1、1,Introduction to industrial policy: Definition, perspectives, lessons and challenges,Bineswaree Aruna Bolaky Africa Section Division for Africa, LDCs and special programmes United Nations Conference on Trade and Development UNCTAD,2,Outline of Presentation,DefinitionsThe Why and How of Industrial p
2、olicyChallengesA few words on Contents,3,A - Definitions,Industrial policy means different things to different people Government measures aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation. An important aspect of a new industrial policy
3、is that it should be part of a broader productive development strategy which is concerned to enhance capital accumulation and knowledge accumulation (UNCTAD /UNIDO 2011) Krugman and Obstfeld (1991) use the term to denote an attempt by a government to encourage resources to move into particular secto
4、rs that it views as important to future economic growth. Rodrik (2004) describes it as restructuring policies in favour of more dynamic activities generally, regardless of whether those are located within industry or manufacturing per se. ” “Policies that stimulate specific economic activities and p
5、romote structural change. As such, industrial policy is not about industry per se. Policies targeted at non-traditional agriculture or services qualify as much as incentives on manufactures”,4,A - Definitions,Wade (2010) defines it as targeted efforts to promote some sectors or products ahead of oth
6、ers. Cimoli, Dosi and Stiglitz (2009) see it as policies affecting “infant industry“ support of various kinds including trade policies, science and technology policies, public procurement, policies affecting foreign direct investments, intellectual property rights, and the allocation of financial re
7、sources. Chang (2009) states that “when we talk about “industrial policy”, the majority of us do not mean any policy that affect industry but a very particular type of policy that affects industries. It is what is commonly known as “selective industrial policy” or “targeting” namely, a policy that d
8、eliberately favours particular industries over others, against market signals, usually (but not necessarily) to enhance efficiency and promote productivity growth.”,5,Why Industrial Policy?,The case for industrial policy rests firstly on the proposition that structural transformation, and in particu
9、lar the development of competitive manufacturing activities, is a necessary condition for sustained and inclusive economic growth rather than simply a side-product of this process, and secondly, on the argument that government action is necessary to promote structural transformation. Those who are s
10、ceptical of the benefits of industrial policy often adopt this position because they see the economic growth processes in terms of an aggregate production function in which added inputs of various kind (capital, labour) and productivity growth (through disembodied “technological progress“) lead to e
11、conomy-wide increments to output. They do not think economic structure matters, do not see some (leading) sectors as having more propulsive effects on aggregate activity than others and do not conceptualize economic change as a process of creative destruction in which some activities are in decline
12、whilst other new activities are introduced into the economy through the innovative activities of entrepreneurs. From this perspective, industrial policy is perceived as irrelevant from the outset because structural transformation is not an integral aspect of a successful growth process.,6,Why Indust
13、rial policy?,The question arises as to why government action is necessary to promote structural transformation and in particular the development of manufacturing capabilities.In the past, the justification for industrial policy in developing countries rested on the need to protect infant industries
14、(Soludo, Ogbu and Chang 2004). However, in recent years, the economic case for industrial policy has focused on either the need to counteract market failures, or more broadly the need to address systemic failures and build capabilities (Rodrik 2004, 2008).,7,Why Industrial Policy-based on Rodrik,To
15、overcome market failures -markets work poorly in developing countries.Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where market participants overall gains from that
16、 outcome would outweigh their losses. Market failures can be viewed as scenarios where individuals pursuit of pure self-interest leads to results that are not efficient that can be improved upon from the societal point-of-view Sources of market failures: information asymmetries, non-competitive mark
17、ets , externalities ,or public goodsDevelopment is fundamentally about structural change: it involves producing new goods with new technologies and transferring resources from traditional activities to these new ones. That is the central insight of the classical two-sector models of development (Lew
18、is 1954). It is also a robust empirical fact, which has recently been documented by Imbs and Wacziarg (2003). Structural change is a process which is a fertile ground for many market failures.,8,Why Industrial Policy- replicated from Rodrik (2008),Examples: Investment in new industries requires fina
19、nce, but presents no track record and appears excessively risky to private lenders. It needs complementary services and inputs which are unlikely to exist absent a substantial scale of operation of the activity in question. It entails training workers and managers, who then become free to circulate
20、to competitors and copycats. It generates learning-by-doing, which others can benefit from. Under these conditions, the deck is stacked against entrepreneurs who contemplate diversifying into non-traditional areas. Poor countries remain poor because markets do not work as well as they could to foste
21、r the structural transformation that is needed.Not to say that government failures and institutional shortcomings in protecting property rights and enforcing contracts cannot also be fundamental stumbling blocksCountries such as South Korea, Taiwan, and China have developed not by suddenly perfectin
22、g their institutions, but by coming up with policies that overcame the market obstacles that their investors faced in modern tradable industries,9,Examples of market failure: externalities such as information externalities and coordination externalitiesInformation externalities: costs of self-discov
23、ery Diversification of the productive structure requires “discovery” of an economys cost structurei.e., discovery of which new activities can be produced at low enough cost to be profitable. Entrepreneurs must experiment with new product lines. They must tinker with technologies from established pro
24、ducers abroad and adapt them to local conditions. This is the process that Ricardo Hausmann and Rodrik called “self discovery”When we put ourselves in the shoes of an entrepreneur engaged in cost discovery, we immediately see the key problem: this is an activity that has great social value and yet i
25、s very poorly remunerated. If the entrepreneur fails in his venture, he bears the full cost of his failure. If he is successful, he has to share the value of his discovery with other producers who can follow his example and flock into the new activity. In the limit, with free entry, entrepreneurship
