The politics of industrial policy: ruling elites and their alliances

Abstract

Economic transformation is driven by successfully implemented industrial policy, but industrial policy is inherently political. We cannot understand why some governments pursue and implement industrial policy better than others without understanding its politics. This article addresses the conditions under which industrial policies are successfully implemented. It presents an analytical approach to understanding why some ruling elite-capitalist alliances lead to better economic outcomes than others. Sub-Saharan African countries present a particular puzzle, given their low productive capabilities and the relatively small number of successful productive sectors. The article examines the most successful productive sectors in Mozambique and in Ghana in order to illuminate the conditions under which such alliances occur and their specific characteristics and outcomes.

Keywords:

• economic development
• ruling elites
• politics of industrial policy
• sub-Saharan Africa
• Ghana
• Mozambique

Acknowledgements

The authors thank the anonymous reviewer for very helpful comments on an earlier version of the article. They also wish to thank Rasmus Ludvigsen for access to his empirical data on cocoa processing in Ghana, and to acknowledge that the framework presented in this article was produced in collaborative work with Ole Therkildsen and Anne Mette Kjær.

Notes

1. See Whitfield, “How Countries Become Rich.”

2. For recent arguments in favour of industrial policy in the sense used here, see Hausmann and Rodrik, “Doomed to Choose”; Rodrik, One Economics, Many Recipes; Cimoli et al., Industrial Policy and Development; and the debate between Ha-Joon Chang and Justin Lin reproduced in Lin, New Structural Economics.

3. On learning rents, see Khan, Learning, Technology Acquisition and Governance Challenges. For a broader discussion of the term rent, as it is used in this article, see Khan, “Rents, Efficiency and Growth”.

4. The research project is the Elites, Production and Poverty research programme, which ran from 2008 to 2011, based at the Danish Institute for International Studies, Copenhagen. see www.diis.dk/epp.

5. This argument about the three approaches is based on a large literature review presented in Whitfield and Therkildsen, What Drives States?

6. The full framework is presented in Whitfield et al., The Politics of Production.

7. For further discussion of the concept of political settlement, see Khan, Political Settlements.

8. Moore and Schmitz, Idealism, Realism and the Investment Climate.

9. Khan, Learning, Technology Acquisition and Governance Challenges.

10. In using the term ‘mutual interests’, we were inspired by Moore and Schmitz, “Idealism, Realism and the Investment Climate,” but our conceptualisation of the factors and relations giving rise to mutual interests go beyond the arguments presented by them, by drawing on the works of other authors such as Kang, Crony Capitalism; Khan, Political Settlements; and Geddes, Politician’s Dilemma.

11. See Maxfield and Schneider, “Business, the State and Economic Performance”; and Doner and Schneider, “Business Associations and Economic Development.”

12. Geddes, Politician’s Dilemma; and Khan, Political Settlements.

13. Doner et al., “Systemic Vulnerability.”

14. For example, see Doner, The Politics of Uneven Development; and Cammett, Globalization and Business Politics.

15. For example, see Kang, Crony Capitalism; and Schneider, “Review.”

16. Geddes, Politician’s Dilemma; and Khan, Political Settlements.

17. Evans, “State Structures.”

18. The term ‘pocket of efficiency’ has been used in the literature in many ways. See Leonard, ‘“Pockets” of Effective Agencies” for the origins of the term. However, the argument presented here on what gives rise to a pocket of efficiency is not based on that literature, but rather draws inspiration from other sources, such as the discussion of the bifurcated state in South Korea in Kang, Crony Capitalism and of pockets of state capabilities in Thailand in Doner, The Politics of Uneven Development.

19. The following analysis of the sugar industry in Mozambique draws on some unpublished studies in English and Portuguese and on government documents. A full list can be found in Buur et al., “Strategic Privatisation”; and ‘Buur et al., “The White Gold.”

20. The surcharge underwent adjustments after the first period of implementation and was downsized in 2003 for raw sugar and 2004 for refined sugar.

21. Kolavalli and Vigneri, “Cocoa in Ghana.” Output in 2010–11 received an artificial boost as a result of smuggling Ivorian cocoa to Ghana to avoid international sanctions imposed on exports of the Gbagbo government.

22. Barrientos et al., “Mapping Sustainable Production.”

23. For further details on the political settlement in Ghana, see Whitfield, Competitive Clientelism.

24. For a good summary, see Williams, An African Success Story.

25. Fold, “Lead Firms and Competition.”

26. Calculated by the authors from data obtained from the Ministry of Finance in 2012.

27. Data obtained from the Ministry of Finance in 2012.

28. The Produce Buying Company acts as a buyer of last resort, penetrating difficult areas of the country to make sure that all cocoa farmers are reached, despite the higher costs of doing so.

29. Hubbard, “Reforming the Role of Government”; and Williams, An African Success Story.

30. fob price means that the seller only pays for transport to bring the goods to the departure port. There is another price in the international market: cif, which means that the seller is responsible for the goods and transport costs all the way to the receiving port.

31. Laven, “The Risk of Inclusions.” Laven notes a lack of transparency concerning how this money is spent.

32. Williams, An African Success Story.

33. Shepherd and Onumah, “Changing Role of Government.”

34. Williams, An African Success Story.

35. Kolavalli and Vigneri, “Cocoa in Ghana.” The main factor behind the massive expansion in production volumes was the clearing of virgin forest land. Planting cocoa in newly cleared forest land delivers what is called a ‘forest rent’, because the yield of cocoa trees is higher, with no extra costs to the farmer. See Fold, “Spilling the Beans.”

36. This analysis draws on empirical material presented in Barrientos et al., “Mapping Sustainable Production”; and Laven, “The Risk of Inclusions.”

37. The npp 2000 electoral manifesto states the goal of increasing processing of the annual cocoa crop from 20% to at least 30%. The 2002 budget statement states 40% and the 2007 budget statement raises the goal to 50%. The 2001 budget statement says that a team will be put together to recommend incentives to attract local and foreign investors into value added processing of cocoa.

38. Ghana Cocoa Sector Development Strategy, Ministry of Finance, April 1999.

39. International Centre for Settlement of Investment Disputes, Gustav Hamester (Claimant) v. Republic of Ghana (Respondent), June 18, 2010. www.icsid.worldbank.org.

40. See Fold, “Lead Firms and Competition.”

41. Laven, “The Risk of Inclusions”; and Ludvigsen, “Global Value Chains.”

42. Laven, “The Risk of Inclusions”; and Ludvigsen, “Global Value Chains.”

43. Light crop beans are sold on the world market at a discount of about 12%–15%, so the real discount for processors is more like 5%–7%.

44. Ludvigsen, “Global Value Chains.”

45. Producers lose out from the processor discount because the discount factors into the average fob price, on the basis of which the producer price is determined.