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For most, that would qualify as a lazy afternoon; for me, it was remarkable. The pot had eased my pain and muscle tension. I did some research and found that prior to , almost every American pharmaceutical company manufactured cannabis-based drugs. I also found out the federal government had its own marijuana farm. Last month, Mobilicity, one of the smallest players in Canada, filed for creditor protection. It does not drill for oil or directly transport it, and most of its customers are involved in aviation, shipping and trucking.
Since his death in , he has been succeeded by various sons. The month-old died from at least 50 injuries, which went undetected by doctors and social workers as his mother lied to cover up the sadistic behaviour of her boyfriend and his paedophile brother. What kinds of policies matter more for trade and industrialization between free trade-neutral industrial policy and strategic trade-selective industrial policy?
How are the policies chosen — what determines trade and industrial policy choices in Africa? This is despite four decades of quantum development assistance, preferential trade arrangements such as the EU-ACP Lome and Cotonou agreements, and experiments with various brands of trade-industrial policies.
Both policies have apparently failed to deliver in Africa. Its proponents insist that the ISI period remained the golden era of industrialization and trade in Africa as the peak performance was achieved then, only that it was in many instances marred by ineffective implementation and the vagaries of the international environment.
On the other hand, the failure of the liberal regime is blamed largely on lack of ownership and commitment. The current re-thinking focuses on ex-post selectivity, and country ownership of the development agenda orchestrated through a participatory, consultative process in the countries. In principle, the countries are free to choose whatever policies that serve their interests best. In practice, both WTO rules and the globalization process are rapidly altering the rules.
Together with the economies of agglomeration in the context of the new economics of geography, the new rules may be circumscribing the policy choices open to the policy-makers. But the growing voices in continued opposition to the current orthodoxy refuse to shut up. At the normative level, the debate is about the kind of policies that should be adopted to best promote growth-oriented trade and industrialization.
This normative question is predicated on the assumption that policy, rather than other factors such as geography and shocks, is the decisive determinant of the outcomes. The positive question is about what factors influence the trade and industrial policy choices policy-makers make.
This is the key question especially given that even in the same broad spectrum of policy e. While the veracity of the above premise needs scrutiny, a better characterization and understanding of the policy process in Africa is critical for the way forward. Consequently, a number of questions beg for answers. Who and what determined the past trade and industrial policies in Africa or why have policy-makers failed to effectively implement policies which they designed?
Under the prevailing international rules of the game and the aid relationships, what room do African policy-makers have to manoeuvre in terms of true country ownership of their policies? In other words, what are the relative contributions of mainstream ideas about development and role of donors in propagating the ideas or policies? To what extent does the interest group public choice model explain policy choice in Africa?
Does the model of state institutional-bureaucratic capacity explain much? What about the effects of history-geography-production structure such as economies dominated by mineral rents, and are ethnically divided, or the impact of ethnic versus economic power balance on policy choice?
Given that Africa might be one of the few regions of the world that would industrialize without the selective industrial and strategic trade policies used by earlier late-comer industrializers, how are African policy-making and institutions adapting to, or coping with, the challenging and changing environment for trade and industrial policies? Are there generalizable lessons from the policy-making and implementation experiences across the region that are important for understanding and for changing the African policy landscape?
What are the challenges and possible responses towards a more sustainable, development-oriented trade and industrialization strategy in Africa? This book is primarily motivated by the positive questions raised above. How Much Does Policy Matter? The focus of the study on political economy is predicated on the assumption that trade and industrialization outcomes in Africa are predominantly the result of policy choices.
To say the least, this assumption is highly debatable. Tangential to the appropriate weight to policy is another equally important issue of the endogeneity of policy to other factors. Do the environment and other factors circumscribe policy? And this is not trivial debate. This is because the appropriate weight given to policy is it 10 percent or 90 percent for example?
Most of the cross-country growth regressions in the last decade have been devoted to debate on the relative explanatory power of various clusters of variables, with unresolved issues pertaining to the robustness and fragility of the parameter estimates as well as fundamental issues of methodology. In the growth literature, over five dozen variables have been experimented with, but they could be grouped into a few clusters as follows: growth fundamentals — savings investment, human capital; policy — with dozens of variables including the degree of openness or trade policy and industrial policy; destiny variables — geography, ethno-linguistic fractionalization, demography, and natural resource endowments; quality of institutions; and external shocks — mostly proxied by terms of trade variables.
For trade and industrialization particularly, there are two levels of the debate. The first is whether there is a definite causal relationship going from trade volumes to growth or from growth to trade volumes. On this, while much of the literature argues for a trade-cause-growth thesis, others such as Rodrik see either a correlation and not causation, or reverse causation in that trade volumes depend on a number of factors including growth and trade policy.
The second level of the debate, which is important for this study, is the relative importance of trade or industrial policy per se in determining either trade volumes or growth. The precise weight to be attached to each of these clusters of explanations still remain an unresolved empirical question. The first of these factors, and perhaps one with the longest history is geography see Acemoglu et al, a for a listing of the long bibliography including Nicolo Machiavelli, Charles de Montesquieu, Anorld Toynbee, Alfred Marshall, Ellsworth Huntington and Gunnar Myrdal.
