peter b. robinson and - usaid

OCCASIONALPAPERS

Number 40

AFRICA AND ASIA

Can High Rates ofEconomic Growth Be Replicated?

Peter B. Robinson andSomsak Tambunlertchai

INTERNATIONALCENTER FOR

ECONOMIC GROWTH

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Africa and AsiaCan High Rates of

Economic Growth Be Replicated?

Peter B. Robinson andSomsak Tambunlertchai

An International Center for Economic Growth Publication

I!:§PRESSSan Francisco, California

This Occasional Paper is based on "Stimulation of Production for DomesticUse and Export," a paper presented at a United Nations interregionalsymposium, "Promoting Accelerated Development in Africa: Perspectivesfrom the Asian Experience," held in Abidjan, Cote d'Ivoire, 15-19 June,1992. The symposium was organized by the Department of Economic andSocial Development of the United Nations Secretariat through financialcontributions from the United Nations Regular Programme of TechnicalCooperation, the Government of Japan, and the African Development Bank.

© 1993 Peter B. Robinson and Somsak Tambunlertchai

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PREFACE

The International Center for Economic Growth is pleased to publishAfrica and Asia: Can High Rates ofEconomic Growth Be Replicated?as the fortieth in its series of Occasional Papers, which feature reflections on broad policy issues by noted scholars and policy makers. Thispaper, originally presented at a United Nations interregional symposium, "Promoting Accelerated Development in Africa: Perspectivesfrom the Asian Experience," is an important addition to that series.The authors, Peter B. Robinson and Somsak Tambunlertchai, wererequested by the U.N. symposium's organizers to prepare a paper onthe topic of stimulation of production for domestic use and export.They have written an incisive and lucid consideration of what suchefforts can be expected to accomplish in Africa in coming years. Theirthoughtful comparison of Africa's prospects with the achievements ofEast and Southeast Asia provides a useful dose of realism for thosewho imagine that Asian success stories can easily be duplicated.

Robinson and Tambunlertchai assert that Africa, afflicted withundeveloped agriculture and a lack of industrial prowess, is not yetready to launch an economic' 'take-off" like that ofJapan and the newlyindustrialized countries (NICs) of East and Southeast Asia. The authorsargue that the Asian experience shows that industrialization is an evolutionary process. African countries, they say, should begin bystrengthening their agricultural base and their labor-intensive, smallscale industries that utilize local raw materials. As these two sectorsgrow, African economies can acquire the skills, capacity, and soundeconomic health they will need to enter an Asian-styIe "virtuous circle' ,of development: export expansion, followed by increased income,

savings, and investment, and ultimately better competitiveness in theworld market.

While the countries of Africa may not yet be ready to join the ranksof the NICs, Robinson and Tambunlertchai point out that African policymakers can learn now from their Asian counterparts the techniquesnecessary to create macroeconomic stability, provide infrastructure,improve education and training, and identify market opportunities. Aproperly conducted opening to foreign trade and investment can ensurethat the industrial sector improves the quality and efficiency of itsoperations.

We at ICEG believe that this sober assessment of Africa's development outlook will prove timely and valuable to the policy makers onwhose planning the region's future depends.

Nicolas Ardito-BarlettaGeneral DirectorInternational Center for Economic Growth

Panama City, PanamaFebruary 1993

ABOUT THE AUTHORS

Peter B. Robinson is an economist and mathematical modeler at ZIMCONSULT, a consulting firm in Harare, Zimbabwe. He has writtenextensively on various aspects of development planning.

Somsak Tambunlertchai is co-ordinator of the International Trade andRegional Co-operation Program at the Asian and Pacific DevelopmentCentre in Kuala Lumpur, Malaysia. He has specialized in trade andinvestment issues in the Asia-Pacific region.

ACRONYMS AND ABBREVIATIONS

ACPAIDSASEANERPFDIGDPGSPIMFNICSAPSME

African, Caribbean, and Pacific (countries)acquired immune deficiency syndromeAssociation of Southeast Asian NationsEconomic Reform Programmeforeign direct investmentgross domestic productgeneralized system of preferencesInternational Monetary Fundnewly industrialized countriesstructural adjustment programsmall- and medium-scale enterprise

Peter B. Robinson and Somsak Tambunlertchai

Africa and Asia

Can High Rates ofEconomic Growth Be Replicated?

If Africa is to overcome the economic crisis that it faces, increasedproduction has to be at the core of the strategy for recovery. Policiesand programs in areas such as macroeconomics, agriculture, trade andindustrialization, institution building, and skill development have to bedesigned and implemented to ensure a consistent increase in production. No attempts to ameliorate adverse economic conditions can besustained without the material base being generated from within thedomestic economy.

What strategy should be adopted to achieve a sustained increase inproduction? The current conventional wisdom in economics is thatgrowth-oriented governments should concentrate on providing a conducive macroeconomic environment within which private enterprisecan flourish. Specific sectoral programs may complement macroeconomic policies, but governments should generally disengage from direct involvement in production. Market forces should be allowed toplay a detenninant role in the economy. There is a renewed belief,

This Occasional Paper is based on "Stimulation of Production for Domestic Use and Export,"a paper presented at a United Nations interregional symposium, "Promoting Accelerated Development in Africa: Perspectives from the Asian Experience" (15-19 June, 1992, Abidjan,Cote d'Ivoire). The views expressed are those of the authors and do not imply any opinion on thepart of the symposium's co-organizers (the United Nations Secretariat and the financing entities).

2 PETER B. ROBINSON AND SOMSAK TAMBUNLERTCHAI

verging on religious dogma, in the gains from trade. An export orientation is seen as a sine qua non of rapid growth, not only because of thegains expected from the exploitation of comparative advantage, butbecause trade openness provides a built-in spur to efficiency in production. This contrasts with the tendency for industries to becomeprogressively more inefficient under the protection of an import substitution regime, with adverse consequences being multiplied throughinterlinkages within the domestic economy.

Much of this conventional wisdom derives from a popularization ofthe factors underlying the unquestionably impressive growth performance of countries in East Asia: Japan, followed by the four "newlyindustrialized countries" (NICs) or "dragons" (Taiwan, South Korea,Hong Kong, and Singapore), and more recently some of the Associationof Southeast Asian Nations countries (Malaysia, Thailand, and Indonesia). The progressive development of different parts of East Asia hasinvolved the "flying geese" pattern of development, whereby predominantly export-oriented industries that had succeeded in Japan werelater transferred to the other emerging East Asian economies (first theNICs, later the ASEAN countries), to be replaced by more sophisticated, capital- and skill-intensive activities. Despite the progressivelyless favorable international climate for export-led growth, three successive generations ofEast Asian countries have succeeded in achievinghigh rates of export-driven growth.

Most East Asian economists, buoyed with optimism derived fromthese perceptions, do not go so far as to suggest that the strategy isuniversally applicable, but find it almost heretical if the broad lines ofthe strategy are questioned. African economists, by contrast, struggling not to be overcome by the enormity of the economic problemstheir continent faces, are cautious about accepting a model which mayturn out flawed, at least when applied in an African context. The onlyexample of successful export-led growth in Africa is that of Mauritius,and it is interesting to note that an East Asian economy (Hong Kong)played an important part in that success (see box on page 3).

If the Mauritian experience is not generally applicable in Africa, anumber of questions arise. Is the export-led, market-oriented growthmodel a fair representation of the most important elements explainingrapid growth in East Asia, or is it an example of selective presentation

Africa and Asia

Mauritius: An African Model of Export-led Growth?

Mauritius provides a unique example in Africa of a country thathas succeeded in attaining a consistent rate of growth derivedprincipally from expansion of manufactured exports. The basisfor this perfonnance is textile exports (mainly knitwear) from theexport processing zone that was started in 1970 and met withconsiderable initial success. Over the period 1979-1982, manufacturing growth halted, however, and the low sugar price (Mauritius is a major sugar exporter), second oil shock, and worldrecession caused serious financial and economic imbalances. Thegovernment responded with a stabilization package and a seriesof specific measures, including control of labor's demands forwage increases, to reactivate growth in manufactured exports.

