Download Import substitution industrialization as learning process: Sub

Business and Management Review Vol. 1(6) pp. 08 – 21, August, 2011
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IMPORT SUBSTITUTION INDUSTRIALIZATION AS LEARNING PROCESS: SUB SAHARAN
AFRICAN EXPERIENCE AS DISTORTION OF THE “GOOD” BUSINESS MODEL i
Kanayo Ogujiuba (Corresponding author)
African Institute for Applied Economics; Enugu State; Nigeria
Email: [email protected]
Uche Nwogwugwu
Department of Economics; Nnamdi Azikiwe University, Awka – Anambra State; Nigeria
Email: [email protected]
Enwere Dike
Department of Economics; Kogi State University, Anyigba – Kogi State; Nigeria
Email: [email protected]
ABSTRACT
The East Asian catch-up industrialization experience is often presented in the literature as a benchmark for
Sub-Saharan African countries seeking to undergo an industrial revolution. A recurrent theme in the East Asian
model is the use of the import substitution industrialization (ISI) phase as a basis for technological learning and
international business. The East Asian countries used ISI to build up an industrial technological competence.
Starting with the low- skill, labour intensive manufactures, these countries gradually moved on to manufacture
more technologically complex products for export using competencies and skills acquired in the ISI phase.
Typically, protectionist industrial policy featured strongly in the East-Asian experiences. Sub-Saharan Africa
embarked on ISI as early as the post war II decades, consolidating that process in the post-colonial decades of
the 1960’s and 1970’s and employing also protectionist industrial policy. However, in stark contrast to East
Asia, Sub-Saharan Africa’s ISI ended up in a cul-de-sac; it failed to develop capacities for export manufactures
and even failed to produce enough to serve expanding domestic demand. Sub-Saharan Africa’s ISI and the
protectionism that underpinned it could then be described as a distortion of the ‘good’ East Asian benchmark
business model. This paper draws on extant literature to explain key aspects of the Sub-Saharan African model
as a distortion of the good East Asian model. The paper focuses on the elements of the protectionism that
featured in both models, the nature of industrial policy, and stresses the role of labour intensive manufacturing
as a viable ‘entry route’ into export-based industrialization and technological learning.
Keywords: Trade, ISI, Industrialization, Protectionism, Entrepreneurship
1.0 INTRODUCTION
Import substitution industrialization is simply the Industrial development program based on the protection of
local infant industries through protective tariffs, import quotas, exchange rate controls, special preferential
licensing for capital goods imports, subsidized loans to local infant industries, etc. ―A deliberate effort to replace
major consumer imports by promoting the emergence and expansion of domestic industries such as textiles,
shoes, household appliances,‖ usually requiring the imposition of protective tariffs and quotas to protect new or
infant industries. From Michael Todaro 1994, Economic Development, p. 681.
One of the most debated questions in the development literature is the role of government
intervention in development using Import Substitution Industrialization (ISI) as was the case of the Asian
Tigers. The process of industrial development in the Twentieth Century can be said to be one in which otherwise
backward countries (East Asian Countries) have employed extant technologies to overcome the wide gaps
between them and the industrial forerunners. The key to the successful industrialization of countries that are
now referred to ―new world‖ had been not only a willingness to imitate but more importantly the will to learn.
Learning inevitably occurs within a teacher-student relation and given the high pay-off that comes with
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successful mastery, the context for knowledge transfer is often difficult and harsh. Eight East Asian economies
achieved extraordinary rates of growth. Income per capita increased more than tenfold in Japan and the ―Four
Tigers‖ during that period, and more than doubled in Malaysia, Indonesia and Thailand in the two decades after
1973.
The logic behind (ISI) is hinged on forward and backward linkages in Industrialization Processes and economies
of scale. ISI was designed to promote native/local industries to replace the foreign produced manufactured
products that were consumed as imports. A few principles of manufacturing need to be understood: First, every
industrial or manufacturing process involves several stages of production. The number of stages in the
production process is a reflection and function of the complexity of the final product. For example, the
manufacturing process that transforms alumina into soft-drink containers entails about 5 stages. The
manufacturing process that transforms about 17 primary metals into the structure that ultimately becomes an
automobile requires over 120 stages. Note also that the ―density‖ (number of stages) of the manufacturing
process also influences the ―value added‖ of the final product, and hence the final price that industrialized
countries can secure for complex manufactured products. Generally, we classify these stages of production into
4 inter-related industrial goods sectors:
 Consumer non-durable goods sector (foods, beverages, clothes, pharmaceuticals);
 Consumer durable goods sector (appliances, autos, etc.)
 Intermediate goods sector (pressed steel, sawn wood, prefabricated plastic structures with versatile
end uses)
 Capital goods sector (e.g. blast furnaces, pressure molds, and robotic assembly devices).
For any truly autonomous manufacturing process to be free of foreign dependency it would need to develop
industries in all 4 sectors to some degree. ISI envisaged that the ―backward linkages‖ from the consumer goods
sectors would generate demand for the products that intermediate and capital goods sectors would produce.
Ultimately, the goal was to develop a vertically integrated industrial economy in which a few (high
capital/output) capital goods manufacturers supplied the entire economy with the basic components for
producing intermediate goods. Then, a broader range of intermediate goods manufacturers produced an even
broader range of intermediate goods that consumer (durable and non-durable) sectors could shape into final
consumer products.
