1. DYNAMIC INDUSTRIALPOLICY IN AFRICAECONOMIC REPORT ON AFRICAAfrican Union 2014

2. DYNAMIC INDUSTRIALPOLICY IN AFRICAECONOMIC REPORT ON AFRICAAfrican Union2014 3. Economic Report on Africa 2014Ordering informationTo order copies of Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible Mechanisms by theEconomic Commission for Africa, please contact:PublicationsEconomic Commission for AfricaP.O. Box 3001Addis Ababa, EthiopiaTel: +251 11 544-9900Fax: +251 11 551-4416E-mail: ecainfo@uneca.orgWeb: www.uneca.org United Nations Economic Commission for Africa, 2014Addis Ababa, EthiopiaAll rights reservedFirst printing March 2014Language: EnglishSales No.: E.14.II.K.2ISBN: 978-92-1-125122-7eISBN: 978-92-1-056602-5Material in this publication may be freely quoted or reprinted. Acknowledgement is requested, together with a copy of the publication.Cover design: Carolina Rodriguezii 4. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsiiiCONTENTSList of figures, tables and boxes ivList of abbreviations used viAcknowledgments viiiForeword xExecutive Summary xiiCHAPTER 1: RECENT ECONOMIC AND SOCIAL DEVELOPMENTS IN AFRICA AND MEDIUM-TERM PROSPECTS 21.1 Africas growth performance 41.2 Other macroeconomic indicators 111.3 Recent developments in Africas trade 151.4 Untapped approaches to bridging Africas financing gap 201.5 Recent social developments and the need for transformative policies 241.6 Policy imperatives for transformation 29CHAPTER 2: THE SOURCES OF GROWTH FOR AFRICAS STRUCTURAL TRANSFORMATION 302.1 Africas growth and structural transformation 312.2 Structural transformation can be a source of growthbut has not been for Africa 402.3 Trends and determinants of Africas low productivity 422.4 Conclusion and key policy implications 52CHAPTER 3: INDUSTRIAL POLICY IN AFRICA: INSTITUTIONAL DYNAMICS AND CHALLENGES 543.1 Africas struggles with industrial policy 553.2 Towards a theoretical framework for industrial policy 603.3 Creating and running effective IPOs 633.4 Successes from the global south 673.5 Conclusions 73CHAPTER 4: EXAMPLES OF AFRICAS INDUSTRIAL POLICY PROCESSES AND INSTITUTIONAL DYNAMICS 744.1 Challenges of high-level industrial policy coordination 754.2 Organizational imperfections 894.3 Institutional gaps 994.4 Conclusions 101Appendix 102CHAPTER 5: TOWARDS A DYNAMIC INDUSTRIAL POLICY FRAMEWORK FOR AFRICA 1055.1 Africas industrial policy problem 1065.2 Key findings 1075.3 Policy recommendations 1085.4 Towards an integrated industrial policy framework 112References 121End Notes 125Statistical Note 128 5. Economic Report on Africa 2014LIST OF FIGURES, TABLES AND BOXESFIGURESChapter 1Figure 1.1: GDP growth, 20102015 4Figure 1.2: Africas growth performance by endowment grouping, 20102015 6Figure 1.3: Growth by subregion, 20102015 8Figure 1.4: Top 11 and bottom 5 performers, 20092013 9Figure 1.5: Africas GDP growth and output gap, 20002013 10Figure 1.6: Fiscal balances, 20102014 11Figure 1.7: Inflation by subregion, 20102014 12Figure 1.8: Real effective exchange rate movements, selected countries, 20062014 12Figure 1.9: Current account balance by endowment grouping, 20102014 13Figure 1.10: Total exports by endowment grouping, 20102014 14Figure 1.11: Total exports by subregion, 20112014 14Figure 1.12: International reserves by subregion and endowment grouping, 20122014 15Figure 1.13: Composition of African exports, 20102012 17Figure 1.14: Share of total imports and exports of commercial services in Africa, 2012 18Figure 1.15: Africas domestic financing gap, 20072011 20Figure 1.16: Foreign debt by endowment grouping and subregion, 20102014 21Figure 1.17: Income distribution, richest 10 per cent versus poorest 20 per cent 25Figure 1.18: Annual employment growth in Africa (excluding North Africa) 26Figure 1.19: Employment share by sector, Africa (excluding North Africa) 27Chapter 2Figure 2.1: Growth rate of GDP and real GDP per worker, 19602010 32Figure 2.2: Expenditure shares of GDP, 19602009 33Figure 2.3 Contributions to growth of expenditure categories 34Figure 2.4: Structural transformation in Africa, 19602011 35Figure 2.5: Sectoral composition of Africas GDP 36Figure 2.6: Sectoral contributions to GDP growth, 19602009 39Figure 2.7: Growth rates of labour and capital productivity 42Figure 2.8: Growth rate of TFP by subregion, 19602010 45Figure 2.9: Average growth decomposition by decade for Africa 19602000s 46Figure 2.10: TFP growth rates across country grouping, 19602010 46Figure 2.11: Trends in Africas foreign currency black market premiums and index policy reform, 19602010 48Figure 2.12: Trends towards democracy and electoral competition, 19602010 49Chapter 3Figure 3.1: Schematic of industrial policy framework 64Figure 3.2: Organizational structure of the Third IMP, 2006 69Chapter 4Figure 4.1: Evolution of major industrial policy institutions in Maurituis since 1970 85Figure 4.2: CSP and IPAP policy processes and policy networks, South Africa 88Figure 4.3: Challenges for industrial policy, Rwanda 99Chapter 5Box figure 1: Typical cluster map 115Figure 5.1: Transmission channels from growth poles to periphery 118Box figure 2: The pharmaceutical industry in Africas seven largest countries by sales 138iv 6. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsTABLESChapter 1:Table 1.1: Distribution of growth performance in Africa, 20112013 (number of countries) 5Table 1.2: Productivity losses from stunting 29Chapter 2Table 2.1: Average growth rates of output per worker, capital stock per worker and human capital, by subregion and decade, 19602010 32Table 2.2: Subregional sectoral composition of GDP 37Table 2.3: Sectoral composition of GDP, by country grouping 38Table 2.4: Share of manufacturing in GDP and contribution to growth 39Table 2.5: GDP, employment and relative productivity levels by sector and subsector, 11 African countries, 19602010 41Table 2.6: Subsectoral decomposition of labour productivity growth, 11 African countries, 19902010 (%) 41Table 2.7: Growth decomposition of labour and capital productivity by subregion 44Chapter 3Box table 1: Vision 2040 targets 58Table 3.1: African manufacturing by sector and technological classification, 20002009 59Chapter 4Table A4.1: Number of respondents per type of questionnaire and country 102Table A4.2: Examples of ministries, IPOs and business organizations interviewed in selected African countries 103vExecutive SummaryBox 1: Keep or shiftor combine effectively? xiiiChapter 1Box 1.1: Salient developments in the world economy in 2013 23Box 1.2: Reclaiming and preventing illicit flows can bridge 70 per cent ofAfricas infrastructure financing gap 41Chapter 2Box 2.1: Vietnampolicy change promoting structural transformation 43Box 2.2: Potential drivers of productivity growthvariables 47Box 2.3: Pro-growth institutionsnature and key functions 49Box 2.4: Institutional change and policy reform underpinnedSouth Africas reversal of economic decline 50Chapter 3Box 3.1: Market failures 57Box 3.2: Ugandaindustrializing for structural transformation 58Box 3.3: Political settlementa balancing act 61Chapter 4Box 4.1: Methodology 75Box 4.2: Problems with extrinsically set agendasin high-level policy councils 76Box 4.3: An over elaborate patchwork in Nigeria 79Box 4.4: Mozambique and sugar rehabilitation 82Chapter 5Box 5.1: The hub keeps the spokes alignedin Tunisia and Singapore 108Box 5.2: Reviewing industrial projects closely 108Box 5.3: Organized dialogue in Mauritius 108Box 5.4: Responding to industrial policy gaps in South Africa 109Box 5.5: Omissions in reevaluating and funding in two countries 109Box 5.6: West African woes 109Box 5.7: DTIs approach to financing interventions in South Africa 109Box 5.8: Singapores success 110Box 5.9: Avoiding capture 110Box 5.10: Checks and balances 110Box 5.11: Industrial policy in East Asia: Some lessons for Afric 111Box 5.12: The role of development planning in Africa 112Box 5.13: Fostering competitiveness 114Box 5.14: Industrial parks and clusters 115Box 5.15: Growth poles in selected countries 119Box 5.16: Local manufacture of pharmaceuticals: An opportunitywaiting to be tapped 120BOXES 7. Economic Report on Africa 2014LIST OF ABBREVIATIONS USEDAft Aid for TradeAIDS Acquired Immune Deficiency SyndromeAIEC Automotive Industry Export CouncilARV AntiretroviralAUC African Union CommissionBMN Skills Upgrading BureauBOI Board of InvestmentBRICS Brazil, Russia, India, China and South AfricaCABs Conformity Assessment BodiesCAGR Compound Annual Growth RateCAR Central African RepublicCNES Senegalese National Confederation of EmployersCSP Customized Sector ProgrammeDBM Development Bank of MauritiusDGI Directorate General for IndustryDRC Democratic Republic of CongoDTI Department of Trade and IndustryECA United Nations Economic Commission for AfricaEDB Economic Development BoardEDPRS Economic Development and Poverty Reduction StrategyEIU Economist Intelligence UnitEM Enterprise MauritiusEPU Economic Planning UnitEPZ Export processing zoneEPZA Export Processing Zone AuthorityEU European UnionFDI Foreign direct investmentFIDEN Ivorian Fund for the Development of National EnterprisesFOSAD Forum of South African Director GeneralsGDP Gross domestic productGEAR Growth, Employment and RedistributionGLP Good Laboratory Practice ActICP Industrial Competitiveness ProgrammeIDB Industrial Development BureauIDEC Industrial Development and Export CouncilIDPDD Industrial Development Policy Development DivisionIFIs International financial institutionsILO International Labor OrganizationIMF International Monetary FundIMP Industrial master planIPAP Industrial Policy Action PlanIPO Industrial policy organizationJEC Joint Economic CouncilKIPI Kenya Industrial Property InstituteKIRDI Kenya Industrial Research and Development OrganizationLCCI Lagos Chamber of Commerce and IndustryMCCI Mauritius Chamber of Commerce and IndustryMEXA Mauritius Export Associationvi 8. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsMITI Ministry of International Trade and IndustryMOI Ministry of Industry and MinesNAAMSA National Automobile Association of Motor Vehicle Manufacturers of South AfricaNAEB National Agricultural Export Development BoardNEDLAC National Economic Development and Labour CouncilNES National Export StrategyNIPF National Industrial Policy FrameworkODA Official development assistancePIACs Presidential Investors Advisory CouncilsPMN Skills Upgrading ProgrammePMPA Pharmaceutical Manufacturing Plan for AfricaPND National Development PlanPPN Primary Policy NetworkPPP Publicprivate partnershipPSF Private Sector Federation of RwandaR&D Research and developmentRBS Rwanda Bureau of StandardsRHODA Rwanda Coffee Authority and Rwanda HorticultureSADC Southern African Development CommunitySANAS South African National Accreditation SystemSARS South African Revenue ServiceSME Small and medium-size enterpriseSMEDA Small and Medium Enterprises Development AuthoritySNDES National Economic and Social Development StrategySPN Secondary Policy NetworkSRTC SME Resource and Technology CentreSYB Start Your BusinessTFP Total factor productivityTIPS Trade and Industrial Policy StrategiesTISA Trade and Investment South AfricaUN United NationsUN-DESA United Nations Department of Economic and Social AffairsUNESCO United Nations Educational, Scientific and Cultural OrganizationUNIDO United Nations Industrial Development OrganizationUNCTAD United Nations Conference on Trade and DevelopmentUS United StatesWEF World Economic ForumWTO World Trade Organizationvii 9. Economic Report on Africa 2014viiiACKNOWLEDGMENTSThe Economic Report on Africa 2014, a joint publication of the United Nations Economic Commission for Africa (ECA) andthe African Union Commission (AUC), was prepared under the leadership of Carlos Lopes, ECAs Executive Secretary, andNkosazana Dlamini-Zuma, Chairperson of AUC, with the active involvement of Abdalla Hamdok, Deputy Executive Secretary ofECA, and Anthony Mothae Maruping, Commissioner for Economic Affairs, AUC. The report team benefited from the guidanceand supervision of Adam Elhiraika, Director of Macroeconomic Policy Division, ECA, and Ren NGuettia Kouassi, Director ofthe Economic Affairs Department, AUC.The ECA core team comprised Souleymane Abdallah, Bartholomew Armah, Chigozirim Bodart, Hopestone Chavula, WilliamDavis, Deresse Degefa, Uzumma Erume, Adrian Gauci, Aissatou Gueye, Mama Keita, Iris Macculi, Michael Mbate, Simon Mevel,Allan Mukungu, Maja Reinholdsson, Matfobhi Riba, John Sloan and Giovanni Valensisi. The AUC team comprised Ciss Amadouand Patrick Ndzana Olomo.Background papers were commissioned from Prof. Howard Stein of the University of Michigan, Dr. Bethuel Kinuthia of theUniversity of Nairobi and Prof. Steven Block of the Fletcher School at Tufts University. Eleven country case studies wereundertaken by Dr. Rosemary Atieno (Kenya), Dr. Zouhour Karray (Tunisia), Dr. Afeikhena Jerome (Nigeria), Mr. Hubert Koua Atta(Cte dIvoire), Mr. Charles Gasana (Rwanda), Dr. Boopen Seetanah (Mauritius), Dr. Seeraj Mohammed (South Africa), Dr. LahcenAchy (Morocco), Dr. Ibra Dioum (Senegal), Mr. Mdard Mengue Bidzo (Gabon) and Mr. Michel Matamona (Republic of Congo).Useful comments and suggestions were received from staff in various divisions and subregional offices of ECA and fromexternal reviewers: Dr. Witness Simbanegavi, African Economic Research Consortium (Kenya); Prof. Machiko Nissanke, Schoolof Oriental and African Studies (UK); Dr. Theresa Moyo, University of Limpopo (South Africa); Dr. Marcel Opoumba, Institut Sous-rgionalde Statistique et dEconomie Applique (Cameroon); Mr. Ahmed Nuru, Ministry of Industry (Ethiopia); Dr. SebastianSpio-Garbah, DaMina Advisors (Ghana); Prof. Rafik Bouklia-Hassane, University of Oran (Algeria); Prof. Fantu Cheru, AmericanUniversity (US); and Ms. Basani Baloyi, University of the Witwatersrand (South Africa).We are particularly grateful for the expert advice provided by Dr. Yilmaz Akyz and written contributions received from all fivesubregional offices of ECA and from Andrew Mold, Thierry Amoussougbo, Rodgers Mukwaya and Daniel Kitaw of ECA and Dr.Pride Chigwedere of UNAIDS African Union Liaison Office.The report would not have been possible without the contribution of the following: Hazel Scott, Steve Glovinsky, MarcelNgoma-Mouaya, Charles Ndungu, Teshome Yohannes, Mercy Wambui, Siham Abdulmelik, Agare Kassahun, Yetinayet Mengistu,Muna Jemal, Solomon Wedere, Bekele Demissie, Melkamu Gebre Ezigiabher of ECA; Bruce Ross-Larson, Jonathan Aspin andJack Harlow of Communications Development Incorporated; Carolina Rodriguez, Communication Specialist and InfographicConsultant; Pauline Stockins and Giacomo Frigerio, graphic designers; and Paul Okolo, Media Consultant. 10. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible Mechanismsix 11. Economic Report on Africa 2014xFOREWORDAfricas recent impressiveeconomic performancecontinued despite subduedglobal economic activity and isexpected to accelerate further in themedium term. Africans are eager tosee this growth sustained, acceleratedand translated into new employmentopportunities, secure incomes andimproved livelihoods. But the growthso far has not been inclusive, and struc-turaltransformation on the continentremains limited. Africas commodity-andinvestment-driven expansion hasnot created the jobs to meet the conti-nentsgrowing young population, andthis growth path has left the continentvulnerable to external commodityprices, demand shocks and internalweaknesses.Industrialization is key for Africa tofoster structural transformation andimprovement in standards of living. Yetindustrialization has remained elusive,with an embryonic manufacturingsector, low productivity and marginalparticipation in domestic and inter-nationalmarkets. While services havesurpassed agriculture and industry asthe leading income-generating sectorsacross Africa, this has not created thequantity or quality of jobs likely to resultfrom manufacturing and labour-inten-siveproduction.The 2014 Economic Report on Africabuilds on the previous years report,which made the case for commodi-ty-based industrialization. It calls onthe continent to refocus its economicdevelopment strategies on industrial-ization,particularly on the means forformulating and implementing effec-tiveindustrial policy. In the past, mostAfrican countries pursued industrialpolicy with mixed results. It is now timeto reacknowledge that state supportis vital to address market failures andspur industrializationand to institu-tionalizeindustrial policy in nationaland regional development strategiesat the highest levels of government. Yetthe states role is different from a directproducer of goods.The report emphasizes that Africangovernments should not repeat theerrors of the past. They used industrialpolicy tools ranging from tax credits toexport subsidies and export processingzones. But these often followed a blue-printapproach of adopting formulaic 12. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible Mechanismsxiinterventionist packages, with littleprivate and other non-governmentalinput. A more holistic alternative wouldbuild strong and inclusive institutionsfor industrial policy and ensure thatthey interact regularly and harmoni-ously.A strong institutional setting willallow the correct and collective identi-ficationof constraints and the formula-tionof smart policy interventions thatare dynamic and refined to deal withthe ever-changing needs of industry inan ever-changing global economy.The report is based on commissionedstudies of industrial policy frameworksin 11 African countries. The focus wason identifying the challenges andpitfalls faced in designing and imple-mentingindustrial policy and how theyhave been overcome. Studies of coun-triesthat have successfully built stronginstitutions are drawn from withinand outside of Africa. They show thatsuccess depends on allowing industrialpolicy organizations to be dynamic andorganically connected to the myriadof processes and players underlyingindustrialization.High-level political support and coor-dinationfor industrial policy is a neces-saryfirst step. Institutionalized dialoguewith the private sector, and addressingcapacity constraints and bottle-necks,are vital for establishing strongprocesses and mechanisms for policy-making.The report finds that industrialpolicy organizations can avoid beingstructurally hollow and dysfunctionalby expanding at rates consistent withtheir underlying capacities, financingand political support. Putting in placeincentive structures for firms to expandproduction and investment in vitaland high growth potential industriesis a key function of effective industrialpolicy organizations, as is monitoringand ensuring that the support goesto its intended purposes. States mustalso address gaps in infrastructure(including energy), skills, financing andother constraints identified directly byindustrial stakeholders.We hope that this report serves asa guide to building dynamic indus-trialpolicy institutions, processes andmechanismswith the goal of gener-atinga prosperous industrial sectorthat fosters structural transformationand inclusive development.Carlos LopesUnited Nations Under-Secretary-General andExecutive Secretary of UNECANkosazana Dlamini-ZumaChairpersonAfrican Union Commission 13. Economic Report on Africa 2014xiiEXECUTIVE SUMMARYINDUSTRIALIZING FORSTRUCTURAL TRANSFORMATIONIN AFRICAOne of the most puzzling paradoxes over the lastdecade is that Africa has benefited from unprece-dentedgrowth while a large part of its populationremained trapped in economic poverty, facing rampantunemployment and inequality. The continent has averaged5 per cent a year growth over the last decade, with somecountries returning more than 7 per cent. Underpinning thisgrowth were relatively high commodity prices, increaseddomestic demand (due especially to increased private invest-mentin infrastructure and energy) and improved economicgovernance and management.The contribution from industrialization was minimal,however. The continuing apparent disconnect betweenstrong commodity-driven economic growth and employ-mentand social development has been exacerbated by thefailure of most African economies to structurally transform.The failure to experience inclusive growth has been rein-forcedby several developments in the world economyparticularly volatile commodity priceshighlighting theperils of strong economic growth without concurrent indus-trialdevelopment and structural transformation.Structural transformation is associated with the reallocationof resources, especially through new investment, from low-tohigher productivity activities, typically from agricultureto industry and modern services, leading to higher econo-my-wide productivity and progressively raising income. Muchof Africa, however, has seen the opposite, as resources movedfrom higher to lower productivity sectors, slowing growth innational productivity. Factors of production such as labourhave shifted notably from agriculture and manufacturing toservicesharming productivity and in some cases curtailingemployment in both agriculture and manufacturing andfrequently cutting the contribution of manufacturing to thecontinents GDP and employment over the last decade.Partly for this reason, African countries remain marginalplayers in domestic and international markets for theirmanufactured goods, with a negligible share of manufac-turedexports in world exports, compared even against otherdeveloping countries.All this is worrying, as industrymanufacturing particu-larlyhas traditionally been a source of substantial employ-mentgeneration in developed countries and more recentlyin developing economies. Industrialization is thus a precon-ditionfor Africa to achieve inclusive economic growth.Africas share in global trade is also way below potential, ataround 3.3 per cent, and its exports are dominated by oil,metals and minerals. Intra-African trade remains low versusother regions (about 11.5 per cent in 2012, though informaltrade lifts the figure) and is hindered by steep intra-Africantrade barriers. Yet intra-African trade is far more industrial-izedthan Africas trade with the rest of the world, suggestingthat boosting intra-African trade can contribute to industri-alization.Other encouraging news, given the crucial role ofservices in development, is the buoyant expansion of Africasservice exports: exports of commercial services, for example,have nearly tripled in the last decade.But we cannot forget that a majority of Africans still dependon agriculture for their livelihoods, and thus enhancing itsperformance is central to sustainable poverty reduction.Beyond increased agricultural income, effects on the widereconomy of a more prosperous agricultural sector includestrengthened backward linkages and greater demand forindustrial products.Managing these change processes is fundamental to struc-turaltransformation and inclusive development. Economicadvancement does not occur in a vacuum, despite the claimsof some proponents of market reform, as market forces alonecannot sustain increases in a countrys income and develop-ment.Countries that industrialized required far-sighted andcogent state efforts to address market failures and promoterestructuring.Structural transformationis associated with thereallocation of resources,especially new investments,from low to higher productivityactivities and sectors 14. