Chapter 9 A Panoramic View of Policies for Competitiveness in Manufacturing in Sub-Saharan Africa

International Monetary Fund
Published Date:
August 2001
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Competing Theories

To understand the role of manufacturing competitiveness in sub-Saharan Africa, one must distinguish between two competing theories: the neo-classical static theory of comparative advantage (STCA) and the dynamic theory of comparative advantage (DTCA). STCA is the theoretical underpinning of much recent work on the issue of manufacturing/primary goods competitiveness (Wood and Berge, 1997; Wood and Owens, 1997). That theory, buttressed by cross-sectional evidence in such studies, suggests that Africa’s comparative advantage, given its endowment, lies in exporting primary commodities rather than manufactured products. STCA thus assumes that endowment is exogenous in the trade relationship.

In contrast, under DTCA, endowment is endogenous. The new endogenous growth theory (EGT) can indeed be viewed as a subset of DTCA, for it concentrates on the endogeneity of technology via total factor productivity. It seems particularly reasonable to assume that endowment is mutable through the pursuit of appropriate policies.

Policies to Change Endowment

Policies that may alter endowment include those intended to reduce transaction costs, to improve the effectiveness of production factors and to enhance overall competitiveness. They may reduce transaction costs associated with, for instance, geography, infrastructure (physical and human) and the government regulatory environment (Elbadawi, 1998). Those designed to overcome the adverse impacts of geography include the promotion of regional co-operation, which might mitigate disadvantages such as being land locked. Governments, in partnership with private investors, could also undertake public-good investment that reverses the negative effects of deteriorating physical infrastructure. Investments in education and health would help reduce transaction costs associated with low levels of human capital. Also of great importance are institutional rules that streamline regulatory requirements and effect appropriate de-control.

Policies may improve the effectiveness of production factors through education and training (Biggs et al., 1998; Elbadawi, 1998) and openness (Hakura and Jaumotte, 1998; Adenikinju et al., 1998; Bigsten et al., 1998). Biggs et al. (1998), for example, find that firms’ investments in training have a direct effect on value added in African manufacturing enterprises, as shown by a pooled sample from Ghana, Kenya, and Zimbabwe. Similarly, on the basis of cross-country aggregate data on developing countries generally, Elbadawi (1998) observes a positive impact of schooling on manufactured exports. With respect to openness, Hakura and Jaumotte (1998) find intra-industry international trade relatively effective in the absorption of technology, as reflected in increases in total factor productivity. Similarly, in their country case study of Cameroon, Adenikinju et al(1998) observe that openness, measured by exports per employee, exerts a positive impact on value added in manufacturing; while the cross-country evidence of Bigsten et al(1998) suggests that exporting improves manufacturing-firm efficiency.

Other actions may enhance overall competitiveness through exchange-rate policy (Elbadawi, 1998; Sekkat and Varoudakis, 1998) and improving the institutional environment (Sievers, 1998). Both Elbadawi (1998) and Sekkat and Varoudakis (1998) find that real exchange rate (RER) misalignment reduces manufactured exports. The results for the volatility and levels of RER are mixed, however. While Elbadawi (1998) uncovers a negative effect of RER volatility, Sekkat and Varoudakis (1998) generally do not. Similarly, the observation of a negative impact of the level of RER by Sekkat and Varoudakis (1998) is not corroborated by Elbadawi (1998) for manufactured exports (Elbadawi does not report the level of RER in his estimated equations, but an earlier version of his paper showed the RER coefficient as insignificant).

Results based on country case studies also seem mixed. Njinkeu (1998) reports negative effects of both RER misalignment and variability on manufacturing exports for Cameroon. Results for Kenya, however, show the coefficient of RER as significant, but not that of RER misalignment or “transitory” RER (Mwega and Ndung’u, 1998). RER misalignment and volatility have also been found to exert negative impacts on GDP growth generally in sub-Saharan Africa (e.g. Ghura and Grennes, 1993). Thus, avoiding RER misalignment and volatility appear to be desirable policies.

