Sean Woolfrey, tralac Researcher, discusses the main findings in the latest Economic Report on Africa

The Economic Report on Africa 2014, jointly produced by the Economic Commission for Africa and the African Union, was officially launched on Monday the 12^th of May in Addis Ababa. The theme of this year’s Report is “Dynamic industrial policy in Africa: innovative institutions, effective processes and flexible mechanisms”. In focusing on industrial policy, the 2014 Report builds on previous years’ reports, such as the Economic Report on Africa 2011 which looked at the role of the state in economic transformation, and the Economic Report on Africa 2013, which explored the possibility of leveraging Africa’s comparative advantages in commodities to promote industrialisation.

Starting with the premise that industrialisation is a “precondition for Africa to achieve inclusive economic growth”, the 2014 Report focuses on how to build “innovative, effective and flexible industrial policy institutions, processes and mechanisms” to promote industrial development and structural transformation in Africa. In doing so, it addresses three fundamental questions:

1. Why, along a broad historical perspective, has industrial policy been ineffective in Africa?

2. How have IPOs [industrial policy organisations] operated and how have they affected industrial development in Africa?

3. How do African countries formulate strategies for building and operating effective IPOs?

The Report finds that “weak institutional structures and poor policy design have been at the root of Africa’s industrial policy problem”. It notes that unlike policymakers in other developing regions that have had significant success with industrial policy – notably East and Southeast Asia – African policymakers have tended to adopt “blueprint approaches to industrialization”, essentially standard packages of prescribed policies which may or may not be appropriate for that particular country. Such an approach has limited industrial policy to the design and implementation of particular industrial policy instruments – such as tariffs, duty drawbacks, subsidies and industrial zones – to address market failures and support investment in certain priority sectors. The focus in Africa, therefore, has been very much on achieving particular policy outcomes, rather than on establishing appropriate institutional frameworks. Furthermore, African industrial policy efforts have not exhibited the required high-level political coordination necessary for effective industrial policy design and implementation. Coordination between governments and private-sector stakeholders has also been inadequate in many African countries.

Having reviewed 11 case studies of African IPOs, the Report finds that African IPOs exhibit a number of deficiencies which have negatively impacted on the effectiveness of industrial policy on the continent. These deficiencies include: structural hollowness; limited organisational capacity in terms of skills and technical capabilities; a lack of embeddedness in the private sector and mechanisms for engaging stakeholders; inadequate or non-existent processes for monitoring and evaluation; and a lack of emphasis on addressing institutional failings through, for instance, better training. African IPOs were also found to devote inadequate attention to the removal of barriers to expanding industries.

Having made this diagnosis the Report addresses the central question of how governments in Africa can create effective IPOs that promote industrialisation, economic transformation and inclusive development, by offering an “institutional framework for designing and implementing industrial policy in Africa”. While the Report notes that “there is no consensus on precisely what steps are required to build high-quality institutions, or which are the most important in any given setting”, it does highlight a number of institutional factors that appear to be critical to successful industrial policy, including platforms for effective coordination at the highest political levels, mechanisms to facilitate ongoing dialogue between policymakers and private sector stakeholders, processes for the monitoring of regulation to avoid conflicts between industrial and other government policies, coherent development planning procedures and appropriate target-setting and monitoring processes. In addition, the Report recommends that IPOs focus on growth poles and pockets of efficiency, through which their effectiveness can be demonstrated, and that they seek out new sources of finance and make better of existing ones. Finally, the Report notes that industrial policy should be accompanied by efforts to reduce trade-related costs, and especially the costs of trading within Africa.

While the focus of the Economic Report on Africa 2014 on building appropriate institutions for the design, implementation and monitoring of industrial policy is not entirely new, it does highlight the fact that too many of the debates around the use of industrial policy in the region remain weighed down by ideologically informed views of industrial policy. Increasingly, development economists are moving away from questions of whether or not developing countries should adopt industrial policy and focusing instead on questions about the appropriate form and extent of particular industrial policy measures and the best ways to implement these. The issues involved in answering these questions may not be straightforward, but hopefully in making such a paradigmatic shift, African policymakers will be freed to actually design and implement policies and measures based on the developmental needs and goals of their countries.

Tell us what you think.

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Sources:

United Nations Economic Commission for Africa (UNECA). 2014. New Economic Report reveals promise of Africa’s Industrialization. Accessed online at: http://www.uneca.org/media-centre/stories/new-economic-report-reveals-promise-africas-industrialization#.U3KW5PmSySo

United Nations Economic Commission for Africa (UNECA) and the African Union (AU). 2014. Economic Report on Africa 2014: Dynamic Industrial Policy in Africa. Addis Ababa. Available at: http://repository.uneca.org/unecawebsite/sites/default/files/page_attachments/final_era2014_march25_en.pdf

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Comments received:

16 May 2014

The report triggers a number of comments, in particular challenging the obvious belief that it is through policies, regulations, high level mobilisation and other top-down initiatives that African industrialisation will take off. I am not questioning the relevance and importance of strong IPOs but in the African context the number one problem is not a lack of policies to regulate the industrial sector but rather to build the industry sector.

The report addresses three fundamental questions. I would like to append three more that are of immediate importance since they address some of the basic questions behind slow industrialisation in Africa:

• Why is the death-rate among start-up small businesses in Africa higher than elsewhere? In South Africa the number has been estimated to be around 60-70 per cent within a three years period 

• Virtually all businesses in many countries around the world are SMEs and the SME label is therefore not significantly more precise than speaking of the full and diverse set of domestic enterprises. Most industrial activities in the African context are carried out by SME sector firms and why is their contribution to GDP less than half of SMEs in high-income countries?

• Why is the role of local governments mostly insignificant when it comes to supporting entrepreneurship and small business growth as a contributor to local economic development? 

It is on local levels that business and industrial activities take place. There is a need for IPOs and policy regulations at local levels in society but the regulations must start from business realities and support business and industrial growth. By encouraging small firms and entrepreneurs to grow their businesses through various forms of incentives IPOs have a highly important role to play.

In a regional project in the Baltic Sea Region in Northern Europe a model for local economic development has been implemented where local universities, municipalities and the small business community are jointly contributing to starting up innovative entrepreneurships. The model is not hampered by cultural barriers but could be copied and implemented anywhere. It does, however, presuppose an active interest and commitment from the participating parties.

Dr Per Lind
Professor of Industrial Development
Uppsala University, Sweden.