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«University Press Scholarship Online International Development: Ideas, Experience, and Prospects Bruce Currie-Alder, Ravi Kanbur, David M. Malone, and ...»

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Industrial policy - Oxford Scholarship http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780199...

University Press Scholarship Online

International Development: Ideas, Experience, and Prospects

Bruce Currie-Alder, Ravi Kanbur, David M. Malone, and Rohinton Medhora

Print publication date: 2014

Print ISBN-13: 9780199671656

Published to Oxford Scholarship Online: April 2014

DOI: 10.1093/acprof:oso/9780199671656.001.0001

industrial policy Michele Di Maio DOI:10.1093/acprof:oso/9780199671656.003.0033 Industrial policy (IP) is one of the most controversial issues in economics. This chapter provides a concise but comprehensive discussion of this concept in the context of developing countries. The chapter begins by describing the different possible definitions of IP. Next it presents the economic arguments against and in favour of IP. The chapter then describes the characteristics of the various models of IP historically adopted by developing countries and discusses them in a comparative perspective. The performances of IP in the different historical periods, regions, and countries are compared and some explanations for their different results are suggested. Next, the chapter discusses how the changes in the rules of world trade and in the international division of labour have influenced the design and implementation of IP.

Finally, elements of the so-called “new industrial policy” are discussed. The last section summarizes and provides some suggestions for future research.

Keywords: industrial policy, east Asian Tigers, latin America, africa, import substitution industrialization, developmental state, public–private dialogue Oxford Scholarship Online requires a subscription or purchase to access the full text of books within the service. Public users can however freely search the site and view the abstracts and keywords for each book and chapter.

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Users without a subscription are not able to see the full content. Please, subscribe or login to access all 1 di 2 19/05/2014 12:10 Industrial Policy Michele Di Maio 1 Abstract Industrial policy (IP) is one of the most controversial issues in economics. This chapter provides a concise but comprehensive discussion of this concept in the context of developing countries.

The chapter begins by describing the different possible definitions of IP. Next it presents the economic arguments against and in favour of IP. The chapter then describes the characteristics of the various models of IP historically adopted by developing countries and discuss them in a comparative perspective. The performances of IP in the different historical periods, regions and countries are compared and some explanations for their different results are suggested. Next, the chapter discusses how the changes occurred in the rules of world trade and in the international division of labour have influenced the design and implementation of IP. Finally, elements of the

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so-called “new industrial policy” are discussed. The last section summarizes and provides some suggestions for future research.

Keywords: industrial policy, East Asian Tigers, Latin America, Africa, import substitution industrialization, developmental state, public-private dialogue

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Introduction Industrial policy is one of the most controversial issues in development economics. There are several reasons for this. First, there is no agreement on the exact definition of industrial policy.

This is obviously quite problematic, because the accepted definition determines the answers to such important questions as whether the use of industrial policy is theoretically justified, what its objectives should be, which measures should be considered part of it, and what its effects have been in both developed and developing countries. Second, the theoretical justification of industrial policy—at least in its most basic version—is based on the existence of some type of market failure. This implies that industrial policy needs to be analyzed in the context of models of imperfect competition and incomplete markets, and thus requires a set of mathematical instruments that, until quite recently, were not common among economists. Third, the analysis of industrial policy is at the crossroads of different research fields, including economic history, development economics, and political science. Finally, and not surprisingly, it is a highly sensitive political topic.

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The last decade has witnessed renewed interest in the use of industrial policy as an instrument to favor structural change and foster economic growth and development. This is especially true with regard to developing countries. Interestingly, the emerging discussion now focuses on how industrial policy should be designed rather than whether it should be used (Aghion 2012;

Rodrik 2004).

This change of perspective is quite impressive considering that twenty years ago the term “industrial policy” was virtually absent from political and economic discourse and development strategy documents. There are two main reasons for this change. The first is the criticism that has been growing in the last decade against the Washington Consensus approach, motivated by its quite disappointing results as a strategy for economic development. The second is that the debate concerning the pros and cons of industrial policy is now far less ideological than in the past. In fact, new issues (as well as old ones) are at the center of the current debate, but the discussion is now better informed because of the availability of more extensive empirical evidence and improved theoretical analysis.





This chapter is intended to provide a concise but comprehensive discussion of the concept of industrial policy. The chapter focuses on the history, characteristics, results, and evolution of

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industrial policy in developing countries. The chapter begins by comparing the different possible definitions before describing how approaches changed over time: the early Developmental State as a golden age; the Washington Consensus era abandonment; and the current return of industrial policy. The chapter then considers the performance of industrial policy in different regions and countries, and describes how external conditions have changed in the last decade and shaped the characteristics of the new industrial policy.