The investment response that followed had a particular historical character. "These adjustments coincided with the emergence of capital from Hong Kong searching for investmentsabroad, pushed by political uncertainties in the colony" (WorldBank 1989b, 111). Besides the fact that the entrepreneurial classin Mauritius had strong links to Hong Kong, one major reasonwhy footloose Hong Kong capital chose Mauritius was that indoing so it gave additional access to European textile markets,because of Mauritius's status as an African, Caribbean, and Pacific (ACP) country associated with the European EconomicCommunity. Mauritius also offered a well-educated, althoughnot technically advanced, labor force.

The Mauritian example is interesting in its own right (GDPgrowth rates averaging 3.9 percent per annum over 1973-1980and 4.4 percent per annum over 1980-1987; sharply reducedexport dependence on sugar, from 94 percent in 1970-71, to 60percent in 1980-81, to 34 percent in 1987-88; reportedly impressive advances in social service provision). But the uniqueconditions that led to its success make Mauritius a problematicmodel for other African countries.

3


of facts and invalid generalization? Are policies really determinant, orare historical, cultural, sociological, and political factors at least asimportant in determining whether a country will achieve rapid economic growth? Even if policies are determinant, will the application ofthe recommended package to African nations achieve the same resultsamid preconditions that may be different in crucial ways from thosethat prevailed earlier in East Asia? Similarly, in what will almostcertainly be the increasingly hostile world economic climate of the1990s (increased protectionism in developed markets, growing competition from other developing countries, and probably reduced netresource flows to Africa), is it rational to launch an export-orientedgrowth strategy? Finally, has the rapid growth of gross domestic product in East Asia been accompanied by development in a broader sense?

For African policy makers, these questions may sound somewhatacademic. Many African countries came to independence committed towhat Samir Amin has called "self-directed" development, defined asa model in which "external relations are subjected to the logic andimperatives of internal accumulation" (Amin 1983, 1). Whether thenecessary policies for self-directed development were misapplied, orwhether internal and external factors intervened to preclude substantive development, can be debated, but the fact that the majority ofAfrican economies are now in crisis is not disputed. Under the auspicesof the International Monetary Fund (IMF) and the World Bank, mosthave adopted comprehensive structural adjustment programs (SAPs).Structural adjustment is the antithesis of self-directed development: itis concerned with sustaining positive economic growth and development through what a recent World Bank paper calls "a reallocation ofresources to best compete in and take advantage of the world environment" (Conway 1991, 3).

A slightly different set of questions can then be posed. If Africa iscommitting itself and being committed, rightly or wrongly, to a modelbased on a generalization of East Asian economic growth experience,what should be done to maximize the chances of a favorable outcome?What lessons can be learned from a more careful analysis of EastAsian experience that could usefully guide the implementation ofSAPs? What adaptations need to be made where African circumstances and the world economic environment differ crucially from the

Africa and Asia 5

preconditions that successfully meshed with economic policies in EastAsia?

Acknowledging the risks of making unwarranted generalizations,this paper attempts to spell out some of the lessons from East Asianexperience that would seem relevant and important for Africa in the1990s. It then discusses the replicability of East Asian experience inAfrica and implications for the sequencing of structural adjustmentprograms. Finally, some concluding comments are given.

Stable Macroeconomic Environment

Compared with developing economies in other regions of the world,developing economies in East Asia have enjoyed considerable stabilityin price level. Prudent macroeconomic management has not onlyhelped to keep inflation low, but has also contained the fiscal deficitand foreign debt. The rate of savings for most East Asian economiesis also quite high by international standards. Combined with activedevelopment of capital markets, the result has been a high level ofinvestment both in production and in social sectors.

Africa, by contrast, has performed poorly, particularly in respectof savings and investment. While the connection between price stability and investment is controversial and certainly less direct than thatbetween savings and investment, African countries should work strenuously .to avoid getting into the hyperinflationary spirals that haveproved so difficult and costly to dislodge in Latin America. Restoringmacroeconomic balances while also achieving other goals, such asstructural adjustment, is difficult; some of the issues involved arediscussed in the section beginning on page 22. Strategies to developcapital markets to mobilize domestic savings, and improvement ofaccess to loans and efficiency of investment, are critical components ofprograms to increase production and incomes.

Agriculture as the Base

While it is undoubtedly true that a country cannot achieve a significantlevel of development without industrialization, it is also the case that


all of the countries now regarded as developed "either started theirindustrialization with a highly productive agricultural base or developed a highly productive agriculture during their industrializationprocess" (Adelman and Morris 1979). Similarly, within groups ofdeveloping economies, it is generally those with developed agriculturethat have succeeded. "The empirical record of economic growth anddevelopment in Asia over the past three decades convincingly demonstrates that countries neglecting agriculture tend to grow much moreslowly than those that pursued agricultural development early on(James 1990, 282). Japan, South Korea, and Taiwan, for example, allengaged in land reform, invested in rural infrastructure and the institutional and organizational aspects of rural development, and ensuredthat explicit or implicit taxation of agriculture to finance industrialization was of limited extent and duration.

In Africa, by contrast, far too many countries with good agricultural potential import basic foodstuffs. Such a situation implies the useof scarce foreign exchange to import goods that could readily be produced domestically at very low foreign exchange cost. It also impliesthe prevalence of low incomes in rural areas, where the majority of thepopulation lives, and thus low internal demand for the products ofdomestic industry and service sectors, which in turn reduces incomesin urban areas. There is also then scant possibility of agriculture providing a source of savings for investment in the development of othersectors. Neglect of, and policies biased against, agriculture have alsoresulted in deficient production or marketing of agricultural productsfor export, leading to reduced foreign exchange receipts and negativemultiplier effects throughout economies whose main macroeconomicconstraint is the capacity to import.

Such considerations should not be taken as an argument that allAfrican countries should strive for self-sufficiency in food production.Indeed, although "the tendency to think of growing more food as theonly way of solving a food problem is strong and tempting ... theneed for a more diversified production structure is very strong inSub-Saharan Africa" (Sen 1990). As the vagaries of internationalprimary commodity markets are superimposed on declining terms oftrade, African countries must strive to diversify exports. Since roughly75 percent of the population of these countries lives in rural areas, any

Africa and Asia 7

economic recovery and growth strategy that is to benefit the majorityof people has to be based on achieving the full potential of the agricultural sector. Furthennore, with agriculture in Africa accounting for36 percent of export revenues (as opposed to 11 percent from manufacturing), a 10 percent increase in export receipts from agriculturemay well be easier to achieve than the increase in manufactured exports (33 percent) that would be needed to give the same absoluteincrease in foreign exchange.! At the same time, because agriculture isgenerally more labor intensive than manufacturing, more employmentis likely to be created, leading to increased domestic demand, which inturn will stimulate the industrial sector.

In order to increase agricultural output, particularly of foodstuffs,what is needed (though not to the extent that it would aggravate ruralinequalities and unsustainable import dependence), is for Africa tobring about its own "green revolution." However, Africa's

will be a revolution of quite different character from Asia's. The AsianGreen Revolution was based on one or two dominant crops, grownmainly on soils whose fertility is renewed yearly by alluvial deposits.The climate is relatively reliable: irrigation maintains water supply tocrops even when dry spells occur. Erosion is minimized by the basinsand bunds in which irrigated crops are grown. Human and animal powerare in plentiful supply to allow timely operations and good management. Populations are dense, cultures fairly uniform, and road networksrelatively well developed. (Harrison 1989, 57)

Achieving the required production goals in Africa, whose agriculture produces a variety of crops on generally dubious soils withunreliable rainfall, scattered populations and underdeveloped infrastructure, will require a massive and sustained effort. The strategy willnecessarily have to be focused on small-scale producers, who constitute the mass of the rural poor and control much of the environment.Such a strategy should aim to combine production improvement withconservation measures, and should focus initially on taking steps thatincrease yields with little or no cash cost and setting labor requirementsthat do not conflict with peak periods of crop production. 2 Later it willbe possible to move to more sophisticated production methods involving a much higher level of inputs.

Governments have an important role to play in ensuring provision


of essential services, including: rural extension programs (not limitedto agricultural extension); localized agricultural and conservation research; adequate supply, through local industry or imports, of agricultural inputs; credit (both working and fixed capital) as newtechnologies of production are adopted; and infrastructure, includingroads and marketing channels. Many of these services could be provided by privately owned organizations, but governments should ensure that distribution is adequate and costs are affordable, and theyshould step in where there are gaps or problems that slow productivityimprovement.

