WORKING PAPERS
Africa Task Force Meeting
JICA and The Initiative
For Policy Dialogue

Yokohama, Japan
June 2-3, 2013

WORKING PAPERS
JICA/IPD Africa Task Force
Meeting
Yokohama, Japan
June 2-3, 2013

2

CONTENTS

Introduction: How Industrial Policy Can Help Africa Meet the
Challenges of the 21st Century
Joseph E. Stiglitz
5
The African Transformation Report: Briefing Note
African Center for Economic Transformation

17

About the Journal of Globalization and Development

33

Measuring policy performance: Can we do better than the World Bank?
Julia Cagé
35
Is industrial policy necessary and feasible in Africa? Theoreticalconsiderations and historical lessons
Ha-Joon Chang
83
Defining development in the 21st century: Implications for Sub-SaharanAfricaSakiko Fukuda-Parr
113
Finance and growth in Sub-Saharan Africa: Policy and researchchallenges
Stephany Griffith-Jones
139
Industrial strategy and economic transformation: Lessons of five
outstanding cases
Akio Hosono
183
Growth strategies for Africa in a changing global environment: Policy
observations for sustainable and shared growth
Danny Leipziger and Shadid Yusuf
233
3

Industrial and trade policies in Africa: From unproductive rents tolearning and accumulation
Akbar Noman
277
The return of industrial policy: (What) Can Africa learn from Latin
America?
Annalisa Primi
299
The economic implications of comprehensive approach to learning on
industrial development (Policy and managerial capability
learning): A case of Ethiopia
Go Shimada
341
About the Japan International Cooperation Agency

371

About the Initiative for Policy Dialogue373

4

Introduction:

HOW INDUSTRIAL POLICY CAN HELPAFRICA MEET THE CHALLENGES OF
THE 21ST CENTURY
April 2013
Joseph E. Stiglitz
Initiative for Policy Dialogue
Columbia University

It is a great pleasure for me to share with you my thoughts
about strategies and challenges confronting African development at the
fifth Tokyo International Conference on African Development (TICAD).
I have had a long-standing engagement with TICAD, having attended
the second conference in 1998 as World Bank’s Chief Economist andhaving addressed the last two TICAD summits in 2003 and 2008. I havebeen impressed by the substantive and serious discussion of policy
issues facing African policymakers at the level of heads of government.
This reflects the care that the organizers of TICAD take indeveloping a considered agenda and background work for the summit
meeting.1 The themes chosen for the conference, on boosting economic
growth, ensuring human security—including the achievement of the
MDGs and Consolidation of Peace—and addressing environmental

This year included organizing a meeting with the Initiative for Policy Dialogue
at Columbia University, New York in November 2012. Special thanks is
extended to JICA for financial support, including support for the IPD task force
that led to Good Growth and Global Governance in Africa, A. Noman, K. Botchwey,
H. Stein, J.E. Stiglitz, eds., New York: Oxford University Press 2012, which
discusses issues of industrial development in greater detail.
15

issues and climate change are, and should be, at the center of concern
for African policymakers. This is true both in light of where Africa istoday, and the situation of the world economy that Africa is confronting
in the wake of the crisis.
I believe that the lessons of East Asia, the remarkable success of
this region of the world, have not been fully taken on board within thedevelopment agenda. A first step in doing so was of course the projectthat was sponsored by Japan at the beginning of the 1990s in which I
participated. The results, published as a series of background papers forthe report, The East Asian Miracle,2 and the literature it spawned, have
had enormous influence in rethinking development strategies, including
the eventual abandonment of the flawed structural adjustment policies
that predominated in the 1980s.
The 21st century has witnessed an impressive revival of growthin Africa—over 5 percent per annum—in sharp contrast to the lostquarter century under the Washington Consensus reforms. Now is thetime to address concerns about the quality of this growth to put Africa
on a path of sustained, inclusive rapid growth—growth that issustainable, not only economically, but politically, socially, andenvironmentally.
These concerns stem from the fact that in much of Africa, a largepart of the accelerated growth has been based on booming commodity
prices and extraction of minerals. The decline in the share ofmanufacturing sector in GDP within Africa that occurred during the lostquarter-century—a share that it is no higher now that it was at the endof the 1970s—is yet to be reversed. The same is true for the share offormal sector employment, which is where decent work (to use theterminology of the International Labor Organization) is to be found.
Whilst foreign investment has risen substantially, it has been
concentrated in non-renewable natural resources. This has been
particularly disappointing, given the substantial improvements in"fundamentals" in so many African countries: they have demonstrated
better macro-economic performance and better governance, but they

The East Asian Miracle: A World Bank Policy Research Report, Washington, D.C.:
The World Bank, 1993.
2

6

have not been rewarded by foreign investors in the ways that one might
have hoped.
I should emphasize, however, that while natural resources havebeen important in Africa's growth in recent years, growth has gone wellbeyond that. One of the best performing countries in the sub-continent,
Ethiopia, had been growing at 11 percent a year in the 5 years prior to
the death of Prime Minister Meles Zenawi, and around 9 percent over
2000-2010. Other examples of non-oil-rich African countries with good
growth—around 6 percent or more during the decade—include
Rwanda, Tanzania, Ghana and Uganda. By some estimates, only arounda quarter to a third of the sub-continent’s recent growth is directly
attributable to natural resources
There is a second concern that the growth has not been as
inclusive as one might have hoped. It is true that there has been a rise in
the number of middle-income households (where "middle income" isgiven a loose interpretation), and the fraction of the population inpoverty has declined. The proportion of Africans south of the Sahara
who live on US$1.25 a day or less declined from 58 percent in 1990 to 51
percent in 2005, the last year for which the UN publishedcomprehensive data. But the rate of poverty reduction, despite robust
GDP growth in some countries, generally lags behind other developing
regions: Across developing countries globally, the proportion of people
living on less than $1.25 a day fell from 42 percent of the population in1990 to 25 percent in 2005. But the absolute numbers in poverty haveincreased. The number of Africans south of the Sahara living on $1.25 a
day or less increased from less than 300 million in 1990 to more nearly
400 million in 2005. And the number of working people living on $2 a
day or less increased from 190 million in 1999 to 243 million in 2009. 3
Again, against these disappointing results, we need to note thesuccesses: “Many Africans are joining the ranks of the world’s
consumers. In 2000, roughly 59 million households on the continent had$5,000 or more in income—above which they start spending roughly
half of it on nonfood items. By 2014, the number of such households
could reach 106 million. Africa already has more middle-classhouseholds (defined as those with incomes of $20,000 or above) than3

All figures from UNDP MDG report.
7

India. Africa’s rising consumption will create more demand for local
products, sparking a cycle of increasing domestic growth.” 4With so many of the poor still living in the rural sector anddependent on agriculture (a situation that is likely to continue forseveral decades to come), inclusive growth will require increases inagriculture productivity. But results have been disappointing. Whilecountries like India, China, and the United States increased theirproductivity by a factor of two, four, or more since the 1960s, African
yields per hectare have hardly nudged upwards. This is not a surprisegiven the low levels of investment. The level of irrigation remains far
below that of Asia: only 4 percent of arable and permanent cropland,
compared with 39 percent in South Asia and 29 percent in East Asia.
Fertilizer use of 13 kilograms per hectare in Africa contrasts with 90
kilograms in South Asia and 190 kilograms in East Asia. 5 Africa is still tobenefit from a “green revolution.”
But underinvestment in agriculture is not the only reason forthe poor performance of the sector. Another reason is that the policy
framework has been flawed: fertilizer subsidies, it is now recognized,
may be an effective way of raising living standards. A third is that theagriculture subsidies of the North have a particularly adverse effect on
Africa. A fourth is global warming, which again is having a particularly
adverse effect on the region. A fifth is the population explosion. The
combination of increasing population and declining land fertility has
meant that Africa has gone from a land-abundant region to one in which
substantial parts are becoming land-scarce. Systems of agriculture
production and land tenure which may have worked well in the past, ina time of land abundance, won't work well in an era of land scarcity. But
these systems have unfortunately not changed, or at least not changed
as much as they should. Africa will have to learn to manage its land
better. However, changing institutional arrangements is not easy. And

McKinsey Global Institute, Lions on the Move: The Progress and Potential of
African Economies, 2010; see also footnote 4 for household income data.
4

See J.E. Stiglitz and A. Noman, 2012, “Strategies for African Development,” inGood Growth and Governance in Africa: Rethinking Development Strategies, A.
Noman, K. Botchwey, H. Stein, and J.E. Stiglitz (eds.), p. 8.
58

such changes often take time. But there can be large costs associatedwith such delays.
There are a number of other challenges facing Africa today,
which I briefly note. Some of these are two-sided. In the case of others,
there are significant down-side risks.
a) Demography: The rapid growth of the population in the region,
though slowing, still stands in sharp contrast to the low growth,or decline in other areas. Countries with a young population
often exhibit more dynamism, more energy, than those marked
by an aging population. But Africa will have to find jobs forthese young people. This will require heavy investments. It will
have to educate these young people. This too will place large
demands on government budgets. If Africa fails in these tasks,
there may be discontent and political, social, and economic
turmoil. In some countries, the unemployment rate is
unacceptably high. Markets have not been working in the way
they should to ensure that everyone who would like work can
get it. Young people who have done everything that theyshould—studied hard and succeeded—cannot get jobs, or atleast jobs for which their education trained them. They feel thesystem has failed them.
b) There are similarly large challenges in ensuring that thisburgeoning population receives adequate, or in many cases, justminimal health care. In some countries, the scourge of AIDS
remains a threat.
c)

Climate change/global warming is likely to have a more adverse
effect on the countries of Africa than elsewhere in the world.

d) Africa, like everywhere else in the world, will suffer from thepoor performance in so many of the advanced industrial
countries: exports will be less than they otherwise would havebeen.
e) The global financial system has not worked well in recent years.
Flows of funds have been erratic, and even if risk premia now
seem to have declined, there is always the worry of a sudden

9

reversal, a sudden increase in risk premia or a decline in theflow of funds.
f)Little has come of the development round of trade negotiations,
initiated in Doha in November 2001. At the time negotiations
were stalled, the agreement on the table arguably would havebeen of little benefit to Africa; many thought that it would makemany African countries worse off. Meanwhile, bilateral("partnership") agreements have proliferated, and many of theseare even more unbalanced, and in particular, reduce access tolife-saving medicines.

g) Inequality is a problem in most countries around the world, but
the problem in some countries and regions is worse than inothers.6 Some of the African countries have among the highest
levels of inequality in the world.
h) Throughout the region, there is a significant infrastructure
deficit, and the absence of infrastructure is an impediment totrade and to regional integration.
i)

Africa will be urbanizing rapidly in coming years—it has
already been happening. But that too will require large
investments in infrastructure. There needs, for instance, to begood public transportation systems, water and sewage systems,
housing, and public parks. It will be important that theseinvestments be made early, and that there be more planning to
the design and expansion of these cities. Without this, there is arisk that cities will evolve in ways that will lower standards ofliving and endanger the environment. We need to be sure tocreate livable cities.

For a more extensive discussion of the causes and consequences of inequality,
see J. E. Stiglitz, The Price of Inequality, New York: WW Norton, 2012.
610

THE GLOBAL ECONOMIC CRISIS AND THE
RETHINKING OF P OLICY FRAMEWORKS
The global financial crisis has led to a broad re-examination of
the policy frameworks that had become conventional wisdom before thecrisis. Indeed, it has even led to a re-examination of the role of the state.
The state had, of course, to intervene intensively to moderate the impactof the financial crisis that broke out in 2008 and prevent a disaster on thescale of the Great Depression of the 1930s or worse.
That crisis reflected the poor "quality" of the growthexperienced by rich countries in the financial and related booms.
Growth was based on debt, and the growth was not inclusive. Those at
the top took most of the gains. Those at the bottom, and even middle,
saw their incomes stagnate or decline.
The immediate cause of the crisis was the breaking of the
7
bubble. The creation of the bubble (in the US, and in several European
countries) was associated with uncontrolled financial liberalization. Thisis a familiar story—the East Asia crisis too was associated with capitaland financial market liberalization. Yet, the world was slow to learn thelessons from these and other experiences.
Thus improving the quality and inclusiveness of growth is as
much an imperative for the US and other rich countries as it is for
Africa, though what that entails differs in important respects. But there
are some lessons for all to learn: unbridled and under-regulated
markets, especially in finance, are to be avoided.
There is a more general lesson: There are many different formsof capitalism and different forms of a market economy. The version soldto Africa under the Washington Consensus reforms—a version thatretains a lingering influence in some quarters—is based on a particularinterpretation of a particular form: the Anglo-Saxon one, particularly as
purportedly practiced in the US. A closer look shows, however, thateven in the United States, government plays a major role in theeconomy. This role has been pivotal in the creation of some of its mostdynamic sectors, including the internet (hi-tech) and bio-tech.

For a fuller discussion of the crisis and what gave rise to it, see J. E. Stiglitz,
Freefall, New York: WW Norton, 2010.
7

11

The East Asia miracle showed that development was possible—
growth, widely shared, that was beyond the level that had everoccurred before. And behind that development was the development
state, a government committed to the development of its countries.
An important set of instruments for promoting development arethose that fall under the rubric of industrial policies—a term that was
not deemed worthy of mention in polite company when I arrived at theWorld Bank. Now the notion of industrial policy is much more widely
accepted—even in developed countries as they try to deal with the greatrecession, dramatically and effectively practiced, for example in the
rescue of the US automobile industry. Showing how industrial policies
could facilitate the structural transformation of economies was one of
the main concerns of the previous chief economist of the World Bank,
Justin Lin. There is also growing concern with such transformation in
Africa both amongst governments, such as those of Ethiopia and
Rwanda, and civil society as reflected in the think-tank African Center
for Economic Transformation (ACET) established some five years ago
by K.Y. Amoako.
The increases in living standards that have marked the moreadvanced countries center around "learning," the increases in
productivity associated with technological progress and a moreeducated labor force. My colleague Bruce Greenwald and I have justcompleted a book on Creating a Learning Society: A New Paradigm forDevelopment and Social Progress.8 It emphasizes the importance oflearning, and the role of government in creating a learning society, andexplains why Washington Consensus policies were counterproductive
in creating a learning society—and thus in creating an economy withhigh quality sustained growth.
For Africa, industrial policies will need to have a broader focus
than such policies have sometimes had in the past. They will have tofocus, for instance, in ensuring the adoption of technologies that areenvironmentally sensitive. They need to address the other challenges
facing the continent—promoting inclusive growth with high levels of
employment, creating a learning society, creating livable cities,
improving agricultural productivity, including reforming, and land8

To be published by Columbia University Press.
12

tenure systems, where appropriate. In the West, innovations andinvestment have focused on saving labor. The growing problems of
unemployment around the world, and the evident shortage of jobs,
combined with the risks to our environment, imply that innovation andinvestment needs to be focused on protecting the environment andcreating jobs.
Of course, unwittingly, every country—even those that haveseemingly been critical of industrial policies—have practiced them.
Every law, every public investment decision, indeed, almost every
public decision, has some effect on the economy and its structure, somemore than others. Building ports enables exports; not doing so"structures" the economy against trade. America's bankruptcy laws gave
first priority to derivatives, thus encouraging this risky part of thefinancial sector.
Critics of the relevance of the development state and industrial
policies for Africa sometimes argue that many of the countries in theregion don't have the institutional capacity. But this misses two key
points. When many of the Asian countries began their development
trajectories, their states too were underdeveloped. They developed thesecapacities. The full-fledged development state does not arrive likemanna from heaven overnight; it has to be constructed and along theway there is a continuum of “developmentalist” states with varying
capacities.
Indeed, in most of these countries, market institutions too areunderdeveloped. The two need to be developed together, in tandem.
Each can help the other—and each can serve as a check against theabuses of the other.
To the extent that there are limits in market and state
institutions, these limitations should affect the manner in which thedevelopmentist state pursues its objectives. The policy framework thatworks well at one level of development might not work well at another.
But it should be clear that the state has an important role to play inpromoting growth at every level of development. And how to strengthenstate capabilities should receive no less attention than how to makemarkets work better.

13

CONCLUDING COMMENTS
I want to conclude with six general remarks about changing
perspectives on growth and on-going changes in the world. The first isperhaps obvious: instability is bad for sustained inclusive growth. But ifthat is so, it means that we need to focus on policies that lead tostability. Here, the IMF's recent decision to re-examine the role of capital
controls is on target. Unfettered capital flows, especially of the shortterm variety, can be, and often are destabilizing
The second is the link between instability and inequality. It is
not only that instability leads to more inequality, but inequality leads toinstability. This is one of the important points raised in my book thePrice of Inequality. Our society, our economy, our democracies pay a highprice for inequality. And one of the prices we pay is high instability.
This is a result that has been again confirmed and emphasized by the
IMF.
Thirdly, for more than a decade9, we have been aware that what
separates developed and less developed countries is not just a gap inresources, but a gap in knowledge. There are knowledge gaps not only
between developed and less developed countries but amongst thedeveloping countries. Conferences like this can do a great deal to close
these knowledge gaps.
Fourthly, while knowledge gaps are important, so too areresource gaps. The developed countries as a whole have not lived up to
the commitments on aid that they have repeatedly made. That is why I
have been so enthusiastic about the recent announcement of the BRICS
Development Bank, a South-South collaboration to enhance the funding
available, especially for critically needed investment in the developing
countries.
While the developed countries have not lived up to thecommitments they made concerning aid, neither have they lived up to
the commitments that they have made on trade: They have largely
reneged on their agreements to restructure the global trade regime tomake it more pro-development. On the contrary, much of what has

Especially since the World Bank's World Development Report of 1998,
Knowledge for Development.
914

happened subsequently has moved in the opposite direction, withbilateral and so-called partnership agreements reflecting the imbalancesof economic and political power fragmenting the global trade regime.
With further agreements currently being discussed, I hope that any suchagreements will be pro-development, will focus on trade creation rather
than trade diversion. The latter could mean that the poorest region of
the world could become even poorer. There is a need for Westerngovernments to move ahead with the Aid for Trade agenda, and torecognize the right to development within the global trade regime.10
Fifthly, the BRICS bank to which I alluded to earlier is but one
reflection of fundamental changes that are occurring in the geo-politicaland geo-economic balance of power, especially after the global financial
crisis. The income of the BRICS is now larger than that of the developed
countries not long ago, at the time of the founding of the Bretton Woods
Institutions. Rising incomes in Asia have helped fuel Africa's growth.
But rising wages there will also mean marked changes in comparativeadvantages. This represents a unique opportunity for this continent.
Much of manufacturing will be moving out of the countries in which it
has been located. There is an open question about where it will move.
This is where the industrial policies—focusing on learning—to which I
referred earlier become critical.
Finally, we need to be aware of the deficiencies in GDP as ameasure of success. As I emphasized in the beginning of these remarks,
we want sustainable, equitable growth. I chaired an international
Commission on the Measurement of Economic Performance and Social
Progress.11 The Commission was unanimous in its view that GDP was
not a good measure of success, and relying on it could be highly
misleading. This is especially true for countries with high levels of

See Andrew Charlton and J. E. Stiglitz, 2006, “Aid for Trade,” with Andrew
Charlton, International Journal of Development Issues, 5(2), pp. 1-41 (reprint of
paper prepared for Commonwealth Secretariat); and 2013, “The Right to Trade,”with Andrew Charlton, a report for the Commonwealth Secretariat on Aid for
Trade.

10

The commission’s report was released in 2009 and published as Mismeasuring
Our Lives: Why GDP Doesn’t Add Up, J.E. Stiglitz, A. Sen, and J.P Fitoussi (eds.),
New York: The New Press, 2010.

1115

inequality, where there are high levels of foreign investment (so GNP,
the income of the citizens of the country, could different markedly from
GDP, the output produced within the country), and/or whether there
are problems of resource depletion and environmental degradation. But
one or more of these problems arise in most African countries.
The challenges facing Africa are daunting. But so are theopportunities. The successes of recent years cannot but make us
optimistic. TICAD provides a wonderful opportunity for countries tolearn from each other on how best to tackle these challenges, in ways
which ensures sustainable and inclusive growth.

16

THE AFRICAN TRANSFORMATIONREPORT
Briefing Note

April 2013

African Center for Economic Transformation

The
AfricanCenterfor
Economic
Transformation (ACET) believes that thetwo mutually reinforcing goals of economic
growth and transformation should be at thecenter of development policy in Africa.

In 2011 more than 30 African ministers, central bankers,
business leaders and international development experts met at theRockefeller Foundation’s Bellagio conference facility to discuss theprospects and requirements for Africa’s economic transformation. Given
the region’s untapped human and physical resources, those prospects
were assessed as tremendous—as were the requirements. Convened by
the African Center for Economic Transformation, much of the
discussion centered on how the drive for transformation should be thefocus for African governments, working with and supporting arevitalized private sector. Also covered was ACET’s proposed African
Transformation Report to review country transformation performanceand to provide analysis and emerging practices as countries pursue
their transformation agendas.

17

In January this year, the heads of the African Union
Commission, African Development Bank, and Economic Commission
for Africa met to see how their organizations could best pursue Africa
Vision 2063—with a more comprehensive and coordinated approach to
tackling Africa’s transformative development goals for the next 50
years. They agreed that for the continent to be vibrant and modern, it
would have to peacefully resolve conflict, strengthen governance, andmake national institutions more effective and the private sector more
efficient.
In March, African finance and economic development ministers
met in Abidjan to make a unanimous call for commodity basedindustrialization as an impetus to Africa’s structural transformation,
moving from primary products to manufacturing and services.
Supporting this call, the ECA’s 2013 Economic Report on Africa, Making
the most of Africa’s commodities, highlighted Africa’s imperative to use
commodity-based industrialization as an engine of growth andstructural transformation.
In April, the Board of the African Development Bank approved
its strategy for the next 10 years, At the center of Africa’s transformation.
Sound policies and better infrastructure would drive thattransformation by improving the conditions for private sector
development—and by boosting investment and entrepreneurship. And
transformation would diversity the sources of economic opportunity inways that promote high productivity and sustain inclusive growth. At
the heart of this, according the Bank president Donald Kaberuka, isreducing the risk and cost of doing business.
And in May the AU summit of African leaders is marking its
50th anniversary by unveiling an agenda for Africa’s socioeconomictransformation. Indeed, several African countries, such as Ethiopia,
Kenya, Nigeria, and Rwanda, are already formulating long-term visions
emphasizing economic transformation.
It is not only African institutions pushing for transformation.
The Japanese government’s Tokyo International Conference on African
Development in June 2013 (TICAD V), with dozens of African leaders
expected to take part, will have transformation as its main theme. The
theme for last year’s World Economic Forum on Africa was “Shaping
Africa’s Transformation,” and participants, including policymakers and18

business leaders, discussed how to transform Africa’s growth story intoshared opportunities for present and future generations.
Transformation is thus the new buzzword in development
circles, but it means different things to different people. For those of us
at ACET, economic transformation is growth through making thestructural shifts from farming to manufacturing and services. But it ismore than merely structural. It is growth through expanding thetechnical capabilities of people and institutions. It is growth throughupgrading the technologies that people use on farms, in firms, and ingovernment offices. It is growth through becoming internationallycompetitive and latching onto global chains. All these channels aremutually reinforcing.
To be kept in mind is that economic transformation is just ameans. The end must be to create productive jobs and satisfying lives
for all Africans. With good policies for the poor and vulnerable, thosejobs can end extreme poverty on the continent, something unimaginablea decade ago but now within reach. And those jobs can narrowconsiderably the inevitable income gaps that open between rich andpoor in rapidly developing economies.
Thus it is that a transforming economy—more than just a
growing economy—can create good jobs and share the fruits ofprosperity. Thus it is that a Ghana or Kenya can become a Korea.

THE AFRICAN TRA NSFOR MATION REPORTACET’s comprehensive research program of country, sector,
and thematic studies identifies some of key lessons for transforming
Africa’s economies and sets benchmarks against Asian and Latin
American economies. Drawing on all these studies, ACET’s flagshippublication, the African Transformation Report, provides data andanalysis for policymakers, private businesses, and civil society to spur
economic transformation. To be launched in October 2013, the reportintroduces the African Transformation Index, an innovative tool to track
how countries are performing over time and against each other (seeannex 1 for the report’s outline). A short preview of the full report will
be released in May.
19

The report reviews how African countries are diversifying theireconomies, boosting productivity, upgrading technology, andincreasing competitiveness. That country focus and detail distinguishthe report in providing guidance and direction for its primary audience:national policymakers and business leaders. Moving beyond
generalizations for the continent, it provides action plans to show how
countries can transform their economies.
The report and the many research studies (see annex 2) will
form the basis for national transformation dialogues and for ACET’s
advisory services to governments. Indeed, ACET’s work will support
the AU, AfDB, and ECA as they pursue Africa Vision 2063 and as
individual countries formulate and tackle their transformation agendas.
PUSHING FOR TRANSFORMATION IN AFRICA
On all measures of economic transformation, Africa has been
lagging behind East Asia—in large part because of state-led industrial
policies in the first decades after independence and the market-led
adjustment policies of the 1980s and 1990s. Since then, some Africancountries have been moving toward a middle course between the twopolicy extremes. Six of the 10 fastest growing economies in the 2000s
were in Africa, and others were above or near the 7 percent thresholdfor economic takeoff, set to double their economies in 10 years.
According IMF projections for the top 10 growers through 2015, 7 areagain in Africa. All this, in a sluggish global economy.
Much of this growth has come from better macroeconomic
policies and booming commodity markets. Needed now is to move towell-managed and robustly growing economies that are competitive in
the global marketplace in a widening array of technologicallysophisticated goods and services.
Here we describe the main elements of the ATR to engage
broader audiences in forging a clear understanding of what
transformation means, where African countries stand, what are theirmost promising pathways to transformation, and what they need to do
to seize the opportunities.

20

ASSESSING COUNTRY PERFORMANCECountry case studies are in-depth analyses of the economic
environment in selected countries and their prospects fortransformation. In collaboration with domestic think tanks, ACET
analyzes country economic transformation performance, based on the
key attributes and drivers of transformation. For the 2013 ATR, we
examine an initial group of 15 countries. Together, these countries
represent 85 percent of Sub-Saharan Africa’s GDP. By using a shared
methodology and in-country expertise the studies provide a uniquebalance of analytical rigor and local application. The headlines:-

Botswana – Growth without transformation-

Burkina Faso – Need for faster growth and structural change-

Cameroon – Manufacturing development but income stagnant-

Ethiopia – Diversifying commodity exports but still very poor-

Ghana – Regaining lost potential-

Kenya – Silicon Savannah?

-

Mauritius – Rapid economic growth and structuraltransformation, but new challenges-

Mozambique – Good potential; will it be tapped effectively?

-

Nigeria – Is the giant waking up?

-

Rwanda – Remarkable recovery, strong transformation efforts,
but still a way to go-

Senegal – Good structure, slow growth-South Africa – Advanced economic structure but slow growth-

Tanzania – Quiet, steady performer-

Uganda – Good performance, but still far from transforming-

Zambia – Great potential yet to be tapped

21

MEASURING TRANSFORMATIONThe African Transformation Index provides a common
quantitative tool to measure the progress of countries on economictransformation. It comprises five main indicators:
1.

Economic diversification

2.

Technology

3.

Productivity

4.

Export competitiveness5.

Human dimension of transformation.

By ranking 50 African countries on this index, the ATR shows how
countries are transforming over time and in relation to others.

DRIVING TRANSFORMATIONACET research and country studies point to 10 policy andinstitutional drivers of economic transformation.
-

State capacity for economic management-

Business environment-

Domestic saving and investment-

Public infrastructure-

Education and skills-

Technology upgrading-

Export promotion-

Foreign direct investment-

Labor-industry relations-

Targeted sectoral strategies.

The inaugural ATR highlights three of these drivers, so thatgovernment officials and business leaders can tailor policy measures22and institutional mechanisms
transformation objectives.

to

suit

their

circumstances

and-Building state capacity. Working with the private sector, African
states have to formulate a national vision for transformation.
They need to develop a planning and budgeting framework thattranslates that long-term vision into medium-term plans.
Through effective macroeconomic management, they need toensure prudent public expenditure management andmonitoring. And to know how they are performing and where
they have to change course, they need to strengthen thestatistical capacity to provide timely economic statistics. The
report also analyzes what states can do to actively support theprivate sector, going beyond providing a general good businessenvironment to facilitate its access to new technologies andmarkets and to help raise its competitiveness in international
markets. Importantly, the state should not try to do
everything—it should build the minimum institutional
capabilities to sustain strategic partnerships that support firms
and farms.

-

Promoting exports. The East Asian countries used a number of
instruments to proactively promote exports. Some of these
instruments are either no longer available or are restricted intoday’s global environment. But there still is enough scope for adetermined government to skillfully use various instruments topromote exports—by lifting the most important constraints on
private enterprise. The ATR provides insights on key elementsof a viable export promotion strategy for Africa today. Offering
perhaps the greatest potential is light manufacturing inagroprocessing, in adding value to extractives, and inassembling appliances and other consumer durables—first to
meet domestic demand and then to supply regional and global
markets. Streamlined regulations and better infrastructure will
help reduce costs generally. But more focused efforts will
include macroeconomic, exchange rate, and other horizontal
measures, as well as vertical efforts to promote targetedexports—such as performance-based subsidies and other23

support to help exporters acquire and master technology,
develop new products, and expand into new markets. The ATR
argues that more must be done to increase access to developedand emerging world markets. Trade preferences can help, but
too often they exclude precisely the products in which an
African country would have a comparative advantage. Easing
the rules of origin, which define how much processing musttake place in the exporting country, could be a major boost.
-

Developing skills for economic transformation. The East Asians also
used their education and training systems to stimulate theireconomic and social transformations. Building on their success,the ATR shows how critical it is for countries to develop andimplement comprehensive policies for skills and educational
development within the frame of a broader transformation
strategy. With guidance from private firms about what they
really need, skills development should cut across several
ministries and agencies of government, not be the sole preserveof education ministries, and high-level political support should
ensure effective coordination. The ATR also proposesapproaches to meet the financing challenges of skills
development.

In each of these areas the state and the private sector have towork together to come up with smart solutions to reach their countyspecific objectives—with parliaments, civil society, and the media
ensuring that actions are transparent and in the interest of all. The ATR
provides concrete examples of good practices for all countries toemulate and adapt to their special circumstances. Future Africa
Transformation Reports, informed by ACET’s ongoing research, will
explore the remaining drivers.

IDENTIFYING PATHWAYS TO TRANSFORMATION
Each country has different endowments, different constraints,
and different opportunities for transformation. The ATR explores
potential pathways for countries to produce new exports or increase
their competitiveness in existing exports and import substitutes. Based24

on the endowments and comparative advantages of African countries,
this year’s ATR focuses on agroprocessing, extractives, garments,
component assembly, and tourism.
-

Agroprocessing. Drawing on studies of cocoa, coffee, cotton,soya, fruits, palm oil, sugar cane, and rice, the ATR presents amarket and value chain analysis for each commodity tohighlight global trends, identify the key policy constraints to belifted, and specify the opportunities for adding value to exports.
Much is under way in this sector. For example, Zambeef
products, one of Zambia’s biggest agribusinesses, covers the fullvalue chain in producing, processing, distributing, and retailing
beef, pork, fish, chickens, eggs, milk, flour, bread, and edibleoils. Annual sales: more than $160 million.

-

Oil, gas, and minerals. The ATR shows how the continent can bestleverage its enormous extractive resources to support economictransformation, with emphasis on fiscal policies, value addition,and local content. Because resources, once extracted, are gone
forever, they should be seen as part of a portfolio of national
assets that also includes human capital, physical capital,
financial capital, and institutional capital. Countries can enjoy
fast growth and fat revenues from extraction for a time, but theycan end up worse off than before a boom if they don’t use theirshare of the revenues to build those other assets—for this andfuture generations. Consider how Botswana is moving beyond
extraction. This year, DeBeers is moving its sorting and trading
operations to Gaborone, making the country the world’s largest
diamond trader.

-

Garments. The ATR explores what it would take for Africa tocapitalize on its abundant labor and cotton to produce
garments, a traditional launching pad for light manufacturing.
It draws on lessons from Mauritius’s success, as well as theexperiences of Korea, Taiwan, Bangladesh, Pakistan, India, andChina, to show what governments can do to support foreignand domestic investors. With so much apparel trade now
organized and controlled in global value chains, the ATR shows25how African firms can insert their activities in wider
networks—doing contract work for branded manufacturers inexport processing zones, full-package production for global
retailers, and generally moving from simple to sophisticatedand from fiber to fashion based on price, quality, andpunctuality.
-

Component assembly. With wages rising in China and with the
African consumer growing in number, component assemblyoffers an opportunity for African business to supply nationaland regional markets for bicycles, motorcycles, appliances, andother consumer durables. Assembly and packaging, the firstlinks in the value chain, are very competitive and very
demanding and thus difficult to break into. Firms have torapidly deepen their skills and capabilities. Countries have todevelop world class logistics: for customs, trade infrastructure,
port infrastructure, and information and communications
systems. On the World Bank’s Logistics Performance Index, ameasure of competitiveness, South Africa ranks 23, followed by
Benin (67), Mauritius (72), and Malawi (73)—and the rest of
Africa farther down the list of 155, pulled down by poor
tracking, tracing, and timeliness. Getting into components
assembly manufacturing will thus require governments andbusinesses to work with global freight forwarders and express
carriers to move goods across long distances in what’s beencharacterized as the “physical internet.”-

Tourism. Africa had 33 million international visitors in 2011, up
from 31 million the year before, with receipts of $33 billion. Half
were leisure tourists, a quarter were visiting family and friends,
and about a sixth were business and professional visitors. On
current trends the arrivals are set to rise to 55 million over the
2010s, contributing US$66 billion to the region’s GDP by 2020,
and 6.5 million jobs, up from 5.2 billion at decade’s start.
Adding indirect and induced spending, tourism’s total
contribution would almost triple to US$172 billion and almost
16 million jobs. Given the continent’s dynamism evident almost
everywhere, those projections are likely to be low, even very26

low. The ATR shows what countries can do to move to nextlevels in leisure tourism and especially in business travel, so
important for foreign investors and for foreign buyers ofAfrican products.
As with the chapters on drivers, those on pathways give
examples of good practices to inform country efforts, spelling out indetail the actions they can take to advance on their own economictransformations.

27

ANNEX 1: OUTLINE FOR THE FIRS T AFRICAN
TRANSFORMATION REPOR T
Overview: Opportunities and prospects for economic transformationin Africa
Part 1: Transforming Africa
1. The case for economic transformation
2. The state of transformation in Africa
Part 2: Policy and institutional drivers of transformation
3. Getting the state and the private sector to work together
4. Promoting exports
5. Developing skills
Part 3: Pathways to transformation
6. Agroprocessing
7. Oil, gas, and minerals
8. Textiles and apparel
9. Component assembly
10. Tourism
Annex 1: Methodology for the African Transformation Index
Annex 2: Summary of the 15 country transformation studies
Annex 3: African Transformation Indicators

28

ANNEX 2: SELECTED ACET STUDIE S

COUNTRY STUDIES- Botswana- Burkina Faso
- Cameroon- Ghana- Ethiopia- Kenya- Mauritius- Mozambique- Nigeria- Rwanda- Senegal- South Africa- Tanzania- Uganda- Zambia

STUDIES OF TRANSFORM ATION DRIVERS-

Promoting exports: what worked and its current relevance
FDI inflows in Africa: trends, sources, and sector distribution
Innovative financing for infrastructure in low income countries:
how the G20 might help
Lessons from the East Asian and European experience for skills
development in African
Skills development for economic transformation in Africa

SECTOR STUDIES-Building a competitive textiles industry: what can African
economies learn from Mauritius?
Opportunities in the textile industry for transforming African
economies
Agricultural supply chains: market structure, farm constraints, andgrassroot institutions
Promoting sustainable development and transformation in rural
AfricaValue for money in financing agriculture
Market competition in export cash crops and farm income in Africa
Tourism in Africa

29

AGROPROCESSING-

Palm oil production and manufacturing opportunities in Africa:a policy discussion
The cocoa agroprocessing opportunity in Africa
The cotton agroprocessing opportunity in Africa
The soybean agroprocessing opportunity in Africa
The value capture opportunity in fruit
Dairy production and processing opportunities in Africa
Sugar as a driver for transformation: unlocking the potential for
African countries
EXTRACTIVE INDUSTRIES-

Case study of Debswana's HR development policy: a De Beers
and Botswana partnership
Case study of Trinidad & Tobago's value-addition using gas
resources
Diagnostic study of Ghana’s mineral sector
Diagnostic study of Ghana’s petroleum sector
Diagnostic study of Uganda’s petroleum sector
The exceptionality of Botswana: economics, politics, andchallenges
The global economic crises, funding public services in Africa,
and concessions in the mining sector: the case of Zambia
Policy, legal, and institutional challenges of local content in
Nigeria and South Africa

SPECIAL STUDIES-

Comparison of the Malaysian and South African domestic
marketLooking East: China’s engagements with Africa—benefits andkey challenges
Looking East: Ghana–China case study
Looking East: Rwanda–China case study
Strategic lessons for Africa’s economic transformation: an
overview30

-Toward economic transformation in Ghana: strategic learningfrom high-growth nations
Turning inward? Or fighting the crises with further opening?
Evidence from the Nigerian banking system

31

32

EDITORS:
José Antonio Ocampo
Dani Rodrik
Joseph E. Stiglitz
M. Shahe EmranArjun Jayadev

Published by de Gruyter
with The Initiative for Policy Dialogue
www.degruyter.com/jgd/loi
jgd@columbia.edu

The following working papers are under consideration for inclusionin the Symposium on African Development, edited by Akbar
Noman, in a forthcoming issue of the Journal of Globalization andDevelopment (December 2013).
The Journal of Globalization and Development publishes research and policy
analysis on globalization, development, and in particular, the complex
interactions between them. Established in 2010, the Journal is dedicated tostimulating a creative dialogue between theoretical advances and rigorous
empirical studies in order to push forward the frontiers of development
analysis. The Journal encourages alternative perspectives on all aspects ofdevelopment and globalization, and attempts to integrate the best development
research from, and across, different fields with contributions from scholars indeveloping and developed countries.
33

34

MEASURING POLICY PERFORMANCE:Can we do better than the World Bank?
April 2013
Julia Cagé 12
Department of Economics
Littauer Center
Harvard University

Abstract
This article questions the relevance of the different measures of policy
performance that are currently used by international organizations. It
evaluates more especially the pertinence of the World Bank's CPIA andof the various alternatives that have been proposed. Using a crosscountry panel dataset over 146 “developing” countries between 1977
and 2008, I show that the CPIA is a blunt and biased tool that can andshould be improved upon. In particular, I show that while the CPIA iscorrelated with current growth, it is not a good predictor for future
growth. I thus argue in favor of other measures of policy performance.
First, I underline the need of introducing new criteria when measuring
policy performance, in particular proxies for the development of fiscal
capacity (e.g. domestic tax revenues) and the quality of industrial policy

I am particularly thankful to Ravi Kanbur, Akbar Noman, Thomas Piketty andJoseph Stiglitz for helpful comments and suggestions. Participants at theInitiative for Policy Dialogue Task Forces also provided valuable advice. A firstdraft of this paper was prepared for the Tokyo International Conference on
African Development (TICAD). The usual disclaimer applies.
1

2

cage@fas.harvard.edu

35

(e.g. export promotion strategies). This is of particular importance tobring sustained growth to sub-Saharan countries. Second, focusing more
specifically on the allocation of development aid, I show that
performance-based measures—as opposed to measures implying ex anteconditionality like the CPIA—are more accurate instruments for aid
allocation. Finally, I make concrete proposals for the development of
new performance indicators: the idea is to use “aid effectiveness” toallocate aid selectively.

1. INTRODUCTION
This article questions the relevance of the different measures ofpolicy performance that are currently used. It especially evaluates thepertinence of the World Bank's Country Policy and Institutional
Assessment (CPIA) and of the various alternatives that have been
proposed in the literature. It argues in favor of new measures of policy
performance.
Measuring policy performance is of particular importancetoday. First, the current global economic crisis has been very harmful fordeveloping countries, in particular sub-Saharan countries, with aslowdown of capital flows, trade flows, flows of remittances anddevelopment aid flows. Development aid is both a limited and needed
resources for developing countries. Finding criteria to allocate it
selectively is thus of great concern for donors.
Second, finding an accurate measure of policy performance is ofparticular importance in the context of sub-Saharan countries which,despite the revival of growth in the past decade, have made little
progress on the path to “sustained” growth. No important structuralchanges have taken place in the majority of sub-Saharan countries.
Striking is the fact that the share of manufacturing and formal sector
employment are still declining in these countries. A good measure ofpolicy performance has thus to be concerned, with policies that would
bring about economic transformations, structural changes and sustained
growth. I discuss the relevance of existing indicators and propose a new
approach in light of these concerns.

36

Using a yearly panel dataset over 146 developing and emerging
countries between 1977 and 2008, I first show that the CPIA is correlatedwith current growth rates. This contemporaneous correlation can by
explained in part by the fact that the assessments of the World Bank
staff are colored by perceptions of countries current performances. Next
I show that the CPIA is not a good predictor for future economic
growth. I also find a positive and statistically significant correlation
between developing countries’ votes in the United Nations General
Assembly (UNGA) with those of the United States and their CPIA
scores. This is obviously subject to a variety of interpretations aboutcausality, but it can be seen as an indication of the influence of a proUnited States disposition in foreign policy on the CPIA. At the very
least, this shows that whatever matters, it is more strongly correlated to
UN votes that to future growth prospects, which seems odd.
I thus argue in favor of other measures of policy performance.
First, I underline the need for introducing new criteria when measuring
policy performance. In particular, I show that more weight has to begiven to the development of state capacities, which supposes to take
into account its fiscal capacity. Fiscal capacity is indeed of crucial
importance for raising domestic tax revenues. One has to go further thatjust underlying the need for “good institutions” when emphasizing therole of the state. Moreover, I underline the importance of the quality ofindustrial policy and especially of export promotion strategies on thepath towards sustained growth.
I then focus more specifically on the allocation of development
aid, which is of great importance given both the scarcity and need foraid. I show that performance-based measures, as opposed to measures
implying ex ante conditionality, are more accurate instruments for aid
allocation. In particular, I discuss the relevance of the Kanbur’s proposal(Kanbur, 2005) of introducing some “outcome criteria” in the CPIA. I
show that introducing straightforward outcome variables will be asignificant improvement on the CPIA but will leave some difficulties
unsolved.
Finally, I make concrete proposals for the development of new
performance indicators. The basic idea beyond these indicators would
be to use “aid effectiveness” to allocate aid selectively. Such indicators
were supposed to compute one “aid effectiveness” coefficient per

37

country and year. I show how this can be done using the “local
Gaussian-weighted ordinary least squares” econometric method.
1.1. RELATED LITERATURE
This paper is first related to the literature which evaluates therelevance of the existing indicators measuring policy performance. The
main focus of this literature is the World Bank. 3 Kurtz and Schrank(2007) evaluate the World Bank's coding of “good governance” by
exploiting the time-dimension of the data. Using Granger-style causality
tests, they found weak support for the notion that “better governance”
was connected with successive improvements in growth. Other studies
focus more specifically on the CPIA. Since the CPIA data was notdisclosed until recently, they mainly emanate from the World Bank. For
example, Gelb Ngo and Ye (2004) show that CPIA ratings have beenquite strongly associated with medium-run growth performance. On thecontrary, in a review of the performance-based allocation system, theWorld Bank (World Bank, 2001) underlines that, on average, CPIA
ratings may be considerably affected by contemporaneous growth, with
only modest predictive power with respect to future growth or poverty
reduction. This is consistent with the empirical findings I obtain in thispaper. Kraay and Nehru (2004) use CPIA ratings and find a significant
inverse correlation between the quality of a country's policies andinstitutions on the one hand and its probability of debt distress on theother hand. Outside of the World Bank, however, other articles aremuch more critical toward the CPIA. For example, Herman (2004) calls
for appreciating the weaknesses of this indicator, especially its low
ability to discriminate among countries or over time. This paper
contributes to this debate by analyzing both conceptually andempirically the relevance of the CPIA.
This paper is also related to the literature which proposes
alternatives to the CPIA or other performance indicators.

An exception is Stuckler et. al (2009) who show, using the EBRD's own data,that the EBRD's indices of progress in market reforms are biased in the directionof positive growth.
338

Kanbur (2005) argues in favor of introducing some outcome
variables in the CPIA. His proposal is in the spirit of Collier et. al.
(1997)'s outcomes-based allocation. They indeed propose a basis for aid
allocation in terms of retrospective assessment of a few major outcomessuch as growth. Similarly, Barder and Birdsall (2006) defend the idea of
payments for progress. I contribute to this literature by opening the way
for a new indicator that improves upon the previous proposals thathave been done.
Finally, this paper is related to a growing literature on optimal
aid allocation, which emphasizes the necessity to take into account thelevel of policies as a selectivity criterion. This necessity was firsthighlighted by Burnside and Dollar (2000) and further examined in theWorld Bank report Assessing Aid (World Bank, 1998). Using thesefindings, Collier and Dollar (1999) derive an effective allocation of aid interms of poverty reduction and compare it to the current allocation.
They find out that the current allocation is radically different from theallocation which would be effective on poverty reduction. They stressthe fact that an optimal allocation of aid not only depends on levels ofpoverty but also on the political environment. Moreover, they further
develop this idea by applying their approach to the dynamic question ofpoverty reduction Collier and Dollar (2001). Cogneau and Naudet (2007)
propose an alternative allocation based on the principle of equality ofopportunity: they take into account structural growth handicaps rather
than the quality of past policies (see also Llavador and Roemer, 2001). In
the same spirit, Wood (2007) presents a more general model of optimal
allocation of aid, in which donors take into account future poverty as
well as current poverty. Finally, Amprou et. al. (2006) argue in favor of
considering vulnerability to exogenous shocks and low level of humancapital as selectivity criteria. All this literature takes the level of policy
or of performance in the effective use of development assistance asgiven. On the contrary in this article, I try to determine the optimal
performance indicator one can use in the selectivity formula for aid
allocation.
The rest of the article is organized as follows. Section 2 presents
descriptive evidence about the CPIA and assesses its relevance. Section
3 provides new ways to improving upon the CPIA. Section 4 concludes.

39

2. THE CPIA, A GOOD MEA SU RE OF P OLICYPERFORMANC E ?
One of the most influential tools for measuring policy
performance as of today is the Country Policy and Institutional
Assessment (CPIA), which is the World Bank's tool. In this section, I
analyze the relevance of this tool as a measure of policy performance.
2.1. SOME HISTORY OF THE CPIA
Since 1977, the World Bank has carried out an annual
performance assessment of its client countries' capacity to effectively
absorb development assistance. This assessment, the CPIA, is one of themain criteria used to allocate International Development Assistance(IDA) resources between low-income developing countries. The CPIA isan assessment tool for the Bank, to gauge the likely return todevelopment assistance in specific countries and to guide IDA
allocations to countries below the income threshold. CPIA assessments
do not directly reflect specific “outcome” criteria as set out in theMillennium Development Goals (MDGs)—e.g. poverty reduction,school enrollment, maternal health, etc.—neither do they directly rest on
proxy outcome variables such as GDP, export or investment growth
rates. The emphasis is on policy actions and institutional effectiveness.
They rely on the judgments of technical analysts to assess how well acountry's policy and institutional framework fosters poverty reduction,
sustainable growth and the effective use of development assistance(Gelb, Ngo and Ye, 2004).4 Ratings are against specific criteria but are
subjective. Indeed, the CPIAs are produced by the Bank's own staff, i.e.
its country teams.
In the past, CPIA results were not made available to the public.
Only recently have governments themselves, whose policies areassessed in a particular CPIA, come to be informed of the numerical

4 Indeed, according to the World Bank, the aim of the CPIA is to assess «how
conducive [a country's policy and institutional] framework is to fostering
poverty reduction, sustainable growth and the effective use of development
assistance» (World Bank, 2007).

40

ratings on a confidential basis. Since 2000, there has been a public
quintile-based disclosure.5 The exact numerical values of the CPIA havebeen disclosed starting with the results of the 2005 CPIA exercise. They
are fully available to the public today.
The criteria used in the CPIAs have evolved over the years, in
response to new analytical insights and lessons the Bank feels it haslearned from experience. Originally called Country Performance Ratings(CPR), the assessment exercise acquired the name CPIA with the 1998
redesign to emphasize that it was the policy and institutional
environment that was being assessed, not economic outcomes. The
definition of the criteria, their relative importance, the rating anddisclosure procedures have undergone important changes over theyears (van Waeyenberge, 2006).
(A) THE 1980'S
Significantly, during the 1980's, the emphasis moved from an
initial concern with both policy inputs and economic performanceindicators (growth and savings rates), to a predominant concern with
policy inputs. By the early 1990s, an exclusive emphasis on policy inputs
prevailed.
In the early 1980s, four criteria were cited in the following orderof priority as affecting IDA's resource allocation:
1.

National poverty as measured through income per capita;

2.

Creditworthiness;3.

Economic performance to be assessed in terms of macro
indicators including growth and saving rates, but also interms of the quality of “administration and economic
management” together with “the speed and direction ofchange;”4.

Project readiness.

With the quintile-based results for the CPIA, its four clusters, the country
portfolio, and the IDA Country Performance (ICP) rating posted on the Bank's
extemal website, as well as the criteria and the methodology of the performancebased allocation system.

541

Guidelines on the allocation of lending among IDA-eligible
countries issued in 1989 were characterized by a shift in emphasis
towards greater consideration of policy performance.
According to Kapur et. al. (1997), Bank staff was instructed torate a country's performance in each of three policy categories: (i) shortrun economic management (mainly of demand); (ii) long-run economic
management (mainly supply side restructuring); and (iii) the country's
poverty-alleviation record as characterized by its delivery of social
services, together with reforms removing “distortions” from labormarkets and from rural-urban terms of trade. As a result, the 1991 CPIA
exercise had three component clusters: (i) short-term economic
management; (ii) long-term economic management; and (iii) poverty
alleviation policies.
(B) THE 1990'S AND 2000'S
In 1997, criteria covering governance-related issues were added,
and in 1998 the CPIA process was revised to add a benchmarking
phase.6
In 2001, several changes were introduced that included
establishing a written record, providing detailed guidance for criteriawith several subcomponents, broadening the set of benchmark
countries, revising the content of the criteria and defining the different
rating levels (previously only the 2 and 5 rating levels were fully
defined). A review took place in 2004, when the Bank commissioned an

6 “The benchmarking phase helps ensure that, given the criteria, the ratings are
set at the right level and are consistent across countries and Regions. The Bank's
six Regions, the Networks, and Central Departments assist in selecting a
representative sample of countries that covers all six Regions, includes IBRD
and IDA-eligible borrowers, good as well as poor performers, and has a ratings
distribution similar to the overall distribution of the CPIA country scores. The
set of benchmark countries is reviewed every year, taking into account the needto both maintain some continuity in the sample and to refresh it. At the onset ofeach year's exercise, the set of benchmark countries is communicated to the
Regions and Networks, along with the timetable for the exercise. “ (World Bank,
2007)

42

external panel to review the CPIA ratings and methodology. The panel
made a number of recommendations: (i) simplify CPIA criteria from 20
to 16; (ii) undertake analytic work to better inform the weighting of thevarious criteria; (iii) reconsider the weight given to the “governancefactor”; (iv) provide country authorities with an opportunity forcomment on the assessments; (v) establish an independent committee toreview the CPIA methodology every three years; and (vi) fully disclose
the numerical ratings of the 2005 CPIA exercise for IDA borrowers. The
criteria were revised in 2004 to take the recommendations made by thepanel into account.
As shown in Table 4 in the Data Appendix, the CPIA currently
comprises 16 criteria divided into four clusters. It is split into twogroups, the CPIA Cluster A-C (Economic Management; Structural
Policies; Policies for Social Inclusion/Equity), and the CPIA Cluster D(Governance Rating: Public Sector Management and Institutions). The
CPIA Cluster A-C includes 11 items and the CPIA Cluster D includes 5
items.
The economic management cluster comprises three specificcriteria: (i) macroeconomic management; (ii) fiscal policy; and (iii) debt
policy.
The structural policies cluster contains three criteria: (i) policies
and institutions for economic cooperation, regional integration andtrade; (ii) financial sector; (iii) business regulatory environment.
The policies for social inclusion/equity cluster have five criteria:(i) gender equality; (ii) equity of public resource use; (iii) building
human resources; (iv)social protection and labor; and (v) environmental
policies and regulations.
Finally, the governance rating cluster comprises five criteria: (i)property rights and rule-based governance; (ii) quality of budgetary andfinancial management; (iii) efficiency of revenue mobilization; (iv)
quality of public administration; and (v) transparency, accountability,
and corruption in the public sector (World Bank, 2008).
Moreover, each criterion includes a series of sub-indicators
through the guidelines that I will not detail here but that are available
online. For example, the macroeconomic management criterion can bedivided into three sub-indicators: (i) monetary/exchange rate policy
with clearly defined price stability objectives; (ii) aggregate demand43policies focus on maintaining short and medium-term external balance;(iii) avoiding crowding out private investment.
Using the guidelines, the Bank's country team gives a score to
every country comprised between 1 and 6 for each of the 16 criteria andgives each cluster the same weight in producing the overall country
assessment.7(C) THE 2010'S
What is striking is that despite the economic crisis and theevaluation of the CPIA released by the Independent Evaluation Group(IEG) in 2009 (IEG, 2009), the criteria used in the CPIA as of today (2012)
are exactly the same than those of 2008. The only difference is that“macroeconomic management” is now called “monetary and exchange rate
policies.”
The main recommendation of the IEG was to “strengthen the useof financial indicators in the CPIA write-ups” (IEG, 2009) as if finance wasbut the only important thing to bring about sustained growth. This isespecially striking given the fact that we know from the literature that
there is a key trade-off between safe and sound finance on the one hand
and the risk-taking in financial sectors’ intermediation between savers
and investors on the other hand. Moreover the pattern of the financial
sector maturation varies considerably among countries. It has been
widely showed that financial instability can lead to poor economic
growth. For example, Williamson and Mahar (1998) and Kaminsky andReinhart (2001) have shown that financial opening preceded most crises.
Griffith-Jones (2000) similarly underlines that international markets are
inherently unstable due to information asymmetries. Hence it seems
that the World Bank, at least from the CPIA point of view, has learned
little from the crisis.
As I emphasize below, there is nothing in the CPIA that is
related to what could bring sustained growth to developing countries.

More precisely, for each criterion, countries are rated on a scale of 2 (weak) to 5
(strong), and a country is rated a 1 if it is very weak for two years or more and a
6 if it is very strong for three years or more.
744

2.2 DESCRIPTIVE EVIDENCE
In this paper, I use the annual series of the CPIA for 146
countries between 1977 and 2008.
Interestingly enough, despite the fundamental changes in the
CPIA design described above and despite a general understanding thatdeveloping country policies have improved on average since 1977,
average CPIA results across countries have remained remarkably steady
between 1977 and 2008. This appears clearly in Figure 1(a). 8
Moreover, CPIA results have been concentrating increasingly
around the median (Figure 1(b)). One can argue that this steadinesscomes from the fact that some developing countries have improved
substantially while others have declined. However, in this case, thestandard deviation of the CPIA ratings should have risen, whereas it
appears that it has decreased since 1985 (Figure 1(c)). According to Gelb,
Ngo and Ye (2004), some inertia is to be expected in the ratings because
they assess institutions and capacity to implement policies rather thanjust “stroke-of-the-pen” policy changes. This can cause CPIA scores tolag reform efforts, as better policies can require time to become properlyreflected in the ratings. However, the concentration of the resultsaround the same median for thirty years cannot be explained by such alag, which leads us to question the current relevance of the CPIA.
Indeed, if the CPIA criteria have changed while at the same time thescores have remained the same, one can argue that there is some
“hidden conditionality” in the CPIA. I come back to this point below.
However, one can also propose alternative explanations to thisempirical fact, especially the fact that the CPIA is a way to grade
countries in a “relative” rather than an “absolute” way, the goal being tosort countries for aid allocation purposes. But this does not explained
the decrease in standard deviations, or the higher concentration aroundthe median.

Similarly, Herman (2004) emphasizes that “although the index was substantiallyrevised in 1998 (and again in 2001) and smaller revisions are made each year, neither
the changes in the structure of the CPIA nor in the definitions of individual items
seemed to cause significant changes in the rating scores, at least through 2000.” Seealso World Bank, 2010.
845

Figure 1: Descriptive Evidence on CPIA, 1977-200846

Note: These figures present some annual descriptive statistics of the CPIA
between 1977 and 2008. Figure 1(a) plots the average annual value of the
CPIA. Figure 1(b) plots the annual median value of the CPIA. Figure 1(c) plots
the annual standard deviation of the CPIA.
Source: CPIA data, World Bank.
If we now look at the average CPIA score by regions, somedifferences across regions appear (Figure 2). At the end of the 1970s,
South Asia had the lowest score with an average score below 3 (Figure2(e)), followed by Sub-Saharan Africa (Figure 2(a)). However, Asia
improved its rating since the end of the 1980s much more than SubSaharan Africa. Latin America and the Caribbean also improve theirrating during the 1990s (Figure 2(b)). The region which has the best
average CPIA score today is Eastern Europe and Central Asia which,despite a slight decrease during the 1990s, is back to its end of the 1970s
average score (Figure 2(d)).
However, despite these small changes, it is important tounderscore that the average CPIA score for each region has been
incredibly stable during the 1977-2008 period. This again goes in the
direction of those arguing that there may be today some hidden
conditionality that comes with the CPIA.

47

2.3. THE RELEVANCE OF THE CPIA: REVIEW OF THE
EXISTING EVALUATIONS(A) EX ANTE CONDITIONALITY
The first caveat of the CPIA is that it relies on policies rather
than on outcomes. From this point of view, it corresponds to a model of“ex ante conditionality.” The main problem of ex ante conditionality isthat until now it has never worked. As underlined by Stiglitz (1999),“good policies cannot be bought.”
What is often heard in the public opinion, the criteria on which
the CPIA relies are for a very large majority considered as important
determinants of growth, poverty reduction and effective use of aid in
the literature and are not object of current controversies. A possible
interpretation of this finding is that the CPIA may have experienced
remarkable changes during the last years with the disappearance of the
explicit mention of a set of policy imperatives. For example, it appears
that certain lessons of the post-Washington Consensus, such as thehazards of capital account liberalization and the fragility of the financial
sector in developing Stiglitz (1998(b)) have filtered through into Bank
practice. From this point of view, the CPIA seems to have acquired more
relevance.
However, as van Waeyenberge (2006) suggests, the meaning ofthese changes is open to a second possible interpretation. The question
could be raised as to whether those imperatives that have disappeared
from the narrative guidelines of the CPIAs may have somehow become“embedded” and now steer the CPIA exercise in less visible ways. Van
Waeyenberge (2006) illustrates this point with the assessment of trade
policy in the 2004 CPIA questionnaire (World Bank, 2004). This
questionnaire focuses exclusively on the policy framework regarding
trade in goods, without reference to the rules and regulations affecting
capital flows. The narrative guidelines on the assessment of the financial
sector, in turn, do not make explicit reference to issues regarding foreign
investors, state ownership or directed credit. However, vanWaeyenberge (2006) argues that closer scrutiny of the guideposts that
accompany
thenarrative
guidelines
for
these
respective
policy/institutional categories reveals how these specific policy
imperatives have in fact been subsumed in the “diagnostic reports” that48

now serve as guideposts to staff's assessment: “these typically embody abias in favor of foreign investment and trade, and are anchored in a frameworkof traditional welfare economics where government intervention is tolerated
only in the context of static market failure.”
This point follows the lines of those arguing that there is hidden
conditionality in the CPIA. This could help explain at least in part the
surprising steadiness of the CPIA scores despite the important changes
in the criteria.

