The World Bank, Neo-Classical Economics and the Application of Asian Industrial Policy to Africa

  • Howard Stein
Chapter
Part of the International Political Economy Series book series (IPES)

Abstract

The extraordinary industrial expansion of Asian countries in the last decade stands in stark contrast to the general economic malaise permeating Sub-Saharan Africa. Between 1980 and 1989 industry in East and South East Asia grew at an astounding 10.4 per cent per year. In contrast, Sub-Saharan Africa’s industrial expansion was an anaemic 0.7 per cent per annum. This pattern of rapid industrial expansion in the last few decades has been associated with a rising standard of living in Asia leaving Sub-Saharan Africa further behind. Between 1965 and 1989, GNP per capita grew at 5.2 per cent per year in East and South East Asia while Sub-Saharan Africa could only manage 0.3 per cent per year. By 1989 manufacturing accounted for 33 per cent of GNP in East and South East Asia, while the comparable figure was only 11 per cent in Sub-Saharan Africa (World Bank, 1991, pp. 204–9).

Keywords

Comparative Advantage Real Exchange Rate Structural Adjustment Import Substitution World Development Report 
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Notes

  1. 1.
    There is a growing literature, on the other hand, examining Asia and Latin America. See for example Naya et al., 1989; Evans, 1987; Ranis, 1989; and Harberger, 1988. With the exception of Evans these examples are interpreted in neo-classical economic terms and are of little assistance to scholars searching for a theoretical framework for comparing Africa and Asia (more on this below). One recent paper (Ranis, 1990) not only compares Latin America and Asia but also tries to draw lessons for Africa. His argument is typically neo-classical, that Latin America went further along the road of import substitutions with more market distorting policies and therefore has found the road to exporting more difficult. His solution for Africa is to follow the Asian route, as he sees it, by first emphasizing mixed rural development (they are land-abundant) while pushing broad liberalization which will still leave room for ‘natural’ import substitution (pp. 23–5). The argument below will indicate ‘natural’ is hardly the word to describe industrialization in Asia import substitution or otherwise. The most significant exception to the focus on Latin America is Lindauer and Roemer (1993) which contains comparisons of Asia and Africa by major sectors. As indicated in chapter one, the study falls into the rubric of what 1 refer to as the ‘revisionist’ neo-classical position; it recognizes the widespread intervention of states but argues that government policy initiatives did not alter what would have been predicted by their static comparative advantage as given by their factor endowments.Google Scholar
  2. 2.
    The most influential contributions (influential in the sense of being widely cited and being in positions of considerable influence in academia or international agencies) would include Little et al., 1970; Little, 1981; Krueger, 1978; Krueger, 1981; Bhagwati, 1978; Balassa, 1971; Balassa, 1981; and Balassa et al., 1982.Google Scholar
  3. 3.
    I believe that this is one of the weaker factors pointed to in the literature given the wide array of cultures that have been associated with rapid industrial development. Even Confucianism following the tradition of Max Weber and Talcott Parsons was considered to be (as late as the 1970s) an impediment to capitalist development in Asia. For a summary of the Weber–Parsons model and the literature it spawned see Tai, 1989.Google Scholar
  4. 4.
    A few examples might be helpful. In the African context on sources of price distortions see Robert Bates, 1981; 1987. On impediments to reform in Africa see Commins 1988, (particularly articles by Christianson et al. and Bates). Finally on the political economy of the NICs, see Haggard, 1988. What is common to these examples is that they add a political dimension to the neo-classical model of development never questioning the validity of its premises.Google Scholar
  5. 5.
    The definition of efficiency is completely neo-classical using the Pareto criteria that ‘an economy is considered production efficient if the supply of any good (or service) cannot be increased without reducing the supply of snme other aood’ (World Bank. 1983. n. 42).Google Scholar
  6. 6.
    Even the World Bank admits this elsewhere. For a good discussion of these problems see Meier and Steel, 1987, pp. 270–3.Google Scholar
  7. 7.
    Weiss (1988) points to many other weakness of the exercise.Google Scholar
  8. 8.
    A few examples of the literature include Wade, 1984; Wade, 1988a; Wade, 1988b; Wade, 1990; Luedde-Neurath, 1986; Luedde-Neurath, 1988; and Reiger and Veit, 1990.Google Scholar
  9. 9.
    Some of this information comes from an interview with Prof. S. Gordon Redding, Chair of the School of Management, University of Hong Kong, which took place on August 29, 1991 in Hong Kong. An additional source is Youngman (1982).Google Scholar
