As the African continent celebrates its 24th Industrialisation Day today, it is opportune to take a step back to look at how the debate has evolved over the years, and more importantly, who has achieved what?
For many years, industrial policies have had a bad reputation. Gurus of the ‘laissez-faire’ believed that it was not the role of Governments to pick winners because that would create inefficiency and rent-seeking behaviours. In a nutshell, they believed that the market would sort itself out by what a country would produce or not, what industries would naturally develop and that only the most efficient ones would survive for the general welfare of the world.
But of course in reality, none of this works. Markets are not efficient, information is not perfect, distortions, in the form of subsidies, tariffs, and other non-tariff measures continue to regulate trade, and government support has evolved in areas such as research and development, innovation and protection of intellectual property, preventing knowledge to be a public good. Adam Smith would probably not have liked it. Similarly, poor industrial policies indeed sometimes picked winners (or rather losers), leaving behind, years later, some inefficient ‘white elephants’, a testimony that policies can cause wastage of (scarce) economic resources.
Nobel prize winner Professor Joseph Stiglitz rightly said in 2002 that “the argument against industrial policy is based on a naive reading of economic theory and a misreading of economic history” as evidenced by the experience of today’s industrialised countries and more recently, by East Asian economies. Put like this, it is indeed a matter of common sense: what is important is not whether governments should put in place industrial polices, but rather, how to do so in a smart way in order to catch-up in a sustainable manner, as the global landscape and the nature of industries change.
To some extent, the 2008-09 global financial crisis forced policy makers to face the reality that market forces alone would not generate the desired economic transformation objectives and that something more had to be done and that there was a responsibility for governments. Additionally, the emergence of global powers such as China, notably through heterodox policy choices, further confirmed the relevance and pertinence of industrial policies as a means to fundamentally transform economic structures.
This debate is even more relevant in African countries. Today, only a handful of countries on the continent are up for celebration. While we have seen the spectacular rise of new manufacturing hubs in South Asia, this stands in stark contrast with the receding trends observed in the industrial sectors in many Sub-Saharan economies. Countries remain desperately trapped as exporters of unprocessed commodities and natural resources, with largely undiversified economic bases, characterised by significant productivity gaps.
Time therefore has come to act on the rhetoric in a different way to significantly transform economic outlooks beyond the “Africa Rising” story, into one that will create better paid and decent jobs, industries and better prospects for the African private sector.
To work, industrial policies should be seen as a package of at least four highly complementary sets of instruments that need to be bundled:
Most African countries have tried combinations and permutations of sector-specific “hard” industrial policies over the years, with the results we see today in most countries. Few have indeed made good progress while the majority have failed lamentably. And it was not for lack of trying! Attempts to explain the disappointing results in Africa led to a blame game, ranging from pointing fingers at externally driven policies during structural adjustment programmes, to inherent challenges with African institutions and governance structures that crippled business development, all of them having certainly played a role.
Interestingly though, few analysis looked at the real conditions that can make industrial policies work or not and how then, can existing policy instruments be used to re-engineer these conditions to obtain results. These might not be the most pareto-efficient ones, but in an imperfect world, be ‘good enough’ to stimulate deeper sustainable and inclusive structural transformation.
Looking at the example of Mauritius, a resource-poor country, which managed in just one generation, to transform itself from an LDC to an upper middle income country, despite two structural adjustment loans, can be inspiring one. What explains Mauritius’ success is the constant political willingness to drive its economic trajectory at its own pace and through nationally defined policy choices, while making the most of every international opportunity and policy space at its disposal to make things work.
Of course, the Mauritius example may not be replicable anywhere else. But it leaves at least one lesson. As many African countries are enjoying a high growth cycle, there is no time for complacency. On the contrary, there is no time to waste, because the rising youth population is becoming increasingly impatient to finally get decent and better paid jobs, and current economic models based on raw-material dependency have run out of steam. Yet, as low income countries, African economies still have significant margins of manoeuvre in terms of policy options to develop their economies. But these are rapidly melting away as industries get more integrated in global value chains. Missing out on this now might be irreversible…
The views expressed here are those of the author and not necessarily those of ECDPM.
Photo courtesy of Gavin Houtheusen/Department for International Development.
In addition to structural support by ECDPM’s institutional partners The Netherlands, Belgium, Finland, Ireland, Luxembourg, Portugal, Sweden, Switzerland, and Austria, this publication also benefits from funding from the Department of International Development (DFID), United Kingdom.