The China- built new AU headquarters in Ethiopia (pictured above), perhaps the foretaste of a coming re-alignment in Africa over development pathways?
By Nicholas Norbrook
Governments across the continent are looking for new development models after the policies of privatisation and liberalisation seem to have run their course.
The arrival of Jim Yong Kim as president of the World Bank bearing promises of a cultural revolution comes at a critical time for Africa’s prospects.
Africa is now the world’s fastest-growing continent, but questions about policy – the failure to develop viable industries and reduce worsening youth unemployment and widening inequality – remain the subject of fierce debate.
That argument pits advocates of a more state-led development strategy, which has produced impressive results in East and South Asia, against the veteran advocates of market economics and liberalisation – the old ‘Washington consensus‘ pushed by the World Bank and the International Monetary Fund in the 1980s.
The terms of the debate are shifting, it seems. World Bank vice-president for Africa Makhtar Diop told The Africa Report in 2012: “If you look at the structure of the economies in Africa 10 years ago and today, there hasn’t been much change.” Africa remains a producer of raw materials and an importer of finished goods.
British industry was protected during the industrial revolution
So what can change the structure of African economies? Has the World Bank been helping or hindering African chances of following Asia’s great industrial leaps? Some African leaders have already made up their minds. Taking Asia as inspiration, and increasingly using Asian finance as development capital, they have junked important elements of the ‘Washington consensus’ in favour of a strong developmental state.
Ethiopia’s late Premier Meles Zenawi, a theoretician of the need to reclaim the state, was most explicit in his rejection of complete faith in the market: “Developing countries face formidable market failures and institutional inadequacies [...] which can adequately be addressed only by an activist state.”
For African leaders, surveying the past 50 years of development as counselled by the West, the question is clear: Why should India, China and South Korea have succeeded when they ignored the privatisation and liberalisation dictums of the ‘Washington consensus’?
The clash of ideas
This contest of ideas is far from academic. Hundreds of millions of lives and billions of dollars are at stake. If African economies can use new ideas and technology to consolidate growth and make it self-sustaining, the next two decades in Africa could be as transformational as the last two in Asia.
Some African governments have already made their choice alongside Ethiopia. Both the Moroccan and the Rwandan government have strong investment arms. Rwanda’s Crystal Ventures has helped companies break into the roadbuilding trade, for example, and has spun off profitable businesses in the construction, food processing and security sectors.
And, in a big roll of the dice, Morocco’s King Mohammed VI has wagered the country can become the next hub of car manufacturing and aeronautical engineering on Europe’s fringes. The Tanger-Med complex hosts Renault and Bombardier as key tenants and is a testament to a thoroughly planned industrial policy.
Policymakers are asking if the World Bank, in particular its new leader, South Korean-born Jim Yong Kim, can bridge the gap between those governments trying state-led policies and the old market purists.
Kim was an astute choice to run the World Bank. He is a non-ideological leader for an age that seems to have had enough of grand narratives. “Here is the news for Africa: I am an evidence guy and so I don’t come into this saying that a particular interpretation of history is what we’re then going to take and implement on everyone else.”
Kim was a member of the ‘Fifty Years is Enough’ movement in the 1990s and edited a book condemning World Bank policies called Dying for Growth. “What we criticised them for is this sense that as long as you focus on the macroeconomic fundamentals everything else would fall into place.”
When the World Bank got mixed up between privatisation and liberalisation
The World Bank pushed for the state to get out of the development business in the 1980s, but proponents of a developmental state are making a comeback in Africa. Perhaps it was the political fervour at the time, with Margaret Thatcher and Ronald Reagan’s market fundamentalism etched so clearly against the centrally planned economies of the Soviet Union.
In any case, “‘stabilise, privatise and liberalise’ became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counselled,” writes Princeton University’s Dani Rodrik. Certainly Africa’s recollection of the Structural Adjustment Programmes (SAPs) remains vivid. From the 1980s onwards the state was distrusted as a development partner.
For Morten Jerven at Simon Fraser University, author of Poor Numbers, one of the critical mistakes of the Bank during the restructuring of the 1980s and 1990s was the assumption that the private sector would automatically fill in for the withdrawing state institutions: “The overwhelming focus was on quality rather than capability.” So for example, when the SAPs stripped out the agricultural extension programmes that financed and handed out inputs to farmers across Africa, the Bank assumed that private companies would take up the burden. They did not, as the Ivorian cocoa sector demonstrated, especially when compared to Ghana. The Ghanaian government managed to convince the Bank only to part-privatise the Ghana Cocoa Board, and today it is in a much better state.
Brain drain
Another problem stemming from that period was the brain drain that still cripples Africa. Instead of helping African governments take the courageous political decision to cut staff numbers, the Bank allowed governments to slash salaries by 50 percent, sparking an exodus of doctors, nurses, engineers and administrators to better paid jobs in Europe or the United States. “In the early period of privatising the Zambian mining sector, they could have privatised much more cleanly and to much better buyers, but politically it was such a difficult thing to do that it didn’t happen”, says World Bank chief economist for Africa Alan Gelb. “The lifeboat is not a good place to make high-quality economic decisions,” he says.
