Efficiency, Finance, and Varieties of Industrial Policy

Guiding Resources, Learning, and Technology for Sustained Growth

Akbar Noman, Joseph E. Stiglitz

• Publisher: Columbia University Press
• Year: 2016
• ISBN:
  9780231542777
• Topic: Commerce
• Subtopic: Gestion industrielle

Industrial policy, once relegated to resource allocation, technological improvements, and the modernization of industries, should be treated as a serious component of sustainability and developmental economics. A rich set of complimentary institutions, shared behavioral norms, and public policies have sustained economic growth from Britain's industrial revolution onwards. This volume revisits the role of industrial policy in the success of these strategies and what it can offer developed and developing economies today. Featuring essays from experts invested in the expansion of industrial policies, topics discussed include the most effective use of industrial policies in learning economies, development finance, and promoting investment in regional and global contexts. Also included are in-depth case studies of Japan and India's experience with industrial policy in the banking and private sector. One essay revisits the theoretical and conceptual foundations of industrial policy from a structural economics perspective and another describes the models, packages, and transformation cycles that constitute a variety of approaches to implementation. The collection concludes with industrial strategies for facilitating quality growth, realizing more sustainable manufacturing development, and encouraging countries to industrialize around their natural resources.

CHAPTER 1

Learning, Industrial, and Technology Policies

AN OVERVIEW

Akbar Noman and Joseph E. Stiglitz

Many of the most fundamental and frequent controversies in economics revolve around two related sets of issues: the salience and significance of market failures and the role of the state in overcoming them. They arise in a particularly acute form in the literature on industrial policies. Broadly understood, industrial policy refers to public policy measures aimed at influencing the allocation and accumulation of resources, and the choice of technologies. A particularly important set of industrial policies, at the center of many of the chapters in this volume, comprises those targeted at activities that promote learning and technological upgrading. They are sometimes more accurately labeled as learning, industrial and technology (LIT) policies. We use the term to cover both deliberate and self-described industrial policies as well as policies that have a similar effect though they are not labeled as “industrial policies” (this is particularly well illustrated by Antonio Andreoni’s contribution, chapter 9).

Industrial policies became virtually ousted from the set of policy prescriptions proffered by economists—even if they were often resorted to in practice—in the heyday of neoliberalism, with the Washington consensus policies heavily biased in favor of largely unfettered markets.¹ There has been a resurgence of interest in industrial policies in recent years, and such policies have even come to be advocated by the World Bank.² This revival prompted the Initiative for Policy Dialogue (IPD) and Japan International Cooperation Agency (JICA) to establish a joint task force on industrial policies. The task force’s work was motivated in part by the neglect of research into industrial policies in the long period the subject was in exile from academic research and policy analysis, and especially from that of multilateral organizations. Issues requiring further exploration included those pertaining to development finance and the links between the recent literature on industrial policies and that on growth and structural transformations. There has been, moreover, new empirical work on different experiences with industrial policies and new insights into the debate on static vs. dynamic efficiency and on mitigation of risks.

The historical experience of advanced economies at or near the frontier of technology, attests to the vital role that industrial policies played in sustained economic growth and transformation.³ This provides compelling testimony to the critical role of governments in fostering sustained economic progress. Moreover, there are good theoretical reasons for the type of public policy interventions that constitute what we have called LIT and industrial policies. These are elaborated in chapter 2 by Mario Cimoli and Giovanni Dosi, and in chapter 3 by José Antonio Ocampo. Before we turn to these and the other chapters that comprise this volume, it would be apposite to comment on one objection to industrial policies: What may be good in theory may be vitiated by the risks of poor design and implementation. The answer to this objection is, first, that while industrial policies are not sufficient by themselves for success in economic development, both historical experience and theory indicate that they are virtually necessary. Second, yes there are risks stemming from institutional imperfections and political economy “failures,” but such problems are by no means confined to industrial policy as demonstrated, for example, by many failed programs of macroeconomic stabilization or of liberalization and privatization. The challenge for public policy is to get the risk–reward ratio right. That industrial policy has the potential to provide plentiful rewards and that there are ways to obtain them and mitigate risks of failure are amongst the central contentions of this collection of essays.

