The role of public policy

As pointed out in the earlier article, a development state is ideal for most African economies whose private sector has not evolved to assume its developmental role.

Under these conditions, the state assumes the sole role of economic agent while at the same time laying down ideal conditions for the development of private sector.

In case of Rwanda, where private sector is still at its infancy, a development state type of policies are not only necessary, but also the only practical option to induce growth and thus development.

This  type of development paradigm was pursued by a number of Asia’s NIC in many ways where governments intervened selectively to induce growth and thus development.

Governments intervened systematically and through multiple channels to foster development, and in some cases the development of specific industries.

Policy interventions took many forms such as; targeting and subsidizing credit to selected growth trigger industries/sectors, keeping deposit rates low and maintaining ceilings and borrowing rates to increase profits and retained earnings (to induce re-investments), protection of domestic import substitutes, and developing export marketing institutions.

Also, they put in place education policies that focused on primary and secondary schools which in turn generated rapid increases in labour force skills. Agricultural policies stressed productivity and did not tax the rural economy excessively.

A close look at some of the African policies after independence, and in some cases today, one notices a continuation of colonial policy trends, and there has been no fundamental change to turn round these economies using well though of, widely debated home grown or endogenous policies by African economists, academics, and other policy stakeholders of which Africa boosts.

Asia’s NIC especially the North East Asian economies used the ‘development state’ model of development with success. Government intervention resulted in higher and more equal growth than otherwise would have occurred.

However, the prerequisites for success of these economies was so rigorous that policy makers seeking to follow similar path in other developing economies have often met with failure, and there are many.

The prerequisites for the success of interventionist measures by north eastern Asian economies was that, these governments first developed institutional mechanism which allowed them to establish clear performance criteria for selected intervention and to monitor performance.

Such interventions also occurred in an usually disciplined and performance based manner i.e. any policy intervention had to have: (i) a clear performance criteria (ii) institutional mechanism to implement the same and (iii) monitoring institutional mechanism independent of the one carrying out the implementation.

The second prerequisite was the determination of the cost/benefit of such intervention both explicit and implicit so as to ensure that such were not beyond acceptable norms. These interventions also had to fit the balanced growth expected so that, where interventions threatened macroeconomic stability, governments in Asia’s NIC had to side with the prudent macroeconomic management.

This therefore meant that, price distortions arising from selective interventions were supposed to be within norm ranges. This is the so called smart economics. Today, many African economies are contented with stable macroeconomic environment, which is necessary, but no a sufficient condition for growth and thus development.

This is a kin to keeping the patient on a drip. Such economies have to move from balancing acts to catalyst acts that do not offset such a balance in the economy. However, for a development state to be efficient and its interventions effective the following conditions must be fulfilled.

First, the government has to address the problems in functioning of markets.

Second, such interventions should take place amidst prudent financial policies and;

Third, the government has to establish and monitor appropriate economic performance criteria related to such intervention, ie create economic contests.

Nevertheless, these perquisites presuppose that, the institutional framework within which these policies are to be implemented is functional and policy reactive. Institutions implementing these policies are as important to their success or failure as are policies themselves.

Thus, the challenge facing developing countries wishing to learn from Asia’s NIC is not only to understand which specific polices may have contributed to such growth, but also to understand the institutional and economic circumstances that made such policies successful as not all of them may fit Africa’s economic setting.

This perhaps will be the greatest challenges to economies taking lessons from Asia’s NICs. For this disconnect in many African economies accounted for the growth differentials compared to the Asia’s NIC where fundamentally sound development policies were major ingredients in achieving their rapid growth.

In these economies, macroeconomic management was unusually good, and macro economic performance unusually stable, providing the essential framework for private sector investments.

Policies to increase the integrity of banking system, and to make it more accessible to non-traditional savers, raised the level of financial savings more than three fold over a period of ten years for some countries, and this pool of savings were invested in trigger industries which were targeted for growth as main catalysts of other sectors of the economy.

As a result of prudent economic policies, Asia’ NIC saw their real per capita income increased more than four times for the period 1960-1985. This was a period that saw these countries record rapid and sustainable growth for decades which was unusual. This was also unique in that, they combined this rapid, sustained growth with highly equal income distributions.

They also had been characterized by rapid demographic transitions, strong and dynamic agricultural sectors, and rapid export growth. These economies also differed from other developing countries in three factors that economists have –traditionally associated with economic growth, namely high rates of savings and investment exceeding 20 per percent of GDP, on average between 1960-1990 especially high rates of privates investments, high and rising endowment of human capital due to universal primary and secondary education.

These factors accounted for 75% of the miraculous growth of Asia’s NIC. The remind is attributed to (but associated with the preceding factors) improved productivity which exceeded by far, not only that of most developing countries, but even some developed countries in general.

This superior productivity performance was as a result of a combination of unusual success at allocating capital to high yield investments, and their coping up mechanism which saw such economies catch up technologically with industrial economies.

As pointed out earlier, these are some of policy areas where African economies failed. Thus for instance, the culture of high savings and from these high investments was, and has not been well entrenched among African economies, and yet no economy can expects to grow at high rates without at least its savings and investments rates running at he 20% of GDP benchmark.

A number of African economies depend on foreign savings by way of foreign aid and grants which are in most cases un-predictable and conditional; and these can only help the economy in the short and medium term, but can not at any rate be a substitute to local savings which are predictable to some extent, and sustainable.

Public policy with regard to savings-investment nexus and that of human capital development remain critical if African economies are to record any meaningful sustainable growth and thus development.

In all, public policy mix will remain essential for development of economies and the issue of development state paradigm (interventionism) should be such that it is market friendly otherwise excessive interventionism is bound to do more harm than good to an economy.

The author is a senior
Presidential Advisor on Economic Affairs