Lecture
Development Challenges
Arne Bigsten
Master of Development Economics
8/11-2011
1
Overview of the lecture
• 1. The dual economy model and structural
change
• 2. Africa’s development since 1960 in a global
perspective
• 3. Changes in poverty
• 4. Prospects for growth in Africa
• 5. The financial crisis and Africa
• 6. Industry in development policy
2
1. The dual economy model and
structural change
• Corden-Findlay (1975) – a open-economy
version of the Harris-Todaro model of
migration
• Wage distortion and unemployment
• Investment, technical progress and growth
• Policy implications
• Informal sector growth
3
2. Africa’s development since 1960
in a global perspective
• Import substitution and control regimes 60s, 70s
• Structural adjustment policies 80s, 90s
• Achieved a measure of economic stabilization
with improvements in terms of budget balance,
monetary policy control, a liberalization of the
foreign exchange market, and implemented a
range of structural reforms such as privatisation
of much of the state owned firms.
• Economies recovered slowly from about 1995.
4
Table 1: Regional Population and GDP shares and relative income levels 2007
Population
GDP
Relative GDP
Relative GDP
share
share
per capita
per capita PPP
(World=100)
(World=100)
High income
0.160
0.738
4.622
3.637
East Asia &
0.289
0.080
0.276
0.497
Pacific
- China
0.199
0.059
0.294
0.539
Europe & Central
0.067
0.058
0.858
1.148
Asia*
Latin America &
0.085
0.066
0.781
0.998
Caribbean
Middle East &
0.047
0.016
0.329
0.721
North Africa
South Asia
0.121
0.026
0.115
0.253
Sub-Saharan
0.121
0.016
0.128
0.198
Africa
Note: * The old Eastern Bloc excluding high income states. GDP share – current US$, Relative GDP
– current US$. Relative PPP – Constant 2005 US$.
Source: WDI, 2009
5
Table 2: Annual per capita income growth 1961-2007 (% per year)
1961-1970 1971-1980 1981-1990 1991-2000 2001-2007
High income
4.18
2.68
1.88
1.57
2.41
East Asia & Pacific
2.45
4.54
7.09
8.09
5.83
- China
2.41
4.37
9.28
9.68
7.77
Europe & Central Asia
-0.94
5.79
Latin America & Caribbean
2.58
3.25
1.63
2.13
-0.83
Middle East & North Africa
4.48
2.60
1.75
2.61
0.24
South Asia
1.95
0.66
3.20
5.42
3.21
Sub-Saharan Africa
2.33
0.84
-0.45
2.44
-1.06
World
3.28
1.91
1.37
1.82
1.39
Source: WDI 2009
6
Table 3: Sectoral value added as % of GDP 1975-2007 in SSA and China
1965 1970 1975 1980 1985 1990 1995
Sub-Saharan Africa
Agriculture
21.85 19.65 20.02 18.50 18.01 18.83 17.95
Industry
31.02 30.86 32.68 36.84 34.49 32.14 29.15
- manufacturing
17.50 17.86 17.63 16.58 16.47 17.60 15.77
Services
47.14 49.48 47.31 44.64 47.49 49.24 52.91
China
Agriculture
37.94 35.22 32.40 30.17 28.44 27.12 19.96
Industry
35.09 40.49 45.72 48.22 42.89 41.34 47.18
- manufacturing
29.23 33.75 38.13 40.23 34.73 33.66 33.65
Services
26.97 24.29 21.88 21.60 28.67 31.54 32.86
Source: WDI 2009
2000
2005
2007
16.53
29.38
14.52
54.10
17.00
31.19
13.11
51.81
15.27
31.98
14.48
52.88
15.06
45.92
32.12
39.02
12.59 11.13
47.68 48.50
32.18
39.72 40.37
7
Table 4: Shares of global export of goods and services by region, 1960-2007
1960 1970 1980 1990 2000 2005 2007
0.761 0.804 0.793 0.813 0.790 0.740
High income
0.022 0.035 0.065 0.077 0.102 0.115
East Asia & Pacific
0.006 0.009 0.026 0.035 0.064 0.077
- China
0.041 0.039 0.055 0.061
Europe & Central Asia
Latin America & Caribbean 0.059 0.046 0.044 0.043 0.052 0.050 0.050
0.022 0.029 0.015 0.017 0.021 0.021
Middle East & North Africa
0.020 0.012 0.007 0.009 0.011 0.015 0.017
South Asia
0.042 0.033 0.035 0.014 0.014 0.017 0.018
Sub-Saharan Africa
Source: WDI 2009
8
Table 5: Export of goods and services as share of GDP 1960-2007
1960 1965 1970 1975 1980
High income
11.98 12.05 14.13 17.25 19.39
East Asia & Pacific
..
