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Monday, July 16, 2012

An Industrial Policy For Africa? A Bad Idea

Ha-Joon Chang, writing in the Manchester Guardian (7.16.12) http://www.guardian.co.uk/commentisfree/2012/jul/15/africa-industrial-policy-washington-orthodoxy  has suggested that Africa should reject the World Bank/IMF investment model of loans/grants on the condition of promised government reforms, and turn to an industrial policy – i.e., instead of focusing on overall systemic reform as the precursor of economic growth, select certain areas of potential growth and invest in them.   This policy has been bandied about in the United States for years, discredited as market distortion, and discarded.  Perhaps most importantly, it smacked of Soviet-style central planning and had an unpleasant political odor.

Although Japan and South Korea (the two countries cited in the article) began with an industrial policy, they quickly turned to free market solutions.  Perhaps more importantly, comparing these ancient, disciplined cultures with well-defined moral centers (e.g. Confucianism) which defined governance and leadership to Africa which was until only recently tribal and European-ruled is specious and unrealistic. In fact, neither the familiar World Bank/IMF free market-with-conditionalities approach nor an industrial policy are likely to work until African countries have had far more time to develop modern, responsive, civic institutions.

The idea of an industrial policy is a bad one, for it is unlikely that bureaucratic decisions – always influenced by political opinion, lobby groups, and electoral self-interest – are better than the old-fashioned but reliable law of supply-and-demand.  There are of course market failures; and we have seen many in the past five years.  The market, left to its own devices, does not always produce a perfect product, distortions occur, and ex post facto government intervention in the form of regulation results; but such corrective action is far more preferable than trying to second guess the market with a priori decisions.

Industrial policy or state planning is a bad idea particularly in Africa, a continent whose leaders are notoriously known for corruption, venality, nepotism, and robbery of state coffers.  Indonesia is perhaps the supreme example of a country with significant economic potential, but which has been subject to oligarchic rule for decades.  The ruling families have already dictated economic policy by channeling billions into their own pockets, and free enterprise is a myth.  The ruling elites of African countries which are light years from the growth of an Indonesia, let alone China or India, have few resources to commandeer and misuse, although they have done a good job with what they can get their hands on. 

The fact that Africa’s accelerating growth rate (touted as a promising fact by many pro-African economists) is almost entirely based on the rise in commodity prices fueled in part by China’s aggressive buying, is perhaps the main reason for staying away from an industrial policy.  Of course rulers in Angola, Equatorial Guinea, Nigeria and other oil and mineral-rich states would choose to invest in commodities.  They are uncomplicated cash cows.  Africa has yet to diversify its economies and create multiple opportunities for investment; i.e. an industrial policy has a greater chance of success in situations where risk can be mitigated by spreading it over a number of sectors.

The author of the article summarizes the position of the World Bank/IMF:

In the 1980s, in their desperate attempts to survive the third-world debt crisis of 1982, most African countries became heavily indebted to the World Bank and its sister organization, the International Monetary Fund. Their loans came with a lot of strings attached. The borrower countries were made to cut government spending, privatize their state-owned enterprises, deregulate their financial markets, and liberalize international trade and foreign investment.

The reasoning behind these policies – often called the Washington consensus policies – was that big and intrusive governments were the main causes of poor economic performances of the African countries. Once you lift the "dead hand" of the state, it was expected, private sector entrepreneurs would burst out and revive their economies.

These policies have failed, Chang says:

The expectation was, to put it mildly, unmet. In most African countries, there was no private sector that could rush in to fill the vacuum left behind by the shrinking state. Even in countries where the private sector was reasonably developed, it could not thrive in an environment of vastly heightened import competition and collapsing public investments in infrastructure, education and skills.

As a result, between 1980 and 2000, per capita income in sub-Saharan Africa fell by 9%. This was a highly embarrassing record for the advocates of the Washington consensus, as the interventionist policies – whose mistakes their policies were supposed to be correcting – had raised it by 37% in the preceding two decades.

The mistake that Chang makes is linking the two – that the policies of the World Bank/IMF were wrong and contributed to slow economic growth.  However he makes an illogical leap of faith by concluding that if free market approaches did not work, then statist industrial policies would.  The demand of the international lenders for government reform was exactly what was needed, and it was their blind faith approach to this reform which sank the enterprise.  International bankers assumed that countries would accept the ‘conditionalities’ – government, fiscal, financial, and economic reforms – because of the threat that they would get no more money unless they were respected and acted upon.  Nothing could have been further from the truth.  The lenders were flush with money they had to spend, and the principle objective of the lending institutions was to spend it.  Program officers’ evaluations were tied to moving money out the door.  When projects failed to meet their development objectives and conditionalities were ignored, the World Bank simply rescheduled the loan, restated the conditionalities, and observed for another five years.

The African country politicians caught on quickly – the World Bank wanted to spend money more than the countries themselves wanted it.  The oligarchs and petty despots were raking off plenty as it was through the thousands of well-meaning, but idealistic and poorly managed bi-lateral programs, themselves beholden to politicians at home who were more interested in showing a commitment to Africa – money – than requiring any real success. Nevertheless, the author persists:

More important, there is a serious question about the sustainability of recent growth on the continent. Leaving things to the market, following the Washington orthodoxy (lending with ‘conditionalities’), few African countries have been able to convert their recent resource bonanza into a more sustainable industrial base. Worryingly, over the past decade many African countries have increased, rather than reduced, their reliance on primary commodities, whose notoriously large price fluctuations make sustained growth difficult.

As mentioned above, African leaders are quite happy to put all their eggs in one basket.  It is highly unlikely that the price of oil, minerals, and rare earths will decline, given the accelerating demand from emerging economies.  Why should they care at all about diversifying their countries’ economies?  It is only with the structural reforms that the World Bank and IMF have insisted upon can there be any hope for real economic development.  Once citizens are truly enfranchised, and once a free press is enabled, accountability can be restored.  Demands for a more equitable economy can at least be heard.  Chang concludes:

So, everything points to a more active use of industrial policy in the African countries over the coming years. No doubt some of them will make mistakes and mess things up in the process, but, to judge by past records, most countries will be better off in the long run with a more activist development strategy than with the bankrupt Washington orthodoxy.

In fact both the current conditionality-based approach to economic development and one based on an industrial policy are likely to fail because of the immaturity of civil institutions.  Without representative government, an independent judiciary, banks that are free from nepotism and corrupt state control, and other elements of a progressive social economy, conditionalities will continue to be ignored and autocratic oligarchies can be expected to turn any industrial policy to their own ends.

The solution is clear – no more concessionary loans or development aid to Africa.  Let countries access international capital markets like everyone else and return the mandate of the World Bank to ‘lender of last resort’.  African countries will be forced to decide exactly for what projects they want to borrow, for if they do not repay the loan, the commercial banks will not be as generous as the international donors.  They will cancel it and will give no more money, period.  The West has been complicit in Africa’s dissolution.  We have propped up autocrats with development aid, soft loans, and idealistic solutions.  We have been moved by images of misery and have chosen short-term, inefficient means to alleviate it.  Now is the time to leave. 

Those countries with valuable natural resources will negotiate sweet deals with the Chinese, but will not become indebted.  These arrangements are not one-way streets, and both parties gain.  In Mozambique, for example, China has but billions of dollars in infrastructure to strengthen the agricultural sector as a whole, not just those portions which support their investments.  A combination of high-stakes barter with the Chinese and borrowing on international capital markets might produce the structural reforms required for real African development.

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