Effective Import Substitution to Start Industrialization

As mentioned previously, the stress on agriculture should not be takento imply that industrialization is to be disregarded in the developmentstrategy. On the contrary, industrialization must remain the ultimategoal, but should be included in a balanced way, in what Paul Streetenhas usefully dubbed a "unified" development strategy:

The poorer the country. the larger the proportion of the population thatis engaged in producing food. To rise above poverty, industrialization isnecessary, for industrialization means the application of power to production and transport.... In addition, manufacturing industry is subject to increasing returns, to learning effects and to cumulativeprocesses. (Streeten 1975, 1)

The implication of the unified strategy is that industrializationshould be oriented to satisfying the needs of the people, and thusshould be more closely tied to rural development needs than it has beenin the past. Industry would emphasize the domestic market over exportpromotion, at least initially. It would, however,· supply products appropriate for the mass domestic market, rather than try to providesubstitutes for sophisticated imported products purchased only by theurban elite (an ambition that is typical of current industrialization inAfrica). With a strategy of support for agriculture together with ruraldevelopment that increases rural incomes and provides a natural market for consumer goods and agro-based industries (often themselves

Africa and Asia 9

quite labor intensive), a "virtuous circle" could be created, with ruraland urban growth being complementary and mutually reinforcing.

It should be noted that this "agricultural-development-led industrialization" strategy is one that has been advocated over an "exportoriented industrialization" strategy in certain Asian (although notpresent-day East Asian) contexts. Inna Adelman, for example, hasargued that the agricultural option would be superior for Sri Lanka,both on a priori grounds and because of changes in the world economy.Using a simulation model calibrated to the early 1960s, but accountingfor the considerably lower growth in world trade of the 1980s, shefound for South Korea that' 'faced with the present world environment... agricultural-development-led industrialization would have been asuperior strategy (to export-oriented industrialization) on all grounds:economic growth, industrialization, poverty alleviation and employment creation" (Adelman 1984).

Simulation results should always be treated with caution, but Adelman's conclusion does point to an important general point: that theEast Asian countries have responded to the actual conditions that theireconomies have faced and have designed appropriate strategies tomake the most of opportunities. Had conditions been different, strategies might have been different. Rather than a blind application of apredetennined set of policies, strategies have been refined and adaptedover time as domestic capacities were built up and as changes in theworld political and economic environment took place.

Nonetheless, at some point all of those East Asian countries thathave achieved high growth rates did turn to the promotion of manufactured exports as an engine of growth. In almost all cases, however,this was the culmination of an industrialization process that had takentime to unfold, and that had started with import substitution. While thesevere problems that arise from overprotection of domestic industrymust be acknowledged, it would appear that some degree of importsubstitution is an essential prerequisite of successful industrialization.

Export Promotion to Maintain the Momentum

After the first stage of import substitution (that is, the development oflight consumer goods or assembly-type industries to substitute for


imports), either second-stage import substitution (development of industries making producer, intermediate, and capital goods) or exportpromotion could be attempted. Either strategy could utilize the manpower and technology developed in the initial stage of industrialization. In a very pertinent paper entitled "Asian and Latin AmericanExperience: Lessons for Africa" (1989), Gustav Ranis argues that thecrucial difference between the Latin American and East Asian experiences is that Latin America adopted second-stage import substitution,while East Asia pursued what he calls "primary export substitution. "

Latin America was able to choose second-stage import substitutionbecause of its superior initial conditions (lower population pressure,better natural resource base), and yet its performance has clearly beeninferior to East Asia's. Not only has Latin America's growth rate beenlower, but its performance in terms of employment and income distribution has been markedly worse. East Asian countries largely avoidedthe supposedly necessary trade-off between growth and distributionthrough "early attention to agriculture, a shift towards more laborintensive crops and the encouragement of labor intensive rural industrialand service industries" (Ranis 1989, 14). By contrast, the Latin American growth path was inefficient and nonparticipatory ,3 although it wascushioned until the 1980s by the availability of natural resources.

Extending Ranis's argument, it is interesting to note that withinEast Asia itself, the timing of the transition to an export orientation wasalso determined in part by the availability of natural-resource-basedexports: those countries without the potential to use natural resourcesto increase foreign exchange receipts (Japan, Hong Kong, Singapore,South Korea, and Taiwan) were forced into exporting at an earlierstage than were the resource-rich ASEAN countries. At the presenthistorical juncture, which finds Africa without the industrial base toinitiate a development strategy based on manufactured exports, it isfortunate that most African countries have a natural resource base thatallows a more gradually phased strategy of industrialization.

Africa, with the benefit of lessons learned elsewhere, has theopportunity to strive for more balanced growth (urban-rural, agriculturalindustrial, export market-domestic market) and to adopt a strong orientation to the market that will ensure efficiency over time and allowAfrica to avoid a tendency toward inefficiency and stagnation.

Africa and Asia 11

Experience in East Asia suggests that import substitution and export promotion should not be treated as mutually exclusive strategies.Instead both strategies can be simultaneously developed, with importsubstitution being adopted in one industry at the same time that exportpromotion is chosen in another, provided the overall trade regime doesnot become significantly biased against export promotion.

It is not always necessary that any given industry go through theprocess of import substitution before its product can be launched intothe export market. A glance at the products exported by countries inEast Asia reveals that there exist several different categories of exporting industries. These include:

A. primary-product-processing industries (such as those refining sugar, palm oil, and tapioca);

B. labor-intensive manufacturing companies launched withforeign investment (such as those making various electronic products);

C. labor-intensive manufacturers making indigenous products(such as garments, jewelry, and handicrafts); and

D. industries originally supplying the domestic market thathave developed into export industries (such as the textileindustry in Thailand and machinery industry in Taiwan andSouth Korea).

Some industries in types A, B, and C can immediately be developed into export industries without going through the process of importsubstitution.

Phased Trade Liberalization

The strongest argument for the superiority of export promotion overimport substitution is the dynamic one alluded to in the previous section.Export promotion is market-oriented, relying more on internationalmarket price than on quantitative interventions to force efficiency ondomestic producers. Import substitution, by contrast, allows the operation of tendencies that may cumulatively undermine efficiency andexacerbate fundamental economic problems.·

For example, a balance of payments problem in an import


substitution regime may lead to a tightening of controls on foreigncurrency, further protecting politically influential producers. The costsof such protection are not visible and are borne by geographicallydispersed or politically weak firms and consumers, often those in ruralareas. By contrast, export promotion costs, such as export subsidies,which have to be met by the government budget, are generally muchmore visible to policy makers and are more regularly reviewed andjustified. The generally higher availability of foreign currency in countries favoring export promotion helps to ease other bottlenecks, makingsuch countries less needful of outside finance from commercial banksor, ultimately, the International Monetary Fund. Ironically, importsubstituting countries, although explicitly committed to reducing dependence on such agencies, have often found themselves moredependent as external shocks, superimposed on the cumulative biastoward protectionism, have precipitated economic crises. Because oftheir weak bargaining positions, such countries have often had to resortto external finance to which stringent conditions have been attached.

Proponents of full-scale trade liberalization take the dynamic argument for export promotion a stage further. In order for exporters tobe able to compete in world markets, they should have access to inputsthat are comparable in quality and price to those of their competitors.This can only be assured in a situation where imports are freely available and import parity thus determines the prices of domestically produced goods and services. Such arguments seem all very well at atheoretical level, but in practice no country has industrialized withoutpracticing considerable trade protection, least of all the East Asiancountries. "The case of Korea shows that selective, often high andprolonged, protection was necessary for its strategy of rapid industrialdeepening led by nationally-owned enterprises" (Lall 1989, 15).