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsTo enhance its industrial development, Africa too needs tofollow this line, ensuring credible industrial policy and theright conditions for it, led by the state machinery of industrialpolicy organizations (IPOs)though debate resounds on thebest approach for developing countries (box 1).Against this backdrop, the Economic Report on Africa 2014focuses on how to build innovative, effective and flexibleIPOs and mechanisms to enhance industrialization and struc-turaltransformation in Africa. It hones in on the answers toxiiithree basic questions: Why, along a broad historical perspective, has industrialpolicy been ineffective in Africa? How have IPOs operated and how have they affectedindustrial development in Africa? How do African countries formulate strategies forbuilding and operating effective IPOs?This report builds on previous work by the United NationsEconomic Commission for Africa and the African UnionCommission as published, for example, in two recentEconomic Reports on Africa2011, which focused on therole of the state in economic transformation, and 2013, whichran the theme of commodity-based industrialization.Market failure is one of the most important reasons for limitedeconomic transformation and slow growth in Africa, coupledwith governments inability to act. Three key types of marketfailure are commonly recognized. First, there are those thatrelate to self-discovery externalities where the social valueof an activity exceeds its private worth. The key barrier is theinformation needed to determine how new products can beproduced profitably in the economy.Second, there are also failures linked to coordination exter-nalities.Lumpy parallel investments are often needed toaccompany economic activities upstream and downstream.Decentralized markets do a very poor job of coordinatingthese.ERA 2014 focuses on how to buildinnovative, effective and flexibleindustrial policy institutions,processes and mechanisms toenhance industrialization andstructural transformation inAfricaThe third aspect concerns the missing inputs from the publicsector, which could include everything from transport to lawsand to research and development specific to an industry.African government intervention through industrial policycan help spur structural transformation by addressingthese market failures. The approach followed by policy-makers,academics and other industrial stakeholders hasbeen to identify key general constraints and devise broadpolicy interventions to alleviate them. Unfortunately, theseresponses have rarely focused on the institutions governingindustrial policy, or on the impact that weaknesses in theseinstitutions have on their own ability to operate in a coordi-BOX 1: KEEP OR SHIFTOR COMBINE EFFECTIVELY?The question of whether developing countries should industrialize along their current comparative advantages or defy these staticcomparative advantages and shift resources to new high-tech industries at an early stage of development has long been debated. Lin(2012) argued that governments should first align their industrial policies with their resource base and level of development and subse-quentlyinvest in new industries as they accumulate human and physical capital. In contrast, Chang (2012) argued that in view of thehigh cost of moving capital from relatively low to high tech industries, industrial policy should encourage investment in high-productivityindustries at an early stage of development.The Economic Report on Africa 2013 (ECA and AUC, 2013) argued, however, that these strategies are not mutually exclusive, and thatcommodity-based industrialization can be a stepping stone to diversifying over the long term and building competitive advantages inresource-rich countries.Further, any policy mix of the two requires direct state interventions, hence more recently the debate has shifted to focusing on institu-tionsand mechanisms that ensure these actions effectiveness. 15. Economic Report on Africa 2014xivnated, dynamic framework. Indeed, weak institutional struc-turesand poor policy design have been at the root of Africasindustrial policy problem throughout its post-independencehistory.Thus once the need for intervention is accepted, the focusfalls on how to design IPOs capable of supporting industrialtransformation. So, beyond an analysis of the problems ofindustrialization in Africa, and based on the experience ofsuccessfully industrializing countries in the global south,this report offers an institutional framework for designingand implementing industrial policy in Africa. Many of theelements in this framework originated from 92 interviewsheld in 11 countries, with interviewees in four groups,depending on their level and type of involvement in indus-trialpolicy and business. Country case studies, too, providedmany examples of how institutional frameworks operateand how failures were overcome or avoided. The findingsand their policy implications are now summarized.BUILDING DYNAMIC INDUSTRIALPOLICY FRAMEWORKSORGANICALLYSuccessful frameworks for industrial policy are organic anddynamic, and should avoid blueprints and goals that arelargely donor driven. A blueprint approach is where indus-trialpolicy consists of standard packages of predefined poli-ciescopied from other country settings. Industrial policyshould though be dynamic, and IPOs must have the abilityand motivation to constantly adapt to the changing needsof the industrial sector. Some IPOs performed disappoint-inglyand failed to respond to changing circumstances, whilesome lacked autonomy from overseeing ministries andfailed to consult the private sector in strategy development.In other cases, priorities have been set by donors rather thanarising organically from interaction of the key players in theeconomy. Corruption, lack of funding and poor operationsfurther inhibit success.ENSURING HIGH-LEVELCOORDINATION AND POLITICALSUPPORTThe industrial policy framework requires top-level coordi-nationto properly deal with potential problems that under-minethe efficiency of industrial policy. Some countriessuffer from coordination failure in the upper reaches of thegovernment and bureaucracy, leading to IPOs disconnectedfrom the private sector, communicating badly and lackingthe backstop of political willall of which may generateshort-term shifts in policy and undermine the long-terminvestment climate. Worse, ministries (and their parastatals)may have conflicting goals, or policies may be designedalong sectoral lines. And even with an apex coordinatingunit, policy can fail because of a lack of political support foreither the creation or implementation of political policy.In contrast, successful governments often form high-levelunits with representatives from the private sector and state,involving the private sector in identifying recommendationsfor policy. The upper echelons of successful countries under-standthe need for systematic coordination and regularlyincorporate the private sector and encourage super-minis-terialcollaboration.LETTING THE PUBLIC ANDPRIVATE SECTORS DIALOGUESuch systematic private sector representation in IPOs allowsgovernments and IPOs to remain adaptable to the changingneeds of the private sector. Feedback points to the stepsneeded to resolve private sector concerns, such as finan-cialshortages or lack of infrastructure. Successful industrialpolicy in African countries has rapidly created IPOs to fill thegaps, as seen by the private sector, in the industrial policyframework.GRANTING EMBEDDEDAUTONOMY TO BUREAUCRACIESSuccessful IPOs have embedded autonomy. Embedded-nessamong IPO officials means that they understand theindustry and have built relations with private stakeholders,improving their ability to collect information (and as seen,allowing businesses to be part of the policy loop).Autonomyis needed to ensure that bureaucrats are not capturedby any special interest groups, to strive for the develop-mentgoals of the whole country. Indeed, some claim thatbalancing autonomy and embeddedness on the part ofgovernment officials is far more important than the finalpolicy choices.Thus bureaucrats conducting industrial policy should beinsulated from political pressure and selected throughcompetitive recruitment and well-defined career pathsthat make politically motivated hiring and firing difficultideally, impossible. 16. