Is there still scope for developing countries to pursue active industrial policies in the new world environment?

Transcription

1 Is there still scope for developing countries to pursue active industrial policies in the new world environment? Phil Green Copyright February 2009 Written as part of a MA in Globalisation and International Development at the University of East Anglia (Module: Globalisation, Industrialisation and Development)

2 Industrial policy, defined by the World Bank as government efforts to alter industrial structure to promote productivity based growth (Bora et al, 2000:.1), is a contentious issue in development economics (Haque, 2007). This paper, after outlining the rationale for industrial policy, will explore whether developing countries are now facing a restricted range of policy options. I will then argue that there is not only still scope for developing countries to pursue active industrial policies, it is possible that the restrictions will promote increasingly effective policies. The origin of industrial policy can be traced back to 15 th century Britain, where the woollen industry was nurtured by placing import duty on textiles and preventing the export of raw materials (Chang, 2004). Since then, the number of tools in the industrial policy toolkit has increased and now includes preferential credit directed at specific sectors, subsidised electricity rates, research and development subsidies, targeted tax relief and import tariffs (Noland& Pack, 2003). Despite the fact that all major industrialised countries used policies of protection and intervention to enable development (Chang, 2001), as neoliberal thinking became more influential, government invention through industry policy was increasingly questioned. According to Schmitz (2006:.8) the message became rely on the market and do not trust government. However, proponents of industrial policy argue that government intervention is required as a result of market failure (Haque, 2007). The development of private industry requires entrepreneurship. However, the market can be unkind on such endeavours as the entrepreneur has to take on the initial cost and risk, yet usually has to share the benefits of success with others (Schmitz, 2006). Industrial development often requires a series of investments, many of which are not immediately profitable, to occur simultaneously in order to be successful, markets rarely provide such coordination (Schmitz, 2006; Pack & Saggi, 2006). Industrial development also requires domestic firms to be profitable, but first they simply have to survive. If immediately exposed to global markets they are unlikely to be competitive and therefore their survival chances are minimal (Pack& Saggi, 2006). These are just three examples illustrating why industrial policy is considered necessary to encourage entrepreneurship, coordinate investment and protect infant industries Phil Green DEV-M072 (Globalisation, Industrialisation and Development) Page 1

3 The examples of Japan, Korea and Taiwan have often been cited as recent examples of countries that have developed successfully as a result of pursuing traditional industrial policy (Noland& Pack, 2003). These policies included targeting specific industries with tax relief and subsidies, and protecting infant industries with import tariffs (Noland& Pack, 2003). However, as these countries continued to experience economic growth the International Finance Institutions (IFIs) coerced other developing countries to adopt neoliberal economic policies. The pressure to rapidly privatise industry and liberalise trade restricted their scope to pursue many traditional industrial policy (Stiglitz, 2002). The birth of the World Trade Organisation (WTO), with its complex rules governing the trade of member countries, caused increasing concern regarding the erosion of policy space in developing countries and their ability to deploy industrial policy as a means to develop (Page, 2007). WTO rules have including setting limits on import tariffs, increased disciplining regarding subsidies and strengthening the protection of intellectual property rights (Bora.et.al,.2000). However, despite the growing amount of literature express concern at the shrinking policy space available to developing countries (Gallagher, 2007; Rodrik, 2007), others question to what extent policy space is actually been eroded by the WTO. For example, Page (2007) explains that when the WTO set limits on import tariffs, most countries tariffs were already lower than the limits. This suggests that countries had already chosen not to use this policy option and means that many countries could raise import tariffs if they wanted to. Although the rules and conditionality of the IFIs have restricted the scope of policy options available to developing countries, there is still policy space available to make active industrial policies possible. However, Noland and Pack (2003:.90) suggest that a more significant restrictive force is developing countries lack of capacity to formulate policy independently of advice from IFIs. Therefore, lack of policy space is due to internal, as well as external constraints (Hamwey, 2005). As a result, countries are often advised to adopt template policies, rather than policies that have been tailor made for their context (See Stiglitz 2002). When seeking advice from IFIs developing countries are influenced by the growing consensus that industrial policy is economically undesirable and harmful (Lall, 2004:.57). Haque (2007:.7) explains that although there is wide acceptance of broad policies that aim to promote a favourable environment for industrialization, such as macroeconomic stability, public provision [and] guaranteed property rights 2009 Phil Green DEV-M072 (Globalisation, Industrialisation and Development) Page 2