Figure 2: Descriptive Evidence (Average) on CPIA by Region, 1977-2008

49

50

51

Note: These Figures present the average annual value of the CPIA by region.
Figure 2(a) plots the average annual value of the CPIA for Sub-Saharan Africa;
Figure 2(b) for Latin America and the Caribbean; Figure 2(c) for the Middle
East and North Africa; Figure 2(d) for Eastern Europe and Central Asia;
Figure 2(e) for South Asia and Figure 2(f) for East Asia and the Pacific.
Source: CPIA data, World Bank.
(B) A ONE-SIZE-FITS-ALL APPROACH TO DEVELOPMENT
Another caveat of the CPIA is that it relies too much on a “onesize-fits-all” approach to development while it has been shown in theliterature that “there is no universal recipe” (Barder and Birdsall, 2006).9This point is made in Kanbur (2005) as well as in Cage (2009 (b)). For
example as to growth, Cage (2009 (b)) underlines that growthpromoting policies tend to be context-specific: one has to take into
account individual country experiences when analyzing thedeterminants of sustained growth. Even the World Bank seems to haveaccepted this new emphasis on country specificities. For example,
drawing the lessons of the 1990s, the World Bank underlines that “there

Similarly, Hoff and Stiglitz (2011) emphasize that “there are clearly no surefire
formulas for success; if there were, there would be more successes.”952

is no one right way to achieve development” and that “which options should bechosen depends on initial conditions, the quality of existing institutions, thehistory of policies, political economy factors, the external environment, and last
but not least, the art of economic policymaking” (World Bank, 2005).
The CPIA does not correspond to the empirical reality ofdevelopment. Being the same for every country, it relies too heavily on a
uniform model of what works in development policy (Kanbur, 2005).
Even if this model were valid “on average,” the variations around theaverage make it an unreliable sole guide to the country-specificproductivity of aid in achieving the final objectives of development.
Moreover, the CPIA does not only rely on a uniform model ofwhat works in development policy, but it does so by underlying very
specific policies. This clearly appears if one considers the “Policies andInstitutions for Economic Cooperation, Regional Integration & Trade”
criterion and the “Quality of Budgetary and Financial Management”
criterion. They are much more detailed than whatever can be found in
the literature, relying on too specific quantitative policies. Moreover,whereas the literature insists on the necessity to set priorities, the CPIA
seems to put everything on the same plan.
Relying too heavily on a uniform model, the CPIA thus does notappear to be a good tool for allocating aid, at least conceptually. We
show that it is even more the case empirically, since it is not a goodpredictor for economic growth.
2.4. IS THE CPIA A GOOD P REDICTOR FOR ECONOMICGROWTH? AN EMPIRICAL ANALYSIS
In this section, I test empirically whether the CPIA is a goodpredictor for economic, using an annual panel dataset over 146
countries between 1977 and 2008.
(A) DATA DESCRIPTION AND DESCRIPTIVE STATISTICS
In order to determine whether the CPIA is a good predictor for
economic growth, I run growth regressions with the CPIA score and theannual change in the CPIA as control variables in a panel of 146

53

developing countries over the 1977-2008 period.10 As a dependent
variable, I use the growth rate of per capita GDP. Usual controls incross-country growth equations, used for example in Levine and Renelt(1992), Ramey and Ramey (1995) and Aizenman and Marion (1999), arethe initial log level of real GDP per capita; the initial fraction of therelevant population in secondary schools; the initial growth rate of the
population; and the average share of trade in GDP over the period.
However, since all these controls are fixed at the country level, I choose
to introduce directly country fixed effects in all the specifications forrobustness reasons. I also control for M2 as a share of GDP lagged one
period and aid flows. Panel data on aid flows are taken from the OECD
Development Assistance Committee (DAC) annual series. Following
Roodman (2006), I use the Net Aid Transfers (NAT) variable formeasuring aid flows.11 Table 1 provides summary statistics for a few key
statistics.

Table 1: Summary Statistics12

CPIA Score
CPIA Change
Per Capita Growth Rate

Mean / sd
3.16(0.77)
2.10(8.13)
1.74(5.15)For the description and the sources of the data in more details see the Data
Appendix.
10

NAT is a net transfer concept, net of both principle payments received on
ODA loans and of interests received on such loans. Moreover, NAT excludes
cancellation of old non-ODA loans since such cancellation generates little or no
additional net transfers.
11

Numbers in parentheses are standard deviations and the others are averages.
Variables are described in the Data Appendix.
1254

Aid/GDP

7.95(10.93)Observations

1095(B) EMPIRICAL SPECIFICATION
Equations are estimated using a panel of eight four-year periods
from 1977-1980 through 2005-2008. Thus, an observation is a country's
performance average over a four-year period. The averaging over fouryear, which is usual in the literature, allows me to avoid the nonstationarity problem for the growth rate.
The baseline empirical specification is:( )CPIA Score
CPIA Change
X
Where index the countries and stands for the eight four-year
periods (from 1977-1980 to 2005-2008). is the growth rate of per capita
GDP; “CPIA Score” is the average CPIA score over the period; and“CPIA Change” is the average of the annual change in CPIA rating overthe period. X is a vector of control variables that vary with thespecification considered.
are country fixed effects;
period fixed
effects; and is a country-period shock.
I estimate equation (1) using both OLS with robust standard
errors and two-step Arellano-Bond GMM (Tables 2 and 3). The use of
two-step Arellano-Bond GMM is driven by possible endogeneity
concerns. The advantage of the system GMM method is that it helps toovercome endogeneity concerns in the absence of any strictly exogenous
explanatory variables or instrument.13 The results are robust to bothmethodologies.

When I estimate my regressions using two-step system GMM, I thus use theforward orthogonal deviations transform instead of first differencing because it
maximizes the sample size in panel with gaps (Roodman (2006)). The forward
orthogonal deviations transform is an alternative to differencing proposed by
Arellando and Bover (1995) that preserves sample size in panel with gaps.
Indeed, instead of subtracting the previous observation from thecontemporaneous—what does the first-difference transform which thus
magnifies gaps in unbalanced panels—it subtracts the average of all future

13

55

(C) RESULTS
Tables 2 and 3 presents the results of the impact of performanceas measured by the CPIA score and the annual changes in this score on
the growth rate of per capita GDP (estimation of equation (1)). I find apositive and statistically significant coefficient for the CPIA score using
both OLS and two-step Arellano-Bond GMM (columns 1 and 2). I alsofind a positive impact of the annual change in the CPIA rating but it is
not statistically robust to the use of two-step Arellano-Bond GMM.
However, these estimates do not prove causality. As acknowledged byGelb Ngo and Ye (2004) despite the use of clear benchmarks to derive
CPIA ratings, it is possible that assessments are colored by perceptionsof “how well the country is doing” which are influenced by recent
growth trends. In this case, the positive coefficient I obtain for the CPIA
score would simply reflect the fact that CPIA scores themselves respondto observed growth rates and so is not indicative of the fact that thisscore can be interpreted as a good predictor for growth rates.14
In the “Staff Guidance Notes” used by the World Bank staff inorder to measure policy performance, it is strongly emphasized that the
only thing that has to be taken into account is the short term: “The writeup should focus on the developments of the past one calendar year (...). Unlessabsolutely necessary, staff are not expected to report developments of more than
two years ago in the write-up.”; “Policy performance should be rated against
the CPIA criteria, rather than the degree of improvements from the previous
year, and in relation to the ratings of the benchmark countries.” Thisemphasis on the short term can explained while the assessments arecolored by the current growth rates.
In order to test whether or not the CPIA score can be interpreted
as a good growth predictor, I introduce as a control variable the CPIA
score lagged one period. Obviously, this cannot be determined by theavailable observations of a variable. No matter how many gaps, it is computable
for all observations except the last for each individual, so it minimizes data loss.
And since lagged observations do not enter the formula, they are valid
instruments.
Similarly, Glaeser et al (2004) underline that indicators measuring the qualityof institutions, supposed to explain economic growth, are in fact the result andnot the cause of economic growth.
1456

current growth rate. But if I were to find a strong positive correlation
between the CPIA score lagged one period and the following period
growth rate, then the CPIA score could be interpreted as a goodpredictor of future growth.
When I estimate equation (1) with this new control, I find anegative and statistically significant coefficient for the CPIA score
lagged one period, using both OLS and two-step Arellano-Bond GMM(column 3). This means that the contemporaneous correlation between
the CPIA score and the growth rate comes from the fact thatassessments are colored by current perceptions of country
performances. More importantly, this means that the CPIA score is avery bad predictor for future growth rates since the countries with thelowest CPIA scores one period ago are those that do better in terms ofgrowth during the following period. Moreover, the coefficient for the
CPIA score lagged one period is negative (and statistically significant
for Arellano-Bond GMM) whether or not I include in the regression thecurrent CPIA score (column 4).
One can argue that these estimates do not distinguish between
the effect of performance as measured by the CPIA and other influenceson growth that may themselves reflect the CPIA rating. For example,
growth in high-performing countries may be partly driven by increased
AID flows in response to higher CPIA scores. In order to control forthese other influences, I include aid flows normalized by GDP as acontrol variable (column 5) as well as the square of these flows tocontrol for decreasing returns of aid (column 6). The introduction ofthese controls, whether I use OLS and Arellano-Bond GMM estimations,or 2SLS and 2-step feasible IV/GMM in order to control for aid
endogeneity, does not change the results (columns 5, 6 and 7). 15
Finally one can claim that the negative and statisticallysignificant coefficient I obtain for the CPIA score lagged one period
comes from the presence of some outliers in the sample. In order tocheck whether this is the case, I identify influential observations using
the method of Hadi (1992), which classifies nine observations as outliers

In columns 6 and 7 aid flows are instrumented by the correlation of thecountry votes with those of the US in the UNGA lagged one period.
1557

at the 5 percent level.16 Removing these observations does not change
the results (column 8).
The negative coefficient I obtain for the CPIA score lagged one
period thus seems to be robust. It appears that the CPIA is not a goodpredictor of economic growth.

Table 2 : OLS and 2SLS Estimation17

CPIA Score

1

2

3

4

5

OLS

OLS

OLS

OLS

OLS

b/se

b/se

b/se

b/se

b/se

1.819***-0.352

1.561***-0.4081.954***-0.406

1.957***-0.41

0.060*

0.015

0.015

-0.032-0.036-0.035CPIA Change(One-Period) Lag of
CPIA Score

0.923**-0.423-0.348-0.4190.981**-0.435Period and Country FE

Yes

Yes

Yes

Yes

Yes

Aid

No

No

No

No

Yes

Aid Square

No

No

No

No

No

Outliers Included

Yes

Yes

Yes

Yes

Yes

Angola in the 2005-2008 period; Azerbaijan in the 1993-1996 and 2005-2008
periods; Equatorial Guinea in the 1997-2000 and 2001-2004 periods; Liberia in
the 1989-1992 and 1997-2000 periods; Tajikistan in the 1993-1996 period; andUkraine in the 1993-1996 period.
16* p<0.10, ** p<0.05, *** p<0.01. Table 2 reports OLS and 2SLS estimates. Table 3
reports Arellano-Bond GMM estimates The unit of observation is acountry/period. Standard errors in parentheses are robust. The dependent
variable is the growth rate of per capita GDP. The endogenous variable for the
2SLS estimations are the aid ows. The excluded exogenous variable for the 2SLS
estimations is the correlation of the country votes with those of the US in the
UNGA lagged one period. All the regressions include M2 as a share of GDP as acontrol. The controls are described in more details in the text.
17

58

R-sq

0.48

0.53

0.54

0.51

0.54

Observations

766

748

734

734

722

6

7

8

OLS

2SLS

2SLS

b/se

b/se

b/se

1.889***

1.958***

2.297***-0.425-0.568-0.426

0.014

0.005

-0.032-0.035-0.038-0.032-0.993**-0.954**-0.855**-0.436-0.468-0.361

Period and Country FE

Yes

Yes

Yes

Aid

Yes

Yes

Yes

Aid Square

Yes

No

No

Outliers Included

Yes

Yes

No

R-sq

0.54

0.49

0.56

Observations

722

658

653

CPIA Score
CPIA Change(One-Period) Lag of CPIA Score

59

Table 3: GMM Estimation18

CPIA Score

1

2

3

4

5

GMM

GMM

GMM

GMM

GMM

b/se

b/se

b/se

b/se

b/se

1.766***-0.3651.516***-0.343

1.446***-0.3381.491***-0.339

0.042

0.006

0.008

-0.031-0.036-0.037CPIA Change(One-Period) Lag of
CPIA Score

1.205***-0.42

1.433***-0.362

1.271***-0.427

Period and Country FE

Yes

Yes

Yes

Yes

Yes

Aid

No

No

No

No

Yes

Aid Square

No

No

No

No

No

Outliers Included

Yes

Yes

Yes

Yes

Yes

Observations

591

571

559

563

547

* p<0.10, ** p<0.05, *** p<0.01. Table 2 reports OLS and 2SLS estimates. Table
3 reports Arellano-Bond GMM estimates The unit of observation is acountry/period. Standard errors in parentheses are robust. The dependent
variable is the growth rate of per capita GDP. The endogenous variable for the
2SLS estimations are the aid ows. The excluded exogenous variable for the 2SLS
estimations is the correlation of the country votes with those of the US in the
UNGA lagged one period. All the regressions include M2 as a share of GDP as acontrol. The controls are described in more details in the text.
18 18

60

6

7

GMM

IV GMM IV GMM

b/se

b/se

b/se

1.487***

1.958***

2.297***-0.345-0.561

-0.42

0.008

0.005

-0.032-0.037-0.038-0.032-1.280***-0.954**-0.855**-0.427-0.463-0.357

Period and Country FE

Yes

Yes

Yes

Aid

Yes

Yes

Yes

Aid Square

Yes

No

No

Outliers Included

Yes

Yes

No

Observations

547

656

651

CPIA Score
CPIA Change(One-Period) Lag of CPIA
Score

8

(a) VOTES IN THE UNGA
I finally find that there is a strong and statistically significant
positive correlation between the CPIA scores of developing countries
and the correlation of their votes with those of the US in the UNGA.
This appears clearly in Figure 3. For each year between 2000 and 2008, I
plot the relationship between the correlation of the votes with those of
the US in the UNGA and the CPIA score of the countries. It appears
clearly that this relationship is positive and statistically significant: thehigher the correlation of the votes, the higher the CPIA score.
Obviously, correlation is not causality, but it seems hard to findan intuitive causal link going from the CPIA score to the correlation of
the vote in the UNGA. On the contrary, one can argue that CPIA scores
are biased in favor of countries having political links with the US.
Moreover, if one remembers that the literature on aid allocation has
shown that aid may be used to buy political support from the recipientsof aid (Alesina and Dollar, 2000; Alesina and Weder, 2002; Schraeder et.
al., 1998; Kuziemko and Werker, 2006), another interpretation could bethat countries to which the World Bank is willing to give more aid
received a higher CPIA score in order for these countries to effectively

61

receive more aid through the Bank allocation formula. Whatever the
precise sense in which that might or might not be the case, thisquestions the relevance of the CPIA.

Figure 3: CPIA Score and the Correlation of the Votes with those of the US in
the UNGA, 2000-2008

62

These Figures present for each year between 2000 and 2008 correlation between
the CPIA scores of developing countries and the correlation of their votes withthose of the US in the UNGA.
Source: CPIA data are from the World Bank; Correlation of the Votes withthose of the US in the UNGA data has been constructed by the author using
UNGA Votes data from Erik Voeten.

The CPIA, despite all the recent modifications andimprovements that have been made and need to be acknowledged, thus
still appears as a blunt and biased tool that can and should be improvedupon.

3. HOW CAN WE IMPROVE U PON THE CPIA?
In this section I first underline the fact that other criteria, and inparticular the role of the state and the quality of industrial policy need
to be taken into account into the CPIA. Focusing more specifically on
the allocation of development aid, I then consider the alternative
proposals to the CPIA that have been formulated in the literature and in63

particular the one of Kanbur (2005). I finally make concrete proposals
for the development of new possible allocations based on the idea ofusing “aid effectiveness” as an allocation tool.
3.1. INTRODUCING NEW CRITERIA INTO THE CPIA
There is still nothing in these criteria related to what could bringsustained growth to developing countries, for example fiscal capacity or
industrial policy. The words “fiscal capacity” or “industrial policy” do
not even appear in the 103 pages of the “Staff Guidance Notes” for the2012 CPIA. As I will underline it below, there is similarly nothing onexport promotion strategies despite the fact that it is widely
acknowledged that all successful liberalizations either explicitly or
implicitly promoted export growth. The CPIA only emphasizes thenecessity to remove trade restrictions.
(A) THE ROLE OF STATE BUILDING AND FISCALCAPACITY
The CPIA clearly underestimates the role that a wellfunctioning government can and must play in the development process.
This is striking when one considers the “trade criteria” in which it isunderlined that “MFN tariffs have been streamlined into a limited number oftariff bands in many countries, so CPIA ratings should reflect how
distortionary is the overall structure of trade taxes, including not just tariffs
but also other border taxes.”
From this point of view, the CPIA totally ignores the fiscal
consequences of trade liberalization, while trade liberalization can havea very negative impact for developing countries in terms of tax revenues
as shown by Cage and Gadenne (2012). Trade taxes are indeed an
important source of revenue for developing countries. These revenues
have fallen over the past decades as these countries liberalized trade.
Many developing countries simultaneously experienced a decrease in
their total tax revenues. These appears clearly in Figure 4 from Cage andGadenne (2012). Using a novel panel dataset of tax revenues andgovernment expenditures in developing countries between 1945 and2006, Cage and Gadenne (2012) identify 110 episodes of decreases intariff revenues. They show that less than half of the countries recover64

the lost tax revenues 5 years after the start of the episode. Moreover theyfind a similar picture when they consider government expenditures.

Figure 4: Evolution of tax revenues as a share of GDP, 1975-2005 (Cage andGadenne, 2012)65

Note: All values are median values for the country group and time period
considered. The sample includes in each time period 26 low income countries,
40 middle income countries and 32 high income countries.
Source: Cage and Gadenne (2012).
The questions are thus the following: how to deliver a proper
education, health and infrastructure system with tax revenues
representing less than 15 percent of GDP, creating a clear competitive
disadvantage for developing countries? And how to bring sustained
growth without a proper education, health and infrastructure system?
In order to levy domestic taxes—and so to be able to open itself tointernational trade—a country needs pre-existing tax capacity. These tax
capacities are not taking into account in the CPIA. I argue in favor of
their inclusion as one of the main criterion rather than only emphasizing
the necessity to remove trade restrictions.
(B) EXPORT PROMOTION POLICIES
Similarly, while the CPIA only emphasizes the necessity toremove trade restrictions, efficient export promotion policies may havean important role to play and should be taken into account. Cage andRouzet (2012) show for example that export subsidies may have apositive welfare effect on exporting developing countries by improving

66

both the average quality of their exports and their terms of trade. They
study the effect of firm and country reputations (the famous “made in”
label) on exports when buyers cannot observe quality prior to purchase.
Measuring national reputations by analyzing the content of US
newspaper articles about foreign countries over the period 1988-2006,
they find that more positive news coverage of foreign countries andcompanies is associated with higher unit values of the exports to theUnited States, particularly in sectors with larger scope for verticaldifferentiation. They rationalize this finding in a model in which firmlevel demand is determined by expected quality which depends on both
past experience with good and country of origin’s reputation.
Asymmetric information acts as barrier to entry for high-quality firms
but facilitates sales by “fly-by-night” low-quality firms. Countries with abad quality reputation can thus be locked into exporting low-quality,
low-cost goods. In this case, export subsidies have a positive welfare
effect on exporting countries.
The findings of this paper are consistent with the success ofsome export-led growth strategies for developing countries. East Asian
economies in particular pursued a few decades ago strategies consistingon exporting low-quality, low-cost goods and gradually moving up tohigher quality, higher unit value goods.19 China is currently attempting
to follow the same path. This is for example the strategy of Lenovo, theonly Chinese company to get a worldwide sponsorship for the Beijing
Olympics. With a Western sounding name, the legacy of IBM brandname and technology and the chief executive from Dell and NCR,
Lenovo Group is not a company that most Americans would assume is
Chinese. This is exactly what the company aims for, although Lenovo’s

At the end of the Second World War, “Made in Japan” goods had thereputation of being cheap low-quality goods. Japanese companies were
suffering from an inferior “national brand.” Currently, Japanese cars andelectronics ranked among the most reliable in all consumer surveys. Japan’s
pattern of specialization in manufactures has evolved dramatically. Japanesecompanies achieved such a dramatic change by privately imposing strict quality
norms. They formed export cartels which provided product quality guarantees.
In particular, they set product design and quality standards; establishedindustry brand names; guaranteed delivery schedules; and mediated thedisputes between exporters and foreign buyers.
19

67

largest shareholder is the Chinese government, because it is aware offact that the American consumer associates Chinese products withcheap and unreliable.
Without policy intervention, moving up to higher quality
exportations may not be feasible if the economy is trapped in a selffulfilling low equilibrium, in which country’s reputation for low quality
prevents high-quality firms from entering the export markets. In thiscase, a successful export promotion policy would consist in subsidizing
exporters’ initial losses or investing public resources into raisingcountry’s perception abroad. This is why the quality of the industrial
policy—and for example the fact of having an efficient export promotion
strategy—has to be taken into account in the CPIA.
3.2. CRITERIA FOR AID ALL OCATION
One of the main uses of the CPIA is as a criterion in thedevelopment aid allocation formula. Indeed, when a country is eligible
to the International Development Association (IDA)—the development
aid agency of the World Bank—the IDA formula to allocate aid is madeof four different terms: (i) the CPIA; (ii) the portfolio performance which
is used to determine a rating for each country's implementation
performance; (iii) population; and (iv) per capita income.20 The
combination of the CPIA and of the portfolio performance forms theCountry Performance Rating (CPR):
CPR

CPIA
rating.

CPIA

CPIA

Portfolio

CPIA
stands for the clusters A through C of the CPIA;
for the cluster D; and Portfolio for the portfolio performance
The IDA allocation formula is then computed as follows:

In order to be eligible to the IDA resources, a country has to meet two criteria.
First, its relative poverty defined as GNI per capita as to be below an establishedthreshold which is updated annually (in fiscal year 2010: $1,135). Second, it has
to lack creditworthiness to borrow on market terms and therefore to need
concessional resources to finance its development program.
20

68

IDA Country Allocation⌊CPR

Population

(

Gini
)
Population⌋

In the last part of this article, I study alternative tools to the
CPIA to allocate aid in the most effective way.
(A) EXISTING ALTERNATIVE PROPOSALS TO THE CPIA(a) KANBUR'S PROPOSAL
Underlying that the CPIA implicitly relies too heavily on a
uniform model of what works in development policy, Kanbur (2005)
proposes to introduce outcome variables in the development aid
allocation formula.
Indeed, as it clearly appears from the formula, the IDA
essentially captures needs through the income criterion, and does not go
directly to indicators such as infant mortality, maternal mortality, girls'
education and other components of the Millennium Development Goals.
Moreover, the CPIA itself does not contain any final outcomes variables
like poverty, extreme poverty, girls' enrollment, etc. What it has instead
is a series of intermediate variables like trade policy, regulatory policy,
property rights, corruption, etc.
On the contrary, Kanbur (2005) argues in favor of an outcomesbased aid allocation, or at least in favor of introducing some outcome
variables in the CPIA itself. 21 His main idea is to measure the needs side
by side with the levels of the outcomes one is interested in, whilemeasuring the performance side by side with the rate of improvementof these outcome variables over a given period of time up to the point ofassessment, suitably normalized by the total aid flow over this period.
He gives the following example: a country that has very low levels ofgirls' enrollment in primary schools should get more aid on grounds ofneed. But a country that is showing rapid improvements of girls'
enrollment from this low level, relative to the aid it is receiving, should“While leaving the current IDA allocation methodology essentially intact, IDA should
introduce one new category of scoring in the CPIA. This category should evaluate theevolution of an actual development outcome variable up to the present. The choice ofvariable is open.”

21

69

get even more. A country that is showing relatively slow rates ofimprovement should get relatively less on account of this measure of
performance. The main advantage of this focus on outcomes is that it
prevents the easy temptation of a “one-size-fits-all” approach todevelopment.
As he acknowledges himself, this proposal is in the spirit ofCollier’s outcomes-based allocation (Collier et. al., 1997). They propose abasis for aid allocation in terms of retrospective assessment of a few
major outcomes such as growth. They show how outcome measures cancontrol for influences on growth over which the government has nocontrol and argue that donors should switch from attempting to“purchase” a pre-specified menu of policy changes to the allocation ofaid on the basis of periodic overall assessments of government
achievements.
Similarly, Barder and Birdsall (2006) defend the idea of“payments for progress,” the main objective being to link additional aid toclear evidence on progress already achieved on the ground. In order todo so, payments would be determined as a function of the outcomes
and not linked to the implementation of any particular policies, anyother intermediate outputs, or tied to purchases from particularsuppliers or companies.
(b) ADVANTAGES OF KANBUR'S PROPOSALOne of the main advantages of the Kanbur's proposal is that it
relies on performance-based measures—on actual performance—and sodoes not imply ex ante conditionality. Indeed, rating countries according
to their rates of improvement of certain outcomes rather than according
to their policies corresponds to an “ex post” approach of conditionality.
From the point of view of this approach, one has to reward countries
that used past aid well (ex post conditionality) without conditions (exante conditionality). This is in the spirit of the Paris Declaration (2005)
and of the following Accra Agenda for Action (AAA) (2008):
Developing countries and donors will work together at theinternational level to review, document and disseminate good practices
on conditionality with a view to reinforcing country ownership and70other Paris Declaration Principles by increasing emphasis on
harmonized, results-based conditionality”
This is an important improvement on the CPIA since, as I
underline above, using ex ante conditionality is a very inefficient way toallocate aid.
Moreover, the Kanbur's proposal is a useful improvement since
it underlines that the CPIA relies excessively on a “one-size-fits-all”
approach to development and proposes a way to overcome thisdifficulty with the use of outcome variables. Finally, his proposal is very
well argued and he anticipates various criticisms.
(c) LIMITS OF KANBUR'S PROPOSAL
Given all the advantages of the Kanbur's proposal, the only
criticism made by Buiter (2007) to this proposal that seems acceptable isthe one according to which realized past outcome changes as a measureof future aid productivity: “the aid could have been looted, diverted orwasted, that is, not even spent on any activity likely to boost the indicator, andthe improvement in the indicator could have been produced by domestic or
foreign factors that have nothing to do with the aid dispensed during thebenchmark period, but never mind....”22 In other words, the Kanbur's
proposal relies on the implicit assumption that past output indicators
are a good guide to future aid productivity. And this is still to be shown.
Similarly, McGillivray (2004) underlines that Kanbur (2005)'s
proposal does not really provide an understanding of what makes aid
works. This is why he argues in favor of more radical changes to the
IDA formula than outlined in the Kanbur's proposal. According to him,
what is required is a better knowledge of what makes aid work and therevisions to aid allocation formula should be considered in this light.
(B) THE NEED FOR AN AID PRODUCTIVITY MEASURE
What emerges clearly from the criticisms of both the CPIA andthe Kanbur proposal—and more generally of any outcomes-based

Similarly, Collier et. al. (1997) acknowledge that “one disadvantage withswitching from policies to outcomes is that it can reward good luck.”
22

71

allocation—is that what is needed is an aid productivity measure. The
CPIA is not an aid productivity measure, being excessively focused on a“one-size-fits-all” approach of development. An outcomes-based
allocation would not overcome this difficulty. In order to overcome it,
one needs to establish a clear statistical link between past outcomes andfuture aid productivity. This has never been done and seems hardly
feasible. Indeed, this supposes first to evaluate the elasticity of thisoutcome variable with respect to aid (which can be interpreted as aid
productivity). Second, this supposes to evaluate the elasticity of aid
productivity with respect to past changes in this outcome variable. In
both steps of the estimation, one would be faced with endogeneity andomitted variables concerns. Moreover, in case one would like tointroduce not one but various measures of outcomes, the estimation
would be even more complicated by the fact that these outcomes may beinterdependent. And then it remains to determine the optimal weight togive to each of these outcomes.
Well aware of all these difficulties but at the same time of thereal need for an aid productivity measure, I discuss below a new way toapproaching this issue. The idea is to use directly aid effectiveness as
such a measure.
(a) A NEW APPROACH: USING AID EFFECTIVENESSTO ALLOCATE AID EFFECTIVELY
Aid effectiveness has to be defined with respect to a given
outcome, which has to be chosen by donors when they establish theirselectivity criteria. This can be the growth rate of the economy; thereduction in the poverty rate; the rate of girls' enrollment or other goals
depending both on donors’ priorities and recipient countries
specificities. Aid is said to be very effective if aid elasticity with respect
to the outcome is very high. For example, if the outcome is the growthrate, the higher aid elasticity with respect to growth—i.e. the more thegrowth rate increases for each increase in the aid flows received—themore aid is effective.
Generally, in order to compute aid effectiveness, one would liketo estimate the following equation for each country and year :AidGDP( ) Outcome72WhereN()

measures aid effectiveness. Outcome

is the outcome ofinterest (for example the growth rate of per capita GDP) and

Aid
GDP

are theaid flows normalized by GDP.
is a vector of control variables.
is ayear-country shock. All the coefficients in equation (2) are time-varying,
which is why I write
to denote the coefficient on aid in country $i$ atyear $t$.
The difficulty comes from the fact that with the econometricmethods that are usually used the equation one estimates is not (2) but:Aid( ) Outcome
GDP
Where

N(

)

That is, one only computes one coefficient for each country
and the entire time period ( ) and not one coefficient country and
year( ). In other words, one cannot estimate aid effectivenessannually.
One way to estimate aid effectiveness annually—to implement
the estimation of equation (2)—is to use the “local Gaussian-weighted
ordinary least squares” method (used for example by Aghion andMarinescu (2007)). The basic idea of this method—which is also calledkernel-based nonparametric regression or local smoothing—is to put
more weight on the most recent years. For each year, points that arecloser in time are given more weight than points that are further away.
More precisely, all the observations are weighted by a Gaussian
centered at date but, since to estimate aid effectiveness in one only
wants to use the information available for the years preceding , I put azero weight on the years following .
Under this method, jumps in the coefficient are mainly due tochanges in the immediate neighborhood of date , as those observationsin the immediate neighborhood of dateare given highest weight.
Hence, if there is a change in the aid effectiveness coefficient in —sayan increase—this comes from the fact that the country has improved its
effective use of aid in . And so in terms of aid allocation, it has to be
rewarded for this improvement.

73

Using the local Gaussian-weighted ordinary least squares
method, one could thus estimate an aid effectiveness coefficient for eachcountry and each year. However, aid can be endogenous which can leadto biased results.23 In order to deal with these endogeneity problems,
one can use Gaussian-weighted two-stage least squares instrumenting
for aid. It is however important to underline that the relevance of themethod is totally independent of the instrument choice.
Using Gaussian-weighted two-stage least squares, one could
thus obtain a time-varying measure of aid effectiveness, with one
coefficient per year and per country. These coefficients can beinterpreted as an estimate of aid elasticity with respect to the outcome ofinterest, i.e. a measure of the country performance with respect to aid
effectiveness. This tool could thus be used to reward good “aidperformer.” Doing so, it helps overcome one of the main weaknesses ofthe outcomes-based allocations that have been proposed until now inthe literature: it does not reward good luck. Indeed, a country can have
one given year for example a very high growth rate and at the sametime obtain a very low coefficient for aid effectiveness if it did not use
aid in an effective way. In this case, its aid allocation decreases despite
its good growth performance. The tool I propose only relies on theimplicit assumption that past aid effectiveness is a good guide to future
aid effectiveness. This is a weaker and more relevant assumption thanthe one according to which past output indicators are a good guide to
future aid effectiveness.
One can also choose to normalize the coefficients obtained using
local Gaussian-weighted ordinary least squares by the “global” aid
effectiveness coefficient obtained by performing equation (3) for all thecountries of the sample taken together (cross-countries regression withcountry fixed effects). Another possibility could be, rather than tonormalize by the cross-countries coefficient, to take into account foreach country the performance of its neighbors, for example using thegeographical distance. Indeed, there may be some externalities createdThis endogenity can come from (i) reverse causation: growth causes aid (e.g.
the higher its growth rate, the less aid a country receives because it does notneed it); or (ii) simultaneous causation: an omitted variable causes both aid andgrowth.
2374

by an increase or a decrease in aid effectiveness in a country for its
neighbors.
A possible caveat of such a measure is that it does not take into
account how donors can have an impact on aid effectiveness. Implicit
here is indeed the assumption that aid performance is only theconsequence of decisions of the recipient country itself and not ofsomebody else. But aid effectiveness does not depend only on the
behavior of the recipient countries but also on the donor's behavior and
one does not want recipients to suffer from bad behavior of donors. One
possibility would be to control for an index of donor performance.
Similarly, aid effectiveness can be affected by events notdepending only on the recipient's economic policy, for example
exogenous shocks like natural disasters. One would have to be very
careful in controlling for these exogenous shocks.
Despite these caveats, I think that using and aid effectivenesscoefficient—together with other indicators—to allocate aid would be arelevant tool. Indeed, with such a tool, one does not give aid to countries
that are the best performers for example in the sense of having a higher
rate of girls' enrollment and so perhaps are not the one which need it themost, but to the countries where aid will be used in the most efficientway. That is to say, to the countries that have a sufficient absorptive
capacity for receiving higher aid flows. It could help allocating a scarce
resource in the most efficient way.

4. CONCLUSION
In this article I question the relevance of the different measuresof policy performance that are currently used. I evaluate more especiallythe pertinence of the CPIA and of the various alternatives that havebeen proposed in the literature.
Using a yearly panel dataset over 146 countries between 1977
and 2008, I show that the CPIA is correlated with current growth rates
but that it is not a good predictor for future economic growth. I thus
argue in favor of other measures of policy performance. I underline theneed of introducing new criteria when measuring policy performance.
In particular, I show that more weight has to be given to the role of thegovernment in the development process, which supposes to take into75

account its fiscal capacity. Fiscal capacity is indeed of crucial importancefor raising domestic tax revenues. I also underline the importance of thequality of industrial policy and especially of export promotion strategies
on the path towards sustained growth.
I then focus more specifically on the allocation of development
aid which is of great importance given both the scarcity and need foraid. I show that performance-based measures, as opposed to measures
implying ex ante conditionality, are more accurate instruments for aid
allocation. However, performance-based measures proposed in theliterature do not help overcome the difficulty of estimating the elasticity
of aid effectiveness with respect to outcome-based performanceindicators. They let unsolved the question of whether when a donor
rewards a recipient for its good performance with respect to a given
outcome variable it is not rewarding “luck” rather than an effective useof aid.
Since in order to allocate aid effectively it appears essential toevaluate the elasticity of aid effectiveness with respect to performanceindicators, I discuss a new tool based on this elasticity. Using new
econometric methods, I show that one could use a time-varying measureof aid effectiveness as an indicator of the performance of a country withrespect to aid efficiency. This tool shares with an outcome-based
allocation the advantage of not relying on ex ante conditionality.
Moreover, it is an improvement upon this outcome-based approachsince it is a way to reward good “aid performer” rather than good“luck.”
Needless to say, more research on aid effectiveness indicators isnecessary before they can be applied. The tool could indeed be used bydifferent donors with different goals (growth, poverty, education and soon.). This is an important characteristic because different criteria can beused given the complexity of the relationship between aid, growth andpoverty reduction, depending on the recipient country specificities andon the donor preferences. The downside is that aid effectivenesscoefficients might be too volatile to be used as single indicators. In myview, the most promising avenue is to use them together with other key
development indicators such as investment in fiscal capacities.

76

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Collier, P., and D. Dollar (2001): “Can the World Cut Poverty in Half?
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Gelb, A., B. Ngo, and X. Ye (2004): “Implementing Performance-BasedAid in Africa: The Country Policy and Institutional
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Glaeser, E., R. La Porta, F. Lopez-de Silanes, and A. Shleifer (2004): “Do
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APPENDIXDATA SOURCES AND DES CRIPTION
Aid: Net Aid Transfers (NAT). Source: DAC.
CPIA: Country Policy and Institutional Assessment. Annual
performance assessment of its client countries' capacity to effectively
absorb development assistance carried out by the World Bank since1977. Source: World Bank.
Per capita GDP growth rate: Annual percentage growth rate of percapita GDP at market prices based on constant local currency. Source:
WDI.
M2 (percent GDP): Money and quasi money comprise the sum of
currency outside banks, demand deposits other than those of the central
government, and the time, savings, and foreign currency deposits ofresident sectors other than the central government. Source: WDI.
UNus: Annual correlation of voting records in UNGA between recipient
and the US (-1 to 1). Source: Erik Voeten.
Table 4: CPIA Criteria 2008
A. Economic Management
1. Macroeconomic Management
2. Fiscal Policy
3. Debt Policy
B. Structural Policies
4. Policies and Institutions for Economic Cooperation, Regional
Integration & Trade
5. Financial Sector
6. Business Regulatory Environment
C. Policies for Social Inclusion/Equity
7. Gender Equality
8. Equity of Public Resource Use
9. Building Human Resources
10. Social Protection and Labor8111. Environmental Policies and Regulations
D. Governance Rating: Public Sector Management andInstitutions
1. Property Rights and Rule-based Governance2. Quality of Budgetary and Financial Management
3. Efficiency of Revenue Mobilization
4. Quality of Public Administration
5. Transparency, Accountability, and Corruption in the Public
Sector

Source: World Bank, 200882

IS INDUSTRIAL POLICY NECESSARY
AND FEASIBLE IN AFRICA?
Theoretical considerations and historicallessons
February 2013
Ha-Joon Chang 1
Faculty of Economics
University of Cambridge

Abstract
Even as the general attitude towards industrial policy becomes morepositive, its applicability to Africa continues to be treated withscepticism. The article asks whether Africa is uniquely incapable of
implementing successful industrial policy. Various arguments ofgeneral ‘Afro-pessimism’—based on climate, geography, history, andculture—are first criticised. Then four types of constraints on the successof industrial policy in Africa—natural resource abundance, political

This is a modified version of ‚Industrial Policy: Can Africa Do It?‛, a paper
presented at IEA/World Bank Roundtable on Industrial Policy in Africa,
Pretoria, South Africa, 3-4 July 2012. I thank for their helpful comments made by
the participants at the conference, especially, in alphabetical order, Mario
Cimoli, Akbar Noman, Simon Roberts, and Joseph Stiglitz.

1

83

economy, bureaucratic capabilities, and the changes in global economic
rules—are critically reviewed.

1. INTRODUCTION: RISING INTEREST IN
INDUSTRIAL POLICY SI DESTEPS AFRICA
Industrial policy has been one of the most controversial issues
in economics, especially in development economics (for a review of theindustrial policy debate since the 1980s, see Chang, 2011). Especiallysurrounding its role in the development success of East Asia, there wasa fierce debate, which came to head in the late 1980s and the early 1990s(Amsden, 1989; Wade, 1990; World Bank, 1987, 1991, and 1993; Stiglitz,
1996).
Fortunately, during the last decade or so, there have been anumber of developments in academia and in the real world that havemade industrial policy more acceptable and thus the debate
surrounding it less ideologically charged and more pragmatic andnuanced.
At the theoretical level, the market fundamentalist view that
there are very few theoretical justifications for industrial policy has lostits dominance. On top of that, the infant industry argument has beenrefined in a number of ways (Chang, 2002; Shaffaedin, 2005; Greenwald& Stiglitz, 2006; Dosi et al. (eds.), 2009). An increasing number of more
orthodox economists accept that there are many types of market failuresthat need to be addressed through industrial policy—not just the moreconventional ‘externalities’ problem, but also economies ofagglomeration and coordination failures (Lin’s interventions in Lin &Chang, 2009; Lin & Monga, 2012).
The interpretation of the evidence on industrial policy has also
evolved. It is increasingly recognized that industrial policy is not somehighly idiosyncratic practice found only in East Asian ‘miracle’
economies (Japan, South Korea, Taiwan, and Singapore) but what mostof today’s rich countries used when they were catch-up economies
themselves (Bairoch, 1993; Chang, 2002 and 2007; Reinert, 2007). Some84

econometric studies have even identified a positive correlation between
protectionism and economic growth in the late 19 th and the early 20th
century (O’Rourke 2000; Vamvakidis 2002; Clemens & Williamson, 2001;
Irwin, 2002, provides a criticism of these studies, which is thencountered by Lehmann & O’Rourke 2008). In particular, the increasing
recognition that Britain and the US—the supposed homes of free-market
and free-trade policies—as the pioneers of infant-industry promotion
through protectionism and other forms of industrial policy has added awhole new complexion to the history of capitalist development. Recent
studies, especially Chang (2002) and Reinert (2007), have revealed thatthe practice of infant industry promotion was first systematicallyapplied by Robert Walpole, the British Prime Minister of 1721-42, andthe theory of it was first invented by Alexander Hamilton, the first US
Treasury Secretary, in his report to the US Congress in 1791 (see Chang,
2002, for further details; Hamilton’s original report is Hamilton, 1791).
The ISI (Import Substitution Industrialization) experience inthe developing world before the 1980s has also been subject to a morenuanced interpretation. The role of industrial policy in the significant
economic development achieved by many Latin American countries
between the 1930s and the 1980s is increasingly accepted, as well as the
success of earlier protectionism in the continent in the late 19th and theearly 20th century (on the latter, see Clemens and Williams 2004). Even
the typical depiction of industrial policy in Africa, especially SubSaharan Africa, in the 1960s and the 1970s as an unmitigated disasterhas been questioned (Jerven, 2011).
More recently, the 2008 global financial crisis has enhanced thelegitimacy of industrial policy. First, the crisis prompted some majorindustrial policy actions—both defensive and proactive—by the richcountries that used to preach against industrial policy (e.g., bail-out of
the US automakers and in increase in ‘green’ subsidies in many
developed countries, including the US). Second, the crisis has prompted
countries like the US, and especially Britain, to accept that their financial
sector had been ‘over-developed’ and therefore that there is a need to‘rebalance’ their economies by reviving the manufacturing sector, if

85necessary through industrial policy. Third, the continued rise of China(and to a lesser extent Brazil) and the solid performance of Germany, allof which have actively used industrial policy, since the crisis have also
made people re-assess the importance of industrial policy.
This general shift in the mood in favor of industrial has not,however, extended to the African countries. However effective thepolicy may have been in Japan, Korea, or China (or even the US in the
19th century), it is argued, it simply cannot work in those countries. A
wider range of reasons is given—ranging from excessive natural
resource endowments (the so-called ‘resource curse’ thesis),
pathological politics, the lack of bureaucratic capabilities, and thechanges in the global economic rules—but the implication is that theAfrican countries would be better off sticking to their natural resource
advantages, rather than trying to develop manufacturing industries
through industrial policy.

2. ARE AFRICA’S DEVELOP MENT FAILURESSTRUCTURAL?— CLIMATE, GEOGRAPHY, CULTURE ,AND HISTORYIn the next section of this paper, we will discuss those factorsthat are supposed to make industrial policy inapplicable to Africa, but
we first need to critically review the arguments that Africa is doomed todevelopment failure because of its climate, geography, culture, andhistory—a group of arguments known as ‘Afro-pessimism’ (the mostprominent examples include Easterly & Levine, 1997; Bloom & Sachs,
1998; Collier & Gunning, 1999; Sachs & Warner, 2001; Acemoglu et al.,2001).
Now, in discussing these arguments, we should bear in mind
that there is a huge problem in talking of Africa as if it is homogeneous.
After all, it is a continent of nearly 60 countries (the exact number
depending on your attitude towards entities like Western Sahara) withvery varied natural and human conditions. If most African economies
look rather similar to each other economically, it is not because they are86

in the same continent, but because all economies—in whichevercontinent they are—at low levels of development look rather similar toeach other, due to the lack of specialization and diversification in the
production structure, which then leads to high degrees of homogeneity
in occupational structures, social organizations, and lifestyles. Bearing
this important point in mind, let us see how those arguments thatemphasize structural factors, like climate, geography, culture, andhistory in explaining African development experiences.
2.1. THE ARGUMENTS
According to the argument emphasizing the climate factors,
being close to the equator, the African countries suffer from tropicaldiseases, such as malaria. These diseases become burdens on economic
development, as they reduce worker productivity and raise healthcare
costs. Some also point out that tropical soil is of poor quality, reducing
agricultural productivity.
The geography argument points out that many Africancountries are landlocked and thus are disadvantaged in integrating into
the global economy through international trade. Many of them are alsoin ‘bad neighborhoods’, in the sense that they are surrounded by otherpoor countries that have small markets (which restrict their trading
opportunities) and, frequently, violent conflicts (which often spill over
into neighboring countries).
Two aspects are highlighted by those arguments emphasizing
the historical factors—ethnic diversity and colonialism. High ethnic
diversity of many African nations makes their people distrust eachother, raising transaction costs. Ethnic diversity, it is pointed out, islikely to encourage violent conflicts, especially if there are a few groupsof similar strengths (rather than many small groups, which are moredifficult to organize). Africa’s colonial history is argued to haveproduced low-quality institutions in most African countries, as thecolonizers did not want to settle in countries with too many tropicaldiseases (so there is an interaction between climate and institutions) and87

thus only installed low-quality institutions that were needed forresource extraction (‘extractive institutions’ of Acemoglu et al., 2001).
The cultural argument is usually presented in rather
convoluted ways to avoid the accusation of racism, but it is essentiallythat African culture is bad for economic development—Africans do notwork hard, do not plan for the future, and cannot cooperate with eachother. In explaining the economic divergence between South Korea andGhana, two countries that were at similar levels of economic
development in the 1960s, Samuel Huntington, of The Clash of
Civilizations fame, argues: ‚Undoubtedly, many factors played a role,
but < culture had to be a large part of the explanation. South Koreansvalued thrift, investment, hard work, education, organization, anddiscipline. Ghanaians had different values. In short, cultures count‛(Huntington, 2000, p. xi). Daniel Etounga-Manguelle (2000), a
Cameroonian engineer and writer writes: ‚The African, anchored in his
ancestral culture, is so convinced that the past can only repeat itself that
he worries only superficially about the future. However, without adynamic perception of the future, there is no planning, no foresight, no
scenario building; in other words, no policy to affect the course of
events‛(p. 69). And then he goes on to say that ‚African societies are likea football team in which, as a result of personal rivalries and a lack ofteam spirit, one player will not pass the ball to another out of fear thatthe latter might score a goal‛ (p. 75).
2.2. THE CRITICISMS
All the factors highlighted by the ‘structural’ arguments
discussed above are relevant, to one degree or another. However, thefact that a factor is given by nature or history does not mean that theoutcome is pre-determined. Indeed, the fact that most of today’s richcountries have also suffered from similar ‘structural’ handicaps suggeststhat all those structural factors are not insurmountable (Chang, 2009a,
2009b, 2010).

88

(A) CLIMATEIn relation to the climate argument, we should first note thatmany of today’s rich countries used to have malaria and other tropicaldiseases, at least during the summer—not just Singapore, which is bangin the middle of the tropics, but also Southern Italy, Southern US, South
Korea, and Japan. These diseases have largely (although not entirely)
disappeared in those countries not because their climates havesomehow changed, but because they have better sanitation (which has
vastly reduced their incidences) and better medical facilities (whichallow them to effectively deal with the few cases that still occur), thanks
to economic development.
Moreover, it should be pointed out that not just tropical climate
but also frigid and arctic climates (affecting a number of rich countries,
such as Finland, Sweden, Norway, Canada, and parts of the US) impose
economic burdens—machines seize up, fuel costs skyrocket, andtransportation is blocked by snow and ice. The Scandinavian countries
used to be effectively landlocked for half of the year, until the advent of
the ice-breaking ship in the late-19th century. Once again, cold climate
does not appear to hold those rich countries back because they haveacquired the money and the technologies to deal with it (the same as in
the case of Singapore’s tropical climate).
When you think about it, there is no a priori reason to believethat cold climate is better than hot climate for economic development.
Indeed, in Politics (Book VII, chapter 7), Aristotle argued that theEuropean societies are not very developed because their climate is too
cold, which makes their people, well, stupid. He said: ‚Those who live
in a cold climate and in Europe are full of spirit, but wanting in
intelligence and skill; and therefore they retain comparative freedom,but have no political organization, and are incapable of ruling overothers. Whereas the natives of Asia are intelligent and inventive, butthey are wanting in spirit, and therefore they are always in a state ofsubjugation and slavery. But the Hellenic race, which is situatedbetween them, is likewise intermediate in character, being high-spirited89and also intelligent. Hence it continues free, and is the best governed ofany nation, and if it could be formed into one state, would be able torule the world.‛ (Aristotle, 2001, p. 1286)
Therefore, to blame Africa’s under-development on climate is toconfuse the cause of underdevelopment with its symptoms. Poor
climate does not cause under-development; a country’s inability toovercome the constraints imposed by its poor climate is a symptom ofunder-development.
(B) GEOGRAPHY
Much has been made out of the landlocked status of many
African countries. Landlockedness does impose economic burdens, butthen how do we explain the economic successes of Switzerland andAustria? These are two of the richest economies in the world, but they
are both landlocked. Some people would respond to this point by sayingthat those countries could develop because they had good rivertransport, but many landlocked African countries are potentially in thesame position; e.g., Burkina Faso (the Volta), Mali and Niger (the Niger),
Zimbabwe (the Limpopo), and Zambia (the Zambezi). So, once again,
the argument is based on confusion between the cause and thesymptom—it is the lack of investment in the river transport system,
rather than the geography itself, that is the problem.
Being in a ‘bad neighborhood’ may not be as disadvantageous
as it may seem. India has grown very fast in the last couple of decades,
despite being in the poorest region in the world (poorer than SubSaharan Africa), with its share of conflicts (the long history of military
conflicts between India and Pakistan, the Maoist Naxalite guerillas inIndia, Hindu-Muslim violence in India, the Tamil-Sinhalese ethnic war
in Sri Lanka, and so on).

90

(C) HISTORY
It would be silly to deny that ethnic divisions can hamper
growth. However, their effects should not be exaggerated. Ethnic
diversity is the norm elsewhere too. Even ignoring ethnic diversities inimmigration-based societies like the US, Canada, and Australia, many of
today’s rich countries in Europe have suffered from linguistic, religious,and ideological divides—especially of the ‘medium-degree’ (i.e. a few,
rather than numerous, groups) that is supposed to be most conducive to
violent conflicts. Belgium has two (and a bit, if you count the tiny
German-speaking minority) ethnic groups. Switzerland has four
languages and two religions, and has experienced a number of mainlyreligion-based civil wars. Spain has serious minority problems with theCatalans and the Basques, which have even involved terrorism. Due toits 560-year rule over Finland (1249 to 1809, when it was ceded to
Russia), Sweden has a significant Finnish minority (around 5 percent of
the population) and Finland, a Swedish one of similar proportion. The
examples can go on.
The East Asian countries, often believed to have exceptionallybenefited from their ethnic homogeneities, also have serious internal
divisions. You may think Taiwan is ethnically homogeneous, as its
citizens are all ‘Chinese’. However, to begin with, there is actually a tiny
native population of Polynesian origin (the so-called Kaoshan people).
Moreover, even the ‘Chinese’ population consists of two (or four, if you
divide them up more finely) linguistic groups (the ‘mainlanders’ vs. theTaiwanese) that are hostile to each other. Japan has serious minority
problems with the Koreans, the Okinawans, the Ainus, and the
Burakumins. South Korea may be one of the most ethno-linguisticallyhomogeneous countries in the world, but that has not prevented myfellow countrymen from hating each other. For example, there are tworegions in South Korea that particularly hate each other (Southeast andSouthwest), so much so that some people from those regions would notallow their children to get married to anyone from ‘the other place’. In
this regard, it is very telling that Rwanda is nearly as homogeneous in91

ethno-linguistic terms as Korea but that the homogeneity did notprevent the ethnic cleansing of the formerly dominant minority Tutsis
by the majority Hutus—this is an example that proves that ‘ethnicity’ isa political, rather than a natural, construction.
The above examples show that rich countries do not suffer fromethnic heterogeneity not because they do not have it, but because they
have succeeded in nation-building (which, we should note, was often an
unpleasant and even violent process). Indeed, despite being geneticallythe most heterogeneous country in the world, Tanzania has been so
successful in nation-building that it has not had any serious ethnicitybased conflicts.
Finally, the argument that bad institutions are holding back
Africa (and often they are) should be tempered by the fact that, when
they were at similar levels of material development to those we find in
Africa currently, the institutions of today’s rich countries were in a far
worse state than what we find in Africa today (Chang, 2002, ch. 3). They
built the good institutions largely after, or at least in tandem with, theireconomic development. In other words, high-quality institutions are as
much outcomes as they are the causes of economic development.
(D) CULTURE
Many people who believe that ‘bad’ cultures are holding back
Africa do not usually realize that all of the descriptions of those‘negative’ cultural traits of Africa heard today used to be hurled at manyrich countries when they were poor (Chang, 2007, ch. 9).
Before the start of German economic development in the midth
19 century, the British would frequently say that the Germans are too
stupid, too individualistic, and too emotional for economic
development—the exact opposite of the stereotypical image that they
have of the Germans today and exactly the sort of things that people
now say about the Africans. For example, John Russell, an early-19th
century British traveller in Germany remarked: ‚The Germans are a
plodding, easily contented people < endowed neither with great92

acuteness of perception nor quickness of feeling < It is long before *aGerman] can be brought to comprehend the bearings of what is new tohim, and it is difficult to rouse him to ardor in its pursuit‛ (Russell,
1828, p. 394). When travelling in Germany, Mary Shelley, the author ofFrankenstein, complained that ‚the Germans never hurry‛ (Shelley, 1843,
p. 276).
Until the early 20th century, Australians and Americans would
go to Japan and say the Japanese are lazy. Having toured lots offactories in Japan, an Australian engineer remarked in 1915: ‚My
impression as to your cheap labor was soon disillusioned when I saw
your people at work. No doubt they are lowly paid, but the return isequally so; to see your men at work made me feel that you are a verysatisfied, easy-going race who reckon time is no object. When I spoke tosome managers they informed me that it was impossible to change thehabits of national heritage‛ (Japan Times, 18 August, 1915). Even Sidney
Gulick, an American missionary who lived in Japan for 25 years andlater became a champion of Asian-American human rights back in theUS, had to admit that many Japanese ‚give an impression < of being
lazy and utterly indifferent to the passage of time‛ (Gulick, 1903, p. 117).
The Koreans were held in even lower esteem. In 1912, they werecondemned as ‚12 millions of dirty, degraded, sullen, lazy andreligionless savages who slouch about in dirty white garments of themost inept kind and who live in filthy mudhuts.‛ That comment camefrom a leading female socialist intellectual at the time, that is, Beatrice
Webb of the Fabian movement (Webb & Webb, 1978, p. 375), so one canimagine what a regular European male conservative would have said
about the Koreans, had he visited the country.
Of course, the cultures of Germany, Japan, and Korea today arecompletely different from what are described above. Thosetransformations happened mainly because of economic development,
which created societies in which people have to behave in moredisciplined, calculating, and cooperative ways than in agrarian societies.
These historical examples show that culture is more of an outcome,rather than a cause, of economic development. Given this, it is wrong to93

blame Africa’s (or any region’s or any country’s) underdevelopment on
its culture.

3. NATU RAL RESOURCE ABU NDANCE A ND
INDUSTRIAL P OLICY
In relation to industrial policy more specifically, the natural
resource abundance of Africa is often cited as the reason why industrial
policy is unwise and/or unworkable. First, it is argued that the Africancountries have relative abundance (and therefore comparativeadvantage) in natural resources. Given this, trying to industrialize,
especially ‘artificially’ through industrial policy, would be bad for theireconomies. Second, countries with natural resource abundance, it isargued, suffer from perverse politics in the forms of corruption andviolent conflicts (a form of ‘resource curse’). Trying to graft industrial
policy onto that political economy, it is pointed out, will mean that it
will only be abused, even if it worked elsewhere.
3.1. NATURAL RESOURCE ABUNDANCE AND
COMPARATIVE ADVANTAGE
Many people take it for granted that the African countries arewell endowed with natural resources, but in fact few of them are (seeChang, 2006, for further details). Fewer than a dozen African countries
have any significant mineral deposits. Only South Africa and the
Democratic Republic of Congo are exceptionally well endowed withmore than one mineral resource. Most African countries may have low
population density and thus a lot of land, but only a handful of them are
exceptionally well-endowed with arable land (Niger, Liberia, DRC,
Chad, Senegal, Sierra Leone, and the Central African Republic). Most
African countries look abundantly endowed with natural resources only
because they have so few man-made resources, such as machines,
infrastructure, and skilled labor.

94

Moreover, even in the case of countries that have exceptionallyabundant natural resource endowments, exploiting them without any
clear long-term industrial policy is unlikely to lead to long-term
economic development.
Except for a few small oil-rich countries like Brunei, Kuwait,
and Qatar, no country—not even the US, Australia, or Canada, the three
countries that are best endowed in the world with natural resources—
has been blessed by nature to such an extent that it could become rich
only by doing things that came ‘naturally’. Australia has the smallest
manufacturing sector (in per capita terms) by far among the richcountries (it is 1/3 smaller than the next smallest ones) owing to its
abundant natural resource endowments, but even it produces
manufacturing value added (MVA) per capita of $2,422, which is 35
times greater than relatively more industrialized Senegal ($69) and 220
times greater than the least industrialized Niger ($11) (all figures are asof 2005, in 2000 dollars; UNIDO, 2009, p. 129, Table 1). Given that
Senegal’s and Niger’s natural resource endowments are not evenremotely as abundant as that of Australia, there will have toindustrialize much more than Australia has done, if one day they are tohave living standards that are comparable to that of Australia’s today.
We should also note that few countries actually do ‘natural’
things. Even many ‘primary’ commodities are not natural, but are
products of colonialism. For example, many African countries exportcocoa and tea, which were brought from, respectively, Central America
and China to Africa by the imperialists. When it comes to highproductivity activities whose existence determines whether a country is
economically developed or not, countries become good at something
only because they deliberately decide to become so—there is really no‘natural’ reason for the Japanese to be good at building cars, the Finns atmaking mobile phones, and the Korean at making steel.
If we left things to the market, high-productivity industries
simply will not get established in developing countries, as there are
already superior producers from the more advanced countries. If theywant to develop those industries, they have to protect and nurture those95

industries through tariffs, subsidies and other means of industrial
policy—this is, of course, the logic of infant industry promotion, which I
discussed above. If the African countries are to develop their economies,
they will have to deploy an industrial policy that will eventually maketheir ‘natural advantage’ industries unimportant by developing higherproductivity activities.
By saying this, I am not trying to argue that the Africancountries should ignore their natural-resource-based industries, for atleast two reasons. First, it takes a lot of time to develop new industries.
For example, it took 40 years for the Japanese car-makers (established in
the early 1930s) to break into the world market, while it took 17 years
for Nokia electronics (founded in 1960) to make any profit. Therefore,
before the new industries fully develop, the natural-resource-based
sectors need to provide the output, jobs, and, above all, export earnings
that will finance the imports of machinery and technologies for the newindustries. Second, natural-resource-based industries can be, and shouldbe, upgraded (on how to upgrade out of the natural resources sectors,
see discussions in Chang, 2008, Section III). Despite having very little
land (the 5th highest population density in the world, excluding islandand city-states), the Netherlands is the third largest agricultural exporterin the world, as it has upgraded its agriculture.
In the long run, however, successful upgrading of naturalresource-based industries requires successful industrialization. The
Netherlands has a high-productivity agricultural sector only because it
has ‘industrialized’ the sector, using its strengths in industries likeelectronics (e.g., computer-controlled feeding) and chemicals (e.g.,
fertilizers, pesticides). In the end, the African countries will have to get
into many industries that today no one—I repeat, no one—would thinkthey can succeed in, if they are going to become economicallydeveloped. And, as I argued above, that requires systematic industrial
policy.

96

3.2. NATURAL RESOURCE ABUNDANCE AND PERVERSE
POLITICSIn relation to the argument that natural resource abundance inAfrica is bound to create perverse pattern of politics (corruption andviolent conflicts), which leads to abuse of industrial policy, even if itwere true, it would apply to only a handful of African countries, as mostof African countries are not that particularly well endowed with natural
resources in the first place, as I have pointed out above.
Moreover, there is no inevitable relationship between acountry’s natural resource endowment and its politics. If natural
resource abundance inevitably led to perverse politics, we cannot
explain how many countries—not just super-well-endowed US, Canada,
and Australia, but also the Scandinavian countries—have not developed
perverse forms of politics despite (or in many cases rather because of)their abundant natural resource endowments (see Wright & Czelusta,
2004 and 2007, on the role of natural resources in the economic
development of the US). In addition, in the late 19th and early 20th
century, the fastest growing regions of the world were resource-richareas like North America, Latin America, and Scandinavia, which showsthat the ‘resource curse’ is not something that is inescapable.