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsxvTRANSCENDINGORGANIZATIONALIMPERFECTIONSOperational failures hinder IPOs due to poor target setting,monitoring processes and incentive structures. One crucialdimension is the failure to developand then monitorcontingent rents (policies to increase private sector profitsthat are linked to undertaking the expansion of productionand investment), which incentivize the private sector tofollow the IPOs interventions.Operational failures can also arise from structural hollow-nessa mismatch between resources and responsibilities.So although many African countries have no IPO or it hasthe wrong mandate, some operating IPOs cannot providethe services. The more successful economies carefully matchthe two sides, or have evolved to focus on a tighter range ofservices.STARTING WITH POCKETS OFEFFICIENCYFrom the above, it stands that IPOs should be developed inline with the political commitment they get, and their capac-itiesand resources. But with little experience and a narrowfunding base, most IPOs need to start slowly, developingpockets of efficiency to demonstrate the effectiveness ofindustrial policy and initiate the institutional processes thatcan be drawn on later if successful.BUILDING COALITIONSStill, these pockets need the support of the ruling elites thatdeem certain policies instrumental to strengthening theireconomic or political power. Thus successful industrial policyalso requires a confluence of interests among the elites,which is particularly important when businesses pursue neweconomic activities where the risks are high, sunk costs largeand the need for government support great.PLANNING COHERENTLY FORDEVELOPMENTOne way to coordinate industrial policy with other macro-economicissuesexchange rate, monetary and fiscalpolicies; infrastructure strategy; and investment-climatemeasuresis through development planning. This is apurposive governmental mapping to coordinate economicdecision making over the long run and to achieve a prede-terminedset of development objectives.ENHANCING TECHNOLOGYTRANSFER, INNOVATION ANDCOMPETITIVENESSIncreasingly sophisticated productive capabilities areneeded to produce internationally competitive goods andservices. But although Africa is moving, many other econo-miesare moving faster: the 2012-2013 Global Competitive-nessIndex places 14 of the 20 least competitive countriesin Africa. It attributes this to weak institutions, infrastructuredeficits, limited technological advancement and too fewskills for a knowledge economy. African countries need torespond at once, and effectively.Industrial policy should bedynamic and IPOs must havethe ability and motivationto constantly adapt to thechanging needs of the industrialsectorCREATING POCKETS OFINFRASTRUCTUREIndustrial growth requires modern infrastructure and logis-tics.As with the earlier pockets of efficiency, governmentswith few resources should create pockets of infrastructurefocused on sectoral or clustering needs of industrial expan-sion.Industrial parks are one approach, providing highpotential for growth and value addition as well as for solidlinkage development and related spillovers among compa-nies,suppliers and service providerseven governmentinstitutions. Domestic technologies should play a key parthere. 17. Economic Report on Africa 2014xviRESPONDING TO CLIMATECHANGEClimate change could hobble Africas economic growthmomentum as the continent attempts to switch to indus-trializationand economic transformation. But it could alsoprovide an opportunity: Africa has vast renewable energyresources of hydropower, geothermal, biomass, wind andsolar. And as Africa is not locked in any technology prefer-ences,it can follow a green and clean industrializing energypathway and leapfrog old carbon-intensive models.FOCUSING ON GROWTH POLESA key element of any regional strategy is a focus on growthpoles, because economic growth usually occurs in regionsor industries (poles) and not throughout the economy. Inthis approach, the growth pole consists of a concentrationof productive economic activity in a region that can fostergrowth in peripheral regions through positive spillovers andbackward and forward linkages. The objective of growth polestrategy is not to address market failures but to capitalize onresources already in place.CAPITALIZING ON TRADECountries that industrialize, also trade. And as intra-Africantrade is far more oriented towards industrial products anddiversified than extra-African trade, measures to boost theformer can help the continent industrialize. African govern-mentsneed to bring down the current very high tradingcosts, and make efforts to formalize informal traders, espe-ciallywomen. In addition, African countries need to boost thedevelopment impact of trade negotiations and agreements,continentally and globally. To this end, countries shoulddevelop greater capacity to coordinate, negotiate and lobbyfor lower tariffs on imported intermediate inputs.FINANCING INDUSTRIALIZATIONMost of the above policy reforms, and all of industrializa-tion,will cost. African economies therefore need to find newsources of finance and make better use of existing resources,as they already do with infrastructure investment.The success of industrial policy projects depends heavilyon African countries securing public and private finance inpriority areas, especially infrastructure, education and tech-nologyacquisition. A further, untapped, area is the pharma-ceuticalindustry, which is expected to burgeon in the nextfew years as Africans become richer and seek greater accessto medicines. Governments should promote better accessto credit, especially for small and medium-size enterprises,which will improve prospects for expanding and diversifyingoutput.FINALLY..The exact design of national industrial policy will vary amongcountries, based on the needs of the private sector, resourceattributes and national development objectives. The key isto institutionalize industrial policy so it becomes part of theregular decision-making mechanism of government andbecomes no different from more broadly accepted responsi-bilitiessuch as monetary and fiscal policy. Doing this, Africangovernments will have to ensure that the economic benefitsare not captured by special interest groups, but are spreadinclusively among the whole population.The exact design of nationalindustrial policy will varydepending on the needs ofthe private sector, resourceendowment, and nationaldevelopment priorities, amongother factors 18. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible Mechanismsxvii 19. 1 CHAPTEREconomic Report on Africa 2014RECENT ECONOMIC AND SOCIALDEVELOPMENTS IN AFRICAAND MEDIUM-TERM PROSPECTS18 20. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible Mechanisms3Global growth of gross domestic product (GDP)continued to decelerate in 2013, mainly owing tosubdued global demand. The euro area finally cameout of a protracted recession, and growth strengthenedin the United States (US) and Japan and stabilized in mostemerging and developing economies (box 1.1). The globaleconomy is projected to strengthen over the medium termwith growth rebounding in major economies such as the USand Japan and continued robust growth in some emergingeconomies such as China.Africas growth slowed from 5.7 per cent in 2012 to aprojected 4.0 per cent in 2013, still almost twice the globalaverage, but slightly lower than the average for developingcountries. Africa was surpassed only by East and SouthAsia, which grew at 5.6 per cent in 2013.1 Africas expansionwas underpinned by sustained relatively high commodityprices, increased domestic demand (due especially tohigher private investment in infrastructure and energy)and improved economic governance and management inAfrican countries.Despite softening global commodity prices, Africas exportperformance continued its post-2011 improvement in abso-luteterms, thanks to rising commodity exports and diversi-fyingtrade partners, though low export-product diversifi-cationand high dependence on primary commodities arestill major constraints to Africas external trade. Intra-Africantrade remains low, largely because of high trading costsexacerbated by inefficiencies in customs and administrativeprocedures.Even with the improved export and still-strong growthperformance, Africas financing gap remains large, against abackdrop where the global economic slowdown and morestringent budgetary consolidation in many donor countriesare expected to affect official development assistance (ODA)to the continent. Africas economic transformation thus hasto rely increasingly on domestic sources of finance, andAt 4.0 per cent in 2013, Africasgrowth remains robust andstands at nearly twice the globalaverageAfrican countries need to develop innovative approachesto development financing from both internal and externalsources.Africas medium-term growth prospects are strong,bolstered by relatively high commodity prices, increasingdomestic demand, easing infrastructural constraints, ever-tightertrade and investment ties with emerging econo-mies,and improving global economic and regional busi-nessenvironments. A moderate global growth recovery inthe medium termunderpinned by expansion in industrialproduction and trade in emerging economies led by Chinaand by projected faster growth in the US, European Unionand Japanshould also stimulate growth in Africa throughincreased trade and investment flows. Still, the continentsmedium-term growth outlook faces several downside risks,including unexpected adverse developments in the globaleconomy, external shocks due to changes in weather condi-tions,and political instability and civil unrest in some coun-tries.To translate rapid economic growth into sustained and inclu-sivedevelopment, Africa must follow through on develop-mentstrategies that foster economic diversification, createjobs, reduce inequality and poverty and boost access tobasic services. It can only do this through the structuraltransformation of its economies, which requires a healthypopulation with high-quality and relevant skills, particularlyas the contribution of manufacturinga traditional sourceof substantial employment in developed and developingcountries aliketo GDP and employment has stagnated,or worsened. As elaborated throughout this report, Africancountries thus need to embrace industrial strategies thatspur industrialization and economic transformation.Industrialization is an imperativefor Africa to foster structuraltransformation, job creation andreduce inequality and poverty 21. Economic Report on Africa 20145.74.72.441.1 AFRICAS GROWTHPERFORMANCEMODERATING GROWTH SET TOPICK UP AGAINAfricas GDP growth slowed from 5.7 per cent in 2012 to 4.0 percent in 2013, against developing economies average of 4.6per cent (figure 1.1). The slowdown was mainly due to weak-enedglobal demand following the financial and debt crisis inthe euro area, sluggish growth in some emerging economiesand political instability and civil unrest in major commod-ity-producing countries, especially in Central and NorthAfrica. Growth in Africa continued to benefit from relativelyhigh commodity prices, increased trade and investment tieswith emerging economies, greater domestic demand under-pinnedby new, urbanizing consumers with rising incomes,and public spending on infrastructure. Improved economicgovernance and management were mirrored in generallystable fiscal and current account balances, which supportedmacroeconomic stability and improved investment environ-mentin many African countries.In particular, improved economic governance and manage-mentcontributed to growth by encouraging private demand(especially domestic and foreign investment demand),increasing government outlays on infrastructure and socialservices and diversifying production and exports. Conti-nentalgrowth in 2013 was also buttressed by increased agri-culturaloutput, given favourable weather conditions in mostareas. As highlighted later, Africa continued to attract strongcapital inflows (including FDI, remittances and ODA).GDP growth is projected to accelerate to 4.7 per cent in 2014and 5.0 per cent in 2015 on the back of continuing relativelyhigh commodity prices and increasing domestic demand. Anexpected firmer global recovery in 2014, bolstered by robustgrowth in industrial production in emerging and developingcountries led by China, should also stimulate growth in Africathrough increased trade, investment and capital flows.FIGURE 1.1: GDP GROWTH, 20102015FIGURE 1.1: GDP GROWTH, 20102014YEARS5.90.84.64.0Developing economies Africa World7.74.64.1Source: UN-DESA, 2014Update 9 January 2014REAL GDP GROWTH RATE %5.35.03.35.14.72010 2011 2012 2013 2014f 2015f9.08.07.06.05.04.03.02.01.00.02.13.02.8Source: UN-DESA (2014).Data updated 9 January 2014 22. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsTABLE 1.1 DISTRIBUTION OF GROWTH PERFORMANCE IN AFRICA, 2011-2013TABLE 1.1: DISTRIBUTION OF GROWTH PERFORMANCE IN AFRICA, 20112013 (NUMBER OF COUNTRIES)2011 2012 20135Real GDP GrowthSTRONGER GROWTH INCOUNTRIES RICH IN OIL ANDMINERALSIn 2013, although GDP growth was relatively strong acrossAfrica, it showed some divergence between oil-exportingand oil-importing countries (table 1.1). Around half of Africancountries grew at 5 per cent or more in 2013, a higher share ofcountries than in 2011 and 2012. Relatively high commodityprices, improved economic governance and macroeco-nomicmanagement and more diversified sources of growthpropelled growth in many of these countries.Growth in oil-exporting African countries fell from 9.9 percent in 2012 to 4.7 per cent in 2013 (figure 1.2).2 A recoveryaccounted for the unusually high growth in 2012, while thedecline in 2013 was, in addition to the high base, mainlydue to subdued global demand as well as disruptions inoil production and political unrest in some of Africas majoroil-producing economies such as Libya. Despite their sharpdrop in growth, these countries stayed among the leadingdrivers of Africas weighted growth in 2013 with oil alonecontributing about 24 per cent of the continents totalgrowth.3 Oil-importing countries grew at 3.7 per cent in 2013,up from 3.1 per cent in 2012.4Mineral-rich economies saw growth of 3.8 per cent in 2013,after 3.7 per cent in 2012 (figure 1.2).5 In resource-rich andresource-poor African countries, growth was also driven bystrong expansion in services and agriculture.Growth is expected to accelerate in oil-exporting countries to6.5 per cent with a slight decline to 5.9 per cent in 2015, whilein mineral-rich economies it will accelerate to 4.4 per cent in2014 and to 4.7 per cent in 2015, as stability returns to Egypt,Libya and Mali. The forecast pick-up also reflects investmentand production at new mineral sites in Sierra Leone (iron oreand diamonds), Zambia (copper), Botswana (copper, coal anddiamonds), Namibia (uranium and diamonds), Angola (coal)and Ghana and Liberia (gold).Oil-importing economies are also expected to record stronggrowth at 4.1 per cent in 2014 and 4.3 per cent in 2015,mainly driven by robust expansion in services and agricul-ture,assuming favourable weather conditions.SUBREGIONAL OUTCOMESGrowth varied among Africas subregions in 2013 slightlymore than in 2012, but remained respectable in all (figure1.3). West Africa led, though its growth rate remainedunchanged at 6.7 per cent in 2013. The subregion still attractsinvestments in the oil and mineral sectors, which are a keysource of growth especially in Burkina Faso, Ghana, Guinea,Liberia, Niger, Nigeria and Sierra Leone.Source: Calculations based on EIU Database and UN-DESA (2014).Note: Calculations exclude South Sudan.5 7%5-7%3-5%3%Oil Exporters (10 in total) Oil Importers (43 in total)422222422211314971214611915118Source: Calculations based on EIU (2013) and UN-DESA (2014)Note: Calculations exclude data on South Sudan 23. FIGURE 1.2: AFRICAS GROWTH PERFORMANCE BY COUNTRY GROUPING, 20102014Economic Report on Africa 2014FIGURE 1.2: AFRICAS GROWTH PERFORMANCE BY ENDOWMENT GROUPING, 201020155.1 4.7 5.06Source: UN-DESA, 2014Data from 8 November 201312.010.08.06.04.02.00.0-2.0Global and regional growth performanceGlobal economic growth decelerated to 2.1 percent in 2013, but this is projected to rebound to3.0 per cent in 2014 and 3.3 per cent in 2015,1owing to increased economic activity in the USand euro area, as well as stabilizing growth inmost emerging economies, notably China. TheEuropean Union contracted by 0.1 per cent in2013 but is forecast to expand by 1.4 per cent in2014 due to increased exports and business confi-dence.Among the larger economies, Germanygrew by 0.4 per cent in 2013, while France grewby 0.1 per cent and the United Kingdom 1.4 percent.Economic growth in the US decelerated to 1.6per cent in 2013, largely because of fiscal tight-eningand spending cuts (sequestration), polit-icalbrinksmanship on the government budget,reduced business and entrepreneurial investmentand slow recovery of the labour market. Theworlds largest economy is projected to grow at2.5 per cent in 20142, underpinned by a reboundin private consumption, recovering real estate,supportive monetary conditions and easing fiscalconsolidation.Japans economy grew at 1.9 per cent in 2013,YEARSfollowing fiscal stimulus packages geared atimproving public infrastructure as well as quan-titativeand qualitative monetary easing, butgrowth is projected to decline to 1.5 per cent in2014 with the introduction of a consumption taxand the unwinding of stimulus packages.Expansion in East and South Asia moderatedto 5.6 per cent in 2013, mainly due to deceler-atingexport growth induced by Chinas marginalslowdown to 7.7 per cent, which is expectedto continue in 2014 with a 7.5 per cent outturn(despite the recent pick-up of export growth andindustrial production). Indias growth declined to4.8 per cent in 2013, owing to a reversal in capitaloutflows and exchange rate depreciation, thoughit is projected to return to its potential 5.3 per centgrowth path in 2014, underpinned by increasedinvestment and government-backed structuralreforms.Western Asias growth slipped a little from3.2 per cent in 2012 to 3.7 per cent in 2013 aspolitical instability and social unrest, notably inIraq, Lebanon and Syria, weighed heavily. LatinAmerica and the Caribbean economies grew by2.6 per cent in 2013, reflecting faltering externaldemand, low commodity prices and weakeningdomestic conditions.3Oil exporting countriesMineral-richWorsening labour marketsGlobal unemployment was 6.0 per cent in 2013,and the number of unemployed is set to rise from202 million in 2013 to 205 million in 2014 assubdued private capital flows and fiscal austeritycontinue to restrict investments and job creation(ILO, 2013a). In 2013, the average unemploymentrate was 12 per cent in the euro area, with crisiscountries such as Greece and Spain registeringrates above 25 per cent. Global youth unemploy-mentremains high, and is projected to stagnateat around 12.8 per cent until 2016 as the reboundin global growth will not be enough to liftdepressed labour markets.Easing inflationary pressuresGlobal inflation was 2.5 per cent in 2013, downfrom 2.9 per cent in 2012, owing mainly to largeoutput gaps in most economies, softening globalcommodity prices and insipid demand fromkey emerging markets (UN_DESA, 2014). It isprojected to increase to 2.7 per cent in 2014 withthe forecast rebound in economic activity, thoughprudent monetary and fiscal policies in manycountries are expected to keep it in check.BOX 1.1: SALIENT DEVELOPMENTS IN THE WORLD ECONOMY IN 2013AfricaOil importing countriesREAL GDP GROWTH RATE %4.60.85.74.0-3.210.04.76.55.94.43.43.13.74.14.33.94.63.73.84.44.7-4.02010 2011 2012 2013 2014f 2015fSource: UN-DESA (2014). 24. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible Mechanisms7Improving fiscal balances amid fiscal con-solidationFiscal balances continued to improve in almostall major economies and regions, after tight fiscalconsolidation and cuts in government spending.Fiscal deficits in advanced countries declined from5.9 per cent in 2012 to 4.5 per cent in 2013, and afurther drop to 3.5 per cent is projected for 2014.The euro area recorded a budget deficit of 3.1 percent in 2013, despite fiscal austerity measures.The US registered a 5.8 per cent deficit in 2013,which is expected to narrow to 4.7 per cent in2014 as a result of sequestration.Subdued world commodity pricesThe index for all commodity prices calculatedby the International Monetary Fund (IMF) wasvolatile in 2013 and reached its annual high of191 in February before steadily declining to 184in December, due to weak global demand anddeceleration of economic activity in emerging anddeveloped economies. In 2014, global commodityprices are expected to change little, largely unaf-fectedby growth, though supply constraints mayexert some upward pressure.The IMFs world crude oil (petroleum) indexdeclined from a high of 203 in early 2013 to a lowDespite a notable drop in growth,oil-exporting countries stayedamong the leading drivers ofAfricas growth in 2013, with oilalone contributing about 24 percent of the continents growthof 188 mid-year, before accelerating to 199 byDecember, though this trend is projected to reverseas economic recovery in most economies inducesmore demand for crude oil. The IMFs agriculture,food and beverage price index declined from anaverage of 178 in the first quarter of 2013, to anaverage of 168 in the last quarter, mainly owingto increased food production in most agriculturalregions. In 2014, world food prices are expectedto continue to slide, though global demand forfood and severe weather conditions in the worldsmajor agricultural regions may halt or reverse thistrend.Slowing world trade growth but improvingcurrent account balancesIn 2013, exports grew at only 2.3 per cent by value,down from 3.1 per cent in 2012 as import demandfrom major developed countries contractedsharply. Current account balances for the majoreconomies and regions improved slightly in 2013,despite slowing international trade and globaldemand (IMF, 2013).Global foreign direct investment (FDI) inflowsstabilized in 2013 at around 2.3 per cent of worldGDP and are expected to rise to 2.4 per cent in2014. Developed countries and regions such asthe euro area remain the largest recipients of FDI,with Brazil and China, being two of the largestdestinations among emerging economies.4Medium-term risks and uncertaintiesKey risks to the global economy include continuedfiscal consolidation and austerity programmes inmajor developed countries (which have aggra-vatedthe already fragile global economy), weak-eningglobal demand, financial market turbulenceand paltry growth in the euro area. Although theworld economy is forecast to rebound slightly in2014, to be prolonged this growth will need tosee global imbalances corrected (especially ontrade and international reserves), implemen-tationof fiscal policies improved and long-runstructural growth policies consolidated.Notes:1. UN-DESA, 2014.2. UN-DESA, 2014.3. However, the advanced estimate for the United States GDP shows anannualised growth of 3.2 per cent for the fourth quarter of 2013,higher than the initial estimate, which might lead to a relativelyhigher annual growth rate and estimate for both 2013 and 2014respectively (UN-DESA, February, 2014, Monthly Briefing).4. EIU Database.Growth in the subregions largest economy, Nigeria,remained unchanged at 6.5 per cent, as increases indomestic demand seem to have compensated for a declinein oil output and weaker global oil prices. Investments inoil and mining supported growth in Niger at 5.7 per cent.Cte dIvoire posted 8.8 per cent growth driven by largeinfrastructure projects reflecting a more stable political envi-ronment,a more propitious investment climate and greatercapital spending by the government. In Ghana, growthstayed robust (8.0 per cent), thanks to higher oil production.Iron ore production remained the main growth driver inSierra Leone and Liberia, which turned in strong growth of14.5 per cent and 7.5 per cent, respectively.East Africas growth also remained unchanged at 6.0 per centin 2013. Growth in the subregions largest economy, Kenya,rose to 5.0 per cent in 2013 from 4.6 per cent in 2012, owingmainly to stronger consumer spending. Tanzania grew at 7.2per cent in 2013, mainly due to increased private consump-tionand investment in natural gas. Uganda grew at 5.8 percent in 2013, up from 4.4 per cent in 2012, reflecting greateractivity in construction, transport, telecommunications andfinancial services, as well as investments in exploration andconstruction of the burgeoning oil industry. Expansion inagriculture and services was one of the major factors under-pinningEthiopias growth of 6.9 per cent in 2013. Growthwas also buoyant in Rwanda (7.4 per cent), Eritrea (6.0 percent largely due to mining, especially of copper and gold)and, less so, Seychelles (3.2 per cent). 