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Industrial Policy meets Doing Development Differently: an evening at SOAS

March 17, 2016
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report_front_pageIt’s always interesting when a neglected issue suddenly resurfaces in multiple locations. That’s been happening with industrial policy – in particular the role of governments in developing their manufacturing industries. ActionAid has a new report out, arguing that promoting manufacturing through industrial policy is essential if countries want to generate decent work and tackling inequality.

Then I went to a packed SOAS event on ‘Smart Industrial Policy in the 21st Century’. The main speaker was my friend Ha-Joon Chang, who in April has a book by the same name published by the UN Economic Commission for Africa. This was billed as a ‘sneak preview’ (which usually means the publication has been delayed after the event was already booked in – I’ve been there…..).

Ha-Joon’s presentation was long and detailed, following the chapter structure of the book. He debunked the prevalent narratives on Africa (both the basket case and Africa rising variants) and got everyone laughing at the laziness of cultural stereotypes. Try this for a bit of Fabian racism. According to Beatrice Webb, writing in 1911, the Koreans were “12 millions of dirty, degraded, sullen, lazy and religionless savages who slouch about in dirty white garments of the most inept kind and who live in filthy mud huts”. No chance of that country coming to much, then.

He then went on to the theoretical arguments for (and against) industrial policy and argued strongly for the special place of manufacturing in development – it generates more, better jobs than agriculture or services, and even a knock-on effect on productivity in those sectors too.

He stressed that there is no blueprint – studying history encourages ‘policy imagination’ in contrast to the sterile stereotypes of ‘best practice’. Each country makes it up to some extent, notably Singapore, which defies any economic theory by successfully mashing up some of the most ‘free market’ measures (free trade, welcoming FDI) with some of the most ‘socialist’ ones (90% of land in public ownership, 22% of GDP produced by state-owned enterprises). Industrial policy needs to adapt to the new constraints created by WTO rules and global value chains by becoming more nuanced and intelligent, but Ha-Joon argued that it remains both feasible and if anything more essential than ever.

government-not-the-problem (1)Then he got onto the political economy of all this, and where we can look for examples of success, at which point I perked up – for me this has always been the crunch issue. It’s all very well arguing, as Ha-Joon does, that other countries can learn about industrial policy from South Korea, Taiwan (and just about every developed country, including the US and Germany). But they had capable, independent state bureaucracies able to implement the ‘embedded autonomy’ required of developmental states (i.e. state bureaucrats were embedded enough in the market to understand what the private sector needed, but autonomous – not politically captured by vested interests looking for easy subsidies and state protection). What if you don’t have that kind of state? What if, as Alex de Waal describes, the rudimentary state in the Horn of Africa is actually disintegrating?

Ha-Joon pointed to places where such bureaucracies have been built along the way – the US and Prussia in the late 19th century or Latin America and East Asia in the mid-20th century. As anyone who has read his books will know, he has a fantastic grasp of history, and gave us the tour of the last four centuries of industrial policy. It was when he got onto the recent decades that alarm bells started to ring.

The book looks at experiences in middle income countries (China, Brazil etc) and in low income ones, with case studies from Vietnam, Uzbekistan, Ethiopia, and Rwanda. Ah. OK, so strong autocratic states can do this, but how about elsewhere? What advice for shambolic, patronage-based democracies, or crumbling states, where embedded autonomy and ‘getting to South Korea’ is really not an option? Anyone seen the ‘democratic developmental state’ recently? I’m not sure Ha-Joon (or anyone else) has an answer on this.

Mushtaq Khan was in the audience and addressed this point. He reckons that centralized industrial policy is pretty much impossible in such contexts – private sector rent-seekers will run rings round government, pocket the subsidies or protection, and deliver very little in the way of improved productivity.

What does seem to work, according to his case studies of the Indian auto and Bangladeshi garment industries in this Indian industrial policypaper, (developed in a second paper on why the political context matters for industrial policy) seems to be a kind of ‘politically smart, locally led industrial policy’ for particular sectors, which provides incentives to the private sector only after they deliver (payment by results meets industrial policy? An interesting ideological confluence there). In India, the government created a joint venture with Suzuki, whereby the Japanese company galvanized a moribund auto sector with the incentive of access to India’s protected market. In Bangladesh, the multi-fibre arrangement created quotas for established exporters like South Korea and gave LDCs like Bangladesh an opportunity to enter garments. Unlike most other LDCs, Bangladesh gained from this opportunity because a Bangladeshi company, supported by the state, set up a financing package that transferred the benefits of MFA to Daewoo (a Korean company blocked by MFA) on condition that organizational knowledge was transferred to the Bangladeshis.

