Building capacity to help Africa trade better

Industrialize Africa: Strategies, policies, institutions, and financing


Industrialize Africa: Strategies, policies, institutions, and financing

Industrialize Africa: Strategies, policies, institutions, and financing
Photo credit: AfDB Group

The secret of the wealth of nations is clear: developed nations add value to everything they produce, while poor nations export raw materials. Africa must quit being at the bottom of the global value chains and move to rapidly industrialize, with value addition to everything that it produces. Africa must work for itself, its people, not exporting wealth to others.

Industrialise Africa is one of five accelerators of the African Development Bank. The others are Feed Africa, Light Up and Power Africa, Integrate Africa, and Improve the Quality of Life for the People of Africa.

To industrialise Africa, the African Development Bank is committed to mobilising capital, de-risking investments for the private sector, and leveraging capital markets. This is essential for moving Africa’s Industrial agenda forward and for building an Africa of the twenty-first century that is well positioned to take its place in global value chains.

Africa is certainly the place to do business today. We have a rapidly growing young population, and an increasing demand for consumer goods, food, and financial services. Together, these factors make Africa an attractive business and industrial proposition for the private sector.

Diversification is not a goal. It is the outcome of well-planned policies for the structural transformation of economies. No region of the world has moved to industrialized economy status without passing through the transformation of the agricultural sector. This is the formula: agriculture allied with industry, manufacturing and processing capability, equals strong and sustainable economic development and wealth creation throughout the economy.

The bottom line is that we need to produce more and we need to produce better. Most of all, we need to add value to our resources and raw materials, and turn them into processed products.

Akinwumi Adesina
President, African Development Bank Group

Introductory remarks: Promoting sustainable industrial policies

by Joseph E. Stiglitz

1. Market inefficiency

For several decades, the Washington Consensus dominated development thinking, and industrial policies were discredited under the prevailing belief that markets would solve all problems. Early in 1978, I gave a lecture, titled “Broader Objectives, More Instruments” at the World Institute for Development Economics Research (WIDER), in which I criticized the policies of the Washington Consensus to make that point. Not everyone agreed with me at that time. Fortunately, the set of ideologies and views about how the economy operates and the one-size-fits-all policies advocated by the Washington Consensus are now largely discredited.

There have been many facts that brought us to understand the limitations of markets. The economic crisis in 2008 was the coup de grâce, because it showed that markets, in their own right, were neither efficient nor stable. And the countries that were most successful in development – and let me emphasize that there have been enormous successes in development, well beyond anything that anybody had ever anticipated – especially, those in East Asia, did not follow the Washington Consensus whereas the countries that followed the Washington Consensus suffered.

One of the questions that I get asked very often is: Why did Africa do so poorly in the quarter century before 2000? Why, when East Asia had enormous success in industrialization, was there the process of de-industrialization in Africa? While there were several factors contributing to it, I believe the most important cause was the structural adjustment policies that were imposed by international economic institutions. Structural adjustment policies advocated by the IMF and the World Bank were predicated on the belief that by eliminating “distortions” in the economy, Africa would grow faster by constructing an economy based on principles of free and unfettered markets.

In reality, these structural adjustment policies foisted on developing countries have actually discouraged indus industrial development and stifled growth, and the result is that, over the past 30 years, Africa has suffered from de-industrialization. A few years ago, Ben Bernanke, then Chairman of the Federal Reserve of the United States, talked about a “savings glut,” by which he meant there was too much savings. When he said that, I thought he must have been living on a different planet than I was living on.

Because when I traveled around developing countries, even when I went to New York, what I saw was huge investment needs for infrastructure, for technology, for retrofitting the world for climate change and for human capital. I continue to see huge investment needs, and yet, Bernanke was talking about too much savings! This is another example of market failure. One of the important markets in the economy, namely the financial market, is supposed to mediate between savings and investment, but it is failing to do so.

Let me explain: the investment needs that we have for infrastructure and retrofitting the world for climate change are long term, and much of the savings, such as sovereign wealth funds and people’s savings for retirement, are also long term. Yet, in between, there are financial markets that are not showing concern about the next quarter, or not even the next hour. So, there is something wrong in an economic system in which short-term financial markets are trying to mediate between long-term investment and long-term savings needs.