..
7.68 10.34 16.90
- China
..
..
2.61 4.59 10.65
Europe & Central Asia
..
..
..
..
..
Latin America & Caribbean 10.59 10.04 9.76 10.82 13.04
Middle East & North Africa ..
18.02 18.06 30.82 24.80
South Asia
5.87 4.74 5.27 6.70 7.60
Sub-Saharan Africa
25.51 24.14 21.81 25.35 31.86
World
12.14 12.06 13.37 16.44 18.74
1985
19.52
15.19
9.94
..
16.02
18.51
6.52
28.26
18.91
1990
18.86
24.37
19.04
20.69
16.88
23.42
8.63
26.35
18.99
1995
20.65
29.38
23.07
26.42
18.43
25.78
12.49
27.72
21.07
2000
23.96
35.85
23.33
35.35
20.29
26.77
14.21
32.48
24.55
2005
25.80
45.63
37.43
35.06
24.45
35.18
19.39
32.75
26.97
2007
.
47.94
41.87
34.28
24.04
36.05
20.56
34.46
..
Source: WDI, 2009. The share of manufacturing exports in merchandise export in Africa was 13.24 % in 1975 and 30.24 in 2000. In China
it was 26.43 in 1985 and then 88.23% in 2000 and 93.19 in 2007.
9
Table 6: Life-expectancy at birth 1960-2007
1960 1965 1970
High income
68.7 69.8 70.7
East Asia & Pacific
38.9 55.3 59.1
- China
36.3 57.4 61.7
Europe & Central Asia
..
..
67.2
Latin America & Caribbean 56.2 ..
60.4
Middle East & North Africa 47.1 ..
52.4
South Asia
42.6 46.4 48.9
Sub-Saharan Africa
41.1 ..
45.1
World
50.2 58.3 59.1
Source: WDI, 2009
1975
72.3
62.9
65.1
67.4
..
..
53.1
..
63.3
1980
73.4
63.5
65.5
67.3
64.6
58.1
54.8
48.6
62.6
1985
74.6
65.1
66.7
68.2
66.6
61.3
57.1
49.9
64.0
1990
75.7
66.9
68.3
68.9
68.3
64.1
59.0
50.4
65.3
1995
76.5
68.6
69.8
67.2
70.0
66.1
60.7
50.1
66.2
2000
77.9
70.3
71.4
68.3
71.5
67.8
62.1
49.5
67.3
2007
79.4
72.1
73.0
69.7
73.1
70.0
64.5
50.8
68.8
10
Table 7: Gross savings by region 1970-2007 (% of GDP)
1970 1975 1980 1985
High income
..
22.41 22.76 21.64
East Asia & Pacific
26.32 29.60 31.95 31.32
- China
27.36 30.95 33.78 34.59
Europe & Central Asia
..
..
..
..
Latin America & Caribbean 19.41 22.72 20.28 18.92
Middle East & North Africa ..
..
..
..
South Asia
14.60 15.45 16.70 21.11
Sub-Saharan Africa
..
..
23.42 19.43
World
..
22.55 22.86 21.89
Source: WDI 2009
1990
21.76
35.67
39.99
..
19.85
..