In the ―old economic order‖, the ―international division of labor‖ was such that industrialized, higher income
countries specialized in the production of manufactured goods, while the low income non-industrialized
countries specialized in the production of ―primary‖ (agricultural, mineral, forests) products. In this way, it was
reasoned, different countries specialize in the production of those commodities with which each enjoys a
―comparative advantage‖ i.e. an abundant resource or factor endowment (e.g. labor, land, technology,).
Countries then trade those commodities they produce for those they consume but do not produce. This meant
that the low income countries would have to trade their own relatively low value-added primary sector products
for the more expensive, higher-value added products in which the industrialized higher income countries
specialized.
Two developments beginning around World War II made this international division of labor untenable for the
low-income developing countries. First, the War itself forced the industrialized countries to shift production
from a civilian consumer market to a wartime military market. Tanks and guns were produced in place of
automobiles and bread toastersii. Second, a long-term trend of declining ―real prices‖ (prices adjusted for
inflation) for primary commodities began after World War II. This development meant that low income
countries specializing in primary commodity production received less and less ―foreign exchange‖ (US$)
through trade, and therefore had to pay relatively more for the manufactured goods from trade with the
industrialized countries. These ―deteriorating terms of trade‖ meant developing countries dependent upon the
manufactured imports from the industrialized countries had to spend more and more money to purchase those
imports. Both of these developments made many Third World leaders, especially in Latin America, to decide to
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ISSN: 2047 - 0398
promote domestic industrialization to reduce their country‘s economic dependence and vulnerability to the First
World economies. ISI became the policy strategy they pursued to gain this economic independence.
The key to success in industrialization requires that individual factories achieve ―economies of scale‖ of
production. In most manufacturing processes a point of output is reached after which the cost of producing
every additional unit of output diminishes. Different types of industries, given their different production
functions (combinations of capital and labor, etc.) obtain different scale thresholds or minimum levels of output
necessarily to begin accruing cost savings from large-scale output. For example, a mechanical pencil factory
may need to sell 5 million units of output (pencils) each year before it can achieve economies of scale of
production – efficient level of productioniii. Clearly, the more units of anything manufactured you can sell the
better the chances that your factories (consumer goods and intermediate, and ultimately capital goods) will
achieve economies of scale, efficient production. In a free market global economy, industries that produce
inefficiently (without obtaining economies of scale of production) under the protections of ISI have been subject
to criticism from more efficient foreign industries – a force driving the neo-liberal campaign for open markets.
What determines whether a country obtains efficiency – economies of scale in production? Market size
(number of consumers, population) and purchasing power (usually but unreliably indicated by GNP/capita).
Hence, larger, richer economies were more likely to make ISI succeed efficiently, whereas smaller countries
with lower per capita incomes were less likely to succeed with ISI.
2.0 THEORETICAL FRAMEWORK/LITERATURE
Two recurrent questions in the literature are: Why has Sub-Saharan Africa failed to experience industrial
revolutions in the style of East Asia? What is there in the East Asian economies that qualifies them to be
described as ‗catching-up‘ economies, whereas Sub-Saharan African economic growth performance has
attracted negative labels: ‗falling behind‘ ‗growth tragedy‘, etc. (see, for example, Easterly and Ross 1997;
Collier and Gunning 1999; Pritchett 2000;). But few Sub-Saharan African countries entered the 21st century
with a significant growth in GDP per capita – a reflection of the general absence of endogenous technological
change in Sub-Saharan Africa as a whole. Indeed for the period 1975-2001, Sub-Sahara Africa recorded a
negative (-0.9%) growth rate in GDP per capita, a stark contrast to roughly 6% recorded for East Asia2 (see
UNDP 2003, Statistical Appendix). It was in the mid-1970s that South East began to overtake Sub-Saharan
Africa in GDP per capita, and by end of the 1990s the income gap separating Sub-Saharan Africa from South
East Asia was rather wide and increasing (Harold, Jayawickrama and Bhattasali 1996).
The East Asian industrialization model and the ‗miracle‘ it produced have been interpreted in two contrasting
perspectives in the development literature: the neo-liberal (neoclassical) and structuralist (neo-Keynesian).
Specifically, the neoliberal perspective has argued that reliance on unregulated market forces (laissez-faire) and
adoption of open-economy strategies [keeping the economy open to global trade and investments] led to
efficient exploitation of the comparative advantage of the East Asian NICs in surplus, cheap labour (see Ranis
and Fei 1975, Balassa 1982) leading to fast economic growth. On the otehr hand, African‘s development
problems, in particular the region‘s inability to undergo industrial take off, are blamed on a lack of openness to
global trade adn investments index pinned by government interventions.The widely circulated Berg Report
(World Bank 1981) had blamed Sub-Saharan Africa‘s development crisis on price distortions (over-valued
exchange rates, subsidized interest rates, etc) underpinned by heavy government interventions. It is relevant to
note that the Berg Report provided a point of departure for the neoliberal structural adjustment programmes
(SAPs) formulated for Sub-Saharan Africa and the developing world by the Bretton Woods institutions – the
International Monetary Fund (IMF) and World Bank – in the 1980s and 1990s. The same neoliberal
perspective informed the neoliberal policy recommendations contained in the socalled Washington consensus
(see Williamson 1990; see also Williamson 2003). The neoclassical literature considers ‗opennes‘ the elixir for
rapid economic growth. However, the neoclassical interpretation of ‗openness‘ as an explanation for East Asia‘s
rapid economic growth has been a subject of contentious debate. Sachs and Warner (1995) conceive openness
rather restrictively using five criteria to classify countries as ‗open:
(1) the average tariff rate is less than 40%;
(2) its non-tariff barriers (e.g quotas) covered less than 40% of imports;
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(3) the premium on the unofficial (parallel) market exchange rate did not exceed 20%;
(4) there are no state monopolies on the major exports; and
(5) it is not a socialist economy. (Dollar 1992) constructs a different index of trade openness to explain rapid
economic growth.