26、 of this kind produces private costs and social gainsWhole industries often arise out of the experimental efforts of lone entrepreneurs. Garments in Bangladesh, cut flowers in Colombia, IT in India, and salmon in Chile (with a state entity acting as the entrepreneur in the last case) are some of the
27、 better documented cases.,10,Carrot and Stick approach: Since self-discovery requires rents to be provided to entrepreneurs, one side of the policy has to take the form of a carrot. This can be a subsidy of some kind, trade protection, or the provision of venture capital. Note that the logic of the
28、problem requires that the rents be provided only to the initial investor, not to copycats. To ensure that mistakes are not perpetuated and bad projects are phased out, these rents must in turn be subject either to performance requirements (for example, a requirement to export), or to close monitorin
29、g of the uses to which they are put. In other words, there has to be a stick to discipline opportunistic action by the recipient of the subsidy. East Asian industrial policies have typically had both elements The trick for the government is not to pick winners, but to know when it has a loser,11,Why
30、 Industrial policy?,Coordination externalities The need to overcome coordination failure also provides justification for industrial policy. Coordination failure occurs when a group of firms could achieve a more desirable equilibrium but fail to because they do not coordinate their decision makingCoo
31、rdination failure could arise, for example, when the profitability of an activity depends on whether or not there are simultaneous investments by other agents acting independently. In such settings, social welfare could be enhanced through collective action. Profitable new industries can fail to dev
32、elop unless upstream and downstream investments are coaxed simultaneously.,12,Why Industrial Policy?,How South Korea and Taiwan grew rich: getting interventions right (Rodrik 1995) Orthodox view: The standard story to which most orthodox economists subscribe is one of export-led growth. During the 1
33、950s, the story goes, both of these countries engaged in traditional import substitution policies, with multiple exchange rates, high levels of trade protection, and repressed financial markets. By the late 1950s, each country had exhausted the easy stage of import substitution. This, together with
34、the impending reduction in US aid - which had been the main source of foreign exchange for both economies - led policy-makers in the two countries to alter their economic strategy and adopt export-oriented policies. These policies included the unification of exchange rates accompanied by devaluation
35、s, various other measures to stimulate exports (including most significantly duty-free access for exporters to imported inputs), higher interest rates, and some liberalization of the import regime. As a consequence of these measures, as well as a broadly supportive policy environment (encompassing m
36、acroeconomic stability and public investment in infrastructure and in human capital), exports took off in the mid- 1960s. Export orientation led both economies to specialize according to comparative advantage, resulting in rising incomes, investment, savings and productivity.,13,How South Korea and
37、Taiwan grew rich: getting interventions right (Rodrik 1995),Revisionist: Observers like Amsden and Wade have argued that the reforms of the 1960s went considerably beyond giving markets and comparative advantage free rein. According to these authors, governments in both countries had clear industria
38、l priorities and they did not hesitate to intervene (through subsidies, trade restrictions, administrative guidance, public enterprises or credit allocation) to reshape comparative advantage in the desired direction. Interestingly, however, the orthodox and revisionist accounts converge on the impor
39、tance of the export-oriented strategy in having disciplined firms and enhanced productivity growth.,14,How South Korea and Taiwan grew rich: getting interventions right (Rodrik 1995),Rodriks view: A much more plausible explanation for the economic take-off is the sharp increase in investment demand
40、that took place in the early 1960s. The early 1960s and thereafter the Korean and Taiwanese governments managed to engineer a significant increase in the private return to capital. They did so not only by removing a number of impediments to investment and establishing a sound investment climate, but
41、 more importantly by alleviating a coordination failure which had blocked economic take-off. Coordinating and encouraging private (and public) investments with a high degree of linkages within the modem sector.The latter required a range of strategic interventions - including investment subsidies, a
42、dministrative guidance and the use of public enterprise - which went considerably beyond those discussed in the standard account.That government intervention could play such a productive role was conditioned in turn by a set of advantageous initial conditions: namely, a favorable human capital endow
43、ment and relatively equal distribution of income and wealth.,15,Why Industrial policy?,Systemic failure arises when the economic system as a whole fails to achieve the development goals set by the government. This view draws attention not simply to market institutions but also weaknesses of non-mark
44、et institutions, for example, the capabilities of the firms and the networks in which they are embedded Structural, institutional and regulatory deficiencies. Examples are provided by the lack of service friendly innovative systems (e.g. lack of R&D programmes) financial shortages or institutional a
45、symmetriesThere are particularly strong arguments why the technological capabilities of firms do not develop automatically through market forces. Firms do not have full knowledge of technical alternatives and developing the requisite know-how, much of which comes as tacit knowledge which is gained t
46、hrough experience and practice, is both costly and time-consuming. For firms in developing countries at early stages of industrialisation, mastering existing technologies is more significant than introducing products and processes which are new to the world. But firms may not even know how to search
47、 and learn about global technological opportunities. There are also major externalities in technological learning which mean inter-firm linkages are important to the process (See Lall and Teubal 1998).,16,Why Industrial policy?,Capability failures: a lack of resources and competences for firms to ad
48、apt to changes in markets and to new organizational concepts and technological capacities. - linked to a limitation of the right knowledge, skills and information to achieve an adjustment to new market or industry developments, so that support for structural adaptation of innovation systems from pub
49、lic authorities may be required. Network failures: Network failures relate to a lack of inter-organisation cooperation in the development and design of goods, services, organizational concepts, market solutions, best practices,etc. These limit the transfer of knowledge among firms, research centres, public institutions and specialized knowledge-based organizations. knowledge advances are increasingly more experience-based, and a lack of collaborative-networks may lead to increasing obstacles and to a reduction in the formation of successful interactive actions.,17,Why Industrial policy?,
