D+C Development and Cooperation (No. 1, January/february 2002, p. 15-17)

Africa’s Aborted Industrialisation
Modernisation Strategies Impede Organic Industrial Growth

Wolfgang Schneider-Barthold

Why has the industrialisation of Africa failed? The strategies of the donors in the North and the African power elites were and still are more interested in setting up capital-intensive large concerns than promoting the growth of existing small-scale and micro-enterprises. But since modern big businesses fail to find the environment they need for their operations they are not capable of surviving and contribute hardly anything to the development of the African economy and society.

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The industrial development policy pursued in most African countries after their decolonisation was billed as ‘catch-up industrialisation’. By that they did not mean catching up on the industrialised nations’ route to development, but rather emulating their level of development. The long and laborious path that had led to this level was to be leapfrogged at one bound. This strategy has failed. What follows is aimed at explaining why it was bound to do so.

Starting point: indigenous
small businesses

Like everywhere else in the world, there are also traditional indigenous industrial activities in African societies. During the colonial era these were impeded and suppressed in order to secure the markets of the colonial powers’ companies or those of the white settlers. Despite the restrictions and bans placed on them, the autochthonous (small) business activities always carried on. They also gained in dynamism – initially during the Second World War, when the companies of the colonial powers were placed in the service of the war economy and could no longer supply overseas markets regularly. The local businesses then really got going when the African colonies were granted independence.

If the governments of the young countries and their development policy advisors and financiers had wanted to ensure that African industry could catch up on the development that Europe and North America had once gone through, they should have begun with what already existed and built up and expanded the industrial sector from the ground up and internally in pace with the development of the other sectors. Aside from a few medium-sized businesses stemming from the colonial era – which were mainly in non-African hands – the business sector in most of the African countries that became independent around the 1960s consisted of local crafts and trades people and small-scale entrepreneurs.

With minimal capital and maximum labour input, limited and mostly handed-down commercial and technical knowledge, without experience in company management and marketing, using easily procurable tools and locally available raw materials, and adapting to the low educational level of their workers as well as patchy infrastructures, these businesses produced goods and provided services for the local people in town and country. However, most of the new governments did not recognise and promote these activities as the starting point for development. Instead, they saw them as being backward and subjected them to discrimination and marginalisation.

Industrialisation from outside

The governments, their advisors and financiers pursued a different strategy. In the expectation that leapfrogging development by introducing state-of-the-art technology would have greater impacts than replicating the European path to it, they ensured that the most up-to-date production technologies were transferred to Africa from the industrialised nations. At the same time, the African governments created rules and regulations and promotion instruments which favoured and subsidised the import of everything new while discriminating, criminalising, and persecuting the existing autochthonous activities and pushing them into informality. (The use of the term ‘autochthonous’ should not lead to the conclusion that these businesses use only traditional techniques and forms of organisation. Over the decades many of them, especially in the technical sector, have adjusted to new developments and implemented the beginnings of modernisation.)

The expectations connected with the modernisation strategy, however, were disappointed. Importing state-of-the-art production plants merely created islands of modernity in a sea of handed-down imperfection.

Modern installations depend on the reliable provision of power, communications and other infrastructure services, and in an African environment they often come to a standstill due to supply bottlenecks. Their technology is so sensitive that it can tolerate only raw materials, fuels, spare parts and maintenance and repair services that meet the highest technical demands, which are seldom to be found in-country. The installations are so complex that local staff are seldom deployed in managerial positions or to handle central technological tasks. Mostly, they are replaced by foreigners. Such plants are capital-intensive and hardly provide jobs for low-skilled people. Their capacity often has no relationship to the buying power of the domestic market. Exports to neighbouring countries are also seldom successful because they too have similar production plants that are protected from competition.

No impetus to development

The modern production plants therefore are integrated in local economies to a minuscule degree, having no bearing on the job market in terms of employment and qualification nor in relation to preliminary work. So there are rarely positive impacts on other sectors. Since the plants’ capacities are mostly not fully utilised, they deliver no profits unless the prices of their products – protected by state intervention – are excessively high.

The modern plants benefit from a number of privileges in investment codes and tax laws that national governments grant investors who commit a certain minimum of capital. These privileges include simplified and low-cost access to commercial land, additional infrastructure investment financed by the local municipality, exemption from corporate and income tax and import duties, guaranteed provision of foreign exchange for importing raw materials and spare parts, permission to transfer salaries, fees and profits (if applicable) abroad, and protection from imports. The plants also benefited from the usual overvaluation of their national currencies from the time of state exchange rate controls, which made imports of machinery, tools, raw materials and fuels cheaper, and exports, particularly of agricultural products, more expensive.

The result was that the fiscal privileges, the plants’ production on or below the profit margin, and their great demand for foreign exchange prevented increases in state revenues and relief of their countries’ foreign exchange balances. On the contrary, the latter were additionally burdened. In most cases the privileges mounted up to huge state subsidies.

This industrialisation policy, which was pursued right up to the 1980s, cost African societies dearly. They were burdened directly in the form of the subsidies, and indirectly due to ‘urban bias’ and its ensuing worsening of internal terms of trade. That meant it cost ever more units of domestic agricultural products to buy the same number of units of industrial goods. In addition, autochthonous small-scale and micro-enterprises with similar product ranges were displaced, and benefits were lost in terms of the impetus to development which a burgeoning industrial sector would have given to others in national economies.

