 5 percent per year for substantial periods in countries such as Ethiopia, Ghana (preoil), Tanzania, Rwanda, and Mauritius, which are not blessed/cursed by natural resource wealth.

As noted earlier, much of the growth in Africa since the turn of the century is attributable to booming commodity prices and hydrocarbon discoveries.³ But there are many instances in various parts of the world of resource-rich countries mismanaging their wealth, demonstrating that an abundance of resources and booming prices are no guarantee of success.

We turn now to the following questions: Why did the region go through such a prolonged period of economic decline? What caused the decline in per capita incomes, the failure not only to make the economic transformation that was going on, say, in East Asia, but to move in the opposite direction, to deindustrialize? What are the lessons for future policy that emerge from this review of these past failures?

The period of Africa’s severest economic decline, from 1980 to 1995, was an era of a multitude of reform programs reflecting external advice and conditionalities based on a brand of economics that came to be labeled the “Washington Consensus” (WC).⁴ These policies reflected what became the dominant orthodoxy in economics: neo-liberalism. In our other writings (Noman and Stiglitz 2012 and forthcoming), we have explained the fallacies and failures of those policies and their contribution to the lost quarter century in Africa. But for the unabashed proponents of the Washington Consensus, the problem was not that the policies were mistaken but that they needed to be intensified and implemented better.

The failures of policies also gave rise to a search for other ingredients of successful development, going beyond the Washington Consensus—including notably a focus on “governance.” Governance is, of course, important. But as we have argued elsewhere, it was mistaken to attribute the failure of the Washington Consensus policies simply to governance: Africa’s experience reveals the limitations of arbitrary and generalized explanations, especially when they confuse cause and effect, and ends and means (Noman and Stiglitz 2014).

Policies have to be designed to be able to be administered by governments with particular competencies. The failure to do so was certainly central to the failure of the WC policies. But policies should also have aimed to strengthen competencies; instead, many of the WC policies actually worked in the opposite direction.

Of course, as we also wrote elsewhere, economics does not have much to offer as solutions to states that are failed or mired in armed conflict; but it is too simple to blame economic failure on political failure. The former also contributes to the latter (Noman and Stiglitz 2014). At any rate, we exclude from our purview here the rather different set of issues raised by the research on states embroiled in severe conflicts or that have failed.

Just as there is controversy surrounding the causes of the lost quarter century, there is controversy about the causes and sustainability of Africa’s growth resurgence in the twenty-first century.

Perhaps predictably, advocates of the WC policies believe that Africa’s recovery is due to those policies and is sustainable—if only the countries persist in their adherence to the WC policies. That interpretation ascribes relatively little weight to the boom in commodity prices and mineral discoveries and to the success of countries like Ethiopia, Botswana, and Rwanda that, while adopting some of the WC consensus policies, resisted others. It glosses over the deindustrialization that accompanied the WC policies and the fact that outside of the natural resource sector, foreign direct investment (FDI) has remained anemic. It ignores too the particular failures of some of the critical reforms in some of the countries in such areas as agriculture and finance.

The continuing controversies arise in part from the difficulties of establishing indisputable causal links between economic policies and outcomes. Reform programs may fail because of their inherent weaknesses (bad policies, or at least policies inappropriate to the circumstances of the economy), because they are not adequately implemented, or because of unanticipated exogenous shocks, and it is often difficult to parse out the relative role played by each of these. Still we can examine whether there are reforms in the reform programs that can enhance the likelihood of success.

Consider the issue of implementation: advocates of the WC policies often attribute disappointing results to failures in implementation. Earlier we noted that part of the explanation for the problems of implementation is that the “programs” were not designed to take into account the strengths and limitations of those who were supposed to implement them.

PACING AND SEQUENCING OF REFORMS

Aside from such implementation issues, there were often even more fundamental weaknesses in the reform programs, stemming from insufficient attention to the pacing and sequencing of reforms.

Sequencing is especially important because economic reforms to remove distortions confront the problem of the second best: eliminating some of many distortions may make matters worse. This is clearly demonstrated by Africa’s experience with, for example, the financial sector, agricultural pricing, and trade policy reforms. The competitive marketplace that the reform advocates hoped would arise spontaneously did not emerge—partly because some of the reforms that would have enabled the emergence had not yet been put into place. While this argues for comprehensiveness in reforms, limitations in the capacity for implementing reforms point to the vital importance of prioritization and sequencing.

Thus one lesson of the failed programs in Africa is that reforms need to be mindful not just of the second-best dilemma but also of the absorptive capacity of the country—not only governmental capacity but also the ability of agents to digest and respond to a myriad of changes. Any particular reform program has transaction costs and opportunity costs. Information about reforms and their implications is neither costless nor instantaneously and universally available.

Moreover, no set of reforms is ever perfect. Any successful implementation process must entail learning about both what is working and what is not. Successful reform programs thus must create institutional frameworks for learning and adaptation.

