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Africa: The Industrialization Agenda

AfricaFocus Bulletin
Apr 2, 2013 (130402)
(Reposted from sources cited below)

Editor's Note

It seems to be the season for economic reports and meetings, with the IMF issuing a critique of subsidies for fossil fuels, the UNDP's Human Development Report focusing on the "Rise of the South," the BRICS summit in South Africa, meetings of the Pan African Parliament and civil society on "Structural Transformation," and more. That's far too much to even provide links for in one AfricaFocus Bulletin, so I'm beginning a series today with a policy paper from the Economic Commission for Africa on the critical importance of new industrialization strategies.

Others in the series will appear over the next few weeks, to avoid a steady diet of economic reports and because of the work involved in excerpting manageable portions from reports that are often long and sometime technical. The report excerpted in this AfricaFocus Bulletin is one of several released for the Sixth Joint Annual Meetings of the African Union and the Economic Commission for Africa, held in Abidjan March 21-26. The full text of this reeport and additional material from the meeting are available on the ECA web site at http://www.uneca.org/cfm

The fundamental point of the report is the need for strategically planned industrialization, taking into context current international economic realities and the need to ensure sustainable industrial growth that builds on African realities and resource endowments, and focuses on job creation and structural transformation instead of only quantitative expansion.

For previous AfricaFocus Bulletins on economic issues, visit http://www.africafocus.org/econexp.php

++++++++++++++++++++++end editor's note+++++++++++++++++

Industrialization for an Emerging Africa Issues Paper

Economic Commission for Africa

African Union Commission

7 March 2013

E/ECA/CM/46/2 AU/CAMEF/MIN/2(VIII)

[excerpts only. For full text of this and other background documents, reports, and press releases, visit http://www.uneca.org/cfm]

Introduction

1. ... Despite the negative influence of the global crisis, the performances of Africa's economies remain significant. In 2012, the growth rate in over 80 per cent of African countries was higher than the global growth rate of 2.7 per cent. In addition, 16 African countries were among the top 30 to be experiencing the highest growth rates in the world.

2. However, the growth performance, thus far, remains highly vulnerable to external shocks and has not translated into meaningful job creation for most countries. ... while the total unemployment rate across Africa marginally declined from 9.7 per cent in 2000 to 8.3 per cent in 2011, the share of vulnerable employment in total employment remains very high, at about 70 per cent in 2011. Africa is also the least diversified region in the world, both in terms of its production and export bases.

3. Africa thus needs to ensure that the current growth momentum is more resilient to external shocks, translates into desirable economic and social outcomes and does lead to development. [This] requires changing the economic structure from predominantly agrarian to industrial and making the most of its large reservoir of natural and agricultural resources. This will significantly boost the economic performance of the countries as well as lift many Africans out of poverty through employment and wealth creation.

...

I. Africa's experience with industrialization and structural transformation

7. Virtually all of today's successful nations actively supported and protected their industries through specific policies and institutions. Contrary to conventional wisdom that often attributes the successes of Western economies to laissez-faire and free-market policies, historical evidence shows that the use of industrial, trade and technology policies was the main ingredient in their successful structural transformations (Lin and Monga, 2010). Also, empirical evidence from developed, newly industrializing and emerging economies has shown that sustainable development cannot be achieved on a weak industrial base (Lall, 1999). ...

11. While industrialization has contributed to exports and employment in such countries as Malaysia and China (Athukorala, 1996) and turned Korea, a relatively small economy in 1999 into one of the largest producers of ships and microchips (ECA, 2011), Africa's experience with industrial policy and its outcomes since independence has been largely disappointing. Yet, the seeds of Africa's industrialization woes were sown during the colonial period, when the extractive nature of African colonialism left behind structures, institutions and infrastructure design to enhance extraction. This means that at independence, the structure of African economies was not geared toward transformation and value addition but rather commodity extraction and export (Nnadozie 2013).

12. There is also the issue of policy failure after independence, starting with import substitution policies, whereby African countries genuinely decided to industrialize; and then Structural Adjustment Programmes (SAPs), whereby African countries were forced to deindustrialize. Both of these policies were externally driven.

...