If we accept that the ultimate goal should be an open trade system,the immediate question becomes: What level and duration of importsubstitution is optimal? In Africa's case, there is some doubt as towhether most African countries can be said to have advanced even tothe first stage of import substitution. Questioning whether import substitution "has failed or not really been tried," Roger C. Riddell writesthat "the overall impact of import substitution appears to have beenminimal" in all but one of seven of the most industrialized countries

Africa and Asia 13

in Africa (the exception being Zimbabwe in a group includingBotswana, Cameroon, Cote d'Ivoire, Kenya, Nigeria, and Zambia)., 'It has resulted neither in a very significant degree of interlinkageswith other sub-sectors of manufacturing, 9r to other productive sectorsof the economy (except, of course, further processing of primary products), nor to a significant fall in the importation of even the simplerconsumer goods" (Riddell 1990, 38).

Despite the weakness and underdevelopment of the manufacturingsector in Africa, most structural adjustment programs include tradeliberalization as a major component. While the short-run implicationsfor highly inefficient manufacturers will be severe contraction or closure, with significant social costs for those formerly employed in thosefirms, the apparent assumption is that trade liberalization will assist inlong-term industrialization. The contrary view is that for Africa, whichlacks an adequate industrial base at the start of trade liberalization, thelonger-term result could well be to foreclose the possibility of significant industrialization.

It is puzzling, when seen in this context, why so much emphasis islaid on trade liberalization per se. The reasoning seems to have less todo with economics than with the IMF and World Bank's profoundmistrust, implicit in their prototype structural adjustment package, ofthe competence of the state, particularly the African state. DaniRoderick, writing specifically about "closing the technological gap,"concludes that "when inferior technological performance is due tomismanagement of macroeconomic policy, countries should be toldto change their exchange rate and fiscal policies; the inclusion oftrade liberalization in the policy package-sometimes as the lead policy initiative-gives the upper hand to ideology over economics"(1988, 7).

In the light of the experience of East A~ia and other parts of theworld, the appropriate conclusion at this time is that African countriesshould concentrate on consolidating existing, domestically orientedindustry, exporting where possible, but only later making a definitiveshift to production of manufactured goods for export. Contrary to theprecepts of the misapplied import substitution theories of the past,following sensible macroeconomic policies, particularly maintenanceof realistic exchange rates and moderate fiscal deficits, would help to


stabilize markets and encourage an increase in traditional exports.Such policies would make available the foreign currency to allow fora higher level of capacity utilization and new investment in industry.Although its historical context was extraordinary, the example of Zimbabwe does show that diversification and consolidation of an industrialbase is possible in a small, landlocked country under carefully managed import substitution policies (see box on pages 15-17).

In implementing such a phased strategy now in Africa, manufactured exports would be encouraged from the start, and only later woulda full-blown export-oriented strategy, including comprehensive tradeliberalization, be contemplated. Countries with formal structural adjustment programs with the World Bank and the IMF should thus becareful to effect trade liberalization, proper sequencing, and extensionof ,such programs sufficiently for them to contribute to, and not undermine, the industrialization process.

The Importance of Small-scale Enterprises

The World Bank's study Sub-Saharan Africa: From Crisis to Sustainable Growth, which views the situation in long-term perspective,rightly makes much of Africa's "missing middle." This term refers tothe division of production and consumption into traditional and advanced categories, characterized by sharp gaps in technology levels,which are either high or low with little in between. Transportation, forexample, is either by foot or by motor vehicle. In rural areas, womenhave been found to spend 400-500 hours per year in transporting itemsby foot; little use is made of bicycles and handcarts, which couldgreatly improve productivity and enable much higher returns to bemade on marketable products. In respect of motor cars, there is athought-provoking comparison with Asia: "Africa has nearly 7 carsfor every thousand inhabitants (Zimbabwe has 30, Cote d'Ivoire 17,and Senegal 13); the Republic of Korea has only 6, India 2, andBangladesh 0.3 percent (World Bank 1989b, 29).

The more widespread use of appropriate technologies and theachievement of higher productivity are important goals in raising incomes and providing greater and more satisfactory employment

Africa and Asia

Industrialization and Trade Liberalization in Zimbabwe

If trade liberalization is on trial in Africa, Zimbabwe is an important case to monitor. Its relatively sophisticated industrial baseis derived from the import substitution forced upon the countrywhen international sanctions were applied against the illegal Rhodesian regime. Significantly, this situation produced a strong anduniform sense of purpose between business and the governmentof the day, a factor probably at least as important as economicpolicies in accounting for the level of industrialization that wasachieved.

From the time of Zimbabwe's independence in 1980, theWorld Bank has been in the forefront of the debate on whether theprotection that had previously been provided to the manufacturing sector should be continued through established quantitativeexchange and import controls, or whether the country shouldmove toward a more open economy, forcing industries that hadgrown up under sanctions to face international competition andbecome more export-oriented. An initial study undertaken at theinstigation of the Bank concluded that a high proportion of Zimbabwean industry was inefficient and should be closed down,including the only iron and steel plant. Zimbabwe's governmentfound the conclusions unacceptable, and examination of the report revealed a poor application of domestic resource-cost methodology, which even if properly used would not give a definitiveassessment of long-term comparative advantage. Later and morecareful studies by the Bank itself found Zimbabwean industry tobe remarkably efficient, the operation of its foreign exchangeallocation and investment licensing having avoided many of theproblems found in other countries with similar trade regimes.Even the capital goods industry received a positive verdict. "Theconclusion that the capital goods industry in Zimbabwe is largelyefficient is puzzling, since the same pervasive policy interventions in other African countries have led to disastrous results"(World Bank 1989a, 46).

15


The Bank's surprise has not led it to abandon its call for tradeliberalization, or, for that matter, to draw some useful lessons forother African countries about what can be achieved by way ofindustrialization under a carefully managed import substitutionregime. The argument for trade liberalization in Zimbabwe simply shifted ground: "Since most industries are efficient, they nolonger need protection. "

As it was not in a situation of economic crisis in which theIMF and the World Bank can determine the main lines of policy,Zimbabwe itself decided to embark in 1990 on a comprehensiveprogram of trade liberalization. The government's decision doesnot seem to have been directly related to efficiency considerations, but to have been motivated by the political threat from arapidly growing number of unemployed, many with a relativelyhigh level of education, and the consequent need to move theeconomy from a lackluster 3 percent annual GDP growth rate toat least 5 percent per annum, and a much higher rate of jobcreation than was achieved in the 1980s.

The strategy is to borrow the foreign currency needed forinvestment, and to reduce bureaucratic requirements for investment and the conduct of business, while also liberalizing trade inorder to make the productive sectors more outward looking andimprove the availability, price, and quality of consumer and producer goods on the local market. The overall success of theprogram will hinge on whether the export response is adequateand sustainable, enabling repayment of the borrowed funds and adiminution of the foreign currency shortage which in the past hasbeen the major constraint on growth and development. The phasing of liberalization has thus been designed -to maximize exportperformance.

Considering that tight protection has been in place at leastsince international sanctions were imposed against Rhodesia in1965, time is needed for economic agents to adjust their thinking.In any event, investment prospects are severely constrained byinfrastructural bottlenecks (particularly in respect of electricity,

Africa and Asia

transport, and telecommunications) and a shortage of skills,likely to be exacerbated in the future by a significant "braindrain" to a post-apartheid South Africa.

If adherence to an overly ambitious timetable of trade liberalization is forced, gratuitous deindustrialization in sectors thathave not had sufficient time to modernize, invest, and streamlinecould well be the result. At the same time, if the productivesectors fail to increase exports, investment, and new jobs rapidlyenough, deficit reduction measures (including subsidy reductionsand cost recovery plans) are nevertheless pushed through, thesewill impose an even heavier burden on the population than isalready envisaged. Even if trade liberalization succeeds in stimulating the formal sector of the economy, if government does notuse the proceeds to effect a widespread but productive program ofland reform and rural development, there will be no substantiveprogress in addressing Zimbabwe's socioeconomic problems ofpoverty, unemployment, and extreme inequality.

17

opportunities. Some very successful technologies have been developedin Africa specifically for African environmental and social conditions(the sorghum dehuller of the Rural Industries Innovation Centre inBotswana and the Blair pit latIjne in Zimbabwe are examples). Policiesshould include overall strategies to ensure more egalitarian asset andincome distribution,4 as well as specific measures in the areas ofreduced regulation, establishment of channels for credit and training,and provision of infrastructure, especially in the rural areas. In policyterms, the objective should be to promote a dynamic role in the industrialization process for the small-scale sector, once it is "efficientenough to compete with other production, and not because it is anefficient sponge for urban unemployment" (Sutcliffe 1971).

