Green? Choice Issue 1, December 2009

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Number 3 n Ha-Joon Chang n Modernizing multilateralism n China on the rise MakingIt n Does micro- Industry for Development finance work? Time Theto go policygreen? choice Issue 1, December 2009

l Rwanda means business: interview with President Paul Kagame l How I became an environmentalist: A small-town story with global implications by Phaedra Ellis-Lamkins, Green For All l ‘We must let nature inspire us’ – Gunter Pauli presents an alternative business model that is environmentally-friendly and sustainable l Old computers – new business. Microsoft on sustainable solutions for tackling e-waster l Green industry in Asia: Conference participants interviewed l Hot Topic: Is it possible to have prosperity without growth? Is ‘green growth’ really possible? l Policy Brief: Greening industrial policy; Disclosing carbon emissions Issue 2, April 2010

l ‘After Copenhagen’ – Bianca Jagger calls for immediate steps to avoid climate catastrophe l The Interational Energy Agency’s Nobuo Tanaka looks at energy transitions for industry l ‘Energy for all’ – Kandeh Yumkella and Leena Srivastava on what needs to be done to improve energy access l Women entrepreneurs transforming Bangladesh l ‘Everywhere under the sun’ – Suntech CEO, Zhengrong Shi, on the power of solar l Hot Topic: The pros and cons of biofuels l Policy Brief: Financing renewable energy; Feed-in tariffs

A new quarterly magazine. Stimulating, critical and constructive. A forum for discussion and exchange about the intersection of industry and development. Editorial The theme of this – the third – issue of Making It: Industry for Development is industrial policy. In response to the global economic crisis, governments around the world are desperate to jump-start economic growth. Following the bailouts of the banks and car makers, more recently most of the world’s biggest economies have been directing public money into attempts to boost manufacturing. The era of the Washington Consensus is over. Even if – as many of our contributors note – industrial policy never really went away, it is definitely now fully back on the agenda. In the words of our keynote article author, Ha-Joon Chang, “Industrial policy is not a taboo any more”. The whole world must find the policies to meet the challenge of climate change. Developing countries must try to meet the expectations of their growing populations by building up their economies on the basis of green growth and clean energy. As one of our contributors argues, industrial policy has a key role to play in the world’s transition to a resource-efficient, low-carbon growth trajectory. In entitling this issue, “The policy choice”, Making It aims to highlight the notion that the real question about industrial policy is not whether it should be practiced, but how. Making It’s website – www.makingitmagazine.net – provides an interactive platform for exchange of views and ideas, and we invite you – our readers – to join in this debate. We want to know how you see this topic, and what industrial policy can do for your country, your community, or your business.

MakingIt 3 MakingIt Industry for Development Contents

Editor: Charles Arthur [email protected] GLOBAL FORUM Editorial committee: Ralf Bredel, Tillmann Günther, Sarwar Hobohm, 6 Letters Kazuki Kitaoka, Ole Lundby (chair), Cormac O’Reilly 8 From steam engines to human consciousness Website and outreach: – Alfredo Sfeir-Younis believes the world needs Lauren Brassaw Cover illustration: Paresh Nath a new industrial revolution Design: Smith+Bell, UK – 10 Hot topic – Anis Chowdhury asks: is micro- www.smithplusbell.com Thanks for assistance to finance an effective poverty reduction tool? Donna Coleman Printed by Ueberreuter Print GmbH, Austria – 14 Business matters – News, trends and events www.ueberreuter.com on PEFC certified paper To view this publication online and to FEATURES participate in discussions about industry for development, please visit 16 A changing climate for industrial policy – www.makingitmagazine.net Wilfried Lütkenhorst on the transition to a To subscribe and receive future issues of Making It, please send an resource-efficient, low-carbon growth trajectory email with your name and address to [email protected] Making It: Industry for Development is published by the United Nations Industrial Development 32 Organization (UNIDO) Vienna International Centre, P.O. Box 300, 1400 Vienna, Austria Telephone: (+43-1) 26026-0, Fax: (+43-1) 26926-69 E-mail: [email protected] Copyright © 2010 The United Nations Industrial Development Organization No part of this publication can be used or reproduced without prior permission from the editor ISSN 2076-8508 The designations employed and the presentation of the material in this magazine do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations Industrial Development Politicizing Organization (UNIDO) concerning the legal status of any country, territory, city or area or economic policy – of its authorities, or concerning the delimitation of its frontiers or boundaries, or 20 Jayati Ghosh its economic system or degree of development. Designations such as on state involvement “developed”, “industrialized” and “developing” are intended for statistical convenience and do in economic activity not necessarily express a judgment about the stage reached by a particular country or area in the development process. Mention of firm names or commercial products does not constitute an endorsement by UNIDO. 22 KEYNOTE FEATURE The opinions, statistical data and estimates contained in signed articles are the responsibility of the author(s), including those Towards a more productive debate – Ha-Joon who are UNIDO members of staff, and should not be considered as reflecting the views or Chang argues for an acceptance that industrial bearing the endorsement of UNIDO. This document has been produced without policy can work, and for ‘outside of the box’ formal United Nations editing. thinking on how to make it work better. 4 MakingIt 38 Number 3, July 2010

30 International cooperation is vital for national prosperity – Deborah Wince-Smith 16 wants to seize a golden opportunity for dynamic global partnerships 32 Modernizing multilateralism for a multi-polar world – The World Bank’s Robert Zoellick sees countries, companies, individuals, and NGOs interconnecting through a flexible network 34 Country Feature: China’s stunning economic rise – Interview with Chen Deming, Minister of Commerce of the People’s Republic of China 38 Rethinking poverty reduction – Jomo Kwame Sundaram argues that governments need to play a developmental role 34 40

40 Greening the Mexican economy – Juan Rafael Elvira Quesada, Mexico’s Secretary of the Environment and Natural Resources, talks to Making It

POLICY BRIEF 42 Revealing research results 43 The private sector and development 44 The power of patient capital

46 Endpiece – Michel Sidibé on HIV/AIDS – a workplace issue MakingIt 5 downturn as early as the second quarter of 2009. But in the past six months, in particular, a feeding trends through of policy stimulus in the US has been supporting a n Most industrialized countries been growing fast, with an disease, and high infant mortality. strengthening of activity in those have experienced severe declines average annual growth rate of 6% Yet Africa’s collective GDP, at countries that are more in industrial production in the between 2002 and 2008. The US$1.6trn. in 2008, is now dependent on the US market. last two years, the worst being in region, which is weathering the roughly equal to Brazil’s or Growth is expected to fluctuate at North America where output has global downturn better than most Russia’s, and the continent is around 4% in subsequent years. fallen by 20% since 2007, other parts of the world, is among the world’s most rapidly This is still well below the average according to the International projected to grow by 3.8 and 4.5% growing economic regions. of 5.2% registered in the boom Yearbook of Industrial Statistics in 2010 and 2011, respectively – (McKinsey Quarterly) years of 2004-07, but represents a 2010, published by UNIDO. faster than Latin America, Europe, positive performance relative to Industrial growth remained and Central Asia. According to n Following a contraction of 2.1% the region’s historical trend largely uninterrupted in the Least McKinsey Quarterly, in 2009, the Economist growth rate. (Economist Developed Countries (LDCs), telecommunications, banking, Intelligence Unit expects Latin Intelligence Unit) particularly LDCs in Africa which and retailing are flourishing. America to post a solid recovery of maintained an annual industrial Construction is booming. Private 4.1% in 2010. Aggressive policy n Capital investment in new growth rate of more than 5% per investment inflows are surging. stimulus and Chinese demand wind power systems is projected cent in 2009. (UNIDO) Many of Africa’s 50-plus enabled the region’s commodity to expand from US$63.5bn. in n Before the global financial individual economies face serious exporters to lead the recovery, with 2009 to US$114.5bn. in 2019. crisis, sub-Saharan Africa had challenges, including poverty, Brazil emerging from the Last year’s global wind power BUSINESS MATTERS

The impact of community investment. Women’s Pursuing business activities leads business on to employment creation, value economic creation, and supply chain effects, the MDGs all of which contribute to opportunities economic development and With the deadline for achieving various MDGs. Most notably, An innovative new report from the Millennium Development commercial activities have a the Economist Intelligence Unit Goals (MDGs) only five years significant impact on alleviating opens a window on to the away, questions have been raised poverty (MDG1). By impacting economic landscape that women as to the effectiveness of the poverty alleviation, MDGs 2, 4 face globally, and highlights private sector in influencing and 5 are also impacted. which countries offer the most progress towards their These insights highlight the opportunities. achievement. A new study important convergence of the The Women’s Economic assesses the contributions of 20 business case for pursuing Opportunity Index is a pilot well-known multinational market opportunities in the effort to assess the laws, companies towards influencing developing world with the moral regulations, practices, and the MDGs. imperative to contribute to attitudes that affect women One of the foremost findings is human development. More workers and entrepreneurs. that the private sector plays a importantly, it suggests that it is It uses 26 indicators to evaluate larger than expected role in by doing business that business every aspect of the economic and field for women over the last few contributing to the MDGs: the can contribute most, something social value chain for women, decades, but too many women sample group’s combined that corporations should be able from fertility to retirement. still cannot exercise their full activities impacted more than 8.2 to embrace more By exploring the binding economic rights,” said Leila Butt, million beneficiaries. The study enthusiastically. constraints that women face, it a senior economist at the also reveals that the pursuit of – Business Impact Report, 2010 points to steps governments can Economist Intelligence Unit and business opportunities in take to improve opportunities research manager for the project. developing countries can for women and boost overall Women’s economic positively impact MDGs just as economic performance. opportunities are influenced not effectively as private sector “Countries have made good just by a country’s regulatory development efforts focused on progress in levelling the playing environment, but also by social

14 MakingIt installations reached a record 37,500 n The Third IASTED African n 4th International MW. China, the global leader in new Conference on Power and Energy Conference on CSR events installations for the first time, Systems September 22-24, accounted for more than a third of September 6-8, Berlin, Germany n Assessing the Role of Prejudice new installations, or 13,000 MW. Solar Gaborone, Botswana www.csr-hu-berlin.org and Discrimination in Power, photovoltaics (including modules, www.iasted.org/conferences/ Poverty and Environmental system components, and installation) home-684.html n The GREEN (Global Sustainability will grow from a US$36.1bn. industry Resources Environment & October 7-10, in 2009 to US$116.5bn. by 2019. New n CSR Asia Summit 2010 Energy Network) Expo Yaoundé, Cameroon installations reached just over 7 GW September 14-15, Hong Kong September 28-30, www.4eppse.org/conference.html worldwide in 2009, a sevenfold www.csr-asia.com/summit2010 Mexico City, Mexico increase from five years earlier. www.ejkrause.com/ n Renewable Energy World Asia Clean Edge reports that the solar n The Right Livelihood Award thegreenexpo/index.html November 2-4, Singapore photovoltaics and wind power September 14-19, www.powergenasia.com/ industries currently account for Bonn, Germany n World Habitat Day index.html 267,562 and 563,577 direct and www.rightlivelihood.org/ October 4, Shanghai, China indirect jobs worldwide, rla30.html www.unhabitat.org/ n Renewable Energy Africa (REA) respectively – a total of more than Conference and Expo 2010 830,000 jobs. The report estimates n United Nations Millennium November 9-11, that, by 2019, the number of jobs will Development Goals Summit Johannesburg, South Africa be 2,178,919 for solar and 1,122,815 September 20-22, www.reafrica.co.za for wind – a total of more than 3.3 New York, USA million jobs. (Clean Edge) www.endpoverty2015.org

In the ranking of economic Top 5 countries opportunity for women in 113 economies, Sweden, Belgium, in Africa, Asia and Norway occupy the top spots. These countries have and the Americas particularly open labour markets

Photo: Robert Churchill/istock for women, high levels of AFRICA educational achievement, and 1 Mauritius liberal legal and social regimes. 2 South Africa However, the index tells other 3 Tunisia stories as well. China, Hong 4 Namibia Kong SAR, performs best in the 5 Egypt Asia region, ranking in the top 25% in most categories. ASIA Mauritius is Africa’s best 1 China, Hong Kong SAR finisher; its labour policies are 2 Israel among the most favourable to women in the region. Excluding 3 Japan Canada and the US, Brazil edges 4 Singapore Chile and Mexico for the best 5 Republic of Korea attitudes and customs. As a help women, implementation is score in the Americas. Eastern result, women’s participation in often weak and opportunities European countries, especially AMERICAS the formal labour force remains remain limited. Nevertheless, Bulgaria, have particularly 1 Canada well below that of men. Women attitudes are changing as balanced labour-law protections, 2 United States are also paid less than their male economies develop and although retirement ages for counterparts, and men continue opportunities for women men and women are often 3 Brazil to dominate in sectors with expand. Countries with stagnant different. Tunisia comes first in 4 Chile higher wage-earning potential, or slow-growing populations Northern Africa, and Sri Lanka in 5 Mexico such as technology and finance. increasingly realize that women Southern Asia. – Women’s economic opportunity. The study finds that even are essential to an expanding A new pilot index and global ranking where legislation is intended to labour force. from the Economist Intelligence Unit

MakingIt 15 GLOBAL FORUM The Global Forum section of Making It is a space for interaction and discussion, and we welcome reactions and responses from readers about any of the issues raised in the magazine. Letters for publication in Making It should be marked ‘For publication’, and sent either by email to: [email protected] or by post to: The Secretary, Making It, Room D2226, UNIDO, PO Box 300, 1400 Vienna, Austria. (Letters/emails may be edited for reasons of space).

the strategies applied in this LETTERS country could serve as an example for other developing Energy for all countries. l Isabel Freyer, received by The articles “Renewable energy email options” and “Energy for all” (Making It, issue 2) are “Energy for all” (Making It, inspirational and thought- issue 2) is really informative. provoking for everyone. As I The Indian model of dealt with these topics – with a promoting access to energy for special focus on the the poor through the

Dominican Republic – in my combined efforts of all Suzlon Photo: academic research, I found stakeholders is a lesson for the ANC because it said it Suzlon wind many aspects that underlined many African countries, would provide essential turbine factory my findings. Taking into particularly Uganda, which is services such as water, health consideration that developing good at developing policies, but care, education and electricity reconnecting about 40 houses countries have 80% of the still fails at the implementation as a service, and not as a source every week. And what’s more, world’s population, but of programmes. The reasons of revenue. What happened? the local police force agrees consume only 30% of global for such policy failures include Let’s take electricity. There has with what they are doing, and commercial energy, it’s a poor institutional framework, been chronic underinvestment officers are ‘turning a blind eye’. obvious that an acceleration of a lack of awareness, and a lack in the state-owned power “We are giving back what energy accessibility is of human technical resources company, ESKOM, and as a belongs to the people. It’s not a necessary. and of financing. result ESKOM has started to luxury,” says one of the SECC In the Dominican Republic, l Doreen Namyalo-Kyazze, raise prices beyond the reach activists. where many households do Director, Energy Solutions of poor people. If people fail to l Ethel Red, received by email not have access to energy, Project, Kampala, Uganda pay their electricity bills, then private enterprises, as well as ESKOM disconnects their the government, are increasing supply altogether. So, under a Wind of change initiatives to promote Energy access government that has failed to I would like to congratulate you renewable energy. Households and the poor meet its pre-election promises on publishing Making It, a in rural areas especially are to provide essential services to magazine which addresses the being targeted for renewable “Energy for all” (Making It, the people, energy access is issues and concerns related to energy options. One exemplary issue 2) is OK as far as declining. environment imbalances, global enterprise is Soluz recommendations for Thankfully, in places like warming and the management Dominicana, which is offering governments go, but at the end Soweto, some people are not of natural resources, and photovoltaic systems on a fee- of the day nearly all the world’s just sitting back and letting this searches for alternatives in a for-service business model. governments are primarily happen. The Soweto Electricity very lucid and understandable In 2007, the Dominican interested in revenue. Unless Crisis Committee (SECC) is a format. The articles on wind government passed a law that there are fundamental political group of electricians who power generation and bio- grants numerous incentives changes, providing access to believe it is the people’s right to mimicry are of great interest. and tax exemptions to energy will only be an option if have free power. When poor The environment is a collective investors in renewable energy. people can pay for it. Poor people are disconnected for responsibility, and there is a The Dominican Republic’s people will remain without failing to keep up with their need to have a comprehensive perspectives on renewable energy access. bills, crusading electricians dialogue and an understanding energy supply are Take South Africa, for from the SECC come round to among experts, scientists and consequently very good, and example. In 1994 voters backed reconnect them. They are the common people.

