Author: G.C

Alberto Lemma (ODI)

03 November 2016

In a new report published jointly by The New Climate Economy and the ODI’s Supporting Economic Transformation programme, we aim to shed light on a key question that will probably become ever more relevant within the economic policy sphere in Africa: how do economic transformation, climate change and societal change intersect? More importantly, what are the requirements for positive economic transformation in the light of these interactions? In light of these, we have attempted to highlight the fact that economic transformation in Africa can present win-win scenarios that promote both growth and climate change adaptation.

To achieve these win-win scenarios, countries in Africa will have to focus on economic transformation and a better quality of growth. If they do not, they cannot aspire to achieve ambitious targets for social and environmental change.  Getting the economic fundamentals right is not only good for economic transformation and growth, but also the poor and environmental resilience. Better use of land and promotion of sustainable agriculture, a more diversified economy, better connected and spatially-aware economic models, and a transition to a modern energy system are all necessary to reap a triple dividend of sustained growth, social inclusion and an environmentally more sustainable planet.

One of the major constraints is the fact that structural transformation has been slow to occur in Africa. Agriculture remains the largest employer and together with low-value services, are the main growth drivers. Historically, these sectors are not the major drivers of productivity change and, by themselves, cannot sustain inclusive and transformative growth. Moreover, growth rates across Africa are now showing signs of slow-down due to declining commodity prices, the high price of which, until 2013, had considerably buoyed growth in the region.

‘Holding pattern’ growth, based on high levels of employment in the agricultural sector and primary commodity-based exports, will not promote employment and increase living standards in the long term. Apart from the unsustainable and unpredictable nature of relying on extractives in the long term (owing to fluctuating prices) which reduces resilience to shocks –  these sectors do not generate enough jobs for a growing population, a critical issue in Africa, where youth unemployment will soon place large political pressures on policy-makers.

At the same time, climatic shocks such as longer droughts (and more severe floods) and greater pressure on land for extensive farming increase the strains on regions where low agricultural productivity levels are the norm. The negative effects of these are likely to be felt most acutely by the poor. Shifts in population away from rural and into urban areas are putting greater pressure on downstream services (e.g. water provision). Concurrently, increasing population levels and economic pressure are leading to rising demand for energy.

The imperative, therefore, is to increase economic diversification and complexity. Such transformation is needed not only to boost growth rates but also to help improve the region’s capacity to increase resilience and adapt to the impacts of climate change (even though Africa’s contributions to the process of climate change are minimal).

Part of the solution involves shifting primary resources towards more productive (and value-adding) activities, emphasising policies that promote a (slowly) resurgent manufacturing sector as the key driver for future growth. An equally important part of the process is to increase agricultural productivity – needed for three reasons in the region. The first is to reduce labour in agriculture in order to move it towards higher productivity, the second is to improve the livelihoods of the rural poor whilst the third is to provide greater food security for increasing urban populations. Doing so under the pressure of climate change requires the use of climate-smart agricultural practices complemented by strong agricultural development programmes in tandem with greater levels of international financing for programmes such as REDD+.

Channelling manufacturing production into Africa’s urban regions helps overcome a major transformative challenge. Improvements in the investment climate (mainly through better infrastructure and access to finance), promoting manufacturing exports and increasing (internal) competition can help boost manufacturing and increase economic diversification. Using the region’s urban areas to maximise agglomeration effects can help improve the prospects of the manufacturing sector. Until recently, urbanisation and structural transformation have occurred as largely separate processes in Africa.

Unlike other regions, where urban growth has occurred mainly thanks to increases in urban productivity and production capacities, the region’s urban areas have grown because of two major factors – low mortality combined with steady fertility rates in urban areas, and increased spending in urban areas as a result of primary commodity sales. This has led to a situation where the majority of jobs are in the informal sector and where urban zones are more ‘consumptive’ than ‘productive’ – neither of which will help to create jobs for the increasing number of unemployed young people. Greater emphasis on urban infrastructure, planning and land use, combined with a focus on enhancing manufacturing, can lead to a shift towards better (i.e. more intensive rather than extensive) urban land use, which will reduce pressure on land and improve employment prospects.

Even though more efficient use of energy can reduce requirements for it, there is still not enough energy available to support diversification. Fossil fuel power plants (i.e. gas) are relatively easy to set up and can provide energy in the short term but the gain has to be counterbalanced by potential opportunity costs arising from lost sales in exports of fossil fuels for exporters, the costs arising from the subsidisation of energy tariffs and international price volatility for importers.

Although investing in renewables takes longer and has higher initial costs, they can provide greater energy security, can be generated and distributed off-grid and are less prone to price shocks. Whilst they can be more vulnerable to volatility in climatic patterns they would make use of resources that are abundant in the region and reduce reliance on imported energy. Ensuring that clean energy use predominates requires a mix of the right energy, subsidy and utility promulgation policies to foster its adoption.

At the national level, specific context-sensitive choices will have to be made vis-à-vis which sectors to promote, what types of infrastructure to invest in and how to provide energy effectively. African countries, especially low-income ones, will need to ask themselves key questions on what type of energy systems they can sustainably rely on in the long-term, what sectors can have the greatest employment and poverty reduction potential, how to make best use of their land and what pathways can help achieve these, whilst being environmentally sustainable and resilient to climate change that will likely affect them the most.

Photo credit: Flickr/James Anderson

Professor Olu Ajakaiye (African Centre for Shared Development Capacity Building)

22 September 2016

Nigeria has so far missed the opportunity to embark on progressive economic transformation as characterised by a reallocation of economic activities away from low- towards high-productivity activities. Rather, under the rubrics of laissez-faire policy and its associated aversion to development planning, during the high-growth era of 2000–14 Nigeria experienced a perverse form of economic transformation, whereby economic activities shifted from low-productivity agriculture and high-productivity manufacturing to other low-productivity other industry and services.

