In the wake of the first global recession since World War II, governments around the world are looking for ways to boost growth and competitiveness. Given the fragility of the business and economic climate—and strained public coffers—the responsibility to get policy right is acute. But can public policy makers improve on their hit and miss record of intervention in the past? I would pick out three useful lessons that we have learned, often the hard way:
■ Don’t focus on single industries in the hope of “picking winners.”: Governments need to take a broad-based, inclusive approach to growth, particularly if a key aim is the creation of jobs. Large domestic service sectors that are labor-intensive are creating all net new jobs in high-income economies and 85 percent in middle-income countries. Don’t get me wrong. New technologies can have a transformational impact beyond their particular sectors, enabling future productivity improvements and growth—think IT. But it is the low-tech green jobs in local services, such as improving building insulation and replacing obsolete heating and cooling equipment, that have a greater potential for creating jobs in the near term.
■ Don’t bet the farm on new, innovative emerging sectors, however exciting and fast-growing: Many governments are looking to sectors such as clean tech to answer today’s urgent employment challenge—but they are likely to be disappointed. Such sectors are simply too small. For example, the highly successful US semiconductor industry represents only 0.3 percent of the US employment.
■ Tailor policies to industries: Industrial policy has too often relied on a purely macroeconomic view—what makes one country more competitive than another. It is true that getting the overall business environment right and enabling policies in place matters—reducing red tape or improving education—matters for most sectors. But the macro view loses the fact that sectors differ in what it takes for companies or countries to be competitive—and that the most effective potential choices on government regulation and policy therefore need to be tailored. Take the automotive industry where the electronics aspect needs skilled labor while assembly needs low wages to compete globally.
The arbiter between success and failure today is not what to do but how to do it. Here, too, I would point out three principles that should help to ensure the effective execution of policy:
■ The devil’s in the detail: Policy needs to be based on a detailed understanding of current competitiveness and the barriers in each sector. In a nutshell, you need to design, tweak, and learn policy at the three-foot level, not the 30,000-foot level—and do so rapidly and repeatedly. Otherwise the risk is that policy is ineffective, and expensive.
■ Engage. Governments can accomplish very few major development goals alone—certainly not building competitive industries. Major stakeholders in the private sector and communities more broadly need to be the co-designers of policy. The “delivery lab” model in Malaysia—now spreading around the globe—has proved to be an effective forum for such collaboration.
■ Embed. Policy efforts often start off in heroic style with a huge burst of activity and leadership from the top. But to sustain such vigor and boost the odds of success requires more. Incentives and market signals need to be aligned to growth, inclusion, and job creation. No amount of planning can replicate the informational and behavioral power of the right market signals. Embedding performance management and learning from best practice needs to be routine. Skills are crucial to avoid bottlenecks and create higher returns on investment. A pro-growth political economy is vital. Powerful private sector players need to accept greater competition in return for a growing market pie.
Two decades ago, the challenge of growth was finding solutions. A decade later, the challenge was funding solutions. Today, a lack of growth is rarely from not knowing or being able to finance the policies that will promote growth, but rather from a failure to focus on the right sectors, to build competitiveness and competition within them, and to design delivery solutions that can cut through administrative silos and political inertia or hostility.