Building capacity to help Africa trade better

Industrialization in Africa


Industrialization in Africa

Industrialization in Africa
Photo credit: Jonathan Rosen

Brexit, now in full remorse, has been a test of the place of regional economic integration in the world.

As right-wing populism recedes, following the tragicomic reign of Trump in the West and the election of the pro-EU Emmanuel Macron in France, the developmental approach taken by the Tripartite might well be a best practice for the whole world in pursuing regional economic integration. The approach bases regional economic integration on at least three simultaneously critical pillars – building of large regional markets to support critical levels of investment, cross-border economic infrastructure including rural infrastructure, and industrialization, with a focus on small to medium scale enterprises, for social economic transformation.

Political economists such as Dani Rodrik and happiness economists such as Joseph Stiglitz and Jeffrey Sachs, have long called for such an approach though only in sketches traceable in their overall narrative and specific suggestions for addressing inequality and other economic challenges from the current version of globalisation. The upshot of the academic, political and economic turmoil surrounding globalization for over 20 years, is that creation of decent jobs, economy-wide rather than for a privileged few, remains a core priority for governments and regional economic integration bodies, going to their very legitimacy.

The United Nations Economic Commission for Africa (ECA) has done some brilliant work over the years, through its annual Economic Report on Africa and Assessing Regional Integration in Africa, on which to consistently build in terms of deeper and specific analysis, and in terms of implementation of Decisions and Action Plans so far agreed by the African Union. That work supported the adoption by the African Union in 2012 of the Action Plan for Boosting Intra-Africa Trade (BIAT) and the initiative to negotiate and conclude an Agreement establishing a Continental Free Trade Area covering the 55 African countries – the negotiations were eventually launched on 15 June 2015. BIAT has 7 clusters or programme areas, including enhancement of productive capacities and trade facilitation. It is estimated that implementation of the Continental FTA together with trade facilitation measures will double intra-Africa trade by 2022 to about 25 percent of total trade, which is still diminutive.

There has been a perceived dichotomy between trade and industrialization, and between manufacturing or goods and services; with the policy implication of focusing on manufacturing, away from trade or markets and away from services. This approach has been wrong to the extent that without markets, investment and production would not be forthcoming in the first place. Also, services inputs make up 60 percent of the value of manufactured products, many of which derive their efficacy from their services components – think of a mobile phone or an aircraft or a computer, and in the internet of things, practically about all items. This has been explained in the 2015 ECA Economic Report on Africa themed Industrialization Through Trade, and in the World Bank publication by Nora Dihel on The Unexplored Potential of Trade in Services in Africa of 2016. Appropriate trade policies and instruments support industrialization, and services in Africa will be part of the solution through facilitative policies in key areas such as movement of skills, and creation of regional markets for financial, energy and transport services that support competitiveness.

In addition, it can no longer be argued that resources should move from the agricultural sector to the industrial sector and then to services, as the pre-ordained development trajectory. Calestous Juma has over the years argued, for instance in his 2011 book The New Harvest with a second edition in 2015, as well as the joint WTO-World Bank publication of 2015 called The Role of Trade in Ending Poverty, that poverty in the rural areas will only be eradicated through agricultural modernization and enhancement of agricultural productivity through innovation and the building of rural infrastructure. African Regional Economic Communities have programs in this area, and of course governments, that include interventions for providing agricultural inputs and rural infrastructure as well as structured trading. The Common Market for Eastern and Southern Africa (COMESA) for instance, has established a specialized agency called the Alliance for Commodity Trade in Eastern and Southern Africa (ACTESA), which supports small scale farmers with inputs and extension services. Such interventions will be a basis for agro-based industrialization, where agriculture is not equated to just farming, but construed broadly to encompass the regional and global value chains from seeds to final products on shelves in retail outlets.

Rather, all these elements (trade, innovation, infrastructure, manufacturing) are part and parcel of the same holistic interventions for industrialization.

The emphasis on value addition and diversification, while in order, has mostly been implemented upside down without the desired industrialization results. Interventions have sought to achieve value addition and diversification usually through investment incentives into mainly the natural resources or extractive sector. Yet what should be done first, or at least simultaneously, is building the technological and innovation capabilities at the national and regional levels, through dedicated interventions. It is when such capabilities exist in critical amounts that value addition and diversification will happen.