25. Economic Report on Africa 2014FIGURE 1.3: GROWTH BY SUBREGION, 201020148Growth in Central Africa slowed from 5.8 per cent in 2012to 4.2 per cent in 2013, largely owing to political instabilityand violence, especially in the Central African Republic,where the economy contracted by 8.9 per cent in 2013. In2013, oil production underlay robust growth in Republic ofCongo (6.0 per cent), Gabon (5.5 per cent), Cameroon (5.0per cent) and Equatorial Guinea (1.8 per cent). The decline inoil production from some of Chads maturing, large oilfieldscut growth from 5.9 per cent in 2012 to 4.5 per cent in 2013.Growth in Southern Africa edged up from 3.5 per centin 2012 to 3.6 per cent in 2013, mainly due to increasedinvestment in the subregions mining sector. South Africasrecovery (2.7 per cent in 2013 against 2.5 per cent in 2012)was marginal, partly because of labour unrest in miningand the economic slowdown in key emerging markets, thecountrys most important export destinations. Zambia, withincreased copper production and consumer spending, regis-teredthe highest growth in the subregion at 7.7 per cent,followed by Angolas 6.8 per cent, which as in previous yearsrelied heavily on oil. Growth in Mozambique deceleratedto 6.5 per cent in 2013 from 7.4 per cent in 2012, mainlybecause of floods in early 2013 that affected agriculture,electricity generation and coal production.Political instability and disruptions to oil output under-minedgrowth in North Africaespecially Egypt, Libya andTunisiacutting it to 2.3 per cent in 2013 from 7.2 per cent in2012. Mauritania registered the strongest growth at 6.1 percent in 2013, mainly reflecting increased investment in theoil and mining sectors and donor support. However, Moroc-cosgrowth accelerated to 4.6 per cent in 2013 from 2.7 percent in 2012, propelled by robust domestic demand andimproved agricultural performance. Increased oil produc-tionand continued expansionary fiscal policy enabled 3.0per cent growth in Algeria. Growth continued to weakenin Egypt as aggregate demand, especially investment, andtourism receipts all fell owing to political uncertainty. Insta-bilityin Libya hurt oil output and exports, cutting growth to3.0 per cent (after the prior years sharp recovery). Sudan,still absorbing the shocks of oil and population losses toSouth Sudan, returned to growth (2.0 per cent) after its 2012contraction (4.0 per cent), reflecting growth in services, agri-cultureand manufacturing.All five subregions are expected to experience robustgrowth in 2014, led by West Africa. This subregion, growingby 6.9 per cent and 6.8 per cent in 2014 and 2015 respec-tively,will continue to attract investment in oil and miningkey sources of growth for Burkina Faso, Ghana, Guinea,West Africa continued to leadthe subregions with 6.6 percent growth rate in 2013, thanksto investments in the oil andmineral sectors, among otherfactorsFIGURE 1.3: GROWTH BY SUBREGION, 201020158.06.04.02.00.0-2.0-4.0-6.0Source: UN-DESA (2014).Data updated 9 January 2014YEARSSource: UN-DESA, 2014Data from 9 January 2014REAL GDP GROWTH RATE %West AfricaEast AfricaSouthern AfricaCentral AfricaNorth Africa3.7-6.17.22.33.34.36.96.16.7 6.7 6.9 6.85.23.95.8 4.2 4.84.17.06.56.06.0 6.46.44.03.5 3.64.24.4-8.02010 2011 2012 2013 2014f 2015f 26. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsFIGURE 1.4: TOP TEN AND BOTTOM FIVE PERFORMERS IN AFRICA, 20092013AVERAGE ANNUAL GROWTH %FIGURE 1.4: TOP 11 AND BOTTOM 5 PERFORMERS, 20092013Zambia 6.7South Africa 2.0Source: Calculations based on EIU (2013) and UN-DESA (2014)Source: Calculations based on EIU Database and UN-DESA (2014).No*teN: oThtee tahvaerta tghee f oarv Seuradgane ifnocrl uSduedsa tnh ein ycelaurds ebse ftohree Syoeuatrhs Sbuedfoanres Sinoduetphe Snudednacne.s independence.9Liberia, Niger, Nigeria and Sierra Leone. East Africas growthis expected to accelerate to 6.4 per cent in 2014 and remainunchanged in 2015, mainly due to increased consumption,stronger investment in natural gas and infrastructure andimproved performance in agriculture and services.Growth in Southern Africa is forecast to accelerate to 4.2 percent in 2014 and 4.4 per cent in 2015, lifted by increasedinvestment in extractive industries. While growth in NorthAfrica is projected to climb to 3.3 per cent in 2014 and 4.3 percent in 2015 on the assumption that stability returns, growthin Central Africa is expected to pick up to 4.8 per cent in 2014and then slow to 4.1 per cent in 2015.TOP 11 AND BOTTOM 5PERFORMERSOver 20092013, Ethiopia recorded the fastest growth (9.4per cent a year) reflecting expansion in services and construc-tion,aggressive public spending on infrastructure and publicservices, and increasing agricultural production associatedwith rising domestic demand (Ethiopian Economic Associa-tion,2013; figure 1.4). Next is Libya, which despite strikes anddisruptions to oil production still managed to expand by 8.7per cent, mainly because of hydrocarbons.The Central African Republic had the slowest five-yeargrowth (0.4 per cent). Political instability and high insecurityaffected agriculture (the largest economic sector and mainsource of employment). Political uncertainty in Madagascarsince the overthrow of the head of state in 2009 has similarlykept GDP growth far below potential. Despite the recentincrease in Swazilands growth owing to increased produc-tionin mining, the countrys growth over the last three yearshas been subdued by a steep fall in manufacturing output,which accounts for almost 45 per cent of GDP.With an average growth of 9.4 percent a year, Ethiopia recorded thefastest growth over the period2009-2013, while Central AfricanRepublic registered the slowestgrowth over the same periodAVERAGE ANNUAL GROWTH %9.48.78.48.37.87.57.47.06.86.72.01.70.50.40 2 4 6 8 10EthiopiaLibyaZimbabweGhanaLiberiaRwandaSierra LeoneNigeriaMozambiqueTanzaniaSwazilandSudanMadagascarCentral African Republic 27. Economic Report on Africa 2014FIGURE 1.5: AFRICAS OUTPUT GAP, 200020132000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Output Gap Potential GDP growth GDP growth10AFRICAS GROWTH POTENTIAL ISLARGELY UNTAPPEDAfricas output gapthe difference between actual andpotential real output as a percentage of potential outputusing the HodrickPrescott filterwas generally negativeover 20002013, signifying that African countries were under-performing(figure 1.5). (A positive output gap suggests thatthe economy is operating above its potential.)During 20092013, Africa grew at 3.6 per cent a year, belowits concurrent potential of about 4.2 per cent. This gap showsthe existence of spare capacity in Africa, suggesting thatgrowth can be fostered with policies that stimulate aggre-gatedemand and trade within Africa and between Africa andthe rest of the world. Indeed, efforts to facilitate intra-Africantrade and enhance access to global markets can help thecontinent promote growth and diversification and benefitmore from expected increases in global economic activity.RISKS AND UNCERTAINTIESAfricas growth outlook is subject to risks and uncertainties.Any unexpected slowdown in global growth may constrainAfricas economic performance through trade; FDI, ODA andremittances; and tourism. Instability in global commodityprices (especially oil) and changes to the terms of trade areamong the key risks that Africa will face in the medium term.While growth in developed economies is expected to pickup in the medium-term, growth in emerging economies islikely to moderate with potential significant adverse impacton global commodity prices as well as trade and investmentflows between Africa and the rest of the world. In the face ofthese risks, African countries need to continue to implementmeasures to boost domestic demand, diversify productionand trade and promote rapid expansion in intra-African trade.Political and civil unrest pose a threat in several African coun-tries,including the Central African Republic, DemocraticRepublic of Congo (DRC), Libya, Mali, Somalia, South Sudanand Tunisia, especially through their effects on investment,trade and tourism.Finally, as most of the economies in the region are agricul-ture-based, weather-related shocks present downside risksfor agriculture, but upside risks for prices.FIGURE 1.5: AFRICAS GDP GROWTH AND OUTPUT GAP, 2000201376543210-1-2-3Source: Calculations based on UN-DESA (2014).Source: Calculations based on UN-DESA (2014)PERCENT (%) 28. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsFIGURE 1.6: FISCAL BALANCES, 20102014111.2 OTHERMACROECONOMICINDICATORSMOUNTING FISCAL PRESSURE INOIL-IMPORTING COUNTRIESAfricas fiscal deficit, which widened from 1.5 per cent of GDPin 2012 to 1.9 per cent in 2013, is projected to accelerate to3.1 per cent in 2014, as many governments continue to faceintense pressure to increase spending on education, healthand infrastructure, as well as raise public sector wages andmaintain food and fuel subsidies (figure 1.6). This fiscal dete-riorationwas mainly caused by rising spending and subduedrevenue growth in both oil-importing and mineral-rich econ-omies.In oil-importing countries, the fiscal deficit widenedfrom 1.3 per cent of GDP in 2012 to 3.2 per cent in 2013. Italso widened in mineral-rich economies from 5.0 per centin 2012 to 5.5 per cent in 2013, reflecting the effects of theglobal economic slowdown. However, it narrowed in oil-ex-portingcountries from 1.7 per cent in 2012 to 0.2 per centin 2013 despite softening global oil prices. Angola and Equa-torialGuinea had fiscal surpluses, while Egypt, Morocco andSudan have taken steps to address their deficit by partiallyremoving subsidies on food and fuel, widening the tax baseand improving tax administration. However, most Africancountries are expected to experience further deterioration intheir fiscal balance in 2014.DECLINING INFLATIONARYPRESSURE AMID TIGHTMONETARY POLICYContinent-wide inflation fell from 8.2 per cent in 2012 to 8.0per cent in 2013 and is projected to decline further to 7.8 percent in 2014. Factors include moderating international foodand fuel prices as well as tighter monetary policy in mostAfrican countries.In Central Africa (the subregion with the lowest ratefigure1.7), inflation decelerated a little from 4.4 per cent in 2012to 3.9 per cent in 2013, and is forecast to decline further to3.3 per cent in 2014. Monetary policy in most Central Africancountries is managed by the regional central bank, Banquedes Etats de lAfrique Centrale, which is keeping its focus oncontrolling inflation and maintaining the CFA francs peg tothe euro.South Africa is expected to tighten monetary policy in 2014to control inflation (5.8 per cent in 2013) and to return realinterest rates to positive territory.FIGURE 1.6: FISCAL BALANCES, 201020140-1-2-3-4-5-62010 2011 2012 2013 2014fAfrica Oil exporting countries Oil importing countries Mineral rich countriesPERCENTAGE OF GDP (%)Source: Calculations based on EIU Database. 