6 MakingIt For further discussion of the issues raised in Making It, please visit the magazine website at www.makingitmagazine.net and the social networking Facebook site. Readers are encouraged to surf on over to these sites to join in the online discussion and debate about industry for development.

In India, the participation of aspects of business that impact support for improvements to Take, for example, the corporations is slowly leading to on the success of an the revised European Union response of the inhabitants of a revolution in terms of focus on entrepreneur, particularly in RoHS Directive (Restriction of the native Iñupiat village of the development of developing countries where it is Hazardous Substances in Kivalina in North Alaska which technologies related to non- often governments that do not electronics); specifically, a is falling into the ocean because conventional energy generation, allow entrepreneurship to methodology for further ice, formerly a wave barrier, is and to efforts to reduce carbon thrive. How then, in this case, restrictions of hazardous melting as a result of footprints. One such company, has the Mexican government substances, and an immediate greenhouse gas emissions. The Suzlon Energy, is purely a home- helped or hindered this ban on BFRs, chlorinated flame villagers refused to go quietly. grown company, working on businessman, and is it difficult retardants, and PVC vinyl Kivalina v. ExxonMobil Corp., wind power generation in general for Mexican plastic. et al., (2008) arguably technology for the last 15 years. It businessmen to be successful? On e-waste, apart from the constituted an important has set up big wind power Does the government push for additional points for development in rights-based generation farms. As a result of environmentally responsible information to its customers litigation against those its efforts to popularize this kind policies, etc? on take-back and reporting on principally responsible for of power generation, some of l Emile Potolsky, received by recycling, Microsoft is climate change. The suit the worst polluting industries, email rewarded for engaging in an EU claimed damages related to like cement production and the coalition supporting Individual climate change against nine oil oil and gas industries, are opting Producer Responsibility. companies (including for wind power generation as an Microsoft and l Greenpeace ExxonMobil, BP and Royal alternative, clean source of Greenpeace Dutch Shell), fourteen power power. The company has a big companies and a coal company. presence in the states of Gujarat, Continuing the discussion After Their complaint echoes the Maharashtra, and Kerala. prompted by the Microsoft article, Copenhagen rights guaranteed under the l Anjana Upadhyay, Gurgaon, “Old computers – new business” Universal Declaration of India (Making It, issue 1), Greenpeace has I would like to applaud Bianca Human Rights and the responded to Microsoft’s letter in Jagger's excellent article "After International Covenant on issue 2. In the most recent Copenhagen" in your magazine Economic Social and Cultural Entrepreneurs Greenpeace Guide to Greener (Making It, issue 2). She is Rights in asserting that I appreciated reading the Electronics, Microsoft has risen one absolutely right – the “Defendants’ emissions of online interview, “Making it place in the ranking of companies’ Copenhagen climate change carbon dioxide and other happen – An entrepreneur’s policies on toxic chemicals, recycling summit ended in a shameful greenhouse gases, by perspective: Mexico”, because it and climate change. compromise. The end result contributing to global warming, gave me an insight into not The Guide to Greener Electronics was a three page document – an constitute a substantial and only the life of an entrepreneur, evaluates company policy and “Accord” (not a treaty because it unreasonable interference with but also into a very personal practice beyond what is is non-binding, merely stating public rights”. side of somebody living and required by regulation…. principles of which to “take The complaint cites the Arctic working in Mexico. I think this (Microsoft) has committed to note”) which no country has Climate Impact Assessment to kind of article is useful for removing PVC and BFRs from signed up to in any event. It has show that defendants supporting and giving a voice its hardware products by or no lawful authority or standing “conspired to create false to entrepreneurs throughout before 2010, and phthalates by at all – it is a mere statement of scientific debate about global the world, especially in the end of 2010. However, it vague intent. warming in order to deceive the developing countries. needs to put products on the In the absence of a legally- public.” The suit may have been One thing though, I would market that are free from BFRs binding treaty for nation states, dismissed by a United States have liked to see more of an in printed circuit boards before how about putting the pressure district court, but the spirit of extensive interview since there it can score points for this on the multinational the action deserves support. are obviously many more criterion. It also fails to show companies? l John Radford, Manchester, UK

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Industrialization will continue to be the most important avenue of future development, but ALFREDO SFEIR-YOUNIS believes that that the world needs a new industrial revolution that is all about people.

From steam engines to human consciousness

The Industrial Revolution that took place that save lives; from the one-to-one corporations remain the biggest polluters in Europe between 1760 and 1850 shifted a telephone to an intercommunicating of the world, the major sources of way of life from an agrarian economy to an world. However, while there are more environmental destruction, and the urban/industrial one. Physical technology sophisticated engines and better principal drivers of social inequality and played a central role in advancing labour machines, the structural patterns of injustice. Some corporations possess productivity, and massively increasing the industrialization have not really changed, assets whose value is many times greater scale of industrial production and trade. and we see almost the same human and than the Gross National Product of several We know now the tremendous human and social results. developing countries combined, and their social challenges that the Industrial Despite attempts at corporate social political power is unprecedented. Revolution created across the board, and responsibility, and the adoption of A new industrial revolution is needed that, even though industrial development elaborate forms of management, control, now. Its essence must be to move us from has advanced on many fronts, negative finance, and marketing (to name a few), the steam engine to the highest levels of patterns still exist in many countries. human consciousness. Corporations are Let’s recall that the Industrial Revolution made up of people. Technology is created created great inequalities, forced women by the human factor. Management is an and children to work long hours for low organized form of human interactions. pay, resulted in slums with no basic Industrial processes are an alignment of services (water, sewerage), and failed to human beings to production. Marketing provide law enforcement to protect and communications influence people’s citizens. In addition, there was behavioural patterns. The external homelessness, low-quality education, environment and social impacts affect power entrenchment and fragmented human beings and all forms of life. social structures, increases in pollution, Owners, managers, workers, stockholders, the misuse of common land, unorganized consumers, traders...all are people. Thus, migration to cities, etc. ALFREDO SFEIR-YOUNIS (Cho Tab Khen the new industrial revolution is all about Today, the scale and composition of Zambuling) is a Chilean economist, spiritual people, and must be deeply interconnected industrial production has greatly changed: leader, and founder and president of the to people. from the steam-boat to the most Zambuling Institute for Human If the old Industrial Revolution destroyed sophisticated cruise lines and cargo ships; Transformation. Before opening the Institute nature, brought about the genocide of from Model T Ford cars to the spaceships in 2005, Sfeir-Younis worked at the World indigenous populations, exploited workers, that circle the Earth; from epidemics that Bank for 29 years, serving as a senior advisor excluded women, and oppressed foreign killed millions to medicines (antibiotics) to the managing directors. nationals, then the new industrial

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revolution must bring about instruments, The new industrial revolution must be Business and entrepreneurship based on processes, and forms of governance that organized around the following guidelines: inner awareness of the self, and directed to will radically change these patterns. Respect for all forms of life, for all human the natural and human environments; on If the core purpose has been to maximize beings regardless of race, colour, or creed, for technology design and implementation that profits for a few corporations, to enhance nature, and for future generations. meets people’s material and non-material the power of a few governments, and to A new eco-morality that conserves, uses, needs rather than just the profit motive; on increase the quality of life of only a few manages, and controls natural resources; technological change that creates the people, then, today, the new industrial that protects and restores ecological niches conditions for human inner growth and revolution must bring about the and life forms that are being depleted; that development; and on governance and maximization of happiness and inner brings back ecological balance, integrity, business management instruments that wealth. It must establish the best forms of rhythm, and sound; and that engages in benefit all people. collaboration, governance, and human production, trade, and consumption patterns Zero tolerance of war, conflict, and interactions in order to expand the that do not harm the environment and that weapons; of poisonous substances of any collective good to benefit all people; to are in sync with the Earth’s carrying capacity. sort; of low quality or unsafe products; of develop the best quality of life across the Human self-realization that puts unethical behaviour; and of the destruction planet; to empower people, create economics at the service of people and not of the social fibre of communities. opportunities and security; and thus create people at the service of economics; that There are positive signs that this form of a world embedded in freedom, justice, eliminates absolute poverty and ends the industrial revolution is possible if we can abundance, and peace. processes of marginalization and exclusion; deepen and extend corporate attention and We live at a crucial moment in history, that provides decent work so that the commitment to, amongst other things, when choices must be made in order to workplace provides the conditions for all green labelling, corporate social attain higher levels of human forms of self-realization; that improves responsibility, and the Equator Principles consciousness and coherence. The judicial systems to protect the rights of of socially and environmentally- situation demands a revolution in values, women, children and the elderly; and that sustainable financing. Without the private turning away from economics and finance puts the focus of education and human sector’s full engagement in building a truly (competition, independence, and resource development on inner development sustainable future, no positive collective exclusion), and embracing the collective and the expansion of human consciousness. destiny for humankind can be expected. n values of interdependence, interconnectedness, solidarity, cooperation, justice, freedom, peace, security, human rights, sustainability, love, compassion, caring, and sharing. These values must be self-realized, and industry must be the human, institutional, and political space to be able to do this. The corporations of the future must become the institutional and organizational space where human beings may attain the highest level of consciousness, and “We live at a crucial moment material and non-material welfare, including health and inner peace. As the in history, when choices must urban population is now larger than the be made in order to attain rural population, and as rural activities higher levels of human acquire an ever-greater industrial consciousness and coherence. character, industrialization will continue to be the most important avenue of future The situation demands a development. revolution in values…”

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No miracle cure HOT TOPIC These findings imply that credit is only one factor in the generation of income or In what is a regular feature, distinguished contributors consider one of output. There are other complementary the controversial issues of the day. With all the media hype factors, crucial for making credit more surrounding new online lending platforms, such as Kiva.org, the time is productive. Among them, the most important is the recipient’s right to ask if microfinance really is an effective poverty reduction tool. entrepreneurial skills. Most poor people do not have the basic education or experience to understand and manage Does microfinance work? even low-level business activities. They are mostly risk-averse, often fearful of losing whatever little they have, and are ANIS CHOWDHURY is Professor of poverty line nor did it find any significant struggling to survive. Most prominent Economics at the University of Western impact on the quality of food that people ate. promoters of microfinance, including Sydney, Australia. Currently, he is working as The findings of the most cited set of Professor Yunus and Sam Daley-Harris, a Senior Economic Affairs Officer at the studies, based on empirical evidence drawn director of the Microcredit Summit United Nations Department of Economic from comparative experiences in seven Campaign, recognize that microcredit is and Social Affairs (UN-DESA). developing countries (published in 1996), not a miracle cure; for it to succeed, other are also provocative: poor households do complementary factors are needed. Professor Mohammad Yunus, the originator not benefit from microfinance; it is only Some microfinance institutions (MFIs) of the concept of microfinance, believes that non-poor borrowers who can do well with and non-governmental organizations 5% of Grameen Bank’s clients exit poverty microfinance and enjoy sizable positive seem to have understood this need, and each year. However, there are few credible impacts. A vast majority of those with are offering training to build management estimates of the extent to which microcredit starting incomes below the poverty line and entrepreneurial skills. However, the actually reduces poverty. actually ended up with less incremental focus has been generally on supply-side Ideally one can ascertain the impact of income after getting microloans, as factors which complement one another to microfinance if the counterfactual – what compared to a control group which did not make microinvestment productive. Very would have happened to a person who get such loans. little attention has been paid to the borrowed from a microlender if he/she had demand side. In the absence of an not done so – can be easily tested. Many expanding domestic market, early studies compared borrowers with non- microenterprises will most likely replicate borrowers. But if borrowers are more a barter economy. In extreme cases of a entrepreneurial than those who do not stagnant market, the availability of credit borrow, such comparisons are likely to in order to facilitate transactions can leave grossly overstate the effect of microcredit. the parties even worse off, as they have to Two recent studies attempted to overcome repay loans with interest, while seeing no this problem by using randomized sample growth in revenues or income. Therefore, selection methods. Neither study found that it is not surprising that a World Bank- microcredit reduced poverty. One of these sponsored study (published in 2005) studies found no impact on measures of involving 1,800 households in Bangladesh, health, education, or women’s decision- found only very marginal improvements making among the slum dwellers in the city “A US$250 one-year loan for borrowers of microcredit. For example, of Hyderabad, India. The other study found would raise a borrower’s the incomes of women who received that the provision of microfinance in microcredit increased by only 8 taka for Manila, the Philippines, had no discernible annual income by US$12.50, each 100 borrowed. As one commentator effects on the probability of being below the or about three cents a day!” noted, a US$250 one-year loan would raise