Advocates of RER policy usually point to the potential desirability of having an undervalued currency in order to overcome the “hysteresis” effect of a limited capability to export manufactures (Elbadawi, 1998). The utility of actually manipulating the level of the RER as a policy variable may be questionable, however, especially in the long run, because of the likely prevalence of “beggar-thy-neighbour” and “fallacy-ofcomposition” realities. Why would other countries not also pursue policies that depreciate their exchange rates as well to gain competitive advantages? Would not eventual erosion of competitive advantage towards zero occur? Moreover, policies to depreciate exchange rates will likely have a cost in terms of accelerating prices. In short, it might make sense to ensure that a country’s exchange rate is well aligned and perhaps subject to as little volatility as possible, but policies that lead to undervalued currencies do not appear likely to be sustainable or desirable in the long run.

Improvement in the institutional environment now receives general acclaim as a major vehicle by which to enhance overall competitiveness. North (1990) emphasises institution building as the main source of modern economic growth, primarily through its ability to reduce transaction costs. The competitiveness index produced by the Harvard Institute for International Development, for example, shows the institutional environment as clearly one of the most important factors influencing competitiveness as perceived by groups surveyed (Sievers, 1998). Political stability and the predictability of policies and laws were among the most salient variables, according to this survey.

Others have also observed the importance of institutional factors in their econometric studies. Among those with positive impacts on growth are the rule of law (e.g. Barro, 1998), anticorruption (e.g. Mauro, 1995), and political stability (e.g. Fosu, 1992). The importance of institutional variables as arguments for the production function cannot be underestimated.

Two Unanswered Questions

Two unanswered questions persist. First, the raison d’être of this conference has been taken as given, namely the presumption that the lack of manufacturing competitiveness is a major impediment for Africa’s growth and development. While this may seem obvious from casual empiricism, it needs to be well grounded. As noted above, Wood and Berge (1997) and Wood and Owens (1997) have challenged such a premise, arguing that improving competitiveness in primary exports is the better vehicle by which to augment growth in most sub-Saharan African countries.

In contrast, Fosu (1990), for example, finds that developing economies exporting more non-fuel primary exports have improved their GDP growth little, compared with those with greater increases in their manufacturing exports. This finding is especially bolstered when the dependent variable is the non-export sector, which constitutes the bulk of sub-Saharan Africa’s economies (Fosu, 1996b). This view of the potency of manufactured exports would appear to provide some justification for concentrating efforts on manufacturing competitiveness.

Second, there is no free lunch. While it might be feasible to implement some of the suggestions above at minimal cost, many could not be acted on without substantial financing. Fisman (1998), for instance, finds a positive relationship between the availability of trade credit and production efficiency. In this regard, therefore, both domestic and international responsibilities appear.

The ultimate responsibility must, of course, rest with governments themselves. They must ensure responsible government, transparency, rule of law and security and respect for the constitution, all of which are conducive to respect for individual rights and the promotion of government partnership with the private sector. If meeting these domestic responsibilities involves substantial costs, then it is appropriate to ask, “Where is the beef?” Governments should reform themselves so that they can have the budgets to achieve their responsibilities. One must be realistic, however, about the political dynamics that could derail such efforts. Domestic policies themselves may be endogenous to these political dynamics. As Easterly (1997) has observed, policy formulation may depend on a nation’s ethno-linguistic makeup. If so, then there is an “elephant in the room” (Easterly) and domestic institutions might require external assistance to remove it.

The international community has responsibilities as well. They include the need to reduce the negative implications of the debt overhang for economic performance (Fosu, 1996a, 1999; Elbadawi, Ndulu, and Ndung’u, 1996). It is also important to ensure that a healthy relationship exists between donors and aid recipients to engender the best use of aid funds.

The ongoing AERC Collaborative Research on “Managing Transition from Aid Dependence in Sub-Saharan Africa” is of special relevance. The provision of regional infrastructure may require particular external assistance, given its public-good nature as well as the substantial costs involved. Above all, capacity building must be in place to foster ownership and sustainability of sound economic policies. My institution, the AERC, was established with the express purpose of developing and maintaining capacity building in policy-oriented economic research. This purpose has clearly been in view at this conference to share ideas on policies for competitiveness in manufacturing in sub-Saharan Africa.


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