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Industrial Policy: a Theoretical and Practical Framework to Analyse and Apply Industrial Policy 2

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Industrial Policy: a Theoretical and Practical Framework to Analyse and Apply Industrial Policy 2 Module 2 Industrial policy: a theoretical and practical framework to analyse and apply industrial policy 2 Industrial policy: a theoretical and practical framework to analyse and apply industrial policy 1 Introduction the first place. Section 4 moves to more practical matters, providing some examples of successful module Government intervention, and industrial policy and less successful industrial policies. Section 5 more specifically, have been issues of conten- discusses some of the current challenges to in- tion as long as the economics profession has dustrial policies in developing countries, distin- existed. Early political and development econo- guishing between internal and external factors mists such as Paul Rosenstein-Rodan, Albert influencing industrial policymaking. The overall Hirschman, Alexander Gerschenkron, and Raúl objective of the module is to provide the reader Prebisch emphasized the importance of gov- with both a theoretical and practical framework ernment intervention and the ability of a state to analyse and apply industrial policy. to mold economic activity in ways that would be most beneficial to society. In the early 1980s, At the end of this module, students should be development policy shifted towards a more able to: market-centered approach, limiting government intervention to policies that try to make market • Explain what industrial policy is and how it outcomes more efficient by increasing competi- can be best designed and implemented; tion or providing public goods. This view even • Describe the policy instruments that can be led some economists to argue that the best in- used to implement industrial policies; dustrial policy is not to have an industrial policy. • Describe the different views on the role of in- More recently, however, there has been increased dustrial policies; public pressure to reduce unemployment and • Analyse country experiences with specific in- stimulate economic growth, and, in this context, dustrial policy instruments; and a revived interest in industrial policy. • Understand the challenges to industrial poli- cies in the context of a developing economy. As we will see throughout this module, histori- cal accounts suggest that the use of industrial policies has been beneficial to many countries, 2 What is industrial policy? spurring structural transformation and develop- ment. Structural transformation, technological Both the definition and the implementation upgrading, and innovation do not always take of industrial policy have varied considerably place autonomously, but rather require careful throughout history and across different coun- and consistent state intervention and support. tries. Based on the views of the leading industrial Recent developments in the world economy, in- policy scholars, this section explains what con- cluding the fallout from the 2007-2008 global stitutes an industrial policy, what policy instru- financial crisis, have put industrial policy back on ments it uses, and how it can be implemented. the policy agenda of developed and developing countries alike. The issue most governments face 2.1 Defining industrial policy today is not whether to have an industrial policy, but how to best design and implement an indus- There is no consensual definition of industrial trial policy. policy, which reflects the controversy surrounding this concept. Adopting a broad definition, War- In Module 1 of this teaching material, we learned wick (2013: 16) defines industrial policy as “any that the process of development entails profound type of intervention or government policy that structural changes in an economy. This module attempts to improve the business environment or discusses how the government can support such to alter the structure of economic activity toward a process. In doing so, we survey the debate on sectors, technologies or tasks that are expected to the role of industrial policy in structural transfor- offer better prospects for economic growth or so- mation and discuss how an industrial policy can cietal welfare than would occur in the absence of be implemented. Section 2 provides an overview such intervention” [emphasis by the original au- of how the literature has defined industrial pol- thor]. Other authors (Chang, 2009; Landesmann, icy and classified industrial policy instruments. 1992; Pack and Saggi, 2006) provide narrower It also discusses the key conditions and princi- definitions of industrial policy. For instance, Pack ples of successful industrial policy design and and Saggi (2006: 2) consider industrial policy to implementation. Section 3 reviews arguments be “any type of selective intervention or govern- in favour of and against industrial policy, start- ment policy that attempts to alter the structure ing with a brief summary of the historical debate of production toward sectors that are expected to around the East Asian and Latin American expe- offer better prospects for economic growth than riences. The aim is to answer the question of why would occur in the absence of such intervention, governments should have an industrial policy in i.e. in the market equilibrium” [emphasis added]. 68 Industrial policy: a theoretical and practical framework to analyse and apply industrial policy 2 2.1.1 Functional or selective industrial policies? in choosing where to build a road – is always pre- sent in policymaking. module As we will see throughout this module, the is- sue of how actively industrial policy should seek 2.1.2 Which sectors deserve support from to alter the structure of economic activity is at selective industrial policies? the heart of the discussion on industrial policy. More precisely, the debate has focused on how Some authors have specified the characteristics selective industrial policies should be, i.e. to what that such sectors must have. They must have extent industrial policy should target (select) export, job, and knowledge creation potential specific sectors, technologies, or tasks in order (Reich, 1982), and they must be new to the econ- to alter the structure of the economy towards omy (Rodrik, 2004). Ocampo et al. (2009) include them. Using Warwick’s (2013) words, policies that dynamic effects by specifying that industrial attempt to improve business environments have policy should aim to restructure the economy been commonly referred to as functional, or and trade specialization towards activities with horizontal, industrial policies. Policies that alter higher technological content and promote inno- the structure of economic activity towards spe- vative activities with strong linkages to the rest cific sectors have been referred to as selective, or of the economy. In their view, innovative activities vertical, industrial policies.36 Functional policies should be understood in a broad sense as new 36 Some authors have sug- would be the least interventionist because they technologies, but also new markets, industrial gested different terminolo- are designed to support the operation of markets structures, or exploitation of previously underu- gies: soft and hard industrial policies (Harrison and Rodri- in general. Examples include policy measures tilized natural resources. Finally, tension exists guez-Clare, 2010), pro-market that facilitate entry of firms through competition between promoting structural and technologi- and pro-business policies policy, or trade policies that liberalize imports. Se- cal change through productivity growth and (Rodrik and Subramanian, lective industrial policies aim to promote certain achieving an acceptable quantity and quality of 2005), and market-based and industries and firms over others. They can make employment, as higher productivity in an indus- promotional policies (Weiss, 2013). use of subsidies and other forms of support and try reduces employment (see Module 1). Noting protection such as import tariffs and restrictions, this, Salazar-Xirinachs et al. (2014: 2) call for a pol- tax incentives, and public procurement. icy that can “strike a good balance in achieving the two fundamental objectives of productivity Some authors (Lall and Teubal, 1998) have further growth and more and better jobs.” divided functional/horizontal policies into two distinct categories. This approach has also been Given these characteristics, manufacturing is the followed by UNCTAD and UNIDO (2011: 34), which most common target of industrial policies. Nev- describe industrial policy as involving “a com- ertheless, some authors, such as Rodrik (2004: 3), bination of strategic or selective interventions caution that “industrial policy is not about in- aimed at propelling specific activities or sectors, dustry per se. Policies targeted at non-traditional functional interventions intended at improving agriculture or services qualify as much as incen- the workings of markets, and horizontal inter- tives on manufactures.” Especially in economies ventions directed at promoting specific activities heavily dependent on agriculture, industrial poli- across sectors.” Following this literature, horizon- cies should simultaneously spur investments in tal policies go slightly beyond functional policies, productivity improvements and technological as they aim to promote cross-sector activities change in agriculture that lay the foundations for which markets are missing or are difficult to for manufacturing and services expansion (Szir- create (a typical example is innovation policy). mai et al., 2013; UNCTAD, 2015a). Hence, horizontal policy would lie somewhere be- tween functional and selective industrial
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