A couple of generations ago, basic notions of development economics were widely understood. It was common for policy makers and foreign aid agencies to discuss strategies of industrialisation and employment policies, based on high levels of sustained public investment as a percentage of gross domestic product (GDP), and a necessary transition away from producing only raw primary commodities and extracting natural resources, towards building new manufacturing and services industries of increasing sophistication over time. But in recent decades almost all of that has been lost. In the modern official discourse of the foreign aid agencies, it has become increasingly difficult to distinguish between ‘foreign aid’, ‘poverty reduction’ and ‘development assistance’, for example, as these terms are often used interchangeably. People no longer seem to have a clear notion of ‘development’ for the poorer countries, and the far more vague notions in today's dominant discourse about ‘poverty reduction’ or ‘poverty eradication’ have seemingly replaced the earlier understanding about what all the foreign aid is supposed to be for in the first place.
If you ask those in the official bilateral and multilateral foreign aid agencies or the many non-governmental organisation (NGO) advocacy organisations what the foreign aid is supposed to be for in the first place, many may likely answer, ‘to help countries develop’. But when one asks, ‘What is development?’ one is surprised at the lack of ready answers available. It is striking how many of the major development and aid agencies, institutions and think tanks neglect to even offer a clear definition. Perhaps the proliferation of aid contractors and the aid industry, with thousands of individual projects and programmes across dozens of countries, has narrowed the issue of development down to simply meaning the completion of particular projects – but has digging 10 wells in villages or administering 3000 vaccinations in a rural district become a stand-in for ‘development’? Is meeting the Millennium Development Goals (MDGs) supposed to be tantamount to development? Is improving human development indicators or reducing poverty supposed to be the same thing as development, or is development something more?
The official discourse seems to have undergone a profound shift in the last few decades. By the early 1990s, the free trade and free-market-oriented economic reforms that had been strongly advocated by the Reagan and Thatcher governments in the 1980s were being heavily criticised for their seeming lack of concern for the poor and neglect of progress on human development indicators such as health, literacy, hunger, access to clean water, gender sensitivity, and so on. By the end of the 1990s, this type of ‘poverty reduction’ terminology being championed by NGOs was adopted by the United Nations (UN) bodies and bilateral and multilateral donor agencies, which ramped up this discourse and led to the adoption of the Millennium Development Goals in 2000. The MDGs are a list of key human development and poverty-reduction indicators to be achieved by the international aid community in developing countries by the target date of 2015. They have been used successfully by aid advocates to pressure donor countries to pledge to increase their levels of foreign aid, leading to the grandiose promise made by the rich countries at the 2005 G8 Summit in the United Kingdom to double their amounts of aid by 2010. While that has not happened, the MDGs have been used effectively to reframe the entire discussion around aid and development to create an explicit focus on getting poverty levels reduced. The International Monetary Fund (IMF) and World Bank followed suit by changing the names of their controversial structural adjustment loan programmes by inserting the words ‘poverty reduction’ into their new titles.
Along the way, the new discourse has led to confusion and a loss of focus. Completely forgotten are earlier notions of what constitutes economic ‘development’ that included the idea of industrialisation, or that process by which countries shift over time from producing only primary commodities and extracting natural resources towards manufacturing and services industries with increasingly higher technological sophistication and value-added. The idea was to create increased levels of productive employment as a way out of poverty, and to diversify the economy to avoid dependence on just a few low-level commodities. The rich countries in the Organisation for Economic Cooperation and Development (OECD) are regularly referred to as the ‘industrialised countries’ for a reason, and yet these basic notions have been all but eliminated from the discussion today.
The idea of industrialisation, along with its corollary of Keynesian full employment goals and large public investments in agriculture and infrastructure, was jettisoned from the official aid agenda in the 1980s with the onset of the free market ideology that has since become dominant and established in the economic policy prescriptions of the so-called Washington Consensus, which call for minimal government intervention and maximum freedom for market forces. By the 1990s, the idea that states should play a proactive role in supporting the development of domestic industry had become decidedly unfashionable in the foreign aid community. Rather than focus on ‘national’ economic development, the new mantra became ‘integration with the global economy’ as the route to development. Micro-credit to enable individual villagers to become entrepreneurs had become acceptable, but full-blown industrial policy was off the radar. Terms such as ‘trade protection’, ‘subsidies’, ‘capital controls’ and other forms of ‘industrial policies’ came to be met with derision and disdain. Anyone from those in the aid agencies to the recipient African ministries interested in advancing their careers or getting more foreign aid for their governments learned to quickly dispense with such terminology.
