Unprofitable Diseases Ebola, COVID-19 and the Return of Industrial Policy in Africa?

Despite being considered ‘unprofitable diseases’, Ebola and COVID-19 have demonstrated the urgent need for larger domestic pharmaceutical industries in African countries.

The 2014-2016 Ebola epidemic in West Africa and the current COVID-19 pandemic emphasize the need for industrial policies across Africa, and specifically an increase in the domestic production of medical supplies. Across the continent, health workers have protested that a lack of personal protective equipment (PPE) endangers their lives and those of their patients. In response, the largest union of medical doctors in Nigeria went on strike in May. As panic spread in March, several governments banned the export of goods like masks, gloves and ventilators, highlighting the danger of dependence on imports.

Free trade policies and a growth model reliant on primary exports have reinforced this dependence. Indeed, even ‘advanced’ economies like the United States and United Kingdom are starting to see the disadvantages of offshoring and just-in-time production for essential medical supplies. For too long, political leaders and economic advisers in much of the world have privileged efficiency over resilience.

The pandemic demonstrates the urgency of import substitution industrialization (ISI)—the replacement of imported manufactured goods with domestic production, especially of medical supplies. Nearly all post-colonial African governments pursued ISI, but these policies were eventually blamed for the debt crises of the 1980s and 1990s, and were dismantled as part of neoliberal reforms. When economic growth did resume across Africa, it was based on natural resource booms. The limits of growth without structural transformation of the economy have led to renewed calls for industrial policy in Africa. Ethiopia’s recent history shows that African governments do not need to be perfect to implement successful industrial policies.

The small number of African countries with significant industry have been able to repurpose factories to produce basic supplies to combat the pandemic. Even fewer countries, however, have a sizeable pharmaceutical sector, delaying the development and diffusion of necessary treatments and vaccines for Ebola and eventually COVID-19. It is therefore essential for African governments to build the local capacity for technological innovation, especially in pharmaceuticals.

A BRIEF HISTORY OF INDUSTRIAL POLICY IN AFRICA

Industrial policy consists of the promotion of any form of infant industry through tariff protection, directed credit, production and export subsidies, as well as other policies (including educational, financial, technological, administrative) that affect investment. The South Korean economist, Ha Joon Chang, has long argued that protectionism and industrial policy were key to all successful historical examples of industrialization in North America, western Europe and East Asia.

Industrial policy, especially import substitution, was considered necessary for the transformation of ‘extroverted’ colonial economies and true independence. Nearly all post-colonial African governments, regardless of their ideological hue, pursued similar polices. As a group of authors including Adebayo Olukoshi writes in Africa is a Country:

Capitalist oriented Kenya, socialist humanist Zambia, scientific socialist Ghana, Negritudist Senegal, and Houphouet-Boigny’s Côte d’Ivoire (then the Ivory Coast) constructed a central role for the state in post-colonial social and economic transformation, often driven by the collective ethos of meeting society’s needs in the absence of any significant local private capitalist class and the levels of investment necessary for transformation.

The state played an entrepreneurial and venture capitalist role, through state-owned enterprises and banks. It managed trade with tariffs to protect, and subsidies to nurture, infant industries. There was substantial public investment in physical infrastructure, including roads, dams, bridges, and social infrastructure including schools, clinics, universities and urban housing. The state intervened heavily in the financial system by imposing capital controls, directing credit allocation and managing exchange rates.

Multilateral lenders, western governments and academics blamed these policies for the slowdown in growth in the late 1970s and sovereign debt crises of the 1980s. They accused African governments of being bloated, wasteful and corrupt, and claimed their heavy-handed approach prevented the private sector from playing its natural leadership role in industrialization. The structural adjustment programs (SAPs) imposed by the International Monetary Fund (IMF) and World Bank dismantled these industrial policies, liberalizing trade and international financial flows, privatizing state-owned industries, and cutting public spending on health and education. They concluded that state intervention hindered economic development and that industrial policies never work.

Despite the claims of neoliberal critics, ISI was relatively successful until the mid-1970s.  The ‘cure’ of structural adjustment programs was in many ways worse than the ‘disease’ of ISI. SAPs led to the premature deindustrialization of Africa, displacing workers from industry to the informal sector or back to agriculture. During the 1980s, in countries such as Zambia, globalization pushed workers from higher to lower productivity sectors. In contrast, East Asian governments were selective about which sectors to liberalize and when, waiting for infant industries to ‘mature’ before exposing them to international competition. They planned for a more orderly phase-out of certain industries, with protection removed gradually in order to preserve jobs. Although such firms were inefficient when compared to foreign rivals, they did provide jobs at productivity and wage levels higher than the alternatives available to workers. In Africa, the indiscriminate liberalization of the 1980s produced a ‘lost quarter-century,’ a catastrophe similar in scale to the collapse of the Russian economy after the fall of the Soviet Union.

