Is Import Substitution Industrialization in Africa – a silver bullet or poisoned chalice to Africa’s development agenda?

For far too long, African economies have been plagued by low growth rates, high levels of joblessness especially among the youth, poverty and inequality. To a large extent, these socio-economic development issues are a direct result of the slow pace of industrialization and deindustrialization on the continent; yet ample evidence exists on how industries, particularly in manufacturing, provides greater opportunities to exploit economies of scale, drives investment and innovation, creates employment, reduces poverty, supports linkages and facilitate global trade. China is a good example, but there are many others alike.

The slow pace of industrialisation in Africa is reflected in Manufacturing Value Added (MVA) as a percentage of GDP, which has been on a downward trend since the 1980s. MVA is estimated at 12%, lower than 18% four decades ago. This has contributed to low intra-Africa trade which stands at around 15% compared to 47% in the Americas, 61% in Europe and 67% in Asia. As a result, on a macro level, African countries have to contend with high import bills, unsustainable debt and economic vulnerabilities due to high dependency on other countries. The supply chain disruptions brought about by the COVID-19 pandemic and the Russia-Ukraine crisis are too raw and too fresh not to force a rethink in Africa's industrial policies. Yet intra-Africa trade may only increase significantly if countries are able to trade a wider range of goods, particularly manufactured goods, intermediary products and consumer goods. Thus, in recent years, African countries are increasingly revisiting old approaches to accelerating industrialization and trade domestically and within the region.

We ask the question could a strategic recalibration of import substitution industrialization be one of the pathways for Africa's sustainable development? Particularly bearing in mind the complex priorities that governments are battling with such as a drive for economic diversification, technological upgrading, negative trade balances in a context of pressures on government revenues, fiscal space contraction and high indebtedness.

Can Import Substitution be successfully re-calibrated to support manufacturing and industrialization on the continent?

The high levels of imports are unsustainable because countries are not earning sufficient foreign exchange to pay for these products, due to low value and volume of exports traded in global markets. In particular low value, unprocessed primary commodities for export leaves most African countries susceptible to external shocks such as commodity price volatility thus impacting on economic development. Industries that focus on adding value to their products would enable countries to reap the full benefits from natural resource endowment and thus increase manufacturing contribution to GDP, which supports faster and sustainable economic growth needed to alleviate poverty and inequality. To precipitate this transformative process, industries in the region would need support or incentives to transition to the production of manufactured goods, a critical step towards industrialization. The perennial question, is how to do that? Many countries are increasingly looking at industrial policies to answer this question, especially as the focus on industrial policy has been in decline in the last 15 years arguably due to globalization, but now being revisited in response to economic realities for most countries.

In Africa many of the regional economic commissions speak to the need for import substitution , that is substituting imports in favour of domestic production in order for countries to respond to the many development challenges which have become urgent, but also build economic resilience against a fast changing and uncertain world.

ISI came to prominence in the 1960's and has been tried and tested as an industrialization strategy before with mixed results. Most success stories point to East Asia and to some extent Latin America. In direct contrast, in Africa ISI failed to yield impressive results mainly due to structural and external constraints in the often-small domestic markets. ISI was characterised by high tariff on goods, import quotas and exchange controls among others instilled to protect domestic industries, which was a driver for the lack of competitiveness of the goods produced by State Owned Enterprises (SOEs) in international markets. Only a few African countries, i.e., South Africa, Morocco, Egypt, Nigeria, Tunisia, Mauritius, Eswatini, Senegal and Kenya have successfully created an internationally competitive manufacturing sector.

With the recent supply chain disruptions, unsustainably high import bills, rising debt levels and the coming into force of the AfCFTA, the Economic Commission for Africa Sub-regional office for Southern Africa and its member states, organized a High level Policy Dialogue (HLPD) revisited ISI as an approach for accelerating inclusive and sustainable industrial development on the continent.

The key questions centred around pathways to recalibrating ISI as an approach in order to yield impressive results. Can value addition, mineral beneficiation of natural resource endowments, development of regional value chains and increased intra-Africa trade be the silver bullet in African's quest to achieve self-sufficiency and structurally transform their economies from primary-based products to high-valued manufactured goods?

Opportunities for regional import substitution: the case of Eswatini, a small and open economy.

In late 2022, ECA SRO-SA took a closer look at the issue of ISI in a research paper that focused on Eswatini, a small and open economy. While low levels of manufacturing have been endemic in the region, Eswatini has been able to maintain an MVA of nearly 30% over the last decade. The research looked at Eswatini's imports and exports from major exporting economies in Africa, and attempts to map imported merchandise from outside Africa by Eswatini against similar goods produced within Africa. The mapping exercise provided an opportunity for the identification of possible import substitution via wider spread intra-Africa trade intensity, in light of the AfCFTA, focusing on potentially competitively produced goods.