  10. 10.
    How much market share is due to these policies is of course difficult to ascertain. However, given the population pressures and land scarcity one could imagine, for instance, the enormous rents which would likely arise in an unregulated market putting upward pressure on wages and hurting the competitive position of industry.Google Scholar
  11. 11.
    The discussion on Singapore is base on interviews with Prof. E. F. Pang of the University of Singapore and a Senior Planning Official of the Economic Development Board in Singapore on August 12, 1991. Conversations with Linda Lim of the Business School of the University of Michigan in Ann Arbor during 1990/91 were also helpful. Finally, the discussion draws on Lim (1987) and Rodan (1989).Google Scholar
  12. 12.
    Although it won’t be undertaken here, it is fairly easy to illustrate that announced government policies in Singapore led to shifts in sub-sectoral growth rates that reflected those announced policies and therefore would be unlikely a reflection of shifting market conditions and comparative advantage as neo-classicals would like to argue. Rodan (1989) provides a fairly detailed account of political changes leading to policy shifts which in turn are reflected in adjustments in the structure of industry in Singapore. On this point, see Linda Lim’s chapter in this volume.Google Scholar
  13. 13.
    Following the neo-classical literature, the World Bank has more recently focused on political economy dimensions of adjustment or the politics of reproducibility. In the introduction to a recent World Bank study of the experience of adjustment, the author notes Taken together, these lessons hold a moral for economists. It is that we at the World Bank — and everyone else, I believe — underestimated the political difficulty ... We fail to give full weight in our own thinking to the fact that structural adjustment means a major redistribution of economic power and hence of political power in many of the countries undergoing this process. The politics of change is one of the reasons adjustment has taken more time than expected in some countries and one of the reasons some adjustments efforts have not been sustained. (Stern, 1991, pp. 4, 5) The implication here is that rationality of adjustment is not in any way flawed, it is just that there might be political reasons for resisting it. This is a rational choice interpretation that is very consistent with the literature cited in the above note.Google Scholar
  14. 14.
    This is not to suggest agriculture should be neglected and completely exploited. I do agree that investment in agricultural extension and infrastructure is very important. My disagreement lies with the World Bank generalization that a rapid and significant rise in the terms of trade for agriculture is needed in almost all African countries. If an employment generating labor intensive form of industrialization is to be developed in Africa then any increase in the terms of trade must be carefully weighed against the impact on rural-urban migratory rates relative to the supply absorption of industry and the inflationary impact on wages (or its equivalent fall in living standards). This type of industrialization also implies food oriented agriculture and state intervention in markets, along the lines discussed above, to keep prices at the retail level down. This is also contrary to broad across the board increases for all types of agricultural production and the hands off approach that the World Bank is encouraging. Finally, the World Bank recognition of the importance of state investment in agriculture runs contrary to the practice of structural adjustment where governments have cutback expenditures to meet the deficit and credit targets of the IMF standby accords.Google Scholar
  15. 15.
    During August 1991, I met with Professor Shigeru Ishikawa (a strong critic of structural adjustment) at the Japan International Cooperation Agency (JICA) in Tokyo, prior to his meeting with aid officials to design an alternative approach to dealing with the economic problems of Egypt. I was informed that they were interested in promoting policies more consistent with the history of Japanese economic development. Since then, there has been a proliferation of reports sponsored by Japanese agencies (Japanese External Trade Organization, Ministry of International Trade and Industry, Institute of Developing Economies, etc.) on the lessons from Japan and East Asia for promoting industrialization in developing countries. Contrary to adjustment, the reports emphasize an industrial policy which includes the selective use of instruments (taxes, protection, subsidies, etc.) to promote specific industries (interviews at the Institute of Developing Economies, Tokyo, July 1995).Google Scholar

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© Howard Stein 1995

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