Leading thinkers share insights with ACET at Bellagio

August 17, 2011

Leading thinkers share insights with ACET at Bellagio

Categories: Bellagio Workshop, Events, Transformation Dialogues

Session 4

Boosting competitiveness and diversifying exports

Chair: Dr. Edward Brown, Director of Advisory Services, African Center for Economic Transformation (ACET)

This session will address a range of sweeping questions.

What do global export markets and the experience of recent successful exporting countries indicate for the prospects of African countries?

What implications do recent major developments in the global markets (the coming into force of the World Trade Organization; the rise of China as a super-efficient exporter of labor-intensive manufacturing products; the likely weakening of future import demand growth in OECD countries in the wake of the global economic crisis; and the rise of China as a source of demand) have for Africa’s chances of emulating the export promotion strategies used so successfully by South and East Asian countries in the 1980s and 1990s?

Can textiles and light manufacturing serve as the launch pads for industrialization and export diversification, as has traditionally been the case? What about agroprocessing?

Where are the possible “low-hanging fruits” on the global market for Africa, and what do African countries need to do to grasp them?

Exporting to grow

Shahid Yusuf, former Economic Advisor, Development Economics Research Group, World Bank

Export competitiveness is vital for economic transformation. Countries such as Ireland, Korea, Taiwan Province of China, Singapore, Malaysia, China, India, and Vietnam have found their niches on the global market and attained rapid economic growth and development by increasing the values, diversity and technical sophistication of their exports.

When we look at the global economic environment in recent decades and what it has done for export-driven growth potential, we see several factors at work: trade liberalization, the opening of the U.S. market, and in general a shift toward free markets. For many countries, trade has become a source for technology transfer and productivity increases.

Globally, there has been a steep decline in transportation costs. In addition, foreign direct investment has risen and companies are moving operations to less-expensive offshore sites. We have seen the emergence of major retail chains outsourcing overseas. Rapid technological change has promoted standardization, modularization, and fragmentation of the value chain, and information and communication technology has facilitated the management of dispersed production.

When we look for success stories in this new world, we look to East Asia, Japan, Taiwan Province of China, Korea, Hong Kong SAR, and Singapore. They all provide diverse examples of investment-pushed, export-oriented industrialization using directed credit, export incentives, and higher end worker skills.

There have been many imitators of these models. Malaysia, Thailand, and Indonesia, to name a few, were assisted by natural resource‒based exports and foreign direct investment. Other countries have not been so successful. The successful countries were helped by low energy and resources costs, GPTs (semiconductors, the internet), elastic low wage labor supplies, and U.S. demand.

The road has not always been smooth. There have been speed bumps along the way, even for the East Asian countries with successful export-led growth. The first was the 1997‒99 economic crisis. Growth slowed in all fast-growing East Asian countries except China. The reasons? Lower investment because of overcapacity, inability to upgrade and diversify, industrial maturity, structural change toward services, and the “China Factor.”

The second bump was of course the 2008‒09 crisis. While 2009‒10 saw a recovery from this downturn, the crisis has left lingering doubt on the future of economic growth through manufacturing exports.

This doubt about manufacturing-based export growth stems from several factors: weakening U.S./EU demand; competition from China; manufacturing share shrinking in all countries (and less buoyant service exports); value chains consolidating production into a few countries to minimize costs and disruption risks; existing GPTs losing momentum; the diminishing potential for transferring industries from the West; and the risks of exchange rate and trade wars.

When we look at the potential for Sub Saharan economies, what do we find? In the World Economic Forum’s competiveness index, no Sub-Saharan countries are in the top 50, and just five are ranked between 51 and 100. Looking at the World Bank Doing Business Index, six are in the 50‒100 range and the rest are below. Other indicators include:

Innovation capacity index: 9 ranked between 46 and 100 and the rest below.
Industrial and export diversification (Hausmann–Hidalgo rankings): five in the top 50 and the rest below.
Sub-Saharan savings/investment rates below 25% of GDP.
Few companies in Sub-Saharan Africa are on the “Global Challengers” list.

Given Sub-Saharan countries’ current status, what are their growth options? There are several. Consumption-led growth supported by infrastructure investment and resource-based exports is one. The East Asian model is a second, with investment and manufacturing exports as the principal drivers. Information and communications technology‒enabled service exports is yet another. A hybrid of all three is another option. (Note that recent Sub-Saharan growth has been mainly resource-based, except in Mauritius and possibly South Africa, which has increased manufactured exports.)

What are the “low hanging” policy adjustments and conditions that could help Sub-Saharan economies grow? A stable macroeconomic environment, better business conditions (with ease of entry and exit), financial sector development, labor market deregulation, and support for small and medium-size enterprises with an emphasis on business development services are important components.

There are also “low hanging” export policy initiatives that can facilitate growth in Sub-Saharan Africa. These include tax rebates, export financing, and guarantees. Efficient port and airport logistics can also facilitate export-oriented growth. Foreign market intelligence research and government assistance with marketing services for smaller firms can also propel a country’s exports. Finally, foreign direct investment incentives in manufacturing and services—especially from Asia—can play a role.

Longer term, Sub-Saharan governments can enhance their countries’ export-growth potential through a variety of policies and tools, including:

An effective central coordinating/implementing agency.
Urban development for an environment conducive for exports.
Upgrading the tertiary-level workforce.
Productivity gains through technological catch-up: industrial extensions, testing, and other services.
Tradable services development.
Promoting start-up activity.
Investment in research and development.