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Microfinance institutions claim that small loans do reduce poverty, and institutional and individual donors respond with huge donations. However, research suggests that, while microfinance can help in times of crisis, in the long-term its monetary impact is minimal. Image: Damien Glez Damien Image: a borrower’s annual income by US$12.50, microfinance? Sri Lanka was a star that microfinance is more cost effective or about three cents a day! performer in social progress long before compared to commercial banking loans. This modest income gain happened in the microfinance movement started. In Where the interest rate is at the lower the context of rapidly expanding garments recent times, Andhra Pradesh in India has end, it is often due to implicit subsidies. production in Bangladesh. It would have also performed much better than the rest This, then, raises the issue of the social been an interesting counterfactual to see of India in terms of social indicators of opportunity cost of subsidies; could this what would have happened in the absence development. Microfinance does not seem money be better utilized elsewhere, such as of the fast expanding garments industry. to have played a big role there either. for public health, education, or supporting Consideration of demand-side factors agriculture and rural industries? Some highlights the importance of pro-growth Interest rates defend the MFIs’ interest rates by arguing macroeconomic, trade, and industry The interest rates charged by microfinance that they are still less onerous than the policies. institutions have drawn vigorous criticism. alternatives offered by moneylenders. In response to the modest findings in There are claims of interest rates ranging Others argue that the returns on capital terms of monetary measures of poverty, from 30 to 100% on an annualized basis. are indeed high in microenterprises, and advocates of microfinance cite impressive Some defend the high rates on grounds of that therefore the levying of high interest social progress, such as reduced infant and sustainability; anything less will not attract rates is justifiable. In respect of the latter, it maternal mortality in Bangladesh. But can profit-seeking bankers into this market. is not clear how these studies impute the such achievements be attributed to However, this argument weakens the claim cost of ‘own labour’ – the time and ‰

MakingIt 11 GLOBAL FORUM

A political economy explanation for the Positive contributions HOT TOPIC growth of the microfinance movement is Even the vocal critics admit that that microfinance campaigners microfinance can help the poor smooth ‰ labour spent by the owner of the successfully projected the image of the consumption over periods of cyclical microenterprise. In an economy movement, such as empowerment of downturns or unexpected crises. If this characterized by surplus labour, one can women, which resonates well with the consumption smoothing means parents impute a zero shadow price for own donor community. The birth of the can send their children to school, or buy labour. In that case, the entire surplus over movement roughly coincided with the rise essential medications, and maintain and above the cost of capital can be of neo-liberal ideas in the late 1970s and nutritional intakes of their children, then regarded as profit or returns on capital. early 1980s. Thus, the notion that microfinance is likely to have positive This could be the most plausible microfinance programmes are primarily long-term impacts on productivity. explanation for finding high returns from engaged in the promotion of small-scale The high interest rates that are charged microenterprise loans. enterprises appealed to major donors. remain an important concern, and most Ideally, own labour should be priced at a While donors were wary of subsidized MFIs have been found lacking in lending “decent” or legislated minimum wage to credit through state-owned specialized to the ultra poor. Nonetheless, it seems enhance poverty reduction. Employment financial institutions, they were quite that microfinance has significantly dented (self or otherwise) at a wage below a decent happy to subsidize microfinance the informal credit markets by rate only adds to the pool of “working institutions, as they appeared to promote a undermining debt-bondage and usury in poor”, who perhaps are even more market economy, and more importantly, some agrarian societies. Thus, vulnerable to shocks, due to the debt they helped to diminish the role of the microfinance is having a modernizing burden of microcredit. This could be government. impact. another explanation for the so-called In liquidity-constrained societies, there More importantly, by “democratizing” graduation problem of microenterprises, is always demand for credit. So, when the credit market, the microfinance or why so many loans need to be donor-supported MFIs push the supply of movement has also constrained the MFIs’ rescheduled or refinanced, as reported by credit, there is no shortage of takers. As a own behaviour. For example, when some the Wall Street Journal. result, microfinance expanded MFI officials went to collect repayments exponentially. However, if the market itself immediately following the devastating Expansion of microfinance does not expand rapidly, this can only cyclone Sidr in Bangladesh in 2007, this If the poverty reduction impact of create debt burden or underutilization of was widely reported in the national microfinance is so doubtful, how can one credit, and a downward pressure on the newspapers. As a result, the MFIs acted explain the movement’s phenomenal returns on investment. quickly to suspend loan recovery and to expansion? The authors of an extensive offer softer loan conditions. survey of the literature and interviews In other words, the rapid expansion of with the movement’s leading players microfinance has empowered not just claim that the success of microfinance is women, but all small borrowers. Note due to innovative business practices should also be taken of the learning-by- involving product design and doing effect. Even when own labour in management, and enabling microenterprises is given a zero shadow environments. Similarly, extensive case price, the people who are involved do studies of MFIs in Bangladesh and the benefit. They learn some basic principles Philippines found that the real of business, and with luck, and perhaps explanation for their success lay in careful “The danger of the hype some help, may be able to become more attention to managerial and strategic about microfinance is that the viable and even expand. This is akin to ‘fundamentals’. These include keeping needs of small businesses in apprenticeship where the apprentice gets a transaction costs low, and matching loan low wage, but in exchange gets training in payment schedules to borrowers’ income the informal sector may not a trade. So, with their support and training and savings potential. get due attention.” programmes, many MFIs are making

12 MakingIt GLOBAL FORUM

A group of women chat outside the offices of a microcredit project in Ouagadougou, Burkina Faso. Photo: Andy Aitchison/In Andy Pictures/Corbis Photo: some useful contributions. Conclusion to promote profit-seeking financial Microfinance gives the unemployed The danger of the hype about microfinance institutions by eliminating state-run, and the poor some opportunities, hope, – and the focus on microenterprises – is that specialized financial institutions that and self-esteem. the needs of small businesses in the catered for the needs of small and medium- Finally, being successful business informal sector may not get due attention. sized enterprises (SMEs) and the agricultural ventures, microfinance institutions The owner-operators of these small sector. It is now realized that these reforms themselves have also created a large businesses have already proven their had their own limitations, and that SMEs number of well-paid jobs, which entrepreneurial acumen, but they face and the agricultural sector, especially food should have considerable multiplier numerous constraints, ranging from production, need state support. effects. inability to access the formal credit market, Management and operational lessons learnt Many of these positive effects cannot to difficulties with marketing their products. from successful MFIs can provide valuable be measured in monetary terms, and These enterprises should be supported with inputs into the design of specialized hence will remain largely easy access to credit and other financial financial institutions for SMEs and the unacknowledged in the literature services, such as insurance. Their problems agricultural sector. focused on the traditional income or have been exacerbated by neo-liberal l The above is an edited and abridged version expenditure measures of poverty. financial sector reforms which have sought of UN-DESA working paper #89

MakingIt 13 Industrial policy has a key role to play in the transition to a resource-efficient, low- carbon growth trajectory. WILFRIED LÜTKENHORST, Managing Director of the Regional Strategies and Field Operations Division of the United Nations Industrial Development Organization (UNIDO), considers the implications. A changing climate for industrial policy

The return, renaissance, rediscovery or come- back of industrial policy has been widely her- alded. This is good news. And let’s be honest: industrial policy has never left the scene. It has been practiced in varying shapes and forms in all countries, developed and developing alike. The issue really is: are various policy instruments applied in an uncoordi- nated, ad-hoc, and at times clandestine manner? Or are they openly embedded in a clearly formulated and communicated strategy behind which a country – with all relevant public and private stakeholders – can unite and move forward? It is this latter notion of an agreed vision (where do we want our economy to go and how do we get there?), which is back on the agenda with a vengeance. Sadly, it ‰

16 MakingIt Workers building a factory near Hanoi, Viet Nam. Image: Andrew Wood/istock Wood/istock Image: Andrew

MakingIt 17 ‰ has taken a major global economic crisis to “Industrial policy today policy failure is considered as even bigger? drive home the point that markets are all I would indeed argue that industrial policy about allocation of resources and efficiency cannot be relevant, cannot today cannot be relevant, cannot be effective, but, in and by themselves, do not take care of and cannot be credible, unless it is explicitly long-term societal objectives. be effective, and cannot be framed in the context of natural resource credible, unless it is scarcity. We need to factor in global (and, by ‘New industrial policy’ the way, also regional and local!) limits to cli- When looking at the policy debate today, in explicitly framed in the mate change, lest we allow an irreversible tip- many ways, there is a strong sense of déjà vu. ping point to be reached. And there are Some of the discourse among economists is context of natural positive signs that this is beginning to be un- revisiting issues already battled over in the resource scarcity. “ derstood by both economists and, impor- 1980s: whether to accept or challenge an econ- tantly, by policymakers, particularly in omy’s comparative advantages; to just set emerging economies. Here a just a few illus- framework conditions or pick and promote trative examples: winners; to steer foreign investment into pri- l In India, there is growing awareness that ority sectors or allow an indiscriminate climate-related factors will hit the poorest seg- inflow; to nurture infant industries or let the ments of society the hardest, and are likely to forces of globalization prevail, etc. lead to a significant slowing down of GDP At the same time, there is, in fact, wide- growth. The nation’s environment minister spread agreement on key features of a so- sees India as the country most vulnerable to called ‘New Industrial Policy’, among them: climate change. A debate on green growth and l that framework conditions such as macro- green energy is intensifying – with or without economic stability, a conducive business en- global agreements. vironment and openness to trade are a l In China, massive investment is being un- necessary point of departure; dertaken in energy efficiency, renewable l that a shift from autonomous government sources of energy, and green technologies in action to a strategic public-private dialogue is general, with over US$60bn. targeted for de- essential; veloping hybrid and electric car technology, l that the focus should move away from set- and further improving rail transport and elec- ting pre-defined outcomes to getting the tricity grid infrastructure, as well as for a new policy process right (Dani Rodrik’s notion of 10-year clean energy plan. According to the industrial policy as a “discovery process”); country’s State Environmental Protection l that, all too often, there is a fixation with Agency, as much as 15% of GDP is lost annu- formulating fancy strategies, while neglecting ally due to various types of environmental the institutional capacities required for their pollution. effective implementation; l In Viet Nam, extreme weather conditions l that we need to move from dogmatic pre- and rising sea levels are considered a threat to scriptions (Washington Consensus) to a sense agricultural and industrial production in half of pragmatism, to a readiness to ‘think out- the country, seriously jeopardizing future eco- side the box’, and to innovate and experiment nomic growth. The Government has re- (sometimes labelled now as the ‘Beijing Con- sponded by integrating these concerns into sensus’ – a term coined by Joshua Cooper the development plans of all ministries. Ramo in 2004); and l Finally, Brazil is re-discovering the “green” l finally, that we need to maintain a healthy merits of its long and well-established policy dose of realism and modesty. History is lit- to promote renewable fuels. This policy dates tered with well-crafted industrial policies that back to the early 1970s, and has led to ethanol failed to achieve their stated objectives and now accounting for over 50% of light vehicle became captive to special interests groups. fuel demand in the country.

Climate change: global market failure Low-carbon growth All of the above is fine and dandy. Now enter If we accept the premise that the transition to climate change as the real game changer: as a resource-efficient, low-carbon growth tra- the “defining trend of our time” in the words jectory is imperative, and that industrial of the UN Secretary-General; as the “greatest policy has a key role to play, then what are the market failure the world has ever seen” in the implications? eyes of Sir Nicholas Stern. Remember politi- First and foremost, we need to start from cal economy 1.01? Isn’t market failure one of the premise that multiple objectives govern the fundamental justifications for policy in- any industrial policy. Policy formulation and terventions – unless, of course, the risk of implementation is always embedded in a po-

18 MakingIt litical and social context from which it derives adaptation strategies will often be more press- its legitimacy. While considerations of climate ing than mitigation needs, and energy access change and resource efficiency are crucial, goals are likely to be more urgent than energy other objectives have to be factored in as well. efficiency considerations. But the same argu- These range from poverty reduction to food ment cannot be applied to middle-income and energy security, to job creation, reduction countries. Here, energy efficiency gains in es- of regional and income inequalities, stimula- Wood/istock Image: Andrew tablished industries (specifically heavy indus- tion of growth and productivity, encourage- tries like steel, chemicals and the like) need to ment of innovation and entrepreneurship, etc. receive priority, and are widely considered to Thus, it is critically important to direct re- be low-hanging fruits. Yet these fruits still search efforts towards exploring the relation- seem to require inputs in terms of informa- ship between these different objectives. What tion, awareness, and incentives, in order to ac- are the complementarities and what are the tually get picked. trade-offs, for example, between energy effi- Finally, there are general and cross-cutting ciency, productivity and cost effectiveness; be- challenges, such as the greening of trade (i.e., tween pushing renewable sources of energy the reduction of the carbon footprint of entire and broadening access to energy; between value chains) and, in particular, the promotion adaptation measures, patterns of industrial lo- of technology transfer through a variety of cation, and regional disparities; and between mechanisms ranging from FDI to official de- CO2 mitigation action and industrial prof- velopment assistance and the Clean Develop- itability? Unless a firm foundation is created ment Mechanism. State-of-the-art green for evidence-based policy decisions, uncer- technologies tend to be high-tech and costly. tainty and speculation will prevail. Who is going to pay for the transfer of propri- Secondly, the conventional focus of indus- etary technology? Unless an international so- trial policy on promoting priority sub-sectors lution for the funding challenge is found, many (be it textiles, food processing or electronics) developing countries wanting “to go green” may need to be revisited and subsumed under may face a genuine dilemma. Hence, there is a an orientation towards resource-efficient strong case for global action, and some degree technologies across the entire spectrum of of international policy coordination. sectors. This would, among other things, call for enhanced benchmarking efforts, an align- The high road ment of research and development incentives Industrial policy has always been faced with and innovation systems with the need to the perils of uncertainty, and with the need to reduce climate impacts, and access for enter- make assessments and judgments that try to prises to financial instruments, including ven- anticipate and shape desired future scenarios. ture capital, for the funding of However, with the new dimension added by a environmentally-friendly investment. global context of climate change and resource Thirdly, investment promotion ap- scarcity, the genuine risk of a global catastro- proaches will have to be revisited. Foreign phe “makes the most powerful case for strong direct investment (FDI) is the key transmitter climate policy”, as recently stressed by Paul of new technologies in many developing Krugman in the New York Times. While indus- countries. To a large extent, FDI inflows de- try is part of the problem (accounting for 36% termine the future technology scenario, the of CO2 emissions), it also offers great oppor- pattern of industrial production and linkages, tunities. There will be no solution without de- as well as learning effects for domestic busi- veloping and diffusing new industrial ness. By applying the right policy instruments, technologies that consume fewer resources, investments could increasingly be geared to- reduce carbon emissions, abate pollution, and wards resource efficient technologies. In this reuse and recycle the waste generated. context, industrial zoning approaches target- “Unless an international Establishing the framework for allowing ing green and clean investors (aimed at this to happen, encouraging responsible pro- demonstration and spill-over effects for local solution for the technology duction and consumption, and ultimately businesses) or, conversely, targeting polluting transfer funding challenge defining a sustainable path to prosperity, are industries (to allow economies of pollution the challenges to which industrial policy abatement), could assume particular impor- is found, many developing today must rise. The gradual decoupling of tance. economic growth from environmental degra- Fourthly, it should be acknowledged that countries wanting ‘to go dation and resource depletion defines the different groups of countries face distinct green’ may face a genuine high road to industrialization that countries challenges, and that policy priorities should should strive for – both to save our planet, and reflect this fact. In Least Developed Countries, dilemma.” to define new frontiers of competitiveness. n

