Economic Transformation Masterclass (2) – A Fine Balance

ACET, in collaboration with African Business Magazine, developed this series to share knowledge on the concept of economic transformation. This is Story 2. (See Introduction and Story 1)

A fine balance

What is the ideal relationship between the state and the private sector for a country to achieve its economic transformation objectives? Several previous approaches failed but, as ACET’s Chief Economist Yaw Ansu argues, if a fine balance can be struck, the relationship can blossom.

Africa has been growing rapidly over the past decade, but its economic structure remains basically the same: a producer and exporter of raw agricultural commodities and unprocessed natural resources. In fact, the growth that we are now seeing has been experienced before on the continent—in the late 1960s and early 1970s.

The earlier growth spell, based mainly on a commodities boom, did not last. It was followed by two decades of falling or stagnant per capita incomes—the two ‘lost decades’.

Although improved economic management has contributed to the current growth spell, to a large extent it has also been based on a commodities boom. And now that the Chinese economy, which has been powering the commodity boom, appears to be slowing down, is history about to repeat itself? Is Africa destined for another two ‘lost decades’?

We must not let this happen. We must ensure that the high economic growth is sustained, and that it generates employment, particularly for the rapidly expanding youth population. To do this, we must generate growth from more than commodities; we must pursue “Growth with Depth” by transforming our economies. This requires the state and the private sector in African countries to each do its part and to also operate as ‘strategic partners’ for transformation.

From the 1960s to the early 1980s, governments in many African countries pursued state-led development, often regarding markets and private businesses with suspicion and at times even trying to suppress them.

Then from the 1980s through the 2000s the pendulum swung to the other extreme. Under reforms inspired and financed by the IMF, World Bank, and some donors, the state was seen as the impediment to economic efficiency and growth.

The goal was to roll it back and give room to markets and to business, which thus unshackled would propel growth and structural change while the state confined itself to setting the rules of the game, acting as an impartial umpire and supplying such public goods as education and health care.

Neither approach has led to the transformation of Africa’s economies, and so we must now look for alternatives; alternatives that leverage the advantages of the two previous approaches while guarding against their pitfalls.

The key reason for a strategic state-private sector partnership is that central to a country’s economic transformation is learning about, acquiring, and mastering new technologies, processes, products, and services—and breaking into foreign markets.

Domestic firms in late-developing countries, as in Africa, face difficult challenges in surmounting these challenges. A favorable business environment helps but is seldom sufficient. The experiences of almost all countries that have successfully transformed their economies show that the state can work with business to help overcome these challenges.

But history also shows that state involvement in the economy can block private initiative, introduce inefficiencies, promote corruption, and retard economic progress.

Economic transformation therefore requires getting the balance right between the state and private enterprise, and having effective mechanisms for the two to collaborate and support each other in the pursuit of economic and technological learning while paying sufficient attention to economic efficiency.

The right balance of course will depend on country circumstances, including the strength of national oversight institutions to enforce public accountability.

Mechanisms for engagement

While the state should provide leadership in setting and guiding the transformation strategy, it is entrepreneurial firms—both large and small, and mostly private—that will spearhead the creation of employment and the production and distribution of goods and services that drive economic transformation. That is why government should create mechanisms that bring it into regular contact with business to seek its inputs. State-business engagements should aim at three objectives:

  • to seek business inputs on medium and long-term national plans;
  • to seek feedback from business on how government policies and programs affect them; and
  • to seek inputs in the design and monitoring of specific transformation initiatives.

Several Sub-Saharan countries have made some progress on the first objective of seeking business inputs on national plans, but business participation could be deepened beyond consultation. A good example in this direction was the process used by Kenya to prepare its Vision 2030 Plan. The National Economic and Social Council that spearheaded its preparation comprised business people and public officials.

On the second objective—seeking feedback from business on the impacts of government programs—several African countries have public-private forums that meet periodically (say, once or twice a year) to discuss issues affecting the private sector. A good beginning, but these large meetings are too infrequent, and they tend to be long on ceremony and short on fact-based discussions of issues.

In some countries, various business associations submit presentations to the government during budget preparation time, advancing their particular interests. These exchanges between the government and business are welcome, but they could be improved.

Kenya’s National Economic and Social Council, with meetings chaired by the President or Prime Minister (during 2009-2012), goes in this direction. Mauritius also has a well-developed consultation mechanism between the government and business through the Joint Economic Council, an umbrella organization for business.

The third objective—deliberating on selected transformation initiatives, on the policies, institutions, and incentives to promote them, and on the monitoring and compliance mechanisms—is not well developed. This stems in part from the low capacity and organizational weaknesses in government that make it difficult for them to translate general objectives to specific initiatives to discuss with business.

It also stems from the fact that throughout the 1980s and 1990s, African governments, heavily dependent on donor funding, were encouraged to focus on macroeconomic management and donor-supported poverty alleviation programs—and to leave production, exports and finance to the private sector.

It is now time for African governments to be also concerned with production, exports, employment and overall economic transformation in addition to macroeconomic stability and poverty reduction programs. But in pursuing these goals, governments should see themselves in the role of supporting the private business, rather taking the lead.

Government technocrats can come up with transformational initiatives that they would want the state to promote. But, however smart they may be, they do not live and operate in the business world every day. Business people do, and so can supply the market-informed perspectives that could make the difference between a well-designed promotional initiative and an economic disaster.

African governments that want to promote economic transformation should court this knowledge, as governments in Japan, South Korea, and other East Asian countries did regularly in driving their economic transformations.

(Read the same articles in their original magazine form).

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