Race to the Next Income Frontier
Chapter

Chapter 3. A Review of Senegal’s Industrial Framework

Author(s):
Ali Mansoor, Salifou Issoufou, and Daouda Sembene
Published Date:
April 2018
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Author(s)
Mor Talla Kane

Introduction

There is no single best emerging market model. In the course of its development, each country follows its own path based on its human, economic, and natural resources and drawing on its capital as a civilization. However, whatever path it takes, every emerging market has put industry at the heart of its economy’s structural transformation. The dynamic approach therefore is often indistinguishable from that of the performance of the manufacturing sector.

It is unanimously acknowledged that the industrial sector has the power to affect labor productivity; raise the level of training; improve the quality of both human capital and productive capital; stimulate the productive exploitation of natural resources; increase exchanges between and within sectors; enhance and disseminate scientific, technical, and technological potential; and so on. Generally speaking, industry is the engine driving the economy of those countries today that are experiencing the greatest growth and creating the largest number of jobs.

In Senegal, therefore, industry could make a substantial contribution to increased productivity, increased agricultural sector output, and better economic use of the country’s resources, hence the interest in giving it a pivotal role to play in the implementation of the Plan Sénégal Émergent.

Apart from the New Industrial Policy initiated in 1986, with its somewhat mixed results, Senegal has not managed to prepare and conduct a real industrialization policy. There have admittedly been a number of initiatives, including the Industrial Redeployment Policy, but even this last example was a policy lacking in visibility as a result of the state’s inability to drive the process. That failure was underscored in the diagnostic undertaken for the Plan Sénégal Émergent, one of whose aims is to make Senegal a regional hub for logistics and industry.

An Industrial Framework Dominated by Small- and Medium-Scale Industry

Economic output in Senegal is distributed as follows: agriculture accounts for 18 percent of GDP, industry 24 percent, and the services sector 58 percent. The industrial sector consists mainly of agro-industry and electricity generation. The bulk of the country’s industrial enterprises are concentrated in the industrial zone in Dakar. The sector’s major challenges are still the small size of its industrial units, high factor costs, underutilization of production capacity, and limited, costly access to financing for the private sector comprising Senegalese citizens. In addition, the country has been unable to successfully pursue decentralization, a policy that would allow it to exploit the enormous potential in the regions and mitigate the stifling concentration of enterprises in and around Dakar.

In 2015, Senegal’s industrial fabric comprised some 1,270 enterprises, distributed as follows: 45 percent in the food industry, 12 percent in the chemicals industry, 4 percent in energy, 3 percent in extractive industries, and 36 percent in manufacturing. The industrial park (all sectors included) is dominated (92.5 percent) by small and medium-sized enterprises. There are only 80 large enterprises. Over 2009–13, the food industries accounted for more than 36 percent of the industrial park, compared with 13.6 percent for agriculture, livestock, and fisheries-related enterprises; 10.4 percent for mechanical engineering enterprises; 9.4 percent for paper and cardboard enterprises; and 8.6 percent for chemical industry enterprises.

As shown in Figure 3.1, Senegal’s economic fabric is dominated by small-scale enterprises (45.8 percent) and medium-scale enterprises (39.4 percent), with just 10 percent of the country’s firms being large enterprises (Agence Nationale de la Statistique et de la Démographie [ANSD] 2015).1 There is a vulnerability in the economy’s being so dominated by small and medium-sized enterprises, and it reflects the relatively fragile state of Senegal’s industrial fabric, as confirmed by the diagnostic study under the Plan Sénégal Émergent. That study reveals that the industrial base is substantially fragmented, with production units of relatively small size and a limited number of large players in a structuring capacity. Moreover, financing for these small and medium-sized enterprises is still a serious challenge, owing to a lack of diversified, innovative financial instruments and mechanisms, such as leasing, venture capital, and low-cost or social funding (fonds de solidarité) to support private investment growth. Currently, small and medium-sized enterprises account for only 16 percent of Senegalese banks’ portfolios (ANSD 2015).

Figure 3.1.Distribution of Distressed Enterprises by Size

Source: Private Sector Support Directorate, Senegal.

There is certainly nothing unusual about this situation, when we consider another characteristic of Senegal’s industrial sector: its excessive indebtedness due to the fact that its low profits limit the possibilities of financing through its own funds. According to Senegal’s National Agency of Statistics and Demography, the indebtedness ratio, measured as the ratio of total debt to total liabilities, averages 78.3 percent for the sector as a whole. The end result is that industrial firms are mostly financed through borrowing, a state of affairs that is particularly critical among small and medium-sized enterprises.

An analysis of the structure of the debt of small and medium-sized enterprises reveals that it is mostly short term, meaning most of the borrowing is undertaken to finance operating costs rather than investment. Financing thus remains one of industry’s chief concerns. As is true in many low-income countries, the small and medium-sized enterprises’ difficulties have to do with working balances and cash flow, access to lines of credit, financing for investment, the exorbitant cost of credit, exacerbation of the level of indebtedness, high production factor (such as energy) costs, and unfair competition from the informal sector (CCIAD 2016).

