«EU INDUSTRIAL POLICY: ASSESSMENT OF RECENT DEVELOPMENTS AND RECOMMENDATIONS FOR FUTURE POLICIES STUDY Abstract Following disregard in the 1980s, ...»
It is still conventional to distinguish between ‘horizontal’ and ‘selective’ industrial policies (Crafts et al., 2013)17. The latter are aimed specifically at improving the performance of particular industries, firms or sectors (e.g. manufacturing, tourism, creative industries, business services, etc.), while the former are designed to benefit the economy more generally and to improve the ‘framework conditions of the policy’. However, this distinction is not always clear-cut. The OECD report stresses that horizontal industrial policies often have a selective equivalent, e.g. targeted inward investment promotion or targeted skills “national champions” in strategic sectors, and policies to support small and medium-sized enterprises.
See Pinder, J. (1982), Causes and Kinds of Industrial Policy, in J. Pinder (ed.), (1982), National Industrial Strategies and the World Economy, Croom Helm, London.
Reich, R. (1982), Making Industrial Policy, Foreign Affairs, Vol. 60, No. 4.
The United Nations Conference on Trade and Development was established in 1964 as a permanent intergovernmental body of the United Nations. See UNCTAD and ILO (2014), Transforming Economies: Making Industrial Policies Work for Growth, Jobs and Development.
UNCTAD (2009), The Relationship between Competition and Industrial Policies in Promoting Economic Development, TD/B/C.I/CLP/3, available at http://unctad.org/en/docs/ciclpd3_en.pdf.
OCED Private Sector Development Synthesis Note: Industrial Policy, August 2013. World Bank (1993), The East Asian Miracle, Washington DC: The World Bank.
Pack and Saggi (2006), The Case for Industrial Policy: a Critical Survey, available at http://www.ycsg.yale.edu/focus/gta/case_for_industrial.pdf.
Warwick, K. (2013), Beyond Industrial Policy: Emerging Issues and New Trends, OECD Science, Technology and Industry Policy Papers, No. 2, OECD Publishing.
Crafts, N. and Hughes, A. (2013), Industrial Policy for the Medium- to Long-term, Centre for Business Research, University of Cambridge Working Paper No. 455 PE 536.320 17 EU Industrial Policy: Assessment of Recent Developments and Recommendations for Future Policies policies, or sector-specific advisory services. Also, horizontal policies may turn out to be highly selective in their impact. For example, general support for an input or activity that is used more intensively in some sectors than others (e.g. the impact of R&D tax credits is highly concentrated in the manufacturing sector).
Generally, the instruments used in industrial policy range from direct and indirect support to specific firms and industries (e.g. grants, subsidies, loans and tax credits) to support for knowledge institutions, infrastructure and skills. Various attempts have been made to categorise the instruments used in industrial policy. For example, it is possible to distinguish between three sets of instruments: (a) external market interventions, including import tariffs, quotas, licensing and local content programmes, and export promotion measures such as export subsidies, export processing zones and subsidised credit; (b) product market interventions aimed at promoting competition in domestic markets, competition policy and law; and (c) factor market interventions: FDI performance requirements and restrictions in the capital and finance markets, labour market and equity objectives (Pangestu, 2002)18. A list of possible policy instruments contributing to an industrial policy is proposed below.
Table 1. Classification of instruments for an industrial policy
Pangestu (2002). Mari Pangestu. Industrial Policy and Developing Countries. In Bernard Hoekman, Aaditya Mattoo, and Philip English (eds.) Development, Trade and the WTO: A Handbook. World Bank. Washington, D.C.
Defining the sectors an industrial policy affects is a delicate issue since its instruments cover a wide range of economic areas. In general, it is observed that industrial policy is not only about manufacturing, although it represents a key part of what it defines as industry, namely “a broad set of activities including also mining and quarrying and energy activities”19. There is evidence supporting the concept that industrial policy can apply also to agricultural or service sectors20. For instance, Dani Rodrik (2007)21 states that industrial policy “is not about industry per se”, but that “policies targeted at non-traditional agriculture or services qualify as much as incentives for manufacturers”. In particular, policies targeted at non-traditional agriculture or services, and non-traditional agricultural products - e.g. new crops such as pineapple or avocado, for call centres, tourism - are some examples. The rationale is that market failures that justify industrial policy can be found in virtually all kinds of non-traditional activities, and not just in manufacturing.
Overall, there are multiple possible combinations of objectives, domains and instruments, which suggest one should refrain from adopting simplistic oppositions or trade-offs to define industrial policy and different types of it. There is little agreement even concerning the definition of the very smallest denominator since one of the possible criteria – the alteration of the economic structure, i.e. in other terms, the effect that an industrial policy would have on the specialisation of the economy - is not acknowledged by the proponents of a very liberal approach.
See European Commission (2014), A Vision for the Internal Market for Industrial Products, COM(2014) 25/2, Brussels.
OECD (2013), Industrial Policy – The Approach and Current Debates, Private Sector Development Synthesis Note.
Dani Rodrik (2007), Normalizing Industrial Policy, Harvard University.
PE 536.320 19 EU Industrial Policy: Assessment of Recent Developments and Recommendations for Future Policies 2.3. Beyond old dichotomies: some arguments in favour of a “new” EU industrial policy This section puts forward a series of arguments found in economic academic literature in favour of a “new” industrial policy. These arguments question old distinctions and dichotomies, and could be used by proponents of the development of an active industrial policy at EU level.