The empirical literature on industrial transitions in developing countries show that, with the possible exception
of Mauritius, no Sub-Saharan African country has undergone an industrial revolution in the style of the East
Asian newly industrializing countries (NICs). In stark contrast to Sub-Saharan Africa, East Asia has, starting far
back in the 1950s and 1960s, produced ‗tiers‘ of NICs: South Korea (Republic of Korea), Taiwan, Singapore
and Hong Kong began their industrial catch-up in the 1950s through the 1970s; Malaysia, Thailand and
Indonesia followed later in the 1970s through the 1980s; and, currently, China, Vietnam and India (in South
Asia) are cruising at high attitude, as it were, in the industrialization catching-up game.
A recurrent question in the development literature is why industrial policy failed to ignite and sustain a
productive entrepreneurship in sub-Saharan Africa? The literature shows that the differences between subSaharan Africa and East Asia do not lie in the type of policy instruments employed to create rents to promote
industrial entrepreneurship – indeed, they were essentially the same or similar [Nissanke 2001; Akyuz and Gore
2001]. The differences lay essentially in how rents created by government policy interventions were managed.
Whereas in East Asia profits were created through Schumpeterian rent-seeking to motivate productive
entrepreneurship, in Sub-Saharan Africa profits were created through static rent-seeking (to distribute patronage
to a narrow elite. (Akyuz, Chang, H-J, and Kozul-Wright 1998). Much has been discussed on African
entrepreneurship in the development literature, starting in the 1960s. Empirical interest in this problem was,
however, heightened in the 1980s following the debt crisis and subsequent structural adjustment programmes
[SAPs] that sought to liberalize African economies and make the private sector the driving force in economic
development. Neoclassical literature suggested that the appropriate strategy for closing the lag in sub-Saharan
African‘s development performance vis-à-vis other developing regions – particularly Southeast Asia – is to
establish an economic policy and business environment favouring the growth of small-scale entrepreneurship.
This policy strategy was fully stressed in the widely circulated World Bank publication; Sub-Saharan Africa:
From Crisis to Sustainable Growth [World Bank, 1989a]. This literature suggested that there was no dearth of
indigenous entrepreneurship in sub-Saharan Africa, but, rather, that the entrepreneurship was unproductive, and
this showed up most clearly in the inability of sub-Saharan African countries as a whole to establish a dynamic
industrial base and break out of their dependence on unprocessed agricultural and mineral commodities as the
dominant mode of participation in international division of labour. Specifically, it was pointed out that Africa‘s
exports of manufactures had declined between 1970 and 1986 while increasing five-fold for Latin America and
thirteen-fold for Southeast Asia [see World Bank 1994, pp. 17-18]. Why has African entrepreneurship been
unproductive? Why has it failed to lead to rapid industrial capital accumulation in the style of the Asian NICs?
The literature was specific in identifying two sets of factors: capabilities and institutional and associated
incentives. Our concern here is with the latter. Collier and Gunning [1999] identified, inter alia, weak and
inefficient governments which were often composed of or controlled [captured?] by narrow rent-seeking elite
who undermined markets and considered the public sector to be a vehicle for distributing patronage [see also
Mkandawire 2001, Bates 1981]. The rent-seeking resulted in reduction in investments as resources were
channeled towards lobbying for access to rents rather than productive investments. The response by agents to
ensuing macro-economic instability was to engage in capital flight and develop their social capital in riskreduction and risk-sharing mechanisms at the expense of social learning [see also Collier, Hoeffler and Pattillo
2004; Lawanson 2007].
Studies on the 1990s onwards, however, reveal that some fundamental changes are occurring in sub-Saharan
Africa‘s institutional and regulatory landscape with potential to affect industrial entrepreneurship positively;
these changes reflect the impacts of two related forces. First, the debt crisis and Structural Adjustment Policies
[SAPs] have forced a ‗radical redefinition‘ of the role of the African state in the economy [see Mkandawire
2001, Aron 1997]. Second, globalization is pressuring African states and civil society at large to reorganize and
devise more efficient mechanisms and networks to be able both to benefit from the expansion of trade flows,
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investment and finance, technology etc.. into an ‗integrated global market‘ and withstand the risks of instability
occasioned by globalization.