The high cost of energy in Senegal is one of the main constraints for industries and enterprises of all kinds and sizes, and this factor is closely related to the country’s competitiveness. Clear progress has been made in energy distribution in recent years, with a substantial reduction in power outages that had plagued industrial production for some time. However, there is scope for further efforts at lowering the cost of energy, which can represent up to 60 percent of the cost of products in the more electricity-intensive industries.

In summary, Senegal has a small and fragile industrial sector, characterized by the near total absence of very large enterprises, insufficient borrowing capacity (which is particularly alarming in the case of small and medium-sized enterprises), and substantial concentration on a small number of exportable products. Despite all of these challenges, Senegal has a base on which it can build an industrial policy, a mechanism for improving its business environment, sizable agricultural resources and mineral reserves, a geo-strategically advantageous position, a young and relatively well-educated population, a rehabilitated macroeconomic framework with increasing economic growth rates, an expanding transportation and telecommunication infrastructure network, and membership in a relatively dynamic economic region.

Industrial Policy Paths from the New Industrial Policy to the Industrial Redeployment Policy

After it gained its independence, Senegal continued to rely on the incipient industrialization model of the colonial period, which was based on making the most of its agricultural, fishing, mining, and other output. Unlike the other countries in West Africa, it had an industrial base with enterprises geared to satisfying regional market demand. On its own initiative, the state quickly acquired an industrial base focusing on a few sectors in agro-industry, chemicals and petrochemicals, seaside tourism, and financial institutions.

In the agro-industrial sector, several enterprises devoted themselves to developing agricultural produce, fishing, and canning (LESIEUR, the Electrical and Industrial Company of Baol [SEIB], and AFRICAMER) and to livestock, leather, and hides (BATA), to name only the largest ones. Among the success stories, the textile sector became one of the best integrated in sub-Saharan Africa, with two units (the Cotton Industry of Francophone Africa [ICOTAF] and SOTIBA-SIMPAFRIC). In the chemical and petrochemical sector, the country had enterprises at an international scale, such as Industries Chimiques (ICS) in chemicals, a refinery (SAR), and a cement manufacturing enterprise (SOCOCIM), with SAR and SOCOCIM each supplying several countries in the region in their respective areas.

Finally, Senegal was quick to develop its tourism industry, establishing large global groups to exploit its coastlines and position Dakar as an international center for congresses and conferences. To finance its development and the industrial sector, the government built strong institutions, such as Banque Nationale de Développement du Sénégal (BNDS), SOFISEDIT (tourism), Union Sénégalaise des Banques, Banque SénégaloKoweitienne, Banque Commerciale du Sénégal, SONEPI (small and medium-sized enterprises), and so on.2

In the absence of a dynamic private sector, the state was the chief initiator and facilitator of that tourism-related industrial hub, which it protected from international competition. The tariff barriers erected against the entry of products from third-party countries thus enabled Senegal’s nascent industrial enterprises to survive for several decades. However, the limitations of that policy quickly became apparent when Senegal, whose economy relies heavily on agriculture, was confronted with its first series of droughts (in 1970, 1972, and 1973) and then with the oil crisis, which depleted the state funds that until then had been used to support incipient industries. The country was subjected to a series of structural adjustment plans, which were destined to put an end to both government subsidies and import substitution policy. The government was required to divest itself of almost all of its industrial sector portfolio, most of which was dismantled in the wake of the shift toward more liberal economic policy. Accordingly, much of Senegal’s industrial base was privatized, restructured, or liquidated.

The New Industrial Policy

With Senegal’s adoption of the New Industrial Policy in February 1986, tariffs were dismantled, and all other forms of protection for the country’s industrial sector were eliminated. Manufacturing was exposed to international competition and was forced to engage in efforts to export products with higher value added.

The New Industrial Policy was guided by the following principles: less protection through tariffs, elimination of nontariff protective barriers, a more competitive Senegalese industrial sector, promotion of high-value-added products, and a rapid revival of manufacturing. In the end, at the behest of development partners, the government abandoned sectoral approaches to development, and industrial development in particular, in favor of an across-the-board improvement of the business environment. This shift in strategy precipitated the closing down of entire segments of the productive system, which were ill-prepared for such a brutal weaning. Between 1993 and 1998, the New Industrial Policy is thought to have brought about the loss of 5,000 jobs in the country and the closure of 14 percent of Senegal’s industrial enterprises.

It should be pointed out that, contrary to the initial New Industrial Policy plan of action, only the policy’s tariff-dismantling measures were actually implemented, which in the end reduced the policy to a simple fiscal reform. Nevertheless, despite its disastrous consequences for the country’s industrial framework, which were mainly due to its faulty implementation, the New Industrial Policy document turned out to be Senegal’s best-written industrial policy paper. It made possible an analysis of the entire productive system with a depth that would not be found in any subsequent studies.