Defining industrial policy There are several possible definitions for industrial policy. It can be safely argued that part of the disagreement among economists and policy-makers regarding its pros and cons is indeed due to a lack of clarity about its definition. This is why the starting point of any discussion must be—or should be—a discussion of what it is meant by industrial policy. More specifically, what are its objectives and what measures are part of it? Some scholars associate industrial policy with the set of government policies directed to developing the manufacturing sector only. For instance, the World Bank (1993) considers it as “government efforts to alter the industrial structure to promote productivity-based growth,” and Pack (2000) defines it as including “actions designed

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to target specific sectors to increase their productivity and their relative importance within manufacturing.” Other definitions include a broader set of objectives, such as enhancing productivity, competitiveness, and overall economic growth. For instance, according to Pack and Saggi (2007), industrial policy is “any type of selective intervention or government policy that attempts to alter the structure of production toward sectors that are expected to offer better prospects for economic growth than would occur in the absence of such intervention.” According to Curzon Price (1981), it comprises “any government measure to promote or prevent structural change.” Since one important cause of structural change is international trade, industrial policy is sometimes referred to as policies to “defy” the country comparative advantage and develop its “latent” advantages (Amsden 2001; Chang 2002). It should be noted that these definitions also include measures that are not specifically (or only) directed to industry or manufacturing.

Industrial policy may in fact be directed to other sectors which the government expects to have high growth potential, such as non-traditional agricultural products or high-value service activities like software development and tourism (Rodrik 2007; Altenburg 2011). Finally, industrial policy is sometimes given the more ambitious objective of shaping structural change in ways that are socially inclusive and environmentally sustainable (UNIDO 2011).

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The more general the objective, the larger the set of measures that are considered part of industrial policy. For instance, according to Cimoli, Dosi, and Stiglitz (2009: 107–43), industrial policy includes targeted industrial support as well as policies related to trade, regulation, innovation and technology, education and skill formation, and sectoral competitiveness. The various combinations of these measures characterize the different industrial policy packages. It follows that each industrial policy model could be ideally located on a continuum ranging from hard to soft, where the hard end includes interventions that distort prices while the soft end includes interventions that deal with coordination problems (Harrison and Rodríguez-Clare 2010). Somehow different is the approach of Rodrik (2007), who defines industrial policy as a process involving a “dialogue” between the state and the private sector to generate information for identifying and removing the binding constraints to development.

While it is important to acknowledge these different possible definitions, this chapter considers industrial policy as framed by the peculiar role of the manufacturing sector within development. 2 Thus, industrial policy is the set of government measures—targeted at specific industries or firms—intended to support the development and upgrading of industrial output. This definition

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of industrial policy includes the large set of policies described by Cimoli, Dosi, and Stiglitz (2009).

Arguments for and against The economic literature on the justification, limits, and effects of industrial policy (IP) is quite extensive. Therefore, this section will briefly present only the main arguments. The theoretical justification for IP is based on the fulfillment of three conditions (Harrison and Rodríguez-Clare 2010): some market failure is present (e.g., industry-level externalities, dynamic increasing returns, the presence of a public good, etc.); the firm/sector is potentially competitive in the international markets; and the discounted future benefits of intervention exceed the costs of the distortion. There are two main arguments against the use of IP in developing countries. The first is that, even in the presence of highly imperfect markets, there is no reason to suppose that the government has better access to information with respect to the market. Since government information is necessarily limited, good selectivity is impossible, which implies—for instance— that the “picking winners” strategy is deemed to fail (see, e.g., Pack and Saggi 2007). A second argument against IP comes from the literature on rent-seeking and corruption (see, e.g.,

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Krueger 1974; 1990). The basic idea is that since any government measure (e.g., import licences, investment permits, etc.) creates rents, firms find it profitable to (legally or not) invest their resources to obtain them. This is a wasteful activity that also distorts allocation of resources because it makes competition between firms unfair.

There are three main types of market failures. The first arises from the existence of an informational externality related to the difference between the private and the social benefit in exploring the profitability of a new activity (see Hausmann and Rodrik 2003). The (partial) socialization of investment risk through government intervention makes private and social return to converge. The second type is a situation of investment coordination failure, 3 which emerges when—because of a lack of required investments in related actives—the private sector investment is sub-optimal. The third type of market failure is due to the existence of a positive (export, technology, or demand) externality.

All these arguments are based on the idea that the optimal industrial policy should be determined by comparing the magnitude of market failures and government failures. A different perspective on this issue is the view that the debate on the pros and cons of industrial policy should go beyond the discussion about the respective roles of the State and the Market. In fact it is crucial

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to acknowledge that industrial policy has a very specific domain of intervention, namely, industry and manufacturing. Thus, the justification of IP can be found in the fact that manufacturing has a special role in the development process: it is a historical regularity that sustained economic growth is associated with industrialization, in terms of growth in manufacturing employment and value added (Maddison 2001; Szirmai 2011). The strategic role of manufacturing in modern economic growth is usually ascribed to the presence of increasing returns and technological spillover effects, high capital intensity, strong and numerous forward and backward linkages, high elasticity of demand, and higher employment potential with respect to the other sectors. These factors have been used—in a variety of combinations—to justify industrialization, considered as a necessary stage of economic development. The next section discusses the characteristics and the historical evolution of industrial policy as the instrument used by the governments of developing countries to achieve industrialization.



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