It has also been observed that the premature tertiarisation of the economy is unsustainable, given the country’s chronic dependence on imports and its dwindling foreign exchange earnings from faltering oil exports – a situation that may persist for quite some time. So, in reality, the Nigerian economy is essentially dominated by primary agricultural production along with petroleum that is exported in its crude form.

The present administration has indicated its desire to diversify the economy away from oil by promoting agricultural production and solid minerals while investing in infrastructure and human capital to support manufacturing activities. In essence, then, it is apparently committed to correcting the perverse economic transformation witnessed between 2000 and 2014.

Meanwhile, on the basis of the development experiences of the East Asian economies that have been successful in their drive for economic transformation (Das, 1992; Economic Planning Unit of Malaysia, 2004; Ajakaiye, 2007; Natsuka, 2008; Otsubo, 2009; Datuk, 2010; Chow, 2011), the following imperatives suggest themselves:

• Political commitment of the leadership to maximising the welfare of the people.
• Creation and maintenance of a competent and highly motivated largely Weberian bureaucracy, with the ability and necessary authority to implement development programmes, including formulating sound development policies and plans as well as vigorously and pragmatically implementing them.
• Strategic and pragmatic state intervention through effective participatory planning, aimed at:
  • investing in people, science and technology;
  • investing in social, institutional and economic infrastructure; and,
  • efficiently and effectively nurturing, supporting and promoting the development of world-class national private sector operators, organisations and institutions able and ready to partner with the government and their foreign counterparts to their mutual benefit and complementary to the national development agenda.
• A cooperative, complementary and collaborative public–private interface and avoidance of adversarial relationship among public and private agents based on misconceived realities (see Ajakaiye and Jerome, 2015, for further discussion of the public–private interface for economic development in Africa).
• Awareness that the pragmatic choice is not between the state and the market but rather between rolling and dynamic combinations of public and private institutions by the state in delivering sustainable and equitable development to all segments of society.
• Avoidance of capture and rent-seeking behaviour as well as readiness to adjust policies quickly once credible and convincing evidence shows that certain strategies are no longer applicable in light of emerging circumstances.

Accordingly, in order to successfully transform the Nigerian economy, the political leadership at the state and federal levels should be committed to:

1. building rolling consensus around development objectives at the state and federal levels;
2. depersonalising the development agenda, thereby ensuring continuity of truly participatory development plans (see Ajakaiye, 2015, for suggestions on articulating a participatory planning process in Nigeria);
3. rebuilding the capability of the Nigerian state at the federal, state and local levels, which has been degraded under structural adjustment and the dogma of a minimalist (laissez-faire) state;
4. restoring the Weberian bureaucracy with adequate autonomy and embeddedness to interface with all stakeholders in an atmosphere of mutual trust, respect, sincerity of purpose and zero tolerance for corruption;
5. avoiding adversarial relationship among agents, be they from the public sector, private business, labour unions, civil society or non-governmental organisations;
6. avoiding capture and rent-seeking behaviour;
7. providing leadership and building a rolling consensus around development plans aimed at transforming the economy, thereby advancing the wellbeing of the people without leaving anyone behind;
8. encouraging all agents to subscribe to the view that society is a corporate entity jointly owned by all members, for which all must work in concert in pursuit of economic transformation through participatory development planning in an environment of mutual trust, respect and sincerity of purpose; and,
9. encouraging development partners to channel more of their development assistance towards integrated infrastructural and technological development projects to enhance the international competitiveness of the agricultural and manufacturing sectors.

Photo credit: World Bank Group, 2010

References

Ajakaiye, Olu (2007) Recent Economic Development Experiences of China, India, Malaysia and South Korea: Some Lessons from Capacity Building in Africa (Commissioned Paper for the 2^nd Pan African Capacity Building Forum, Maputo, Mozambique, August 1-3.

Economic Planning Unit (2004) Development Planning in Malaysia, Federal Government Administrative Centre, Putrajaya, Malaysia.

Paddy Carter (ODI)

09 September 2016

Morten Jerven made a splash with his exposé of the woeful state of economic data in the developing world, Poor Numbers, and his second act Africa: Why Economists Get it Wrong has won him more fans. In this book he argues that economists were misled by cross-country growth regressions into thinking that Africa is incapable of development, and that by seeking to explain a failure of growth economists missed the chance to study historical growth episodes and show how Africa can grow.

In a forthcoming edition of Development Policy Review we are lucky enough to host a debate between Morten Jerven and three eminent economists, Denis Cogneau, Jonathan Temple and Dietrich Vollrath.

There is a lot of agreement around about the limitations of cross-country quantitative research and the need for closer study of individual countries. There is also some disagreement, with Jon Temple and Dietz Vollrath in particular arguing that empirical economic research is more useful than Morten is willing to admit. Morten mounts a methodological critique and our respondents concentrate on those points; none really tackles what exactly it is that Morten thinks economists have got wrong about Africa. That’s what I am going to take on here.

Morten’s call for more useful research into African economic growth, for better data and for richer, historically grounded, studies, should galvanise the profession, but I am going to argue that the gulf between how economists think about Africa and how Morten thinks they ought to is not as large as it may appear. Morten thinks economists are unduly pessimistic about Africa because they have concentrated on explaining why the continent is so much poorer than others today (or why growth averaged from 1950 until now is lower), which has led them to form the view that there is something about Africa that is inimical to growth. That something is ‘bad initial conditions’. Morten writes that the bottom line is that there is no bottom billion (those who Paul Collier wrote are trapped in countries with conditions inimical to growth). As Morten has it, part of the reason economists have gone wrong is that they have ignored the fact that African countries have often experienced periods of growth, when external conditions have been favourable (p.86).