There are many good practices on how to harness technology, skills, creativity and innovation from around the world, or how to restructure our education systems along the lines of entrepreneurial universities (Strathmore University in Nairobi for instance), and how to put in place partnerships between universities and researchers, banks and other financing institutions and industry especially SMEs, with a view to identifying ideas that can be commercialized into whole new industries, getting patient or angel capital/ investors for the ideas, and twinning fledgling entrepreneurs with seasoned entrepreneurial or tutoring networks around the world.

Another dimension of value addition is that interventions have focused on value addition in the very same extractive sectors, getting trapped into vicious cycles, as Sir Paul Collier explained in his little book called The Bottom Billion. Rather, dedicated interventions to go beyond the existing product range should be prioritized, to achieve a repertoire of high value and high technology content products for regional and global export markets. This has usually been called regional or global value chains, an expression that can easily miss the point of the utter criticality of wholly new product ranges. As an example, Taiwan’s major export in the 1960s was mushrooms. But Taiwan did not get to being a global producer and exporter of micro-chips and computer parts that it is now, through adding value to mushrooms. Rather, deliberate government policy was put in place to move into a learning economy and innovation driven mode, beginning with rehabilitation of four dilapidated research institutes left behind by colonial Japan. Other examples can be drawn from South Korea, and Finland; as well Mauritius in the 1980s and to some limited extent Kenya lately.

Quite some noise has been made about the re-balancing of China and how Africa can strategise to tap the 85 million jobs or so that will move from China with the industries that are being relocated away. Justin Lin has advanced Helen Haiyu, a Chinese entrepreneur who has successfully pursued her African dream in Ethiopia and elsewhere, as an exhibit of how this can actually happen. Justin, however, has famously downplayed regional integration as quite a waste of resources, recommending instead, the building of colonial style railways and roads to seaports to facilitate exports from Africa to China and some developed countries. This is the model that Ethiopia is following, as alleged proof that regional markets are not that important to support industrialization (Ethiopia seems to prefer the preferential schemes such as the European Union’s Everything-but-Arms Initiative (EBA) and the Africa Growth and Opportunity Act (AGOA) of the United States as channels of export markets, to the immense potential in intra-Africa trade estimated by Mckinsey Global Institute’s Lions on the Move 2.0 of October 2016 at about 4$ trillion already in consumer products and business-to-business inputs). Justin Lin and Celestin Monga, the new Chief Economist of the African Development Bank, have published a book entitled Beating the Odds, where this argument is reinforced, that even without the oft touted pre-requisites like infrastructure, African countries could focus on special economic zones and industrial parks, and building routes, for exportation to global markets

This therefore is a policy area that needs to be looked into carefully. In questioning the worth of regional integration, Justin Lin stabs at the entire architecture of African continental integration and its Agenda 2063, the blue print and template for the social economic transformation of Africa. His views can therefore be written off as unfortunate, given that a lot of soul searching and exquisite analytical work has gone into the development of these overarching continental development strategies encapsulated in African regional economic integration. However, Justin Lin and his team have operations Africa-wide and have won medals from presidents in recognition of their work and contribution. The largely false narratives they purvey around need to be addressed, in order to always have the most appropriate ways forward on strategic and existential issues concerning Africa. Trade for Africa is a developmental tool, and therefore not limited to foreign exchange earnings, but is part of the process of strengthening regional value chains for structural transformation, and creating regional markets to support cross-border economic infrastructure for regional connectivity that facilitates resource flows and competitiveness.

One point Justin Lin is correct on of course, is that political leadership is required and there is need for a careful selection of the sort of high growth strategic investment to bring back home. This strategy was successful followed by the statesman Lee Kuan Yew, the father of Singapore, and is well articulated in his international best seller called From Third World to First. As a case study, the prime ministers of Ethiopia have not left investment selection and attraction to statute books containing incentives and to market forces. They have physically and aggressively gone out into the world to screen, select and bring home investors that share the national developmental goals and objectives. Lee Kuan Yew was prepared and did go back to school a number of times, and sent cohorts of young civil servants into top notch schools around the world, to harness knowledge and innovation, for deployment into the national development effort. Such political leadership is indispensable, along the lines that President Kagame of Rwanda is consistently following.

