From Old Taboo to New Consensus: ‘Industrial Policy’ and ‘Competitive Industries’ (Pt 2)


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Economic development succeeds best when public policy and the private sector work in harmony, not at cross-purposes. That’s the idea at the heart of the efforts by two former Chief Economists of the World Bank, Justin Lin and Joseph  E. Stiglitz, to promote a renewed embrace of Industrial Policy, as Tuesday’s blog post described. Exploring their ideas on how activist government policies can help shape development, their recent International Economic Association (IEA) roundtable and forum at the Bank was a reminder that there are many variations on the Industrial Policy theme.

By focusing on areas of comparative advantage, the Competitive Industries approach lets winners emerge. (Credit: ees1bk, Flickr Creative Commons)

Industrial Policy practitioners, learning from experience, have adjusted many of their old tactics and techniques. Using a modernized, market-sensitive policy toolkit, a promising new approach is now being implemented by the Competitive Industries Practice within the Bank’s Financial and Private Sector Development Network.

The Competitive Industries approach helps clients focus investments in their areas of potential comparative advantage within the global value chain. Competitive Industries takes an industry-level perspective to long-term competitiveness, analyzing economies from the bottom up rather than from the top down. That perspective helps Competitive Industries avoid the pitfalls of the more dirigiste versions of Industrial Policy that were sometimes tried, with mixed results, in the 1970s and 1980s. The epithet “picking winners and losers” is always eagerly hurled, at any and all policy interventions, by laissez-faire fundamentalists – but market-conscious Competitive Industries steers clear of such a risk. Focusing on the industry level, Competitive Industries fills in “the missing middle,” in-between overall macroeconomic policy and individual company-level investments. As it promotes investment in “public goods” and encourages public-private dialogue, the Competitive Industries Practice is now helping many of the Bank’s client-countries – including Lebanon, Jordan, Niger, Burkina Faso, Mozambique, Malaysia, Brazil and Haiti – analyze their optimal niches in the global value chain, set up growth poles, create special economic zones, establish industrial clusters and organize resource corridors.

This analytical approach aims to maximize the impact of each country’s or region’s limited investment capital by targeting the industries that have the best chance of commercial success. Competitive Industries engagements always include a strong focus on good governance and transparency.

Improving on past approaches, Competitive Industries shuns cookie-cutter solutions and is ready to admit when attempted policy interventions do not work. When a Bank team recently recognized that Special Economic Zones – a staple of traditional Industrial Policy – were not working as planned in India due to local circumstances, they  readily revised their approach.  Competitive Industries recognizes the need to rigorously judge what works and what doesn’t.

One way or another, after all, every country ends up adopting some sort of policy approach – whether it’s active or passive, rational or irrational – to economic development. Even if a country consciously chooses not to pursue a strategic plan, that abdication is, in itself, a kind of “strategy by default.” If a government chooses not to have an explicit industrial policy, it will still wind up having an implicit policy – but it will be haphazard rather than strategic.

The 1980s ideological skirmishes over whether the United States should pursue Industrial Policy have alas left political scar tissue on today’s Washington debate – which, in turn, has affected the tone of the debate within the Bank. The Obama Administration remains hesitant to use the phrase– perhaps understandably, amid an election year when complex ideas are vulnerable to drive-by distortion – even though this year’s State of the Union address called for adopting a more coherent U.S. manufacturing strategy: a kind of Industrial Policy Lite.

Obama’s director of the National Economic Council, Gene Sperling, avoided the term “Industrial Policy” when he recently delivered a major speech outlining ideas for a stronger U.S. competitiveness strategy. The phrase “Industrial Policy,” however, was conspicuous by its absence.

Policy sage Steve Clemons of The Atlantic has noted that the White House has avoided using the phrase in public: “I know from my own discussions with leading White House economic advisers to the President, the term ‘industrial policy’ is the policy that cannot be uttered.” Yet even leaders of “American multinationals are ready to chat about industrial policy,” says Clemons, having shaken off their decades-long “strong allergy”against the concept. Perhaps after Election Day, whoever is in the White House will feel liberated to explore the benefits of taking a more holistic approach to competitiveness.

Industrial Policy has been practiced for centuries – even in the free-market-friendly United States. Since 1791, when then-Treasury Secretary Alexander Hamilton sent Congress his expansive “Report on Manufactures,” Washington has embraced Industrial Policy to various degrees. The Obama Administration has supported public-private collaboration in an understated way, consistent with the long American tradition of federal activism in shaping the conditions in which industrial development can thrive.

