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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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This poses an important trade-off. Broad-based measures such as exchange rate interventions require only that the government ascertain that the sectors that would be encouraged by such interventions have more societal learning benefits than the sectors that would be discouraged—and there is ample evidence that that is the case (evidenced by the success of export-led growth strategies). Firms and sectors within the economy self-select, and the expansion of firms and sectors with greater learning enhances the dynamism of the economy.

On the other hand, more targeted interventions can lead to even more learning and faster rates of growth.

Of course, no intervention completely “solves” the political economy problem: Sectors that benefit from exchange rate intervention may lobby for the maintenance of that intervention even in the absence of learning benefits.

Some countries have shown that they can manage the political economy problems of more targeted interventions. The East Asian countries did so by using rule-based systems in which interventions were linked to past export success.

The East Asian countries used the quest for "rents" in a positive way: competition for rents led to firms that learned more and became more competitive in the global market place. In other countries, though, rent-seeking has diverted resources away from growth inducing innovation.

Firms have devoted their resources to learning how to circumvent regulations designed to make the economy more stable and to learning how to exploit consumers and their monopoly power better. Markets don't work well when private returns are not well aligned with social returns; and in those circumstances, incentives to innovate and learn are also distorted.

Liberalization and political economy

Finally, we note that liberalization is itself a political agenda. As we previously commented, markets do not exist in a vacuum. There are always going to be rules and regulations, even in a liberalized world. And the design of those rules and regulations will shape markets. The rules and regulations that were adopted in the process of “liberalizing” and deregulating financial markets in the US and UK led to bloated financial institutions backed by implicit guarantees from the monetary authority and ultimately the taxpayer — a perhaps unintentional industrial policy that distorted the economy.

V Concluding Comments

The central thesis of this paper is that pervasive market failures (and other distortions which result in private rewards being misaligned with social returns) provide a rationale for industrial policies --- government interventions in sectoral allocations. We focused on one particular set of market failures, those that arise in the process of learning: Learning is especially important for developing countries as they strive to close the gap between their incomes and those of the more developed countries. A central focus of development policy should be, how to promote learning, how to create a “learning economy and society.” We noted that much of the advice of the past, based on neo-classical models, not only gave short shrift to these concerns, but may actually have led to counterproductive policy prescriptions that were adverse to learning, and hence to long term increases in standards of living.

A focus on creating a learning society has broad implications for financial and capital market liberalization, the design of monetary policy and institutions, macro-economic policies, intellectual property regimes, investment treaties, taxation, and expenditures on infrastructure, education, and technology, legal frameworks for corporate governance and bankruptcy— indeed for the entire economic regime. All need to be viewed through a learning perspective.

Some have direct effects on learning, some have longer term effects on learning capabilities or how they impact the acquisition of learning capabilities, while some have indirect effects, e.g.

as they create more macro-instability, which has adverse effects on investments in learning.

Some have multiple effects.31 For Africa, as it attempts to reindustrialize, to restructure its economies to become more integrated into the global economy and move away from excessive dependence on commodity exports, to raise standards of income, increase employment, reduce poverty and inequality, and protect a fragile environment, industrial policies are of especial importance. We have explained why the widely cited objections—that though industrial policy may have worked in East Asia, they are inappropriate for Africa because of deficiencies in governance—are unpersuasive. Governance issues are, of course, relevant in all countries, and are important in shaping the form that industrial policy takes and the instruments that are appropriately used.

The belated recognition of the potential of these policies comes at a fortunate time, for changes in the global economy may afford the countries of Africa a distinct opportunity to transform their economies in a way that will, at long last, narrow the gap that separates standards of living in the sub-continent from that of much of the rest of the world.

That is the case, for instance, for financial liberalization, which may lead to more macro-economic volatility, and less access to finance by domestic small and medium sized firms, thus impeding the development of domestic entrepreneurship capabilities. See Rashid (2012) and Emran and Stiglitz (2009).





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