Because of the belief that the unfettered market would solve everything automatically, the aid industry had only to concern itself with ameliorating the suffering and focusing on basic human needs, which led to the logic of the MDGs. By the 1990s, the Washington Consensus had replaced earlier pathways to development, with its overriding idea that if developing countries simply cut their budget deficits and keep them under control, raised interest rates if necessary to get inflation down and keep it down, privatised, deregulated and opened their trade and financial accounts to the global economy, they would be rewarded with higher economic growth and development. The supremacy of this set of ideas and the belief that, as UK Prime Minister Margaret Thatcher said, ‘there is no alternative’, has imbued this approach to development with a singularity that excludes any possible alternatives, or the search for any. Thus, today these ideas have become so widely accepted they are ubiquitous, and not even considered in the conscious mind: they have become the backdrop in discussions of foreign aid and for understandings of development.
The only problem for African countries and others in the developing world is that such a policy approach has failed to lead to the successful economic development that was promised. Instead, the record has shown that by themselves markets cannot determine the direction of development, and cannot deliver growth and redistribution, job creation or social protection.
Countries such as China, to some extent, India, and regions such as East and South-East Asia, have experienced strong growth during the last few decades and have managed to significantly reduce poverty levels, particularly in urban areas. These successes have driven the aggregate global poverty levels down; but not every region or country has recorded such progress, and there has generally been less poverty reduction in many other countries which have experienced little or no growth. In fact, according to United Nations and World Bank data, the absolute number of poor people has gone up in several countries in sub-Saharan Africa, Latin America, the Middle East and northern Africa, as well as in central Asia (Mekay 2004, Chen and Ravallion 2008, United Nations Department of Economic and Social Affaires 2009). Where some economic growth has occurred in developing countries, particularly the least developed countries, it has often been tied to price increases in global markets for their commodity exports, but this has rarely translated into poverty reduction or national economic diversification into manufacturing and services. This has been especially the case when higher growth has been concentrated in extractive industries, which has not resulted in much job growth and structural change. Additionally, high or rising inequality within countries has undermined the poverty-reducing effects of growth where it has occurred.
By 2003, such facts of the track record led Mark Malloch Brown, then administrator of the United Nations Development Programme (UNDP), to call for a reaffirmation of the role of the state in development policy: ‘Market reforms are not enough. You can't just liberalise; you need an interventionist strategy’ (Elliot 2003). But such insights fell on deaf ears in foreign aid agencies, where a near-religious belief in free trade and free markets still goes largely unchallenged.
If we ask ourselves what the basic indicators of economic ‘development’ had been a few decades earlier, common understandings would have looked to employment and production. The questions asked would have been: are there more jobs and domestic companies in the formal sector (contributing to the tax base) than there used to be? Is the level of public investment as a percentage of GDP by the government increasing or not? Is the level of workers' wages as a percentage of GDP increasing or not? Is the economy diversifying and moving from primary agriculture and extractives into new manufacturing and services industries or not? Yet, not only are these kinds of questions no longer being considered by the ‘development’ experts, but if asked, the track record of many countries in Africa and beyond shows that the answers in many cases would be ‘no’. Here the dominant poverty reduction discourse presents a dilemma. Some countries have scored some improvements on their poverty indicators. But even for countries with improved Human Development Index (HDI) scores, can they be ‘developing’ successfully when they are not increasing their levels of formal sector employment, when workers are not earning higher wages, when there are not more domestic companies engaged in increasingly diverse productive activities and when the tax bases are not growing? Arguably not. But then again, in the foreign aid agencies, no one is asking.
