The Practice of Industrial Policy UNU World Institute for Development Economics Research (UNU-WIDER) was estab- lished by the United Nations University as its first research and training centre, and started work in Helsinki, Finland, in 1985. The mandate of the Institute is to undertake applied research and policy analysis on structural changes affecting developing and transitional economies, to provide a forum for the advocacy of policies leading to robust, equitable, and environmentally sustainable growth, and to promote capacity strengthening and training in the field of economic and social policy-making. Its work is carried out by staff researchers and visiting scholars in Helsinki and via networks of collaborating scholars and institutions around the world. United Nations University World Institute for Development Economics Research (UNU-WIDER) Katajanokanlaituri 6B, 00160 Helsinki, Finland www.wider.unu.edu The Practice of Industrial Policy Government–Business Coordination in Africa and East Asia Edited by John Page and Finn Tarp A study prepared by the United Nations University World Institute for Development Economics Research (UNU-WIDER) 1 OUP UNCORRECTED PROOF – FIRST PROOF, 9/2/2017, SPi 3 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Korea International Cooperation Agency 2017 © Chapters 1 and 14 © United Nations University World Institute for Development Economics Research (UNU-WIDER) The moral rights of the authors have been asserted First Edition published in 2017 Impression: 1 Some rights reserved. This is an open access publication. Except where otherwise noted, this work is distributed under the terms of a Creative Commons Attribution-Non Commercial-Share Alike 3.0 IGO licence (CC BY-NC-SA 3.0 IGO), a copy of which is available at https://creativecommons.org/licenses/by-nc-sa/3.0/igo/. It is permitted to reuse, share and adapt this work, subject to the following terms: Attribution - appropriate credit is given to the original work, the copyright holder and creator, and any changes made to the work are properly indicated. 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Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work. Foreword Academic writing on industrial policy emphasizes the role of consultation and coordination with the private sector, both in designing appropriate public actions and in providing feedback. But, in many cases, a close relationship between business and government can lead to capture and inappropriate policy choices. Managing the tension between close coordination and capture is a central challenge in the practice of industrial policy. The academic litera- ture on implementing industrial policy, however, is remarkably light on practical guidance for policy makers as to how to achieve coordination with- out capture. There is perhaps no region of the developing world more in need of this guidance than Africa, where twenty years of sustained economic growth have resulted in only modest industrial development and job creation, an issue increasingly emphasized by the continent’s leaders themselves. In 2014 the Korea International Cooperation Agency (KOICA) and the United Nations University World Institute for Development Economics Research (UNU-WIDER) launched a joint research project on ‘The Practice of Industrial Policy’ to contribute to the topic. This volume, written by national researchers and international experts, presents the results of the joint project. The book consists of three parts, including framing essays that survey key topics in the practice of industrial policy, case studies from Asia addressing the evolution of business–government coordination, and case studies of efforts to build business–government engagement in Africa. The objective is to assist policy makers develop close coordination between the public and private sector to identify, design, implement, and monitor policies to remove the constraints to industrial development. While simple imitation of institutional frameworks that have been successful in Asia is unlikely to bear fruit in the very different social and political context of Africa, a main purpose of this volume is to ‘deconstruct’ successful experiences with close coordination and remove them from their political and social context in order to come to grips with the underlying institutional economics of the coordination process. These first principles may then be applied effectively in other institutional and political settings. I would, on