These authors saw climate as a major determinant of work effort, productivity and therefore the prosperity of nations. A seminal statement of the role of destiny and geography as determinants of trade and industrialization was given by Adam Smith in Book 1, the Wealth of Nations 25 as follows: As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland part of the country.
All the inland part of Africa, and that part of Asia which lies any considerable way north of the Euxine Black and Caspian seas, the ancient Sycthia, the modern Tartary and Siberia, seem in all ages of the world to have been in the same barbarous and uncivilized state in which we find them at present. There are in Africa none of those great inlets, such as the Baltic and Adriatic seas in Europe, the Mediterranean and Euxine seas in both Europe and Asia, and the gulps of Arabia, Persia, India, Bengal, and Siam, in Asia to carry maritime commerce into the interior parts of that great continent.
Although written more than years ago, it seems Adam Smith was describing much of contemporary Africa. The resilience of this idea was reinforced by Diamond who elaborated the importance of the geographic determinants of the Neolithic revolution, showing that modern prosperity was related to the timing of the emergence of settled agriculture in more conducive environments.
Many analysts would answer in the affirmative see particularly Bloom and Sachs, ; Wood and Jordan, ; Wood and Mayer, , Wood, ; Easterly and Levine, The other, and perhaps major aspect of the nature and geography thesis is the consequence of natural resource endowment. An important statement of this thesis was provided by Wood and Mayer, , based on an extended Heckscher-Ohlin model of differing paths of development see Kruger and Leamer A key aspect of the Kruger-Leamer extended H-O model is that it shows that the sectoral structures of production and trade will evolve differently in the course of development in different countries, depending on their initial land-labour ratios.
Countries specialize in the sectors in which their mix of factor endowments give them a comparative advantage. Therefore, the differing evolution of sectoral structures in land-abundant and land-scarce countries depends on the assumed number and factor intensities of the goods in the model.
With this framework, Wood and Mayer show that because Africa is better endowed than Asia with natural resources especially land but less endowed with human skills, it has an endowment-based advantage in primary commodities. Besides the skill-land ratios and possibility of the Dutch disease, there are other channels through which dependence on natural resources could hinder growth and industrialization see Collier , and Collier and Dehn, Since African countries are dependent on a narrow range of primary commodity exports, they are also susceptible to large and volatile price shocks.
As Collier , p. In the case of the typical large negative export shock, directly costing 7 percent of GDP, the shock then triggers a cumulative contraction in the economy over the next two or three years, leading to an additional loss of output of around 14 percent of initial GDP. Furthermore, natural resource dependence leads to bad governance due mainly to the generation of rents which are either inefficiently spent causing the Dutch disease, as well as creating an incentive system favouring illegal asset stripping relative to investment and support for persistence of weak rule of law.
Finally, natural resource dependence increases the risk of civil war, especially in very poor societies where the opportunity cost of being involved in rebellion is almost zero. Related to the endowment thesis is the impact of location on transport costs.
Redding and Venebles had drawn attention to this model where a key comparative advantage is proximity to market and to suppliers. The need for this proximity consequently exerts a powerful force of agglomeration thus giving a huge comparative advantage to those countries that industrialize first.
Agglomeration economies imply that manufacturing industries will always be concentrated in a few locations, and locations such as Africa that have not yet industrialized may have permanently missed out. For Africa, therefore, industrialization is viable only to the extent that it serves the local market and benefits from the natural protection of high transport costs. From the analysis presented so far, it is not only that policy matters less, it is to some extent endogenous to geography and natural resource endowments.
For example, Gallup and Sachs suggest that countries isolated by location will also have weaker lobbies in favour of trade, hence geographic isolation will be compounded by policy- induced isolation. Collier and Gunning 16 suggest that natural resources may bring forth a variety of other policy errors. For example, it may worsen policy by turning politics into a contest for rents or, through crowding out manufactured exports, prevent the emergence of potentially the most potent lobby for openness.
Easterly and Levine suggest that ethno-linguistic fractionalization makes co-operation among the ethnic groups more difficult, which worsens policies. But performance is not explained only by geography, natural resource endowments and exogenous factors. On the contrary, some analysts fly the institutions-matter flag and sometimes present it as an alternative explanation for performance see North and Weingast, ; Olson ; Acemoglu et al a, etc 2.
The analysts largely attribute differences in economic performance to differences in the organization of society and the incentive structure. Acemoglu et al not only make the case for institutions as the decisive factor in performance but also challenge the geography hypothesis. The authors argue that if geography is the key determinant of differences in economic performance across countries, then such performance should be highly persistent, since geographic factors have not changed much in recent history.
To the extent that other factors also matter for income, persistence will not be perfect, but we should expect relatively rich countries today to have been, on average, richer several hundred years ago. However, since institutions and the way societies are organized are persistent, the institutions hypothesis predicts persistence in income levels.
Consequently, if there is a major change in institutions, then we should expect a significant change in the distribution of income across countries. The authors show that European colonialism made fundamental differences in the development trajectory of their colonies depending on whether productive institutions or extractive institutions were established by the colonizers. Thus institutional reversals have coincided with reversals in development.
The major impetus for the wrong or right type of institutions was determined by European settlement. Relatively poorer regions were often sparsely populated and if they also had a relatively lower tropical disease environment such as malaria , then Europeans settled in large numbers and developed institutions encouraging investment.
