The three recipes that Africa can borrow from Asia to develop

So far, African leaders and policymakers have tried really hard to replicate the rapid economic development process experienced by Asian economies in the last decades. This has been done both by trying to transplant many of the development tools adopted by such countries (for instance, the Special Economic Zones, largely used by China for stimulating industrial development and transform its economy), and by formulating industrialization policies that have flourished almost everywhere in the continent, both at level of single States and of Regional Economic Communities. Inspired by economic development patterns such as the “developmental State” approach, which had one of its main supporters in Africa in the Malawian economist Thandika Mkandawire, so far the success has not been so spectacular as many would have expected.

The developmental State concept is based on the assumption that in an economic context typically characterized by market failures (i.e., by an inefficient distribution of goods and services, like in Africa), the achievement of economic growth requires a considerable level of intervention of the State into the economy as a mechanism to overcome these market failures and to stimulate the growth of new industries. Developmental States used a wider range of macroeconomic policy tools that went far beyond Keynesian policies that stimulate demand. Chalmers Johnson, who coined the concept, indicated the state control of finance as the most important, if not the defining feature of such economic model, followed by the creation of a meritocratic bureaucracy and the development of mechanisms to channel domestic private savings into productive sectors of the economy. In Japan and South Korea, for instance, the government controlled the interest rates and bank loans were used as a primary sources to fund targeted interventions for industry development. South Korea, in particular, financed its own industrialization by channeling much of its domestic retirement savings into national champions such as Samsung and Hyundai. Unfortunately, these conditions have not re-created in Africa, and especially in this historical moment are particularly hard to develop, due to the reduced availability by African governments of financial resources to inject into the economy because of their high debt exposure. However, an article published on the Brookings Institution website shows that there are still three lessons that Africa can take from East Asia for the years to come.

First, it notes that it is necessary to reduce reliance on external sources of finance and mobilize domestic capital. It is unwise to keep borrowing from international creditors as happened so far, the article notes, considering that a stronger U.S. dollar and high interest rates will make servicing debt much more difficult. Africa needs therefore to tap on its own pool of wealth by leveraging investment funds, pension funds, sovereign wealth funds, and more generally, its capital markets for funding its development objectives.

Indeed, one of the key factors why industrialization in Africa has remained stagnant is the underdeveloped state of its capital markets, the article argues. Capital markets are basically financial markets that connect buyers and sellers for trade of stocks, bonds, currencies, and other financial assets. Capital markets, the article argues, can optimize the allocation of domestic private savings into productive sectors of the economy and reduce at the same time the cost of capital. This is particularly critical in African, where the availability of domestic private savings - it worth to be remembered - is extremely limited, due to the low savings rates of African households (their continental average is 19 per cent against the 37 percent of East Asia), with consistent declines over the last decades.

In other words, capital markets are a catalyst for capital formation, making it possible to pool small savings into bigger investments. And the wider the participation of citizens in the capital markets, the lesser is the need for the State to rely on foreign borrowings for development. This is a particularly critical point. In this regard, is also important to point out that some African States are already trying to develop innovative financial tools to leverage private saving for funding the development of their economies. The Federal Government of Nigeria for instance, just announced plans for the launch of domestic bonds for a USD 500 million value offering repayment plans in US dollars, which are targeted to both domestic investors and to the diaspora, as well as non-Nigerians living in Nigeria.

The Brookings article also mentions two key initiatives in the area of development of capital markets that could be transformative for Africa. The first one is the African Exchanges Linkage Project (AELP), a flagship project of the African Securities Exchanges Association (ASEA) and the African Development Bank (AfDB) aimed at unifying several regional stock markets to facilitate cross-border trading of securities in Africa. The second one is the Pan-African Payment and Settlement System (PAPSS), a platform that enables near-instant cross-border payments in local currency, which is in course of implementation in several African States and that is expected to remove an important impediment to intra-African trade (it is one of the main tools supporting the AfCFTA implementation), and to put an end to the African trade dependency on hard currencies like the U.S. dollar and third-party banks in the U.S. or Europe.

The second recipe that Africa could learn from East Asian economies is to build public grain reserves and provide incentivize to farmers so that they can produce more staple indigenous crops. This can be done by granting subsidizes for the purchase of seeds and fertilizers, by providing extension services (e.g., supplies of the necessary inputs and services to support agricultural production), and by guaranteeing minimum price support for their output. In this regard, China is an example. Having suffered the worst man-made famine in living memory, China operates a complex agricultural reserve system, where provinces are required to stockpile a minimum amount of wheat, rice, cotton, sugar, and other strategic agricultural commodities as a means of controlling price volatility and ensuring supply. In Africa, African governments, on average spend less than 5% of their annual national budgets on agriculture, a figure that the African Union calls to at least double, by allocating not less than 10% of their annual budget to the agriculture sector. Africa will also need to build strategic grain reserves if it wants to counter harvest failures that will inevitably occur more frequently as the climate changes.

The third recipe is to industrialize, and to do it quickly, before that other economies will start harnessing new technologies such as robotics and artificial intelligence (AI) for further reducing their production costs. If this will happen and Africa will not be prepared, as a latecomer continent approaching to industrialization, it would be completely cut off from global value chains. But in this regard, it also worth to be noted that industrialization alone is not a guarantee for success. There is also the need to improve the transport infrastructure to reduce transport costs from farm and from factory to market and remove obstacles to trade. The Kiel institute noted in its latest Africamonitor bulletin that the continent “mainly participates in Global Value Chains (GVCs) as an upstream supplier of primary inputs, with minor roles for manufactured goods and other industrial or services products.” After noting a trend in the growth of exports of intermediate goods, the bulletin points out that “if trade barriers and other obstacles can be overcome, Africa could easily become more engaged in GVCs, as already demonstrated by a subset of North African countries heavily engaged in GVC related trade with Europe”. This is another point to keep in mind.

The Brooking article finally raises the importance to sustain the development of the manufacturing sector in Africa, as this sector is a time-tested path to economic transformation. Yet, this sector still contributes too little to the aggregated African Gross Domestic Product (GDP), only 11% in sub-Saharan economies, a figure that has progressively declined, at the point that some observers talk about a process of de-industrialization of Africa that they mostly attribute to the trade liberalization process. In other words, the abandoning of protectionist policies and the opening of African economies to free trade, instead of favouring industrialization, has achived the opposite effect. However, this is a theory that is not entirely convincing. On the other hand, the services sector constitutes almost 47% of the economic activity in sub-Saharan Africa by value (World Bank). In this regard, a recent article recently published by the International Growth Centre (IGC) pointed out that in contrast to the East Asia experience, where workers moved out of low-productivity agriculture into industry, in Africa, most of labor has shifted into services. But, the Brookings article notes, the problem is that with a few exceptions, most of African economies have shifted and are dominated by low-productivity services sectors which have contributed relatively little to improve incomes of African citizens and to create new jobs. Despite the importance of the service sector in Africa, the manufacturing sector is therefore the main recipe for creating more new jobs, which is particularly critical in a continent whose population growth at rates that are the fastest in the entire world. Moreover, in a continent where imports of manufactured goods are equal to 60% of total imports from abroad, the need to adopt import substitution policies aimed at incentivize the production of these goods locally is another important aspect to consider to reduce such dependance.