Targeted interventions by governments in trade, industry and supporting institutions have been critical to industrialisation throughout history. But in today's climate of rapid technological progress and globalisation, the rules of the game have changed. Set by the Bretton Woods institutions and the WTO, the new rules do not support traditional forms of industrial policy. So what can Africa do to advance her industrial progress?

A paper from Queen Elizabeth House analyses the case for selective (directed at specific activities) industrial and trade policies in Africa, drawing upon the lessons of East Asia. It identifies reasons for Africa's ineffective industrial policies and suggests ways forward within the new rules of the global marketplace.

The poor performance of African manufacturing industry is well documented. The structure of manufacturing is basic, dominated by the minimal processing of natural resources and by simple consumer goods industries. Import liberalisation, with competition largely from other developing countries is devastating exposed industries. Despite low wages and welcoming policies on foreign direct investment, there is little sign of resources flowing into new, export-oriented manufacturing industries. Apart from primary resources, linkages of large firms with local suppliers are fragmented. Technology efficiency and dynamism is low. Governments have intervened to promote industry, but performance remains poor.

Reasons identified for sub-Saharan Africa's poor industrial performance include:

• Exogenous shocks - for example, droughts, wars, internal conflict, political instability, and adverse terms of trade.
• Bad economic management, debt, inflation and uncertainty.
• Policies affecting industry, such as enforced public ownership, nationalisation, price controls, and infrastructure lags.
• Mistakes in trade, domestic competition and ownership policies, wrong interventions in technology transfer and development, weak human capital creation and neglect of institutional support.
• Structural factors such as the small size and fragmentation of local and regional markets, poor infrastructure, low entrepreneurial base and weak human, particularly technical, capital.
• Design and implementation factors, such as poor policymaker information and capabilities and weak preparation for WTO membership.

The paper acknowledges that the first four factors, generally cited as the source of African development problems, have played a role. The paper notes, however, that the last two factors are relatively under-emphasised. These provide a case for more proactive government in Africa, but with a very different approach and strategies from those in the past.

Policy recommendations include:

• For Sub-Saharan Africa, management of the liberalisation process offers one potential avenue for the exercise of industrial policy over the medium term.
• A gradual strategy of liberalisation should be implemented subject to the time and resource needs of learning, with the final objective of becoming fully competitive.
• Government capabilities have to be greatly improved (with information, training, incentives and insulation from the political process) to make gradual liberalisation work effectively.
• Industrial policy design requires the establishment of agencies that can cut across competing interests and use the resources of each ministry to further national aims.
• Export activities have to be divided between those that need special promotion and those doing well based on the current capabilities, feasible rates of improvement in the domestic factor markets and the expected evolution of demand.
• Supply-side support to selected activities include attracting foreign direct investment to targeted activities, with incentives for higher value technologies, building the skill, technology support and supplier base needed for foreign investors, and strengthening of domestic enterprises.

Source(s):
‘Selective Industrial and Trade Policies in Developing Countries: Theoretical and Empirical Issues', Queen Elizabeth House Working Paper Series #48, by Sanjaya Lall August 2000 Full document.

Funded by: IDRC, Canada

id21 Research Highlight: 5 February 2002

Further Information:
Sanjaya Lall
Queen Elizabeth House
21 St Giles
Oxford OX1 3LA
UK

Tel: +44 (0)1865 273 600
Fax: +44 (0)1865 273 607
Contact the contributor: sanjaya.lall@economics.ox.ac.uk

Queen Elizabeth House (QEH), UK

Other related links:
The Bretton Woods Project

WTO

Visit the Centre for the Study of African Economics

The UN Economic Commission for Africa has further research

TIPS focuses on South Africa's trade policy research

'Can Africa afford free trade? Liberalisation, industrial change and prosperity don't always mix'

The World Bank aims to help countries to use Trade for development