The Role of State in Economic Development: Infant Industry Promotion in South Sudan

Christopher D. Zambakari

Abstract:  In this article I examine the relevance of infant-industry promotion theory to South Sudan’s economic revitalization efforts. As a newly formed state with jurisdiction over people with varied and often conflicting interests, the South Sudanese government will likely experience difficulty developing institutions and procedures that produce an equitable distribution of economic gains across the South Sudanese population. After a brief introduction, I discuss the role of the state in economic development dating back to the renaissance. I discuss the state and economic development in South Sudan and argue that recent declines in South Sudan’s performance on key human development indicators heighten the urgency of evaluating different strategic options for rebuilding an economy ravaged by civil war.  This process will necessarily require careful consideration of the optimal degree of state involvement in designing and implementing these solutions.  Infant-industry promotion is one promising approach to leveling the playing field between developing and developed country economies.  Lastly, I present the case for infant-industry promotion and call for the government to serve an active role in economic development and promotion, an alternative model for development in South Sudan by applying selective economic policies to industries where productive capacities can be developed. 

I. Introduction

It has been eight years since the Republic of South Sudan became an independent state, following the Comprehensive Peace Agreement (CPA), signed on January 9, 2005, between the National Congress Party (NCP) and the Sudan People’s Liberation Movement/Army (SPLM/A). In a referendum on self-determination conducted in January 2011, 98.83% of South Sudanese voters elected to secede from Sudan. On July 14, 2011, South Sudan officially joined the international community as the 193rd member of the United Nations. Less than three years later, in December 2013, South Sudan descended into civil war (Mamdani 2016; Johnson 2014; Nyaba 2019; Zambakari 2019). The violence  has exacerbated tensions between disparate political factions, delaying the process of reconciliation and casting doubt over South Sudan’s viability as a state. 

Prior to the outbreak of this ongoing conflict, South Sudan’s leaders applied for admission into the East African Community (EAC), a regional intergovernmental organization whose mission is to promote regional peace, security, governance and socioeconomic development. However, the application has been deferred on multiple occasions, first in April 2011 and later in November of the same year. In early March 2016, the East African Legislative Assembly finally passed a resolution approving South Sudan’s ascension into the EAC.  South Sudan officially became the EAC’s sixth partner state, joining Kenya, Uganda, Tanzania, Rwanda and Burundi (Ogola 2015).

South Sudan is one of the most diverse countries in East Africa, and covers an area of approximately 644,329 km2 (Johnson 2016; NBS 2012). Including its disputed border regions,[1] South Sudan is approximately the combined size of Kenya, Uganda, Rwanda and Burundi (De Mabior 2005). A 2008 census estimated that South Sudan had a population close to 8.3 million people, with a 2017 UN World Population Prospects Report putting the current population at a significantly higher count – more than 12.2 million – in 2016 (NBS 2012; UN DESA 2017). The majority of the population is young and highly dependent on farming and animal husbandry for their livelihoods.[2] Moreover, many citizens lack basic educations that are a prerequisite for work in certain industries.  A UNESCO report states that only 38% of adults in South Sudan are literate, with separate research conducted by the South Sudan National Bureau of Statistics putting the literacy level even lower, at 27%. Among women, the illiteracy rate stands at a whopping 92% (UNESCO 2011; NBS 2012).

Given the challenges posed by South Sudan’s insufficient investment in human capital and a destabilizing civil war, it is no surprise that the country’s economic development has faltered, at best. In 2014, South Sudan’s Gross Domestic Product (GDP) per capita was $1,111.  Owing primarily to the instability produced by South Sudan’s civil war, GDP per capita dropped to less than $200 in 2017. Since December 2013, thousands of civilians have been killed (Olusegun Obasanjo et al. 2014), and more than 4.2 million people have been displaced both internally and to neighboring countries as refugees (World Bank 2019). For those who remain, livelihoods are concentrated in low-productivity activities, such as subsistence farming. Severe inflation compounds these difficulties by making even minimal food baskets unaffordable for many households. Recent declines in South Sudan’s performance on key human development indicators heighten the urgency of evaluating different strategic options for rebuilding an economy ravaged by civil war.  This process will necessarily require careful consideration of the optimal degree of state involvement in designing and implementing these solutions. 

Figure 1: Annual GDP per capita in South Sudan (2011-2016)

This article will examine the relevance of infant-industry promotion theory to South Sudan’s economic revitalization efforts (Hirst 1965; List 1909). As a newly formed state with jurisdiction over people with varied and often conflicting interests, the South Sudanese government will likely experience difficulty developing institutions and procedures that  produce an equitable distribution of economic gains across the South Sudanese population. This paper presents the case for infant-industry promotion in South Sudan and calls for the government to serve an active role in economic development.

