Industrial policies for development: It’s more than you think

Click to find out more
Click to find out more

Today’s post is by Anne-Lise Prigent, the editor in charge of development publications at OECD Publishing.

It was a dirty word. Not something to boast about. Yet it was widely practiced, even by its harshest critics. Industrial policy is now back it seems – unless, as Stiglitz says, it never really left. The third edition of Perspectives on Global Development from the OECD Development Centre demystifies industrial policies. Does this edition live up to the outstanding standards set by the first two? Yes, and it should prove just as useful too.

As Cambridge professor Ha Joon Chang puts it: this “landmark publication… shows a supreme degree of pragmatism”. 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. It is an excellent example of how that exploration may be conducted in an intelligent, well-informed and balanced way”.

That is not to say that this book paints a rosy, unrealistic picture of industrial policies. Countries have used industrial policies with more or less success and this report does not only look at successes, it also draws lessons from failures. Nimrod Zalk (Department of Trade and Industry, South Africa) will probably not be the only policy maker to consider that the book’s checklist of pitfalls is very useful. These range from indiscriminate subsidies and never-ending support, to short-termism, lack of monitoring and evaluation, preventing competition, and closed-door bureaucracy-led prioritization.

What are industrial policies really about? Their definition tends to be broad nowadays. It includes both innovation, infrastructure and skills policies as well as targeted interventions boosting a specific sector,  activity or cluster. And it is not only about  manufacturing, it’s also about high value added activities in agriculture and services (Beyond Industrial Policy).

In the context of developing economies, industrial policies imply “targeted government actions aimed at supporting production transformation that increases productivity, fosters the generation of backward and forward linkages, 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 not to recommend 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? Is it because of the crisis? In fact, countries like Brazil and Morocco started to design and implement industrial policies before 2007. There has been a deep, structural shift of the world’s economic centre of gravity towards Asia and the South which brings tremendous opportunities – and challenges – for developing countries. Today, the combined GDP of China and India amounts to one-third of that of the OECD area and it should outstrip it by 2060. Asian economies are increasingly integrated with China through supply chains. And China, India and Brazil have emerged as new partners for Africa. South-South trade and investment are on the rise.

The geography of production and innovation is changing. Like never before, new forms of FDI 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.

Countries now try to diversify, enter new sectors or activities and thus upgrade domestic production. For example, Brazil, China, India and South Africa are using sectoral technology funds and public procurement to promote innovation. Brazil, Morocco and India are using FDI to foster innovation and industrial upgrading. They promote new forms of linkages between multinational companies (MNCs) and local firms to increase spillovers to the domestic economy.

21st century industrial policies will be agile, responding to change will be key. They will be iterative: countries need to be able to reorient actions when goals are not achieved. And interactive: industrial policies are about people and (territorial) inclusion. Dialogue with partners, the private sector and among peers will also be essential to share knowledge and make progress. For example, national development banks are regaining ground as key partners in strategy setting (Brazil) and in promoting greener development  (e.g., special schemes to finance green technologies  in South Africa).

Industrial policies require a high level of co-ordination and sequencing of actions in several fields such as skills, finance and infrastructure. Investing in more and better skills is not enough, skills mismatches should be reduced. Increasing access to finance for companies to invest in innovation and production development  will be essential. This is especially true for SMEs that only received 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. And infrastructure gaps can jeopardize 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.

Industrial policies are highly specific to country and time. Like a well-adjusted bow, they should match each country’s development level and aim at the right targets – neither too high nor too low in the value chain, building on comparative advantage without being a slave to it. China for example has a comparative advantage in manufacturing, yet one-third of the value added of its exports originates from services. Indeed, catching-up stories suggest that economic development comes with changes in specialisation and trade patterns and with growing innovation capabilities. Finland, Korea and China are cases in point.

Industrial policies help accumulate capacities and know-how. They are about making strategic choices to address long-term structural issues and setting the conditions for business to prosper. To take off, they require political leadership, well-functioning institutions and empowered regional governments. Not meddling governments, myopic bureaucracy and cramping markets. No, as Shakespeare said, “ambition should be made of sterner stuff”.

Useful links

OECD Development Centre