September 21, 2017
By Francis Abebrese
As the debate concerning Africa’s economic transformation progresses, there is increasing agreement that industrial sector development, guided by credible industrial policy[i], is crucial for the structural transformation of many African economies. This view is largely influenced by the widespread failures of free market development strategies that have been pursued over the last few decades and by a recent growth in joblessness without concurrent industrial development. To be successful, however, any industrial policy should include certain key fundamentals, including sufficient support to and from the private sector, increased dialogue between the public and private sectors, and sound macroeconomic management.
The history of industrial policy in Africa dates back to the 1960s, when many post-independence countries applied it primarily in the form of state-led import substitution industrialization strategies. This continued until the 1980s, when the Structural Adjustment Programme (SAP) regime came to dominate much of African development policy and discouraged industrial policy in favor of free market policies supported by the World Bank and the IMF. Virtually all of today’s industrialized nations actively supported their industries through specific policies, especially trade protectionism and institutions, reinforcing the recent thinking by researchers on the necessity of industrial policy.
The 2014 African Transformation Report, among other reports, cites that economic transformation requires a “market-oriented industrial policy,” balancing state and private enterprise, and realizing effective mechanisms by which the two sectors can collaborate and support each other in the pursuit of economic and technological knowledgepaying sufficient attention to economic efficiency.[ii] In response to such reports, industrial policy is back on the agenda today and has gained traction in several development strategies in Africa at both the national and regional level. Today, most regional economic communities are promoting a regional industrial policy as a vehicle for accelerating industrialization in the regions. Both the West Africa Common Industrial Policy (WACIP 2012-2020) and East African Community Industrialization Policy (2012-2032) identify and promote the development of sectors in which each region has a comparative advantage. Clearly, industrial policy has become fashionable again on the African continent, as the collapse of recent commodity boom has alerted policymakers and researchers to the reality that market forces alone do not ensure welfare maximization.
Each time a failed policy reemerges, the question is, what needs to be done differently to achieve success this time around? What are the ingredients required for this new wave of industrial policies to drive the overall industrialization agenda of the continent? Fortunately, several well-documented case studies of successful industrial policies exist globally. Many lessons can be learned from the success stories in Asia and Latin America, as well as from the experiences of a few successful African countries like Mauritius and Ethiopia. Nonetheless, it is important to note that industrial policy must be tailored to each country’s specific economic and political opportunities and challenges. As such, the prescriptions will vary considerably depending on each country’s history, political system, and institutions. Nevertheless, broader issues and the conditions necessary and sufficient for industrial policy to thrive apply across the board. Amongst the countless sets of institutions and policies, the following principles apply to any successful industrial policy:
(a) Sound macroeconomic management
(b) Business-friendly environment
(c) Public-private consultations (dialogue)
First, and most importantly, state should promote policies that reduce the risks to business associated with high inflation, high interest rates, and high public deficit, together with an efficient exchange rate system that promotes competition.
Second, states must promote a private sector friendly environment. They can do this by reducing regulatory, legal, and institutional constraints of doing business. Additionally, states should practice sound public expenditure management and ensure the right composition and structure of budgetary allocations so as not to crowd the private sector out of credit, with a particular focus on expenditures that finance infrastructure, education, and health, which enhance business operations and reduce costs.
While the business environment has improved in Africa today since the implementation of structural adjustment programs and other reforms, much improvement remains to encourage private sector growth. World Bank data that analyzes the ease of doing business ranks the performance of several economies on the continent poorly. Of the ten worst performing countries in 2017, seven are on the continent. However, there are African countries that have made great gains on the business rankings. Mauritius and Rwanda have for many years been ranked among the top fifty countries in world for doing business. According to the 2016 report, half of the top ten improvers of the world were in Sub-Saharan Africa; progress in this area can be built upon.
Third, states should promote public-private dialogue and information exchange between political organs and the private sector regarding the implementation of industrial policy, seeking feedback on the formulation and implementation of industrial policy. Continued dialogues with businesses must be consistent in order for a government to know how their policy affects business. Such conversations afford government the opportunity to discuss and solve business-related challenges and also allow the business community to have a say in business reforms. Here, instruments that prove ineffective in implementation can be quickly eradicated or modified, as businesses and government discuss the practical implementation of industrial policy. Although a few countries like Rwanda and Botswana have made progress in this direction, such conversations between top political leaders and private business operators on the continent do not happen regularly enough.
Once the above are in place, there is a better chance that specific industrial policy initiatives and instruments will work; otherwise, poorly-formulated policies that do not help address the challenges faced by the private sector can lead to waste and rent-seeking. However, as studies suggest, practical application in many African countries continue to face a plethora of challenges such as weak institutions, low bureaucratic capacity, and inadequate skills development. For instance, the design and implementation of most industrial policies in Africa lacks the necessary consultation with the private sector. Additionally, the policy space for implementing industrial policy instruments, like export subsidies, which were available to earlier transformers, have been shrinking under current global trade and economic treaties.
Francis Abebrese is a Research Analyst at the African Center for Economic Transformation (ACET). He is also a current Southern Voices Scholar Network for Peacebuilding.