4. POLITICAL ECONOMY CONSIDERATIONS :LEADERSHIP, S TATE COHERENCE , AND STATESOCIETY RELATIONSHIP
Even ignoring perverse politics due to natural resource
abundance, there is a general concern that the political economy of mostAfrican countries makes effective implementation of industrial policy
impossible. Many people characterize politics in most African countries
as ‘neopatrimonial’, which undermines economic rationality in favor of‘Big Man’ politics (for a comprehensive critique of this literature, see
Mkandawire, 2012). Given this political economy, it is believed, any

97policy that suspends market discipline will be hijacked and abused,unlike in East Asia or Europe.
This argument is partly in line with one key conclusion of theindustrial policy debate, which is that a key difference between successstories and failure stories of industrial policy is in the differences in theirpolitical economy (Toye, 1987; Amsden, 1989; Chang, 1994; Evans, 1995).
There are three aspects to this.
First, political leadership is considered important indetermining the nature of industrial policy. Even if we ignore someextreme cases in which the leaders are interested only in personal
aggrandizement, the leaders may have a ‚wrong‛ vision. They may belooking backward, rather than forward, as Thomas Jefferson did when
he opposed Hamilton’s infant industry protection. Or they may behostile to private sector development, as many African country leaders
were in the 1960s and the 1970s. Or, as many 19 th century liberalpoliticians did, they may think that doing nothing, other than protecting
private property, is really the best industrial policy.
Second, even if the political leaders have the ‘right’ vision, theyshould be able to impose that vision on the rest of the state apparatus.
While in theory the state is a hierarchical organization, in practice thewish at the top does not always percolate through the hierarchy. There
will be some degree of self-seeking by government bureaucrats,
although not as much as it is assumed in the public choice theory. There
will also be problems arising from clashing visions (e.g., the bureaucrats
may be more conservative than the political leaders), turf wars within
the bureaucracy, ‚tunnel vision‛ that specialized organizations are wont
to develop, internal coordination failures (coming from poororganizational design inside the government or the emergence of newissues that cut across the existing organizational structure), and manyother reasons.
Third, even if the leadership has the right vision and even if thestate apparatus is coherent, the state still should be able to impose its
will on other agents in the society. In some extreme cases, the state may
not even have full control of its claimed territories. In some countries,

98the state cannot implement policies effectively due to manpower andresource shortages. Even when the state has enough enforcement
capabilities, there will be attempts by some private sector agents toneutralize or even pervert policies through lobbying and bribing.
The tendency is to assume that these types of political economy
problems are uniquely serious in the African countries, but thisassumption lacks empirical foundations (Mkandawire, 2012). In
addition, the advanced economies all suffered from these problems in
the past (and some of them still do to an extent). In fact, when they wereat levels of economic development comparable to today’s Africancountries, the developed countries were actually much worse in termsof suppression of democracy, corruption, state capture, incoherence ofthe state machinery, nepotism, and other ‘pathological’ forms of politics(Chang, 2002, ch. 3).
Whatever we think of African countries’ political economy
problems, we should not let the best be the enemy of the good. The
existence of those problems should not make us believe that Africancountries have to wait for a perfect state to emerge before doing
anything. In the real world, successful countries are the ones that havemanaged to find ‚good enough‛ solutions to their political economy
problems and gone on to implement industrial (and other) policies,
rather than sitting around bemoaning the imperfect nature of theirpolitical systems.
In fact, quite a few of the successful ‚industrial policy states‛
themselves overcame political obstacles to effective statecraft insituations that did not instill much hope. For example, between the fallof Napoleon and the end of the Second World War, the French state wasnotoriously laissez-faire, ineffectual, and conservative. However, this wascompletely changed after the War, with the rise of Gaullisme, theestablishment of the planning commission, and the foundation of the
ENA (École Nationale d’Administration), the famous school for elitebureaucrats (Cohen, 1977; Kuisel, 1981). For another example, theKuomintang (Nationalist Party) bureaucracy was arguably one of themost corrupt and inefficient in modern history when it ruled mainland

99

China. However, after being forced to migrate to Taiwan, following thedefeat by the Communists in 1949, it was transformed into a highly
efficient and relatively clean one. This was done through a gradual but
deliberate process of building ‚islands of competence‛ and then giving
them greater responsibilities as they succeeded and increased theirlegitimacy and status within the bureaucracy, finally replacing much of
the old bureaucracy with the new one (Wade, 1990).

5. ‘DO NOT TRY TH IS AT HOME’: THE QUESTION O F
BUREAUCRATIC CA PABIL ITIESWhatever the political intention and power of the top
leadership may be, policies are likely to fail if the government officials
implementing them are not capable. They have to make difficult
decisions, with limited information and fundamental uncertainty, often
under political pressure from inside and outside the country. Dealing
with all this requires competent decision-makers. On this ground, it has
been argued that ‚difficult‛ policies like (selective) industrial policy
should not be tried by countries with limited bureaucratic capabilities,
especially the African countries (World Bank, 1993, is the best example).
In other words, this is the policy-world equivalent of ‚do not
try this at home‛ (DNTTAH) warning that accompanies thedemonstration of difficult and dangerous stunt acts in TV shows.
However, there are numerous problems with this argument.
First, the assumption is that industrial policy is exceptionallydifficult. However, this assumption is made without any theoreticalreasoning or empirical evidence. For example, World Bank (1993)
assumes that policies getting the ‚fundamentals‛—such as humancapital, agriculture, and macroeconomic stability—right are easier thanindustrial policy, but there can be no such presumption. First, different
governments have competences in different areas—the Japanese
government was good at industrial policy but messed up
macroeconomic policies in the 1990s. Second, the ease of a policy will
also partly depend on its scale. For example, promoting a few industries
100through industrial policy may be a lot easier than organizing a mass
education program. Third, it will also depend on the number of agents
involved in the policy. Trying to coordinate investments among a few
large firms may be easier than organizing a country-wide distribution ofsubsidized fertilizer that involve millions of small farmers who are notorganized into co-operatives and scattered all over the country.
Second, another (implicit) assumption behind the DNTTAH
argument is that industrial policy requires sophisticated knowledge of
economics—as exemplified by the comment by Alan Winters, theformer head of Research Department at the Bank and the former chief
economist of the UK government’s DfID (Department for International
Development) that ‚the application of second-best economics needs
first-best economists, not its usual complement of third- and fourthraters‛ (Winters 2003, p. 66). But is this true? An important fact in thisregard is that the East Asian economic bureaucrats were not ‚first best
economists‛. While they were smart people, most of them were not even
economists. The majority of the Japanese economic officials thatengineered the country’s ‚miracle‛ were mostly graduates from the Law
Department of Tokyo University. Until the 1980s, what little economics
they knew were mostly of the ‚wrong‛ kind—the economics of KarlMarx and Friedrich List, rather than neoclassical economics. In Taiwan,
most key economic bureaucrats were engineers and scientists, as is thecase in China today. Korea also had a high proportion of lawyers in its
economic bureaucracy until the 1970s, while the brains behind thefamous HCI (Heavy and Chemical Industrialization) programmer in the
1970s, Oh Won-Chul, was an engineer by training. Both Taiwan and
Korea had rather strong, albeit officially unacknowledged, communist
influence in its economic thinking until the 1970s.2

The Nationalist Party’s constitution was a copy of the Soviet Communist Party
constitution. Taiwan’s second president, Chiang Ching-Kuo, who succeeded his
father Chiang Kai-Shek, was a communist as a young man and studied in theSoviet Communist Party school in Moscow with future leaders of the Chinese
Communist Party, including Deng Xiao-ping. Korea also had its share of2

101Third, many advocates of the DNTTAH argument believe thathigh-quality bureaucracies are very difficult to build and that the East
Asian countries were exceptionally lucky to have inherited them from
history. However, a high-quality bureaucracy can be built pretty
quickly, as shown by the examples of Korea and Taiwan themselves.
Contrary to the popular myth, Korea and Taiwan did not start theireconomic ‚miracles‛ with high-quality bureaucracies. For example,
until the late 1960s, Korea used to send its bureaucrats for extra training
to—of all places—Pakistan and the Philippines. Taiwan also had asimilar problem of generally low bureaucratic capabilities in the 1950s
and most of the 1960s (see above). These countries could construct ahigh-quality bureaucracy only because they invested in training,organizational reform, and improvement in incentive systems. In
addition, there was also a lot of ‚learning-by-doing‛. By trying out
relatively easy industrial policy from early on, the East Asianbureaucrats could build up the capabilities they needed in effectively
running more sophisticated industrial policy later. In other words, there
has to be some ‚trying at home‛, if you aspire to become good enough toappear on TV with your own stunt act.
Last but not least, the fact that something is ‚difficult‛ cannot bea reason not to try it. When it comes to personal advancement, we
actually go to the other extreme and encourage our youngsters to aspire
to become the best of the best, when most of them are going to end up as
production-line workers or shop assistants, rather than prime ministers
or business tycoons. Even when it comes to countries, developing
countries are routinely told to adopt ‚best practice‛ or ‚global
standard‛ institutions used by the richest countries, when many of themcommunist influence. General Park Chung-Hee, who masterminded the Korean
economic miracle, was a communist in his younger days. He was sentenced todeath in 1949 for his involvement in a communist mutiny in the South Koreanarmy but earned an amnesty by publicly denouncing communism. Many of hislieutenants were also communist in their younger days.

102

clearly do not have the capabilities to effectively run the American
patent law or the Scandinavian welfare system. However, when it
comes to industrial policy, countries are told to aim low and not to try atall, or at best try to learn from the Southeast Asian countries, whichused more market-conforming (and therefore presumably easier)industrial policy than did the East Asian countries (this is the position
taken by World Bank, 1993). I am all for people warning against therisks involved in ‚aiming too high‛, but why should countries aim low
only when it comes to industrial policy?
The problems of low bureaucratic capabilities are real in mostAfrican countries. However, they should not be exaggerated. They are
not unique to industrial policy, nor are they unique to Africa. And there
can be no presumption that industrial policy is necessarily moredemanding in terms of bureaucratic capabilities than other policies are.
More importantly, in the longer run, bureaucratic capabilities may beenhanced (and relatively quickly at that) with appropriate investments
and learning-by-doing, so their poverty at the present moment cannot
be an excuse for never using industrial policy in the future.

6. CHANGING RULES OF THE GLOBAL ECONOMY
The changes in global rules of trade and investment since the1990s—through the WTO (World Trade Organization), bilateral andregional FTAs (Free Trade Agreements), and BITs (Bilateral Investment
Treaties)—have made the use of many of the classic tools of industrial
policy either banned or significantly circumscribed by). Given this, it isargued, developing countries, including the ones in Africa, therecommendation goes, should not waste their time thinking about
policies that cannot be used anyway.
The most important changes have been brought about by thelaunch of the WTO in 1995. Quantitative restrictions (e.g., quotas) havebeen banned altogether. Tariffs have been reduced and ‚bound‛ (that is,
tariff ceilings have been set). Export subsidies are banned. Most othersubsidies (except those frequently used by the rich countries, such as
103those for agriculture, R&D, and regional equalization) have become
open to countervailing duties and other retaliatory measures. New
issues, like regulations on FDI (Foreign Direct Investment) and IPRs
(intellectual property rights), have been brought under the jurisdictionof the WTO, making it difficult for countries to ‚borrow‛ foreigntechnologies for free by violating IPRs or put performance requirements(regarding things like local contents) on the TNCs (Transnational
Corporations) that make FDI.
While the WTO has certainly made industrial policy moredifficult to implement, the constraints imposed by it should not be
exaggerated.
To begin with, even on paper, the WTO by no means obliges
countries to abolish all tariffs—only to bind them. Although the middleincome developing countries were forced to bind most of their tariffs,
the LDCs (Least Developed Countries), including most countries inAfrica, were exempt from tariff-binding. Even though some low-income
countries chose to bind some tariffs, the extent of such binding is small
and the ceilings quite high. So, the ‘policy space’ for using tariffs is still
considerable for the LDCs.3
Second, the use of emergency tariff increases (‚importsurcharges‛) is allowed on two grounds. The first is a sudden surge insectoral imports, which a number of countries have already used. The
second is the overall BOP (balance of payments) problem, for whichalmost all developing countries, including the African ones, would
qualify and which quite a few countries have also used. Since countries
have discretion over the coverage and the levels of emergency tariffs

3 Of course, if the rich countries have their ways in the current NAMA (nonagricultural market access) negotiations of the Doha Round in the WTO,
industrial tariffs in the developing countries are, at 5-10%, likely to fall to thelowest level since the days of colonialism and unequal treaties (Chang 2005, p.
4). However, this is yet to happen.

104

that are meant to lessen the BOP problem, they can target particularindustries through this provision.
Third, not all subsidies are ‚illegal‛ for everyone. For example,
the LDCs are allowed to use export subsidies. Given the enormous
benefits that exports generate for developing countries—by enablingthem to import better technologies, by exposing them to international
quality standards, by making it easier for them to measure performanceof the recipients of industrial policy supports—this is a very valuable
policy tool that many African countries can utilize. Also, subsidies for
agriculture, regional development, basic R&D, and environment-related
technology upgrading are at least de facto allowed.4 Even though someof these subsidies are not relevant for most African economies (e.g.,
R&D subsidies), others (e.g., agricultural subsidies) are, so they should
use them proactively. Moreover, the subsidy restrictions only cover‚trade-related‛ ones, which means that ‚domestic‛ subsidies can beused (e.g., subsidies on equipment investments, subsidies forinvestment in particular skills).
Fourth, the TRIPS (trade-related intellectual property rights)
agreement has certainly made technology absorption more expensive
for developing countries (Chang, 2001). However, this mainly affects the
middle-income countries. The technologies that most African countries
need are often the ones that are too old to be protected by patents.
Fifth, the TRIMS (trade-related investment measures) agreement
has banned certain policy measures which had been successfully usedby both the developed and the developing countries in the past (Kumar,2005) (e.g., local contents requirements, trade balancing requirements),
but other measures are still allowed. These include conditions regarding
the hiring of local labor (a good way to create technological spill-over

These subsidies were explicitly allowed (‚non-actionable‛ in WTO parlance)
until 1999. Even though the first three have become ‚actionable‛ since 2000, nota single case has been brought to the dispute settlement mechanism since then,suggesting that there is an implicit agreement that they are still acceptable.
4105

effects), technology transfer, and the conduct of R&D in the hostcountry. They can also provide targeted subsidies, directed credits, andtailor-made infrastructure (measures that Singapore and Ireland haveused, to attract FDI into ‚targeted‛ industries; Chang, 2004), insofar asthese do not violate the MFN (most-favored nation) provision (Thrasher
and Gallagher, 2008). Many of these measures are relevant for the
African countries.
Even though the WTO rules allow quite a lot of industrial policy
measures, especially for the LDCs and other poor economies, this policy
space is in practice highly constrained by other international factors.
First, the conditions attached to bilateral and multilateral aids and loans,on which they are quite dependent, significantly constrain theirindustrial policy space. Second, many developing countries are also
parties to bilateral and regional trade and investment agreements,
which tend to be even more restrictive than the WTO agreements(Thrasher and Gallagher 2008).
So, all in all, the range of industrial policy measures thatdeveloping countries can use has become considerably smaller,
compared to the 1960s and the 1970s. However, there is still room formaneuver for countries that are clever and determined enough,especially for the poorest economies, many of which are African, thatare subject to less systemic restrictions (especially in relation to tariffs
and subsidies).
Moreover, the new global rules of trade and investment are notsome unalterable laws of nature. They can be, and should be, changed, if
they are found wanting. The modification of the TRIPS agreement inrelation to the HIV/AIDS drugs is a good, if a relatively small, example.

7. CONCLUDING REMARKSIn this paper, I have critically examined a number ofarguments suggesting that the African countries cannot learn from otherexperiences, as they possess uniquely disadvantageous conditions

106

against any attempt to develop their economies through deliberatemeasures.
I first criticized the more general arguments espousing ‘Afropessimism’ on the bases of ‘structural’ factors, like climate, geography,
history, and culture. And then I critically examined four types ofarguments skeptical of the applicability of industrial policy to theAfrican context—natural resource abundance, political economy,
bureaucratic capabilities, and the changes in global economic rules. I
argued that, while all these arguments contain some germs of truths(some more than others), they are all highly biased and partial.
The African countries—even the exceptionally well-endowed
and the most industrialized South Africa—still need huge amounts ofindustrial development. And such developments require substantial
degrees of industrial policy. Given this, getting industrial policy rightand getting the conditions for its successful implementation right are
not matters of choice but imperatives for the African countries. In thispaper, I tried to show how the existing possibilities may be exploitedand the constraints overcome in all sorts of areas—ranging fromlandlockedness to bureaucratic capabilities—through an appropriate
mix of vision, realism, institutional reform, and investments.

107

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112

DEFINING DEVELOPMENT IN THE 21ST
CENTURY
Implications for Sub-Saharan Africa
April 2013
Sakiko Fukuda-Parr
International Affairs
The New School

1. INTRODUCTION
As the international community debates the elaboration of theInternational Development Agenda post-2015 and the Sustainable
Development Goals, the future of development of cooperation is atstake. These debates mark shifts in consensus thinking aboutdevelopment as an international project, how the important objectives
are defined, what key constraints are identified, and what strategies are
considered as necessary to overcome constraints and achieve objectives.
The Millennium Declaration and the Millennium Development Goals(MDGs) marked a departure in how development is defined byachieving a consensus on poverty as its primary, over-arching objective.
This is an important achievement in advancing global commitment tohuman dignity. But as Charles Gore (2010) remarks, this new idea aboutdevelopment replaces an old idea about development. He warned that
this could be a ‘Faustian Bargain’ where developing countries give up
the idea of development as transforming the productive capacity of theirnational economies.

113

Thus the MDGs mark a major departure from the idea ofdevelopment as economic transformation that underpinned the postwar framework for international cooperation as support to developing
countries to become economically self-sustaining, and around whicharrangements for resource transfers and other types of support weredeveloped, including specific arrangements for development aid, trade
agreements, debt relief, and capacity building. The focus on poverty is
not only new but reframes the architecture of these global economic
arrangements. Such shifts in thinking can have fundamental
implications for economic and political relations between the rich andpoor countries of the world.
This paper explores the implications of these shifts in thinking.
It first examines how consensus ideas about development—the MDGs
in this case—can exert influence on national and international policy
priorities and identifies two mechanisms, through setting standards for
performance and resource allocation, and through creating a narrative.
The paper then contrasts the MDG consensus framing of developmentwith earlier conceptions of development in the way that it articulates a
motivation as a political priority, identifies key problems, objectives,and unit of analysis. Finally, the paper then examines how priorities ofnational governments and donors have shifted since 2000.

2. HOW GLOBAL GOALS SHAPE IDEAS AND EXER T
INFLUENCE ON DEVELOPMENT PRIORITI ES
What consequences do global goals have on policies and action?
The influences are indirect, for the agenda is not an implementation
plan comprised of policy reforms and investment projects, and those
who elaborated the MDGs do not have control over resources andpolicies. But as the recent work on the sociology of numbers show
(Merry, 2009), indicators can exert influence in two ways: first, by
influencing resource allocation by being used as planning targets orindirectly by setting standards for performance or introducing planningtargets; and secondly by communicating a narrative of development
and a framework for action.
The MDGs have come to be effectively used in these two ways.
First, they have become the standard reference framework for114

international development. They are used as a proxy to judge progressin tackling global poverty. The UN, the World Bank and numerous
other international bodies monitor MDG implementation and issue
annual reports with detailed data. IMF country reports systematically
include data on MDG progress, along with key macroeconomic
performance indicators. UN meetings to review progress in achieving
MDGs have become both frequent and high-profile political events thatare significant for a country’s prestige and international standing.
MDGs have come to be used by some governments and donors asplanning targets that shape priority spending and effort. National
development frameworks, notably the Poverty Reduction Strategy
Papers prepared by low-income countries as a requirement for
benefitting from debt relief, have adopted the MDGs. Moreover, themonitoring of government performance is predicated on the assumptionthat the goals are hard planning targets for which government must be
held accountable1.
Second, the MDGs have been most frequently used forcommunicating global poverty as an urgent challenge and a priority for
global action. But in the process, they have also come to redefine
development. Political leaders make speeches defending policy
initiatives with the warning: ‘without such and such action the MDGs
will not be achieved’. Economists write research papers on
macroeconomic policy choices and evaluate them against contributions
to achieving MDGs. Local NGOs advocate national budget reforms ‘toachieve the MDGs’, however critical they may be of these goals, because
they are the accepted standard to evaluate policy. Media reports onpoverty refer to failure to achieve MDGs as a demonstration ofpervasive abject poverty. In other words, MDGs have become aconvenient short hand for what they mean by the purpose ofdevelopment and ending poverty.

However, as I have explained in another article (Fukuda-Parr, Greenstein, &Stewart, 2013), this makes little sense as the methodology of national planningrequires consideration of many factors other than globally agreed-upon social
objectives.
1

115

This redefinition of development is not based on a theoretical
reformulation of the concept. Yet it presents a narrative that can reframe
development policy agendas.

3. LOCATING THE MDG S IN THE HISTORY OF
DEVELOPMENT THINKING AND PARA DIGMSThe MDG narrative—referred to in this paper as ‘Development
as Ending Poverty’—contrasts with earlier conceptualizations ofdevelopment in the way that the key objectives are defined. It also
contrasts in its analytical framing in terms of the way that the problem isdefined, and the unit of analysis, the priority concern with inequality
and poverty within or between countries, and whether development isunderstood as a set of outcomes or as a process. While there have been
multiple and competing conceptions of development that have been
advanced, for the purposes of this paper, they can be grouped into threestrands of thought that have dominated development thinking:‘development as transforming national productive capacity’;‘development as globalization’; and ‘development as improving humanwell-being’.
3.1. CORE ELEMENTS OF DEVELOPMENT AS ENDIN G
POVERTY
The MDGs are not a theory of development but a list of targets.
Moreover, the MDGs were developed as reporting tools to monitor the
implementation of the Millennium Declaration’s commitments, in whichworld leaders pledged to do their utmost to lift their fellow men,
women and children from the dehumanizing conditions of poverty. Yet
they have come to be used as a consensus framework creating anarrative of development. The MDGs identify ending absolute poverty
as the core purpose. As explained by the UN (United Nations, 2008),
while each of the eight goals is important, they are intended to be seen
as a package. ‚The goals and targets are interrelated and should be seen
as a whole. They represent a partnership between the developed
countries and the developing countries to create an environment—at the116national and global levels alike—which is conducive to development
and the elimination of poverty" (United Nations, 2008 p.2).
Thus the MDG framing of development is motivated by concern
with absolute poverty as an urgent social priority, and international
action appeals to humanitarianism. The goals focus on humanoutcomes, and the disregard for the means was an important strength inachieving consensus (Fukuda-Parr & Hulme). In fact, the MDGs grewout of the context of the 1990s when the development community was
divided in bitter controversies over structural adjustment lending
programs and neoliberal policies. The success of the MDGs was to beable to form a consensus on points of agreement—improving humanoutcomes—without raising the divisive issues of policy strategies(Fukuda-Parr & Hulme). The analytical framework of this narrative
identifies the problem as the existence of pervasive absolute poverty inthe world, with the unit of analysis focused on the individual, and thesituation within the context of inequality within countries. However the
specificity of country conditions is ignored, as goals do not take accountof initial conditions but set the same time-bound targets for all
countries.
3.2. DEVELOPMENT AS TRANSFORMING PRODUCTIVE
CAPACITY
The concept of development that dominated the field for muchof the 20th century can be characterized as ‘transforming productive
capacity of national economies’ (Gore, 2010). Development as aninternational project emerged in the aftermath of the Second World
War, when the world community adopted it as one of its key objectives
along with peace and security. It emerged in the context of thedecolonization process, motivated by the need for newly independent
countries to be economically, not just politically, viable. The motivation
focuses on inequality between countries rather than within. In contrast
to the MDG narrative, the analytical framework identifies the problem
as the weak capacity of newly independent and other non-industrializedcountries. The unit of analysis is the country in the context of anunequal world.

117

Informed by modernization theories2 and economic growthmodels3, the policy strategy over the 1950s up to early 1980s focused on
industrialization
anddiversification
includingtechnologicaltransformation, and built on investment in physical and, later, humancapital. In the absence of a significant private sector, public sector
investments were considered necessary, requiring capital transfers fromrich to poor countries. The purpose of development aid was therefore toprovide concessional financing. While mainstream policy strategies
focused on national investments, heterodox economists including
Structuralists and Dependency theorists identified the workings of theinternational economic system as key constraints and advocated policy
reforms and arrangements in areas of trade, investment, access to capitaland commodity markets that would create a more enabling condition
for development. Both mainstream and heterodox economists
understood development as a long-term process. The main point ofconcern was as much about the process of transformation in economic
and social structures necessary for sustained improvement in living
standards as the higher levels of living standards achieved.
Though there sharp divides between the North and the Southon the agenda of the South, much of it was reflected in the UN
consensus development agendas (Stokke, 2009).4 The First UN
Development Decade set a goal of 5 percent annual growth andemphasized the need for financing development. Industrializedcountries were urged to cooperate by helping ensure high commodity
prices, providing markets for developing country exports, andproviding a target of 1 percent of GDP in concessional finance. The
Second UN Development Decade (1970s) set an agenda to promotesustained economic growth with a goal of at least 6 percent per annum.
The strategy emphasized the important role of the developed countries

2

Such as Rostow’s model of takeoff.

Such as Harrod-Domar model, the Solow model, and the New Growth
Theories.
3

For a well-researched history of the four development decades, see UnIntellectual History Project series, notably Olav Stokke, 2009.
4118

in helping transfer capital that was beyond the capacity of the countries
themselves and maintained the target of 1 percent of GDP to betransferred in the form of development aid. National governments
prepared five-year development plans the core of which was long-term
investment projects. External donors supported these plans by financing
these projects.
3.3. DEVELOPMENT AS GLOBA LIZATIONThe onset of globalization starting in the 1980s not only
involved shifts in national policies but had major implications forreconceptualizing economic and political relations between the Northand the South. The idea of global market integration is underpinned by
the principle that all countries compete equally in global markets, anidea that contradicts the principle behind the development project thatstarts from the recognition of differentiated levels of development, or
inequality between countries. In contrast, the basic problem identified in
the premise of the earlier development project was the unequal levels ofdevelopment amongst countries.
The key problem of developing countries is identified as the
weak ability to benefit from global markets—trade and private
investments—that would be the engine of economic growth. Poverty
reduction is assumed to be a consequence of growth and global
integration. Policy agendas from the 1980s pursued liberalization, withthe core policies described as ‘Washington Consensus’. While theapplication of the core macroeconomic policies—fiscal discipline,
monetary policy, trade openness, privatization and deregulations—canvary and has become more flexible and adapted to national conditions,the basic principle of maintaining stability as a central objective remains.
The focus on growth contrasts with the MDG focus on poverty
and the individual, yet the two paradigms are perfectly complementaryin the way that the earlier framing is not. The MDG narrative neatly
skirts around the issue of unequal initial conditions, and of defining
development by outcome rather than by a process of transformation.

1193.4. DEVELOPMENT AS IMPROVING HUMAN WELL-BEING
Through the decades, critics challenged mainstream strategies
for neglecting attention to what should be the ethical motivation fordevelopment, namely to improve human lives. Alternative approaches
that incorporated well-being into conceptualizing development and informulating policy strategies came into prominence from the 1970’s, asinternational agencies began to launch initiatives such as the ILO’s
employment program and the World Bank’s poverty initiatives under
President McNamara. The introduction of Basic Needs in the late 1970s
was a major step in bringing human well-being into conceptualizing
development.
The 1980s and 1990s were also decades with important
evolution in conceptualizing human well-being as central development
objectives. While Basic Needs focused on key outcomes and on social
investments as a policy strategy, other approaches emerged whichemphasized human agency and development as societal change. The
work of Amartya Sen (Sen, 1999) on capabilities was a major advanceand provided a rich conceptual framework for reconceptualizing
development as expansion of human capabilities, or the freedom thatpeople can have to do and be what they would value. Other approaches,
including feminism, human rights, and participation also emerged
following distinctive theoretical frameworks. These perspectives thatemerged in the 1990s were complementary, especially in forging themutually supportive policy agendas critical of globalization that were
influential in shaping the debates and agendas adopted at the UN
Conferences of the 1990s. Each focuses on distinct concerns but sharescommon elements as development frameworks. They describe thecentral problem or objective as improvement in human well-being—
defined in diverse ways—but challenge the notion of economic growth
as a central objective by pointing out that the negative consequences ofgrowth on people. But in addition, they emphasize three otherelements—equality, participation and transformation—that were notpart of earlier conceptions of development as well-being, including
Basic Needs. First, they are motivated by a common commitment toequality of individuals. Second, they emphasize participation as animportant element of a development strategy, seeing people as agents ofchange, not just as beneficiaries. For this reason, empowerment of120

people and groups is an essential means to progress, and power
structures are an important obstacle. Just as the earlier conception saw
development as a transformation of productive capacities, theseapproaches understand development to be transformative of social andpolitical arrangements.
While at first glance, capabilities and rights approaches would
appear similar to the MDG narrative, the overlap is very limited. The
unit of analysis is the individual, but is broader. Capabilities and rights
approaches include groups and inequality between countries as intergroup discrimination, and therefore incorporate attention on groups
within countries, and focus on disaggregated analysis. Concerned withwhat people are able to do and not just outcomes or possession ofmaterial resources, development is understood as a process of social andpolitical transformation. Feminist approaches exemplify this way ofconceptualizing development; while feminist economics opened up thedefinition of the economy as market activity to incorporate all activities
that lead to provisioning of human needs (Power, 2004), policy
frameworks go far beyond advocating for equal education and health towomen having a voice in decision making in all spheres of life.
Human well-being began to be reflected in consensus agendas.
The UN’s International Strategy for the Third Development Decade,adopted in 1981, also included objectives to reduce poverty andinequality, and the human dimensions of development—hunger,
childhood survival, health, water and sanitation—were prominent
among objectives (Stokke, 2009). For the first time, this UN
Development Decade set goals for primary education (universal
primary education by 2000), infant survival (120 deaths per 1000 live
births in the poorest countries), and employment (full employment by2000). These themes continued into the Fourth Development Decade of
the 1990s. But it was in the 1990s that the development as capability
expansion and human rights fulfillment became dominant on UN
conference agendas. These agendas were agreed in the context of thecontroversies over the social impact of structural agenda and theeconomic liberalization reforms that were being implemented in the
1980s and 1990s throughout the world. An important motivation was topursue inclusive globalization and that the benefits of globalization
were shared broadly by all countries and people within countries(United Nations Department of Economic and Social Development,121

2007). The conference agendas reflected the broad human development
approach, emphasizing: recognition of human rights from the right tofood to women’s rights; inequality within and between countries;
participation; and inter-connections amongst different dimensions ofdevelopment.
Table 1 summarizes the contrasts between the MDG narrativeand other concepts of development. The MDG narrative reflects
important shifts in the conception of development and the way that
motivations and objectives are defined, problems are identified andpolicy priorities and agendas are framed. The MDG narrative redefines
the motivation of international development from an economic andpolitical to a humanitarian project; from weak capacity of national
economies to individuals living in abject poverty as the inequality issue;
and an understanding of development as a process to a set of outcomes.
Focusing on outcomes rather than process, and on individuals rather
than countries, excludes issues of unequal economic and political
relations between countries that development cooperation was
originally intended to redress.

122

123

Decolonization andcatch upOutcome

Outcome andprocess

Key motivation

Within countries

Between countries

Approach toinequality andpoverty as aconcern
Development as
outcome or processFree markets, global
integration

National aggregate

National aggregate

Unit of analysis

Weak ability tobenefit from global
markets

Weak capacity inthe economy

Development as
globalization

Problem describedasDevelopment astransforming
productive
capacities ofcountries

Humanitarian,human dignity andfreedom

Outcome andprocess

Within and between
countries

Constrained human
lives conditioned bydiverse national andglobal processes
Individuals, groups,
national aggregates

Development as
improving humanwell-being

Table 1: Development Paradigms Compared

Humanitarian

OutcomeWithin countries

Individual

Extensive absolute
poverty in theworld

Development as
ending poverty

4. IMPLICATIONS FOR NOR TH-SOUTH ECONOMIC
RELATIONSHow did the new definition of development change economic
relations between the North and the South? Recalling Gore’s Faustianbargain referred to earlier in this paper, has the consensus on poverty
lead to a neglect of support for national economic development, as Gorepredicted?
4.1. DEVELOPMENT STRATEGY: A BASIC NEEDS AGEN DA
The MDGs influence resource allocation by setting standards
and creating a narrative. They create incentives to prioritize public
investment in meeting basic needs, with little attention to building
productive capacities, or to transforming social structures. One major
gap is that the MDGs leave out the economy altogether, even though
without economic growth, most MDGs cannot be achieved.
Employment was only added as an afterthought in 2005 and isembedded in the broader poverty goal. Agricultural production isindirectly reflected in the hunger target, which in itself is buried in thepoverty goal. Indeed, Ha-Joon Chang remarked in his recent paper,‚Laudable these goals and targets may be, their sum total does notamount to development in the sense we are talking about, as they pay
no serious attention to the transformation of productive structure andcapabilities‛ (Chang, 2010).
The priority issues advocated by the developing countries sincethe 1950s are poorly represented in this agenda. The issues of aid, trade,debt, technology transfer that are central to the economic prospects forcountries to compete and succeed in global markets are included in goal
8, under the heading of strengthening global partnerships. Thesewording of these issues was notoriously weak, with no quantitative
targets. These issues were nonetheless included by the architects of the
MDGs, because without them, the developing countries would not have124

endorsed the goals5. Development aid is justified on humanitarian
grounds for the sake of charity rather than on developmental grounds
for the sake of justice. These trends are manifest for example in thenegotiations on climate change in which developing countries have had
little success in obtaining concessions based on their greater
developmental needs for energy in the future and limited contribution
to the problem in the past. These ideational shifts thus have important
implications for the political economy of international development.
The Development as Ending Poverty agenda is also deceptive
with regard to human development. While the MDGs incorporate andthus highlight many human development priorities as well as Economic
and Social Rights—schooling, health, hunger, gender equality—it is also
bereft of the transformative process of development as empowering
people, challenging power structures within and between countries.
While inequality within and between countries and participation was
the hallmark of the agendas adopted at the 1990s UN conference
agendas, these are elements that are outside of this framework.
4.2.
PRIORITIESPROGRAMMESINNATIONAL

AND

DONOR

National and international development policies continue togive priority to objectives of macroeconomic stability and economic
growth, justified by the theory that growth is not only a necessary but
also a sufficient condition for reducing poverty. While national andinternational policies appear to set higher priorities for social sector
investments to meet basic needs, other important elements of the humandevelopment strategy are neglected such as equality, pro-poor economic
growth, empowerment and democratic governance. A study by theauthor (Fukuda-Parr S. 2010) of 22 Poverty Reduction Strategy Papers(PRSPs) found that these national strategy documents almost all identify
poverty reduction as the over-riding goal and action plans focus on

Interview September 12, 2008, with Michael Doyle, former Assistant Secretary
General for Strategic Planning and chair of the technical committee who
elaborated the MDGs.
5125economic liberalization and social investments. They emphasizedcommitment to the MDGs but were selective in which ones theyemphasized among the multitude of targets and indicators. Almost allof them included among core objective and action plans, specificstrategies in areas of primary education, health and economic
governance. For these areas except governance, the strategies set
quantitative targets in line with the MDGs. What is striking is theabsence of the strategic elements of a socially transformative agenda—
empowerment, distribution, employment generating growth, anddemocratic governance. Of the 60 MDG indicators, those that received
virtually no mention were those most important for ensuring thatgrowth is inclusive and pro-poor, and that development empowers
those who are marginalized; less than 4 out of 22 documents mentioned
employment, natural resource conservation, protecting orphans fromthe HIV/AIDS pandemic, women’s political representation, violenceagainst women, and social integration of migrants. And while theobjective of PRSPs are to generate growth and reduce poverty, there islittle by way of proactive government support for these objectives suchas infrastructure development, expansion of credit financing or
technological upgrading. The growth is expected to come through theprivate sector by creating a stable macroeconomic environment to foster
investments.
With respect to donors, the same study (Fukuda-Parr S. 2010)
also analyzed policy statements of the 21 largest bilateral donors. As in
the PRSPs, these donor policy documents emphasized poverty but notempowerment, social integration, equality, and pro-poor growth, thethemes that are central to human development. There has been aperceptible increase in funding for social sectors and within these
sectors to primary basic services ODA for other MDG priorities, notably
food production and agriculture—which are important for reducing
hunger and malnutrition and for reducing rural poverty—also increased
but much less markedly. The proportion of aid allocated by DAC
donors to basic social services increased from 10.1 percent in 1999 to 21.0
percent in 2009 while the proportion of ODA for building trade capacity
declined from 38.5 percent in 2001 to 28.9 percent in 2009 (Tables 2-3,
figures 1-4). There was a corresponding decline in aid allocations toeconomic infrastructure and services from 24 percent to 15 percent, and126

production sectors from 12 percent to 7 percent and in budget support
from 8 percent to 5 percent.
From the late 1990s, global diseases and health in general
received high priority attention from both official donors and new
foundations such as the Gates Foundation. This has led to new
initiatives and new financing such as the establishment of the Global
Fund to fight AIDS, Tuberculosis and Malaria. Manning (Manning,2009) argues that some of this increase was encouraged by theinstitutionalization of MDGs that drew attention to neglected priorities
in child and maternal health.
Table 2. ODA commitments by DAC donors 1990-2010 (US$millions,constant 2010)1990
Social Infrastructure andServices
Production Sectors

1995

19,844
10,322Agriculture

2005

2010

4,405

34,174
5,997

44,333
8,977

2,142

2,219

3,042

5,372

20,23
1
6,755

2000
20,919General Budget Support

1,155

1,291

561

1,826

2,365

Education Total

8,631

7,307

5,522

6,656

9,470

Basic Education

..

775

1,166

1,910

2,510

Health Total

2,441

2,845

2,385

4,076

5,116

Basic Health

..

1,266

1,329

2,532

2,945

83

66

102

239

Food crop production

Source: UN 2011 http://mdgs.un.org/unsd/mdg/Resources/Static/Data/2011
percent20Stat percent20Annex.pdf accessed April 14, 2012.

127

Table 3. ODA allocations of DAC donors to MDG priorities (percent of sector
allocable ODA)
1999

2001

2003

2005

2007

2008

2009

Basic social
10.1
14
15.7
15.9
19.9
21
services(MDG indicator
8.2)
Aid for trade
38.5
29
30.7
27.7
34.4
28.9
(MDG indicator
8.9)
Source: UN 2011 http://mdgs.un.org/unsd/mdg/Resources/Static/Data/2011
percent20Stat percent20Annex.pdf accessed April 14, 2012.

128

129

Source, Figures 1-4: OECD.org, http://www.oecd.org/dac/stats/internationaldevelopment-statistics.htm
While the MDGs and the consensus on poverty drew from the
UN conference agendas for inclusive globalization, the policy content of
most PRSPs and donor policy statements contain little attention to issues
that were at the core of the inclusive globalization agenda of the UN
conference plans of action. And while it was the criticism of the
distributional consequences of the Washington Consensus policies andthe broader liberalization agendas that drove the demise of thestructural adjustment programs of the 1980s and 1990s, and the rise ofpoverty and human concerns to the fore of international agendas,
maintaining a stable macroeconomic environment, economic growth,and liberalization remain key objectives. Stringent macroeconomic
policies aimed at maintaining low inflation, minimum balance of
payments and budgetary deficits still remain at the core of the economic
management and development strategy, coupled with strengthening130

institutions of economic governance such as property rights. While they
are no longer conditions in structural adjustment loans, they are coreprovisions for access to debt relief from the HIPC initiative and from the
IMF under the Poverty Reduction and Growth Facility (PRGF).
Though the Washington Consensus may be ‘dead’, the basic
macroeconomic policy prescriptions for macroeconomic stability andprivatization of economic activity remain at the core of both World Bankand IMF lending operations and conditions. Structural adjustment loans
have been discontinued, but the macroeconomic policy prescriptions
continue under IMF lending programs and conditions for accessing debt
relief. It should be noted that much of the criticism of the Washington
Consensus was only partly about what the core policy prescription thatwere included (measures to ensure macroeconomic stability) but also
about what they left out (human well-being, poverty and inequality),
the rigidity with which the policy prescriptions were applied (ignoringtrade-offs involved such as cutting social expenditures), and the aid
architecture (conditionality) with which they were implemented.
The post-2000 architecture of international development haschanged in terms of instruments and narratives but not in content. The
structural adjustment loans have been replaced by HIPC and IMF PRGF.
The policy frameworks on which the funding was based is now thenational government’s PRSPs with a focus on poverty and has replaced
the Policy Framework Papers, which required IMF and World Bank
approval. These new instruments conform to the narrative of thepartnership paradigm emphasizing national ownership, but they retain
the same policy content that condition access to financing. Most
importantly, the narrative of development and development aid has
been reformulated around the moral imperative of eliminating
dehumanizing poverty, an unacceptable condition for a world ofimmense financial and technological means.
While the years following the introduction of the MDGs were
striking for the ambitious and high-profile political commitments madeby the G8 countries, such as the pledge to double development aid to
Africa (or 0.51 percent of their GNIs) made at the Gleneagles Summit in2005, they have largely not been implemented (United Nations, 2011)
though a few countries have made significant increases in their support131

to Africa.6 Moreover, no significant international poverty initiatives
were launched, and the rich countries have not shifted their positions on
critical international economic policies including trade, finance,
investment and technology transfer. As the title of the UN MDG Gap
Task Force 2011 report, ‚The Global Partnership for Development: Timeto Deliver‛, makes clear, donor countries have fallen far short of
implementing their Goal 8 targets for aid, trade, debt and technology(United Nations MDG Gap Task Force, 2011). So far, the only tangible
progress in these areas has been reduction of the debt burden of thepoorest countries. Multilateral trade talks—the Doha Round, labeled the‘development round’—have become deadlocked, largely overdifferences between developing and developed country positions on
agricultural subsidies in the developed countries. Aid commitments
have increased in volume, but these trends started before 2000 and haveslowed since 2006. Moreover ODA still remain at 0.31 percent of donor
GNI in 2010, far short of the UN target of 0.7 percent GNI. There has
been substantial reallocation to the Least Developed Countries (LDCs)—
from $21 billion in 2000 to $29 billion by 2009 (2009 prices and exchange
rates). But this is still only 0.10 percent of donor GNIs compared with
the UN target of 0.15-0.2 percent GNI (UN 2011 p.10, table 1).
Surprisingly, the consensus on poverty as a policy priority has
not led to fundamental debates or new thinking about policy
alternatives for faster poverty reduction. While poverty reduction was
identified as the ‘overarching’ objective, development strategies
continued to follow the approach of the 1990s that emphasized
macroeconomic stabilization as the priority objective through theapplication of Washington Consensus policies to promote aggregate
economic growth through private investments. Greater focus has beenplaced on social sector investments to meet basic needs and on social
protection, including conditional cash transfers.
For sure, important studies have been published, and there havebeen many departures from the structural adjustment programs of the

The US doubled aid to Sub-Saharan Africa between 2004 and 2009, one year
ahead of the pledge; Canada doubled funding from 2001 levels; Norway
surpassed the pledge to maintain ODA at 1 percent of GNI, and Switzerland
increased its ODA to 0.41 percent of GNI.
6132

1980s. Social investments and protection, including initiatives such as
conditional cash transfers, have emerged as important priorities. But thecore macroeconomic strategies have remained unchallenged. The MDGs
did not propel new thinking about challenging the macroeconomic
policy approaches of the Washington Consensus framework, since theirimplications for poverty reduction have not emerged into mainstream
international policy debates. In other words, the core Washington
Consensus policies aimed at macroeconomic stabilization andliberalization have continued to dominate development strategies, only
supplemented by emphasis on social investments. New development
strategies and approaches have emerged not from mainstream thinking
and advice from the international community, but from innovation
within developing countries such as Brazil and China that have not been
in IMF policy-based lending programs. These approaches have included
not only alternative growth strategies, but also poverty reduction
strategies, particularly in Brazil and several other Latin Americancountries which have achieved not only stable economic growth andweathered the global financial crisis, but have also reduced inequality.
These policy approaches have been more interventionist in promoting
expansionary macroeconomic policies, expanding employment, andraising incomes of the poorest, such as through minimum wage
legislation.
4.3. OUTCOMES
Whether the MDGs have had an impact on the pace of poverty
reduction and development outcomes is difficult to assess, since it is
impossible attribute any recent trends to the MDGs as opposed to the
myriad of other factors that have driven national poverty outcomes. But
the problem remains that poverty reduction has continued globally, but
too slowly and unevenly. Overall, the pace of progress has not
accelerated, while the trends have been uneven across regions with SubSaharan Africa showing faster progress than other regions.
The UN and other international agencies assess progress madeagainst the 2015 targets, focusing on the level of achievement. According
to the 2011 UN MDG Progress Report (UN 2011), globally, the 2015
targets for income poverty (goal 1) and water (goal 7) are on track to be133

met, while steady progress continues in reducing child mortality (goal4), malaria and other global diseases (goal 6). Primary schooling has
been advancing, but the pace has begun to slow down and the goal ofuniversal enrollment may not be achieved. More alarmingly, there has
been either stagnation or regress for some goals and targets. The
proportion of people who are hungry (goal 1) has plateaued at 16
percent since 2000/2002 and the number of undernourished people hasgrown from 817 million in 1990/92 to 830 million in 2005/2007.
Employment and decent work (goal 1) has shown a setback in many
countries, while progress has been slow in gender equality andempowerment, other than in primary education (goal 3) and in reducing
maternal mortality (goal 5).
The impact of the MDGs on changing policy behavior andoutcomes would be reflected, if the pace of progress were improved
rather than whether the goals were likely to be achieved. Countries havedifferent starting points and for many, achieving the MDGs may not be
feasible even if they were to adopt improved efforts resulting in better
performance (Clemens, Kenny, & Moss, 2007). In another paper(Fukuda-Parr, Greenstein, & Stewart, 2013) my co-authors and I argue
that the criterion for success should be improvement in performance, as
measured by the pace of progress. We proposed a methodology for thiscriterion and made estimates for 24 indicators.
Our findings were disappointing for the country level, but moreencouraging for Sub-Saharan Africa and South Asia as regions. We
found improved performance by a majority of countries for just five of
the 24 indicators studied. On the other hand, the majority of SubSaharan African countries showed improved progress for 16 indicators.
At the global level, the pace of progress improved for under-5 mortality
rate, measles immunization and gender parity in primary schooling, but
not for attended births or improved water source. For income poverty,
the pace improved in all developing regions. Disaggregated to regions,South Asia and Sub-Saharan Africa, the two regions with the highest
concentrations of poverty showed consistent improvement andperformed better than the other regions. In Sub-Saharan Africa, progresshas been made at a faster progress since the MDGs were introduced
across all but one indicator for which data are available. In South Asia,
improvements are faster for all indicators except child mortality and134

child malnutrition. While it is not possible to attribute the improved
progress to the MDGs, the record of improvement is encouraging.
In brief, the impact of MDGs on outcomes and policy isambiguous, uneven and limited at best, but has been a significant factor
in shaping international debates. The MDGs did not introduce a newconcept or policy strategy, but created a narrative that has raised global
awareness of poverty as a compelling moral challenge requiring urgent
action. The narrative has become a consensus framework for debate oninternational development. MDGs are widely accepted among the key
stakeholders including national governments, donor agencies, NGOs,
and local civil society groups, regardless of views that any of these
actors might hold individually about their relevance as a development
strategy. The importance of this new awareness and consensus should
not be underestimated considering that the pursuit of development
priorities in the globalized and democratically-governed world requires
the public at large to share commitments to these priorities as a matterof ethical imperatives of a common humanity. The MDGs are associatedwith an increase in social sector investments, notably in aid allocations,but this is continuation of a trend that started prior to the introductionof the MDGs. If there is causation, we might ask if donor policy drove
the MDGs rather than the other way round.

5. CONCLUDING REMARKS : ‘DEVELOP MENT’ IN
TRANSITIONAs the international community proceeds to define a newinternational development agenda, what is at stake is as much about alist of priority objectives as what it implies in defining the meaning ofdevelopment. The experience of the MDGs highlights some key issues tobe considered for the new agenda.
First, inequality and poverty within countries should not be apriority at the expense of inequality between countries. The MDGs havebeen instrumental in institutionalizing ending poverty as a global
priority, and equitable and sustainable development as a universal
challenge. This has been a great advance. At the same time, countries
face widely divergent conditions and constraints and opportunities.
Second, the focus on essential Basic Needs should not be at the expense135

of a broader range of development objectives including economictransformation and social change. As a framework for promoting
development and ending poverty, the MDGs were not instrumental inmobilizing greater support for social investments in Sub-Saharan Africa.
However, their major weakness is the extremely narrow scope as a Basic
Needs agenda, which marginalized productive sectors and the challenge
of development as a transformative process that builds productive
capacity of economies and that empowers people.
Third, the new agenda should go beyond setting outcome goals
to making commitments for policy agendas. While the simplicity ofquantitative targets on human outcomes has been the core strength of
the MDGs, does not comprise a strategy. As noted, progress over thelast decade has been important but uneven and inadequate for thepoorest countries. The corollary to these trends has been the failure toaddress the systemic problems of protecting developing countries fromthe consequences of global market integration. A leading example ofthese trends is the inadequate response of international cooperation toprotect the poor against the consequences of climate change, and thecrises of global financial, fuel and food markets. Seen in this light, theMDGs could arguably have provided a convenient ‘cover’ behind which
the economic model of the 1990s—augmented by the Washington
Consensus—could be continued without controversy. The MDGs
perhaps co-opted the language of human development, and theinclusive globalization while ‘defanging’ critical debates about the
impact of the liberalization agendas on poverty and inequality.
But the new consensus will require a more effective strategy for
equitable and sustainable development that is more than a list of goals.
Simple, quantitative, and concrete goals make effective communications
device and targets set benchmarks essential for monitoring progress.
But that does not make an adequate agenda.

136

REFERENCES
Chang, H.-J. (2010). Hamlet without the Prince of Denmark: How
Development has Disappeared from Today's Development
Discourse. In S. K. Christiansen, Towards New Developmentalism:
Markets as Means Rather Than Master. Abington : Routledge.
Clemens, M., Kenny, C., & Moss, T. (2007). The Trouble with the MDGs:
Confronting Expectations of Aid and Development Success.
World Development , 35 (5), 735-751.
Fukuda-Parr, Greenstein, J., & Stewart, D. (2013). How should MDG
Implementation be measured: Faster Progress or Meeting
Targets. World Development , 41 (1), 19-30.
Fukuda-Parr, S. (2013). Global Goals as policy gools: intended andunintended consequences. IPC. Brasilia: International Centre for
Inclusive Growth.
Fukuda-Parr, S. (2010). Reducing Inequality—The Missing MDG: A
content review of PRSPs and bilateral donor policy statements.
IDS Bulletin , 41 (1), 26-35.
Gore, C. (2010). The MDG Paradigm, Productive Capacities and the
Future of Poverty Reduction. IDS Bulletin , 41 (1), 70-79.
Manning, R. (2009). Using Indicators to Encourage Development: Lessons
from the Millennium Development Goals. Retrieved April 24, 2013,
from Danish Institute for International Studies Report 2009/1:
http://www.diis.dk/graphics/Publications/Reports2009/DIIS_rep
ort_2009-1_Using_indicators_to_encourage_development.pdf
Merry, S. E. (2009). Measuring the World: Indicators, Human Rights andGlobal Governance. Current Anthropology , 52 (53), 83-95.
Power, M. (2004). Social Provisionining as a Starting Point for Feminist
Economics. Journal of Feminist Economics , 10 (3), 3-19.
Sen, A. (1999). Development as Freedom. New York: Knopf.
Stokke, O. (2009). The UN and Development: from Aid to Cooperation.
Bloomington: University of Indiana Press.
United Nations Department of Economic and Social Development.
(2007). United Nations Development Agenda: Developemtn for All.
New York: United Nations Publications.
United Nations MDG Gap Task Force. (2011). The Global Partnership for
Development: Time to Deliver.
United Nations. (2008, January 8). Millennium Development Goals
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Indicators. (U. S. Division, Producer) Retrieved April 24, 2013,
from http://www.unstats.un.org/unsd/mdg
United Nations. (2011). Millennium Development Goals Report 2011. New
York: United Nations.
Vandemoorte, J. (2009). MDGs conundrum: Meeting the targets without
missing the point. Development Policy Review , 27 (4), 355-371.

138

FINANCE AND GROWTH IN SUBSAHARAN AFRICA:
Policy and research challenges
April 2013

Stephany Griffith-Jones1 with Ewa Karwowski2
Initiative for Policy Dialogue
Columbia University

Abstract
This article looks at lessons from the 2007/2008 global financial crises for
African low-income countries' financial sectors and suggests researchquestions which need to be investigated. It examines lessons from recent
empirical literature both for the scale and structure of the financial
sector as well as its regulation. Excessive—and too rapid growth—of thefinancial sector is warned against as it can cause very costly financial
crises and does not necessarily contribute to financing the real economy.
The paper recommends that where market failures exist, government
interventions through public institutions or indirect mechanisms may bedesirable.

1

www.stephanygj.net; www.policydialogue.org

We are very grateful to Joseph Stiglitz for valuable comments on an earlier
draft. We are also very grateful for comments received at the IPD Africa Task
force meeting in New York, especially those by Akbar Noman, as well as at a
UNDESA seminar. We thank Shari Spiegel very much for her support for thispaper. We are also grateful to Florence Dafe for her valuable inputs andNshalati Hlungwane for excellent research assistance.
2139

1. INTRODUCTION
Finance provides a particularly challenging and important field
for policy design and policy-relevant research, especially if placed in thecontext of those countries’ needs for development. The policy challenges
and research needs are very large, due partly to a major rethinking of
the role, scale and structure of a desirable financial sector, as well as its
regulation, in light of the major financial crisis that started in 2007/8.
There is an urgent need to understand the implications of this policy
and analytical rethinking for Sub-Saharan African (SSA), especially low
income countries’ (LICs) financial sectors, especially regarding its
impact on their economic growth.
The financial sectors of African LICs are still at an early stage ofdevelopment, so lessons from the crisis could inform their financial
sector development strategies. Moreover, their financial sectors, while
generally still shallow, are experiencing fairly rapid growth. Combinedwith African countries’ existing vulnerabilities, such as limited
regulatory capacity, this might pose risks to financial system stability.
Despite the infrequent appearance of systemic banking crisis on the
African continent over the past decade (see below), fast credit growth inmany economies—even if at comparatively low levels—calls for caution,
signaling the need for strong, as well as countercyclical, regulation of
African financial systems. For policymakers and researchers this poses
the challenge of applying the lessons from the crisis in developed andpreviously in emerging countries to African LICs, while paying carefulattention to the specific features of African financial systems.
There are also more traditional policy challenges and researchgaps on financial sectors in LICs, and their links to inclusive growth. To
support growth, there are a range of functions that the financial sector
must meet in African LICs, such as helping to mobilize sufficientsavings; intermediating savings at low cost and long maturities toinvestors and consumers; ensuring that savings are channeled to themost efficient investment opportunities; and helping companies andindividuals manage risk. There are also large deficiencies in these areas
originating from specific market failures and/or gaps. For example,

140there is a lack of sustainable lending at relatively low spreads, including
with long maturities to small and medium enterprises (SMEs), which isparticularly constraining for growth in LICs.
This paper presents two key areas for a policy, as well as
corresponding research agenda on finance and growth in Sub SaharanAfrica building partly on lessons from the Global Financial Crisis: 1) thedesirable size and structure of the financial sector and 2) new challenges
for financial regulation. The discussions in these two areas is importantto advance understanding on the links between the financial sector andinclusive as well as sustainable growth.

2. FINANCIAL SECTOR DEVELOPMENT A ND
GROWTH
Central bankers and financial regulators in African LICs havealways faced major conceptual and institutional challenges in striking
the right balance in their policy design to achieve the triple aims offinancial stability, growth and equity.
These challenges acquired a new dimension in the light ofnumerous financial crises, initially in the developing world, but recently
in developed countries. The latter led to a major re-evaluation of the roleof the financial sector, its interactions with the real economy and theneed for major reform of its regulation, especially in developed andemerging economies (see for example, Griffith-Jones, Ocampo andStiglitz, 2010, as well as IMF, 2011 and 2012, as well as Haldane andMadouros, 2012 on the need to simplify regulation); the latter resonatesvery well with LICs. Before examining the implications of this analysis
for SSA countries, we will look first at how the Global Financial crisis
affected SSA countries.
Interestingly, although the Global Financial Crisis originated inand strongly hit developed economies, its cost to developing SSA (incontrast to all LICs on average) in terms of foregone growth andinvestment as well as falling tax revenue with increasing budget deficits

141

is quite substantial. Developing SSA3 suffered a GDP growth slowdown
to 4.0 percent in the aftermath of the crisis (2008-2010) in comparison toaverage growth rates of 4.7 percent between 2000 and 2007. This equalsa loss in GDP growth of 0.7 percentage points (see table 1). SSA growth
was much more affected by the recent slowdown in economic activity
around the world—mainly driven by recession and stagnation indeveloped economies—than that of all low income countries on average,
which have managed to grow by 0.4 percent more in the same period(2008-2010, compared to 2000-2007). Similarly, the crisis impact on tax
revenue is potentially larger in SSA than in low income economies on
average. While low income countries did not see a reduction in tax
revenue in the aftermath of the crisis, taxes collected in SSA fell by 1.7
percent of GDP in comparison to pre-crisis levels. Concurrently, budget
positions in SSA countries worsened by 1 percent of GDP on average.
Table 1: The Impact of the global financial crisis on high, middle and low income
countries
Region/Country

Decline in
GDP growth

Decline ininvestment(% of GDP)

Decline intax revenue(% of GDP)

Rise inbudgetdeficit (% of
GDP)
-4.2

High income
-2.7
-2.2
-1.2
countries
Middle income
-.08
3.2
0.8
n/a
countries
Low income
0.4
3.3
0.8
n/a
countries
Sub-Saharan
-0.7
2.5
-1.7
-1.0
Africa(developing)Note: All decline figures are calculated a difference between the 2000-07 average and the
2008-10 average. Developing Sub-Saharan Africa refers to all Sub-Saharan countries
with the exception of Equatorial Guinea, which is classified as high income
Source: World DataBank, World Bank, 2013.

3 Developing SSA refers to all SAA countries with the exception of Equatorial
Guinea, which is classified as high income country by the World Bank. All SSA
figures in the document exclude Equatorial Guinea since the focus is on
developing economies.

142

Furthermore, the question can be raised whether SSA growth ininvestment rates would not have been faster in the absence of the Global
Financial Crisis. Figure 1 illustrates this point. Gross capital formation(investment), as share of GDP, peaked at 22 percent in 2008 falling by
almost 1.5 percentage points in the following year. The 2008 level has
not been recovered as of 2011, the latest year for which data are
available.
Figure 1. Impact of the global financial crisis on gross capital formation.

Source: World DataBank, World Bank, 2013.
It is interesting that the number of banking crises on the African
continent has overall been remarkably low over the past decade (20002009), potentially indicating increased resilience of African financial
systems particularly in comparison to the 1990s (see figure 2).

143

Figure 2. Systemic banking crises in Africa, 1980-2009

Number of systemic banking crises

15

10

5

20
10

20
00

19
90

19
80

0

Source: Laeven and Valencia, 2008.
This argument is in line with the observation that thedissemination of the financial crisis from strongly affected advanced
economies to African low income countries has mainly happened
through the trade channel, falling commodity prices as well as shrinking
remittances and official development assistance budgets.
In this context the Nigerian banking crisis—discussed below—isseen by some as a ‘sporadic outlier’ (Beck et al. 2011, p. 3). There isnevertheless the danger that lack of recent crises can lead topolicymakers’ and regulators’ complacency (as well as that by thefinancial actors), which precisely could increase the risk of future crises.
This phenomenon, known in the literature as ‚disaster myopia‛, has in
the past contributed to increased risk of crises in other regions.
There has been far relatively little research and policy analysis
on the implications of the Global Financial Crisis for African countries
and LICs more generally, with some valuable exceptions (see forexample, Kasekende et al 2011, and Murinde et al, 2012 for good analysisof regulatory issues in LICs). As African financial sectors are growing
quite quickly, they may be more vulnerable to threats to their financial
stability. The value added of policy analysis and research on finance and144

development that explores the right lessons to learn from the Global
Crisis—and previous ones in emerging economies—for African LICs, isthus likely to be high. This research might help answer the question of
how the need to ensure financial stability interacts with the need of afinancial system in LICs that assures enough access to sustainablefinance for the different sectors of the economy, including long-term
finance to fund structural change, as well as different segments, such as
small and medium-sized enterprises (SMEs) and infrastructure.

