Empowering the private sector to drive economic growth in low-income countries
In an article published in the Guardian newspaper on 16 April 2016 (1), Liberia’s Minister of Commerce and Industry, Axel M. Addy, and the Deputy Secretary-general of the United Nations Conference on Trade and Development, Joakim Reiter, suggest that jobs are the solution to the migrant crisis in low-income countries. ‘We must re-ignite the engines of growth by stimulating private sector development,’ they urge.
The UNESCO Science Report observes that many low-income countries have used their strong economic growth over the past decade during the commodities boom to develop infrastructure, such as roads, railways, ports, hospitals, schools and universities. Countries are also conscious of the need to diversify their economies, in order to create jobs and reduce their vulnerability to fluctuating global market prices for raw commodities. Cotton accounts for nearly three-quarters of Mali’s exports, for example, and copper and iron ore for two-thirds of Mauritanian exports. When raw materials are extracted or grown locally but processed on other continents, this deprives producer countries of industries and jobs. In Mauritania, for instance, unemployment was a high 31% in 2013, despite average economic growth of 5.9% since 2011. This indicates that economic growth alone has not been sufficient to provide the economy with much-needed jobs.
A need to diversify the economy
By diversifying their economies, countries can tap export earnings from value-added and manufactured products and create jobs for their populations – which are growing by 2.6% per year on average in Africa and 1.6% in Asia. With the Brent crude price having collapsed to less than US$ 40 a barrel since mid-2014, economic diversification has taken on a fresh urgency for many oil-rent economies. Nigeria, for instance, has devalued the naira and planned to cut public spending by 6% in 2015. One of the goals of the national Vision 20:2020 adopted in 2009 is to diversify the economy, yet, by 2015, oil and gas still accounted for 35% of Nigeria’s economic output and more than 90% of exports.
In 2015, the government of Zimbabwe was analysing draft legislation that would promote the local cutting and polishing of diamonds to create an estimated 1 700 new jobs. It had already slashed license fees for local cutting and polishing firms. Currently, the entire stock of diamonds is exported from Zimbabwe in raw form. Mining accounts for 15% of GDP and generates about US$ 1.7 billion in exports annually, yet the government receives royalties of just US$ 200 million. The new legislation will require companies to pay a 15% value-added tax but they will incur a 50% discount if they decide to sell their diamonds to the Minerals Marketing Corporation of Zimbabwe.
A number of low- and lower middle-income countries already have industries producing value-added goods. Côte d’Ivoire, Ghana, Guinea, Kenya and Nigeria, for instance, have all set up research institutes to transform raw products into semi-processed or processed goods with added market value. Ghana and Nigeria have also set up institutes specializing in aeronautics, chemistry and metallurgy. Technology parks and cybervillages are emerging in a growing number of African countries.
Kenya’ industrial parks and technology incubation hubs
Kenya has embarked on an ambitious programme of industrialization within its Vision 2030 adopted in 2008. It is establishing five industrial parks for small and medium-sized enterprises, the majority in agro-processing. In 2013, construction got under way of what the government has branded ‘Kenya’s Silicon Savannah.’ Konza Technology City is being built on a 5 000-acre site some 60 km from Nairobi, through a a public–private partnership whereby the government provides basic infrastructure and supporting policy and regulatory frameworks, leaving private investors to build and operate the industrial development. Ultimately, Konza should include a university campus, residential accommodation, hotels, schools, hospitals and research facilities. It is hoped to create 20 000 jobs in information technology by 2015 and 200 000 by the time the city is completed in 2030.
To support Kenya’s burgeoning technology start-up sector, the government formed a partnership in January 2013 with a private incubator for start-ups in information and communication technologies (ICTs) called NaiLab. The US$1.6 million, three-year technology incubation programme will enable NaiLab to broaden its geographical scope to other Kenyan cities, helping start-ups obtain information, capital and business contacts. In December 2013, the government announced that it would be establishing technology incubation hubs in all 47 counties.
Technology innovation hubs have sprung up across the African continent in the past few years, including in countries wrestling with internal armed conflict, such as Somalia or the Democratic Republic of Congo. Somaliland, which was established with partners from South Africa and the UK in 2012, provides mobile and internet services and fosters social enterprise incubation and innovation, accompanied by training.
Incentives to attract foreign investment
If many low-income countries emerged unscathed from the global financial crisis of 2008–2009, it was largely due to their limited integration in global markets. In Ethiopia, for instance, a government report in 2013 mapping progress in implementing the country’s Growth and Transformation Plan observed that measures designed to attract foreign investment, combined with privatization, had fostered sustainable technology transfer in medium and large-scale manufacturing industries, resulting in 13.6% growth in value-added industrial products by 2012, but that export earnings from textiles, leather goods, pharmaceuticals and agro-processing had been disappointing, owing to low productivity, an inadequate technological capability, a lack of inputs and other structural problems.