I contend that what most economists actually think is that most African countries are saddled with circumstances that hamper their chances of achieving sustained growth, which requires structural transformation and continuing productivity improvements. I do not think there is an economist on the planet who believes ‘bad institutions’ mean a country is incapable of riding a commodity boom.

Unfavourable initial conditions do not imply growth is impossible. The two economists most closely associated with the credo ‘institutions rule’, Daron Acemoglu and James Robinson, emphasise that what they term ‘extractive’ economic and political institutions are compatible with decades of economic growth (as evident in China) and also that their theories do not imply ‘historical determinism’: two similar societies can drift apart and then, when a critical juncture arrives, head off in quite different directions.

If certain initial conditions are found to have explanatory power in a long-run growth regression, this only tells us something about what happened on average. Morten writes that such regressions tell us ‘that growth needs private property rights and that the Gold Coast and Ghana could not grow [as they did] under such institutional frameworks’ (p.86). That is not what regressions tell us.

Morten describes how political and economic institutions should be seen as adaptations to individual circumstances, and quotes Anthony Hopkins to argue that asking whether initial conditions determine growth is ‘rather like trying to decide if life is more difficult for penguins in the Antarctic or camels in the Sahara’. But economies that achieve long-run growth may resemble each other more than penguins do camels. Sustained growth requires investment, productivity improvements and structural change. Striking metaphors cannot rule out the possibility that some institutional adaptations are more conducive to this than others. There are many paths to growth, but there may also be some commonalities across country experiences, and cross-country empirical research tests this possibility.

If initial conditions are understood to mean whatever it is that makes the transition from externally driven growth to structural transformation and sustained growth more (or less) likely, what economists think about Africa does not seem to me very different from what Morten thinks, when he writes, ‘change is required in the political economy of African nations to enable them to weather difficult external conditions more effectively. Finally, a shift towards self-reliance and self-sustained growth is required. This means building institutions that can invest and reinvest returns from more prosperous times that can then be used to keep economies afloat when conditions are less favourable’ (p.88).

Morten focuses on regressions that seek to explain growth averaged over a long period or, equivalently, to explain income levels today, conditional on historical variables, and argues that research should concentrate more on what explains episodes of growth within Africa. But economists have been doing this for decades: the bulk of econometric growth research employs ‘panel regressions’ that identify which variables are correlated with growth episodes within countries. Useful research has been done on the consequences of trade liberalisation, public investment in infrastructure and recent signs of structural changes in Africa, for example.

One gets the impression that Morten thinks economists are unaware that many African countries have seen periods of growth. This is not so. Morten’s bête noire Paul Collier wrote in a survey article from 1999 ‘African performance has been strongly episodic’, and there are countless papers looking at what drives episodes of growth and the role of external factors (Easterly et al., 1993; Blattman al., 2004; Raddatz, 2007). Morten cites a paper on growth episodes by Lant Pritchett that I think every growth economist knows well. Readers may not come away from the book with the impression that economists are well aware that African economies have experienced periods of growth.

Moreover, if economists are Afro-pessimists who place too much importance on institutions, both these views are possible without going anywhere near a growth regression. Acemoglu and Robinson are at pains to point out that their theories draw on other forms of evidence. As for whether there is a bottom billion, forecasts see uncomfortably close to 1bn still living in extreme poverty by 2030.

Characterising what economists think about Africa is difficult because there are so many of them and they disagree about much. Cross-country regressions represent only a fraction of the research economists have done on growth in Africa. Some names that spring to mind, who look at African growth from different perspectives, are Stefan Dercon, currently DFID Chief Economist, Christopher Udry, Christopher Woodruff, David McKenzie and the doyenne of development economics, Esther Duflo.

So I think the picture is brighter than Morten paints. No doubt some economists have oversold their ideas based on flimsy evidence, but academics everywhere are prone to that sin. Cross-section regressions have well-known limitations but can be informative if interpreted with care, and quantitative research into African growth moved beyond that approach many years ago. On the specifics of what economists are wrong about, Afro-pessimism and the role of institutions and other initial conditions, I’d say it’s all a question of degree, and economists are not alone in thinking Africa faces many challenges.

Morten writes that economists have been trying to explain something that did not happen: African chronic growth failure. But if the problem is seen as failure to achieve sustained growth through structural transformation, as opposed to episodic externally driven growth, and questions around initial conditions and institutions are taken as asking what determines the chances of sustaining growth, then, I think, much of the apparent disagreement between Morten and the economics profession can be resolved.

Photo credit: Antony Robbins, 2008

Linda Calabrese, Neil Balchin and Maximiliano Mendez-Parra (ODI)

15 June 2016

Africa’s regional economic communities (RECs) are looking to achieve deeper regional integration that goes beyond reducing tariffs. This has generated greater focus on trade facilitation to ease the movement of goods across borders and promote economic transformation. A recent paper prepared jointly by the African Center for Economic Transformation (ACET) and the Overseas Development Institute’s (ODI’s) Supporting Economic Transformation (SET) programme argues that, if implemented effectively, trade facilitation initiatives can help stimulate economic transformation in Africa by raising exports, supporting export diversification, reallocating resources to more productive activities, improving access to cheaper and better-quality imported inputs and enabling participation in value chains.