3. AREAS OF ANALYSIS
There are two areas of enquiry for understanding the links
between the financial sector and inclusive, as well as sustainable,
growth: 1) what is the desirable size and structure of the financial sector
in LICs? and 2) what are the regulatory challenges to maximize thelikelihood of achieving financial stability, whilst safeguarding inclusive
and more sustainable growth? Political economy might be a fruitful lensthrough which to perform such analysis because it sheds light on thepolitical determinants of financial policy.
3.1 SIZE AND STRUCTURE O F THE FINANCIAL SECTOR
At a broad level, what is the desirable (‚optimal‛) size andstructure of the financial sector in African countries, to maximize its
ability to support the real economy? What are the desirable paths ofdevelopment of the financial sector in Africa to help it maximize its
contribution to growth, considering features of African countries andlessons from recent crises?
The traditional positive link between deeper as well as larger
financial sector and long-term growth, that started in the literature with
Bagehot and Schumpeter, but then was reflected in quite a large part ofthe empirical literature, such as Levine (2005), is being increasingly
challenged. Authors like Easterly, Islam and Stiglitz (2000) had alreadyearly on suggested that financial depth (measured by private credit to
GDP ratio) reduces volatility of output up to a point, but beyond that,
actually increases output volatility. More recently, a number of papers
are showing inverse relation between size of financial sector and145

growth, especially beyond a certain level of financial development,
which is estimated at around 80-100 percent of private credit to GDP.
Thus, Bank for International Settlements (BIS) economists (Cecchetti and
K. Kharroubi, 2012) based on empirical work reach the following
conclusions, which challenges much of earlier writing:‚First, with finance you can have too much of a goodthing. That is, at low levels, a larger financial system
goes hand in hand with higher productivity growth.
But there comes a point, where more banking and morecredit lower growth. Secondly, looking at the impact ofgrowth in the financial system—measured in
employment or value added—on real growth, they findclear evidence that faster growth in finance is bad for
aggregate real growth. This implies financial booms arebad for trend growth. Hence, macro prudential orcounter-cyclical regulation, discussed below, isimportant.‛
Finally, in their examination of industry-level data, they find thatindustries competing for resources with finance are particularly
damaged by financial booms. Specifically, manufacturing sectors thatare R&D-intensive suffer disproportionate reductions in productivity
growth when finance increases.
Similarly, an IMF Discussion Paper (IMF, 2012a) suggests
empirical explanations for the fact that large financial sectors may havenegative effects on economic growth. It gives two possible reasons. The
first has to do with increased probability of large economic crashes(Minsky, 1974, Kindleberger, 1978 and Rajan, 2005) and the second
relates to potential misallocation of resources, even in good times(Tobin, 1984). De la Torre et al, 2011, point out that "Too much finance"
may be consistent with positive but decreasing returns of financial
depth which, at some point, become smaller than the cost of instability.
It is interesting that the IMF Discussion paper, (op cit.) results are robust
to restricting the analysis to tranquil periods. This suggests thatvolatility and banking crises are only part of the story. The explanation
for the "Too Much Finance" result is not only due to financial crises andvolatility, but also misallocation of resources.
146

It is also plausible that the relationship between financial depth
and economic growth depends, at least in part, on whether lending isused to finance investment in productive assets or to feed speculative
bubbles. Not only where credit serves to feed speculative bubbles—
where excessive increases can actually be negative for growth—but also
where it is used for consumption purposes as opposed to productive
investment, the effect of financial depth on economic growth seems
limited. Using data for 45 countries for the period 1994-2005, Beck et al.
(2012), and Beck et al., (2011) show that enterprise credit is positively
associated with economic growth but that there is no correlation
between growth and household credit. Given that the share of banklending to households increases with economic and financial
development and household credit is often used for consumption
purposes whereas enterprise credit is used for productive investment,
the allocation of resources goes some way towards explaining the nonlinear finance-growth relationship. In African countries, only a small
share of bank lending goes to households. However, as financial sectors
and economies grow, this will change, as has been the case in South
Africa.
Rapidly growing credit to households—even though desirable
when strengthening reasonable levels of domestic demand and financial
inclusion, in a sustainable way—might, however, cause financial
instability if not regulated prudently. This is especially the case if
lending is excessively channeled into the construction sector, creating a
housing bubble. The two most advanced African economies, South
Africa and Mauritius—both upper middle income countries—haverecently experienced or are currently experiencing a construction boom.
Both economies possess relatively deep financial markets with strong
private domestic lending including significant consumption credit
extension. Figure 3 shows that private credit in high income economies
was around 100 percent of GDP on average in 2010 while it accounted
for 70-80 percent of GDP in Mauritius and South Africa.

147

Figure 3. Private credit extension in African middle income countries comparedto high income countries, 1990-2000

Private sector credit as share (%) of GDP

120
100

High income countries
MauritiusSouth Africa

80
60
40
20

20
10

20
05

20
00

19
95

19
90

0

Source: World Development Indicators, World DataBank, World Bank, 2013.
In international comparison, South Africa was the country inAfrica which experiences the strongest house real price gains between
2004 and 2007, by far exceeding even the price growth in the booming
residential property markets of the US and the UK (see figure 4). In
South Africa the ratio of household to business credit is approximately
1:1. The large majority of household borrowing takes on the form ofmortgage finance. During the early 2000s this led to an unprecedented
housing boom in South Africa fed by growth in housing loans of over
500 percent in real terms between 2000 and 2010 (see figure 5). This waslargely absorbed by upper income South African households accounting
for three quarters of total household credit created (DTI, 2010). In an
attempt to reduce inflation, asset price increases and potential macroeconomic over-heating, the South African Reserve Bank gradually
initiated monetary tightening in June 2006, accelerating the rise ininterest rates the following year.
The subsequent economic slowdown in South Africa was to alarge extent based on domestically accumulating economic and financial
imbalances while the Global Financial Crisis merely intensified therecession of 2008/09. The fact that credit and consumption-led growth148was unsustainable in South Africa was illustrated in over 1 million jobs
shed in 2008/09, largely in low-skilled consumption-driven sectors. A
positive aspect was that there was no financial crisis, perhaps because of
the positive policy response from the economic authorities; however, as
mortgage credit picks up, and especially if it does at a very fast pace,care has to be taken to regulate this. The South African experience
reiterates that private sector credit expansion at very high levels mightlead to output volatility and adverse growth effects (see Easterly, Islamand Stiglitz, op cit, and Cecchetti and K. Kharroubi, op cit). In order toprevent future crisis and foster economic development a re-orientation
towards more business credit, particularly for productive investment,
might be needed.
Figure 5. South African private sector credit extension by purpose, 1990-2012
R 1,200,000

Total household credit (in real 2000 prices)
Mortgage loans (in real 2000 prices)

R 1,000,000

in Million Rand

R 800,000
R 600,000
R 400,000
R 200,000

20
10

20
08

20
06

20
04

20
02

20
00

R-

Source: SARB, 2013.
In Mauritius almost one third of private sector credit flows tohouseholds, equaling 20 percent of GDP by late 2012. The majority ofhousehold borrowing is mortgage finance (60 percent of total household
credit) with the rest used to fund consumption (40 percent). Givensustained demand for residential property housing credit has been
growing close to 20 percent annually on average over the past 5 years
149

(Bank of Mauritius, 2012). Simultaneously, foreign direct investment(FDI) flows into the country concentrate on real estate activities with thebulk in tourist resorts, real estate and invest hotels schemes. The
construction industry accounted for approximately half of FDI inflows
in recent years (2008-2012). Mauritius’s construction boom should bemonitored with caution, which has also been pointed out by the IMF
Article IV Mission Consultation. Financial vulnerabilities appear to beaccumulating in the industry with potential adverse impact on balance
sheets of domestic commercial banks. Even though non-performing
loans as share of total credit are at reasonably low levels, they haveincreased from 2.1 percent to 3.1 percent between 2010 and 2012.
Furthermore, non-performing loans in the construction industry(excluding housing loans) as share of sectorial credit are more than
twice as high, rising from around 5 percent in 2010 to 8 percent last year.
This development is worrying and calls for counter-cyclical regulation
especially since year-on-year growth in construction credit has shot up
sharply during 2012, exceeding 35 percent by September. This is almost
three times above the long-term average (see figure 6).
Figure 6. Construction sector credit in Mauritius
40
Credit to construction sector (excl. housing loans)
35

Long-term average

Annual growth in %

30
25
20
15
10
5

p12
Se

2
Ma
y-1

Ja
n12

Se
p11

y-1
1
Ma

Ja
n11

p10
Se

0
Ma
y-1

Ja
n10

0

Source: Bank of Mauritius, 2012.
Limited data availability makes it difficult to measure to what150

extent consumption credit is on the rise in other African economies. This
would seem to make the case for more disaggregated credit data, as well
as monitoring by regulators as well as policymakers, more urgent.
One of the few low income SSA countries providing
disaggregated domestic lending data is Mozambique (Banco deMoçambique, 2013). Private sector credit has increased significantly
between 2000 and 2010 in the Southern African country from 15 percent
to 23 percent of GDP (see table 2 below). During this period consumer
borrowing almost tripled as share of total credit while it grew almost
eightfold between 2001 and 2012 in real terms (see figure 7).
Mozambique has had a strong growth performance implying a robust
medium-term economic outlook despite stagnant poverty reduction andthe need for more inclusive growth (IMF, 2012).
Figure 7. Mozambican consumer credit in real terms and as share of total
private sector credit, 2001-201230%
Consumer credit (real in 2000 prices)
25%

Consumer credit as share in total credit(right-hand scale)

20
12

20
11

0%
20
10

0
20
09

5%

20
08

2,000,000

20
07

10%

20
06

4,000,000

20
05

15%

20
04

6,000,000

20
03

20%

20
02

8,000,000

2001

In Thousands of Meticais

10,000,000

As Share (%) in Total Private Sector Credit

12,000,000

Source: Banco de Moçambique, 2013
Nevertheless, falling consumer price inflation has beenaccompanied by potential price pressures present in urban housing
markets, which are difficult to assess due to lack of house price data for
Mozambique. Significant housing rent increases (20-25 percent per year)151have been reported for upmarket and expatriate areas of Maputo(Emerging Markets Consultants, 2012) while central areas inMozambican towns and cities (so-called ‘cement cities’) have been
observed to experience property price growth of 100 percent annually(CAHF, 2012).
More broadly, as we began to discuss above, of relevance for
growth is thus the link between the structure of the financial sector andgrowth. The IMF in its Global Financial Stability Report (IMF, 2012b)
has interesting further empirical analysis of the relationship between the
structure of the financial sector and economic growth, as well as thevolatility of this growth and financial stress. This is a fairly understudied area, and one which has hardly been applied to LICs. The
preliminary empirical results of the IMF report suggest that crossborder connections through foreign banks may during crises be
associated with instability, though their role may be more beneficial innormal times. The empirical evidence also seems to show that ‚adomestic financial system that is dominated by some types of nontraditional bank intermediation has in some cases been associated withadverse economic outcomes, especially during financial crises.‛
Crucial in the context of policymaking and research on financein Africa is the extent to which the findings on the relationship between
the structure and size of the financial sector and growth in moredeveloped economies are relevant for and apply to African LICs because
their financial systems are markedly different. In particular, thesecountries’ banking systems are small in absolute and relative size, manyof them reaching the size of mid-sized banks in high-income countries.
Beck et al. (2011), op cit report for instance, that if measured in relative
size based on the claims on the private domestic nonfinancial sector to
GDP (private credit), the median for African countries as a whole (i.e.
including North African countries) was 19 percent in 2009, while it was
49 percent for non-African developing countries. African financial
sectors also show levels of financial intermediation and access tofinancial services has remained limited for large segments like SMEs,
the agricultural sector or poor households. Many of those use informal
financial services. In addition, African financial systems are mainly
bank-based with non-bank segments showing an even lower level ofdevelopment.
Given the importance of SMEs in creating employment, the lack152

of financial infrastructure supporting their activity in African financial
systems is a major drawback for development. International financial
indicators show that African businesses in general are disadvantaged
through less access to finance than competitors in other regions.
Concurrently, SMEs enjoy a particularly poor access to sources offinance, leaving them with internal cash flow as main source forinvestment finance. As consequence, enabling African SMEs to better
access financing sources has the potential to strengthen and accelerate
growth if done on sustainable grounds under adequate regulation.
The obstacles African SMEs experience in their domestic
financial systems are mainly concentrated around the insufficient
support by financial and banking institutions, lacking development ofequity and bond markets and alternative sources of finance. Therefore,
recent developments of deepening African financial markets might help
SME growth if successfully and sustainably channeled into thissegment. International indicators such as the capital access index anddomestic analysis via enterprise surveys, by company size, support thisview as argued below.
Figure 8. Milken Institute Capital Access Fund Index, 2009.
Industrialised countries
Middle East
EuropeAsia

Capital Access Index 2009

Americas and the Caribbean
Africa
0

2

4

6

8

10

Source: Milken Institute, 2010.
A measure that can be used to understand the overall ability ofbusinesses and entrepreneurs to access domestic and foreign capital is
the Milken Institute’s capital access index, CAI (Barth et al., 2010) which
is a ranking tool of the relative strength and performance of capital153

markets around the world4. African economies perform most poorly,
with a score of 3.07 on a scale of 0 to 10, on business access to capital(see figure 8). Furthermore, of the 61 countries that form the bottom halfof the ranking, 30 are African countries, while 17 of the 20 countries
with the lowest scores are African low income economies (see table 2).
Table 2: Bottom 20 CAI scores and country rankings
Country

Score

Mozambique

2.74

Cameroon

2.67

Rwanda2.64

Burkina Faso

2.63

Syria

2.59

Benin

2.58

Sierra Leone

2.56

Ethiopia

2.44

Laos

2.37

Mali

2.37

Central Africa Republic

2.32

Togo

2.31

Guinea2.19

Mauritania

2.18

Republic of Congo

2.17

Madagascar

2.13

Chad

2.06

Niger

2.03

Haiti

1.95

BurundiSource: Milken Institute, 2010.

1.87

This is achieved by assessing the macroeconomic environment, institutional
environment, financial and banking institutions, equity market development,
bond market development, alternative sources of capital, international funding
in the relevant countries. The CAI is compiled by the Milken Institute and ranks
122 nations on six continents. The latest CAI, referred to in this document, hasbeen provided by the Milken Institute for 2009.
4

154

The graphs below illustrates the difficulties that Africanbusinesses and entrepreneurs have in accessing finance (see figure 10),in comparison to the average for all countries in more detail (see figure9). African economies struggle to establish internationally competitive
financial and banking institutions, to support equity and bond market
development as well as to develop alternative sources of finance. All
these, and particularly alternative sources of finance, could serve as
crucial sources of finance for SMEs.
Figure 9. CAI components for Africa compared to the average.
Macroeconomic environment
Institutional environment
Financial and banking institutions
Equity market development
Bond market development
Alternative sources of capital

AfricaAverage

International funding
0

1

2

3
4
Scale from 0 to 10

5

6

Source: World Bank, 2013.
There is a gap of 4.28 (ranked out of 10) in the score between the top(South Africa) and the worst performing African country (Burundi) in
the CAI ranking. This could indicate large discrepancy in financial
sector development on the African continent.

155

7

Figure 10: Regional percent of firms by firm size with a bank loan/line ofcreditSmall (5-19)

Medium (20-99)
67%

63%

49% 46%
32%

52%

36%

Large (100+)

58%

56%

44%

40%

37%
21%
18%

26%

31%

17%

4%

East Asia & Eastern Europe Latin America & Middle East &Pacific& Central Asia Caribbean
North Africa

South Asia

Sub-SaharanAfricaSource: World Bank, 2013.
Note: Years vary for different regions, ranging from between 2006—2012.
Assessing the ability of firms to access finance more deeply, thepercentage of small, medium and large firms that have a bank loan or acredit line can serve as a measure (see figures 10 and 11). Sub-SaharanAfrican small and medium sized firms have poor access to finance (only17 percent of them, as opposed to 40 percent in Latin America, and 32
percent in East Asia) when compared to other developing regions,performing only better than Middle East and North Africa region. This
analysis of access to credit by firm size is taken further below for some
Sub-Saharan African countries on two levels:
1) By looking at the firms of different sizes and the implications on
the ability of the firm to have a bank loan or a credit line;
2) By assessing whether the performance based on the size of thefirm is different if the CAI score for the African country was in
the bottom half or the top half.
In some cases where the CAI score is high small businesses havenevertheless poorer access to finance (measured as share of total firms
with access to bank loan/line of credit) than countries that scored in the156bottom of the CAI rankings. This is true, for example, for South Africa
as compared to Rwanda, Burundi and Benin (see figure 11).
Figure 11. Access to bank loans and/or lines of credit by some SSA countries’
firms.

90%
Small

Share of Total Firms

80%

Medium

Large

70%

60%
50%
40%
30%
20%
10%
0%

Source: World Bank, 2013.
Note: Years vary for different countries, ranging from between 2006—2011.
In general, between 60 percent and 70 percent of SMEs in SubSaharan Africa need loans, however only 17 percent of small and 31
percent of medium-sized firms actually have access to finance. As aconsequence, firms in Sub-Saharan Africa have to finance a highproportion of investment through internally generated cash flows (82percent among small Sub-Saharan African firms, see figure 12). This
reflects the CAI finding that African countries lack developed equity
and bond markets, alternative sources of capital and that there are lowlevels of lending by banking institutions. Not surprisingly,
approximately 50 percent of small enterprises in Sub-Saharan Africa
have identified access to finance as a major obstacle to their businessactivities (see figure 13).

157

Figure 12. Investment financing methods of firms in SSA.
Small (5-19)
82%

78%

Medium (20-99)

Large (100+)

72%

28%
12%

17%
8%

12%

17%
3% 4% 4%2% 2% 3%

Percent of firms
Proportion of
Proportion of
Proportion of
Proportion ofusing banks to investments financed investments financed investments financed investments financed
finance investmentsinternally (%)
by banks (%)
by supplier credit (%) by equity or stock
sales (%)

Source: World Bank, 2013.
Figure 13. Share of firms with access to finance as major constraint.
50%

48%

45%

41%

Access to finance as a major constraint

Percentage of firms

40%
35%

32%

30%
25%
20%
15%
10%
5%
0%
Small (5-19)

Medium (20-99)

Source: World Bank, 2013.

158

Large (100+)

In an effort to increase the level of participation of financial
institutions to finance small medium enterprises public banks, such as
the African Development Bank (AfDB), are driving a number of
initiatives designed to encourage the participation of financial
institutions. One notable initiative is the African Guarantee Fund (AGF),
which is a for-profit social investment fund. The AGF is owned by
AfDB, AECID and DANIDA with contributions of US$10 million, US$20
million and US$20 million, respectively (African Development Bank,
2012). Over the next 3 to 5 years, this share capital is expected toincrease to US$500 million, giving the institution capacity to guarantee
up to US$2 billion worth of SME loans. The additional capital will be
coming from bilateral donors, private investors as well as from DFIs
(African Development Bank, 2012). The AGF will select certain financial
institutions to be partner institutions by assessing their commitment togrow their SME portfolio and improving financial product offerings to
SMEs. For these partner institutions AGF will have two lines of activity:
1) Partial credit guarantees: the provision of partial guarantees forfinancial institutions on the African continent to incentivize them toincrease debt and equity investments into SMEs. These guarantees,
with different fee structures (see table 3), will support:a) Loans made by client financial institutions to SMEs
through a hybrid approach (portfolio and individualloan basis);b) Funds mobilization (i.e. issuance of bonds) by financial
institutions in support of their SME financing activities;
andc)Equity capital financing for SMEs.

2) Capacity development: supporting AGFs partner institutions
enhance their SME financing capabilities through assisting to
improve the capacity to appraise and manage SME portfolios(African Development Bank, 2013).

Table 3. Mechanisms of the AGF
159

Guarantee type

Portfolio (Loan)guarantee
Individual (Loan)
Guarantee
Equity Capital
Guarantee
Resource Mobilization
Guarantee

Guarantee
Limit

Pricing
Originating
Fee (flat)

Guarantee
Commissions (p.a.)

US$2,500,0
00

0.75%

2.00%

US$500,000

0.75%

1.75%

US$500,000

1.00%

5.00%

US$1,000,0
00

1.00%

2.50%

Source: African Guarantee Fund, 2013.
Operationally, the AGF will work on a risk-sharing basis withfinancial institutions and the maximum risk coverage ratio will be 50
percent. The balance of risk will be borne by the financial institutions(African Development Bank, 2013). AGF is designed to achieve a tripleA rating in order to attract a zero percent risk-weight on SME loans
provided by partner institutions. This will allow these institutions tolend money with limited need to set aside regulatory capital because of
the guarantee from the highly-rated AGF. The tenor of the guarantee
will be for 80 percent of the life of the underlying transaction. The firstof the AGF guarantee agreements are expected to be signed imminently
and thus an assessment of the guarantee is not possible at this point,
however, it is reported that there is high interest from financial
institutions on the African continent (African Development Bank, 2012).
It is worth noting for the purposes of future research that over
and above the general consensus that SMEs lack long-term finance atreasonable lending rates, working capital facilities are also starting to beemphasized. The AfDB notes that (African Development Bank, 2012, p.
3): ‚SMEs … complain … how banks are hesitant to provide long-term
lending and working capital facilities, both of which they need for
growth.‛ Currently, 15 percent of small enterprises in Sub-SaharanAfrica use banks to finance working capital, however, only a small
proportion (6 percent) of their working capital needs are covered by thistype of finance (see figure 14).
Figure 14. Financing of working capital by SSA firms.

160

Working Capital Financing Method for Firms in SSA
Small (5-19)

Medium (20-99)

Large (100+)

38%
30%

15%

15%
12%

15%
11%

14%

6%

Percent of firms using banks tofinance working capital

Proportion of working capitalfinanced by banks (%)

Proportion of working capitalfinanced by supplier credit (%)

Source: World Bank, 2013.
The need for working capital finance from financial institutions
is echoed by Standard Bank, which found that there is a need forworking capital facilities for SMEs in Sub-Saharan Africa (Botha, 2011).
To this end, Standard Bank has launched a product called Quick Loans,which provides unsecured loans of between US$300 to US$30000 for 3 to
12 months, as well as other forms of finance to traders (Standard Bank,2013). Standard Bank (2013) has established SME banking in 13 African
Countries (excluding South Africa) and during 2011 provided financial
services to more than 150,000 SMEs across these countries.
In general data on the asset composition of banks acrossdifferent regions shows that unlike banks in other regions of the world,
African banks hold a much smaller share of their assets in private sectorloans and a much larger share in government securities, foreign assets,
and liquid assets (Beck et al., 2011, op cit). Household credit constitutes
only a small share in bank credit, except in countries where financial
sectors are more developed like South Africa.
Banking sectors in most African countries are highly
concentrated. In many countries, banks are predominantly foreignowned, many of them being regional banks from other Africancountries. Banks also operate very profitably, with subsidiaries offoreign banks in sub-Saharan Africa having higher returns on assets
than subsidiaries of the same banks in other regions (Honohan and161

Beck, 2007).
It is not clear the extent to which the findings on the reverse link
between financial depth and growth found in the context of developedand emerging economies is as relevant for low income countries, with amuch lower level of financial development, and with large parts of the
population and companies, lacking any access to financial services, as tocountries with far deeper financial sectors. However, these findings willcertainly be relevant for designing policies that will influence their
future evolution. Furthermore, it may well be that in the near-term, theissue is more related to avoiding excessive speed of growth of finance,that we have started to illustrate above, which may be more the threat tofinancial stability in the case of Sub-Saharan Africa, (SSA). Indeed, as
shown in figure 15, financial deepening in SSA has accelerated in recent
years. The amount of private credit as share of GDP almost doubled
from an average of 10 percent during the 1990s to 18 percent by 2010.
Bank deposits as share of GDP grew from 13 percent (in 1990-1999) tomore than 20 percent (in 2010), while liquid liabilities (also known as
broad money or M3)5 to GDP rose by more than 10 percentage points
over the same period from 20 percent to exceed 30 percent.

Figure 15. Financial deepening in Sub-Saharan Africa, 1990-2010.

They are the sum of currency and deposits in the central bank (M0), plustransferable deposits and electronic currency (M1), plus time and savings
deposits, foreign currency transferable deposits, certificates of deposit, andsecurities repurchase agreements (M2), plus travellers checks, foreign currency
time deposits, commercial paper, and shares of mutual funds or market funds
held by residents. This definition of broad money is used by the IMF and theWorld Bank.
5

162

35
Private credit

Deposits

Liquid liabilities

Share (%) of GDP

30
25
20
15
10
5

20
10

20
05

20
00

19
95

19
90

0

Source: Global Financial Development Database, the World Bank, 2012.
Note: Sub-Saharan Africa regional aggregate. This Figure was prepared by
Florence Dafe.
The above aggregate figures do not do justice to the fast pace ofcredit expansion in certain SSA economies. Table 4 provides country
data about credit extension as share of GDP for all SSA economies
individually. It highlights countries which have experienced a doublingof private credit to GDP within the past decade (2000-2010) in light gray.
Economies where private credit tripled or increased up to tenfold overthe same period are given in dark gray whereas SSA states that saw arise in lending to the private sector of ten times or more are highlighted
in black.

163

Table 4. Credit Extension in Sub-Saharan Africa by Country, 1990, 2000,
2010.

164

This analysis shows that in the recent decade there has been a
considerable number of SSA countries with very rapid credit growth,
namely: Benin and Swaziland where credit to GDP (almost)
doubled;

Malawi, Mali, Niger, Nigeria, São Tomé and Príncipe, Sierra
Leone, Sudan, Tanzania and Uganda where credit to GDP
increased threefold and more (but less than tenfold);Angola with private credit growing by a factor of more than
15-fold, or 1500 percent.

Though this is a rough indicator, countries in the last two
categories would seem more vulnerable to potential crises, so they may
need to examine whether they need to introduce tighter regulations, ingeneral, or in particular sectors.
Financial systems in many African countries share features165

which seem to increase their vulnerability to shocks in the economic andfinancial system, including limited financial regulatory capacity,
macroeconomic volatility linked to the economic structure of thecountries (e.g. natural resource dependence, which implies volatility of
their terms of trade) and political pressure for financial deepening witha view to develop the real economy.
Fast credit growth might exacerbate vulnerabilities and enhance
the risk of financial crises, as it has done in all other regions of theworld. In the African context, the case of Nigeria provides a recent
illustration that banking crises might cause a negative link between
financial deepening and growth, even at relatively low levels offinancial development. In 2004/2005 the Central Bank of Nigeria (CBN)
mandated a steep increase of minimum bank capitalization with a viewto create large internationally competitive banks and increase financial
depth (Soludo, 2004). Banks achieved this capitalization, which washigh even by international standards, by means of equity investment,
mergers and acquisitions, resulting in the consolidation of the banking
sector from 89 to 25 banks. The consolidation in the domestic banking
sector, along with abundant capital in the wake of rising oil prices
increased the speed of credit creation with significant flows to sectors
with little growth impact. Between 2006 and 2009 private credit tripledfrom 12 percent to 36 percent of GDP. In real terms (2002 prices) thismeant that domestic borrowing by the private sector grew almost
fivefold (see figure 16).

166

Figure 16. Nigerian private sector credit extension, 2003-2013.
6,000,000
Private sector credit (real in 2002 prices)in Million of Naira

5,000,000
4,000,000
3,000,000
2,000,000
1,000,000

20
13

20
12

20
11

20
10

20
09

20
08

20
07

20
06

20
05

20
04

20
03

0

Source: Central Bank of Nigeria, 2013This included loans used to finance share purchases, anundesirable practice clearly, setting the stage for a financial asset bubble
particularly in bank stocks (Sanusi, 2010). The financial sector boom
ended in a bust with a systemic banking crisis in 2009 as financial sector
growth was excessive, partly because it had not been accompanied by
the corresponding regulatory and supervisory upgrade. Consequently,
non-performing loans as percentage of gross loans rose sharply from 9.5
percent in 2007 to almost 30 percent in 2009. Finally, nine financial
institutions that were close to collapse had to be rescued at the cost of
US$4 billion. The cost of cleaning up the balance sheets andrecapitalizing the banks concerned is estimated at about 2.4 trillion
Naira, equivalent to almost 8 percent of GDP (IMF, 2011). The Nigerian
crisis shows there is no reason for complacency about the need for
rigorous financial regulation in African economies especially in the faceof rapid credit expansion in many SSA markets.
With respect to the effect of foreign bank presence on financial
stability and growth in Africa, the existing evidence is somewhat
ambiguous and requires further research. There are indications that
foreign banks can bring in experience from other regional economies

167

and can help exploit scale economies in small host countries. Yet thebenefits for financial access remain ambiguous, partly because of thegreater reliance of foreign banks on ‚hard‛ information about borrowers
as opposed to soft information which often implies a focus on prime
borrowers (Detragiache et al., 2008, Sengupta, 2007). Furthermore, it
seems that foreign banks are fundamentally different from domestic
banks. As argued by Rashid (2011) foreign banks seem less inclined tolending and their loans are likely to be more volatile than those offeredby domestic banks. Despite strong foreign bank presence, the effects ofthe global financial crisis on African banks have been limited. In part,
this is due to the relatively limited presence of banks from developed
economies in Africa (with a high proportion of foreign banks being
regional ones) and the fact that existing subsidiaries mostly fundthemselves locally and not via their parents; this, however, limits thecontribution these foreign banks make to national savings (Fuchs et al,2011). In addition, reportedly large capital buffers—often above levels
required by Basel III—have served to increase the resilience of Africanbanks during the global financial crisis although this may have involved
some costs for intermediation (Fuchs et al., 2012b).
The fact that financial sectors in LICs tend to be relatively
smaller and simpler provides an advantage in that governments havemore policy space to influence the future nature and scale of theirfinancial system. Furthermore, the fact the financial sector is smaller
may imply it is less powerful politically; thus, potentially this gives
more autonomy to regulators and—more broadly governments—toshape the financial sector.
LICs thus have the advantage of being latecomers to financial
development and can benefit from positive and negative lessons fromexperiences and research on other countries. On the other hand, theincompleteness of LIC financial systems means that important
challenges remain on extending access (to all types of financial services)to those excluded, such as a high proportion of poor households,
microenterprises and SMEs. More generally, it is difficult to fundworking capital and investment in sectors such as agriculture andindustry, especially for SMEs (and particularly at low spreads andlonger maturities) crucial for growth and employment generation. The
financing of infrastructure is a well-known problem in LICs, and themobilization of sufficient long-term finance, as well as the most effective
168

way to channel it to investment in that sector, is a key area of policy,
where research, including clear understanding of market gaps—as wellas effectiveness of policy interventions—could be very valuable.
Research on the desirable structure of the financial sector could
include the following research themes and questions:a) What functions are particularly important to meet in African
LICs? What are the deficiencies and needs in these areas in
LICs? For example, how can sustainable lending at relatively
low spreads and sufficient maturities to SME be bestencouraged? What are the main challenges for delivering thattype of finance in LICs? What are the specific needs of particularsectors, e.g. agriculture, for innovation? These and related issues
could be researched using a number of methods, including
consultation with policymakers and practitioners, theoreticalanalysis, empirical analysis, such as cross country and timestudies, as well as in-depth case studies. Surveys of privatecompanies to determine unmet demand for financial services,and especially credit at reasonable cost, and maturity would bevaluable.
b) What combination of public/private institutions/mechanisms
may be desirable to best achieve the three objectives of growth,financial stability and equity? This would look—in general andin country settings—at the existence of market gaps and market
failures in specific areas (e.g. long-term finance) in LICs, as wellas potential government failures. Careful review of theoreticaland empirical work needs to be combined with analysis ofexperiences to offer a balanced menu of policy options for mosteffective institutional arrangements in particular country
contexts. What mechanisms (public guarantees, first losses
assumed, for example by IFC) are desirable to encourage private
financing? How can they be best structured to avoid excessive
contingent public liabilities and for them to be effective? What
experiences exist, which have worked well? How can they best
be applied to LICs?
c)

Since the 2007/2008 crisis, increased interest has emerged in169expanding the role of national and regional development banks
to provide counter-cyclical lending when private credit falls.
Also, public banks can be valuable for incorporating
environmental externalities, to give LICs the opportunity to‚leap frog‛ by adopting low-carbon technologies. More broadly,
public development banks can be a valuable mechanism forfinancing particular strategies of development. What are the
incentives and institutional arrangements that are required tomake such development banks effective and efficient in LICs?
What lessons can be learned from successful banks in developed
countries (e.g. the European Investment Bank, German KfW)
and emerging economies (e.g. BNDES in Brazil, as well as Asiandevelopment banks)? Most research on the experiences with
development banks in Africa dates from the 1980s and 1990s
and evaluations report fairly
negative experiences(Brownbridge et al., 1998). However, many development banks
have been reformed over the past decade so that research
implying re-evaluations of their effectiveness are necessary.
Returning to the theoretical issues, what are the specific market
gaps and failures which need addressing in specific LIC
contexts, and how best can government failures be minimized?
A hypothesis to be explored is that the effectiveness ofdevelopment banks depends substantially on governancearrangements and political economy factors. Pressures on
African governments to facilitate access to finance for the real
economy may for example be particularly strong. What are preconditions, including political economy ones for such banks tobe effective in LICs, in ways similar to how they have been in
emerging and developed economies?
d) In the case of private banks, should a particular model, forexample with respect to size, be encouraged? Many Africancountries banking systems have an oligopolistic structure wherea small number of banks dominate the market and competitionis limited. Is there a case that smaller more decentralized banks
are better for reducing asymmetries of information? Are there
more benefits from increased competition? Or are economies ofscale an important factor for determining bank efficiency? Are
170

potential costs of increased systemic risk of large banks so highthat smaller, narrower banks may be preferable (DemigurcKunt and Huizinga, 2010)? What are the lessons, if any, for
African LICs from the debate in developed countries on the
structure of banking, for example as reflected in the recent UK
Vickers report? What should be the preferred model forinternational banks in African LICs? Should LIC regulators
encourage/require international banks to act as subsidiaries,
rather than branches, as the UN Stiglitz Report proposes, tofacilitate the task of national regulation? In India and someother developing countries, branching regulations are in place.
What have been the experiences with such regulations? Shouldinternational (and possibly all large banks) be required to have
not just branches in large cities, but also in smaller cities?
e) To what extent is it best to concentrate in LICs on thedevelopment of banking, or should non-banking institutions(like stock markets and insurance markets) play also an
increasingly important role? Both financial and humanresources for developing and regulating non-bank institutions
tend to be limited in African countries, so that efforts to develop
such markets which are resource-demanding should be basedon evidence-based policy advice. Should specialized lending
institutions, like leasing or factoring companies, as well as lowend financial institutions, such as cooperatives, credit unions
and microfinance be promoted, as suggested in Beck, DemigurcKunt and Singer (2011)? If the insights of imperfect andasymmetric information are central, such information tends tobe local and specialized (Stiglitz, 2012); this may provide animportant theoretical and practical justification for greater useof more low-end and more decentralized institutions. Would
the latter, for example be particularly effective for the financingof SMEs, and more broadly for the so-called missing middle?
What is the empirical evidence on this, especially in LICs? For
many African households such low-end financial institutions
constitute the only form of financial access. In Uganda, forinstance only 21 percent of adults above the age of 15 have an
account at a formal financial institution (Demirguc-Kunt and171

Klapper, 2012). Governments have hence promotedcooperatives, credit unions and microfinance. However, there islittle systematic research comparing costs and benefits ofpromoting such low-end institutions as opposed to access tobanking services. How can a more desirable mix be
encouraged? What is the empirical evidence on which to basesuch decisions?
f)

How can development of primary public debt markets be
encouraged, to establish risk-free benchmark curves? Based on
deepening of public bond market, how can the local corporatebond market best be developed, including for long-term
institutional investors to buy? What are relevant lessons fromthe analysis of experiences in other parts of the world and ofrecent empirical work on growth impact of structures ofdifferent financial sectors?

g) What kind of institutional developments and financial
innovations are valuable for promoting inclusive and moresustainable growth, without increasing systemic risk
excessively? More specifically, what systems can improve accessby the poor and by SMEs to sustained credit, without creating
systemic risk for the financial system? Mobile banking, whichshould be regulated proportionate to its risk, is an example forsuch an innovation. How can the poor not only have access to
sufficient and sustainable credit, but be protected in times ofcrises, so that the poor are ‛not too small to be counted‛ duringcrises, whilst banks are rescued as considered too big to fail (BIS
paper, 2012)? What are the complementarities between financial
and other policies, e.g. for increasing productivity of SMEs?
3.2 THE CHALLENGES OF FI NANCIAL REGULATION
A key lesson from recent crises has been the need for regulation
to be both counter-cyclical and comprehensive to avoid the build-up of
systemic risk (Griffith-Jones and Ocampo, 2009; Saurina and Repullo,2011). Though there is agreement on these principles, there is far lessconsensus on how these should be implemented. A great deal of172research and policy analysis is being carried out in the BIS, the IMF and
the Financial Stability Board on these issues.
One of the key problems is that LICs are not represented at all
or are heavily underrepresented in these bodies. Therefore, there isinsufficient focus in their work on how relevant these issues are for LICs
and how they should be implemented in them.
It may be useful to carry out research that would synthesize ongoing discussions on these issues of counter-cyclicality andcomprehensiveness, as well as other key issues that LIC regulators andpolicymakers define as a priority for them. Over the past decade, there
has been rapid credit growth in a number of African countries including
Angola, Democratic Republic of Congo, Equatorial Guinea, Ghana,
Guinea-Bissau, Liberia, Malawi, Nigeria, São Tomé and Príncipe, Sierra
Leone, Swaziland, Tanzania, and Zambia (Iossifov and Khamis, 2009).
Whether a manifestation of a credit boom or driven by fundamentals,
rapid credit growth can give rise to systemic financial andmacroeconomic risks, making the design and implementation of
appropriate macro-prudential regulation and supervision a policy
priority in Africa. For example, the Final Report of Making Finance Workfor Africa, in collaboration with the Association of African Central banks(AACB) and Bank of Uganda (2011) defined as most relevant and urgent
for African LICs—within Basel III—the incorporation of macro
prudential supervision. Relevant research in this field would betherefore seen to be a priority. Similarly, the concept of proportionality
in regulation implies that regulatory standards should be set in a way
proportional to the importance of the risks. (GPFI/CGAP, 2011) andBasle Committee, 2010). This requires further research for LICs.
In the case of macro-prudential regulation, an importantresearch issue is how can it be complementary to monetary policy in
LICs? Macroeconomic volatility, for instance, remains a problem, partly
because many African countries exports are concentrated in a few
commodities, which makes their economies vulnerable to the large priceshocks characteristic of commodities.
Furthermore, practical issues on how best to implement macroprudential policy would require research. These could include:a) What, in the LIC context, is the best choice of regulatory
instruments through which counter-cyclical regulation can best173

be implemented both for solvency and liquidity? What are thebest indicators to determine in LICs when capital requirements
or provisions need to be increased in boom times, or allowed tobe drawn down in bad times? How should the variables andmethodologies suggested internationally for counter-cyclicalregulation be adapted to realities in LICs, as regards data
limitations, as well as broader context of the smaller financial
sector and existing financial regulation (Bank of Uganda, 2012)?
b) Should counter-cyclical regulation of banks be done in LICs
mainly at an aggregate level and/or in specific sectors, forexample where lending is increasing fastest? How relevant isthe emerging international experience in this field (Ren, 2011)
for LICs? Should such measures be implemented through ex
ante rules or have some flexibility?
c)

Focusing on the issue of comprehensiveness, how relevant are
the international analyses of comprehensive regulation for
African LICs and how any international conclusions should be
modified for the LIC context? This requires taking into accountthe different nature of the financial system in LICs, where forexample many financial transactions go through informal
channels, or financial services are provided by non-banking
institutions like retail shops or mobile service providers. The
mobile payment service M-Pesa, developed in Kenya, is a casein point. M-Pesa was launched to target mobile subscribers who
were un-banked and now has over 7 million customers, bothbanked and un-banked. Light regulation in the testing phase of
the financial product, on the principle of proportionate
supervision, contributed to M-Pesa’s rapid growth. However, at
a later stage of product development and at a higher level ofoutreach, regulation may need to become significantly more
stringent for M-Pesa’s success to be sustainable. Yet
comprehensive regulation of M-Pesa and other financial
innovations may call for closer coordination between regulatorsof such institutions (e.g. telecommunications regulators inmobile banking) and banking regulators. Therefore, thechallenge of comprehensive regulation has a very different
institutional character in LICs. Does this mean that underlying
principles should also be different, or is the criteria of avoiding
174systemic risk and concentration of risk common to any financial
system?
d) Also in relation to aims of financial regulation, in LICs theseinclude more explicitly the purpose of inclusive growth. Can
regulations go beyond stability and be designed more explicitly
for growth? How can moral hazard best be avoided? Could
lending support industrial policies, regional mandates, toensure poor regions have more access to credit? What is theexperience on establishing minimums and maximums oflending in certain categories, e.g. SMEs? Are experiences likethe US Community Reinvestment Act or the Small Business
Administration successful and relevant to LICs? Are theirsimilar successful experiences in LICs?
Another issue highlighted by the Making Finance Work for Africa
report, op cit as high priority are regional/cross-border issues. This refers
not only to regulation of traditional international banks, but also to therapidly emerging pan-African banks. As Fuchs, et al (2012b) point out,
recent reforms of the international supervisory architecture
concentrated on creating colleges of supervisors for all internationallyoperating banks. Representation of African supervisors (especially LICs)
is very limited; this is a source of concern as an international bank may
have a small part of its portfolio in an African country, but implies avery large share of their market for a particular LIC country. The role of
the LIC supervisor in these colleges becomes too small, if any at all, withpotentially serious consequences for financial stability and growth
impact in the LIC country. Research could be valuable, both on theinstitutional and technical aspects, but also on the political economy of
how practically to enhance the ‚voice‛ of LIC supervisors in crossborder supervisory processes that have strong impacts on theireconomy, to overcome asymmetries of power that can lead toeconomically inefficient outcomes for LICs.
A key source of macro-economic volatility, as well as offinancial systemic risk, is generated by certain types of capital flows. As
a result, there has been growing recognition, in IMF and BIS, as well as
in the academic literature (for example Stiglitz and Ocampo, 2008;
Korinek, 2011; Gallagher, Griffith-Jones and Ocampo, 2012) on the needfor management of the capital account. One of the newest research and175policy challenges is how to most effectively combine regulation ofcapital flows and national counter-cyclical regulation. Again discussionin LICs has been more limited. Are capital account management
measures needed also in LICs and under what circumstances? In bestpractice, when are capital account regulations more effective, and whenare domestic prudential regulations, which focus on currency
mismatches? How best can they complement each other?
The type of issues to be examined on capital accountmanagement for LICs would relate to issues of: a) timing, relating to
how soon after a surge of capital flows starts occurring should measures
to discourage more short- term flows be used? b) should they be
temporary or part of a permanent system that can be suspended? c) if
and when should these regulations be price or quantity based? d) How
can avoidance be prevented?
Our analysis above has focused more on discouraging excessive
short-term capital flows when they threaten to cause macro-economic
over-heating, overvalued exchange rates and increase financial sector
systemic risk. However, there is also the important issue of attracting
long-term capital flows, especially where it can provide technology
transfer and access to new markets. This is a topic that now has new
dimensions, such as the increased role of Chinese and other Southern
investors. Research and research synthesis is needed on the positive
impact and potential risks to the financial sector of these new country
sources and modalities of investment.

4. CONCLUSION
While the 2007/8 crisis originated in, and strongly hit, developed
economies, there is no reason for complacency in regulating African
financial sectors. Fairly rapid credit growth in the late 2000s in thecontext of limited regulatory and supervisory capacity, especially insome countries, suggests that the time is now to draw appropriate
lessons from the North Atlantic crises for African countries. There is also
no reason to believe that if major private financial crises have hit allother continents, Africa would be an exception, unless it proceeds very
cautiously with financial liberalization and financial development, as
well as accompanies it with strong and effective regulation.
Furthermore, the fact that African LIC systems are still relatively small
176

in relation to the size of their economies allows more space for African
policymakers and regulators to try to shape their financial systems sothey serve well the needs of the real economy, by helping support
inclusive and sustainable growth (for example by supporting muchneeded lending to SMEs), as well as desirable structural change.

177

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http://sustainability.standardbank.com/socioeconomicdevelopment/enterprise-development/supporting-smes/.
Stiglitz, J.E. and Ocampo, J.A. 2008. Capital Market Liberalization andDevelopment. Oxford University Press: New York.
Stiglitz, J.E. 2012 ‚Monetary Policy in a Multipolar World,‛ Paper
presented in IEA Conference in Turkey, November.
Tobin, J. 1984. ‚On the efficiency of the financial system,‛ Lloyds Bank
Review 153, 1–15.
The World Bank Group 2012 Enterprise Surveys, What Businesses
Experience, Washington, D.C., The World Bank, available under:
http://www.enterprisesurveys.org.

182

INDUSTRIAL STRATEGY AND
ECONOMIC TRANSFORMATION:
Lessons of five outstanding cases

April 2013
Akio Hosono 1
Research InstituteJapan International Cooperation Agency

Abstract
Industrial development, especially industrial structure up-grading anddiversification, is considered essential for economic transformation andsustained growth. The objective of this paper is to obtain insights into
how crucial factors for industrial development, such as accumulation ofknowledge and capabilities, technological innovation, infrastructure,
institutions, interact in practice, focusing on several outstanding cases ofindustrial development, which produced a remarkable economictransformation. In these cases, different factors including investment ininfrastructure, technological breakthrough, as well as external factors,
triggered the economic transformation, but it could not have happened
without continuous accumulation of capabilities and knowledge
through learning. In all cases, effective institutions accomplished therole of facilitator or catalyzer of transformation.

The author would like to express his gratitude to Yasuo Fujita, Go Shimada
and Ayako Otaguchi of JICA Research Institute for their valuable comments.
Errors and omissions are the responsibility of the author.
1183

1. INTRODUCTION
Industrial policy and economic transformation have been
attracting renewed attention of late. Thus several studies in the past
decade or so have focused on industrial development, especiallyindustrial structure upgrading and diversification, as a basis forsustained economic growth and development.
These studies have emphasized such aspects as theaccumulation of knowledge and capabilities, and creation of a learning
society (Cimoli, Dosi and Stiglitz 2010; Greenwald and Stiglitz 2012);
exploiting and changing factor endowments and comparativeadvantage (Lin 2012); need to compensate for the information
externalities generated by pioneer firms (Rodrik, 2004); and pragmatic
policymaking for developing countries that must cope with the strongpressures of market-orientation and globalization of our times (Ohno2013).
The main objective of this paper is to obtain insights into how
the above-cited crucial factors interact in practice, focusing on several
outstanding cases of what we term ‚industrial policy.‛ which resulted
in a remarkable economic transformation in a country or in regions of acountry. These five cases are of the automobile industry in Thailand; thetransformation of the ‚Cerrado‛ in Brazil from barren lands to a sourceof high-productivity agriculture; the garment industry in Bangladesh;salmon fishing in Chile; and the upgrading of Singapore’s industry fromlabor to knowledge intensive.
As these five cases suggest, we use the terms the terms‘industry’ and ‘industrial sector’ very broadly to refer not only to
manufacturing sector but also agro-business, modern agriculture,
aquaculture, transport, logistics, tourism and any other activities that
produce non-traditional or ‚modern‛ goods and services that requiresignificant human and/or physical capital. Similarly industrial strategy
refers not only to narrowly defined ‘industrial policy’ targeted at
manufacturing but also other policies such as education policy, fiscal

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policy, financial policy, trade policy and labor policy, which encourage
the development of the aforementioned productive activities. 2
The next section briefly reviews the major findings of somerecent studies related to industrial policy and economic transformationand sketches the analytical perspective of this paper. Then, country casestudies will be presented. Finally, the concluding section attempts to
extract lessons that could be derived from these cases.

2. AN ANALYTICAL PER SPECTIVE

2.1. MAJOR FINDINGS OF SOME RECE NT STUDIESRELATED TO INDUSTRIA L STRATEGY AND ECONOMIC
TRANSFORMATION(A) LEARNING AND ACCUMULATION OF KNOWLEDGE
AND CAPABILITIESNoman and Stiglitz (2012, p.7) emphasize that ‚long-term
success rests on societies’ ‘learning’—new technologies, new ways of
doing business, new ways of managing the economy, new ways ofdealing with other countries.‛ Related to this notion of a ‚learning
society‛ is Cimoli, Dosi, and Stiglitz (2009)’s view that great industrial
transformation ‚entails a major process of accumulation of knowledge
and capabilities, at the level of both individuals and organizations.‛ The
author finds a lot of similarities of this view with that of the ‘Capacity
development (CD)’ approach in which the capacity refers toindividuals’, organizations’ and society’s (or the country’s) as a whole.
Knowledge and learning in a CD process has increasingly been a featureof recent discussions (Hosono et al. 2010, p.180-181).

Greenwald and Stiglitz (2012, p.3) use a similar definition: ‚Industrial policies
are what we call those policies that help shape the sectoral composition of an
economy. The term is used more broadly than just those policies that encourage
the industrial sector. A policy which encourages agro-business, or evenagriculture, is referred to as an industrial policy.‛
2185Noman and Stiglitz contend that ‚capabilities have to do withthe problem-solving knowledge embodied in organizations—concerning, for example, production technologies, marketing, labor
relations, as well as the ‘dynamic capabilities’ of search and learning‛.
(Ibid. p.2) Here again, we find similarities between their ideas and theconcepts of CD. The problem-solving knowledge could be considered asa core capacity in terms of CD, which could include problem-identifying
and problem-solving capacities (Hosono et al. 2010, p.180).
Regarding this aspect, Greenwald and Stiglitz (2012, p.18)
further elaborate: ‚The discussion so far has focused on ‘learning,’ buteven more important is ‘learning to learn’ (Stiglitz 1987). Industrial andtrade policy can enhance an economy’s learning capacities, its
underlying ‘capabilities,’ and development strategies need to be focusedon that, especially in an era with fast-changing technologies, where
specific knowledge learned at one moment risks rapid obsolescence.‛3 In
the management field, this fundamental capacity based on ‚learning tolearn‛ of individual workers and of an enterprise as a whole could beenhanced through ‚continuous improvement activities (also calledkaizen activities)‛ aimed at improving productivity by organizational orwork flow and incentives modifications—with the participation ofworkers—rather than via significant physical investment. These
activities enable the enhancement of both workers’ and enterprises’
capabilities to get more out of its physical assets. This paper will
highlight this fundamental aspect of learning when it discusses theSingapore case later.
(B) CHANGE OF ENDOWMENTS AND COMPARATIVEADVANTAGE
According to Noman and Stiglitz (2012), the ‚old‛ policies
focused on improving economic efficiency within a static framework. ‚But
the essence of development is dynamic. What matters, for instance, isThis view is also similar to the recent argument on CD. The wider acceptanceof systems thinking in the current CD discussion is based on the assumptionthat it can better capture and explain the complexities of multilayeredtransformative processes in a constantly changing external (that is,development) environment (Hosono et al. 2010, p.181).
3

186

not comparative advantage as of today, but dynamic comparativeadvantage‛ (p.7).
Justin Lin (2012a) discusses ‚changing comparative advantage‛:‚The more effective route for their learning and development is to
exploit the advantages of backwardness and upgrade and diversify into
new industries according to the changing comparative advantages
determined by the changes in their endowment structure‛ (p.73). Lin
puts it: ‚Conceptually, it is useful to add infrastructure as one morecomponent in an economy’s endowments. Infrastructure includes hard
infrastructure and soft infrastructure‛ (Ibid. p.22). The New Structural
Economics, which he advocates, ‚considers human capital to be one
component of a country’s endowment....And, several components,
among others, infrastructure and human capital, which determinechanging comparative advantage, are endogenous‛(Ibid. p.36).
The concepts of accumulation of knowledge and capabilities,
and the creation of a learning society, especially for ‚learning to learn‛or core capacity, discussed above, are intimately related to the ‚soft
infrastructure‛ (or human capital), which, together with ‚hard
infrastructure,‛ constitutes an important part of a country’s endowment.
However, we should emphasize the fundamental differences
between ‚hard infrastructure‛ and ‚soft infrastructure‛ in this context.
First, while the former (roads, ports, airports, energy plants and so on)
could be realized through intensive investments in a relatively shortperiod, the latter is achieved only through a longer-term, incremental
process, and is essentially path-dependent. Second, investments inlearning are high-risk, and risk markets are absent (especially indeveloping countries), which also discourage such investments (Noman
and Stiglitz 2012, p. 6), while the feasibility and rate of return ofinvestments in hard infrastructure can be measured. Both knowledge
and hard infrastructure tend to have a public good dimension but as
Noman and Stiglitz (2012) mention, ‚markets by themselves are neverefficient in the production and utilization of public goods‛ (p.5) .
JICA and JBIC (2008, p.48-55) review some cases of theindustrial development of Asian countries through ‚developing newcomparative advantage‛. Diverse specific cases are discussed: theDevelopment of ICT industry through higher education; investment
climate enhancements through the establishment of special economic
zones; strategic human resource development and support for overseas
187employment; and establishment of a development corridor. In thisstudy, both ‚soft‛ and ‚hard‛ infrastructures are included.
(C) LEADING INDUSTRIES, ECONOMIC
TRANSFORMATION AND ROLE OF GOVERNMENT AND
INSTITUTIONS
Now two basic questions need to be answered in this context.
One is how and under what conditions do countries change
endowments? The other is how and under what conditions do countries
take advantage of changing comparative advantage to develop new
industries?
Endowments could be changed dynamically. As soft and hard
infrastructures, important components of endowments of a country, areendogenous and essentially public goods. As the market is often notefficient in the production and utilization of public goods, government
and/or public and private institutions have to play an important role in
the process of dynamic change of endowments. In this regards, more
attention is increasingly being paid to the government, and public andprivate institutions as agents for accomplishing this role, together withappropriate policies related to such issues.
The Growth Commission’s report studied the experience of 13
countries that achieved annual growth rates of seven percent or more
for at least 25 years. The report identified ‚committed, credible, andcapable governments‛ as one of five characteristics of high-performing
countries. These governments, except that of Hong Kong, were morehands-on, intervening with tax breaks, subsidized credit, directedlending, and other such measures. These interventions may have helped
them to discover their comparative advantage (Noman and Stiglitz 2012,p.12).
Their finding is convincing as it drew on the experience of 12
high-performing countries throughout the world. However, thisgovernments’ role referred to by the Growth Commission’s report isrelated basically to the static comparative advantage of countries.
Rodrik (2007)’s view on ‚self-discovery‛ as well as market failures
related to information externalities is important principally in terms ofstatic comparative advantage. As the dynamic change of endowmentsthat transform long-term comparative advantage is endogenous, the188governments also have an important role to play in relation to dynamic
comparative advantage. Noman and Stiglitz (2012, p.40, note 15)
mention this point. In short, governments’ role is two-fold: 1) facilitating‘self-discovery’ of static comparative advantage and 2) investing in softand hard infrastructures which are endogenous components ofendowments for dynamic comparative advantage.
This paper’s objective is to get insights into both of these
aspects, but with special reference to the second aspect, based on casestudies of countries which realized outstanding economictransformation, not just high performance in terms of growth. We will
focus on (a) how factor endowments dynamically changed in terms ofhard and soft infrastructures; (b) how investment in hard infrastructure
was made and how learning as well as accumulation of knowledge andcapabilities were achieved; (c) how the transformation was triggered(initiated) with the change of endowments; (d) what kind of drivers(driving forces) kept the momentum of transformation; and (e) whatkind of strategy/vision was behind and what policies and institutions
promoted the process.
The World Bank (2012, p.218) summarizes the current
discussion on ‚industrial policy‛ highlighting three schools of thought:(i) New Structural Economics; (ii) an approach that emphasizes thepolicy process and especially a public-private partnership; and (iii) the
school of thought that stresses spillovers of productive knowledgemastering ways of doing things. The document cites views of opponents
regarding, among others, the practicality of implementation of suchpolicy, doubting, especially, whether the public sector has the capacity
to identify industries with potentially sizable knowledge spillovers anddynamic scale economies.
This paper’s analysis on the abovementioned five aspects, inaddition to addressing basic questions of the ‘industrial strategy andeconomic transformation agenda’ discussed in this section, would also
get insights into several aspects of the controversy between the threeschools of thought and those opposing them.

189

(D) TYPOLOGY OF INDUSTRIAL DEVELOPMENT AND
TRANSFORMATION CHALLENGES
Challenges facing countries are different as they move along thedevelopment path and endowments change. Industrial development
strategies could be different according to these challenges countries face.
They could have different focuses on infrastructure, human resource
development, technological innovation and so on. In some countries,
industrial challenges are shaped by special circumstances affecting
particular groups such as resource rich countries, small countries, andpost-conflict countries.4
A typological approach could be useful to address thesediversities. JICA and JBIC (2008) distinguish, first of all, resource-richcountries and resource-poor countries. The World Bank (2012) identifies
eight categories of ‚job challenge,‛ including resource-rich countries,
urbanizing countries and conflict-affected countries.
From the ‘economic transformation agenda’ point of view,
meaningful categorization could be made according to both theendowments of such almost fixed or exogenous factors as mineral andenergy resources on the one hand, and to the endowment ofendogenous factors such as hard and soft infrastructure on the other. In
this sense, as regards the former line of typology, we need to introduce
categories of resource-rich countries and resource-poor countries. As forthe latter line, we need to take into account the development phases
reflecting human resource development as well as physicalinfrastructure endowment such as 1) agrarian countries, 2) urbanizing
and early-industrializing countries based on labor intensive sectors, 3)
industrializing countries with higher skills and technology, and 4)
countries with high-level technology and innovation capabilities.
These categories are not mutually exclusive and might not cover
all types of divergence among countries. Having this endowmentsbased categorization in mind, we selected for our analysis three
resource-poor Asian countries with different phases of development:
Bangladesh, Thailand and Singapore. From Latin America, twoThis typological approach is inspired by World Development Report 2013,p.18-19.
4190

resource-rich countries are included: Brazil and Chile. All of them havebeen at least fairly high-performing countries for about a couple ofdecades.
2.2 RESEARCH QUESTIONS FOR CASE STUDIESThe most important research question to be answered in casestudies of selected countries is how economic transformation wasachieved with endowment changes and how such endowment changes
had been attained. More concretely, how learning and accumulation ofknowledge and capabilities took place and how hard infrastructure wasconstructed, as well as what kind of policies and what kind of
institutions enabled the process of change and transformation. These
practical aspects need to be analyzed in order to get insights into
successful industrial strategies with impacts on economictransformation.
As mentioned above, how the transformation process was
triggered (initiated) with the change of endowments and what kind ofdrivers (driving forces) maintained the momentum of transformation
are important research questions as well.

3. CASE STUDIES

3.1. CASE 1: EASTERN SEABOARD, ‚DETROIT O F ASIA‛
AND BEYOND: PRODIGIOUS DEVELOPMENT OF
THAILAND’S AUTOMOBILE INDUSTRY
In 1995, Thailand’s annual automobile exports were less thanhalf a billion US dollars, well below exports from India and Malaysia.
By 2008, exports approached US$28 billion, making Thailand the largest
automobile exporter in the ASEAN region, the third largest in Asia, after
Japan and South Korea, and the seventh largest exporter in the world in
2012. Production of 1 million cars was achieved in 2005 and 2.5 million
cars in 2012. It is estimated that there are about 690 first-tier parts
makers, 30 percent of them Thai majority joint venture companies, and23 percent of them pure Thai companies, and 1,700 second- and third-

191

tier parts makers, most of them locally owned small and medium
enterprises (SMEs), supporting the automobile industry in Thailand in2010 (Natsuda and Thoburn 2011, p.8). At present, the automobile
industry is the principal engine for growth in Thailand's economy. ‚The
Detroit of Asia‛ envisaged once by the Thai government is now a reality
and the ‚automobile belt‛ is established from Ayutthaya to the Eastern
Seaboard.
(A) ACCUMULATION OF KNOWLEDGE AND
CAPABILITIES, PREREQUISITE FOR DEVELOPMENT OF AN
AUTOMOBILE INDUSTRYAs Athukorala and Kohpaiboon (2011) mention, ‚theautomobile industry has been the target of industrial development inmany countries as a growth driver—a source of employment,
technological expertise, and a stimulus to other sectors throughbackward linkages<.But only a handful of developing countries havemanaged to develop an internationally competitive automobile
industry.‛5
Development of an automobile industry requires skilled laborand supporting industries to provide up to 20,000 to 30,000 parts andcomponents. Supporting industries and automobile assembly plants areclosely related and provide externality to each other. Accordingly, inmany countries, lack of supporting industries made the installation of
automobile assembly plants difficult, while supporting industries areconstrained by the demand of parts and components of assembling
plants. Their relationship is like that of the chicken and egg.
Furthermore, the development of supporting industries for automobile
industries takes years because they need a prolonged process ofaccumulation of knowledge and capabilities, especially the formation ofhuman resources and learning about technology.

