international analysis and commentary

Development strategies and industrial policy in North Africa: how to seize opportunities


Recent events have continued to remind us of the importance of North African countries (NA5) for the political stability of the European Union’s Southern border. Political instability and sluggish growth in North African countries have been often associated with a slow development of market economies in the region. Unfortunately, the Great Recession of 2007/08 and the Arab Spring revolts of 2011 have delayed the implementation of necessary reforms that are needed to improve the economic performance of North Africa. However, sooner or later, NA5 will find their political equilibrium, and now is the time to launch a serious debate about the most suitable industrial policies that will, under the right conditions, accelerate the sustainable development of the area.

The current economic situation at a glance

NA5 is a group of non-homogenous countries in terms of GDP, per capita GDP and population size. Algeria, Libya and Tunisia, on one side, Egypt and Morocco, on the other, are classified by the World Bank (WB), respectively, as upper and lower middle income countries. Algeria and Libya are strongly dependent on oil export revenues; Egypt, Morocco and Tunisia have a more diversified economic activity. Tunisia, with a population of 11 million, and Libya (6 million) are significantly smaller than Egypt, Algeria and Morocco with 91, 40 and 34 million, respectively.

The recent history of each of these countries has been unique also from the political point of view: Libya is a failed state with a very strong tribal tradition, Egypt has an autocratic government, Algeria went through a civil war during the nineties, curbed by President Abdelaziz Bouteflika in power since 1999, while Tunisia and Morocco have been characterized by more stable political experiences. Tunisia, in particular, even despite its comparative level of success in terms of a delicate constitutional transition, is struggling to complete its journey towards a new political equilibrium after the Jasmine Revolution of 2011.

These countries have developed different bilateral relationships with European countries and their level and forms of integration in the global economy are diverse. Not all of them have been able to join Global Value Chains (GVC), the production networks that have proven to be a crucial factor in the economic growth of several other emerging countries, in particular the “Asian tigers” in the mid-1990s.

The WB has recently stressed how the limited economic progress of some NA5 countries masks the serious weakness of the region’s old development model, which differs significantly from the Asian one. In particular, in NA5, the middle class has remained stagnant, with not only public services suffering from poor governance, but also high levels of unemployment for university graduates and 4 out of 5 women not yet participating in the labor force.

The environmental sustainability of the region is also a growing challenge, with severe water scarcity creating problems of food security for the region. Recent political instability, structural distortions, such as low quality education, large scale fuel subsidies and a low quality of governance affect the growth of the private sector. The recent fall in oil prices has also added to macroeconomic vulnerability for oil exporters in the region, while fiscal deficits are high for some others countries and investor confidence remains low overall.

The combination of severe macro-imbalances, long standing distortions, fragility and social inequality (the so called triple challenge of North African countries) threatens stability and private sector development, while also requiring a differentiated approach as institutional and economic environments are very different.

Overall, economic growth in North Africa is stagnating. Algeria and Libya are suffering simultaneously from low oil prices and high fiscal spending. Libya (where a civil war has effectively been underway since 2011 and large chunks of the country are hardly “governed” at all) saw a significant drop of its oil potential output. As a result, it stands out with a fiscal deficit of 52.5 per cent of GDP and a current account deficit of 42.5 per cent of GDP at the end of 2015. Libya’s foreign reserves are expected to drop from US$ 107,6 billion in 2013 to an estimated US$ 43 billion by end-2016.

Looking at Tunisia, two terrorist attacks in 2015 and a protracted economic stagnation in the eurozone combined to cause a drop in Tunisia’s real GDP growth  in 2015 to 0.8 per cent, from a reasonably good level of 2.3% in 2014. The Egyptian economy, on the contrary, is improving: the GDP recorded, in 2015, an increase of 4.2 per cent, higher than the 2.4 per cent of 2014.

For Morocco forecasting is more difficult as its economy depends heavily on agriculture and thus on weather conditions. Anyway, improved fiscal management and diversification of the economy have strengthened Morocco’s resilience and the potential of its economy. The government’s plans to begin a gradual transition toward a more flexible exchange rate regime and inflation targeting could be very useful to facilitate integration in the global economy by preserving competitiveness and reinforcing the capacity to absorb external shocks. In a more business friendly environment, growth has been projected to about 4.4 per cent in 2017.