4 there is resistance to traditional industrial policies that target specific industries. Reasons for resistance include; the lack of information available to governments to enable them to pick winners ; the distorting effect industrial policies have on markets; the possibility of rent-seeking where firms profit more from reliance on government subsidies than becoming competitive; and the lack of evidence to suggest selective industrial policy is effective. For example Pack and Saggi (2006) argue that Japanese industries that were encouraged by the government did not show significantly higher growth than those that were not targeted. The United Nation Conference on Trade and Development agree that the theoretical argument for government invention is not convincing and despite acknowledging some cases of successful invention, they draw the conclusion that there have been more losers than winners (Bora et al, 2000). The pursuit of active industrial policies is being restricted by the IFIs, hindered by internal constraints and discouraged by evidence suggesting its ineffectiveness. However, the changing nature of international trade is also having an impact. The result, according to Haque (2007: 5) is that in today s climate firms not only have to be low cost producers it is now also necessary for the producer to become part of a trade network or value chain. Haque (2007) goes onto suggest that achieving this is down to luck as much as it is efficiency. As a result, future industry policy will not only have to overcome complex restrictions it will need to address new hurdles to industrialisation. The industrial policy options now available to developing countries differ from the ones pursued by countries who industrialised in previous centuries. However, it would appear that industrial policy has arrived at a crossroads not a dead-end. Rodrik (2004), in his assessment of this juncture suggests that as the two extremes in the government intervention vs. market forces only debate become increasingly untenable, there is the possibility of finding a more balanced approach. He sees it as an approach in which: Market forces and private entrepreneurship would be in the driving seat of this agenda, but governments would also perform a strategic and coordinating role in the productive sphere beyond simply ensuring property rights, contract enforcement, and macroeconomic stability. (Rodrik,.2004:.2) 2009 Phil Green DEV-M072 (Globalisation, Industrialisation and Development) Page 3

5 Rodrik (2004) advocates a deliberative approach where both governments and the private sector bring their strengths to the table, enabling more effective policy outcomes. For example, the private sector generally has more accurate market information than governments do; therefore, a collaborative approach could ensure industrial policy is deployed in the appropriate direction at an appropriate level. In his paper, Rodrik (2004) suggests many examples of both general and targeted industrial policies, which are still allowable and which he believe, could be highly effective as a result of appropriate deliberation. Suggestions include, reducing bureaucratic regulations that hinder entrepreneurs, developing service clusters around improved transport hubs and public research and design that are responsive to the needs of the private sector. Whist Rodrik s approach focuses on synergy between government and private sector, Pack and Saggi s (2006) suggestions focus on ideas to make industrial policy more relevant to the nature of international trade today. They explain how industrial policy in the 21 st century is not just about improving a firm s productivity; it also needs to enable firms to become part of international production networks. In particular, they suggest that governments, where markets do not, should ensure the creation of trading companies, enabling clusters of firm to penetrate international production networks collectively. I have suggested that industrial policy is currently at a juncture, however, that s not to say it is currently at a standstill, waiting to move away from traditional policies towards new ones. In reality it s an ongoing evolutionary process. An example of this is the creation of Export Processing Zones (EPZ). According to Rodrik (2004) there are over 1000 such zones in the world, providing firms with unlimited duty-free imports, tax breaks, exemption from bureaucratic regulations and modern infrastructure. These EPZ are evidence of an evolutionary process and provide an example of industrial policies that bridge the gap between the traditional industrial policies of a previous century and the new policies appropriate for a new world environment. This new world environment includes many countries who are seeking to achieve economic growth through industrialisation. Uganda is one such example and is a country seeking to pursue an active industrial policy in today s evolving milieu. The country s National Industrial Policy (NIP) (2008), outlines the government s plan to promote industrialisation through general policies that include 2009 Phil Green DEV-M072 (Globalisation, Industrialisation and Development) Page 4