African RECs are also increasingly recognising the importance of promoting the free circulation of services, labour and capital in order to create truly integrated regional markets. For example, the East African Community (EAC) has made strides in harmonising academic and vocational qualifications in order to facilitate the circulation of professionals in the region.

There is also greater recognition that moving towards deeper integration requires regional solutions to development challenges. This is reflected in attempts to develop regional approaches to industrialisation in the EAC and in the Southern African Development Community (SADC).

But deeper regional integration comes with implementation challenges

Notwithstanding these intentions, progress in terms of implementation has been less impressive. Regional economic agreements are complex, and they often create both winners and losers, making them difficult to implement – especially if national governments fear that specific regional agreements will harm domestic sectors, firms or households. Competing national agendas (e.g. when regional commitments are not aligned with a country’s industrial policy requirements) often take priority for individual governments.

The way forward is a ‘smart’ integration agenda for Africa

A smart regional integration agenda is required to address these implementation challenges and facilitate deeper regional integration in Africa. We believe this agenda should be built around a 10-point charter, focused on the following actions:

1) Address productive capacity in Africa and eliminate barriers to regional exports. The industrial policies of African governments (especially the least developed countries on the continent) must focus on developing international competitiveness rather than trying to develop local industries behind protective barriers. Regional exporting offers opportunities for African exports to exploit scale effects and become more competitive, while also reducing their dependence on traditional trading partners and raising their resilience to external shocks. Encouragingly, a recent SET paper shows that intra-African manufacturing exports have grown considerably since 2005, and account for the bulk of manufacturing exports in several African countries.

2) Invest more in developing and upgrading regional infrastructure (roads, railways, ports) to facilitate regional integration. Options to raise funds for regional infrastructure could include spending a greater share of Aid for Trade on regional infrastructure and incentivising regional programmes by making funds more concessional.

3) Focus, in particular, on improving soft infrastructure, for example by eliminating barriers to the provision of (regional) trade logistics services, improving their efficiency and reducing their cost. This can be facilitated by identifying lead governments, encouraging private sector participation and allowing flexibility to work with RECs or small groups of countries. A recent ODI publication highlights the importance of regional infrastructure for trade facilitation and the complementarities between hard and soft infrastructure in supporting trade. Collaborative, cross-country approaches to developing regional hard and soft infrastructure can be more efficient than those taken unilaterally or at the country level. For example, creating a well-functioning trade corridor requires a good degree of regional planning.

4) Ensure trade in services is included in the broader regional integration agenda. It will be important to link services negotiations (both at the multilateral level and within African RECs) to regional infrastructure priorities and focus on regulatory issues in services, including those related to standards and investment.

5) Ensure the private sector is a key actor in driving the regional integration agenda. The private sector not only should benefit from regional integration (e.g. through access to larger, regional markets) but can also play a key role as an implementer in the regional integration process. For instance, the private sector can help identify and eliminate non-tariff barriers hampering regional trade, it can exert influence and lobby for national or regional regulatory environments that are more conducive to regional integration and it can help provide and maintain the physical infrastructure (roads, railways, ports) and services (telecommunications, financial, logistics) necessary to support regional integration.

6) Be pragmatic in the sequencing of regional integration processes. Identifying champions as first movers can pave the way for others and demonstrate the advantages of further regional integration involving more difficult reforms.

7) Monitor regional integration commitments effectively. Regional commitments need to be binding and enforced, and it is important to ensure they are acted upon, with consequences for non-compliance.

8) Generate more evidence on the impact of regional integration. This should include, for example, evidence on how regional integration affects the development of domestic manufacturing sectors, or the impacts it has on employment and poverty; and how these effects are distributed across sectors and populations. We need the tools to measure these impacts effectively. This requires better data that are collected specifically with the intention of isolating the effects of regional integration and are comparable across countries.

9) Identify and compensate those that lose out in the regional integration process. Regional integration raises national income but creates winners and losers. For example, a recent ODI research paper shows that small-scale traders may benefit from smoother borders through access to a larger market for their products. However, we also know that some vulnerable groups depend on inefficiencies at border crossings – for example workers who help load and unload trucks. In aggregate, an integrated, dynamic region can generate new employment opportunities that outweigh the loss of livelihoods that may accompany regional integration. Even so, this does not eliminate the need to effectively identify winners and losers at an early stage of the regional integration process and to implement appropriate policies that specifically address issues relevant to the poor and vulnerable.

10) Adopt an iterative, adaptive and flexible approach to the regional integration process. Governments and regional bodies should have the space to experiment with policy interventions and adapt them when needed.

The regional integration process in Africa is at an important juncture, with the ongoing negotiations around the Tripartite Free Trade Area (involving the Common Market for Eastern and Southern Africa, the EAC and SADC) and a proposed Continental Free Trade Area providing a platform to push for further integration. Cooperating around a smart integration agenda can help build larger, more integrated regional markets in Africa and promote shared growth and prosperity on the continent.

Acknowledgement

The authors are grateful for the input of participants at a roundtable on trade and regional integration in Africa (organised jointly by ODI and the Saana Institute on 18 April 2016), who contributed significantly to shaping the ideas put forward in this post. The roundtable included participants from the Commonwealth Secretariat, European Centre for Development Policy Management, the International Centre for Trade and Sustainable Development, ODI, the Organisation for Economic Co-operation and Development, Saana, Tralac, the UN Economic Commission for Africa, the University of Sussex and the World Bank.