The rise of the doctrine of free markets and free trade was partially enabled by the failures of previous attempts at industrialisation in developing countries from the 1950s through the 1970s. Many industrial policies used by African governments to support and protect infant industries failed because they were driven by political considerations, nepotism or corruption, and not by economic analyses or strict efficiency grounds (Robinson 2009). In contrast, the structures of the political economy in several East Asian countries included institutions that tended to enforce stricter rules for which industries got subsidies and trade protection, and which were cut off from them when they failed to meet performance targets. Yet, this history says more about ‘how’ industrial policies should be done, not ‘if’ they should be done.
The use of industrial policies, in which the government supports the emergence of new industries with publicly financed research and development (R&D), in acquiring new technologies, with subsidies, trade protection, subsidised credit, and other mechanisms, had long been part of mainstream development economics until they came under sustained attack from advocates of free trade and free markets in the late 1970s and 1980s. Critics argued that industrial policy had not worked and indeed could not work because government failures were always worse than market failure. They advocated that industrial policy or for that matter any other policy intervention to solve problems of development should be discarded and replaced with a focus on creating free markets and greatly reducing the role of the state to that of a light regulator, if at all.
As the Washington Consensus logic of hard-nosed efficiency gained acceptance, the subtext was that any industries which were not capable of competing in international open markets should not be protected with tariffs or subsidies but should be gotten rid of. The earlier long-standing notion of industrialisation as an evolutionary learning process was abandoned, along with the corollary idea that ‘it is it better to have an inefficient industry than no industry at all’ (Reinert 2007).
These critics were certainly correct in pointing to some very unsuccessful instances of industry policy in Africa and elsewhere, but they were selective in their criticisms and ignored successful cases. Furthermore, the critics did not account for why industrial policies had worked so well in the United States, Europe and East Asia but failed so badly in Africa and Latin America. Instead, they just tossed out the baby with the bathwater and took the whole discussion of industrialisation off the table. Future access to foreign aid and debt restructuring would be conditioned on rolling back the state and the satisfactory implementation of Washington Consensus reforms. And so the modern world we have come to be known over the last three decades was born.
The shift in the university curricula was equally dramatic, largely eliminating over time the history of the extensive use of industrial policies by the rich countries over the last few centuries, from the time of Henry VII in England in 1485 through the successful East Asian industrialisation of the last 50 years (Chang 2002, Reinert 2007). Instead, many students of economics and development in the last few decades have only been taught neoclassical free trade theory and the efficient market hypothesis. Increasingly, students of economics only get mathematical models and elegant equations that are entirely devoid of the messiness of real-world contexts or ‘externalities’ such as politics. Indeed, many of today's central bankers and finance ministry officials throughout Africa, who have gone to school at elite universities in the United States and Europe, have only learned neoclassical economic theory and returned home to try to implement it, even though it stands in stark contrast to what the rich countries actually did to industrialise successfully.
As the Norwegian historian of economic policies, Erik Reinert (2007), has lamented, there is no discipline called the History of Economic Policies; students learn quite well what Adam Smith said the UK should do, but they learn virtually nothing about what the UK actually did. Others, such as the Massachusetts Institute of Technology's (MIT) Alice Amsden (2001) and Cambridge's Ha-Joon Chang (2002), have attempted to resurrect this forgotten historical record, but they are up against two or three generations who have only learned neoclassical theory. Nobel Laureate Joseph Stiglitz is aware of this phenomenon, too, and has advised African officials: ‘Don't do as the US tells you, do as the US did’ (Stiglitz 2003). If students of economics and development actually learned the history of industrial policies used by the rich countries, perhaps efforts to industrialise the African continent would look different today.
There are, however, some interesting new cracks in the dominant mythology of the Washington Consensus policies, not least of which was offered by former Chairman of the Federal Reserve, Alan Greenspan, who in 2008 conceded, ‘I was wrong’ about the efficient market hypothesis, which suggests that banks and financial institutions would not engage in excessively risky over-leveraging out of a sense of self-interest, and thus there was no need for government regulation of the financial sector (Andrews 2008).
In the wake of the recent financial upheavals, research has shown that those countries which went against IMF admonitions and used some type of capital controls actually weathered the crisis much better than those which had adopted the Washington Consensus dogma of liberalised open capital accounts. Indeed, even the IMF has conceded such in recent staff papers that have found there may be some efficacy to such state intervention after all, something which would have been dismissed as pure heresy just a few years ago (Subramanian and Williamson 2009, IMF 2010).
