Lessons in the pursuit of industrial development by African governments

Blog Firms

Industrial policy appears to be making a comeback in Africa. The African Development Bank (AFDB) reports that about 26 countries on the continent currently have a national strategy for industrialisation. This should not be too surprising. The end of the commodity super cycle (the rise and fall of commodity prices over the past two decades), the slowdown in the continent’s economic growth, and the reduction in demand from China are likely factors accounting for this renewed drive.

But this is not the first time Africa is making a concerted effort towards industrial development. Previous attempts have been met with minimal success, either due to too much government or too little government involvement. Therefore, as Africa embarks on a new phase of industrialisation, it is critical to reflect on its previous experiences to glean lessons that can be used to ensure that the outcomes are more successful this time.

Africa’s early attempts at industrial development: too much government involvement

Upon independence, many African governments embarked on ambitious industrial projects to reduce their foreign economic dependence. In many cases, this involved huge government investments in large scale and capital-intensive manufacturing industries, which were considered critical to economic development - many of which were owned and managed by the state. In many countries, including Nigeria and Ghana, import substitution industrialisation was adopted. It was seen as a means of protecting locally manufactured goods from foreign competition. Indeed, these efforts paid off as manufacturing grew faster than overall output during the 1960s.

However, by the 1970s, manufacturing growth rates started to plummet, as growth in manufacturing began to lag behind gross domestic production (GDP) growth in many countries. It became clear that many of these state owned businesses were largely inefficient as they depended heavily on government subsidies and protection. Worse still, the import-substitution strategy adopted by many countries in fact increased import dependence, as many of the industries depended on imported capital and intermediate goods.

Structural Adjustment Programmes: too little government involvement

Following the failures in these efforts at state led industrialisation, the World Bank and the International Monetary Fund (IMF) introduced Structural Adjustment Programmes (SAPs), which many African countries adopted in the 1980s and on into the 1990s. The SAPs were based on the Washington Consensus, a set of market oriented policies that placed unfettered faith in markets and advocated for a very limited role for the government. These policies included the liberalisation of trade and prices, as well as privatisation and deregulation. Many African governments embarked on these reforms as they were a component of the conditionalities imposed on them by international financial institutions.

Initially, it appeared that the SAPs were successful, as they restored macroeconomic balance and manufacturing growth shifted from negative to positive in many countries. However, these gains soon disappeared as the liberalisation in exchange rates put significant pressure on many manufacturing enterprises, meaning many were operating on as little as 10% capacity. In fact, some scholars have argued that the SAPs lead to deindustrialisation on the continent because their introduction led to a falling share of manufacturing in GDP and employment in many African countries.

Lessons learned

  1. Africa’s attempts at industrialisation have been characterised largely by one extreme of government intervention, to another extreme of full liberalisation. The first lesson for Africa is the need to be wary of strict adherence to ideological extremes. What is really needed is a healthy dose of economic pragmatism in determining what the appropriate balance should be in the roles of the government and the market in industrial development.
  2. In determining what the role of the government should be, it is important that government support of industries should be merit driven and not offered in perpetuity. To avoid the past situation, where many of the firms were totally dependent of the government for protection and subsidies, conditionalities must be in place to be entitled to such assistance. A combination of sticks and carrots could help in this regard. In South Korea for instance, the government sets export targets for firms and rewards those who comply with cheap credit and tax benefits, while those who fail are subject to tax audits and a credit squeeze.
  3. Many efforts at industrialisation in the past focused solely on manufacturing but that should not necessarily be the case today. Indeed, the importance of manufacturing in structural transformation can never be overemphasised, however, there are other sectors that if well harnessed can support Africa’s efforts towards structural transformation and economic diversification. These include sectors such as agro-processing, technology, and services with high value added. What’s more, there appears to be a new generation of African entrepreneurs who are excelling in these areas.
  4. In development literature, East Asia is often held as the model of how industrial policy can be used to effectively spur economic development. Indeed, the industrialisation experiences of many East Asian countries hold many lessons for Africa, however, while they might serve as a general blueprint on what Africa can do, they shouldn’t be used as a step by step guide. This is not only because of the local and contextual differences between both continents but because technological advancements and the international trade environment has changed considerably since the heyday of East Asian industrialisation. Strategies that worked in East Asia may not necessarily work for Africa today.

In conclusion, the renaissance of industrial policy on the continent is largely a welcome development and an illustration of the commitments of many African governments to bridge the gap between Africa and the rest of the world. However, to ensure that Africa emerge as an industrial giant in the 21st century, the mistakes of the past should be strongly avoided.