Opinion
Will Africa leave the World Bank behind?
By Nicholas Norbrook
Governments across the continent are looking for new development models after the policies of privatization and liberalization seem to have run their course.
The arrival of Jim Yong Kim as president of the World Bank bearing promises of a cultural revolution comes at a critical time for Africa’s prospects.
Africa is now the world’s fastest-growing continent, however, questions about policy, the past failures to develop viable industries and reduce youth unemployment and inequality continue to remain the subject of fierce debate.
That argument pits advocates of a more state-led development strategy, which has produced impressive results in East and South Asia, against the veteran advocates of market economics and liberalization – the old ‘Washington consensus’ pushed by the World Bank and the International Monetary Fund (IMF) in the 1980s.
The terms of the debate are shifting, it seems. World Bank vice-president for Africa Makhtar Diop is quoted to have said in 2012: “If you look at the structure of the economies in Africa 10 years ago and today, there hasn’t been much change.” Africa continues to be a producer of raw materials and an importer of finished goods.
So what can change the structure of African economies? Has the World Bank been helping or hindering African chances of following Asia’s great industrial leaps?
Some African leaders have already made up their minds. Taking Asia as inspiration, and increasingly using Asian finance as development capital, they have junked important elements of the ‘Washington consensus’ in favor of a strong developmental state.
Ethiopia’s late Prime Minister Meles Zenawi, a theoretician of the need to reclaim the state, was most explicit in his rejection of complete faith in the market: “Developing countries face formidable market failures and institutional inadequacies which can adequately be addressed only by an activist state.”
For African leaders, surveying the past 50 years of development as counselled by the West, the question is clear: Why should India, China and South Korea have succeeded when they ignored the privatization and liberalization dictums of the ‘Washington consensus’?
This contest of ideas is far from academic. Hundreds of millions of lives and billions of dollars are at stake. If African economies can use new ideas and technology to consolidate growth and make it self-sustaining, the next two decades in Africa could be as transformational as the last two in Asia.
Some African governments have already made their choice alongside Ethiopia. Both the Moroccan and the Rwandan government have strong investment arms. Rwanda’s Crystal Ventures has helped companies break into the road building trade, for example, and has spun off profitable businesses in the construction, food processing and security sectors.
And, in a big roll of the dice, Morocco’s King Mohammed VI has wagered the country can become the next hub of car manufacturing and aeronautical engineering on Europe’s fringes.
The Tanger-Med complex hosts Renault and Bombardier as key tenants and is a testament to a thoroughly planned industrial policy.
African policymakers are asking if the World Bank, in particular its new leader, South Korean-born Jim Yong Kim, can bridge the gap between those governments trying state-led policies and the old market purists.
The development business, for many years the domain of the World Bank, is now an open field. There was a sixfold increase in private sector capital flows between 2000 and 2007, reaching US$86 billion. That makes the World Bank just one lender among many.
The fact that Kim is the first non-white to run the World Bank helps to deflect the traditional irritation that African countries suffer from being lectured to. Given the pressure from Brazil, China and India to select a candidate of the developing world, the fact Kim was born to South Korean parents may help to attenuate the disappointment that Nigeria’s Ngozi Okonjo-Iweala did not win the post.
So will Jim Yong Kim temper African governments’ desires to get more involved in the economy? Certainly a clear case can be made against state involvement in industry. From around the world, at different periods in history, politicians and business-people have come together to bleed the public purse dry in the name of industrial policy.
Africa has some acute examples, such as the hundreds of millions of dollars that went into the steel works at Ajaokuta in Nigeria, Zimbabwe’s own steel company ZISCO, Tanzania’s General Tyre East Africa, and Volta Aluminium Company, the aluminium smelter in Ghana.
Successful Asian economies such as China, South Korea, Taiwan and Japan managed to introduce market mechanisms into such state support. Often state subsidies were dependent on export receipts, which are difficult to falsify.
If a particular company could show it was successful at exporting a particular good, then it received more state support.
“Japan’s Ministry of International Trade and Industry was superb at structuring competitive, highly transparent fights for industrial licences, staggering the entry of different firms to manage the mix of protection and competition, and forcing businesses to upgrade their production equipment”, writes Joe Studwell in How Asia Works.
The debate around this subject at the World Bank has been dormant for decades. Recently, a new front was opened by Justin Lin, the Bank’s chief economist from 2008 to 2012. Significantly, he was the first chief economist the Bank has ever had from China.