How did an industrialisation strategy come about which proved to be costly and developmentally ineffective for the economies of the young African nations?

Self-interests determine
industrialisation policy

The answer is that those involved in it got their money’s worth from it. The beneficiaries in the industrialised nations were on the one hand the suppliers of the plants, who often were also shareholders and licensors of the companies, also supplied raw materials, and at times sold the plants’ products. On the other hand, this type of industrialisation created jobs for skilled workers in the North. Third, financing modern plant enabled the development cooperation institutions to implement a fast outflow of funds and point out to the public that they were creating jobs in the North because that was where the plants were produced.

e African countries, the leadership elites in politics and administration benefited from this kind of industrialisation. It enabled politicians and senior officials to pocket rent income in the form of bribes, dividends and directors’ fees for seats on company supervisory boards. The plant suppliers, competing for orders, spread money around liberally in a bid to outdo each other. The plants also gave many managers the opportunity to provide jobs, orders and other kind of income for their personal clientele. It is obvious that this cannot easily be done in the case of ‘industrialisation from the bottom up’, as the local small-scale and micro-enterprise sector demanded.

In theory, this industrialisation strategy was founded in the modernisation strategy paradigm which then prevailed among all development cooperation institutions worldwide. The African leadership elites – in many cases alienated from their own culture and origins – simply could not imagine industrial development based on local tinkers, craftsmen and tradespeople.

In addition, at the beginning of national independence the African elites were penniless because they had no economic basis. The import of modern industrial plants and the kickbacks that went with them benefited both the socialist-oriented elites and the politicians in countries with market economies.

Systematic obstruction of
industrialisation from below

Unfortunately, while the elites did everything to drive ahead the industrialisation of their countries by means of leaps in modernisation, they did very little to at least at the same time promote the step-by-step and organic development of the local small-scale and micro-enterprise sector. Almost all measures which promoted the modern sector hurt the ‘small people’, either because they raised the hurdles for their legal and formal existence (expenditure of work and time, charges), or by distorting competition and harming or depriving them of their livelihoods.

These hostile conditions compelled many of them to ignore regulations, go ‘underground’ and carry out their production secretly. The authorities consider this behaviour to be illegal and try to track down and prosecute the offenders. But they usually avoid that by bribing market officials, municipal supervisors and the police. A cynical view could conclude that promotion of modern industry is complemented by suppression of the autochthonous sector. If politicians and officials at the national level benefit from the former, the administration staff at the local level benefit from the latter process.

The impacts in terms of unrealised development are fateful. Owners of unregistered or non-licensed micro-enterprises, which therefore are not legal entities, and who for lack of suitable business premises work on a piece of land which they have neither leased nor rented have no legal rights and thus are totally at the mercy of state organs and criminal business partners and employees. This applies to the overwhelming majority of the micro-enterprises and small-scale businesses in Africa. The people in this category:

• do not advertise their goods and services because it could attract the police as well as customers;
• invest very sparingly and buy only as many tools as they can carry away with them when the bulldozers arrive to destroy ‘illegally’ located businesses;
• even if it means economic disadvantages, enter into business relationships solely with partners whom they can put under social pressure (such as relatives and persons of the same origins) because the latter cannot take legal action against unlawful partners;
• for the same reason, prefer to hire these types of people even if they are less skilled than strangers; and
• invest a great deal of their income in social relationships because they are the only things which guarantee social security and legal certainty.

Businesses whose owners are forced to pursue such a strategy do not grow, make no innovations, and thus have no growth impact on other businesses and sectors. At best, they secure the survival of the owners and their employees. Short-sighted development economists conclude from this that these entrepreneurs actually want to achieve nothing more by their self-employed activities, and therefore need no promotion. This conclusion is wrong.

The small businesses’ contribution to macroeconomic development is also inhibited by the fact that they have no, or only overpriced, access to finance institutions and other services. Capital comes from private sources and therefore is scarce. To date, there have been practically no further training and advisory services customised to the needs of small businesses. Apart from a few exceptions, there have been no attempts by either the state or private sector to stimulate, arrange and back up cooperation between small businesses and modern medium-sized and large companies. Cluster-forming, sub-contracting and franchising are largely unknown terms and concepts in Africa.

These conditions still hinder the micro-enterprise and small-scale business sector in developing and differentiating itself and integrating in the national economy in division-of-labour terms, and thus prevent it contributing to overall social and economic development. An ever growing number of micro-enterprise providers is supplying a stagnating and in part shrinking market of declining sales.

Latest development

Regrettably, a consistent and determined reverse of the industrial development policy in most African countries is not in sight. True, as a result of structural adjustment programmes and other conditions of donor organisations, ailing medium-sized and large businesses are no longer subsidised and since about the mid-1980s many have been closed or privatised. But in most African countries promotion of the small business sector has not yet gone much beyond the publication of strategy papers. At the same time, the small businesses are seeing themselves exposed to tougher competition due to the progressive liberalisation of foreign trade.