On the contrary, a large population and relative prosperity made extractive institutions more profitable for the colonizers, for example to force the native population to work in mines or plantations, or tax them by taking over existing tax and tribute systems. In other parts where settlement was not conducive because of the disease environment such as in West and Central Africa, the systems of economic structure and institutions established were geared towards extraction and servicing of European industries rather than development of the colonies.
Implicit in Acemoglu et al is the notion of path dependence — institutional persistence and the corresponding performance persistence. The Acemoglu et al thesis about institution-performance persistence is interesting because it sheds some light on one of the emerging puzzles in the country case studies. It may not also be an accident that the development of property rights is far more advanced in these countries than in most others.
The European settlers also gave the colonies a headstart in productive business relationships with more advanced firms and their technology and finance in metropolitan Europe. The social capital fostered information flows. It is also little wonder that these settlers largely own the industrial complexes in the former colonies. In Kenya, for instance, the , Indian population owns 75 percent of the industrial complex, while the five percent of Mauritian population which is French owns about 60 percent of industrial firms.
If the foregoing accounts exhaust the explanations for performance, then almost all of Africa would have identical outcomes. Yet, there is some striking difference in Africa. The first decade after independence s experienced very rapid growth and development in the region — proving that Africa is not condemned by nature and inherited institutions to a life of misery.
Botswana, for instance, has the world record as a country with the fastest rate of growth in the past 35 years despite being landlocked, small, and dependent upon abundant natural resources. Most of the explanations for the Botswana case point to a combination of policies and institutions. Thus, at least in the single spectacular case, policy is seen as the differentiating variable.
In his comments on Bloom and Sachs , Collier , p. It has been determined by policy, which has changed considerably over the past forty years. Policy can mitigate or worsen the effects of nature, shocks and institutions. What is still unknown is the precise weight to be attached to policy relative to other variables. While I share the agenda of trying to make manufacturing work, I think one should acknowledge that hysteresis effects of a prolonged period of poor policies may have made this infeasible.
First, there has been a loss of capital that may be irrecoverable. Second, as the rest of the world has developed manufactured exports, it has developed constituencies to defend the interests of the sector. In most African countries there is not yet a political constituency for the deep changes needed to make manufactured exports competitive. Finally, I worry more about an implication of the other new economic geography, which emphasises economies of agglomeration.
It is possible that the prolonged phase of poor policies has caused Africa to miss its window of opportunity to develop manufacturing: the time when the cheap labor of Asia offset the agglomeration economies of the developed world.
By the time Africa reforms its policies, the world may have enough manufacturing sites for the long-term share of manufactures in the world demand, and given the advantages of an existing agglomeration, new entrants will not be able to out-compete them. I hope not. I hope that agglomeration economies are sufficiently specific to market niches that Africa could quickly reach agglomeration thresholds. But this is another unresolved empirical question.
In his summary, Collier p. For many countries diversification is in principle feasible, but has not occurred because dependence on primary commodities has certain trap-like features that make it persistent. For some countries, diversification cannot be a credible strategy, and for these countries it is vital that the international community takes the actions that would improve their chances of successful poverty reduction.
For these trapped countries, Collier suggests that their option is to learn to live with the problem, and recommends that the international community helps with a contingent aid regime to assist them live better with their fate. A similar pessimistic message on the slim prospects for late-comer industrializers is also stressed by UNIDO See Box 1.
Africa could surpass the current income level of South America, although it may never quite catch up with North America because of its tropical climate and its division into many countries, which obstructs internal movement of goods, ideas and people.
Hope because he projects that Africa can attain income levels higher than that of South America — which would be a significant improvement. A similar optimistic scenario is shown in a major study of African economy see World Bank et al, , chapter 7.
The study shows that for labour-intensive manufacture exports, the catch-up effects of the coastal African countries benchmarking their policies and institutions to those of Asian developing countries could be significant. For example, such benchmarking could increase the current production and exports by several hundred percent.
In a sense, the limits of policy thesis could be likened to the analysis in mainstream literature in the early part of the 20th century that gave no chance of development to Japan, Korea or many of the current Asian Tigers, ostensibly because given the orthodox development models of those days, these countries did not fit into the model and so were written-off.
History has proved those predictions wrong. Can Africa also turn the predictions of doom on their head? For example, many reforming African Box 1. Their main competitive strengths are in precisely those industries where demand growth is slowest and where international competition, especially from low-cost Asian suppliers, is intense.
They are at a serious disadvantage in infrastructure costs, especially transport. They are at the bottom of the global league in industrial sophistication and technology. The private sector is very weak, dominated by a few major multinationals at one extreme and a mass of small enterprises at the other. The middle of medium-sized indigenous firms is missing.
The importance of labour quality in attracting FDI counts against Africa. The region has become excessively and unsustainably dependent on external support, including that for foreign technology and expatriate skills. Source: UNIDO economies have been shown to increase their non-traditional exports, including manufacture exports from barely nothing to a sustained annual growth rate of above 30 percent.
So, despite the lingering questions, policy and institutions can still make important differences. If policy matters, the key question is: What kind of policy matters more for industrialization and trade? It is remarkable that despite the claim that bargaining among different interests in society determine policy, the debate about policy options has been dominated by highly structured theoretical models — powerful ideas — that in practice have divided the policy menu into two broad categories.