17. Two key lessons on industrialization can be drawn from the SAP period. First, while SAPs focused on creating macroeconomic stability and structural reforms to achieve a conducive environment, especially for foreign firms (e.g. protection of property rights and ensuring contract enforcement), there was little effort to address market failures and externalities that had historically constrained economic activity in Africa. Coherent strategies were also lacking. Second, the withdrawal of Government support even in the presence of pervasive market failures and the liberalization of trade without taking account of the capabilities of domestic firms, exposed African firms to foreign competition at a time when they were not mature enough.

18. ... Most of Africa's economies are still driven by commodity production and export of agricultural and mining products. Africa remains the least industrialized continent of the world. Indeed, the growth of manufacturing value added during the SAPs period was disappointing, with several countries actually suffering de-industrialization. From 1980 to 2009, the share of manufacturing value added to GDP marginally increased in North Africa, from 12.6 per cent to 13.6 per cent, while it fell from 16.6 per cent to 12.7 per cent in the rest of Africa. Over half a century after independence, while other regions have increased their share of manufactured exports, the continent still depends on the export of raw materials to the industrialized world. ...

...

20. The dependence on primary commodity production and exports exposes the continent to external demand shocks and leads to pro-cyclical fiscal spending in many resource revenue- dependent countries. More importantly, the commodity-driven feature of Africa's economy poses serious questions about its long-term sustainability, as agriculture is subject to diminishing returns to scale due to land constraint while exploitation of nonrenewable natural resources is limited by available reserves.

21. This industrial stagnation is in sharp contrast to the success of the East Asian newly industrialized countries. ... The success of the East Asian model is attributed to three factors from which African countries could learn. First, Governments provided stable and predictable incentive frameworks that supported investments. Second, Governments had close, continuous and strong dialogue with the private sector. The State was thus able to withdraw support whenever a firm's performance was not satisfactory and imposed exportperformance standard. Lastly, Governments used import substitution and export promotion strategies simultaneously, combining them in the most efficient way to serve the industrialization objective (ECA, 2011).

II. Role of industrialization in Africa's emergence

22. While sustained growth has contributed significantly to rapid economic transformation in other parts of the world, in Africa it has been observed that the relatively good growth performance has not been inclusive ...

Structural transformation and value addition

...

24. Development in Africa requires economic transformation and industrialization, as has already been stated; this is the key to achieving sustained levels of growth. Africa's economic development thus needs to be accompanied by structural transformation from an agrarian base to an industrial one. The structural transformation in Africa will be a continuous process that should include an industrial catch-up period, as industry in many countries is either inexistent or in the very early stages. Equally important is an industrial upgrading period. However, Africa being resource rich, has potential to achieve rapid structural transformation by manufacturing its vast natural/raw materials (primary products) into finished products for export. It can also take advantage of leader countries and follower countries in Europe or Asia as well as the backward linkage between industrialization and the rest of the real economy.

Sustainable structural transformation

25. Industrialization and structural transformation lead to intensive use of natural resources at the expense of the environment. The challenge for Africa is not only to successfully transform its economies, but to do it in a sustainable way, using and adapting existing environmentally sound technologies to local conditions as well as indigenous technological innovation.

26. Implementing sustainable structural transformation in Africa will not be easy and there is no "one size fits all" approach. Each African country will have to design strategies and policies based on its own sectoral and resource priorities, environmental challenges, initial conditions and domestic capabilities.

...

IV. Industrializing for Africa's economic emergence: emerging global issues

...

36. The problem is that Africa today faces a very different global and regional environment from that faced by earlier developing country entrants into industrial development. Among the factors that have shaped the new global environment are globalization and the changing international economic order; the rise of (East) Asian countries; and climate change and its implications for latecomers into the industrial development process.

37. Globalization: Africa did not benefit from the massive globalization that began in the early 1980s and which was characterized by several changes in the world economic order. First, it coincided with the period of SAPs in Africa, which meant that, as Governments were liberalizing their trade and financial sectors and eliminating the import substitution industrialization strategies, multinational corporations were able to expand their markets to Africa. SAPs brought in the growing dependence on (mostly consumer) imports, which eroded the weak industrial base of most African economies (Ogbu and others, 1995). On the other hand, East Asian, and to a lesser extent, Latin American economies were able to take advantage of globalization and be part of the global value chains, partly because their Governments still used industrial policies (including providing finance and developing strong commercial public sector enterprises) to seize those opportunities.

