INNOVATION, GROWTH AND STRUCTURAL CHANGE IN AFRICA:

DEVELOPMENT STRATEGIES FOR THE LEARNING ECONOMY

Innovation Diffusion in Low Income Countries

Growth Research Workshop

London, November 2

Bengt-Åke Lundvall

Globelics Secretariat, Aalborg University

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THE STRUCTURE OF MY LECTURE1. Uneven development of information regarding what is

happening in Africa in respectively material production (the production system) and knowledge (the innovation system)

2. Linking structural change to learning and the knowledge base.

3. What we do know about growth and structural change in Africa

4. Two different interpretations and prescriptions in the policy sphere.

5. What we do know about innovation, learning and knowledge in Africa.

6. Old and new perspectives on innovation and development within the research community.

7. Is there a third road for research and policy?

8. Managing the openness of national innovation system.

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WHAT WE KNOW AND WHAT WE DO NOT KNOW • We have detailed information on the production and export of oil

and other commodities emanating from the formal sector. Gives an over all picture of economic growth and structural change.We know much less about the production taking place in the informal sector (which dominates and remains increasing its share in terms of employment).

• We have only rudimentary systematic information on the knowledge base of the economy. This is true both for the formal and the informal sector.

• Experimental data gathering on standard indicators of STI supported by Sida and Nepad from 2014.

• Formal education data by Unesco are somewhat patchy.• Overviews of policy intentions regarding STI-policy• Perceptions of northern business community in competitiveness

reports

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ON THE STRENGTH AND WEAKNESS OF CASE STUDIES AND STORYTELLING

• In the absence of systematic data we come to depend on case studies and story telling regarding upgrading, learning and innovation.

• Case studies give rich information and they can take into account specific context and sometimes they can even produce new theoretical perspectives.

• But if they are not set in a context of systematic data it is difficult to assess their relevance and validity.

• There is a risk of biased selection of case studies that support to ideological interpretations and policy recommendations.

• In a highly contested field such as development theory this is highly problematic.

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KNOWLEDGE AND LEARNING ARE AT THE CORE OF DEVELOPMENT IN COUNTRIES AT ALL LEVELS OF INCOME!

1. Development is a learning process and learning is a prerequisite for development

2. Learning is an emancipatory process for people and countries.

3. Structural change is a process where individuals and organisations learn to do new things and learn to use new methods.

4. To establish institutions and organisational forms that support learning is key to development.

5. But we know far too little about how knowledge creation, learning and innovation and about how it shapes structural change in Africa. No or very poor indicators.

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WHAT WE KNOW ABOUT AFRICA’S STRUCTURAL CHANGE

1. A new era of economic growth in Africa?

Since 2000 the continent has seen a prolonged commodity boom and sustained growth trend. And although growth slowed from an average of 5.6 per cent in 2002–2008 to 2.2 per cent in 2009 . It rebounded strongly to 5.0 per cent in 2012, despite the global slowdown and uncertainty.

2. But not much too show in terms of development

Yet this impressive growth story has not translated into economic diversification, commensurate jobs or faster social development: most African economies still depend heavily on commodity production and exports, with too little value addition and few forward and backward linkages to other sectors of the economy

3. Deindustrialisation is a major problem

The key challenge for African countries today is how to design and implement effective policies to promote industrialization and economic transformation. Despite some gains in manufacturing over the last decade, the continent is yet to reverse the de-industrialization that has defined its structural change in recent decades:

UN ECONOMIC REPORT ON AFRICA 2013

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THE DRIVERS OF GROWTH IN THE LEAST DEVELOPED COUNTRIESAnother important contribution to the disjoint between growth and development comes from Valensisi and Davis (2011) :

In other words, the pattern of LDC growth in the last decade – be it in terms of sectoral contribution to GDP, sources of aggregate demand or export specialization – has largely failed to address the fundamental challenges of economic diversification and capital accumulation, and was often characterized by limited inclusivity.

                                                       

With regard to the demand side of the economy, three stylized facts emerge for the 2000‐2009 period

1. Final consumption expenditure represents the main source of expansion of aggregate demand.

2. Limited contribution of gross capital formation to overall demand expansion.

3. Exports provide a decisive impulse to demand growth while imports of goods and service – have been growing faster than exports in 38 out of 49 cases. that implies that in the period analyzed, the net effect of international trade flows on demand expansion was actually negative for the overwhelming majority of LDCs. 

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SECTORAL CONTRIBUTIONS TO GROWTH IN LDCS 2000-2009 AND EMPLOYMENT

Strong growth in services (informal and low-productive) and in extractive industries

Decline in the importance of manufacturing and agriculture as shares of GDP. Net import of food!

In most LDCs the employment elasticity (the job creation triggered by 1% growth) has become smaller as compared to the 1990’s

Underemployment and youth unemployment are serious threats to stability – given the current composition of the population and the ongoing population growth.