The second is the assortment of ideas and models associated with mercantilist thought and import-substitution industrialization which underlie the strategies of managed strategic trade and selective industrial policy. The experiences of the US on the one hand, and Japan and South Korea, on the other, seem to have provided some live examples that both models can work with remarkable success.
The idea, as Stiglitz puts it, is that although the government cannot simply replace the market or any significant part of it, it can play a critical role through the markets in promoting economic growth. More broadly, industrial policy can be classified into four categories see Suzumura, pp.
The second category consists of policies designed to correct market failures associated with technology development and imperfect information. Policies in this category encourage and promote the shift towards more appropriate use of research and development resources and knowledge by providing a public information exchange, and transmission and dissemination mechanisms, or through the use of favourable tax and subsidy measures.
The third consists of policies seeking to raise economic welfare by means of administrative intervention in the industrial organization of specific industries. Specific policies here exemplified by entry and exit regulations, are used to intervene either in the competitive structure of industries or in the allocation of resources among industries through the use of administrative authority or guidance.
The fourth category refers to those industrial strategies based on political rather than economic considerations. In its classical form, mercantilism gave great priority to policies promoting the power and autonomy of the state, often expressed in terms of maintaining self-sufficiency in industries relating to defence or food security. See also Chapters 2, 3, 4, and 5 of this book. The history of this swing in policy from the import-substitution industrialization of the earlier two decades is rooted in the Structural Adjustment Programme adopted by most African countries.
Under this framework, the African crisis was blamed squarely on an intrusive state that has intervened extensively in the economy and therefore caused despicable distortions, which prevented markets from functioning efficiently. Liberalization of markets, especially trade liberalization and outward-orientation, constituted the fulcrum of the reform packages.
The reforms aim to bring trade regimes in several developing countries as near as possible to the classic free trade model, or at least to similar regimes in the industrial countries. In summary, the policy calls for African governments to commit themselves irreversibly to opening their economies to international competition, and in the process, ensure a more neutral incentive structure which does not discriminate between exportables and importables or between production for the domestic market and for exports.
Thus, the reform generally involves both liberalization, and movement towards a neutral incentive structure, even though the two terms are often used interchangeably see Box 1. Trade liberalization is assumed to confer several productivity-enhancing and growth-inducing benefits to the economy: i it reduces static inefficiencies arising from resource misallocation and waste; ii it raises learning effects from the development of new products, technologies and information sources; iii it increases ability to cope with adverse external shocks; iv it reduces wasteful rent-seeking activities; v it creates Box 1.
Traditionally, trade policies are those, which are aimed at altering the relative price of goods traded through tariffs, subsidies, quotas, safeguards, and anti-dumping and countervailing duties. The essential feature of all these measures when used as instruments of trade policy is that they drive wedges between the foreign and domestic price of a good or service at a given exchange rate.
Trade policy encompasses not only the traditional tariff and non-tariff instruments, but also exchange rate regime, and a gamut of other policies that could be ascribed to competition policy. The non-tariff barriers NTBs take at least three forms, and within each group UNCTAD distinguishes between Group A measures — which operate primarily through quantitative restrictions on trade, and Group B measures — which operate through prices and costs, and these classes are as follows: Type I: commercial policies designed primarily to protect import-competing sectors or to promote exporting sectors; e.
Group A: quantitative measures : import quotas, restrictions of public purchases to domestic goods, export restraints. Group B: price-cost measures : variable levies, production subsidies, income tax concessions on export profits, advanced deposit schemes for imports, different exchange rates for different transactions multiple exchange rates. Type II: measures not primarily associated with commercial policy, but have sometimes been used for protective purposes; e.
Group A: Excess trade documentation, delays in customs procedures, advertising restrictions. Group B: customs valuation procedures, health requirements, labeling requirements, sales and excise taxes, selective employment taxes. Type III: measures applied with no intent of protection, but which may have spill-over effects on trade e.
Group A: government spending plans, restrictions on toxic materials. On the other hand, competition policy encompasses the area commonly referred to as anti-trust or anti-monopoly law and practice as well as various micro-industrial policies affecting markets. These policies seek to deter and prevent abuse of market power, dominance, exclusionary practices and the reaching of agreements among competitors.
They aim to promote and protect competition and economic efficiency, rather than competitors. Evidently there is a natural convergence between trade and competition policy measures, and the distinction between them has become blurred. For example, during the Tokyo and Uruguay Rounds of trade negotiations, among the issues that came up for negotiations were: specification of technical standards, government procurement, domestic subsidies, intellectual property rights, trade related investment measures, and services.
Furthermore, Thomas, et al distinguish between liberalization and neutral incentive structure. According to the authors, liberalization means a reduction in trade restrictions and an increase in the use of prices instead of discretionary intervention by bureaucrats and politicians.
It implies a reduction in the welfare cost of government interventions — that is, a reduction in the direct costs or at least in some of the indirect costs. On the other hand, a shift toward neutrality is a change that makes the policy-induced effect on price incentives more nearly uniform- broadly speaking, among exportables, importables, and nontradables as well as between sales of a given product in the domestic and foreign markets.
