|Title:||Africa and BRIC per capita gross domestic product by country in dollars for 2011|
|Source:||Economic Development in Africa Report|
Start of full article - but without data
GDP per capita in Africa and the BRIC countries
Equatorial Guinea XXXXX.X Seychelles XXXXX.X Libya XXXXX.X Russia XXXX.X Gabon XXXX.X Brazil XXXX.X Mauritius XXXX.X Botswana XXXX.X South Africa XXXX.X Namibia XXXX.X Algeria XXXX.X Tunisia XXXX.X Cape Verde XXXX.X China XXXX.X Swaziland XXXX.X Morocco XXXX.X Congo XXXX.X Egypt XXXX.X Angola XXXX.X Sudan XXXX.X Nigeria XXXX.X Cameroon XXXX.X Djibout XXXX.X Coted'Ivoire XXX.X Senega XXX.X Zambia XXX.X India XXX.X
Note: Table made from bar graph.
This chapter focuses on the justification for industrial policy, particularly on its functional and horizontal dimensions, and how it can be implemented. It draws on an extensive recent literature to distil lessons from past experience in industrial policy, identify principles behind success and define the most effective new approaches to implementation. In general the debate on industrial policy has over the years evolved from a focus on the rationale (the why) to a focus on how it could be made to work (the how). However, these two are interrelated, as the content of policy is inevitably linked to its justification.
A. THE RATIONALE FOR INDUSTRIAL POLICY
The case for industrial policy rests firstly on the proposition that structural transformation, and in particular the development of competitive manufacturing activities, is a necessary condition for sustained and inclusive economic growth rather than simply a side-product of this process, and secondly, on the argument that government action is necessary to promote structural transformation.
The first step in this rationale was addressed in the introduction to this Report and will not be repeated here. However, it is important to note that those who are sceptical of the benefits of industrial policy see the economic growth processes in terms of an aggregate production function in which added inputs of various kinds (capital, labour) and productivity growth (through disembodied technological progress) lead to economy-wide increments to output. They do not think economic structure matters, do not see some leading sectors as having more propulsive effects on aggregate activity than others and do not conceptualize economic change as a process of creative destruction in which some activities are in decline, while other new activities are introduced into the economy through the innovative activities of entrepreneurs. From this perspective, industrial policy is perceived as irrelevant from the outset because structural transformation is not an integral aspect of a successful growth process.
This Report is not based on this view, but then the question arises as to why government action is necessary to promote structural transformation and in particular the development of manufacturing capabilities. In the past, the justification for industrial policy in developing countries rested on the need to protect infant industries (Soludo, Ogbu and Chang, 2004). However, in recent years, the economic case for industrial policy has focused on either the need to counteract market failures, or more broadly the need to address systemic failures and build capabilities.
One important market failure identified in the literature is the presence of information, learning and production externalities (Harrison and Rodriguez-Clare, 2009; Lin and Chang, 2009). For example, Hausmann and Rodrik (2003) show that when there is information spillover associated with discovering which goods could be profitably produced in a country, entrepreneurial entry will be suboptimal because the first entrepreneur to invest in cost discovery bears the cost, but cannot appropriate the full social benefits. In such an environment, industrial policy is called for to encourage entrepreneurial entry and promote self-discovery. The need to overcome coordination failure also provides justification for industrial policy (Aiginger, 2007; Rodrik, 2008). Coordination failure could arise, for example, when the profitability of an activity depends on whether or not there are simultaneous investments by other agents acting independently. In such settings, social welfare could be enhanced through collective action. Another type of market failure that is becoming more significant is the existence of environmental externalities, which imply that environmental goods such as clean air or biodiversity are not taken into account in private investment decisions. In the presence of market failures, markets alone cannot be relied upon to promote industrial development because they are either unable or too slow to bring about structural change and technological progress, or do so in a way that ignores environmental costs.
While there is a strong theoretical case for industrial policy based on the existence of market failures, it has been very difficult to provide conclusive and robust econometric evidence on the impact of industrial policy due in part to estimation problems and the absence of counterfactuals (Harrison and Rodriguez-Clare, 2009). In this context, some analysts have presented a broader case for government action that does not identify market failures according to deviations from some abstract equilibrium in economic theory but rather identify such failures in terms of the inability of the free play of markets to provide the goods and services that are deemed necessary by society. Moreover, some authors have gone even further and suggested that the issue is not market failure per se, but rather system failure. System failure arises when the economic system as a whole fails to achieve the development goals set by the government. This view draws attention not simply to market institutions, but also to the weaknesses of non-market institutions, for example, the capabilities of the firms and the networks in which they are embedded (see Cimoli, Dosi and Stiglitz, 2009).
There are particularly strong arguments why the technological capabilities of firms do not develop automatically through market forces. Firms do not have full knowledge of technical alternatives and developing the requisite know-how, much of which comes as tacit knowledge that is gained through experience and practice, is both costly and time-consuming. For Arms in developing countries at early stages of industrialization, mastering existing technologies is more significant than introducing products and processes that are new to the world. However, Arms may not even know how to search and learn about global technological opportunities. There are also major externalities in technological learning that mean that inter-firm linkages are important to the process (see Lall and Teubal, 1998).
Until recently, the conventional wisdom was that African countries and developing countries in general, should not attempt to induce structural change through industrial policy. The idea is that industrial policy is susceptible to capture by vested interest groups. Furthermore, it is argued that governments cannot successfully pick winners in fast-growing industries and that they do not have the information and capacity necessary to conduct effective industrial policy. The view that governments should not use industrial policy is based on the assumption that: (a) self-regulating markets produce efficient outcomes and (b) government failure is more costly than market failure. However, the recent financial and economic crisis suggests that self-regulating markets can result in socially undesirable outcomes and that the private sector is not necessarily more efficient than the government. The capacity of African governments to successfully implement industrial policy is an important issue that will be discussed below (see X.D., Institutional and governance issues).