The Industrial Redeployment Policy

After a long pause, followed by a diagnostic assessment of industrial policy between 1986 and 2001, in 2002 the Senegalese government adopted the Industrial Redeployment Policy and then, in 2004, the Plan of Action that went with it. The Industrial Redeployment Policy can be broken down into three levels:

  • Spatially, it sought a rebalancing of the country’s industrial establishments.

  • By sector, it pursued a reorganization of the productive system and its reorientation toward new growth sectors.

  • Professionally, it promoted the managerial capacity building needed to promote competitive, high-productivity enterprises.

The goal was to endow Senegal with a tightly knit, modern, dynamic, and competitive industrial sector, delivering high-value-added industrial products thanks to access to technologically advanced activities, and so on. That was to guarantee the country’s industrial take-off, optimizing the industrial sector’s performance indicators and its weighting in the national economy from a stagnant 16 percent of GDP in 2004 to at least 20 percent of GDP by 2020. To achieve that goal, the Industrial Redeployment Policy was supposed to focus on “upgrading the industrial sector” and “endogenous industrial development.”

Unfortunately, like the New Industrial Policy, the Industrial Redeployment Policy was never accompanied by the supporting measures envisaged in its Plan of Action, which prevented it from achieving its goals of reviving a sector that in fact had markedly declined. In contrast to the objectives proclaimed in the policy, since it was implemented, the Industrial Redeployment Policy has underperformed: industrial processing of natural resources remains low; there has been a leveling off or even a decline in the workforce for several years; and there are but paltry results to show for industrial decentralization. Dakar alone continues to account for almost 90 percent of all industrial enterprises in Senegal, 70 percent of value added in its industrial sector, 75 percent of permanent industrial jobs in the country, and more than 75 percent of wages paid in the sector.

The Industrial Redeployment Policy has been unconvincing for a private sector that seems worryingly indifferent to it, whether because the private sector was insufficiently involved in the policy’s development, or because the policy was poorly communicated, or because the private sector’s priorities lie elsewhere.

Finally, the country’s industrialization has come up against a failure to grasp the dynamics of sectoral change, the obstacles that sectors face, and the sectors’ potential. At times there has been a failure to discern the weighty trends shaping industry worldwide, which determine the directions it can take. In short, there has been an inability to anticipate, and a lack of forward-looking thinking.

The Plan Sénégal Émergent

Unlike the New Industrial Policy and the Industrial Redeployment Policy, the Plan Sénégal Émergent is not an exclusively industrial policy. It serves as a national benchmark for economic and social policy that, when it refers to industrialization, takes into account lessons learned from the previous policies, and it discusses the outlook for the future.

The plan seeks to increase industrial value added, that is to say, the industrial sector’s contribution to growth, by substantially improving and diversifying exports, enhancing the business environment, and expanding access to production factors (energy, credit for small and medium-sized enterprises, and so on). It aims to turn Senegal into a regional logistical and industrial hub and to develop three integrated industrial platforms, mainly in the agro-food, textiles, and construction materials sectors.

Several interesting initiatives have been pursued to render the country more attractive to investors. Be it with regard to industrial platform projects, new-generation interconnected infrastructure, or the decentralization of processing activities, the Plan Sénégal Émergent opens up new industrialization prospects for Senegal by improving the physical ecosystem in which industries evolve. Thus, learning from the failures of the regional industrial free zone and industrial development corporations (which, with the exception of Dakar, have been disappointing), the establishment of special economic zones and industrial parks prioritizes improvement of the industrial environment thanks to a steady supply of integrated services. Surveys have been conducted among numerous industrialists who, in recent years, have opted to relocate to other countries like Côte d’Ivoire and Ghana or else have just carried out extension projects there. Their responses document the shortage of sites in Senegal with the right facilities and the greater openness of public administrations in those other countries.

Like the industrial parks, the special economic zone project was supposed to be a response to those concerns. The same concerns had also prompted the Diamniadio logistical platform project, initiated in connection with the first Millennium Challenge Account (MCA) compact but never carried out.

By combining a new generation of infrastructure projects with the opening up of production zones, thanks to the construction of a well-designed and diversified transportation network throughout the national territory, the Plan Sénégal Émergent is aiming for both effective industrialization and spatial balance. Naturally, the industrial platform projects, the new-generation interconnected infrastructure, and the decentralization of processing activities will need to be supplemented with tax and commercial incentives to attract investors to the plan’s 10 specialized and labor-intensive poles in the textiles, agri-food, household products, electronics, services, aeronautical, and other sectors.

Finally, the Plan Sénégal Émergent is to be commended for anchoring industry in agriculture. That should ensure significant bandwagon effects for the overall regional economy. By according this incubator role to agricultural poles that are competitive and integrated into value chains with high-value-added potential in the production regions, the plan has the ambition of making agriculture the engine of industrialization.

However, for its industrial policy to succeed, the country has to overcome its greatest weakness, which is the difficulty it has in charting a course and sticking to it. After the plan has been formulated, the required efforts must be made to go the full course and complete the reforms, even those most difficult to achieve.