There is clearly a great deal to be learned from Asia in this regard."One of the key ingredients of successful industrial development inEast Asia . . . has been the active role of small and medium-sizedenterprises" (Park 1989, 175). The reasons for this situation includethe labor-intensive nature of production in small enterprises, their ex-


tensive use of locally available raw materials, and their geographicaldispersion, which leads to regionally balanced development. In theASEAN countries, over 90 percent of manufacturing enterprises fallwithin the small-scale sector, defined as enterprises with fewer than 50workers. Small-scale enterprises, which comprise the majority of industrial enterprises in East Asia, have undoubtedly also played animportant role in the development of the industrial sectors of SouthKorea and Taiwan. 5

There are several different types of successful small- and mediumscale enterprises (SMEs) in East Asia:

A. manufacturers of household products satisfying local demand (for example, makers of food products, garments,and furniture);

B. small machine shops (for example, small workshops specializing in repairing motorcycles, cars, and agriculturalmachinery);

C. modern SMEs producing goods to serve domestic urban orexport markets (for example, makers of garments, wigs,jewelry, plastic products, and preserved fruits and vegetables).

SMEs of types A and B can operate even in very small towns orvillages. In addition, SMEs or even larger-scale enterprises located nottoo far from rural areas can subcontract part of their production to ruralhouseholds, which thus find gainful employment in nonfarm activities.

Cottage undertakings located in small towns or villages in predominantly rural areas have proved particularly important. Such enterpriseshave strong links with the rural sector, procuring their raw materialsfrom this sector and selling their ouput to it. They also enlploy mostlyvillagers in the nearby vicinity and thus contribute significantly to theincome and employment of rural households. Studies of rural off-farmemployment in various provinces in Thailand, for example, found thatmanufacturing activities contributed significantly to income and employment of residents in the rural areas. 6

Although SMEs have contributed significantly to the beginnings ofindustrial development in East Asia, more and more SMEs have faceddifficulties in growing and even surviving as the industrial sector of acountry becomes more developed. This is particularly true in the case

Africa and Asia 19

oftraditional SMEs that tend to use rudimentary techniques. Such SMEswould thus have to upgrade themselves in terms of product types anddesigns, product quality, and marketing efforts. In all East Asian countries, including Japan, there are government institutions established toprovide assistance to SMEs in various areas: finance, marketing, production technology, product design, and quality improvement. There isa great need for similar institutions to be established in Africa, and forthose that already exist to be made more effective.

The Role of Foreign Direct Investment

In all market economies in East Asia, inflow of foreign direct investment (FDI) has actively been encouraged, with generous incentivesbeing offered to foreign investors. FDI is considered a preferred formof external financing, since it is believed not only to provide additionalcapital, but also managerial skills, technological knowledge, and otherresources important for industrial development. For example, foreigncompanies induced to invest in import substitution industries are, inmost cases, those that have already supplied the local market withexports, and they are the ones that possess the technological know-howto produce their products. For countries emphasizing export promotion, FDI in export industries helps to quicken the realization of exportexpansion, not only because foreign investors are capable of producinghigh-quality products for export, but also because the established export market channels of the foreign companies can be utilized.

However, the contribution to growth and industrialization of FDIin East Asia should not be overstated. Studies have shown that although,FDI flows to East Asian developing economies have been substantive,they do not represent a significant proportion of total financial resourceflows to those countries, nor of aggregate investment. 7 Although FDIhas contributed to the growth and development of certain modernindustries in East Asia, it is the indigenous industrial sector that has beenthe major driving force behind industrial growth in most of theseeconomies.

FDI in East Asia has sometimes been criticized for being excessively capital intensive, for having limited linkages with domestic


economies, and for crowding out local investment (mainly in domestically oriented sectors, but also in export-oriented sectors, by using upexport quotas and generalized system of preferences (GSP) privileges.Detailed, empirical evidence to support these charges is lacking, however. While the incentives offered to foreign investors are sometimesconsidered unnecessarily generous, the general assessment is that developing economies in East Asia have been able to harness FDI for theeconomic growth and industrialization of their countries.

In Africa, past experience with FDI has been far more problematicand there continues to be considerable skepticism about the merits ofcompeting to attract foreign investors. Until the mid-1970s, foreigninvestment had about the same aggregate macroeconomic influence inAfrica as in other parts of the developing world, but the picture haschanged since then. In the 1980s, although foreign investment fell inall developing countries, in sub-Saharan Africa the declines in netinflow of foreign investment and in the share of private investment tototal foreign resource flows were especially dramatic (Cockcroft andRiddell 1991). As a result, FDI in Africa now plays a much smallerrole than in other regions, notably East Asia.

Given the need to increase investment rates in the face of severeforeign currency shortages, and to gain access to technologies andmarketing channels, it would seem an opportune time for Africa toreconsider its approach to foreign investment in light of the recentexperience of developing countries elsewhere. Given the fragility ofmost African economies, however, a degree of discrimination andcase-by-case negotiation of terms with foreign investors would still beimportant. This would have to be done speedily and efficiently, however, as one of the main complaints of foreign investors in the past hasbeen the complexity, arbitrariness, and bureaucratic nature of the process of investing in Africa.

Other Key Elements

Among the many other factors that have been identified by those tryingto explain rapid growth in East Asia, there are two that stand out: theavailability of skilled manpower and the effective intervention of East

Africa and Asia 21

Asian governments in the development process. This discussion wouldnot be complete without some mention of the significance of thesefactors for the effective stimulation of production.

On the role of human resources in East Asian success stories,Lance Taylor writes that a number of "intangible factors set the stagefor the [South] Korean industrial miracle. The contrast with Africancountries which still struggle with relics of a much more exploitativeform of colonialism could not be sharper. Their lack of educationinfrastructure and even rudimentary industrial experience stands out"(Taylor 1990, 49).

The lesson is not that Africa should invest indiscriminately ineducation and training, but that a much more concerted effort is neededto ensure that existing education facilities an~ put to good use. It willalso be necessary to supplement them with new facilities and programs. There is a need to review the abject failure of decades oftechnical assistance in Africa and come up with more effective meansfor "capacity building." Maximum advantage needs to be taken ofnew programs, such as the Africa Capacity Building Initiative sponsored jointly by the African Development Bank, United Nations Development Programme, and the World Bank.

It has also to be remembered that there is an important pool ofskills on the continent and among the Africans carried outside Africaby the' 'brain drain. " Creative ways need to be found to involve thosewith skills and some experience of Africa in training a more broadlybased cadre of people to meet the development challenges of the 1990sand the next century. The problem is caused more by the difficulty ofdeveloping political will nationally, and of sharing skills subregionallyand regionally, than by a total lack of people with the requisite skillsand experience.

In respect of the role of governments in the development process,the idea that East Asian economies are laissez-faire, with minimalgovernment intervention, is far from true. All examples of successfulindustrialization have involved highly dirigiste governments, and EastAsia is no exception.

What distinguishes East Asian government intervention from thatin most African economies is that it is substantially "pro-market" or"market-friendly." If governments are to contribute to expanded pro-


duction, their main role should be to provide macroeconomic stability:to invest in infrastructure, education, and skills training; to protectinfant industries (but not succumb to indefinite and indiscriminateprotection of local industry); to foster small-scale industry; to attractforeign investors, donors, and creditors and negotiate appropriate conditions with them; to help to identify market opportunities; and tonegotiate useful trading relations with other countries. This is quitedifferent from the sort of obstructive intervention that has been prevalent in many African bureaucracies until now.

Political stability is also necessary to create the confidence required for investment, whether domestic or foreign. It is an openquestion whether this is most effectively achieved through the sort ofauthoritarian regime that has prevailed in East Asian countries duringmuch of the period of rapid economic growth, or whether a regime of"good governance" can be as effective, as well as being more desirable on a priori grounds.

Can the Asian Development Experience Be Replicated?

