The need for new generation of Industrial Policies Ziad F. Ifram April 2011.

The need for new generation of Industrial

PoliciesZiad F. Ifram

April 2011

Global development discourse

Gradual move towards: Critical role of economic growth to underpin MDG

achievementCentrality of manufacturing sector for economic

growthRenaissance of explicit strategy/policy setting

Strategic advocacy of the role of industry to solve global

challenges Industrial development and productive capacities key for sustainable economic and social development

Industry as relevant driver of the energy/resource efficiency/low carbon agenda

Technology/development/transfer on energy efficiency can become a shared North-South platform in the COP negotiations(from Cancun to Durban, Rio+20)

Industrialization of agriculture – key strategy to increase food security/independence, boost agro-processing exports, create jobs

Productive capacities in marginalized regions – key solution to fight migration, brain-drain, downsides of excessive urbanization

Emerging consensus among policymakers

Need to rally stakeholders behind common strategy No “one- size-fits-all” industrial policy, but careful

customization to local realities Right model for industrial policies is one of strategic

collaboration between public and private sector Shift of focus from predefined “outcomes” to getting “policy

process” right From picking winners to fostering excellence and growth of

firms From resource-based to knowledge-based manufacturing

paradigm

Three game-changers Asian Miracle: contrary to preceding consensus,

Korea, Taiwan, Malaysia managed to “create” a comparative/competitive advantage

Threat of Climate Change: business-as-usual incompatible with global sustainability constraints

Global Financial Crisis: failure of under-regulated global markets to sustain wealth-creation calls for redesign of multilateral governance framework and national policy response

Climate change as defining trend

Promoting Development, Saving the Planet (DESA, WESS 09) We need a Global Sustainable New Deal to “integrate the

climate and development agendas” “…. energy transition will be at the core of an alternative

integrated strategy for meeting climate change and development goals ….”

“ … it is difficult to imagine an integrated approach that does not take industrial policy seriously …”

“while the emphasis in developed countries is on .. the carbon market, the preferred option for developing countries should be an emphasis on active industrial policies”

Factors affecting Industrial Policy

Recent global financial crisis Food crises (2008 and espected 2011) Mounting commodity prices Flucations of oil prices (peak oil prices) Increasing water scarcity Pollution from Agriculture Climate change (Copenhagen Conference)

Human –inducedclimate change could have an overall negative impact on global development)

Rising greenhouse gas (CHG) emissions and their consequences (ongoing negotiations)

Structural change as cornerstone

Structural change is the process whereby productive resources move from lower to higher value addition (desired direction!)

It happens across sectors and within sectors (inter/intra)

It lies at the core of tackling the most pressing global challenges, such as:Poverty eradication/Food crisisTransition to low-carbon resource-efficient growth Migration/illegal economy

Green structural change Paradigm shift to low-carbon/energy-efficient

production (increased labour productivity to be coupled with increased resource productivity)

Next growth wave will be stimulated by green industries

Global and regional transition strategies and policies towards sustainable industrial development are key

Kyoto, Bali, Copenhagen, Mexico …. business and markets are moving ahead anyway

The Neo-liberal economists have written ... the industrial

policy BUT

Successful economies always relied on government policies

that promote growth by accelerating structural

transformation

“ The global economy is literally unsustainable now and cannot absorb further economics and

population growth without serious risks of global

destabilization-even collapse.”Jeffery Sachs

The context: From “Old” to “New” Industrial PolicyThe return of Industrial

Policy

The return of Industrial Policy

The recent financial crises has induced some doubt about western mainstream policy prescriptions for “more market and less state”

Shaken confidence in “free market” model Doors are open to reconsideration of role of state in

development, including as steerer of industrial development (& not just as referee).

Industrial policies have to take centre stage as governments grapple with rising commodity pries, growing unemployment

and inequality and ... economic growth.

The real question about industrial policy is NOT whether

it should practiced, but HOW

Role of state in mainstream view

Ensure macroeconomic stability Liberalize trade Improve institutions Conducive business environment World Bank’s Country Policy & Institutional

Assessment formula (CPIA)

Role of industrial policy in mainstream view

Industrial policy = policies which affect industrial performance through microeconomic variables

States should not have vertical or sectoral IP; at most, horizontal or generic or sector-neutral IP (e.g. support for SMEs, R&D).

Default role of state: no IP, only macrostabilization + trade liberalization + “institutions”.

Assumption: Optimum industrial upgrading & changes in production structure will occur “automatically” if government gets prices & institutions right (= the default role).

Key ideas of new-old approach

Successful cases of development in second half 20th century: govts focused on changing production structure & upgrading industry (not just on “making mrkts work”).

Growth is a process full of uncertainty about what might work, therefore a process of self-discovery of cost structures & mkt opportunities, difficult to predict in advance, path-dependent.

Evolutionary economics, institutional economics better than neoclassical economics (Schumpeter, Nelson & Winter). But marginalized in universities

Public intervention has played significant role in almost all

successful industries Need to complement macro stability with

“productivist” economic strategy focused on the needs of real sector

Institutional design for industrial policy must balance carrot and stick insulation and embeddedness

Policy matters: Latin America experiences

Brazil: steel, aircraft, and (to an important extent) shoe industries are all the creation of ISI, state ownership (aircraft) and subsidized credit.

Chile: salmon the creation of FundacionChile; grapes a result of public R&D in 1960s, forestry was beneficiary of subsidies

Mexico:motor vehicles and computer industries are the creation of ISI policies (initially) followed by preferential tariff policies under NAFTA.

Scratch the surface of nontraditional export

success stories, and you will often find industrial

policies, public R&D, sectoralsupport, export

subsidies, and preferential tariff arrangements lurking

beneath the surface.

Thank you for your attention