The Industrial Challenge and the Informal Sector

With the explosive growth of its services sector, Senegal appears to have embarked on a unique course in its development process, going from a predominantly agrarian to a tertiary economy, skipping the industrialization phase (IMF 2017). The country’s economy is now characterized by the parallel existence of a formal sector and a large informal sector that includes major importers. In addition to facing high factor costs, low productivity, difficult and costly access to credit, and so on, Senegalese industry has to contend with unfair competition from massive imports of (often Asian) products that circumvent trade regulations. A number of studies, including the Plan Sénégal Émergent diagnostic, have focused on fraud and import competition, which are among the main factors impeding the development of local industry. In 2014, the National Federation of Industries of Senegal expressed concern over this problem, in a memorandum submitted to the Senegalese authorities, in connection with sectors such as the footwear industry, electrical equipment, school supplies, and vegetable oils, to mention only a few. According to recent estimates, turnover in these industries reportedly declined by 35 to 60 percent over the period 2009–14 as a result of anticompetitive practices, including fraud, smuggling, and dumping.

The scope of fraud may be illustrated by two sectors: vegetable oil and textiles. In the case of vegetable oil, a 2015 study on oilseed oils sponsored by the National Confederation of Employers of Senegal (CNES) found serious anomalies in determining the customs values declared for imports from Indonesia, Malaysia, and Turkey, among other places (CNES 2015). It was also found, in the examination of customs statistics, that certain importers have made large-scale use of tariff positions that no longer exist in any of the versions of the current harmonized customs nomenclature system, in order to undervalue their charges. Imported cooking oil, priced at as little as half of the levels on the world market, has almost totally destroyed the entire oilseed industry, which is now down to one enterprise, as compared with six a few years ago (CNES 2015).

Senegal’s textile industry is the second case illustrating the scope of fraud, and its plight is typical of sectors that, despite great potential, have paid a heavy price for total, uncontrolled liberalization. The textile sector had been perfectly integrated during the 1970s, with producers ranging from fiber production to apparel, but it was destroyed by massive imports, particularly second-hand clothing and the pirating of flagship products such as Wax, which in the past were exported to the United States and Europe. Moreover, customs statistics derived from the National Agency of Statistics and Demography’s Enquête sénégalaise auprès des ménages [Household Survey] (ESAM) revealed that annual fraud involving Wax represents 28.8 percent of total annual consumption and corresponds to approximately CFAF 35.3 billion per year (Mbaye 2005).

In many sectors, the decline in industry is largely attributable to the scissors effect between fraud and high production costs. We must also add to these considerations the tax burden. This is substantially borne by the formal sector, which contributes more than 95 percent of the country’s tax revenue, as against 3 percent from the informal sector (Mbaye 2005).

However, we also observe interesting migration patterns in which players in the informal wholesale import sector migrate to industry. During the past few years, the informal sector has provided many of the new captains of industry, who have succeeded in migrating after spending several years developing their skills in wholesale trade. Many of those recent converts to industry have been quite successful in sectors that can be relatively complex or capital intensive.

Intense domestic competition in the informal wholesale sector has encouraged some traders to invest in industrial sectors in which they control the product marketing chain. Accordingly, the informal sector plays a twofold role, both exercising “predation and renewal” of industry and serving as an incubator for future entrepreneurs. In addition, if the informal sector can provide a cohort of industrial operators, as we are seeing happen more and more frequently, it becomes important to examine this sector more seriously than in the past. This will be valuable for gaining an understanding of the informal sector’s internal dynamics against the backdrop of the structural transformation of the Senegalese economy, within which the sector plays a dominant role.

To summarize, industry is subject to two major constraints: high production factor costs and unfair competition from the informal sector (such as fraud, underinvoicing, and dumping). Without going so far as to adopt the same protectionist policy that has made it possible for today’s emerging market economies to prepare their industries for international competition, domestic industries must be protected from the devastating practices of the informal wholesale import sector. In practice, the community protection measures provided for that purpose are generally ineffective, either because they are circumvented or because they are not a deterrent. Some industrial operators believe that the main reason for the closure of enterprises and divestiture is this lack of protection against unfair practices, which encourages massive, uncontrolled imports of competing products.

A Public-Private Partnership to Achieve an Industrial Goal

The Plan Sénégal Émergent outlines a clear vision and precise goals for the industrial sector. However, to overcome one of the government’s weaknesses in connection with the operational problems the New Industrial Policy and Industrial Redeployment Policy have encountered, it is essential for the government to chart a course and to stay on that course. It would be desirable to maintain an inclusive approach, in which the private sector is involved at every stage, in order to build the consensus required for the industrialization policy to succeed.

Accordingly, for the Plan Sénégal Émergent to succeed, (1) public administration needs to be mobilized, (2) consensus has to be consolidated, (3) a support mechanism needs to be reconstructed and streamlined, (4) the education system needs to be reinvented, (5) subregional opportunities need to be seized, and (6) strategic steering mechanisms and a long-term industrialization project need to be pursued.

