Industrial policy still relevant

KUALA LUMPUR AND SYDNEY: Industrial policy refers to the promotion of new investments and technology by governments to encourage the growth and development of specific economic sectors. But scepticism persists about the feasibility and desirability of using industrial policy, especially of the ability to “pick winners,” often accused of leading to “propping-up failing industries.”

The debate over industrial policy has arguably been among the most ideological and contentious in the history of economics. Sometimes, the same evidence is cited in support of opposing industry policy positions.

Differences in opinion on the desirability of industrial policy, however, are not simply ideological. They are also due to genuine differences in theoretical and related perspectives as well as perceptions and interpretations of particularly influential experiences.

For many, industrial policy only refers to promoting manufacturing activity because of its special features, advantages and benefits — especially in terms of its potential employment, productivity and linkages — compared to agriculture and services.

Others insist that industrial policy should be “general” (or “functional” or “horizontal”), rather than “selective” (“sectoral” or “vertical”). They argue that the state should concentrate on providing education, infrastructure and other public goods, not only because of their ostensibly general benefits, but also because they are likely to be underprovided by the market.

Historically, and even now, industrial policy has been used by developed countries. For instance, the US and even Britain have historically had much higher degrees of protectionism compared to developing countries in recent decades, even before trade liberalization.

Now, although industrial policy is back on the agenda of developed countries, by restricting trade policy interventions, preferential finance and technology transfer agreements, developed countries are in effect “taking away the ladder” for others, both developing countries and “transition economies,” seeking to accelerate economic transformation and growth.

Renewed interest

Industrial policy was dismissed as heretical, “ideological” and passé, with the ascendance of neo- liberalism promoted by policy conditionalities for emergency credit support from the Bretton Woods institutions — the International Monetary Fund and the World Bank.

Their so- called “Washington Consensus” cast industrial policy in a bad light; instead, they insisted on market- oriented policies, ostensibly based on international specialization determined by comparative advantage. Nevertheless, debates continue over notions of comparative advantage, however unconventional, e. g., “dynamic” comparative advantage.

Recent renewed interest ( see the Organization for Economic Cooperation and Development or OECD) in industrial policy is partly due to growing incontrovertible evidence that both developed and developing economies, thus accelerated economic progress. Also, failed industrial development in much of the developing world and deindustrialization in Africa, after more than three decades of neo- liberal policies, have prompted such reconsideration.

There is now grudging recognition, particularly after the spectacular progress of several fast growing East Asian economies, including China, that industrial policy — both investment and technology measures — has been crucial to their development successes.

Plurilateral organizations of developed economies, such as the OECD, which previously argued against industrial policy, now concede the role and potential of industrial policy for sustainable development, seeking to influence the debate for their own ends.

Even the World Bank has begun to operationalize “building competitive industries,” i. e., industrial policy by another name. But its emphasis tends to be on “horizontal” or “general” industrial policy, eschewing more pragmatic and feasible selective promotion.

Implementation key

While some economic activities may help achieve particular policy goals, they may not contribute to others — e. g., investments, which can generate mass employment, may not offer much scope for technological learning — thus underscoring the importance of sequencing.

Undoubtedly, some developing countries have been more successful than others in using industrial policy, e. g., due to different circumstances, pragmatic sequencing, better discipline or even good luck. Success has been achieved, often despite unfavorable conditions, usually when policies have been creatively and pragmatically implemented.

But how should industrial policy be implemented? While industrial policy should be realistic, this does not mean avoiding all risk, as some risk taking is typically associated with entrepreneurship and innovation. Careful comparative evaluation of available options often yields useful lessons.

There is no general industrial policy formula or approach for all time and in all circumstances. Rather, it needs to be elaborated and implemented with full consideration of existing challenges, conditions and constraints, and adapted appropriately to changing circumstances.

Some opponents insist that even if industrial policy may once have been important for development, there is no longer the needed policy space, especially with the “one size fits all” “single commitment” of the World Trade Organization ( WTO) since 1994. Many note how other aspects of globalization, including financialization, constrain national governments.

Undoubtedly, a large number of bilateral, regional and other plurilateral treaties have been concluded among countries, shaping, but also undermining general trade liberalization. While WTO rules and other free trade agreements limit the role of trade and other related policies in the industrial policy arsenal, they still allow legal use of many industrial policy measures; also, even previously agreed tariffs can be renegotiated.

Although unaffordable to poorer developing countries, subsidies are not prohibited by WTO rules. Bilateral and plurilateral trade agreements as well as bilateral investment treaties can also be revoked or renegotiated. Such agreements and other dimensions of globalization are not irreversible as Trump, Brexit and other recent developments remind us.

Policy space

Clearly, recent changes in the global environment have not made industrial policy impossible although policy space, or the scope for alternative intervention options, may have been diminished. So, what can developing countries do?

Those who try to elaborate industrial policy in relation to globalization argue that developing country governments should develop their economies by inducing relocation of appropriate segments of “global value chains” in their economies.

This typically involves attracting relevant foreign direct investment (FDI) for capital, technology, management, expertise and market access. But FDI is a double- edged sword, also undermining economies and development prospects of developing countries.

Sustainable progress requires appropriate and pragmatic industrial policy, which should not be dogmatic, or determined inflexibly by some supposed theory. Instead, options appropriate to circumstances, addressing real constraints and prospects, should be critically considered.

Productive capacity and capability building is critical and needs to be facilitated and coordinated by responsible governments. To be effective, industrial policy design and implementation need to consider both government capabilities and political will.

As no “one size fits all,” governments of developing countries should pragmatically and flexibly use appropriate industrial policy to accelerate sustainable development instead of the conventional wisdom associated with the neoliberal Washington Consensus in recent decades.