In Malawi, the government has introduced a series of fiscal incentives to attract foreign investors, including tax breaks, in order to foster technology transfer, develop human capital and empower the private sector to drive economic growth. In 2013, the Malawi Investment and Trade Centre put together an investment portfolio spanning 20 companies in the country’s six major economic growth sectors, namely agriculture, manufacturing, energy (bio-energy, mobile electricity), tourism (ecolodges) and infrastructure (wastewater services, fibre optic cables, etc.) and mining. Meanwhile, the Malawi Innovation Challenge Fund provides businesses in the agricultural and manufacturing sectors with competitive grant funding for innovative projects which have a potentially strong social impact and could help the country to diversify its narrow range of exports. The fund is endowed with US$8 million from the United Nations Development Programme and the UK Department for International Development. The great majority of foreign investors in 2012 came from China (46%) and the UK (46%).
A need to improve the climate for business
One factor holding back economic diversification in low-income countries is the business sector’s negligible contribution to research spending. This is where low- and high-income countries diverge most: the British government devoted just 0.44% of GDP to research in 2013 – less than Ethiopia, Kenya, Mali, Malawi or Uganda – but British businesses contributed a further 1.05%. As it is the private sector which contributes the lion’s share of research expenditure in developed countries, a more research-oriented private sector could make all the difference to the development of industry and job creation in low-income countries.
To achieve this, governments will need to create a better climate for business, including through tax incentives, stronger intellectual property protection, greater respect for the rule of law and better regulation. In countries hosting foreign multinational companies that produce value-added goods, such as for electrical machinery and telecommunications in Cambodia, the challenge will be to facilitate spillovers in terms of skills and innovation capability from these large operators towards smaller local firms.
Business still contributes little to overall research spending In Tanzania. Life sciences and bio-engineering are priority areas for research and development (R&D) but there are no specific fiscal incentives to promote business in the biotechnology sector. Private entrepreneurs have appealed for tax regimes to support ideas developed domestically and for the provision of loans and incubation structures to allow them to compete with foreign products.
Across the border in Uganda, the business sector has been making a bigger contribution to research in the past few years. In 2010, public and private enterprises contributed 13.7% of total research expenditure, compared to just 4.3% two years earlier. This investment helped to boost overall research spending in Uganda from 0.33% to 0.48% of GDP over this period. The government has been encouraging the private sector to invest in innovation through public–private partnerships involving the parastatal Uganda Investment Authority, the Uganda Industrial Research Institute and, since 2013, the Business Process Outsourcing Incubation Centre, which is run by three private companies. Two dynamic technology incubation hubs have emerged in Uganda since 2010, Hive Colab, which focuses on mobile technologies, climate technologies and agribusiness incubation, and the Consortium for enhancing University Responsiveness to Agribusiness Development Limited (CURAD), which was launched in 2014. CURAD is a public–private partnership based at Makerere University, the same university which made the headlines a few years ago when it presented a car of its own design to the public, Kiira EV. In 2010, President Musevini created a Presidential Innovations Fund endowed with the equivalent of US$8.5 million over five years to support projects like Kiira EV at the university’s College of Engineering, Art, Design and Technology. The university has used the fund to develop a business incubator, the Centre for Technology Design and Development, and a centre for renewable energy, among other projects.
For its part, the Kyrgyz government is focusing on removing controls on industry, in order to create jobs, increase exports and turn the country into a Central Asian hub for finance, business, tourism and culture. With the exception of hazardous industries and environmental protection where government intervention is considered justified, restrictions on entrepreneurship and licensing are to be lifted, as part of the National Strategy for Sustainable Development (2013−2017) and the number of permits required are to be halved. Inspections are being reduced to a minimum and the government is striving to interact more with the business community. By 2017, Kyrgyzstan hopes to figure in the Top 30 of the World Bank’s Doing Business ranking and no lower than 40th in the global ranking for economic freedom or 60th for global enabling trade. By combining a systematic fight against corruption with legalizing the informal economy, Kyrgyzstan hopes to figure among the Top 50 least corrupt countries in Transparency International’s Corruption Perceptions Index by 2017.