Because most economies have a substantial bias against exportables relative to importables and nontradables, moving toward neutrality means a reduction in anti-export bias. This reduction can be achieved by reducing import protection, by raising export incentives, or by doing both. Source: Thomas et al, ; Winters Guasch and Rajapatirana, A large amount of literature claims that such policy regime has had deleterious consequences for the countries for a number of reasons.
First, the domestic markets of many developing countries are too small to realize the economies of scale obtainable in many industries, so that industries geared primarily towards the domestic market tend to be inefficient. Second, import restriction is a tax on exports because it inhibits industries that would have developed high export potentials if they had access to production inputs at world prices.
By making import substitutes relatively more profitable, import controls increase the costs and reduce the availability of imported inputs used in the production of exportables, thereby forcing exporters to use relatively expensive and low quality locally produced inputs. Also, import restrictions, through the substitution effects, lead to a more appreciated real exchange rate, which hurts exports. Trade reforms liberalization are expected to redress these negative consequences of restrictive trade policy.
Often, literature on this line of thought rests its case by pointing to the success of the east Asian newly industrialized economies as the empirical proof of the recommended outward-orientation. A number of other direct and indirect benefits are expected from the reforms. The first — the static, resource misallocation effects — derive from the presumed misallocation of resources in production and the reduction in consumer welfare caused by the misalignment of domestic and international prices.
The indirect costs of restrictive trade regime include waste of resources in income-generating but unproductive activities associated with protection such as smuggling, lobbying, evading tariffs, and building plants with excess capacity to get import licenses Thomas, et al, Besides the costs of restrictive trade policy, another justification for liberalization is the dynamic growth effects of such orientation.
Such dynamic effects derive from the growth-inducing impact of more efficient resource allocation and production, as well as the technological change and learning that would result from the elimination of the anti-export and anti-competition bias that discouraged innovation, cost-cutting, the acquisition of technological capabilities and thus growth. These alternative models have the policy prescriptions that favour gradualism in import liberalization, sequencing of import liberalization to export expansion, emphasis on technological capability and learning, and the strong role of the state in complementing the market rather than seeking to supplant it see particularly Chapters 3 and 5 of this book 3.
Most of the objections do not necessarily question the principle of trade liberalization but note that it requires specific conditions to work well, and could in fact cause more damage if the specific conditions of the liberalizing economies are not taken into account.
For example, it is suggested that most of the benefits from the free trade model derive from assumptions of well functioning competitive capital, product and labour markets. It is not surprising therefore that most of the objections to the model also derive from the conditions of market and coordination failures as well as the limited dynamic benefits accruing to primary commodity producers. Furthermore, a large body of literature has emerged which attributes the miraculous transformation of the East Asian economies to the pervasive government interventions to promote industry and trade.
Furthermore, there have also been legitimate challenges to the robustness of the orthodox neoclassical framework. For example, Rodrik argues that: The analytical foundations of such arguments regarding the dynamic benefits of liberalization have never been too clear. Too often, the preferred method of proof is a casual appeal to common sense. In particular, no distinctions are typically made between policies for which received theory is silent as regards learning or has ambiguous implications , and those for which a definite theoretical presumption exists.
Relative price distortions, such as trade taxes and investment subsidies, are of the first kind. Such distortions affect relative profitabilities across industries and sectors. If some sectors are adversely affected by intervention, others must be left in better shape. Innovative activity would be reduced in some sector, but enhanced in others. Another benefit of outward-oriented trade regime pertains to the presumed robustness in responding to negative external shocks.
Implicit in this argument is that the absence of microeconomic distortions that bias incentives away from exports help facilitate adjustments to negative shocks. Second, basic economics predicts that trade restrictions would lower both imports and exports, and thus have no obvious implications for the balance between the two.
Furthermore, the logic of rent-seeking as a case against trade restrictions seems somewhat tautological. As long as governments exist and they implement policy, individuals and groups will exercise political power to obtain particularistic benefits for themselves. Helleiner has seriously challenged the anti-export bias argument. In a general equilibrium context, and given the Lerner symmetry, it is assumed that taxes or barriers on imports are equivalent to taxes on exports. First, anti-export bias can be reduced, and frequently has been, via the provision of export subsidies as well as by lowering import barriers.
It follows then that by deploying the symmetry argument, one must begin by measuring the degree of protection or anti-export bias net of the effect of export subsidies; this may significantly reduce the required degree of import liberalization or the effects of removing all trade policy interventions — both on imports and exports. Second, it is possible that movements in the real exchange rate — and hence in the price of tradables exports and import substitutes relative to non-tradables — can, and frequently do, swamp those in the anti-export bias in the tradables sector.
In that sense, therefore, export expansion can be motivated by the high price of exportables relative to non-tradables, rather than a high price of exportables relative to importables. By the same argument, real currency appreciation can discourage exports even when imports have been fully liberalized.
It is expected that trade liberalization will have substantially different effects on the pattern of manufacturing, including that for export, depending upon whether previous governmental interventions had been relatively uniform or diverse from industry to industry. Rodrik summarizes the scepticism and concerns: Development policy is susceptible to fashions.
