“Africans have not negotiated well in a number of areas…Who’s fault is it? It’s Africa’s problem and they need to address it.”
African Arguments caught up with the UN Economic Commission for Africa’s Executive Director to talk about economic transformation, what’s holding the continent back, and whether leaders will really take action in the wake of the #PanamaPapers.
In a lot of your work, you emphasise the need for Africa to undergo ‘structural transformation’. What does this mean, and why is industrialisation so important to it?
There is a whole literature about structural transformation, but in practical terms right now in Africa it means moving to higher productivity sectors. We see this happening in three particular areas. Firstly, there’s agricultural productivity, which is at its lowest in Africa yet offers incredible potential for minimising poverty and contributing to industrialisation through agro-processing. Secondly, there’s manufacturing, which requires policies that mimic part of the experience of successful industrialisation processes of the past but are much more adapted to African characteristics. And thirdly, there’s the service sector, which needs to become more integrated into the formal economy.
Industrialisation plays a critical role because it’s more than just the production of processed goods or value addition from natural resources. It’s also an enabler for a rising society and, being a latecomer, Africa can learn from the experiences of others and adjust. For Africa, issues such as the environment, for instance, can be tackled up front.
There are varying verdicts as to how African industrialisation is faring. Some emphasise that manufacturing as a share of Africa’s GDP has almost halved from its 20% level in 1970. But others highlight that manufacturing is increasing at 3.5% a year, faster than the global average. What’s your take?
If you measure it by manufacturing value added, which is the common preferred indicator, then yes it is true that in percentage GDP terms, African manufacturing is stagnating if not falling. But African economies have doubled in the last 15 years, so even if you maintain the same percentage it means a lot more industry has come on board. Moreover, this also doesn’t take into account a number of activities that we can consider industrial but aren’t counted in statistics because of delays in updating national accounts.
Our take is that industrialisation is increasing significantly in some countries, though not across the entire continent, and that we need to accelerate and aggressively.
What’s holding African industrialisation back? Is it insufficient infrastructure? Lack of imagination amongst policymakers? Trade treaties that constrain what governments are able to do?
It’s all of those but the important question is which of those comes first. I think the capacity for comprehensiveness that comes with an industrial policy is what is the most important, because if you tackle the issue from just a specific sector or enabler or dimension, you are never going to get your act together.
The countries that really move and industrialise always have the same recipe: a very strong state hand, but a state that is very smart, a state that is capable of introducing smart protectionism because crude protectionism is no longer available, a state that is capable of identifying the critical enablers like infrastructure, and a state that knows how to fund its policies whether through domestic resource mobilisation or astute borrowing.
In a recent ECA report, the World Trade Organisation (WTO), Bilateral Investment Treaties and Economic Partnership Agreements are painted as significant barriers to African industrialisation. Do these agreements just need tweaking or are they inherently detrimental for Africa?
I think African countries have embarked on signing stuff they shouldn’t sign, but too bad for them. The WTO is a consensus-based mechanism that would allow for stalling, so if Africans don’t get their act together to stall the things that are bad for them, then that’s an African problem not a WTO problem.
I think Africans have not negotiated well in a number of areas. They are not taking advantage of space they already have. And Africans are also distracted by negotiating bilateral trade agreements before they finalise their own. Who’s fault is it? It’s Africa’s problem and they need to address it.
Given enormous global power imbalances, do you think it’s enough for African policymakers to just be slightly smarter and more imaginative under the current system, or do you think there needs to be more fundamental change too?
The moral and political dimension I leave for the media, NGOs, and civil society, though we should certainly give them ammunition so their claims are evidence-based. Where we can really make a difference is in deconstructing some untruths that have long been masquerading as truths. That’s why we’ve been plunging into legislative issues, contract negotiations, and investment and trade treaties to try and have a more informed discussion. We think a lot of space exists in these that Africans are not using. After all, countries that are good negotiators do get a better deal.
In terms of untruths, take this race to the bottom towards zero tax for investors for an example. Does it attract more investors in relation to potential competitors? No. Typically countries that are well organised and structured and that offer investors a package of incentives that are not tax-based are more attractive than ones offering tax incentives.
When it comes to illicit financial flows, through which $50 billion leaves Africa each year according to an ECA report, do you think leaders will seize this moment after the #PanamaPapers to implement real reforms?
There are various dimensions to the debate, but because of Mossack Fonseca we are currently focusing on one dimension: namely tax jurisdictions and how multinationals are taking advantage of different loopholes to move from one jurisdiction to another in order not to pay tax.
Another dimension, however, is the competition amongst financial centres. The City of London, for example, doesn’t want to lose its prominence as one of the leading financial centres of the world. This means that they have to stay ahead of competitors and protect a certain number of very complex legislative dimensions that will appear from a regulatory point of view to be very strong and powerful, but at the same time be lenient where they know competitors could have an edge.
There is certainly now a strong public push for regulators to put a bit of order to things. And I don’t think the rhetoric is hypocritical, but how far they will go and how much political leaders will embrace actual change is another matter.