Equally compelling was former President Bill Clinton's remorseful apology about having pushed premature trade liberalisation on Haiti. Decades of inexpensive imports, especially rice from the US, have destroyed local agriculture as domestic companies could not compete against the floods of cheaper imports. Such premature trade liberalisation policies have left impoverished countries such as Haiti unable to feed themselves and shifted many former food exporters into net food importers today. While those policies have been criticised for years in aid worker circles, world leaders focused on fixing Haiti are admitting for the first time that lowering trade barriers only exacerbated hunger in Haiti and elsewhere. In March of this year, Clinton, now UN special envoy to Haiti, publicly apologised for having championed the free trade policies that destroyed Haiti's rice production. In the mid 1990s, his administration along with the World Bank encouraged the impoverished country to dramatically cut tariffs on imported US rice. ‘It may have been good for some of my farmers in Arkansas, but it has not worked. It was a mistake,’ Clinton told the Senate Foreign Relations Committee on March 10. ‘I had to live every day with the consequences of the loss of capacity to produce a rice crop in Haiti to feed those people because of what I did; nobody else’ (Katz 2010). While the lessons could easily apply to most countries in Africa as well, the idea that industrial policies such as trade protection may actually be useful for promoting jobs, domestic companies and economic development remains lost on those currently engaged in providing foreign aid, and seemingly on many of those willing to receive it.
As with the whole set of Washington Consensus policies, the idea of trade liberalisation has taken on a life of its own and become enthroned as an end in itself, and unqualified free trade theory has deeply influenced development policy. Yet such rapid, across-the-board, premature trade liberalisation in Africa, Latin America and elsewhere since the 1980s and 1990s has in fact led to the destruction of many existing industries, particularly of those that were at their early stages of development, entailing massive job losses without necessarily leading to the emergence of new ones. The nascent industries in Africa were especially hard hit. According to some estimates by the United Nations Conference of Trade and Development (UNCTAD), total income losses for sub-Saharan Africa from trade liberalisation amounted to US$270 billion over the past two decades – more than the total foreign aid received by the region (UNCTAD 2005). In striking contrast, the newly industrialising economies in China, India and East Asia have taken a much more gradual and selective path to trade liberalisation, much like Europe, Japan and the US did, as part of a long-term industrial policy, lowering trade protection only after they had reached a certain level of industrialisation and development when firms were in a position to compete internationally (Amsden 2001, Chang 2002, Stiglitz et al. 2006).
Despite the failure of the Washington Consensus policies to lead to substantive real economic development in Africa, such policies continue to move full speed ahead as policy reform conditions on most new IMF and World Bank loans. Such loans are regularly approved by the representatives of finance ministries of most rich countries, who approve such loans on the executive boards of the institutions in Washington. The flipside of this is that every six months or so the IMF missions visit African capitals where the finance ministries sign on the dotted line and pledge to continue to implement such policies in return for the official ‘green light’ IMF signal to aid agencies and capital markets of their creditworthiness.
Such polices also continue unhindered in the ongoing World Trade Organization (WTO) negotiations and in the proliferation of new bilateral and regional free trade agreements and investment treaties being negotiated by the US, European Union (EU), China and others with willing African trade ministries, who believe they will one day gain greater access for their exports into northern markets. The current WTO negotiations include an agenda item that involves principally reductions in industrial tariffs. Referred to as non-agricultural market access (NAMA), these negotiations are problematic because they could lead to even further significant job losses, very significant tariff revenue losses not recouped from other sources of revenue, and they could narrow the remaining ‘policy space’ for many African countries to pursue industrialisation strategies by removing, or outlawing, the flexible future use of such tariffs in different industrial sectors and over time. Strategic use of tariffs can mean applying very low tariffs at one point in time on imported inputs but higher tariffs on other final products for which the local economic base is not yet ready to compete internationally. History shows that the industrialised countries and East Asian success stories made abundant strategic use of such tariffs as part of their development strategies. But because of years of having already implemented Washington Consensus policies, developing countries on average today have much lower tariffs than the rich countries had at a comparable stage of development. Despite this, many African countries still have some potential to use remaining tariffs flexibly because their current applied rates are much lower than the rate at which they already committed to in the WTO (the ‘bound rates’). Yet, now the rich countries are demanding in the NAMA talks that such remaining flexibility should be removed entirely, both in terms of the actual level of tariffs and the ability to use different tariff levels for different sectors at different stages of development. However, removing all future flexibilities to raise tariffs in support of industrialisation would not only lead to further job losses, it could also lead to African economies becoming ‘locked’ into low-value-added production paths that would hinder their potential to create more productive employment, decent jobs, more advanced industries and move up the development ladder (Busser 2009).