The exercise finds that during the period 2015 to 2020, Eswatini's major merchandise imports included fuels, plastics, machinery, cereals and cotton averaging US$1.6 billion. Excluding South Africa which is Eswatini's major trading partner, Eswatini's imports mainly originate from Asia and the United States. To reduce on the import bill, Eswatini can begin to expand production in agribusiness and light manufacturing in which it has comparative and competitive advantage. In agribusiness, sugar (Eswatini is Africa's fourth-largest sugar producer), forestry, and beef are strategic value chains to enhance competitiveness. The country's, light manufacturing includes soft drink concentrates, textiles and apparel, potable alcohol, canned fruits, timber, wood pulp, citrus fruits, fresh produce, handcrafts, cut flowers and refrigerators. Furthermore, apart from goods that Eswatini can produce locally and competitively export, the assessment of possible exports to Eswatini from African countries, as probable substitutes for merchandise imported outside Africa, reveals that there exist potential substitutes among major African exporting economies, especially from North Africa, which is steadily growing as a manufacturing region in which Eswatini currently barely trades. The potential countries include Algeria, Egypt, Ghana, Guinea, Libya, Morocco, Tunisia as well as Angola. These countries export some of the major merchandise that are imported by Eswatini. Notably, editable vegetables and fruits; natural calcium phosphates; fertilizers; chemical acids; motor vehicles; parts and accessories for machinery and motor vehicles; and petroleum products. Of course, the true or revealed comparative advantage for these products as potential exports to Eswatini would be identified through an assessment of the full cost of exports to the market, taking into account freight and insurance costs which cannot be underestimated.

Will a different context - implementation of the AfCFTA - improve prospects of ISI for Africa?

Evidently, ISI proved largely a failed strategy for the continent owing to poor distributional consequences, uncompetitive SOEs driving high budget deficits and rent seeking behaviours. However, these failures seem to have eluded peers in East Asia and at to some extent Latin America who have successfully transformed their economies, indicating that a successful ISI strategy entails a quick progression from a regime protecting infant industries, to an Export Oriented Industrialization (EOI) approach. Thus, a recalibrated ISI strategy for Africa should be based on principles of export promotion, competitive industrialization production, value addition, comparative advantage, regional value chains, intra-Africa trade, and technological learning.

The African Continental Free Trade Area (AfCFTA) presents an immense opportunity to leverage EOI and overturn the path of industrialisation for the continent. Implementation of the AfCFTA would facilitate access to a larger market with lower barriers of trade and drive competitiveness on the continent, thereby alleviating the key domestic structural constraints faced in the past. Furthermore, the AfCFTA is poised to encourage domestic production of finished goods, gradually replacing importation of goods and services from outside the continent, while accelerating implementation of the AfCFTA.

Looking ahead…

Overall, taking insights from the case of Eswatini, African countries can reduce import bills and external vulnerabilities by identifying sectors of comparative and competitive advantage and exploiting those opportunities. This will encourage local production and value addition. In addition, for goods that cannot be domestically produced, countries could pursue the next best competitive alternative, with respect to importing from other regions on the continent. This points to the need for Africa to support business-to-business linkages for increased market accessibility especially in the face of the AfCFTA. Africa will ensure a sustainable development pathway where she is able to exploit intra-Africa trade of higher value goods, particularly commercial and consumer goods, whilst investing in skills development and technologies of the future. That demands critical focus on executing the AfCFTA, with a strategic approach to investment in key sectors.

While it may be tempting to think that the AfCFTA is a panacea for Africa's industrialization and trade challenges, implementation of the AfCFTA would need to be complemented by other measures, including industrial policies at the domestic and regional levels. Key interventions for the continent to effectively adopt ISI and EOI approaches include:

• facilitating foreign direct and domestic investment and savings;

• the promotion of new technologies and industrial upgrading in the manufacturing sector;

• effective infrastructure development for the free flow of goods;

• facilitating the ease of doing business;

• access to affordable long-term capital;

• promoting skills development; and,

• implementation of effective national quality policies to ensure that the manufacturing industry produces quality products for exports.

Transformation of the continent, will thus, not emerge from the interplay of free market forces but will require proactive, concerted, and targeted efforts. But, unlike in the past, African countries have a promising instrument - the AfCFTA - to change the narrative of ISI on the continent and collectively begin to play in the same league as other regions in the world.

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