Industrial development in Africa – from theory to practice

11th September 2020 By: Saliem Fakir

I recently participated in a panel discussion on industrial development in Central and West Africa, organised by the United Nations Economic Commission for Africa. The panellists, drawn from diverse backgrounds, shared notes, if you like, on progress in industrial development on the continent.

South Africa, Kenya, Ethiopia and Nigeria have growing industrial capabilities, but not enough to suggest that these countries lead the way in terms of exports – Africa’s commodity exports remain the continent’s dominant trait. There is also that awful statistic of how much food we import, compared with how much we export. Trade imbalances between imports and exports are growing.

The resource curse persists – it entrenches dependence on commodities trade and is the cause of the Dutch disease problem: during commodity booms, currencies strengthen, thus weakening the ability of exports to be competitive. The Covid-19 pandemic has brought to the forefront the fact that Africa has to be far more active in broadening its economic base and has to internalise beneficiation and the development of its manufacturing sector.

It goes without saying that this will have long-run benefits. Industrial capability is not just about turning raw materials into goods; rather, it is about the creation of an evolutionary ecosystem of putting knowledge, ideas and other technical capabilities into practice. Learning by doing pushes countries into the sphere of higher value-add.

Global industrialisation lives in a new context in which the world is far more integrated; thus, having only strategic natural endowments is an insufficient basis to become leaders in specific areas of industrial capability.

There are four things that matter: tacit knowledge following the gaining of experience from doing things, skilled labour with certain know-how, attractive sources of capital, and technology. These four factors are critical to transforming raw endowments into goods of value not only to a specific country or region but the world at large.

Industrialisation strategies aim to convert raw endowments into something else – other forms of capital. As Douglas North put it, a country’s raw natural endowments are now outbalanced by endowments sitting in different ecosystems of knowledge that are aligned to high-value goods production, services and industrial capability.

This ought to be the long-run game of an industrial strategy that can only be sustained when natural resource endowments no longer matter but the flexibility a country gains by being able to access a range of knowledge endowments within its diverse industrial ecosystems.

Japan is a great example of this – after its entire industrial base was destroyed during World War W II, it lifted itself out of atomic ashes and rebuilt its industrial capability. Japan is not endowed with significant raw materials but relied on organisation, its own model of a developmental State and its people to become a leading industrial nation in a few years.

Japan influenced the industrial pathways of South Korea and, later, China. Japan’s success was also dependent on a few flagship companies that have now become household names, such as Mitsubishi, Toyota and many others. We have to recognise that knowledge endowments grow with a combination of directed design (meaning strategic State intervention) and evolution of capability through osmosis.

By osmosis we mean that, once the basic elements of an ecosystem have been established, the State, firms, universities and other agents that become core to that ecosystem develop their own creative means of connecting and multiplying the long-run experience and development of tacit knowledge needed to do things of value.

Understanding the dynamics of this ecosystem is more crucial than the individual pieces of the industrial puzzle. The success of industrial development is not the product of an individual firm or bright entrepreneur only, but the way the ecosystem creates mutually beneficial dependence and working relations. This is not sufficiently acknowledged in industrial development strategies. One form of industrial capability tends to spawn a few others capabilities over time.

The question remains as to whether countries that have rich mineral endowments but lack other types of endowment to pull off industrial development should do so on their own. Some thought should go into whether a group of countries – in this case in Central and West Africa – should have a cooperative special economic zone (SEZ). Let us say the development of new agroprocessing and forest products development in such a collective SEZ where resources are pooled and participating countries own a proportional share (based on their individual contributions) in the new agriforest industrial development zone or park.

This model has not been tested but could be an experiment worthy performing. Realism also has to prevail. Nationalistic sentiments do not win ground but practical solutions that orchestrate transnational initiatives may offer better outcomes. Realism also dictates that the way in which many African countries have been ‘Balkanised’, due to colonial and post-colonial legacies, limit the ability of individual countries to make much out of an industrial development vision.

A regional SEZ model can draw capabilities from individual participating countries into the gravity of activities of the SEZ. As time goes by, there may well be spillovers that benefit and accrue to each country. SEZs would need enterprising firms, and the collective governance model of the SEZ, described above, may well curtail rent-seeking as each country has an incentive not to allow this to happen. There is no doubt that foreign skills, expertise, market networks, technology and capability will play an important role.

The Africa Continental Free Trade Agreement can be an enabler of foreign participation, provided that the incentives – while giving short-run gains to foreign firms – establish long-run benefits to African industrialists. Things can be done but diligence is required and we have to shift from rentier economies to economies where the human capital is now the centrality of our focus and primary source of sustainable development.