A nuanced view is emerging. Some policymakers are now saying that macro-economic reforms were necessary, but that the role of the state in nurturing industrial progress has not yet been settled. “At the time that those programmes were introduced,” says Alan Hirsch, former head of South Africa’s Department of Trade and Industry and economic adviser to South African president Jacob Zuma, “something dramatic was needed to try and get governments to think better about what their job was and what the job of the private sector was.” But, at the same time, he argues that the focus was on privatisation – and reducing the role of the state – instead of on what was needed, which was liberalisation. “Sometimes the World Bank got mixed up between privatisation and liberalisation. Liberalisation was actually more important than privatisation and in many countries that happened the wrong way round.
“Certainly in South Africa it happened the wrong way round as well in some important sectors like in telecoms,” says Hirsch. The result, in South Africa, was the creation of predatory monopolies such as Telkom. Even Western banking stalwarts like Citibank’s Africa economist David Cowan argues that the privatisation agenda has run out of steam. “I think people understand that privatisation as promoted by Margaret Thatcher and the Adam Smith Institute and Ronald Reagan and company is not the panacea. “And so people look at the Asian development model and ask how can the state drive development; how can parastatals or Korean chaebols or whatever drive development?” ●
Financiers multiply
He arrived at the Bank in July 2012 at a critical juncture. The development business, for many years the domain of the World Bank, is now an open field. There was a sixfold increase in private sector capital flows between 2000 and 2007, reaching $86bn. That makes the World Bank just one lender among many – putting into perspective the $9bn that the World Bank will disburse to Africa in 2013 through concessional loans from the International Development Association.
The fact that Kim is the first non-white to run the Bank helps to deflect the traditional irritation that developing countries suffer from being lectured to. Given the pressure from China, India and Brazil to select a candidate of the developing world, the fact Kim was born to South Korean parents may help to attenuate the disappointment that Nigeria’s Ngozi Okonjo-Iweala or Colombia’s José Ocampo did not win the post.
Refreshingly, Kim’s schooling and professional background are in the domains of anthropology, medicine and on-the-ground development work, rather than the usual Bank candidates parachuted in from the worlds of politics and finance. This sets him apart from other more strict adherents to the Washington consensus who have sat in the top offices of 1818 H Street in Washington DC.
Kim is also the first Bank president who can talk about South Korea’s development with authority. “Even during the time when there was such strong industrial policy, there was intensive competition among the chaebols [conglomerates] inside Korea. So Samsung and LG and Hyundai and Daewoo at that time were killing each other trying to compete [...] this was not your classic command economy by any stretch of the imagination,” explains Kim.
State squander
So will he temper African governments’ desires to get more involved in the economy? Certainly a clear case can be made against state involvement in industry. From around the world, at different periods in history, politicians and businesspeople have come together to bleed the public purse dry in the name of industrial policy.
Africa has some acute examples, such as the hundreds of millions of dollars that went into the steel works at Ajaokuta in Nigeria, Zimbabwe’s own steel company ZISCO, Tanzania’s General Tyre East Africa, and Volta Aluminium Company, the aluminium smelter in Ghana.
As Kim himself suggests, successful Asian economies such as China, South Korea, Taiwan and Japan managed to introduce market mechanisms into such state support. Often state subsidies were dependent on export receipts, which are difficult to falsify.
If a particular company could show it was successful at exporting a particular good, then it received more state support. “Japan’s Ministry of International Trade and Industry was superb at structuring competitive, highly transparent fights for industrial licences, staggering the entry of different firms to manage the mix of protection and competition, and forcing businesses to upgrade their production equipment”, writes Joe Studwell in How Asia Works.
The debate around this subject at the World Bank has been dormant for decades. Recently, a new front was opened by Justin Lin, the Bank’s chief economist from 2008 to 2012. Significantly, he was the first chief economist the Bank has ever had from China.
Lin’s work did not advocate a fully-fledged embrace of industrial policy, but he did talk about the role of the ‘facilitating state’. Echoing Meles, Lin writes: “Developing economies are ridden with market failures, which cannot be ignored simply because we fear government failure.”
In this mild version of state-directed development, there are useful things a state can do to encourage industrialisation. One is providing subsidies aimed at innovation in order to help companies to bear the cost of coming up with new products.
Another is government assistance in coordinating all infrastructure, institutional, legal, financial and educational improvements that need to happen before more sophisticated companies can develop.
Morocco is a classic example of this, with a raft of government-led development institutions – from the Caisse de Dépôt et de Gestion to the Société Nationale d’Investissement – which have been critical in creating an industrial fabric around Tanger-Med that includes training institutes designed by the private sector and paid for by government.
