Industrial Policy meets Doing Development Differently: an evening at SOAS

March 17, 2016 9 By Duncan Green

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!