II. The Role of the State in Economic Development

Given that economic growth plays a critical role in development, the goals of economic reforms should be defined in terms of sustainability and asymmetrical or uneven growth. This is for the simple reason that economic growth is an inherently uneven process (Reinert 2005). While there are many institutions capable of promoting economic development, the state is the most effective mechanism for stimulating growth in the earlier stages of economic development. At the turn of the century, the United Nations Millennium Declaration assigned to nation-states the primary responsibility of preserving the integrity of the human race, protecting the environment and moving the world in a positive direction (Stiglitz 1998; Chang 2003; United Nations 2005).

As a general rule, the state remains the only institution vested with the power to legalize and enforce property rights, regulate markets, levy taxes and issue currency.[3] The state also plays three other critical roles: institution builder, conflict manager, entrepreneur. The antagonism that is commonly reported in economic literature between the state and the private sector is largely only applicable to industrialized and postindustrial states. In a study presented at the High-Level United Nations Development Conference on Millennium Development Goals, Reinert noted that one crucial undertaking of the state since the Renaissance has been to “create well-functioning markets by providing a legal framework, standards, credit, physical infrastructure and if necessary to function temporarily as an entrepreneur of last resort.” (Reinert 1999, 268)

For countries at earlier stages of economic development, a high degree of state involvement in economic regulations is often a necessary first step toward creating markets that operate efficiently.  However, in South Sudan’s fragile post-civil war environment, there are clear constraints on the government’s capacity and ability to develop and implement policy. Aside from securing control of territory and establishing a monopoly over the legitimate use of violence, there is no more fundamentally important role for the state than ensuring macroeconomic stability. The government typically promotes macroeconomic stability by raising revenue and then spending in key sectors, such as health, infrastructure, education and security. While there will inevitably be questions over which measures should be considered at different points in time, the state will always play an important role in aiding economic development.

A survey of the history of development shows that countries do not do well vis-á-vis the dynamic of diminishing returns (Chang 2002; Reinert 2009; Marshall 1890). Cases of countries successfully catching up with their more developed counterparts are generally attributed to a series of protective measures that provide incentives for engaging in increasing-return activities combined with taxes on diminishing-return activities. Reinert (1996)[4] asserts that diminishing returns occur in economic activities when greater investment in one factor of production takes place, when one factor of production is held constant, and the other factors of production are expanded. As a consequence of the one factor being held constant, the increased input of the other factors yields progressively less benefit. As a result, specialization increases unit costs in diminishing-return industries.

In contrast, specialization in activities with increasing returns generates decreasing unit costs, increasing labor productivity, and rising per capita income as production output increases. Increasing-return activities thus emphasize the dynamic of imperfect competition that leads to growth, while diminishing-return activities place an emphasis on perfect competition and the pursuit of market equilibrium.  Alexander Gerschenkron recognizes that there are increasing disadvantages to developing late for countries hoping to become competitive with Western economies. U.S. economist Moses Abramowitz, notes that colloquial expressions, such as “catching up,” “forging ahead” and “falling behind,” (cited in Reinert 2009) typically refer to economic measures that either promote knowledge acquisition for increasing-return activities or incentivize transitions away from diminishing-return activities (Reinhert 1996).

Early proponents of international trade and comparative advantage like David Ricardo (1974) argue that developing countries are better off sticking to their comparative advantage in agriculture or other diminishing-return economic activities. The contemporary policy implication is that African states should be able to interact with other states on a so-called “equal playing field” and to compete directly with their counterparts in other parts of the world without the support of protective measures and by focusing on each country’s comparative advantage. However, proponents of this argument ignore the fact that the current playing field is far from equal, with countries and companies starting at drastically different levels of development (de Melo and Portugal-Perez 2013).[5] The history of today’s developed countries illustrates that most developing countries cannot become rich without first developing the productive powers of their domestic industries and insulating infant industries from external competition (Chang 2003; Reinert 2007).

Infant-industry promotion is one promising approach to leveling the playing field between developing and developed country economies. The term refers to state policies designed to shield domestic industries from competition with  more established firms for a period of time. As a state policy, infant-industry promotion is credited to Alexander Hamilton, the first U.S. treasury secretary (Hamilton 1791). The concept was further developed by two other 19th-century economists: Daniel Raymond from the U.S. and Friedrich List from Germany, who each viewed the state as the main instrument for economic progress (Chang 2007, 25). Recently, two other economists – Ha-Joon Chang and Erik S. Reinert – have further developed the concept (Reinhert 1999; Chang 2011). Infant-industry promotion is characterized by a series of policies designed to nurture domestic industries until the point at which they become competitive with comparable industries in developed countries. Common measures include tariffs, subsidies, quotas, import bans on key raw materials and rebates on industrial inputs (Brown, Lynn-Jones, and Miller 1995, 54; Zambakari 2012).

III. The State and Economic Development in South Sudan

Economic history suggests that, in order for countries to break free from the bondage of underdevelopment, the government needs to be selective about the sectors and industries it targets for investment, protection and support (Amin 1973; Nwonwu 2016; Taylor 2016).  Due to the paucity of high-quality infrastructure in South Sudan, the government should prioritize investments in human capital, infrastructure and agriculture. South Sudan is endowed with vast arable land, forest, oil, minerals and wildlife. Given available resources and human development levels, the state should focus its initial efforts on facilitating growth in the  agricultural industry.  At the same time, the government should take steps to nurture South Sudan’s infant manufacturing sector.  As this industry becomes more successful, South Sudan will become less dependent on its agricultural and natural resources for economic growth, and the government can shift its focus to industries that are increasingly capital- and technology-intensive.

