The conversion of the now widely accepted theoretical principles of industrial policy into practical frameworks for government action is indeed a daunting task everywhere, and perhaps more so in the African context.
The above elegantly articulated argument is captured in a 2013 World Bank Policy Research Paper on Industrial Policy in the African Context which further elaborates that “there has been substantial progress on the understanding and acceptance of industrial policy and that Africa could benefit enormously from it and from the unprecedented new opportunities brought to light by the multipolar world”.
The policy research paper, written by Joseph Stiglitz, Justin Lin, Celetin Monga and Ebrahim Patel has its focus on Africa, still home to most of the “bottom billion” poor people in the world, but a continent on the move – the fastest growing in the world.
The industrial policy, once considered anathema among mainstream economists and in the public discourse, has become a matter of almost common sense. Conservative and liberal leaders throughout the world are now promoting it as a vehicle for building more equitable societies.
The IMF chief economist is quoted saying: “We’ve now entered a new brave world, a very different world in terms of macroeconomic policy making. In the age-old discussion of the relative roles of the markets and the state, the pendulum has swung – at least a bit – toward the state. There are many distortions relevant for macroeconomics, many more than we thought was the case earlier. We had largely ignored them, thinking they were the province of the micro-economist. As we integrate finance into macroeconomics, “we’re discovering that distortions within finance are macro-relevant”.
Industrial policies are defined as policies directed at affecting the shape of the economy (including sectoral allocation of resources and the choices of technology within any given sector).
It is acknowledged by the paper that “all governments really do have an industrial policy. The only difference is between those who construct their industrial policy consciously and those who let it be shaped by others, typically by special interests, who vie with each other for hidden and open subsidies, for rule and regulations that favour them, usually at the expense of others”.
It has also become increasingly clear that government interventions are needed to ensure proper coordination of risky investment decisions that no single firm or private agent alone can pursue efficiently. So too, government has played a constructive role in promoting industries and activities that give rise to positive externalities – most notably those associated with learning and research.
Identification of new industries and prioritization of government’s limited resources (and more broadly, society’s limited resources) to facilitate the development of those industries are both essential for successful growth strategies in Africa. Why? Because the infrastructure improvements required are often industry specific.
“One simply has to look at the list of recent success stories in African countries to understand the role that industrial policies have already been playing: textiles in Mauritius, apparel in Lesotho, cotton in Burkina Faso, cut flowers in Ethiopia, mango in Mali, and gorilla tourism in Rwanda all required that government provide different types of infrastructure.
“The refrigeration facilities needed at the airport and regular flights to ship Ethiopia’s cut flowers to the auctions in Europe are obviously quite different from the improvements needed at the port facilities for textile exports in Mauritius, Similarly, the type of infrastructure needed for the garment industry in Lesotho is distinct from the one needed for mango production and export in Mali or for attracting gorilla tourism in Rwanda.
“Because fiscal resources and implementation capacity are limited, the government in each of those countries had to prioritize and decide which particular infrastructure they should improve or where to optimally locate the public services to make those success stories happen”, the research policy paper states.
The paper also argues that if economic development is essentially about the diffusion of knowledge among the broadest segments of society, then it is inevitable that there be, or there ought to be, a role for government intervention.
It follows that industrial policy should also be about facilitating the generation and acquisition of new knowledge that empowers households and firms. In fact, formerly poor countries – those in East Asia – that have been able to converge toward the income levels of advanced economies have generally done so through learning.
The paper maintains that the mantra that governments should not be involved in “picking winners” is therefore beside the point: the objective of any government should be not only to correct negative externalities but also to promote positive externalities that arise from learning and sharing knowledge.
The authors of the paper acknowledge that widespread poverty is not the only worry in Africa: there are concerns about sustainability of economic growth, unemployment, and inequality. About a third of the continent’s good growth performance is attributable to commodities and many African countries are still discovering new oilfields and mineral deposits. But history shows that excessive reliance on raw natural resources is never a prudent development strategy.
While today’s prices are near record highs, commodity markets are often known to collapse abruptly. In addition, recent gains in agriculture may be undermined by climate change and environmental concerns, Already, savannahs are drying out, water tables are dropping and rains are either failing or becoming more irregular.
The paper also observes that the dynamics of demographic growth makes things even more challenging: with population growth projected to be 2.2 percent in the next 25 years, the African private sector faces the challenge of creating employment opportunities to absorb the youth bulge: about two-thirds of the region’s population is under the age of 24 and is underemployed – including those with college and university degrees.
Most workers are trapped in very low productivity activities in subsistence agriculture and the informal sector. Sub-Saharan Africa will have to generate 7 – 10 times million jobs annually in order to accommodate the high rate of population.
It is argued that for a region facing such opportunities and challenges, industrial policy is not a speculative intellectual exercise for academic debates, but a necessary economic tool to address the pervasive discrepancies between private gains and social returns and to correct major sectoral or other misallocations.
Neither of these will occur on its own. Proactive action must be taken by policy makers. It is necessary, for instance, for the government to facilitate the growth of existing and emerging unskilled labour-intensive industries. Without such action, there is a risk that urban unemployment will increase even beyond the current high levels.
On the supply side of the labour market, African governments must also provide basic education and training to enhance the rural-migrants’ ability to adapt to the new working environment and requirements in the industrial sector.
It is also noted that whilst the challenges of implementing industrial policy in any country need to be taken seriously, not only is this a moment in which such policies are especially needed, this is a moment of real opportunity.
They are needed in part because Africa is going through a major structural transformation and markets by themselves manage such transformations poorly, for a variety of reasons. But there is, in addition, a major structural transformation going on globally: rising real wages and current appreciation in China will result in at least significant parts of its manufacturing base moving elsewhere.
“There is an opportunity for some of it, perhaps a substantial part, to move to Africa. If that were to happen, it would provide a significant boost to growth and employment. It would reverse the pattern of de-industrialization that began with the structural adjustment programmes fostered on Africa in earlier decades,” the paper argues.