The rest of the volume comprises three parts. Part I elaborates on the conceptual and theoretical foundations of LIT or industrial policies. Part II focuses on an aspect that has been relatively neglected in the recent literature, even as its importance has been widely recognized: development finance, in particular development banks. The primary focus of part III is on experiences and experiments with industrial policies, their lessons, and proposals about their design and implementation. In this overview, we pay particular attention to part I. This quick sketch cannot, of course, do justice to the chapters and is aimed more at whetting the appetite and drawing some salient links between the various contributions than at providing a summary.

Chapter 2 by Cimoli and Dosi draws heavily on Cimoli, Dosi, and Stiglitz (2009). It begins by noting that LIT policies and associated institution building play a vital role in sustained economic progress and transformation. At the outset Cimoli and Dosi emphasize the pervasiveness of market failures, noting that the conditions required for the standard normative welfare theorems to hold are far from the conditions that prevail in the real world: “The whole world can be seen as a huge market failure!” They recognize that the question in practice is more one of whether the deficiencies are sufficiently serious to warrant active policy intervention, including in shaping institutions. They observe that this way of posing the question shifts the burden of proof away from those who believe that the presumption should be to avoid interventions in markets.

In particular, Cimoli and Dosi point to the severe shortcomings of markets in dealing with knowledge and information. Knowledge is essentially a public good (in the sense of Samuelson). But the nexus of technology, learning, and information is at the heart of sustained growth and catch-up. Cimoli and Dosi further note that most firms are operating below “best practice” even within the same economy and that this pervasive phenomenon raises the question of whether the standard production possibility curve makes sense even within a sector or a country. Most importantly, they argue that comparative advantage “needs to be re-examined: a country’s comparative advantage is based in part on its comparative learning capabilities.” Many of the policies that “enhance economy-wide learning are the opposite of those derived from the standard neoclassical model.”⁴ Cimoli and Dosi also point to the trade-offs that may arise between static efficiency and the dynamics of learning and technology along similar lines to the more detailed elaboration of that theme in the contribution by Ocampo (see below).

A particular kind of information problem that developing countries face is called the coordination problem. In well-functioning market economies, prices serve this role. Even there, prices often fail to provide the necessary coordination, but in the context of development, industrial policies can help overcome coordination problems of the sort recognized in the early development literature (e.g., Nurkse 1953; Gerschenkron 1962; Rosenstein-Rodan 1943; Hirschman 1958; and Prebisch 1963).

While stressing that there are no “magic policy bullets,” Cimoli and Dosi identify broad types of policy prescriptions revolving around the “necessity of nurturing infants.” In particular, Cimoli and Dosi provide a taxonomy identifying seven broad “domains of policy intervention” and how they map into different policy measures and institutions. They recognize that policy frameworks need to pay attention to building the “capabilities” of actors and also to curb rent seeking and inertia. They argue that in achieving development objectives, incentives via altering prices such as protection or subsidies are not likely to be sufficient. In this context, they contrast the stylized Latin American experience with that of the East Asian “tigers” (Japan, Korea, Taiwan, and Singapore).

Cimoli and Dosi then turn to how to motivate learning and accumulation of capabilities and the increase in productive capacity. They emphasize that while innovation may give rise to rents, these rents may incentivize research, and rents may be necessary for financing innovation in the absence of a well-functioning financial market. Even innovation rents today do not automatically get reinvested into producing innovation in the future. They elaborate on the three aspects of strategies designed to promote innovation and the accumulation of capabilities: carrots, sticks, and competition.

Cimoli and Dosi’s last two sets of policy prescriptions pertain to avoiding the natural resource curse and the imperative of consistency between macroeconomic and industrial polices.

Cimoli and Dosi, as well as Ocampo in chapter 3, also note that the world has changed in ways that provide challenges to the effective implementation of some of the “old” policies that worked in the past. In particular, they point to the constraints imposed by globalization and changes in global rules such as those reflected in World Trade Organization (WTO) commitments and bilateral and “plurilateral” investment and trade treaties. Both Cimoli and Dosi and Ocampo examine in distinctive ways how these constraints impact industrial policies and how the adverse effects can be mitigated. After noting the several loopholes and flexibilities that developing countries can exploit, they make a case against bilateral trade and investment treaties and in favor of a reform of the international rules governing trade and intellectual property rights. Both chapters conclude with a call for a reform of the current framework of such international rules.

