James Heintz, University of Massachusetts, Amherst IEA/World Bank Roundtable, July 3-4, 2012 Industrial Policy in sub-Saharan Africa

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James
Heintz
, University of Massachusetts, Amherst

IEA/World Bank Roundtable, July 3
-
4
th
, 2012

Industrial Policy in sub
-
Saharan Africa


Macroeconomic policy and
industrial policy


Conventional wisdom: macroeconomic policy creates
the enabling environment for industrial policy.


Industrial policy manages the details of economic
development within the boundaries determined by
macroeconomic management.


Argument of this paper: in sub
-
Saharan Africa,
institutional and structural constraints limit the scope
for conducting macroeconomic policy.


Challenge: to relax structural constraints which would
replenish the macroeconomic toolkit


Example: Liberia


Context: ILO study of the impact of the crisis on
Liberia


Balanced budget constraint imposed.


Market for government bonds did not exist.


Economy was largely dollarized.


Trade taxes accounted for a large share of revenues


Almost no scope for any kind of macroeconomic policy


But the institutional constraints could be relaxed to
support productive sector development.

Three policy areas


Real exchange rate


Monetary and financial sector policy


Fiscal policy: domestic resource mobilization


Real exchange rate


Maintain real exchange rate at a level which
encourages allocation of productive resources to
tradable sector


Economies of scale, scope for productivity
improvements, access to export markets.


But can interventions to manage the nominal
exchange rate work in SSA?


High levels of pass
-
through. Little scope for lowering
the real exchange rate

Domestic price levels


Average price levels are higher in sub
-
Saharan African
countries compared to countries with similar
productivity levels.


Reduces competitiveness of tradable sector.


Indicator of relative prices: PPP conversion factor to
nominal exchange rate ratio.

Macro conditions for
competitiveness


Problem: high domestic prices can lead to an
uncompetitive real exchange rate.


Possible reason: lower productivity of the non
-
tradable
sector (e.g. infrastructure, distribution services, etc).


Solution: raise productivity of the non
-
tradable sector,
rather than manipulating the nominal exchange rate.


Monetary policy I


Inflation targets and inflation targeting


May introduce a pro
-
cyclical bias into monetary policy
formulation when inflation due to supply
-
side/external price shocks is common.


Hard to isolate a measure of “core inflation” in many
sub
-
Saharan African countries.


Need for a broader approach to monetary policy,
including developing indicators for real economic
activity.

Monetary Policy II


Even in the absence of strict inflation targets, can
monetary policy support industrial development
through credit extension?


Institutional problems in SSA: excess reserves in the
commercial banking sectors constrains credit
extension.


Other issues: limited long
-
run credit due to structure
of deposits, imperfect information.


Possible solution: financial sector reforms which
improve credit allocated to industrial development
which goes beyond liberalization.

Mobilizing domestic resources


Tax revenues: tax revenues in sub
-
Saharan Africa, as a share
of GDP, have increased since the 1980s, but much of this
improvement has been driven by revenues from natural
resource exploitation.


Institutional weaknesses/poor tax administration
constitute barriers to mobilizing resources in the region .


Two interventions:


re
-
organizing the administration of tax collection on a
functional basis


establishment of statutory bodies which specialize in tax
collection, but not tax policies

Mobilizing domestic resources


The ability to mobilize domestic credit to the public
sector to support industrial development is
constrained.


Very high costs of domestic debt v. external debt.


Short
-
term structure of debt & concentrated
ownership raise costs of debt service.


Institutional reforms could help change this situation:
introducing longer term bonds, efforts to deepen the
bond market (i.e. a wider range of ownership).

Conclusions


Need to go beyond seeing macro policy as simply
creating an enabling environment.


In order for macroeconomic policies to support
industrial development, institutional reforms are
needed to address existing problems which limit their
effectiveness.


Structural transformation is required to enhance and
deepen the scope of macroeconomic management.


The exact nature of the institutional and structural
reforms would necessarily vary from one context to the
next.