Photo credit: Pete Lewis, Department for International Development

20 April 2016

Sonia Hoque – ODI, Programme & Communications Manager

Economic transformation now has the attention of African leaders. National strategies with the goal of economic transformation need to be developed inclusively and ultimately have the buy-in of citizens. Those developing them must be prepared to move from technical, rigid documents with unrealistic targets, to flexible, visionary ones, led by “politically savvy leaders” and supported by citizens who hold them to account.

These were among the key messages emerging from the first African Transformation Forum (ATF) convened by the African Center for Economic Transformation (ACET), in partnership with the Government of Rwanda, in Kigali, on 14-15^th March 2016. The conference brought together leading policy makers, business leaders, academics, journalists, civil society and development partners to share ideas and collaborate on advancing Africa’s economic transformation.

The motivation and need for such an event is clear. Despite a number of years of positive progress in terms of economic growth, an overall rise in population in Africa has seen increasing numbers of people living in extreme poverty across the continent. The ACET President, Dr. Kingsley Amoako, opened the ATF stating that African leaders must prioritise economic transformation to create the jobs for the future. The consensus across the forum was that whilst this is true, the real question and focus should be on how to make it happen.

The goal of economic transformation raises the stakes for policy-making in Africa and national transformation strategies remain essential. After decades of aid dependency and jobless growth, renewed positivity about the future of Africa was felt across participants at the forum. ‘African-led development’ was also a commonly used phrase, reflecting the fact the event was convened and organised by an African think-tank. In fact, Emmanuel Nnadozie, Executive Secretary of the African Capacity Building Foundation, argued the need for more of such think-tanks across Africa.

Creating national transformation strategies

The first step which leaders need to take in order to progress towards the goal of economic transformation, is to create a comprehensive national strategy which can be understood by the citizens of a country.

The importance of vision and long-term planning was echoed throughout the opening plenary session. Indeed, several African countries have produced strategies with ‘Vision’ in their titles, to show they are more than just a plan. The importance of feasibility was also highlighted and it was generally agreed that transformation strategies are more laudable than development models, which do not always apply to the vastly different contexts in African countries. Models can be borrowed but “transformation happens by design, voluntarily” (Ibrahim Mayaki, CEO, New Partnership for Africa’s Development).

Planning, sequencing and prioritisation are also needed in a good strategy. Carlos Lopes, Executive Secretary of the United Nations Economic Commission for Africa, stated “a developmental state is central to the process of accelerated growth and transformation” and this is evident in Ethiopia and Rwanda. However, the roles of the government, the private sector and citizens need to be crystal clear, with buy-in from citizens being particularly important. In a paper written by SET and ACET ahead of the forum, creating a transformation strategy inclusively with key stakeholders, with a shared vision which survives political cycles, was considered key to success and achieving results in the long-term.

Implementing national transformation strategies

Public-private dialogue and cooperation is essential for implementation. Governments play a critical role in mobilising a public-private sector coalition and serving as a broker between multinationals and the rest of the economy. As well as developing an inclusive strategy, SET and ACET also found other basic requirements for successful partnerships:

• Have strong public agency that is able to discipline other ministries, public agencies which are embedded in private sectors (through both formal and informal networks) and public dialogue that incentivises collective action in the private sector.
• Learning, experimenting and building in feedback processes is important in public-private collaboration for economic transformation.

The last point of learning and experimenting was echoed by President Paul Kagame who attended and addressed the ATF participants and stated: “we have to stay adaptable and flexible. Plans and frameworks should not become a barrier to action or to course corrections. Mistakes will be made along the way and money wasted. But that should not be the end of the road.” Strategies should not be rigid with ambitious and inflexible targets for industrialisation. They should rather be adaptable and realistic, to avoid becoming restrictive to policy-makers.

However, having a well-designed and implementable strategy is not enough. The importance of political will, strong leadership and buy-in from citizens came to the forefront of discussions on implementation. Rwanda’s Minister of Finance, Claver Gatete highlighted the fact many African states face difficulties in building partnerships due to challenges in governance and corruption. He believes Rwanda’s success in this regard has come from the top – with a president that believes in the need to fight corruption. His advice is to use the law, enforce tough penalties, and to not underestimate the importance of addressing corruption.

Catalysing and sequencing transformation

The importance of prioritisation and sequencing when designing a strategy, plus questions around challenges of implementation, naturally leads to questions on how to catalyse transformation. Several discussions at the ATF focussed on what could be done in several areas such as transforming agriculture and developing youth skills, promoting financial inclusion, amongst others. Trade and regional integration for example play an important role in stimulating economic transformation in several ways such as raising exports, stimulating export diversification, reallocating resources to more productive activities etc. And as argued by Dirk Willem te Velde manufacturing should not be neglected, given exemplary experiences and opportunities in a range of manufacturing sub-sectors and countries in Africa including Mauritius, Tanzania and Ethiopia. The wide range of discussions across the ATF alone, reflects the challenge for African leaders in selecting and sequencing public investment activities.

Sonia Hoque is the Programme and Communications Manager for the SET Programme at ODI.

ODI and ACET co-wrote a set of papers for the African Transformation Forum which was held in Kigali, Rwanda on 14-15 March 2016. An event report and Storify can be viewed online.

References

1. Emmanuel Nnadozie (14 March 2016) African Transformation Forum Event Report, prepared by Sonia Hoque. Available at https://set.odi.org/14-15-march-2016-acet-african-transformation-forum/

2. The SET programme produced three background papers, in collaboration with ACET to facilitate discussions around the ‘how to make it happen question. Available at https://set.odi.org/category/analysis/

Photo credit: ACET

22 January 2016

Helen Hai (CEO, Made in Africa Initiative, UNIDO Goodwill Ambassador)

Africa can become the next manufacturing hub for global markets. The Made in Africa Initiative aims to help the continent capture the window of opportunity for industrialisation arising from the pending relocation of light manufacturing from China and other emerging market economies. By capturing this opportunity, Africa will achieve sustainable, dynamic and inclusive growth. What Africa needs now are success stories, to provide the aspiration, confidence and experience necessary for it to realise its potential in terms of industrialisation and shared prosperity. The Made in Africa Initiative hopes to create such successes in African countries.