A fatal flaw in the reasoning of the dominant Washington Consensus/MDGs approach is that development will be realised through external inputs, such as more foreign aid, allowing more foreign investment, remittances flows and debt relief. Yet this approach is wholly insufficient and the tax bases of many least-developed countries are not increasing (McKinley and Kyrili 2009), more domestic firms are not being created, and economies are not diversifying. In order for these aspects of meaningful economic development to be realised, African policy makers will have to pursue proactive use of various industrial policies.
These fundamental ideas were well exemplified in UNCTAD's annual LDC Report for 2006, which called for a ‘paradigm shift’ in national and international policies to promote development. The UNCTAD report seeks to move sharply away from the Washington Consensus approach and the dominant focus on external inputs and to restore an earlier emphasis on policies that can proactively build domestic productive capacities.
The report finds that productive capacities develop within a country through three closely interrelated processes: capital accumulation, technological progress and structural change. In almost all the least-developed countries (LDCs) there is an imbalance between the rate of growth of the labour force, which is very rapid owing to population growth, and the rates of capital accumulation and technological progress, which are generally very slow. It examines the working of these processes within the LDCs, and discusses three basic constraints on them: the deficient infrastructure systems; weak institutions, notably firms, domestic financial systems and domestic knowledge systems; and a lack of sufficient demand. It suggests how these constraints may be addressed, drawing on a range of policies that are today considered ‘heterodox’ or alternative, and which go against the Washington Consensus model of the last 30 years, but which were used extensively by all of the successfully industrialised countries, and are urgently in need of serious consideration today (UNCTAD 2006).
In Africa, the lack of national physical infrastructure systems, including transport, telecommunications, water and energy, is one of the most serious constraints for building domestic productive capacities. Although possibilities for private financing of physical infrastructure should not be neglected, the past record of the free-market approach shows that this source alone cannot meet infrastructure needs (Estache 2004, Bayliss 2009). There is thus a need for increased domestic public investment and a reversal of the downward trend in aid for economic infrastructure which a number of developing countries, particularly in Africa, have experienced in the period 1990–2003. Physical infrastructure provides strong complementarities between private and public investment which can serve as an important source of growth and influence on the composition and distribution of gains from growth. Public investment in such infrastructure can be a key factor in raising the levels of productivity and productive capacity in order to generate a net surplus as a key source of accumulation in all sectors of the economy (Roy 2006). However, according to UNCTAD, infrastructure investment should not only focus on investment in trade-related infrastructure for exports, but rather there is a significant need for more of a joined-up approach to infrastructure development which includes: rural infrastructure and district-level links between rural areas and small towns; large-scale national infrastructure (such as trunk roads, transmission lines and port facilities); and cross-border regional infrastructure (UNCTAD 2006).
Another major problem in many African countries is the so-called ‘missing middle’ in the domestic enterprise structure, with a multitude of informal sector micro-enterprises coexisting with a few large firms, and relatively few formal-sector small and medium enterprises (SMEs), particularly medium-sized firms, which are often weakly developed. In addition, these SMEs face numerous obstacles to expansion. SMEs are certainly important as they tend to use local inputs and thus are the agents that link local primary and manufacturing activities. They are also key providers of both formal and informal sector employment for the local population. But according to UNCTAD, an exclusive focus on SMEs (to the neglect of large domestic firms) is often based on a static view of the development process. From a longer-term and dynamic efficiency perspective, UNCTAD suggests large-size domestic firms are in a better position to generate the resources to realise higher rates of capital formation, technological innovation, economies of scale and the accompanying learning effects. Such firms are also in a far better position to diversify into higher value-added activities. Therefore, it is important to get better financing options available to domestic SMEs and large firms.