Public Administration Needs to Be Mobilized

For its industrialization policy to succeed, Senegal needs a stronger administration resolutely committed to a dynamic virtuous circle of renewal and development. The administration must be capable of pushing in-depth reforms through to completion in an ongoing and structural process. The country has the good fortune to possess a strong, high-quality public administration; this public administration now needs to be sensitized, motivated, and engaged in making sure that the Plan Sénégal Émergent’s vision for industry materializes.

In emerging markets, the private sector has been able to benefit from an encouraging environment spurred on by the agility, good governance, and commitment of civil servants at all levels of administration. This has been key to successful public policies. Malaysia is a particularly interesting case because of the special role the government and its administration have played. Under the leadership and vision of Mahathir Ibn Mohamed and his Wawasan 2020 [Vision 2020] program, the country was transformed over the period 1981–2003 from one based on a primary sector economy to a production area for high-tech and telecommunications products. In Korea, the expansion of strong, competitive industries based on chaebols, conglomerates of Japanese-inspired enterprises, owes much to the voluntarist policy similar to the Japanese model of Park Chung-hee (Amsden 1989). The same state voluntarism is found in Taiwan Province of China and Singapore (Schein 1996). The concept of the “developmental state” has often been used to characterize this type of public policymaking and implementation under substantial impetus from the state (Evans 1995).

Accordingly, while departing from time to time from liberal precepts, the state in Southeast Asia was the most effective agent of industrialization policy in countries that would go on to become emerging market economies. It was the driving force of development in all sectors of the iron and steel industry, infrastructure, ship construction, electronics, and banking. Moreover, one of its priorities was to push to build a critical mass of national champions capable of standing up to international competition (Kateb 2011) and to help them in their strategy of international expansion.

Ultimately, the success of emerging markets cannot be explained without reference to the special role traditionally played by the state, particularly in Asia and to a lesser degree in Latin America (Kohlia 2007). In the countries in these regions, a genuine revolution in the mentality of a formerly omnipotent public administration has made it possible to create a dynamics of development led by an enterprising private sector aided and abetted by government services that are now more receptive to the business world. Thanks to that, their firms have been able to transcend the domestic market by raising their competitiveness and productivity, producing an increasingly sophisticated range of products to capture demand from global consumers. Their emergence has unfolded with the support of administrations that opted to pursue a proactive approach, a clear vision, and strong ambitions to forge a robust and powerful industrial sector.

Consensus Has to Be Consolidated

Senegal has a tradition of dialogue within the administration that goes back many years. Consultation processes take place at different levels, beginning with the sector ministries, where technical issues are concerned, and with the prime minister or head of state for cross-cutting and general issues. These processes have made it possible to involve the private sector in the development of certain tax or customs reforms, to mention only the most common instances. By contrast, this dialogue has been insufficient when it comes to sharing strategic guidelines. Although strategic guidelines are the purview of the state, better dialogue regarding them could help to forge a strong consensus around a shared vision.

Alongside this technical consensus building, Senegal’s Presidential Investment Council has, since 2002, become the framework for a public-private dialogue initiating and proposing reforms for improving the country’s business environment. The council’s multidisciplinary and multistakeholder working groups have been at the origin of the measures that have helped improve Senegal’s Doing Business rating. Through the facilitation of a quality dialogue between civil servants and the business model, consensus has emerged on many issues, making it easier for the administration to accept reforms.

Despite occasional resistance and delays by the administration, the business environment has greatly improved since 2002. Senegal has been ranked among the top 10 reformers in the world with respect to business regulations, after making considerable progress with facilities for establishing and starting up enterprises, investor protection, cross-border trade, enforcement of contracts, property transfers, and so on. Nevertheless, efforts to improve the business environment need to go beyond the Doing Business indicators. Indeed, some of the most substantial constraints confronting Senegalese industries have to do with production factors, labor regulations, and credit, which are not taken into account.3 Consequently, while a good Doing Business rating is an indicator that the business environment has improved, the improvement remains only a relative one.

Accordingly, although the state’s efforts to accelerate the reforms of the business environment have made it possible for the country to place well in the Doing Business rankings, they have not been rewarded with inflows of foreign direct investment, which, after all, are one of the best indicators of attractiveness. With foreign direct investment representing approximately 2.2 percent of GDP, it is difficult for Senegal to catch up with the key beneficiaries in the low-income countries, in which foreign direct investment accounts for an average of 4.4 percent of GDP.4

In connection with implementation of the Plan Sénégal Émergent, the consensus-building framework must be used to share policy guidelines with the private sector, which still often feels left out. Industrial operators must be subject to ongoing, targeted consultation in order to gain their support. This might be done through a formal framework for consultation between industrial operators and the other administrations involved, with the line ministry playing a central role. The absence of such a framework for dialogue creates a sense of frustration and causes industrial operators to turn to the Ministry of Finance to find spot solutions to their problems on an individual basis. Such a fragmented, isolated approach to addressing needs of the moment tends to justify the criticism that the overall management of the industrial sector lacks leadership, transparency, and consistency. Symptomatic of this situation is the fact that for several decades now, no Council of Ministers has addressed industry, even though at least two meetings per year have been held to address agriculture or livestock production.