The resumption of consistent economic growth since 2000 has inspired the ‘Africa Rising’ narrative. But like previous booms in the global South, this has been built on a surge in commodity prices. African economies remain perilously dependent on the export of one or two goods such as gold, petroleum, diamonds, iron ore, cocoa, cotton and palm oil.  There is nothing natural about Africa’s current comparative advantage since colonialism redrew the economic geography of the continent. Tea and cocoa—two typical exports—are not native to Africa, and as Chang notes, ‘there is really no “natural” reason for the Japanese to be good at building cars, the Finns at making mobile phones, and the Koreans at making steel.’ The limits of this ‘growth without development’ were apparent across Africa even before the coronavirus pandemic. Reminiscent of the colonial era, this growth model has failed to create enough jobs for the millions of Africans entering the labour force every year.

Today many economists, even at institutions like the IMF, will concede that industrial policy has been effective in East Asia, but warn that it is extremely difficult to implement well. Chang dubs this the ‘Do Not Try this at Home’ argument, and counters that simply because policies are challenging this does not mean that governments should not try. Even in Latin America, where ISI policies were much maligned, they achieved a significant degree of industrialization in the larger countries such as Brazil, Mexico and Argentina between the 1930s and 1970s. In sum, industrial policies rarely work but they are the only thing that ever does.

Claims that African governments are too corrupt to effectively implement industrial policies are ahistorical. While corruption is morally wrong, it is not always and everywhere a hindrance to economic growth and development. The US was fabulously corrupt during its industrial take-off in the last third of the nineteenth century. Japan and Italy are rich countries still notorious for their mafias. The spectacular industrialization of China in recent decades has happened despite, or possibly due to, massive corruption and cronyism. Even in the wealthy US, with its ostensibly excellent political institutions, regulatory agencies were captured by the big banks, enabling the subprime mortgage crisis of 2008–2009.

Over the past 15 years, Ethiopia’s government has demonstrated that successful industrial policy in Africa is possible. From 2004 to 2019, growth in the country’s average annual GDP per capita has been above seven per cent, and export earnings have more than tripled. Ethiopia demonstrates that a ‘government by angels’ is not needed to implement industrial policy. The economy has grown despite deep-seated political problems, including the favourite bugaboo of western political scientists and economists—ethnic fractionalization.

The Ethiopian government has nurtured two infant industries, cut flower exports (mainly to Europe) and leather goods. In both cases, the government provided credit through the Development Bank of Ethiopia, facilitated training and international exchange and exposure for managers, created new agencies as coordination mechanisms and maintained close ties with businessmen. Government intervention addressed information and coordination failures in these two industries. Authorities tried to remove bottlenecks and improve quality control along the value chain in the leather goods industry. Trade and lobbying organizations like the Leather Industry Development Institute and the Ethiopian Horticultural Development Agency served as coordination mechanisms. Assistance was also industry-specific: for example, horticultural firms needed land close to the airport and a well-functioning airline. The Development Bank of Ethiopia has also learned how to monitor firms in the floriculture sector, developing the ability to discipline them effectively. This approach distinguishes the few effective developmental states from the many failures.

While Ethiopia has a comparative advantage in leather production given its large cattle population and long herder tradition, it has little connection to flowers. As the economists Florian Schaefer and Girum Abebe note, to attribute the success of the development of a horticulture industry to mere comparative advantage ‘disregards the slow and complex process of discovery, testing, failure, and adaption that led to sectors. Especially in floriculture…it is probably better to say that there was a potential for creating a competitive industry.’

Ethiopia provides an additional important lesson. While achieving international competitiveness in some sectors is crucial, export-led growth can leave economies vulnerable to disruptions in global trade. Ethiopia’s cut-flower exports rely on European consumers and the global airline industry, both of which face considerable uncertainty during the pandemic.

Countries cannot use their export earnings to pay for necessary imports if other governments simply ban their sale abroad, as happened with ventilators and PPE earlier this year. Even once such bans are lifted, export-led growth is less promising if consumer markets abroad are depressed. Global trade has been slowing down since the global financial crisis of 2008, a trend that the current pandemic is likely to accelerate. These recent lessons make ISI—which, by definition, aims to develop domestic markets—more attractive.

