Africa's industry still in need of a buffer

17 Jul 2015

Business Day, 17 July 2015
By Moses Obinyeluaku

VIRTUALLY all of today’s successful nations actively supported and protected their industries through specific policies and institutions. Contrary to conventional wisdom that often attributes the success of western economies to laissez-faire and free-market policies, historical evidence shows that industrial, trade and technology policies were the main ingredient in their success.

Several successful sectors in Africa have been the recipients of government support during the era of import substitution and industrialisation. Africa’s experience with industrial policy and its outcomes since independence has been largely disappointing. In the early 1960s, industrialisation was seen as a central part of Africa’s development agenda, which was expected to facilitate transformation into modern industrial economies.

To achieve this objective, most countries adopted the import substitution industrialisation model in the 1960s and 1970s. The model’s key policy component was the protection of domestic firms from foreign competition. But with the adoption of structural adjustment programmes from the early 1980s, many African countries were forced to deindustrialise. Government support was withdrawn in the presence of pervasive market failures and countries were forced to liberalise their trade without taking account of the capabilities of their domestic firms. This exposed African firms to foreign competition before they were mature enough.

With globalisation came international trade and a division of labour along value chains, with multi-national corporations playing a dominant role in creating and controlling these value chains. Without being integrated into these value chains, it will be difficult for African countries to access larger external markets. Yet they risk being further pinned down at the lower end of global value chains as their industrial base is weak.

African exporters are put at a serious cost disadvantage if they have to pay high import tariffs on inputs used in producing exports. The importance of tariffs in particular, for high-value-added and labour-intensive industries, remains critical in retaining and creating jobs. However, this has to be complemented by improved competitiveness and exports. A deficiency of tariff protection is that, even if the raised rates are explicitly temporary, there is no way to discipline firms enjoying the protection at the expense of efficiency. So, there cannot be industrialisation without some form of protectionism, but one has to strike the right balance.

Rebate and duty drawback schemes that would enable the import of critical inputs free of duty for the manufacturers of exports are among the measures to encourage and support competitive exports. Carefully chosen direct incentives in support of the development of targeted local firms’ capabilities (through supply-side measures), together with tariff support, can overcome the above-mentioned disadvantage of tariff protection and boost total factor productivity as the actual conferring of the benefits can be firm, specific and contingent on reciprocity and performance. This has been a key strategy behind the success of East Asia. The governments of the region used import substitution and export promotion strategies simultaneously, combining them in the most efficient way to secure industrialisation.

Structural change is the key to sustained growth, and opening up a country to international trade in itself does not lead to such structural change. There are several examples of countries in which integration into the world economy was followed by strong growth and a reduction of poverty, but evidence also indicates that it does not automatically bring growth. More open trade is a growth opportunity for a country only if local resources can be deployed in adequate quantities to produce goods for the external market.

Obinyeluaku is Chief Economist at the International Trade Administration Commission of SA