At the Bank, Lin published New Structural Economics under the World Bank imprint. One chapter of the book is a debate between Lin and South Korean economist Ha-Joon Chang. Chang is the author of a book excoriating the “Bad Samaritans” – World Bank included – who advise developing countries to ad- opt policies that they themselves did not follow.
Chang’s ideas find ready defenders on the continent. “British industry was protected during the industrial revolution,” says Central Bank of Nigeria governor Lamido Sanusi. “In America, Alexander Hamilton protected infant industry; the Asian countries also did”.
Chang’s vision of state-led development is more muscular. It takes the example of South Korean steel company POSCO.
The World Bank refused to fund it in the late 1960s on the grounds that Korea did not have reserves of coking coal and iron ore, and its companies were exporting fish and clothes. POSCO is now the third-largest steelmaker in the world and one of the most profitable.
Ethiopia has also decided to leapfrog into heavy industry, creating the Metals and Engineering Corporation (METEC) in 2010. It will have the $5bn Grand Ethiopian Renaissance Dam as an anchor client. The Bank has yet to make a decision over whether to fund the dam.
Industrialisation is not a luxury for Africa but a necessity for its longterm survival
Lin was certainly an outrider in the Bank and his talk of industrial up- grading was greeted enthusiastically by African leaders for whom World Bank emphasis on reducing poverty rather than boosting industrialisation wears thin.
“Industrialisation is not a luxury for Africa but a necessity for its longterm survival,” the African Union Commission chairwoman Nkosazana Dlamini-Zuma told delegates at a March conference in Addis Ababa.
But how far does the Bank want to take Lin’s ideas? Chang relates a conversation where Lin revealed that barely 10% of his staff went along with his ideas.
The main case against industrial policy is that a strong developmental state quickly dissolves into crony capitalism, with picking winners turned into picking friends.
“Its a razor’s edge you are playing with here! If you have an enlightened bureaucracy with perhaps a military government or at least a government able to bring along the powerful industrial groups in the direction of greater economic growth and stay on top, then maybe,” says Shanta Devarajan, formerly Africa chief economist for the Bank, now chief economist for the Middle East and North Africa.
The challenge is in designing the mechanisms through which subsidies go to the intended beneficiary.
The Bank is involved in a fertiliser subsidy scheme in Tanzania that introduced a voucher system.
“So we do it, but we’re also pretty naïve,” says Devarajan. “There is some attempt at keeping the rents from being misused – then we did an analysis in Tanzania and found that 60% of the vouchers went to local politicians and their families.”
Unsurprisingly, the successful East Asian governments were the ones that managed to corral the private sector into productive sectors of the economy without getting captured. Joe Studwell says: “Big-time entrepreneurs who are not effectively disciplined by a developing country government become the oligarchs of Southeast Asia – or Russia, or Latin America.” He could have added of Africa.
Carry a big stick
Lamido Sanusi has caught public attention in Nigeria for his own embrace of industrial planning. His dismissal of eight bank chief executives in 2009 following a huge stock market bubble did much to reduce the levels of moral hazard in the sector.
He believes in encouraging entrepreneurs to invest productively – for example, showing the diesel cartel in Nigeria, which had been sabotaging the power sector for its own short-term gains, that much greater riches are around the corner if Nigeria can keep the lights on.
“You create a lot more money by investing in a refinery, so stop being a marketeer! So you transform them from primitive accumulation into capitalists. The US had its robber barons, all the J. P. Morgans, etc.”
Ultimately, this is where the argument over industrial policy will live or die. Will METEC resemble POSCO or Ajaokuta? A general launched POSCO, and Ethiopian army officers run METEC. They may have the discipline to see the project through, though, as Nigeria’s experience shows, a military background is no guarantee.
Crucially, the managers at METEC will be driven to develop their skills and technology with the help of others, which was one of the keys to POSCO’s success. METEC has brought in France’s Alstom, China’s Poly Group and United States-based company Spire. “We’re doing this in collaboration,” METEC spokesman Michael Desta told reporters. “We want to learn from them.”
If African governments can rein in their entrepreneurs, then they may be tempted to follow the lead of Ethiopia, Morocco and others. If they cannot, perhaps they would be better off heeding the Bank’s warnings.
Sourced here: http://www.theafricareport.com/North-Africa/will-africa-leave-the-world-bank-behind.html
Carlos Lopes’ blog: http://www.uneca.org/es-blog
Related articles
- http://developmentdiaries.com/how-the-world-banks-saps-impoverished-africa/
- Meles Zenawi, Africa’s intellectual giant (allanapotashblog.org)
- An extraordinary journey (allanapotashblog.org)
- Tomorrow is a new country (allanapotashblog.org)
- Does the World Bank Gloat Too Much? (psmag.com)
- Africa will have robust 2013-15 growth – World Bank (mdginafrica.wordpress.com)