MakingIt 19 JAYATI GHOSH believes that state involvement in economic activity is now imperative, and that such involvement must be more democratic and accountable. Politicizing economic policy

There are several reasons why we urgently and education. Ensuring universal provision need to think seriously about appropriate in- of these things will inevitably require greater dustrial policies. There are of course the old per capita use of natural resources and more (or continuing) reasons: that the development carbon-emitting production. So, both sus- project cannot really proceed without some tainability and equity require a reduction of form of explicit or implicit industrial policy; the excessive resource use of the rich, espe- that static and dynamic economies of scale cially in developed countries, but also among mean that ‘late industrializers’ need to plan the elites in the developing world, in order to methods of achieving competitive scales in adjust for the necessarily greater resource use particular activities if they are to survive; and of the world’s poor. that market-driven investments in a context of economic inequality will simply not gen- Resource consumption erate the required scales of production with- This means that redistributive fiscal and other out some form of intervention. economic policies must be specially oriented to- But there are also newer, and possibly now wards reducing inequalities of resource con- vatized urban transport, involving many pri- more pressing reasons for industrial policy. sumption, globally and nationally. For example, vate vehicles and congested roads, actually These emerge from structural tendencies (in countries’ essential social and developmental generates more GDP than a safe, efficient, and particular the more basic forms of market failure expenditure can be financed by taxes that pe- affordable system of public transport that re- that relate to human interaction with the natu- nalize resource-wasteful expenditure. duces vehicular congestion and provides a ral environment), as well as conjunctural ones Some of the shift can certainly be met pleasant living and working environment. (the fact that countercyclical fiscal policy has per- through “cleaner, greener technologies” of force increased the role of government spending production, and this clearly requires proac- Strategic thinking in both mature and developing economies). tive industrial policies to promote such tech- Obviously, the shift cannot be left to market What we can now recognize as unsustain- nologies. But it also requires new patterns of forces, since the international demonstration able patterns of production and consumption demand, since it is no longer good enough to effect and the power of advertising will con- are deeply entrenched in the richer countries, talk about newer forms of production that are tinue to create undesirable consumer de- and are aspired to in developing countries. based on the older pattern of consumption. mands, and unsustainable consumption and But many millions of citizens of the develop- Instead, we must think creatively about such production. But public intervention in the ing world still have poor or inadequate access consumption itself, and work out which market cannot be confined to knee-jerk re- to the most basic conditions of decent life, goods and services are more necessary and de- sponses to constantly changing short-term such as the minimum physical infrastructure, sirable for our societies. conditions. Instead, planning – not in the including electricity, transport and commu- This is why the present focus on develop- sense of the detailed planning that destroyed nication links, sanitation, health, nutrition, ing new means of measuring genuine the reputation of command regimes but progress, well-being, and quality of life are so strategic thinking about the social require- JAYATI GHOSH is professor of Economics at important. Quantitative Gross Domestic Prod- ments and goals for the future – is absolutely Jawaharlal Nehru University, New Delhi, and the uct (GDP) growth targets, that still dominate essential. Fiscal and monetary policies, as well executive secretary of International Development the thinking of regional policymakers, are not as other forms of intervention, will have to be Economics Associates (IDEAS). She is a regular simply distracting from these more important used to redirect consumption and production columnist for several Indian journals and newspapers, and a member of the National Knowledge goals, but can even be counterproductive. For towards these social goals, to bring about such Commission advising the Prime Minister of India. example, a chaotic and polluting system of pri- shifts in socially created aspirations and ma-

20 MakingIt “How can industrial policy – and macroeconomic policy in general – be truly democratized?” Image: Csuka László/istock elected bodies – not extra-national and un- accountable bodies like the Bretton Woods Institutions and multinational companies – should decide the nature of economic strategy. Balancing the needs and interests of different regions and strata of society would also ensure that the creation of well-paid and productive employment would have priority over GDP growth for its own sake. Third, non-state actors who exercise inor- dinate influence over state policies and receive disproportionate benefits from states – such as large corporations or big financial players – need to be brought into the realm terial wants, and to reorganize economic life nomic policy in general – be truly democra- of public accountability much more explic- to be less rapacious and more sustainable. tized? Obviously, the methods and mecha- itly. As the examples of the gas leak in Bhopal, Since state involvement in economic activ- nisms will differ across economies and India, more than two decades ago, and this ity is now an imperative, we should be think- societies. But some general principles can year’s Gulf of Mexico oil spill suggest, this ing of ways to make such involvement more be listed. should certainly include attributing respon- democratic and accountable within our coun- First, the notion that economic policies sibility for environmental damage. But it tries and internationally. Large amounts of belong to some technocratic realm that is should also mean that corporations which republic money are being used and (despite the above politics needs to be dispensed with. ceive implicit and explicit subsidies must current talk about exiting from stimulus pack- Since economic policies are also about function in what is seen as the broader social ages) will continue to be used for financial income and asset distribution, they are also interest in terms of preventing excessive bailouts and to provide fiscal stimuli in the necessarily about politics, and this has to be volatility, focusing on social goals like regional near future. How this is done will have huge recognized, with all the implications of par- balance and job creation, ensuring quality for implications for distribution, access to re- ticular policies being fully spelt out. consumers, and so on. sources, and the living conditions of the or- Second, this means that the economic Finally, the economic goals of society dinary people whose taxes will be paying for policies of states have to be developed on a have to be broadened, moving away from it. So, it is essential that we design the global genuinely participatory basis, not in a cen- the fixation on income growth and profits, economic architecture to function more dem- tralized top-down fashion with some token to focusing on the generation of decent ocratically. And it is even more important that “consultation” with so-called “stakeholders”. employment; the improvement of living states across the world, when formulating and This is not a simplistic call for decentraliza- conditions rather than just the accumula- implementing economic policies, are more tion, which has become another ‘flavour of tion of material objects; the ensuring of open and responsive to the needs of the ma- the month’ with international donors. safety, security and a voice for all citizens; jority of their citizens. Rather, decentralization of public service de- and the encouragement of human creativ- livery to enable more control by citizens ity. Simply put therefore, the new industrial Democratizing policy needs to be combined with a more nuanced policy is no longer just about industry, and How is this to be achieved? In other words, and complex form of central control over instead will have to be all about generating how can industrial policy – and macroeco- critical macroeconomic decisions. Nationally human freedom. n

MakingIt 21 22 MakingIt Towards a more productive debate

With the discrediting of orthodox policies, and the exposure of the double standards of the rich countries, industrial policy is no longer taboo. HA-JOON CHANG argues for an acceptance that industrial policy can work, at least some of the time, and for ‘outside of the box’ thinking on how to make it work better.

HA-JOON CHANG teaches economics at the University of Cambridge, UK. He is the author of several influential policy books, including Kicking Away the Ladder: Development Strategy in Historical Perspective, and has served as a consultant to the World Bank, the Asian Development Bank, and the European Investment Bank, as well as to Oxfam. He was awarded the 2005 Leontief Prize for Advancing the Frontiers of Economic Thought.

MakingIt 23 For the last three decades, industrial policy – or, more precisely, selective “As Lord Peter Mandelson industrial policy, where the government intervenes in a way that discrim- inates between industrial sectors – has been off the mainstream policy quipped, there needs to agenda. In the English-speaking developed world where neo-liberalism originated, industrial policy came to be denounced as ‘picking losers’ in be more ‘real a misguided attempt to ‘pick winners’. With the intellectual and political shift towards neo-liberalism at the World Bank and the IMF, structural adjustment programmes (SAPs) dismantled existing industrial policies engineering’ and less through trade liberalization, privatization, and deregulation of domestic business activities and foreign direct investment – or what are commonly ‘financial engineering’, known as the Washington Consensus policies. The rise of Japan and other East Asian economies forced a debate on industrial policy between the late- recognizing that selective 1980s and the mid-1990s, but even then it was dismissed as something that worked only because of the unique political and cultural conditions of the East Asian countries, such as an exceptionally capable bureaucracy. When industrial policy has an the East Asian economies got into trouble, with the bursting of Japanese financial bubble in the mid-1990s and the Asian financial crisis in 1997, important role to play” industrial policy was blamed as one of the key causes of their economic problems, and declared defunct. However, the continued economic problems in developing and transition economies that had faithfully implemented orthodox policies – rising income inequality, repeated financial crises, and, above all, a slowdown (or sometimes a collapse) in growth – badly dented the reputation of the Washington Consensus. By the early 2000s, even the main proponents of the Washington Consensus started modifying their positions, even though they fell short of changing anything fundamental. Some others have talked of a post-Washington Consensus, although there is no consensus on what the term exactly means. Even in this retreat of the free-market orthodoxy, the rejection of selective industrial policy – and all the policy measures that go with it, such as tariff protection, subsidies, regulation on foreign investment, state own- ership of industrial and financial firms – continued. Many who were critical of free-market orthodoxy drew the line at selective industrial policy, and argued that, while there is a case for industrial policy, it should be of ‘general’ kind that does not discriminate across sectors – education, training, infrastructure, etc. Selective industrial policy, for many, still remained ‘beyond the pale’. However, the tide may be finally turning. The 2008 global financial crisis has exposed the limits of the free-market orthodoxy even further. Up until then, many people had assumed that orthodox policies worked in the rich countries, especially the Anglo-American ones where they originated. The problem, the critics argued, was that these policies had been imposed on developing countries where they are not suitable. But the 2008 crisis has shown that these policies are not suitable for the rich countries either. With the crisis blowing up in the United States, the United Kingdom, and the smaller economies that had most aggressively pursued neo-liberal strategy based on financial deregulation (Ireland, Iceland, Dubai, Latvia, etc.), there is a shift in opinion. As the former British business secretary, Lord Peter Mandelson, quipped, there needs to be more “real engineering” and less “financial engineering”, recognizing that selective industrial policy has an important role to play in the process. At the same time, the government bail-out of GM and Chrysler in the USA, and the subsidies provided to the automobile and other industries by the governments of other developed countries, has exposed the double standards that these countries had applied in advising developing countries not to use active industrial policy. Of course, it is too early to tell whether all of this – the discrediting of orthodox policies, and the exposure of the double standards of the rich countries – will lead to a revival of industrial policy. However, it is undeni-

24 MakingIt able that the terms of debate on industrial policy have changed. Industrial policy is not a taboo any more. There is an open acknowledgment, even among critics and sceptics, that the declaration of the demise of industrial policy may have been premature. People are increasingly accepting that at least some economies need to rebalance their economies away from the over-blown financial sector, and that this may require active industrial policy. With the exposure of the double standards of the rich countries, developing countries are going to have an easier time defending their industrial policy against criticisms by donor governments and the international financial institutions. This may also affect the evolution of the World Trade Organization and other elements of the world trading system.

Understanding industrial policy Industrial policy is such a contentious thing that people cannot even agree on its definition, but most of us would define it as “targeting”– or “selective industrial policy”. Industrial policy in this sense is usually associated with the East Asian economies (Japan, the Republic of Korea, Taiwan province of China, and Singapore) during their “miracle” years, between the 1950s and the 1980s. In the early days of the debate on industrial policy – in the late 1970s and the early 1980s – some denied its very existence on the ground that the East Asian countries did not spend much on subsidies. However, it was sub- sequently revealed that industrial policy in East Asia involved a lot more “Despite its free-market than handing out tariffs and subsidies to internationally uncompetitive, domestic-market-oriented industries. The range of policy tools deployed was very extensive, including: direct and indirect export subsidies; policies rhetoric, when it comes to to ensure scale economy; policies aimed at restricting “excessive competition”; regulation on technology imports; requirements imposed on for- R&D spending, the US eign direct investment; state provision and/or subsidizing of research and development (R&D) and worker training. government has been Moreover, industrial policy was not a practice confined to late-20th century East Asia. First, successful industrial policy experiences in the late 20th century more interventionist are also found in many European countries (national industrial policies in Austria, Finland, France, and Norway; regional industrial policies in Ger- than many of its many and Italy). Even in the case of the US, there was a lot of “hidden” industrial policy through federal R&D programmes. Despite its free-mar- competitor governments” ket rhetoric, when it came to R&D spending, the US government has been more interventionist than many of its competitor governments.. Through- out the post-World War II period, the government’s share of total funding in R&D in the US was 40-65%, compared to around 20% in Japan and Korea, and less than 40% in Belgium, Finland, Germany, and Sweden. It is notable that most of the industries where the US has an international technological lead are the industries that have been receiving major government R&D funding through military programmes (e.g., computers, semi-conductors, aircraft) and health projects (e.g., pharmaceuticals, biotechnology). Second, in the 19th and the early 20th centuries, when they were developing countries themselves, all of today’s rich countries practiced protectionism and deployed industrial policy through subsidies, public own- ership, regulation of foreign direct investments, and a deliberately lax intellectual property rights regime. For example, Britain and the US, countries that most people think invented free trade, were among the most pro- tectionist countries in the world during their respective catch-up periods (mid-18th to mid-19th century, and mid-19th to mid-20th century, respectively). France, Austria, Finland, Norway, Singapore, and Taiwan used state- owned enterprises extensively during the post-WWII period. The US, Japan, Korea, Taiwan, and Finland heavily regulated foreign direct investment when they were at the receiving end of it. The Netherlands and ‰

MakingIt 25 ‰ Switzerland, two countries that did practice (nearly) free trade, refused to introduce a patent law until 1912 and 1907 respectively (on the grounds that a patent, as an artificially-created monopoly, is incompatible with the principle of free trade) Third, contrary to the popular perception, developing countries did not do poorly when they more actively pursued industrial policy during the import substitution industrialization (ISI) period in the 1960s and the 1970s. In fact, during the period, they grew much faster than in the ‘age of imperialism’, when they were forced into free trade and laissez- faire industrial policy through colonial rule or ‘unequal treaties’ (which deprived them of their tariff autonomy). Under colonial rule or unequal “If industrial policy is so treaties, the economies of many developing countries contracted or at best grew at anaemic rates. Their growth performance in the ISI period bad, how is it that in every was also much better than that in the more recent period of neo-liberalism, when they used less industrial policy. For example, during the 1960s and the 1970s, per capita income in Latin America and Sub-Saha- era the fastest growing ran Africa grew at 3.1% and 1.6% per year respectively. These rates fell to 1.1% and 0.2% between 1980 and 2009. economies happen to be Individually, the above sets of evidence, as well as the evidence about the East Asian experience that we discussed earlier, do not prove any- those with a strong thing. However, taken together, they raise some difficult questions for the sceptics of industrial policy. If industrial policy was not confined to East Asia in the late-20th century, it becomes difficult to downplay its role industrial policy?” in East Asia by resorting to some region- and time-specific “counter- vailing forces”. Even if many countries that have used industrial policy did not succeed, the fact that few of today’s rich countries have become rich without industrial policy prompts us to ask whether a good industrial policy may be a necessary, although not sufficient, condition for economic development. Looking at all these sets of facts together, we are bound to wonder if industrial policy is so bad, how is it that in every era the fastest growing economies happen to be those with a strong industrial policy: Britain between the mid-18th and mid-19th centuries; the US, Germany, and Sweden between the late 19th and the early 20th centuries; East Asia, France, Finland, Norway, and Austria in the late 20th century; and China today.

