African development, commodities and diversification

“CentralKigali” by SteveRwanda – Own work.

Roger Bootle points out that Africa’s fairly rapid growth in the past few years is at risk from the current slump in global commodity prices. Many of the continent’s economies are overly dependant on the export of commodities, and will therefore suffer disproportionately from the slowdown and structural change in China. He suggests that they generally have poor governance and that an improvement in this factor is the key to more rapid and sustainable development.

I agree with Bootle that much of Sub-Saharan Africa (SSA) has done well in recent years due to the boom in China and the resulting rapid growth in demand for commodities. I also think that it is vital that these economies diversify away from commodities and towards industry and services.

However, the claim that improved governance is the solution to poverty among developing countries is wrong-headed. Among the few countries that have made the transition from poor to rich country status and done so over a mere several decades, such as Taiwan and South Korea, major improvements to governance have followed development rather than preceded it. Reduced corruption, democratic elections, and human rights have been the outcomes of development. This is one of the central claims of the work of SOAS economist Mushtaq Khan.

Khan has proposed that the countries that have gone through the process of ‘late industrialisation’ and a period of rapid catch-up productivity growth all adopted some form of industrial policy. Of course, many other countries which have not made the transition to rich country status have also had industrial policies. These countries often went through a period of rapid growth in the beginning, but as in the case of many Latin American countries, they found themselves caught in the ‘middle income trap’, unable to catch-up fully with the rich countries.

According to Khan, the difference between industrial policy success and failure, given its great potential to accelerate growth in poor countries, is the compatibility of the kinds of policies adopted, and the balance of power or political settlement in society. Where industrial policies were a success, the government was more able to withdraw support to particular industrial sectors when they failed to grow rapidly. These firms and sectors were therefore subject to disciplinary incentives which forced them to learn to use already existing technologies and improve their productivity levels in order to become competitive enough to export. If they failed to improve support was generally withdrawn. By contrast, government support for industry in the countries that were not so successful was often captured by firms that did not improve their performance sufficiently. In many cases these firms became inefficient monopolies, with no incentive to raise productivity. The continued provision of subsidies and protection from competition produced welfare losses to society, without the productivity growth necessary to make the policy a success.

In the successful ‘late-developers’, there was plenty of corruption and governance during the catch-up phase was not necessarily ‘good’, as defined by organisations such as the World Bank. But the incentives of the state and the favoured industrial sectors were more aligned with each other and geared towards rapid industrialisation and development. This produced an expanding middle-class which ultimately pushed for governance improvements.

If we accept Khan’s argument, then instead of simply liberalising the entire economy and expecting a diversified pattern of development to emerge, attention should be given to how to support growth-promoting sectors in a way that is compatible with the balance of power in society. The best development outcomes have resulted from successful industrial policies. Some poor outcomes have come from failed industrial policies. Liberalisation can possibly produce something in between, but with no guarantee of catching-up with the richest countries and escaping the middle-income trap.

Many countries in SSA, despite recent improvements, are still characterised by considerable absolute poverty. Governments in these countries need to think carefully about the relationship between the balance of power in society and particular forms of industrial policy. They need to learn from the successful late-developers. The lesson is more subtle than one of state intervention versus liberalisation. This is vital if they are to diversify their economies away from a reliance on commodities exports and towards industry and services. Only in this way will they be able to develop more rapidly and allow their poorest among the population to escape from poverty.

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