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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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Why results differ across countries At the end of the 1970s, the divergence in the growth rates between East Asia, Latin America, and Africa began to increase significantly. The orthodox view explains it as the result of two different development strategies: a successful, market-friendly, export-led model in East Asia as opposed to a failing, state-led ISI strategy in Latin America and Africa. In this account, the role of the State in the “Asian Miracle” was very marginal: the government set the rules to favor export growth and allowed the markets to work freely. Those economies were then able to automatically take off. Selective industrial policy was absent, and other types of government interventions—when in place—were if anything an obstacle to growth (World Bank 1993; Pack and Saggi 2007). Instead, Latin American countries had poor economic performance because they implemented the ISI strategy and used industrial policy extensively to support their industrialization process. This is the view that has long prevailed within thinking on international development.

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An alternative view argues that the Developmental State was common to all three regions. The reason industrialization results have been so different is that East Asia adopted a different model of the Developmental State with respect to other developing countries and it evolved over time.

In fact, different countries have implemented similar policies in radically different ways. It is now a shared view—emerging from the vast literature on the East Asian Tigers—that the recipe for their success was the effective combination of incentives with discipline (Amsden 2001;

Hausmann and Rodrik 2003). The former were provided through subsidies and protection, while the latter was obtained through direct and indirect government control of economic activity (for instance, using export performance as a selection and monitoring device for both entrepreneurs and bureaucrats). Another peculiarity of the Development State in East Asia was its “embedded autonomy” (Evans 1995). It was a “strong State” and thus able to promote industrialization because it was (at least partially) autonomous from social forces that might oppose industrial policy. At the same time, the State created some beneficial interactions with the entrepreneurial elite that allowed it to promote industrialization.

According to Lall (2003), the main characteristics of the East Asian economic model are: strict selectivity and time-limited government intervention; the temporary use of public enterprises to enter risky sectors; massive investment in skill creation and infrastructure; centralization of

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strategic industrial decisions in competent authorities; and highly selective use of foreign direct investment.

The first element is particularly important. Governments in East Asia provided stable and predictable incentive schemes and were able to withdraw support whenever they wished. As in any other country, industrial policy did create inefficient firms; yet here, unlike what happened elsewhere, the State was able to withdraw support whenever a firm’s performance was not satisfactory. The selecting devices for receiving targeted support were the exporting performance and the domestic competition. Finally, it should be acknowledged that while there are similarities, there are also important differences between the experiences of the different East Asian Tigers. For instance, government intervention was widespread in South Korea and Taiwan, and much less relevant in Singapore and Hong Kong. Moreover, while both South Korea and Taiwan invested heavily in the development of domestic innovation capabilities, for Singapore and Hong Kong the main technology policy was always to attract foreign direct investment (see Lall 2000).

The Developmental State was much less successful in Latin America. The industrialization strategy and the specific industrial policy adopted were indeed very different from the ones in

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East Asia: this difference can be summarized by saying that firms in Latin America received incentives similar to those provided to firms in East Asia, but they faced much less discipline. An interesting example is how regulation and competition policies modified the domestic market structure. These policies were common to many developing countries but their results were quite different in the two regions. While in East Asia these policies created an environment favorable to the exploitation of economies of scale and increased firms’ efficiency, in Latin America they mostly only generated a protected domestic market for inefficient local firms. Other relevant differences between the two models can be summarized as follows: Latin America adopted an “anti-export” version of the ISI strategy; there was a lack of government capabilities; and investments in education, science, and technology innovation were much more limited than in East Asia.

In Africa, attempts at industrialization generally fared poorly. While there are some success stories (such as Mauritius, Botswana, Madagascar, and Kenya), in most cases ISI strategy was a failure. UNCTAD (2007) identifies two possible interpretations. The first argues that the Developmental State could not succeed because of the inability of the African States to design and implement an effective industrial policy. In contrast, the second interpretation emphasizes that the Developmental State collapsed because of the inability of the ISI to adjust to changes in

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external conditions. To these one can add the political dimension. Robinson (2009) argues that industrial policy has been successful only when those with power wanted industrialization to succeed, or have been forced to act in this way by the incentives generated by political institutions. Apparently, these conditions were not always met in Africa.

The debt crisis and the Washington Consensus The process of differentiation between the three regions reached its climax in the 1980s. While East Asia continued its rapid growth, Latin America entered the “lost decade” caused by the external debt crisis, and Africa entered a long period of economic difficulties. 7 At the beginning of the 1990s, Latin America had become the laboratory for the implementation of the most orthodox version of the Washington Consensus policies (see Stallings and Peres 2000), while in much of Africa, Structural Adjustment Programs (SAPs) were in place.