Nevertheless, the industry’s management problems are not solely attributable to the state. The private sector has also been characterized by an insufficient capacity to organize and to put forward proposals, in particular as a result of the plethora of professional associations, which prevent it from posing as a credible interlocutor, speaking with one voice. Obviously, that shortcoming impairs the quality of public-private dialogue and manifests itself in the form of difficulties in dealing with industrial issues. Unlike in the case of other interest groups, such as the informal sector, the fragmentation of those associations reduces their capacity to negotiate.

A Support Mechanism Needs to Be Reconstructed and Streamlined

Frequently cited constraints on Senegal’s industrialization include weak productive capacity and skill sets, lack of entrepreneurial spirit, a shortage of electricity or other forms of energy, the high cost of production factors, infrastructure bottlenecks, and weak institutional support mechanisms. Of all those constraints, the last is one of the most worrying and deserves special attention. Indeed, in the construction phase of the emergence process, the state’s involvement as a strategist is manifested in a set of thorough, effective, rationally organized, and coherent support mechanisms. As it is, the current private sector support mechanism has flaws that make it incompatible with the emergence of an international-class business environment, owing to the dispersal of a series of bodies bereft of the resources they need to do their jobs.

Economic agents in Senegal complain that the support system is incomplete, with overlapping missions and activities, little ability to meet targets and reach certain areas of the country, and a notable lack of synergy and coordination. In short, the support mechanism suffers from both efficiency and governance constraints. In recent years, an effort was made to rationalize the system, but the exercise unfortunately did not go far enough to give the country a genuinely efficient private sector (CPI 2011).

To support the private sector, properly run public services need to be geared principally toward a few essential functions, namely promoting investment; monitoring the needs of small and medium-sized industries; promoting exports; providing support for training, guarantees, and financing; upgrading; standardization; and, lastly, research and development. Each of these functions should be performed by a robust unit, endowed with adequate resources. Finally, the institutional mechanism should be supplemented by the establishment at the highest level of a strategic framework for public-private coordination and monitoring, responsible for ensuring the consistency of state actions in respect of those functions, guaranteeing synergy among the various units involved, and optimizing the resources and financing methods designed to support the private sector.

The Education System Needs to Be Reinvented

To support the dynamics of a structurally transformed economy, Senegal would benefit from reinventing its educational system so that it becomes capable of constantly adapting to changes in the labor world and to developments in the international environment. The country is endowed with a young population and needs to adopt the approach of a nation keen to garner its demographic dividends by emphasizing relevant education and training. For that to happen, it needs to free itself from an educational setup in which, every year, cohorts of students are directed toward universities for courses many of which have no bearing on either current labor market needs or the competitiveness requirements of the country’s economy. The current educational system needs to be coordinated with sectoral strategies to accord pride of place to business needs. The vocational training system needs to be reappraised, with reforms that dispel the “university myth.”

By making the most of the demographic window of opportunity, a state-of-the-art and forward-looking educational system could enable the country to build a competitive economy by turning that opportunity into a “demographic dividend.” The government’s decision to multiply and decentralize vocational training institutes and its decision to support the scientific disciplines are both steps in the right direction, along with disseminating training and know-how in the regions in support of local initiatives and upgrading the country’s overall level of technical know-how. Similarly, joint efforts with the private sector should continue, with a view to developing a better foundation for alternating work and training opportunities and enhancing apprentices’ employability. Chief executive officers should encourage school-company exchanges in order to strengthen efforts to tailor training to the job market.

Finally, while youth are being trained for today’s professions, thought also needs to be given to tomorrow’s. This anticipatory approach is vital if the country wishes to seize the opportunities the future holds and not find itself hemmed in by sectors at risk of falling into decline. Clearly, industrial operators have a great responsibility to upgrade and constantly make adjustments within the enterprises to avoid stagnation and deepening of the competitive divide separating them from the “globalization winners.” Addressing the challenge of ensuring quality education tailored to the demands of the twenty-first century by mastering the present and anticipating the future has thus become an everyday requirement. For that reason, it is necessary to stress the need for the ongoing training of human resources in the companies they work for and for more extensive use of new technologies to enhance productivity gains at every link in the value chain.

Clearly, the state has an important role to play here, namely, promoting better use of information technology in small- and medium-scale industry, as the administration has been doing with impressive results with the help of the Agency for Computerization of the State. In this connection, the country would benefit from adopting a full-fledged policy of maximizing the use of information technology both within the administration and in the private sector.

In summary, the development of local industry needs to be accompanied by a general education policy but also, and above all, by vocational training. Raising a population’s level of education has always been a decisive pillar in the emergence process, and support for vocational training is one of the keys to ensuring success in industry. Finally, thinking about the jobs of the future is another important area, if Senegal is to stay on top of changing international product ranges. Government initiatives involving increased numbers of vocational training institutes, particularly in the regions, using new pedagogical approaches, are a step in the right direction and deserve to be continued and strengthened.

