Rodrik’s Triple Trap and Growth Prospects in Africa

Many factors lead people to write about heterodox economics in development. This has obviously been greatly informed by the Eurozone debt crisis and political fiasco of the past 4 years where the good old criticism of ‘the system, man’ has gone beyond simply blaming the excesses and transgressions of the financial sector and the superwealthy, to reach at issues of basic wealth distribution and equality and discrimination in society.

The attraction of the schools of thought which reject neoclassical economic models of growth and convergence to me is that they come with concrete policy tools and prescriptions, which are drawn in many cases not from an ideological contre-posture to the Washington Consensus or the like, but tied to concrete cases of economic success. The policies that East Asian countries like Korea, Japan and Taiwan used to develop since the 1950s have been used to highlight and guide policy advice for current developing countries. In short, my appreciation for heterodox development economics has been rooted in the suggestion that it can actually achieve economic development.

So when my favorite thinker in this line, Harvard’s Dani Rodrick, starts getting pessimistic, I get worried. Rodrick has given talks and put out papers in the past year or so looking at the shifts in labor among different sectors of an economy, the productivity of those sectors, and the rate of growth of the countries. The diagnosis, apparently, is bleak.

Developing economies, Rodrik argues, are facing a triple trap of economic structural change. Convergence in productivity certain sectors of manufacturing has slowed down compared to previous decades, meaning that transitioning an agrarian labor force to manufacturing will be less effective than before at increasing productivity. However, the service sector has its own pitfalls (a leitmotif of many development economists), mainly in the high barrier to entry that it has, presented by the higher skills needed to enter this labor market and the lower number of workers that it can absorb. And the third trap is that of primary-resource-led development. The argument here is also a classic- agriculture and mining are too dependent on demand + investment in commodities, or they are simply not sustainable. Besides which, the more high productivity sectors such as mining are invariable much less labor-intensive. Much of African growth over the past decade (stellar by the way) has been led by high primary commodity prices.

The outlook is somewhat grim. African countries’s real issue according to Rodrik seems to be a mix of their high urban informal sectors, which are apparently very unproductive, and the can’t go here, can’t go there conundrum.

I wonder though. Countries like China and Korea achieved high growth in part because they first saw huge increases in factor accumulation- they brought more labor into their manufacturing sectors, and they bought and used more machines- before productivity went up much (this is Krugman’s famous ‘perspiration not inspiration‘ argument (pdf) regarding East Asia’s development). African countries haven’t seen this sort of shift (at least not into the formal sector manufacturing jobs), so it is perhaps too early to say that manufacturing cannot lead to very solid growth. We simply haven’t seen much sustained manufacturing growth- not even in inputs, forget productivity- in African countries to be able to tell what factors would push it forward. The optimists on Africa will not stop talking about the rise of an African consumer. Imagine a growing manufacturing industry which benefits from rising costs of production in China on one hand and rising demand on the continent on the other.

To achieve this, it’s clear that the large informal urban economy (think Nairobi) would have to be addressed by policymakers. Finding way to drive labor into the most productive sectors of the economy (Rodrik’s opinion on the best way forward)? This isn’t the fight-the-comparative-advantage Rodrik I know. Imagine if you raise the productivity of these informal urban micro-firms and production centres, just a little, and the effect that might have. Imagine subsidy programmes which encourage larger scale production, social protection which drives people to larger firms, and skills and business education which makes individuals more productive.Let’s see if Dani Rodrik can start proning more solutions as well.

While I am by no means an optimist of the “Africa Rising’ type, the continent has not yet had its final word.

Special Economic Zones in Africa: What Lessons from China?

ChinafriqueThe government of Ethiopia announced earlier this month that the long-awaited and carefully planned Bole-Lemi Industrial zone (a Special Economic Zone, or SEZ) would finally be seeing light by the end of the fiscal year. The first government-lead economic zone of its kind in the country, it will cost an estimated 49 million USD to set up. And it looks like this is only the beginning; five more such zones are planned in the country. The trend is also visible a little to the south, in Tanzania and Kenya- also Nigeria. What could possibly be pushing this renewed interest in the Special Economic Zone, you ask? Because it’s not as though this is the first time (PDF-p.61) governments on the continent have warmed to the idea of SEZs. What makes the Ethiopian Minister of Industry so eager to tell the world that this new SEZ will be the “key for [their] industrialization”? Why the Chinese of course.

The Chinese?

