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Beyond Infant Industries and Trade Liberalization: Productive Development in a Value Chain and Cluster Context

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Beyond Infant Industries and Trade Liberalization: Productive Development in a Value Chain and Cluster Context Beyond infant industries and trade liberalization: Productive development in a value chain and cluster context Frank Hartwich and Gerardo Patacconi CONTENTS Abstract ........................................................................................................................................................................................................... 4 Introduction .................................................................................................................................................................................................... 5 1. Structural change of industries and the role of value chains ........................................................................................... 8 2. Policy instruments of value-chain-centred industry development ................................................................................12 3. Common practice in value-chain-based industry policy ....................................................................................................15 4. Good practice in value-chain-centered industrial development: Lessons from UNIDO projects ...................19 4.1 Focus on holistic value chain development .................................................................................................................... 19 4.2 Focus on private-sector-based pro-poor development of existing clusters.................................................... 22 4.3 Focus on supplier development .......................................................................................................................................... 22 4.4 Focus on expert promotion via consortia ...................................................................................................................... 23 4.5 Focus on firm networking for local capacity development ..................................................................................... 24 4.6 Focus on standards compliance infrastructure development ............................................................................. 25 4.7 Focus on business agglomeration within industrial parks ..................................................................................... 26 4.8 Focus on regional/supranational integrated value chain development .......................................................... 27 Conclusions ...................................................................................................................................................................................................... 29 Literature References ................................................................................................................................................................................. 30 3 ABSTRACT INTRODUCTION In the presence of global value chain dynamics, strategies for commodity development and industrial policies need Productive development involves producing new goods with new knowledge and technologies. But which are the to be revised: first, measures of infant industry protection do not work where industry knowledge and technology is right measures to foster productive development? This question has been at the heart of the discussions on provided through international input providers and buyers; second, measures of trade liberalization are ineffective industrial policies for developing countries for decades. The scholary debate has been particularly dominated by where global suppliers and buyers enable market access and dictate quality standards with which suppliers have to the dichotomy between protectionism and free trade, also leading to a divide in practical policy-making. For less comply. In this situation, developing countries need to define new policy tools and programme interventions that allow developed countries (with less developed industries), the debate often has centered around their willingness and their producers to capture a higher share of value in rapidly-evolving global value chains. ability to support and protect “infant industries”, that is underdeveloped industries that are not able to compete under free market conditions in the presence of first developers, i.e. countries which have already developed these This report argues that, in the presence of global value chain dynamics, developing countries need a revised strategy industries (Shafaeddin 2011a). In fact, almost all of today’s “rich” countries used tariff protection and subsidies to for productive and industry development. It discusses various options for policy instruments from a theoretical develop their industries (Chang 2003). point of view and in light of UNIDO-related experiences in a wide range of value chains. The report argues that underdeveloped industries in developing countries would benefit from in-depth value chain analysis and corresponding The infant industry argument suggests that newly-established industries come with high production costs as compared industry strategy development based as well as policy instruments focussing on private-sector-based pro-poor to established foreign industries and that they require time to become competitive. During this time, it would not pay development of existing clusters, supplier development, expert promotion via consortia, firm networking for local off for an entrepreneur to enter the industry. However, with protection and public support, dynamic factors would capacity development, standards compliance infrastructure development, business agglomeration within industrial come to play for increasing efficiency and eventually industry maturation (Krueger and Tuncer 1982). Protection parks as well as regional/supranational integrated value chain development. Further, systemic aspects of value and support from the state budget would be justified on the basis of future returns. In essence, in the presence of chain organization need to be taken into account so that supply, production and value addition activities are well- the infant industry argument, technological latecomer countries would want to pursue proactive industrial policies to functioning and interlinked. In essence, developing countries need to move away from a trade-based approach to compensate for disadvantages vis-à-vis industrially-advanced countries. industry development policies to innovation, knowledge and capacity development policies for inclusive and sustainable industrial development. Following this argument, since World War II, many developing countries have provided high level of protection for newly-established industries via import substitution policies. The policy measures targeting infant industry development included the intense use of tariff protection, import duties, quotas, exchange rate controls and financial as well as fiscal incentives and, in some countries, the use of state-owned companies to bridge production gaps in certain segments of the production chain. All these measures were meant to prevent international competitors from matching or beating the price of the infant industry while giving it time to develop and stabilize. In antagonism to the infant industry development argument, developing countries have been pushed to open their markets through structural adjustment policies and bilateral trade agreements. The argument here is that, while the developing countries would end fiscal imbalances and allow free trade, positive development effects would unfold from concentrating on trade and competitive production where markets would take care of research and development, technological development, learning through trade and foreign direct investment. In the end, the experience in developing countries has shown that neither of the two models provides a guarantee for success. Evidence seems to suggest that, depending on level of development, country-size, resource endowment, market access, human resource base and other factors, there seems to be no other option than raising certain levels of protection in support of industry development (Chang 2009). Evidence from China and the Asian “Tiger” countries support this argument (Amsden 1992). However, import-substitution industrialization (ISI) and protectionist policies fostering the development of infant industries have also led to inefficiencies in the organization of the sectors and, at the end, industries were only surviving at low levels of competitiveness and on the basis of high social costs. Meanwhile, the inadequacies of the Washington Consensus reform packages for economic growth (and industry development) have been well documented. Stieglitz (2005), for example argues that a) the benefits of trade liberalization are questionable where workers move from low-productivity jobs to unemployment instead of moving to high-productivity jobs, b) capital market liberalization does not necessarily lead to faster growth and exposes the countries to higher risks and c) privatization leads to higher prices of utilities and adverse social consequences, among others. Perverse effects of trade liberalization have been highlighted by various authors. For example Shaffaedin (2011a) have shown that developing countries can produce and export high value-added products but that they are constrained by unfair competitive pressure from imports as well as hampered by tariffs and arbitrary anti-dumping policies. Regarding infant industry development, one of the main arguments against trade liberalization is that it particularly helps those countries where industries are near the stage of maturity (Shafaeddin
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