For the whole area, the short-term future does not look bright. However, today, governments could elaborate policies designed to sustain socially inclusive development and environmentally sustainable growth into the mid-term future.

Industrial policies for low and middle income countries

The literature on economic development has been fascinated for a long time by the successful experience of East Asian countries: as Japan – and later, Korea and China – doubled its per-capita output in approximately a quarter of a century, other developing countries could emulate this growth model. But the success of Asian countries, particularly the “Asian tigers” (Hong Kong, Singapore, Taiwan, South Korea), was favored by several different factors: over the period 1965-89, the economies of most East Asian countries recorded high savings and investment rates, a relatively high degree of equality, high growth rates of human and capital productivity (also in the agriculture sector) and of manufacturing exports. In the East Asia & Pacific Region, between 1990-2003, very successful human and physical capital formation programs drove the agricultural contribution to GDP from 25 to 14 per cent and the contribution of the manufacturing sector from 30 to 36%. This has not been the case for all “less developed” countries. In the period 1990-2003, NA5, for instance, recorded small differences of agricultural and manufacturing sector contributions to GDP. In some cases, the contribution of the manufacturing sector even decreased.

After the Great Recession and macro-imbalances created by widespread market failures, scholars have started to recognize the positive role of industrial policy in helping low and middle income countries achieve higher per capita incomes. Policy makers could learn from the experiences of several successful development trajectories produced by a wide variety of industrial policies.

The first element of any development process is manufacturing, as it creates not only new but also high quality jobs that can raise incomes on large scales. It is a central component in any sustainable job creating effort, in supplier industries, from mineral processing to services. Even if many of successful experiences of how industrial policy can help manufacturing develop can be found in East Asia, there are some examples also in South Africa and, importantly for the NA5 region, in Tunisia.

These positive experiences suggest that governments can implement “smart industrial policies”, and thus play a constructive role in shaping the economy: they can encourage market forces to move in more environmentally sustainable directions, creating more jobs and developing less unequal economies . A strong research & development (R&D) sector and a more productive agricultural sector are both important elements in this context.

Governments can foster dynamic competitiveness, on the basis of past successful international experiences, by using a wider toolbox of measures including:

– Investment in infrastructure and supply chain logistics to ensure that output of emerging manufacturing industries can move quickly and cheaply between countries and from production centers to markets;

– Strengthened innovation and R&D as well as technology policies that deepen the local technological base by diffusing production and product innovations that meet specific domestic needs;

– Improved education and skills for workers to enhance their productivity and wages;

– Competition policies to promote employment and industrial capacity;

– New free trade agreements to get critical mass allowing the exploitation of economies of scale;

– Financial deepening of the economies to allow affordable access to liquidity by SMEs;

– Policies to create stable macroeconomic conditions and to safeguard competitive exchange rates.

Abundance of raw materials can determine the “resource curse”, one of the most difficult challenges for governments in developing countries: fast-growing industrializing economies have shown that the role of institutions is crucial in developing competitive downstream industries and reducing the role of extractive industries.

Examples from East Asia, where governments have pursued active industrial policies, but also from the United States, suggest the importance of actively promoting new technologies. Successful policy efforts along these lines in East Asia have often been compared with repeated failures in many other parts of the world, where “Washington consensus” policies have often dominated.

Moving from traditional industrial policies (the so called vertical approach) to “smart” ones (a neutral and horizontal approach) is hard because the two are intertwined. Furthermore, some analysts suggest that certain old industrial policies – like the often criticized import substitution policies implemented in South America – did not actually fail completely and should just be redesigned and adjusted.

Current debates on development strategies are focusing increasingly on addressing “market failures” not only in financial markets, but also in the production and transfer of knowledge – which are crucial to increase standards of living in our economic environment characterized by constant innovation and a rapid succession of technological “revolutions”. The socially optimal level of learning – that unregulated markets cannot deliver for intrinsic market failures – could be reached only through state interventions and adequate regulations. As about 70 per cent of growth comes from the increase in “total factor productivity”, i.e. sources other than factor accumulation, it is crucial to develop policies to sustain knowledge production and diffusion.

