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Industrial policy’s new look

Industrial policy is now back–unless, as economist Joseph Stiglitz says, it never really left. The third edition of Perspectives on Global Development from the OECD Development Centre demystifies industrial policies. Cambridge Professor Ha Joon Chang calls it a “landmark publication because it looks for ways to make industrial policy work better, rather than having an ideological debate on whether it exists and whether it can ever succeed.”

This book paints a realistic picture of industrial policies, and draws lessons from failures as well as successes. These failures range from indiscriminate subsidies and never-ending support, to short-termism, lack of monitoring and evaluation, preventing competition, and closed-door bureaucracy-led prioritisation.

What are industrial policies really about? A broad definition includes both innovation, infrastructure and skills policies, as well as targeted interventions boosting a specific sector, activity or cluster of firms. And it is not about shoring up old-style manufacturing, but rather about encouraging high value-added activities in agriculture, industry and services.

In the context of developing economies, industrial policies imply “targeted government actions aimed at supporting production transformation that increases productivity … improves domestic capabilities and creates more and better jobs”.

Industrial policies are not necessarily easy to put in place. The risk of failure is high. But as Ha Joon Chang points out, the fact that something is difficult cannot be a reason to ignore it. Countries, like individuals, learn by doing, so “without trying out ‘difficult’ policies, like industrial policies, capabilities cannot be improved”.

Why should developing countries turn to industrial policies now? Thanks to globalisation and shifts in the pattern of investment, the geography of production and innovation is changing. Like never before, new forms of investment and the offshoring of high value-added activities open up opportunities for learning, innovation and entering into new activities and sectors. At the same time, rising middle classes mean new consumer markets–by 2030, 80% of the world’s middle classes will be living in developing countries. And all this is happening in a context of intensified competition where innovation is essential.

Look at Brazil, China, India and South Africa, which are using sectoral technology funds and public procurement to promote innovation. Morocco also uses inward investment to foster innovation and upgrade its industrial base. These countries promote new forms of linkages between multinational companies and local firms to increase benefits that spill over into the domestic economy more widely.

Whereas old industrial policies might have been fairly static, 21st century industrial policies must be agile, and respond to change. Policymakers need to be flexible enough to reorient actions when goals are not achieved. Being interactive is also important: industrial policies are about people and (territorial as well as social) inclusion. Dialogue with partners is more essential than ever to share knowledge and make progress, and to tap into resources such as national development banks.

Industrial policies nowadays require a high level of co-ordination and sequencing of actions directed at skills, finance, infrastructure and the like. This means investing in more and better training and addressing skill mismatches. It also means increasing access to finance for companies to invest in innovation and developing production. This is especially true for small and medium-sized firms which only receive around 11% of total credit in Africa and the Middle East, less than 13% in Latin America, and less than 20% in Southeast Asia, compared with nearly 25% in OECD countries.

Infrastructure gaps can undermine the efforts of domestic companies to become more competitive. About 60% of the world’s infrastructure stock is located in high income countries, 28% in middle income countries and 12% in low income countries.

In the end, good industrial policies are about making strategic choices to address long-term structural issues and setting the conditions for people to prosper. To take off, they require political leadership, well-functioning institutions and empowered regional governments, not meddling governments, myopic bureaucracy or cramped markets. Anne-Lise Prigent

References

OECD (2013), Perspectives on Global Development, OECD Development Centre, Paris.

©OECD Observer No 296, Q3 2013