It goes without saying that the automobile is a complex product, consisting of alarge number of parts and components which involve different production
processes and factor proportions. Many of these parts and components are
manufactured by independent suppliers in other industries such as textiles,
glass, plastic, electronics, rubber products, and steel and other metals(Athukorala and Kohpaiboon, 2011, p.1).
5

192

Among several policy measures, a series of initiatives by theThai government to incrementally enhance the localization of parts
production was important for the accumulation of knowledge andcapabilities of supporting industries. In the 1960s, the Board of
Investment (BOI) introduced the Industrial Investment Promotion Act,and six major foreign automobile joint venture companies were
established with Thai capital by the end of the decade. However, theproduction of vehicles remained very limited, accounting for only 18.5
percent of the total sales of automobiles in the country in 1969, and theprocess heavily depended on assembly operations using imported
complete knock-down (CKD) kits that created a serious balance of tradeand payment deficits (Natsuda and Thoburn 2011, p.13).
The specific policy for the automobile industry was introduced
for the first time in 1971, establishing, among others, a local contents
requirement (LCR) of 25 percent, which became effective in 1973, andconditions for new market entry over 0.2 million baht for investment(except for land) and production capacity of 30 units per day, in order toachieve economies of scale, which is essential for competitive
development in the automobile industry.6 The LCR encouraged car
assemblers to produce locally or to purchase parts from local
companies. This was not easy because supporting industries in Thailand
did not exist. Assembling companies had to start the process of
localization from scratch. Following this, the LCR was raised
incrementally through 1994 up to 60 percent for pick-up trucks withgasoline engines and 72 percent for those with diesel engines. The LCR
was abolished in 2000 in consideration of WTO rules. 7

6

As regards this new policy, see Natsuda and Thoburn (2011), p.13.

From 1978, the LCR for passenger cars was increased from 25 percent to 35
percent in the first two years and was then raised by 5 percent every year until
1983, eventually reaching 50 percent, and for commercial vehicles from 20
percent to 45 percent. The new policy also required assemblers to localize
specific parts production by introducing a ‘mandatory deletion’ scheme,
targeting specific parts such as brake drums and exhaust systems. In 1994, theLCR was further raised to 60 percent for pick-up trucks with gasoline engines
and 72 percent for those with diesel engines. In 1996, the government
announced the abolition of the LCR by 1998 prior to the WTO target date,7

193

Techakanont (2008, p.8) considers that ‚the most important
policy of the Thai state was the implementation of the LCR.‛ In order tocomply with the LCR, automobile assembly companies in Thailand had
to increase the local content of components which were produced bythemselves, to ask their component suppliers in their countries of origin
to invest in Thailand, or to support local Thai firms to produce
components with the required quality standard. Yamashita (2004, p.5),
based on his extensive field research concludes that ‚the process ofadaptation to the LCR enabled the accumulation of a very wide range of
automobile parts industries and formation of skilled technicians andengineers, both of which are indispensable for the development of theautomobile industry.‛8 Through this process, assembly companies haveoffered continuous technological support to local supporting industries.
In this context, it should be emphasized that ‚most of thepolicies in the early 1980s were deliberated in a formal public-private
cooperation committee (PPCC) before they were officially declared asgovernment policy‛ (Techakanont 2008, p.12) . Doner puts it: ‚thepolicymakers were quite flexible for assemblers to choose how to
produce parts: either produce them locally or assemble components
from imported parts‛ (Doner 1991).9 Assembly companies asked theThai government to revise the LCR policy when they reached the 54
percent level because any further increase of the LCR percentage would
make it difficult to assure the safety of the cars and reduce further thecost of production. Responding to this request, the government
switched its policy from the LCR to one requiring the local productionof specific important components such as engines (Techakanont 2008,
p.9).

although, eventually, the period was extended to 2000 (Natsuda and Thoburn
2011, p.15).
8

Yamashita (2008, p.5), translation by the author.

9

Cited in Techakanont (2008), p.9.
194

(B) FORMATION OF AUTOMOBILE CLUSTERS AND
INDUSTRIAL ESTATESThe government facilitated the formation of industrial clusters
by establishing the infrastructure for manufacturing activities,
especially, automobile assembly and parts production. Automakers andtheir components suppliers enhanced their competitiveness when they
were agglomerated as a cluster with articulated value chains.
For this purpose, the Industrial Estate Authority of Thailand(IEAT) was established in 1972 and many industrial estates (IEs) wereconstructed, firstly around Bangkok and later on the Eastern Seaboard
and its vicinities. The agglomeration of assemblers and part makers in
IEs was observed since the 1970s. The establishment of IEs, leading tocluster formations, has been an important instrument through which theThai government attracts foreign investors by providing infrastructure
and tax incentives (Lecler 2002, p.802).
(C) INFRASTRUCTURE WHICH TRIGGERED THE RAPID
EXPANSION OF THAILAND’S AUTOMOBILE INDUSTRY,CHANGING SIGNIFICANTLY THE ENDOWMENT OF THE
COUNTRY
The automobile industry requires efficient ports and logistics
facilities, in order to be competitive in the export market. From thisperspective, the most important milestone for Thailand’s automobile
industry was the construction of infrastructure on the Eastern Seaboard.
The Eastern Seaboard Infrastructure created an export hub andcenter for technology-intensive industries: 14 industrial estates; 360,000
workers; 1,300 factories; and 516 automobile-related factories. The
explosive emergence and concentration of the new machinery, metal
and non-metal industries with FDI inflows in the early 90s, which
occurred around Leam Chabang, became possible only through thecompletion of such large-sized infrastructure as the Eastern Seaboard
Development Plan, which became a synergetic production nexus and a
hub for the shipment of products (Shimomura and Mieno 2008, p.14-16).
The Eastern Seaboard Development Plan is a leading large-scale
development scheme that the Thai government implemented in the
1980s with assistance from Japan and the World Bank. It had a twofold
195

purpose of boosting international strength and inviting direct overseas
investment in export-oriented industrial fields, and easing the overconcentration of economic activity in Bangkok. The large-scale project,which extends over three provinces in the coastal area southeast of
Bangkok, consists of a composite industrial site formed by two deep sea
ports, Leam Chabang and Map Ta Put, supported by harbors, roads,
railways, dams, service pipelines and other facilities.10
Today, Leam Chabang is Thailand's largest port and plays asignificant part in increasing trade in Thailand. It is where Thailand's
automobile industry is most heavily concentrated, with many
automakers' and parts manufacturers' operations set up in the area
(Japan ODA White Paper 2005). Figure 1 illustrates how these activities
have moved into the Eastern Seaboard demonstrating that thisinfrastructure produced a major change in the endowments structure in
Thailand and played a crucial role in this country becoming the ‚Detroitof Asia‛.
(D) ‚DETROIT OF ASIA‛ VISIONThe Thai automobile industry experienced different phases ofdevelopment, namely, the introduction of the localization policy (197177), the strengthening of localization capacity (1978-90) andliberalization (1991-99) (Natsuda and Thoburn 2011, p.13-20). A newphase started from 2000. The Thai government, after abolishing the LCR
in 2000, introduced the New Automobile Investment Policy in 2002,
which aimed to develop Thailand into a regional center of theautomobile industry in Southeast Asia. Two years later, a further
automobile development plan was introduced, the so-called ‚Detroit ofAsia‛ plan, which was later renamed the ‚Production of Asia‛ plan
(Ibid. p.22). In order to meet the targets of this plan by 2016, thegovernment’s first ‘product champion’, the pick-up truck, was notconsidered enough. To attract additional foreign investment fromautomobile producers, the ‚Eco Car‛ project was introduced as thesecond ‘product champion’ in 2007 (Ibid. p.23). At the same time, a
policy to strengthen supporting industries through the promotion of

10

This summary is based on JICA/JBIC (2008), p.50.
196

SMEs was established: the SMEs promotion law in 2000 and the Master
Plan of SMEs promotion in 2003. In addition, the ‚Automotive Human
Resource Development Project (AHRDP)‛ was launched in 2006.
(E) INSTITUTIONS WHICH FACILITATED CHANGES OFENDOWMENTS
Among others, there are two public institutions that havecontributed to the development of Thailand’s automobile industry. One
is the Automobile Development Committee and the other is the Eastern
Seaboard Development Committee (ESDC), a cabinet-level national
committee chaired by the prime minister, together with the Office of
ESDC (OESD).
The Automobile Development Committee provided an effective
institutional setting for middle-level and senior officials to formulate
policies in consultation with firms and business organizations.
Interference by political leaders and top-level policymakers was
virtually absent in the decision making process (Athukorala andKohpaiboon 2011, p.12). Thai authorities adopted a consensual andpragmatic approach to setting the LCR target in consultation with
automakers, as mentioned above. Athukorala, and Kohpaiboon (2011)highlight that the consensual approach to policy making and absence ofabrupt policy shifts created stable expectations and confidence in theoverall business environment.
As regards the Eastern Seaboard, JICA/JBIC (2008, p.51)
evaluates: ‚The reasons behind the success of the Thai government’splans for the Eastern Seaboard Development are 1) the consistent skill
level of the technocrats and their independence from politics; 2) theunique check and balance structure in Thailand (several players sharing
influence meant that mutual checks were continuous); 3) the
development- centered orientation of the Prem administration and, 4)‘the unintended transparent and open political process’ created by theintervention of the media.‛11

Another study reached a similar conclusion: ‚It was the cumulative synergetic
effect of a number of factors that had contributed to pushing the Eastern
Seaboard Development Program forward. These included: Effective leadership

11

197

Figure 1: Development of Automobile Industry in Thailand
to ensure the public’s interest, competency of technocrats, powerful central
economic agencies, special institutional settings, functioning coordination
mechanisms, and external global factors‛ (GRIPS Development Forum 2007
p.131).
198

(F) OTHER FACTORSIn addition to the abovementioned factors which enabled theoutstanding development of the automobile industry of Thailand, weshould add others such as the advancement of economic integration
among ASEAN countries via the ASEAN Free Trade Area (AFTA),ASEAN Industrial Cooperation (AICO) and others, and the size of thecountry’s automobile market (the largest among ASEAN countries).
3.2. CASE 2: CERRADO MIRACLE: VAST BARREN AREA
TRANSFORMED INTO ONE OF THE MOST PRODUCTIVE
AGRICULTURAL REGIONS IN THE WORLDStarting from the mid-1970s, the tropical savanna of Brazil,
called the Cerrado, was transformed into one of the world’s mostproductive grain-growing regions in just a quarter of a century,
realizing modern upland farming in a tropical region for the first time inhuman history. This remarkable transformation has become known
throughout the world as the Cerrado Miracle (The Economist 2010).
Today, Brazil is one of world’s major grain-producing countries, and in2012 exported the world’s largest volume of soybeans. Dr. Norman E.
Borlaug, who received the Nobel Peace Prize for his work related to theGreen Revolution, rated the development of agriculture in the Cerrado
as one of the great achievements of agricultural science in the 20th
century. The World Food Prize founded by Borlaug was awarded in2006 to two Brazilians who contributed to the Cerrado Miracle. This
agricultural transformation not only increased the production ofcompetitive commodities such as soybeans, corn, coffee, sugar, andcotton but it also enabled the development of food value chains both
inside and outside the Cerrado region. While the production of broiler
chicken and pork had been growing steadily in the 1990s, this growth
accelerated at the end of the decade and a sharp increase in meat exports
was seen.
The Portuguese word cerrado refers to ‚closed‛ land, or landthat was for many years regarded as being unfit for agriculture. The

199

total area of this vast region is about 240 million hectares, or 5.5 times
the land area of Japan. This land was considered to be unsuitable for
agriculture because the soil has extremely high acidity, and because lackof potassium and phosphoric acid and damage caused by aluminum
hinder crop growth.

(A) CHANGE OF ENDOWMENT BY TECHNOLOGICALINNOVATION: FROM ALMOST ABANDONED LANDTO FERTILE LAND, ‚A NEW COMPARATIVEADVANTAGE‛ ACHIEVED
For the development of Cerrado agriculture, three technologicalaspects appear to have been essential. Firstly, soil improvement and thedevelopment of new crop varieties suited to the tropical zone werecrucial. These constituted the core technological innovations needed tolaunch Cerrado agriculture from a base of practically zero. Secondly,
there was the need for effective dissemination of new technologies andpractices to an increasing number of farmers who were the main actors
in Cerrado agriculture. This was because this new industry was
undertaken by a large number of farmers and enterprises instead of alimited number of companies, as is the case in some manufacturingindustries. Thirdly, a solid and highly effective system wasindispensible to continue achieving the technological innovations
required for Cerrado agriculture.
The vast land of the Cerrado had a drastic value change, which
produced a ‚new comparative advantage,‛ in the terms of a JICA and
JBIC study (2008). Here, technological innovation was crucial, but theinland transport infrastructure constructed before and after the transferof the national capital from Rio de Janeiro to Brasilia could have been
another factor.
The Brazilian government ‚invested in learning‛ in terms of
Noman and Stiglitz (2012). Investments in learning are highly risky, andrisk markets are absent (especially in developing countries), which also
discourage such investments (Noman and Stiglitz (2012, p.6). For
Cerrado agricultural development, the government took the initiative.
The Brazilian Agricultural Research Corporation (EMBRAPA) and its
Cerrado Agricultural Research Center (CPAC) were established in 1973200

and 1974, respectively, and did in fact achieve a lot of innovations:
recent discussions on the Cerrado point out that EMBRAPA’s greatest
contributions were soil improvement in the Cerrado and breeding
improvement for soybeans and other crops. A significant technologicalbreakthrough was the success in developing new varieties of soybeansthat were fit for the tropical climate.
Soybeans, a crop suited to temperate regions, bloom and sprout
by sensing differences in day length (photoperiod), and soybean
cultivation was therefore difficult in the tropical region. Cultivation iseven more difficult in lower-latitude areas in the Cerrado because the
day length is nearly constant year-round. Dr. Plínio Itamar de Mello deSouza developed the revolutionary varieties of soybeans suited to thetropical region. Dr. de Mello collected 3,000 soybean varieties from thesouthern United States, the Philippines, Japan, and other parts of theworld, selected those with low sensitivity to changes in day length, andthen selected those that grow tall in tropical regions, and crossbred themwith varieties with high yields. Finally, in 1980, the first soybean variety
was completed for cultivation in the Cerrado.
Soybean varieties adapted to tropical zones were essential not
only as a new crop, but also for soil improvement in the Cerrado.
Soybeans fix nitrogen in the soil through root nodule bacteria andfacilitate the soil to absorb fertilizers. Therefore, soybeans played therole of a precursor among the plants introduced to the Cerrado.

(B) ACCUMULATION OF KNOWLEDGE AND
CAPABILITIES
Although the technology for Cerrado had been developed fromscratch, there had been years of effort to establish Cerrado agriculture
even before the establishment of EMBRAPA. Initiatives of farmers withexperience in the southern region (the non-Cerrado region) were crucial
as well. They undertook pioneering experimental work in the Minas
Gerais Cerrado region. Drawing on their experience, the Program of
Guided Settlement of Alto Paranaiba (PADAP) was implemented by thestate of Minas Gerais together with the Cooperative Cotia. It was thefirst structured program to prove the feasibility (for businessdevelopment) of Cerrado agriculture. The starting point was São
Gotardo, in the state of Minas Gerais in 1974.
201

On the basis of the successful PADAP experience, the JapanBrazil Cooperation Program for Cerrados Development (PRODECER)
was launched to extend Cerrado agriculture to other areas of Minas
Gerais. The pilot projects of the first phase of PRODECER fully
demonstrated the feasibility and high potential of Cerrado agriculture.
The second phase of PRODECER carried out full-fledged projects in
Minas Gerais as well as in the states of Goiás and Mato Grosso do Sul.
At the same time, PRODECER also started pilot projects in the states of
Bahia and Mato Grosso. The third phase of PRODECER covered thestates of Tocantins and Maranhão. In this way, PRODECER was scaled
up from the core regions to the frontier regions of the Cerrado. Figure 2
depicts PADAP, PRODECER, and the development of Cerrado
agriculture.
In this process, there has been continuous learning andaccumulation of knowledge and capabilities for both the researchersand farmers. How did these groundbreaking technologies developed by
EMBRAPA spread? How did the pioneers of Cerrado agriculture
improve their technological capabilities after they settled in the Cerrado,
once believed to be sterile, and strove tirelessly to establish agricultural
land? As noted by Dr. Eliseu Alves, who is known as the father of
EMBRAPA, many of the farmers who migrated to the Cerrado fromsouthern Brazil had experience in agricultural production and were
proactive about adopting new technologies. Cooperatives such as Cotia
contributed greatly to the process of technological dissemination. The
Technical Assistance and Rural Extension Company (EMATER) was
initially in charge of disseminating technologies developed by
EMBRAPA. A recent study by the Inter-American Development Bank
points out that after the company was liquidated as part of aderegulation policy, producers utilized technological innovations
through cooperatives and other organizations.12 In PRODECER, thegrowth pole strategy was adopted at Cerrado frontiers. Cotia and other

Inter-American Development Bank (IDB) (2010) states that the Technical
Assistance and Rural Extension Company (EMATER) worked to widely
disseminate the technologies developed by EMBRAPA. After EMATER was
liquidated as one of a number of deregulation measures, producers were able toutilize technological innovations through cooperatives and other organizations(IDB 2010, p. 320).
12

202

cooperatives provided detailed technological consultations forindividual farmers, contributing greatly to raising their technologicalcapabilities.

(C) INSTITUTIONS WHICH FACILITATED CHANGESOF THE ENDOWMENTThe single most important institution that enabled the amazingchange of the Cerrado and the establishment of Cerrado agriculture isconsidered to be EMBRAPA. The research begun by EMBRAPA in 1973
progressed steadily, making it one of the largest agricultural research
institutes in the southern hemisphere, and one of the largest tropicalagricultural research institutes in the world. As of 2010, there were over
8,637 people working with the institute, with 2,116 researchers, 1,622 ofthem holding doctorates. Only three researchers with doctorates werewith the institute at its founding in 1973. Since then, EMBRAPA has
dispatched 3,000 people to advanced countries to study, and it now has
43 affiliated research centers. EMBRAPA is today highly appreciatedoverseas for its distinguished research. Analyzing the factors behind its
success reveals some clues on how to develop institutions capable ofresearch and development activities suited to a country’s conditions,which at the same time generate technological innovations, cultivate
human resources, and produce ‘miracles’ similar to that in the Cerrado.
EMBRAPA set the development of Cerrado agriculture as itscore mission, achieved success, and therefore established its eminent
position, thus succeeding in steadily securing its research budget while
maintaining political neutrality; by securing its research budget, further
research results were obtained, which further reinforced its position.
Alves (2012) described the situation thusly: ‚What solidified theposition of EMBRAPA was the achievement of transforming the
Cerrado into a modern agricultural region. EMBRAPA’s contributions
are at the core of Cerrado agriculture, and society recognized that its
involvement is vitally important for its success.‛
In addition, Alves and other authors emphasize other factors
which made the EMBRAPA model successful: close relations between
researchers and farmers; meritocratic incentive system and structure;transparency; and so on.

203

204

Figure 2. Development of Cerrado Agriculture

3.3. CASE 3: BANGLAD ESH GARMENT INDUSTRY: FROMADVERSE INITIAL COND ITIONS AT INDEPENDENCE TOONE OF THE WORLD’S BIGGEST EXPORTERS OF READYMADE GARMENTS
In 1981, ten years after Bangladesh achieved independence, raw
jute and jute goods were its major exports, corresponding to 68 percent
of total exports. In 2011, garments and textiles constituted 85 percent of
total exports, of which 76 percent corresponded to garments. These
industries’ business entities amounted to 50 percent of all
manufacturing establishments in the country (UNCTAD 2012, p.11).
Today, the garment industry has 5,000-6,000 factories with 7-8 million
workers using the assembly-line method of production. The wages of
the workers in these industries are around 35 percent higher than thenational average (Ibid. p.11). Exports as a percentage of GDP tripled
between 1990 and 2010, with much of the increase in the thriving readymade garment industry, which is highly intensive in female labor (WB
2012, p.197). This Bangladesh success story is remarkable, because as arecent World Bank study highlighted, ‚the country was often held out
in the development literature as a hopeless case‛ (Ibid. p.197).
(A) LEARNING, ACCUMULATION OF KNOWLEDGE AND
CAPABILITIES
Rhee (1990) undertook extensive research on how this country’s
garment industry started.13 In 1978, Daewoo of Korea proposed to thegovernment of Bangladesh, an ambitious joint venture involving thedevelopment and operation of tire, leather goods, cement and garment
factories. As it turned out, the Bangladesh government actually put thegarment industry first. Although the public and private sectors wereparticularly interested in the garment industry, Bangladesh was notexporting garments because of a total lack of domestic production
technology and marketing knowhow, and had no apparent means ofacquiring them from overseas (Rhee 1990, p.336). In this context, Noorul
Quader, who had been exposed to the foreign business world as a senior

13This and following two paragraphs are mainly based on Rhee (1990).
205

official in the previous government, founded the Desh Garment
Company, and he expressed the desire to collaborate with Daewoo in a
new garment venture in the country (Ibid. p.336). Quader and Daewoo
signed an agreement to collaborate in the areas of technical training,purchase of machinery and fabric, plant start-ups and marketing. Deshrecruited 130 workers for training at Daewoo’s Busan plant, where‚they received some of the most intensive on-the-job training ingarment production ever seen in the history of developing countries‛(Ibid. p.337) for seven months in 1979.
One of the most outstanding features of this training is, as Rheeemphasized, that in addition to the in-depth, excellent skills training
they received, Desh workers received a wide-ranging, high-quality
education involving a look at the entire operations of a highly
successful, multifaceted international company and the corporate
culture that created and supported its superior performance (Ibid.
p.338). The 115 Daewoo-trained workers who left Desh after the middleof 1981 proved a very powerful medium for transferring knowhow
throughout the whole garment sector and for significantly improving
garment exports. In 1985, there were more than 700 garment export
manufacturing factories in Bangladesh, compared with a few suchfactories in 1979. Rhee mentions that many new garment firms havebeen able to handle production and marketing without involving
expatriates or foreign companies because they have been staffed byformer Desh workers who had fully mastered production andmarketing knowhow (Ibid. p.342). However, he also recognizes thecontinuous need for many of these new factories to collaborate to somedegree with foreigners in the areas of marketing and technology (Ibid.
p.342).
Another noteworthy feature of Daewoo’s training is that there
were 14 women among the trainees. Rhee (1990, p.337) puts it, ‚Muslim
tradition had precluded females from working in factories in
Bangladesh. However, Quader had been so impressed by the efficiency
and sheer numbers of women at Daewoo and other garment factories in
Korea that he persuaded the Bangladesh government to support female
trainees.‛
Easterly (2002, p.149) comments on the Desh-Daewoo
collaboration from the standpoint of learning and knowledge creation:
Creating knowledge does not necessarily mean inventing new206

technologies from scratch. Some aspects of garment manufacturing
technology were probably several centuries old. Furthermore,
Bangladesh has the legacy of Dhaka Muslin. The relevant technologicalideas might be out there floating in the ether, but only those who apply
them can really learn them and can teach them to others. In this regard,
Mostafa and Klepper (2011, p.3) emphasize that tacit knowledge seeding
was essential for the initial establishment and subsequent expansion of
the Bangladesh garment industry. They contend that key to the
explosive growth of the industry was knowledgeable workers leaving
Desh, and then other successful firms, to set up the production
processes of later entrants. These workers organized an assembly-line
production process, trained workers, and supervised production,effectively diffusing vital tacit knowledge to new garment producers.
Despite having limited literacy, Bangladesh had a sufficient number ofeducated entrepreneurs with some prior business experience who could
gather the relevant resources and establish garment factories (Ibid. p.29).
The process of learning and accumulation of capabilities
continued after this impressive transfer of technology from Korea.
Mottaleb and Sonobe (2011) conjectured that highly educatedentrepreneurs have been attracted to the garment industry by highprofitability, which was boosted initially by the Desh-Daewoo infusionof Korean skills and know-how (p.4-5). Their analysis indicated that thehigh-level education of manufacturers and enterprise performance wereclosely associated. This is because manufacturers have to continuously
upgrade their skills and know-how in order to survive the intensecompetition in the world garment market and because high levels ofgeneral human capital for the entrepreneur are needed to manage anincreasing number of managers and experts (Ibid. p.20-21).
(B) CHANGE OF ENDOWMENTS: RURAL DEVELOPMENT
AND MOBILIZATION OF FEMALE WORKERS WITH LOWOPPORTUNITY COST
World Bank (2012, p.197-199) classifies Bangladesh as anurbanizing country. Indeed, the changes in rural society in this country
have been profound and are related closely to the massive mobilizationof female workers by the garment industry located mainly in two big
cities: Dhaka and Chittagong. Generally speaking, urbanizing countries207

are endowed with abundant unskilled labor, and these countries’
integration into the world economy can lead to the development of lightmanufacturing industries. In the case of Bangladesh, several factors
interacted in order that this change took place. Modernization ofagriculture based on technology adoption which enabled farmers’ shift
from low-yield, single crop, deep-water rice to double cropping of shortmaturity, high-yield rice, as well as the well-known rapid spread of
microfinance and construction of rural infrastructure, were amongmajor factors that changed the rural society of Bangladesh (Ibid. p.197).
More specifically, rural roads, irrigation, market facilities and otherrural infrastructure, micro-credit, school education and so forth,provided by NGOs, central and local governments and donors, alltogether enabled the remarkable agricultural and rural development of
Bangladesh in the last three decades. In this process, the ruraldevelopment programs of the government and donors were
implemented effectively by the Local Government Engineering
Department (LGED), which played a critical role in the provision ofrural infrastructure.14 Micro-credit and related services were also
effectively extended by NGOs including BRAC and Grameen Bank.
This process enhanced the mobility and readiness of lowopportunity-cost labor in rural Bangladesh and changed gradually, but
steadily, the endowments of the country.15 The mobilization of this labor

The role of LGED in the rural development cannot be overemphasized. LGED
is one of the largest public sector organizations in Bangladesh, with a staff
exceeding 10,000 and a development budget accounting for 14 percent (FY200910) of the total development budget of the Government. For details of LGED, see
Fujita (2011).
14

We should remember that a pessimistic appraisal was common as regards
women’s role in the labor market in Bangladesh, which caused pessimism about
the country’s growth, due to, among others, the fact that most East Asian
countries had the advantage of a high initial female labor force participation rate
at the start of the growth process. As Hossain, Sen and Sawada (2012, p.29)
emphasize, none of the predictions could anticipate that women would offer thesecret ingredients of success that was achieved in Bangladesh from exports toschooling to microcredit use. The dramatic nature of the increase in female
participation in the growth of ready-made garment (RMG) workers is a case inpoint.
15208

was triggered by the Desh-Daewoo garment project. Rhee (1990, p.45)
puts it, ‚development is a dynamic process in which self-generating
mechanisms may emerge once action is initiated<.To start on the pathof development in an outward-oriented direction, a first spark must be
created.‛ That spark was the collaborative effort of a domestic catalyst(Desh) that mobilized the necessary local resources and a foreign
catalyst (Daewoo). It was a process of self-discovery of the changing
comparative advantage of the country.
Hossein, Sen and Sawada (2012, p.5) contend that ‚in the
predominantly agricultural economy with high population density andhigh population growth, the critical challenge is to reduce the burden of
surplus labor in agriculture. This challenge can be met throughsustained sectoral and social policies and attendant institutional changes
commensurate to each stage of development to support productivity/growthenhancing relocation of ‚surplus‛ farm labor to non-farm and nonagricultural jobs‛ (italic is original).
(C) CHANGE OF ENDOWMENTS: CONNECTIVITY AND
LOGISTICS UP-GRADING BY INFRASTRUCTURE
When Desh started its business in 1980, its factory was locatedin Chittagong, the country’s main port. The first Export Processing Zone
(EPZ) was also constructed in 1983 in this port city. Exports from Dhaka,
which does not have an efficient port facility nearby, had a serious
bottleneck due to the lack of bridges on rivers which cross Highway
No.1, which connects the capital city with Chittagong. As trucks had touse ferries, the transport between Dhaka and Chittagong wasconstrained in terms of time and unpredictability. This handicap
affected the competitiveness of the garment industry in Dhaka. It was
overcome by the construction of Meghna Bridge in 1991 and MeghnaGumti Bridge in 1995. The Dhaka EPZ was constructed in 1993.
Jamuna multipurpose bridge, inaugurated in 1998 as the largest
construction in Bangladesh history, has been a major channel for
integrating the lagging western region of the country with the leading
eastern region, enabling cheaper transportation of gas, electricity andtelecommunications, and enhancing the labor mobility of the westernregion (Hossein, Sen and Sawada 2012, p. 11).

209

(D) INSTITUTIONS THAT FACILITATED GARMENTINDUSTRY DEVELOPMENT
Initial conditions in Bangladesh, when the garment industry
started with the Desh-Daewoo initiative, were affected by high levels ofpolicy distortions and weak institutions. However, in spite of therigidity of the government’s response in terms of the adaptability of theideas coming from private entrepreneurs, which is very common indeveloping countries, Yunus and Yamagata (2012, p.5) mention that in
the case of Bangladesh the innovative ideas and strategies from theentrepreneurs were well accommodated by the government
policymakers. A back-to-back letter of credit (L/C) system16 and special
bonded warehouse facilities were two of the most important features
and were formulated based on the prescription of the leading
entrepreneurs (Ibid. p.5).
The special bonded warehouses were critical to the initiation ofgarment export production. According to Rhee (1990, p.339), ‚it appears
that Daewoo’s intimate knowledge of the nuts and bolts of thesuccessful bonded warehouse system in Korea, its ability to transmit
that knowledge to Desh staff, and the advice that Desh’s senior manager
gave to administration officials on the new system were instrumental in
the design and implementation of the special bonded warehousesystem.‛ Although the government did not provide any importfinancing facility, it did allow the back-to-back L/C, which was a very
effective instrument, given the system of strict foreign exchange controls
in the country at that time. Here again, Daewoo and Desh’s influence on
the public agencies was instrumental (Rhee 1990, p. 340).
The consequent accelerated development of the garment
industry was enabled by learning and the accumulation of thecapabilities as mentioned above. The government facilitated its
development through infrastructure investment, construction of Export
Processing Zones, policies for the free importation of machines, bonded
warehouses and back-to-back L/C, followed by other general policies
such as the New Industrial Policy (1982), Revised Industrial Policy(1986), and credit facilities (1991). At the same time, the Multi-Fiber-

16

For details of this system, see Easterly (2002), p.149.
210

Figure 3. Bangladesh Garment Industry

Agreement (1985) and its quotas as well as preferential access to the EU
market have been important factors. Interaction of all such factors isroughly illustrated in Figure 3.

2113.4. CASE 4: CHILE’S SALMON INDUSTRY: STA RTING
FROM SCRATCH TO BECOME A MAJOR WORLD SAL MONEXPORTING COUNTRY 17
Salmon did not exist in Chile four decades ago. Natural salmon
still does not exist in the Southern Hemisphere except for king salmon
in New Zealand. Now, Chile is one of the world’s top salmon-exporting
countries, ranked on a par with Norway. It is no exaggeration todescribe this as a ‚miracle.‛ Moreover, Chile is a resource-rich country
that is highly dependent on copper exports. In 2011, exports of mineralores and their refined products corresponded to more than 60 percent of
total exports, 52 percent of which are copper ore and refined copper.
The challenge for resource-rich countries is diversification of exports.
The ensuing export revenue from rich resources leads to strong realexchange rate appreciation and deterioration in competitiveness insectors exposed to international competition (WB 2012, p.199).
(A) CHANGE OF ENDOWMENT BY TECHNOLOGICALADAPTATION/INNOVATION
Chile’s comparative advantage in salmon sea farming was
definitely confirmed when the Chile Foundation’s subsidiary, Salmones
Antartica, demonstrated the commercial feasibility of salmon
aquaculture at a scale of 1,000 tons a year in 1988. The Chile Foundation(Fundación Chile in Spanish) is a public-private corporation that aims at
developing technologies for establishing new industries, setting up
businesses, and selling successful ones for profit. This uniqueorganization, which has no equivalent elsewhere in Latin America, wascreated through compensation consultations that the Chilean
government had been having in the mid-70s with an American
multinational corporation that was nationalized by the previous
government.
In general, for a new industry to be established so that it grows
in a self-sustaining manner, the industry must demonstrate its feasibility

This case study is based on Hosono (2010). The English version isforthcoming.
17

212

and international competitiveness as a sustainable profit-making
business. This requires, as a precondition, technological development,
which in turn calls for sizable investment. Many venture businesses
invest in the development of such technologies and new products.
Although technology development itself carries the risk of failure, theguarantee that the founder’s profit will be secured under the protectionof patent rights provides a substantial incentive for creating a new
industry. This is not to say, however, that the founder’s profits in a new
industry are always protected by patent or other means. There are manycases to the contrary.
In developing countries trying to catch up with developed
countries, for example, entrepreneurs aiming to develop a new industry
with the help of technology transfer from other countries usually find it
difficult to protect their technologies gained through such transfer. Suchtechnologies will not be protected by patent. As a result, as soon as acompany succeeds in technology transfer, others will soon follow in the
successful company’s footsteps. This will intensify competition. In thiscase, the profit the pioneer deserves may not be guaranteed. Or worse
still, the investment may not be recouped. Therefore, Rodrik (2007)
argues that costs of ‚self-discovery‛ of pioneers should be subsidized(p.117).
This may be described as a case of market failure, in that open
access to the information in question discourages investment.
Specifically, this is known as market failure associated with ‘information
externalities’. In the case of Chile in the 1970s and 1980s, thegovernment did not take an interventionist policy of directly supporting
the development of industries. However, it is clear that the Chilean
salmon industry was not developed as a result of the private sector
making voluntary investments from the outset. In this context, notingthat the major export items for Chile include copper, grapes, fish, andlumber/wood, Rodrik (2007) stresses that the diversification of export
products from the traditional item of copper has not been achieved in alaissez-faire market (p.109).
In the case of the Chilean salmon industry, market failure wasaverted by the Chile Foundation and Japan-Chile salmon project. The
Chile Foundation, a newly-created, semi-governmental foundation
made an investment large enough to support salmon production
through sea-farming on a major scale and successfully recouped this213

investment. The foundation thus demonstrated the commercial
profitability of sea farming on that scale. In addition to proving the
profitability of such venture, the Chile Foundation provided
information on salmon farming for free or for a fee as public goods so as
to allow many companies to invest in the salmon farming industry
without having to make a sizable investment in research anddevelopment.
Two private companies had started salmon sea farming before
the Chile Foundation started its salmon initiative. In 1978, Nichiro
Fisheries of Japan set up Nichiro Chile, which in 1979 launched salmon
sea farming, near the city of Puerto Montt, the first of its kind in the
country. This was a groundbreaking event that astounded fisheries
experts at home and abroad who were familiar with the situation.
Nichiro had already accumulated salmon sea farming technology inJapan. Following Nichiro’s groundbreaking success in salmon farming,
the Chile Foundation acquired the facilities that Domsea Pesquera, acompany under the umbrella of Campbell Soup of the United States,
had owned in Chiloé Island and elsewhere. This represented the starting
point for the Chile Foundation to enter the salmon industry in earnest.
Nichiro’s success in pioneering mariculture and its
commercialization in Chile had a great impact on the Chile Foundation;
it preceded the success of the semi-governmental corporation. Nichiro’s
corporate history says, ‚the Chile Foundation of the Republic of Chile
had been keeping an eye on our progress in coho salmon sea farming.
Upon learning about our success, the foundation wasted no time inlaunching feasibility studies on sea farming.‛ Despite being a latecomerthat followed trailblazing Nichiro and Mytilus (latter-day ‚Mares
Australes‛), the second entrant into the market, Chile Foundation’s
Salmones Antártica successfully put larger-scale salmon mariculture on
track. What factors lay behind this success? In short, the Chile
Foundation was a semi-governmental corporation capable of mobilizing
ample risk capital. Originally designed to encourage venture businesses,
the Chile Foundation was in a better position to promote salmon
farming than private companies in general.
The Chile Foundation, following the successful achievement of
the 1,000-ton program, decided to sell the venture to a private company.
This led to an international bidding contest in 1988, in which many
companies participated. Nippon Suisan Kaisha (today Nissui), one of214the major fisheries in Japan, which operated in Chile at that time, won
the bid. As a result, Salmones Antártica became a wholly owned
company of Nippon Suisan Kaisha, which had been conducting salmon
and trout businesses in the North Pacific Ocean since before WWII and
had acquired advanced technical capabilities.
The Chile Foundation unexpectedly came up with the idea of
offering corporate consulting services, started by the broadcasting in
1986 of a TV program featuring salmon farming in cooperation with
Salmones Antártica. Many Chilean entrepreneurs who watched theprogram made inquiries to the TV station. Some of them later ventured
into the salmon industry. In the mid ‘80s, the Chile Foundation
supported projects by seven private companies.
(B) LEARNING AND ACCUMULATION OF CAPABILITIESAND KNOWLEDGE
In the case of the Chilean salmon industry, the natural
conditions, capital, and labor were generally favorable. With
technological adaptation and development, the value of theseendowments changed, enabling Chile to attain a new comparativeadvantage. However, what was still scarce were R&D professionals andtrained industrial personnel. Introducing and developing technology
with high-level professionals is not an easy task for the private sector.
Industrial personnel will not be trained overnight, and it will cost a lot
for the private sector. In the preparatory phase of the Chilean salmon
industry, these circumstances made it difficult for private companies todevelop technologies and train industrial personnel by themselves.
This gap was filled by the Japan-Chile Salmon Project, which
was implemented from 1969 for 20 years by Japan International
Cooperation Agency (JICA) and its counterparts, National Fishery
Services (SERNAP) and Fishery Promotion Institute (IFOP), under anagreement between the Japanese and Chilean governments. Because theJapan-Chile Salmon Project was under the auspices of these two
governments, technologies developed and personnel trained by the
project were public goods and were available to what was to later
become the salmon industry in Chile. This allowed salmon firms to saveon the cost of investment in industrial personnel training. The Chile
Foundation also played a similar role.
215

Between 1969 and 1989, 28 Chileans received training in Japan
under the salmon project, which was implemented by JICA and its
counterpart organizations in the Chilean government—firstly, SERNAP,
including its predecessor, Agriculture and Livestock Service (SAG), andsecondly, IFOP. The training participants to be dispatched to Japan wereselected from Chilean professionals who had been assigned to theproject based on an order of priority that took their assignments into
consideration. What the Chilean participants learned in Japan, where
the technology of seed production and fry farming was advanced, as
well as in the joint project, later translated into their own specialty,
which in turn proved to be of great help in establishing and developing
the salmon farming industry in Chile. The Chilean fishery journal
AQUA attracted the attention of people who had been involved insalmon farming in Chile when it issued a 20th anniversary special issue(December 2007). The article on the aquaculture pioneers in Chile
carried pictures of familiar faces who had worked in the industry formore than two decades. In all, six out of the 11 pioneers in salmon
farming in Chile had received training in Japan. Of the six, five played acentral role in the Japan-Chile Salmon Project over a long period.

(C) INSTITUTIONS WHICH FACILITATED THE
DEVELOPMENT OF THE CHILEAN SALMON
INDUSTRYAs explained above, it was important to demonstrate that thesalmon business was promising and commercially viable. This was doneby conducting feasibility studies and investing in the salmon business.
This role was played by the Chile Foundation, and contributed greatly
to the establishment of the Chilean salmon industry. In addition, theChile Foundation’s feasibility studies were partly supported by theJapan-Chile Salmon Project. Together with technology development,
industrial personnel training was an important activity in thisestablishment phase.
It was not until the full-fledged development phase that salmon
industry clusters increased their importance as an innovation system. It
is worth noting here that the nascent form of that innovation system wasalready emerging in the establishment phase and that the Chile216

Foundation and the Japan-Chile Salmon Project contributed to theprocess. Although industrial clusters in a wider sense include research
institutes and universities, Chilean universities did little in the role ascomponents of such clusters at the beginning. The scale-up of salmon
production resulted in the deepening of the division of labor, theexpansion of the value chain, and the development of salmon industry
clusters involving a wide range of components, including salmon
farming companies and their affiliated firms, government agencies,
universities, and research institutes. One of the organizations that
played an important role in this context was the Chilean Association of
Salmon and Trout Producers (APSTCH, today SalmónChile). The Chile
Foundation again made a significant contribution here, supporting theestablishment of APSTCH.
The Chilean government, its specialized entities, SERNAP and
IFOP, through the Japan-Chile Salmon Project, also served as a catalyst
and played a facilitating role contributing to technological developmentin the area of national salmon eggs production, fish diseases as well as
fry farming. Furthermore, the Japan-Chile Salmon Project contributed agreat deal to the establishment and enforcement of relevant laws andregulations. The Office of the Undersecretary of Fisheries of the Ministryof Agriculture, established in 1978, played the pivotal role inestablishing relevant laws and regulations. SERNAP assumed the
responsibility for their enforcement.
Each of these two organizations served as the counterpart
organization of JICA. SERNAP, the Chilean counterpart organization for
the Japan-Chile Salmon Project until 1987, has put many of the project’s
outcomes to good use in establishing laws and regulations concerning
the aquaculture industry in Chile. For example, technical cooperation in
the area of fishery disease control has resulted in the development ofregulations on the prevention of infectious disease epidemics associatedwith salmon and trout farming. Likewise, a Chilean Ministry of
Economy ordinance issued in 1985 has imposed control on imported
salmon eggs. The ordinance has also provided for the disinfection ofhatcheries, among other control measures. In addition, it has prompted
the veterinary check of farmed salmon, making the ordinance thestarting point for salmonid infectious disease control in Chile.

217

218

Figure 4: Pioneer Companies and Institutions of Chilean Salmon Industry

3.5. CASE 5: SINGAPO RE: BECOMING ONE OF THE
WORLD’S MOST COMPETI TIVE COUNTRIES WITH HUMAN
CAPITAL, TECHNOLOGY AND LOCATION
Singapore, a country without natural resources and with a large
number of unemployed people at the time of independence, is today
one of the most competitive countries in the world. The experience ofSingapore is particularly relevant as a highly successful industrial
development and economic transformation case regarding a small
country. Its population was 2.7 million in 1985 and 4.8 million in 2008. A
small country faces a different agenda to larger countries and needs toadopt different strategies.
Singapore was one of the first Southeast Asian countries topromote export-led growth rather than import-substitution-led growth.
In the late 1970s, faced with rising competition from other exporters
whose wage rates were lower, Singapore decided to transition fromexports dependent on cheap labor into a knowledge economy based on
skilled labor and higher value-added exports. During the last three
decades, the country has continuously upgraded its industrial structure,
overcoming the so-called middle income trap. As Yusuf and Nabeshima(2012) mention in their study on Singapore, Ireland and Finland, by the
1980s, it was becoming apparent that by betting on the technologicallydynamic
industrial
subsectors—principally
electronics,
telecommunications, chemicals, and pharmaceuticals—small countries
could improve their longer-term growth perspective. In this context, therapid transformation should have demanded increasingly higher-level
human resources and entrepreneurs. In many cases, in which foreign
direct investment played an important role in transferring anddisseminating cutting-edge technology, especially in the areas ofelectronics, the Internet, and biotech industries, transnational companies
would not have been interested in investing in Singapore if the country
did not have the human capital and knowledge base to absorb suchtechnology.
The following section intends to get insights into how humanresource development and accumulation of capabilities to address theglobal competition was achieved. Then, the institutions which
formulated the country’s development strategy and facilitated thetransformation will be discussed.
219

(A) HUMAN RESOURCE DEVELOPMENT AND
ACCUMULATION OF KNOWLEDGE AND CAPABILITIESIn the transformation process of Singapore, Yusuf andNabeshima (2012, p.34-36) emphasize the importance of generalpurpose-technologies (GPTs). They further argue: ‚The revolution
causedbyadvancesinsemiconductors,
electronics,
andtelecommunication technologies is widely associated with new products
and the ways products are manufactured. Undoubtedly, these advances
have contributed significantly to economic changes, but productinnovation was powerfully reinforced by numerous collaborative
innovations in other areas—for example, in services, institutions,organizations, and habits and lifestyles. GPTs have proven to be an
extraordinarily potent transformative force because the learning
economy generated a cross-disciplinary matrix of supporting andintersecting innovations that enormously magnified the influence of
core technologies.‛
Yusuf and Nabeshima (2012, p.44) highlight that in embracing
technology as a driver of long-term growth, Singapore, Finland andIreland successfully engaged in building capabilities. This success is thecore of the three countries’ models and resulted in the making of a
networked learning and innovation system of the highest rank. The
concept of such capabilities has a close similarity with that of ‚learning
to learn‛, as coined by Stiglitz and cited in section 2 of this paper. He
stresses that development strategies need to be focused on ‚learning tolearn‛, especially in an era with fast-changing technologies, where
specific knowledge learned at one moment risks rapid obsolescence.
So, how did Singapore succeeded in building such capabilities?
A close look at Singapore’s national initiative in increasing productivity,
together with strengthening quality and later with innovation will help
us to understand Singapore’s experience. ‚The shift to a knowledgeintensive industrial structure with strong international competitivenessis only possible through the human-resource development of 2.6 million
people, the only resource Singapore has,‛ said Prime Minister Lee Kuan

220

Yew.18 Lee was concerned about how to organize and motivate
Singapore’s labor force in such a way as to make the most of plantmodernization and skills development (JICA/IDCJ/IDJ 2010, p. 30). In
April 1981, the Singaporean Committee on Productivity was formed byrepresentatives of enterprises, workers’ organizations, government
officials, and academia. The committee reviewed the experiences of
productivity movements in Japan, another country without natural
resources but with abundant labor. It then presented a report to thepresident of the National Productivity Board (NPB) of Singapore. NPB
was designated as the main body for promoting productivity
development in Singapore. In June 1983, the Singapore Productivity
Development Project (SPDP) was launched with the support of theJapanese government.
Some 15,000 Singaporean engineers, managers, and otherprofessionals participated in the project. Two hundred engineers,managers, and other professionals from Singapore took part in training
courses in Japan. More than 200 Japanese experts were dispatched toSingapore. More than 100 textbooks and other training materials wereprepared specifically for the project. During the period of SPDP and
beyond, labor productivity in manufacturing industries improved by anannual average rate of 5.7 percent (1981-86), 3.0 percent (1986-91), and
4.8 percent (1991-96).19
In 1990, when SPDP ended, 90 percent of workers in the country
were involved in productivity development activities, compared with 54
percent in 1986. In 2001, 13 percent of the total labor force wasparticipating in quality-control circles, in comparison with 0.4 percent in
1983, when SPDP started. Quality control circles are considered the mosteffective vehicle for improving quality and productivity with the active
participation of workers. Through this participatory approach, workers’
ideas are incorporated into the production process with innovative

Remarks made by the prime minister when he visited Kohei Goshi, honorarypresident of Japan Productivity Center in June 1981. Japan Productivity
Organization (1990, p. 1).

18

The figures and those of the following paragraph are from JICA/IDCJ/IDJ(2010) p.16 and p.22.

19

221

solutions. Hence, SPDP became one of the driving forces for
productivity gains in Singapore.
NPB’s activities gathered considerable momentum, progressing
from the awareness stage (1982-85), in which it created widespreadawareness of productivity among companies and the workforce, to theaction stage (1986-88), when it translated awareness into specificprograms to improve productivity in the workplace, and then to thefollow-up stage (1988 to the present), in which it encouraged ownershipof the productivity movement (Ohno and Kitaw 2011, and Ohno 2013).
The NPB was merged with the Singapore Institute of Standards andIndustrial Research in 1996 to create the Productivity and Standards
Board (PSB), bringing together the soft skills and the technical aspects ofproductivity. The PSB was later strengthened and reorganized into theStandards, Productivity and Innovation Board (SPRING) in 2002.
NPB, PSB, and now SPRING became global centers of excellencein the field of productivity, quality, standards, and innovation. Other
key factors that bolstered these institutions include the transition from apublic-sector-led entity to a private-sector-led entity, active advocacy
and publicity, human resource development inside and outside theinstitution, and the establishment of a skills development fund by thegovernment. Singapore’s productivity initiative was strongly
encouraged by the country’s senior leaders, especially Prime Minister
Lee. He understood the need for institution building and the need topromote creativity and the capacity to innovate in order to sustain
growth for Singaporeans.
Here, it should be particularly emphasized that the abovementioned process enhanced capabilities of both individuals andorganizations. Ohno (2013, p.190) reiterates that a nationwide
productivity drive requires a paradigm shift and a mindset change andthat it requires the establishment of an attitude by which all people
strive for and acquire the habit of improvement, as well as systems andpractices that translate such an attitude into action. He further
emphasizes that a new way of thinking, living, and working must be
firmly built in the minds and actions of all leaders and actors andhighlights the importance of strong political commitment from the top
and strong organizational backup (Ibid. p.190).

222

(B) INSTITUTIONS THAT ENABLED THE PROCESS OF
TRANSFORMATIONIn Singapore, its Economic Development Board (EDB) was asingle agency with the task of delivering the key elements of a growthstrategy (Yusuf and Nabeshima 2012, p.105). It was established in 1961
with the original goals and organizational structure as spelled out in its
first annual report: ‚The primary function of the Board is to promote theestablishment of new industries in Singapore and to accelerate thegrowth of existing ones‛ (cited by Schein 2001, p.38). Schein, who
described the culture of EDB as ‚strategic pragmatism‛ based on an
extensive study of EDB, summarizes that Singapore displayed aremarkable adaptive and learning capability without, however,sacrificing short-term problem solving (Ibid. p.57-58).
Ohno points out that EDB is a business-friendly, one-stop
agency for domestic and foreign investors (Ohno 2013, p.172). EDB, inattracting FDI in priority sectors, uses both broad-based approaches andtargeted approaches (Ibid. p.172-173). Holding first position among
more than 180 countries in the World Bank Doing Business Reports forfive consecutive years, EDB also engages in individual negotiations withforeign companies to offer company-specific support and incentives inwhat is called the ‚Queen Bee‛ approach.
Kuruvilla and Chua (2000, p. 40-41) considers the following,among others, to be the major reasons behind Singapore’s remarkablesuccess in upgrading workforce skills: General linkage between
economic development needs and skill formation/development
facilitated by an institutional structure that places the EDB at the centerof the efforts with responsibility for both areas; EDB’s model oftechnological transfer linking FDI to skills development as well as ofjoint government-private sector operation for skill training; andeducational reform for long-term skills development.
In the area of productivity, quality, standards and innovation,
NPB, PSB and now SPRING, played a crucial role in mainstream crosscutting general purpose technologies (GPTs) in Singapore’s industrial
development and economic transformation.
Furthermore, the provision of infrastructure for industrial
development by Jurong Town Corporation (JTC) as the principal
statutory board for industrial development cannot be overemphasized.
223

224

Figure 5: Major institutions of Singapore in areas of economic development,
productivity, standards and innovation

It is seen as a strategic developer of cutting-edge industrial spaces
bringing forth new paradigms in industrial planning and urban design(Kaushik 2012, p.13). It now aims at strategic clustering and innovation
providing new estates, new cluster hubs, new paradigms, new land
creation and eco-sustainability.
Figure 5 illustrates roughly the development of institutions in
Singapore responsible for economic development, productivity,
standards and innovation, as well as infrastructure provision.

4. CONCLUDING REMARK S: FINDINGS FROM CASESTUDIESThe five cases show how distinctive critical factors identified byseveral recent studies interact in practice. Learning and accumulation ofknowledge and capabilities are essential. The process is gradual,
incremental and, generally, path-dependent. It is also vital for changing
the endowments to attain dynamic comparative advantage. In most of
the cases, the government or public institutions facilitated the process.
In Thailand, Bangladesh and Singapore, the constant improvement of
the capabilities of those involved in the new industries was crucial.
Change of endowments is also attained by infrastructure
construction and technological innovation. They often trigger oraccelerate industrial development and transformation. The Eastern
Seaboard was crucial for the expansion of the automobile industry inThailand, which eventually enabled the country to be labeled the‚Detroit of Asia‛. In Bangladesh, construction of more efficienttransport and logistics infrastructure facilitated and accelerated theprocess of transformation via the garments industry. In Brazil,
technological breakthroughs changed the endowments and comparativeadvantage of the country and, together with institutional innovations,triggered the transformation of Cerrado from barren land into one of themost productive agricultural regions in the world. In Chile,
technological adaptation and development changed the endowments.
But in all these cases, industrial development and economictransformation could not have happened without constant developmentof capabilities and knowledge through learning. In Singapore, ‚learning225

to learn‛ was a key factor in the country’s rapid and profoundtransformation.
In all five cases, effective institutions accomplished the role offacilitator or catalyzer of transformation. First of all, many of them had
been created for specific purposes and embodied long-term vision andsense of mission. Second, most of these institutions regarded publicprivate interaction, consultation or coordination to be of the highest
priority: this was demonstrated in the cases of Thai automobile
industry, Brazilian Agricultural Research Cooperation, Bangladesh’s
garment industry, Chilean Foundation, and Singapore’s Economic
Development Board, and Standard, Productivity and Innovation Board.
Third, most of these institutions adapted flexibly to changes in the
global market and phases of industrial development.
These findings generally confirm the conclusion of JICA/JBIC(2008) regarding factors of economic growth found in the Asianexperience. They are the mid-to long-term vision for development andstrategies, flexibility in responding to a changing environment, andgovernment’s close ties with the private sector, harnessing the private
sector’s capacity to the maximum.

226

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232

GROWTH STRATEGIES FOR AFRICA IN
A CHANGING GLOBALENVIRONMENT:
Policy observations forsustainable and shared growth
Danny Leipziger
The Growth Dialogue
George Washington University
Shahid Yusuf
The Growth Dialogue

Abstract
Following decolonization, growth accelerated in the leading African
economies with the emergence of industrial activity, the modernizationof physical infrastructure, and the quickening of urbanization.
However, by the mid-1970s this initial phase of catching up had run outof steam, and African countries entered a long economic twilight that
extended through the mid-1990s. Since then, and for over a decade,
Africa, has benefitted from a widely shared revival of economic activity.
Some reasons for this revival are shared worldwide, including
globalization, innovations triggered by the advent of the Internet andadvances in semiconductor/digital technologies, expansionary monetary
policies, and by the growth of Asian countries that accelerated
industrialization and trade volume. Other causes are internal to Africa,such as greater stability, better-managed macroeconomic policy, more233

open economies, and improved human development indicators. But thisnew-found momentum cannot be taken for granted. In particular, thefinancial crisis of 2008–09 has weakened Africa’s principal Western
trading partners. Export-led growth is no longer the recipe for allseasons. This paper sketches a strategy for African late starters that
identifies the key objectives and policy initiatives appropriate for a postfinancial-crisis environment where South-South trade and capital flows
are taking on a greater salience.

1. INTRODUCTION
Following decolonization in the 1950s and the 1960s, growth
accelerated in several of the leading African economies with theflowering of long-delayed industrial activity, the modernization ofphysical infrastructure, and the quickening of urbanization. However,by the mid-1970s this initial phase of catching up had run out of steam,as countries fell prey to political turbulence, internal and cross-borderconflicts, and economic distortions introduced by policy
mismanagement and import-substituting industrialization. Problems
internal to the continent were exacerbated by the weakening
performance of Africa’s main trading partners in the West. Africancountries entered a long economic twilight that extended through themid-1990s;1 since then and for over a decade, Africa has benefitted froma widely shared revival of economic activity. Reasons for this revival
include the spurt in growth worldwide that can be traced to
globalization, the upsurge in innovations triggered by the advent of theInternet and advances in semiconductor/digital technologies, byexpansionary monetary policies, and by the extraordinary economic
prowess of China and other Asian countries that raised the tempo ofindustrialization and the volume of trade. Other causes for this1 Only two countries, Botswana and Mauritius, bucked the trend and grewstrongly during this period. The former grew because political stability, soundgovernance, and the effective management of the production and export ofdiamonds yielded steady returns; the latter successfully used policy measures toattract FDI into the apparel industry and to capitalize on preferential access to
European markets.

234

resurgence are internal to Africa. On balance, there is greater stability
and a democratization of politics, and macroeconomic policy is better
managed, African economies are more open, and human development
indicators have improved. Also, higher primary product prices haveenhanced export earnings and increased the volume of FDI in resourcebased sectors and linked infrastructures.2
With growth averaging over 5 percent per year during 2000 and2011, both African policymakers and external observers are confident
that that the continent has turned the corner and its long-term prospects
are brighter than at any time in the recent past. But this newfoundmomentum cannot be taken for granted and sustaining or even
improving on this performance will depend upon how effectively
African countries, both individually and collectively, respond to anumber of challenges—old and new. In particular, the financial crisis of
2008–09 has seriously weakened some of Africa’s principal Western
trading partners and suspended questions over the future contributionof industrialization, trade, and the flow of aid to Africa’s growth. Aidfatigue, and doubts as to its efficacy,3 is compounded by the budgetary
woes of Western countries that are unlikely to be resolved during thisdecade. Moreover, the sources (and the future 4) of growth are less easy
to discern than was the case just five years ago. Export-led growth is nolonger the recipe for all seasons with even the East Asian economies
casting around for additional drivers of growth. The fragmentation of
production and its offshoring from Western countries might have run its
course. A sharp and sustained increase in capital investment, rapid
technological advance, and innovation complemented by human capital
deepening and a strengthening of governance institutions are plausible

2

See Miguel (2009).

Aid effectiveness is the subject of a recent meta-study by Doucouliagos andPaldam (2007) and a literature review by Roodman (2007). Both conclude that
there is little evidence that aid raises investment and growth or reduces poverty.
William Easterly (2009) has poured cold water on the efforts of Westerncountries to transform Africa instead of supporting dispersed and incremental
efforts at home-grown improvement that are seen to yield results. However, aid
has many supporters and one of the most articulate is Jeffrey Sachs (2005).
3

4

See Rodrik (2011) and Rogoff (2012).
235

options, but all demand a commitment to long-term development
strategies backed by the sort of sustained political resolve that has beenin short supply in Africa.
So much is at stake that inaction is not a viable option. Africancountries will need to adopt a proactive approach and capitalize on boththe newly gained confidence in the continent’s future, but also themineral and energy discoveries that have brightened the growthprospects of countries such as Mozambique, 5 Ghana, and Uganda,
among others. Several attempts have been made to craft a strategic
framework for African countries,6 but the uncertainties injected by the
lingering aftermath of the financial crisis have complicated the situationand made it harder to chart a course forward. While recent researchoffers a plethora of findings, these too add to the confusion because notinfrequently their relevance for Africa and the practical policy
implications are left unstated.
The purpose of this paper is to sketch a modern strategy for
African late starters that identifies the key objectives and the mix ofpolicy initiatives appropriate for a post-financial-crisis environment
where South-South trade and capital flows are taking on a greater
salience. In sketching this framework, the paper will draw upon theempirical work that is helping spell out the constants in growtheconomics and what our new knowledge suggests are the changes thatneed to be factored into policies.7 The paper is divided into three parts.
Part 1 briefly reviews the performance of African economies over the
past decade; it highlights the factors that enabled the continent to escapefrom a prolonged spell of stagnation. Part 2 notes the challenges for
African countries and how these have been sharpened by the crisis andby other developments, such as the greatly enlarged role of China inboth the global economy and in Africa. Part 3 defines a diversified

5

See Smith (2012).

