Vertical Industrial Policy Debate

Vertical Industrial Policy: An illusion for poverty reduction!

Elena Pici, Yunji Choi, Julia Tory, Hadil Siklawi,

Merve Ozcan, Abdul Malik Omar

Table of Content1. Define Industrial Policy2. Arguments against Industrial Policy3. Preconditions of Industrial Policy4. Case Study: Malaysia5. Case Study: Sierra Leone6. Regional Policy Recommendations

Vertical vs Horizontal Industrial Policy

1. Vertical Industrial Policy – ‘selective’ or ‘targeting’ policy which deliberately favors particular industries/sectors (or even firms) over others, against market signals, usually (but not necessarily) to enhance efficiency and promote productivity growth, for the whole economy as well as for the targeted industries themselves ( Pack & Sagi, 2006)

2. Horizontal Industrial Policy - policy focus on ‘public goods’ that benefit all industries equally but are likely to be under-provided by the market – e.g., education, research and development (R&D), and infrastructure – and not involve ‘picking winners’

Vertical top-down industrial policies are inefficient for poverty reduction

1. Arguments Against Vertical Industrial Policy

Embeddedness of vertical industrial policy in an institutional framework of a region

Countries at early stages of institutional development should avoid selective policies

and focus instead on reforming the overall investment climate.

As a strong supporter of vertical industrial policy would suggest, “in general, the lower

the capabilities, accountability and commitment of the government the lower the

degree of selectivity it can be safely entrusted with” (Lall, 2004).

Arguments Against:

1. Sectional interests, rent-seeking and corruption

2. Asymmetric Information/ Lack of coordination

3. Inflexibility of industrial policy

4. Lack of government and private sector capabilities

5. Opportunity costs

6. Targeting the wrong sector

7. Susceptible to shocks

Argument Against6. Targeting the wrong sector and Misallocation of

resources

“...number of industries that were apparently

producing negative value added at world prices, …

shutting these industries down would have

increased national output”

Rodrik (2008)

Argument AgainstExample: Case studies of industries in India, Pakistan,

Mexico, and Brazil

● 6 cases where market yield was higher than the

social yield

● 3 were actually harmful to the economy

Argument Against7. Susceptible to external or macroeconomic shocks

Example: Uruguay’s Forestry and Wood Industry

● Involved long-term investment

● Subsidizing planting costs and Tax exemptions

● As financial crisis hit Uruguay, subsidy payment

was postponed

2. Preconditions for Industrial Policy

The Three Preconditions for Industrial PolicySustainable Development

Framework

Effective Governance Inclusive Institutions

Oppositions’ lacking preconditions for Industrial Policy

Unsustainable

Development

Weak governance

Weak Governance Extractive Institutions

3. Case Study: Malaysia

Data on Malaysia • Current economic situation in Malaysia

• Some growth signals

• Malaysia:upper middle-income country

• Definition of middle-income trap

• World Bank’s 2014 thresholds for upper middle-income class (GNI per capita) :

$4,125-$12,746

MIDDLE-INCOME TRAP: Case Study: Malaysia

MIDDLE-INCOME TRAP: Case Study: Malaysia• Real GDP Per Capita and Total Factor Productivity:

MIDDLE-INCOME TRAP: Case Study: Malaysia

Technology creation in Malaysia is

really low!

• Innovation-driven growth is the key!

• Development of new technologies for new goods

• Production of the same set of goods

The Missing Links: Case Study:MalaysiaReasons of patents & technology scarcity:

Lower levels of education Lower R&D Spending

Conclusion: Malaysia needs horizontal industrial policies!

Conclusion: Malaysia needs horizontal industrial policies!!

4. Case Study: Africa

The Case of AfricaBy 2030, Africa will be home to 80% of the

world’s population living below the poverty

line (African Economic Outlook, 2015)

Ultimate goal is structural transformation

towards higher-productivity areas outside of

commodities (AE) 2015; Altenburg and

Melia)

Problem with Narrow Sectoral Policies

“Narrowly-defined sectoral approaches tend to almost exclusively frame

governmental action, hampering effective problem-solving at the local

level” (AEO 2015)

Regional Policies Looking ForwardInnovation needed in structural transformation approach for

Africa

Regional Policies Looking Forward3 main policy strategies of the African Economic Outlook 2015 Report:

1. Focus on local assets

2. Various sectoral policies within a regional

framework

3. Multi-level government involvement with

different actors and active participation of

local stakeholders

“Place-based, multi-sectoral,

participative development strategies”

The Case of Sierra LeoneSierra Leone has rapidly improved its business environment

and begun to implement successful government initiatives in

recent years

Success so far:

Diagnostic Trade Integrated Study (DTIS) (2006 and 2013)

Economic Diversification Pillar in the Agenda for Prosperity

(A4P) (2013-2018)

The Case of Sierra Leone According to the 2013 DTIS Report: “A holistic approach is needed for

trade related strategies and investments to truly achieve their intended

purpose. Such an approach entails investments and strategies be

underpinned by institutional reforms... This has not been the case in Sierra

Leone’s experience with the implementation of the 2006 DTIS, therefore,

the full benefits of progress made in areas like building of hard

infrastructure and adoption of numerous trade related national strategies

have not translated into lower trade costs, value added exports, and reliable

supply chains” (11).

Conclusion

The best industrial policy is none

at all! - The Nobel laureate Gary

Becker

With a few modification of it to adapt to the circumstances of our debate, we claim

that: The best vertical industrial policy for poverty reduction is none at all!

Thank you for your attention!