The COVID-19 pandemic has demonstrated the extent to which the world has become interconnected. With the virus starting in Wuhan, China in November 2019, it has quickly spread across the world. It has exposed a heavy reliance on Chinese suppliers and industries revealing China’s central position in global supply chains. China’s favourable trade balance with Africa can be explained by comparative advantage—particularly in manufacturing—and is reflective of China’s capacity to meet growing demand in Africa. As the largest investor in Africa, China’s activities on the continent have also enabled the continent to access diverse job-creating investments.
Still, the push for Africa to become more self-sufficient and play the main character in its development story is more urgent now that Sino-Afro trade is crippled. This self-sufficiency has primarily been sought by improving and accelerating intra-African trade to stimulate internally sustainable value chains through local production and consumption. These efforts, however, remain inadequate with African countries notedly being just as dependent on foreign economies now as when globalised value chains were stagnated during the 2008 economic recession. It is appropriate to consider, then, what increased African industrial productivity and intra-continental trading can do for Africa’s aspirations for sustainable economic growth.
Building Local Capacity to Meet African Needs
The African Continental Free Trade Area (AfCFTA) is the latest milestone in Africa’s journey towards an integrated and self-supporting economy. It aims to increase the volume and value of trade taking place across African borders to lift Africa out of dependence on global suppliers through products that are competitive on the global market. A key step in this journey is import substitution wherein local industries are promoted to enable their products to serve needs that are currently met by external suppliers.
Import Substitution Industrialisation (ISI) is an approach that has been adopted by developing countries to reduce dependence on global economic leaders. ISI involves measures that stimulate the production and improve the competitiveness of domestic goods. In South-East Asia particularly, ISI policy focused on the diversification of production. While this policy also heavily utilised protectionist measures that placed restrictions on imports, a modern economy should prioritise improvements in domestic production over embargos on foreign products.
The popularity of ISI policies in the global south was met by questions posed by developed and export-specialised economies as to its ability to result in meaningful economic growth in a globalised economy. However, many developing countries such as BRICS have adopted ISI measures that have raised the global competitiveness of their industries. This policy decision is also analogous to measures employed in the developmental phases of currently advanced economies. As Cambridge development economist Ha-Joon Chang notes,
‘Almost all of today’s rich countries used tariff protection and subsidies to develop their industries in the early stage of their development. It is particularly important to note that Britain and the USA, the two countries that are supposed to have reached the summit of the world economy through free-market, free-trade policies, are the ones that most aggressively used protection and subsidies’.
Evidently, developed economies adopted ISI before they later embraced neoliberal ideology, after a particular level of industrialisation, ‘kicking away the ladder with which they had climbed to the top’. It has been suggested that less industrialised economies should implement ISI policy in the short term with export promotion as a long term goal once their manufacturing capacity can meet export standards and global demand. Outrightly protectionist ISI policies do place economies at risk of missing out on the boosts to efficiency that specialised global trade offer, but a structured approach is a valid means to augment the productivity and competitiveness of developing economies.
The first phase of ISI in Africa would thus be industrial restructuring for diverse production. While earlier attempts of ISI did not seem feasible because ‘rich countries, through tariffs, quota restrictions and other barriers, are inclined to protect their markets from exports of Third World countries’, any such production for export can target other African economies. With this, then African countries can increase their domestic production for goods and services where they have comparatively lower opportunity costs and trade with each other for these other products, in the later export promotion stage.
Kenya’s Experience: Successes, Failures and Lessons
Similar to other developing countries, Kenya employed the ISI strategy using foreign capital and inputs to manufacture consumer goods for the East African market. Kenya’s colonial ISI policy was put in place to cater to the needs of the settler economy with a number of strategies in place to promote production including high tariff protection, allocation of industrial land, financial assistance and preferential rail rates for domestically produced goods.
This era witnessed the establishment of several manufacturing and processing industries which, by independence, contributed 9.5% of Kenya’s GDP. With the continuation of these policies post-independence, this contribution grew and was coupled with economic and industrial growth that saw some of Kenya’s products break into the international export market. ISI success at this time was largely focused on the production of primary products, late-stage assembly production, and agro-processing. Later, the improved livelihoods that this success supported created a market for locally produced luxury goods. These goods required more complex technology, expertise and machinery which was incompatible with the initial focus on developing primary production capacities.
In retrospect, Kenya’s ISI policy was structurally deficient in its emphasis on initial import substitution and primary commodities which neglected considerations on economic transition, leading to the following failures:
- These earlier attempts at implementing ISI policy are reported to have led to uneven growth. In Kenya, these attempts focused resources on developing specific sectors to the detriment others. The industries that saw growth did so in a vacuum without complementary industries that could have driven further growth and specialisation.