These post-adjustment studies reveal, also, that new entrepreneur types are emerging on the scene [Dike 1997]
and the scale and orientation of activities of old-established entrepreneurs are changing as the ideological
climate also becomes more favourable to private enterprise. These studies also do suggest a hypothesis:
economic liberalization as from the 1980s is creating an environment more conducive for entrepreneurship
than the highly regulated environment of the pre-adjustment decades. Even so, we need still to establish the
extent the entrepreneurship system evolving in the post-adjustment decades – the 1990s onwards – differs from
the system of the pre-adjustment decades. Can the system evolving in the post-adjustment decades provide a
basis for dynamic industrialization in sub-Saharan Africa – not a static one? The term dynamic
‗industrialization‘ implies the expectation that the accumulation system evolving from the entrepreneurship of
the 1990s onwards will contribute towards enhancement of capabilities – reflected in development of export
capacities in sub-Saharan African firms leading in the long-term to industrial transition in the fashion of the
Asian NICs. This question or problem cannot be pursued in the present paper. A separate research will do
justice to this important problem. For now, however, suffice to state that if entrepreneurship or a lack of it is to
serve as a viable concept for explaining sub-Saharan Africa‘s slow pace of industrial growth and inability to
achieve industrial catch-up, whereas other regions of the developing world have achieved progress in this
regard, a key problem for analysis would be to establish a link between entrepreneurship and rapid industrial
capital accumulation. What links entrepreneurship and rapid industrialization? This link is to be found in
availability of rents or monopoly profits – referring to incomes or profits above what the unregulated market
environment can provide.
3.0 IMPORT SUBSTITUTION INDUSTRIALIZATION [ISI] AS LEARNING PROCESS
For ISI to provide a dynamic ‗entry route‘ into export-based industrialization, it must serve as a basis for
technological learning. The experiences of the East Asian NICs suggest that the appropriate way for Sub
Saharan Africa to start building up industrial competence is to begin with the low-skill, labour-intensive
manufactures, and later move on to manufacture gradually more technologically complex products. It is
important to stress that technological convergence is a necessary condition for ISI to serve as an ‗entry route‘
into export-based manufactures – i.e. a dynamic entry, not a static one. The word ‗route‘ in this context suggests
or implies that there will be a continuation and enhancement of technological learning over time. But if the
knowledge and skills of the workforce producing in ISI are not useful for producing goods for the international
market, the former will simply not serve as a viable entry route for achieving the latter, which appears to be the
problem with Sub-Saharan African ISI.
Firms in sub-Saharan Africa failed to use ISI as a learning process to acquire the requisite technological
capability for export production. ISI, apparently, had encouraged accumulation of production capacities but paid
little attention to accumulation of technological capability. By the end of the 1970s, ISI in sub-Saharan Africa
had entered a cul-de-sac - a phase of decline [see, for instance, Valk 1996 on textiles]. In Nigeria, for instance,
after 1960, textiles rapidly became the leading ISI sector, with protectionist policies encouraging a spate of fresh
investments by Oriental investors, mainly Indians and Japanese. By 1980, the industry had some 100 major
plants in its large-scale firms, employing some 100,000 workers (Dike 2003). However, unfortunately, ISI in
Nigeria, as in most of postcolonial Africa, operated in protected markets, isolated from world technology and
uninfluenced by domestic and international competition. Although protection did, indeed, stimulate investment
and growth in production capacity, as Nigeria‘s experience cited above shows, it did little to stimulate
innovative activity or technological learning leading to productivity growth- and so failed to lead to the type of
growth booms associated with industrial catch-up or industrial revolutions.
3.1 Sub Saharan Distortion Model (Key Aspects)
The experiences of the East Asian NICs, Korea in particular, ISI was based on a dynamic Schumpeterian view
of the world market-driven ‗creative destruction‘ which maintained domestic competition. Because of
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protection, the ISI sector in sub-Saharan Africa was not subject to entry and exit- i.e. it did not admit
Schumpeterian ‗creative destruction13‘ Specifically, it did not permit industrial capital stock to be reallocated
from less efficient activities to more efficient ones through ‗producer turnover‘ and differential investment or
growth rates by firms in the source industry. Because selection decision tended to be too weak or non-existent in
ISI, otherwise inefficient firms survived, which in turn reduced the productivity of capital stock as an industry or
economy-wide aggregate. This, indeed, is a key factor explaining why sub-Saharan Africa as a whole failed to
use ISI as a platform for technological learning in the style of East Asia. In the event, plant and machinery, and
management and labour skills to master new technologies could not be accumulated, which, in turn, reflected
adversely on product quality.
Table 1
In Sub-Saharan Africa‘s ISI the production inefficiencies that developed behind tariff walls led not only to trade
inefficiencies but even to a form of product differentiation in which lower quality good were produced
specifically for domestic consumers. Eventually, failure to pursue ISI to its logical end, i.e. export
competitiveness, and other [internal and external] causes of technical inefficiencies, have meant that much of the
existing machinery had lost its capacity to produce export quality. Valk (op.cit) concludes that:
‗The long march back, towards trade efficiency through both technical and production efficiency, involving all
factors of production, will have to incorporate a concerted effort on all fronts…‖ and will involve changes in the
macroeconomic environment; simultaneously, market contacts will have to be developed supplying information
about quality, design, technological change, etc. Underpinning all these will be a process of massive human
capital accumulation to facilitate international knowledge absorption.
