“It is worth considering what it would take for any of these strategies to work, and more crucially, whether the current pandemic and the global after-shock affect how they might be implemented.”
Professor Dani Rodrik has been ahead of the curve on many economic issues, including a more balanced view of industrial policies, a sense that manufacturing had perhaps run its course as the main driver of growth for many poor countries, and the prophetic view that hyper-globalization, national economic interest, and democracy might resemble the famous trilemma (and thus be simultaneously unachievable).
On prospects for Sub-Saharan Africa, his 2016 assessment (Journal of African Economics) on possible growth miracles for the continent described four possible avenues to promote economic development: (i) industrialization, (ii) agro-business, (iii) services, and (iv) commodity-based growth. As a broad set of options, it is worth considering what it would take for any of these strategies to work, and more crucially, whether the current pandemic and the global after-shock affect how they might be implemented. Let’s examine them in reverse order.
The Commodity-based Approach
The commodity-based strategy might be considered if either commodity prices were high or if new precious metals or minerals were discovered and could be processed. Of course, the history of Africa is that whether it’s oil (which is exported and re-imported in refined form), cocoa (which has never progressed to higher value-added products), or minerals, a commodity-based strategy has proven disastrous. The “resource curse” rings very true for Africa, where other exports have been driven out, resource rents captured, unsustainable debt (often using natural resources as collateral) has sky-rocketed, and poverty rates have not budged.
To be fair, the fault lies not only with governments, but also with the unequal division of power that makes it almost impossible to negotiate terms that would be developmentally-friendly with large, oligopolistic corporations that seek natural resources and provide investments. Whether the exploiters were colonial, capitalist, or new state capitalist, the outcomes are largely the same. The resource curse makes it easier to capture illicit gains from exploitation, and the reality is that we have seen governance indicators reflecting this for many decades. While the discovery of titanium might be attractive, few countries can rely on this kind of luck, and few would exploit it to the fullest. So we can rate this approach as plus ça change and basically not rely on it for Africa’s future growth.
In Africa, as in most other parts of the world, services are an increasingly more dominant portion of GDP. Notwithstanding the measurement problem related to services, and the difficulty to measure it accurately, we know that manufacturing as a percentage of GDP has been falling in Africa and that its peak came a far lower levels of per capita income that in East Asia. This finding is due to Rodrik in the first instance.
Services depend heavily on two key factors: first and foremost, human capital must be strong enough to satisfy demand standards and also drive productivity, and second, the digital economy needs to be functional and efficient. Sub-Saharan Africa ranks poorly on both measures. Major investments would be needed in both areas to make services competitive beyond borders, which would be a prerequisite for services to be a major growth driver. A corollary requirement is to allow new entrants into services locally since without strong competition at home, there is little likelihood of being regionally or globally competitive.
This sector can be a component of a viable growth strategy, provided that 1) the private sector is incentivized to export, 2) that it improves its productivity, and 3) that logistics are made competitive through key infrastructure investments and marketing strategies are pursued. Those countries that have achieved success, such as Chile, Peru, and Ecuador, have forged productive collaborative arrangements between business and government to help with the R&D aspects ( viz., Fundación Chile), with phylo-sanitary and quality standards ( viz., Peru), and through improved infrastructure logistics. In the case of Sub-Saharan Africa, there will be a need to develop trade finance, agricultural research, and efforts to enter new markets with higher quality agricultural exports.
There may be efforts required to brand certain products, and there are lessons to be learned from other parts of the world. Collaborative arrangements with established exporters and contracts with retailers in the developed world can be successful; however, standard-setting and monitoring by government has proven necessary to penetrate developed markets. There have been local success stories, such as Kenyan flowers, and these could be replicated.
Nothing is more controversial than the possible reliance on home-grown industries, and many countries on the continent have flirted with these ideas. Certainly, this aspiration of industrialization is very similar to the “infant industry” argument that pervaded development thinking for decades. The problem is that despite the success of South Korea and a few other economies, many more have failed, including Brazil and Argentina, where local industry survived only due to import protection. These industrialization efforts failed because the outputs could not achieve global competitiveness standards. As a result, consumers have lost out due to higher prices, lower quality goods, and government has lost because its subsidies yield poor returns. These are the clear warning signs associated with this approach.
