Enterprise Development and Economic Transformation: Creating the Enabling Environment
- poverty reduction approaches
- endogenous poverty alleviation
- vulnerable groups
- targeted poverty alleviation components
- supporting policies
Enterprise Development and Economic Transformation: Creating the Enabling Environment
Title : Enterprise Development and Economic Transformation: Creating the Enabling Environment
Commencement Date : Tue Mar 06 2018--
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Abstract Summary :
Africa can make far-reaching economic and social progress in the next 30 years. Africa’s current situation should not be assessed against China as it is now, but with China as it was in the 1980s. Africa’s transformation will be different from the Chinese experience because the contextual factors - historical, political, geographic, ecological and technological - are very different. But, Africa will have important latecomer advantages, including the multi-polar global economy with new sources of demand and business models and new technologies which will help Africa to leapfrog forward in some crucial areas.
In looking ahead at Africa’s transformation prospects, the issue of enterprise development is central and goes well beyond the familiar lists of things to do to improve the policy and business environment Key dimensions are:
l Nation-building leadership with a clear vision and commitment to becoming an inclusive, well-functioning middle-income country within the next generation, meeting and going beyond the MDGs.
l Effective states and responsible corporate governance in Africa become a strategic interest for China and other emerging countries, as they build up their participation in Africa’s development Transparency, financial sustainability and fiscal integrity are important in this context and require co-operative international and domestic efforts.
l Transformation will both demand and produce a huge increase in organisational capacity in both the public and private sectors in Africa. Performance-based organisation is the source of value-added at all levels. Entrepreneurs essentially bring ideas together with organisation. Participation in local, regional and global supply chains will speed up the organisational learning process and the expansion of the formal economy.
l Transformation is a people-based process. Fostering upward mobility, the role of the diaspora and the emergence of a growing professional middle class in a process of dynamic capacity development is a strategic part of the transformation process. A favourable intellectual climate is as important as a good investment climate and good infrastructure.
l Joining up the African continent through regional integration and infrastructure and promoting linkages between the agriculture, industry and services sectors and rural- urban areas is a dynamic growth frontier for Africa.
l Effective on-going interaction/adaptation between policy makers, researchers, economic actors and public feedback is the basis for the fast learning-based growth that is possible with the absorption of ideas from many sources, domestic, regional and global.
l African countries’ efforts to shape their own national and regional development pathways are being supported by their development partners in the growing number of African knowledge platforms, partnership forums and peer review processes across a wide spectrum of issues.
l African ownership is strengthening. The policy frameworks and institutions emerging for growth, governance and regional integration in Africa provide a central point of reference for future co-operation.
Discussion at this meeting in Addis Ababa of the China-DAC Study Group linked back to key themes emerging from the Study Group’s first event in Beijing in September 2009, which underlined the importance of a strong developmental state with an inclusive national project for economic transformation. Leadership is key to providing the vision and linking it to public policies and performance.
Chinese participants set out the narrative of how, in 1978, Chinese leaders had set out a vision for the transformation of the nation from poverty to middle-income status within a generation:
l This vision was not set out as a detailed blue print, but served to guide policy making as an experimental, pragmatic process closely linked with extensive performance monitoring and feedback systems.
The creation of an enterprise-driven market economy emerged from this process. The beginnings were:
l A bottom-up reform of land tenure arrangements, which created strong production incentives and laid the basis for off-farm enterprise and employment in the rural sector.
l The setting up of an experimental special economic zone (SEZ), which became the basis for the development of a globally competitive manufacturing sector, drawing on the large labour pool released by the success of the rural reforms.
Policies and priorities were determined in relation to emerging experience and opportunities as the process evolved:
l Significant capacities for policy analysis and empirical studies were created in ministries, in the universities and in scientific institutes as a basis for informing policy development and review and accountability.
l Civil service appointments became competitive and performance based.
l Political leadership was subject to rotation and selection, with strong performance objectives, incentives and evaluation.
The planned economy and the extensive state enterprise system were transformed into a competitive economy with extensive privatization and decentralization to provincial and town and village levels:
l At the same time, the state invested heavily in supportive “hard” and “soft” infrastructure.
l Much policy effort and infrastructure investment has been needed to link up the various regions of China.
The Chinese miracle has seen hundreds of millions of people lifted from poverty, the creation of a large urban middle class and a double surplus of domestic savings and foreign exchange.
At the same time, there have been considerable social stresses and accumulating social and economic imbalances. It is important not to idealise China’s transformation story; there were mistakes and setbacks and many reforms are still needed. And more than 50% of China’s population is still rural:
l The new Chinese five-year plan looks to address these challenges: to increase the quality and sustainability of growth more than the rate of growth; raise domestic consumption rates and reduce the export-orientation of industry; correct widening social and regional imbalances; eliminate remaining poverty; and share actively in the governance of the international system - all this implying accelerated institutional reform.
