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Industrial Policy and Structural Change: Some Policy Perspectives

Michael Mbate

Abstract Development thinking in most African countries is gradually shifting in favor of industrial policy. This paper examines the dynamics of industrial policy, with a special focus on West African countries. The paper then presents a comprehensive macroeconomic framework which can guide policy makers in designing and implanting effective industrial policies. Taking into account country and sector specificities, the paper concludes by examining the various industrial policy tools which can be implemented to accelerate industrial development on the continent.

Keywords Industrial policy • Structural change • Institutions

JEL Classification L52 • L67 • O55

1 Introduction

The necessity of African countries to add value to their natural resource endowment remains a crucial component of promoting and sustaining growth and development. Designing and implementing sound industrial policies can promote structural change and address constraints related to social-economic challenges. African policymakers thus need to ensure that industrial policies accelerate resource movement from low, traditional and subsistence sectors to high productive and value added sectors. Recent evidence, especially from the fast growing Asian countries, underscore the importance of commodity based industrialization as a viable and feasible channel of addressing poverty and unemployment. Countries which add value to their natural resources and promote labour movement to productive sectors are associated with increase in per capita income and technology accumulation (UNCTAD and UNIDO 2011).

Theoretically, several propositions have been advanced to support the importance of promoting industrial development through industrial policy. For instance, there is abundance evidence of market and coordination failures, as well as externality effects (Stiglitz et al. 2013). However, implementing industrial policies in most countries has not been successful. Several reasons have been proposed to explain this phenomenon. This include the inability of the State to design and implement sound industrial policies, as well as the incapacity to identify productive sectors to which policy should target. As a consequence, industrial policy has been neglected by most countries despite its central role in promoting economic growth and development.

Industrialization efforts by African countries in the past were largely ineffective and most countries either engage in resource extraction and exportation, or are mainly agricultural driven. Exports are largely unprocessed and exhibit limited value addition and technological content. This has been the case, for instance, in Nigeria where oil constitutes a large proportion of exports, or in Cote d'Ivore where cocoa production dominates exports. Some of the main reasons for this phenomenon include inefficient industrial policies, structural bottleneck such as human capital, physical infrastructure, lack of complementary policies (monetary, fiscal and trade policies) and political economy issues.

Irrespective of these challenges, most African countries have rejuvenated their interest in industrial policy and promoting labour intensive industrial development. Value addition initiatives and integration of domestic firms into value chains has expanded in most countries, especially in the agri-business sector. For countries which have successful done this, industrial policy has been an important tool. A core component of industrial policy has been strengthening the collaboration between the State and the private sector, instituting incentive mechanisms that attract entrepreneurship, accelerating technological upgrading, boosting skilled human capital as well as providing infrastructure (ECA and AUC 2014).

The objective of this paper is to examine the rationale for industrial policy and the policy lessons to be distilled from past industrialization attempts on the continent. In addition, the paper presents insights on policy elements of an effective and coherent industrial policy framework. The rest of the paper is organized as follows. Section 2 examines the rationale for industrial policy, the importance of the manufacturing sector and Africa's prior industrialization experience. Sections 3 and 4 provides some stylized facts on structural change in the West African region and discusses key elements of an industrial policy framework. Section 5 concludes with policy implications.

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