Why Industrial Policy-making Is the Key to Unlocking Gains From Industrial Policy

As poverty rates have fallen in Asia and elsewhere, Africa accounts for two thirds of the world’s extreme poor although it is home to only 16% of the world’s population. That industrialization is yet to happen in Africa is a major part of the explanation. Though various models—from the 18th-century industrializers to the broad convergence achieved by today’s successful late developers—industrialization has provided a proven pathway to economic transformation and increasing levels of income. It is not any different for Africa: the continent’s route out of poverty lies in achieving sustainable industrialization. 

While traditionally associated with manufacturing, contemporary industrialization, however, encompasses a broader concept founded on sustainable productivity growth driven by technological change and innovation. This is in consideration of the compounded interrelationship between the primary sectors—agriculture and natural resources—and services and manufacturing. Hence, the “return of industrial policy” is a nod to this complexity amplified by a changing geopolitical and geoeconomic global order, rapid technological advancements, and a climate emergency. A universal question, then, is not whether to pursue industrial policy, but how. 

Drawing upon a 2023 white paper published by the Firoz Laji Institute for Africa at the London School of Economics, The Art of Upgrading Industrial Policymaking Itself, which provides the framework for ongoing country case study research, we outline what the “how” means for African countries. To the extent that there is no single model or “golden policy template” leading to industrialization, what matters is the approach and process, including “experimenting and learning” to craft appropriate interventions by a committed developmental state. This first requires an understanding of the “big five” industrialization issues of today: policy consensus, green industrialization, supply chain security and resiliency, shifting industrialization paradigms, and widening policy space. But most importantly, it requires that industrial policy-making in Africa is itself upgraded to be more adaptive, collaborative, and consultative, while bringing together government, anchor investors, and development partners into a grand bargain for social and environmentally sustainable industrialization. 

The Big Five Issues of Industrial Policy-making 

First, for industrial policy to succeed, it needs to attract a sufficient level of buy-in or policy consensus. This concerns the political economy of industrial policy and how it is governed. It can entail building a collective strategic vision for industrialization, striking careful bargains with elites, and aligning economic incentives to ensure that the industrial policy—whatever it is—has a deep and sustained commitment to it at the highest levels of government, but also beyond the executive and through the business community to other constituencies and individuals within societies. Challenges to the current model of development in African countries are the distributional struggles and the emergence of stark inequalities. The mining and resource sectors have created islands of wealth, but few jobs. This has left increasing numbers of Africans to resort to the informal sector, and particularly informal and insecure services sector work. As Mazzucato and Rodrik (2023) have noted, welfare orientation is a critical aspect of achieving policy consensus. 

Second, with global temperatures already exceeding the Paris Agreement 1.5°C target in 2024, neither a degrowth strategy nor a “grow now and clean later” approach is a viable option for late industrializers. The path is clear, and it is green industrialization. However, as Lebdioui (2024) argues in Survival of the Greenest, what remains less clear is how to balance economic prosperity with the decarbonization agenda. Africa’s historic contributions to CO2 emissions are negligible, but are likely to rise as the continent develops. The challenge is to ensure the emergence of a competitive industrial sector while transitioning to cleaner energy and production methods. This should involve developing Africa’s underutilized renewable energy sources, reducing process emissions in production, and increasing resource efficiency. Green industrialization may also create opportunities as the world transitions to new technologies and patterns of consumption. For Africa, this could include leapfrogging into new and cleaner technologies, encouraging “green mineral” value chains, harnessing green hydrogen, and developing the continent’s sizable but underutilized renewable energy resources. Achieving these goals requires delicate balancing without compromising the just development aspirations of African countries. 

Third, the security and resilience of global value chains in the contemporary global landscape are under threat of geoeconomic fragmentation and costly trade diversion. In today’s uncertain geopolitical climate, where “friends” and “enemies” are equally considered targets of protectionism, the risks associated with global supply chains are being recalculated. Instead of getting trampled under foreign giants, African countries must consider how national industrial policies can traverse and circumvent such risks. 

Fourth, shifting industrialization paradigms must be taken into account by African countries. The three biggest emerging changes to the current industrial paradigm are the rise of digital production methods, the growth of platform production models, and continuing changes to the geographic distribution of production. 

Digitalization is increasing the skills and technology intensity of manufacturing, undermining its traditional developmental role in absorbing large numbers of workers from the countryside. Digitalization also creates opportunities that could be seized, including new possibilities for late industrializers like African countries to leapfrog into new ways of producing, including the increased role of digital services in manufacturing, many of which can be outsourced. 

The two other factors that define industrial paradigms include the organizational model of production, currently characterized by network production and platform production, and the geographic scope of industrialization, currently dominated by value chains at regional as well as global levels. These developments come with opportunities and challenges that African countries must factor into the design and implementation of industrial policy. For instance, regional or global value chain systems entail specializing in specific tasks but require efficient transport, information and communication technology, and energy infrastructure as the price of entry. 

