Sectoral Strategy

Industrial policy in Africa is back.¹ Beginning last January, Nigeria implemented the second phase of its “Sugar Master Plan,” a flagship industrial policy that, since 2013, has sought to stimulate domestic production—predominantly by offering various incentives to investors and by prohibiting refined sugar imports. Last month, Ghana extended a zero VAT policy on locally manufactured textiles, while Kenya announced plans to impose a 25 percent levy on imported clothes to revive its textile sector. This strategic investment is facilitating the country’s transition from merely producing cotton to becoming a significant exporter of textiles. These instances illustrate industrial policy—government strategies designed to promote industrial development or facilitate structural transformation—in action.

Import substitution industrialization had once been popular in much of Africa, but from the 1980s state intervention models fell out of favor. Governments were advised by the World Bank and the International Monetary Fund to let market forces dictate development paths.² And so arrived neoliberalism in Africa, largely propelled by structural adjustment programs. Now, with the return of industrial policy on a grand scale, many are questioning whether, as in Europe and the US, neoliberalism may be coming to an end in Africa. 

Several factors are driving the current resurgence. Key among them is the foreign exchange crisis that has intensified since 2015, leading central banks in many African countries to limit Forex availability for certain imports. This limitation inadvertently prompts domestic manufacture for substitute goods, which then receive support through instruments like credit facilities.³ Elsewhere, China’s Belt and Road Initiative has sparked extensive infrastructure and investment projects. Many African countries have adapted their national strategies to capitalize on Chinese production investments, thereby crafting new industrial policies. The Covid-19 pandemic has further highlighted the importance of this strategic shift, emphasizing the need to cultivate local industries for critical sectors like pharmaceuticals and agro-processing.

Finally, and perhaps most significantly, is the influence of newly prominent Diversified Business Groups like Nigeria’s Dangote Group. These conglomerates have been steering their national governments toward infant industry protection, import bans, subsidies, tax incentives, and the creation of Special Economic Zones and Industrial Parks. They also promote measures like public procurement and export promotion—quintessential industrial policy measures.

​​The revival of industrial policy in Africa coincides with transformative changes in intra-continental trade dynamics, notably the development of the African Continental Free Trade Area (AfCFTA). Although AfCFTA has for the most part been greeted as a positive development in Africa, I argue that it comes with substantial challenges as well. The AfCFTA seeks to encourage industrial policies by promoting the establishment of regional value chains, where different nations specialize in particular production stages.⁴ But while the agreement is ambitious in many areas, it doesn’t necessarily align with domestic political ambition, which, it must be stressed, may hinder implementation. The coordination involved in organizing various phases of production across the region presents another challenge. I posit that strategic sectoral coordination—achieved through a negotiated division of labor among countries—can serve as an effective strategy to navigate these challenges, providing African nations with a clear pathway to leverage the AfCFTA for industrial development.

Political realities

The AfCFTA Agreement establishes a free-trade area uniting all fifty-five African Union member states, encompassing a market of over 1.3 billion people; in terms of the number of countries involved, it forms the largest free-trade area since the establishment of the WTO. The African Union has been pivotal in negotiating the agreement; its origins trace back to 2012 when the African Union Assembly of Heads of State and Government resolved to establish the AfCFTA to enhance intra-African trade. Negotiations commenced in 2015, and the agreement was signed in 2018. The primary aim of the AfCFTA is to forge a unified market for goods and services, underpinned by the free movement of persons to intensify the economic integration of the African continent. More precisely, the State Parties are committed to gradually removing tariffs and non-tariff barriers, liberalizing trade in services progressively, collaborating on investment, intellectual-property rights, and competition policy, engaging in all trade-related areas, cooperating on customs issues, and implementing trade facilitation measures. Furthermore, they agree to establish a dispute settlement mechanism to adjudicate their rights and obligations and to create and sustain an institutional framework for the AfCFTA’s implementation and administration.⁵

Though the AfCFTA Agreement officially commenced trading on January 1, 2021, actual trade has not yet occurred, pending the finalization of some protocols. Nevertheless, the AfCFTA has catalyzed the development of key mechanisms: it has established institutional structures that include an Assembly, a Council of Ministers, and a Secretariat headquartered in Accra, Ghana. It has introduced the AfCFTA e-Tariff Book, in line with digitalization and trade facilitation objectives; the Pan-African Payment and Settlement System, created in collaboration with the African Export-Import Bank to streamline intra-AfCFTA payments; an online platform to report non-tariff barriers, which assists in identifying and eliminating trade obstacles across the continent; and the AfCFTA Adjustment Fund, conceived to support countries with the adoption and implementation of the agreement’s stipulations.