Window of opportunity

Modern economic growth, highlighted by the continuous rise in a country’s per capita income, is a process of ever-increasing labour productivity. Making this process possible are continuous structural transformations in technologies and industries – to reduce the factor costs of production and increase output values – and in infrastructure and institutions – to reduce transaction costs and risks. Why have African countries failed to prosper? Because they have not transformed their economic structures from agriculture and mining to modern industry.

High-income developed countries in Europe and North America all started off transforming their humble, pre-modern agrarian economies by developing light manufacturing. The few economies in East Asia catching up to the developed countries after World War II jumpstarted their industrialisation by entering light manufacturing thanks to rising wages in higher-income countries. Consider the relocations from the US to Japan in the 1950s, from Japan to the four Asian Tigers in the 1960s and from the four Asian Tigers to China in the 1980s.

China is now at a stage, like that of Japan in the 1960s and the four Asian Tigers in the 1980s, to begin relocating its light manufacturing to other countries because of its rapidly rising labour costs. Growth in China and in other emerging market economies, such as India and Brazil, will again provide opportunities to other developing countries to jumpstart their industrialisation.

Africa is potentially an attractive destination for the relocation of light manufacturing from China and other emerging market economies. It has an abundant supply of young labour. It is close to European and US markets. And it faces zero tariffs on its exports, thanks to the US Africa Growth Opportunity Act and the EU’s Everything But Arms policy.

The Made in Africa Initiative intends to help Africa exploit this window of opportunity to become the world’s next manufacturing hub and to achieve dynamic, sustainable and inclusive growth.

What challenges must African countries overcome?

To capture this opportunity, African countries must overcome major challenges.

• They lack technological knowhow about how to produce high-quality goods at a competitive price in the global market by using their abundant labour and resources.
• International buyers lack confidence in the ability of their manufacturers to deliver goods on time and with the consistent quality specified in contracts.
• They lack the infrastructure and business environment to reduce the transaction costs in reaching international markets.

A pragmatic approach towards attracting manufacturing firms

How can an African country best overcome these challenges? First, the government must adopt an active investment promotion strategy to attract existing export-oriented light manufacturing firms that have the technological knowhow and confidence of international buyers in China and other emerging market economies. Second, the government must use its limited resources and implementation capacity strategically to establish industrial parks and special economic zones with adequate infrastructure and a good business environment that helps investors reduce their transaction costs.

The immediate success of Huajian Shoe Factory in Ethiopia’s Eastern Industrial Park in 2012 and the inflow of foreign direct investment in light manufacturing into the new industrial park near Addis Ababa in 2013 show such an approach can work in Africa.

Building on success to formulate a new mission for the Made in Africa initiative

The Made in Africa Initiative will help African countries generate quick successes in export-oriented light manufacturing through the following four-pillar strategy:

1. Bridging the gap in information

• Help export-oriented light manufacturing enterprises in China and other emerging market economies understand Africa’s advantages and set up production in Africa.
• Engage with policy-makers, development agencies, businesses communities and other key stakeholders – globally, regionally and nationally – to share the vision and the approach for capturing Africa’s window of opportunity to industrialise.

2. Advocating triangle collaboration and connecting the dots

• Advocate win-win cooperation among prospective investors, international retailers in Europe and the US and African countries, with comparative advantages in abundant supplies of labour and raw materials.
• Work with international organisations and world leaders in the global supply chain to connect the dots of triangle collaboration (manufacturing capability, global retail market and African comparative advantages).

3. Supporting African countries to identify their comparative advantages and develop their own development approach

• Provide intellectual support to African countries to identify their sectors of comparative advantage.
• Share successes and failures of past industrialisation efforts and support African countries in developing an approach to development that is green, inclusive, sustainable and environmentally friendly.

4. Working with government to build quick key success examples

• Work with national leaders to develop a pragmatic approach to generating quick successes in industrial development.
• Bring prospective investors who have the manufacturing knowhow to visit the country, facilitate early-stage investment negotiations with the government and ensure successful investments and implementation to turn the country’s opportunities into reality.
• Identify policy constraints through the first movers’ operations, and advise the government on further reforms to attract more international and domestic manufacturing investment.

Helen Hai took part in a panel session at ODI on 14 January 2016 discussing industrialisation in Africa (video).

You can download her presentation here.

Photo credit: Quartz Africa: Michiel Hulshof and Daan Roggeveen

Photo credit: Yang Aijun / World Bank

11 December 2015

The world’s trade ministers are concentrating on the outcome of 10^th World Trade Organization (WTO) Ministerial Conference in Nairobi and its aftermath. The intense discussions under the Doha Development Agenda seek to advance a multilateral trade deal and to restore credibility in the WTO’s trade negotiating function. But the real issue for trade ministers is whether latecomer African economies can emulate the success of first mover East Asian economics in joining global supply chains and achieving rapid economic transformation.

Global supply chains have been an important feature of the world economy for several decades. They refer to the geographical location of stages of production (such as design, production, assembly, marketing, and service activities) in a cost-effective manner. Different production stages are increasingly located across different countries, linked by a complex web of trade in intermediate inputs and final goods. For instance, the Toyota Prius – a hybrid electric mid-size hatchback car – for the United States market was designed in Japan and is presently assembled there. But some parts and components for the Prius are made in Thailand, other Southeast Asian economies, and the Peoples Republic of China. This type of sophisticated industrial organization is a far cry from the simple textbook notion of a single large vertically integrated factory situated in a country.