To sum up the factors that have been discussed thus far in this paper,it can be said that East Asian countries started from a situation in whichthey were reasonably well-off in terms of human resources, agricultural development (excepting the city-states of Hong Kong and Singapore), equality of income distribution (achieved through prior landreform), and successful "first-stage" industrialization by import substitution. They proceeded to emphasize exports, particularly manufactured exports, at a time when world trade was expanding rapidly. Theirgovernments maintained macroeconomic stability, encouraged privatesector initiative, fostered small-scale enterprises, welcomed foreigninvestment, and continued to invest in infrastructure and human resource development. The result, in successive generations of EastAsian countries, and despite considerable differences in the detailedapplication of the broad lines of this strategy, has been rapid growthand a broadening and deepening of industrialization.

At the start of the 1990s, Africa is under pressure to adopt policiesthat are premised on a simplification of East Asian experience. Some

Africa and Asia 23

would even call it a caricature of that experience, because of the implicitassumption that the broad lines of the strategy can be universallyapplied, irrespective of differing preconditions and circumstances in theworld economy. Three particular areas of concern warrant discussion.

Difference in preconditions. First, current conditions in mostAfrican countries are generally not comparable to those in East Asiancountries at the time that the export-oriented growth strategy was applied: skills are in short supply, agriculture is underdeveloped, incomes and access to basic productive resources are highly unequal, andindustrialization efforts have been ineffective, so that it cannot even besaid that Africa's first stage of import substitution has been satisfactorily completed. New problems, such as the AIDS epidemic, which isreaching crisis proportions in many African countries, and environmental degradation of productive farmland, cast doubt on whether anybold development initiatives can be sustained.

Against the pessimistic view, however, it should be noted that theconditions that prevail in most African economies at present, includingfragmentation of the rural sector (where a large proportion of thepopulation relies on subsiste~ce agriculture), shortage of skilled labor,backwardness in technology, and lack of institutional support in theindustrial sector, are not much different from the situation foundtwenty or thirty years ago in some now fairly advanced developingeconomies in East Asia, such as South Korea and Taiwan. Thesequalities are still features of rapidly industrializing economies such asIndonesia and Thailand. The real problem may be that the time framerequired for successful development is simply longer than most African countries have been willing to accept.

Involvement of development-assistance agencies. The secondconcern is closely related to the first. Not only are the underlyingconditions in many African countries far from ideal, but the immediatesituation is one of economic crisis, with policy being influenced, if notdetermined, by outside financiers, particularly the World Bank and theIMF, under the rubric of precast structural adjustment programs. Thereis general agreement about the broad outlines of how the crisis is to betackled: a balanced development program that emphasizes agriculture


while it also attends to the needs of industry, lessening of restrictiveintervention by government, greater reliance on markets to allocateresources, and emphasis on the mobilization of domestic savings andthe development of human resources.

The typical structural adjustment program, however, goes further,to include more controversial elements such as significant devaluationand trade liberalization. As we have noted, there exists the risk ofdeindustrialization if trade liberalization is implemented too rapidlyand comprehensively in an economy where the industrial sector isfragile and underdeveloped. There is thus need for governments towork closely with financing agencies to ensure that the sequencing oftrade liberalization enhances the progress of industrialization, ratherthan the opposite. In many African countries, this would imply muchlonger periods for trade liberalization than are currently laid down. 8

Appropriate timing and sequencing are issues of more generalconcern in the management of structural adjustment. The first issue iswhether stabilization should precede or be carried out simultaneouslywith structural adjustment. Starting with stabilization is bound to forcea contraction within the economy, so that the immediate implicationfor growth will be negative. While the balance of payments and theinflation rate are likely to improve in the first year of such programs,even the IMF admits that "programs do involve some cost in terms ofa decline in the growth rate" (Khan 1988, p. 26). Once the economyhas contracted further, however, there is a danger of it remaining in alow-level trap, for public investment is likely to remain squeezed aspart of any fiscal austerity regime, while private investors may wait foran upswing that, through their own inactivity, may fail to materialize.

The alternative to structural adjustment following stabilization isfor the two to proceed in tandem. This policy may be forced whensome aspects of structural adjustment (such as reform of public enterprises and the financial sector) are needed to achieve stabilization. Thelogic of this strategy dictates that, once a start has been made on it,stabilization measures should not be relaxed because' 'many failures ofliberalization attempts have been due to the absence or failure of accompanying stabilization efforts" (Corbo and Fischer 1991, 3). Conversely, where there is a high degree of macroeconomic stability-lowand predictable inflation, external and internal balance-a strong pri-

Africa and Asia 25

vate investment response to economic incentives is likely. The resilience of the economies of South Korea, Singapore, and Thailand toadverse conditions in the 1980s has been cited as an example in thisregard (Serven and Solimano 1991, 27).

Investment is the essential factor in determining if structural adjustment will succeed, and this is the Achilles' heel of the BanklIMFsponsored SAPs, to date. Empirical justification of structuraladjustment ideally should be based on analyzing the actual situationunder adjustment and comparing h with what could be expected tohappen without adjustment. Such a counterfactual comparison is hypothetical, of course, and other tests, such as comparing supposedlysimilar countries, some with and others without adjustment policies,also leads to questionable and inconclusive results. 9 What is becomingclear from econometric studies is that structural adjustment programshave been associated with reductions in investment ratios. Unless earlier investment was exceptionally wasteful,lO and post-SAP investmentparticularly efficient, this has alarming implications for future growthand thus for the overall impact of the structural adjustment program. Ifan adequate investment response is not forthcoming, efficiency gainswill not materialize, and the only tangible result of the refoffils will benegative (increased unemployment, higher prices for basic foodstuffsand social services, political instability), and will particularly affect themost vulnerable populations.

There are a number of reasons to expect that investment responsemay be poor. 11 First, tightening of monetary policy, particularly theraising of interest rates, will raise the user cost of capital and hencedepress investment. Although there is no strong theoretical explanationwhy, investment does seem to be strongly influenced by ouput, so theinitial contraction associated with stabilization will also tend to depressinvestment. This situation may be exacerbated by the contractionaryeffects of devaluation, which arise in economies with high dependenceon imported capital and intermediate goods and a relatively low shareof the traded-goods sector in total investment. The increased costs ofimported equipment following devaluation may lead to the cancellationor postponement of investment projects. This combination of economic factors in turn can adversely affect investor expectations, keeping investment at a low level.


This possibility appears puzzling at first sight. Notwithstanding theadverse influences on investment already identified, adjustment programs are designed to switch incentives to the tradable sector, so whywould not investment be forthcoming in tradables, restoring overalleconomic growth and helping to sustain the adjustment effort? Theevidence suggests that this investment response has been weak anddelayed in practice; with no satisfactory explanation for this to befound in conventional investment theories, recent analysis has come tofocus on the importance of uncertainty in investment decisions. Whilethe policy measures of an adjustment program can easily be reversed,investment decisions can only be changed at a cost. The significanceand longevity of policy changes may be very uncertain when an adjustment program is first introduced, particularly when such changesare perceived to be imposed from outside the country. For the investor,there will be a value in waiting in order to avoid making an irreversiblemistake.

The indications are that investment may be very sensitive to suchuncertainty: "the stability and predictability of the incentive structureand the macroeconomic policy environment may be as important as thelevel of the tax incentives or the interest rate" (Serven and Solimano1991, 41). The problem is one of self-fulfilling expectations: if apositive view of the future is adopted, investment will become selfsustaining, while a negative sentiment will have the opposite effect.This places strong requirements for credibility on adjustment programs, which have anyway to battle against the general feeling thatSAPs have failed throughout Africa. It also implies that once thedecision to embark upon a reform program has been taken, even if itis done under duress from the BankJIMF, the economic situation islikely to be made worse if the strategy is later reversed, particularly ifthis possibility was anticipated by potential investors from the start. Atrade liberalization that is perceived to be temporary is almost bound tobe so, because it will lead to a temporary investment boom directed tothe protected sector and not to exports.