During the s and s, when import substitution was in vogue, there was excessive optimism about what government interventions could achieve. Now that outward orientation is the norm, there is excessive faith in what openness can accomplish. Early on, planning models emphasized capital accumulation at the expense of price incentives and the role of markets.
Today, the importance of investment is consistently downplayed. The swing of the pendulum from one extreme to another creates blind spots, causing the risk of yet another unproductive change in fashion. Policy-makers have to understand that integration into the world economy is unlikely to bring long-term growth on its own.
They have to complement openness with other policies, including an explicit and coherent domestic investment strategy. Despite the objections to industrial policy of the Asian type in the mainstream literature, Chapters 3 and 5 show that there is strong theoretical and empirical basis for active industrial policy.
Both chapters as well as Chapter 2 also highlight as in a lot of other literature that the fundamental challenge is whether these kinds of policies can still be put in practice especially in Africa. On the workability of industrial policy, Chang cautions that: Industrial policy, needless to say, is no panacea.
Like any other policy, or any other form of economic co-ordination, it has its own costs and benefits. Its benefits seem to have more than offset its costs in success stories like those of Japan and Korea, but we have plenty of other examples that show that its costs may overwhelm its benefits. The real question is not whether industrial policy can work or not because it does , but how it can be made to work.
The question therefore is what has changed to warrant continued faith in the industrial policies to deliver or whether indeed, African states are capable of making selective industrial policies of the Asian type happen. Without question, capacity is a key problem in Africa especially institutional capacity see also Lall, Chapter 3.
Chang, however, argues in Chapter 5 that the other policies liberal regimes do not require any less state capacity or institutional sophistication to implement than the selective industrial policies. So, the issue of developing the institutional capacity of the African states to implement policies — of all kinds — is a general problem not necessarily restricted to selective industrial policies.
The other argument is that the new global rules governing trade and industrial policy make it impossible for governments, including those of Africa, to pursue the kinds of policies that the East Asian countries were able to get away with during their late industrial catch-up World Bank, Such policy measures as industrial protection, trade discrimination, the use of subsidies in trade and industrial promotion, the denial of national treatment to foreign investors, provisions for the local value-added, and outright or concealed disregard for intellectual property rights in the quest for technological development are now ruled out by the existing WTO regime to which African countries are signatory.
A lot may depend on the skills of the government concerned in designing measures that are permitted or in camouflaging those that are not. It is also necessary to build strong government capabilities to deal with trade disputes in WTO; all major exporting countries are now engaged voluntarily or otherwise in constant battles with importers or competitors on detailed, technical matters that can have important repercussions on their export and import performance.
Countries that fail to develop the legal and economic expertise to cope with these disputes risk losing competitive advantage. Many countries have a grace period before they have to fully liberalize trade and investment. Depending on the WTO terms agreed upon, they might be able to further prolong the period or seek exceptions for particular industries or in particular periods.
This is in addition to the generalised security and other special exceptions, including those that pertain to health and moral concerns as well as national emergencies, that are recognised and accommodated by the agreement. There is also some scope in the agreement for the promotion of regional co-operation schemes by the members of the organisation. Furthermore, there is no reason to believe that the existing rules of WTO or any future ones that may be agreed upon are not subject to review, renegotiation and reinterpretation in the light of experience.
Indeed, there is a lively political contestation presently going on around the WTO regime both in and outside the organisation. Politics remains a strong conditioning element of the evolving international trade regime. The message here is that Africa, in collaboration with other countries and regions can in principle demand, negotiate and shape WTO rules to its advantage. In summary, it is fair to say that the debate on the policies required for Africa to industrialize and trade has narrowed considerably and some broad consensus is emerging.
This ideological shift has been ratcheted under the aegis of SAP, but the region is currently undergoing a process of ideological consolidation centred around the market economy, a private sector driven framework. This framework is predicated on the assumption that competitive advantages only partially emerge due to the invisible hand of the market, and are to a significant extent being created by deliberate, collective actions.
Such competitiveness also goes beyond firm-level productivity see Box 1. To create the environment for systemic competitiveness, there is also a growing consensus that despite the debate about content and sequencing of liberalization, a certain dose of trade liberalization is required.
I also accept that the progress of technology and globalisation over the past three decades limits the exercise of industrial policy today. Box 1. Meta-level: This refers to the nature of the control and governance capacity of government and collective problem-solving arrangements.
Systemic competitiveness cannot happen without social transformation and social integration. This is more so in the context of weak markets, weak firms and weak states that characterize many developing countries. In some countries this has further deteriorated due to the structural adjustment programmes SAPs , and failure to establish regulatory and governance capacities government reform, formation of complex linkages between strategic actors and the requisite social structures.
The governance structure should produce a basic consensus on the necessity of industrial development and integration into the global system. If fundamental differences exist on these issues, macro- and meso-policies designed to support industry will be erratic, and firms will develop a defensive posture in order to be able to react quickly to changes in the rules of the game. Thus, some of the major elements of this level include: the development-oriented pattern of politico-economic organisation, ability to formulate strategies and policies, learning- and change-friendly value attitudes, and social cohesion.
Macro-level: This requires an enabling and well-functioning macroeconomic environment: developed and well functioning factor, goods and capital markets, as well as a stable and predictable macroeconomic framework. This should include a competitive exchange rate policy and general trade policy regime that stimulates local industry. Generally, it is almost impossible for firms to become globally competitive when national macroeconomic environment facing them is not competitive.