Okay, so it’s not just the Chinese. But if you look at who is funding many of the new SEZs popping up in African countries, or if you look at the countries who are hosting conferences on SEZs, those who are in the boardrooms and Prime Minister’s Offices, providing the policy advice, giving the lessons learnt and helping to draw up the master plans, you’ll find a likely group of suspects: China, Singapore, Hong Kong, and Japan and Korea (to a slightly lesser extent).

You’ll find no shortage of people to explain to you why this is exciting, not the least of who work in the World Bank. And they are right: the twist on South-South cooperation that is this African SEZ development in partnership with Asia has some great benefits that were not there beforehand. Take China. Not only does it have the experience setting up over 100 SEZs in its own country, Chinese politicians are playing for keeps, showing how serious they are about producing actual sustainable results in the zones they manage (Oh yes: you see, in addition to helping states set up SEZs, China has already set up a number of its own SEZs on the continent, run mainly by Chinese capital interests). Plus the Chinese are in large part subsidizing the establishment of these zones, making them more accessible to governments who previously who not have ventured that far into exploring this type of economic tool.

The real gains from partnering with East Asia

But (I know you felt this coming) all is not cotton candy and unicorns. This opportunity of learning from the East Asian development experience in this particular area is a real one, but one must be oh so careful when going down this road. After thinking it over, I’ve come to the following conclusion: the greatest benefit from East Asian collaboration on SEZ development for African countries is not the money they get to make the Zone, and it’s not the capital they attract. It’s not even the vaunted technology transfers that always make the list of plusses. The greatest benefit is the actual technical advice, the capacity gains one gets from being with a partner on the ground and seeing how they go about doing things. It’s the gains in policy-formulation, in learning literally how you write up a new law, who the best person or company is to talk to about X subject, and so on. You don’t need to copy your partner 100%, but you need to see what they are doing, who they are talking to…

Of course, the potential is there for gains from SEZs for the economy which come from the SEZ itself- that’s after all one of the reasons it’s being built. Chief among these are more competitive industries (ideally able to compete in global markets i.e. to export), technology transfers, skills acquisition, technology transfers, and so on. The expected benefits are certainly there. But the more one looks at it, the more one sees that the value from these gains is pretty ephemeral compared to the possible value of the technical know-how and policy-savvy that I mentioned earlier. This is certainly not the main line of reasoning that one hears in the papers, however. The real value of the partnership is not where it initially appears to be.

‘Leading Dragons’ is not enough

Partnering with Asian countries, especially with China, often leads to the following line of reasoning. Since wage rates in China are climbing, one can anticipate a very substantial shift of manufacturing jobs out of the Middle Kingdom and into the backyard of lesser developed Southeast Asia and Africa. Establishing SEZs with Chinese cooperation is a means of making sure that African economies get their share of this so-called ‘Leading Dragon’ effect.

But this is dangerous thinking. For one, this phenomenon isn’t a sure thing; it’s contingent on rising wages in China, but no one is sure if wages for these unskilled manufacturing jobs will keep rising at the same rates- imagine a slowdown in wage increases which lasts for a good 10 years. Where is your massive influx of manufacturing jobs now? The second point is that even if this is the case, and the demand for labor in manufacturing industries (along with the requisite relocation of said industries) actually happens, African countries still find themselves in a race-to-the-bottom competition. Without concrete gains in productivity, without harnessing the technology, then all these economic opportunities are little more than passing fancies; one cannot drive a shift in economic structure on another country’s costs of labor.

As it is, many of these Chinese-backed export zones risk becoming enclaves of special economic activity and subsidies, in unfair competition with the host country’s other domestic industries. What is more, in many cases the leadership/managerial roles in running these zones are left exclusively to the partners- that is, out of African hands. Who will ensure that the technology transfers will happen properly, that skills will be acquired, and that in short, the venture does not just become another ill-fated economic experiment? As it stands, the Africans run the risk of missing the possible high-tide brought on by the Chinese.

The East Asian Miracle- Ignored

The real value of these Africa-Asia SEZ cooperation initiatives is not, I said, where it initially appears to be. This is also because a very partial and partial (this play on words sound better in French: partiel and partial) account of how these Asian countries have used SEZs in their development seems to be privileged when it comes time to explain the role of these economic zones in East Asian countries’ development. These conferences on the subject that are held seem to drive past the larger development experience and come right down to the point: ‘How did China/Singapore succeed in establishing and managing its SEZs?’