38. Globalization has also changed the pattern and rules of international trade in two critical ways. First, current international trade and division of labour are organized along value chains, and multinational companies play a dominant role in creating and controlling these value chains. Without being integrated into these value chains, it will be difficult for African countries to access larger external markets. Yet on the other hand, there is the risk that they may be further pinned down at the lower end of the global value chains as their industrial base is weak and their negotiation capacity with multinationals may be low. African countries must thus strategize on how to position themselves in the global value chains and steadily promote value addition towards the higher end of these value chains.

39. Second, with globalization came new global trade rules that have reduced the space of industrial policy in Africa. Traditionally, trade policies have been critical tools for industrial policy. However, various regional and international agreements over the past two decades have changed the rules of world trade significantly, affecting domestic trade policies as well as opening new markets for trade. Indeed, Africa must overcome the burden of having opened up to international trade before domestic industries had a chance to become competitive. Domestic firms must therefore first be able to compete with high-quality and low-cost goods that have penetrated local markets.

40. Rising labour costs in East Asia: The growing middle class in Asia and the development of most Asian countries into middle income economies have led to a rise in the cost of labour -the very characteristic that attracted most multinational corporations to invest their production processes in the region. This implies that as labour costs increase, the multinational corporations will start looking elsewhere for labour services to maintain or lower their production costs. The challenge for African countries is that the cost of manufactured products is steadily falling, meaning that competing on low labour costs is no longer an attractive option.

41. The growing significance of South-South Cooperation: The economic emergence of the South is likely to continue to be the major feature of the global development landscape in coming decades. The leading Southern economies have already become the global hub for low-tech and labour-intensive manufacturing and are quickly moving up along the global value chains towards more technologyand capital-intensive sectors. To obtain access to larger external markets and become integrated into global industrial value chains, Africa must form a proactive strategy to engage the southern partners to effectively enhance its own industrialization process. ...

42. Trade relations between Africa and emerging countries should be put into perspective: Africa's trade with these countries is characterized by exports of raw materials and imports of manufactured goods. In particular, China is becoming an important trading partner with Africa. However, China's exports to Africa compete with the domestic manufacturing sector, with adverse implications for the employment of low- skilled workers. ...

43. Climate change, sustainability and green growth: The global concern about climate change provides Africa with both challenges and opportunities. In practice, it means that Africa may need to take an industrialization path that may need harmonizing industrial development with environmental sustainability, as opposed to the "pollutefirst -clean-up-later" approach that most industrialized nations took.

...

V. Planning and accelerating Africa's industrialization

45. Implementing sustainable structural transformation in Africa will not be easy, and there is no "one size fits all" approach. Each African country will have to design strategies and policies based on its own sectoral and resource priorities, environmental challenges, initial conditions and domestic capabilities. Among other areas, focus should be placed on efficient, sustainable resource use in energy, industry and agriculture. African countries that are well embarked on that path include Kenya, Mauritius and South Africa (UNCTAD, 2012).

46. The planning and industrial acceleration process in Africa needs to define strong industrialization strategies, identify priority sectors to focus on the short term, as well as strategies for the medium and long terms, and identify the key enablers to kick-start and sustain industrial development. ...

...

48. The priority sectors are bound to vary from country to country in Africa. However, agroprocessing is a priority in most countries, as are value addition to the extractive sectors and modernization of agriculture. As indicated in the Economic Report for Africa 2007, most African countries are still in the very early stages of industrial development and should strive for diversification in higher-valued products, capitalizing on their mineral and agricultural wealth. In addition, Africa needs to increase its participation in a broad range of global value chains, starting with natural resource extraction and agro-industry and later moving into other manufacturing global value chains to create wealth and employment.

49. An overwhelming majority of the poor in Africa live in rural areas and potentially depend on agriculture for their livelihood. A modernized agriculture sector, which is labour-intensive and creates jobs and generates value added in agro-processing activities would lift many Africans out of poverty. A modernized agriculture sector also entails significant forward and backward linkages to the domestic economy, which do not exist to the same extent in the extractive industries. Indeed, an agribusiness-led development strategy involving higher value added and stronger productivity growth throughout the entire value chain system of the economy offers a strong potential and promise for rapid and broad-based economic growth and wealth creation in Africa and poverty alleviation for Africa's rural dwellers.

