Structural transformation and green industrialisation

Antonio Pedro Pedro Martins Last week, we launched in Kigali three reports, namely the Economic Report on Africa (ERA) on “Greening Industrialisation”, a think piece on “Transformative Industrial Policy for Africa” and the Rwanda Country Profile. Many have asked us why launch three reports at the same time. You will blur the message, some pundits argued. To the contrary, we believe that the three reports talk to each other and amplify the core message: the imperative of structural transformation to Africa’s development. While noting the impressive progress Rwanda has made, the Country Profile notes that tackling the country’s balance of payments deficit remains a major policy challenge. To address the challenge, we state that enhancing productive capabilities within each sector must be pursued with vigour, while at the same time shifting productive factors out of low-productivity agriculture towards higher-productive factors such as manufacturing and services. This is particularly so because, most likely, the successor framework to Rwanda Vision 2020 will align itself with the EAC Vision 2050. The latter has set the ambitious target of lifting the EAC partners States, including Rwanda, to the upper middle-income bracket by 2050. For sure these shifts will not occur by chance or as a result of organic evolutionary processes! In all accounts, achieving the EAC Vision 2050 is a mammoth task that will require bold leadership, determined action, aggressive pursuit of industrial policy and the freeing of the region’s policy imagination from the shackles of conventional thinking and rigid economic theories. This is exactly the framework that the “Transformative Industrial Policy for Africa” think piece offers. “Transformative Industrial Policy for Africa” puts it squarely that it is possible to pursue industrial policy in the 21st Century, but we have to do it smartly. It argues that industrial policy has been used much more extensively than often thought. For example, in their early stages of development, today’s rich countries applied high trade tariffs on specific products (US and UK), set up state-owned enterprises (Germany and Japan), heavily regulated foreign investment (US), had lax intellectual property rights (Netherlands and Switzerland), and strongly invested in infrastructure and education (Sweden). A case is made that almost all countries that have achieved rapid economic growth, including the US, followed some sort of import substitution strategy. More recent successes have been built around a pragmatic framework that combines ‘free market’ measures with ‘central planning’. For instance, Singapore promotes free trade and welcomes foreign investors, but 22 percent of GDP is produced by state-owned enterprises and 90 percent of land is in public ownership. The rationale for industrial policy is very compelling. Without a deliberate strategy to promote industrial development, African countries will find themselves locked in a perpetual state of low productive capabilities. Market failures and perverse incentive structures act as an obstacle to the expansion of the industrial sector, while a range of positive externalities warrant the intervention of the state. As indicated in the Rwanda Country Profile, a country’s economic success ultimately depends on developing productive capabilities, which requires building on and defying their comparative advantages – since the latter often favours the export of raw materials and the production of goods that require low capabilities. The manufacturing sector plays a central role in any industrialisation strategy. The sector is typically characterised by fast productivity growth. It also has strong linkages to other economic sectors. Moreover, it does not suffer from the price and demand volatility that affects primary commodities. Finally, labour-intensive manufacturing can provide a vast number of decent employment opportunities for Africa’s youth, a key agenda for the continent. Green industrialisation, in particular, presents a unique prospect for combining economic prosperity and environmental sustainability in the continent. ERA 2016 presents green industrialisation as an opportunity to achieve the type of carbon-neutral structural transformation that yields inclusive and sustainable growth. This entails the decoupling of industrial activity from resource use and its environmental impact. It requires greater efficiency in the use of resources, as well as the adoption of environment-friendly technologies and production processes. As a late industrialiser, Africa can avoid the pitfalls of previous carbon-intensive industrialisation efforts and devise a new resource-efficient path. Pursuing this development option would not be at odds with what countries in Africa aspire and are already doing. The extensive review of country and sector experiences provided in ERA 2016 and in the “Transformative Industrial Policy for Africa” document, suggests that there are many paths to achieve structural transformation, with no single blueprint available. Each country will therefore have to devise its own context-specific path– ideally, a green one. Rwanda is doing that! Antonio Pedro is the Director of the UN Economic Commission for Africa (ECA) in Eastern Africa and Pedro Martins is Economic Affairs Officer in the same office.

Opinions

Structural transformation and green industrialisation