See, for example, the New Partnership for Africa’s Development (NEPAD),
which defines a strategic framework covering six thematic areas and theProgramme for Infrastructure Development (www.nepad.org).
6

7

See Growth Dialogue (2012).
236

strategy8 that could help African countries remain on their current
growth paths while addressing challenges they cannot afford tosidestep.

2. AFRICAN ECONOMIC PERFORMANCE , 1990–2011
The first half of the 1990s was a low point for growth in SubSaharan Africa—0.8 percent per year. In the latter half of the decade,growth rose to an average of 3.9 percent per year, well in excess of the
2.4 percent average of the 1980s,9 and it continued accelerating into thefirst decade of the twenty-first century.10 Growth between 2000 and 2010averaged 5 percent per year and in spite of spreading gloom in the EU
was 5.1 percent in 2011. In fact, 6 African countries11 were among the 10
fastest-growing economies in the world during 2011. This performance
was supported by a rise in investment rates from an average of 18
percent in 1990 to 21.8 percent in 201112—not comparable to East Asianlevels, but respectable nonetheless. Exports grew from just over 26
percent of GDP in 1990 to almost 30 percent in 2009.13 Several countries

Minerals and petroleum accounted for well over half of Africa’s exports andare key to the prosperity of countries such as Botswana and South Africa. They
also sustain the economies of others such as Ghana, Nigeria, the United
Republic of Tanzania, and Zambia. Diversifying the sources of growth is apriority for all mineral exporters, a point driven home yet again by the crisis.

8

9

See UNCTAD (2001).

10

See, for example, Radelet (2010).

These included Ethiopia, Ghana, Mozambique, Rwanda, Liberia, andEquatorial Guinea.

11

12

The investment rate was 22.9 percent excluding South Africa and Nigeria.

Some researchers (Gruber and Koutroumpis 2011) claim that the penetrationof mobiles has contributed to innovation—such as the justly famous M-PESA
mobile banking innovation in Kenya and Tanzania—and to growth, especiallyin the higher-income countries with greater mobile penetration. Annual growthin the higher-income countries has risen by 0.2 percent per year whereas in thelower-income countries it is up by 0.11 percent. Seventy-four percent of Kenyans
now use a mobile phone (the average for SSA in 2012 was 60 percent) and a13237

also improved their social and Doing Business indicators, 14 and foreign
investment in Africa rose from US$9 billion in 2000 to US$82 billion in2011 (after peaking in 2008 at US$88 billion)15 with African countries
attracting 4.4 percent of all investment in developing countries between
2008 and 2011. Remittances also climbed to US$41.6 billion in 2011.16
And African countries reduced their external debt in 2012 to 22 percent
of GDP from 63 percent in 2000 (Severino and Debled 2012).
The stronger growth performance is reflected in further
progress towards several Millennium Development Goals (MDGs). The
African population living on less than US$1.25 (in 2005 prices) a day fell
from 56.5 percent in 1990 to 47.5 percent in 2008 (World Bank 2011a),
and according to Pinkovsky and Sala-i-Martin (2010), Africa is en routeto halving its poverty rate by 2017—missing the MDG target by just two
years. In a recent paper, Alwyn Young (2012) goes further to claim that
income statistics might be seriously underestimating the actual gains. By
using the Demographic and Health Surveys, which collect data on
household ownership of durables, he concludes that household
consumption has in fact been increasing by between 3.4 and 3.7 percent
per year, which is 3–4 times the rate reported by international data
sources. Declining rates of poverty have had positive spillover effects,
with the percentage of underweight and malnourished children
declining by 25 percent. Furthermore, primary school completion rates
rose to 79 percent in 2009, with countries such as Burundi, Madagascar,

quiet digital revolution appears to be stirring in the country (Economist 2012a).
M-PESA has facilitated bank transfers and encouraged users to put their money
in banks rather than in rural credit co-ops. See Mbiti and Weil (2011).
Between 2000 and 2010, the time required to register property was almost
halved to 65 days on average. Furthermore, time required to enforce contracts
and to obtain construction permits were among the areas showing
improvement.
14

FDI in Sub-Saharan Africa still amounts to only 5.5 percent of global FDI (seeEngland 2012).
15

See IMF (2011) and African Economic Outlook(http://www.africaneconomicoutlook.org/
en/outlook/financial_flows/remittances/). The African diaspora totals some 30.6
million people and their remittances account for a large part of the GDP ofcountries such as Lesotho (30 percent) and Cape Verde (10 percent).
16

238

and Rwanda achieving near-universal primary enrolment; childmortality dropped from 181 to 130 over the same period; and there wasa significant slowing in the growth of new HIV infections (United
Nations 2012).
Other indicators convey a less positive picture. Gross savings
fell from an average of 24.6 percent in 2006 to 19.8 percent in 2011.17
Gross capital formation rose from 18 percent of GDP in 1995 to a still
modest 22 percent in 2011, but private fixed investment was unchanged
at 13.4 percent of GDP from 2006 to 2009, and the infrastructure deficit
scarcely narrowed.18 In a disturbing trend, the share of manufacturing in
GDP for Africa as a whole declined from 13 percent in 2000 to 10.5
percent in 2008 (UNCTAD 2011). It was 9.7 percent in East Africa, 5percent in West Africa, and 18.2 percent in Southern Africa.19 Moreover,most manufactures are resource-based with low domestic value added
and they register limited productivity gains and spawn few linkages
with the rest of the economy (UNCTAD 2011). Diversification of
manufactured exports was correspondingly limited. The share ofmanufactured exports, which was 43 percent in 2000, fell to 39 percent
in 2008 (UNCTAD 2011), and Africa was responsible for just 1.3 percent
of global manufactured exports in 2008 (and 1.1 percent of global
manufacturing value added in 2009), as against 1 percent in 2000 (and1.2 percent of global manufacturing value added). The top exports ofeven the more industrialized African countries were resource based. For
example, South Africa’s top two exports were platinum and gold;
Kenya’s were tea and cut flowers; Ethiopia’s were coffee and sesame
seeds; Tanzania’s were coffee and tobacco; and Ghana’s were cocoa
beans and manganese ores (World Bank 2011b). Exports as a share ofGDP, which had risen to 41.8 percent in 2008, dropped to 37.9 percent in2011, with commodities accounting for 80 percent of the total.

See IMF (2012). Gross savings in East Asia reached 47 percent in 2009—afigure that is somewhat biased because of China’s weight in the total and very
high savings.
17

According to some estimates, the incremental capital output ratio (ICOR) for
Sub-Saharan Africa during 1980–2010 averaged 5.23, which is high incomparison with East Asian countries during 1970–2000. See Kumo (2011).
18

19

Manufacturing accounted for 32 percent of GDP in East Asia in 2009.
239

3. CONTRIBUTING TO GLOB AL PUBLIC GOODS A ND
RAISING GROWTH POTEN TIAL
The accumulated experience of more than half a century has
substantially enhanced the developmental potential of the African
continent. Technological advances and globalization have improved thegrowth prospects of late starters and opened up avenues forleapfrogging in areas such as telecommunications, banking, and power
generation. Having internalized decades of lessons, it is now possible
for African countries to pursue smart urban development and avoid themany missteps of countries at a more advanced stage of urbanization.
Increased South-South trade and capital flows and Africa’s diminishingreliance on its traditional trading partners reduces the continent’svulnerability to a prolonged stagnation of Western economies. In
comparison to the 1970s, Africa is far better prepared to forge ahead andto sustain its regained growth momentum. But success continent-wide
will rest on two factors. First, Africa must increase the supply of global
public goods that have helped foster recent prosperity but are currently
inadequate to sustain future growth. Second, African countries musttake a strategic and methodical approach to transforming economic
assets into innovative drivers of economic performance.
Africa faces a host of challenges and an exhaustive listing serves
no useful purpose. However, a small subset of global public goods islikely to exert a profound influence on Africa’s prospects. These include
continued integration with the global trading environment in a mannerthat contributes to the diffusion of capital and ideas; continent-wide
political stability; and a wide-ranging, multi-sectoral response to global
climate change that minimizes economic costs while containing theincrease in greenhouse gas emissions.
3.1. INCREASING THE PROVISION OF PUBLIC GOODS
Preserving globalization: The past decade has witnessed a seachange in international relations alongside a rebalancing of the global
GDP. It appears that we are on the threshold of a multipolar world
where a number of regional hegemons are likely to displace a single
superpower. This could have political and economic consequences. On

240the political front, the risk of regional tensions leading to arms races andflaring into sharp and costly conflicts is greater. On the economic front,
the stalemated Doha Round provides a foretaste of what a multipolarworld may be like. There is risk of a slide back to a more protectionist
environment, if countries are unable to correct trade imbalances, and if
industrial hollowing and unemployment induce politicians to buy
short-term relief by raising barriers to trade. The term ‚murky
protectionism‛ has been coined to describe the creeping revival of trade
impediments, which if not contained, could begin to eat into the gains
from trade and the opportunities for export–led growth (Baldwin and
Evenett 2009). The backlash following the financial crisis againstinternational capital could result in ‚sudden stops‛ in flows to somecountries when investors panic, the appreciation of exchange rates inothers faced with a surge in inflows, and asset bubbles. Similarly, thebacklash against financial innovations (including securitization andexotic derivatives) could easily lead to the imposition of punitive taxes
and regulations. These could curb not only the excesses of financial
globalization, but also limit the benefits to developing countries in theform of productivity gains from financial development (Bekaert,
Harvey, and Lundblad 2011), equity capital for industrialization, andsophisticated banking technologies that improve access of local
businesses to capital and resource allocation.20
Although its promoters21 can exaggerate the advantages ofglobalization and a tempering of certain trends may well be desirable, 22a reversal would not be in the interests of the community of nations. The
world has lived through one such reversal in the early decades of thetwentieth century and a recurrence is best avoided. But unless theBeck, Chen, Lin and Song (2012) present evidence on the links between
financial innovation and growth and also the link between innovation andfinancial fragility.

20

See Bhagwati (2007) and Wolf (2004). See also review summaries of Wolf at
http://www.complete-review.com/reviews/economic/wolfm.htm.

21

Sundaram, Schwank, and von Arnim (2011) claim that much of the FDI in
Sub-Saharan Africa, courtesy of globalization, has gone into mineral extraction
and that trade liberalization, by exposing infant African industries tocompetition, has stunted their development.

22

241

widening cleavages between the interests of the advanced countries anddeveloping countries can be bridged, there is great likelihood of apartial retreat from globalization and a weakening of the institutions
that contribute to the benefits from closer integration. Africa cannot
afford to remain a largely passive bystander, and the challenge for
African countries is how to collectively work with and influence othernations to secure and improve the institutional underpinnings ofglobalization. This institutional infrastructure, painfully pieced together
over the past several decades, is an enormous asset. It has its
deficiencies; however, the priority should be to fix the problems so thatthe gains from economic globalization are more widely shared and there
are effective procedures and fora for settling political differences. In an
increasingly fractious world, the importance of the latter and its bearing
on the former cannot be minimized. Africa will need to use ‚voice,‛
diplomacy, and its growing economic clout to help safeguard the futureof ‘good’ globalization.
Sustaining globalization and contributing to the public goods
that will maximize its advantages must be complemented by continentwide efforts at trade integration that could serve as an additional engineof growth. In particular, Africa’s many small, landlocked countries
stand to benefit from increased intra-African trade. This has risen more
rapidly since 2000 than exports to the rest of the world, but still amounts
to less than 10 percent of Africa’s total trade, with the large countries
accounting for the lion’s share.23 Intraregional trade confers anadditional advantage on the smaller countries because it favors theexports of processed goods to partner countries in Africa as against theexport of unprocessed goods overseas.24 Regional institutions
supporting trade liberalization, and backed by domestic policies
promoting export-oriented development, will contribute to greater
integration, as would investment in infrastructure to close the wide
remaining gaps, and removal of other behind-the-border impediments

See Broadman (2007)’ for a detailed account of Africa’s trade prospects with
Asia and the trade facilitation issues that dog the growth of trade.
23

See Douillet and Pauw (2012). Severino and Debled (2012) cite a higher
figure—15 percent.
24242

to the flow of trade.25
Political stability and institutions: It is a commonplace to notethat political stability and conflict avoidance are critical for growth to besustainable. Africa has had its share of local conflicts 26 and has
experienced their destructiveness.27 With the spread of democratic andmore inclusive regimes, the continent is enjoying a period of relative
respite. But the threat of renewed instability has not disappeared.
Internal conflicts continue to smolder in Côte d’Ivoire, Sudan, Uganda,
Mali, and in the Democratic Republic of Congo. Democratic rules ofgovernment appear to be widely applied throughout the region with allcountries except Eritrea holding elections, but both the Mo Ibrahim
Index and the Freedom House Index point to a decline in ‚full electoral
democracy‛ and in political participation since 2007. Only Mauritius can
be classified as a ‚full democracy.‛28 However, as the Economist (2012a)
notes, there are grounds for optimism in the blurring of ideological fault
lines, the increasing numbers of young voters, the information andmedia access made possible by information and communication
technology, and more carefully supervised elections in some countries.
Nevertheless, Africa’s political institutions are at the embryonic stage
and the recent progress seems tentative and precarious. There isunabated need for continuing national and Pan-African efforts to secure

The defragmenting of African markets would be a boon for Africa’s exporters,
especially smaller firms (see Brenton and Isik 2012). Also helpful would be
progress at strengthening road and rail infrastructures and reduced delays atcustoms and border checkpoints (see Rippel 2011). Infrastructure gaps in SubSaharan Africa are spelled out in World Bank (2011). Closing these by 2020
could require as much as US$93 billion. Maintaining the infrastructure, anothermajor issue in Africa, would demand adequate budgetary provisioning
thereafter (see AfDB 2010).

25

Some of these conflicts were the result of interventions by the superpowers
and were in effect proxy wars fought in Africa. See Hironaka (2005), Shah(2012), and Gettleman (2010).

26

According to Paul Collier (2003), the ‚conflict trap‛ is one of the causes ofstalled development in many African countries. Some others are reliance onnatural resources, being landlocked, and bad governance.
27

28

See the Economist (2012a).
243the gains achieved and create the political milieu conducive to inclusive
growth. How to minimize economic instability, political tensions,corruption, and violent conflict will be a continuing test for many
African countries.29
Climate change: The third most pressing challenge, which is
entwined with preserving globalization, is climate change. Many
African countries are at the epicenter of the changes to come that will
result in higher temperatures, desiccation, worsening water scarcities, 30
extreme weather events, and coastal flooding.31 Adaptation willundoubtedly provide partial relief, and as Africa becomes more
prosperous, the continent will find it easier to absorb the additionalcosts. But early and concerted efforts to mitigate climate change wouldease the burden on later generations. In this regard, the challenge for
Africa is to play a proactive role in international negotiations—because
it has so much at stake—and for Africa’s leaders to make an earlycommitment to greening growth. With the advanced economies
preoccupied with their fiscal and employment problems, by default thebaton is for developing countries to grasp. They should engage in bold
commitments followed by determined efforts at implementing difficultand initially unpopular policies. With so much urbanization,industrialization, and transport development ahead, Africa could
embark on a path that tightly constrains the growth of energy, water,and resource utilization. Similarly, Africa could constrain increasing
greenhouse gases emissions caused by deforestation by preserving
carbon-sequestering forests. This step would help Africa avoid
becoming locked into less resource-frugal technologies and forms ofurbanization. It would also protect the continent’s wealth of biodiversity

29 Acemoglu and Robinson (2012) refer to the failure of countries ‚not with abang but with a whimper‛ because they are ‚ruled by extractive economic
institutions, which destroy incentives, discourage innovation, and sap the talentof their citizens by creating a tilted playing field and robbing them ofopportunities.‛
30

On water stress in Africa, see Tatlock (2006).

Cities at risk in Africa include Abidjan, Accra, Dakar, Dar es-Salaam, Durban,
Maputo, Mombasa, and Port Elizabeth. See the figure ‚African cities at risk due
to sea-level rise‛ in UH-HABITAT (2008).
31

244

(Steiner 2010). The policies and technologies to achieve these objectives
are well known, if governments can muster the political will and theadministrative capacities to put them into effect. In the long run, suchgreen policies are likely to prove much more inclusive than current
strategies, which will entail costly adjustments that could destabilize
societies and be especially hard on the poor.32
In part, growing sustainably will depend upon global
developments, which Africa can influence—if it tries. Successfulintervention would require a joint and unified approach predicated on
an alignment of key objectives among African countries, using existing
Pan-African institutions; making common cause with other developing
nations; and articulating the approach forcefully in international bodies
such as the G-20, which have the capacity to affect the direction of
global change.
3.2. RAISING AFRICA’S GROWTH POTENTIAL
How Africa mobilizes its own resources and enlarges its
economic potential will largely determine its future. The potential
differs significantly among countries, which range in size from Nigeria,with a population of 150 million, to the Comoros and Cape Verde, withpopulations of just half a million, and will evolve at differing rates.
Moreover, natural resource endowments differ widely among countries.
Hence strategies and policy options will vary and need to be country
specific. These country characteristics will affect how countries respondto trends and harness their factor endowments. Nevertheless, broadly
speaking, growth potential is likely to be keyed to the following
conditions.
Natural resources: Africa’s growth spurt is closely tied to theexport of mineral resources and to the higher prices these now
command. Looking ahead, the abundance of natural resources will be amajor determinant of future potential. Therefore, it will be vital toaccurately assess the magnitude of resources; adopt a rate of
exploitation that maximizes long-term benefit streams, while taking

The desirability of greening urbanization and in the process making it more
inclusive is discussed in ADB (2012) and McKinsey Global Institute (2010).

32

245

account of absorptivity; and carefully choose options for investing theproceeds from the mineral wealth.33 Furthermore, augmenting resources
through discovery34 and with the help of technological advances willfurther contribute to the potential. Arable land and water resources are
no less important. Both are scarce in a number of countries and theirefficient utilization can be enhanced with the help of new technologies
that minimize the wastage of water and the degradation of arable landthrough erosion. More fortunate countries, such as Zambia, byeffectively managing their water resources,35 can benefit from the foodsecurity and agricultural exports that could derive from an abundanceof cultivable land.
Population and the youth dividend: Demographics will have alarge hand in the fortunes of African countries, all of which havegrowing populations. Between 1950 and the end of the century, Africa’s
population ballooned from 230 million to 811 million and by 2010 had
passed the 1 billion mark (Deen 2011). At current trend rates of growthof 2.2 percent per year it will approach 2.3 billion by 2050. There is scopefor reaping a demographic dividend because more than one half ofAfrica’s population is under the age of 20 (Fine 2012); and Africa will
add 122 million people to its workforce between 2010 and 2020. Whether
the dividend, which offers a window of opportunity, 36 is realized will
depend upon the quality of education provided,37 measures to secure thehealth of the population, and investment that generates jobs.38

An assessment of Africa’s mineral resource potential can be found in Custers
and Matthysen (2009).

33

Gelb, Kaiser, and Viñuela (2011) show that new discoveries have substantiallyreplenished mineral resources and contributed to national wealth.
34

35World Bank (2009b).

In the form of lower dependency rates, higher savings, a more elastic labor
supply, and increased entrepreneurial energy.
36

37

About 42 percent of the 20–24 year olds have some secondary education.

See AfDB et al. (2012). The official unemployment rate for the continent is 9
percent. However, only 28 percent of the workforce has stable and well-paidjobs and the safety net is nonexistent in most countries (McKinsey Global
Institute 2012).
38

246

Export-oriented industrialization: The development of
productive activities, mainly by the private sector, and theircomposition, will decisively affect growth potential and employment.
How these evolve is a function of entrepreneurship (including from thelarge African diaspora), investment, and technological change. As noted
above, investment in productive assets and in infrastructure has been
low. No African country has a manufacturing base or export-oriented
services—other than tourism—comparable to the East Asian countries.
Perhaps more damaging to export performance is the fact that, with the
exception of South Africa, African countries host very small numbers ofcompanies employing more than 100 people,39 the sort of companies
likely to venture into overseas markets. Moreover, as evident from the
Boston Consulting Group’s report on Africa’s new challengers, the vast
majority of the larger firms are in services (such as banking,telecommunications, transport and construction) (Ndulu et al. 2007).
Strengthening and diversifying the base of tradable products, not onlyin urban areas but also in the agricultural sector, will ultimately
determine if Africa can reap the advantages of globalization. It will also
determine whether African firms can integrate with global value chains,
especially those that will tighten Africa’s links with markets indeveloping countries where demand is likely to be growing faster.
Rural economy: The demographic center of most African
economies is in the rural sector. In Sub-Saharan Africa, 63 percent of the
population was rural in 2009, although on average, agriculture
generated just 13 percent of the GDP. Nevertheless, the unexploited
agricultural potential is large (60 percent of the world’s uncultivatedcropland is in Africa40) and as global population grows and foodsecurity becomes an issue, some African countries could emerge asmajor exporters. In 2008, arable land per 100 people amounted to over
24 hectares—well above the average for low- and middle-income
countries. Moreover, because of the neglect of agricultural R&D,
fertilizer inputs, irrigation infrastructure, and better tillage practices,
agricultural productivity is the lowest in the world. Yield increases have

The UNCTAD (2011) report observes that small firms dominate African
manufacturing. See also Mckenzie (2011).‛39

40

See Fine and Lund (2012).
247

contributed 34 percent to the increase in production since 1960 asagainst 80 percent in South Asia (Smith et al. 2010). The opportunities forcatching up are considerable and with climate change, the developmentof drought and disease resistant crop strains and lean irrigation
techniques is rapidly becoming a priority.
Technology, innovation, and FDI: Africa has gained relatively
little from the huge advances in industrial, agricultural, and servicesbased technologies, although mobile telephone has made substantial
inroads. There is a wealth of opportunity for late starters if they canmobilize skills and capital. For Africa, the shorter route to growth could
be via human capital deepening and determined efforts at raising its
quality so that it can harness the technologies now available. Once apool of human capital initiates a virtuous spiral, the supply of capitalcan follow from local sources and overseas. Casual empiricism suggeststhat there is no shortage of capital globally that is searching forprofitable opportunities. Over the medium term, FDI could substitutefor domestic savings if the business climate is propitious and foreigners
can perceive the market opportunities. In addition to capital, FDI can bea source of much-needed technologies and it can help stimulate local
innovation. For Africa, the benefits of plugging into the global
innovation system will increase commensurately as innovation becomesa bigger source of growth.
Demand as a driver: There is a limited likelihood that Africa’s
growth will be constrained by a dearth in the demand for its mineral
resources. However, that alone might not be enough for the continent as
a whole to sustain the growth and to create the jobs that it needs to.
Agro-industrial development and a robust services economy are sourcesof tradables that the rest of the world demands, and they will to varying
degrees figure in the strategies of all countries. However, as seen in thecase of South Africa, rich in resources, stable in politics, and large insize, the development of new industries, especially manufacturing, hasbeen limited (Yusuf 2011). Africa will need to derive a substantial boost
from the growth of its own middle classes eager to raise their own
consumption standards—especially the younger elements (Fine 2012).
By 2020, this class is projected to number 130 million, which will
generate a large demand for consumer goods (Fine and Lund 2012). Thispotential source of future growth must be facilitated and factored into
any calculation of longer-term growth prospects.
248

4. A FRAMEWORK FOR SU STAINABLE GROWTH
A two-pronged strategy straddling the global and the local iscentral to the achievement of sustainable economic growth; African
economies will have to conduct policy on both registers depending on
their international salience and capabilities. Here we will focus on how
countries might go about augmenting and realizing their growthpotential starting with the minimum objectives for sustainable andinclusive growth: the rate of increase of GDP; employment
opportunities for the vast majority of the workforce; the avoidance ofwide income disparities without eliminating ‚good inequality‛ thatsharpens incentives; and containing of the ecological/resource footprint.
A growth rate averaging 7 percent per year would bring Africa
to the level reached by the Republic of Korea at the end of the twentiethcentury.41 Although higher than what most African countries haveregistered during the past decade, it is a desirable target for a number ofreasons. Africa’s current low per capita income and large technological
gaps permit an acceleration of growth, and also present well-charted
opportunities for catching up. The current overhang of unemployment,
which exceeds 20 percent of the workforce in countries such as South
Africa, and the anticipated increase in the labor force, 42 cannot be
accommodated except through growth in excess of current levels.
Technological change that is capital-intensive and unskilledlabordisplacing is also reducing the elasticity of labor demand in
manufacturing and in services (and at least in the advanced countries,
resulting in jobless growth) (Kapsos 2005). Therefore, absorbing Africa’s
growing pool of workers will call for faster growth than in the past,even if most of the jobs are in light industry and services. Ensuring an
acceptable sharing of the fruits of growth will be a challenge, but one
that could be manageable if more of the growth derives from (i) labor-

The Growth Report (Commission on Growth and Development 2008) also
recommended a growth target of 7 percent.

41

Africa’s population is expected to grow at 2.4 percent per year during 2009–15,
and although the rate is likely to slow further down the road, reaching
replacement-level fertility by 2050, the United Nations (2004) projects that theAfrican population will exceed 1.8 billion by mid-century.
42249

intensive manufacturing (some of it shifting from East and South East
Asia to Africa), (ii) relatively labor-intensive tradables, and (iii) laborintensive services. Finally, green growth (which encapsulates some of
the messages embedded in ‚sustainable‛) will be a function of pricesignals that encourage conservation and changing life styles. But it
equally will be influenced by regulatory policies; government
procurement; by standards (for vehicles, equipment, and durables,
among others) and their enforcement; by technological change; and by
the pace of absorption of new ideas into equipment and in production
practices.
Looking forward, we elaborate the five elements of a strategic
framework for sustainable growth in Africa: (i) the political system; (ii)state policy making, regulatory, and implementation capacities; (iii)
resource mobilization, investment, and total factor productivity (TFP);(iv) learning and innovation systems; and (v) management of the urban
system. Although many of these elements are not new, the global
situation in which economic growth is proving more difficult for all
economies makes this a necessary list of priorities in our view to propel
Africa’s future growth.
4.1. POLITICAL SYSTEM
There has never been much doubt that economic policies arealmost always freighted with myriad political concerns. They leave an
imprint on policy design, affect implementation, and influence both theoutcomes and how the public perceives them. The varied, and in many
instances, partial and halting responses to the financial crisis across theworld have brought home once again the far-reaching role of politics
and of political institutions in how countries respond to crises and how
they struggle to arrive at a consensus on longer-term strategies.43
What kind of a political system delivers the better economic

The political economy of Botswana’s growth and stability is analyzed by
Acemoglu, Johnson, and Robinson (2001). Acemoglu and Robinson (2010, p. 22)
claim in another paper that ‚the main reasons why African nations are poor
today is that their citizens have very bad interlocking economic and politicalinstitutions.‛

43

250

results has been endlessly debated and accumulating experience
subjected to rigorous testing. A prior belief in the efficacy of democracy
and the enlightened resilience of democratic institutions has beenchallenged by the superior economic performance of a handful ofcountries all in East Asia; they achieved outstanding results under
autocratic regimes and without the benefit of institutions that credibly
protected individual rights to speech and to property against thegrasping hand of the state.44 With two exceptions, China and Vietnam,
all of the East Asian star performers have embraced democracy and thetwo African countries that vied with East Asian ones with regard to
economic performance—Botswana and Mauritius—managed to growrapidly under democratic regimes. But the belief lingers that the wiseand far-seeing autocrat, who can create an effective bureaucraticmachinery, is more likely to deliver the prosperity that developing
countries are seeking. The empirical research suggests, however, thatthe prior belief in democracy has considerable merit (Radelet 2010). At
worst, democracy does not impede growth, and for developing
countries that are taking the democratic road, the direct and indirect
benefits of democracy can be large. Pereira and Teles (2010) state thatpolitical institutions supporting a more pluralitarian electoral system areimportant determinants of growth in incipient democracies, but politicalinstitutions have a weaker bearing on growth in consolidated
democracies that have already internalized their effects. Indirect benefitsof democracy derive from increased stability; a higher degree ofaccountability; lower rates of inflation; the greater protection afforded toproperty rights; and the responsiveness to popular demands foreducation, health care, and a safety net.45
In a globalized world, countries are more exposed to external
shocks, and will require collective action and sacrifices if a liberalmultilateral trade regime is to be sustained and climate change curbed.
Under such conditions, democracies are better placed to win the supportof the majority and to more equitably distribute rewards or burdens. For

Easterly (2011) finds that on balance, the occasional and temporarily
benevolent autocrat does not promote long-term economic growth.

44

See Doucouliagos and Ulubasoglu (2010); Feng (2003); Gerring et al. (2005);
Knutsen (2009); Pereira and Teles (2010); and Rock (2009).

45

251

African countries that have embraced democracy (and the majorityhave), the priority is to continue the process of building institutions andstrengthening those already in place. African democracies have been
buoyed by good economic times, but the danger of slippage has by nomeans passed. A precondition of future sustained and inclusive growthis surely the commitment of governments and of the public to making
democracies work better. To this end, Africa’s democracies should use
the political leverage of representative government to craft long-term
growth strategies.
4.2. STATE CAPACITY
Democratic institutions can serve as the foundation of growth,
but absent state capacity to frame and implement policies derived froman overarching strategy, progress is unlikely. For example, East Asian
economies notably have delivered good economic results under bothautocratic and democratic regimes, and have performed credibly on theinternational stage. To be successful, they all have relied on the capacityof the state’s bureaucratic machinery to efficiently conduct wideranging development activities—including long-range planning policies
to develop comparative advantage—and to steadily build the market
and regulatory institutions that determine how well or poorly an
economy functions. Weak state governing and policymaking capacities
have been the bane of many African countries. These deficiencies should
be remedied through public sector reforms that address problems withrecruitment, culture, incentives, accountability, and the motivations toserve the public and to deliver results. A reformed public sector is thenecessary complement to a development strategy aimed at prolonging
the recent growth spurt and tackling the challenge of sustainability.
State capacity might be even more vital in the future because thefinancial crisis has stirred doubts and forced a rethinking of neoliberalpolicies.46 The retreat of the state in developing economies (if such aretreat was ongoing or in the offing) is over, for the time being at least.
A number of countries—including some advanced economies—are

Among the expressions of doubt that have surfaced since the crisis, see Turner(2011).
46

252

taking a second look at updated variants of industrial policies practiced
by China47 (and earlier by the Republic of Korea; Taiwan, China; andother Asian ‚tigers‛). There is also a renewed push to fashion policies
compatible with World Trade Organization rules to stimulate
industrialization.48 Widening income inequality compounded bystructural unemployment might also demand a more active role increating jobs (as is currently the case in the Middle East and a number ofAfrican countries). However, for industrial, active labor market, andredistributive polices to succeed, state policy making andimplementation capacity must be up to the task. Thus far, only a tiny
handful of African countries can claim to have reached the requisite
level of public sector efficiency and transparency needed to accomplish
the task.49
4.3. RESOURCE MOBILIZATION, INVESTMENT, AND TFP
Capital investment in infrastructure,50 housing, and productive
assets is critical in the earlier stages of industrialization. However, as
countries develop, more of the growth is derived from total factor
productivity (TFP), which reflects embodied and disembodied
technological change, innovation, tacit knowledge and gains inefficiency from a variety of sources. Income gaps and the slow speed ofincome convergence among countries are associated with slowness in

See the championing of the Chinese approach by Justin Yifu Lin (in Chandra
et al. 2012), who is of the view that as China vacates certain industries as its costs
rise, African countries could move in.

47

48

See Aghion, Boulanger and Cohen (2011); Leipziger (2012); Yusuf (2011).

See the World Bank’s Public Expenditure and Financial Accountability
Assessment Reports (PEFA) for African countries.
http://web.worldbank.org/WBSITE/EXTERNAL/PEFA/0,,contentMDK:
22687152~menuPK:7313203~pagePK:7313176~piPK:7327442~theSitePK:7327438,0
0.html49

The recent adoption of the Programme for Infrastructure Development in
Africa is a step toward a regionally coordinated approach that responds to theanticipated growth in demand.

50

253

assimilating technologies and persisting technology gaps. 51 Whentechnology gaps are wide, as in most African countries at an early stageof industrialization, more of the TFP accrues from investment in fixed
assets and linked processes embodying the latest technologies.
Jorgenson and Vu (2007) estimate that between 1989 and 1995, capital
accounted for 41 percent of growth, and TFP accounted for 22 percent ofgrowth in 110 countries analyzed. By 2000–04, the share of capital had
declined to 34 percent, while that of TFP had risen to 37 percent. In
developing Asia, the share of TFP was 39 percent, while that of capitalwas 35 percent. In other words, between 70 percent and 74 percent ofgrowth is from these interlinked sources. For African countries, during
2000–04, capital contributed 21 percent of growth and TFP 23 percent.
Much of the growth in Africa came from labor inputs, with quantity
prevailing over quality gains. Ndulu et al. (2007) point to the low ornegative contribution of physical capital and TFP to growth in Africa
between 1990 and 2003. However, recovery in the late 1990s was
substantially aided by improved TFP.
If African countries want to follow the path of otherindustrializing economies over the next couple of decades, particularly
East Asian economies, then they may need to invest heavily to generate
growth and make up for infrastructure deficits in the agricultural andurban sectors, and also widen and deepen the productive base. Further
down the road, TFP could move into the lead once incomes are
considerably higher. For this reason, measures to raise investment inspecific areas with the highest growth potential deserve priority. These
are likely to differ from ones that have been the principal sources ofrecent growth. A third of Africa’s growth in the past decade was fromthe exploitation of natural resources; the balance was from developmentof wholesale and retail activities (13 percent), transport andtelecommunications (10 percent), real estate and construction (10percent), financial intermediation (6 percent) and public administration

See Parente and Prescott (2000) and Comin and Hobijn (2010). Francesco
Caselli (2005) shows that an equalization of physical and human capital acrossall countries would explain only 37 percent of the differences in GDP per capita.
The balance is due to productivity differences arising from technology of all
kinds.
51

254

(6 percent). The real sectors—manufacturing and agriculture—contributed 9 percent and 12 percent, respectively.52 In contrast, over thesame period these latter subsectors were the main sources of growthand employment in East Asia, and arguably will play a vital role inenabling Africa to grow at higher and sustainable rates.
The markedly small share of manufacturing in African
economies is responsible for weaknesses in the export mix. Abdon andFelipe (2011), using the product space methodology53 devised byHidalgo and Hausmann (2009), show that the export structure ofresource-rich African countries barely changed between 1962 and 2007.
They remained exporters of a narrow range of products, almost all lying
on the edges of the product space (although it should be noted thatexports from Ghana, Kenya, and South Africa are dominated bymanufactures). A few landlocked countries added exports to theirportfolio that were closer to the networked interior of the product space,
while coastal countries revealed a comparative advantage in more
networked products, particularly garments. But the results for African
coastal economies were dominated by South Africa, which has the mostproducts in the core of the product space. Abdon and Felipe observethat Africa’s poorly diversified productive structure and the highproportion of standardized ubiquitous (peripheral) products exported
by many countries seriously compromise their export prospects.
Especially for the smaller countries that need external markets togenerate sufficient demand for rapid growth, export diversification andupgrading is a must.
Moreover, as Easterly and Reshef (2010) note, the desired
growth outcomes will depend upon achieving ‚big hits,‛ that is, large
exports of a few products to a single market or a limited number ofmarkets.54 They claim that a disproportionate share of export earnings
derives from big hits that are difficult to anticipate, and in addition the52

See McKinsey & Company (2010). See also UNCTAD (2011).

The product space refers to a network that brings out the interrelationships
between products traded in the global marketplace. See
http://www.chidalgo.com/productspace/.

53

54

See also Lederman and Maloney (2010).
255

composition of the big hit is itself subject to churning. 55 The winningrecipe, discerned from the experience of leading export nations, consistsof conditions facilitating the entry and maturing of companies that canopportunistically become exporters of diverse products. Creating theseexport-friendly conditions requires a long-term strategy to stimulatedomestic and foreign investment (supported by domestic saving) byimproving the business climate and access to financing at reasonable
cost,56 and through incentives for entrepreneurs. The strategy can besupported by investments in infrastructure that ease troublesome
logistics constraints for businesses, but infrastructure-building by itself
will not alone lead to a crowding in of industrial investment needed todeepen and diversify the industrial sector. For that, some form of stateled industrial policy based inducements might be required as well, andEast Asia is replete with such examples.
4.4. LEARNING AND INNOVATION SYSTEM
If growth is sustained, domestic public and private savings
could rise and help finance increased investment. However, it isunlikely that Africa will be able to realize East Asian levels of resource
mobilization; if so, increased TFP will be an asset. The road to higher
TFP winds through the learning and innovation system, which is a weak
point for all African countries, even South Africa. But it is a weakness
that can and must be addressed.
The research of Hanushek and others57 suggests that such a
growth path will require improving and deepening human capital withthe help of education and related health policy reforms. If African
economies can substantially raise the quality of their workers, and if thisThe composition of the Republic of Korea’s exports changed from one decadeto the next. Garments, steel, and footwear in the 1980s were displaced bysemiconductors, computers, and autos in the 2000s, and semiconductors,
vessels, and autos in the 2010s.
55

The cost of financing and limited access is frequently blamed for the slow
entry growth and lagging export capacity of firms in Africa. See Venables (2010).
56

57

http://hanushek.stanford.edu.
256

in turn makes it possible for businesses to step up the pace oftechnology absorption, research, and development and innovation, thenit is possible to envisage a shift to a sustainable high-growth path lessreliant on capital accumulation. In fact, the quality of the labor force
affects economic performance through multiple channels. Human
capital is key to the building of research infrastructure, the productionof ideas, and their commercialization. And human capital, suitably
motivated, will influence the vigor of entrepreneurship. The difficult
part—a difficulty underscored by the Glewwe et al. (2011) review—isactually identifying and implementing the policies that will produce
results within the space of 5 or 10 years,58 and then translating the gains
in human capital quality into growth performance. No country has
found a durable recipe, although small countries such as Finland andSingapore can claim a measure of success.59
For health policies, Africa’s disease burden and epidemiological
profile raise the challenge for policymakers by an order of magnitude.
The widespread prevalence of debilitating infectious diseases andhelminthic infections erodes efforts at building human capital, but thesehave been joined by the spread of chronic diseases arising fromchanging lifestyles and eating habits associated with urbanization andrising incomes (Aikins et al. 2010). As with education, there is some lowhanging fruit to harvest with the help of policy changes, the harnessingof appropriate technologies, and foreign assistance. But the key tosuccess again lies with implementation, monitoring of results followedby policy adjustment as needed, and persistence.60
Development thinking buttressed by the experience of East
Asian countries has given most attention to manufacturing and tradable
services. However, for decades ahead, Africa’s growth and export
prospects will also hinge upon the productivity and diversification of
the agricultural economy. In almost every African country, agriculture is
the largest employer, especially of women; and given Africa’s reserves

58

On recipes and progress to date in Africa, see World Bank (2009a).

59

See Yusuf and Nabeshima (2012).

Glewwe and Kremer (2005) present the findings from research on initiatives in
the area of education and deworming of school children in Africa.

60

257

of unused arable land, agriculture is a potentially large source ofexports.61 Africa has lagged behind in agricultural research, and as aresult labor and land productivity is well below levels elsewhere(Paarlberg 2008). African researchers are making limited progress indeveloping disease-resistant and drought-resistant strains of the crops
most vital for farmers.62 Compounding the problem is increasing water
scarcity in a number of countries, particularly in the north and the eastof the continent. This is likely to become more acute as populations
expand, industrial and urban demand increases, and global warming
leads to worsening desertification that is already apparent in Ethiopia
and Kenya. Both rural and urban dwellers will need to come to termswith water scarcity in the coming decades,63 and the risk is thatdifficulties in agreeing on a fair sharing of water resources could lead totensions between riparian nations. A combination of pricing,conservation, and many technological fixes will be part and parcel ofdevelopment strategies, but recent history offers scant encouragement.
Evidence of shrinking freshwater resources has been growing, but
African countries have yet to take the needed initiatives to manage theirwater resources, which will be a key to sustainable growth. Whether
independently or in conjunction with agricultural development, watermust figure prominently in the defining of a sustainable growthstrategy. Water management will be an ongoing and expensive
undertaking.64 However, if neglected, poor water management will leadto rising food prices, trade imbalances, and water stress, and cities will

See Klaus Deininger and Derek Byerlee (2011). They note that of the 10
countries with large stocks of potentially cultivable land, 5 are in Africa.
Globally there are 446 million hectares of such unutilized land that is
unforested, uncultivated, and with less than 25 people per square kilometre. Of
this stock, 201 million are in Africa. Chad, the Democratic Republic of theCongo, Mozambique, the Sudan, and Zambia head the list.
61

The breakthrough will come from replacing annuals with equivalent
perennials so as to reduce erosion and enable soils to hold on to nutrients.
62

See UNEP (2008), Chapter 2, ‚Freshwater Resources,‛ section on ‚A Scarce
and Competitive Resource,‛ graphic on ‚The coming water scarcity in Africa.‛
Available at: www.unep.org/ dewa/vitalwater/article83.html.
63

64

See Schaefer (2008) and Science (2006).
258

suffer under the weight of unchecked migration from rural areas.
4.5. URBAN SYSTEMS
Industrial and innovation policies (which have a bearing on thebusiness climate) are intermeshed with urbanization policies. Together
these affect what sort of productive activities flourish and where, theircompetitiveness, how much employment they generate, their growthpotential, and the revenue they produce for cities. Managing the process
and the characteristics of urbanization in Africa to extract the
productivity gains from agglomeration economies will be a crucial testfor policymakers. This challenge must be confronted while containing
per capita resource and energy costs, and also minimizing the negative
externalities that undermine the quality of urban life and contribute toenvironmental degradation.65 Policymakers will have to battle theinertial patterns of sprawling urban development prevalent in almost all
countries because of widening private automobile use, the problems
caused by past infrastructure and housing development, and resistancefrom all those who benefit from the existing land use and urbanization
patterns. But neglect of urbanization strategy and enabling policies
would seriously compromise an important strand of development andalso cripple efforts to limit climate change and mitigate its
consequences. Urbanization strategies can be highly complex, and mostAfrican municipal administrations will need to develop the technicalcapacity, the administrative skills, and the financing to craft andimplement workable strategies that take full advantage of newtechnologies, hard as well as soft.

5. CONCLUDING OBSERVA TIONS
The current decade is likely to differ markedly from thepreceding one and this will have significant implications for national

The urbanization rate in Africa was 36 percent in 2011. See
http://data.worldbank.org/topic/
urban-development.

65

259

growth policy formulation in Africa and for the policies of others,
principally donors and foreign investors (see Rodrik 2012a, 2012b). The
evolving global economic environment is both a blessing and a curse. It
is a blessing because the high-growth engine of the world economy,
China, is generating substantial and sustained demand for raw
materials that Africa has in abundance, and because China’s financial
status, and its willingness to use its surpluses, make Africa a privileged
destination. Moreover, China’s resource commitment to Africa in recent
years exceeds that of the World Bank and the AfDB combined, if one
looks at lending and foreign direct investment flows. 66 Hence, Africa has
everything to gain under current circumstances. Of course, thegeneralized global slowdown is not good news for the export ofmanufactures; however, it will take a while for Africa to reach the stage
when it can compete in many developed markets and by then theoutlook may well have improved. Moreover, while the advanced
economies are struggling to extricate themselves from the financial crisis
aftermath, Africa until now has been largely spared these dislocations. It
is for this reason that we argue that this could well be the take-off
decade for the continent, provided that progress is made on some key
infrastructure and institutional bottlenecks.
Africa’s growth momentum, if sustained, will also continue tobenefit from the policy dividend arising from favorable macroeconomic
developments. Independent examination by the IMF, the World Bank,and others show that macroeconomic management has been
increasingly prudent in many African countries, and that as a group,
they are in a better position than at any other time in recent memory to
make significant advances (according to the IMF and others). 67 By any

Although data is often imprecise and confusing, Fitch reported than China’s
Exim Bank lending over the 2001–10 period totalled US$67.2 billion comparedwith US$54.7 billion for the World Bank, and that in 2011 lending from China
was an estimated US$11 billion without counting either Chinese grant aid or its
considerable FDI in the continent, a stock figure reported to be US$40 billion.
See www.bloomberg.com (12-28-2011) and www.ChinaDaily.com as well as Ali
and Jafrani (2012).
66

See IMF (2010). More generally on China’s contribution to Africa’s investment
and growth, see, among others, Weisbrod and Whalley (2011), Kaplinsky andMorris (2009), and Renard (2011).
67

260

number of measures of macroeconomic probity—fiscal and current
account balances, foreign exchange reserves, and access to capital
markets or inflation—the situation is generally propitious andgovernments are well positioned to take advantage of this. According tomost analysts, moreover, the historically low interest rates that now
prevail are unlikely to continue in the medium term, another reason to
attract capital for the myriad of needed investments previously
mentioned. Hence, there is ample reason to act vigorously and to act
now.
So what constitutes a vigorous growth policy and how might
governments act so as to achieve the elusive 7 percent per year growthrate that doubles incomes in a decade? From past experience, it is clearthat few countries have managed growth acceleration without
considerable policy effort (Commission on Growth and Development,
2008). Rapidly growing countries have generally made conscious
choices to defer some consumption in order to promote investment.
While a country is living near subsistence, this may be a difficult
tradeoff to manage, yet, Africa as a region is no longer in this absolutely
dire situation (although there are of course counterexamples and special
cases). The policy elements that have worked have included high andeffective investments in human capital; strong efforts on infrastructure;
the channeling of savings into productive export-led growth (executedby the private sector but supported by public sector policies); wellcoordinated, yet malleable programs; and a long-term vision to propel
the economy forward.
Some of the necessary, but not in and of themselves sufficient,conditions have already been mentioned, in particular capablebureaucracies, effective public spending, low levels of corruption, and aworkable relationship between business and government. With respect
to a key point on cooperation between business and government, it
should be noted that local entrepreneurs with the ability to tap informal
overseas financial markets can be effectively mobilized—provided they
understand what is expected of them. In the case of Malaysia, the 30year pro-Bumiputra policy stance yielded some positive results in termsof redistribution and opportunity for the Malay majority. It is now
widely accepted that the ethnic Chinese Malaysians (who saw
themselves as nationals but may not have been perceived as such)needed to be given a firm stake in the future of the country to harness261

their considerable talent, finance, and energy. The same is true in Africa,
where entrepreneurship is scarcer and where offshore ties to its
diaspora (Ratha and Plaza 2011) and East Asian financing can be an
asset if properly exploited. Affirmative action programs, along withother pro-growth policies, can be meritorious, as long as theopportunities are judged as to their effectiveness in delivering jobs,
manufactures, and exports.
Another lesson to be learned from East Asia is that vigorouscompetition is a good thing. In some countries, such as the Republic ofKorea, access to scarce finance was used as the lever to force firms tocompete for export markets, with the successful ones being given theopportunity to grow and ultimately become national champions. 68 If
firms are protected in the domestic market, they will have little
incentive to improve productivity, pursue innovation, and shift theirenergies to exports.69 Examples from Latin America abound, where
either a lack of domestic competition has resulted in high-cost services(for example, Mexican telecommunications charges are the highest in
the OECD) or where comfortable domestic markets have limited theexport drive in new products (for example, Chilean manufacturing).
Where domestic markets are small, as in most African economies, thefocus should be on regional markets supported by regional tradingarrangements. These can be encouraged by cross-border policies on
infrastructure, regulations, and standards (as has been happening in
East Africa with some success).70
The interest on the part of China in both exploiting natural
resources on the continent and also providing large infusions of capitalprovides an opportunity that is not infinite in duration. The rules of thegame, therefore, become quite crucial in determining how natural
resource rents will be used, what kinds of enticements will be offeredand in exchange for what, how infrastructure projects will be

68

See Amsden (1992) and Kim and Leipziger (1997).

In his recent book on the making of an antifragile system, Nassim Taleb (2012)
makes the case for tough love.
69

On East African trade-related arrangements, see ‚EAC and China Discuss
Partnerships for Trade and Investment‛ and ‚The Future of East African
Integration,‛ at www.eac.int.
70262

sequenced, how much job creation will occur, and how much technicalknowhow will be transferred. Africa’s policymakers can take advantage
of favorable circumstances, provided that they have strong and viable
development strategies prepared. This is a clear lesson of East Asia’s
success.71
Finally, the role of bilateral and multilateral donors in helping
Africa to make maximum use of this ‚decade of opportunity‛ requires
some elaboration. The stories of bilateral assistance programs that are
too small to be effective, too narrowly focused on areas that seem togenerate support in donor capitals, and too short-term in duration to
generated sustainable impact are well known. Also well established is
the insufficient level of cross-border financing for projects, especially ininfrastructure needed on the continent, but that cannot command
sufficient international development assistance. To break free of their
low-manufacturing, low-value-added export structure, Africancountries need a significantly altered flow of assistance. Priority needs
to be given to those flows that can be leveraged with private sector
investments in energy, transport, ports, and rails. The analytic work of
the Stern Report on Infrastructure (Commission for Africa 2005) and thefollow-up work by the World Bank (Foster and Briceno-Garmendia
2010) leave no doubt that there are a myriad of high-return projects
waiting to be funded. Action on these, some of which NEPAD has
identified, is long overdue.72
Africa is the last region to be facing the huge development
challenges of today. In the past, much time was spent lamenting what
did not happen and explaining why, and much of the scholarly work
was excellent in its diagnostics.73 The game has to move on to the phase
where action is required to enable Africa to make the necessary strides
forward. A great deal can be learned from the policies of other regions,particularly East Asia. After all, Vietnam 20 years ago had an average
per capita income of around US$100 and a poverty rate of 70 percent;71

See Leipziger (1997) and World Bank (1993).

The role of the New Partnership for Africa’s Development (NEPAD) and
Africa’s regional infrastructure needs are outlined in Estache (2011).

72

73

See Collier (2007).
263

currently its average per capita income is above US$1,000 and poverty is
below 20 percent. While still an agricultural exporter, Vietnam managed
to attract FDI and expatriate capital and move into new and higher
value–adding industries. Vietnam was better endowed with energy thanother poor developing countries, had a population of close to 70 million
and thus a large domestic market, and is not landlocked. Nevertheless,Vietnam’s vital statistics as of 1990 were far worse than those of many
African economies. Yet it has begun transforming into a more modern
economy. Africa can and should do no less.
A final observation based on the work of the Commission on
Growth and Development is that countries that radically transformed
themselves and grew at high and sustainable rates decade upon decade
did so not with the stroke of the pen or a single policy intervention, butwith the help of many, coordinated policy interventions. The GrowthReport (Commission on Growth and Development, 2008) enumerates
these interventions, and most have found their way into this diagnostic
paper on Africa’s future growth. The salient finding of that exhaustive
exercise, however, was that countries needed to get many policies right,
needed to have coherence among policies, needed effective leadershipand political stability, and needed a long-term vision of where theeconomy was headed. Africa is at a moment in history, in our modest
opinion, where it must grasp the opportunities that exist and propel
itself forward. The time is now!

264

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INDUSTRIAL AND TRADE POLICIES IN
AFRICA:
From unproductive rents to learning andaccumulation
February 2013
Akbar Noman 1
Initiative for Policy Dialogue
Columbia University

Abstract
The resumption of growth in Sub-Saharan Africa though impressive has
yet to translate into the economic transformation that provides the basis
for sustained, rapid growth. The shares of manufacturing and formal
sector employment have still not recovered to 1980 levels. Governanceconcerns have unduly inhibited emulation of successful trade andrelated policies that have worked elsewhere and can work in Africa.
Many of the liberalization policies not so much reduce rents andcorruption as divert them into unproductive activities and capital flight.
Africa can choose selectively from lessons of successes and failures intrade and industrialization policies, including in institution building. A
carefully crafted system of protection can help to divert rents to
productive activities and learning that are the basis for sustained

Sanjay Reddy provided valuable comments. Along with gratitude for his help
comes the usual caveat absolving him from any responsibility for errors andomissions.
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growth. The neglect of the need for appropriate protection and financeneeds to be rectified.

1. INTRODUCTION
Transforming the economic structure of Sub-Saharan Africa(hereinafter, simply referred to as Africa) is essential for placing theregion on a path of sustained, rapid economic growth. Arguably, amajor failing of the conditionality-intensive “structural adjustment”
reforms of the 1980s and early 1990s in Africa was the neglect ofstructural change. A focus on getting prices right tilted the balance somuch in favor of the pursuit of static efficiency in the allocation of
resources that these so-called “Washington Consensus” reforms
neglected incentives for the accumulation of resources and learning
required for growth and transformation.
That there are potential conflicts between the efficiency and theamount of investment and learning is reflected in the many failed
polices of excessive and inappropriate protection and financial
repression in Africa and elsewhere that these reform programs aimed tocorrect. But that conflict and associated moral hazard is also reflected in
the sort of protection and subsidies that raised the profitability andsocialized the risks of investment in many of the most successful
economies such as the East Asian star performers2. Moreover,liberalization policies aimed at correcting price distortions andimproving efficiency can be counterproductive by diverting rentseeking activities into even less productive forms, as arguably, they
have done in many countries, notably in Africa. The question then is notwhat should receive precedence—static efficiency or dynamic
accumulation/learning—but how to strike the right balance and manage
the moral hazard.
This question remains largely unasked even as the worst
excesses of those so-called “Washington Consensus” reforms have been
widely accepted and corrected. It is argued below that this stems in partSee, for example, World Bank (1993) The East Asian Miracle: Economic Growthand Public Policy (Oxford University Press, New York and London).

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from neglecting a vital prerequisite of private sector led
industrialization or indeed of a well-functioning market economy, andthat trade policies by providing appropriate protection can play a vitalrole in overcoming that shortcoming.
The implications of these considerations for trade and industrial
polices in Africa are the focus of this essay.

2. ADAM SMITH, KARL M ARX AND INSTITUTIONS :IMPLICATIONS FOR AFR ICA
In his foundational work, Adam Smith ((1776] 2003) spoke of a“previous accumulation” of wealth in the economy into the nature andcauses of whose wealth he was inquiring. This “previous accumulation”
predated and preconditioned his analysis: "the accumulation of [capital]
stock must, in the nature of things, be previous to the division of labor,
so labor can be more and more subdivided in proportion only as stock ispreviously more and more accumulated"3. Smith then could be said tohave explicitly assumed the existence of capitalists, i.e. private agentswith the ability and willingness to invest.
Karl Marx followed Smith in making that assumption,translating “previous” as “ursprunglich” in German, which histranslator rendered back into English as the famous “primitive”
accumulation4. By being embellished by Marx and becoming part of the
Marxist lexicon, “primitive accumulation” presumably acquired the

3 Smith , Adam([1776] 2003), The Wealth of Nations (Bantam Dell), p. 350. “Stock”
is Smith’s term for capital stock. Smith elaborates that for example, in a market
society, "a weaver cannot apply himself entirely to his peculiar business, unlessthere is beforehand stored up somewhere, either in his own possession or in thatof some other person, a stock sufficient to maintain him, and to supply him withthe materials and tools of his work, till he has not only completed but sold his
web. This accumulation must, evidently, be previous to his applying his
industry for so long a time to such a peculiar business" (Smith [1776] 1976).

Perelman, Michael (2000) The Invention of Capitalism: Classical Political Economy
and the Secret History of Primitive Accumulation (Duke University Press) p. 25
4279

connotations that perhaps led to its neglect by economists of otherpersuasions. Marx (1867) criticized Smith for being ahistorical in his
explanation but agreed on its essentiality.5
The fundamental point on which Smith and Marx agree is thatthe accumulation of capital, at any point in time, depends on somealready existing capital accumulated earlier to invest in the production
process. In other words accumulation or investment requires the existence of
the institution of capitalists or investors.
Hoff and Stiglitz remark that “in leaving out institutions,
history and distributional considerations, neo-classical economics leaves
out the heart of development economics.”6 But even the large recent
literature on institutions, including notably those required for the
existence and proper functioning of markets, ignores the institution
implied by “previous” or “primitive” accumulation. In other words, it
implicitly assumes the existence of economic agents who have monies toinvest and the ability to do so—capitalists and entrepreneurs. Incentives
play the role of simply determining their willingness to invest—howmuch and in what—but not their ability to do so.
But almost by definition, that assumption is not particularly
valid for economies at early stages of development, like many countries

In highlighting the historical process, Marx developed a different meaning ofprimitive accumulation in that he linked it to the notion of capital as "classrelation" rather than as "stock." Given that "the capital-relation presupposes acomplete separation between the workers and the ownership of the conditions
for the realization of their labour," it follows that "the process < which createsthe capital-relation can be nothing other than the process which divorces theworker from the ownership of the conditions of his own labour." By turning "thesocial means of subsistence and production into capital, and the immediate
producers into wage-labourers," this process is therefore the basis of classformation. Thus, the "so-called primitive accumulation is nothing else than thehistorical process of divorcing the producer from the means of production",Marx, Karl ([1867] 1976). Capital. Vol. 1. (Penguin, New York) pp. 874-875.
5Hoff, K. and Stiglitz, J.E. (2001) “Modern Economic Theory and Development”
in Meier, G. and Stiglitz, J. (eds) (2001) Frontiers of Development Economics(Oxford University Press, New York), p.390.
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in Sub-Saharan Africa today or many in East and South Asia yesterdayand elsewhere the day before yesterday. Arriving at later stages ofdevelopment requires economic agents with adequate ability to invest.
Some of the earlier literature on development with its emphasison capital accumulation as being central to development did pay someattention to the issue of the absence or weakness of the institution
implied by Smith’s “previous” or Marx’s “primitive” accumulation.
Gerald Meier, for example, remarks that “Believing that [in] adeveloping country<the supply of entrepreneurship was limited andlarge structural changes<were needed the first generation ofdevelopment advisers< turned to the government<to promote capital
accumulation, utilize reserves of labor, <undertake policies of deliberateindustrialization <” (emphasis added).7
More often than not, the focus was not so much on the complete
absence of capital and capitalists as on their inadequacy. Peter Evans
notes
that
“Gerschenkron’s
work
on<lateindustrializers
confronting<technologies with capital requirements in excess of what
private markets were capable of amassing were forced to rely on the
power of the state to mobilize<resources<The crux of the problem
faced by late developers is that institutions that that allow large risks tobe spread across a wide network of capital holders do notexist.<Hirschman takes up this emphasis on entrepreneurship as themissing ingredient for development in much more detail.” 8
However, as noted above, the large literature on the economic

Meier, G. (2001) “The Old Generation of Development Economists and theNew” in Meier, G. and Stiglitz, J. (eds) (2001) Frontiers of Development Economics(Oxford University Press, New York). Also see (See for example, Papanek (1967);
Lewis (1971); Little, Scitovsky and Scott (1971), where the issue of creating or
strengthening the institution of the private sector or capitalists/entrepreneurs is
discussed. Elsewhere, advocates of public sector led industrialization based theircase partly on the weakness of the private sector.
7

Evans, Peter (2005) “The State as Problem and Solution: Predation, Embedded
Autonomy and Structural Change”, excerpted in Meier, G. and Rauch, J, (eds)(2005) Leading Issues in Economic Development (Oxford University Press, NewYork and Oxford), p. 543.
8281

role of institutions that has emerged rapidly in recent years ignores thisdimension and thereby implicitly assumes the existence ofcapitalists/entrepreneurs in adequate measure.9 Thus, Dani Rodrik in
answering the question of which institutions matter according to the
new institutional literature identifies the following five pertaining to: (a)property rights, (b) regulatory functions; (c) macroeconomic
stabilization, (d) social insurance and (e) conflict management, (whilst
adding that in his view participatory politics is a “meta institution”).10
Many of the failures of privatization in the transition economies
of Eastern Europe and the former Soviet Union are attributed to theneglect of this pre-requisite.11 Some of the critics of privatization,
particularly the Russian privatization of the 1990s, blamed the disasternot only on the absence of the “standard” institutions of property rights
and contract enforcement that figure so prominently in the institutional
literature but also, in effect, of capitalists.12 This has also been an issue insome of the reform programs of Africa that have also been beset bycases of privatization without the requisite institutional underpinnings.
This essay focuses on the implications of the neglect of theinstitution of capitalist-entrepreneurs for economic policy in countries at
early stages of development. In particular, it is concerned with the fact

For a general overview and critique of this institutional literature, see Mushtaq
Khan (2012), “Governance and Growth: History, Ideology and Methods of
Proof” in Akbar Noman et.al. (eds) op.cit. Also see, in the same volume,
Thandika Mkandawire (2012) “Institutional Monocropping and Monotasking in
Africa.”9Rodrik, Dani (2007), One Economics Many Recipes: Globalization, Institutions andEconomic Growth (Princeton University Press, Oxford and Princeton), Chapter 5.
10

The schemes for voucher privatization in some of these countries reflected an
attempt to deal with the problem posed by the absence of the institution.
11

See for example, Stiglitz, Joseph (1999), “Quis Custodiet, Ipsos Custodes?”,
Challenge, Vol. 42, No.6.. Also see Ellerman, David (2003) “On the RussianPrivatization Debate”, Challenge, vol. 46, No. 3. And Godoy, S and Stiglitz, J(2006) “Growth, Initial Conditions, Law and Speed of Privatization in Transition
Countries: 11 Years Later”, NBER Working Paper No. 11992.
12

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that whilst the past decade or so has witnessed a reversal in the collapseof growth in Sub-Saharan Africa that resulted in its “lost quartercentury,” progress in bringing about economic transformation of thesort that lays the foundations for sustained growth and development
remains very limited. Indeed, the share of manufacturing and formal
sector employment has been generally declining since 1980.
On average, the share of manufacturing in GDP in Africa fell
from 17.5 percent in 1965 to 12.9 percent in 2009. Relatedly, as Noman
and Stiglitz point out “there has been little success in exporting
manufactures and in attracting foreign direct investment in nonextractive activities. Much of the growth of the past decade or so isaccounted for by extractive activities in non-renewable resources—
minerals, metals and above all, oil<”13
In section 4, we attempt a diagnosis of this phenomenon ofdeindustrialization or “detransformation” of African economies. Muchof it is necessarily speculative and more in the nature of hypotheses thanestablished results of research. Before that, in the next section, we sketch
a formal case for infant capitalist protection with minimal mathematics
to keep it accessible to a wider audience. The final section makes
concluding remarks.

