Changing global trends are creating new opportunities for economic transformation and green industrialization in Africa. Policies that encourage economic transformation and ‘green growth’, combined with entrepreneurship, could enable Africa to achieve a clean, resource-efficient modern economy.

Policymakers across Africa have widely embraced economic transformation as a key to help accelerate and sustain inclusive growth. Economic transformation refers to two linked development processes. One is structural change: the shift of workers and other resources from low-productivity sectors, such as subsistence agriculture, to high-productivity sectors, such as industry and modern services. The other is faster productivity growth within various sectors. Sustained robust economic growth is essential to achieve rapid job growth and poverty reduction in Africa.

Economic transformation and green growth both depend on doing new things or doing things differently: making risky investments in new, unfamiliar sectors or products or adopting new, unfamiliar methods, processes, technologies, or inputs. Therefore they depend crucially on the activity of entrepreneurs, who drive change through their innovation and risk-taking.

This paper discusses the opportunities – and challenges – for African policymakers and businesses on these three related issues: economic transformation, green growth, and entrepreneurship. Better policies and institutions, changing world markets and global technological progress have the potential to foster both economic transformation and green growth in Africa, or to better manage trade-offs between them, as well as to encourage more vigorous entrepreneurship, a key for economic transformation and green growth.

The paper synthesises the evidence on green industrialisation and entrepreneurship in Africa; analyses the relationship between structural transformation, industrial development, and the environment in Africa; and highlights a number of research gaps, particularly with respect to the role that dynamic smaller firms can play in greener industrial development.

Opportunities for greener industrial growth

Making firms more productive and attracting more investment will not be easy, as the history of African countries’ efforts to industrialise attests. These objectives do, however, provide a basis for thinking about the region’s prospects for green industrialisation.

Given the magnitude of the challenge, it is tempting to focus first on getting industrial development moving, deferring consideration of the environmental costs to a later time. Doing so would be an error. The industrialisation path taken, the choice of policies, and the capacity to absorb new energy-efficient and clean energy technologies will all significantly determine how large the increase in energy use, and its impact on the environment, will be. It makes sense for policymakers to think systematically about the environmental consequences of their industrial policy choices from the outset, both to identify potential win-win opportunities and to understand fully the trade-offs.

Increasing the prospects for greener industrial development in Africa will depend on two factors. The first is the extent to which the environmental impact of structural change may differ from the patterns associated with industrialisation in East Asia, driven in part by factors such as the region’s resource endowments, the availability of new technologies, and the changing nature of global industry. The second is the extent to which the policy interventions designed to support the drivers of firm-level productivity outlined above – the basics, exports, and agglomerations – can be adapted to support greener industrial development.

Mounting an export push

For the vast majority of countries in Africa, the regional and global export market represents the best option for rapid growth of manufacturing, agro-industry, and tradable services. Because individual firms face high fixed costs of entering export markets, there is a risk that countries will export too little unless public policies are put in place to offset the costs to first movers.

To deal with these externalities, African governments need to adopt “export push” strategies similar to those Asian countries have used since the 1970s. Asian governments adopted a set of macroeconomic and exchange rate policies, public investments, regulatory reforms, and institutional changes to increase the share of industrial exports in GDP.

Many of the public actions needed for an export push involve the basics but with the twist that priority should be given to reducing constraints on exports. Institutional and regulatory reforms should aim to reduce the transaction costs that exporters face. Duty drawback, tariff exemption, and value added tax (VAT) reimbursement schemes are often complex and poorly administered. Port clearance times are long, and customs delays on both imported inputs and exports are significantly longer than in Asia. Trade-related infrastructure is particularly weak; poorly functioning institutions and logistics markets increase trade costs.

Governments can support green exports by developing initiatives to identify green markets and support certification and standards. Africa’s regional economic communities can play a role in certification. Development partners can also give consideration to supporting green exports through trade preferences, although care must be taken in the design of such schemes, to ensure that they do not in practice serve as a form of protection against developing country exports.

Strengthening special economic zones and industrial parks – making them greener

Industrial agglomeration poses a collective action problem: if a new industrial location can attract a critical mass of firms, each firm will realise productivity gains from clustering. Until such a critical mass is reached, however, there is no incentive for a firm to move.

Governments can foster industrial agglomerations by concentrating investments in high-quality institutions, social services, and infrastructure in a limited area, such as an SEZ or industrial park.80 Appropriate public policies to attract a critical mass of investors into such areas are a prerequisite to breaking into global markets.

Most African SEZs have failed to reach the levels of physical, institutional, and human capital needed to attract global investors. A World Bank survey finds that non-African SEZs had an average monthly downtime from electricity outages of 4 hours; the average downtime in sub-Saharan African SEZs was 44 hours. A similar pattern is observed in the institutions supporting SEZs. Clearing customs takes about twice as long in African zones as it does in non-African competitors.

Experience with spatial industrial policies in North Africa has been mixed. Tunisia’s manufacturing success is based largely on its export processing zones (EPZs), which have been criticised for their limited links to the domestic economy. Egypt’s EPZs have generally been regarded as failures, especially in the public sector.

Thus, a first order of business is to raise the performance of Africa’s SEZs to international standards. The benefits of doing so include not only more rapid export growth and economic transformation but also social gains, such as greater female employment in industry. Ethiopia has demonstrated that it is possible to pursue green growth and spatial economic policies at the same time.

This Working Paper has been prepared as a supporting paper for the AfDB/OECD/UNDP report, African Economic Outlook 2017: Entrepreneurship and Industrialisation. The authors are Milan Brahmbhatt (New Climate Economy), Catlyne Haddaoui (Overseas Development Institute), and John Page (The Brookings Institution).

Opinions expressed or arguments employed in this working paper are solely those of the authors and do not necessarily reflect the official views of the OECD or its member countries, or those of the UK government (which funded the material).