Published on Let's Talk Development

Is there a way to do industrial policy without strong institutions?

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Having a discussion. | © shutterstock.com Public-private dialogue is potentially one way to develop the institutions required for effective industrial policy. | © shutterstock.com

In today's rapidly evolving global economy, governments are seeking to develop new industries that can drive growth and create jobs for the next generation. This effort, loosely called “industrial policy,” relies on effective communication between the state and private firms. Two-way communication is essential: firms must reveal their constraints and opportunities, while the state must clearly communicate regulations and available incentives and services.
 

Facilitating communication

But how can countries facilitate this communication, especially with limited capacity in the civil service, or limited trust between the public and private sector? A body of case studies from the past decades suggest one potential approach.
 

Embedded autonomy

Peter Evans's concept of "embedded autonomy" describes the ideal institutional arrangement for this two-way communication. In this model, a few government agencies have both complete authority to shape policy and deep social integration with entrepreneurs and their networks. Evans illustrated this concept using cases of industrial policy for the computer sector in the late 20th century. For instance, the success of the Republic of Korea as a computer exporter was attributed to high embedded autonomy, stemming from the delegation of industrial policy to a few meritocratic ministries and unique social ties between civil service and business groups.
 

Public-private dialogue

However, few countries have the embedded autonomy Korea did then. To address this, many states have implemented what the World Bank calls public-private dialogue: formal working groups that bring together business executives and regulators, supported by professional coordinators and high-level oversight.

Historically, these dialogues focused on economy-wide issues. For example, in the 2000s, the World Bank supported several Presidential Investors’ Advisory Councils in East and West Africa. These councils, chaired by the President and including primarily foreign investors, met semi-annually, and drove important economy-wide reforms, like a law in Ghana making the central bank independent, revisions to the Land Act in Tanzania, and the establishment of an anti-corruption Commission in Senegal.
 

Sector-specific dialogues

Today, many economy-wide reforms have already been completed, and investment constraints are more likely to be sector-specific. As a result, dialogues in the 2010s have focused on specific industries, typically bringing together technical level civil servants and domestic firms.
 

Designing effective dialogues 

The challenge of designing effective public-private dialogue involves three objectives: maximizing information exchange benefits, motivating participation, and minimizing rent-seeking. These challenges vary between “passive” and “active” industrial policy.

While much attention has been given to active policy---subsidies for semiconductor factories in the United States, or subsidies for shipbuilding in China---recent dialogues have focused on passive policy, which rather than subsidies for specific firms focuses on regulatory reforms and infrastructure improvements accessible to all firms in an industry, and so has less risk of rent-seeking.
 

Best practices

A study reviewing the experience of 40 countries with public-private dialogue suggested a set of best practices.

Best practices for public-private dialogue
Limit group size to 20 participants to build trust
Ensure representation from all sector stakeholders and relevant authorities
Provide dedicated technical staff and secretariat support
Maintain regular weekly or bi-weekly meeting schedules
Produce both quick-win proposals and longer-term policy papers

Adapted from Herzberg and Wright (2005)

Country case studies

Several more detailed country cases illustrate this approach can be successful:

  • Cambodia: Established a Government-Private Sector Forum, clarifying export and business regulations for private sector participants.
  • Peru: Implemented dialogues known as mesas executivas, achieving reforms such as streamlined regulations in forestry and aquaculture.
  • Tunisia: Focused on industries not yet exporting at scale, achieving reforms like the acceleration of pharmaceutical marketing authorizations and the establishment of regulation for clinical trials.
     

Conclusion

All these reforms were followed by export growth in the targeted industries. While it is difficult to conclusively attribute growth to the reforms, it is plausible that they played a role. If so, public-private dialogue can develop embedded autonomy where it does not exist, and at relatively low cost. For example, in Tunisia, four dialogues generating substantive policy reform were supported by a grant of just $750,000, suggesting a high return on investment.

A frustrating aspect of recent debates about industrial policy is that most of the evidence is historical, with leading cases in East Asia in the mid-20th century. These more recent case studies provide some cause for optimism. To emulate Korea’s success, one does not necessarily need a civil service like Korea’s, at least immediately. Public-private dialogue is potentially one way to develop the institutions required for effective industrial policy. 



This is the third blog in the World Bank’s Prosperity Vertical’s Chief Economist’s Office Chat-IPT (Industrial Policy Talks) series. The inaugural blog:
The double-edged sword of export bans on critical metals explored the impact of restrictions and bans on exports of critical metals for the world's green transition and their economic trade-offs for developing countries. The second blog: The promise and pitfalls of production subsidies as industrial policy analyzed the rationale for the use of subsidies, what improves the likelihood of their success and what are possible alternatives.


Tristan Reed

Economist, Development Research Group at the World Bank

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