How to do industrial policy better? While there is actually much stronger empirical evidence for industrial policy than most people think, the debate rages on, and probably never will be conclusively resolved. But the good thing is that we do not need some absolute “proof” of its merit, either way, in order to take the debate forward. As far as we can agree that industrial policy can work, at least some of the time, we can still have a productive debate on how to make it work better.

Targeting – selective v. general industrial policy Many argue that industrial policy should be of a “general” (or “functional”), rather than a “selective” (or “sectoral”) kind,that it should provide things like education, R&D, and infrastructure that benefit all industries equally, rather than trying to “pick winners”. One problem with this view is that in a world with scarce resources, there are no truly general industrial policies that affect every industry equally. R&D subsidies favour R&D-intensive industries; infrastructure investment is location-specific; and we cannot train engineers that are equally useful for all industries. Now, if targeting is inevitable, can we at least say that less targeted policies are better? Unfortunately not – targeting has its merits and problems. Indeed, in social policy many people think the more targeted a policy, the better it is. Instead of debating whether we should target, we should debate what the optimal degrees of targeting are for different types of policies.

26 MakingIt Can the state ‘beat the market’? One classic argument against industrial policy is that, given the limits to information and capabilities, the state cannot “beat the market”. However, there are quite a few examples in history where government officials made decisions that blatantly went against market signals, only to build some of the most successful businesses in history (e.g., the Japanese auto industry, the Korean steel-maker POSCO, and the Brazilian aerospace company Embraer). Moreover, in order to explain these success cases, we do not need to assume that government officials are omniscient, or even that they are clev- erer than capitalists. Many (although not all) of the “superior” decisions made by the state were made because the government officials could look at things from a national and long-term point of view, rather than from a sectional and short-term point of view. Instead of debating whether the state can beat the market, we should be debating how to improve the personnel and organizational conditions of good state decision-making.

Political economy Another set of objections to industrial policy may be described as “political economy” arguments where critics have rightly questioned the commitment of the political leadership to economic development, the coherence of the state machinery, and the ability of the state to discipline the recipients of its support. Political economy problems need to be taken seriously. However, we should not let the best be the enemy of the good. If we wait for the perfect “Instead of debating state to emerge, we will never get anything done. In the real world, successful countries are the ones that have managed to find “good enough” whether we should target, solutions to their political economy problems, and went on to implement policies. In order to take the debate forward, we have to discuss how prag- we should debate what matic improvements can be made to a country’s politics. We have to improve our understanding of issues like: how effective political visions can be formed and deployed to inspire various individu- the optimal degrees als and groups to act in a concerted manner; how to build nations and communities out of disparate groups that may even have a very long his- of targeting are for tory of mutual hostility and mistrust; how to work out social pacts and build lasting coalitions behind them; how to partially accept but improve different types of policies” the customs and organizational routines in the bureaucracy; and how to minimize socially-harmful lobbying and bribing, while maximizing the flows of information between the state and the private sector. In order to fully address these issues, we economists need to go beyond the usual boundaries and work with practitioners (politicians, government officials, businessmen) as well as academics from other fields (political science, soci- ology, anthropology, psychology, cultural studies).

Bureaucratic capabilities However willing and strong the state may be, and however “correct” its vision may be, policies are likely to fail if the government officials implementing them are not capable. Difficult decisions have to be made with limited information and fundamental uncertainty, often under political pressure from inside and outside the country. This requires decision-makers with intelligence and adequate knowledge. In this context, people have argued that “difficult” policies, like (selective) industrial policy, should not be tried by countries with limited bureaucratic capabilities. And it is for this reason that the World Bank’s East Asian Miracle report of 1993 recommended the South-east Asian countries (Thai- land, Malaysia, and Indonesia), where industrial policy was quite circum- scribed partly in recognition of the relatively low quality of their bureaucracies, as models of industrial policy for other developing countries. ‰

MakingIt 27 ‰ At the general level, I cannot dispute the proposition that we need capable bureaucrats in order to design and implement good policies. However, this sensible point is often exaggerated into the policy world equivalent of the “do not try this at home” warning that is shown on TV when dangerous stunts are performed. The first problem with this “do not try this at home” argument is that there is no basis for the assumption that industrial policy is more difficult than other policies. Second, another implicit assumption that industrial policy requires a sophisticated knowledge of economics is also unwar- ranted. The industrial policymakers of East Asia were not economists – they were lawyers in Japan and South Korea, and engineers in Taiwan and China – and until the 1970s what little economics they knew was usually of the “wrong” kind – Marx, the German Historical School, Schumpeter, you name it. Third, the “do not try this at home” argument assumes that high- quality bureaucracies are very difficult to build, and that the East Asian countries were exceptionally lucky to have inherited them from earlier eras. However, high-quality bureaucracy can be built pretty quickly, as shown by the examples of South Korea and Taiwan themselves. Fourth, there is also “learning-by-doing” in policy. Without “trying”, you will never master difficult policies. And lastly, the fact that something is “difficult” cannot be a reason not to recommend it. After all, developing countries are “We need capable routinely told to adopt “best practice” or “global standard” institutions used by the richest countries, even though many of them clearly do not bureaucrats in order to have the capabilities to effectively run such institutions. To be more productive, rather than bemoaning the lack of bureaucratic capabilities in developing countries, we need to have more debate on how to improve design and implement them. good policies. However, Performance measurement Especially when industrial policy is comprehensive, objective perform- this sensible point is often ances become difficult to measure, as virtually all prices are “distorted” and are also subject to manipulation. But rather than debating whether setting and enforcing effective performance targets is possible (as it certainly is), exaggerated into the policy we should concentrate on questions like: l what performance indicators should be used for which industries?; world equivalent of the lhow do we set credible performance targets without becoming too rigid about them?; ‘do not try this at home’ lhow does the government listen to the private sector without becoming beholden to it?; and warning that is shown on l how do we operate with a long, but not infinite, time horizon? Export-related industrial policy TV when dangerous Exports have critical roles to play in the conduct of industrial policy in developing countries. To put it bluntly, economic development is impos- stunts are performed” sible without good export performance. Economic development requires the importation of advanced technologies, which need to be paid for with foreign currencies, which in turn have to be acquired, mainly from exports. Now, saying that exports are the key to economic development is not to say that developing countries should adopt free trade. Export success requires significant industrial policy, even for comparative advantage-con- forming industries, as export markets have high fixed costs of entry, which smaller firms and farmers may not be able to bear. Direct export subsidies can offset the entry costs, but these are now banned by the WTO, except for the LDCs, so help should be provided through other channels. These may include state marketing help, risk-sharing schemes, initiatives to help small exporters to meet quality standards, and policies to help coopera- tives among exporters. In the longer run, if a country is to continue the momentum of its export success, it is not enough to rely on its comparative advantage-con-

28 MakingIt forming industries. Sooner or later it will have to upgrade its export industries into comparative advantage-defying industries, which requires even “The global business stronger industrial policy. We have to move away from the sterile debate on openness and growth, landscape can change and explore how free trade, export promotion (which is, of course, not free trade), and infant industry protection can be best integrated with each significantly, opening up other.

Changing global environment unexpected possibilities Many people argue that the recent changes in the global business environment (such as the rising importance of FDI and the increasing indus- of moving up and across trial concentration) and changes in global trade and investment rules have made it virtually impossible to implement industrial policy. global value chains for It is true that the range of industrial policy measures that developing countries can use has become considerably smaller, compared to the hey- day of industrial policy in the 1960s and the 1970s. However, there is still at least some developing room for manoeuvre for countries that are clever and determined enough. Moreover, especially in the context of the recent world financial crisis, the countries” global business landscape can change significantly, opening up unexpected possibilities of moving up and across global value chains for at least some developing countries. As for the global rules of trade and investment, it is not as if they are some unalterable laws of nature. They can be, and should be, changed, if they are found wanting. Of course, the policy space is in practice highly constrained by the conditions attached to bilateral and multilateral aid and loans, and bilateral and regional trade and investment agreements, which are more restrictive than the WTO. Having said that, I would argue that, as far as all these are man-made rules, we can change them, should we agree that they need changing.

Conclusion My main purpose here is to plead for “thinking outside the box”, and to find the common ground for people on both sides of the industrial policy debate. I believe that once the adversaries abandon theoretical grand- standing, and focus on more practical issues, there are vast and fertile middle grounds to explore.

MakingIt 29 With trade, technology, and talent becoming ever more global, and with national economies increasingly interlinked, DEBORAH WINCE-SMITH believes the world needs dynamic strategic partnerships to spur economic growth, development, and jobs. INTERNATIONAL COOPERATION IS VITAL FOR NATIONAL PROSPERITY In 1986, when US producers were losing their every place a potential workplace. Entrepre- have evolved into truly global enterprises. global market share to the Japanese, the then- neurs and small firms, once constrained by Twenty years ago, trade was mostly about CEO of Hewlett-Packard, John Young, created their size and resources, can now reach out goods that moved physically across national the US Council on Competitiveness to bring globally for employees and customers. borders. But, today, the geographic footprint together leaders from the private sector to de- of supply chains is global. For example, US velop and promote a national competitiveness Emerging economies companies increasingly develop products and agenda for the United States. The idea struck Another transformational shift is the rapid services, and serve customers through foreign a chord among US CEOs, university presi- advance of emerging economies. Just 20 years affiliates and foreign business ventures. In dents, and labour leaders, and next year the ago, China, India, and other emerging fact, sales from foreign affiliates of US com- Council’s 150 members will celebrate its 25th economies would have been relegated to companies are more than three times greater than anniversary. Over the span of a quarter cen- peting with commodity-based goods, slowly US exports of goods and services. We have to tury, the economic challenges facing the working their way up the ladder of economic ask ourselves, given this data, what does a United States have changed, as have the global development. That model has been shattered. trade deficit mean? economic players. In fact, the very nature of As a result, in just one generation, emerging what competition in the global marketplace economies’ shares of global imports, global Global labour force means has evolved. exports, and foreign direct investment have The final transformation is the growth of the Seismic shifts are radically reshaping the nearly doubled. global labour force. As billions of people in competitive landscape. Anyone with an But the issue is not just that emerging emerging economies entered global com- iPhone or Blackberry, or anyone who uses the economies are growing – it’s how they are merce, the effective global labour supply Internet, knows that the digital revolution has growing. Innovation’s pivotal role in national quadrupled between 1980 and 2005, with most been an epic force of change. It has fuelled an wealth creation, and a rising standard of of the increase occurring after 1990. Legions unprecedented integration of the world’s na- living, have prompted many nations to adopt of educated and skilled people in emerging tional economies. The incredible proliferation innovation-based growth strategies similar to economies are competing to perform the of advanced telecommunications means that that of the United States. Governments world’s work. The practical effects of this knowledge, information, capital, and techno- around the world are boosting public spend- trend: every day it is easier to ship work logical know-how flow across national borders ing on research and development (R&D), around the globe in bits and bytes. at the speed of light. Wireless devices make building research parks and centres of inno- As a result, companies outsource an ever- vation, and ramping up the production of sci- widening array of work – from software de- entists and engineers. velopment to accounting to research. If work DEBORAH WINCE-SMITH is president and CEO of the Another fundamental shift has been in in- is routine, rule-based, and if it can be digi- US Council on Competitiveness ternational trade, as multinational companies tized, there is a low-cost source of labour

30 MakingIt 35% 36%

30% Emerging economies’ share of the global total

25% 23% 20% 20% 19% 18% 18%

15% 12% 10% 10% 10%

5% 1986 2005 1986 2005 1986 2005 1986 2005 1986 2005 0% Gross Domestic Exports Imports Energy Foreign Direct Product Consumption Investment Inflows somewhere in the world to compete for that tices between competitiveness councils to Policy initiatives work and those jobs. promote national competitiveness, and in In 2010, the GFCC will pursue two ground- While the impact of these transformations turn promote global economic growth. breaking policy initiatives – the development is global, every country is seeking to identify l Identifying emerging challenges and ob- of a set of global competitiveness principles, policies that will serve its national interest and stacles that jeopardize national competitive- and a review of current competitiveness met- support national prosperity. But, because of ness, global growth, and prosperity through rics used in national rankings. Modelled on the the global nature of trade, technology, and the collaboration of leaders from competi- global “Call to Action” released at last year’s talent, and because the world’s economies are tiveness councils around the world. Council on Competitiveness National Energy ever more linked to each other, these polices l Establishing a model of global cooperation Security, Innovation and Sustainability Summit cannot be enacted in a vacuum. on competitiveness that supports national and International Dialogue, the competitive- Since the US Council convened the first prosperity based on innovation, and sustain- ness principles will be a valuable tool in in- meeting of the Global Federation of Compet- able economic growth and development. creasing global understanding of factors that itiveness Councils (GFCC) in Washington, affect national competitiveness in a global D.C. in September 2009, tremendous progress economy. has been made toward developing a greater Spearheaded by the Presidential Council on understanding of global business and com- National Competitiveness from the Republic of petitiveness issues. The GFCC has eight Korea, the initiative to review the current slate founding members: Brazil, Chile, Egypt, India, of competitiveness metrics builds on a discus- the Republic of Korea, Saudi Arabia, the sion started at the September 2009 meeting of United Arab Emirates and the United States, the GFCC. At that meeting, participants ques- who have pledged time and resources to en- tioned if the right metrics were in use, and what suring a strong foundation for the new or- new metrics should be considered to ade- ganization. “Entrepreneurs and small quately evaluate a country’s competitiveness. The basic goals of the GFCC include: firms, once constrained by Around the world, there is growing conver- l Creating an ongoing dialogue between gence in national interests that are affected by leaders from competitiveness councils around their size and resources, global economic conditions. The growing in- the world who are committed to their na- terdependence among nations offers a golden tional prosperity and the prosperity of the can now reach out opportunity to move beyond static engagement world. globally for employees to dynamic global strategic partnerships that l Establishing a global forum for the ex- will spur economic growth, development, and change of information, ideas, and best prac- and customers.” jobs. n

