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«Learning and Industrial Policy: Implications for Africa1 Bruce Greenwald2 and Joseph E. Stiglitz3 Over the past thirty years, Africa has suffered ...»

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We noted earlier the large dependence of African economies on resource exports. In the previous section we argued that linkages between natural resource production and other sectors were typically weaker than, say, between manufacturing and the rest of the economy, helping to explain why there is typically such a large gap between the state of technology in the mining and natural resource sector and other sectors of African economies, and explaining in part why the abundance of natural resources has often not been accompanied by the hoped for increases in standards of living.

The latter failure, which has become known as the “resource curse” or the “paradox of plenty” (Humphreys, Sachs, and Stiglitz 2007; Karl 1997)] is partly explained by macro-economic problems of high volatility and non-competitive exchange rates that mark resource rich countries. We have explained why volatility and high exchange rates are especially bad for creating a learning economy, and thus for long run increases in standards of living. But there are well known effective policy responses, including stabilization and sovereign wealth funds and care in borrowing from abroad, especially in periods of commodity price booms.

But industrial policies have not played as important a role in addressing the problems of the resource curse that they should. This is partly because the issues on which we have focused in this paper (and this conference more generally) have not received the attention that they should.

Historically, African countries were thought of simply as a source of raw materials. In the development of the mines, little or no attention was given to how that development might affect the broader development of the economy (other than through the availability of resource rents.) Transportation systems were designed to move the resources out of the country, not to promote the broader development of the country.

Trade policies in developed countries in the post-colonial era reinforced these colonial era policies. Escalating tariffs, for instance, discouraged the development of value-added activities

within the country. Neo-classical economics has provided a rationale for reinforcing policies:

because most African countries do not today have a static comparative advantage in these value-added activities, they have been discouraged from developing them. The only circumstances in which such activities might make sense (from that perspective) are when transportation costs offset these disadvantages, i.e. it may make sense to do some processing if in doing so the costs of transportation are thereby reduced.

But from a learning-development perspective, matters look markedly different. One of the reasons that African countries may not have done as well as others is that the “natural” (market- driven) learning spillovers from mining and natural resource industries to the rest of the economy are less than those from, say, manufacturing. In this view, then, the high exchange rate and high volatility marking most natural resource dependent countries has led to an economic structure that has discouraged activities with large learning spill-overs. Better macro-policies (leading to less volatility and lower exchange rates) can go some way in correcting this distortion. But so can industrial policies, by leveraging off the countries’ resource base (in which at least some countries have a degree of monopoly power.) This entails exploiting upstream, downstream, and horizontal linkages (Hirschman, 1958), and linkages that might be associated with processing and resource extracting itself. Some developing countries (like Malaysia) have actually succeeded in developing capabilities in resource extraction, by imposing employment and training conditions on foreign operators.

Even if much of resource extraction technology itself is not closely linked with other technologies which might provide the basis of broader growth and learning, many of the subactivities entailed in the long and complex process of removing natural resources do. Buildings have to be built and people have to be hired. Workers have to be fed. There is a demand for people and vehicles for transportation and logistics. In short, for many African countries, the exploration and development of these linkages can be the basis of an effective industrial policy, one which enhances the capabilities of the people and firms within them. (For a more extensive discussion, see Jourdan, 2013.)

VI. Distribution, employment and Environmental Concerns

Standard industrial policy focused on changing the sectoral composition of GDP to enhance growth—in our case, to enhance learning. But it should be emphasized that the failure of markets to incorporate learning externalities is only one market failure, one instance in which private rewards and social returns are misaligned, and any misalignment provides a rationale for industrial policy.

Of particular relevance for many African countries are distribution, the environment, and employment. The market, by itself, seems to be creating too few jobs, is associated with socially unacceptable levels of inequality, and has adverse impacts on the environment.

Industrial policy can and should be directed at each of these; and in some cases, policies directed at mitigating one problem may have benefits in addressing another.

More generally, what matters is not GDP, but the quality of life, “well-being” and the enhancement of individual and societal capabilities. What that entails—and how performance can be better measured28, and how better measured performance can be increased through industrial policy— should and can be a subject of rational inquiry.

For instance, environmental impacts are important for all countries, but especially for developing countries. The fact that natural resources and the environment are “underpriced” means that there are insufficient incentives to allocate resources (including those devoted to learning) towards the environment and natural resources—so more get expended on saving labor, even though labor is in surplus.

This highlights a difference between developed and developing countries, and a reason why it is important that developing countries have their own innovation policies. Much of innovation in advanced industrial economies has been directed towards saving labor. But in many See, in particular, Stiglitz, Sen, and Fitoussi (2010).

developing countries, labor is in surplus, and unemployment is the problem. Labor saving innovations exacerbate this key social problem.

Even when labor saving innovation does not result in unemployment, it will have adverse distributional consequences, lowering wages. With inequality already so high in many African countries, this should be of concern.