4.0 PROTECTIONISM (Industrial Policy in East Asia versus Sub Saharan Africa)
The import substitution idea, by its very nature, involved protection, and from the beginning of the 1950s
virtually all developing countries began to put in place a variety of instruments to protect their economies from a
large number of imports. The role of trade policies in East Asia has also been the subject of deep controversies,
which sometimes overlap with the debate on industrial policy. Some authors have emphasized the role of trade
policies in East Asian growth. This is partly explained by the contrast between the growing export shares,
especially in manufactured goods, as a percent of GDP in East Asia, and the dismal export performance in Sub
Saharan Africa. Hence, the East Asian model of growth became popular for being ―export oriented‖ while
protecting local industries in contrast with rigid import-substitution strategies in other countries that were
―inward looking‖ with high tariff and quantitative barriers to trade and barriers to foreign investment.
East Asian economies, with the exception of Hong Kong and Singapore, also used import protection through
tariffs and quantitative barriers and restricted foreign investment, but utilized incentives and exchange rate
policies to promote exports. Taiwan, China moved to export- orientation in 1958, and introduced duty
exemption schemes, bonded factories and export processing zones to promote of FDI for export. Korea followed
in the mid 1960s, but kept a more restrictive regime for foreign investment. Trade regimes in Hong Kong and
Singapore were more liberal due to their traditional role as trade hubs, although Singapore has followed a
selective approach to Foreign Direct Investment. Indonesia, Thailand, and Malaysia followed importsubstitution strategies, and started promoting exports, reducing trade protection, and especially, offering
incentives to FDI in the 80s. Taiwan, China, and Korea have also liberalized their economies significantly since
then. China also reduced tariffs and started to open to foreign investment in that period. Since then, the growth
in East Asian exports in global trade has been spectacular, from 9 percent in 1980-85 to 18 percent in 1997.
How did governments actually intervene in East Asia? The truth is that each economy followed a very different
strategy (see table 2 below). With some exceptions, the economies shared a few common characteristics: stable
business environment with low inflation, prudent fiscal policies, exchange rate to promote export
competitiveness, financial development with gradual liberalization, efforts to minimize price distortions,
emphasis on education and skill acquisition. However, there were big differences in the importance of foreign
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investment, state-owned enterprises, and import protection. And differences in performance were also
significant.
Table 2
We may ask, therefore, in addition to the present research, what types of institutions are being established in
sub-Saharan African countries in the post-adjustment decades to provide incentives to bolster industrial
entrepreneurship? How have these institutions been created and recreated? In what ways is the incentive system
that is evolving now [in the post-adjustment decades] different from that obtaining in the pre-adjustment
decades? Is the incentives system in sub-Saharan African any different from that of the East Asian NICs? This
last question becomes the more relevant because of the entrepreneurship system in Southeast Asia has often
been used to gauge the weaknesses of the sub-Saharan African system [Brautigam 1994, 1998].
An important point to note here is that for the East Asian NICs, GDP per capita grew positively at annual rates
superior to the rates recorded for the OECD as a whole and the USA, which steadily pushed their per capita
incomes towards the OECD level. Again, South Korea has had the most rapid growth rate in GDP per capita
among the East Asian NICs. In 1996, just about two decades after its industrial take-off began (1973), South
Korea became designated a high-income country by the World Bank and joined the OECD as an industrialized
economy and provider of development aid. For most of these countries per capita income increased manifold
within the three to four decades involved; for Korea it was a 12-fold increase.
For the East Asian NICs, however, moving up the global industrial ladder to the more skill-intensive products
was never an easy process. More skill-intensive production demanded better facilities in physical and economic
infrastructure, trained industrial workforce and entrepreneurial capability. To a certain extent, market forces can,
and do indeed, facilitate these processes, as changes in the relative scarcities of the production inputsland,
natural resources energy, labour, capital lead to changes in comparative advantages. But the East Asia NICs
show that more than market forces are required; specifically, policy interventions supporting (labour-intensive)
exports are required,
Table 3
Table 4
East Asia was not the only region in which governments intervened with the goal of promoting industrialization
and growth. All countries, including todays more developed, have followed similar strategies for centuries. So
did Latin America in the 20th century and in some countries such as Brazil at the end of the 70s, the strategy
seem to work for some time. However, as the pace of technological change accelerated, Sub Saharan African
and Latin American countries were not able to adapt fast enough. Several reasons help explain the differences
especially for the Sub Saharan Africa: poor macroeconomic management, falling investment in education at all
levels, technology policies that failed to create incentives in firms to innovate, and lack of discipline in
government support to firms. In Africa, after disappointing experiences with import substitution, attempts to
follow export promotion strategies largely failed due to exchange rate policies, lack of capacity and trust, and
poor infrastructure.
4.1 Policy Lessons
A dilemma confronts Sub Saharan Africa – African countries have been unable to participate in the setting of
standards and regulations in a way that is not harmful to their industries. African countries have become, in the
words of one report (World Bank, 2003), ‗standard-takers‘, being ―forced to accept and try to meet international
standards, reacting to ever-changing standards that do not accommodate unique constraints pre-existing in the
local environments.‖ What are the lessons that can be learned of the East Asian debate for the Sub Saharan
countries looking for successful developing strategies?
The first lesson should be about the diversity of experiences. The selection and implementation of policies
varied enormously and was highly dependent of the conditions facing each of the East Asian governments.