Global supply chains are sometimes labelled as production fragmentation, global value chains, or global production networks but essentially mean the same basic concept with subtle differences. This new pattern of international specialization is intertwined with the international integration processes of globalisation and regionalization. It is also underpinned by corporate strategies of multinational firms, technological advances (e.g., information, communications, and transport technologies), developments in logistics and trade facilitation, and falling barriers to trade and investment. Global supply chains were initially visible in clothing and electronics and have since penetrated a wide range of industries including consumer goods, food processing, automotives, aircraft, and machinery.

The role of services in global supply chains are increasingly important but have been underestimated due to serious data problems. Small and medium enterprises (SMEs) can participate in global supply chains initially as suppliers to large exporters and then gradually become independent exporters or investors.

The structural transformation of East Asia from a poor, less developed agricultural periphery to become a wealthy global factory over half a century is considered an economic miracle. The extent of East Asia’s participation in global supply chains is significantly greater than elsewhere and has spurred the region’s global rise to the coveted “Factory Asia” league with rapid economic growth over a long period. In 2009-2013, East Asia accounted for 48% of global supply chain trade compared with 28% for the European Union and 7% for the United States. Eastern Europe and Latin America each had 6% of global supply chain trade. However, Africa is a relatively small player as it accounted for less than 1% of global supply chains. As wages and other business costs rise in East Asia, it is possible that some global supply chains (e.g. in clothing) may shift to latecomers including Africa.

Adjusting business strategies and national policies have been critical for expanding East Asia’s role in supply chain trade. The size of firms matters when joining supply chain trade – being a big firm naturally creates advantages to participating in supply chains, due to a larger scale of production, better access to technology from abroad, the ability to pay higher wages for skilled labour and to spend more on marketing. It is key for economic transformation to work with large firms. Hence, smart business strategies, such as mergers, acquisitions and forming business alliances with multinationals or large local business houses, are rational approaches.

East Asia’s experience suggests that under some circumstances, nimble SMEs can also join supply chains. By clubbing together in industrial clusters, SMEs can overcome some of the disadvantages of being small and rely on the benefits of interdependence. Small firms located in clusters can jointly finance a training centre or a technical consultant to upgrade skills. Business associations can facilitate clustering by mitigating trust deficits to cooperation among SMEs, and by coordinating collective actions for cluster formation. For instance, major industrial clusters are located in Vietnam near Hanoi and Ho Chi Minh City, where large firms are surrounded by thousands of SME suppliers and subcontractors making garments, agricultural machinery and electronics goods.

The national policy environment – which consists of myriad incentive and supply side interventions (such as investing in physical infrastructure, upgrading education and training, and support from technology institutions) – also matters for firms in supply chains in East Asia.

The coverage and quality of business support services counts. The better and more affordable the type of technical, marketing and professional services firms especially SMEs have around them, the more the chances they grow and enter supply chains. A sound and effective financial system (with specialist financial products and institutions) is crucial. Modern and cost competitive physical infrastructure – particularly transport, telecommunications and electricity – is another. Finally, open trade and investment regimes which transmit price signals and induce competition are important. So too is streamlining procedures to business start-up and operation.

More controversial perhaps is resorting to industrial policies to support the entry of particular sectors or firms into global supply chains. The experience of East Asia is replete with some successes and many costly failures in the use of industrial policies. Some often cited examples of failures include Korea’s Heavy and Chemical Industry push, Malaysia’s National Car Project (the Proton Car) and the Peoples Republic of China’s home grown 3G mobile Technology (TD-SCDMA). More research is needed on what works and what does not, as there is a high risk of government failure associated with the application of industrial policies.

East Asia’s experience underlines that there is no one-size-fits-all approach to helping latecomers including firms in Africa to join supply chains. Smart business strategies, facilitating business associations and supportive national policies are all useful ingredients, while firms and governments working together is essential to tailor these ingredients to national circumstances.

References

1. Baldwin, R., and J.V. Gonzalez (2014). Supply-Chain Trade: A Portrait of Global Patterns and Several Testable Hypotheses. The World Economy. Online version. DOI 10.111/twec.12189.

2. Athukorala, P, (2011), Production Networks and Trade Patterns in East Asia: Regionalization or Globalization? Asian Economic Papers 10(1): 65–95.

3. Wignaraja, (2016 edited), Production Networks and Enterprises in East Asia: Industry and Firm-level Analysis, Springer.

4. Wignaraja, G (2015). Factors Affecting Entry into Supply Chain Trade: An Analysis of Firms in Southeast Asia. Asia and the Pacific Policy Studies, 2:3, pp.623-642, September. http://onlinelibrary.wiley.com/doi/10.1002/app5.78/abstract.

Photo credit: Dave Lawrence / World Bank

8 December 2015

Promoting quality growth and economic transformation is crucial to sustained progress and job creation. Trade plays a special role in this process but unfortunately this is not always acknowledged in policy design or realised in practice. New ideas in trade related to identifying niches in value chains, nudging firms towards exporting or facilitating services trade fail to make it onto the radar screen of policymakers, who may instead choose to stick with unrealistic targets for old-style full-blown industrialisation. It requires hard work to embed new thinking on trade in the mind set of policy makers.

