When industrial policy meets African political realities: lessons from Uganda

Since the global financial crisis of 2008/2009, industrial policy has been widely celebrated as having returned to fashion. Joseph Stiglitz, Justin Yifu Lin and Célestin Monga argued in 2013 that governments around the world were increasingly protecting industries to diversify their economies, heralding the rise of industrial policy on a global scale.

There has also been a proliferation of industrial policy research in Africa over the past decade. These range from comparative case studies to single country case studies.

One of the goals of the research has been political constraints on industrial policy, blaming a singular villain: government corruption. This portrays politics as “evil,” politicians rarely being at fault. Yet the experiences of all successful industrialized countries tell us that policy experimentation, rather than replication, has worked better.

It remains to be seen whether the “new” industrial policy should conform to the market or challenge the market. Proponents of market compliance argue that countries should not experiment with investing in sectors too far removed from their comparative advantage. Market-defying optimists argue that the all-time high shows countries like South Korea have managed to pick winners in sectors far enough from their comparative advantage.

Industrial policy regimes

Four industrial policy regimes have been applied in most African countries at different times since independence.

The first was import substitution. These are trade and industrial policies that encourage domestic production to reduce dependence on foreign imports.

The second is a market driven regime. Policies here ranged from currency devaluation, privatization, trade liberalization to financial sector liberalization. This regime has resulted in a decisive transfer of power from “spending ministries” to “budget ministries”.

The third regime was export-oriented industrial policy. It has been dominant for the past two or three decades. It has been most visible through the Special Economic Zones and the encouragement of businesses in Africa to connect to high-end global markets. This link was most pronounced in the clothing industry.

The fourth regime was nationally oriented industrial policy. It has become more and more visible over the past decade. It involves the protection of national producers and recourse to public markets. Public procurement is used to encourage national consumption of locally purchased goods (through Made In campaigns).

Uganda, Rwanda and Kenya recently increased import duties on used clothing and subsequently banned their imports. Other African countries have used public procurement to secure domestic markets. They include South Africa, Rwanda, Uganda, Kenya and [Ghana](https://www.gsa.gov.gh/made-in-ghana/#:~:text=The%20Made%20in%20Ghana%20(MiG,the%20Made%20in%20Ghana%20campaign)

Industrial policies looking outward and inward have been reproduced in several African countries. Examples include Uganda and Rwanda. This has sometimes been done without adapting these policies to local political constraints.

In a new article, I examine how this replication took place in Uganda. I also examine the challenges associated with failure to adapt policies to local political realities.

Rwanda has implemented similar policies to which the government of President Paul Kagame has remained committed. The government of Ugandan President Yoweri Museveni, on the other hand, has faltered.

I couldn’t wait to understand why.

The article argues for a more historical understanding of industrial policy. The objective is to better understand the contemporary constraints in specific sectors.

Ugandan clothing sector

The case of Uganda shows how national coalitions, for example, with technical support from international financial institutions, can hamper policy implementation. These coalitions have hampered both the Buy Uganda strategy, the Build Uganda strategy and the attempt to increase tariffs on used clothing.

When Uganda, Kenya and Rwanda proposed a ban (or an increase in tariffs) on imports of used clothing, the United States threatened to withdraw its preferential market through the African Growth and Opportunity Act. .

This shows the first of two problems with bilateral trade treaties. The first is that they limit a country’s ability to adopt policies that focus on the domestic market and prioritize exports. In addition, the export-first industrial policy has empowered foreign companies, which depend on preferential market access through bilateral treaties.

This has certainly been the case in Uganda.

The Ministry of Finance and the Central Bank led the charge against the country-oriented industrial policy. They have consistently publicly expressed their dissent against country-oriented industrial policies. And the comparatively weaker Ministry of Industry, Trade and Cooperatives has struggled to adopt industrial policies.

It has become common practice to analyze the constraints of industrial policy by examining the technical (industrial policy instruments) or transient (how the powerful oppose it) costs. However, historical analysis highlights two other essential constraints. The first is whether the balance of power within ministries has shifted towards budget ministries, favoring limited waste.

Yet if experimentation is at the heart of a successful industrial policy, waste would be inevitable.

The second constraint concerns the existence of an intellectual space to think about how politics can shape the possibilities rather than just being a hindrance. The pursuit of pluralistic policies in Africa is hampered by the predominance of neoclassical economics in universities and budget ministries. This means that there is little room to challenge market-induced assumptions associated with the policies of multilateral financial institutions.

This is why there has been little adoption of country-oriented industrial policies in Uganda. The Ugandan government continues to prioritize supporting export-oriented businesses. And the current domestic political environment does not make it possible to support companies that produce for the internal market.

Currency constraint

Most of the former colonies depended on commodity exports after independence, leaving them vulnerable to fluctuations in commodity prices. But trying to reverse this has proven difficult. Indeed, a reduction in commodity exports to boost domestic manufacturing can lead to foreign exchange shortages. In turn, this makes it difficult to pay for imports.

Most African countries are still constrained today by this challenge.

With many African countries facing a loss of exports and a shortage of foreign exchange, they could become even more dependent on foreign funding. In this political space, it remains to be seen whether there will be any possibilities for experimentation with industrial policy.

About Darnell Yu

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