Industrial policy is in fashion in Africa. The path out of poverty, goes this new thinking, lies through high-value manufacturing, specialisation and industrialisation.
This is a worthy and necessary long-term goal. But the truth is most African economies are not in a good position to embark on such a strategy immediately, lacking both the infrastructure and the capital to bring it about. Fortunately, much can be done with what Africa has, including its agricultural and mineral resources.
If African countries can work with the private sector to attract productivity-enhancing investments and improve their revenue mobilisation they can generate the revenue needed to embark on more ambitious strategies later, without racking up huge debt. Here is a blueprint of how they could do it.
First, countries need to work with the private sector to attract investments that can boost productivity. The agriculture sector employs 60% of the region’s population and contributes to nearly a quarter of its GDP. Yet something is amiss. Africa is still a net importer of food because it’s stuck in a low-productivity trap. African agricultural output could double or triple by intensifying the use of fertiliser, improving seed quality and building irrigation infrastructure and food storage to reduce post-harvest losses. Increasing productivity will allow countries to aggregate tradable quantities and drive export-led growth in the near term.
Likewise, the mining sector has high potential — demand for minerals such as cobalt, copper and lithium is forecast to increase by nearly 500% by 2050 to meet the demand for clean energy technologies. Globally, we will need more than 3-billion tonnes of minerals and metals to deploy geothermal, wind and solar power and build energy storage. And cross-cutting minerals such as copper and chromium will be used across various clean energy generation and energy storage mechanisms, creating a more stable demand environment. Sub-Saharan Africa is well endowed with many of these minerals.
In SA, the government has prioritised the platinum group metal (PGM) sector in the Economic Reconstruction and Recovery Plan. The country already has a comparative advantage in the sector, with more than 75% of the world’s PGM reserves. If SA can build its hydrogen fuel cell production capabilities (which use PGMs), we will have a competitive advantage in the clean energy transition as vehicle emissions regulations continue to tighten. Technological upgrading plays an important role in being able to tap into this potential. The shift from conventional labour-intensive mining to open-pit mechanised mining has increased production of PGMs by a factor of 11.
But increasing productivity alone is not enough. Covid-19 highlighted the vulnerabilities of African economies that rely on resource revenues. Strengthening revenue mobilisation efforts is critical for two reasons: appropriately taxing the sector is important so that firms cover the economic, health and environmental costs imposed on surrounding communities and other stakeholders. And the tax system must be strengthened to prevent fiscal leakages so that resource rents finance a long-term economic growth plan rather than corruption.
The recent announcement by French energy company Total of a gas discovery off the southern coast of SA is another potential source of revenue for the country. This can offer a bit of fiscal reprieve if rents are captured effectively when drilling commences. Elsewhere in the region countries like Nigeria and Angola could fix tax leakages in the system, especially from important industries such as oil and mining, to build the cash buffers for investment in productive sectors of the economy.
But stability is important too. For Zambia, Africa’s second-largest copper producer, which is also facing a debt crisis, the lack of a stable policy environment has adversely affected the investment climate. With no less than 11 mining royalty increases in just 17 years and the addition of other levies, the country has seen a number of copper mining firms closing operations and planning their exit.
Overall, while the debates in some countries have focused on identifying priority sectors for development and crowding in industrial policy incentives such as subsidies, reduced rents and infrastructure provision, these are largely expenditure programmes rather than revenue generators. Such an approach could prove challenging for countries nearing or already in debt distress. Hence the inclusion and expansion of traditional primary sectors remains important.
Ultimately, industrial policy is not a short-term recovery plan. Japan took four decades to develop a globally competitive automotive manufacturing industry, and in Finland Nokia had to be cross-subsidised for 17 years before it yielded a profit. Furthermore, Japan could not predict that it would take 40 years of infant industry protection or that Nokia would need 17 years — industrial policy is inherently entrepreneurial — and a long-term approach is required. Importantly, all of these programmes were backed by government finance, which much of the Sub-Saharan Africa region is not in a position to provide now.
Leveraging what countries have is critical to getting them where they want to go. Boosting productivity-enhancing investments in primary commodities, broadening the tax base and improving the efficiency of the tax system may expedite the journey for the Sub-Saharan Africa region.
• Baskaran (@Gracelin75) is a development economist who has consulted for the private sector, governments and multilateral development banks. She is completing a PhD at the University of Cambridge. Sihlobo (@WandileSihlobo) is head of economic and agribusiness research at the Agricultural Business Chamber.