In addition, to be sustainable, reforms have to have “political buy-in.” They cannot be seen to be imposed by outsiders, especially when those outsiders lack legitimacy as a result of a conflict of economic interests or a colonial heritage. Conditionality was, as a result, often counterproductive.

This does not constitute a general argument for always going slowly: there may be threshold effects that require decisive, critical, minimum efforts. Thus, for example, when Ethiopia launched its reform program in the early 1990s, it moved rapidly on selected fronts: establishing macroeconomic stability, dismantling collectivized agriculture, and establishing a system of famine prevention. But Ethiopia’s reforms have been much more measured and gradual in other areas, such as financial liberalization. While some have suggested that in some areas Ethiopia could have moved faster (for example, in telecommunications⁵), its mixture of speediness and gradualism has served the country well overall, with its economy growing at a rate in the vicinity of 10 percent per year for nearly a decade before the global crisis of 2008. Even after the crisis, its economy maintained much of the growth momentum. One welcome consequence was that the proportion of the population living below the poverty line of $1.25 per day—in purchasing power parity terms—fell from 56 percent in 2000 to 31 percent in 2011.⁶

Further afield, perhaps the most notable case of combining fast and slow reforms is that of China; its success stands in marked contrast with the “shock therapy” of the former Soviet Union (see Stiglitz 1999). In China the initial focus was predominantly if not exclusively on agriculture, and subsequently on two-track price reforms and creating Township and Village Enterprises. Only later did it engage in large-scale privatizations. As another example: it first invited foreign firms only in joint ventures; much later, it allowed foreign financial firms to enter, and then only with extensive restrictions, and it still has not fully liberalized its capital accounts. In the case of the other mega country, India, a different sort of gradualism may have worked (see Ahluwalia 2002).

The issue is thus not one of how fast or how slow, but one of priorities and sequencing given the country’s capacities for implementation, the transactions and opportunity costs of any set of policy measures, and the country’s ability to assimilate information about the successes and failures of each policy measure and to adapt the policies in response. An approach that allows for experimentation and flexibility with successes scaled up and failures quickly abandoned is an important ingredient of success.

To take the example of financial sector reforms, liberalization of interest rates to make them market-determined typically faced the problem of financial markets that were at best thin and highly imperfect or at worst non-existent. The all-too-frequent result was exceptionally high real interest rates (a range of 12 to 15 percent was not uncommon) and the absence of long-term credit for investment. Even the United States and Europe learned in 2008 that financial sector “reforms” could be taken too far; strong regulations are necessary to maintain an efficient, competitive, and stable financial system. This is even more so in developing countries.

Privatization, trade policy, and related reforms compounded the problems posed by the “reformed” financial sector. While there was much to be said for rationalizing and liberalizing the trade regimes and public sector enterprises, the structure, pacing, and sequencing of reforms in these areas led to the deindustrialization of Africa instead of the emergence of a more competitive and vibrant sector and one that attracted foreign investment in non-extractive activities. Domestic firms faced strong competition from abroad—competitors who had better access to finance at attractive rates. Not surprisingly, many did not survive. Trade policies were one sided: the advanced countries did not simultaneously liberalize their markets. Escalating tariffs were designed to keep poor African countries supplying raw materials and to prevent them from entering into higher valueadded activities. A lack of investment in infrastructure meant that even were firms able to produce something that might be desired in developed countries, the “internal barriers” to trade remained significant. (Aid for trade did not enter seriously into the trade agenda until 2005.)

INSTITUTIONS AND GOVERNANCE

The question of why the neo-liberal reforms did not work as expected led to a renewed interest in institutions. As Thandika Mkandawire (2012) states, the failure of the “good policies” of “getting prices right” prompted those multilateral institutions and aid donors advocating such policies to turn their attention to an institutional agenda.

There is a large literature on the development state emphasizing the role of the state in successful development, not just in the East Asian “miracle” economies, but also in many of the now-developed countries elsewhere.⁷ Th...

Table of contents

• Cover 
• Series Page
• Title Page
• Copyright
• Contents 
• Acronyms
• Acknowledgments
• 1. Introduction and Overview: Economic Transformation and Learning, Industrial, and Technology Policies in Africa
• 2. Is Industrial Policy Necessary and Feasible in Africa?: Theoretical Considerations and Historical Lessons
• 3. Industrial Strategy and Economic Transformation: Lessons from Five Outstanding Cases
• 4. The Economic Implications of a Comprehensive Approach to Learning on Industrial Policy: The Case of Ethiopia
• 5. Review of Industrial Policies in Ethiopia: A Perspective from the Leather and Cut Flower Industries
• 6. The Return of Industrial Policy: (What) Can Africa Learn from Latin America?
• 7. Can the Financial Sector Deliver Both Growth and Financial Stability in Sub-Saharan Africa?
• 8. Growth Strategies for Africa in a Changing Global Environment: Policy Observations for Sustainable and Shared Growth
• 9. Measuring Policy Performance: Can We Do Better than the World Bank?
• About the Editors
• About the Authors
• Index