- The policy championed a few commodities such as tea, coffee and sisal and although agro-export served as the country’s principle growth contributor, the growth ultimately proved to be unsustainable. Appraisal of Kenya’s ISI phase reveals a manufacturing focus that promoted existing firms and value chains over growing the diversity of products that could be produced in the country.
- Most of the import substitution industries established were subsidies for multinational corporations. For this reason, many domestic industries could not afford to venture into production which meant that—as import licenses were readily available—local inputs were barely used. This result is evidently against the expectation that the ISI policy would reduce dependence on the international economy for locally-substitutable commodities.
- With regard to the long-term economic development goals, Kenya’s ISI policy was criticised for its exclusive focus on the domestic market. This lack of access to external markets did not allow for the expansion of production or the benefits of economies of scale.
These failures meant that, when the EAC collapsed in 1977, Kenya was left without a viable external market. In the current context, future ISI policy may utilise the (AfCFTA) to structure its export promotion strategy and establish the most efficient trade partners in the region.
Policy Considerations in Charting the Way Forward
Kenya’s ISI successes were not without considerable challenges, but the full spectrum of this ISI venture provides useful lessons for a second go at it. Moving forward with the benefit of hindsight, it is necessary for Kenya, together with fellow developing African countries, to take the following into consideration to develop and structure effective ISI policy for increased domestic production and future transition into export specialisation:
- Investment towards the competitive production of goods and services. This entails prioritisation of developing value chains supportive of products from industries that hold a comparative advantage in the producing state. Import substitution sacrifices the cost and efficiency benefit of relying on extant external producers. It requires significant capital commitments to the development of human resources, inputs, and distribution networks. There is a real risk that any gains made will still fall short of the benefits of importing products from more efficient producers or produce inferior or expensive commodities that cannot compete on either local or international markets. This issue cannot be equitably resolved by banning foreign commodities to protect the local market dominance of local products either as this will burden local consumers with higher costs for lower quality goods.
- Implementing measures to improve current production. Related to the previous point, one of Kenya’s ISI policy failures was its inability to grow productivity to match growing demand. Equitable economic growth comes with a general increase in the purchasing power of people within an economy which, if not complemented by increased commodities, causes inflation. As for improving-African trade and Africa’s export performance, the desire to break into wider markets must be met with a capacity to service wider markets. Improving current production is, therefore, necessary to create greater efficiencies and production volumes that allow consumers to afford, and therefore sustain, existing industries.
- Scoping out markets for new industries. With growth in industrial productivity comes increased specialisation and diversification. Kenya’s ISI policy focused on promoting certain commodities and neglected complementary and tributary value chains, leading to an imbalance in development across sectors. Market sophistication is predicated on the possibility that producers can find profitable outlets for their new products, thereby supporting the growth of diverse value chains, new and highly specialised jobs, diversified investment opportunities, and a growing and sustainable demand for innovation and education.
- Integrating industrial development across AfCFTA members. This has two dimensions:
- Kenya’s ISI policy revealed that neighbouring markets reward industrial productivity with prospects for, and therefore incentivises investment and development. This is a goal for AfCFTA member states who desire to see their local industries grow in a widened market. Scoping out efficient supply networks into other member states that avoid oversaturation—and therefore unprofitable competition—requires a collaborative approach by producers across member states.
- The diversity of human and natural resources available on the African continent also offers the opportunity for considerable pan-African collaboration in the development of high-value industries that are as yet unfeasible. The free movement of labour, capital and intellectual property under the AfCFTA are harbingers for the transitioning of Africa’s innovative exuberance into a thriving continental technological industry. Value addition in one region can greatly improve the products of another region in a cost-effective manner that would be advantageous to the birth and growth of highly specialised industries such as digital technology and aviation.
While trade deficits are rare in China, which is heralded for a merchandise surplus, the country ran a trade deficit in January and February this year due to COVID-19-related shutdowns. It may be too soon to see and know the effects of this on African economies that have invested in big projects under China’s Belt and Road Initiative (BRI). It is likely that less developed countries experiencing the expected economic effects of this crisis will be unable to continue to service their BRI debts and, more crucially, make progress on their projects without industrial inputs from China. With countries like the US already beginning to rethink their overdependence on China, it is crucial that Africa does the same. The current pandemic is a wakeup call illustrative of the urgency of bolstering African production and value chains against external influences. We should heed this call beyond simply surviving the health and economic crisis and orient our efforts towards attaining shared economic prosperity in Africa through sustainable industrialisation.