Fostering industrial development in Africa in the new global environment: Key policy recommendations

9 December 2011

In a special issue of its Economic Development in Africa Report this year, the United Nations Conference on Trade and Development (UNCTAD) collaborated with the United Nations Industrial Organization (UNIDO) to delineate strategies and policy options for Africa to foster its industrial development in the new global environment. The report advocates for African countries to embark on a new industrial policy centered on manufacturing development. By industrial policy is meant government measures that are aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation. Without manufacturing development, Africa cannot engage in the structural transformation from low- to high- productivity activities that economists have argued is necessary for sustained and high growth and significant poverty reduction. Such manufacturing development however cannot happen without deliberate government intervention due to the presence of both market and coordination failures.

While the report recognizes that there have been numerous attempts and initiatives in the past to propel industrialisation in Africa, it advocates for an industrial policy that will be based on a new approach. Such a new approach must be strategic in design and yet tailored to specific country's circumstances. It must not repeat mistakes of the past. It must make support by the State to the industrial sector conditional on good performance. It must be based on effective state-business relations and must incorporate a monitoring and evaluation mechanism that identifies lessons learnt from current policy to feed into the next policy-making stage. This feedback loop from current policy to future policy has been a crucial missing link in past industrial policies in Africa.

Manufacturing development in Africa: facts and figures

Africa still accounts for a very low share of global manufacturing value-added (MVA) and global manufacturing exports (1.1 percent and 1.3 percent respectively in 2008). Even more worrying is that Africa's share of global low-technology manufacturing exports, a sector where it should have immediate comparative advantages, fell from 1.5 percent in 2000 to 1.3 percent in 2008, as opposed to East Asia and the Pacific where it rose from 17 percent to 26 percent over the same period. Africa has made some progress in boosting medium and high technology manufacturing activities in recent years. The share of medium and high technology (MHT) activities in total MVA in the region increased from 25 percent in 2000 to 29 percent in 2008 and its share in total manufacturing exports rose from 23 percent in 2000 to 33 percent in 2008. However most of Africa's MHT activities are heavily concentrated in the chemical industry.

Empirical analysis also reveals that African countries are very dependent on resource-based manufacturing. In 2009, resource-based (RB) manufacturing accounted for about 49 percent of both total MVA and manufacturing exports in the region.  Such dependence is problematic for the continent for several reasons. RB manufacturing involves relatively low value-addition, makes exporting countries highly vulnerable to external price shocks, exhibits lower productivity growth and have few linkages with the rest of the economy. In sum, resource-based manufactures show only very limited product differentiation and share the pitfalls that are characteristics of commodities on which many African countries depend. Manufacturing development should be viewed as an opportunity for Africa to lessen its dependence on commodities and engage in economic diversification as a way to reduce vulnerabilities to shocks. In this respect, there is thus a need to diversify away from RB manufacturing within the manufacturing sector in Africa.

Key policy recommendations

What is needed therefore is a new strategic approach to industrial policy-making. It could rest on six elements. It starts with an industrial diagnosis or thorough evaluation of the country's present industrial base, followed by the design of an industrialization strategy, whereby governments have to decide, in coordination with the private sector, which existing manufacturing industries to strengthen (industrial deepening), which new industries to stimulate (industrial diversification) and in which industries they want to improve the internal integration of existing involvements (industrial upgrading). In designing such strategies, due consideration must be given to the challenges and opportunities posed by the new global environment such as new trade and investment rules, climate change, South-South cooperation and the potential of integrating into global value chains. It then moves to consider the industrial policies needed to implement the strategy. Such industrial policies have to be aligned with other policy areas that should complement the decisions taken, in particular macro-economic and financial policies. Another important feature of this strategic approach to industrial policymaking relates to the feedback loop from policymaking to the diagnosis stage. Essentially, it has to be ensured that a critical examination of prior policy decisions (i.e. an independent monitoring and evaluation process) identifies success stories and failures that can inform the next policymaking cycle. Through such monitoring and evaluation, a systematic process of policy learning can take place, enabling adaptation and better performance.

Key principles

This said and based on the consensus emerging from the current literature, one could identify key principles on which a successful industrial policy should rest on. These include:

(i) Supporting and challenging entrepreneurs. The idea here is that any support that businesses receive from the government should be made conditional on the achievement of certain overall policy goals, such as increased investment or exports.