6 improving infrastructure, creating a business friendly environment and encouraging foreign direct investment. The policy provides evidence of Rodrik s approach with much emphasis being placed on the interaction between the state and private sector. This includes the creation of an Industrial Consultative Council which will provide an arena for this deliberative approach to occur. Pack and Saggi s emphasis on enabling firms to become part of international production networks also feature, with reference being made for the need of policies that, Facilitate improved supply chain efficiency and market responsive product and brand development. (NIP, 2008:.8) Uganda s industrial policy also selects specific industries to be promoted to ensure diversification, including the resource based industries of petroleum and cement, and the agro-processing industries of food processing and textiles. However, despite this, the country s Poverty Reduction Strategy Paper (PRSP)(2004:.49) explains that the government is not planning to pursue a policy of firm-specific interventions. The reasons given for this decision are similar to the arguments against industrial policy already mentioned in this essay. Uganda s PRSP (2004) also explains that although integrating into the global market is a long term aim, the countries first priority, in terms of manufacturing, is the domestic and regional markets. In relation to Uganda s long term aim traditional industrial policies such as simplifying the export procedure and removing export taxes have been implemented. However, when it comes to their short-term aim of nurturing the manufacturing industry for the domestic and region markets, they have chosen not to pursue traditional industrial policies such as import tariffs. The government argue that within a protectionist approach, although jobs would be created for some, the lack of competition would see prices increase for all consumers. Concern is also expressed that if industry does not have the incentive to be competitive, it will be harder in the long run for them to integrate into the global market. This classic neo-liberal argument would undoubtedly receive much support from the IFIs and suggests that Uganda is a typical example of a country that is dependent on the IFIs for policy advice. Only time will tell if Uganda s blend of traditional and evolving industrial policy will facilitate industrial development, however, it certainly illustrates how industrial policy is still crucial in development planning. Industrial policy has had to face the challenges of external restrictions, internal constraints, unfavourable evidence and the changing nature of international trade. However, these challenges may well have provided the catalyst required for industrial polices to be honed and evolve into more 2009 Phil Green DEV-M072 (Globalisation, Industrialisation and Development) Page 5

7 balanced and effective tools that ultimately enable developing countries to industrialise and integrate into the global markets. Therefore, there is still plenty of scope for developing countries to pursue active industrial polices in the new world environment. What s more, it s possible that these refined policies will be more effective and therefore more conducive to development than previous policies Phil Green DEV-M072 (Globalisation, Industrialisation and Development) Page 6

8 Bibliography Bora, B., Lloyd, P. & Pangestu, M. 2000: Industrial Policy and the WTO. Geneva: UNCTAD. (Access 2 February 2009) Change, H-J. 2001: Kicking Away the Ladder. London: Anthem Press. Chang, H-J. 2004: Institutional Foundations for Effective Design and Implementation of Trade and Industrial Policies in Least Developed Economies. In Soludo, C., Ogbu, O. & Chang, H-J. (eds.) The Politics of Trade and Industrial Policy in Africa. New Jersey: Africa World Press, Gallagher, K. 2007: Measuring the Cost of Lost Policy Space at the WTO. IRC American Program Policy Brief. (Accessed 2 February 2009) Hamwey, R. 2005: Expanding National Policy Space for Development: Why the Multilateral Trading System Must Change. Geneva: South Centre, Working Paper. option=com_content&task=view&id=336 (Accessed 2 February 2009) Haque, I. 2007: Rethinking Industrial Policy. UNCTAD Discussion Paper, No en/docs/osgdp20072_en.pdf (Accessed 2 February 2009) Lall, S. 2004: Selective Industrial and Trade Polices in Developing Countries: Theoretical and Empirical Issues. In Soludo, C., Ogbu, O. & Chang, H-J. (eds.) The Politics of Trade and Industrial Policy in Africa. New Jersey: Africa World Press, Noland, M. & Pack, H. 2003: Industrial Policy in an era of Globalization. Washington: Institute for International Economics. Pack, H. & Saggi, K. 2006: Is there a case for industrial policy? A critical survey. World Bank Research Observer, 21 (2), Page, S. 2007: Policy space: Are WTO rules preventing development? ODI Breifing Paper, No (Accessed 2 February 2009) Republic of Uganda, 2004: Poverty Eradication Action Plan (Poverty Reduction Strategy Paper). (Accessed 2 February 2009) Republic of Uganda, 2008: National Industrial Policy. strial%20policy.pdf (Accessed 2 February 2009) Rodrik, D. 2004: Industrial Policy for the Twenty-First Century. UNIDO Paper. edu/~drodrik/unidosep.pdf (Accessed 2 February 2009) Rodrik, D. 2007: How to save Globalization from its Cheerleaders. Harvard: Working Paper. (Accessed 2 February 2009) Schmitz, H. 2006: Reducing complexity in the industrial policy debate. IDS Working Paper (Accessed 2 February 2009) Stiglitz, J. 2002: Globalization and its Discontents. London: Penguin. Stiglitz, J. 2006: Making Globalization Work. London: Penguin Phil Green DEV-M072 (Globalisation, Industrialisation and Development) Page 7