African participants at the Addis Ababa meeting again identified the need for leadership in African states to create inclusive, motivating, national visions and political consensus, and to generate the policy processes and public goods to speed up the transformation of their countries to middle-income status.
The growth record in Africa has picked up markedly in recent years, stimulated by the additional demand for natural resources from emerging economies, notably China and India, and by policy improvements in many African countries, including regional integration frameworks.
The continuation and acceleration of this upturn in growth performance will promote, and demand, the development of the enterprise sector. There are signs of strengthening global investor perceptions of an unfolding African growth story.
Analysis of the growth records of African countries indicates that the relative underperformance of the past few decades can be attributed to a number of policy syndromes - perverse economic incentive structures; predatory leadership, with rent-seeking and corruption among elites and ethnic groups; boom and bust public expenditure cycles; and state failure and breakdown.
l Together these syndromes reduced African growth rates on average by 2% per capita over the 1960-2000 period, accounting for more than the growth gap with other parts of the world except for East Asia.
l The prospects for the African growth story to become an established phenomenon, attracting large amounts of domestic and foreign investment and enterprise creation, depend upon avoiding these recurring syndromes in the future.
Thus, a “syndrome-free” Africa would open the way for an African economic miracle. The evidence suggests that the most effective way of assuring syndrome-free policies are constitutions that place constraints on the executive, including notably through term limitations.
State breakdown and predatory leadership are particularly costly, often involving conflict with regional repercussions. With over 50 sovereign states, often with complex ethnicity problems, the emergence of leadership in Africa with effective nation-building skills and developmental vision is frequently problematic.
Regional integration and continental policy definition, peer review processes, and peace and security architecture are of special importance in this context. The African Union has these mandates and is progressively providing the “African public goods” that can assure a dynamic, syndrome-free growth path for Africa.
Fostering the Enterprise Economy: China and Africa
In China, the creation of the enterprise economy went hand in hand with the change from a socialist economy to a market economy, agricultural reform and the decision to join up with the global economy:
l Policies targeted town and village enterprise creation (TVEs), special economic zones and widespread privatisation of State-owned enterprises. Agricultural modernisation was pursued in tandem with industrial modernisation, in an enterprise-intensive dynamic process.
l Policy frameworks were improved progressively and eventually put into legal form with a complete set of laws covering TVEs, SME’s and FDI. The State moved from being a regulator to being a service provider and facilitator for enterprise creation and growth. Intensive consultation processes were established in towns, villages and SEZs to deal with problems and opportunities on a fast-track basis.
l Infrastructure was given high importance - transport, water and energy.
l Management strengthening for SMEs was a priority and strategies for high-tech development put in place.
l Today, only 3% of enterprises are in the State sector. They are large enterprises, accounting for 30% of GDP, but 90% of employment is in the private sector. A booming private sector has been the key driving force in the Chinese economy.
In Africa, there has been extensive privatisation, but the emergence of a vibrant, innovative private sector has not been spontaneous in many African states. But African policy makers, inspired by and learning from China "and other emerging markets, are now making enterprise development and employment a core priority. And new African business models and entrepreneurship are now emerging and the corporate banking market is expanding:
l The role of the State as a facilitator of enterprise creation has been recognised in the creation, in 2005, of the African Union Private Sector Forum, to deliberate on policies and strategies.
l The African Union has a private sector development strategy and action plan, built around strengthened policy frameworks and institutions, and regional integration is a central thrust
l Enhanced partnership between China and Africa will be of mutual benefit. The FOCAC is a key vehicle for this and trade and investment links are expanding fast China’s opening of its markets to African exports is also of strategic importance alongside OECD market opening programmes.
The China-DAC Study Group process provides another excellent platform for sharing experiences: African participation should be institutionalised. African participants are noting a new appreciation among OECD countries of the role of the State in economic development and enterprise creation; an important and welcome shift in recent development thinking.
Dynamic Capacity Development: States, Enterprises and Markets
What Africa can learn from China and other emerging economies is not the specific experiences, which are not replicable - every country is different and will forge its own growth path; there was no standard Asian model. What is replicable is the basic strategy of promoting leaming-by-doing through competitive markets, engaging in supply chains, providing mechanisms for rapid interaction and feedback between the State and the enterprise sector and creating the human and institutional capital needed for managing enterprises which can progressively move up the value chain;
l A dynamic capacity development approach starts with the identification of existing strengths and possibilities and builds on that through hands-on focused efforts and trial and error. A learning mindset is of the essence. Industrialisation is not a document, or even a plan, but a process with an on-going policy dialogue and self-owned responses to changing comparative advantages, which needs to be very self-disciplined.
China did very well with this approach it had been goal-oriented, experimental and with integrated policies and public investments. It found entry points and then moved from there, with strategic management of foreign investment and aid incorporated into its evolving growth path. The move to a market economy and membership of the WTO had provided enterprises with many opportunities. A number of enterprises that had begun as small, low-tech companies were now, through highly innovative management and supportive macro and micro policies, among the Fortune 500. The complex management capacities and structures needed to run these companies had been created along the way.