MakingIt 31 If 1989 saw the end of the “Second World” tion; demographics; and fragile and post-con- ing different perspectives and circumstances, with Communism’s demise, then 2009 saw flict states. so as to build mutual interests. the end of what was known as the “Third It is no longer possible to solve big inter- Take financial reform: of course we need World”: We are now in a new, fast, evolving national issues without developing country better financial regulation. But beware unin- multi-polar world economy – where North buy-in. But in discovering a new forum in the tended consequences like financial protec- and South, East and West, are points on a G-20, we can’t impose a new, inflexible hier- tionism. Regulations agreed in Brussels, compass, not economic destinies. archy. Nor can we address this changing world London, Paris or Washington might work for Poverty remains and must be addressed. through the prism of the old G-7; developed big banks, but could choke off economic op- Failed states remain and must be addressed. country interests, even if well-intentioned, portunity and growth in developing countries. Global challenges are intensifying and must cannot represent the perspective of the Wall Street has exposed the dangers of finan- be addressed. But the manner in which we emerging economies. cial recklessness, and we need to take heed must address these issues is shifting. The out- and serious actions. But financial innovation, dated categorizations of First and Third Power and responsibility when used and supervised prudently, has Worlds, donor and supplicant, leader and led, But modernizing multilateralism isn’t all brought efficiency gains and protected against no longer fit. about developed countries learning to adapt risk, including for development. A G-7 pop- Today, we already see the strains in multi- to the needs of rising powers. With power ulist prism can undercut opportunities for lateralism. The Doha Round of world trade comes responsibility. Developing countries billions. negotiations and the climate change talks in need to recognize that they are now part of the Take climate change: it can be linked to de- Copenhagen revealed how hard it will be to global architecture and have an interest in velopment and win support from developing share mutual benefits and responsibilities be- healthy multilateralism. countries for low carbon growth – but not if it tween developed and developing countries. We cannot afford geopolitics as usual. A is imposed as a straitjacket. Developing coun- And this will be the case for a host of other ‘New Geopolitics of Multi-polar Economy’ tries need support and finance to invest in looming challenges: water; diseases; migra- needs to share responsibility while recogniz- cleaner growth paths. Some 1.6 billion people

No more geopolitics as usual. ROBERT ZOELLICK, President of the World Bank Group, sees decisions and sources of influence flowing around, through, and beyond governments. Photo: World Bank World Photo: Modernizing multilateralism for a multi-polar world

32 MakingIt lack access to electricity. While we must take to focus on productive investments in infra- Modern multilateralism care of the environment, we cannot consign structure and early childhood development. In the new multi-polar global economy, most African children to homework by candlelight They want to free markets to create jobs, governmental authority will still reside with or deny African workers manufacturing jobs. higher productivity, and growth. nation-states. But many decisions and sources The challenge is to support transitions to This new world requires multilateral in- of influence flow around, through, and cleaner energy without sacrificing access, pro- stitutions that are fast, flexible, and account- beyond governments. Modern multilateral- ductivity, and growth that can pull hundreds able, that can give voice to the voiceless with ism must bring in new players, build cooper- of millions out of poverty. resources at the ready. The World Bank ation among actors old and new, and harness Group must reform to help play this role. global and regional institutions to help ad- Developing country perspectives And it must do so continually at an ever dress threats and seize opportunities that sur- Take crisis response: in a world in transition, quicker pace. This is why we have launched pass the capacities of individual states. the danger is that developed countries focus the most comprehensive reforms in the in- Modern multilateralism will not be a hi- on summits for financial systems, or concen- stitution’s history, including boosting de- erarchical system but look more like the trate on the mismanagement of developed veloping country voting rights and global sprawl of the Internet, interconnect- countries such as Greece. Developing coun- representation. Yet problems need resources ing more and more countries, companies, in- tries need summits for the poor. Hearing the to fix them. The World Bank needs more re- dividuals, and NGOs through a flexible developing country perspective is no longer sources to support renewed growth, and to network. Legitimate and effective multilat- just a matter of charity or solidarity: it is self- make a modernized multilateralism work in eral institutions, such as the World Bank interest. These developing countries are now this new multi-polar world economy. Group, can form an interconnecting tissue, sources of growth and importers of capital Should the recovery falter, we would have to reaching across the skeletal architecture of goods and developed countries’ services. De- stand on the sidelines. This is why the World this dynamic, multi-polar system. We must veloping countries do not just want to discuss Bank is seeking its first capital increase in support the rise of multiple poles of growth high debt in developed countries; they want more than 20 years. that can benefit all. n Image: Feng Yu/istock MakingIt 33 COUNTRY FEATURE

China

34 MakingIt Image: Alex Nikada/istock China’s stunning economic rise In just three decades since initiating the shifted emphasis from agriculture to light reform and opening-up policy, China has industry and export-led growth. achieved tremendous economic success. Gross The development of the light industrial Domestic Product growth of about 10% per manufacturing sector proved vital for a annum since the late 1970s has helped to lift developing country working with relatively several hundred million people out of absolute little capital. The revenues that this sector poverty. China alone accounts for over 75% of generated were reinvested in more poverty reduction in the developing world over technologically-advanced production and the last 20 years. further capital expenditures and investments. The rise of what is now the world’s third- China’s economic boom has been based on largest economy can be traced back to the late very high levels of investment and, in recent 1970s, when the country’s leadership adopted years, on soaring export growth. China’s entry economic reform policies designed to expand into the World Trade Organization in 2001 rural income and incentives, encourage served as a catalyst for a contraction of the experiments in enterprise autonomy, reduce state-owned sector, a surge in foreign central planning, and attract foreign direct investment, and explosive growth in private- investment. The strategy for achieving these sector activity. Today, the country is one of the aims was dubbed “socialism with Chinese world’s top exporters, and is attracting record characteristics”. amounts of foreign investment. In turn, it is At the local level, peasant farmers were investing billions of dollars abroad. allowed to earn extra income by selling the As a member of the World Trade produce of their private plots on the free Organization, China benefits from access to market. Nationally, the main move towards a foreign markets and agrees to expose itself to market economy saw local municipalities and competition from abroad. Relations with provinces allowed to invest in industries that trading partners have been strained over Shanghai: showpiece of they considered most profitable, which China’s huge trade surplus, and this has led to the world’s fastest- encouraged investment in light demands for Beijing to raise the value of its growing major economy. manufacturing. China’s development strategy currency, which would make Chinese goods ‰

MakingIt 35 COUNTRY Interview with His Excellency CHEN DEMING, Minister of FEATURE Commerce of the People’s Republic of China Going global China in great strides ‰ more expensive for foreign buyers. China has achieved an impressive economic will further improve, while China and the rest In the early 1990s, China’s manufacturing performance over the last three decades. of the world will see more win-win and all- industry was largely characterized by the What in your view have been the keys to this win outcomes. China will not close its door assembly-driven production of low- success? simply for the reason of protectionism, and it technology goods, but this is no longer the The key to China’s huge economic success is will remain one of the most attractive desti- case. Industrial policy has shifted from its firm commitment to socialism with Chi- nations for investors. developing labour-intensive industries during nese characteristics, and to the policy of the first two decades of reform, when China’s ‘reform and opening-up’ to the outside world. How has China tackled the global economic competitiveness in labour-intensive export- The socialist market economy has taken root crisis and recession? oriented manufacturing was at a peak, to in China, with non-public sectors now con- Faced with the great challenges brought on by capital-intensive, high-tech industries. tributing to around 60% of China’s GDP and the most severe crisis since the Second World Although sectors such as textiles still over 70% of urban and township job cre- War, the Chinese government has promptly contribute a large share of manufacturing ation[…]. From establishing special economic reoriented its macroeconomic policy, set as its output, a greater proportion of value added zones to opening up coastal, border, and primary task the maintenance of steady and output is now derived from electronic goods, inland areas; from bringing in, on a large speedy economic growth, and focused on many of which are relatively advanced. China scale, capital, technology, and talent, to going boosting domestic demand. A proactive fiscal is now an important, and, in some cases, global in great strides, all along China has policy and a moderately easy monetary policy world-leading, producer in industries such as kept to the strategy of opening-up. The steady have been pursued in order to step up invest- mobile phones, integrated circuits, and advancement of reforms has greatly enhanced ment for growth, stimulate consumption for automobiles. productivity, laid down an ever-improving in- people’s well-being, and boost employment to The fast-growing economy has fuelled stitutional framework for opening-up, and ef- create stability. demand for energy. China is the largest oil fectively promoted the development of an A package of countermeasures against the consumer after the United States, and the outward-looking economy[…]. crisis has been implemented: world’s biggest producer and consumer of By effectively utilizing both domestic and First, in order to boost domestic demand, coal. This over-reliance on imported oil and international markets and resources, actively fiscal spending has been increased to encour- coal, and the environmental consequences of taking part in the international division of age non-public investment. An investment the massive increase in fossil-fuel use, have labour, and by strengthening Intellectual scheme was introduced over two years, and prompted a government shift in favour of Property Rights protection and encouraging was worth 4 trillion renminbi (Rmb), or 14% of clean energy. According to Bloomberg New innovation, China’s competitiveness has been China’s GDP in 2008. Structural tax cuts Energy Finance estimates, China spent considerably enhanced. amounting to Rmb550bn. have been carried US$34.6bn. on clean-fuel projects in 2009, Take, for example, industrial development out to enhance investment and consumption. almost double the amount invested by the US. driven by the process of opening-up: the share Commerce is being invigorated and house- Feed-in tariffs for wind power were brought in of the value added of China’s manufacturing hold consumption stimulated through a last year, and the government has also sector as a percentage of the world total in- number of measures, such as providing fiscal introduced incentives for power companies to creased from less than 1.5% in 1980 to 14% in subsidies for the replacement of used cars and install solar panels. 2007. By 2008, China had become the biggest household appliances with new ones, and the China aims to produce renewable energy producer of 172 categories of manufactured promotion of cars, household appliances, equivalent to about 700 million metric tons of products, yielding over US$1 trillion in man- agricultural machinery, amongst other things, coal, or 15% of its power, by 2020. The ufacturing value added, and was ranked as the in the countryside. government wants to cut carbon emissions world’s second biggest exporter of manufac- Second, in order to stabilize the financial per unit of gross domestic product by as much tured goods. market, the interest rate has been brought down as 45% of 2005 levels by 2020, and the Reform and opening-up is a basic state five times in a row, resulting in the release of country’s first commercial carbon capture and policy that China must maintain in the long around Rmb800bn. of liquidity, and more fi- storage plant is expected to be operational by run. Through reform and opening-up, nancial support has been provided to agricul- the end of the year. n China’s trade and investment environment ture and small and medium-sized enterprises.

36 MakingIt Third, in order to revitalize industry, plans have been formulated for ten key industries, including automobiles and iron and steel, with a view to promoting industrial restruc- turing and upgrading. Fourth, in order to stimulate technological innovation, a National Programme for Medium and Long-Term Scientific and Tech- nological Development has been implemented, with a special emphasis on 16 major projects, including core electronic devices, the development and use of nuclear energy, and advanced numerically-controlled machine tools. The development of emerging industries such as new energy and environmental protection has been pushed forward. Fifth, in order to ensure people’s well- being, Rmb850bn. will be invested in the reform of the medical and health care system over three years; a rural medical insurance programme has been introduced on a pilot basis, covering 90 million people; and support “The Chinese government is ready to strengthen is being provided to the employment of col- lege graduates and migrant rural workers. cooperation and to share the experience and As well as expanding domestic demand, the Chinese government has also been stabi- opportunities of development with other countries...” lizing demand in external markets by keeping the value of the Rmb stable and by tlenecks constraining China’s sound eco- perfection of the social security system cover- enhancing trade facilitation. nomic development, boost the economy’s en- ing both urban and rural areas will be accel- In 2009, the preliminary effects of these dogenous dynamism and sustainability, and erated, investment in social services for public policies – GDP grew by 8.7%, fiscal revenues realize an all-round, balanced, and sustainable welfare increased, and the social safety net im- by 11.7%, and 11.2 million new jobs were cre- development. proved. ated in urban areas – indicate that China’s Firstly, we need to expedite industrial re- Fourthly, we need to continue to open economy is turning for the better and con- structuring. Vigorous efforts will be made to more widely to the outside world. Efforts will tributing greatly to the recovery of the world advance the technological upgrading of tradi- be made to steadily develop foreign trade. The economy. tional industries, and to encourage enter- export mix will be optimized, imports in- prises to use new technology, new techniques, creased, and the processing trade transformed In terms of future economic development, and new equipment. New economic growth, and upgraded. The guideline to utilize foreign what are the challenges and difficulties facing focusing on strategic, emerging industries, direct investment (FDI) will be adhered to, and China, and how will they be addressed? will be fostered. Industrial systems featuring the structure of FDI utilization optimized. Although China is among the first countries low carbon emissions will be built as part of FDI will be encouraged to play a bigger role in in the world to make a rebound, there are still the effort to conserve energy and reduce emis- building the economy. The implementation many deep-rooted problems. They are mainly sions. The development of the services sector, of the “going global” strategy will be acceler- as follows: household income only takes a especially the services for enterprises’ pro- ated, and enterprises will be encouraged to small share of national income and con- duction and people’s daily life, will be accel- conduct international economic cooperation. sumers lack the impetus to spend; some in- erated in a bid to fully leverage the sector’s Multilateral and bilateral economic and trade dustries have excessive capacity, use too much role in job creation. ties will be deepened for mutual benefit, win- energy resources, and seriously damage the Secondly, we need to drum up household win opportunities, and shared development ecological environment; the level of urban- consumption. Efforts to adjust national with other countries. ization remains low, and the rural economy is income distribution will be beefed up to in- To conclude, I want to emphasize that ac- vulnerable; and the development of social un- crease the remuneration of urban and rural celerating the transformation of the economic dertakings is slow, with insufficient input in workers, enhance people’s consumption growth pattern is a profound revolution, health care, education, housing, and social ad- power, and make the most of the role of con- which needs to be explored and advanced in ministration. sumption in guiding production. practice. The Chinese government is ready to The key to addressing these challenges and Thirdly, we need to pay more attention to strengthen cooperation and to share the ex- difficulties, and maintaining steady, rapid eco- livelihood-related undertakings. A more perience and opportunities of development nomic development, lies in the transforma- proactive employment policy will be imple- with other countries, so as to make a greater tion of the economic growth pattern. This will mented to create more jobs and expand em- contribution to the stability and prosperity of help ease the systematic and structural bot- ployment in every possible way. The the world. n