Falling income per capita for the poorest in Africa – an increasing share of the world’s poor are in Africa

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GROWTH REDUCING STRUCTURAL CHANGE IN AFRICA

Important contribution by Mc Millan and Rodrik (2011):

1. A classical pattern in catching up economies is that part of the aggregate growth reflects that labour moves from low productive (agriculture) to high productive (manufacturing) activities.

2. 1990-2005 the contribution from structural change was positive in Asia but negative in Africa. Labour moved from more into less productive jobs.

Authors: Our empirical work shows that countries with a comparative advantage in natural resources run the risk of stunting their process of structural transformation..

Structural change, like economic growth itself, is not an automatic process. It needs a nudge in the appropriate direction, especially when a country has a strong comparative advantage in natural resources.

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BWI VERSUS UN1. The Bretton Woods Institutions (BWI) (IMF and the World Bank

– often supported by OECD) argue in favor of strategies of low barriers to trade, full respect for property rights – including international IPRs - openness to FDI, unregulated financial flows, making life easy for private sector enterprises and against sector specific industrial and trade policy. When these recipees do not give good results BWI propose more of the same treatmen+’good governance’

2. The UN development experts recommend active industrial policies aiming at making economies more diversified through import substitution and less dependent on commodities and natural resources. The fact that there are few examples of success with import substitution strategies in Africa is explained by the fact that these strategies were aborted in Africa after a rather short period.

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SAME DATA – DIFFERENT INTERPRETATIONS

45 African countries are highly specialized in commodity exports and they have become increasingly specialized in commodities in the new millenium (Unctad: The State of Commodity Dependence Report 2014)

1. This observation gives rise to different interpretations:

1. BWI presents this as an opportunity for African countries and point to the increasing potential for upgrading through global value chains offered by commodity production.

2. UN experts present this as a fundamental problem since it reflects deindustrialisation and stagnation in agriculture. Hereby undermining future economic growth as well as stability.

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THE KUTSNETZ DILEMMAKutsnetz on aggregation of sectoral growth rates:

1. New high growth sectors are crucial for long term growth but in the short term their contribution is limited.

Assume that a new sector constitutes 1% of total national income and that it grows with 10% per annum – then it would contribute with 0,1% per annum to GNP.

2. An increase in growth in the major sectors now dominating the economy has a major impact upon economic growth in the short term.

Assume that agriculture contributes with 30 % of national income. Increasing productivity with 1% in agriculture would then contribute with 0.3% to GNP.

Industrial policy must combine the creation of new sectors with upgrading the currently dominating ones, including agriculture.

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WHAT WE KNOW ABOUT THE KNOWLEDGE BASE IN AFRICA1. STI indicators are not very relevant and they are scarce

and unreliable in Africa.

1. Almost no business R&D. Government R&D between 0.1 and 0.5% of GNP. Mainly in Higher education.

2. Innovation takes the form of product quality enhancement. Internal sources and customers are main background for innovation. Most innovations were developed domestic.

3. Bibliometrics show relative strength in relation to medicine and agriculture. Little intra-regional scientific collaboration.

We should give high priority to develop complementary indicators referring to experience based learning – in all parts of the world – but not least for Africa!

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THE RESEARCH COMMUNITY ON INNOVATION AND DEVELOPMENT REFLECT A SIMILAR SPLIT

1. Traditionalists (often located in the South) believe that old development economics is still relevant

Active state intervention to

• Accelerate capital accumulation

• With key role for manufacturing

• Import substitution

• Build stronger national innovation systems

2. Modernists (often located in the North) argue that new technologies and new patterns in the international division of labor opens up/requires new development strategies

• Building competence on the basis of natural resources.

• Joining global value chains – learning from global interaction with multinationals.

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THE MODERNIST ATTACK ON THE NATURAL RESOURCE CURSE1. Historical data show that countries can grow rich on the basis of natural resources – this is true for the US as well as for the Nordic countries.

YES: BUT THESE CASES INVOLVED AMBITIOUS INSTITUTION BUILDING AND INVESTMENT IN EDUCATION AND KNOWLEDGE AND THEY TOOK PLACE IN A RADICALLY DIFFERENT HISTORICAL GLOBAL CONTEXT.

2. There are examples of successful transformation of natural resource activities into knowledge intensive networks with upstream and downstream spin off activities.

YES: BUT THERE ARE MORE EXAMPLES WHERE THE NATURAL RESSOURCE INDUSTRY REMAINED QUITE ISOLATED (Oil and gas in Nigeria, Algeria and many other countries in Africa).

3. The assumption that terms of trade would always move against natural ressource based commodities has been falsified.

YES: BUT THE FLUCTUATIONS IN DEMAND AND PRICES REMAIN DRAMATIC WITH A DESTABILISATION EFFECT ON THE OVER ALL ECONOMY

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GLOBAL VALUE CHAINS AS NEW ROAD TO DEVELOPMENT 1. It is undisputable that more and more international trade takes the form of commodity trade.