The contribution by José Antonio Ocampo (chapter 3) provides a grand sweep of the literature on economic growth and structural change and places the role of industrial policies in that broader context. He contrasts the neoclassical focus on static efficiency with what is needed for sustained growth: “Economic growth in developing countries is intrinsically tied to the dynamics of production structures and to the specific policies and institutions created to support them. The major focus is on the dynamic efficiency of economic structures, defined as their capacity to generate new waves of structural change….”

Ocampo makes extensive use of the “old” and “new” literature on growth and development. He first addresses the methodological issues that arise in (1) distinguishing between what Madison (1991) refers to as “proximate” and “ultimate” causes and (2) the direction of causality given the simultaneous movement of a series of variables with growth (investment, production structures, technology, human capital, etc.).

Ocampo then sketches the regularities characterizing the growth process, providing a succinct discussion of five sets of stylized facts that are of special importance in understanding growth and their implications: (1) the persistence of large intercountry difference in several dimensions; (2) the large discontinuities that generally characterize growth (which often tends to come in spurts); (3) the importance of elastic factor supplies in the development process; (4) the path dependence of growth; and (5) the variability of successful trade policy packages, which argues against the simplistic generalizations about what constitutes “good” trade policy that have been all too common.

Ocampo then distinguishes “framework conditions” (macroeconomic stability, basic institutions, human capital, infrastructure) that are necessary for growth from the active determinants of the growth momentum, the ability to generate continually new dynamic activities. He argues that it is “the system-wide processes,” including interactions among (1) innovations and learning and (2) complementarities, linkages, or networks among production activities that matter the most.

He concludes that “the key to rapid growth in the developing world is the combination of strategies aimed at the dynamic transformation of productive structures with appropriate macroeconomic conditions and stability…” (emphasis added).

Both of these papers on conceptual and theoretical foundations also point to the importance of development finance, especially the role of development banks in providing long-term capital for new activities of the sort they emphasize. The four chapters of part II are devoted to development finance, a topic that has been widely recognized as important in the recent literature on industrial policies but elsewhere has received rather scant attention. Together, the four chapters not only present the theoretical case for development banks—explaining why conventional financial market institutions fail to meet certain societal needs—but also demonstrate that a number of successful development banks have made a difference in the development of their countries. Of course, there have been failures of development banks in the past, sometimes associated with politically connected lending. Unfortunately, there is a paucity of research on development banks (perhaps reflecting the long period during which they were out of favor). The key question is: Why have some banks succeeded and others failed?

João Carlos Ferraz in chapter 4 notes that the 2008 financial crisis and its lingering aftermath have brought renewed attention to development banks, including notably for the countercyclical role they have played. Had they not continued to provide finance, the economic crises in these countries would have been deeper. But that is secondary to the main purpose of development banks, which is to overcome financial market imperfections, especially for longer-term investment and structural transformation. (Of course, avoiding the volatility of private finance has long been held as one of the advantages of development banks.)

Over the years, development banks have been subject to extensive criticism. Ferraz tackles head on some of these, such as the alleged crowding-out effect of development banks: that they crowd out private banks, which (under the standard neoliberal framework) are presumptively better at allocating scarce capital. On the contrary, he asserts they can also “crowd in” private finance. Other criticisms are associated with political interference and cronyism and the inability of any public institution to outsmart the private sector in “picking winners.” He suggests ways—institutional designs—in which the risks of these potential problems can be mitigated (e.g., clear segregation of functions, independent board members, banking supervision).

Ferraz shows that development banks have become a major source of finance within the global economy, with a combined asset base of the 23 members of the International Development Finance Club (IDFC) of around $2.8 trillion in 2013. As a ratio of GDP, the sizes of national development banks vary greatly, with their asset base ranging from 0.5 percent of GDP in Indonesia to more than 14 percent in China, Brazil, and Germany.

Ferraz chooses four of the largest development banks for a more detailed analysis of their structure, behavior, and performance in recent years. These are the China Development Bank (CDB), Kreditanstalt fur Wideraufbau (KfW) in Germany, BNDES in Brazil and the Japan Finance Corporation (JFC). He finds many more similarities than differences among them and judges them on the whole to be successful in achieving their developmental objectives while turning in a “very sound financial performance…based on a strong asset base” in 20...