INDUSTRIAL POLICY AND PUBLIC HEALTH

Few African governments have worked with the private sector to repurpose their garment and chemical factories to produce goods necessary to prevent and treat COVID-19, highlighting the importance of a domestic industrial base. In South Africa, the government has worked with the local affiliate of the American automaker, Ford, to produce face shields, and with the chemical and energy company, Sasol, to make hand sanitizer. Similarly, the Kenyan government has worked with the British-Dutch consumer goods company, Unilever, and the British liquor company, Diageo, to also make hand sanitizers. In Ethiopia, the government has worked with its growing textiles industry to manufacture millions of facemasks daily.

It is impossible, however, for many other African countries to follow these examples because they cannot repurpose factories that they do not have. Thousands of deaths could have been prevented during the Ebola outbreak in West Africa if the governments of Sierra Leone, Liberia and Guinea could have quickly and reliably supplied medical personnel and impacted communities with basic goods like gloves, soap, hand sanitizer, face shields and medical gowns. A similar delay in provisioning may have already cost many lives during the current COVID-19 pandemic.

Beyond relatively simple products like face masks and hand sanitizer, African countries must also be able to produce more complex goods like testing kits, stretchers, ventilators and pharmaceuticals. In South Africa, the most industrialized African country outside North Africa, the government is trying to mobilize local electronics industries to manufacture ventilators, but it may be the only sub-Saharan country capable of doing so.

In the medium- to long-term, the biggest need is for drug and vaccine development and production. African countries import between 70 and 90 per cent of the pharmaceuticals they consume. Currently, about nine sub-Saharan African countries account for the bulk of production and only South Africa, Nigeria and Kenya have significant industries. The whole continent has fewer than 400 pharmaceutical companies, mostly in North Africa, to serve a population of over 1.3 billion people. All but a handful of these companies import active pharmaceutical ingredients and assemble them into capsules, pills, syrups and creams. A quarter simply repackage imported drugs for retail. Most importantly, none do their own research and development (R&D) into new drugs and vaccines.

UNPROFITABLE DISEASES

The global consulting group, McKinsey, claims that greater pharmaceutical production would bring only modest economic gains, but they miss the most important benefit of domestic drug production: the ability to prioritize the public health needs of Africans. McKinsey is correct that pharmaceutical production is capital-intensive and unlikely to generate many jobs. At best, higher pharmaceutical production would only increase economic growth and improve the trade balance slightly. But it has the potential to save the lives of millions of Africans.

The history of the development of the vaccine for Ebola, Everbo, is a case in point. A team of Canadian researchers discovered its basic elements as early as 2003. Funded by the national bio-terrorism agency, the researchers had to consistently defend their program to bureaucrats who doubted its importance. The private sector had even less interest in an Ebola vaccine. As Helen Branswell notes in Stat, such ‘vaccines are estimated to cost in the neighbourhood of US$1 billion to develop. The pharmaceutical industry was not interested in making a product to protect against a disease that emerged only now and again in impoverished countries.’ For the American and European companies that dominate the global market for new drugs (most generics sold in Africa come from India or China) Ebola was simply an unprofitable disease.

Only after the largest outbreak of Ebola in 2014 was the Ebola vaccine fast-tracked for development. Eventually, the American pharmaceutical company, Merck, tested the vaccine in Guinea in 2015 and helped to end the epidemic. Would a Congolese or Ugandan pharmaceutical sector have waited so long to develop an Ebola vaccine? How many west and central Africans would still be alive today if African governments had invested in medications to treat or prevent diseases of the poor like Ebola and malaria?

It is also clear that when a viable COVID-19 vaccine is developed, governments in countries with large pharmaceutical industries will prioritize their own populations. Africans will be the last to receive the vaccine.

An essential part of industrialization is to cultivate domestic technological capacity—the ability to innovate without indefinite need for foreign patents or personnel. The COVID-19 pandemic is a reminder to African governments that the private sector is unlikely to invest in this kind of knowledge infrastructure. There are already excellent public health research institutes on the continent like the Pasteur Institute in Dakar, which is developing home-based testing kits for COVID-19 and has been part of the Senegalese government’s exemplary response to the pandemic. Given the economies of scale in pharmaceutical production, large countries like Nigeria, Ethiopia, Kenya, and South Africa could build significant capacity at the national level, but smaller countries must insist on regional solutions.

Governments need to invest in and harness the creativity of Africa’s youth, the largest and best-educated generation of Africans ever, like this young Ethiopian inventor who has developed a contactless soap dispenser, improvised ventilators and created a device to remind people not to touch their faces. Governments also need to build and expand on Africa’s rich tradition of medical knowledge. While sweet wormwood (artemisia) is not an effective treatment for COVID-19, as initially touted by Andry Rajoelina, president of Madagascar, there should be more research into all kinds of African herbal remedies and their potential uses. Achieving the successful import substitution of medical supplies, equipment, drugs and vaccines is necessary to build a healthier, more prosperous and resilient Africa

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