As a first step but also a regular ongoing exercise, governments and institutions with strategic roles in the national economies and in the RECs need to be mapping out SMEs with a view to developing and maintaining inventories of start-ups and new ideas that need nurturing and incubation, and aggressively supporting them with patient capital, entrepreneurial tutoring, and market and investment information, within a framework of facilitating trade into regional and global markets. The entrepreneurial university and other training initiatives, short-term re-tooling and skills development, are required to continuously build business skills in the private sector and improve employability. In addition, innovation reports and awards around Africa and the world, should be paid close attention to for new ideas that generate whole new economies, and high value high technology content products.

The role of the developmental state cannot be over-emphasized. A number of publications on this abound, recently as part of the backlash against runaway globalisation. Within the mess, a lot of good analytical work has emerged, notably by Dani Rodrik, espousing a political economy that should have provided the development path for developing countries over the years. A number of case studies are available for good practices; such as the Botswana requirement for cutting and polishing of diamonds before exportation, as well as broadly the developmental approach to regional integration in Africa taken by the COMESA-EAC-SADC Tripartite and the African Union at large where the trade-industrialisation-infrastructure nexus provides the joint pillars for integration programs.

When all is said and done, Government has a role as buyer (government procurement, which is a sizable market and can assist SMEs, a Kenyan law requiring that 30 percent of government procurement should be from youth, women, and disadvantaged and other marginalised groups has been a huge factor for inclusive growth), as financier (through development banks and corporations), as regulator (through putting in place the required policy framework and overseeing the proper functioning of trade and investment markets as well as enforcing investor rights and obligations through appropriately persuasive initiatives, for instance South Africa’s guidelines for its investors into Africa), and as facilitator (through sorting out and promoting strategic and high growth investment, especially into high growth but presently risky areas, including public goods – this is supposed to be the secret of China’s rapid economic growth and transformation).

Governments are better advised, building on best practices from China for instance, to embed training components into their large-scale procurement projects such as infrastructure building in transportation, energy, irrigation, and other public utilities and goods. A requirement for service suppliers to work in credible partnership with local universities, research institutions and staff in government departments, can provide learning opportunities for sustainability and for maintenance of these public goods after initial propagation or construction. At the same time, large scale infrastructure projects are part and parcel of and indeed a motor for industrialization. The training component should at the same time allow for local ownership of knock-on inventions and innovations, through enabling clauses on the intellectual property in the creative ideas that can emerge.

The fourth industrial revolution is said to be here, and Africa is awash with warnings not to be left behind again as happened in the past. Scenario setting is on – and Africa is being reminded, for instance by a group of 60 researchers in their report on Knowledge and Innovation in Africa Scenarios for the Future, that it lost out on the industrial revolution mainly because it was marginalized out of the knowledge networks of the time, and due to intellectual property laws that monopolized skills and innovations into a few hands in the UK, and subsequently Europe and the US though these other countries fought the UK laws in openly using initial inventions that spurred the industrial revolution. The report calls for open collaborative innovation, pointing out that knowledge networks support entrepreneurship and economic growth. The message is that Africa must ensure it is networked into the global knowledge networks and systems in an organic manner that doesn’t leave outcomes to chance or blind market forces. The recent G20 summit held on 7-8 July 2017 called for follow up on the World Information Summits that were the in-thing at the beginning of the millennium, seeking to avoid a digital divide between developed and developing countries. Momentum towards this direction will be very much a priority.

In conclusion, industrialization requires well known interventions, according to rich discourses on economic development over the years. However, formulating, sequencing and implementing the interventions needs careful thinking. For instance, should technology and innovation, as well as a national or regional intervention for harnessing knowledge and skills from around the world, be a standalone intervention in the plethora of interventions usually written into national and regional industrialization policies and strategies? Good practice would suggest that acquisition and deployment of technology, building a sound technological base, harnessing innovations together with knowledge and skills from around the world, should be an overarching goal and strategy that informs the entire industrialization and structural transformation policy; it should be the organizing logic that infuses all the interventions, and all sectoral initiatives. This is not quite as simple as building fibre-optic cables to enable internet access for chats and apps. It is prioritizing the knowledge economy as a national and regional ethos, on which to anchor human resource development, financial markets, private sector development, systems and institutional strengthening, long and medium term development strategies, annual planning and budgeting cycles, and all else that supports social economic transformation, including songs and poems.

Dr Francis Mangeni is Director of Trade, Customs and Monetary Affairs at the Common Market for Eastern and Southern Africa (COMESA).

The views expressed in this article are those of the author and do not necessarily represent the views of tralac.


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