Bad luck or bad policy?
On Thursday, November 20, the United Nations celebrated the 25th Africa Industrialization Day. But maybe “celebrate” isn’t exactly the right word. Africa’s experience with industrialization over the past quarter century has indeed been disappointing. In 2010, the average share of manufacturing value added in sub-Saharan Africa in GDP was 10%, unchanged from the 1970s. At the same time, manufacturing output per capita was about a third of the average for all. developing countries, and exports of manufactures per person about 10 percent. So, I ask the question: Is Africa’s failure to industrialize in the 25 years since the first African Industrialization Day due to bad policy or bad luck?
About four years ago, the African Development Bank, the Brookings Institution, and the United Nations University-World Development Economics Research Institute (UNU-WIDER) got together to attempt to answer a seemingly simple but puzzling: why are there so few industries in Africa?
We called our research program Learn to competebecause it was the biggest challenge the African industry has faced. Among the projects we sponsored were 11 in-depth country case studies – eight from sub-Saharan Africa, one from North Africa and two from newly industrialized East Asia – carried out by researchers from the countries concerned. The case studies are now available here. They are a daunting read for anyone interested in African industrialization.
The eight sub-Saharan countries — Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Senegal, Tanzania and Uganda — were all among the region’s early industrialized countries and are also among the stars of the region’s growth recovery. Tunisia, along with Mauritius, which we have not studied in detail, is one of the brightest lights in the history of industrialization on the African continent. Asian countries — Cambodia and Vietnam — were chosen because they are the most recent industrializers in emerging Asia.
The country studies describe the range of public policies used to promote industrial development and the evolution of industry in each country. Most seek to identify the factors that have constrained industrialization and the nature of public actions intended to alleviate these constraints. What is striking about the eight countries of sub-Saharan Africa is that, despite considerable diversity in geographic location, resource endowments, and history, they share a remarkable similarity in their experience of industrialization. The Asian and Tunisian stories begin in much the same place as these sub-Saharan countries with an early trend towards state-led import substitution industrialization, but diverge considerably in terms of industrial policies and performance in later periods.
Part of Africa’s failure to industrialize is due to bad luck. The terms of trade shocks and economic crises of the 1970s and 1980s led to a 20-year period of macroeconomic stabilization, trade liberalization and privatization. Competition from imports is forcing inefficient firms, both public and private, to close their doors. Uncertainty about the outcome of the adjustment process and low or negative economic growth meant that there was little private investment overall and virtually none in industry. Political instability and conflict have also set investors back. When Africa emerged from its long economic hibernation at the turn of the 21st century, African industry was no longer in competition with the high-wage industrial “North” as it had in the 1960s and 1970s. He was in competition with Asia. From an industrial development perspective, the timing of the region’s economic recovery was unlucky to say the least.
But the failure of industrialization was also due to bad policy. The eight sub-Saharan countries have adopted remarkably similar policies for industrial development: state import substitution, structural adjustment, and investment climate reform. Import substitution has sown the seeds of its own destruction. High protection and heavy dependence on imports meant that African industry was ill-prepared for international competition. The tendency of many African governments to assign a leading role to the state in the creation and operation of manufacturing enterprises has only compounded the problem. Investments were often made without worrying too much about efficiency, and the state’s management capacity was highly strained. While the reforms of the structural adjustment period have borne fruit in terms of better macroeconomic management and faster overall growth, rapid trade liberalization and some ill-advised conditions, such as the liberalization of the importation of clothing from used for resale, probably caused the industry to contract more severely than was desirable. But, looking back, it’s still 20/20. The key question for the future is: do the policies that African governments now have in place prepare Africa for the shift towards industrial development?
Around 2000, the World Bank and many bilateral donors focused on stimulating industrial development towards the “investment climate” – the political, institutional and physical environment in which private enterprises operate. Investment climate reforms reflect the priorities and dogmas of the aid community. Given the importance of development assistance in the eight sub-Saharan economies, it is perhaps not surprising that all have implemented investment climate reforms since 2000. Our country studies, however, strongly suggest that the donors’ investment climate agenda is both poorly implemented and insufficient. .
While in principle improvements to the investment climate are expected to cover the full spectrum of issues from macroeconomic management, infrastructure and skills, to the policies and institutions that most affect private investors, in practice, the investment climate agenda has focused too much on regulatory reform. It is certainly possible to set new priorities for the investment climate – and we’ll make some suggestions on how to do that in a forthcoming book, Learn to compete, which summarizes the results of the project, but, on their own, changes in the investment climate are unlikely to be enough to overcome the challenges facing African economies trying to compete in global industry.
Learn from success
What is the alternative? Starting with Japan and going through the ‘Four Tigers’, Indonesia, Malaysia, Thailand and, dramatically, China, the economies of East Asia have all followed industrial development policies. quite similar with startling results. The source of their initial industrial dynamism came from the rapid growth of export manufacturing, based on an “export push” – a coordinated set of macroeconomic and structural policies designed to stimulate industrial exports. East Asian countries have also actively supported industry more generally, developing programs to encourage diversification and increase productivity at the firm level. Today, Cambodia and Vietnam, the two countries we studied, are taking the same path. Industrial growth in both has been explosive.
The two African countries – Mauritius and Tunisia – which have followed their own path in terms of industrialization policies have imitated the East Asian model. While it’s fair to say that neither country’s history of industrialization is an unqualified success – both have had some difficulty in making the transition from low-end manufacturing to more expensive products. sophisticated and technology-intensive – compared to the rest of the continent, they are the “leopards.” It may be time to rethink investment climate reform.