What’s nice about Mushtaq’s examples is that they avoid the twin extremes of ‘all you need is policy, just ignore the politics’ v ‘first build an effective state then worry about the industrial policy’. By working with the grain of particular sectors, weak and dodgy governments can still make some progress in boosting manufacturing and creating some kind of virtuous circle. But he has yet to find any examples in Africa, suggesting that even the South Asian experience may be too demanding in terms of administrative capability, autonomy and leadership.

More generally, it feels like this is crying out for an exchange between with the Doing Development Differently crowd of people working on governance and institutional reform – what would be the implications of hybrid institutions, PDIA, working with the grain etc etc for doing smart industrial policy in politically difficult settings?

Views?

Update: When I sent the draft of this post to Ha-Joon for comments, here’s what he said:

‘As for “can others ‘do a South Korea’?”, the first point is that South Korea was not ‘South Korea’ in the beginning. It became ‘South Korea’ because it started doing industrial policy and learned in the process and, more importantly, deliberately invested in building the necessary political and administrative capabilities.

The second point is that in the 1950s South Korea was considered a basket case. I don’t think anyone could have predicted that it will become a ‘South Korea’. Same story with Ethiopia. These countries became what they are because they wanted to be so. Here is where your points on leadership, coalition building, etc. come in.’

And now Mushtaq has come back in the comments – what fun!

9 comments

  1. Ha Joon Chang has documented how the Japanese auto industry was a big beneficiary of government intervention in the 1930s, as was the chaebol Daewoo in Korea. (Not making a bigger point here), but it is quite fascinating that both of Mushtaq Khan’s examples (Japanese car makers in India; and Daewoo in Bangladesh) involve a collaboration between a poor country and an industry that benefited from significant government protection in their early years.

  2. An interesting read indeed Duncan.

    I must admit that comment from “Beatrice Webb” riled me a little bit – how can someone refer to the population of an entire country like that?

    P.S. Love the hand drawn illustration too, made me chuckle.

  3. I fully agree that committed leaderships and political movements can change societies around. But I disagree with the implication that political will can change anything it likes or that the costs of change can be ignored. Agency matters but so does structure and we need to rediscover the importance of analysing their interdependence. Dialectics anyone? The great good luck of the East Asian developmental states was that the policies and enforcement strategies they attempted turned out to be aligned with their pre-existing social power structures (political settlements). Their political settlements changed further as a result, but in directions that set off few internal conflicts. The great bad luck of developing countries like Pakistan in the 1960s was that they had equally committed leaderships that tried to do similar things but their initial political settlements not only prevented them from implementing these fully or evolving in the right directions, they eventually triggered off violent internal conflicts. In neither case had leaderships figured out what was politically feasible in advance, but if we want to learn from history and advise countries, we need to get the dialectics of Doing Development right. I am much less sanguine than Hajoon about industrial policy success in Ethiopia or even Vietnam. Vietnam is abandoning industrial policy and supporting TPP because they have failed to discipline many of their supported industries. But in a relative sense they have some successes. Ethiopia has a committed leadership but many of their industrial support policies show no evidence of discipline (yet). The structure of the party and its internal divisions make it hard for it to develop in this direction. I hope they do, but it is by no means very likely. It would have been much better to analyse the power structures within Ethiopia and advise them of industrial policies that have a higher chance of success given their actual enforcement capabilities.