Meanwhile, the neoliberal/neoclassical model suggests that there is only limited importance to be attributed to market failures, but global warming and climate change has made us recognize that there are some first order important externalities of market failures that are threatening the very survival of our civilization. So, it is not only that there were conventional market failures that demonstrated how markets have not managed risk and that markets were inefficient and unstable, but also markets are failing to help the world address the key issue of global warming.

These are all examples of the ways in which the markets do not work well, or simply examples of market failure. This clearly points in a direction that there is a need for governmental policies.

2. The inevitability of industrial policies

Often when people talk about industrial policies, they are thinking about manufacturing, but industrial policies have a far broader agenda than only industrialization, narrowly defined, and merely increasing GDP. The view of industrial policies has to be broadened. I view industrial policies as any government policies that affect sectoral composition or choice of technology or direction of innovation. They can be energy policies, modern service sectors, and many other aspects that promote a whole range of non-traditional activities and non-traditional technologies.

Thus, industry is not just about manufacturing. Although there are real advantages to developing a manufacturing sector, because it is an important way of moving from agriculture into a more advanced economy, we have to be realistic that the overall number of jobs in manufacturing globally is going down. This decrease is the result of the success of the manufacturing sector. Productivity in manufacturing is increasing faster than the output of manufactured goods, which means not every country can have an increase in manufacturing jobs. There will be, or has been, a significant decrease in manufacturing employment in countries like the United States and in Europe, and they will have to accept and adapt to that kind of decrease. The increase in the cost of labor and the changing comparative advantage means that manufacturing is moving elsewhere. An institution like the United Nations Industrial Development Organization (UNIDO) can play an important role in helping some of the countries, for instance, in Africa, to seize a larger fraction of those jobs that are going to be moving from where there are today. There have been big successes in some African countries, for instance, in Ethiopia, where 50,000 jobs have been created in the shoe industry. This is a real success for industrial policies.

Governments are inevitably involved in industrial policy. Markets do not exist in vacuums; instead, they have to be structured. Markets and governments must be viewed as complements, as working together. All governments have to make decisions about expenditure policies, tax policies, and which infrastructure to invest in. These policies favor one industry over another, one technology over another, and their infrastructure decisions affect one over another.

So, I want to emphasize that every country has industrial policies. In the United States, many people do not believe in industrial policy. The truth is, of course, that it has an industrial policy – the industrial policy that the United States has had for the past 25 years has been to encourage the financial sector. A case in point is the bankruptcy law. In many countries, in the event of bankruptcy, the law states clearly who gets paid when the debtor cannot pay all his debts, whereas in the United States the laws give priority to derivatives. That is an example of industrial policy. Also, the policy of privatization is, or can be, an industrial policy, because it favors some sectors over others. The result of this set of policies in the United States has led to the growth of the financial sector, which has grown from around 2.5% of GDP to around 8% of GDP. As a teacher, I feel this very strongly, because our most talented students are going into the financial sector and real estate speculation, rather than into more productive activities.

And think about what were the most important innovations at the end of the 20th century. One of them was the Internet, which, basically, resulted from one of the industrial policies of the US government. It was a very successful industrial policy, and it was the basis of what has continued to be one of the important sources of our economic growth. Many of these industrial policies in the United States are admittedly hidden in the Defense Department, but they are still important.

In short, all governments have industrial policies, explicit or otherwise. The only difference is between those who construct their industrial policy consciously and those who let it be shaped by others, typically, special interests, which vie with each other for hidden and open subsidies, for rules and regulations that favour them over others.

In this regard, UNIDO has been very good at emphasizing that the issues of industrial policy do not apply just to developing countries and the least developed countries, but also to advanced countries. In addition, I think the focus of UNIDO should be on helping countries figure out good industrial policies – policies that will promote inclusive sustainable growth and are consistent with the Sustainable Development Goals. Just as I said in one of my talks in 1998, we ought to be promoting equitable, sustainable, and democratic development. All of these issues are interrelated.

Development is, to a large extent, a structural transformation; it is not just growth, it is changing the structure of the economy. There are many dimensions to structural transformation. One aspect is that we are moving towards a green economy, a learning society, and an innovation economy. In one of my more recent books, titled Creating a Learning Society, I talked about how industrial policies can help structure the economy. I call it a “learning society,” because it is more than a learning economy – it is the way our whole society interacts.