But when you look, especially in the Chinese case, at the history, you find that it tells you more than what is being said today (it seems so at least). Case in point: Chinese establishment of SEZs was the result of and a response to gains in factor accumulation (mostly capital, some labor) as its economy enlarged, not the other way around. Now, it’s true that with 7-10 million people in Africa’s least developed economies entering the job market each year, there is a chance that smart, adaptive policies and the right type of capital inputs can bring about large economic expansion. But this isn’t really what the Chinese did, nor does it take the lesson that the Chinese example is giving.

Then there is the standard argument that the likes of Dani Rodrik have been giving against the export-led model of growth, which applies in part here too: for the East Asian Tigers, first came gains in productivity, then exports-oriented industrialization, not the other way around. Exports played a smaller role than often thought in the actual economic takeoff of the likes of Korea and Taiwan. Both these points come to the same (cautious) conclusions: 1) SEZs are the result, not the start, of a certain economic process, and have been effective in Asian countries which have already seen important gains in capital and labor inputs. 2) Economic zones have led to globally competitive domestic industries (mostly) after these industries have gained in productivity (usually through gradual competition with industrialized countries’ exports in the domestic market).

It is not clear at all that this same dynamic is taking place in East Africa. Rather, the SEZs appear to be treated as the solution in and of itself to the question of factor accumulation and total factor productivity.

The Most Important Factor

I attended a talk by Japanese professor (and industrial policy scholar) Kenichi Ohno last summer in Korea, and he said something which really gave me pause. He said that, in the process of advising the Prime Minister of Ethiopia’s office on how to set up Special Economic Zones, he received what he considered to be the best question, from some Ethiopian official. It was something like: ‘Can you show us an example of a well-written proposal? What should go in it? What does the Table of Contents look like?’

This was the best question because it was precisely with information like this, Ohno said, that the government would build the expertise necessary to successfully manage a Special Economic Zone. Once this know-how is transferred, no matter the partner -be it the Chinese, the Japanese, the Europeans, or other Africans- Ethiopia would have the tools necessary to achieve their goals- whatever those be. It struck me as a very true point. The know-how, the technical skills, the transfer of concrete experience goes miles beyond the ideology, the money, the ‘comprehensive development experience’ and the pitfalls of debates that inevitably turn to a meaningless merry-go-round of “developmental state or free market? Import substitution or export orientation?” etc.

It remains to be seen how well this know-how and these tools will be transferred and used by African countries, but this is without a doubt the richest experience that can be gleaned from these new SEZ partnerships.

Korean Aid: from ‘Development Experience’ to ‘experience development’

I have recently changed jobs, leaving the ‘scary D.C. organization’ I was at for the more moral-hazard-free (haha) shores of the United Nations here in East Africa. I am working on implementing a project funded by KOICA, the Korean aid agency. The past few weeks have been a time of adjustment (to the new country, to work) and my first discovery of how Korean aid operates on the ground. It is too early to come to any conclusions, but safe to say that there are many interesting questions and doubts to follow up on. I look forward to doing this as I move along in my writing here.

So, the ‘new’ donors. Or the ‘once alienated, slowly being brought into the fold’ donors. Japan. Korea. Brazil. South Africa….others.

There is something fascinating about countries that have paid their dues to the World Banks and IMFs and then turned around to become worldwide donors, regional powerhouses, or even to add a brick or two to the mosaic of countries and agencies with their own little niche in the world of international cooperation.

The most fascinating element is probably how these countries use the knowledge and lessons, the know-how gained throughout their history in their development programmes. Some countries are more high-profile about it than others. Some countries prefer sticking to policy advising, others like very technical advice, others still prefer direct, on-the-ground action. But there is one thing in common with all ‘development experience’-related programmes from new donors: they are all new.

Take a country like Korea. I will spare you the story behind Korea’s economic development. But it was just in 2010 that Korea joined the OECD’s Development Assistance Committee, and it was just two years ago that its Knowledge Sharing Program got off the ground. Everything is still in planning. Here and there, scattered in Southeast Asia and Africa, one can find Korean-aid funded ‘pilot projects’ with grand visions of scaling-up once they get the ‘Korean development model’ down pat (good luck).

Because all of these initiatives are new (yes, you can also find older initiatives as well, the best example of which is Brazil’s social protection/school feeding know-how being exported), and because the road ahead is not paved, there is often a lack of clarity in how one gets from the experience of development to the packaging of an aid/development programme.

