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Industrial policy in historical perspective Industrial policy has a long history. Governments of both developed and developing countries have widely adopted targeted interventions to support industrialization. For instance,
governments played an active supporting role in the industrialization of the UK, the U.S., Germany, and Japan during the nineteenth and twentieth centuries (Landes 1970). Following the end of the Second World War, governments of newly independent countries started to intervene in the economy to favor industrialization as a strategy to spur their catching-up process.
Government intervention took different forms, from complete economy-wide plans to various combinations of trade policies, production subsides, direct credit allocation, and use of stateowned enterprises (SOEs). In this, developing countries were actually doing what developed countries did during their development process (Reinert 1999).
This section provides a brief historical overview of the experiences of developing countries in East Asia, Latin America, and Africa during the last fifty years. The section begins by describing some aspects of industrial policy during the Developmental State period, in particular its content in the different countries, the results flowing from it, and why these results varied widely. Next, we discuss how the Washington Consensus approach influenced the use of industrial policy in developing countries.
The Developmental State period The literature on the historical experiences of developing countries with industrial policy is extremely vast. 4 Therefore, this chapter can provide only a brief description of the actual content of industrial policy in those countries, emphasizing similarities and differences while recalling that countries have sometimes implemented similar measures in very different ways. Measures are grouped in the domains of intervention included in the definition above (in the section on “Defining industrial policy”). While this categorization provides clarity, it should be noted that industrial policy is something more than and different from the sum of the government interventions in the different domains.
Trade policy, import substitution, and export promotion Trade policy affects the degree of international competition to which firms are exposed. This contributes to the profitability of different production activities and thus plays an important role in influencing firms’ investment decisions. Trade policy was a key part of the import substitution industrialization (ISI) pursued by several countries between the 1950s and 1970s. There are several reasons why ISI policies were popular. The first and most important is that
industrialization was believed to be necessary for development and that infant domestic industries needed (temporary) protection. The idea was that free trade would increase the economy’s dependence on the export of commodities that were expected to suffer declining prices over time (Prebisch 1950).
While initially the use of a protectionist trade policy was commonplace, some countries soon started differentiating their strategies. In South Korea import protection was already coupled with export promotion in the 1960s. Import protection was high, prolonged, and selective, but at the same time, export performance was used as the disciplinary device for both firms and bureaucrats (Amsden 1989). Firms were given subsidies and the right to sell in the protected domestic market under the commitment to export. In Taiwan the government extensively used tariffs and quantitative restrictions, while exporters were given preferential tax treatment and access to credit on favorable terms. Latin American governments largely used protectionist trade policies as part of their ISI strategy, but they were not coupled with incentive schemes to promote export and domestic competition.
The implementation of active export policies has been—with the partial exception of Brazil— much more limited. Immediately after independence, African countries also started a process of
industrialization through import substitution. In most of the cases, governments offered protection to domestic firms with little discrimination between activities, no time limit, and no requirements of international competitiveness (Mkandawire 2001).
Targeted sectoral measures, development banks, and fiscal incentives A basic assumption of the ISI strategy was that some sectors were strategic for the economic development of the country. This was the justification for a number of measures that governments provided to targeted sectors. While almost any government has selectively supported targeted sectors, the degree of selectivity and the degree of direct State intervention have been very different. For instance, India followed the example of the USSR and adopted a strategy based on massive public investments in heavy industry, the state-imposed coordination of investment decisions in both the public and the private sectors, and the bringing of certain strategic industries and firms under public ownership (Singh 1995). In East Asia, on the other hand, it was common for governments to identify priority sectors to be selectively supported but, in contrast to what happened in many countries, the economic initiative remained mostly private sector-led.
Control of the financial sector was another key aspect of the Developmental State approach to development. In many cases, the State nationalized the banks and other financial institutions and created national development banks to influence the private sector investment decisions (Soludo, Ogbu, and Chang 2004). The development bank provided discretionary credit lending to specific sectors and firms, playing a crucial role in funding technological accumulation and export growth (giving exporting firms access to long-term subsidized capital) (Amsden 2001).
Governments used development banks to condition the firms’ behavior by providing loans conditional on the fulfillment of certain requirements that were sometimes even firm-specific.
These conditions were particularly severe in South Korea and Taiwan (Rodrik 1995; Lall 2003;
Amsden 1989), while they were much less clear and demanding in Latin American countries.
Competition and regulation policies Governments have used several measures to influence the market structure of their domestic economy. For instance, in South Korea, beginning in the 1960s the government reduced domestic competition for selected firms in exchange for their commitment to export (see Amsden 1989). In India, the government used a strict licence system to regulate the entry into selected sectors to avoid large firms competing with small ones in the same market. The
objective was to preserve some market share for small household firms and avoid rising economic inequality associated with industrialization (Kapur, this volume). In other cases, governments intervened to reduce monopolistic situations so as to decrease costs (of inputs and services) for manufacturing firms and favor their competitiveness in international markets.