There is a consensus about the ability of the most successful East Asian countries to get the fundamentals right.
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With some exceptions, they enjoyed macroeconomic stability, promoted education at all levels; invested heavily
in infrastructure, and possessed a civil service committed to development. Efforts to promote industrial sectors,
without having the fundamentals in place have been unsuccessful (for example in the Philippines). This has been
the case for the Sub Saharan. There is a high risk that favored sectors will capture the policies and resist
attempts to reverse them. The literature highlights that policies have evolved over time, as the domestic and
international context changed; East Asian countries have increasingly liberalized their economies, lowered their
trade barriers and changed their regulations to promote competition and particularly, a more efficient use of
resources.
Another important lesson is the need to look at the changing circumstances. Currently, governments are more
focused on creating a good investment climate for private firms. The paradigm of industrial policy has also
evolved. The emphasis is less on direct government selection of promising sectors, and more on the use of
indirect mechanisms to promote technological upgrading, by means of attracting FDI and developing local
technological capabilities. The world‘s production and trade patterns have changed. As global integration
increases, it becomes more difficult for governments to predict what sectors a country can produce with
advantage. As an example, the initial success of the software industry in India was facilitated in part by the
easing of government intervention.
A frequent argument made by proponents of greater government intervention is that the international trade
regime limits the instruments available to developing countries. They claim that international trade rules
constraint the possibility of using the tools that proved effective in East Asia –mainly local content requirements
and export subsidies). Three comments can be made regarding this argument. First, the impact of these
instruments is not clear, and they are subject to the risks of abuse by special interests. Even in East Asia,
experiences with these instruments varied substantially. Second, the current trade regime under the WTO still
offers governments some margin to promote the manufacturing sector, especially for less developed countries.
They have longer transitory periods to decide how quickly they want to liberalize. In addition, certain kinds of
subsidies (i.e. promotion of R&D activities) are still permitted. Finally, the purpose of international trade rules is
to create a more level playing field and avoid beggar-thy-neighbor policies and this should benefit developing
countries. Certainly, there is room for improvement in international trade rules to better serve the needs of
developing countries.
The lessons learned from the import substitution points to a new strategy. The central notions were a return of
confidence in the market combined with a strong commitment to exporting nontraditional products and to
liberalizing imports. Emphasis was placed on elimination of price distortions, recognition of the power of
comparative advantage, privatization of virtually all public firms, acceptance—even encouragement—of private
foreign investment, maintenance of price level and balance of payments stability, and becoming internationally
competitive. The view that an effective market mechanism would appear if the government simply removed
itself from the economy was implicit in many formulations even though evidence to support the view was rarely
offered.
Some of the learning, however, was not included in the new orthodoxy. Recognition of the deep-seated
difficulties of the international transfer of technical and other knowledge and of the fundamental role of
searching and learning by firms and governments, of a necessary role for agriculture, of the role of initial
conditions and hence of history and institutions, and of the fact that effective implementation of policies is as
important as the choice of policies—these are all missing. Ideas of economic independence (including
ambivalence toward foreign direct investment) to accompany political independence, so important in the import
substitution approach, are given no attention by the new orthodoxy.
5.0 SUMMARY AND CONCLUSIONS
Sub Saharan Africa in the 21st century cuts the picture of extreme poverty, gloom, despondency and
desperation; the deplorable state of the continent contrasts sharply with the fortunes of almost every other
region. The HIV/Aids pandemic is a terrible menace particularly to Africans threatening to reduce life
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expectancy by up to 20 years imposing costs on Africa up to 50% more than any other part of the world.
Primary school enrolment is dropping, food production is dropping on the one hand (due to a myriad of both
natural and economic factors) while on the other, population growth rate is rising, exacerbating poverty levels.
It remains correct to say that outward orientation is still urged strongly on all developing countries by powerful
institutions and well-placed individuals. Why? One may speak of an easy stage of outward orientation as well as
of import substitution. In an economy in which there are great price distortions, underutilized capacity, rampant
inflation, and large balance of payment problems, correcting these problems may well produce quick increases
in output and measured factor productivity. Such an easy stage can continue for some time, especially if world
trade is booming. But what happens after this easy stage of outward-orientation reform has exhausted its
momentum, and something more fundamental has to come into play. What is it that is more fundamental? If, in
Sub Saharan countries, distortions are eliminated—if all prices are right—the government‘s role is minimal, no
inflation exists anywhere, saving and investment are at least 15 percent of GDP, and world trade is booming,
would all countries grow at the same rate as Korea and Taiwan have in recent decades? The answer surely must
be no. Another question leads to a more general question: Why did per capita GDP not begin to grow in Africa,
when it began to grow in East Asia? Or why did economy-wide growth not take hold in periods of commodity
booms in presently less-developed countries?
Import substitution and outward orientation offered easy solutions to the development problems of Sub Saharan
countries. Import substitution as implemented by the region failed, and the justifications for outward orientation
(as usually presented) are being increasingly undermined. This paper suggests strongly that no quick and easy
fixes to development problems are available. To accept learning and knowledge accumulation both as the
bottom line of growth and as having roots deep in the ethos and history of a society requires that explanation
and policy prescription probe these precincts that are so alien to mainstream thinking. This is the great message
of the histories of technical knowledge accumulation and of the stories of the failures of import substitution and
outward orientation reported herein.