Subregional Opportunities Need to Be Seized

Senegal’s industrial sector is facing new challenges and opportunities with the expansion of the West African Community market (the Economic Community of West African States, or ECOWAS) and the forthcoming entry into force of the European Union–West Africa economic partnership agreements. With the implementation of a customs union now expanded to include 15 countries, the idea is to make locally produced products more competitive, increase intracommunity trade (integration through production), and expand and deepen the regional market, which has a population of 308 million and a GDP of US$564.86 billion.

Products produced in the region licensed under the ECOWAS Trade Liberalization Scheme benefit from both the lifting of customs duties and tariff protection of up to 35 percent for products from third countries imported into the West African Community market. Product classification in ECOWAS is based on one principal criterion, namely, the degree of processing, and one secondary criterion, namely, the economic and social importance of the product. Thus, under the principal criterion, the less processed a product is, the lower its classification and the lower the tax levied on it.

Accordingly, consumer staples are taxed at 0 percent; raw materials and machinery for industry at 5 percent; semifinished and intermediate products at 10 percent in the form of a customs duty; and final consumption products at 20 percent in the form of a customs duty. Finally, there is a category of heavily taxed (35 percent) products that are “specific goods for economic development”; this is designed to protect local branches of production. The merchandise classified under this category must meet criteria relating to product vulnerability, economic diversification, economic integration, promotion of a particular sector, or large production potential.

Although under the principal criterion, as noted, the less processed a product is, the lower the tax levied on it, manufacturers still think that the nominal tax differential is relatively small. In their opinion, it is not sufficiently protective of local production relative to similar, much more competitive imported products. In addition, practices regarded as unfair competition, such as dumping, under-invoicing, and fraud, are regularly denounced by professionals and considered to account for most of the difficulties the national industrial sector is facing.

Customs services, which have been aware of the manipulation of the values of imported products, have for many years used price correction mechanisms after derogations from the World Trade Organization. At times, declared prices of some imported finished products are lower than the world price of their raw materials. In such conditions, there is no possibility for the local industry to be competitive. Thus, an additional protection mechanism has been adopted to combat the risks of unfair competition by dumping, underinvoicing, or massive imports that could threaten a sector.

This additional protection mechanism essentially consists of two instruments: the Import Adjustment Tax, which permits member states to adjust gradually to the common external tariff, and the Supplementary Protection Tax, which protects local products against price and volume variations on the international market. The ECOWAS authorities have thus sought to alter the level of protection of domestic branches of industry radically while at the same ensuring the conditions needed for local resources to be developed by industrial enterprises established in the region. However, the administrative hassles on the Dakar Bamako corridor, the main axis of circulation of Senegalese products, slow down the fluidity of trade and increase the cost of transporting products from Senegal.

To reduce the industrial gap with countries such as Côte d’Ivoire, Ghana, and Nigeria, Senegal would benefit from the presence of more dynamic, innovative small and medium-sized enterprises, more champions at the regional and even international scale, and more leaders in their sectors. In fact, the West Africa region is a testing ground for restoring industrial ambition by consolidating a “first-class attitude” at all levels and in all sectors of the economy.

Finally, the greatest challenge Senegalese industry will have to face in the future is the dismantling of customs duties, which is being contemplated in the Economic Partnership Agreements between the West African region and the European Union. The trade component of those agreements puts an end to the trade privileges derived from the Lomé Convention and would expose enterprises in ECOWAS to strong competition from much more competitive European enterprises. Industrialists take a very dim view of these proposed agreements, which they consider poorly put together and a threat to industries already in distress as a result of massive imports from Asia. Added to that, it turns out that the Upgrade Program funds envisaged by the Economic Partnership Agreements to help local manufacturers become more competitive are both insufficient and unlikely to be raised in time to strengthen the competitiveness of local industries before the entry into force of the agreements. In the private sector’s view, entire swathes of local industry have little chance of surviving a prolonged openness to competition from more competitive European enterprises and, above all, in the absence of a comprehensive upgrading of both Senegal’s firms and the business ecosystem they work in.

Finally, in the current international context, new constraints render the process of emergence more restrictive for Senegal than the pathway followed by those new industrial powers that have now benefited from globalization, including Brazil, China, India, and the former Eastern bloc nations. First, there are World Trade Organization rules that oppose protectionist practices; then there are commitments against polluting forms of energy, which are nevertheless the cheapest forms and have allowed numerous countries to industrialize; then there is the impact of lowering customs duties; and finally there is greater economic liberalization. All of these recent changes in international trade have profoundly changed the rules of the game and made the emergence of new middle-income economies much more difficult than in the past. After all, the increased standard of living in emerging market economies, higher wage expectations, and new opportunities to be discovered in the international value chains all provide countries that are candidates for emergence with some opportunities for industrialization.

