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Lessons for African Economies from Irish and East Asian Industrial Policy

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Abstract

When comparisons in terms of industrial policy lessons to be learned have taken place, it has tended to be solely vis-a-vis the ‘development state’ East Asian experience. This paper broadens the analysis and considers lessons which African countries can learn from other so-called ‘tiger’ economies including Ireland and the East and South Asian countries. We recognise that the latter are indeed clearly significant as many African countries at the time of independence had economic structures and levels of income quite similar to East Asian countries, yet have grown at vastly different rates since then. Exploring why this has been the case can thus offer important insights into possibilities for industrial policy. Yet this comes with some health warnings over East Asian experience. We suggest that another important contribution can come by looking at the Irish example, given its emphasis on corporatism rather than simply relying on state direction in the operation of industrial policy. The Irish model is also more democratic in some senses and has protected workers’ rights during the development process in contrast to the often highly dirigisite East Asian model. Overall we suggest that some immediate actions are needed, notably with regard to the financial system in small African economies. Without such changes, a poorly functioning financial system will continue to keep investment at low levels. In relation to the small size of the African economies, the paper recommends regional integration and sufficient overseas development assistance (ODA) for infrastructural development. It is also critical to note that the various small African economies each face their own industrial and economic development challenges, and that a ‘one size fits all’ approach is not appropriate; rather the key is to tailor policies and systems to the unique opportunities and development challenges in each African country.

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Notes

  1. Amsden (1989) and Wade (1990) are two well known representative studies from the huge literature on this subject.

  2. These were the high growth periods for the two countries. In 1973 Japan was still more like a developing country than it has been since. See further Singh (1995).

  3. On the latter point, numerous studies on the barriers encountered by small firms in Ireland have pointed to access to finance as being the single most critical issue (Forfás 1994; Goodbody Economic Consultants 2002; Global Entrepreneurship Monitor 2001). Very recent work on the Irish case shows that small businesses continue to experience difficulties in obtaining appropriate levels of finance for start-up and growth (Small Business Forum, 2006). This finding has been reiterated in recent work with regard to small firms in Africa.

  4. Singh (1995) comments on the inter-relationship between industrial policy and macro economic stability with particular reference to the experience of East Asian countries. To the extent that industrial policy was effective in Japan or the Republic of Korea in relieving the balance-of-payments constraint, it will also have aided macroeconomic stability. A current account balance at the desired growth rate can help to avoid the stop-go cycles which many economies experience. This, in turn, will lower the cost of capital since for a given savings rate in the economy, other things being equal, the more variable and unstable the economic performance, the higher the interest rate. Similarly, faster economic growth also leads to faster growth of real wages, and hence enhances social stability and the political legitimacy of the socio-economic order. Thus, macroeconomic stabilization and industrial policy interact with each other in a virtuous circle of cumulative causation.

  5. For further discussion on the systems perspective of innovation, the interested reader should refer to Matcalfe (1994).

  6. Ireland has the highest fertility rate in the EU, and between 1981 and 2001 experienced a population increase of 15 per cent, from 3.5 million to just over 4 million in 2004 (NESC 2005: 1).

  7. UNCTAD (2008; 25) notes that monetary or non-monetary resource transfers by migrants to their home countries are increasingly recognized as an important source of financing for development in Africa, being the second largest source of development capital flows to developing countries.

  8. Quite why the Irish economy prospered at this time when the state pursued a very restrictive fiscal policy has been the subject of much debate. The European Commission saw it as an "expansionary fiscal contraction" which led to improved confidence and greater consumption and investments (EC Commission 1991; McAleese 1990). Others have stressed the Lawson boom in Britain which raised demand for Irish products and fall of the oil-prices; "Irish policy makers were just lucky that their adjustment was carried out at a time when world growth became buoyant and world interest rates were falling" (Bradley et al. 1993). Kennedy (2001: 131-2) also suggests that growth in the US economy and the advent of the Single Market after 1993 were important factors.

  9. MITI (the Ministry of International Trade and Industry) in Japan may have played a similar consensus-building role after the Second World War through to the 1980s (see Bailey and Sugden, 2007).

  10. See Bailey and Cowling (2007) who note that industrial policy in the US and Japan has involved both vertical measures in targeting new technologies and emerging industries, and horizontal measures to support all industries, suggesting that the current focus in Britain and the EU with the horizontal aspects of industrial policy has been largely misplaced.

  11. A related point is made by Gottheil (2003) when he argues that FDI is highly mobile and that in the case of Ireland there is also the additional threat that other countries (e.g. some of the New Member States) may also introduce low corporate taxes. He proceeds to argue that from the perspective of a potential investor that “It’s the best corporate tax deal that matters” (p. 734).

  12. For a discussion of the concepts and estimation of deadweight and displacement, in the context of Ireland, see Lenihan (1999 and 2004) and Lenihan and Hart (2004).

  13. Even as far back as 1989, there were 307 US companies located in Ireland. By 2001, the number of US companies reached a peak at 531 (source: UNCTAD WID (2005) Country Profile Ireland and various Annual Reports from IDA Ireland (various years).

  14. On the development of stock markets and banks in Africa, see further Singh (1999) and Singh (2009).

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Acknowledgements

Helena Lenihan worked on this paper whilst a Visiting Fellow at the CBR, Judge Business School, University of Cambridge and concurrently at Wolfson College, University of Cambridge, UK and finally at CSME, Warwick Business School, University of Warwick, UK.

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Authors and Affiliations

  1. Department of Applied Management, Coventry University Business School, UK, Coventry, UK

    David Bailey

  2. Department of Economics, Kemmy Business School, University of Limerick, Limerick, Ireland

    Helena Lenihan

  3. Judge Business School, University of Cambridge, Cambridge, UK

    Ajit Singh

  4. University of Birmingham Business School, Birmingham, UK

    Ajit Singh

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Correspondence to Helena Lenihan.

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Bailey, D., Lenihan, H. & Singh, A. Lessons for African Economies from Irish and East Asian Industrial Policy. J Ind Compet Trade 9, 357–382 (2009). https://doi.org/10.1007/s10842-009-0049-2

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