In assessing the appropriateness of structural adjustment policiesfor Africa, the general reasons why the investment response to anadjustment program is likely to be weak must be combined with arecognition of the structural weakness of African economies. Insuffi-

Africa and Asia 27

cient entrepreneurial, management, and technical skills, poor infrastructure, and a disarticulated production base are all significantconstraints on both domestic and foreign investment. It cannot therefore be assumed that the changed incentive structure implied by structural adjustment will necessarily lead to the required transformationand expansion of the productive base of an economy. Without anadequate investment response, the economy could get stuck in a "lowinvestment-adjustment failure" trap, with the main outcome beingincreased unemployment, reduced social spending, and reduced consumption. By way of example, some comments are made in the box onpages 28-29 concerning Ghana, a country that is often cited as anexample of successful adjustment, but whose fundamental problemsstill persist.

Change in trading conditions. The third concern about the replicability of the export growth model is that world economic conditionsare markedly less favorable now than in the period when the East Asiancountries transformed their economies with the help of rapid increasesin exports and inflows of foreign capital (in various forms) at criticaltimes.

Commercial bank lending to Africa has always been small and willlikely remain so, whereas "aid levels are likely to increase in realterms but not by amounts sufficient to meet growing requirements"(Riddell 1991 , 3). Moreover, "prospects for foreign investment inflowmay well be worse than they were in the dismal years of the 1980s"(Cockcroft and Riddell 1991, 66). This conclusion is shaped partly byan assessment that prospects in other parts of the world will be moreattractive to investors. To compete, African countries not only willhave to offer fiscal incentives, but make policies more transparent,streamline the process of investment approval, and gi.ve credible guarantees against nationalization. If these changes do not increase theflow of external investment, insofar as fiscal incentives have beenimproved, the result may be only to increase profitability for the fewcompanies that might have invested anyway.

As regards exports, there is general agreement that prospects forprimary commodities are poor. In part, this is due to competitionbetween primary commodity exporters, competition which is actively


Ghana: An Example of Successful Adjustment in Africa?

Of more than thirty-nine African countries that have adoptedstructural adjustment programs, Ghana is one of the few that issaid to be "succeeding." The main reason for this would seem tobe the dramatic improvement in agricultural production, much ofit from the small-scale sector, following the imposition of a "realistic" exchange rate, an environment conducive to agriculturalproduction and, fortuitously, the end of a period of drought. Totalcereal production, which was 400,000 tons in 1983, the first yearof the Economic Refonn Programme (ERP), had increased toover 900,000 tons by 1987. Cocoa output was 462,000 tons in1972, but declined to 175,000-199,000 tons per annum duringthe period 1983-1985; it had recovered to 228,000 tons by 1987,and is targeted to reach 300,000 tons by 1995. Success in agriculture is positive for a large portion of the population, limitingthe impact of the social costs of the program, at least as comparedwith the experience of some other African countries.

In the industrial sector, growth rates have been more dramatic, but following their steep decline in the years precedingadoption of the ERP, they would need to be, as the base hadbecome so small. The World Bank report Sub-Saharan Africa:From Crisis to Sustainable Growth (1989, 117) gives annualgrowth rates in output and exports before the refonns (19801983) as -17 percent and 15 percent, respectively; the corresponding figures after the reforms (1984-1987) are 10 percentand 51 percent, respectively. The resulting improvement in capacity utilization, however, was from 19 percent to only 32 percent. This may provide one reason why private investmentperformance has been so poor (about 3 percent of GDP in 1987,the same as the average for the 1980-1983 period), with much ofnew investment going to the mining sector.

Another World Bank report comments that' 'to an increasingdegree, future expansion in the economy will depend on adequateprivate investment in a wider range of economic activity." The

Africa and Asia

main changes made-in the areas of "prudent" fiscal and monetary policy, reduced intervention in the economy, and the rehabilitation of infrastructure-have not been sufficient to elict thenecessary investment response. If private investment does not atleast double as a proportion of GDP, not only will the intendedgrowth (a modest 5 percent per annum) be prejudiced, but "thestructural transformation of the economy will be stymied"(World Bank 1988).

29

sponsored by the IMF and the World Bank. In manufactures, the worldeconomy of the 1990s looks likely to be riven by protectionism in bothsubtle and overt forms, and by the emergence of trading blocs, accessto which it may be particularly difficult for African countries to gain. 12

Of course, Africa also has the problem of having to compete with thesuccessful Asian countries they are supposed to be emulating,13 bothin respect of many primary exports, as well as manufactures.

While admitting that buoyant world trade was an important factorin the success of South Korea and Taiwan, Asian economists generallyrefuse to allow pessimism about export prospects to undermine arguments for the replicability of export-led growth. They point to the factthat a country like Indonesia has succeeded in increasing its non-oilexports significantly in recent years, despite adverse trends in theworld economy. Futhermore, they note, Indonesia has succeeded withproducts that many other countries are exporting, such as textiles andfinished garments (Hill 1991).

The principle of comparative advantage has to be kept in mind. Nocountry or set of countries can have comparative advantage in everyproduct line, and there will always be products in which any particulardeveloping country will have a comparative advantage. Moreover,comparative advantage is not a static but a' dynamic phenomenon,changing with rising wage and skill levels. This is what underlies the"flying geese" or "catching-up product cycle" pattern of development that accounts for the spread of industrialization from Japan toEast Asian newly industrialized countries and then to the ASEANcountries. 14 The trick is to anticipate and prepare for such changes in


comparative advantage, particularly in respect of manpower trainingand the acquisition of the requisite technical, managerial, and marketing skills.

Potentially more serious than the problem of identifying where aparticular country's dynamic comparative advantage lies is the trendemerging from the Uruguay Round of General Agreement on Tariffsand Trade negotiations to treat as "trade" issues policies that a fewyears ago would have been regarded as "domestic" and thus open toquestioning in international negotiations. As development economistSheila Page observed in a letter to one of the authors:

If all subsidies with an effect on trade are trade policies, and potentiallychallengable, either directly or through anti-dumping, and if this isapplied to all countries (except perhaps the least developed) at an earlystage, not when they are as developed as the industrial countries arenow, this makes following the Asian example, or any other previousexample of industrial development, impossible.

Most East Asian economists would not admit to such extreme pessimism, arguing instead that developing countries can unite to maintainpressure in international forums to prevent such tendencies from beingcodified or enforced, while working strenuously to build economiccapacity. This in itself, they would assert, will give developing countries more bargaining power.

Effective regional cooperation, and later integration, among developing countries would also contribute. greatly to overcoming problems engendered by the protectionism of industrialized countries. InAfrica, the fostering of intraregional trade and the planning of industrialization on a subregional basis are particularly important. Regionalcooperation would greatly enhance the chances of successful expansion, particularly in manufacturing, where investors are deterred by thesmall size of many individual national markets. The starting point hasto be expansion of intraregional trade, which has actually declined overthe last two decades. In view of the hostile external environment facingthe continent in the 1990s, "Africa has better options for trade andgrowth by turning towards its own markets, " but to do so will requirefollowing "rhetoric and countless resolutions by African leaders bypractical measures and means" (Ndlela 1990, 16).

Africa and Asia

Concluding Comments

31

The starting point for this paper is the record that successive sets ofdeveloping economies in East Asia have compiled in making significant strides toward industrialization and economic growth. A "virtuous circle" of export expansion, which results in higher levels ofincome, savings, and investment, and which, in turn, leads to evenbetter competitiveness in the world market, has been created. Thechallenge that Africa faces is to turn its current vicious circle of inefficient production, widespread poverty, and low growth into something akin to the virtuous circle that has been demonstrated in EastAsia.

It would obviously be simplistic to think that all or most policymeasures adopted by developing economies in East Asia in the past canbe directly replicated in present-day Africa. However, it would also beunwise to overemphasize the differences between Asia and Africa andconclude that none of the policy measures applied by Asian countriescan usefully be adopted by countries in Africa.

An essential point is that agriculture should not be neglected ordiscriminated against in the'drive to industrialize. Where a country hasagricultural potential, agricultural development is an essential prerequisite and complement to industrialization.

The experience of development in East Asia shows that industrialization is an evolutionary process, which requires that an activegovernment consciously implement policy measures designed to reduce distortions in the price system and build up manpower and aninstitutional base to serve the ever-changing industrial sector. Much ofthe importance of opening up the economy to foreign trade and investment lies in this forcing the industrial sector to upgrade and maintain efficiency.