Finally, the “return of industrial policy” brought with it widened policy space. The expansion of the acceptability of industrial policy measures is an opportunity for African countries as late industrializers. While this opens the door to more adventurous industrial policies, it calls for a rethinking of the multilateral rules-based system to respond to this changed reality. 

Tenets of Sustainable Industrial Policy 

Industrial policy can be a powerful tool for Africa’s development, but without the certainty of any specific model to follow, it requires the art of upgrading industrial policy-making itself to be more nimble in a changing world. The following five tenets outline the foundations of a more sustainable, active, and intentional industrial policy-making process. 

The first tenet, adaptive industrial policy-making, positions experimentation and learning at the centre of economic transformation. It appreciates that industrialization must occur in a new, unsettled era of challenges and opportunities, including “greening” industrialization, the reprioritization of supply chain security, and shifting industrialization paradigms. Rather than “perfecting” industrial policy design, an adaptive approach prioritizes systematic implementation through dedicated “policy-testing” zones or “sandboxes,” such as Special Economic Zones (SEZs) and pilot industrial parks. However, the process does not stop here. A complementary policy learning ecosystem allows for a rigorous assessment of outcomes and policy refinement. Doing so allows governments to build capacity by delivering results and to focus more on implementation (which is generally appreciated to be a greater challenge in many African countries) instead of getting caught up in perfecting policy design. 

Secondly, upgrading the practice of industrial policy-making requires a consultative approach for developing iterative dialogue channels to leverage synergies between stakeholders in the public, private, and third sectors, both local and international. What Peter Evans (1995) calls embedded autonomy is the outcome of an approach that preserves the ability of a state to protect its autonomy from capture by competing interests. The key is to leverage stakeholder relationships to understand how industrial paradigms are shifting and where opportunities can be created. 

The third tenet, partnering for industrial policy-making, builds network capital that enhances the credibility of the industrialization agenda and garners a crowd-in effect of investment opportunities. However, gathering investments is not enough; the destination of the investment matters. For instance, most investment flows in Africa are concentrated in primary extractive activities, such as mining and energy. While partners can help shift this dynamic toward a mutually beneficial relationship, the onus is on African policy-makers to negotiate and realign partners’ interests toward supporting their own sustainable industrialization agenda. 

Partnerships between international and domestic agents are not limited to investments, but are central to a transboundary industrial policy-making approach, the fourth tenet. We live in an interconnected world where the consequences of an event in one part of the world—geopolitical rivalries, supply chain disruptions, ecological catastrophes, and viruses—are felt in another. Some of the opportunities for African industrialization are also transboundary, including the potential to create scale economies and tap into rapid market growth through African regional integration. But the influence of individual African countries and their technical capacities in transboundary issues can be limited. 

To use the language of the African Union’s Agenda 2063, African countries must “speak with one voice and act collectively to promote our common interests and positions in the international arena.” By pooling their resources and influence, African countries can better ensure that their interests are heard and accounted for in global issues. The African Continental Free Trade Area can be a powerful resource not just for integrating African economies, but for establishing commonalities on tricky issues being negotiated in multilateral fora. 

What all four tenets have in common is the demand for building greater capacity to shape industrial policy-making that is adaptive, consultative, partner-based, and transboundary. The final tenet, capacitated industrial policy-making, forms the foundation of upgrading the practice of industrial policy-making. It refers to the need for effective and well-resourced public institutions for policy development and implementation. Such capacity provides governments with agency to steer the national industrialization agenda, building upon local expertise and knowledge. Well-capacitated institutions facilitate the effective brokering of different interests not only to ensure implementation remains on track, but also to navigate regional and international partnerships to achieve mutually beneficial transboundary goals. 

Conclusion 

The framework we have outlined provides a basis for putting industrial policy-making practice on a sustainable, adaptive, and experiment-based trajectory. We recognize that the framework assumes a rigorous and deliberate decision-making process across the design, implementation, and monitoring of industrial policies. In practice, however, policy-making is often reactive, rather than adaptive. Nonetheless, navigating today’s complexity to achieve sustainable economic transformation and overcome pervasive poverty requires more than tinkering with industrial policy instruments. Instead, the key to unlocking the gains of industrial policy lies in upgrading the practice of industrial policy-making itself. While no “golden template” exists, our framework serves as a starting point for a universal approach for rethinking the design, implementation, and monitoring of industrial strategies. With capacitated industrial policy-making as a foundation, the process must be adaptive, consultative, and transboundary to address the challenges of a sustainable future. 

David Luke, Professor in Practice and Strategic Director and Hana AlWakeel, Research Assistant, Firoz Lalji Institute for Africa, London School of Economics and Political Science.