behalf of UNU-WIDER, like to express my deepest gratitude to John Page for taking on the lead role in this project, including co-editing this Foreword volume. In addition, I wish to express our gratitude to each of the authors for their willingness to participate in the project and for their insightful contri- butions. Finally, UNU-WIDER gratefully acknowledges the special programme contribution by KOICA for the joint project and the core contributions to its work programme from Denmark, Finland, Sweden, and the United Kingdom. Finn Tarp Helsinki, November 2016 vi Acknowledgements First and foremost, we would like to thank the Korea International Cooper- ation Agency and its staff for their collaboration in implementing the joint study on ‘The Practice of Industrial Policy’ as well as UNU-WIDER’s core donor group of the governments of Denmark, Finland, Sweden, and the United Kingdom for their support to the Institute’s work programme. We would in addition like to express our sincere gratitude to all of the individual authors: Joseph E. Stiglitz; Justin Yifu Lin and Khuong Minh Vu; Alberto Lemma and Dirk Willem te Velde; Rachel Gisselquist; Eun Mee Kim; Rajah Rasiah; Hinh T. Dinh; Vu-Thanh Tu-Anh; Mulu Gebreeyesus; Haroon Bhorat, Aalia Cassim, and Alan Hirsch; Thomas Farole and Lotta Moberg; Ernest Aryeetey and Nkechi S. Owoo; and John Page. Last but not least, special thanks go to the UNU-WIDER team, Janis Vehmaan-Kreula for administrative support, Anna-Mari Vesterinen for editor- ial assistance, and Lorraine Telfer-Taivainen for advice and facilitation of the collaboration with Oxford University Press. Adam Swallow, Economics and Finance Commissioning Editor at Oxford University Press, provided expert guidance with the publication process, and we are also grateful for the anonymous referee reports that helped sharpen our focus. John Page and Finn Tarp Helsinki, November 2016 Contents List of Figures xi List of Tables xiii List of Boxes xv List of Abbreviations xvii Notes on Contributors xxiii 1. Overview and Insights 1 John Page and Finn Tarp Part I. Coordination and Industrial Policy 2. Industrial Policy, Learning, and Development 23 Joseph E. Stiglitz 3. Coordination through an Asian Lens 40 Justin Yifu Lin and Khuong Minh Vu 4. State–Business Relations as Drivers of Economic Performance 63 Alberto Lemma and Dirk Willem te Velde 5. State Capability and Prospects for Close Coordination: Considerations for Industrial Policy in Africa 80 Rachel M. Gisselquist Part II. Coordination Mechanisms in Asia 6. Korea’s Evolving Business–Government Relationship 103 Eun Mee Kim 7. The Industrial Policy Experience of the Electronics Industry in Malaysia 123 Rajah Rasiah 8. Case Studies of Decentralized Coordination in China 145 Hinh T. Dinh Contents 9. The Political Economy of Industrial Development in Viet Nam: Impact of State–Business Relationships on Industrial Performance, 1986–2013 167 Tu-Anh Vu-Thanh Part III. Building Coordination in Africa 10. A Natural Experiment of Industrial Policy: Floriculture and the Metal and Engineering Industries in Ethiopia 191 Mulu Gebreeyesus 11. Policy Coordination and Growth Traps in a Middle-Income Country Setting: The Case of South Africa 211 Haroon Bhorat, Aalia Cassim, and Alan Hirsch 12. Special Economic Zones in Africa: Political Economy Challenges and Solutions 234 Thomas Farole and Lotta Moberg 13. Ghana’s Experiments with Business–Government Coordination 255 Ernest Aryeetey and Nkechi S. Owoo 14. Importing Coordination: Africa’s Presidential Investors’ Advisory Councils 275 John Page Index 295 x List of Figures 3.1. Educational attainment: SSA in 2010 vs Asia at the beginning of rapid development 41 3.2. SSA countries and GDP growth trends 43 3.3. SSA countries and GDP per capita growth trends 43 3.4. Catch-up performance, 1990–2010: SSA vs developing Asia 44 3.5. Employment share of the industry sector in the economy 45 3.6. Improvement in education and economic growth, 1960–2010: SSA and developing Asia: a global picture 58 3.7. Human capital development in 2010: SSA vs developing Asia 59 5.1. Selected WGI, 2014: a comparison of regional averages 89 7.1. Exports and value-added activities in electrical-electronics industry, Malaysia, 1986–2013 125 7.2. Contribution of electric-electronics to manufacturing, Malaysia, 1986–2013 126 7.3. Value chain of ICs, 2014 129 7.4. Composition of the electrical-electronics industry in electronics value-added activities in per cent, Malaysia, 1989–2013 134 7.5.