Creating Comparative Advantage: The New Industrial Policy and WTO Disciplines Richard Newfarmer World Bank Geneva, Sept 25 2008 WTO Geneva Week Forum This presentation is done with Elisa Gamberoni, World Bank
Key questions: Are market failures that systematically retard trade growth susceptible to government intervention? What types of institutional arrangements can be adopted to lower the probability of capture and ensure the highest probability of success? Do WTO disciplines prevent governments from adopting pro- active policies to remedy the most important market failures, and stimulate export growth and structural change?
In value terms, average exports of developing countries have grown and at a pace similar to high performing countries Average index of export value of goods, 1990=100 500 450 400 350 300 250 200 150 100 50 0 HP 13 [N=13] 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Bank staff calculations based on data from World Economic Outlook MICs [N=44] 2003 2004 2005 LDCs [N=37]
Source: Authors calculation. Wolrd Bank,WTI Note: Quintile scale are from the entire sample of low and middle income countries but despite export growth, about half of LICs lost market share Low income countries: Change in market share, 1996-2006 India Viet Nam Nigeria Angola Azerbaijan Equatorial Guinea Sudan Cambodia Bangladesh Chad Yemen M yanmar Zambia Mozambique Georgia Congo Bolivia Ghana M ongolia Nicaragua Armenia Cameroon Ethiopia Mali Cape Verde Hait i Lesotho Tanzania Lao s Rwanda Sierra Leone Guinea-Bissau M auritania B urundi Comoros Kyrgyzstan Burkina Faso Djibouti M aldives Dominica Saint Lucia Niger M adagascar Uganda Central African Gambia Eritrea Honduras M oldova Kenya Benin Malawi Guyana Senegal Guinea Congo DR Uzbekistan Nepal Côte d'ivoire Sri Lanka Papua New Pakistan 1 st quintile 2 nd quintile 3 rd quintile 4 th quintile 5 th quintile
Many low income countries are still are heavily reliant on just a few products 0.7 Index of export concentration* 0.6 0.5 LDCs [N=19] 0.4 0.3 0.2 MICs [N=24] HP 13 [N=12] 0.1 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Bank staff calculations based on data from COMTRADE x i *) H = X total 2
Dependence on a few exports exposes countries to terms of trade shocks Terms of trade volatility 30 Developing Countries: Terms of trade volatility (1996-2006) 25 20 15 10 5 0 0 10 20 30 40 50 60 70 80 90 100 Concentration Index Source: Authors calculation based on World Bank, Wolrd Development Indicators and World Trade Indicators
Is there a case for government intervention to actively promote particular sectors at the expense of other sectors? One view: Unleash the power of the market and get the government t out of the way Problem with poor trade performance is associated with government failures such as protecting inefficient industries, creating barriers to competition, rent seeking Opposite view: Market failures inhibit trade and activitist government policies are needed to provide coordination, missing markets, and d create dynamic spillovers Intermediate view: Reduce policy barriers to competeition,, improve government trade-related related services, but recognize that in small markets the range of government services has to be larger.
Proponents, such as Rodrik (2004, 2007), argue that Market imperfections impede trade expansion and diversification capital and credit markets labor markets products Knowledge and information Imperfections require government intervention through identification tion of the shortcomings and right combination of tax, tariff, and subsidy policies p (selecting the right prices to make wrong ). These policies have been used successfully by countries, including ng nealry all the East Asia success stories Japan in the 1950-60s, South Korea and Taiwan during the 1960s-70, and Malaysia 1970s-80s. Some WTO disciplines restrict the potential use of industrial policies (export subsidies, domestic content requirements, intellectual property).
Pack and Saggi (2006) present a careful review of the historical experience Economic evidence presents counter-arguments are flawed Infant industry, knowledge spillovers, coordination failures, and informational externalitiese Government intervention may co-exists with successes, but in many instances industrial policy has failed to yield any gains, costs of mistakes in worthless subsidies outweighs few success stories. Government ineffective at picking winners Policy is subject to capture The evolution of new organizational structures (international production networks and buyer-led networks) make industrial policies irrelevant. New organizations require rapid improvement in quality, in the change c characteristics of existing products, and new goods and governments are too slow to respond
Instruments of industrial policy are multiple Tariffs and border barriers: Infant industry arguments Credit subsidies: : Through investment banks or special programs Budget subsidies through tax expenditures: tax breaks to favor selected activities (R&D), selected sectors (e.g. high tech), or locations s (disadvantaged areas or EPZs). Performance requirements: : export requirements, local employment requirements, and value added requirements Policy barriers to competition: : Rules preventing entry (e.g., into state monopolies or barriers to FDI) Does the WTO proscribe the use of industrial policy instruments?
Key questions: Are market failures that systematically retard trade growth susceptible to government intervention? What types of institutional arrangements can be adopted to lower the probability of capture and ensure the highest probability of success? Do WTO disciplines prevent governments from adopting pro- active policies to remedy the most important market failures, and stimulate export growth and structural change?
References Hausmann, R., Hwang J. and D. Rodrik (2006) What You Export Matters. CEPR Discussion Paper 5444, Centre for Economic Policy and Research, London. Hausmann, R. and D. Rodrik (2003) Economic Development as Selfdiscovery. Journal of Development Economics 72: 603 33. Pack, H. and K. Saggi (2006) The case for industrial policy: a critical survey, World Bank Policy Research Working Paper 3839. Rodrik,, D. (2007) Normalizing industrial policy,, mimeo submitted to the Growth Commission (www.growthcommision.org) Rodrik,, D. (2004) Industrial policy for the twenty-first century,, mimeo.