I used to be a big fan of discourse analysis, so if we order things by ‘frame’, we get something like this:

  1. The development itself. This is the string of policies, the events, people and decisions that drove economic growth and that produced whatever result we see. Needless to say, this is an ephemeral concept, and not really analyzable in and of itself, if not to make a simple statement: Korea’s GDP went from X to Y in A years.
  2. The perception of the development experience. How do countries order and understand the course of their economic and social, political and cultural history? How do they perceive the ‘success’ and ‘failures’ of policies after the fact?  To what do they attribute it? We can add to this one more dimension, that of ‘who’? Who perceives a policy as a success? The state? Civil society? Scholars within the country? This is in my mind one of the key points that will inform what road new donors’ aid (and especially Korean aid) goes down over the next decades.
  3. How these countries’ different actors make the leap between their understanding of how their country developed and their ‘aid philosophy’. To what are development successes attributed, and do related policies form part of the plan when the higher-ups decide where the money goes? Are there countries that retain one discourse about their own development and employ greatly differing or non-sequitur aid allocation strategies?  (The short answer, from what I know of Korean aid, is yes)
  4. The packaging of the development experience. That is, how aid-related ideas are perceived to travel in space and time. What is seen to travel well and what is not. There may also be an interesting variation by region (ie. Different policy advice, different programs etc. depending on the region the recipient country is in, and not depending so much on similarities in economic, political or social structure).
  5. The actuation of the development experience. The concrete policies and programs that come out of the ‘packaged development experience’ and their effects. The idea, when one hears talk about a ‘model’ (the ‘Korean model’, and so forth) is that repeating the same experiment will lead to fundamentally similar results. To my knowledge there has been very little literature looking closely at this question. (Should you know of any though, I would be happy to hear about it!)

Emerging Africa: More Questions

View from the Heritage Hotel, Dar es Salaam- Seyemon

View from the Heritage Hotel, Dar es Salaam- Seyemon

The tone was slightly reminiscent of an afro-pessimism/afro-optimism debate, but the January 11 rebuttal article of Rick Rowden’s Foreign Policy piece certainly makes some good points.

The interesting framing of the problem, (à savoir, ‘going the way it is going and pursuing the path it is on, will many countries on the African continent achieve more economic development?’) is in terms of what African countries do with the resources they have.

The authors of the book The Fastest Billion: The Story Behind Africa’s Economic Revolution make five big arguments for progress on the continent:

  1. Social and economic policies in many African countries are seeing a shift akin to that which took place in East Asian countries before their ‘takeoff’
  2. African countries are doing (and will keep doing) better at reinvesting the gains from agriculture and primary goods exports into infrastructure, services and other higher value-added production which will drive production in the future
  3. Rising wages in China and other Southeast Asian countries can cause a renewed interest in African countries for labor-intensive production
  4. Education levels are also rising on the continent, which will spur on the advent of industrialization and manufacturing
  5. Ease of doing business indicators have been getting better, corruption as well, and this is creating a more favorable environment for growth

After reading this I simply must get my hands on this book, The Fastest Billion. There are simply too many questions that I could not find answers for in the short Foreign Policy article. The book, I think, should be great for providing paths to the following questions:

–          Is agriculture really doing all right? Are the African countries in the so-called middle income stage of growth being supported by the agricultural sector? The authors mentioned the importance of agriculture as a basis for industrialization in Korea; is this the same case in African countries? Niger and Gabon are two countries with interesting plans to reduce reliance on food imports- is this type of state-led program the way to go?

–          Is it really easier to do business on the continent? There might be some improvement over the last 5 years in African countries’ scores on the World Bank’s Doing Business Index, but are these the result of steady improvement in policies? Here I surmise the answer will vary vastly among countries. Rwanda’s indicators for this year are leaps and bounds better than just four years ago, and are driven by a government dedicated to change. But so many countries are not showing much steady progress, while they also face trouble in corruption indicators.

–          Are resources being properly reinvested in value-added industries? There is much talk as to the extent to which these resources need to all be funneled into new industries- they are not the end-all be all of economic development, and first ensuring a population’s basic needs are addressed makes more sense on so many levels. But where are the oil dollars and copper and bauxite dollars going? I don’t have nearly as good an idea of this as I would like.

–          Are African countries really on track to absorb higher value added production, successfully move up global commodity chains and mobilize their population’s rapidly growing education? My most vivid memory over the last year were the protests in several countries by what were essentially overeducated youth, who invested precious years in study only to find that there were few, if any jobs available for them in their countries. Successes in primary education in Africa are becoming more and more known, and many have pointed to tertiary education as a sort of new education frontier for many countries. But how well is this skilled labor being absorbed by these economies? I really want to know.

For now there are only questions.

But the beginning of an answer will probably come more from looking at individual countries, as opposed to trying to rationalize trends across the great diversity that is the Continent.

Chris Blattman

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