Neil Balchin (Former Research Fellow, ODI), David Booth (Senior Research Associate, ODI) and Dirk Willem te Velde (Principal Research Fellow, ODI)
9 April 2019
A new Gatsby Africa-ODI paper detailing sector transformation in eleven African and Asian cases shows how sector dynamics depend crucially on:
- Correct identification of the economic opportunities;
- Conducive political-economic conditions at the sector level
- Credible commitments to investors
- Reasonably good provision of public goods
- Specific efforts to tackle investment coordination problems; and
- Taking advantage of a moment of unusual opportunity.
The paper examines six experiences of successful sector transformation: air transport and logistics services in Ethiopia; the automotive industry in South Africa; the revival of the cocoa sector in Ghana; the staple food revolution in Indonesia; garments in Bangladesh; and sector-based strategies in Mauritius. It also considers five cases where sectors did not transform or where a promising initial transformation was not sustained. These cases of relative failure are cashew nuts in Mozambique; pineapples in Ghana; maize subsidies in Malawi in the years 2005–2008; President Kikwete’s rice initiative in Tanzania; and Malaysia’s faltering manufacturing sector.
What did the research find about the factors behind sector transformation?
Correct identification of economic opportunities is a common feature in all the successful transformation examples, although on a variety of different grounds. These range from successful identification of market access advantages for Bangladeshi garments or opportunities to serve Asian markets through Ethiopian air transport services, to supply opportunities in South Africa presented by the global sourcing strategies of original equipment manufacturers (OEMs). However, economic opportunity factors alone do not make it possible to distinguish successes from failures.
All successful cases exhibited positive political-economic relations, at least at the sector level. But the type of relationship varied across the successful transformation experiences, from centralised economic planning enabling state-led development of an airline in Ethiopia or exceptional democratic unity post-apartheid and an effective alignment of interests facilitated through dedicated sector-specific structures and support organisations around South Africa’s automotive industries, to the development of a consensus view across elites and the wider public and private sectors around a strategic direction for the Mauritian economy.
In the failed or disappointing experiences, these relations soured over time, or were weak or entirely absent. Political-economic causes of failure also took a variety of forms, but in almost all cases these were the most decisive factors, either directly or by weakening the public actions required to stimulate or support the investments. In Mozambique, there was a lack of consensus among different actors about necessary reforms in the cashew nut sector. In Ghana, there was little government interest in pineapple production, leaving pioneer investors in the sector to attempt, ultimately in vain, to address the growing infrastructure and learning requirements of remaining internationally competitive. Similarly, the maize sector in Malawi suffered from weakening political support for maize. In Malaysia, dissolving political conditions after the Asian financial crisis and the politics of ethnicity undermined attempts to improve manufacturing performance.
In several of the successful cases, favourable balances of political and economic interests supported transformation because they resulted in credible commitments to investors. In Ghana, this took the form of cross-party political support for the cocoa sector, and the key sectoral institution. In Mauritius, high-level political backing for a consensus view on the desired future direction of the economy was important. In Ethiopia, state investments in air transport were backed by a long-term policy vision designed by a regime that is relatively secure. In South Africa, multi-year policy visions provided a credible platform for long-term planning in the automotive sector. Technically proficient planning and macroeconomic management provided a predictable investment environment for staple agriculture in Indonesia. In Bangladesh, credible commitments came externally in the form of clear international commitments providing market access for Bangladeshi garments.
In failures, such commitments were typically uncertain, undermining investor confidence. For example, the government’s credibility in the case of cashews in Mozambique was undermined by poor communication, the perception that the policy reforms were World Bank-driven and the knowledge that processing could be profitable only with government protection. In Tanzania, the power of food-importing businesses undermined the credibility of the presidential rice initiative and the East African Community’s tariff rules. Political changes in Malaysia removed support for export processing zones and undermined the credibility of investment incentives.
The success cases often included reasonably good provision of public goods. This ranged from coordinated public infrastructure investments in Ethiopia or investments in the construction of automotive industrial parks and targeted transport infrastructure in South Africa to major investments in rural public works in Indonesia and improved telecommunications and power in Bangladesh and Mauritius. In Ghana, the development of quality control systems helped maintain the international price advantage of domestically produced cocoa.
The absence of adequate public goods provision, or related support, was almost always one of the proximate causes in the cases of relative failure. For instance, poor rural roads and weak extension services affected the maize sector in Malawi, while failure on the part of district governments to maintain medium-size irrigation works hampered the presidential rice initiative in Tanzania.
In the successful cases, specific efforts were made to tackle investment coordination problems. In Ethiopia, there was coordination and sequencing of investment in public infrastructure alongside the airline’s own capital investment in key areas such as cargo and maintenance facilities. The South African government devised well-coordinated policies – including import duty credits and productive asset allowances – for subsidising investment in exporting cars. The Indonesian government had a well-staffed national planning agency, which handled the coordination issues surrounding the uptake of improved rice and the utilisation of oil revenues in an effective way. There was some coordination among garment firms in Bangladesh, for example to capture spillovers from firm-level learning and establish strong links between education institutes and the private sector.
In failures, unsolved coordination problems had deleterious effects. For instance, little effort was made to coordinate investments to boost raw cashew nut production after export liberalisation in Mozambique. In Ghana, there was a lack of coordinated investment in post-harvest handling and other infrastructure to support pineapple production.
In certain success cases, support was provided to investors, and sometimes directed to specific first-mover firms. For example, tax incentives available to all investors and tariffs helped attract OEMs to South Africa, and similar incentives had the effect of attracting foreign investors to export zones in Malaysia. Support was provided to first-mover firms in Bangladesh’s garment sector, while support was provided to whole sectors through targeted support for innovation in Mauritius.
In the failure cases, support was often provided and then withdrawn. In Mozambique, the government removed export restrictions without investing in firm capabilities. In Malawi, subsidies were not sustained long enough, or supported with sufficient complementary measures, to pull off a profitability breakthrough.
The evidence in these cases shows that interventions at sector level, coordinated around a targeted set of activities, in a politically smart way, and set in a competitive framework can be an important driver of economic transformation. Targeting specific sectors that have strong basic conditions for competitiveness and where political economy factors are not going to be strongly detrimental is critical. The development of specific competitive sectors has been key to dynamic growth periods and hence to long-term transformation, even in countries where wider aspects of economic governance have not improved. This implies it is possible to develop dynamic, competitive sectors even when broader conditions in the economy are unfavourable. This insight has implications for actors looking to support economic transformation.
The factors set out above operate primarily as transmission mechanisms, meaning it is the function rather than the form of support at sector level that matters most. They are crucial mechanisms by means of which a favourable or unfavourable political-economic configuration influences the transformation outcome. In other words, once an economic opportunity has been identified, the political economy really matters.
And, finally, what matters about the political economy may be a temporary configuration, a moment of unusual opportunity – and it is also likely to be sector-specific. Transformation breakthroughs can and do occur in systemic contexts that are generally unfavourable. This places a premium on the ability to identify moments and sectors of opportunity in a timely fashion. Given the high level of uncertainty that must accompany such judgements, this also points to the importance of having the flexibility to recognise initial errors and change course when necessary.
Photo: Young Bangladeshi women being trained at the Savar Export Processing Zone Bangladesh 2016. Dominic Chavez/World Bank. CC BY-NC-ND 2.0.