21.20
14.79
22.24
1995
20.74
38.26
42.69
20.65
17.79
25.06
25.33
14.23
21.49
2000
21.59
35.17
36.83
23.82
17.28
27.61
24.55
14.85
22.12
2005
19.47
44.79
51.21
22.82
21.00
30.40
32.59
15.12
21.25
2007
..
48.19
54.80
23.19
22.32
32.97
36.32
16.72
..
11
Table 8: Gross capital formation by region 1970-2007 (% of GDP)
1970 1975 1980 1985 1990
High income
23.64 23.33 24.08 21.83 22.61
East Asia & Pacific
23.38 28.02 28.21 27.96 27.38
- China
24.23 29.37 29.09 29.64 25.86
Europe & Central Asia
..
..
..
..
22.46
Latin America & Caribbean 19.66 23.49 22.83 17.56 18.78
Middle East & North Africa 21.93 30.39 27.85 26.55 23.27
South Asia
13.94 15.78 18.31 19.79 21.83
Sub-Saharan Africa
..
25.33 22.67 18.92 18.18
World
23.04 23.46 24.08 21.85 22.59
1995
20.91
33.81
34.35
19.21
18.14
22.31
23.22
17.00
21.35
2000
21.43
30.62
34.11
19.97
18.72
21.92
22.16
16.32
21.65
2005
20.47
36.71
42.19
20.29
18.76
23.19
28.71
18.26
21.32
2007
..
35.90
40.89
22.96
20.32
24.33
31.46
20.91
..
Source: WDI 2009
12
Table 10: Foreign aid by region (% of GNI)
1970 1975 1980
High income
0.02 0.03 0.02
East Asia & Pacific
1.09 0.86 0.90
- China
..
..
0.03
Europe & Central Asia
..
..
..
Latin America & Caribbean 0.62 0.36 0.30
Middle East & North Africa 3.00 4.55 3.20
South Asia
1.65 2.61 2.23
Sub-Saharan Africa
1.88 2.55 2.91
World
0.24 0.31 0.31
Source: WDI 2009
1985
0.03
0.72
0.31
..
0.50
1.57
1.43
4.53
0.26
1990
0.02
1.16
0.57
0.32
0.48
3.70
1.49
6.24
0.27
1995
0.01
0.76
0.48
1.17
0.36
1.58
1.09
5.94
0.23
2000
0.01
0.51
0.15
1.13
0.25
0.99
0.70
4.08
0.18
2005
0.00
0.32
0.08
0.25
0.26
4.02
0.90
5.40
0.24
2007
0.00
0.20
0.04
0.19
0.19
1.83
0.72
4.45
0.19
13
Figure 1: Net ODA of DAC Members 1990-2007 and DAC Secretariat Projections (Billion USD)
14
Figure 2: Debt outstanding, total long-term (US$)
2.50E+11
1.50E+11
1.00E+11
5.00E+10
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0.00E+00
1970
Million US$
2.00E+11
15
Table 11: Total debt service (% of GNI)
1970 1975
East Asia & Pacific
..
..
Europe & Central Asia
1.04 0.59
- China
..
..
Latin America & Caribbean 3.26 3.45
Middle East & North Africa ..
1.19
South Asia
1.46 1.09
Sub-Saharan Africa
1.57 1.87
Source: WDI 2009
1980
..
2.50
..
6.52
4.61
1.17
..
1985
4.03
6.93
0.81
7.31
3.93
1.93
..
1990
4.78
..
1.97
4.14
6.25
2.84
..
1995
4.14
2.75
2.10
4.67
7.13
3.85
4.79
2000
4.37
6.88
2.29
9.16
4.83
2.57
4.23
2005
2.77
8.15
1.22
6.42
3.91
2.78
3.40
2007
1.96
7.21
0.99
4.44
2.69
3.15
2.19
16
3. Poverty
•
The most important goal for development is poverty
reduction. This can be done by economic growth
and/or income redistribution.
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How to measure welfare and economic development?
