What African economies need: good, old fashioned industrial policy

Uitenhage vehicle factory, Eastern Cape province. Image via Volkswagen South Africa.

In terms of economic development, most African countries are operating below the least developed country income threshold of $1,035 per person. While developing countries in East Asia, most importantly China, have been lifting millions of people out of poverty at break-neck speed, Africa’s poverty rate has barely budged. In 2011, 69.5% of people in sub-Saharan Africa were living on less than $2 a day, only three percentage points lower than in 1981. As a result, Africa’s share of world poverty is 40% higher today than it was at the turn of the millennium.

The key to China’s rapid growth, and most other countries that have experienced the transition from low to high income, has been industrial policy – targeted interventions by the state to push economies towards the global technological frontier, especially in the manufacturing sector, while relinquishing dependence on agriculture and natural resources.

There are virtually no internationally competitive manufacturing firms in Africa, so the continent desperately needs industrial policy. The report summarized in this post is the result of work I did with Dr Ha-Joon Chang and Dr Muhammad Irfan, for the UN Economic Commission for Africa. Titled Transformative Industrial Policy for Africa. It aims to serve as a guiding tool for using industrial policy in Africa.

Industrial policy as a development theory is nothing new. One of its seminal advocates was Alexander Hamilton, the first treasury secretary of the United States. The core of Hamilton’s argument was that backward economies – which the US was in the late 18th century – needed to protect and nurture their industries in infancy through various policy measures until they could attain international competitiveness. Heeding the advice of Hamilton, successive US politicians made the country a bastion of protectionism: it had the world’s highest average tariff rates on imported manufacturers throughout the 19th century. It is ironic, then, that financial institutions much influenced by the United States – the World Bank and the IMF – thwarted any attempts by African countries to use industrial policy in the 1980s and 1990s. During those decades, neoliberalism swept the world – an ideology that saw the state fit for little more than adhering to the free market. In most of Africa, the state was consequently scaled down. But this also ended up diminishing any hope for industry to flourish.

States can surely fail, but industrialization has never happened without an active state, with its slew of tools and incentives aimed at making firms competitive in advanced sectors of the economy. The report re-emphasizes the significance of state intervention for the purpose of industrialization. In doing so we make two key policy points:

One is the importance of history. Successful catch-up economies have rarely (if ever) formulated successful industrial policy plans out of thin air. Although every country has its own political, economic and social nuances, learning from history is important. That’s why the report dedicates a large chapter to successful cases of industrial policy, from 19th century United States to 21st century Vietnam. The report deliberately provides a wide variety of cases, so that policy makers can pick and choose from this “treasure box” of tools.

Recurring tools include: tariffs and subsidies to nurture industries in their early stages, often handed out to firms on the condition of meeting performance requirements; the provision of long-term subsidized credit to industry through state-owned development banks; and the establishment of state-owned enterprises to take on risk that the private sector is hesitant to underwrite.

Take the example of South Korea between 1960 and 1990. The country’s risky entry into steel was made by the state setting up POSCO, which today is one of the world’s largest steel companies. Steel and other industries received long-term financing from the Korea Development Bank, which in 1957 accounted for 45% of total bank lending to all industries in the country. But this type of financing and other forms of subsidies usually came on the condition of meeting performance standards, like reaching a certain amount of exports in a five-year time frame.

Second, policymakers should take the changing global economic environment into consideration, but should do so with caution. Since the mid-1990s, production networks have become increasingly global and fragmented. A popular argument, especially advocated by international organizations, is that developing countries shouldn’t build entire industries to develop, but rather join a segment of a global value chain, often controlled by big transnational corporations. For example, instead of trying to build their own brand of phones, they should just assemble iPhones for Apple.

However, the report shows that since the 1990s, many countries have become trapped in a low-growth path through this type of segmented specialization. Examples in Central America, such as the Dominican Republic and Mexico, show how countries can be stuck with low-value tasks, be it assembly of electronics products or the sewing of jeans, without creating any linkages to the domestic economy. On this point, the history of economic development is clear: in order to prosper, developing countries need to take ownership of their own industries, not simply be production puppets of transnational corporations based in the West.

Ultimately, industrial policy should be context specific, so the report doesn’t provide a golden formula for success. Ethnically and culturally, the 54 countries in Africa are arguably more distinct from each other than countries in Europe.

But economically, they’re strikingly similar. No African country has structurally transformed its economy, making the move from dependence on agriculture and natural resources to manufacturing. That’s why industrial policy needs to be put on the forefront of the development agenda on the continent.

Further Reading

An unfinished project

Christian theology was appropriated to play an integral role in the justifying apartheid’s racist ideology. Black theologians resisted through a theology of the oppressed.