Saturday, December 13, 2008

Why industrial transformation failed in Uganda and Africa

By Juma A. Okuku, The Independant

President Museveni continuously talks about the need for Uganda to industrialise. In the third part of our Insight series, Juma A. Okuku looks at the African experience and tries to answer why we have so far failed to industrialise. The first part was published in Issue 035.

Why did industrial transformation fail in sub-Saharan Africa? Broadly, there are four major reasons that account for the failure of industrialisation. The first is a general failure by the political leadership to reconstruct the post-colonial state, institute development projects and understand the institutional and political processes underlying effective industrialisation processes.

The misuse of public enterprises – a reality that undermines all other processes – comes second. The source of finances comes third, and fourth – the form of industrialisation adopted after independence – import substitute industrialisation (ISI).

Unreformed institutions

From the time of independence, Africans failed to reform the states they inherited from the colonial powers. The end of colonialism did not mean that the new African leaders could design institutions for economic transformation or reform the state structures without let or hindrance; indeed, they faced opportunities and threats from both within and outside the state.

Although variations exist, the African governments were, in general, characterized by lack of political autonomy. They were beholden to both internal and external interests. Political autonomy is a major factor in the state’s ability to undertake many of the policies required in order to redirect the economy.

Instead of pursuing national policies aimed at the transformation of society, the political leadership became hostage to realities that characterise it across Africa today: nepotism, corruption and the obsession with power for life.

Unlike the East Asian countries, which stressed merit, talent and competence in recruitment in the era of post-colonial independence, African bureaucracies fell to domination by political, tribal and family considerations.

Public enterprises

The absence of a local entrepreneurial class allowed the public sector to obtain a dominant role in industrialisation. Public corporations were chosen because it was believed they were in a better position to provide a combination of ownership, accountability and business management for public ends. Most of these, however, ended in failure. They failed to achieve their dual objectives: firstly, to become architects of the private sector of African capitalism and, secondly, to consolidate themselves as viable instruments of state capitalism.

Their failure became evident not simply because they were public enterprises. Public enterprises were at the centre of industrialisation in successful East Asian new industrialising countries, particularly Taiwan. The underlying difference was the institutional basis of policies.

The governing elite failed to reconstruct the post-colonial state and focus them to the task of industrial transformation, and their institutions possessed neither the technical skills nor the financial resources necessary to accomplish their goals. Rather than seen as compliments to the private sector, they were observed to replace it entirely. They suffered from the dual problem of corruption and recruitment practices, policies themselves based on nepotism and ethnic favouritism in opposition to qualifying benchmarks like merit and competence. The protection of these firms inhibited their abilities to become truly innovative and competitive. The financial basis of industrialisation further made it even more difficult to realise industrial transformation.

Finances behind industrialisation

The control over financial resources – who owns them and how these actors use them – constitutes the most critical institutional mechanism needed to ensure the success of industrial policies. It provides the state with the power to influence the private sector investment decisions. Although several African states established new commercial and development banks following independence, they came to suffer from the problems that befell the bureaucracies and the parastatals: patronage and corruption.

Overreliance on foreign direct investment (FDI) and foreign aid as sources of finance for industrialisation in much of Africa produced several limitations. FDI implies the ability of investors to maintain control over their assets. In the context of so little interaction with local capital, FDI restricted the growth of domestic industrial capacities, more so because foreign investors retain less interest in the development of a country. Bureaucrats at home saw FDI as an opportunity for the extraction of the greatest personal share of whatever wealth or income it could generate.

To benefit from continuing FDI, the government must ensure that dynamic interaction with foreign investments is included with an organised national development strategy. The centre piece in the interest in FDI is acquisition of technology, and the transfer of technology cannot happen passively without the active participation of government.

Most African states suffered from passivity toward technology acquisition. The weak human capital base is noted as a key factor hindering economic progress in Africa. Apart from South Africa, there seem not to be any systematic development of technological capacity in Africa. The incapacity to apply, adapt and modify new technology is a key explanation for the lack of dynamism and competitiveness in continental African industries.

Coordination agencies

Coordination agencies provide focal points around which private sector investment decisions can be coordinated. The colonial and post-colonial governments established such agencies across the continent. The regimes failed to reform them Instead they were simply inherited.

In general, most African states failed to carry out the necessary reforms. This failure precluded the possibility of successful industrial transformation in Africa. Any subsequent form of industrialisation implemented in much of Africa could not compensate for these major failings.

ISIs vs IRIs

African states implemented import reproduction rather than import substitution. Import substitution involves the identification of purposes embodied in imported products; determine their relevance to the local environment and the design of a product that conforms most closely to domestically available inputs, material and non-material. Within the context of import substitution strategy, there is no automatic assumption involved with the characteristics of the product in quality, size, colour, material input or design. Import reduction as a share of domestic consumption thus occurs without requiring that the locally made product be made identical to the formerly imported one.

Therefore, in the process of import substitution, ‘production’ is not the sole end. It becomes partial to a complex process of technological learning that encompasses product specification and design, process choice and change in social organisation of production.

Import reproduction strategies take the ‘product’ as their point of departure than ‘purpose’. Import reproduction strategies ignore the extent to which products incorporate concepts of functionality, cost, quality and taste that correspond to the producers’ principal markets. It simply involves imitation and reproduction of the products without learning the technology and fostering the necessary institutions. Import reduction industrialisation (IRI) is general and non-selective, an end in itself.

The ISI approach requires the implementation of a wide variety of policies and interventions at multiple levels. These would include: the establishment and enforcement of industrial, technological and sectoral targets, the promotion of local content, the acquisition and upgrading of technology, the creation of basic knowledge infrastructure and general infrastructure. There was no systematic application of these measures in much of Africa.

ISI’s failure in Africa should be attributed not to the concept inherently but to the form it took in Africa. It was imitative and entailed more import reproduction than import substitution. It came to suffer from what was referred to as import substitution syndrome. That syndrome consisted of reliance on central planning effort, a set of nominal tariffs that generally showed little economic rationale, quotas, exchange controls, overvalued exchange rates that contributed to unemployment under-utilisation of capital in capital scarce economies and penalised exports.

African states applied blanket protectionism to their struggling industries by using the infant industry argument; that is, to industrialise, given the existence of already industrialised and highly productive economies in northern countries, southern countries must protect their economies from imports from the north. African states instead practiced ‘across-the-board’ protection. Fredrick List, chief proponent of infant industry protection, did not recommend ‘across-the-board’ protection of the whole manufacturing sector. Accordingly, protection had to be temporary, selective, targeted and not excessive.

The bulk of the new industries in Africa were in the consumer goods sector. The form ISI took was wholly a matter of imitation and importation of tried and tested processes. It brought in complex technology but without the sustained technological experimentation. There was no concomitant training in innovations that are characteristic of the pioneer industrial countries. In fact, import substitution did not fail in Africa; rather it was never really tried. What failed was import reproduction.

An absence of enabling international arrangements like export subsidies and preferential exchange rates, a critical shortage of land reforms in the context of agro-industrial linkages – where industrialisation in other sectors depends enormously on agricultural development – and a deteriorated relationship between the state and private sector contributed – and continue to contribute – to sluggish economies and irrational public policies. These factors ensure that no dynamic industrial transformation will occur in sub-Saharan Africa so long as states and political leaders adhere to them.

Dr. Juma Anthony Okuku is a lecturer in Political Economy at Makerere University, Kampala.