Critics of industrial policy often argue that governments should move away from targeting specific sectors and focus on providing an enabling environment for Arms to flourish. There are also economists who recognize the need for industrial policy in developing countries, but stress that the role of governments in such endeavours should be to create incentives for the private sector to exploit the country's current comparative advantage (Lin, 2009; Harrison and Rodriguez-Clare, 2009). There are both theoretical and empirical problems with this line of thought. At the theoretical level, it treats comparative advantage as a static rather than a dynamic concept. It assumes that a country cannot change or create comparative advantage in products other than those it currently produces. Redding (1999) shows that comparative advantage evolves over time and that selective trade and industrial policies that move an economy from low to high productivity exports may be welfare improving.
Empirically, the history of industrialization of currently advanced countries as well as emerging economies suggests that export specialization is determined not only by factor endowments but also by policy. In other words, policy matters. Comparative advantage can indeed be created in new products through industrial policy. Examples are legion, but a few cases will suffice. Before the 1970s, Chile was not an exporter of salmon. However support provided by a public agency (Fundacion Chile) since the late 1970s, has made it one of the world's leading salmon exporters. In the 1960s, the Republic of Korea was not deemed to have a comparative advantage in production of steel. However, in 1973 the Government established the Pohang Iron and Steel Company (POSCO) and offered it various forms of assistance. Consequently, by 1985 the Republic of Korea became a major producer of steel with lower unit costs of production than Japan and the United States of America (Redding, 1999). In Brazil, public ownership of the domestic aircraft company EMBRAER and government support in the form of subsidized credit and investments in R&D played an important role in the development of the aircraft industry (Rodrik, 2008). There are also cases in Africa where industrial policy has led to success in either developing new export products or adding value to existing products. For instance, in Ethiopia, State activism played a critical role in the successful development of the cut flower industry (box X). In Cote d'Ivoire, government support led to an increase in the share of cocoa grinding in cocoa exports, making the country the world's third largest cocoa processing country since 1998/XX (Kjollerstrom and Dallto, 2007). (XX)
Box X. Floriculture in Ethiopia: an African Success Story
Ethiopia is a major exporter of primary commodities. However, with
government support, it has successfully developed a globally
competitive floriculture industry. The country's rank among top
exporters of cut flowers improved from twenty-four in 2001 to fifth
in 2007. The domestic floriculture industry began in the 1980s with
exports by two State-owned enterprises: Horticultural Development
Enterprise and Upper Awash Agro-Industry Enterprise. Since then,
foreign investors (particularly, British, Dutch, and Kenyan) and
local entrepreneurs have entered the industry.
The Government provides incentives to exporters in the industry
through various channels, including export credit guarantees and
foreign exchange retention schemes. The industry employs about
XX,XXX people but the government's target is to increase it to
XX,XXX. In 2008/XX, Ethiopia exported X.X trillion flower stems and
earned $XXX.X million in export revenue. The main export
destinations for Ethiopia's flowers are the Netherlands, Germany,
the United States and Japan.
In terms of flower type, roses are the most important, accounting
for over XX per cent of firms and XX per cent of total cultivated
land. Field flowers account for XX per cent of total cultivated
land and flower cuttings represent XX per cent of total cultivated
Source: Sutton and Kellow (2010).
B. KEY PRINCIPLES OF NEW INDUSTRIAL POLICY
A consensus is slowly emerging in the literature on the key principles which policymakers should consider in the formulation and implementation of industrial policy to enhance the likelihood of success. These include:
Supporting and challenging entrepreneurs
There is the understanding that government support to private Arms is necessary to influence and direct their investments to activities or sectors deemed critical for long-term economic growth and development. However, new thinking on industrial policy also recognizes that the role of the government is not only to support entrepreneurs. It is also to challenge them to perform better and become more competitive in export markets. This implies that any support that businesses receive from the government is made conditional on the achievement of certain overall policy goals, such as increased investment or exports. Governments that have had success in using industrial policy to enhance competitiveness and promote industrialization are those that have been able to enforce discipline and terminate assistance to Arms when there is evidence that they are not performing. In this context, there is a need for sunset clauses to ensure that inefficient Arms are not supported indefinitely. This reflects the view that industrial policy is not about picking winners per se, but also about letting the losers exit the market.
Encouraging experimentation, search and learning by both governments and the private sector
An important feature of the new thinking on industrial policy is the emphasis on industrial policy as a social learning or search process in which the government interacts with the private sector to identify the key constraints facing domestic Arms and how to overcome them (Wade, 2009; Rodrik, 2008). The idea here is that governments do not have enough information about the market failures that constrain industrial development and would need to interact with the private sector on an ongoing basis to elicit the relevant information. In doing so, however, there is a need for transparency and accountability on the part of the government to ensure that its involvement with the private sector does not encourage rent-seeking and corruption. The new emphasis on industrial policy as a learning process rather than a list of policy instruments differs from the traditional top-down mode of implementing industrial policy, in which the government sets sectoral priorities and uses certain policy instruments to support the preferred sectors. Industrial policy is also oriented to encourage search processes by the private sector so that it can discover what can be competitively produced and it can maximize the diffusion of best practices. Unforeseen development trajectories can emerge through this process.
Adopting a mix of functional, horizontal and vertical measures