Agriculture offers South Sudan one of its best opportunities. De Mabior (1981)[6] estimates that the region now encompassing South Sudan has more than 207,600,000 acres of viable agricultural land, concluding that the region has the potential to become the “breadbasket” of Africa and the Middle East (De Mabior 1981, 219-259). Agricultural investments would strengthen South Sudan’s economy by simultaneously diversifying the government’s income sources and decreasing its dependency on oil revenue (Natsios & Abramowitz 2011; Shankleman 2011).[7] According to the World Bank, South Sudan is “the most oil-dependent country in the world,” with oil accounting for  60% of its GDP (World Bank 2019).

The South Sudanese government is currently evaluating construction of a new oil pipeline as an option for  reducing the country’s dependence on oil infrastructure within neighboring Sudan. However, focusing exclusively on oil production would prove detrimental to South Sudan’s economy in the long run. The economic rationale for committing to the pipeline and prioritizing oil over other sectors, such as agriculture, is based entirely on South Sudan’s theoretical proven reserves and the price of oil in the international market (Zambakari 2020).[8] With a volatile commodity like oil, demand for South Sudanese exports could easily  be undermined by any of the dominant market players who effectively control global production volumes. South Sudan could suffer significant declines in oil revenue if another provider, such as Nigeria, Algeria, Angola, Chad, Republic of Congo, Libya or Saudi Arabia, were able to  produce high-quality oil at a lower cost per barrel (British Petroleum 2012).[9]

Despite initial optimism over the execution of nonbinding agreements with Ethiopia and Kenya to build pipelines connecting South Sudan to the ports of Djibouti and Lamu (EIA 2012), some analysts have recently expressed skepticism over the project’s viability (Sudan Tribune 2012). The fact that eight years that have passed since formalizing this agreement – with no significant progress made on either of the two pipelines – appears to validate these concerns.  Patey (2012) also acknowledges  that the attractiveness of the plan is highly contingent on new oil discoveries. Because current reservoirs are projected to decline relatively quickly over the next five years, an investment in alternative pipelines does not make economic sense unless new discoveries are made (Patey 2012). This is why a focus on agriculture offers South Sudan a way to finance its economic growth while contributing to the development of an emergent industrial base. Current oil exports afford the government critical baseline revenue. Given the limited expected returns of new pipeline investments, it is more logical to direct existing government resources toward the agricultural industry, which can employ and generate income for a greater number of people compared with the oil industry.  It would also be relatively easy to mobilize South Sudan’s existing population of rural peasants, nomadic communities, pastoralists, and farmers to adopt advanced agricultural techniques. Burgeoning agricultural revenues could then be used to accumulate foreign reserves, which would eventually facilitate the purchase of foreign technology necessary to expand domestic infrastructure and launch more capital-intensive industries.[10]

At a conceptual level, it is important that the South Sudanese government makes a distinction between rents produced by innovative, increasing-return activities and rents extracted from diminishing-return activities.  As previously stated, South Sudan needs to implement economic measures that protect increasing-return industries from external competition while increasing taxes or regulations applied to decreasing-return industries. Reinert has referred to the former, rent-seekers who produce under increasing returns, as Schumpeterian cronies while those who produce under decreasing returns are referred to as Malthusian cronies.[11]

IV. Conclusion

The South Sudanese government will need to make several challenging decisions related to its infant-industry promotion policies. The state has to play all three roles – institution builder, conflict manager and entrepreneur – and lead the way by building strong institutions, managing ethnic conflict and creating the conditions that will give rise to a class of entrepreneurs. However, human, material, and financial resources in South Sudan will likely remain highly constrained for the foreseeable future. Deployment of defensive measures, such as tariffs, will become even more important given that they do not require state expenditures. Offensive tools, such as subsidies, will need to be carefully designed to maximize impact in light of limited state resources. This will undoubtedly make industrial policy implementation much more challenging.

There are multiple historical examples of countries that have relied on protectionist  policies to strengthen key industries to a point where they could compete internationally.  The United States is one of the most notable examples of a state whose infant industries benefited from a combined regime of protectionism, massive subsidies and relentless government intervention in the market (Zambakari 2012). Such policies enabled American companies in several key industries to grow strong enough to compete globally with British, French and German companies in the 19th and early 20th centuries and  develop further into the global powerhouses they are today.  There is undoubtedly a balance to be struck between protectionism and exposure to competition, which at the right levels, can also help stimulate development.  However, when industries or sectors are at such different levels of competitive ability, assistance from the state is vital. While the government of South Sudan has a substantial number of areas that require its attention, policymakers should prioritize protections for the agricultural industry.  In its current fragile state, exposure to international competition would likely be punishing.