Innovation and technology policies The role of the State in the knowledge accumulation process has been preeminent in many countries (Katz 2000; Cassiolato, de Matos, and Lastres, this volume). Governments made an effort to stimulate the domestic production of technological knowledge (Alcorta and Peres 1998).
The commitment of governments to technological development has been particularly strong in the East Asian Tigers (South Korea, Taiwan, Hong Kong, and Singapore). From the early 1960s, the South Korean government supported domestic technological upgrading in several ways. The import of technology was strongly subsidized and public funds to finance domestic technological innovation were created. Similarly, in Taiwan import and diffusion of advanced technologies among domestic firms was subsidized, and science parks and technology clusters were created to improve technology accumulation. Governments of East Asian Tigers acted as venture capitalists and pioneers, especially in high-technology sectors such as informatics, semiconductors, and
telecommunications, when the private sector was unable to develop the necessary capabilities. In fact, accumulation of technological capabilities in East Asia was also stimulated by high-quality government demand (for South Korea, see Amsden 1989; for India, see Singh 1995).
Education and skill formation policies Education and skill formation policies are a necessary complement to technology and innovation policies. For instance, education policies were crucial in the experiences of Germany and Japan at the end of the nineteenth century. Similarly, they have been a fundamental part of the development strategy of latecomers after the Second World War. But the experiences of East Asia and Latin America have been considerably different in this respect. The East Asian Tigers invested heavily in education and technical training, implementing numerous public policies with the objective of improving the scientific education indicators and creating an education system strongly biased in favor of technical degrees (Kim 1993). The Indian government intervention in supplying high-quality education (especially engineering) has been a fundamental ingredient of its industrial policy. Latin American governments tried to support high skill formation as part of their ISI strategy, with Brazil among the most active in this area. While the general education
level increased, the improvement in technical and scientific education in the region was much more modest than in East Asia.
The results of industrial policy during the Developmental State period The debate on the effects of IP during the Developmental State period is still open. The reason is that IP is predicated to be the cause of both impressive successes and spectacular failures. While there are theoretical arguments in favor of it, the critical question remains: Does industrial policy work in practice?
This question is not easy to answer, given the high heterogeneity among the different regional and national experiences. In some cases, the government played a direct leading role in the industrialization process. There was widespread public ownership of industry: public investment was extensive and a number of firms were nationalized. In other cases, the government merely provided incentives to the private sector, which acted as the prime engine of the industrialization process. Furthermore, the same policies have been used by different countries in very different ways.
Analysis of the effectiveness of industrial policy can be grouped into three categories (Harrison and Rodríguez-Clare 2010; Rodrik 2007). The first group of studies focuses on the analysis of one specific industry that has received some kind of support. Most of these studies analyze the effect of protectionist trade policies, and generally show that protection leads to higher growth but that the net welfare effects are negative (see, for example, Head 1994; Luzio and Greenstein 1995).
A second group analyzes whether (more) supported industries exhibit faster growth. Here also, most of the studies have focused on trade protection. The evidence is mixed 5 and no study is able to show a causal link between protection and economic results. In general, trade protection seems to have been granted to protect a special group or to generate tariff revenues rather than as part of an industrialization strategy (see Goldberg and Maggi 1999; Lee 1996). At the same time, the historical experiences of the East Asian Tigers clearly show that trade protection is not per se harmful to growth. On the contrary, one of the keys for the success of these countries has been the mix between openness and protection (e.g., opening some markets to international competition while keeping others closed) (Amsden 1989).
Finally, a third group of studies attempts to evaluate the effects of IP using the cross-country approach. Again, most of the studies have focused on trade policy. Interestingly, some of these studies find a positive correlation between import tariffs and economic growth across countries during the late nineteenth century (O’Rourke 2000; Chang 2002)—as occurred in the U.S.— which emerged in the nineteenth century as economic leaders in conjunction with high domestic tariffs.
In an attempt to summarize the evidence, it would be fair to say that the results of IP under the Developmental State are mixed. While the results were remarkable for East Asian countries, 6 they were mixed in Latin American countries and were almost everywhere a failure in Africa.
This said, there are few doubts that government intervention has been crucial for most of today’s developed countries during their economic take-off. For instance, it is rather difficult to identify cases of current export successes that did not involve government support at some early stage.
Among these, the most notable are POSCO in South Korea, EMBRAER in Brazil, the salmon industry in Chile, and the ICT revolution in India, with the first two being clear examples of import substitution under public ownership, the third a case of the success of a quasi-public agency acting as a venture fund, and the last—at least in part—the result of decades of
investment in high education (Rodrik 2007; Singh 1995). Still, beside these successful cases, there are numerous—and in some cases enormous—failures.