Research on the AfCFTA often overlooks the complex political dynamics within distinct African countries, assuming that complete implementation and compliance are possible when they may in fact not be. For instance, a 2022 World Bank study forecasts that the AfCFTA could boost Africa’s exports by $560 billion, mainly in manufacturing through regional value chains. It could also lift 30 million Africans from extreme poverty, improve the livelihoods of 68 million people earning less than $5.50 a day, and by 2035, increase wages for unskilled workers by 10.3 percent and for skilled workers by 9.8 percent.⁶

Additionally, the agreement is projected to raise Africa’s income by $450 billion by 2035, a 7 percent gain, with a $76 billion income boost for the rest of the world. The agreement is expected to yield larger wage gains for women (10.5 percent) compared to men (9.9 percent). However, these projections are based on the assumption of absolute compliance with tariff liberalization and trade facilitation, including the complete removal of red tape and streamlining of customs procedures. Such assumptions fail to acknowledge that the inefficiencies targeted by the AfCFTA are entrenched in the local political landscapes, which often overshadow regional objectives. Consequently, previous regional efforts like the establishment of mechanisms for reporting, monitoring, and eliminating non-tariff barriers have not succeeded due to local political interests.

For instance, the Republic of Benin depends significantly on an informal entrepôt trade system which thrives on importing goods and informally smuggling them into Nigeria, particularly when Nigeria enacts protectionist policies on products like poultry, used cars, and rice.⁷ Benin capitalizes on these moments by importing these items in large quantities and smuggling them into Nigeria. Despite its illegality, this trade accounts for roughly 20 percent of Benin’s GDP and holds substantial economic importance for the West African nation’s political elites. For instance, the current president of Benin, Patrice Talon, has a vested interest in this system as his company he owns handles port logistics, which benefits from the entrepôt system and thus a significant revenue stream for the country. Similarly, his main political rival, Sébastien Ajavon, often referred to as the “king of chicken” (due to his dominance in the chicken import market) also benefits from the current system. It is unlikely that political elites would dismantle such a lucrative system essential to their political and economic influence. Similarly, in many African nations, certain non-tariff barriers and inefficiencies are maintained by ruling elites as mechanisms to generate resources critical for their political survival.

Coordinating regional value chains

In tandem with the new industrial policies, the AfCFTA is meant to expedite the formation of regional production chains within Africa.⁸ Yet such production chains, be they global or regional value chains, rarely emerge through market forces alone. They are typically the result of strategic choices and deliberate actions by “lead firms.” These firms hold a central role, coordinating the production chain with authority, determining the particulars of production processes, including task assignments, cost parameters, adherence to standards, meeting specifications, and delivery timelines.⁹ The absence of lead firms complicates the organization of production; indeed, various coordination failures have surfaced among African nations attempting to foster regional value chains without a central entity to guide the process. To delve deeper into this issue, we must address the essential aspect of the value chain: the organization of production processes. 

In Africa, the absence of regional lead firms in some sectors has led to coordination failures. For instance, in East Africa, the Kenyan government implemented protective measures against Ugandan raw milk due to Uganda’s cost advantage, despite the fact that Kenya’s dairy processing firms, including confectionery businesses, could benefit from such cost efficiencies.¹⁰ Moreover, Kenya has barred maize imports from Uganda and Tanzania, even though maize has a critical role in various production chains like milling, stockfeed production, ethanol, corn starch, and syrup manufacturing.¹¹ Despite the EAC’s commitment to free trade, inter-sectoral complementarity is scant, largely due to the absence of regional lead firms to oversee production organization.

West Africa presents another example. Nigeria recently enacted a policy to encourage domestic tomato paste production by limiting canned tomato imports and promoting local canning investments. The expectation was that these facilities would utilize tomatoes from both local and regional growers to create a regional value chain. Nonetheless, as Nigeria pursued this policy, other West African countries also sought to develop their tomato processing industries, relying on both local and regional tomato supplies. This led to a notable dilemma: a surge in processing capacity across the region, juxtaposed with a shortage of tomatoes for processing. For instance, a Nigerian investor had to suspend operations of a new facility with a daily capacity of 1,200 tons due to a lack of raw tomatoes—a challenge echoed throughout the region.¹² These cases highlight a critical point: the inherent complementarity in production, crucial to regional value chains, does not manifest without concerted coordination and the alignment of national industrial efforts.