2.3.1. Beyond old dichotomies The failures of industrial policies have been emphasised from different perspectives in recent years22. The discussion of such failures echoes in the debate today, in particular with reference to excessive government involvement in the private sector leading to favouritism and rent-seeking. The failures arise from the fact that in the past industrial policy was picking the winners, by selecting and promoting national champions. Such an “old” industrial policy consisted of vertical or sectoral top-down interventions. This type of intervention is subject to the criticism that governments are not particularly good at picking winners. In addition, governments may be captured by vested interests. The disrepute was thus primarily due to the lack of knowledge and ensuing bad judgment of policymakers.
In fact, the trade-off between a vertical and a horizontal definition of industrial policy is for many scholars a sterile controversy. There are different conceptual developments that suggest going beyond this apparent trade-off. A common way to overcome this dichotomy is to resort to notions such as systems or networks, which are increasingly pertinent to account for the organisation of economic activities at times of heightened worldwide competition. For example, in their analysis of innovation systems as a basis for policy in the science, technology and innovation policy domains, Lundvall and Borrás (2005) draw the familiar distinction from a system perspective between a neo-classical economic approach that focuses on market failures and a systems-based approach. In the latter a critical step is made by recognising that pure arm’s length and anonymous relationships between producers and users is logically incompatible with what they regard as the ‘real’ world of markets. In that world, markets are organised and “constitute frameworks for interactive learning between users and producers”. In turn, “technological systems” can be identified (Carlsson and Jacobsson, 1997), as well as “sectoral systems of innovation” (Malerba 2004), where sectors are not defined in a classic way along traditional statistical nomenclature, but across them, where the systems of innovation are, i.e. where users and providers of knowledge interact.
These different developments have direct policy implications. The interest for the regional level of action, in particular, illustrates such a shift in the units of analysis and actions. For example, one justification for industrial policy is the success of industrial clusters around the world. Some scholars suggest that promoting industrial clusters is a way to avoid favouring, in a discretionary manner, particular manufacturing industries. There are different ways of doing that, for example, by promoting architecture of institutions for bridging industries and universities (see Kline and Moretti, 2013 and Mazzuccato, 2013). In the same vein, more recent developments revolve around the notion of smart specialisation (see Chapter 2 below).
Interestingly, these policy developments not only go beyond the old horizontal vs. vertical dichotomy, but they also illustrate strategies to eschew the traditional top-down designs seen as a mistake of the past. According to many authors, the new industrial policy will have to "be embedded in private sector networks” (Rodrik, 2006; Crafts and Hughes, See for example, Ades and Di Tella (1997); Krueger (1990); Pack and Saggi (2006).
2013). This is in sharp contrast to top-down economic models in which the government, as “principal”, provides the guidelines for the private sector, as “agent”.
In a slightly different manner, the notion of “global value chains” also questions conventional units of analysis and action. As a reflection of the globalisation process, value chains are being reorganised across countries and continents (Crafts and Hughes, 2013, Berger, 2012). This motivates companies to invest in the valorisation of capabilities and calls for government intervention to sustain higher education and increase human capital skills. In this respect, a recent focus has been placed on capabilities. With the achievement of strong globalisation, companies are stressed by tougher competition, so competing in capabilities is one way of tackling the globalisation process. (Sutton, 2012). Companies should be able to pursue structural changes, this is possible by investing in capabilities, and it requires investments in higher education (D. Palma, 2014). This follows from the belief that increasing investment in education is necessary to compete in a globalised world, where human capital and the capabilities embedded in the workforce of each company will increasingly be the key assets with which to compete (Sutton, 2012). What are the company’s capabilities? Literature identifies one key source of a firm’s value in the organisational structure of the firm, as opposed to its proprietary knowledge, or its market position. In other words, capabilities consist of a team of people who work effectively together, within some framework of rules, routines and tacit understandings that have been put in place or have evolved over time23. The increasing role of capabilities as a competitive tool for companies shows the connection between investments in higher education and company performances.
Another dichotomy that is being increasingly blurred and which is particularly relevant in the European case is the alleged opposition between pro-competitive and industrial policies.
In the EU the recent pursuing of pro-competitive policies often failed to deliver remarkable results in terms of employment, particularly so in the years following the recent and farreaching financial crisis. Some scholars are finally considering competition and industrial policy as synergic tools as opposed to elements in necessary juxtaposition. The synergies appear attainable particularly in more competitive sectors (Aghion et al. 2011). The safeguarding of market competition is no longer perceived as an obstacle to sectoral industrial policy, rather it is acknowledged that in many cases it can have a positive effect on sectoral growth. An active industrial policy for the more competitive sectors can be growth-enhancing. This shows that in the longer run, especially, there is no conflict of competition and industrial policy, even when targeted subsidies are involved. This opens the door to one possible lever, namely the considerable weight and impact of public procurement on GDP. According to Florio (2005), a proper industrial policy at EU level should include huge public demand for infrastructure, high technology industries and services by revising the magnitude and the allocation of the EU budget, and learning the lesson of the impact of federal procurement on high-tech industries in the USA.
2.3.2. New approaches to industrial policy Learning from these recent developments, new approaches to industrial policy are proposed. For example, some authors propose a “matrix approach” (Aiginger, Sieber, 2006). This approach will no longer focus on a sequence of disjointed and narrow sectoral interventions. Rather, critical and challenging multi-sectoral interventions are proposed “To see what this implies, consider, for example, the Aquafresh company in Ghana (Sutton and Kpenty, 2012).
This company began life in the clothi and textiles sector, but when this sector came under intense competition from Chinese imports, the firm reinvented itself as a maker of soft drinks. Its expertise in clothing and textiles was secondary to the fact that it was a well-functioning, medium-sized firm, which could reorient itself in the product market as market circumstances changed” (Sutton, 2012).