Economic Policy

Strengthening the Local Economy, Expanding Domestic Demand, Increasing Value Addition

In aspirational terms, the objectives of economic policy should be to increase productive capacity and promote product diversification (what to produce), foster horizontal and vertical integration across and among sectors (how to produce), multiply growth poles across the region (where to produce), engage in market development, trade promotion and facilitation (where to sell). Stated differently, it also means to significantly increase value addition over primary production.
Moving from aspiration to real change requires the deployment of “agency”. It is essential to shift from an approach aimed at “lifting” people out of poverty, to one that focuses on the creation of conditions that can provide the individual and collective capabilities, an enabling environment and catalytic support for people to take charge of their own lives and “lift themselves” out of their marginalization.
In the past, industrial policy generated significant market distortions and disappointing outcomes as it translated into the “state picking the winners” often on the basis of political calculations rather than economic efficiency and competitiveness. At the same time, the current market-centric approach means that the wealthy, particularly in terms of financial assets, have a distinct and almost permanent advantage over others.
The average size of economic actors in East Africa is either very large or very small. The presence of a ‘missing middle’ is a strong indicator of how difficult it is for the vast majority of economic actors such as subsistence farmers and informal traders – to move beyond survival entrepreneurship. A new approach could that of creating and promoting a new generation of economic actors who are “fit to run” (skilled and competitive) but on a playing field that must be level (regulatory clarityand fairness). Arguably, these are the two most important responsibilities of policy leadership at all levels.
In the interests of concreteness, if one critical objective of economic policy is to increase value addition, governments could identify a number of value chains in which to invest. But rather than using subsidies or negotiating trade barriers, they could invest in capabilities (such as vocational training, skill development, technology transfer), create mechanisms for start-up and scale-up support (including business incubation units, incentives, new financial instruments), and actively engage in market development and trade facilitation (using pro-youth and pro-women public procurement policies, minimum local content regulation, product cluster promotion boards andexport consortia). One other option could also be to extend tax breaks and similar fiscal incentives for start-ups, small and medium firms rather than reserving them for larger investors.
Another essential element of this approach is the development of regional value chains in conjunction with special economic zones. Beyond the economic benefits of developing comparative advantages, putting production in multiple locations, and greater access to regional markets, such a strategy could also generate a deeper sense of “East Africanness” in both the identities of the products and in the minds of business owners, workers and suppliers. Regional value chains would bind the region together.
Finally, it would be missing the point to engage in a tangential discussion on the much-needed reform of agricultural policy. Rather than talk about how to raise agricultural productivity, the real challenge is connecting agriculture to the industrial and services sectors, and to add value to primary produce. Such a horizontal integration of the productive sectors could help to shift agriculture from subsistence farming into small and medium scale agribusiness. An additional potential benefit would be to make agribusiness attractive to young East Africans, and thus reverse the current trend of aging farmers.