By Alireza Sanieipour
With East Asian economies having successfully industrialized through the use of trade zones, along with the examples of Norway, Qatar, and United Arab Emirates demonstrating successful commodity-led industrialization, African states have an opportunity to implement similar models in pursuit of their own successful development policies.
Trade Zones & Export Push Policies
Gradually increasing involvement in export-oriented industrialization can lead to diversification and the sophistication of industrial production. This positive relationship between export structure and the sophistication of a country’s manufacturing capacities is what fuels development. However, due to a lack of meaningful structural changes, many African states have seen industrial production become both less diverse and less sophisticated since the 1970s. How then can African countries improve policy to make export-oriented industrialization work?
Reforms such as tariff exemption schemes, tackling bureaucratic inefficiencies, and the creation of Special Economic Zones (SEZ) and Free Trade Zones (FTZ) can attract foreign investors and lead to further industrialization. If implemented appropriately, SEZs and FTZs can also foster structural transformations by establishing domestic backward linkages and developing domestic industrial clusters. This was the case in East Asia where SEZs allow for linkages to surrounding domestic firms through both technology and skills transfer, leading to an increase in domestic capability.
In addition to the positive spillover effects on domestic industry, such relations will be more cost effective for the firms in the zone as well. As a result, SEZs and FTZs both contribute to the local manufacturing value added chain and diffuse imported knowledge throughout domestic industry. The interaction among different firms in the SEZ can thus increase access to specialized skills, free up knowledge flows, and improve access to primary input materials.
The success of SEZs in Africa has, to date, been mixed. According to economists Deborah Bräutigam and Xiaoyang Tang, there are few signs of meaningful clustering to be seen. In addition, “the zones’ weak linkage with local enterprises and the lack of local participation in the zone management make it more difficult for the zones to drive broad transformation in the local communities.”
As the true legacy and benefits of Special Economic Zones can only be fully appreciated over the long term, the fairly recent interest in SEZs in Africa means that most zones are still in their infancy. Nonetheless, even in the short term the mixed results highlight the important role of the host nation. As key stakeholders and custodian of the domestic interest, the host government must be involved in the supervision and oversight of zones at all stages, ensuring that national objectives are being implemented. Doing so requires more comprehensive coordination between the developers and the hosts than currently exists. Successful implementation of SEZs and FTZs is among the most important and effective ways to enhance manufacturing capabilities, positively contribute to the export-led industrialization, and promote broad economic development.
Commodity Led Industrialization
Many of today’s advanced economies, such as Canada and Norway, successfully industrialized through sustainable extraction and distribution of natural resources. Consequently the idea of resource curse and its negative link to development cannot be validated. In this respect, today’s commodity industry cannot be regarded to as displaying enclave characteristics as it used to in the latter stage of the colonial era. In contrast, due to recent economic liberalization, different forms of linkages such as backward, fiscal, and consumption can be observed.
A key feature of natural resource industry is that geography and terrain both play an important role in defining the nature and scope of operational activities. In retrospect, the type of technology used, skills, and resource inputs can vary from place to place as no two sites are identical. This provides the opportunity to have local firms, using local skills and knowledge, involved in the extraction process, promoting the localization of input provision and establishing sustainable backward linkages. In order to take advantage of this opportunity, policies must be in place that promote the upgrading of domestic technology and local industry skills development thereby increasing the depth of linkages.
There should also be a push to further absorb value added domestically by promoting the development of adjacent industries, stimulating industrialization, and diversifying the domestic economy.
Natural resource based industrialization can increase the real income due to an increase in consumption. As a result, the revenue earned through direct and indirect taxation can positively contribute to the national fiscal balance making possible an upsurge in infrastructure and social policy expenditures. However, as the recent plunge of oil prices had demonstrated the vulnerability of resource rich countries such as Nigeria and Angola, it is crucial that revenue generated through natural resource based industrialization be used to diversify the economy, increasing its ability to absorb exogenous shocks.
Countries such as Canada and Norway have shown that a commodity-led industrialization policy based on the extraction and export of natural resources can create broad development. Others such as China and the Republic of Korea have achieved sustained industrialization through manufacturing. As we have seen, there is no “one policy fits all” approach to industrialization and each country must take the route that best matches its realities and core competencies.
Africa is no exception. With unique sets of challenges, African countries will need to pursue policies that fit their own narratives. Given the abundance of natural resources and the prominent role of agriculture throughout the continent, both commodity and agriculture led industrialization are real options. But in each case domestic governments must play a central role in promoting industrialization. Consequently, the commitment of governments to stabilize the macro-economic environment, promote linkages, and increase governance capacity, is required for the future growth of the continent.
Alireza Sanieipour is a Canadian postgraduate economist research contributor for Fireside Research. He is based in Cape Town, South Africa, affiliated with the University of Cape Town.