This was a dramatic change for the two regions. The implementation of the Washington Consensus in Latin America was characterized by economic reforms—including trade liberalization—that eliminated the ISI apparatus and drastically reduced the measures to support industrialization. Something very similar happened in Africa, where through the SAPs the World

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Bank exhibited its “deep-rooted anti-industrial-policy position:” one of the objectives of structural adjustment was indeed to eliminate the ISI apparatus and any selective industrial policy measures (Mkandawire and Soludo 1999). While IP was eliminated from the political and economic discourse in both regions, governments nonetheless continued to implement it under other names (Melo 2001). In the meantime, the rules of the game and the economic environment changed, posing new challenges to the industrialization attempts of developing countries.

New rules, competitors, and challenges To better understand the current difficulties of developing countries in their attempt to industrialize, one must first consider how the world economy has evolved over the last three decades. There are two most relevant differences with respect to the past: new rules of the game and a new international division of labor.

The rules of world trade have changed significantly. The growing number of multilateral, bilateral, and regional trade agreements has increasingly restricted the policy space available for using trade policy as an instrument to promote industrial development, especially for non-Least

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Developed Countries (non-LDC). For example, protectionist trade policies are now prohibited by the World Trade Organization (WTO) for all non-LDCs. The WTO rules are also progressively forcing countries to reduce export subsidies (and also the establishment of export processing zones) and subsidies for the use of domestic (rather than imported) inputs. Local content requirements and quantitative restrictions on imports are now banned too (Tussie and Quiliconi, this volume).

These changes have caused some concern, because trade policy—including import protection and export promotion measures—was a fundamental instrument of industrial policy during the Developmental State period. 8 In practice, developing countries are nowadays not allowed to use the measures employed by advanced economies during their industrialization period. 9 While the rules have changed significantly, this does not mean that trade policy can no longer be used. The WTO rules still allow all countries to use trade policy interventions in the form of selective subsidies to promote domestic research and development (R&D), regional development, and environment-friendly activities. Moreover, governments can selectively promote science and technology activities, in particular by subsidizing private and public R&D.

This indicates that there is still some room for policies to support industrialization, but

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governments should design industrial policy, particularly trade policy, so as to take the new constraints explicitly into account.

A second important change concerns the characteristics of the global economic environment, particularly a new international division of labor. The level of competition in global markets has increased enormously with the emergence of new world-level economic powers such as China, India, and Brazil. As world leaders in labor-intensive manufacturing, these countries have significantly reduced the market for other emerging countries traditionally specialized in those products. This new competitive environment requires that industrial policy include a different set of instruments and measures from the ones used in the past. Since industrialization can no longer be expected to be obtained through infant industry protection or nationalization of foreign firms, IP should be designed to support diversification and production upgrading of firms. Indeed, the new international division of labor obliges firms from developing countries to meet increasingly stringent standard and quality requirements in order to participate in global value chains. It is clear that to achieve this objective, an updated IP is required.

The world economy has dramatically changed since the Developmental State period, and since the decades of the Washington Consensus. The main issue is no longer to understand if and how

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“old” policies will fit the “new” world. The magnitude of the changes that have taken place in these decades has created the need for a new approach to industrial policy.

Elements of the new approach The concept and application of industrial policy have evolved over the last two decades.

Recently the literature has moved from discussing whether or not governments should use industrial policy to discussing how to design and implement it effectively. There is an increasing consensus among scholars on the elements that should characterize this new approach to industrial policy (Rodrik 2007; Lin and Chang 2009; Di Maio 2009; Asche, Neuerburg, and Menegatti 2011).

Public-Private Dialogue The dialogue between the government and the private sector is crucial in order to identify distortions, bottlenecks, and weaknesses to be addressed by IP. The central role of the private sector in the design and implementation of IP suggests the need for a proper consideration of its

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specific characteristics. Dealing effectively with the private sector implies the acknowledgment of its heterogeneity within and between countries. After having put much effort into learning about the strengths and weaknesses of governments, we should now learn more about the private sector, which ultimately is the target/recipient of IP. It follows that a highly tailored assistance to entrepreneurs is needed in an increasingly complex environment where the challenges are context-specific, country-specific, and even firm-specific.

Awareness and information To be effective, industrial policy needs to provide a set of monetary and non-monetary incentives to induce firms to enter new sectors and improve their current production. To this end, the first step is to make entrepreneurs aware of the availability of support measures, their content, and the way to access them. It is not uncommon for industrial policy to fail simply because local entrepreneurs are unaware of its existence. It is also crucial that its results—even if negative—be made public, in order to make credible the commitment of a government that has declared itself willing to support the manufacturing sector. In particular, it is important that any positive results of IP be properly disseminated, in order to provide a signal to entrepreneurs that it may be useful to apply for the support measures despite the cost.

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Coordination Industrial policy includes measures belonging to different domains of intervention that cannot be considered in isolation: complementarities need to be taken into account. It matters not only what measure is implemented, but in what context and in what policy mix. It follows that a comprehensive policy framework is needed to implement IP effectively. While this consideration may appear obvious, it should be noted that policy coordination across governmental agencies often faces enormous challenges in developing countries because of political economy considerations and lack of human and financial resources and capabilities.

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