Finally, it should be emphasized that the experience of East Asiais by no means all positive. There are, in fact, many negative aspectsof economic development in East Asia, such as excessive exploitationof natural resources, degradation of the natural environment, concentration of economic activities in only a few geographical areas, a highdegree of inequality in income and wealth distribution, excessive rentseeking activity in some economic sectors and in the government,


inadequate consumer protection and existence of numerous illegalactivities.

These problems are, of course, not confined to East Asia, but instudying the development experience of East Asia, some of these sideeffects of rapid growth need to be considered. A more balanced pictureof East Asia's development may allow such problems to be anticipatedand perhaps avoided by African countries attempting to emulate itspath of rapid economic growth.

NOTES

1. Export shares apply to 1989; data from World Bank (1991), Table 16. Theremaining 53 percent of exports from sub-Saharan Africa is accounted for by "fuels,minerals and other metals" (agriculture has been taken as synonymous with "otherprimaries"). The same absolute increase in foreign exchange would require less thana 7 percent growth of fuel and mineral exports, as compared with a 10 percent growthof agricultural exports.

2. "Conservation techniques have been identified for many zones that wouldfulfill these three requirements" (Harrison 1989, 61), examples being windbreaks,terracing, innovative tillage systems, and a range of options under the rubric of"agro-forestry. "

3. Ranis in 1974, on an International Labour Organisation assignment to studythe failure of import substitution in the Philippines, made the following forceful point:"It is essentially the non-participation of more than four-fifths of the population inproductive and innovative activity which lies at the root of the problems to which theMission was asked to address itself" (1974).

4. "An effective AT [appropriate technology] policy usually requires a moreegalitarian distribution of income and assets, both to secure markets for appropriateproducts and to increase rural linkages. But this is not a concern of IMFIWB policyrefonn" (Stewart et al. 1990, 38).

5. See, for example, Ho (1980).6. For a summary of study results of a comprehensive project on rural off-fann

employment in Thailand, see Akrasanee et al. (1984). Case studies of a number ofAsian countries are presented in Islam (1987).

7. See United Nations Centre for Transitional Corporations (1986) and Hill andJohns (1985).

8. Trade liberalization is one of the major concerns in the "African AlternativeFramework to Structural Adjustment Programmes for Socio-Economic Recovery andTransfonnation" (Economic Commission for Africa 1989).

9. Studies of this kind are reviewed by Corbo and Rojas (1991), p. 21 andEvans et al. (1991), p. 8.

10. This might be the case in very inefficient parastals or highly protected importsubstitution subsectors employing capital-intensive technologies.

11. These are spelled out in detail in Sections III and IV of Serven and Solimano(1991).

33


12. The more unified European Economic Community, for example. Changes inthe EEC will offer new opportunities as well as losses for African exporters, withincreased demand for primary goods and some manufactures (as income rises inEurope) set against the loss of demand for other manufactures, expected to be produced more competitively in post-1992 Europe (Davenport and Page 1991).

13. There will also be competition from new Asian players. "There is a highprobability China's industrial development will ensure East Asia's share" of worldexperts of textiles and clothing, although this would also open up new markets for rawfibers such as cotton (Anderson and Park 1989, 144).

14. For more detail on this phenomenon, see Akamatsu (1962). Akamatsu'spaper described the "flying geese" pattern of development in Japan. It was only later(over the last decade or so) that this pattern has been applied internationally.

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Adelman, Inna, and Cynthia Taft Morris. 1979. "The Role of Institutional Influences in Patterns of Agricultural Development in theNineteenth and Early Twentieth Centuries: A Cross-Section Quantitative Study." Journal of Economic History 39, no. 1 (March).

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Akrasanee et al. 1984. Rural Off-Farm Employment in Thailand.Bangkok: Industrial Management Corporation.

Amin, Samir. 1983. "Is a Self-Directed Development Strategy Possible in Africa?" Paper presented at the United Nations Educational, Scientific and Cultural Organization (UNESCO) meeting"Philosophical Thinking on the Fundamental Problems of Endogenous Development," 19-22 December, Libreville, Gabon.

Anderson, Kym, and Young-il Park. 1989. "China and the International Relocation of World Textile and Clothing Activity."Weltwirtschaftliches Archiv 125, no. 1.

Cockcroft, L., and Roger C. Riddell. 1991. "Foreign Direct Investment in Sub-Saharan Africa." PRE Working Papers, WPS 619,International Economics Department. Washington, D.C.: WorldBank (March).

Conway, P. 1991. "An Atheoretic Evaluation of Success in StructuralAdjustment." PRE Working Papers, WPS 629, Country Economics Department. Washington, D.C.: World Bank (March).

Corbo, V., and Stanley Fischer. 1991. "Adjustment Programs and

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Bank Support." PRE Working Papers, WPS 582, Country Economics Department. Washington, D.C.: World Bank (January).

Corbo, V., and Patricio Rojas. 1991. "World Bank-Supported Adjustment Programs." PRE Working Papers, WPS 623, CountryEconomics Department. Washington, D.C.: World Bank (March).

Davenport, M., with Sheila Page. 1991. Europe: 1992 and the Developing World. London: Overseas Development Institute.

Economic Commission for Africa. 1989. African Alternative Framework to Structural Adjustment Programmes for Socio-EconomicRecovery and Transformation. Addis Ababa: Economic Commission for Africa.

Evans, D., I. Goldin, and D. van der Mensbrugghe. 1991. "TradeReform and the Small Country Assumption." Paper prepared forthe conference "Economic Policy and Development in SubSaharan Africa," Cape Town, South Africa.

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Hill, Hal. 1991. "Policies for Industrial Growth in Indonesia duringRepelita V: Issues and Strategies." In Prospects for IndustrialDevelopment in Indonesia, final report of the Industry AnalysisProject, edited by P. S. J. W. Wymenga. Jakarta: Government ofIndonesia and Netherlands Economic Institute.

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Park, Eul Yong. 1989. "Some Lessons from East Asian DevelopmentExperiences. " Background paper to Sub-Saharan Africa: FromCrisis to Sustainable Growth. Washington, D.C.: World Bank.

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__. 1989. "Asian and Latin American Experience: Lessons forAfrica." Mimeo.

Riddell, Roger C. 1990. Manufacturing Africa: Performance andProspects of Seven Countries in Sub-Saharan Africa. London:Overseas Development Institute.

__. 1991. "Prospects for Aid to Sub-Saharan Africa in the 1990s."Paper prepared for the conference "Economic Policy and Development in Sub-Saharan Africa," Cape Town, South Africa.

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leEG Academic Advisory Board

Abel G. AganbegyanAcademy of National Economy,Russia

Michael J. BoskinStanford University, USA

Hakchung ChooKorea Development Institute, Korea

Rudiger DornbuschMassachusetts Institute ofTechnology, USA

Ernesto FontainePontificia Universidad Cat6lica deChile, Chile

Herbert GierschKiel Institute of World Economics,Germany

Francisco Gil DiazMinistry of Finance, Mexico

Malcolm GillisDuke University, USA

Arnold C. HarbergerUniversity of California, Los Angeles,USA

Helen HughesAustralian National University,Australia

Shinichi IchimuraOsaka International University, Japan

Glenn JenkinsHarvard Institute for InternationalDevelopment, USA

D. Gale JohnsonUniversity of Chicago, USA

Roberto JunguitoBanco Sudameris, Colombia

Yutaka KosaiJapan Center for Economic Research,Japan

Anne O. KruegerDuke University, USA

Deepak LalUniversity of California, Los Angeles,USA

Yuan-zheng LuoChina

Ronald I. McKinnonStanford University, USA

Charles E. McLure, Jr.Hoover Institution, USA

Gerald M. MeierStanford University, USA

Seiji NayaUniversity of Hawaii, USA

Juan Carlos de PabloArgentina

Affonso PastoreUniversidade de Slio Paulo, Brazil

Gustav RanisYale University, USA

Michael RoemerHarvard Institute for InternationalDevelopment, USA

Leopoldo SolisInstituto de Investigaci6n Econ6mica ySocial Lucas Alaman, Mexico

David WallUniversity of Sussex, UnitedKingdom

Richard WebbPontificia Universidad Cat6lica delPeru, Peru

James WorleyVanderbilt University, USA

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