One major reason why SMEs do not grow is that there is an inadequate domestic demand for their products. Fostering improved linkages between large domestic firms and SMEs is an important demand-side measure to complement the supply-side measures for SME development. Moreover, such inter-firm linkages can also facilitate knowledge transfers, technology transfer and technological upgrading.
Although difficulties with firm entry are major problems, a more significant constraint for new entrants is acquiring the required technological capabilities and affordable financing to grow. Greater attention thus needs to be given to constraints on firm growth, not just market entry. Attention should also be given to dealing with the anti-competitive conduct of oligopolistic processors and exporters (some of which are vertically integrated with multinational corporations), which often prevents domestic diversification and the development of new processing industries.
The working of financial systems and knowledge systems is closely related to the issue of enterprise development. In many African countries and other LDCs, financial markets are weak and subject to major market failures. Increasingly, in a more liberalised policy environment, foreign financial institutions have come to dominate, but the narrow client base has not expanded and remains concentrated on either the government or few large domestic and foreign firms. Overcoming bottlenecks in affordable financing for domestic private sector firms should be a critical priority for policymakers in developing countries, yet strikingly little has been done on this front, often because IMF and central bank policy prefers to raise interest rates in order to keep consumer price inflation unnecessarily low.
Knowledge systems are as important as financial systems in the development of domestic productive capacities. Thus proactive public policies to improve domestic knowledge systems should complement efforts to improve domestic financial systems. Investing in all levels of education is particularly important given the currently low levels of schooling which are found in most African countries and LDCs. Low literacy and skill levels make technology absorption difficult and slows down the technological catch-up process. Countries need to develop well-designed and coherent national technology learning strategies to increase access to technology and to improve the effectiveness of imported technology, as well as to benefit from linking to global knowledge. Public policies, firms' needs, and educational investments must be carefully co-ordinated, because when schools train people with skills for which there are no jobs, such people emigrate, leading to a wasteful diminishing returns exercise.
Upgrading of the export structure is particularly important in Africa because it is difficult to generate sufficiently fast export growth to finance the imports needed in order to develop productive capacities, given its current pattern of trade integration with the global economy. The current LDC growth trajectories, based on export specialisation of raw, unprocessed commodities, have evolved in line with the theoretical principles of static comparative advantage. The neoliberal model's concentration on production and export of a few primary commodities and extractive industries largely oriented towards external markets has essentially failed in Africa to contribute effectively to the ‘catching up’ that was promised, and has not provided the road out of persistent poverty. Instead, too often, such growth trajectories have led to enclave economies, dualistic economic structures, a poor poverty reduction record, and an increase in macroeconomic instability (UNCTAD 2006). Kregel (2009) notes that the current model's approach of using the bulk of domestic productive forces (including labour) for producing primary exports and generating an external surplus (used for repaying foreign creditors) necessarily reduces the leftover resources that could otherwise be directed towards building domestic demand. Therefore, the neoliberal model blocks any effective use of classic Keynesian deficit spending to achieve full employment goals. Not only is favouring exports over enabling greater domestic demand at odds with the new post-2008 consensus in the rich countries, Kregel (2009) notes that it also exacts ‘a double whammy’, since devoting resources to exports also involves a sacrifice in foregone or lost output because of domestic labour resources that were not mobilised.
Consequently, policy measures to achieve export upgrading should not be limited to the trade regime but must also include new kinds of industrial policies and public–private partnerships. It may encompass measures to promote agriculture and services as well as manufacturing industries. Such policies need to seek out new areas of dynamic comparative advantage, or to ‘acquire’ comparative advantage, whereby goods with a high-income elasticity of demand in the world markets are produced. There is potentially a role for selective protection in Africa based on arguments linked to addressing market failures, capturing externalities or welfare-enhancing policies, and in the case of international distortions. This implies that, in countries which have not yet undertaken extensive trade liberalisation, there is a case for caution and a gradual approach. For those countries which have undertaken trade liberalisation, this is not a call for a blanket reversal of this policy; rather, it is a call for a pragmatic analysis of policy options. This could include utilising WTO provisions for ‘special safeguard mechanisms’ against food import surges, as the Group of 33 is currently working to protect in ongoing negotiations.