  4. When referring to South Korea Ha Joon Chang deals with a success story. Mushtaq Khan when referring to Bangladesh and India refers to cases which still to prove to become a success. Still, the very fact of debates between two heterodox economists sounds interesting.
    Some early ‘non-conventional’ ideas on the role state, political parties concerned by short term electoral cycles rather than longer term (decades-long) structural reforms in economy (and social transformations in societies, which requires not decades, but generations), and leadership…- were raised by the Growth Commission (led by Michael Spence and sponsored by the WB, http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/ORGANIZATION/EXTPREMNET/0,,contentMDK:23224987~pagePK:64159605~piPK:64157667~theSitePK:489961,00.html ).
    In there recent article Jomo Kwame and Michael T. Clark from FAO not only question the term ‘good governance’, but raise another questions. We cannot expect that immature, in many cases infacnt governments, moreover infant states and societies, with extremely weak economic ground, could ‘introduce democracy’ just by a presidential decree or a parliamentary law. “The required reforms are so wide-ranging that they are beyond the means of most developing countries to implement. As a result, good-governance solutions tend to distract from more effective development efforts” (http://www.project-syndicate.org/commentary/governance-reform-development-agenda-by-jomo-kwame-sundaram-and-michael-t–clark-2015-06).
    Developmental state thus is not about democracy or authoritarism, market or plan, industries or services, villages or urban mega-cities…. Developmental state is about development, it is about process. It is about a systemic transformation of both economy, society, state “as an interconnected system rather than a set of preferences and wishes that are correct individually but contradict one another when taken as a whole” (http://vision.cer.uz/Data/lib/vision/en/VISION_en.pdf#page=29), it is about more holistic approach for development and changes with societies and states.
    The very term “developmental state’ becomes more fashionable these days. Luiz Carlos Bresser-Pereira – another well known promoter of the concept of developmental state organizes the 1st New Developmentalism’s Workshop: Theory and Policy for Developing Countries in June in Brazil. (http://www.bresserpereira.org.br/).

  5. As far as I know, the company Desh Garments didn’t get any support from the government initially. After the set-up of Desh Garments, it along with Daewood pursuaded the government to start bonded warehouse through which fabric could be imported duty free. So, the role of the government was indirect. See “The Catalyst Model of Development: Lessons from Bangladesh’s Success with Garment Exports,” World Development, 18(2), 333-346, 1990

  6. An excellent read and great summary Duncan. Thank you. There is a lot of great insights here for a country like Papua New Guinea (where I am working), which is struggling with rebuilding the public service and diversifying t he economy away from a reliance on extractives. I found Mushtaq’s comments very helpful. I have been trying for some time to get the International Growth Centre here to provide some top quality advice to political leaders here – but unfortunately it seems that a country the size of PNG (roughly 10m population and equating to roughly 80% of the population of the Pacific) and with significant elements of ‘fragility’ is not of interest to them. We would really welcome someone like Mushtaq to visit here. Thanks again.

  7. I may have missed the discussion here as I am arriving a bit late.
    I am curious about a tension that I have not fully understood in debates about industrial policy. One kind of question is about what sorts of policies should domestic governments pursue. A second kind of question is about how trade agreements should be structured. On that second kind of question, I am unsure of what someone persuaded of the merits of industrial policy should say. On the one hand, trade agreements which leave room for states that can successfully pursue industrial policy without a big risk of rent-seeking and undue political interference should be free to do so. But on the other hand, those states which are least likely to succeed with industrial policy are those that are best served by trade agreements which do not leave room for industrial policy. This is because free trade agreements which tie the hands of government in supporting particular sectors turn out to protect that government against private sector backed coups and other forms of interference. So if one designs trade agreements with the developmental interests of somewhat effective states in mind, industrial policy stays in, but if the worst and weakest governments are the primary target, then industrial policy is out.

  8. I like and appreciate the points you make around poverty and inequality, I think we need to talk and discuss inequality much more than we currently do.

    I have recently published an article around how Netflix are making a difference in the TV and Movie industry to improving awareness of the current inequality of actors and cast members. In their own media publishing, Netflix seem to be trying to be as diverse as possible – while still not perfect, I think it’s a dramatic improvement to what we’re currently used to.

    If you’d like to check it out you can see it here: http://streamsidekick.com/netflix-diversity-racism/

  9. Nice summary and discussion. What you call “payment by results meets ind pol” is what amsden called reciprocal control mechanisms, or performance requirements, the hallmark of more successful industrial policies. Not a new idea. Nor does it solve the problem of state capacity, so much as re-ask it, since need ability to not just design but credibly enforce constraints. HJC’s insight here seems to be that the capacity need not come first but rather can emerge from the industrial policy experiences?

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