Initial efforts at local industrialization in many Sub-Saharan countries tends to rely on state-owned enterprises and this usually dooms these efforts from the start. Of course, without robust regulatory environments, it may prove difficult to enable local entrepreneurs and still protect consumers. Still there are very few state-owned enterprises that achieve efficiency standards that foster the achievement of scale economies and export competitiveness. Therefore, it not ideology that makes this route problematic, but rather the difficulty of reaching the requisite efficiency standard necessary to prod export-led growth.
Takeaways and priorities
So where does Professor Rodrik’s list of possible strategies leave us? The answer is that there are some basic pre-conditions that inhibit each approach. That’s the bad news. The better news is that there are complementarities in policy action that can help all these strategic approaches, and that a diversified set of actions is often the more successful.
All four strategies require investments in human capital and skills as well as investment to remove key infrastructure bottlenecks. Nothing new here, you might say. True, but any viable development strategy for the next 10 years will rely on these investments. The first place to start is improving public investment programs, which now are usually poorly implemented, lack proper oversight and governance, and are not sufficiently linked to the real economy or the needs of citizens. The second place to focus attention is the mis-spent public funds on education and health that do not achieve the desired results due to absenteeism, poor standards, weak management, and public sector inefficiency. Every percent of GDP spending that can be efficiently redirected helps to promote growth.
The next over-riding issue that affects all four approaches is the necessity of a better working relationship between the public and business sectors. Without being captured, government can provide incentives that are performance-linked. A more functional private sector can also help attract higher quality FDI, an area where government needs to have a clear strategy, as did Malaysia, Singapore, and Vietnam. Much of the recent capital from surplus economies fails to meet those strategic standards. Part of this new collaboration between public and private sectors can be assisted by stronger regulatory institutions and better governance. (See the work of Acemoglu et. al. on these points).
The last area that cuts across various approaches is adapting to the digital economy and making it work for Africa. There are many studies concerning technological leap-frogging; however, there are some necessary conditions to enable technology to push forward new development efforts. Without electricity, the digital economy will not flourish; without competition to make broadband access affordable, digitalization will not take root; and without proper regulation, the internet of things will be stifled. That said, digitalization can help overcome weak capital stocks, and it can overcome distance constraints. It can promote services. It can help foster new business activity and new entrepreneurial efforts.
The basic feature of all successful development efforts over the past 60 years has been good governance. Without it, no strategy can succeed and development plans are merely exercises in prose. As someone who has worked and advised most countries in East Asia and who has seen the spectacular success of South Korea, Malaysia, Singapore, and Vietnam, among others, it is fair to say that government success has been dependent on a) a vision, b) a long-term strategy that was operationalized and implemented, c) a strong program of investment, d) reliance on the private sector to drive exports, and e) a well-articulated plan to show that the average citizen would benefit from economic growth.
The post-pandemic world will be even more challenging. Uncertainty is very high, public expenditures are rising, and debt is becoming less manageable for many. As governments seek to reposition their development strategies, there is room to experiment and adjust, provided that many of the basics outlined above are satisfactorily dealt with. Coordination among ministries is essential. Good governance is required. And national efforts that are inclusive and well understood stand a better chance of success.
About the author
Danny Leipziger is Professor International Business at George Washington University and the Managing Director of the Growth Dialogue, a successor to the Spence Commission on Growth and Development. Dr. Leipziger, former Vice President of the World Bank for Poverty Reduction and Economic Management, has been teaching in the Milken Institute/IFC Capital Markets Program since its inception.
COVID-19 Africa Watch tracks major developments and policy announcements from across the continent and also offers a curated selection of analysis on how the pandemic will impact African economies and development efforts. The site is a project of the Milken Institute’s Global Market Development Practice.
The views and opinions expressed in this publication are solely those of the author. They do not purport to reflect the opinions or views of COVID-19 Africa Watch or any affiliated organization.