Strategic Steering Mechanisms and a Long-Term Industrialization Project Need to Be Pursued

Economies that have achieved their structural transition toward emergence are those that have benefited from a clear vision of the path to take. They have always had strong leadership and a resolute will to undertake sometimes difficult reforms. Another of the pillars emerging markets have in common has undoubtedly been political and social stability. Senegal has been fortunate to benefit from a peaceful democracy supported with active, comprehensive dialogue among enterprises. The national social stability and economic emergence pact signed on April 15, 2014, by all of the social partners is an important milestone for managing long-lasting social peace within enterprises (that is, the absence of conflict between business leaders and workers) and to create an environment conducive to growth. Consequently, it should not be difficult to forge for the long haul an industrial policy built around points of consensus capable of transcending political regimes.

It will be crucial both to share a strategic vision widely with all key actors (the administration, the private sector, and workers) and to apply that strategy with clarity and rigor, knowing full well that only structural reforms guarantee long-term growth. A vision and policy for industrial development cannot be developed by turning toward sectors in decline.

Rather, such a vision should show us new areas of industrial development for the future winners in globalization. The integration of worldwide value chains means that countries whose emergence strategies are focused on exports must be competitive in the products of tomorrow. Regardless of the size of its industry, a country must aim to be competitive with products that will drive tomorrow’s world growth. Accordingly, this presumes a voluntarist policy based on quality training to support the required industrial change and diversification, the placement of increasingly sophisticated products on the market, research and development, and a forward-looking approach to global value chains.

The processing of local resources should not be seen as the only option for industrialization, contrary to what seems to be implied by Senegal’s first options in the sectors selected in the Plan Sénégal Émergent. Being ambitious means daring to take the leap, even without local natural resources, toward the areas in which tomorrow’s growth gains will be made. Textiles represent a typical case of a sector that is undergoing significant change, with its own new growth sectors. The global textile sector is now shifting toward “intelligent” products at twice the rate of textile apparel applications, in addition to representing more than half of worldwide textile production (Mbaye 2005). Any globalized industry, such as the automotive or aeronautics industries to mention just two, provides good opportunities, and Senegal already has experience in information technology subcontracting. Last, biotechnologies are an area within the country’s reach, provided that it adopts a voluntarist approach.

To the extent that there is an evolving plan, it must embrace the dynamics of ongoing innovation in industry. This means that Senegal must be kept constantly informed about products that might drive world demand tomorrow. How might the trends in this demand be described? What is Senegal’s potential to produce these products? What incentives can be put into place?

Next, the country must intensify its efforts to attract world leaders and to benefit from the knock-on effects in research as well as in subcontracting. It is often these world leaders that are in the best position to provide comprehensive assistance in structuring the country’s productive system, to promote a spirit of research and innovation, and to stimulate exports. In addition to its small-scale enterprises, Senegal needs strong large-scale enterprises capable of ensuring that the national economy is resilient, capable of standing up to external competition, and with partnerships with small units that are better established at the national level.

Conclusion

Senegal is at a crossroads and must undergo certain necessary reforms if it still seeks to pursue an industrial, even regional, purpose. Otherwise, if the country does not apply those reforms, or postpones them indefinitely, it risks losing its way on the path to emergence.

If it chooses the path to emergence, Senegal must become resolutely committed to a virtuous dynamic of renewal and industrial development. This means seizing the opportunities with which it is now presented through an ongoing, structural process of reforms capable of giving it a role to play in the ECOWAS community context before moving on to the international level. Moreover, the country’s industrial policy must find its place in major national consultations, under the leadership of the head of state, to provide greater visibility and clearly affirm the options of Senegal’s highest authorities.

The Directorate of Industry, which is responsible for implementing the government’s policy in that sector, should be allocated more substantial resources. Its relative discretion and the current low visibility of its initiatives contrast sharply with the ambitions of the Plan Sénégal Émergent, supporting the assertions that the country has no strong ambition for industry. For its industrial plan to be a success, it must be restructured and better equipped with resources and materials. It is equally important to ensure that the increasing interest in the country’s mining sector does not marginalize its industrial sector.

Finally, at the institutional level it is becoming an urgent matter to have a framework for consultation to ensure ongoing strategic vigilance, to promote a public-private dialogue, and to provide impetus for and maintain the dynamics of emergence for the sector. The absence of such a framework to date has prevented the establishment of a consistent vision shared by all players.

Industry must once again become a national priority in Senegal, in the same way as agriculture, in which part of the growth potential stems from the country’s capacity to transform production in such a way that it becomes integrated into global agro-industrial value chains. To that end, Senegal must decide on its priorities: either to become open to massive imports or to industrialize.

References

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The remaining 4.8 percent of the country’s enterprises are of an unknown or undetermined size.

BNDS is the former development bank of Senegal, which was liquidated in 1985. The development bank of Senegal is now BNDE (Banque Nationale pour le Développement Économique SA).

For example, the Doing Business indicators do not take into account the price of electricity and water; only the connection costs are taken into account. Also, the interest rates, the salary levels, and the quality of the labor code (labor flexibility, duration and costs related to social disputes) are not taken into account. All these factors that are not accounted for in the Doing Business indicators have extremely important consequences for the conduct of business in countries like Senegal.

According to the Financial Markets Data Base (www.fdimarkets.com).

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