50. Asian NIEs used a variety of strategies, including incentives, to promote local industry such as lowered costs of entry into different manufacturing activities. They started their industrialization process in situations similar to current African ones, especially Malaysia, which relied on exports of primary products before embarking on rapid industrial development through a series of policies (Athukorala, 1996). ...

...

52. Africa can thus capitalize on its resource endowments and the commodity price boom to develop its industrial base. Previous policy advice on industrialization in Africa encouraged African countries to diversify away from the natural resource sector in pursuit of industrialization. ...

53. However, the historical experience of many resourcerich countries is that commodity sectors do foster productivity, growth, technological innovation and forward and backward linkages, provided good institutions exist and investment is made in human capital and knowledge (de Ferranti et al, 2002). Examples of countries that have developed their industry using their natural resources include Sweden, Finland and the United States. African countries endowed with natural resources can take advantage of the recent commodity market boom, expected to remain for the medium term, to promote industrialization and knowledge intensification processes around backward and forward linkages to the commodity sectors.

...

Key enablers for Africa's industrialization

55. Successful industrialization requires leadership and Government commitment to industrial development that will set the right tone at the top and make industrial development a top priority. It is crucial that Governments translate the strong political will for industrialization into action and provide leadership at various levels to support certain strategic sectors in the overall long-term development. First, Governments need to set up the right policies and use the right policy mix to facilitate industrial development and secondly, the private sector should be confident about its political commitment to industrialization. ...

56. The success of any industrialization programme will require the creation of an enabling business climate that enhances domestic capacity and capability, particularly in respect of physical and social infrastructure, human capital, financial systems, technology and governance. In addition, Governments should put in place regulatory frameworks for tackling market failures and also address coordination failures within Government as well as between Government and other actors. Within Government, coordination will entail making the right policies in terms of industrial, trade and macroeconomic policy levels. ...

57. Productivity matters for the success of Africa's industrialization. Africa is the least productive region in the world, based on gross domestic product (GDP) per hour worked. For each hour worked, Africa generates less value form the efforts of its workers. As a result, income growth is driven more by capital investments and terms of trade than by productivity. This productivity gap is a prosperity gap for an organization pursuing the objective of a prosperous continent. Improving productivity means producing more from available resources such as labour, natural and mineral wealth, capital and equipment, management capacities and finances. Higher productivity allows a nation to afford its citizen's well-being, which encompasses quality healthcare and education, quality infrastructure and environmental sustainability, through green growth and industrial green productivity. ...

58. To tackle the various challenges, such as low productivity and competitiveness in a globalized economy, poverty and climate change confronting member States of the Union, Africa must endeavour to pursue industrialization that is rooted in the quest for high productivity performance and innovation-led productivity growth. For the African industrialization venture to succeed, it is vital to ensure orderly implementation of the AU Productivity Agenda for Africa.

59. Operating in a democratic environment, where people's rights, in particular workers' rights, are of prime importance, the mechanism for building a shared vision on industrial development is also vital. This points to the importance of social dialogue as a means for consensus that leads to sustainable and productive partnership. Effective social dialogue is needed at the national level, as are other supportive labour market institutions, to construct a peaceful and attractive environment for industrial development in Africa.

60. The international community can also contribute to Africa's industrialization. In particular, it should deliver on its commitments to Africa in the three critical areas of official development assistance (ODA), debt and trade. So far, the experience of Africa has been one of considerable gap between commitments and implementation.

...

62. However, while the responsibility for industrial development rests primarily with national Governments, regional integration has an important role to play in lifting the various binding constraints to industrialization. For instance, regional cooperation in the development of infrastructure would lower transaction costs, enhance the development of regional markets and make manufacturing production and exports more competitive. Regional integration can also contribute to reducing the regulatory burden facing African firms by, for example, harmonizing policies and serving as an external agency of restraint on domestic policies (UNCTAD, 2011). ...

...


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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