Per capita income
Income distribution
Poverty
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UNDP’s Human Development Index; a composite
index which basically combines log per capita income,
life expectancy, litracy.
Shares of global GDP (PPP-measure)
1000 1500
1820
1870
1913
1950
1973
1998
W Europe
8.7
17.9
23.6
33.6
33.5
26.3
25.7
20.6
W Offshoots
0.7
0.5
1.9
10.2
21.7
30.6
25.3
25.1
Japan
2.7
3.3
3.0
2.3
2.6
3.0
7.7
7.7
67.6
62.1
56.2
36.0
21.9
15.5
16.4
29.5
Latin America
3.9
2.9
2.0
2.5
4.5
7.9
8.7
8.7
E Europe &
former USSR
4.6
5.9
8.8
11.7
13.1
13.1
12.9
5.3
11.8
7.4
4.5
3.7
2.7
3.6
3.3
3.1
Asia (excl.
Japan)
Africa
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Human Development index – 2009 ranking
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Norway
TOPP
Australia
Iceland
Canada
Ireland
Netherlands
Sweden
France
Switzerland
Japan
Luxembourg
Finland
United States
Austria
Spain
Denmark
Belgium
Italy
Liechtenstein
New Zealand
United Kingdom
Germany
Singapore
Hong Kong, China (SAR)
Greece
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Togo
Botten
Malawi
Benin
Timor-Leste
Côte d'Ivoire
Zambia
Eritrea
Senegal
Rwanda
Gambia
Liberia
Guinea
Ethiopia
Mozambique
Guinea-Bissau
Burundi
Chad
Congo (Democratic Republic of the)
Burkina Faso
Mali
Central African Republic
Sierra Leone
Afghanistan
Niger
Table 4: Median values of Gini coefficient by region
Region
1960s 1970s 1980s 1990s
Eastern Europe
22.76 21.77 24.93 28.60
South Asia
31.67 32.32 32.22 31.59
OECD and High Income 32.86 33.04 32.20 33.20
Countries
East Asia and the Pacific 34.57 34.40 34.42 34.80
Middle East and North
41.88 43.63 40.80 39.72
Africa
Sub-Saharan Africa
49.90 48.50 39.63 42.30
Latin America
53.00 49.86 51.00 50.00
• Millenniemålen och andra nya initiativ
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Millennium Development Goals to be Reached 2015
Endorsed in the Millennium Declaration, September 2000
Eradicate extreme poverty and hunger
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Achieve universal primary education
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Halt and reverse the spread of HIV/AIDS.
Halt and reverse the spread of malaria and tuberculosis.
Ensure environmental sustainability
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Reduce by three quarters the maternal mortality ratio.
Combat HIV/AIDS, malaria and other diseases
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Reduce by two thirds the under-five mortality rate.
Improve maternal health
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Eliminate gender disparity at all levels of education.
Reduce Child Mortality
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Ensure boys and girls alike complete primary schooling.
Promote gender equality and empower women.
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Halve the proportion of people with less than dollar a day.
Halve the proportion of people who suffer from hunger.
Integrate sustainable development into country policies and reverse loss of environmental resources.
Halve the proportion of people without access to potable water.
By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers.
Develop a global partnership for development.
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Develop further an open, rule-based predictable, non-discriminating trading and financial system including a
commitment to good governance, development, and poverty reduction - both nationally and internationally.
Address the special needs of the Least Developed Countries.
Address the special needs of landlocked and small island developing countries.
Deal comprehensively with the debt problems of developing countries through national and international measures in
order to make debt sustainable in the long term.
In cooperation with developing countries, develop and implement strategies for decent and productive work for youth.
In cooperation with the pharmaceutical companies, provide access to affordable drugs in developing countries.
In cooperation with the private sector, make available the benefits of new technologies, especially information and
communications.
• PRSPs - anti-poverty programs
• United Nations Millennium Project (2005)
coordinated by Jeffrey Sachs.
• Big Push of investment supported by a huge
increase in foreign aid.
• The emphasis is on investment in core
infrastructure, human capital, and governance to
lay the foundation for economic development
and private-sector led growth.
