Can Africa afford free trade? Liberalisation, industrial change and prosperity don't always mix

Trade liberalisation involves the lifting of currency restrictions, import controls and other barriers to free trade. It has been widely hailed by economic advisors in the World Bank and IMF as a 'quick fix' capable of reviving industrial development by attracting inward investment and spurring the modernisation of industrial technology. Many economists and policymakers have adopted these axioms. A consortium of UK and African researchers co-ordinated by Queen Elizabeth House, Oxford has questioned whether liberalisation merits its star billing. Focusing attention on the garment and engineering industries of Kenya, Tanzania and Zimbabwe, they found many complex factors lie behind technology and export development. If implemented too hastily or clumsily, liberalisation could easily do more harm than good.

The research report argues that one of the critical components of industrial development boils down to the ability of particular firms to absorb new or improved technologies. Models of adjustment promoted by the IMF and others (and their interpretation of benefits from liberalisation) ignore technological learning processes and the market failures often associated with development geared to liberalisation. Based on a newly devised 'technology index', the researchers itemise real problems African firms face, including specific situations where:

• lack of in-house technological activity is not sufficiently counteracted by new technologies from abroad
• firms lack technically qualified staff, cannot afford employee training and lack awareness of the need for it
• few linkages exist for sample firms to turn to other firms and technological institutions for a helping hand.

The report also notes that the stronger the technological capabilities firms in the study sample possessed, the greater their export activity, and that foreign-run or non-African firms generally possess stronger technological capabilities than African firms. The outcome of liberalisation in any given economy will depend equally on:

• the credibility and pace of liberalisation
• the status of existing capabilities -- defining the 'distance' firms have to travel to survive liberalisation
• the efficacy of related interventions.

Considering lessons from Asian 'Tigers' like Korea, Taiwan, Singapore, and Hong Kong, the report argues strongly for government intervention to foster human capital development and in-firm capabilities. In more specific policy terms it calls on governments and donors to accept that industrial capabilities and liberalisation may need to be moderated by interventions that curb competition, in accordance with a clear-cut decision matrix:

When there is strong base of capabilities before liberalisation, no intervention may be necessary, though interventions on related or nearly competitive activities needing functional support may still be required.

• When capabilities are deficient prior to liberalisation, no intervention to support 'white elephants' is advisable and these should be left to respond to market forces. However, interventions involving potentially competitive activities (those needing functional and selective support) may still be required.
• While import liberalisation had led to a positive technological response from some firms, it was not enough, the report concludes, to establish world class competitiveness across the board. Thus simply 'surviving' liberalisation can never be relied on as a sufficient measure to stimulate national industrial and export growth.

Source(s):
'The Technological Response to Import Liberalisation in Sub-Saharan Africa', Macmillan, edited by Sanjaya Lall, 1998 >
'Learning from the Asian Tigers: Studies in Technology and Industrial Policy' Macmillan, by Sanjaya Lall, 1996

Funded by: University Institute for New Technologies, Maastricht

id21 Research Highlight: 3 December 1999

Further Information:
Sanjaya Lall
Queen Elizabeth House
University of Oxford
Oxford
OX1 3LA
UK

Tel: +44 (0)1865 273 623
Fax: +44 (0)1865 273 607
Contact the contributor: sanjaya.lall@economics.ox.ac.uk

University of Oxford

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