So what is the future for industrial policy (ISI) in Sub Saharan Africa? To some, this question may sound
pointless, given the wide-ranging liberalization measures that have been instituted and implemented in the
region, and also given, at least for the moment, the positive attitude of most governments in the region to the
liberal cause. However, formal laws and rules cannot fully determine the working of an economic system – after
all, it was out of the very American formal institutional structures that the Occupation Authorities imposed after
the Second World War that the ―idiosyncratic‖ Japanese and German economic systems had developed.
Moreover, policy needs and fashions change, and therefore it is not certain whether the economic directions of
governments in the region will maintain their current policy. The region, still needs to explore the more
structural economic and political trends of ISI to reflect on whether the governments in the region should
reshape their activist industrial policy and commitments to a vision change. In this conclusion, we draw out the
ingredients of successful industrial transitions (as born out by the East Asian experiences) in the form of what
Sub-Saharan African countries aspiring to undergo such transitions ought to do.
 Africa could tag along by keeping its markets open, its politics democratic and its economic policies
inspired by fiscal and monetarist principles that would preserve market signals and also not interfere
with prices. By generally, being uncritical of the extant structure of global political economy;
embracing among others, a floating exchange rate, eliminating subsidies, reducing public sector
borrowing etc.
 Africa is to regard globalization as a perverted form of the New International Economic Order (NIEO)
it clamoured for, and seize the opportunity to renegotiate its peripheral status. This would entail a
more critical, more combative, even radical approach but the fruits would have been sweeter and
longer lasting albeit delayed. New Economic Partnership for African Development (NEPAD) is an
eloquent testimony to the preference the present generation of African leaders has settled for, a sacred
oath to be on best behaviour and not upset the applecart of real capitalism.
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Initiate an agrarian revolution as a starting point. Apart from providing food for an expanding
population and, hence, guaranteeing socio-political stability, agriculture constitutes a backwardlinkage sector for a processing industry that could form the initial starting joint for developing viable
agro-based export industries.
Engage with the global market place to undergo technology transfer. Growth theory and development
experience tell us that economies can learn faster than can invent. A critical factor in technological
learning is engagement with the global economy that enables developing countries to absorb
international knowledge, to access markets, and to develop strong export industries, which are
especially important in the initial phases of industrial transition (Finance and development 2008, pp.
32-33).
Complement engagement with the global market place with accumulation of human capital. As we
have observed, the industrial revolutions in East Asia in the last four decades or so owe much to the
quantity and quality of their human capital, inter alia. International competitiveness is critically
determined by human capital – a critical factor, also, in technological capability. The right type and
mix of education investments facilitate technological accumulation, which, in turn, impact positively
on long-run growth and catch-up.
Control and regulate openness to the global market place whose key agent is the multinational
corporations (MNCs). No country has developed on the basis of unregulated openness to the world
market; this is true both for the ‗early industrializers‘ (Britain, Western Europe and the United States)
and the ‗Late industrializers‘ (the NICs) (see Reinert 2007). Among the dilemmas confronting SubSaharan African countries – indeed, developing countries, generally is whether they should open up
completely to the forces of the global market place (in the hope of maximizing its well known
benefits), or to take a more regulated approach so as to minimize or avoid its potential destabilizing
forces. The challenge to national economic policy in Sub-Saharan Africa lies in ability to devise
strategies that optimize the advantages of engaging effectively with the world market and its key
agents: take advantage of liberalization to expand export trade, in crease FDI inflows, etc., while at
the same time avoiding or minimizing the disruptive consequences on the economy (see Khor 2005).
The beginning all the key institutional prerequisites for catch-up industrialization must include the
emergence of a development-oriented social class. The latter asserts itself and takes control of the
state, sees to it that there is coordinated industrialization dynamics oriented on strategically important
sectors, and creates favourable general conditions for the implementation of strategies to develop
those strategic sectors. To repeat, the success of an economic policy aiming to achieve catch-up must
incorporate these four elements as its political and social counterpart:
1. Evolution of a public sector with capacity to supply the critical ‗public goods‘ and externalities
which act as a leverage on the private sector to engage in productive entrepreneurship;
2. Such a model must include elements to expand domestic demand (‗redistribution with growth‘)
and selective ISI which promotes and is based on competitiveness on the world market (the ‗good
protectionism‘ model- see table 6);
3. Programmes to increase and diversify exports with clear controls on the imports of good and
inflows of FDI and foreign capital generally (regulated interaction with the global market place);
and
4. Entrepreneurial capability of the state to develop without undermining individual or private-sector
enterprise or initiatives (complementarity of public and private-sector entrepreneurial initiatives).
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Table 1: Sub-Saharan Africa‘s ‗bad‘, model of protectionism compared with East Asian ‗good‘ model
Sub-Saharan: „Bad‟
East Asian: „Good‟
Permanent protection of ISI industrial products for the home
market
Temporary protection of new industries
/products to acquire competitive capability for
the world market
Learning curves lagging behind global trends
Learning curves keeping abreast with global
trends in technology
Adopting a static view of the world economy whereby world
technology is viewed as given and unchanging
Adopting a dynamic Schumpeterian view of
the world-market-driven ‗creative destruction‘
motion of innovation.