• Poverty trap story
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Commission for Africa (2005), initiated by Prime Minister Blair
Puts stronger priority on the need for improved governance.
Build transparent and accountable budgetary processes
Systems that can manage and prevent conflicts.
Investment in people via the development of good systems for
education, health delivery, and water and sanitation.
Combat the spread of HIV/AIDS.
Investment climate.
Massive infrastructure investments to integrate African economies.
Development strategies should focus on agriculture and the
development of small scale enterprises to reach poor groups.
African countries need to enhance their capacity to trade, while the
rich countries must reduce barriers to African exports, particularly for
agricultural goods.
The quality of aid is crucial and it requires good governance on the
part of the recipient countries and improved aid quality on the part of
the donors (bilateral as well as multilateral).
Complete debt cancellation is recommended for the poorest
countries.
Problems with a massive scaling-up of aid to Africa?
4. Prospects for growth in Africa
• Johson, Ostry, Subramanian (2007), NBER
• Conventional – geography, fractionalisation,
corruption hinders growth.
• Optimistic – can be improved with the help of
aid.
• Africa has done badly apart from some growth
spurts. How can it achieve sustained growth?
• No unified theory for this.
• But three plausible views about what creates
crises and derails growth.
33
• 1. Weak economic and political institutions
• 2. Greater propensity to experience conflict and
social strife
• 3. Bad macroeconomic policies
• (+ 4-5). Poor education and health.
• What is the threshold at which any of these
indicators signal a potential problem with
sustained growth?
• One plausible benchmark – recent experience of
countries which started with weak institutions
(and low income levels) but nevertheless were
able to sustain high growth rates.
34
• 12 such countries post 1945.
• All had rapid growth of exports – and in
most cases this was of manufactures.
• Here – a study of whether African
countries are on their way to break away
from the poverty path.
• Not so bad:
• Institutions have improved
• Macroeconomic stability better.
35
• But ..
• In terms of specific economic institutions
(World Bank: Doing Business indicators)
there remains a wide gap E g Regulatory
costs of exporting.
• Some SSA countries have experienced
significant real exchange rate
overvaluation.
• Health indicators are poorer.
36
The benchmarking exercise
• Defining a sustained growth acceleration:
Countries must have experienced an
improvement in growth rates of at least 2
percentage points per capita, sustained
growth of at least 3.5 per cent per capita
for at least seven years, and higher postacceleration income level than the preacceleration peak.
37
Why did manufacturing exports
matter so much after 1960?
• One possibility is that manufacturing exports helps
create a middle class that cares about the institutions.
• Acemoglu et al Handbook (2005): Interaction between
economic and political power that produces (or changes)
institutions.
• Trade may change the balance of power so that
progressive groups get more influence.
• Note that economic and political institutions improved
over time in countries that experienced sustained
growth.
• Natural resource based growth does not seem to have
the same positive effect.
38
Recent African growth experience
• Broad economic institutions are not worse than
they were in the 12.
• Cost of doing business a problem.
• Fractionalization somewhat worse.
• SGs increased their manufacturing growth
dramatically.
• Liberal trade regime.
• SGs avoided currency overvaluation – not
generally so in Africa.
39
• If development and diversification is about creating
incentives to invest in tradables, and given the
unwillingness of African countries to pursue industrial
policy, the exchange rate becomes the key instrument in
pursuing this objective.
• Can they feasibly sustain an undervalued exchange
rate?
• - distributional consequences
• - capital account open (and aid)
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Cost of trading high
Education is comparable
Health status worse
Poorer basic infrastructure like roads
40
Conclusions about constraints
• For those who view Africa’s prospects
through the perspective of the “deep”
determinants of development –
geography, institutions, history – the
outlook seems bleak.
• For other rosier because of commoditypowered upturn of certain policy levers
(aid) will help.
• Neither view is fully convincing
41
• Results of the benchmarking exercise:
• The deep determinants are not much worse for
a group of promising African states today than
they were in much of East Asia in the 1960s.