But there are further reasons that we should be concerned about growing inequality. It can lead to increased political and social instability. There is, moreover, a growing understanding, even within the IMF, that inequality may lead to lower economic growth, more economic instability, and a weaker economy. (Stiglitz 2012b; Berg and Ostry 2011). While there are many channels through which these adverse effects operate (e.g. inequality diminishes the aggregate demand for domestic non-traded goods), one may be of particular importance in developing countries, where there is a need for heavy public investments in infrastructure, education, and technology.

In a society with very little inequality, the only role of the state is to provide collective goods and correct market failures. When there are large inequalities, interests differ. Distributive battles inevitably rage, and to prevent redistribution, wealthy elites often try to circumscribe the powers of government. But in circumscribing government, the ability to perform positive roles is also circumscribed. As we have argued here and elsewhere, government needs to play an important role in any economy, correcting pervasive market failures, but especially in the “creative economy.” Thus, our critique of non-inclusive growth goes beyond that it is a waste of a country’s most valuable resource—its human talent—to fail to ensure that everyone lives up to his or her abilities. Non-inclusive growth can lead to democracies that do not support high growth strategies. There can be a vicious circle, with more inequality leading to a more circumscribed government, leading in turn to more inequality and slower growth.

The analysis of this section has several obvious but important implications: (a) Developing countries cannot just “borrow”/adapt technology from the North. There is a need for a new “model” of innovation. (b) In particular, innovation needs to be directed (through industrial policies) at saving resources, protecting the environment, and improving the distribution of income. (c) These objectives may be intertwined—industrial policies that promote more inclusiveness may promote more learning; better environmental policies may lead to a better distribution of income.

VII. Political Economy

One of the standard objections to industrial policies in the past has been political: the potential for misuse. The question is raised, can there be effective industrial policies in countries with significant deficiencies in governance. The argument has been put that even if such policies contributed greatly to the success of East Asia, elsewhere they were less successful, because they were abused. Critics suggest that industrial policies were largely to blame for Latin America's lost decade. The implication is that, while with Ideal Government intervention might improve matters, in the “real world” interventions do not necessarily does so. Given the widely acknowledged deficiencies in governance in many African countries, they should shy away from such policies.

There are several responses to these objections. One is methodological: such political economy objections may be true—but the conclusion is based on political analysis, not economic analysis. And the political analysis is often more simplistic than economic analysis.

The first question is not whether in some cases such interventions have failed, but whether in some instances they have succeeded, and the answer to that is unambiguously, yes. The second question is, whether there are policies and institutions that can be adopted that are more likely to lead to success, that at least reduce the likelihood or extent of abuse.

Moreover, similar questions can be raised about every other aspect of policy. Many governments have not used monetary and financial regulatory policy well; in some cases, the misuse can be traced to problems of governance (some have argued that regulators and central banks in some advanced industrial countries were captured by special interests in the financial market, and this played an important role in the 2008 global economic crisis.29 But few would argue that as a result, governments should eschew the use of monetary and financial regulatory policy.30 Historical interpretation We observed earlier that there is ample evidence that countries have successfully used industrial policies. Indeed, there are few successful economies in which the government has not successfully employed industrial policies, broadly understood.

Moreover,, it is widely acknowledged that at the time that many of the East Asian countries began their industrial policies, not only was their economic development lower than some of the less developed countries today, but so too was their political development.

The conclusion that industrial policies were a failure in Latin America is, at best, contentious, at worst, simply wrong. Brazil, the most ardent adopter of such policies, had an impressive growth rate of almost 6% in the three quarters century before 1980. Industrial policies played an important role in that country's success in this period. The lost decade was a result of Latin American countries' excessive indebtedness in the 1970s, the period of the oil shock --understandable, perhaps, given the low, or even negative, real interest rates at which the petro-dollars were being recycled--followed by the unprecedented increase in interest rates, a result of the United States suddenly switching its monetary policy regime to monetarism. The lost decade of the 80s was, in short, a result of a macro-economic shock, not a failure of microeconomic policies. The subsequent adoption of the Washington Consensus policies, which eschewed industrial policies, prolonged the subsequent period of slow growth. The more See, e.g. J. E. Stiglitz (2010).

Though some conservatives do argue, on this basis, that there should be a return to the gold standard, and that there should be no role for discretionary monetary policy. However, since the failure of monetarism, these extreme positions have garnered little support among economists.

recent revival of growth, for example, in Brazil, has much to do with the government once again undertaking activist policies (Bértola and Ocampo, 2012).

In short, the historical experience shows that industrial policies can work. Even instances of failure need to be interpreted with caution. Good policies involve some risk — if every public or private investment succeeded, it would be indicative of insufficient risk taking. There are undoubtedly instances where industrial policy has failed because of abused. But the relevant question is: are the problems inherent in political processes? The historical record suggests strongly that failure is not inevitable. The historical record does suggest caution, especially in countries with poor governance. And it suggests that countries do what they can to improve governance; there are institutional reforms in the political process that would reduce the risk of failure.

Implications of governance deficiencies for the design of industrial policies But reforms political processes are slow. The implication of deficiencies in governance is that one needs to tailor the design of the instruments of industrial policy around the capabilities and governance of the public sector.

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