Lin’s work did not advocate a fully-fledged embrace of industrial policy, but he did talk about the role of the ‘facilitating state’. Echoing Meles Zenawi, Lin writes: “Developing economies are ridden with market failures, which cannot be ignored simply because we fear government failure.”
In this mild version of state-directed development, there are useful things a state can do to encourage industrialization. One is providing subsidies aimed at innovation in order to help companies to bear the cost of coming up with new products.
Another is government assistance in coordinating all infrastructure, institutional, legal, financial and educational improvements that need to happen before more sophisticated companies can develop.
Morocco is a classic example of this, with a raft of government-led development institutions – from the Caisse de Dépôt et de Gestion to the Société Nationale d’Investissement – which have been critical in creating an industrial fabric around Tanger-Med that includes training institutes designed by the private sector and paid for by government.
At the Bank, Lin published New Structural Economics under the World Bank imprint. One chapter of the book is a debate between Lin and South Korean economist Ha-Joon Chang. Chang is the author of a book excoriating the “Bad Samaritans” – World Bank included – who advise developing countries to ad- opt policies that they themselves did not follow.
Chang’s ideas find ready defenders on the continent. “British industry was protected during the industrial revolution,” says Central Bank of Nigeria governor Lamido Sanusi. “In America, Alexander Hamilton protected infant industry; the Asian countries also did”.
Chang’s vision of state-led development is more muscular. It takes the example of South Korean steel company POSCO.
The World Bank refused to fund it in the late 1960s on the grounds that Korea did not have reserves of coking coal and iron ore, and its companies were exporting fish and clothes. POSCO is now the third-largest steelmaker in the world and one of the most profitable.
Ethiopia has also decided to leapfrog into heavy industry, creating the Metals and Engineering Corporation (METEC) in 2010. It will have the US$5 billion Grand Ethiopian Renaissance Dam as an anchor client. The World Bank is likely not to fund the dam.
“Industrialization is not a luxury for Africa but a necessity for its longterm survival,” the African Union Commission chairwoman Nkosazana Dlamini-Zuma told delegates at a March conference in Addis Ababa.
But how much does the World Bank subscribe to this idea?
The main case for the World Bank against industrial policy is that a strong developmental state quickly dissolves into crony capitalism, with picking winners turned into picking friends.
“Its a razor’s edge you are playing with here! If you have an enlightened bureaucracy with perhaps a military government or at least a government able to bring along the powerful industrial groups in the direction of greater economic growth and stay on top, then maybe,” says Shanta Devarajan, formerly Africa chief economist for the Bank, now chief economist for the Middle East and North Africa. The challenge is in designing the mechanisms through which subsidies go to the intended beneficiary.
Unsurprisingly, the successful East Asian governments were the ones that managed to corral the private sector into productive sectors of the economy without getting captured. Big-time entrepreneurs who are not effectively disciplined by a developing country government become the oligarchs of Southeast Asia – or Russia, or Latin America.”
Lamido Sanusi has caught public attention in Nigeria for his own embrace of industrial planning. His dismissal of eight bank chief executives in 2009 following a huge stock market bubble did much to reduce the levels of moral hazard in the sector.
He believes in encouraging entrepreneurs to invest productively – for example, showing the diesel cartel in Nigeria, which had been sabotaging the power sector for its own short-term gains, that much greater riches are around the corner if Nigeria can keep the lights on.
“You create a lot more money by investing in a refinery, so stop being a marketeer! So you transform them from primitive accumulation into capitalists.
The United States had its robber barons, all the J. P. Morgans, etc.”
Ultimately, this is where the argument over industrial policy will live or die.
Will METEC resemble POSCO or Ajaokuta? A general launched POSCO in South Korea, and Ethiopian army officers run METEC. They may have the discipline to see the project through, though, as Nigeria’s experience shows, a military background is no guarantee.
Crucially, the managers at METEC will be driven to develop their skills and technology with the help of others, which was one of the keys to POSCO’s success. METEC has brought in France’s Alstom, China’s Poly Group and United States-based company Spire. “We’re doing this in collaboration,” METEC spokesman Michael Desta told reporters. “We want to learn from them.”
If African governments can rein in their entrepreneurs, then they may be tempted to follow the lead of Ethiopia, Morocco and others. If they cannot, perhaps they would be better off heeding the Bank’s warnings.
Republished from The Africa Report