29. Economic Report on Africa 2014FIGURE 1.7: 1.7: INFLATION INFLATION BY BY SUBREGION, SUBREGION, 20102010201420142005 = 1002010 2011 2012 2013 2014f18161412108642FIGURE 1.8: REAL EFFECTIVE EXCHANGE RATE MOVEMENTS IN SELECTED AFRICAN COUNTRIESSource: UN-DESA, 2014Data from 9 January 20142006 2007 2008 2009 2010 2011 2012 2013 2014f12300250200150100500Source: EIU, 2013ANGOLAKENYAGABONSIERRA LEONEBOTSWANAEQUATORIAL GUINEAETHIOPIAMALIMOROCCOALGERIARWANDASOUTH AFRICANIGERIAMALAWIREAL EFFECTIVE EXCHANGE RATEYEARSSource: UN-DESA (2014).Data from 9 January, 2014YEARSINFLATION RATE (%)North Africa West Africa Central Africa East Africa Southern Africa Africa0FIGURE 1.8: REAL EFFECTIVE EXCHANGE RATE MOVEMENTS, SELECTED COUNTRIES, 20062014Source: Calculations based on EIU Database. 30. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsFIGURE 1.9: CURRENT ACCOUNT BALANCE BY ECONOMIC GROUPING, 20102014% OF GDPFIGURE 1.9: CURRENT ACCOUNT BALANCE BY ENDOWMENT GROUPING, 201020142010 2011 2012 2013 2014fOil exporting countries Oil importing countries Mineral-rich Africa13Domestic credit growth slowed in much of Africa in 2013,notably in Ethiopia, Guinea, Malawi and Sudan, where tightmonetary policy was needed to control relatively high infla-tion.Exchange rate depreciation and falling foreign reserves willbe a major concern for monetary policy in Malawi, Kenya,Burundi, Tanzania, Uganda, Sudan and Egypt, although thegravity of the situation varies. Loose monetary policy, widefiscal deficits, domestic currency depreciation and relativelysteep energy costs are expected to heighten inflationarypressure in 2014 in some East and Southern African coun-tries.REAL EXCHANGE RATESGENERALLY APPRECIATINGReal exchange rates appreciated in most African countries in2013, often influenced by tight monetary policies to reduceinflation. However, significant real depreciations were seenin Botswana, Ethiopia, Gambia, Mali, Morocco, Sudan andSwaziland (figure 1.8), primarily owing to widening currentaccount deficits and weakening global commodity prices.Malawi and South Africa also saw real depreciation, to someextent influenced by instabilities in South Africas miningsector.Inflationary pressure recedesacross Africa thanks tomoderating international foodand fuel prices and tightermacroeconomic management inmost African countriesMIXED EXTERNAL PERFORMANCEAMONG ENDOWMENTGROUPINGSAfricas current account deficit widened from 0.8 per centof GDP in 2012 to 1.8 per cent in 2013 but is expected toslightly narrow to 1.7 per cent in 2014 (figure 1.9). In oil-ex-portingcountries, external balances are seen as stayingpositive, though falling, but negative and narrowing inoil-importing and mineral-rich countries. Improved macro-economicmanagement is one of the key factors, as in Egypt,Kenya and South Africa, which allowed their exchange ratesand interest rates to adjust in line with changes in macroeco-nomicfundamentals.121086420-2-4-6-8-10PERCENTAGE OF GDP (%)Source: UNECA calculations, based on EIUYEARSSource: Calculations based on EIU Database. 31. Economic Report on Africa 2014FIGURE 1.10: TOTAL EXPORTS BY ENDOWMENT GROUPING, 20112014Exports of goods by oil-exporting versus oil-importing in Africa's countries143530252015105Exports (% of GDP)605040302010Source: UNECA calculations, based on EIUGROUPING, 20112014201302011 2012 2013 2014fPERCENTAGE OF GDP (%)YEARSOil exporting countries Oil importing countries Mineral-rich Africa02010 2011 2012 2013 2014fCentral Africa East Africa North Africa Southern Africa West AfricaPERCENTAGE OF GDP (%)YEARSSource: Calculations based on EIU Database.FIGURE 1.11: TOTAL EXPORTS BY SUBREGION, 20102014Source: Calculations based on EIU Database. 32. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsFIGURE 1.12: INTERNATIONAL RESERVES, BY SUBREGION AND ENDOWMENT GROUPING, 2012201415Africas exports are projected to decline further to 27.5 percent of GDP in 2014, in all subregions except East Africa(figures 1.10 and 1.11). There they show a slight gain due toincreasing non-traditional exports such as floriculture andtrade in services, especially in Ethiopia, Kenya and Tanzania.Similarly, total imports are expected to decline as a shareof GDP across all subregions with the largest decline inSouthern Africa, from 29.5 per cent in 2013 to 27.3 per centin 2014.INTERNATIONAL RESERVESHIGHER FOR OIL EXPORTERSInternational reserves climbed in US dollar terms by 3.5 percent in 2013, but marginally declined relative to GDP from28.3 per cent in 2012 to 28.1 per cent in 2013 (figure 1.12).Reserves declined in oil-exporting countries but marginallyincreased in oil-importing and mineral-rich countries. NorthAfrica, led by Algeria and Libya, had the highest reserves asa share of GDP (48.0 per cent) in 2013, East Africa the lowest(12.4 per cent). Oil exporters maintained higher reserves(49.1 per cent of GDP) than oil importers (13.1 per cent) in2013. Adequate reserves help countries better manage theireconomies and respond to external shocks, while appro-priatereserves management is essential for minimizingthe opportunity cost of holding reserves and maximizingreturns.1.3 RECENTDEVELOPMENTS INAFRICAS TRADEAFRICA HAS TO DIVERSIFY ITSEXPORTS TO BOOST TRADE ANDSUSTAIN GDP GROWTHAlthough Africas exports have generally kept growing inabsolute terms, they showed declines in 2013 relative toaggregate output.6 And although the volume of Africanmerchandise (or goods) trade grew faster than that ofnon-African economies from 2011 to 2012 (WTO, 2013),Africas share of world exports is still low. In 2012, the conti-nentaccounted for just 3.3 per cent of world merchandiseexports7against 4.9 per cent in 19701979, though a littlebetter than the 2.8 per cent seen in 20002010 (UNCTAD,2013b). Africas share of world imports has witnessed asimilar slowdown.Oil, metal and other mineral exports accounted for morethan two thirds of total export growth over 20022012, andoil alone for more than half of merchandise exports in 2012.In the first half of 2013, goods exports (by value) contractedby 4.1 per cent owing to decreased overall output causedFIGURE 1.12: INTERNATIONAL RESERVES BY SUBREGION AND ENDOWMENT GROUPING, 20122014INTERNATIONAL RESERVES100806040Source: Calculations based on EIU Database.EASTERNAFRICAOIL-EXPORTINGCOUNTRIESCENTRALAFRICASOUTHERNAFRICAWESTERNAFRICANORTHERNAFRICAOIL-IMPORTINGCOUNTRIESMINERAL-RICHCOUNTRIES2012 2013 2014f200PERCENTAGE OF GDP (%) 33. Economic Report on Africa 201416by political instability in Egypt and Libya as well as slowingglobal demand and softening global commodity prices.African imports are dominated by products from the EU-27,accounting for 31.6 per cent of Africas total imports of goodsin 2012. Africas imports from China accounted for 12.7 percent of its total imports, close to the equivalent share ofexports. Africas imports from the US accounted for only 6 percent of its total imports (as in 2000), around half the share ofthe US as an importer of African exports (11.7 per cent).8Even if trade between Africa and its traditional partners(EU-27 and the US) has continued to increase in recent yearsin absolute terms, Africa is diversifying its import sourcesand export destinations in favour of developing economies.Africas share of total world exports to developing countriesincreased from 2.6 per cent in 2000 to 3.8 per cent in 2012(OECD, 2011). After 2009, the BRICS9 became the second-largesttrading partner (after the EU-27) for Africa, excludingSouth Africa (ECA, 2013c).Africa has the natural resources demanded by the BRICSwhile the BRICS have the finance and capital goods that canimprove Africas infrastructure. Yet the AfricaBRICS relation-shipshould not be restricted to this exchange, which doesnot encourage Africa to diversify its exports.More specifically, the AfricaBrazil relationship offers furtherpotential. In one example that may point to the future, aprivate fund has been set up to attract capital from Braziland Japan for large investments in soy and other crops inMozambiques Nacala region (which has a climate similar toBrazils Cerrado).10 In this triangular partnership, called ProSa-vanna,Brazil shares technology with Mozambique whileJapan finances infrastructure to help farmers in Mozambiqueexport their high-value crops.FORMAL INTRA-AFRICANMERCHANDISE TRADE IS RISINGBUT INFORMAL TRADE STAYSSIGNIFICANTIntra-African trade (imports and exports) rose from $67.7billion in 2011 to $73.7 billion in 2012.11 In 2012, the share ofintra-African trade accounted for 11.5 per cent of Africas totaltrade. Between 1996 and 2011, Africas trade with the restof the world grew at 12.0 per cent, faster than intra-Africantrades 8.2 per cent. High commodity prices largely explainthis, as Africas exports to the rest of the world are skewedtowards primary commodities (dominated by mineral, oiland other metal productsfigure 1.13), unlike intra-Africantrade (UNCTAD, 2013b).Although Africas trade is constrained by low export diver-sificationand heightened dependence on primary prod-ucts,within the region non-fuel exporters trade more thanoil exporters. Intra-African trade among oil exporters wasclose to 8 per cent in 20072011 but 16 per cent for non-oilexporters. Intra-African trade also is more diversified andindustrialized than the continents trade with the rest ofthe world: manufactured goods accounted for 40 per centof total intra-African goods trade in 2011, but only 13 percent of that with the rest of the world.12 Thus diversifyingthe production base is expected to boost intra-African trade(UNCTAD, 2013b).Although informal intra-African cross-border trade is notrecorded in the above data, it is nonetheless significant.One recent report suggests that informal trade within theSouthern African Development Community (SADC) accountsfor 3040 per cent of total intra-SADC trade (UNCTAD, 2013b).Such trade also seems high in other subregions, but esti-matesare few. For example, in 2006, 83 per cent of Ugandanexports to its five neighboursDRC, Kenya, Rwanda, Sudan13and Tanzaniawas estimated to be informal (Ogalo, 2010). InWest Africa, the informal sector (beyond just trade) makes upa large proportion of GDP in some countries, with estimatesat 2090 per cent (ECA, AfDB and AUC, 2010). Strategies toformalize informal agentsin trade and other sectorsshould therefore be considered.Intra-African trade is morediversified than the continentstrade with the rest of the worldWith increasing diversificationof trade destinations, Africasshare of total world exports todeveloping countries increasedfrom 2.6 per cent in 2000 to 3.8per cent in 2012 34. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible MechanismsFIGURE 1.13: COMPOSITION OF AFRICAN EXPORTS 2010-2012FIGURE 1.13: COMPOSITION OF AFRICAN EXPORTS, 20102012Composition of African exports to the rest of the world Composition of African exports to Africa1717% All food items2% Agricultural raw materials5% Ores and metals32% FuelsPearls, precious stonesand non-monetary gold4%40% Manufactured goods0% Not elsewhere allocatedAll food items 7%Agricultural raw materials 2%Ores and metals 10%Fuels 63%Pearls, precious stonesand non-monetary gold4%Manufactured goods 12%Not elsewhere allocated 1%Source: UNCTAD, 2013, accessed 6 September 2013.Source: UNCTAD (2013b). 35. Economic Report on Africa 2014FIGURE 1.14: SHARE OF TOTAL IMPORTS AND EXPORTS OF COMMERCIAL SERVICES 2012, AFRICA18AFRICAS TRADE IN SERVICES ISON AN UPWARD TRENDThe steep increase of global trade in services in the pastthree decades has been reflected in Africa. Services are thefastest-growing sector in the global economy, accounting forone fifth of global trade and three quarters of global output;the value of Africas total exports of commercial services14to the world more than doubled over the last decade (WTO,2013).In Africas services imports in 2012, transport is by far thelargest subcategory, accounting for 39.3 per cent, followedby travel which makes up 16.5 per cent (figure 1.14). The lowshare of Africas trade in categories such as business services15is a disturbing sign, as they add high value and are crucial foreconomic diversification.Africas services exports increased from $31.6 billion in 2000to $91.2 billion in 2012a rather encouraging sign consid-eringservices critical role in development and job creation(World Bank, 2010). One sector that offers great potentialfor growth in services is the financial services sector, whichis underdeveloped in most African countries. Africas mainservices exports are travel (47 per cent), transport (29 percent), business services (11 per cent) and communications (5per cent).POTENTIAL POLICIES TO BOOSTAFRICAS TRADE AND ITS IMPACTON ECONOMIC TRANSFORMATIONAmong the key factors constraining Africas trade are itsnarrow production and export base, which is dominatedby primary commodities, very high trade costs, tariff andnon-tariff barriers to intra-African trade, and access to inter-nationalmarkets. Trade and growth policies should thereforeinclude the following efforts.Enhancing productive capacity and widening the produc-tionand export baseAs discussed many times in previous Economic Reports onAfrica (ERAs), such policies must be based on a long-termdevelopment planning framework that enables governmentsto work closely with stakeholders to identify and addressmarket failures and other constraints such as the infrastruc-turegap, skills gaps and poor access to credit, all limiting Afri-casinvestment and productivity growth.Reducing trade costsAfrica (excluding North Africa) is one of the most expensiveregions for trading internationally, along with Eastern EuropeFIGURE 1.14: SHARE OF TOTAL IMPORTS AND EXPORTS OF COMMERCIAL SERVICES IN AFRICA, 2012SHARE IN TOTAL IMPORTS OFCOMMERCIAL SERVICES 2012, AFRICAOthercommecialTravelTransport servicesservices44.3%39.3%16.5%Source: International Trade and Market Access Data, WTO, accessed 25 October 2013.SHARE IN TOTAL EXPORTS OFCOMMERCIAL SERVICES 2012, AFRICASource: WTO International Trade and Market Access Data (Accessed 25 October 2013)46.8%29,1%24,0%TransportservicesOthercommecialservicesTravel 36. Dynamic Industrial Policy in Africa: Innovative Institutions, Effective Processes and Flexible Mechanisms19and Central Asia (where, however, the share of land-lockedcountries is higher). Trade document requirements areparticularly burdensome by international standards, with anaverage of eight documents needed for exports and nine forimports. In Africa, import procedures (including documentpreparation, customs, terminal handling and inland trans-port)take 22 per cent longer than exporting ones and aresome 25 per cent more costly (ECA, 2013b). Trade-relatedcosts vary greatly in Africa but are particularly high in land-lockedcountries, largely due to expensive inland transport.Trade costs are also sometimes higher within Africa thanbetween Africa and the rest of the world (ECA, 2013b). SomeAfrican countries such as Algeria, Burkina Faso, Egypt, Ethi-opiaand Rwanda have started reducing cross-border tradecosts relative to the world average despite a rise in the globaltrend of these costs in nominal terms (ECA, 2013b). Thesecountries are proof that trade costs can be reduced by facil-itatingmovement of goods and people across borders andsimplifying custom procedures.Mobilizing resources for regional integration and tradeAs discussed in ERA 2013, implementation of the Conti-nentalFree Trade Area is expected to help address many ofthe constraints to intra-African trade. Indeed, removing allremaining tariff barriers within the continent, coupled withmaking customs procedures and port handling twice as effi-cient,could double intra-African trade within the next 10years (Mevel and Karingi, 2012). Such reforms would primarilyboost industrial trade while offering great opportunities forstructural transformation. Hence the Continental Free TradeAreas Action Plan recognized that efforts to boost intra-Af-ricantrade need to go beyond lowering trade barriers, andit has designated trade facilitation as a priority. The ActionPlan also recognizes improving productive capacities andtrade information and integrating factor markets as critical toboosting intra-African trade. Yet such measures are costly andwith aid from traditional donors under greater pressure, theirfinancing will have to rely more on domestic resources.Enhancing AfT effectivenessOver 20092011, $16.3 billion of commitments and $11.9billion of Aid for Trade (AfT) disbursements were made toAfrica.16 However, the share of AfT allocated for trade facili-tationremains low overall and for Africa in particular (1 percent of AfT to Africa in 2011 was devoted towards tradefacilitation), despite research suggesting that improvingthe efficiency of Africas customs and administrative proce-durescould have a substantial impact on trading costs acrossthe continent (ECA, 2013a). Further, during 20062011, thedisbursements-to-commitments ratio for AfT to Africa wasthe lowest of any world region. Hence a higher share of AfTcommitments disbursed, coupled with improved donor coor-dination,would improve AfT effectiveness in Africa.Boosting the development impact of trade negotiationsand agreementsDevelopments in multilateral trade negotiations have pivotedaround the 9th World Trade Organization (WTO) Ministe-rialConference held in Bali in December 2013. Thirteenyears after the Doha Ministerial Declaration, WTO membersreached agreement in Bali, sealing the WTOs first multilateraldeal and helping revitalize the multilateral process, whichhad been threatened by the prolonged stalemate of theDoha Development Agenda and by the proliferation of bilat-eralagreements and the move to plurilateral negotiations.The agreement on trade facilitation signed at Bali is expectedto boost global trade and economic growth. African coun-triesstand to gain considerably from any reduction intrade-related costs, even though they may have to undertakedeeper reforms to align themselves with the agreementscommitments. The agreement thus provides an opportunityfor African countries (particularly land-locked ones) to lockin and implement critical reforms to facilitate internationaltrade.Beyond trade facilitation, the Bali Package encompasses onlya narrow subset of the issues covered by the Doha Devel-opmentAgenda. In agriculture, member countries haveagreed to refrain from challenging, through the WTO disputeRemoving all remaining tariffbarriers within the continent,coupled with making customsprocedures and port handlingtwice as efficient, could doubleintra-African trade within thenext 10 yearsThe Bali Package provides anopportunity for African countriesto lock in and implement criticalreforms to facilitate internationaltrade 37. Economic Report on Africa 20142007 2008 2009 2010 2011Savings Investment Resource gap20settlement mechanism, support provided by developingcountries for staple food crops through public stockholdingprogrammes. However, no binding agreement was reachedon the long-standing issue of developed countries exportsubsidies. Nor do the commitments for duty-free, quota-freemarket access for exports from least developed countries, orthose for preferential rules of origin for these countries, havea binding nature. African countries must therefore developgreater capacity to coordinate, negotiate and lobby to ensurethat key issues from the Doha Development Agenda (agricul-turalmarket access, cotton, etc.), unresolved at Bali, can nowbe addressed.African countries need to make concerted efforts to enhancethe developmental impact of existing and potential bilateralagreements. Notwithstanding the potential benefits and risksfor Africa such as decisions by the US on renewing (or not)the African Growth and Opportunity Act, African countriesshould explore and exploit opportunities to benefit more byfully exploiting the trade preferences allocated under the Act,for example, by lowering the high tariffs on imported inter-mediateinputs that could allow African firms to use cheaperinputs in their production processes and further add value toexported goods.1.4 UNTAPPEDAPPROACHES TOBRIDGING AFRICASFINANCING GAPScaling up both domestic and external financial resourcesis central to Africas industrialization as its financing gapremains large, at around 6 per cent of GDP in 2011, with thegross domestic savings rate consistently lower than the grossdomestic investment rate since 2008 (figure 1.15). Despiteimproved recent economic growth, domestic savings haveconsistently fallen short of the continents investment needs(see ERA 2012 and ERA 2013), whereas ODA is expected tocontinue to decline in the near future. Africa thus needs tofocus on more innovative or untapped approaches to mobi-lizingdomestic resources and external private capital.FDI flows to Africa have been steadily increasing over the lastfew years, from $20 billion in 2001 to $50 billion in 2012, a riseof 5 per cent from 2011. Although such inflows are concen-tratedin extractive industries, there are an increasing numberof success stories of market-seeking investments, particularlyin manufacturing FDI not directly linked to these indus-tries.Examples of market-seeking FDI include investmentsin the automotive sector in South Africa, leather in EthiopiaFIGURE 1.15: AFRICAS DOMESTIC FINANCING GAP, 200720