The first thing that becomes apparent when considering how developing countries might implement some parts of the ‘paradigm shift’ articulated above is the constraint countries face in their national ‘policy space’. Whereas all of the policy tools, tactics and best practices in industrial policy used by all of the successfully industrialised countries used to be officially outlawed and prohibited in the colonies under colonialism, these freedoms are again being denied to developing countries today through IMF and World Bank loans and other donor aid agencies (as loan conditionalities), WTO agreements, and, increasingly, through the proliferation of bilateral free trade agreements (FTAs) and bilateral investment treaties (BITs), particularly the agreements between the European Union (EU) and the Africa, Caribbean and Pacific (ACP) group countries (Chang 2005, Shafaeddin 2008).
Along these same lines, UNCTAD's Economic Development in Africa Report 2007, Reclaiming policy space: domestic resource mobilisation and developmental states, advocates that countries must take steps to lessen dependence on donors and reconsider surrendering so much of their policy space in free trade and investment negotiations. Many countries have given away so much of the ‘policy toolkits’ in such negotiations in the belief that they will gain greater market access to northern markets, yet this alone is not a development strategy. Instead, just as industrialised countries have done, developing countries must guard their remaining policy space and use various context-specific financial, trade, fiscal and monetary policies to support domestic industry, achieve employment goals and increase the levels of public investment in accordance with long-term national development plans.
Fully using remaining policy space or even perhaps backtracking on recent trade negotiations is not tantamount to a return to statism or protectionist economic policies. Rather, it is a call to move away from misguided neoliberal preoccupations with policies based on the ideological dogma of ‘laissez-faire’ and towards a set of more refined and eclectic policy measures that combine features of both, but tailored to the specific development challenges or circumstances of each country. Such a policy toolkit must also be dynamic, in which different policies can used at different times depending on where countries are in their developmental trajectories. In other words, it is a move to a kind of ‘à la carte development policy menu’ (UNCTAD 2007).
According the 2007 UNCTAD Africa Report, some policy measures under this menu might violate existing commitments in the various WTO and bilateral trade and investment agreements, which define current global trade rules. Nevertheless, these agreements are not cast in stone, and several development economists and trade experts have been calling for their review to take into account the peculiar situations prevailing in poor countries (UNCTAD 1998, Das 2005). There is also some flexibility in these agreements, although highly restricted, that African countries could exploit to serve their development objectives (Mayer 2008). But whatever the case, it is clear that African countries need greater ‘policy space’ to be able to design and implement these and other alternative policies.
Countries must seek to develop strategies to more actively mobilise their own resources for investment in the medium term with a gradual reduction of dependence on external resources, namely overseas development assistance (ODA). Yet in most official aid agencies, there is a glaring neglect of any dynamic or catalytic ‘domestic driver’ to support self-sustaining growth and a transformational development process towards manufacturing and services. A renewed focus on greater domestic mobilisation would not only reduce excess reliance on ODA and foreign direct investment (FDI), but would also create a legitimate policy space in which ‘ownership’ is actualised by channelling both aid and investment into fast-growing domestic industrial sectors with multiple beneficial forward and backward linkages to domestic companies and massive long-term multiplier effects for the whole of the economy.
Following on the 2007 UNCTAD Africa Report on ‘Reclaiming policy space’, UNCTAD undertook a nine-country study with the objective of strengthening the capacity of African countries to identify and utilise efficiently non-debt-creating domestic resources. The result was a policy handbook, Enhancing the role of domestic financial resources in Africa's development (UNCTAD 2009).
The handbook highlights several largely neglected opportunities and policies for increasing the types and levels of financial resources for the continent's development through an improvement in domestic financial resource mobilisation and efficient use, though many of the suggestions contained in this document apply differently to different countries. Of the extensive list of policies explored, some include establishing a national financial charter to identify and get a national consensus on the role and future development of the financial sector, such as was done with some success in South Africa in 2004 as the result of negotiations between the government, business community, labour and community constituencies. Their main objective was to transform the financial sector into a leading force for the empowerment of black businesses that had traditionally been sidelined. Other policies include establishing a tiered, differentiated regulatory structure that could accommodate existing informal institutions; establishing a national credit information database to tap the extensive knowledge of the informal financial agents; expanding financial services to underserved areas; establishing business schools and training centres for building capacity for both private actors in the financial sector and the public sector regulatory bodies.