Emphasis on greater inclusiveness and more sustainable development
In addition to better governance, the ‘vision’ planning documents of low- and lower-middle income countries to 2020–2035 stress the need for more inclusive wealth creation. In Liberia, for instance, the government’s development strategy to 2030, Liberia Rising, places emphasis on ensuring greater inclusiveness, as ‘instability and conflict remain the primary risk to long-term wealth creation in Liberia.’ The document goes on to say that ‘the challenge will be to turn away from the traditional practice of concentrating wealth and power in the elite and in Monrovia [the capital].’
A third thrust of national planning documents is sustainable development. In Liberia, the government considers that being able to supply electricity to most of the economy will be ‘essential’ for achieving middle-income status by 2030. Liberia Rising cites a World Bank Doing Business survey (2012), in which 59% of Liberian firms identified lack of electricity and 39% lack of transportation as being hindrances to developing their businesses. With the entire infrastructure for energy generation and distribution having been destroyed by the war, the country plans to make greater use of renewable energy and to install affordable power services, with ‘more access to fuel that does not contribute to deforestation,’ with support from the national Renewable Energy Agency. It is expected that financing for Liberia Rising will come essentially from large mining companies – including those currently prospecting offshore for oil and gas – and from development partners. In 2012, foreign direct investment contributed 78% of GDP in Liberia, by far the largest share in sub-Saharan Africa.
The development of a ‘green economy’ offers exciting opportunities for job creation in Africa. Rwanda is pursuing a ‘green economy’ approach to economic transformation, with a focus on green urbanization and green innovation in public and private industry. A pilot green city is being launched in 2018 to test and promote a new approach to urbanization that employs various technologies to create sustainable cities. Energy security and maintaining a low carbon footprint are also pillars of Kenya’s Vision 2030. In 2009, the government formed the Geothermal Development Company to cushion investors from the high capital investment risks associated with drilling geothermal wells in the Rift Valley.
Economic diversification hampered by a skills shortage
Diversifying the economy will call for a stronger knowledge base in low-income countries. Currently, there is a lack of skilled personnel, including technicians to maintain technology, in fast-growing sectors such as mining, energy, water, manufacturing, infrastructure development and telecommunications, as well as in the health and agriculture sectors.
Over the past decade, the drive to achieve universal primary education for all by 2015 within the Millennium Development Goals has tended to divert public resources from investment in higher levels of education. Liberia has achieved universal primary education, for instance, but less than half of pupils attend secondary school and university enrolment has stagnated at 33 000 since 2000. Just 3.5% of the country’s education expenditure goes on higher education. Bangladesh has also made impressive strides towards universal primary education, with a net enrolment rate of 97% by 2013, but here, too, just 13% (0.23% of GDP) of education spending is earmarked for higher education.
Several low-income countries have raised public expenditure on higher education to over 1% of GDP in recent years (e.g. Benin, Burundi, Guinea, Malawi, Mali) and others are close (e.g. Burkina Faso, Togo, Mozambique) but a majority still devote less than 0.5% of GDP to higher education.
A number of low-income countries have responded to the growing demand for higher education by founding new universities since 2011, including Malawi, Mali, Tanzania and Zimbabwe. University enrolment doubled in Afghanistan between 2011 and 2014, even though women still accounted for just one in five university students in 2014, despite the ambitions of the Higher Education Gender Strategy (2013) for improving this ratio. A shortfall in donor funding has prevented the construction of facilities from keeping pace with the rapid rise in student rolls, including a sufficient number of women’s dormitories on university campuses. The shortage of classrooms has led to the creation of ‘night schools,’ which make use of limited space that would otherwise be vacant in the evening.
Greater collaboration with industry would facilitate technology transfer
Countries will also need to broaden their knowledge base, if they are to make use of the technology facilitation mechanism adopted by the United Nations in September 2015 which has been designed to help least developed countries implement the new Sustainable Development Goals to 2030.
Greater collaboration between industry and academia in low-income income countries would also facilitate technology transfer. In Zimbabwe, the current regulatory framework hampers the transfer of technology to the business sector and the development of industrial research and development (R&D), despite the commercialization of research results being one of the major goals of the country’s Second Science, Technology and Innovation Policy.
In Tanzania, academic researchers have evoked the lack of incentives for them to collaborate with the private sector, explaining that obtaining a patent or developing a product does not affect their remuneration and that they are evaluated solely on the basis of their academic credentials and publications.
In 2014, the Ethiopian government decided to place universities specializing in science and technology which have ties with industry under the new Ministry of Science and Technology to promote innovation in academia and stimulate technology-driven enterprises. The first two universities in Addis Ababa and Adama were transferred from the Ministry of Higher Education in 2014.
Bangladesh also plans to foster university-wide innovation and academic collaboration with industry through a Higher Education Quality Enhancement Project (2009–2018) funded by the World Bank which is establishing a National Technology Transfer Office.
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