Finally, some notes on the prospects for growth through trade:

There will be a new focus on South-South trade, but with more competition, lower rents, less sophisticated markets, higher marketing costs.
There is limited scope for light manufacturing to become a major driver. Services need more attention.
Capital and skill intensity of export-led growth is rising.
Transport costs may climb.

Climate change may raise the capital costs of growth.

Brazilian economic development and its implications for Africa

Wagner Guerra Jr., Central Bank of Brazil

Brazil’s economic story has three phases, beginning with an era of macro-populism (high volatility, low policy predictability, and low growth), graduating to a period of stabilization (with credibility gains, increased private investment, increased foreign direct investment, and higher growth); and finally to structural reforms, which has successfully brought about sustainable higher growth with redistribution of wealth.

How did Brazil arrive at this third phase, and what can African countries learn from the Brazilian experience? In brief, the main features of Brazil’s macroeconomic framework have been:

Targeting inflation.
Implementing fiscal responsibility.
Increasing exchange rate flexibility.

These macroeconomic fundamentals, combined with prudent policy decisions and strong bank supervision, have resulted in:

A capacity to absorb internal and external shocks.
Macroeconomic and financial stability.
Sustainable growth.
Credit and capital market development.
Investment growth.

Some specific accomplishments as a result of Brazil’s economic reforms include:

20 million Brazilians lifted from poverty.
36 million people elevated to the middle class.
A Gini index depicting the lowest level of inequality in 30 years.
A solid financial system and intermediate credit market development (about 50% of GDP)
Significant International Reserves Position (about $325 billion—14% of GDP)

Even with these successes, Brazil still faces challenges. These include:

Reducing the tax burden, enhancing public sector effectiveness, and improving services delivery.
Increasing fiscal space for investment, especially in infrastructure.
Improving competiveness and enhancing credit access to small and medium-size enterprises.
Boosting domestic and public sector savings.
Increasing agriculture productivity and mobilization of usable land to meet growing food demand.
Maintaining energy self-sufficiency, diversifying energy sources, and relying on renewable ones in the context of an overall strategy for global warming alleviation.

Brazil’s international challenges—relating directly to Africa—include increasing trade liberalization and promoting a strategic dialogue between emerging economies and low-income countries, thus consolidating a South- South cooperation platform.

In this context, the following are recommendations for furthering African development.

A hybrid model is preferable, especially for larger countries—for example, creating the space for resource-based manufacturing and information and communications technology.
Invest in information and communications technology to increase agriculture and resource-based activities to benefit from the structural demand arising from India and China.
Countries should use innovative information and communications technology instruments to preserve market signaling, avoid excessive incentives, and monitor targets.
Assist small and medium-size enterprises with market services and intelligence structured to provide them with an evaluation system.
Focus on consolidating low-hanging macroeconomic policies, favoring macro and institutional reputation to attract foreign direct investment and long-term foreign capital, particularly for infrastructure.
Stimulate investments linked to sustainable urban development and climate change adaptation and mitigation.
Do not neglect South-South trade opportunities, even with lower rents. Market presence and preferential agreements may open doors for foreign direct investment and favorable financing arrangements.
Upgrade the workforce and improve human capital accumulation to generate long-term benefits for innovation and entrepreneurship, civil governance, and political stability.

Finally, with respect to a strategic dialogue and South-South cooperation, I would propose this agenda for Brazil and Africa:

Triangular cooperation: Brazil and Africa through Japanese sponsorship—for example, enhancing research and technological transfer capacity through such projects as ProSAVANA, which has been based on the experience of “Cerrado” development cooperation in Brazil since the 1970s.
Technical cooperation and assistance to African Portuguese-speaking countries through Paises Africanos de Lingua Oficial Portuguesa.
An ongoing dialogue to improve policy formulation capabilities to deal with international challenges and transition to a new international monetary system, including capital flows management (for example, the Center for Latin American monetary studies for Latin American central banks).
Strengthening institutional capacity networks to deepen collaboration on developing new regulatory frameworks that are supported and assisted by international financial institutions on such matters as public-private partnerships, toll road auctions, and regulation of new and complex infrastructure sectors.

Comments from the floor

Comment 1: This session resonates with my experience. Textiles in Africa? Difficult even in Swaziland or Lesotho, which went from 40,000 jobs to 16,000. Why? Cheap Chinese imports, which jumped from 150 million units to 750 million.

We have to look at natural resource management—at why countries are not agroprocessing at scale, except in Mozambique. We have to look at why there have been successes in tourism (1 million visas in Kenya) and why there have been failures (50,000 in Mozambique)

Comment 2: There are good opportunities for growth from horizontal and vertical integration across borders. And there is a lot to gain from public-private partnerships in infrastructure to support manufacturing and cross-border links. We have to be careful on incentives, with low, predictable taxes. We have to avoid South-South quarrels, especially in services (the Doha stall could actually be good for Africa). And we have to do much more to lower transport costs.

Comment 3: Two points. First, be wary of the micro guys who think that an undervalued currency equals a competitive export policy . Second, what are China and India doing in and for Africa? China eviscerates local markets in textiles. Why not take advantage of the opportunities for local industry?

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