Countries can either invest in a disorganized way – hoping to blunder blindly into the future – or they can invest strategically. Approaching economic development rationally rather than randomly distinguishes Competitive Industries from earlier, flawed models: the absolutist approaches inflexibly enforced by either the dirigiste left or the laissez-faire right.

Whether using traditional Industrial Policy devices or the more market-sensitive toolkit of Competitive Industries, policymakers who heed Lin and Stiglitz can envision constructive public-private collaboration to help strengthen economic growth. The development community is increasingly embracing their activist logic – with Competitive Industries giving policymakers, in both the wealthy West and the developing world, a market-driven but policy-conscious way to help create jobs, generate wealth and shape development.

Join the Conversation

Philip Schuler
June 15, 2012

Far more care needs to be taken when digging into 18th and 19th Century history to justify policy stances in the 21st Century. Hamilton's Report on Manufactures certainly was a bold and revolutionary piece of thinking. It is incorrect to point to it as evidence that the new U.S. government had embraced industrial policy or anything approaching the role of the state in the economy that the U.S. adopted in the 20th Century.

* Congress rejected the Report when first submitted. There was considerable opposition from Jefferson (serving alongside Hamilton in the Cabinet) and Madison (in Congress).

* What it later adopted was a caricature: rejecting the subsidies to support manufacuring; ultimately adopting protectionist tariffs instead of the moderate tariffs proposed by Hamilton (to raise revenue for the subsidies).

* Very significantly, Hamilton did not propose (and Congress did not adopt) tariffs on cotton textiles, which with 200 years of hindsight would have been an obvious measure to foster the nascent manufacturing industry.

There was great opposition to other of Hamilton's proposals for greater state support of the economy, which today many would see as legitimate functions of a national government, such as a central bank and investment transportation infrastructure.

The fact that the U.S. government has pursued policies to shape the country's economic development from its very beginnings is hardly sufficient grounds for advocating any particular policy today. First, this is nothing more than a celebrity endorsement, not a cost-benefit analysis of the policy.

Second, one cannot selectively point to one set of economic policies that the U.S. implemented in the 19th Century in isolation from other policies that the U.S. also adopted:

* Some we would certainly find abhorrent today: slavery, using naval gunships to enforce international commercial disputes, virtual extermination of indigenous people to obtain land.

* Some were arguably more influential than trade policies: public education (in the North), a modern approach to corporate charters, patent protection.

* Some of what we would today consider essential were conspicuously missing in the U.S. until the 20th Century: income tax, a central bank, commitment to full employment, consumer protection, recognition of collective bargaining.

You can't cite one policy without buying the whole package.

Rosa Alonso
June 15, 2012

I am not "an unreconstructed remnant of free-market dogmatists who dwell in some libertarian echo chambers of Washington and Wall Street." Neither am I one of the "laissez-faire absolutists who helped propel the global economy toward the abyss" nor do I believe I wear "old ideological blinders."(these are some of the qualifiers used in this article to describe those who do not agree with its views). I am rather a social democrat who strongly believes in the crucial role governemnt needs to play in the economy. I am also someone who has learned from the enormous failures of excessive and ill-conceived government intervention, especially but not exclusively in developing countries. Almost all of those ill-conceived roles are to be found in the area of Government intervention in directly productive activities outside the natural resource sector.
The role of Government in direct resource allocation --whether through State Owned enterprises outside the transport, utilities and natural resource sectors or through industrial policy-- has been an unmitigated disaster in almost all developing countries. After 16 years of work at the IMF and the Bank, I have not worked with one country in which that role was positive and even-handed. Rather, it has been one more way of creating corruption and redistributing income to the wealthy and well-connected. Developing countries (and arguably many developed countries as well) do not have the technical capacity, let alone the political economy make-up to carry out the type of industrial policy described in these articles effectively. Moreover, when government resources are insufficient for education, health care, roads and basic infrastructure provision, should they be used to subsidize industrialists? My view is that they shouldn't; that it doesn't work either for growth or for poverty reduction, and that it ends up benefiting the rich. There may be exceptions, but those are few and far between. I have great respect for Joseph Stiglitz and agree with him on almost everything, but not on this one. Even if one were to be able to properly make the call on what to support technically (and I greatly doubt it, especially in developing countries), the political economy of the large majority of developing (and arguably developed!) countries is simply utterly at odds with the ability of government to play such a role. The result would be --as it was in the 1950s to 1980s-- diverting scarce government resources from the core role of the state in providing public goods to rent-seeking opportunities and goodies for the rich.

Silliker Caraig
August 07, 2012

The fact is that Industrial Policy can [have] and has had a very important role – in all countries, and it’s even more so in developing countries, in emerging markets.!

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