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Infant Capitalists, Infant Industries and Infant Economies Trade and Industrial Policies for Early Stages of Development in Africa and Elsewhere DRAFT.

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Presentation on theme: "Infant Capitalists, Infant Industries and Infant Economies Trade and Industrial Policies for Early Stages of Development in Africa and Elsewhere DRAFT."— Presentation transcript:

1 Infant Capitalists, Infant Industries and Infant Economies Trade and Industrial Policies for Early Stages of Development in Africa and Elsewhere DRAFT Akbar Noman

2 I. Introduction  The resumption of growth in Africa after the “lost quarter century”, has seen limited progress in bringing about economic transformation of the sort that lays the foundations for sustained growth  Share of manufacturing and formal sector employment has been generally declining since Ave.Manuf/GDP share fell from 17.5 percent in 1965 to 12.9 percent in 2009.

3  Relatedly, little success in exporting manufactures and in attracting foreign direct investment in non-extractive activities. Much of the growth of the past decade or so is accounted for by extractive activities in non-renewable resources – minerals, metals and above all, oil  Africa Task Force concerned with these issues: subject of the volume “Good Growth and Governance in Africa: ………

4  Focus here on a related but rather different aspect of learning, industrial and technology policies  Begin with the beginning: Adam Smith explicitly assumed the institution of a class of capitalists -- “previous accumulation” of capital

5  Marx followed Smith, translating “previous” as "ursprunglich” in German which his translator rendered back into English as the famous “Primitive” accumulation  What about economies at an early stage of development without “previous” or ”primitive” accumulation?

6  The recent large literature on institutions, including those required for the existence and functioning of markets largely neglects this question– implicitly assumes existence of capitalists/entrepreneurs in adequate measure

7 II. Infant Capitalist Argument  The explicit assumptions of Smith and Marx and the implicit one of much recent institutional literature (and some reform programs) acquire particular salience at stage where embarking on development aimed at moving beyond simple agriculture and crafts to producing output for which capital and learning are important

8  By definition “modern” private sector and capitalists absent at this stage  Inevitable, the early stages characterized by a form of industrial organization where there is no divorce between ownership and management. The capitalist and the entrepreneur are one and the same  Industrial entrepreneurship requires capital, albeit much of it typically borrowed

9  Alexander Hamilton’s venerable 200+ years old infant industry argument matured 6 years ago with the infant economy argument of Greenwald & Stiglitz  The essence of these is well-known and revolves around learning and spillovers  As does the infant capitalist argument: protection by reducing risks and boosting profits can help create and nurture a class of capitalists and enable learning. Can also help to direct rents into industry and entrepreneurship.

10  Given that capital accumulation and entrepreneurship are intertwined at “infancy”, both physical and human capital are accumulated jointly  Accumulating physical capital is necessary for learning which in turns facilitates further accumulation  This is of special relevance to much of Africa

11 III. Infant Capitalists in Africa  At independence, Africa lacked a class with the wherewithal to become entrepreneurs in “modern” activities. More precisely, to the extent such a group existed, it was dominated by foreigners or ethnic minorities of relatively recent origin  Certainly more recent that say Malaysia with its “bumiputra” promotion program  At independence probably greater divorce than anywhere else between economic and political elites

12  Not surprising then the ambivalence, at best, in the 60s and 70s, towards the private sector and resort to public ownership and management  Many countries still characterized by infant or at best toddler capitalists, especially indigenous ones  Political economy imperative to protect/create/nurture them

13  Whilst individuals/groups have acquired significant wealth in some countries from rent-seeking; they are discouraged from investing in modern transformational sectors  Unproductive rents not associated with investment in industry and learning  Investment climate and related “governance” reforms have been very imperfect substitutes for infant capitalist protection and associated industrial policies

14  These reforms have not so much reduced rents as diverted them into unproductive activities  Rents acquired via incentives to invest by an infant class of industrial entrepreneurs can be vital and facilitate learning  Of the type that succeeded so spectacularly in East Asia and to varying degrees elsewhere in parts of Asia and Latin America

15 IV. Lessons of Success  East Asia is well-known, oft cited case. Often said to be “unique” developmental state not easy replicated  The non-replicability in Africa much exaggerated.  Also example of Pakistan as successful case of what was in effect infant capitalist protection (and surely its governance is not an impossibly high bar)

16  Excellent detailed study by Papanek of how Pakistan created a class of “industrialist- capitalist-entrepreneurs” from scratch almost overnight (5 years)  Papanek; Lewis: how the high and assured profits contributed to the accumulation of capital and learning. Rents acquired by investing in industry  Package of protection and low-interest long- term credit

17  Even the seminal work of Little, Scitovsky and Scott (LSS), otherwise highly critical of “import substitution” acknowledges this achievement  No doubt static efficiency losses but much exaggerated by LSS and others (Noman, 1991) and not so high as to clearly drown out dynamic gains  GDP and industrial growth accelerated to Korean levels before Korea. As did the emergence and growth of manufactured exports.

18  Korea explicitly set out to learn from Pakistan, especially how to combine protection with export promotion  As in E. Asia, availability of long-term credit on reasonable interest rates wasalso crucial  If Pakistan could do it, surely several countries in Africa can

19 V. Concluding Remarks  Danger of excessively high and irrational protection should and can be avoided. The worst sins now much better understood. We have lessons of failure that were not available in the 60s and early 70s  Also now lesson of importance of an experimental approach, of abandoning failures  Still not all governments can do it

20  Avoid extremes of level and variability of protection but some variability needed: moderately high for simple consumer goods in which comparative advantage, lower on intermediates (none for exports); and very low or none on capital goods  There will be rents and corruption everywhere. The question is how to minimize their negative effects and channel them into productive activities and learning

21  Embed protection in a strategy, a vision, in industrialization policy  Ensuring infants grow and learn: exports and competition  Another challenge: avoiding exchange rate overvaluation in resource-rich and aid-dependent economies


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