MakingIt 37 Conventional approaches failed to deliver rapid growth and economic stability. JOMO KWAME SUNDARAM believes that governments need to play a developmental role. Rethinking poverty reduction

Last year, the United Nations Food and Agri- than 100 million people fell into poverty as a culture Organization announced that the result of higher food prices during 2007-2008, number of hungry people in the world in- and that the global financial and economic creased over the last decade. In 2008, the crisis of 2008-2009 accounted for an increase World Bank announced a significant decline of another 200 million. Delayed job recovery in the number of poor people up to the year from the global downturn remains a major 2005. But if poverty is defined principally in challenge for poverty reduction in the coming terms of the money income needed to avoid years. hunger, how can announcements such as Meanwhile, measurement controversies these be reconciled? continue to cast doubt on actual progress. According to the World Bank’s much cited With the 1995 Social Summit adopting a wider “dollar-a-day” international poverty line, definition of poverty that includes depriva- which was revised in 2008 to US$1.25 a day in tion, social exclusion, and lack of participa- 2005 prices, there are still 1.4 billion people tion, the situation today may be even worse living in poverty, down from 1.9 billion in than suggested by a money-income poverty 1981. However, as China has accounted for line. most of this decline, there were at least 100 Inequality appears to have been on the rise million more people living in poverty outside in recent decades at the international level China in 2005 than in 1981. and in most countries. More than 80% of the In sub-Saharan Africa and parts of Asia, world’s population lives in countries where poverty and hunger remain stubbornly high. income differentials are widening. The poor- $$$$$$$$$$$ International agencies estimate that more est 40% of the world’s population account for

“The poorest

40% of the world’s JOMO KWAME SUNDARAM is United population account Nations Assistant- Secretary-General for for only 5% Economic Development. of world income”

38 MakingIt only 5% of world income, while the richest have enough policy and fiscal space to enable 20% account for 75%. them to play a proactive role and to provide The mixed record of poverty reduction calls adequate universal social protection. into question the efficacy of conventional ap- The last three decades also saw the divorce proaches. Countries were advised to abandon of social policies from overall development their national development strategies in favour strategies as a consequence of the drive for of globalization, market liberalization, and pri- smaller government. National economic de- vatization. Instead of producing sustained velopment strategies were replaced with rapid growth and economic stability, such donor-favored poverty-reduction programmes, policies made countries more vulnerable to such as land-titling, microcredit, and “bottom the power of the rich and the vagaries of in- of the pyramid” marketing to the poor. ternational finance and global instability, Such fads have not succeeded in signifi- which has become more frequent and severe cantly reducing poverty. This is not to deny due to deregulation. some positive consequences. For example, The most important lesson is the need for microcredit has empowered millions of sustained rapid growth and structural eco- women, while important lessons have been nomic transformation. Governments need to learnt from the design and implementation of play a developmental role, with implementa- such schemes. tion of integrated policies designed to sup- Meanwhile, universal social programmes port inclusive output and employment have improved human welfare much more than growth, as well as to reduce inequality and targeted and conditional programmes. How- promote social justice. ever, conditional cash-transfer programmes Such an approach needs to be comple- have been quite successful in improving vari- $$$$$$$$$$$$$$ mented by appropriate industrial investment ous human-development indicators. and technology policies, and by inclusive fi- Unfortunately, poverty remains endemic, $$$$$$$$$$$$$$ nancial facilities designed to support them. In with more than a billion people going hungry addition, new and potentially viable produc- every day. Urgent action is needed, as the $$$$$$$$$$$$$$ tion capacities need to be fostered through recent financial and economic crisis, follow- complementary developmental policies. ing hard on the heels of the food-price crisis, $$$$$$$$$$$$$$ By contrast, the insistence on minimal is believed to have set back progress on poverty government and reliance on the market led to reduction even further. There are also grow- precipitous declines in public infrastructure ing fears that climate change will more ad- $$$$$$$$$$$$$$ investment, particularly in agriculture. This versely threaten the lives of the poor. not only impaired long-term growth, but also The United Nations’ biennial Report on the $$$$$$$$$$$$$$ increased food insecurity. World Social Situation 2010, entitled Rethinking Advocates of economic liberalization poli- Poverty, makes a compelling case for re- $$$$$$$$$$$$$$ cies cited the success of the rapidly industri- thinking poverty-measurement and poverty- alizing East Asian economies. But none of reduction efforts. For the world’s poor, $$$$$$$$$$$$$$ these economies had pursued wholesale eco- “business as usual” has never been an ac- nomic liberalization. Instead, governments ceptable option. Nor have the popular trends played a developmental role by supporting in- of recent decades proven to be much better. $$$$$$$$$$$$$$ dustrialization, higher value-added agricul- There will be no real poverty eradication ture and services, and improvement of without equitable and sustainable economic $$$$$$$$$$$$$$ technological and human capabilities. development, which deregulated markets Structural transformations should pro- have proved unable to deliver on their own. $$$$$$$$$$$$$$ mote full and productive employment as well l Copyright: Project Syndicate, 2010. www.project- as decent work, while governments should syndicate.org $$$$$$$$$$$$$$

“The richest 20% of the world’s population account for 75% of world income”

MakingIt 39 As Mexico prepares to host the next UN Framework Convention on Climate Change (COP16), which will take place from 29 November to 10 December 2010 in Cancún, Making It spoke with JUAN RAFAEL ELVIRA QUESADA, the country’s Secretary of the Environment and Natural Resources GREENING THE MEXICAN

Image: Ronaldo Schemidt/AFP/Getty Images ECONOMY Climate change Juan Rafael Elvira Quesada was appointed by wards a ‘green economy’, Juan Rafael Elvira activists campaigning President Felipe Calderón to serve as head of Quesada is clear, “Achieving sustainable devel- against global warming, Mexico City. the Secretariat of Environment and Natural Re- opment means that investments should be di- sources (Secretaría del Medio Ambiente y Re- rected toward clean technologies, renewable cursos Naturales, SEMARNAT) in December energy, and water and waste management, so 2006. He has a long and distinguished career in that every sector of the economy should become environmental protection in Mexico, and has ‘green’. This includes the creation of green jobs, also served as mayor of the city of Uruapan, Mi- because one of the main goals of this adminis- choacán. tration is increasing employment.” As the head of SEMARNAT, Elvira is re- Elvira continues, “Greening the economy sponsible for the expansion of protected areas, means reconfiguring businesses and infra- forestry development, improving access to structure to deliver better returns on natural, potable water and increasing sewage treatment, human and economic capital investments, expanding agricultural irrigation, strengthen- while reducing greenhouse gas emissions, the ing water conservation measures, and leading use of natural resources, waste generation, and the Mexican government’s response to climate social disparities.” change. Climate change mitigation is a central part Elvira says, “Our main focus is working with of the country’s national development policy. society, for our success is strongly related to As Mexico is Latin America’s largest fossil fuel- social involvement and compromise. Our ac- consuming country, with the majority of its tions are reinforced by environmental educa- greenhouse gas emissions coming from energy tion, and a strong policy of law enforcement production and consumption, priority has and compliance.” been given to the introduction of eco-efficiency He adds, “The Federal Government imple- measures. ments an environmental policy where natural For Elvira, improving the environmental resources and climate stability are considered performance of industry is a key element. “We public assets that should be preserved.” have been working very closely with industry Mexico, the second largest economy in Latin to improve industrial environmental perform- America, was hit hard by the global economic ance: The Pollutant Release and Transfer Reg- crisis and the collapse of international trade istry is a public information base that assesses during the last quarter of 2008 and the first the performance of industry and other quarter of 2009. Now the country’s economy is sources of pollution, and helps identify op- starting to rebound, with economic activity portunities for emission and transfer reduc- picking up in the second half of 2009, and off tion, while the Environmental Audit to a strong start in early 2010. Programme assesses industries for their com- Asked if Mexico is committed to moving to- pliance with environmental regulations, and im-

40 MakingIt “Investments should be directed toward clean technologies, renewable energy, and water and waste management, so that every sector of the economy should become ‘green’.”

Juan Rafael Elvira Quesada, Mexico’s top environment official. plements preventative and corrective measures.” Elvira says, “We have established a goal of 1,957 Some of the large-scale basic materials in- MW in generation capacity from renewable dustries in Mexico, such as iron and steel, and sources, which will require investments of cement, are among the most efficient in the around US$3bn. from the private sector.” One world. However, a large part of the country’s area of great potential is the generation of wind industrial sector is made up of small and power, particularly on the Isthmus of Tehuan- medium-sized enterprises that have relatively tepec – the south-eastern parts of the states of high energy intensities, often using old equip- Veracruz and Oaxaca – where high-quality ment, and lacking access to the know-how and wind resources could deliver some of the finances needed to upgrade. In order to meet lowest-cost wind power in the world. these challenges, SEMARNAT is implement- Under the leadership of President Felipe ing an Environmental Leadership for Compet- Calderón, Mexico has pushed hard to become itiveness Programme aiming to improve the a leading voice on environmental issues, host- competitiveness of the supply chains for small ing a number of international summits on cli- and medium-sized provider industries by mate change and inviting climate guru Al Gore means of an environmental management to discuss the dangers of inaction. Elvira says, mechanism centred on eco-efficiency. Elvira is “Mexico is recognized as a leader in the inter- enthusiastic about the impact of this pro- national negotiations on climate change. We gramme. have presented the Multinational Fund for Cli- “The results are very promising: water sav- mate Change, known as the ‘Green Fund’ as a ings of more than 61 million cubic feet – financial scheme that would complement ex- enough to permanently provide water to 3,400 isting mechanisms and ensure the implemen- families; annual energy savings of 190 million tation of the Convention on Climate Change.” kWh – equivalent to the annual electricity In the run-up to the COP16 climate summit supply for 66,000 households; and annual re- in Cancún, Mexico is talking up the prospects ductions of almost 198,000 tonnes of CO2 and of a successful outcome, but Elvira says agree- 62,000 tonnes of waste. The participating in- ment on well-defined goals and actions will re- dustries have achieved savings of almost quire innovative ways of negotiating. “The US$69m.” Parties to the Convention should move towards With regard to energy supply, demand for Cancún with something in their hands, not electric power in Mexico has been growing again to merely plan something. We need to faster than gross domestic product in recent work with clear signals and with mitigation decades, and is likely to continue in the near- goals: reducing emissions from deforestation future with associated growth in electricity use and soil degradation, and long-term financing across the economy. Expanding renewable and fast-starting funds for adaptation pro- energy is another key mitigation strategy, and grammes in developing countries.” n

MakingIt 41 POLICY BRIEF

Weighing and packaging meat products, Matadero Central S.A., Chontales, Nicaragua. The food and beverage sector constitutes the backbone of many economies. Revealing research results

By NOBUYA HARAGUCHI, industrial development officer in the Development Policy and Strategic Research Branch at UNIDO

The rise of manufacturing and decline of agriculture is a well-known pattern of structural change associated with a country’s economic development. But for UNIDO CREA Comunicaciones, Aragón Renuncio, Antonio Photo: what do we know about changes within industrialization, and, even at an advanced electrical apparatus, which can maintain manufacturing industry while a country is level of development, only a few sectors are fast growth into their advanced stages of going through the development process? likely to surpass its output level. industrialization, and fewer sectors of For example, when is the garment sector Secondly, small countries (defined as scale and capital intensiveness, such as likely to take off in a given country? How smaller than the world average), which basic metals and fabricated metals, which quickly can it grow, and for how long? constitute more than 80% of all countries, can sustain growth after reaching the Which sector is the most sustainable? tend to face a higher degree of uncertainty income level of US$10,000 per capita. In These are very relevant questions for than larger countries during the addition, in small countries, more than policy-makers engaged in economic development of manufacturing industry. 30% of development patterns for many development but, unfortunately, there They often have fewer sectors, such as sectors are explained by country-specific have not been many robust empirical chemicals, machinery and equipment, and characteristics other than the income studies showing the development paths of levels, such as natural and human resource different manufacturing sectors. endowment, country size, and wage levels. To help policy-makers gain a better The influence of country-specific insight, UNIDO has been looking at characteristics means that some sectors patterns of industrial development using will not take off, regardless of a country’s newly-available statistics covering the last development level. Important production 40 or so years. The research provides some “The food and beverage factors for the development of these useful inputs for policy formulation. sector is usually the largest sectors, such as natural resources, a critical Firstly, contrary to the available studies sector within manufacturing mass of particular talents, or space for and anecdotal evidence, both of which industry for most of the realizing necessary economies of scale, tend to downplay the role of agro-industry may simply be absent. Thus, it is more in economic development, the research period of industrialization, important for small than large countries to results indicate that the food and beverage and, even at an advanced level manoeuvre their manufacturing into the sector in fact constitutes the backbone of of development, only a few sectors where they are likely to have many countries’ economies. It is usually advantages based on their country the largest sector within manufacturing sectors are likely to surpass characteristics. Then, the government and industry for most of the period of its output level.” international supporters should make a