• There are inherent institutional weaknesses in
Africa but they can be overcome as in East Asia.
• “Escapes from poverty in the face of weak
institutions have generally involved exports and
– in almost all cases – manufacturing exports” p
37
• 1. Reduce the direct regulatory costs for
exporters
• 2 Avoid real exchange rate overvaluation
42
5. The financial crisis and Africa
• How does the current crisis affect the African growth
prospects?
• Africa needs to try to live through the crisis in such a way
that it can maintain the improvements that have been
achieved, and to continue with the institutional and policy
reforms needed.
• When cutting back expenditures countries should from
this perspective thus try to protect its investments in
infrastructure and generally in the business environment.
• However, there will have to be a trade-off here with social
protection.
43
Economic policy for recovery
from the crisis
• The African banking system was partly
isolated in the first phase of the crisis, but
it suffered when the real economy started
to be affected.
• The impact of the crisis is negative on
trade volumes and export prices.
• It has reduced the capital inflows - foreign
direct investment and transfers.
• Domestic fiscal revenues are declining.
44
• When banks start to feel the pressure there may be a
need for the Central Bank to recapitalize the banks. But
there seems to be less need in African systems for the
type of uncongenial monetary policy that has been
implemented in the USA and Europe.
• Still, the countries in Africa may need fiscal stimulus to
maintain the demand in the national economy, but due to
the lack of resources there are choices that have to be
made. Still, aid inflows may help protect important fiscal
expenditures.
• These could on the one hand be in the form of social
protection and food protection, but countries should at
the same time seek to protect expenditures that are
essential for the capacity of the countries to regain their
growth momentum.
• It is generally good if aid can help stabilize African
economies, since even in normal times they are very
vulnerable to economic shocks. It would be useful if
donors can coordinate their interventions to make
efficient use of their resources.
45
6. Industry in development policy
• International economic integration requires
a stimulus of tradables production.
• Rodrik (2009, p. 18) notes that increases
in the industry share is more significantly
related to growth than increases in export
shares overall, and therefore it is the
structural change that matters and not the
export orientation.
• He notes that “once industry shares in
GDP are controlled for, trade surpluses
exert no additional positive effect on
46
economic growth”
• Firms in the industrial sector are subject to
learning spillovers and coordination failures and
to high costs imposed by weaknesses in legal
and regulatory frameworks.
• It is a long-term process to fix institutions and to
remove market failures is a long-term process.
• Some successful countries have alleviated these
constraints indirectly, by raising the relative
profitability of modern activities through other
means.
• SSA countries can get away with undervaluing
their currencies (which China has been doing so
far, but which may be harder in the future).
Undervaluation of the currency is a subsidy of
tradables exports, while other ways of
supporting tradables production affects both
exports and domestic sales.
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• Rodrik’s strategy proposal is that government should
seek to enhance the relative profitability of nontraditional products that face large information
externalities and coordination failures, or which suffers
particularly strongly from the poor institutional
environment.
• Interventions such as tax exemptions, directed credit,
payroll subsidies, investment subsidies, export
processing zones aimed at specific firms or sectors.
• One can think about ways of shifting the relative
incentives in favour of tradables by reducing cost of
inputs which are used intensively by modern economic
activities. A typical area for intervention would be
infrastructure for transport and logistic costs.
• Labour is the most important non-traded input, so what
happens to wages is also very important for
competitiveness.
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• Two arguments against these interventions.
• 1. The government does not have enough
information.
• 2. And even if they had, there will be rentseeking and corruption.
• Rodrik argues that there are good responses to
these critical questions. First he notes that
mistakes are unavoidable. Governments must
recognize their mistakes and change. Industrial
policy not the only area that is open to
corruption. Should no policies be pursued that
are open to corruption?
• Attempts in this direction during the importsubstitution phase in Africa were largely a
failure. So the question is whether the
institutional environment in Africa good enough
for Rodrik’s idea of industrial policy as a
development tool?
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