BUT: WE DO NOT KNOW MUCH ABOUT WHAT PROPORTIONS OF THIS BIG AND INCREASING VOLUME OF TRADE THAT INVOLVES ELEMENTS OF NON-MARKET INTERACTION BETWEEN CUSTOMER AND SUPPLIER. MUCH OF IT IS EITHER ‘CAPTIVE’ OR ‘PURE MARKET’ ARM’S LENGTH TRANSACTIONS AND HERE UPGRADING WILL NOT FOLLOW.

2. There are case studies indicating that some of the firms that become suppliers of multinational firms enhance the quality of their production processes and their products. (Functional upgrading, on the other hand, will normally lead to conflict with the dominant multinational firms.)

BUT: TO WHAT DEGREE SUCCESSFUL UPGRADING HAS AS PREREQUISITE LOCAL AND NATIONAL CHARACTERISTICS OR INITIATIVES IS OFTEN NEGLECTED IN THOSE CASE STUDIES.

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UPGRADING DEPENDS ON LOCAL AND NATIONAL CHARACTERISTICS1. Guiliani, Pietrobelli and Rabelotti (2005) analyses upgrading in

connection with local, national and global interaction in Latin America on the basis of no less than 40 case studies. The analysis confirms that in order to explain how integration in global value chains affect upgrading in the firm you need to take into account the characteristics of regional and national systems of innovation and especially the firm’s own effort to engage in capacity building.

2. In Xiaolan Fu, Carlo Pietrobelli and Luc Soete (2011) “the benefits of international technology diffusion can only be delivered with parallel indigenous innovation efforts and the presence of modern institutional and governance structures and conducive innovation systems.”

Therefore joining global value chains should not be presented as the ALTERNATIVE to national innovation, industrial and trade policy. Nonetheless this seems to be the case currently in Latin America where BWI successfully are pushing a neoliberal agenda.

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IS THERE A THIRD ROAD?A. It is a good idea to promote innovation and to build competencies in connection with natural resource based activities – especially agrofood sectors.

BUT: It is not a sufficient strategy for development!! There is a need to develop industrial and trade policies aiming at promoting unrelated sectors (including manufacturing activities) with growth potential and this requires active industrial policy. No indications in Africa that there is a ‘natural path’ leading from depence on natural resources to a diversified economy

B. Enterprises and clusters can use participation in global value chains to upgrade production processes and the quality of products.

BUT: It is not a sufficient strategy for development!! There is a need to develop public policies to build a stronger national innovation system and local competence and not least to prepare ‘breaking the chains’ (cf. Korea and Taiwan). Without such policies most firms and enterprises from low income countries would remain low productive prisoners in the chain and the over all development impact would be limited.

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ON THE NEED FOR NEW TYPES OF RESEARCH TO AVOID ‘FALLACY OF COMPOSITION’

Modernists tend to refer to case studies showing good examples of building sectoral innovation networks around natural resource activities and successful examples of upgrading in global value chains.

But there are many counterexamples and one cannot draw conclusions from case studies of single firms and sectors to aggregate performance of national systems of innovation.

There is a need to develop methodologies that link to each other national economic development, participation in trade, openness to foreign direct investment and the strength of the national innovation system.

Work by Fagerberg indicates that ‘economic openness’ does not contribute to explaining ‘catching-up’ while the strength of the national innovation system has a significant impact. A major problem is the lack of data on innovation and competence building in Africa. We are working on that in a new paper.

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FOSTERING A LEARNING ECONOMY THROUGH PUBLIC POLICY AND INSTITUTIONAL DESIGN

1. Non discrimination (gender, youth and ethnic minorities)

2. A stronger focus upon technical training, engineering and design

3. Industrial and trade policy - needs to promote industries with learning potential through combining protection with exposure!

4. Policy learning should be stimulated (cf. Chinese example 1985-2000)

5. A key issue is to build a strong national innovation system supporting old sectors such as agriculture as well as new manufacturing sectors. And not least to ‘manage the openness’ of the system.

6. A new global regime for knowledge sharing and knowledge protection – compensation to LDC for brain-drain and access to knowledge sharing.

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SOURCES ON THE RECENT AFRICAN GROWTH RECORD

McMillan, M.S. and Rodrik, D. (2011), ‘Globalization, structural change and productivity growth’, NBER Working Paper no 17143.

Jomo K. S. et al (2012), Globalization and Development in Sub-Saharan Africa United Nations Press, New York.

Stiglitz, J., Lin, J. and Patel, E. (2013), ‘Industrial policy in the African context’, World Bank Working Paper, S6633, World Bank.

United Nations (2013), The UN 2013 Economic report on Africa, New York, United Nations.

Unctad (2013), The least developed countries report, 2012, Harnessing Remittances and Diaspora Knowledge to Build Productive Capacities, Geneva, Unctad..

Valensisi, G. and Davis, J. (2011), ‘Least developed countries and the green transition: towards a renewed political economy agenda’, Merit Working Paper November 2011.

Gehl Sampath, P. (forthcoming), Sustainable industrialisation in Africa, Palgrave Macmillan.

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Thanks for your attention!