Domestic competition stifled
Domestic competition encouraged and
sustained
Core technology generally imported from abroad/assembly
plants/industrialization lacking domestic foundation and,
hence, ‗superficial‘.
Core technology locally controlled via
acquisition of ‗imitative‘ or adaptive R&D
capability to absorb foreign technology.
Weak human capital infrastructure; educational investments
failed to create the right volume and types of industrial
workforce matching the demand from modern industry. On
the other hand, types of industries established failed to create
adequate demand for education. Educational expansion seems
only to feed the ‗brain drain‘ – large-scale emigration of
educated workforce to the OECD countries.
Massive accumulation of human capital
/industrial policy encouraged huge, sustained
demand for education. Industry and education
maintain a synergy.
Distribution of industrial investments, jobs and privileges
based on regional/ethnic/political considerations and far less
on meritocracy
Distribution of industrial investments, jobs and
privileges has meritocracy as a deciding
through not sole criterion.
Agrarian reform given little emphasis as factor in the
industrialization process.
Agrarian reform (land redistribution) preceded
industrialization
Profits created through static rent –seeking
Profits created through ‗Schumpeterian‘ rentseeking
Limited linkages between ISI and local economy
Intense linkages between industry and local
economy
Capital imports and FDI hardly regulated to lead to
technology transfer and technological change and
maximization of knowledge for international competition
Capital goods imports and FDI highly
regulated and oriented on maximization of
knowledge for international competition
Source: Adapted from Reinert (2007)
Sub-Saharan Africa‘s ISI and the protectionism that underpinned it could be termed ‗bad‘ in comparison with
the ‗good‘ protectionism of East Asia. The table above, attempts to provide a picture of ‗bad‘ protectionism in
Sub-Saharan Africa vis-à-vis ‗good‘ protectionism in East Asia.
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Table 2: Different Strategies followed in East Asia
Countries
Deepening
Industrial
Structure
Raising local
content
FDI
Strategy
Raising Technological
Effort
Promotion of
large
enterprises
Hong
Kong
Singapore
None
None
None, but
subcontracting
promotion
now
started for
SMEs
None Except
Technology Support
None for local firms,
but TNCs targeted to
increase R&D
None
Very strong push
into specialized
high skill/high tech
industry, Singapore
without
protection
Passive
Open Door
Aggressive
targeting
and
screening of
TNCs,
direction
into
high valueadded
activities
Taiwan
Strong push into
capital, skill and
technology
intensive
industry
Strong
pressures for
raising local
content and
subcontracting
Screening
FDI,
entry
discouraged
where local
firms
were strong,
Local
technology
diffusion
pushed
Strong technology
support for local
R&D and upgrading
by SMEs.
Government
orchestrated
high
tech
development
Sporadic: to
enter heavy
industry mainly
by government
Korea
Strong push into
capital, skill and
technology
intensive
industry,
especially heavy
intermediates
and capital goods
Stringent local
content rules,
creating
support
industries,
protection of
local
suppliers,
subcontracting
and promotion
FDI kept out
unless
necessary
for
technology
access or
exports, joint
ventures and
licensing
encouraged
Ambitious local R&D
in advanced industry,
heavy investment in
technology
infrastructure.
Targeting of
strategic
technologies
Sustained drive
to create giant
private
conglomerates
to internalize
markets, lead
heavy industry,
create export
brands
None, but some
public sector
enterprises
enter targeted
areas
Source: Lall (2003
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Table 3: GDP per capita and Growth Rates for East Asia, the OECD & Sub-Saharan Africa
Country & region
GDP
Per GDP Per capita Growth Rate GDP Per Capita Growth Rate
Capita
(%) 1975-2001
(%) 1990-2001
22,149
2.0
1.7
OECD
USA
35,277
2.0
2.1
1,267
5.9
5.5
EAST ASIA
South Korea
8,917
6.2
4.7
Singapore
20,733
5.1
3.9
Malaysia
3,699
4.1
3.9
Indonesia
695
4.3
2.3
Thailand
1874
5.4
3.0
SUB-SAHARAN
475
-0.9
-0.4
AFRICA
319
-0.7
-0.3
Nigeria
634
-2.0
0.1
371
0.3
-0.6
Cote d‘Ivoire
Kenya
Source: UNDP (2003, Statistical Tables)
Table 3 provides comparative data on GDP per capita for East Asia, the OECD and Sub-Saharan Africa in the
1970s through the beginning of the 2000s.
Table 4: Sustained High Growth in the East Asian Economies
Economy
Period of High Growth Per Capita income at start of
growth period
1961-2005
105
China
Hong Kong
1960-1997
1966-1997
2005 (in constant 2000 US
$)
1400
3,100
200
29,900
900
3,500
1,100
790
2,200
1,500
330
39,600
12,200
4,400
25,400
16,400
2,400
Indonesia
Japan
1950-1983
Rep. Of Korea
1960-2001
Malaysia
1967-1997
Singapore
1967-2002
Taiwan
1965-2002
Thailand
1960-1997
Source: Finance and Development 2008, p.32
i
All Correspondence to [email protected]
This left many developing countries which had come to depend upon foreign manufactured consumer goods
imports vulnerable to shortages of those goods.
iii
An automobile industry may need to sell 100,000 units of output (cars) to achieve the same level of efficiency.
ii
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