Ethiopia, among the African countries now pursuing an industrial development strategy, is working with the dynamic capacity development approach, under its Growth and Transformation Plan (GTP). Growth is running at 11% p. a. and export growth has been 25% for the last 5 years. The aim is to become a middle-income industrialised country in the next 10 to 15 years. Infrastructure investment and public software, such as work skilling and higher education systems, are being sharply expanded to provide a new generation of skilled workers, competent managers and entrepreneurs. Agricultural enterprise is being stimulated by a nationwide commodities exchange which delivers price making and rapid cash settlements to farmers. Industry-support systems are being created in the form of institutes and training schemes to assist existing and new enterprises to scale up their capacities for market. Development partners are helping with various dimensions of this agenda, with Japan providing advice on dynamic capacity development methodologies and concrete cases.
Following this approach, the key ingredient is leadership which promotes a learning environment with piloting and experimenting, identifying and building on new opportunities as the economy develops. It implies an effective state. Effective states and effective markets are therefore interdependent and interactive with fast feedback processes and adjustment. This implies discipline and future-orientation, rather than the protection of acquired interests or economic rents. It also implies bringing the social policy agenda back into the economic agenda as human development and human security are key inputs into the development process. Social protection is not welfare, but investment in this growth framework.
Another key ingredient is time. While Africa will benefit from the leap-frogging opportunities of recent technical progress, it is important to recognise that China is where it is now after starting, 30 years ago, at a point where many African countries are today. So, it is necessary above all to start, and then to adapt and improve progressively. African participants had identified four key drivers: a learning and experimentation culture; swift and timely inputs from central and local governments in Africa; comprehensive incentive schemes for enterprise development; and education and skilling policies designed to generate a productive workforce.
With China’s “going global” policy spurring dynamic growth in Chinese investment worldwide and Africa’s “looking east” policy looking east, there is an historic opportunity for Africa to play a new role in global value chains. But the key factor will be Africa’s success in shaping policy responses that can capture this opportunity.
OECD investors still account for the major part of Africa’s foreign investment stocks and new inflows. But the strong trajectory of Chinese investment in Africa suggests that it could become the largest source within the next decade, even though Africa is only the third destination for Chinese investment and accounts for just 5% of China’s total annual outflows of foreign investment.
Chinese investors are active in 50 African states and the investment is in all kinds of sectors in all kinds of places, albeit with a concentration in some 5 or 6 African countries. The main investors are not Chinese State-owned enterprises but Chinese private companies, mainly from a few provinces and working with the Chinese diaspora. They are characterised by a strong entrepreneurial spirit, combining risk taking with a powerful work ethic and focused on seizing opportunities and adjusting quickly to local conditions. They see Africa as a continent of opportunity, rather than problematic ground:
l Their motivations include local market opportunities, intense competition in China, shifting production to Africa and access to raw materials. Chinese investors compete with each other, not with foreign firms, and rarely work with African companies.
Push factors in China include the progressive trend towards structuring aid projects as enterprises, with on-going active involvement of Chinese managers (from “official development assistance to official development investment”) 5 and the provision, under FOCAC, of a USD 5 billion pool of assistance for private Chinese investment in Africa.
From an African perspective, the development impact will depend on these investments generating spillovers of management skills and technical know-how into the local enterprise sector.
China’s own policy towards foreign direct investment was shaped by the objective of maximising and absorbing these learning opportunities, to speed up the modernisation of industries and business models and to gain entry points into global value chains. A learning approach to foreign investment in Africa, in agriculture, industry and services, would involve the encouragement of economic linkages through sub-contracting, joint ventures and public-private partnerships. The regional economic integration process in Africa is strategically important here, providing larger economic spaces for such linkages and for the joining up of agriculture, industry and services.
China is providing a USD 1 billion fund of assistance for African SMEs, which could help to build such linkages. Other development assistance providers are also helping with this linkage agenda, including through the untying of aid and the promotion of local procurement opportunities as, for example, in local and regional procurement of food aid.
A vulnerable front for Africa is the social and environmental dimensions of foreign investment A typical view is that China is spreading labour and environmental problems around Africa and other developing countries where it invests. There is a pressing need to engage Chinese companies in the landscape of social development and green growth in Africa.
Many Chinese companies do not have the management skills and horizons needed for such engagement. But to sustain their investment over the long run, corporate social responsibility will need to be embedded in their corporate strategies. Helping them to be part of the corporate social responsibility agenda will need intergovernmental co-operation and a multidimensional approach:
l An African platform on corporate social responsibility is needed to bring this about.
l The OECD can assist with its experience with investment policies and MNE guidelines, and instruments such as the risk awareness tool for weak governance zones and its due diligence guidance.
l Work on climate change and green growth strategies for Africa in the UNECA and UNEP can help and the OECD’s green growth strategy is another reference point for dialogue and engagement (China is participating in this work).