Although many African countries have enjoyed fast economic growth over the past two decades, the growth has been low in quality and accompanied by little economic transformation. Witness, for example, the lack of significant structural shifts in production and employment (declining shares of manufacturing in gross domestic product (GDP) in Africa); weak levels of and growth in (labour) productivity within sectors; concentrated export baskets and lack of diversification into complex products; and substantial differences in productivity levels among firms, sectors and locations, suggesting scope for the enhancement of productivity. A change towards higher-quality growth is sorely needed now commodity prices have plummeted.

Trade plays a special role in promoting economic transformation. One lesson that emerges clearly from the experiences of countries that have achieved economic transformation is the importance of emphasising global competitiveness, even in a large economy with a growing domestic market. A number of successful economic developers, many in East Asia, have benchmarked their performance to global standards, whether by exporting or by opening their national economies to external competition so as to drive out unproductive firms in favour of productive ones. In Korea, allocating credit selectively to productive firms has played a key role alongside the use of performance criteria to provide time-bound incentives.

International competitiveness (through openness, skills and infrastructure development) has to be the yardstick of success if the productivity gains of trade and economic transformation are to be realised. It is tempting to regard the domestic market as a sufficient basis for transformation but in practice this has weakened the industrial performance of economies like Argentina and Brazil. In those countries, domestic firms protected by high tariff barriers have had little incentive to upgrade, leading to a failure of industrial transformation. Trade helps countries move towards higher-productivity sectors, raise within-sector productivity through entry and exit and facilitate upgrading in value chains.

A range of carefully targeted but realistic and politically feasible policies around stimulating exports and attracting foreign direct investment (FDI) can complement the emphasis on competitiveness. These policies need to be well thought-out within country-specific institutional frameworks. For example, special economic zones (SEZs) that fit within a wider industrial strategy, target appropriate geographical and sectoral areas and are run competently have greater success in terms of achieving transformation. Achieving this is a tall order. Whereas Asian countries have long used SEZs successfully, African countries have a much weaker record (e.g. around preference-dependent garments), although Chinese firms have recently set up manufacturing in African SEZs.

Such demonstration projects that combine public and private sector actions can show export-oriented industrial policy is possible. They provide an answer to the observation that manufacturing share in GDP in Sub-Saharan Africa has fallen in recent decades to 11%. There are other promising signs. Data from the World Development Indicators show that, over 1997-2012, although manufacturing production increased on average by 2.3% annually across the world, it increased by 3.4% annually in Sub-Saharan Africa, with examples such as Tanzania growing 7.9% annually. Overall, the share of Sub-Saharan Africa in world manufacturing increased from 0.9% in 2000 to 1.1% in 2012.

At the same time, services have long been ignored in debates on economic transformation. Services used to be seen as following economic transformation, with demand increasing as incomes rise and the sector being endogenous to a country’s structural position. However, a more comprehensive and balanced view is warranted, one that includes a supply-side view, whereby services can lead economic transformation through direct, indirect, induced and second-order/productivity effects, depending on the specific subsector. IT-enabled services can be modest escalators for economic transformation; efficient financial, energy and logistics services raise the productivity of goods and diversify exports; and tourism is already a major export earner and job creator in countries such as Tanzania.

Whereas agriculture tends to contribute a significant part of labour productivity change at low-income levels, the manufacturing sector begins to contributes more at slightly higher levels of income, but services contributed more than half of productivity change over 1991-2013 in developing countries. Countries gain significant increases in labour productivity through changes between sectors (structural change towards higher-productivity sectors), although recently there has also been premature deindustrialisation and movements towards low-productivity services (e.g. retail). We find that, over time, the within-service sector change in productivity has the greatest contribution to overall productivity change. In general, countries with a high contribution of manufacturing (within and between) to productivity change also have a high contribution of services (within and between) to productivity changes, which points to the need for a balanced trade and growth strategy.

These considerations have significant implications for trade policy design and practice. Countries need to embrace competitiveness and begin implementing this throughout government policy. This means encouraging firms to export, promoting zones and developing joint manufacturing and service clusters. It also means avoiding past mistakes, whereby ambitious targets for old-style industrialisation were not implemented, in favour of a more pragmatic approach by putting in place demonstration projects that show new trade ideas can work. It further entails adopting a more aggressive approach in negotiating better conditions for trade in goods and services at home and abroad.

References

1. Note to guide the SET workshop on trade and economic transformation on 17 December in Nairobi https://set.odi.org/17-december-2015-trade-session-at-trade-and-development-symposium-wto-mc10/

2. McMillan, M., Page, J. and te Velde, D.W. (2015) ‘Supporting Economic Transformation’. Draft. London: SET Programme, ODI https://set.odi.org/17-december-2015-trade-session-at-trade-and-development-symposium-wto-mc10/

3. Leipziger, D. (2015) ‘Economic Transformation Lessons from Large Developing Countries’. London: SET Programme, ODI. https://set.odi.org/economic-transformation-lessons-from-large-developing-countries/

4. Jouanjean, M.A., Mendez-Parra, M. and te Velde, D.W. (2015) ‘Linking Trade Policy and Economic Transformation’. London: Set Programme, ODI. https://set.odi.org/trade-policy-and-economic-transformation/

5. Xiaoyang, T. (2015) ‘How Do Chinese “Special Economic Zones” Support Economic Transformation in Africa?’ London: SET Programme, ODI. https://set.odi.org/chinese-special-economic-zones-in-africa/

6. Khanna, A., Tyson, J. and te Velde, D.W. (2015) ‘The Role of Services in Economic Transformation – With an Application to Kenya’. Draft. London: SET Programme, ODI. https://set.odi.org/kenya-as-a-services-hub-the-role-of-services-in-economic-transformation-2/