Meso-level: This refers to specific policies and institutions targeted to shape industries and their environment. There are increasing demands on the local, regional and national level to create and support business environment, and this applies to demands on business associations and other non-governmental actors as well as to demands on the state at all these levels. The key point here is that in the highly competitive world trading system, national and regional governments are under pressure to devise institutions to nurture and promote the competitiveness of the industrial clusters and groups of firms.
Thus, a major aim of meso policies is to create specific locational advantages. This, among other things, requires actions on the following: i technology- contract research, technology extension, consultancy, business associations, universities, selectivity and networking; ii education and training- public and private institutions, technical orientation and specialisation; iii finance- investment credit, working capital, equity, insurance, export finance, patience and risk-friendly disposition; iv infrastructure- rail, road, water, air transport, harbours, telecommunication, energy, etc; v exports- foreign market information, design, trade insurance, trading companies- specialisation and close links to private business, and; vi environment-supervision, pressure and support, etc.
Furthermore, two key aspects of the mesolevel task with the central government pertain to large-scale technology initiatives and the formulation of an overall long-term strategy. Competitive advantage is increasingly less a function of cost or price and more one of quality, style, design, timely and after-sales service. For many developing countries, acquiring the necessary competence and sustaining technological upgrading in these areas require interactions between the various actors.
Micro-level: Industrial development requires capable and competitive firms, and networks of firms with strong externalities. To be competitive, firms have to optimize on cost-efficiency, quality, variety, and responsiveness to changes in demand and new opportunities. Source: Soludo b. There is a need to unpack the openness principle into the component elements. Furthermore, World Bank et al basically agrees with Rodrik that liberalization is not enough, and should be accompanied by a number of complementary measures.
Tangential to the issue of unbundling the openness concept is the unresolved empirical question of what the optimal tariff rate should be. As Mussa argues, the theory suggests that the optimal tariff rate for a small open economy should be zero. But he recognises that for revenue, industrial protection and balance of payments, the tariff rate cannot be zero. The question therefore is how high it should be. Much of the empirical literature seems to be settling with a suggestion of tariff bands in multiples of five such as 5, 10, 15, How these magic numbers are derived remains an open empirical question.
In addition is the recognition that Africa needs preferential and differential treatment to enable it to succeed. If there is such a broad consensus on a menu of policies that can jump-start African industrialization and trade, why is there so much variation in the details of policies chosen and implemented in African countries? What determines these policy choices?
The literature on economic policy process is large, and has evolved significantly over the past three decades. It has evolved from the traditional normative theory where economic policy analysis, policy-making and implementation are viewed as purely technical processes in which the political process is increasingly integrated into the theories. Under the traditional analysis, policy analysts disinterested economists start with a model of the workings of the economy and some instruments of policy intervention, assume an evaluation criterion, then calculate the values of the instruments that will maximize the criterion, and finally present the policy choices and reforms as the correct ones.
Viewed as a technical problem, the model assumes a single-social welfare-maximizing principal. Implicit in this model is the assumption that once the correct policies that maximize social welfare have been identified and recommended, such policies are necessarily implemented as designed and the expected outcomes follow. Although still the dominant conception of the policy process among economists, this model largely leaves out a crucial aspect of economic policy process, namely the political process.
According to Dixit : In reality, a policy proposal is merely the beginning of a process that is political at every stage- not merely the process of legislation, but also the implementation, including the choice or formation of an administrative agency and the subsequent operation of this agency. The political process of economic policy-making is constantly influenced by the legislature, the executive and its agencies, the courts, various special-interest lobbies, the media, and so on.
The outcomes may fail to correct market failures and may instead introduce new costs of their own. Spurred by the writing of political scientists and more so the public choice literature, there is increasing interest in the political process of economic policy. Broadly, three stages of a policy process can be distinguished: i agenda setting i. Sustainability probably depends most on correctly anticipating the likely public and political support.
Chazan, ; Holm, ; Rimmer, , Pryor, ; third, case studies and comparative work on adjustment policy experiences especially since the s eg. Callaghy ; Grindle and Thomas, , ; Mosley et al. Leonard, 7; and fifth, recent studies on institutions and growth e. Aron, , ; Collier a, b.
These studies contain important, but disparate threads about the motives, organization, and influence of the different actors in economic policy, and the implications of these for performance. Recent literature on the analytical framework for explaining the politics and constraints of the policy process is dominated by theories of the new political economy and new institutionalism which derives from the work of Ronald Coase, Mancur Olson, James Buchanan, Gordon Tullock, Douglass North, Anthony Downs, and Oliver Williamson.
From the thematic papers and case studies, four key factors emerge as central to shaping and understanding the choices and implementation of trade and industrial policies in Africa. These include: the power of mainstream theories and ideas of development and role of donors; the state institutional-bureaucratic capacity approach; the interest group-public choice model; the impact of history, and the structure of the state and production-ownership structure on policy choices — including the role of geography see Figure 1.
Power of ideas and role of donor agencies Lord Keynes had recognised that nothing else influences economic policies more than the power of economic ideas. The two simple models that have defined the policy spectrum are the liberal-free trade theory on the one hand, and the mercantilist thoughts expressed Figure 1.