3. THE INFA NT CAPITAL IST ARGUMENTThe explicit assumption of Adam Smith and Karl Marx and theimplicit one of much (all?) recent institutional literature acquires
particular salience at early stages of development. Formally, this can becharacterized, along the lines of Greenwald and Stiglitz,14 as the stage

Noman, Akbar and Stiglitz, Joseph (2012) “Strategies for African
Development” in Noman et.al (eds) (2012), Good Growth and Governance in Africa:
Rethinking Development Strategies, (Oxford University Press, New York andOxford), p.8.
13

Greenwald, Bruce and Stiglitz, Joseph (2006) “Helping Infant Economies
Grow: Foundations of Trade Policies for Developing Countries”, American
Economic Review, 96 (2): 141-6.
14283

when the economy is embarking on development aimed at moving beyond
simple agriculture and crafts to producing output for which capital andlearning are important.
Bydefinition,“modern”
privatesectoranditscapitalists/entrepreneurs are absent at this stage and all output
emanates from sector A which comprises agriculture and crafts, using
only labor L (including skills). Sector M, consists of manufacturing (andmodern agriculture and services) and employs both L and capital, K,
which is owned and operated by capitalists, C.
( )
(

)

(

) { i.e.

( )}With both sectors, total output
( )

( (

))

C either exists on account of primitive/previous accumulation or mustbe acquired. There is no foreign capital or capitalist15.
The argument that is elaborated below on the acquisition of C
and its impact on Y can be summarized as:
(

)

( )
( ( (
))
where T stands for tariffs (implicit and explicit) and F for investment
finance. With no protection and no finance for investment there is no
capital accumulation, and hence no capitalists and no output in M.
The relationship is not monotonic, especially with respect to T.

Alternately, foreign capital/capitalists are very imperfect substitutes for thoseof the domestic variety or domestic capital/capitalists are a different andnecessary factor of production. This is essentially a political economy argument
for the need for local capitalists, where “local” could mean a particular ethnolinguistic group like the “bumiputras” in Malaysia.
15284Indeed it can be thought of as having a threshold below which andanother above which there is no relationship between C and T (orindeed even a negative one beyond a point as the static efficiency costs
outweigh dynamic gains) i.e.
Inevitably at early stages of development, the form of industrialorganization is characterized by an absence of divorce between
ownership and management of capital. The capitalist and the entrepreneur
are one and the same. So protection stimulates both accumulation andentrepreneurship.
Industrial (or modern sector) entrepreneurship requires capital,
which can be borrowed—and much of it typically is, especially at earlystages of industrialization—or saved out of profits.
Again inevitably, the financial sector is very weak and highly
imperfect at the stage we are concerned with. Stock and bond markets
do not really exist and the availability of long–term finance is largely
characterized by its absence, especially at rates of interest that would
allow borrowing for investment that does not yield immediate and very
high returns.
The venerable infant industry argument used by Alexander
Hamilton, the first Treasury Secretary of the United States, to establish
the system of protection under which US industrialized16 can be said tohave matured some six years with the infant economy argument ofGreenwald and Stiglitz.17
The essence of these arguments is well known and revolves
around learning and spillovers. Activities in countries at an early stageof development cannot compete with those already well-established in
more advanced economies and protection is necessary to help themgrow, learn and become competitive. That case is extended or adaptedin this essay to what we refer to as the infant capitalist argument:
protection by reducing risks and boosting profits can help create and nurture
capitalists and enable learning. It does so by facilitating both higher

See Ha-Joon Chang (2002), Kicking Away the Ladder: Development Strategy inHistorical Perspective (Anthem Press, London)

16

17

Greenwald, B. and Stiglitz, J.E. (2006)285

accumulation (savings) out of profits and bigger borrowings—as larger
profits and reduced risks in the protected activities enhancecreditworthiness.
If the capitalist and the entrepreneur are one and the same thencapital accumulation and entrepreneurship are intertwined at “infancy,”and physical and human capital are accumulated jointly. Acquiring
physical capital is necessary for learning, which in turn facilitatesfurther accumulation.
Moreover, as argued below, a well-designed structure ofprotection can also help to improve the quality of rents by directing
them into industry and entrepreneurship from arguably the morewasteful forms that rents have often taken, particularly after tradeliberalization in many countries, notably in Africa.

4. INFANT CAPITA LISM IN AFRICA: FACTS,
SPECULATIONS AND HYP OTHESESAt the dawn of independence, African countries typically can becharacterized as lacking a class or private sector with the wherewithal to
become entrepreneurs in “modern” activities. More precisely, to theextent such groups existed, they predominantly comprised foreigners or
ethnic minorities of relatively recent origin (such as Indians andLebanese in parts of East and West Africa, respectively).18
Arguably, there was a greater divorce between economic andpolitical elites in Africa than anywhere else at the end of colonial rule.
This would seem to underlie the emergence of the political economy ofwhat Meles Zenawi calls the “predatory state” in Africa. 19 At any rate,

This is analogous to the situation in Malaysia that led to the New Economic
Policy (NEP) launched in 1971 to promote the development of Bumiputra(indigenous Malay) businesses/capitalists/private sector. Whilst controversial
and flawed in some respects, NEP is credited with possibly staving off ethnic
conflicts.
18

Zenawi. Meles (2006) African Development: Dead Ends and New Beginnings(excerpts) available at19286

this phenomenon is likely to have provided the basis for an attitude ofambivalence, at best, towards the private sector and of resort to public
ownership of industries that characterized much of Africa, especially inthe 1960s and 1970s.
Whilst some individuals and groups have acquired significant
wealth from rent seeking in the post-independence period, that does notserve the purpose that previous or primitive accumulation performed in
the analysis of Adam Smith and Karl Marx. This reflects the fact thattypically, incentive regimes provide little or no encouragement forinvesting in modern, transformational sectors in which learning isimportant or indeed for investing domestically as opposed totransferring assets abroad. The sources of wealth have become
predominantly trading or unproductive rents in a system of incentives
that emerged from the economic reforms that are commonly referred toas of the Washington Consensus (WC) variety.20 Typically, rents havetaken the form of kickbacks on government contracts, insider wheelingand dealing associated with contracts for mineral resources or realestate, privatization or just plain theft. Such wealth is also more likely to
end up overseas than that emanating from investments in modern
productive sectors such as manufacturing.
Trade and financial sector reforms aimed at liberalization haveoften taken away the incentives to invest in domestic production
activities. As Azizur Rehman Khan put it, such reforms have often taken
away bad incentives but replaced them with worse ones.21 There is apolitical economy case to create, protect or nurture infant or toddler

http://policydialogue.org/events/meetings/africa_task_force_meeting_mancheste
r_2006/materials/
For a more general critique see for example Serra, Narcis and Stiglitz, Joseph(eds) The Washington Consensus Reconsidered (OUP, New York and Oxford). In
particular, see the paper of Stiglitz, Joseph “The Post-Washington Consensus
Consensus” in that volume.
20

Khan. A.R. (2009) chapter 4 in Shahabuddin, Q and Rahman, R.I. (Eds),
Development Experience and Emerging Challenges: Bangladesh (University Press,
Dhaka), especially pages 66-72.
21

287

indigenous capitalists/entrepreneurs in modern, transformational
sectors.
Nicholas Stern argues that the “central policy question here is:
How can a country develop governance and institutions to support
entrepreneurship and well-functioning markets?<The policy challenge
is thus the promotion of growth through improvements in theinvestment climate: it is about creating conditions so the pie keeps
expanding. It is not just a question of how to avoid or limit losing slicesof the pie as measured by Dupuiy-Harberger triangles or even rentseeking quadrilaterals<.”22
However, the investment climate and related governancereforms of the type that have become the fashion or part of donor
conditionalities, have been very imperfect substitutes for the sort oftrade and industrial policies that attract investments in productive,
learning activities. The private sector development and associatedgovernance reforms have focused on the business climate or ease of
doing business such as property rights, contract enforcement, rules andregulations, bribes to agents of the state, level playing field and so on.
Reform programs focused on such governance and institutional
reforms, along with liberalization and privatization, have more often
than not led not so much to reducing rents and corruption as todiverting them into unproductive forms.
They have ignored or neglected incentives that enhance theprofitability and reduce the risks of investment such as tariff protection,
subsidies and access to long-term finance at modest interest rates. Suchrents acquired via incentives for infant industrialists to invest in infantindustries can contribute to structural transformation and learning of
the type that succeeded so spectacularly in East Asia and to varying
degrees in South Asia and Latin America.23

Stern, Nicholas (2003) “Public Policy for Growth and Poverty Reduction” in
Arnott, R., Greenwald, B., Kanbur, R., and Nalebuff, B.(eds) Economics for an
Imperfect World: Essays in Honor of Joseph E. Stiglitz (MIT Press, Cambridge, Massand London) .
22

See for example, Wade, Robert (1990), Governing the Market (Princeton
University Press, Princeton); Amsden, Alice (1989), Asia’s Next Giant (OUP, New

23

288

5. LESSONS OF SUCCESS : INFANTS WHO GREW U P
Much of the literature on policies for developing countries tocatch-up revolves around the interpretation and lessons of theastounding success in several East Asian countries that has been labeled
the East Asian miracle.24
The replicability of the East Asian “model”, especially withregard to trade, industrial and financial policies has been much debatedessentially on account of its “governance” requirements. The“developmental state” that is said to account for the success of East
Asian-style public policy interventions is also said to be well-nighimpossible to emulate. However, others such as Ha-Joon Chang,
Mushtaq Khan, Noman and Stiglitz, and Meles Zenawi haveemphasized that governance is not entirely exogenous and argued thatthe non-replicability of East Asian style policies in Africa and elsewhereis much exaggerated.25

York); Chang, Ha-Joon (1994) The Political Economy of Industrial Policy,(Macmillan, London and Basingstoke); Ocampo, Jose Antonio (2012) The
Economic Development of Latin America since Independence, (Oxford,
Oxford University Press).
The literature is vast. In addition to Amsden (1989) and Wade (1990); see forexample, World Bank (1993), The East Asian Miracle: Economic Growth and Public
Policy (OUP, New York); Chang, Ha-Joon (2006), The East Asian Development
Experience: The Miracle, The Crisis and the Future, (Zed Books, London and NewYork); Balassa, Bela “The Lessons of East Asian Development: An Overview”,
Economic Development and Cultural Change No. 3, April 1988, Supplement; Vol.
36; Stiglitz , Joseph (1996),“Some Lessons from the East Asian Miracle”, The
World Bank Research Observer, Vol. 11, No.2; Stiglitz, J. (2001) "From Miracle toCrisis to Recovery: Lessons from Four Decades of East Asian Experience," inStiglitz. J and Yusuf , S. (eds.), Rethinking the East Asian Miracle, Oxford: Oxford
University Press. Also see Commission on Growth and Development, The
Growth Report: Strategies for Sustained Growth and Inclusive Development (World
Bank, Washington DC).

24

See Ha-Joon Chang’s contribution to this volume. Also see the following
essays in Noman, A., Botchwey, K,, Stein, H., and Stiglitz, J., (eds) (2012) Good
Growth and Governance in Africa: Rethinking Development Strategies (OUP, Oxford,
25

289

Whatever one’s views on the replicability of the East Asian“developmental state”, the feasibility of success with the sort of infant
capitalist promotion outlined above is demonstrated by relevant
examples from other regions, including notably that of Pakistan. An
excellent, detailed study by Gustav Papanek26 shows how Pakistan
created a class of “capitalist-industrialist-entrepreneurs” pretty muchfrom scratch almost overnight— in not much more than five years.
Protection played a key role.
Papanek notes that “Pakistan like other countries in Africa andAsia, not only lacked industrial entrepreneurs; it seemed unlikely todevelop them in the short run< [but] in fact industry grew rapidly,
indeed and was largely developed by private entrepreneurs.”27 He
attributes it at the most proximate level to “annual profits of 50-100
percent on investment” in industry28 in the early 1950s (which moreover“helped to restrict both capital flight and consumption”). 29 By the late
1950s, Papanek reports, such profit rates had fallen to 20-50 percent.
Nonetheless by then enough of a class of industrial entrepreneurs andmomentum had been created for industrial growth to continue at headyrates.
Stephen Lewis (1970) and Akbar Noman (1991) also examine
how industrialists/entrepreneurs/capitalists emerged and blossomed. At
the center of a host of incentives for investment in manufacturing were

New York): Mushtaq Khan (2012) “Governance and Growth Challenges for
Africa”; Akbar Noman and Joseph Stiglitz (2012) “Strategies for African
Development” and Meles Zenawi (2012) “Neo-liberal Limitations and the Case
for a Developmental State”.
26 Papanek, Gustav(1967) Pakistan’s Development: Social Goals and Private
Incentives (Harvard University Press, Cambridge, Mass.). See in particular
chapters II and III.
27

Ibid. p.29.

28

Ibid. p.33.

29

Ibid, p.36.

290

rates of protection that provided high and assured profits.30 With longterm credit at modest interest rates provided in ample measure by twodevelopment banks—Pakistan Industrial Credit and Investment
Corporation (PICIC) for large industries and the Industrial
Development Bank of Pakistan (IDBP) for medium sized industries—in
a context of reasonable macroeconomic stability, investment andaccumulation boomed.
The aforementioned Lewis study was undertaken under the
rubric of the highly influential OECD research program on trade andindustry directed by Little, Scitovsky and Scott (LSS) that resulted intheir seminal synthesis volume and accompanying country studies.31
Even as LSS noted and criticized the many pitfalls of the protection
regime they pointed out that “within our seven countries, only Pakistan
had to discover an entrepreneurial class” and as the accompanying
country study, Lewis (1971) showed, it had done so well within adecade.
LSS and Lewis agree with Papanek (1967) on this count but theydiffer from him, in emphasizing the static inefficiencies generated byprotection. Indeed, LSS go as far as to suggest that the rapid
industrialization that Pakistan experienced was so inefficient that valueadded at world prices remained almost negligible. However, this claimof LSS has been subjected to several criticisms with the upshot that there
is little doubt that these inefficiencies are much exaggerated.32 The

Lewis, S.R. (1970), Pakistan; Industrialization and Trade Policies (OECD, Paris).
Noman, Akbar (1991) “Industrial Development and Efficiency in Pakistan: A
Revisionist Overview”, The Pakistan Development Review, Vol. 30, No. 4 (Winter1991).
30

Little, I.M.D., Scitovsky, T. and Scott, M.F. (1970) Industry and Trade in Some
Developing Countries, (OECD, Paris).

31

See Noman (1981) op. cit. for the compelling reasons for considering the LSS
estimates of inefficiency to be grossly exaggerated and references to otherrelevant studies, including Kemal, A.R. (1974) “The Contribution of Pakistan’s
Large-scale Manufacturing Industries Towards GNP at World Prices”, The
Pakistan Development Review, vol. 13. No. 1.
32291

system of protection in Pakistan had many excesses, irrationalities, andattendant inefficiencies but they were nowhere near as bad as claimedby LSS and Balassa (1971)33. Moreover, there was considerable learningwith productivity growth and declining inefficiencies over time 34.
Indeed, Pakistan’s GDP and industrial growth accelerated towhat came to be known as East Asian miracle levels before Korea, as did
the emergence and growth of manufactured exports. Such exports in the
mid-1960s exceeded those of Korea by a substantial margin. Korea
actively sought to learn from Pakistan, including by sending the staff of
its economic ministries for training there.
Whatever the inefficiencies of Pakistan’s industrialization, there
are, arguably, some important lessons about creating or building theinstitution of capitalists/entrepreneurs, albeit whilst avoiding theexcesses that vitiated Pakistan’s trade and related policies. The rates andvariability of protection in Pakistan during the 1950s and 1960s were sohigh as to leave considerable scope for improvements in trade polices
while still providing the critical level of incentives for the building of agroup or class of economic agents with the ability and willingness toinvest in modern, transformational activities.

6. CONCLUDING REMARKSThe case for infant capitalist or any other rationale forprotection has to be tempered in the light of the many failures ofinterventionist policies for trade and industrialization. But the dangers
of excessively high and irrational protection can—and should—beavoided. We have lessons of failure that were not available or widely

Balassa, B. and Associates (1971) The Structure of Protection in Developing
Countries (Johns Hopkins Press, Washington).

33

See, for example, Ahmed, Meekal (1980) Productivity, Prices and Relative Income
Shares in Pakistan’s Large-Scale Manufacturing (D.Phil. Thesis, Oxford University);
and Kemal A.R. (1978), An Analysis of Industrial Efficiency in Pakistan, 1959-601969-70 (PhD thesis, University of Manchester).

34

292

appreciated in the 1950s and 1960s and perhaps even in the early 1970s.
The importance of an experimental approach that scales up
successes and abandons failures quickly is one of the lessons of success.
However, learning and implementing the lessons of successes andfailures well does demand capacities that not all governments have.
More precisely, the risks and rewards depend on the particular
circumstances of a country including its governance. But governancecapabilities are not given and immutable: the question is not only what
governance capacities exist at any point in time, but what need to exist
and what can be built up at what speed. This way of posing the questionis all too often ignored or neglected.
As noted above, the absence of protection of infants also carries
risks. Inevitably, there are and will be rents and corruption everywhere.
The questions are what forms of corruption are most intolerable, whatforms can be eliminated and how to minimize the negative effects ofcorruption and rents, and channel them into productive activities andlearning. A blanket attempt to eliminate all corruption and rents, as is
the avowed aim of the good governance agenda that has become sodominant in the policy discourse, may make the pursuit of the best theenemy of the good by a failure to prioritize and by unintended
consequences.
Diverting rent-seeking towards rents that accrue from investingin domestic transformational activities such as industry in poor
countries can be done by a well-designed system of protection. We havea much better appreciation of the need to avoid extremes of level andvariability of protection, but some variability is needed: broadly
speaking moderately nigh for simple consumer goods in which low
income countries have comparative advantage, lower on intermediate
goods (none for those that are inputs for exports) and very low or none
for capital goods.
Trade policies need to be embedded in a vision, a strategy foreconomic transformation, in industrialization policies (broadly
understood to include modern activities in which learning is important).
Managing the moral hazard emanating from socializing risks ofinvestment and accumulation in industry requires ensuring that infants
grow and learn. The successful cases provide ample evidence of the role293

of exports and competition in achieving that: protection and export
promotion can co-exist and competition can be gradually increased.
Another challenge is to avoid exchange rate overvaluation inresource-rich and heavily aid-dependent economies. That is beyond thescope of this paper, except to point out that such overvaluation is anargument for protection. Indeed, trade liberalization in such a context
can exacerbate the adverse effects of currency overvaluation andarguably did so in some African economies.
This is reflected in the de-industrialization or “detransformation” of African economies in their lost quarter-century thathas not been reversed even as economic growth has accelerated in thepast decade or so. Bringing about that reversal, in particular the role that
trade policies can play in facilitating Adam Smith’s “previous” or KarlMarx’s “primitive” accumulation or just plain private sector investment
in domestic activities that transform the economy is what we have been
concerned with. Infant capitalists establishing infant industries in infant
economies need some protection. They also need long-term finance atreasonable interest rates. These considerations were neglected in the socalled Washington Consensus inspired reform programs. The neglect
remains to be rectified.

294

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for an Imperfect World: Essays in Honor of Joseph E. Stiglitz (MITPress, Cambridge, Mass and London) .
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297

298

THE RETURN OF INDUSTRIAL POLICY:(What) Can Africa learn from Latin America?
April 2013

Annalisa Primi 1
OECD Development Centre

Abstract
High growth in Africa and the changes in the global economic
landscape have contributed to redefine development policy and open
new spaces for debating the role of industrial policies in promoting
structural transformation and development. Despite the high growth ofAfrica during the last decade, the continent not solved the problems ofyouth employment and low productivity of the domestic industry. Nor
it has seen the flourishing of domestic entrepreneurship. After decades
in which industrial policies were banned from the development agenda,
their return is welcomed. However "What to do?" and "How to do it?"remain unanswered questions. Latin America is often regarded as a
“failure” in contrast with the “success” of South East Asia. Nonetheless,the region has accumulated learning about designing and implementing
industrial policies, especially taking into account the resurgence ofinterest in the last decade. The Latin American experience in industrial
policies offers lessons that could help the policy making process in

The views expressed in this paper are those of the author and do notnecessarily reflect those of the Organisation. This paper is part of the
background research carried out by the Author in the frame of the elaboration of
the OECD Perspectives on Global Development 2013- Shifting up a Gear: Industrial
Policies in a Changing World, OECD (2013, forthcoming), Paris.
1299

Africa, if adapted to the specificities and varieties of its different
countries.

1. INTRODUCTION
Africa is growing. The development debate in Africa has shiftedfrom how to overcome poverty in a low-growth continent to how to
profit from the high growth momentum. The rise of China and its
appetite for raw materials have contributed, to a large extent, toboosting growth and to raising dynamism in African markets. Poverty
has been decreasing, access to information technologies has increased inmost of the countries of the region and new partners have emerged in
trade and investment. Media, on their side, are playing their part
portraying Africa as the next “booming” continent, with a growing andyoung population that could be a big reservoir for growth anddevelopment in the medium-term. However, all that glitters is not gold,
and Africa still suffers from deep structural problems. Youthemployment is high and growing; middle classes are emerging withnew demands and aspirations that need to be addressed. The African
production structure is still weak, with few domestic companies
operating at the technological frontier and with the majority of firms
lagging behind in terms of productivity and innovative capabilities.
Diversification and upgrading are, in fact, often confined to “islands of
excellence” within the countries of the region.
While optimism regarding growth and development
opportunities abounds, there is growing recognition that the newcontext is not a guarantee of structural transformation and job creation
for Africa, unless targeted policies are implemented (Chang, 2012;
Greenwald and Stiglitz, 2012; Noman, 2012; Noman et al. 2012). In
addition, the new global economic context is changing the debate on
development policy, and it is re-opening the debate on industrial
policies. While the Washington Consensus had wiped them away fromthe policy mix, the new global economic context and the growing
discontent with conventional economic approaches are contributing tobring industrial policies back on the development agenda. Few believe
today that open and free global markets would allow each country to
specialize in the “best” possible sector/activity. However, “what to do?”300

and “how to do it?” are questions with no easy answers. In Africa, inparticular, most of the good practices and policy advices look even moredifficult to implement: corruption, weak states, lack of public resources,
low entrepreneurial culture, elites, poor infrastructure and skills areoften quoted as barriers for designing and implementing effective
industrial policies in the countries of the region. In addition, there is a
generalized policy aversion about government “interventions” in most
Ministries of Finance in African countries. This, matched with therecognition that “most of the policy tools applied by South East Asian
economies during their catching up are not available anymore,” turns
industrial policies into an option with low feasibility and politicalacceptability in many countries of the region. Yet, things are changing.
Industrial policy in the new global economic landscape is much
more than the policies applied by South East Asian countries in the past.
During the last decade there has been a resurgence of interest inindustrial policy at the global level, in OECD and in developing
countries (Cimoli et al. 2009; Naudé, 2010; Lin, 2012; OECD, 2012a;
OECD, 2013a). Latin America has often been regarded as a “failure” incontrast with the “success” of South East Asian economies2 in respect
catching up and industrial policies. However, the region has
accumulated an extensive experience in designing and implementing
industrial policies, and has advanced, particularly since the last decadethrough a process of trial and error (Peres, 2009; Peres and Primi, 2009;
Devlin and Moguillansky, 2012; Coutinho et al. 2012). Latin America is
far from having solved its development problems and it is still
struggling in tackling inequalities and achieving economictransformation. But the region has been witnessing high growth, theemergence of new middle-classes with new aspirations and demands
and a renewed commitment of many governments to promote science,technology and innovation as pillars of new development strategies
more in line with the new global economic landscape. Like Africa, Latin

What is a “failure” in the Latin American experience is also part of the debate.
Some argue that the Import Substitution Policies of the 1950s and 1960s havebeen a failure, while others see in the Washington Consensus recipes and intheir diligent application the reason of the “failure” of the Latin Americancatching up.
2

301

America is also varied, with countries that differ in endowments,
geography and institutions, as well as in size.
Can the recent experience of Latin America in industrial policies
offer lessons for Africa? Policies are always time and context specific,
but they are also shaped by regularities and general principles thatmake the sharing of practices and challenges in design andimplementation a valuable exercise. The idea is not to find shortcuts oreasy answers through the experience of others, but to enrich the analysis
and add dimensions that might be under the radar in different
geographic and economic contexts.
This paper aims at contributing to the renewed debate on
industrial policy in Africa. It focuses on the changing economic
landscape in which Africa is developing and it looks at the experience of
Latin America in industrial policy to identify some policy principles that
could be of help in shaping the debate in Africa. The paper is structured
in three sections. The first describes the changes in the global economic
landscape that are redefining the context in which developing countries
are re-thinking about industrial policies. It focuses on the newgeography of growth, production and trade and on the emerging new
geography of innovation. The second discusses the implications of the
new global context on development policy and the resurgence ofinterest about industrial policies. Finally, the third section focuses on
identifying what lessons for Africa can be derived from the recent Latin
American experience.

2. A CHANGING GLOBAL ECONOMIC LANDSCAPE
We are living in a fast changing world and our economies andsocieties are experimenting big transformations. Among the multiple(and interrelated) issues that are contributing to redefining development
opportunities today, I will recall two aspects that are, to my view,
crucial to understanding and contextualizing the return of industrial
policies on the development agenda and that are determining some of
the major policy challenges that developing economies are facing today:

302

i.

A new geography of growth, production and trade is emerging
due to the rise of China and its growing integration into world
trade; andii.

A new geography of innovation is emerging too, but at a muchslower pace. The increased diffusion of information
technologies and growing priority given to science andtechnology in emerging countries are defining new microdynamics of learning, knowledge circulation and innovation
and are contributing to create new innovation hubs in theworld. However, Africa still lags behind other developing
continents, including Latin America.

2.1. AN EVOLVING GEO GRAPHY OF GROWTH,PRODUCTION AND TRADE
Developing countries have been growing more than advanced
economies since the late 1990s. Despite recent concerns about global
economic slowdown, this trend is likely to continue, even though many
emerging economies will be advancing at a slower pace than theirprevious two-digit growth pattern (OECD, 2010; 2013). Thisphenomenon has been driven mostly by China, but other countries, like
India, have also contributed (Figure 1). This shift of the center of gravityof the world economy towards the East (and partially the South) has
also contributed to make Africa the fastest growing continent in theworld. While it is clear that growth is not enough for development, it isevident that it opens new opportunities for development and that it ischallenging the existing the political economy dynamics ofpolicymaking in developing countries. Policy priorities (and consequent
agreements and disagreements) tend to change when policymakers
discuss investment options in low-growth or in high-growth contexts.

303

Figure 1. Annual GDP growth rates by income group, 1985-20117

Smoothed Rates

6
5
4
3
2
1

1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

0

Low and middle income economies

OECD members

Note: Chile, Mexico and Turkey are included both in low and middle-income
economies and in the OECD.
Source: OECD (2013), Perspectives on Global Development 2013- Shifting Upa Gear: Industrial Policies in a Changing World, OECD Paris, based on World
Development Indicators (2012) and OECD National Accounts data files.
The new global geography of growth, where growth poles aretoday more numerous and increasingly localized towards the East andthe South, is coming together with changes in the organization of
production at a global scale and with new trade and investment
patterns. China is today the world’s largest manufacturer. Its share of
total world manufacturing value added (18.9 percent) outperformedthat of the US (18.2 percent) in 2010 (Figure 2). Over two decades its
share in world manufacturing output has increased six-fold. The rise ofthis giant is reshaping the global landscape, and developing countries
are aware that they need to take this into account when designing theirstrategies for the future (Barros de Castro, 2009; Castro and Castro,2012).
304

Figure 2. World top 20 manufacturers, 2010
Country share in total world manufacturing value added
%

1990

2000

2010

30

25

20

15

10

5

0

Note: Manufacturing refers to industries belonging to International Standard
Industrial Classification (ISIC) divisions 15-37. Value added is the net output
of a sector after adding up all outputs and subtracting intermediate inputs. It is
calculated without making deductions for depreciation of fabricated assets ordepletion and degradation of natural resources. The origin of value added isdetermined by the ISIC, revision 3.
Source: OECD (2013), Perspectives on Global Development 2013- Shifting Upa Gear: Industrial Policies in a Changing World, OECD Paris based on United
Nations Statistical Division, National Accounts Main Aggregates Database,
March 2012.
Manufacturing is shifting to China, but it is also growing inmost developing economies. The share of non-OECD economies,
without China, in total world manufacturing value added rose from 14
percent in 1990 to 20 percent in 2010 (UN, National Accounts Main
Aggregates Database, 2012). And even though Africa is suffering fromdeindustrialization with respect to the 1980s, more recent trends are305

indicating a renewed dynamism in the countries of the region. For
example, Egypt, Morocco and South Africa have much lower shares ofmanufacturing in their GDP than the OECD average, but their
manufacturing output has been growing more rapidly than in OECD
countries between 2005-2010 (Figure 3).
Figure 3. Manufacturing, intensity and dynamism in developing economies,
2005-10.

40

Thailand

Manufacturing value added (% GDP), 2010

35

30

China

Malaysia
25

Indonesia
Philippines
Argentina
Tunisia
Russian Federation

20

Mexico15

India

MoroccoSouth Africa

105Myanmar

Algeria
OECD Average = 1.8 %0-5OECD Average = 16.2%

Egypt

Brazil

0

5

10

15

Average annual growth of manufacturing value added (%), 2005-10
MVA volumes, 2010 (const. 2000 USD)

'000 Bn

100 BnAsia
10 Bn

AfricaLatin America/ Caribbean

Note: OECD average: Manufacturing value added (% GDP) =2009 data orlatest.
Source: OECD (2013), Perspectives on Global Development 2013- Shifting Upa Gear: Industrial Policies in a Changing World, OECD Paris, based on UN
National Accounts Main Aggregates Database, World Bank, World
306

20

Development Indicators, and OECD STAN Database, for OECD average, July
2012.
These changes in growth and production are accompanied by
growing trade between developing economies. China, India and Brazil
are emerging trade partners for Africa. They increased their share of
total African trade from 2.3 percent and 1.7 percent respectively in 2000,
to 7 percent and 3 percent in 2011 (OECD, 2013). China is playing adeterminant role in African trade. In 2011, it accounted for 19 percent of
total African exports, while in 2000 that share was only 5 percent.
African imports from China also grew from 5 percent of total imports in2000 to 17 percent in 2011 (OECD, 2013a). China has also started togenerate FDI outflows in a growing number of African countries (Figure4). These new trade partnerships are contributing to open newtechnology transfer and learning opportunities.
Figure 4. Top 15 destinations of Chinese foreign direct investment, 2003-12.

Note: The size of the arrows indicates the number of jobs created by Chinese
FDI from January 2003 to December 2012 in the top 15 recipient countries.
The graphic only includes data from greenﬁeld and expansion-related
investments; merger and acquisition transactions are not captured. This map is307

for illustrative purposes and is without prejudice to the status of or sovereignty
over any territory covered by this map.
Source: OECD (2013), Perspectives on Global Development 2013- Shifting Upa Gear: Industrial Policies in a Changing World, OECD Paris, based on fDi
Markets. A service from the Financial Times Ltd., 2012.
In addition, growing developing economies are expressing new
and diversified demands. Their growing middle classes are opening
new consumer markets to be captured. These new consumers represent
an enormous potential, and companies will struggle to gain theirconfidence and sell to them. This is happening not only in Asia, but alsoin Latin America and Africa. This rising demand can represent a strong
incentive for domestic companies to develop products and services, andalso to customize existing solutions to domestic market needs. The
competition to gain those markets will be harsh. So far establishedmultinational companies (MNC) have not being particularly active intargeting the emerging middle classes, but all points to the fact that they
will increasingly do so (McKinsey, 2012). It is probable that MNCs will
partner with local firms and institutions in order to penetrate the newmarket segments. The growing demand together with the new learning
opportunities could be powerful allies for production transformation
strategies in developing countries.

2.2. A NEW GEOGRAPHY OF LEARNING AND
INNOVATION IS EMERGI NG TOO, BUT AT A MUCHSLOWER PACE
In addition to the new geography of growth, production andtrade, a new geography of innovation is also emerging, but at a muchslower pace. The diffusion of information technologies has contributed
to increasing the possibilities for knowledge transfer and processing.
Learning is increasingly happening not only through market channels.
The new forms of knowledge flows go beyond capital imports or FDI
and happen through networks and growing mobility of skilled
personnel. Research partnerships between agents facing similar
challenges and having complementary competences are happening on a
global scale. A growing number of cities or localities hosting specific308

competences are investing in “branding” themselves to reaching newpartners beyond any national effort. For example, the French city ofLyon, hosting a cluster of companies with high tech and logisticalcompetences in urban lighting, is involved in a knowledge transfer
partnership with growing Vietnamese cities willing to implement newforms of urban lighting. This is not an isolated trend; in the new global
context new forms of partnership are developing by which highly
localized competences and businesses can establish global partnerships
to open new business and learning opportunities. But often only the
localities with empowered governments and with at least basic
capabilities are taking advantage of these new opportunities.
A growing number of developing economies are becoming
attractive locations for research and innovation. For example, a raisingnumber of R&D centers are opened in developing countries thanks topublic policy support and to new business strategies of MNCs that
increasingly perceive developing economies as future markets. These
new trends are opening opportunities for learning and accumulating
capacities in developing economies that were not available during thefirst generation of FDI that only included delocalization of the lowest
levels of production phases.
Developing countries are also increasing their investment inskills, science and technology. Nonetheless, the gap with OECD
countries persists (Figure 5). China is emerging as an innovator. Its
image as a low-cost competitor is still present, but it is not predominantanymore. Chinese factories have accumulated capabilities and learningand are now moving up in the value chains. China more than doubled
R&D expenditures over the last decade and in 2009 invested 1.5 percent
of its GDP in R&D (the OECD average for the same year was 2.3
percent) and it is increasing training technical workers and scientific andengineering personnel. In Latin America innovation is, at least in termsof declarations, a key priority for most countries. However the countriesof the region are far from the OECD average in R&D expenditures,
patents and trademarks. Brazil, for example, is the leading country in
the region, and its investment in R&D was 1.2 percent of GDP in 2010.
Africa lags behind; investment in R&D, patents and trademarks areminimal when compared to other regions. The majority of Africancountries invest little in R&D and the private sector hardly engages in309

innovation activities. No African country devotes more than 1 percent of
GDP to R&D and most of the financing comes from the public sector.
Figure 5. R&D intensity and private sector commitment in selected countries,
2009.
4.0

3.5

Korea

R&D invesment (% of GDP), 2009

3.0

SingaporeJapan

Germany
United States

2.5OECD Average = 2.3 %France2.0

China

United Kingdom
1.5
BrazilRussian Federation
1.0

India
Argentina

0.5South Africa

MoroccoMalaysia

Costa Rica

Kenya
ThailandIndonesia

0.0
0

10

20

30

40

50

60

70

80

90

R&D investment financed by the private sector (%), 2009

GERD in USD (PPP), constant 2005 prices

100 Bn

10 Bn

OECD

Latin America/ Caribbean

1 Bn

Asia

AfricaNote: 2009 or latest available year.
Sources: OECD (2013), Perspectives on Global Development 2013—Shifting
Up a Gear: Industrial Policies in a Changing World, OECD Paris, based on
OECD MSTI Database for OECD countries, RICYT for Latin America and the
Caribbean: RICYT; UNESCO for other countries.

310

100

3. CHANGES IN DEVELOP MENT POLICY AND THE"RETURN" OF INDU STRI AL POLICY

3.1. THE QUEST FOR NEW FO RMS OF ECONOMICTHINKING
The new geography of growth, trade and innovation is not onlychanging development opportunities; it is also contributing toredefining development policy and the main issues on the development
agenda. On the one hand, there are emerging global development
challenges, like health and environment that are calling for new forms ofglobal governance. On the other hand, there is wide consensus thatgrowth, albeit necessary, cannot be an end in itself. Growth needs to be
inclusive and sustainable, and not only for reasons of external pressures,but for growing internal demands. The new “middle classes” and thegrowing young populations in emerging and developing countries are
increasingly expressing new aspirations and demands, puttingpressures on national policy choices and calling for new responses toincrease their opportunities and achieve better lives. These new
demands represent a growing source of pressure for governments inemerging and developing economies to shift towards new development
models that match global aspirations with local needs. Examples ofthese trends range from the growing demand for better and fairer
education in Chile, a high-growth and well export-performing countryin Latin America, to the call for social and economic fairness expressedby the Arab Spring. On the financial side, the new emerging countries
are discussing how to close the financial gap and mobilize new sourcesof finance for development. The project of a BRICS bank could represent
a major novelty in development finance (and hence in priorities forinvestment); however, the agreement between these emerging countries
will require some time as many fear the potential predominance ofChina in this sphere. In addition, the 2008 financial and economic crisis
has contributed to shake the fundamentalism in free markets and has reopened a debate on the role of the state in contemporary capitalist
economies (Skidelsky, 2009; Griffith-Jones et al. 2010). A growing quest
for new forms of economic thinking and policy models is arising in

311

OECD and non-OECD countries due to the growing recognition thatmarkets alone do not always perform optimally for the society.
From the 2000s onwards, as the promises of the Washington
Consensus were not fulfilled, developing countries have started to lookat new development models. The rise of political leaderships concernedwith the welfare impact of traditional market-led growth policies,
together with the growing discontent with conventional growth recipes
and the more ambitious demands and raising aspirations of the societies
in growing developing countries, are concurring to define a newlandscape in which the fundamental trust in self-correcting markets isstarted to be questioned, or, at least, not automatically assumed as thereference for policy action. This has implied on the one hand, the returnto classical ideas of economic development, including the recognition
that production activities differ in their capacity to generate linkages
and raise aggregate productivity and a growing attention towards therole of demand, especially the domestic one. But it has also required
searching for new policy models capable of taking into account the
specificities of the new landscape, characterized by increasing relevanceof (local, regional and international) networks for production andinnovation, higher speed of diffusion of information (when not ofknowledge), and higher mobility of capital and talents.
How the changing economic landscape will affect development
policy is still to be clarified on many fronts (including the future of aid,
development finance and development cooperation priorities).
However, a major difference with respect to the previous decades has
already emerged: production structure (i.e. what countries produce,
trade and consume and how they organize these processes) is back on
the development agenda. Production structure is, once again, seen as an
essential determinant of growth, productivity and income distribution.
Even the discussion on the post-2015 MDGs has revealed that theneglecting of the “production and structural side” in the first generationof MDGs had been a weakness that needed to be addressed in the next
generation of development goals, as often outcomes on poverty andinequality are shaped by structural issues. However, there is also a
growing recognition that the development debate and the challenges
differ today from the ones of the 1950s and 1960s where the structuralissues were at the core of the development agenda. Today the level ofintegration of global economies (especially on the financial side) is much312

higher, thus requiring different types of policy approaches. On the other
hand, the diffusion of information technologies has deeply changed the
speed of information flows, thus creating new pressures for theaccountability of policy actions.
3.2. THE RESURGENCE OF IN TEREST IN INDUSTRIAL
POLICIES
Together with the renewed interest in the “structural”
dimension of development comes the resurgence of interest in industrial
policy. After its golden age—which spanned from the 1940s to the1970s—industrial policy was banned from development strategies in thename of structural adjustment programs. From the late 1940s onward,
the majority of developing economies had put in place strategies, with
mixed results, to foster the creation of endogenous technological andproduction capabilities to shift from agricultural to industrializedsocieties (Amsden, 1989; Wade, 1990; Reinert, 2007). With the upsurge ofthe debt crisis, the development agenda shifted from policies to foster
structural change and productivity catching up, to narrowing poverty
gaps. Poverty was considered an area that needed targeted strategies
and active policy support, while the development of industrial
capabilities was assumed to be an automatic process guaranteed byopen capital and good markets, which once freed from the ties of stateintervention and regulation would have conduced countries tospecialize in exporting what they were best at. This was not the case inpractice. While structural adjustment programs and globalization
contributed to macroeconomic stability and fostered modernization of
production activities, they also brought about job losses anddismantling of production and institutional capabilities in key
manufacturing and technology areas, contributing to truncate the stateled industrialization efforts started in many developing economies in
the previous decades (Fajnzylber, 1983).
The resurgence of interest in industrial policy does not meanthat the controversy about it is over. But it seems that after decades ofgood and bad examples of industrial policies and in the presence of anew, more challenging economic landscape, the discussion is shifting toa more pragmatic level where economists and policymakers discuss not313

about the need (or not) of industrial policy, but on “what” to do and on“how” to do it (Chang, 2011). Somehow there has been a convergence
towards recognizing that state intervention is needed in order toengender processes of structural change and favor the transition of theeconomy towards superior stages of development, in which rents are
extracted more from knowledge than from capital accumulation or raw
materials (Reinert, 2007; Cimoli et al. 2009; Chang 2012; Lin; 2012).
A major novelty in the current debate is that industrial policy isless and less viewed at as a set of targeted government interventions
linked to the South East Asian policy management style. Industrial
policy today is much more than a “South East Asian phenomenon”. Theinterest on industrial policy today is coming from different countries
and in different ways (Rodrik, 2004; Chang, 2009; Cimoli et al. 2009;
Noman et al. 2009; Noman, 2012; ECLAC, 2012; Lin, 2012; OECD, 2012a,
2013a). China is a peculiar case; it has been implementing industrial
policy for a long time, mixing open economy approaches with strategic
management of accumulation of capabilities and technology transfer fordomestic learning. Most South East Asian economies are implementing
production transformation strategies each with a peculiar focus;
Malaysia is fostering FDI spillovers and SMEs development, Singapore
is promoting technological upgrading and global integration and Korea
is focusing on promoting national champions and the development of
new key technologies.
A growing number of OECD countries are reopening the debate
on industrial policies due to the long-lasting effects of the 2008 economic
and financial crisis (OECD, 2012a). Austria, France and the UK are
implementing new industrial policies to boost the competitiveness of
their domestic industries and to create better jobs. The US is crafting
new strategies to face the growingly competitive global scenario byimplementing new manufacturing and innovation initiatives tostrengthen the national production and technology clusters, as well as
by promoting the creation of new US-based firms. In Latin America, thereturn of industrial policy predated the 2008 financial and economic
crises. Brazil re-launched its industrial policy in 2003 and since then it isrefining the institutional and financial arrangement for its production
transformation strategy basedon technologicalupgrading,diversification and specialization. Industrial policy is also rebounding in
Africa. South Africa is the most pro-active country with its multi-annual
314Industrial Policy Action Plan (Zalk, 2012), but Morocco is also actively
involved in designing and implementing a new industrial policy tobetter leverage from growing FDI in key strategic sectors, as the car
industry. Senegal, on its side, is planning to re-create a national
development bank to channel resources to production development.
Several issues are contributing to the resurgence of interest inindustrial policy in developing economies:i.

First, sustained growth and catching up are not low-hanging
fruits for most of these countries. Globalization with a booming
China opens new opportunities but also threats for growth job
creation and is requiring new strategic approaches to grasp the
benefits of the new scenario (Dahlman, 2011). China evidently
impacts different countries in diverse ways. It is boosting thedemand for natural resources exports contributing to sustain
growth in several developing economies; it is fostering newinvestment flows in the developing world contributing, forexample, to the new dynamisms in African markets and it ischallenging the survival of low-cost assembly andmanufacturing in most developing economies. The rise of China
is pushing countries to look at trade, manufacturing anddefense under new angles due to the changes in the global
geopolitical order. Creating and retaining manufacturing,
technological and scientific capabilities is becoming moredifficult and it is rising in countries’ priorities.

ii.

Second, growth in emerging and developing economies has also
opened spaces for proactive policies, which were not available
in the 1980s and 1990s. In Brazil it allowed boosting investment
for production development and social inclusion, contributing
to create incentives both on the supply and on the demand side
since the early 2000s. In Colombia the rise of revenues fromnatural resources has recently contributed to reopening thedebate on the competitiveness strategy and on how to channel
funds from natural resource extraction to support innovation
and regional development. The coming into power of politicalleaderships in favor of a pro-active role of the state in fostering
structural change also contributed to creating pressures to315

design and implement industrial policies in countries like Brazil
and South Africa.
iii.

Third, the costs of poor industrial and innovation capabilities
have become more visible. No country has developed without
the creation of a sound and productive scientific andmanufacturing base (Amsden, 1989; Wade, 1990; Chang, 1994;
2002; Reinert, 2007; Cimoli et. al 2009; Lin, 2012). This is eventruer in global economies. The existence of knowledge-based
capabilities is the precondition to grasping the benefits of global
markets. The issue is not merely to be part of value chains, but
to be in the position that allows capturing the most of theirvalue. It is the existence of production and knowledge
capabilities that allows seizing the benefits of global economies,
not the other way round. Manufacturing has been changing in
nature, and per se cannot be the only locus for absorbing therising mass of workers, neither in OECD nor in emerging
markets (IDA, 2012). But it is widely agreed that it is a key area
to creating better jobs, promoting productivity growth andengendering linkages with other sectors. History shows that
manufacturing is key to contributing to sustain growth andproductivity and that it fosters the accumulation and diffusionof technical change. Advanced economies too, which have beenpraising the benefits of the "tertiarization" of the economy, areincreasingly worried about their loss of manufacturing
competences, especially in the aftermath of the 2008 financial
and economic crisis (OECD, 2012a; IDA, 2012).

When governments envisage a more pro-active role of the statein the economy, the risks of capture and rent mismanagement are ofcourse high. Policymakers and the public administration are often wellaware of the major bottlenecks in the policy processes and of the
difficulties in implementing industrial policies. But new policy circles indeveloping countries today are starting to debate on how institutions
and performance-based management schemes can help to maximize theeffectiveness of government intervention to reduce lock-in and capture,
instead of preaching for a minimalist policy approach to avoid mistakes
and failures.

316

Since the last decade many developing countries are designingand implementing new industrial policies in a variety of ways. In
general industrial policies involve a set of coordinated actions directed
to change the prevailing specialization pattern of a country over the
medium and long term, by increasing the rents derived from knowledge
and innovation with respect to the ones deriving from the extensive useof raw material and labor. Often industrial policies include government
actions designed to support the creation of endogenous production andtechnological capabilities in areas that are considered strategic fornational development. The identification of these activities is country
and time specific, but it is also based on the emulation of successful pastexperiences. When they are successful, industrial policies contribute toachieving a deep transformation of the socio-economic structure of thecountry in the medium and long run (Chang, 1994; Reinert, 2007; Cimoli
et al. 2009).
By observing the theory and practice of industrial policies indifferent countries, it is possible to identify the principal features thatshape them. Industrial policies differ, or resemble, across countries, fortheir governance, priorities, objectives and policy mix (Table 1). Somecountries have a centralized/plan-based industrial policy model. Targets
are set, and objectives and lines of action are formalized in national
plans. This is the case for most East Asian economies, as well as for
Brazil, Morocco and South Africa. But even countries without aformalized “industrial policy plan” or strategy implement de facto anindustrial policy by financing research and technology transfer, bysetting up regulations that favor certain types of agents over others andby promoting trade in specific industries. This is, for example, the caseof the US where industrial policy follows what can be called a“decentralized/initiative-based” system where a variety of Federal andState-led programs and initiatives contribute to establishing apreference for American industry, including the intellectual property
regimes law and some of its provisions, such as the Bayh-Dole Act(Cimoli, Coriat and Primi, 2009; Block and Keller, 2011).
Industrial policy has often a strong regional and/or local
component. In some countries there is a prevailing bottom-up approach
where most of competences at the level of industrial and technologicalcapabilities are managed at the sub-national level; Germany and India
are cases in point. Other countries follow a more top-down approach317

with reduced margin of maneuver for regional and/or local authorities,
as it happens in South Africa. In other cases a more mix-approachprevails where national initiatives coexist in a more or less coordinated
way with regional actions. This is the case in China, Brazil and Italy, forexample.
In addition, industrial policy today needs to deal with the issueof the greening of the economy. The green economy represents a
potential new paradigm for which industries need to be prepared for(Mathews, 2012). Not all will be leaders in green production andtechnologies, but there are windows of opportunities for first comers inthis area that should not be disregarded by developing countries. In fact,
developing economies include territorial and social inclusion (i.e. Brazil
and India) and green (i.e. China and South Africa) as priorities in theirindustrial policies.
Developing countries often face multiple challenges when
designing their industrial policies. Some industrial policy actions aim atdiversifying the production structure, contributing to creating capacities
in new economic sectors (e.g. electronics, pharmaceuticals or
biotechnology, etc.), or in new types of activities (e.g. design, researchand development, value-added services, etc.). Other actions aim at
fostering specialization and upgrading of existing activities and sectors.
This means favoring modernization of production, increased efficiency
and improved performance of existing companies or clusters of entire
sectors. But industrial policy also aims at strengthening the density of a
production system by fostering entrepreneurship, networks andcollaborations, on the basis of the recognition that denser systems are
more resilient, innovative and productive. This also implies including
specific policies to address the drawback of persistent informality indeveloping countries (Srinivas, 2012). Each of the objectives poses
specific challenges to the policymakers: how to identify the beneficiaries
and stakeholders? Which incentives are needed to get them interested in
the policy and which forms of dialogue are better suited to foster thenecessary public-private partnership required for going from design toimplementation?
In every country industrial policy is often nested in a strategic
vision about the country’s development path. The end is not tostrengthen national economic actors (weather large or small firms orclusters); the end is to achieve higher growth, better jobs by318

simultaneously improving the positioning of the country in the global
political and market place. This strategic dimension of industrial policy
requires actions in multiple fields, well beyond private sector
operations. For an industrial policy to be effective, targeted actions infinance, skills, infrastructure and trade are needed, as well as alignment
with macroeconomic policy and competition policy. This systemic
dimension is often difficult to achieve, but it is what ultimately
determines the effectiveness of industrial policy in the medium and long
term.

319

320

Territorial inclusion & competitivenessSocial inclusion
Sustainable/green economy

GrowthJob creation
International competitivenessBottom-up: (High responsibilities forregional/local governments).
Ex. Germany, Spain, India.

Mixed: (Co-existence of national andregional/local initiatives).
Ex. China, Brazil, Italy.

Top-down: (Low responsibilities forregional/local governments).
Ex. South Africa.

Industrial policy tools strictu-sensu(i.e. direct and indirect incentives to firms;
business regulation)
Trade policy and FDI
Support to science and technology
Skills development

Infrastructure building and upgrading
Financing (i.e. development banks)
Macroeconomic policy(i.e. exchange and interest rate management)
Competition policy

Increasing the density of the production system (i.e. fostering entrepreneurship, linkages,
networks)

Specialisation and upgrading (i.e. scaling up in local and/or global value chains)

Diversification (i.e. entry in new sectors/types of activities)

Emerging

Traditional

Initiative-based: (i.e. based on multiplegovernment-led initiatives).
Ex. US

Source: Author's elaboration.

POLICY MIXOBJECTIVESPRIORITIES/SCOPE

POLICY MODEL
GOVERNANCE

Plan-based: (i.e. formalised in national
development plans/strategies).
Ex. Brazil, India, Korea, South Africa.

Table 6. Main features of contemporary industrial policies.

4. (WHAT) CAN AFRICA LEARN FROM THE
RECENT LATIN AMERICA N EXPERIENCE IN
INDUSTRIAL POLICY?
There are no blueprints for designing and implementing a“good” industrial policy. Each country will need to identify its own
approach taking into account its vision for development, as well as its
endowments and challenges. However, countries can learn from theexperience of others. We are often told by experts on Africa, that “Africa
has another history, challenges and heritage” and that hence, mostpolicy recommendations valid for other parts of the world do not apply.
Africa is also highly heterogeneous, it includes small and large
economies, natural resource rich and poor countries, landlocked
countries and islands, countries at war and countries that areconsolidating their democratic systems.
Even though every country is unique and faces challenges that
require a context-specific approach, lessons can be learned from theexperiences of others. Countries learn how to implement policy by trial
and error and by accumulating know-how and expertise. The past andthe current successful cases show that industrial policy works better
when it has clear priorities, it is capable of getting a constructive
dialogue between the public and the private sector, and it mobilizes
investments in bundles in critical areas, including infrastructure, skills
and finance. Since some South East Asian countries have been extremely
successful in implementing industrial policies and achieving structuraltransformation, it is common to look at their experience and try andidentify lessons for other developing countries. Often the “success” of
the East Asian experience is confronted with the perceived “failure” ofLatin America. However, Latin America has also accumulated extensive
learning in industrial policies, not only in the past, but also in the last
decade. Latin America has witnessed a (slow) return of industrial
polices (Peres, 2009). Clearly, the fact that industrial policies are back in
the region to a different extent and under different forms is not a proofof their effectiveness and good management; structural transformations
tend to occur over decades and often industrial policies deliver resultson the medium and long run. But many lessons can be learned from the321ongoing experience of Latin American countries in designing industrial
policies in the new and changing economic landscape.
The learning in industrial policies in Latin America can offer
interesting contributions to the debate in Africa for several reasons. Bothregions have been growing since the late 1990s and are facing thechallenge of sustaining this growth and reducing inequalities in the longrun. At the same time, they are both influenced by the new trends intheir traditional OECD trade partners and in their emerging partners,
which are redefining their development opportunities. In addition, they
are both profiting from a good global momentum in which windows ofopportunity for new comers seems to be more accessible due toincreased diffusion of ICT, emerging global challenges such as thesearch for new and renewable energy sources and greener production
and consumption modes, and changes in the organization of production
at a global level, with growing specialization opportunities. In addition,
countries in Latin America, as well as in Africa, are increasingly
involved in developing new visions for their development in context of
new societal demands and growing concern about equity. Most
countries in the two regions have in fact suffered from a process ofinstitutional weakening in the realm of science, technology andproduction in the aftermath of the structural reforms, and are now
facing the challenge of design and implementing industrial policies with
old or weak institutions.
Since the 2000s Latin America has witnessed a resurgence ofinterest in industrial policies. Brazil has been the pioneer, with theIntegrated Industrial, Technology and Trade Policy introduced in 2003,
that then evolved into the Production Development Policy in 2008 andin the Plano Brazil Maior in 2012. Other countries in the region have hada shier approach towards explicitly using the term industrial policy, but
in practice sectoral technology initiatives and governments incentives topromote domestic scientific, technological and industrial development
have been strengthened in most countries of the region. Argentina, forexample, has created its Ministry for Science, Technology andProductive Innovation in 2007, signaling the willingness of the country
to increasingly shift towards a more knowledge-based growth pattern.
Chile has focused on promoting industrial clusters and has created a
new government funds to promote innovation by extracting rents frommining.
322

The return of industrial policy comes in a new and rapidly
evolving global context that calls for new policy approaches. The
reshaping of the global development landscape and the rise of China arenor a blessing, nor a curse for developing countries. In the medium andlong term, much of its impact on other emerging and developing
economies will depend on the strategies and policies they will
implement in the short and medium term. If the ultimate goal ofindustrial policy is still sustaining growth, productivity andemployment, countries today need to do it by operating in global
knowledge economies and by fostering at the same time social andterritorial inclusion as well as the greening of production andconsumption modes. The broadening scope of industrial policy and theincreased interdependency of economic agents in global economies posenew challenges to the creation and retention of production andknowledge capabilities. How to better tap into the resources andcompetences available elsewhere? How to create the incentives to go
beyond easy short term gains and engage in the costly and painstaking
effort of building domestic capabilities?
Latin American countries are recognizing the importance ofstrengthening their production and innovation capacities. Despite thestill-prevailing suspicion about the risks of failure of industrial policy,
the wind is changing. The new context and the increased availability of
information about countries' strategies are showing that a great deal ofstate intervention is needed to back up private sector dynamics andboost development. In the last decade several emerging and developing
economies re-engaged in active industrial policies in Africa, Asia andLatin America.
Latin America looks today like a region in motion that isincreasingly acknowledging the relevance of science, technology andinnovation for development and that is, in different ways, trying tofoster production transformation and upgrading though different
channels (Peres and Primi, 2009; David and Moguillansky, 2012). From
the recent experience of the return of industrial policies in Latin
America it is possible to identify some lessons for Africa around thefollowing eight main points:323

4.1. REHABILITATING THE PLANNING FUNCTION IN
GOVERNMENTS
Industrial policy is back in Latin America, but with different
strengths and nuances in the different countries. Brazil is the country
that more openly speaks about its industrial policy, however most Latin
American countries have reinforced in the last decade government
actions to strengthen domestic entrepreneurial activities and/or topromote a better inclusion in global value chains by promoting new
forms of FDI and by increasing support to science and innovation.
Achieving structural transformation in Latin American countries means
overcoming several barriers—low skills, poor infrastructure, lowdemand and scant financing, for example. Critics often argue thatgetting all these conditions right is a luxury that most developing
countries cannot afford. But clarifying the objectives of structuraltransformation helps in revealing the barriers and in creating a demand
for articulating the necessary actions.
Regardless of the specific country approach, the countries of theregion are facing a major governance challenge to rehabilitate theplanning functions in countries where these capabilities had been
reduced due to the extensive application of the structural reforms
packages of the 1990s. In the last decade, Argentina, Brazil, Chile, butalso smaller countries like Costa Rica, have re-strengthened theirplanning functions by creating inter-ministerial bodies for policy
coordination. The institution of these councils is not a guarantee of theircapacity to operate, but when matched by Presidential commitment
they help in creating spaces for aligning actions of different ministries tothe objective of structural transformation and production upgrading. In
certain cases they can help in building trust and alignment with the
Ministries of Finance, which often are the most adverse to endorse
production transformation strategies.
4.2. RECOGNIZING THAT IT IS POSSIBLE (ANDLEGITIMATE) TO GO BE YOND CURRENT COMPARATIVEADVANTAGESThe heritage of structural reforms has contributed to a
generalized perception that production activities and sectors are all alike324and that deliberate efforts to "build" competences in given technologicaland production fields were doomed to failure. However, one of themost welcomed changes in the policy discussion in Latin America in the
post-Washington Consensus period has been the return of the sectoral
dimension in innovation and competitiveness strategies; i.e. sectors
differ for their impact on aggregate productivity and for inter-sectoraltechnological spillovers and for the ways in which they create, absorb
and diffuse knowledge. Hence, policies need to openly take into accountthe sectoral dimension.
However, many countries in Latin America struggle when it
comes to deciding how to prioritize actions. And often policymakers feel
more comfortable (or face less opposition) when dealing with horizontal
measures. The discussion on how ambitious should the policy be andhow far from existing assets and competences a country can target are
non-consensual issues in the region. A large economy like Brazil with aquite articulated industrial matrix and a young and growing population
is putting in place a strategy (Brazil Plano Maior) with multiple targets:
some incentives target the creation of frontier knowledge andtechnology, others aim at boosting the competitiveness of existing
sectors and others target national priority sectors like energy and health.
For smaller economies the issue is more challenging. Costa Rica has
opted for a competitiveness model that focuses on the attraction of FDI
as a lever to transform the economy, while Chile has followed a softer
approach by promoting cluster development in areas where the country
already had some advantages and capabilities (copper and mining, wineand ICT, among others). In addition, even in the same sectors somefirms operate at the frontier and are well integrated in global production
networks. Yet most of the domestic firms are small and characterized by
low productivity and reduced international competitiveness, when they
do not operate in conditions of informality. The experience of Latin
American countries shows that horizontal measures have limited impact
in context characterized by high structural heterogeneity.
The return of industrial policy is contributing to redefining thedevelopment debate and to re-legitimizing interventions to create newcapabilities. This can be done in several ways, by promoting the
upgrading and diversification of existing companies, by fostering thecreation of new companies and by strategically dealing with foreign
ones. While there is disagreement on how to choose the direction of325technical change, and who should do it, there is consensus on the factthat the new context opens opportunities for going beyond the current
specialization pattern. Countries can mobilize different levers forstrengthening capabilities, including financing of S&T development,
public procurement, FDI and entrepreneurship promotion. Those
instruments are not novel, but can be designed in new ways to be in linewith the new scenario and be more effective.
Science, technology and innovation do not receive the sameattention in all Latin American countries. Some countries are trying to
exploit the synergies between industrial development and promotion ofscience, technology and innovation. Brazil is a case in point where thepartnership between the Ministry of Science and Technology, Ministryof Development, Industry and Foreign Trade and the Brazilian
Development Bank (BNDES) is a clear advance in institutional design.
Fostering science, technology and innovation requires new spaces forvertical and horizontal co-ordination. Innovation is increasingly a crosscutting issue in the agendas of different sectoral ministries (such as
health, energy, the environment and education), beyond its traditionalrole for development in agriculture and manufacturing. There is anincreasing need for more co-ordination between different sectoral
agendas (of the various ministries) to increase the effectiveness of public
action. Brazil has responded to these challenges by creating coordination mechanisms between innovation policy and productive
development policy. At the same time, in line with the recent national
strategy for growth with social inclusion, the Ministry of Science andTechnology has supported the strengthening of institutions in Brazil’s
federal states in order to promote production structure diversificationand to increase the country’s scientific, technological and productive
strength.
Among some of the recent tools that Latin American countries
are introducing to foster the strengthening of domestic innovation
capabilities and sustain learning processes, there are:i.