In the developing countries, they are moving from agriculture to manufacturing. In many of these countries, there is a process of moving toward an urban economy. This year marks the first year in which a majority of the world’s population will probably be living in cities, and that is a very big transformation. In advanced countries, there are other aspects of structural transformation insofar as they are moving toward service sector economies. In all of our economies, we should be moving from a finance-based economy to a real economy, and we should put emphasis on inclusive growth and inclusive industrial development.

Ironically, one of the problems facing the world today has to do with innovation. There is something very peculiar about the nature of innovation going on today, especially, in the developing countries in which the real challenge is job creation. Innovation across the globe is largely focused on saving labor, which goes in exactly the wrong direction. If employment does not increase, then inequality will, and if inequality increases, then aggregate demand will become weak. If aggregate demand is weak, then GDP growth will be weak. This is a vicious circle.

To prevent this from happening, it is very important for us to frame policies that shape the direction of technology. We need to encourage innovation, which is focused on saving the planet and protecting the environment and less involved in saving labor. If we want to have sustained economic growth, we have to make sure that the industrial policies framed should create employment and shared prosperity, as well as save the planet.

3. Instruments for sustainable industrial policy

Admittedly, there are many tensions between global agreements and the logic of modern economics, tensions between what developing countries and emerging markets need and the global agenda, which is, to some extent, stifling industrial policy. Countries have to learn how to deal with and navigate this difficult terrain.

For example, one tension is in education. When I was a Chief Economist at the World Bank, one of the important aspects of the advice that we gave to countries and programs, which we supported, was about education. Most of the education advice that was given to countries was that they should focus their scarce resources for education on primary education. Although that policy made some sense, because resources were limited and that meant everyone was given a small amount of education, it actually was a recipe for making sure the countries did not develop. Countries could not develop, based on just primary education for its peoples. Instead, people who have secondary and university education were needed. Countries, such as Korea and China, and most of the East Asian countries, realized this need in their development strategies. Therefore, we should adopt a broader education strategy, one that can help countries succeed.

Another example of tension lies in trade policy. We have come to realize that many trade policies have actually stymied development instead of promoting it. One of the ways in which advanced countries have done well for such a long time is what I call escalating tariffs – tariffs on unfinished goods, namely raw materials, have been lowered whereas tariffs on finished goods have been increased. As a result, developing countries are forced to stay at the lower level of the value-added chain. The development round, like the Doha Round, was supposed to stop such tactics of the advanced countries – who try to maintain the status quo of developing countries providing only raw materials – but, unfortunately, the development round failed to address this problem.

There are multiple instruments that are at the disposal of governments and the international community for promoting industrialization, broadly defined. One of them is creating a learning society. My colleague Bruce Greenwald and I have tried to define a broad agenda for creating a learning society. There are multiple strategies for doing that, and it has been successful in several countries. In the book, we show how well-designed government trade and industrial policies can help create a learning society, and how poorly designed intellectual property regimes can retard learning.

Each government policy has effects, both positive and negative, on learning, a fact that policymakers must recognize. Many standard policy prescriptions, especially those associated with “neoliberal” doctrines that focus on static resource allocations, have impeded learning. Broad-based industrial policies may bring benefits, not just to the industrial sector but to the entire economy. One of the instruments is exchange rate interventions. China has used a competitive and stable exchange rate very effectively.

Another important set of tools involves development banks. Twenty years ago, the World Bank, even though it was a development bank, said development banks were not a good idea. We understand now that they are important. There are many successful development banks, and some very important new development banks, such as the BRICS Development Bank and the Asia Infrastructure Investment Bank. They are going to play an important role in providing finance for industrialization.

Another point in this broad area of instruments is in promoting a sustainable industrial policy; we need a tax on carbon. I think developing countries, emerging markets, and advanced countries that want to promote sustainability will have to have a price on carbon, which should have been sought at the Climate Summit in Paris.

Meanwhile, the strengthened versions of traditional instruments can also play an important role in industrial policies. Traditional instruments, like anti-trust policies, can also be considered to be part of industrial policies. When I was at the World Bank, we formulated what was called the Comprehensive Development Framework (CDF).

The issues of development are so complex that there is no magic bullet; we cannot approach them with any single tool. Instead, we need a comprehensive approach with a comprehensive industrialization framework and toolkit, adapting to the circumstances of the individual country.

Joseph Stiglitz is Professor at Columbia University. He was the 2001 Nobel Laureate in Economic Sciences, and member of the Special Panel on Accelerating the Implementation of the pdf AfDB Ten-Year Strategy (844 KB) .


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