My colleagues Justin Lin and Celestin Monga have proposed a six-step plan for identifying industries that could help developing countries industrialize.
The first step in the plan is to find countries that have a per-capita income that is roughly double yours and have a similar endowment, and observe what they are producing. These industries would then serve as the basis for possible government intervention to either protect or create, depending on the country’s situation.
However, the six-step plan seems to gloss over the fact that countries, even seemingly successful ones, produce certain goods for political rather than economic reasons.
Someone who was trying to apply the framework to Kenya found that the country with double the per-capita income and a similar endowment—in terms of labor/land and labor/capital ratios, etc.--was India, which produces high-tech goods and services. The implication was that Kenya should gear up for making these its future industries. But a paper by Kalpana Kochhar and colleagues shows that India’s pattern of development is idiosyncratic: despite a large pool of unskilled or semi-skilled labor, India produces skill-intensive goods and services. One reason is the restrictive labor regulations in India that leave formal-sector manufacturing at a low level, but are politically very difficult to remove.
Likewise, once an industry has been identified, it may not be competitive because policies and regulations in the poor country make certain prices immovable.
For instance, in South Africa, again for political reasons, it is very hard to lower the minimum wage, so that certain labor-intensive industries, even if they conform to the country’s comparative advantage, may not be the best way to industrialize.
The Lin-Monga framework does consider this, by ensuring in one of the subsequent steps that all other prices in the economy reflect market conditions. But it is not clear what to do when this condition doesn’t hold. Should we work on removing the distortion, or find an industry that doesn’t rely on the distorted prices (something which is hard to do when the distorted price is the price of labor).
The attempt to identify “winners” in a systematic way is certainly welcome. Countries are not satisfied with the recommendation to simply improve the business climate and let the winners emerge.
As Justin and Celestin observe, governments around the world already practice industrial policy; their paper tries to provide some economic reasoning for it. But, in keeping with other self-improvement programs, I hope they will add a seventh step, namely, to examine the political economy of industrial policy—both in the “model” country with double the per capita income, and in the country trying to industrialize.
Photo: Arne Hoel, World Bank
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Shanta: Good to see that there is interest in revisiting industrial policy, and in the spirit of debate, I hope you as well as your faithful blog readers will check out my rejoinder post on 'Let's Talk Development' Link-https://blogs.worldbank.org/developmenttalk/growth-identification-and-facilitation-let-the-debate-begin
The Lin-Monga proposal is apt and a step in the right direction. African nations need more of ideas than grants and loans that adds to the debt burden due to highly undefined policies and self serving project management styles. Can i have access to the full study?
You can access the full study by clicking on Justin's name in the original blog post. It will take you to the working paper.
Dear Shanta. I am writing this and at the same time not having a lot of hope to be fully understood (Out of experience in talking to people and decision makers). Closely watching the state of the earth as a whole, especially the amount of available resources left, here again especially fossil fuels left, one must be shaken by the insights. Insights, a lot of leaders of this world seem to deny out... of, to me, unknown reasons. Some call it "denial of reality". As the end of cheap oil in sight and already experiencing, everything is going to change. Steps taken "early" could mitigate the consequences for at least some countries and areas in favourable climate. These steps in favourable climate can only mean to bring people, given the opportunities, back to producing food without involving fossil fuels. As for Africa, there might be solutions left, and there are indeed a lot of people and organizations recommending this. On the other hand, the actual opposite is evolving, as countries are giving away their fertile land to heavy industrialized agricultural industries of foreign countries and companies. (E.g. http://www.farmlandgrab.org/ ) To give, at least a chance, to mankind in some areas with favourable climate of the earth, only agriculture on a sustainable level, means close to markets, not involving fossil fuels not even fossil produced fertilizer, bringing the waste back to the land to keep the land fertile, involving man labour and at the maximum draught animals, can help and mitigate. I know this letter might look like the writing of just another alarmist. But I have been an optimistic person, watching closely for decades and hoping for good solutions for mankind. It turns out very different from my hopes. The ones who want to see and put the bits and pieces evolving into a picture, can easily be quite speechless, at least at first. I do hope to receive an answer in one or the other way. As I see you are in such a responsible position, maybe some people can make a change to at least some people of the world. Kind regards, Bernhard
Read more Read lessThank you Shanta.
The 35 page document is not in English. Kindly avail me with an English version.
Shanta, Justin Lin has responded to your blog post here: https://blogs.worldbank.org/developmenttalk/choosing-countries-as-models-for-industrial-growth
Africa should grow at double digits to avoid not being left behind. Let us concentrate on food security, industrialization and poverty eradication rather than exploitative tendencies of multinationals. Even the template of the southern economic engines grew via this pathway.
My apologies. Here is the URL for the English version: http://go.worldbank.org/POZV61JT30
Thanks for the English version. Why did Lin recommend local industry protection? It could be counterproductive in my view.