The strategic management of FDI. While in the past FDI was
considered a potential threat for the creation of endogenous
technological and production capabilities, many countries in
Latin America are now trying to profit from the new generationof FDI. Companies have, in fact, started to delocalize not only326

assembly functions, but also more knowledge intensive
activities including design, testing and R&D. Some countries in
the region have started to put in place on the one hand
incentives to attract these types of FDI and, on the other hand,to promote the generation of backward and forward linkages
with the local economy. Costa Rica is probably the best known
example in the region (OECD, 2012b), but Brazil (especiallysome states) and Chile have also been active in this field. And
have accumulated negotiation capacities with potential
investors.
ii.

Public procurement, that until few years ago was another taboo in
the regional policymaking, is now starting to be included
among the tools to strengthen the domestic industry and toattain social goals (like for example in the health-care sector). It
is generally used in areas such as health, defense, infrastructureand energy where there are high social and economic issues atstake and where in general the state is involved on the research,use, service delivery and/or production. Brazil includes public
procurement as one of the tools of its industrial policy.
However, public procurement needs strong government
capabilities. Often there are controversies, especially fromforeign companies, which claim for the application of the WTO
principle of equal treatment. In addition, it happens that theexisting legal frameworks can act as barriers for the required
procedures. Developing countries would benefit from building
institutional capabilities at the national, regional and local levelto allow policy learning in the management of public
procurement (Kattel and Lamber, 2010).

iii.

A new and fashionable trend in Latin America is the setting upof new government programs to promote the creation of start-ups.
These programs have low operation costs and are contributing
to create an image of Latin America as a new place forinnovation (OECD, 2013b). Initiatives of this type areflourishing in most countries in the region, including, Brazil,
Chile, Colombia and Peru. Some are more oriented towards theattraction of foreigners with entrepreneurial skills and327

experience, as the Chilean program. Others, as the Brazilian one,target mostly national entrepreneurs, even though 25 percent of
total beneficiaries can be from outside the country.
A major puzzle for Latin America, as well as for Africa, is how
to promote the transformation and upgrading of the agricultural sector,
while promoting diversification and industrialization. Brazil offers aninteresting example. In the 1970s Brazil instituted a National
Corporation for Agricultural Research (EMBRAPA); a public company
is in charge of carrying out frontier research to increase the productivityof the national agro-industrial production, while at the same timepreserving the environment. The organization is financed by the general
government budget, but it is also allowed to receive additional
contributions by external partners, including multilateral financing
agencies, private companies and foundations. The organization is
managed with high research standards, but it is strongly oriented
towards technology transfer and productive application. It works bothwith small rural producers and in partnership with large domestic andforeign companies. The work with local producers heavily relied on theexistence of rural extension services that have been closed or
impoverished by the structural reforms, inducing EMBRAPA, todevelop ways to share solutions with agricultural producers; somebranches of EMBRAPA have in fact developed new “mobile units” thattravel to the regions and help the small producers to introduced theinnovations in their processes.
4.3. FINDING APPROPRIATE SOURCES OF FINANCE AND
TAILORING FINANCING SCHEMES TO THE NEEDS OF
BENEFICIARIESThe recent experience of Latin America shows that appropriate,
long-term oriented financing schemes are necessary. Industrial policy
needs to get the private sector on board, and for this, long-term
financing and clear regulatory framework for financing schemes arenecessary.
Development banks are proving to be powerful allies inchanneling financial resources to production development andinnovation. But these institutions need to introduce innovations in their328

management and operational routines to be able to foster innovationand operate in a fast-changing environment. For example, in Brazil the
National Development Bank (BNDES) is a key actor in the design andimplementation of the national industrial and innovation policies. The
bank had introduced new procedures to evaluate intangibles to be morecapable of screening projects with higher innovation potential, and it
has introduced new tools for targeting the different demands. For
example, a key challenge for Brazil is increasing SMEs financing.
Scanning and evaluating credit requests for SMEs is not only
challenging and time-consuming, it also requires multiple operations
that could result in delays that actually inhibit the operation of the firms
and their investments in innovative projects. The BNDES has introduced
a credit card for SMEs (cartão BNDES) that allows them to easily accessgovernment credit lines in a quicker and safer way than through credit
cards operated by other first-tier banks.
Latin American countries have also developed new forms ofpartnership with the private sector to match funds and financeinnovation and production development. On the one hand, somecountries have introduced sectoral technology funds to finance missionoriented research programs and innovation projects in fields of strategic
importance (e.g. oil, energy, and water management in Brazil; softwareand biotechnology in Argentina). Sectors matter for industrial policy
because production, technology and innovations have organizational,
technical, skills and infrastructure requirements that are highly sectorspecific. These systems that channel private and public resources toinnovation projects are operative in Argentina, Brazil and Mexico,among others. Brazil has been the pioneer. As early as in 1999, it
instituted a system of sectoral technology funds to finance R&D andinnovation in specific sectors, thanks to a system of matching grants
from the private and the public sector (Cimoli et al. 2005; 2009). The
existence of these funds contributes to build partnerships and trust
between universities and the private sector. The operation of thesefunds is complex because they require coordination between industry
and academy, and these relationships are often difficult and built overtime through processes of trial and error.
Natural resource-abundant countries have also introduced newforms of financing for innovation. The rising prices of raw materials
opened opportunities for extracting rents from these activities and329

channeling them to economic development. Chile has been the pioneer.
In 2005 it issued a law that channels royalties from mining exploration
to a public fund for innovation. Colombia and Peru are today debating
on introducing a similar type of mechanism. The use of this source offinance for production development and diversification requires
addressing the territorial dimension, because consensus is needed bothon the sectoral allocation of those resources and on their territorial
destination. The communities hosting the natural resource related
activities claim rights on the use of those resources and consensusbuilding efforts are needed. While the creation of funds based onnatural resource rents is a step in the right direction, it is not a panacea
for countries rich in natural resources. The design and management of
those financing schemes is complex and requires strong learning
processes both at the central and at the regional level. High politicalleadership and long-term support are required to allow the mechanisms
to function and be effective.
4.4. CLARIFYING WHO ARE THE STAKEHOLDERS AND
BUILDING TRUSTIn Latin America, a major challenge is to identify the
stakeholders and the beneficiaries of the industrial policy initiatives, aswell as to get a consensus for these policies in a context with high socialand poverty challenges. The conformation of the “elite” challenges thecapacity of industrial policy to get the private sector on board and toestablish a pact for national development. Often the “elite” is wellconnected with foreign economies, but shows low level of trust withdomestic financing and production agents. Today the option of picking
few national companies as major beneficiaries and stakeholders of thepolicy would not be feasible. Not only is the context characterized by avariety of agents that the policy is called to act upon, but it would not besocially sustainable to make industrial policy a policy for the few. Even
accepting that a degree of concentration of efforts and resources isneeded, because scattered interventions are inefficient, the newindustrial policy needs to be inclusive. Countries need to decide how todeal with a variety of stakeholders including SMEs, start-ups, foreigncompanies operating in the country and with the nationals installed330

abroad. A key challenge for Africa, as well as for Latin America, is how
to create incentives for the birth and evolution of a national
entrepreneurial class. It is not only about having companies operating in
the country; it is about creating a system in which nationals can grow as
Schumpeterian entrepreneurs.
4.5. MOBILIZING REGIONS AND TERRITORIES AS A GENTS
OF CHANGEThe return of industrial policy in Latin America is characterized
by a growing attention devoted to the “territory.” While in the pastindustrial policy interventions have been territory-blind, today thisoption is not sustainable and not desirable. In some countries in Latin
America, including Chile, Colombia and Peru the willingness to channel
resources from the mining sector towards innovation is helping to createa demand for strengthening institutions at the regional level. In
Argentina and Brazil, the governments are increasingly concerned about
promoting a more balanced development pattern and finding new
sources of growth in provinces and states.
Regions and cities can be powerful additional sources of growthand innovation on the one hand, and on the other hand,industrialization today needs to take into account its impact onurbanization and territorial management. Many countries in Latin
America (as well as in Africa) are consolidating their democraticsystems and their industrial policies need to be nested in these politicalschemes; they cannot be a kind of closed-door bureaucratic exercise thatthen has to permeate the whole country. The development of
production capabilities in Latin America is not happening in aharmonious way within countries. Often, rising growth andaccumulation of production and innovation capabilities is happening inspecific locations within the countries, while the majority of the territory
still lags behind. This agglomeration trend, if not counterbalanced withactive policies for territorial development, might undermine potential
growth in the future by underestimating new sources of growth and byengendering growing social tensions.

331

4.6. PLANNING INCENTIVES FOR THE NEXT PARADIGM:INVESTING IN GREEN S OLUTIONS
Despite the disagreement at the multilateral level, many
developing economies are recognizing the opportunities and challengesof the new green economy paradigm. On the one hand, they need tofoster learning and increasing participation in global production
networks, which is many cases are still based on “back” technologicalparadigms. On the other hand, they will all need to invest and prepare
themselves for the future. This means being involved in research, aswell as profiting from importing greener technologies which are
increasingly cheaper in the markets thanks to the Chinese action(Mathwes, 2012). Brazil, for example, is investing in green technologies,
building up on government-led efforts started in the 1970s.
Environmental sustainability is a priority also for small economies like
Costa Rica and Panama, but it is still not high up in most countries in
the region. In addition, most of the “green” transformation programs
focus on the technological dimension, as in Brazil, while the green
paradigm would require to address in addition to the technologicaldimension, also the consumption side and the change in behaviors,
service delivery and urban planning. These are all areas wheredeveloping countries could make big steps.
4.7. INVESTING IN STRENGTHENING STATE CAPAB ILITIESThe role of institutions is paramount in development. These are
created through time in a cumulative process. The countries where thegovernment administration has been reduced or minimized due to theimplementation of the structural reforms face peculiar challenges, when
there is a growing demand for more and better state intervention.
Institutional strengthening is necessary. The traditional argument statesthat countries should get the “institutions” right and only then get thepolicies “right”; but the reality shows that things work the other way
round. Institutions co-evolve with the challenges they are called to face
and with the policies that they administer and implement. Poor
institutional capabilities are no excuse for calling for low stateintervention. Investing in institutional strengthening is part of a proactive policy package. Latin American countries have strengthened their332

institutions for innovation in the last decade. Argentina created a
Ministry for Science, Technology and Productive Innovation in 2007 to
signal the willingness of the country to promote knowledge-based
growth. Brazil introduced innovation among the priorities of its national
development bank (BNDES), and it is promoting the creation of a newcorporation to promote mission oriented research. Chile created a
Ministerial Council for Innovation. Smaller economies have madeprogress too: Costa Rica has created a ministerial council to promote thecoordination between FDI policy and innovation and Uruguay has
created a National Agency for Innovation, for example.
4.8. DO NOT LEAVE EVALU ATION AS AN ADDITIONALITEM ON THE “TO DO LIST”
Latin American countries have been investing more in policy
planning than in implementation and have been traditionally sloppy inpolicy evaluation. Most countries lack systems for policy monitoringand evaluation. However, in the last decades, thanks to the diffusion of
ICT, knowledge about “inputs” has increased in quality, quantity andaccessibility, but still impact evaluation has not been developed in an
adequate manner. In addition, even in countries where there is afavorable climate for industrial policy today, like Brazil and South
Africa, proponents are required to be "accountable" for the executed
actions and to prove the effectiveness of the implemented measures. The
slowdown of the global economy in the aftermath of the 2008 crisis (andthe entry into a non-expansionary phase of the economic cycle) led to
advocate for fiscal consolidation in order to stabilize the economy.
The experience of Latin American countries shows that targeted
efforts to create a culture of evaluation is needed. It will not develop
spontaneously in most countries. Evaluation is more useful when it isconceived of as an integral part of the policy cycle, and not an "external"function of control of check and balances. In small countries, external
support is often essential to carry out policy evaluation; however, evenin those cases, direct participation of local constituencies is essential toensure meaningful evaluation exercises. Some Latin American countries
have introduced industrial and innovation surveys to monitor trends
and assess policy impact (Cimoli et al. 2011). Improving the capacity to333use surveys is a mid-long term process requiring a permanent dialogue
between experts, statisticians and policymakers.
While impact assessment in rare in Latin America, mostcountries advanced in creating and facilitating access to information
about policy programs and their implementation. In some countries
agile agencies like observatories are contributing to information
generation and analysis. For example, in Argentina the Observatory on
Employment monitors job and production trends in the country andfavors policy fine-tuning by operating in close collaboration with theministerial level. In Colombia the Observatory for Science andTechnology (OCyT), created in 1999 as a public-private partnershipinitiative, is responsible for the elaboration of qualitative andquantitative indicators to monitor trends and support the process ofstrategic decision-making.3

5. CONCLUSIONSThe new economic landscape is opening up opportunities for
Africa, but market forces alone will not be enough. Creating more andbetter jobs, improving the participation of Africa in production
networks and increasing scientific and technological capabilities in the
countries of the region are still goals to the reached by African countries.
History shows that development is a process that goes hand in handwith the building of domestic institutions, strengthening of domestic
demand and supply and with the creation of backward and forward

3 In South Africa, for example, the Department of Trade and Industry (DTI) has toreport annually to the Parliament the implementation results of the Industrial
Policy Action Plan. It is also required to present a mid-term implementation
review, including quantitative and qualitative achievements of strategic andsectoral targets, including the number of beneficiary firms, number of jobs
created, allocation of government support and changes in legal framework. The
evaluation process includes a review of mid-term challenges and opportunities
and a re-assessment of strategic priorities taking into account what has beenachieved through policy implementation and the eventual rise of newchallenges. In South Africa the industrial policy implementation mid-term
review also clarifies the coordination requirements with other policies, including
trade, competition, technology, innovation, and green economy.

334

linkages within the economy and with foreign partners. These processes
entail accumulation of scientific, technological and production
capabilities as well as intensive institutional learning. Creating theconditions for promoting learning and structural change in Africa could
help the countries of the continent to fully grasp the opportunities of the
new global economic scenario and reduce the deep gap that stillseparates opportunities and living standards in Africa from the rest of
the world.
The re-legitimization of the "production structure" as an area forpolicy intervention and the resurgence of interest in industrial policies
can be allies in engaging African countries in implementing newtransformation strategies and improving the participation of its
countries in the global economy and achieving progress on the domestic
fronts. For example, South Africa is engaged in Multi-Annual Industrial
Transformation Plans and Morocco has a new industrial policy aiming
at strengthening domestic production leveraging on FDI in priority
sectors, including the automotive one. However, designing andimplementing industrial policies is easier said than done. Especially inthe new economic landscape characterized by high mobility of capitaland labor, the growing relevance of international knowledge andproduction networks and in countries where there is still a high policy
resistance in accepting the legitimacy of embracing ambitioustransformation strategies.
Southeast Asian countries are often looked at to derive lessons
about industrial policies; however, Latin America has also recently
accumulated interesting experiences to share with Africa in this respect.
Countries should not underestimate the importance of claiming theright to deliberately intervene to alter the production structure andfavor specialization in more knowledge and technology intensive
sectors and activities as a key pillar in a country's development strategy.
There are no automatisms in development processes, and market
incentives alone are not generally enough to promote a transition
towards superior stages of development. Science, technology andinnovation, as well as learning processes, are paramount indevelopment. Investing in building learning and absorptive capacities is
crucial to be able to tap into existing knowledge and to open
opportunities for leap-frogging. Latin America has started to advance inthis area by increasing the importance of the innovation agenda in the335

countries' development strategies; Africa has much to do in this respect.
Creating a culture for innovation and stimulating domestic
entrepreneurship are important component of development strategies.
Industrial and innovation policies are effective when they
manage to get the private sector on board; this is an open challenge forcountries in Latin America as well as in Africa. It is not uncommon thatbusiness and political elites are responsible of the low impact ofgovernment industrial development strategies because they tend tohave low trust in domestic consummation and production. Creating anational entrepreneurial class is a key component of the development
process. Africa has a big asset for breaking this vicious cycle andgrasping the opportunities of the new global economic and politicalcontext: the potential of its young and growing population. The young
population is increasingly skilled and is expressing new demands andaspirations that are at the essence of the "animal spirits" that are behindthe dynamism of our economies. Industrial policies should be able tomobilize them, whether they are in the continent or abroad, to make
Africa the next rising giant.

336

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340THE ECONOMIC IMPLICATIONS OFCOMPREHENSIVE APPROACH TO
LEARNING ON INDUSTRIAL
DEVELOPMENT (POLICY AND
MANAGERIAL CAPABILITYLEARNING):
A Case of Ethiopia

April 2013

Go Shimada1
Research Institute
JICA (Japan International Cooperation Agency)

Abstract
Industrialization is the key for sustainable economic growth inAfrica. The role of industrial policy has been discussed intensively
recently. This paper sheds light on the learning (or learning how to

The author would like to express his gratitude to, Akio Hosono, Hiroshi Kato,
Naohiro Kitano, Akbar Noman, Miho Oikawa, Kanako Nakayama, and Megumi
Niimura for their valuable comments. Errors and omissions are theresponsibility of the author. The opinions expressed and arguments employedin this paper are the sole responsibility of the author and do not necessarilyreflect those of JICA.
1

341

learn) aspect of industrialization policy, proposing a comprehensive
approach. A great deal of past literature focuses only on thetechnological aspects of learning, but industrialization is a multi faceted task, covering policy planning, policy implementation, andmanagerial knowledge. This paper took up a case from Ethiopia.
The case study confirmed that learning on managerial knowledge
improved performance of private firms. It also confirmed that policy
learning expanded the policy scope of the government to help
private sector development. These two aspects are inseparable, andthis comprehensive approach should be used by donor countries forthe industrialization of Africa.

1. INTRODUCTION
Notwithstanding the much improved economic performance ofAfrica in the past decade or so, industrial development continues tolanguish. The percentage of the GDP held by the manufacturing sector
has been declining since the 1980s. Recent economic growth isdominated by the mining sector. Foreign Direct Investment (FDI) also
goes into natural resources and not the manufacturing sector. As the
population grows, youth unemployment (in other words, job creation)
will become a serious issue for sustainable growth as well as politicalstability in the region. Therefore, industrial development, which
contributes to increase in employment and income, is crucial.
There has been heated debate over industrial policy elsewhere
and a renewal of interest recently; it remains one of the mostcontroversial topics (Noman et al., 2012; Lin, 2011; Lin and Chang, 2009;
Cimoli, Dosi, and Stiglitz, 2009; Hausmann, Rodrik, and Velasco, 2005;
The Economist, 2010).2 This debate even goes back to 19th century

Following past literature such as Rodrik (2007) and Noman and Stiglitz (2012),
this paper also considers that industrial policy covers not only the
manufacturing sector, but also broad sectors such as the agricultural and service
sectors.
2342

economists Ricardo and List.3 There is still little consensus. From theviewpoint of the Washington Consensus, a number of issues such as
rent-seeking, political capture, policy mistakes, and picking the winnerwere raised (Krueger, 2011; Pack and Saggi, 2006). On the other hand,advocates of industrial policy have emphasized that the market cannot
be said to function perfectly to achieve general Pareto optimality under
the assumption of perfect information and perfect competition, among
other things (Greenwald and Stiglitz, 2012).
This paper will focus on the “learning” (or “learning how tolearn”) aspect of industrial policy. Knowledge gaps (not just resourcegaps) have long been identified as issues requiring attention fordevelopment, but have been long neglected (Stiglitz, 1998; Greenwald
and Stiglitz, 2012; Noman and Stiglitz, 2012). Further, only a small
number of papers have performed empirical analysis on learning in
Africa in the past. Due to the recent growing interest in this field, thenumber of empirical studies has been growing gradually. These include
the World Bank’s report by Dinh et al. (2012) on light manufacturing in
Africa: Eifert, Gelb, and Ramachandran (2008) on infrastructure anddoing business: and de Mel, McKenzie and Woodruff (2008), andBanerjee and Duflo (2005) on financial market failures.
Regarding learning, it is important to disaggregate “what tolearn.” Technology and skill are not the only areas of importance for
Africa. Industrial development does not occur by simply adopting newtechnology. There are other types of knowledge necessary to learn forindustrial development, such as policy planning and managerial skills,
as we will see later. Almost all the past literature on Africa, however,focused mainly on the technology/skill aspects. There is only limited
literature surveying the policy and managerial aspects of learning in
Africa, and still further empirical studies on other aspects of learning are
required to see how effective learning is for economic growth (Sonobe
and Otsuka, 2006; Sonobe, Suzuki and Otsuka, 2011; Klinger and
Schündeln, 2007; Karlan and Valdivia, 2011; Field, Jayachandran, andPande, 2010). This paper intends to shed lights on a comprehensive

Historically, the most successful countries including the US and UK, among
other counties also proactively used industrial policy in its development process(Chang, 2002).
3

343

approach to learning, which will be discussed in detail later. For thispurpose, this paper will look at the on-going project by JICA (Japan
International Cooperation Agency) in Ethiopia.

2. LITERATURE REVIEW

2.1. INDUSTRIAL POLI CY
In the 1990s, the major development policy was based largely on
liberalization, privatization, and price-stability, and regarded industrial
policy as a source of inefficient, market distortion. In 1993, the OECF
(Overseas Economic Cooperation Fund, now JICA) publishedOccasional Paper No.1 entitled “Issues Related to the World Bank’s
Approach to Structural Adjustment: Proposals from a Major Partner”(OECF, 1993a), arguing in favor of infant industry protection and of
credit subsidies for selected industries believed to have export potential,
which was in opposition to the Bank’s approach. In the same year, theWorld Bank published “The East Asian Miracle,” which gave very
guarded and qualified support to industrial policy, and that too only forexport promotion, not on import protection and credit market
intervention. The OECF (1993b) disagreed with its view (Mosley et al.,1995). Although the World Bank published the report, the mainstream
policy has not changed. Industrial policy was by and large sidelined.
In the wake of emerging economies such as China, India, Brazil,
and South Korea, a growing number of people have started to regard
industrial policy as an important policy tool for economic development
as well as private sector development (Lin, 2012; The Economist, 2010;
Hausmann, Rodrik, and Velasco, 2010; Lin and Chang, 2009; Cimoli,
Dosi, and Stiglitz, 2009; Rodrik, 2007). 4 This trend is partly due to the
response of developed economies after the Financial Crisis; Rodrik(2010) called this movement the “return of industrial policy.” At least, if
and how donors should promote industrial policy has become a hotly

Michael E. Porter (2007) proposed cluster approach and public policy to foster
clusters instead of industrial policy because it minimizes distortions tocompetition, and is better aligned with market competition.
4344

debated subject in recent years.
In the African context, in January 2008, the African Union
Summit dedicated to the theme “the Industrialization of Africa,” AU(African Union) (2008) adopted AIDA (Action for the accelerated
Industrial Development of Africa), declaring that:
it is Africa’s turn….the time is now….(n)o country or region in
the world has achieved prosperity and a decent socio-economic
life for its citizens without the development of a robust
industrial sector (p. 1).
The UN Economic Commission for Africa (UNECA) and AU
published their annual Economic Report on Africa (ERA) in 2011. This
report also concluded that the role of states needs to be enhanced tofoster economic and social transformation, and to correct market
imbalances.
Justin Lin (2012), the former Chief Economist of the Bank,
proposed what he calls New Structural Economics (NSE). The concept
of NSE is controversial because it differs from the traditional WorldBank approach. In his classification, the NSE is the third wave ofdevelopmental thinking. The first wave was from the emerging anddeveloping economies (old structural economics). They emphasizedmarket failure and proposed import substitution for structural changes.
The results were disappointing, and the second wave of thinking
highlighted government failures, and emphasized a “getting the prices
right” policy. The third wave, which Lin proposed, intends to bringstructural change back to the core of the discussion. His proposal is toindustrialize according to the comparative advantages under the given
endowment structure, which old structural economics went against.
Regarding the last point on comparative advantage, Ha-Joon Chang isagainst comparative advantage theory, and argues that developing
countries need to take more proactive industrial policy beyond thecomparative advantage theory like Japan and South Korea (Lin andChang, 2009).
Krueger (2011) commented on Lin’s proposal that his view isindustrial and urban-biased (distortion), and there are many questions
on the role of the state. Questions are, for instance, whether support345

should be given to all industries or to a specific industry, and what
incentives (e.g., firm-specific treatment, subsidies, or tariffs?) should be
included. She also pointed out the issues such as picking the winner andgovernment failure as well.
On the other hand, Stiglitz (2011) agrees with the NSE proposal,and stressed, as Solow (1957) found, advances in technology have been
the source of increase in per capita income over the last two centuries. In
his view, disparity in knowledge matters for developing countries, so
Stiglitz proposed to create “a learning society,” in which society intends
to absorb and adopt knowledge, and eventually to produce newknowledge. In addition to “learning,” he also stressed the importance of“learning to learn (or the ability to learn)” 5 (Greenwald and Stiglitz,
2012; Stiglitz, 1987).
2.2. LEARNING
Regarding learning, investment in learning tends to be less than
expected (underinvestment) due to market failure. This is because ofimperfect information and the nature of knowledge, with characteristics
of public goods associating with externalities (spillovers). Knowledge
itself should be essentially zero marginal cost. In the real world,
however, firms have a tendency of neglecting to take learning benefits
into account, so the “learning phase” incurs losses for private firms. This
becomes a barrier to entry, implying the existence of a monopoly(Stiglitz, 2010 and 2012). Unlike the aggregate growth model of a closed
economy with competitiveness assumed by Arrow (1962) and Kaldor
and Mirrlees (1962), Dasgupta and Stiglitz (1988) found that theassumption is not valid. In other words, market equilibrium is notefficient if firms learn with cost. Because of the market failure, the state
has to play the role of a catalyst to learning.
Noman and Stiglitz (2012) discussed that development
strategies need to focus on a LIT (Learning, Industrial, and Technology)
policy. This is due to the effectiveness of the LIT policy in promoting

Stiglitz (1989) explained the “learning to learn” effect by the following
function:. Here, learning to learn changes theparameter b.
5346

technological changes and encouraging shifts in production structure,
just as knowledge accumulation could change the endowment.6 Further,
it is argued that the LIT policy needs to support investment projects
with large spillovers. The reason why the industrial sector is considered
important is that learning in the industrial sector has more spillovers to
the rural/agricultural sector. Moreover, there is greater incentive toinvest in R&D (innovation) in the industrial sector than in therural/agricultural sector. In this regard, linkages between the natural
resource extraction sector and other sectors were typically weaker thanthe manufacturing sector and the rest (Greenwald and Stiglitz, 2006 and2012).
2.3. MANAGERIAL CAPITAL
Then, the next question of “what to learn” comes to mind. Do
we have to learn only “new technology,” as Solow (1956) found? 7 When
Lall, S. (1987) surveyed Indian firms, he stressed the importance oftechnological capability (TC). He disaggregates the TC into fiveelements: (1) project execution; (2); product engineering; (3) processengineering; (4) industrial engineering and planning; and (5)technological transfer. This classification is useful to deepen our

They referred to examples from the US that the LIT policy led to thedevelopment of the telegraph, the Internet, and successful companies such as
Federal Express.
6

Ansu and Tan (2012) argued that even though skill development is
indispensable for economic growth and employment, it costs too much for SubSaharan governments to finance. In other words, they need growth to financeskill development. To solve this chicken-and-egg problem, they proposed a twoway solution. First, in the short term, the strategy needs to focus on meeting
industrial needs and spurring growth. Second, in the long term, the strategy
needs to improve the whole educational system. As for education, a number ofstudies found that higher education is closely correlated with firm growth inAfrica (McPherson, 1996; Mead and Liedholm, 1998; Ramachandran and Shah,
1999; Mengistae, 2006).
7347

understanding on elements of technology/skill. 8
There is however, bias in his definition toward technical aspectsof the firm. Other than these technological capabilities, private firms
need to have other abilities as well: “management capabilities” which
include marketing, finance, and external relations, among others (Wad,1991).9
Although management capability is important, it has been
neglected in development and growth literature. For Solow (1956),
management capability is reduced to the residual of a production
function (the error term).10 In the early days, Lucas (1978) and Rosen(1982) proposed “talent for management” as an important factor for
production. Few empirical studies however, have been conducted on
the managerial capital in the theory literature. Bruhn, Karlan, andSchoar (2010) discussed that the capital missing in developing countries
is “managerial capital.” In their views, managerial capital can affect the
production function through two channels. One is improving themarginal productivity of inputs (e.g., labor, physical capital). The otheris improving resource constraints (e.g., access to capital or labor with

8 Cimoli, Dosi, and Stiglitz (2009) discussed that technological learning is mainly
done by imitation, reverse engineering, and copying, for example. This kind of
capacity is called “absorptive capabilities.”

9 This thinking is the same as that of Cimoli, Dosi, and Stiglitz (2009) when theydifferentiate technological knowledge and sheer information. For them,technological knowledge is embodied in specific people, organizations, andlocal networks. They further classified production capacity and technologicalcapabilities (or dynamic capabilities). The former is capacity to do routine work,and the latter is for technological change. It is argued that it is important for acountry or organization to transition from production capacity to technologicalcapabilities. Stiglitz (2012) also identified various structure of learning includingthese management capabilities as well, such as: inventory control process, labor
management process, computerization, and financial service.

Bruhn Karlan, and Schoar (2010a) incorporate management capital into
endogenous growth theory, as A in the production function:. Thisimplies that A decides if other inputs lead into high level of outputs.
10348

better resource forecast).11
Recently, with the attention on this field growing, the number of
empirical studies has been increasing. These include: Klinger and
Schündeln (2007) on a business training program held in Central
America; Karlan and Valdivia (2011) on basic business training in Peru;
Field, Jayachandran, and Pande (2010) on financial and basic businesstraining in India; and Bruhn, Karlan, and Schoar (2010a) on consultant
services to supplement management knowledge. These studies foundmixed pictures that some training improves business performance (e.g.,revenue, profits, employment, productivity), but others may not.
Through an empirical study in Africa, Sonobe, Suzuki, andOtsuka (2011) also confirmed the importance of management capital, inthat technical assistance on “kaizen” enables informal firms to expand
operations and generate employment.12 As we will see in detail in thecase of Ethiopia later, a productivity and quality improvement method,
called kaizen, provides inexpensive basic management skills and can
improve management practices. Their study focuses mainly businessadministration, basic business skill, and desk study of manufacturing
floor management. They found that in Tanzania the training effects onrecord-keeping and kaizen practices are highly significant, and so affects
marketing in Ethiopia. According to their study, a majority ofentrepreneurs do not keep records of the costs and revenues, and it
hampers their objective judgment on their operation.13

Recent papers also found that management practices and education are of low
quality in developing countries, such as Chaudhry (2003) and Bloom and Van
Reenen (2010).

11

Similarly, Cimoli, Dosi, and Stiglitz (2009) also emphasized “problem solving
knowledge” embodied in organizations (such as production technologies,
marketing, labor relations, as well as “dynamic capabilities” of learning).

12

Sonobe and Otsuka (2006) studied eight industrial clusters in Japan, China,
and Taiwan, and found that multi-faceted innovations are needed to achieve amajor improvement in the enterprise performance. Further, they argued that theinnovations are difficult tasks, and are possible only by entrepreneurs withhigher education or entrepreneurs with rich managerial human capital.

13

349

2.4. POLICY LEARNING
In addition to the managerial capital, there is another importantelement of learning. That is policy learning. When Lall (1987) surveyed
Indian firms, he rightly concerned the methods by which individual
firms acquired technological capability (TC). These firms considered
policy environment as an external factor, and they had got TC without
any support from the government. As we have already seen, because of
market imperfection, the knowledge does not spillover automatically. It
is important for governments in developing countries to promoteknowledge spillover, and to encourage learning.
There have been successful policies and failures in the past.
Looking at the development cases of Asia, their recipe and timing (whatand when) varies country by county (JICA, 2008). In other words,
country context mattered greatly when planning industrial policy. As
country context matters, a government should not just blindly copy the
successful policy of another country: they need to learn how to analyze
country context and how to adopt the best possible scenario. In otherwords, they need to “learn how to learn” selectively from the cases ofvarious countries. For instance, the role of public sector to develop SME(Small and Medium Enterprises) changes according to the country
context and to the stages of industrial development. Ito and Urata (1998)
compared the development of the auto parts industry in Japan and
Korea, and found different roles for the public sector to promote theauto industry. In Korea, the public sector was to dissipate knowledge toSME, but in Japan, the public sector played a small role. Ohno (2013)
stressed the importance of policy learning, and discussed that policy
learning should be based on a systematic collection and comparison ofinternational best policy practices and failures. This is to enhance
government capability for a country to be able to become industrialized.
Thus, policy learning is another aspect on which some thought isrequired.
Regarding learning on a policy level, there are several attempts
from donor countries. One example is the KSP (Knowledge Sharing
Program) of the KDI (Korean Development Institute). The case we will
see in this paper is JICA’s program in Ethiopia. One feature
distinguishing this program is a comprehensive approach, which wewill discuss in the next section.
350

3. POLICY A ND MA NAGE MENT CAPITALLEARNING IN ETHIOPIA

3.1. A COMPREHENSIVE APPROACH TO LEARNING
As we have seen so far, two levels of learning are necessary: (1)policy level (policy learning) and (2) private firm level (technology/skill
and management capital learning). The two of them are inseparable.
Business environment affects private firms’ strategy in the market.
There are various elements in the business environment that private
firms need to take into consideration. Among them, the following
elements are especially important: outlook on inflation and exchange
rate, changes in the system of taxation, and industrial policy.
Here, industrial policy in broad definition includes various
policies. These are: infrastructure development policy, education andvocational training policy, financial policy (especially loans to small andmedium-sized enterprise), FDI promotion policy, trade policy,
intellectual property rights policy, and industrial standards policy,
among others. The outlook of these policies will affect a private firm’s
long-term strategy, especially for its investments, but not its short-term
strategy. If the future is uncertain, it will result in low investment in theprivate sector, since private firms would not take the risks. The term
“investment” includes investment on productivity and quality
improvement as well as physical investment.
A government policy will affect private firm’s decision in many
ways. For instance, productivity and quality improvement will be
discouraged under high inflation and exchange rate volatility. This isbecause it is difficult for private firms to recognize and measure theresults of the improvements under uncertain situations. On the other
hand, government support such as infrastructure development,
education, vocational training, and SME development policy willencourage private firms to improve productivity. Thus, policy andprivate firms’ operations are closely connected to each other. In order toindustrialize, it is necessary to tackle both policy and private levels.

351

Table 1: Structure of Learning
1. Policy Level
1-1 Policy Planning
1-2 Policy Implementation
2. Private Firm Level
2-1 Strategic Business Administration
2-2 Manufacturing Floor Management
2-3 Basic Business Skill
2-4 Technology/Skill
Now, each level can be disaggregated. Regarding the policy
level, these are (1-1) policy planning and (1-2) policy implementation.
The capacity of policy planning is important, as the previous section
discussed. The capacity for policy implementation is different from thatof policy planning. How effectively a government can implement a
policy largely depends on their organizational capacity. Industrial
development is a multi-sector (or a multi-ministerial) task. Several
sectors can be involved in exporting even a single agro-industrial
product abroad: for example, agriculture, manufacturing, and transport
sectors. In addition, factors such as quarantine, tax and customs
procedures, and exchange rate also affect export performance. In otherwords, promoting exports requires total governmental effort with intergovernmental coordination as well as public-private consultation.
Coordination with all stakeholders requires very high capacity, and is adifficult task.
In some countries, excellent policy plans are drafted without
taking feasibility and government organizations’ capacity into account.
These two factors are correlated, but the issues that need to be learned
are different. As Cimoli, Dosi, and Stiglitz (2009) discussed,“organization building” is one of the most difficult tasks, and policies
and institution-building have shaped both the accumulation oftechnological and organizational capabilities. These capabilities decide
the national capabilities to catch up with crucial knowledge (Cimoli etal., 2009). This paper disaggregates these.
Turning now to the private firm level, there are four sub-levelsof entrepreneurial skills: (2-1) strategic business administration352

(including
labormanagement
andcomputerization);(2-2)
manufacturing floor management (including inventory control); (2-3)
basic business skill; and (2-4) technology/skill. Basically the first three
items are elements of managerial capacity. The capacity of strategic
business administration (2-1) is required for employers and the businessadministration department. Manufacturing floor management (2-2) isrequired for factory workers as well as factory managers. The basic
business skill (2-3) was found lacking by Sonobe, Suzuki, and Otsuka(2011) in many micro and small enterprises in Africa. This includes skills
such as record keeping, which is essential for the day-to-day operationof a company in any general affairs. This paper will look at the case of
Ethiopia based on this structure.
3.2. BACKGROUND OF THE PROGRAM IN ETHIOP IA
As a comprehensive approach to learning, this paper will takeup a program in Ethiopia supported by JICA in collaboration withGRIPS (National Graduate Institute for Policy Studies of Japan). This
program was initiated in response to the request from the late Prime
Minister Meles Zenawi, and has two components: support to formulate
industrial policy in the new five-year development plan (industrial
policy dialogue); and support to develop private firms (a project for
quality and productivity improvement). These two components are
implemented side by side, taking the linkage between the policy andoperation of private firms into consideration. This program started in2009 and completed its first phase in 2011. The program was started
with strong leadership by high-ranking government officials (topdown), and was implemented by equally strong ownership bygovernment technocrats and private firms (bottom-up).
The late Prime Minister was critical of the Solow model because
the model treats technological change as something external to theeconomic process, as an exogenous factor (Zenawi, 2012). In his view,
technology is a public good, and there are market failures in providing
it. Therefore, he believed that developing countries should not leave
technological development (innovation) to the market, and the key tothis is learning from abroad. He argued that technological capability
accumulation is the central challenge for developing countries to353

achieve continued growth. It will enable developing countries to moveup the technological ladder. He compared two types of nationalinnovation systems, and discussed that the system needs to reflect thestructure of the economy. Those systems are the mission-oriented
systems in the US, UK, and France, and the diffusion-oriented systemsof Germany, Sweden, and Switzerland. A mission-oriented system is asystem to explore the new technology, such as by first-rank universities.
A diffusion-oriented system is to exploit existing technologies throughsocial mechanisms such as standardization of products, or an apprenticesystem of training craftsmen. For developing countries, he argued that it
would be easier to adopt and adapt existing technology in developed
countries rather than innovation.
With this view, he tried to learn from cases in foreign countries
such as South Korea and Taiwan. He even sent government officials tothese countries. In addition, he requested specific assistance to adopt
and adapt existing technology from development partners such as
Germany, Italy, and UNIDO (United Nations Industrial Develop
Organization) (Ohno, 2013). In response, Germany implemented ECBP(Engineering Capacity Building Program). ECBP includes a TVET
(technical and vocational education and training) system, engineeringand private sector development, among others. From Japan, herequested the specific support mentioned above.
3.3. OUTLINE OF THE PROGRAM(A) INDUSTRIAL POLICY DIALOGUE – MUTUALLEARNING
The industrial policy dialogue was started in June 2009 andended the first phase in May 2011. The dialogue was started together
with the pilot project for productivity and quality improvement (kaizen),
which we will see in the next section. The aim of the dialogue is toexchange views on: (1) the new five-year development plan;14 (2) issues

The five-year plan (2005-2009) is the Plan for Accelerated and Sustained
Development to End Poverty (PASDEP). The debate was also held for the new
five-year plan namely, the Growth and Transformation Plan (GTP, 2010-2015).
14354

needed to be tackled for policy planning and implementation (e.g.,inter-governmental coordination); and (3) progress and issues on thepilot project. These three elements complement each other, and coverpolicy strategy to private sector operation on the ground.15
The dialogue was held quarterly eight times at three levels: (1)Prime Minister, (2) Ministers and State Ministers, and (3) Heads of
Directorates and Institutes. These three levels have different
organizational responsibilities and authorities on policy planning andpolicy implementation. Therefore, naturally, even if the topic is thesame, the contents of discussion and issues to be challenged are
different. From the Japanese side, the core members of JICA-GRIPS team
were Professors Kenichi Ohno and Izumi Ohno.
(B) THE PILOT PROJECT FOR PRODUCTIVITY ANDQUALITY IMPROVEMENT (KAIZEN)
In parallel with the policy dialogue, a pilot project for
productivity and quality improvement started in October 2009 andended in May 2011 (phase 1). Phase 2 of the project has been underway
since November 2011. The productivity and quality improvement iscalled “kaizen.” It is a method to continuously improve productivity andquality in a participatory process and a bottom-up approach. Under the
structure of learning we discussed above, kaizen mainly focuses on (2-1)
strategic business administration, and (2-2) manufacturing floor
management. It does not require additional cost from the employer. It
does not require restructuring such as cutting employment, unlike BPR(Business Process Reengineering).
Japan itself introduced productivity and quality improvementin 1955 at the start of Japan’s era of rapid economic growth, learningThis dialogue was an approach to “mutual learning” between the Ethiopianside and the Japanese side. As discussed, context matters greatly for policy
planning; the Japan side has rich knowledge on East Asian cases, but little
knowledge on the Ethiopian economy. The Ethiopian side understands its own
economy, but has little knowledge regarding East Asian cases. If policy
prescription were one-size-fits-all, things would be much simpler. The dialogue
approach provided mutual learning opportunity to find solutions.
15355

from American business management tools.16 There were dual aims.
One was to enhance competitiveness to expand the market, utilizing
resources effectively and scientifically, at the same time reducing
production costs. The other was to boost employment and to enhancereal wages and the standard of living.
3.4. IMPACTS AND THE IR CAUSES
What kind of impact did the program have? Before examining
overall impacts, we will start by looking at the impacts of the pilot
project. There is a certain degree of limitation in this analysis due to lackof data such as benchmarking data, since the program was not designed
to be analyzed by econometric analysis such as RCT (Randomized
Control Trial). Therefore, the analysis here is only a qualitative analysis.
It is a future task after phase 2 to run a more rigorous impact analysis.
Regarding the pilot project, a team of JICA and Ethiopian
experts together visited 28 pilot private manufacturing firms 10 times
each, and gave them questions, rather than answers, on what thecompanies needed to think about to improve their operations. The 28
pilot private firms were from the (1) agro-processing, (2) chemical, (3)metal, (4) leather, and (5) textile industries. After the 10 consultations
over a half-year, as Table 2 shows, the highest benefit to a company was
3.25 million Ethiopian Birr (ETB), equivalent to around US$195,195. The
28 firms had obtained an average benefit of ETB 500,000 (equivalent toaround US$30,030). Given that the average number of employees was
402 per company, the pilot project generated a benefit of ETB 1,240(US$74.5) per head, which almost equaled the prevailing gross monthly
wage (US$75).
These improvements, having such significant impacts, weremade without additional investment cost. The firms simply improved
their method of operations through kaizen by conducting 5S activities
and reducing seven types of waste (overproduction, inventory,

The three guiding principles of productivity improvement were set out in 1955
in Japan, which were: (1) expansion of employment; (2) cooperation between
labor and management; and (3) fair distribution of the fruits of productivity.
16356

repairs/rejection, motion, processing, waiting, and transport).17

Table 2: Results Observed from the Pilot Project Companies (examples)
Quantitative Results (Monetary Impacts)(1) Average quantitative benefit of ETB 500,000 (US$30,030) per pilot
company.
Given that the average number of employees is 402 per company, the average
benefit per head is ETB 1,240 (US$74.5), which is comparable to the prevailinggross monthly wage (US$75).
(2) Company A reduced costs by (a) ETB 10,000 (US$600) per month and (b)ETB 78,000 (US$4,685) per annum.
(3) Company B generated additional income of ETB 1.2 Million (US$78,072)
per year.
(4) Company C decreased down time ETB 204,000 per day (US$12,252).
(5) Company D rectified raw material defect used for manufacturing ETB 2.4
million (US$144,144).
(6) Company E identified repaired and reused usable machines andequipment worth 3.25 million US$.
Quantitative Results (Non-monetary Impacts)(1) Company F increased labor productivity, by reducing time loss forsearching for tools on average by 50 percent.
(2) Company G reduced floor space by around 50 percent.
(3) Company H improved the defect ratio in the range of 50 to 70 percent.
(4) Company I improved lead time in the range of 16 to 90 percent.
Qualitative Results(1) Clean working environments created.
(2) Teamwork and motivation of workers developed.
(3) Health and occupational safety of workers improved.
(4) Increased employee participation.
(5) Knowledge obtained on how to meet quick delivery and to reduce costs.

Source: the author based on Shimada, Homma, and Murakami, 2013 and JICA,
2011b
Note: 1 ETB = US$16.65

5S is the working environment improvement methodology called Seiri(orderliness), Seiton (tidiness), Seiketsu (cleanliness), Seisou (cleaning up), andShitsuke (discipline); these terms have been standardized in English as Sort, Set
in Order, Shine, Standardize, and Sustain.
17357

Table 3 shows qualitatively measured results by the EthiopiaJICA team. Companies classified as Grade 5 means that there is a highpossibility to be a model company, with the other grades meaning:
Grade 4 (good possibility); Grade 3 (some possibility); Grade 2 (lowpossibility); and Grade 1 (no possibility). In short, this table shows 10
companies out of 28 companies (more than one-third) are graded 5 and
4 as candidates for being excellent companies in the near future. These
results indicate that even if the input is small, learning about (2-1)
strategic business administration and (2-2) manufacturing floor
management have certain positive impacts. In other words, according to
the 28 pilot companies experiment, there are huge possibilities for
Ethiopian (or African) enterprises to improve productivity and quality
greatly with small changes in (2-1) strategic business administration and(2-2) manufacturing floor management.

Table 3: Qualitatively Measured Results from the Pilot Companies

Sub-sector
Metal
TextileAgroprocessing
ChemicalLeather

5

4

Grade
3

2

1

Total No.
of
Companies

1
1
1

2
1
1

2
1
1

2
1
2

1
1
1

8
5
6

2
2

1

3

6
3

8

6

6

28

3

Total
6
Occurrences
Source: JICA, 2011a

4(A)
FACTORS OF DIFFERENT PACE OF PROGRESS:
CLEAR POLICY MESSAGE FROM THE GOVERNMENT AND
MANAGER’S STRONG COMMITMENT AND OWNERSHIPIs learning about (2-1) strategic business administration and (22) manufacturing floor management enough to improve private sector
operation without any learning on the policy level? What are the358

decisive factors for success and failures among pilot companies? The
pace of progress is different among companies participating in the kaizen
project.
One of the important factors of success was the managers’
strong commitment and ownership to introduce the new method.
Managers of successful companies understood that the key to improve
productivity and quality is a bottom-up approach at the manufacturing
floor. They tried to build good management-employee relationships,
appreciating communication with employees and employee training.
This commitment of managers is difficult to measure. Before the project,kaizen was new to Ethiopia, and managers did not have knowledge
about the method. Considering the situation, it was extraordinary that
Ethiopian entrepreneurs showed strong commitment to the new
method. What was the reason behind it?
It was the clear policy message from the government that the
government will support the introduction of the new method. The latePrime Minister and other government high-ranking officials had
mentioned the initiative to introduce kaizen on TV and in public
speeches. This clear message reduced the entry barrier for privatecompanies to learn the method and improve productivity and quality.
Unlike under the condition of asymmetry of information, managers took
the learning benefit into account, so the learning phase was notconsidered a loss for them. Because of this clear policy message, anintroduction seminar on kaizen held in Addis Ababa before the project
started attracted huge attention. Even though kaizen was very new toEthiopian entrepreneurs, more than 320 entrepreneurs from 170 privatecompanies attended the seminar. The policy message generated
commitment and ownership of Ethiopian entrepreneurs.
(B) LEARNING POLICY PLANNING: FOCUS ON QUALITY
AND PRODUCTIVITY
In spite of the clear massage from high-ranking officials, thesame policy massage was not clear in the policy documents, such as the
five-year development policy and sectorial development policy. In theprocess of the preparation of the GTP, the policy message was discussed
in the policy dialogue. The issue was how to synchronize the GTP, a
guiding framework of national development plans, and activities on the359

ground. For that purpose, MSE (Micro-Small Enterprises) policy was
discussed in detail.
The Ethiopian government examined Asian cases bythemselves, with JICA-GRIPS providing some comparative case studies
from East Asia such as Japan’s SME development policy andSingapore’s nation-wide movement of productivity and quality
improvement. This self-learning increased policy space, and a result of
this, in the framework of the GTP, a new MSE development strategy
was adopted, referring the introduction of kaizen to industrial
development. This policy shows the policy direction, and catalyzes
learning in the private sector.
(C) LEARNING POLICY IMPLEMENTATION –COORDINATION AND CAPACITY DEVELOPMENT
Another important point is policy implementation by
government bureaucrats and technocrats. One of the issues raised anddiscussed in the policy dialogue was a policy coordination mechanism
across ministries and agencies. For industrial development, as we saw,
different ministries and agencies are involved. For any government, it isa challenge to build consensus on key policy directions and the way it is
implemented among stakeholders inside and outside government. East
Asian countries have certain mechanisms to coordinate this. JICAGRIPS provided the Ethiopian government with various case studies ofsuch mechanisms.
In terms of MSE development in Ethiopia, there are several
ministries and agencies in charge of it, and the government setup is very
complex. These include the Ministry of Industry (MoI), Ministry of
Urban Development and Construction (MoUDC), Ministry of Education(MoE), TVET, and the EKI (Ethiopian Kaizen Institution). Learning thecoordination mechanisms of East Asia, the Ethiopian government also
developed several coordination mechanisms. For example, for MSE
development, a National Council was established to coordinate it, cochaired by MoUDC and MoI. This coordination mechanism reduces
unnecessary fragmentation.
Further, regarding learning kaizen at the private firm level, thegovernment agency plays an important role in catalyzing the learning.
The important thing is that the above impacts of the project were360

brought from the Ethiopian government experts who learned themethod based mainly on on-the-job training (spillover effects based on
the knowledge acquired by doing).
The experts belonged to the Kaizen Unit in the then Ministry ofTrade and Industry (now the Ministry of Industry). The late Prime
Minister established this new unit just before the start of the pilot
project, as a part of his initiative. The membership of Unit consists ofnine young Ethiopian professionals, but without any knowledge about
the method. There was very clear policy guidance for them from theGovernment high-ranking officials and the new MSE development
policy. They also received higher demand from private firms other thanthe pilot companies (bottom-up needs), as they knew that the
government supported the introduction of kaizen. These demands fromthe top and from the ground are the driving force behind their selflearning.
(D) POLICY LEARNING AND EXPANDING POLICY SCOPE
The business environment for pilot companies was an importantfactor. The successful companies had no disruptive management
condition. On the other hand, companies with disruptive management
conditions failed to progress. The condition was mainly being unable toprocure essential materials for their operations due to the shortage of
foreign currency. Ethiopia had difficulty with importing some essential
materials.
The issue of shortage of foreign currency had been discussed at
the policy dialogue, and pros and cons of import substitution policy
discussed in the process to prepare the GTP. With careful examination,
the government of Ethiopia expanded the scope of the policy from anexport promotion policy focusing on a few selected sectors (such asleather and leather products, textile and garment, and agro-products) toan import substitution policy. The import substitution policy focuses on
industries such as chemical, metal and engineering. Regarding the
expansion of policy scope, Dani Rodrik of Harvard University also
advised the Ethiopian government in 2008 (Rodrik, 2008; Ohno, 2013).
As Table 4 shows, although this management skill was new to
the Ethiopian experts before the project, after the project six out of nine
experts were assessed as being competent enough to be a Consultant
361

and provide a consultancy service, and three experts were assessed as
assigned to be Assistant Consultants.18
Table 4: Assessment of Capacity Development of Ethiopian Experts on kaizen
Level

Competence

Level of knowledge
and skill

Assignment

5Competent
to provide
consultancy
services onkaizenLead
Consultant

4Competent
to provide
consultancy
services onkaizen3Competent
to provide
consultancy
services onkaizen- 8 years of experienceand more- Experience ofconsultancy services
for at least 30
companies byhim/herself in 6years’ service- 6 years’ experience- Experience ofconsultancy services
for at least 15
companies byhim/herself in 4years’ service- 4 years’ experience- Acquired relevant
knowledge and skills
for kaizen in addition
to TQM/QCC/5S/QC
7 tools- Acquired otherknowledge and skill
on industrial
business engineering

BeforeProject

After
Project

SeniorConsultant

Consultant

In response to the achievements of the initial project, which ended in June
2011, including the kaizen dissemination plan, in October 2011 the Ethiopian
Government established the world’s first governmental institute named kaizen,
called the Ethiopian Kaizen Institute (EKI), under the Ministry of Industry. The
Ethiopian Government and JICA began the Phase 2 Kaizen Project in November
2011 for capacity building of EKI and related organizations in order todisseminate kaizen throughout the country. This project is expected to contributeto establishing a system to disseminate kaizen in Ethiopia in a sustainable
manner.
18

362

6

2

Competent
to guidekaizenactivities

1

Competent
to conductkaizenactivities foryourself0Noexperience(financial
management,
human resource
management etc.)- Competent to
prepare casematerials for training
exercise- Experience ofconsultancy services
for at least 5companies byhim/herself in 2years’ service- 2 years’ experience- Acquired advanced
and applied
knowledge and skills
on TQM/QCC/5S/QC
7 tools- Competent topresent at least 5case studies of kaizen
for training purpose- Acquired personwith no experience- Acquired basic
knowledge and skill
on TQM/QCC/5S/QC
7 tools- Competent to makeat least two cases
analysis

Assistant
Consultant

3

JuniorConsultant

9

Source: JICA, 2011aNote: TQM: Total Quality Management; QCC: Quality Control Circle; 5S:
Sort, Set in Order, Shine, Standardize, and Sustain; QC: Quality Control.
As we have seen with the Ethiopian case, learning managerial
knowledge improved performance of private firms. The quality andproductivity project focuses, among various aspects of managerial363

capital, on strategic business administration and manufacturing floor
management. Policy learning also contributed to the improvement,
expanding the policy scope of the government to help private sector
development. Selective policy learning from successes and failures ofEast Asian countries enables the Ethiopian Government to expand its
policy scope. The clear policy direction catalyzed learning on the
ground. The coordination mechanism among Ministries andgovernment agencies made the approach to MSE development morecomprehensive rather than fragmented. The government agency has
obtained practical knowledge on kaizen through learning by doing, andhas disseminated its knowledge to private sectors to improve theirproductivity and quality.

4. CONCLUSIONSThis paper examined the learning aspect of industrial policy,
disaggregating the elements of learning, which mainly consist of policylevel and private company-level learning. Earlier literature focused
mainly on introducing skills and technology into private companies.
Recently, there is growing interest in managerial capability learning.
This paper explored the possibilities of a comprehensive approach, since
policy learning and managerial capability learning are inseparable, andused a case in Ethiopia to study the impacts.
The results of the Ethiopian case imply that learning on various
levels will strengthen Africa’s private sector for industrial development,
allowing it to become competitive. This comprehensive approach oflearning is still new to the development partners. The approach will
enable African countries to sustain their economic growth, diversifying
their economies and securing more jobs for the younger generations.
As mentioned, there is certain limitation set on this case study
due to lack of data. The ongoing empirical study for the phase 2 should
provide a more thorough analysis.

364

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370

The Japan International Cooperation Agency (JICA) works to provide
solutions to some of the most difficult issues facing developing
countries: armed conflict, macroeconomic instability, poverty, andenvironmental degradation. In 2008, JICA established the JICA ResearchInstitute in order to facilitate in-depth research of these issues. The JICA
Research Institute incorporates four fundamental policies into its work:

Incorporation of a comprehensive perspectiveIntegration of past and future

Unraveling of the East Asian experiences

Open activities and collaboration with the international
community

Because JICA-RI is a component of the JICA development agency, ittakes a networked approach to its research. It produces policy- andoperations-oriented research that is conducted with international
development professionals, operational organizations, and academic
institutions. The research institute acts as a collaborative forum fordeveloping country policymakers, development practitioners, andJapanese and international researchers. JICA-RI targets its work towards
developing

country

governments,

international

donor

community;

academics,
and

and

Japanesecitizens;

thestakeholders(government officials, academics, business leaders, politicians, NGOs,
the media, and the public at large).

371

JICA-RI focuses its work on four research areas:Peace and Development: This area focuses on identification ofeffective

development

assistanceapproaches

toconflictprevention and state-building in post-conflict contexts.
Growth and Poverty Reduction: Research in this area focuseson identifying reasons for successful growth and poverty
reduction in Japan and East Asia, and reasons for vulnerability
in Africa.

Environment and Development/Climate Change: This topic
concentrates on developing policies to evaluate environmental
damage, ways to manage natural resources, and methods for
mitigating or adapting to climate change.



Aid Strategies: This faction of JICA-RI studies and analyzes theeffectivenessofdifferent

approaches

tointernational

development assistance, including capacity development andthe aid agenda after the Millennium Development Goals.
You may view the complete range of our organizational research andprogramming online at www.jica.go.jp/english/

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The Initiative for Policy Dialogue works to broaden dialogue andexplore trade-offs in development policy by bringing the best ideas indevelopment to policymakers facing globalization’s complex challenges
and opportunities. We strive to contribute to a more equitably governedworld by democratizing the production and use of knowledge.
Founded in July 2000 by Nobel Laureate Joseph Stiglitz, the Initiative for
Policy Dialogue (IPD) stimulates a heterodox policy dialogue on major
issues in international development. IPD is a global network of leading
economists, political scientists, and premier academic and policy centersin the global South and North. We bring the issues of developing
countries to academics and the fruits of academic research topolicymakers.
We promote more inclusive and pluralist discourse on the major global
debates on economic and political development, in which countries
often face a narrow set of policy prescriptions that may not fully suit
their domestic preferences and capabilities. IPD helps countries analyze
the complex policy trade-offs they face and provides them with access toa broader range of economic solutions that promote democratic,
equitable and sustainable development.

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IPD pursues its objectives through four programmatic areas:

Our Task Forces bring together experts from various countries
to study complex development issues and provide policy
alternatives;

Our Country Dialogues improve the quality of official decision
making on economic issues, and open critical development
debates up to a broader array of participants;

Our Journalism Program helps strengthen journalists' economic
literacy to better report on the major economic issues
confronting developing economies;Our Education Programs are grounded in a critique andreformulation of standard economic theory, examining issues at
the nexus of the global and local in developing countries.

You may view the complete range of our organizational research andprogramming online at www.policydialogue.org

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