(ii) Encouraging experimentation, search and learning by both governments and the private sector. This means that industrial policy should be viewed as a social learning or search process in which the government interacts with the private sector to identify the key constraints facing domestic firms and how to overcome them.

(iii) Focusing on lifting binding constraints. This requires identifying the key binding constraints facing domestic firms as well as possible measures that could be put in place to lift or relax them.

(iv) The use of monitoring, evaluation and performance criteria to ensure that support is linked to performance, that errors are quickly identified  and that quick and appropriate action is taken to correct such errors.

(v) Recognizing country heterogeneity. This refers to an understanding that industrial policy should be tailored to the needs and challenges facing each country. A one-size-fits-all approach will be counterproductive and unlikely to achieve desirable outcomes.

Encouraging effective state-business relations

Under the old approach, industrial policy was often viewed as a list of policy instruments to be set and implemented by government in a top-down mode. Under the new approach, on the other hand, there is a recognition that the state and the private sector need to be engaged in an effective state-business relations in which the government consults with the private sector when identifying new sectors and new activities. It is not about the government telling the private sector what to do. Rather it is a question of government providing and seeking information from the private sector and dispensing incentives and resources such that the private sector, through the pursuit of profit, behaves in a way that contributes towards the achievement of the national industrial development objectives.

Complementary actions

The new approach to industrial policy also recognizes that industrial policy is implemented through coordinated action in a number of different policy areas. It stresses the need for industrial policy to lay emphasis on (a) the promotion of scientific and technological innovation; (b) the creation of linkages in the domestic economy; (c) the promotion of entrepreneurship; and (d) the improvement of government capabilities.

Without scientific and technological innovation, African countries will find it difficult to compete with global exports in an increasingly competitive global environment.  African countries therefore should provide more support for science and innovation by for example stimulating domestic production of technological knowledge through the provision of incentives to entrepreneurs, or facilitating access to existing technology through FDI, licensing and purchasing capital equipment. African countries should also invest in education and skill formation to ensure that firms have reliable access to the skilled labour required to produce the high-quality goods that can survive competition in global markets.

African countries should give priority to the creation or development of linkages in the domestic economy to ensure that the promotion of industrial development yields positive spill-over benefits in other sectors of the economy. There are various ways to create domestic linkages in an economy. For example the promotion of agro-industries is one way to develop domestic linkages between the industrial and agricultural sectors of an economy. Furthermore, linkages can be created between domestic and foreign firms by building domestic technological capabilities. The report stresses the importance of fostering industrial development in conjunction with the development of other sectors. Industrial development should not be done at the expense of other sectors such as agriculture or services as this will compromise on the goals of reducing vulnerabilities to external shocks, limit the building of inter-sectoral linkages and in so doing reduce the benefits from industrialisation itself.

African countries should step up efforts to promote entrepreneurship by creating an economic environment that favours both domestic and foreign investment. In particular, they should reduce policy uncertainty, strengthen infrastructure provision and improve access to finance for firms, particularly SMEs. In promoting industrial development, African countries should ensure that the scope and degree of intervention takes into account government capabilities. Weak state institutions make

it challenging for governments to successfully implement their industrial development programmes and policies. In this context, African governments should give priority to enhancing government capabilities to design, formulate and implement policies.

In addition, strengthening regional integration may be critical in fostering manufacturing development. The building of robust regional markets in Africa, through regional integration, could unlock the manufacturing potential of the continent. African countries can target their regional markets as buyers of their manufactured products. Such an approach will permit African firms to exploit economies of scale and garner the experience they need to successfully face global competition. In addition regional integration can also facilitate the development of the other markets that Africa needs in order to support its industrial development objectives such as financial markets, transport and infrastructure. 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. In this context, the adoption of the West African Common Industrial Policy by the Economic Community of West African States (ECOWAS) Council of Ministers is welcome.

Finally, complementary policies should also put in place to increase the likelihood of success of industrial polices. The adoption of appropriate exchange rate, monetary and fiscal policies, policies to enhance domestic resource mobilisation, policies to strengthen infrastructure development and the achievement of political stability are deemed critical to the success of industrialization in Africa.

Author: Bineswaree Bolaky, Division for Africa, Least Developed Countries and Special Programmes.  Bineswaree Bolaky is an Economic Affairs Officer in the Africa Section of the United Nations Conference on Trade and Development. Her specialization is in International Trade, Economic Development and Institutional Economics.

This article is based on UNCTAD/UNIDO Economic Development in Africa Report 2011: Fostering industrial development in Africa in the new global environment

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