In this respect, Africa is unique. In broad terms, no region has been more susceptible to swings in the pendulum of ideas of economic development than Africa — from the ISI-planning models of the s to the s, to the swing into massive liberalization and structural adjustment programmes from the s to date. Any account of the policy process in Africa that ignores the power of mainstream ideas, as well as the role of donor agencies in propagating or mainstreaming such ideas misses the central point.
Most of the now discredited ISI strategies and national development plans of the earlier decades were designed and implemented largely with the financial and technical assistance of donors. Inherent in the role of donors in the policy process is the question of policy autonomy enjoyed by the African policy-makers. Most African countries especially the 34 least developed countries out of the 49 in the world depend heavily on external aid.
Donor agencies, especially the Bretton Woods institutions, have especially since the s become dominant in the policy choices of African countries — through policy-lending under SAPs and the increased donor coordination under the Paris and London clubs of creditors.
There is taking place an implicit loss of sovereignty desirable in some instances, in view of the misuse of it by those in power. It is not in doubt that the World Bank and the International Monetary Fund IMF have come to wield unprecedented control over the economic policies and institutions in most of Africa since the s. The implications of this are not only in loss of policy autonomy, but increasingly also, the undermining of existing capacity in the policy institutions.
This is in fact an endemic problem in the donor community — expatriate management substituting for domestic management. What is left in that demoralized ministry is being attracted away by donors and salary supplements. From the foregoing, it is evident that because most African states depend on bilateral and multilateral aid for basic financing, and because of the conditionalities attached to the rescheduling of existing unsustainable debt stock, it is impossible for the states to have an autonomous policy process.
He who pays the piper, it is said, calls the tune. Thus, to the extent that aid money can be regarded as a form of rent, the policy process is essentially beholden to the interests of donors more than the demands of the civil society sometimes even in countries with highly developed civil societies.
The organized groups might scream, sometimes violently protest, but in most cases, the states have little choice but to muster all their instruments of coercion to ram through the policies as dictated by the donors. In these countries, parliament rubber stamps what a technocratic elite submits to them as the non-negotiable policy agenda. Furthermore, trade and industrial policies are being locked-in under various regional and preferential arrangements.
The US model could significantly re-direct the production and trade structure as it stacks incentives in certain sectors but not in others. Thus, ideas, donors and external obligations matter more in determining policy choices. But despite the broad characterization of policy regimes, countries have differed significantly in details.
Even under the ISI- planning regime, details of trade and industrial policies adopted by Botswana and Mauritius on the one hand, and many other countries on the other, are remarkably different — and with different outcomes. Other factors could explain the differences. In these state-centred models of policy choice — popularly couched as rational actor, bureaucratic politics, and state interests models — the policy-maker is considered a rational actor who accumulates information, assesses alternative courses of action, and chooses among them on the basis of potential to maximize the social welfare function see Robinson and Majak, ; March ; Killick ; and Allison The activities of the policy-maker correspond to rational choices or to bureaucratic games in which the stakes are personal, organizational, and positional.
Furthermore, while rational actor models tend to focus on the individual in the decision-making process or on organizations acting as rational individuals, they are also useful in exploring how organizational contexts simplify the decision process, minimize the amount of conflict engendered through policy change, and constrain the choices available Frohock, The rational actor model certainly has some attractive features.
In the first instance, it would be difficult to deny rationality of some sort in the policy-making process. A shortcoming of the models is that they restrict the rationality of policy-makers to their organizational contexts and suggest that politics and policies take place within the confines of bureaucratic organizations.
These models ignore the role of societal interests, values, alliances, and historical issues in shaping or determining the policy process. Another variant of the state-centred models is the bureaucratic politics approach.
In this approach, state policy is the result of competing activities among bureaucratic entities and actors constrained by their organizational roles and capacities. For instance, the executive and bureaucratic actors compete over preferred solutions to particular policy problems and use the resources available to them through their positions — hierarchy, control over information, access to key political actors and decision-makers — to achieve their objectives.
Thus, the autonomy of the policy-makers in shaping and pursuing policy is potentially very great in the bureaucratic politics approach, for it is constrained only by the power and bargaining skills of other bureaucrats and by their own hierarchical position of power, their political skill, and the bureaucratic and personal resources available to them. This model provides some insights that are useful for understanding conflict and negotiation in the state and that indicate the extent to which policy is the result of intense political processes and power relationships in government.
The model could also shed light into the dynamics of negotiations and conflicts among bureaucrats that, in many cases, result in deliberate attempts by some well-connected and powerful bureaucrats to frustrate or sabotage policies they do not support.
An aspect of the state-centred model of policy-making refers to the institutional arrangements and governance structure of the state. A modern Third World leader, however, who wanted to perform essentially the same activity of rewarding followers and kinsmen would do so typically by assigning them jobs or import licenses or contracts that ostensibly ought to go only to those satisfying certain impersonal objective criteria of functional qualification.
The state would normally respond through political repression of varying kinds depending on the perceived threat. Moreso, the more lucrative the control of the state, the more intense will be the pressure of rival claimants, and so the regime will have to face the problem of how wide or narrow to make the coalition that enjoys the benefits of state power.
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