If improvements in standards of living come mainly from diffusion of knowledge, learning strategies must be at the heart of development strategies. Externalities in learning and discovery support the argument for government intervention to overcome the stage of “infant economy”, far more than the conventional “infant industry” argument. The production of knowledge is uniquely important and different from the production of ordinary goods. Information problems surrounding projects that require R&D make them difficult to finance.

Efforts should also be made in incentivizing the process of industrialization, but it is less obvious in what direction. Structural transformation is constantly taking place because of changes in technology, in comparative advantage, and in the global economy overall making quite difficult what investments are more effective. However, in several developing countries, it is relatively easy to increase productivity simply by closing the gap between best and average practices implemented by domestic policy makers.

In drawing industrial policies, policymakers should favor setting goals that are consistent with the level of development of the country and the structure of its endowments at a given time. In other words, governments should emphasize the importance of competitive advantages in their development strategy. It is crucial to understand how a poor technological endowment can jeopardize the developing process and how learning policies could be the best approach to enrich a country’s potential growth. Avoiding “one size fits all” approach, typical of “Washington Consensus” supporters, requires a deep knowledge of each country’s social background and dynamics.

New global scenarios and smart policy choices

Historically, developing countries have turned into emerging ones after signing FTAs with advanced countries and putting in place an FDI friendly economic environment. FDIs allow know-how transfer, increase productivity and raise wages. Asian countries enjoyed this successful economic experience and transitioned from the FDI model of development in the 1980s to a deeper integration into Global Value Chains (GVC) at the end of the 1990s.

The NA5 have also tried this approach: Tunisia and Morocco seem to be two of the most integrated NA5 countries in GVC. The experience of Tunisia shows that the “Association agreement” signed in 1995 with the EU has been the starting point of an integration process that culminated in 2008 with the creation of a free exchange zone for industrial products. Unfortunately, in the meantime, Asian competition has caused the decline of Tunisian textiles. However, engineering and electronics have seen major progress over the last 15 years, with the development of automotive and aeronautics component activities.

Since 2005, Morocco’s government has been trying to make industry more dynamic through the “Moroccon Emergence Plan” (in 2005), the “Morocco Green Plan” (in 2008), the “National Pact for Industrial Emergence” (PNEI, in 2009). This set of initiatives favored the development of aeronautics, offshoring, agrifood, textiles, electronics and automobiles, by attempting to restructure all value chains in export industries. However, these efforts have not yet been sufficient to close the infrastructure gap that is delaying the Morocco’s industry integration in GVC, to improve the country’s overall competitiveness and to provide an education system providing skilled human resources.

Can we imagine a similar path of integration in GVC for other North African countries? The current GVC will be challenged by digital globalization. The rate of growth of international trade and financial flows have flattened or declined since 2008. On the contrary, digital flows are soaring and emerging economies are directly involved in more than half of global trade flows, just as South-South trade is the fastest-growing type of connection.

Digital globalization makes policy choices even more complex. Value chains are shifting, new hubs are emerging and economic activity is being transformed. This transition creates new openings for countries to carve out profitable roles in the global economy. Those opportunities will favor locations that build infrastructures, institutions and business environments that will benefit their companies, workforce and consumers.

At the core of new forms of globalization there are not only goods and services, but also data flows. The convergence of globalization and digitization means that policy makers need to reassess their strategies and, as we are only in the very early stages of this phenomenon, enormous opportunities are still at stake. Digitization drives down the cost of cross-border communications and transactions, allowing business to connect with customers and suppliers in any country. Digital platforms reduce the minimum scale needed to go global, enabling small businesses around the world to participate.

But digital globalization also poses several challenges, exposing companies to international pricing pressures, aggressive global competitors and disruptive digital business models. Political equilibria can be put at risk because more educated young people in emerging countries can become impatient when they compare their standard of living with that of advanced countries.

In conclusion, past financial crisis and several failures in different markets have suggested the substitution of the “Washington consensus” approach with “smart industrial policies” to foster growth in emerging countries. Focusing on production and transfer of knowledge, strengthening the rule of law, improving governance, making economies more investment-friendly could be part of the agenda useful to offer new opportunities to NA5.

As “one size fits all” is not an effective approach, proper considerations of dynamic comparative advantages and socio-economic situations typical of each country could be the right recipe for the economic success of North African countries.