In sectors where African countries have established lead firms, we observe meticulously coordinated regional value chains under their guidance. Telecommunications, one of the most rapidly evolving sectors in Africa, characterized by extensive fintech innovation and significant capital investments, serves as a prime example. Prominent telecom companies possess the capacity to govern their respective chains. The MTN Group, Africa’s premier mobile network operator and the world’s eighth largest, spearheads a supply chain encompassing various facets such as infrastructure, network/IS operations, and commerce. This expansive chain covers over fifty contracted activities, from producing installation materials like network masts and microwave communication dishes to software testing programs and radio planning.¹³ Given its presence in seventeen countries, each with distinct market dynamics, MTN has found it essential to establish a continental chain. Currently, MTN oversees more than 2,000 critical supply projects, collaborating with over 300 suppliers across Africa, and managing orders valued at billions solely within the continent. While some of these suppliers are opportunistic, others are targeted. Additionally, several regional suppliers also cater to other telecom giants like Safaricom in Kenya and Globalcom in Nigeria. 

The cement industry offers another instance of lead firms coordinating regional production. Notable entities like Nigeria’s Dangote and Morocco’s CIMAF operate across multiple regions, with each firm overseeing a regional production chain in numerous African countries without any coordination failure. Pioneering lead firms akin to Dangote Cement and MTN emerges as the most pragmatic approach to constructing regional supply chains and actualizing the objectives of the AfCFTA, particularly for chains catering to regional markets.¹⁴ However, since African countries possess few lead firms capable of coordinating production, intentional coordination via sectoral negotiations is necessary.

Sectoral coordination

It’s unlikely that all African countries will fully implement every provision of the AfCFTA. There is, however, the potential for sector-specific policies within the framework that could support the development of regional value chains. These sector-focused strategies could align with the domestic political landscape, as not all industries are deeply intertwined with local politics in every country. Regional industrial policies should be based on coordination in chosen sectors, as opposed to a comprehensive liberalization that could conflict with various local political climates.

Sectoral coordination between countries involves the deliberate negotiation of industrial and production policies to address local political challenges and coordination issues that stem from the absence of lead firms. For example, consider the industrial rice value chain. Subject to regional negotiations, it would involve segments like input supply—such as seeds, fertilizers, pesticides, irrigation, and machinery—paddy farming, logistics for collection, and processing activities like milling, grading, sorting, and packaging. Nations facing political challenges in this sector could choose to opt out, or they could leverage their political climate to negotiate a beneficial position, an option less feasible under a comprehensive free trade agreement that is not sector-specific. Such a deliberately negotiated division of labor would perform the role traditionally held by a lead firm by deciding who should produce what. 

Countries can strategically determine and capitalize on specific niches within a sector based on their unique resource endowments and political landscapes. Consequently, sectoral industrial policies can be precisely tailored and coordinated with the choices of neighboring countries. Continuing with the industrial rice value chain example, a country opting to focus on paddy production must enact paddy-centric policies and cultivate trade networks for collection logistics, or with countries specializing in processing, which should, in turn, develop policies conducive to processing activities. Facilitating negotiations on production processes allows freer trade on the value chain to emerge organically, as opposed to free trade as a prescriptive goal without practical underpinnings. The benefit of a negotiated division of labor is its ability to minimize competitive overlap and foster synergy among nations. This approach can potentially mitigate trade disputes and encourage the development of industrial policies that align with each nation’s designated role in the value chain.

The AfCFTA and industrial policy

The weak implementation of free trade policies across the continent, despite stated commitments to the contrary, testifies to the flawed assumptions of the broad liberalization paradigm. While specialization has the potential to harmonize sectoral policies between nations, such coordination requires a reevaluation of the AfCFTA, and in particular, the notion that market forces alone will spur regional value chains. At certain points, two central objectives—implementing domestic industrial policies and expanding trade between African nations—may conflict. While the AfCFTA strives for comprehensive liberalization, sectoral coordination could lead to selective liberalization. Given that the AfCFTA vision of organic, market-led regional value chains may be stifled by the absence of lead firms, sectoral coordination involves a more collective and negotiated approach.

The AfCFTA presents a unique opportunity for African states to tailor their industrial policies at the sectoral level, rather than implementing blanket liberalization. Opting for selective liberalization and establishing robust regional value chains through a negotiated division of labor could alleviate tensions within the elite networks and policy agendas of distinct counties.  A negotiated division of labor can foster an increase in intra-African trade and provide investment clarity. Achieving this economic transformation in several African nations would consolidate the return of state intervention, while promoting prospects for regional integration.