42 MakingIt POLICY BRIEF

conscious effort to maximize the development potential of these sectors, by upgrading their infrastructure, The private sector institutions and human resources. Thirdly, economies of scale help most of the sectors to increase their output levels. and development However, agglomeration, which facilitates interactions with customers, suppliers and relevant service providers in close proximity to each other, seems more important for chemical (including fertilizers and soaps), By KAREN ELLIS, head of the Overseas businesses that are making a significant and plastic, electrical apparatus, and non- Development Institute’s Business and positive contribution to achieving the metallic minerals (including cements, Development Programme Millennium Development Goals through pottery and china) production. This both their core business and corporate suggests that, for these sectors, the There is growing recognition that the social responsibility activities. It would differ formation of industrial districts, if not potential contribution of the private sector from other schemes by focusing on the naturally then through policies to provide to development far outstrips the potential positive contributions made to economic related producers and service providers with impact of aid. Business itself is development, (e.g. through job creation and the appropriate infrastructure, may facilitate recognizing its potential role, with skills development) rather than simply the growth of production. Cluster growing demand for ethical and Fair Trade meeting minimum labour standards or development and the promotion of export produce. But more could be done, through minimizing environmental costs. consortia may be appropriate approaches new tools to measure the impact of for the more labour-intensive producers business on development, new business New policy frameworks within these sectors. models to maximize the development At the same time, the impact of business Finally, the research results suggest that contribution of the private sector, and a on development depends on the policy in small countries, where the domestic better policy framework governing framework in which it operates in market is usually too small to support business engagement. developing countries. ODI research sustained sectoral growth, and industrial confirms that a good investment climate development is therefore often dependent New tools and open and competitive markets can on exports, keeping unit labour costs low Last year, the Overseas Development help to ensure a good development relative to the competing producers is Institute (ODI), the UK Department for impact, but these are rare in developing essential. The maintenance of unit labour International Development (DFID), and countries. New approaches are needed to costs at a competitive level is an important Business Action for Africa ran a series of tackle market distortions created by vested factor contributing to the success of the meetings on business and development interests who are opposed to pro-growth export trade, and it can be achieved by attended by many businesses that wanted reforms. For example, ODI proposes new keeping wages low, by increasing labour advice on improving and communicating approaches to the mobilization of productivity, or both. Since in many their development impact. ODI is business interests in favour of pro-growth developing countries the wage levels of developing tools to help, such as a reform, to offset vested interests who production workers are generally already proposed new ‘Good for Development’ oppose reform. low, continuous increases in labour mark, which companies could use if they Since the financial crisis, more emphasis productivity are usually more appropriate. score highly enough against indicators has been placed on the role of the state in The rewards of having competitively- linked to the Millennium Development disciplining and managing the market. In priced products by increasing productivity Goals. Support from DFID could help developing countries there is a great deal could be potentially enormous for small ODI to pilot this initiative with business of government intervention in the market, countries which could then have a this year. e.g. through industrial policies that often disproportionately large production scale A Good for Development mark could distort and that are damaging to markets. to serve the world markets. n provide commercial advantage to The time is ripe for a new kind of ‰

MakingIt 43 POLICY BRIEF

‰ industrial policy. This would not be Access to finance is crucial for private about picking winners, or providing sector development and for poverty subsidies or import protection. Instead, it reduction. ODI research shows that access The power would be about the intelligent and to savings or credit helps people across all carefully prioritized use of government income groups to invest in education and policy to encourage and facilitate private microenterprises, and to work their way of patient sector development in promising high out of poverty. While the focus of much growth sectors, and in a market-friendly donor effort has been on microfinance way. institutions, the banking sector also has an capital important role to play. We have also Practical proposals examined market-friendly policies that While the Washington Consensus has can stimulate wider provision of financial paralyzed intelligent discussion of this services by the banking sector, and our By JACQUELINE NOVOGRATZ, the founder issue, the crisis has reopened the debate. practical policy recommendations include: and CEO of Acumen Fund, a non-profit ODI has practical proposals on this middle l setting targets for the banking sector to global venture fund that uses way, based on extensive fieldwork: widen access to services, and monitoring entrepreneurial approaches to solve the l Consult business to identify growth and publicizing the results; problems of global poverty. sectors that could be transformative – l facilitating linkages between the formal enabling economies to move from low- banking sector and semi-formal A new field of international development skilled commodity-based industries, to institutions that reach the poor more has emerged in the last ten years that sectors with more scope for technological easily; seeks to harness the power of market progress and the building of human l supporting innovative cost-saving forces. Social investors and donors are capital. technologies and business models. n using “patient capital” to bet on l Help these sectors grow by identifying, enterprises addressing global challenges again in consultation with business, like the persistent threat of malaria, lack priorities for reform. of clean drinking water, chronic lWork with business to encourage malnutrition, and lack of education. business models that are pro- Patient capital fills a critical gap in the aid development. and capital markets, allows for The private sector also has a crucial role experimentation and innovation, and has to play in low carbon growth in developing begun to demonstrate real results. countries, but will only fulfill its potential While traditional capital investing when the right policies are in place. ODI focuses on maximizing financial returns, has reviewed low carbon growth/climate patient capital recognizes the particular change response strategies across a challenges of working in low-income number of developing countries, and communities, including creating identified lessons for growth policy, e.g. acceptance for new products, operating the importance of being proactive in with poor infrastructure, and serving identifying and capitalizing on new green customers with low levels of income and growth opportunities. But we found that trust. Patient capital has a higher few provide enough certainty or tolerance for risk and a longer time information on future direction to enable horizon for investment than more the private sector to invest with traditional capital, is often accompanied confidence. ODI wants to facilitate by significant management assistance, dialogue between government and the and is primarily focused on social impact. private sector on this challenging issue, Acumen Fund was launched in 2001 to and would welcome support for this. bring this model of development to

44 MakingIt POLICY BRIEF

major global challenges, with an initial “What is needed most of all is programmes and the market have focus on India, Pakistan, and East Africa. overlooked smallholder farmers, Since then, we have invested roughly moral leadership willing to limiting their access to critical farming US$40 million in 40 companies that are build solutions from the technologies. In 2001, Amitabha Sadangi forging a new path to deliver critical perspectives of poor people designed a drip irrigation technology products and services to millions in a way themselves, rather than that would be affordable and useful to that is sustainable in the long run. the world’s poorest farmers. His Acumen Fund’s portfolio includes imposing grand theories and organization, International companies like Water Health plans upon them.” Development Enterprises – India (IDE-I), International in India, which operates 285 initially relied on grants to build a village-level water purification systems, prototype and learn how to market providing over 240,000 low-income effectively to low-income farmers. individuals with access to safe water, and Acumen Fund’s patient capital enabled D.Light Design in India and Tanzania, him to form a for-profit company, Global which has sold more than 200,000 low- Easy Water Products (GEWP), to build on cost solar LED lights, providing safe, the research and marketing strengths of affordable energy to more than 1 million IDE-I and to focus on expanding people. distribution and tapping into export Each of these companies provides a new markets. More than 250,000 farmers model for large-scale sustainable change. have purchased drip products through The challenge is to strengthen proven IDE-I and GEWP, allowing many of the business models, and scale them up to farmers to double or triple their incomes provide quality goods and services to tens on an annual basis. of millions of people who want the As I write in my book, The Blue Sweater: chance to improve their lives. Ultimately, Bridging the Gap between Rich and Poor in an these ideas will only achieve their greatest Interconnected World, “I’ve learned that impact through partnerships with many of the answers to poverty lie in the mainstream private sector institutions, space between the market and charity, and such as banks and multinational that what is needed most of all is moral corporations, as well as with leadership willing to build solutions from governmental institutions, that can create the perspectives of poor people an enabling environment for innovations themselves, rather than imposing grand to scale. theories and plans upon them.” Patient At present, I see the funding gap both in capital is invested in entrepreneurs incubating promising ideas, and building such solutions. accelerating the scale-up of ideas that The world needs a new vision for have demonstrated significant promise, development assistance. At a moment but whose financial models are not yet when the aid system faces increasing attractive to the traditional capital scrutiny and criticism, the global markets. community has an opportunity to In many cases, entrepreneurs bring a strengthen assistance programmes with a needed perspective because, by necessity, complementary approach focused on they must remain attuned to the needs of social innovation and entrepreneurship. n their customers. Let’s take one example from India. There, more than 75% of farmers cultivate less than two hectares of land, but for decades, both aid

MakingIt 45 ENDPIECE

Awareness-raising for workers in Djibouti. AIDS is a workplace issue not only because it affects labour and productivity, but also because the workplace is one of the most effective settings for responding to the epidemic.

The economic impact is particularly prevention, treatment, care and support severe in least developed countries services directly to employees. The HIV/AIDS – (LDCs), where the combined impact of International Labour Organization and HIV-related absenteeism, productivity UNAIDS work with companies to decline, health expenditures, and promote HIV policies and programmes in a workplace recruitment and training expenses, is the workplace. reducing profits. Advocacy: Businesses can disseminate As two out of three people living with vital information on HIV through the issue HIV go to work each day, the workplace is mass media. Businesses can also one of the most effective settings for participate in policy dialogue and lobbying MICHEL SIDIBÉ, Executive Director of responding to the epidemic. The business for effective HIV policies. UNAIDS, believes that the workplace has a sector has a vital role to play in limiting Cash donations: Financial resources are vital role to play in the wider struggle to limit the spread of HIV and the impact of the urgently needed to support HIV the spread and effects of the AIDS epidemic. epidemic, and a growing number of prevention, treatment, care and support companies, even in the poorest countries, services. Business is becoming a The vast majority of the world’s 33 million are taking up the challenge. contributor to the AIDS response by people living with HIV are aged 15-49 and donating financial resources for HIV and are in the prime of their working lives. This What can business do? health-related programmes. has critical implications for businesses and Every business can make its own In-kind contributions: Business expertise, national economies, as well as for contribution to the AIDS response – based services and materials are needed in every individual workers and their families. on its size, type of workforce, location, aspect of the AIDS response. In-kind AIDS is a workplace issue for many financial strength, and core capabilities. contributions from business can include reasons. Stigma and discrimination can The activities often fall into five main the donation of advisory services, threaten the fundamental rights of categories: HIV workplace programmes, seconded personnel, printing, office employees living with HIV. The loss of advocacy, financial support, in-kind facilities, equipment, supplies and access workers, and their skills and experience, contributions (including technical to distribution networks. Companies may can increase the burden on the remaining support), and research. offer logistical support and networks for workforce, lowering morale and reducing HIV workplace programmes: These the distribution of commodities, such as productivity. programmes expand access to HIV condoms and antiretrovirals.

46 MakingIt ENDPIECE MakingIt Industry for Development FURTHER READING Arun, Thankom and Hulme, David (Editors) – Microfinance: A Reader Chang, Ha-Joon – Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism Chossudovsky, Michel – The Globalization of Poverty and the New World Order Chowdhury, Anis and Islam Iyanatul – Growth, Research: UNAIDS supports public- workplace programmes in several Employment, and Poverty Reduction in Indonesia private partnerships, working to companies, conducted various Easterly, William – The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much accelerate the development of workshops and training on HIV Ill and So Little Good preventive HIV technologies, such as prevention and treatment, and Edward, Tse – The China Strategy: Harnessing the microbicides (a synthetic or natural developed a generic HIV policy to be Power of the World’s Fastest-Growing Economy Gupta, Anil K. and Wang, Haiyan – Getting China and substance in the form of a gel, cream, used by all companies. In just twelve India Right: Strategies for Leveraging the World’s suppository, or film that can kill or months, its membership increased by Fastest Growing Economies for Global Advantage neutralize viruses and bacteria), 91%. McNeill, Desmond and St. Clair, Asunción Lera – Global Poverty, Ethics and Human Rights: The Role improved female condoms, and a The Ethiopian Business Coalition of Multilateral Organizations vaccine, as well as advances in therapies against HIV/AIDS, created in 2004, has Rodrik, Dani – One Economics, Many Recipes: Globalization, Institutions, and Economic Growth such as simpler and more effective also encouraged businesses to move Sachs, Jeffrey – The End of Poverty: Economic next-generation drugs. from providing information to its Possibilities for Our Time UNAIDS works closely with employees to service provision. This Sanchez, Teodoro – The Hidden Energy Crisis: How Policies are Failing the World’s Poor companies and foundations in each includes voluntary counselling and Smith, Michael, et al. – Cents and Sustainability: one of its priority areas, particularly the HIV testing, care for people living with Making Sense of How to Grow Economies, Build reduction of sexual transmission of HIV, facilitating access to Communities and Revive the Environment in Our Lifetime. HIV, the prevention of mother to child antiretrovirals, and local referrals. transmission of HIV (PMTCT), the Some businesses have even gone reduction of TB/HIV co-infection, and beyond the workplace, extending FURTHER SURFING the empowerment of women and girls. support to families of HIV-positive http://blogs.cgdev.org/globaldevelopment – The Centre for Global Development’s weblog. Examples of these partnerships employees. http://ourworld.unu.edu/en/ – Web magazine include Chevron’s financial In Bangladesh, the US organization, focusing on climate, peak oil, food security and contribution to PMTCT in Angola, and Pathfinder, works with local non- biodiversity. http://rodrik.typepad.com – “Unconventional the UNAIDS Body Shop global governmental organizations (NGOs) to thoughts on economic development and campaign around World AIDS Day. provide factory-based health services to globalization.” Dani Rodrik’s weblog. Over twenty years into the epidemic, garment workers, an overwhelming www.chinadaily.com.cn – The largest English portal in China, providing news, business information, etc. we can confidently say that early majority of whom are young, www.compete.org/about-us/initiatives/gii – The investments in the AIDS response have unmarried women. The workplace Council on Competitiveness’ Global Initiative had long-term benefits. For example, programmes are part of a large “seeks collaborations around the world with critical US partners to build business environments that we have seen how early HIV education national programme to provide clinic- support innovation at home and abroad.” and prevention investments in Senegal and community-based essential health www.iied.org/sustainable-markets/blog/due-south – have resulted in one of the lowest services in partnership with 41 local The International Institute for Environment and Development’s weblog. infection rates in sub-Saharan Africa. and national NGOs. www.networkideas.org – International Development The message is clear ‒ if LDCs want Economics Associates is a network of progressive to boost their economies, then economists. Business coalitions www.oxfamblogs.org/fp2p – From Poverty to Power. UNAIDS has supported the employers must make HIV their Duncan Green’s weblog. development of a number of national business. By protecting their workforce www.policyinnovations.org – “The best new thinking on a fairer globalization.” business coalitions on HIV in regions from HIV, private companies and the www.twnside.org.sg – Third World Network of hardest hit by the epidemic. UNAIDS is public sector can benefit from individuals and organizations involved in issues currently working with over 30 national increased productivity and reap relating to development, the Third World, and North-South issues. business coalitions, helping to support financial gains. n www.wider.unu.edu – World Institute for Development the private sector response to AIDS. Economics Research of the United Nations In Tanzania, the AIDS Business University. Coalition in Tanzania has made significant headway in mobilizing businesses to respond to HIV. It has supported the establishment of

MakingIt 47 MakingIt Industry for Development A quarterly magazine aiming to stimulate debate about global industrial development issues