Also recommended are policies that encourage and strengthen non-bank financial institutions (NBFIs) such as pension funds and insurance companies, whose resources are often better suited for mobilising for intermediation into productive investment than are bank deposits. The experiences of Mauritius and Namibia demonstrate the beneficial influence that insurance and pension funds can have on the financial sector and on the economy at large. For example, in Mauritius, NBFIs represent a very important segment of the financial sector. Assets held by the insurance companies alone were worth the equivalent of 19.2% of GDP in 2006. Mauritius also has a number of public and private–public joint venture institutions that add to the density of the financial sector. These include the State Insurance Company of Mauritius, the Mauritius Civil Service Mutual Aid Association and the National Housing Development Company. In Sierra Leone, a National Social Security and Investment Trust was created in 2002 to serve both as a pension fund and as a source of funding for priority projects such as housing development. It is already providing financial security to over 100,000 people (UNCTAD 2009).
Regarding the re-establishment of development banks, steps must be taken to avoid the previous poor track record due to mismanagement, poor project selection and insufficient monitoring. Past mistakes in their management do not diminish the relevance of development financing. These mistakes do, however, underline the importance of efficient management and of ensuring that development remains at the heart of their mission (UNCTAD 2009). Success of development banking initiations in Africa depends on integration of development finance institutions into the national development agenda, appropriate governance, minimising non-interest barriers to access to credit; and innovative strategies for the mobilisation of stable long-term funds (Ndikumana 2007 cited in Epstein 2009).
Finally, even without establishing explicit development banks, many countries can use their central banks to play similar roles, including expanding their official mandates to include monetary policy targets such as GDP growth goals and/or employment level goals in addition to price stability (low inflation) goals.
Indeed, Pollin et al. (2006) developed an elaborate alternative policy proposal for replacing the IMF's harmful low-inflation targeting policies with new central bank targets for employment in South Africa, and did the same for Kenya (Pollin et al. 2008). Pollin and others also offer several important innovative approaches that African policy makers ought to consider (Atieno 2001, Aryeetey 2003, Epstein and Grabel 2006, Epstein and Heintz 2006, Pollin et al. 2006, Heintz 2008 cited in Epstein 2009, Pollin, Githinji and Heintz 2008, Epstein 2009).
The reasons why earlier attempts to industrialise African economies failed must be examined and made clear. Today, however, there are reasons to believe industrialisation can be done differently and better. There are increased numbers of citizen groups undertaking regular budget analysis, budget tracking and budget advocacy work to increase public scrutiny of public funds. In the last decade, dozens of countries have enacted formal statutes guaranteeing their citizens' right of access to government information. Other efforts include local chapters of the international Publish What You Pay Coalition (PWYP), to better regulate the reporting of royalties paid to foreign investors in the extractive industries, and Publish What You Earn, to pressure foreign investors to disclose publicly the profits they are repatriating out of countries. There are efforts under way to get citizens more directly involved in economic policy making such as ‘participatory budgeting’ and economic policy ‘audits’ from a human rights-based approach (Balakrishnan and Elson 2008). And advocacy by the international Tax Justice Network has sought to take on issues such as tax evasion, illicit capital flight and the role of offshore tax havens in an effort to help authorities increase and improve tax collections. These important trends suggest that citizens are increasingly intending on holding their governments to account for budgets, policies and priorities. These trends suggest that industrial policies which may have been less successful in the past may be much more successful in a modern climate of increased transparency, public scrutiny and accountability.
For African policy makers who are interested in moving towards more ambitious industrialisation strategies for the continent, there must be a willingness to re-open long closed debates about development economics and challenge the dominant assumptions about the Washington Consensus model, understanding why and how it has failed to help countries industrialise. Also needed is a willingness to engage in the political pressure that will be required to change such policies at the bilateral and multilateral lending agencies, and in their own finance and trade ministries. These steps can begin by re-examining the definition of ‘development’ with a clearer understanding that poverty reduction is a result of successful economic development, not a replacement for it.