A delicate balance: How to harness regional integration and industrial policy for economic transformation in Africa

Blog Firms, State, policy, markets, industrialisation and economic transformation

Two powerful drivers of economic transformation, industrial policy and regional integration, can be friends or foes. Africa’s economic prospects will be profoundly shaped by their relationship.

One of the key factors shaping industrialisation in Africa this decade (and beyond) will be the relationship between regional integration and industrial policy. Both are necessary ingredients, but can be mutually destructive just as easily as they can be complementary.

As regional production networks become an increasingly central feature of industrial development, industrialisation will require more regional collaboration. This has been seen within the electronics industry in East Asia and, to some extent, with automobiles in Southern Africa. One example from East Africa that demonstrates the importance of regional collaboration is the iron and steel sector. Uganda has high-quality iron ore reserves, and extracting and processing these into steel is a major industrial policy objective. However, Uganda’s iron smelting furnaces will need fuel, and coal from Kenya is the most likely feasible option. Further, in order to achieve economies of scale and unlock this key industrial sector, Uganda will need to serve the domestic market as well as engage neighbouring countries on inputs and markets. 

The African Continental Free Trade Agreement (AfCFTA), of course, inspires the greatest hope for economies of scale, promising a common market of over 1.2 billion people (and double that by 2050!). But even though the deal has been signed, we should not expect much to happen overnight.

The East African experience again provides valuable insights through the East African Community’s (EAC) Common Market Protocol, signed in 2005. Yet, while the agreement should ensure the free movement of goods within the bloc’s borders, the reality has been very different. East African news archives from the last few years are awash with stories of products being blocked, not to mention the recent border closure disputes between Uganda and Rwanda. In general, Kenya is seen to be the biggest proponent of accelerating market integration, while other countries have displayed various degrees of reticence. This is no surprise—Kenya’s industries are years ahead of their neighbours in most sectors. Thus, Kenya would be the biggest winner of open markets, while other countries’ industries are justifiably wary of being overrun by their more competitive Kenyan counterparts.

The same dynamic should be expected at the continental level. Instead of waiting for trade barriers across Africa to vanish overnight, there is a more realistic scenario that governments—and those advising them—should strive towards. There are likely to be some sectors that countries can mutually agree to genuinely open up, one at a time. Thus, I believe a piecemeal evolutionary progress—achieved through continuous bilateral and multilateral negotiation—can and should be adopted at the East African as well as the continental level.

For example, in East Africa, most governments recently embraced the idea of using government procurement to support domestic industries through local content bills and directives to give preference to domestic suppliers—a classic industrial policy tool. But this is in violation of the Common Market Protocol. The Buy Uganda, Build Uganda (BUBU) initiative even faced internal resistance—from the Central Bank—for this reason. There are now suggestions from some at the regional level to move from initiatives like BUBU towards “BEABEA” – Buy East African, Build East Africa. This certainly won’t happen overnight, but I’m hopeful it could be piloted within the pharmaceutical industry, where Uganda and Tanzania arguably hold significant productive capabilities that can compete with Kenya’s. Thus, the pharma industries in these three countries may all support a BEABEA approach. The other EAC members—Burundi, Rwanda, and South Sudan—have little to lose as they do not have their own pharmaceutical producers.

The economies of scale created by opening regional markets are powerful levers for industrial development but they are certainly not sufficient. The development of productive capabilities in new industrial sectors requires a difficult process of learning-by-doing, and international competitiveness is usually achieved after lots of time, support, and failure. To add to that, private investors tend to behave like water – they take the path of least resistance. Given the prevailing conditions in most African countries, this usually means investing in risk-free government bonds, property, and import trade, rather than venturing into risky new industrial activities with large upfront investment costs and uncertain long-term returns. This is why effective industrial policy—which supports and pushes the private sector into building new productive capabilities—has been at the heart of virtually every economic transformation success story in history.

This brings me to the most important point: African governments must not let regional integration kill off industrial policy! Free trade agreements often see industrial policy at the national level, like BUBU, as unfairly privileging domestic firms, and often include provisions intended to prevent this. If AfCFTA does this, the trade deal would have the opposite of its intended effect. Rather than spurring African industrialization, it would actually prevent member states from fostering the development of the new industrial capabilities needed to take advantage of the continental market opportunity. That would be a disaster. Rather, countries need to work together to ensure that the continental trade bloc leaves room for, and perhaps even encourages, governments to support infant industries.

Finally, African industrial policy success depends on global trade and investment rules and multilateral agreements beyond Africa. The COVID-19 crisis is accelerating a deeper paradigm shift that I observe taking hold, especially in the so-called Global North: a shift away from the neoliberal paradigm and towards something new that is yet to be christened. It’s clear that the neoliberal ideal-market produces economies that are woefully ill-prepared for the kinds of disruptions caused by a global pandemic, not to mention the climate crisis. With Green New Deals, industrial strategies, and massive COVID-related stimulus packages popping up across Europe and North America, I’m hopeful that the crisis will leave behind an enduring new paradigm that is more flexible, recognizing both the power of market forces and the importance of the state action to shape economies.

Industrial policy is no longer the dirty word it has been throughout the Washington Consensus era. On top of that, the new multipolar world means that African governments have more than one source of development finance and market access to turn to. This is a chance for African governments to take a more assertive stance on industrial policy. And maybe – just maybe – African regional integration will enable collective bargaining to turn this new paradigm into a global economic order that more genuinely favours African economic transformation.

Disclaimer: The views expressed in this post are those of the authors based on their experience and on prior research and do not necessarily reflect the views of the IGC.