A
panel discussion in Doha, Qatar, as part of the Thirteenth
UN Conference on Trade and Development (UNCTAD XIII)
brought together some economists and policy makers
to provide new perspectives on industrial policies
in the South. It became evident that industrial policies
have been significant, if unsung, forces behind the
much trumpeted ''emergence'' of some developing economies
as major players in the world stage.
For some time now, in different parts of the world,
industrial policy has been making a comeback. Indeed,
as participants in the panel noted, it never really
went away, especially in the more successful countries,
even though for at least two decades it was decried
and generally given a bad name by the dominant Washington
Consensus.
What exactly is industrial policy? Robert Wade - whose
book ''Governing the Market: Economic theory and the
role of government in East Asia'' (Princeton University
Press 1990) remains an essential classic for anyone
even vaguely interested in this issue - was able to
provide the simplest definition: selective government
support for some activities over others. This does
not relate only to ''industry, but to any economic
activity. The basic purpose is to shift the economy
towards higher value added activities in a process
that cannot occur based simply on free market forces.
This has been described simplistically as the strategy
of ''picking winners''. And this in turn is obviously
prone to all sorts of difficulties, which is why such
a strategy has been criticised roundly for the possibilities
it generates for wrong government choices, creating
rent-seeking behaviour and crony capitalism, thereby
wasting public resources, other forms of elite capture
and so on. While these are certainly problems that
must be recognised and dealt with, overall this is
far too unsophisticated a response.
In the first place, the best industrial strategy is
not about picking individual firms or even sectors.
Rather, as Richard Kozul-Wright pointed out, UNCTAD
and other have stressed over the years that it is
about creating appropriate economic environments and
generating incentives for economic diversification
in a wide range of ways: through fiscal and monetary
policies, financial, trade and investment policies,
infrastructure creation, education (particularly higher
education to develop the required skills dometically)
and so on. Indeed, at some level, all countries are
pursuing industrial policies, whether or not they
recognise it, although of course the quality of the
interventions varies.
In a fascinating and thoughtful intervention, Joao
Carlos Ferraz, Vice President of the Brazilian development
bank BNDES, brought out how this can work in practice.
BNDES (whose assets currently are greater than those
of the World Bank and Asian Development Bank put together)
has emerged as a critical player in Brazil, allowing
for the development of some now internationally competitive
industries, providing more funds for investment to
some poorer regions, and even enabling faster recovery
in troubled macroeconomic circumstances such as those
generated by the global crisis of 2008.
Ferraz noted that tenacity, flexibility and realism
are key elements in any successful industrial policy,
and also that much of it consists not of forceful
direction but gentle and persistent nudging to develop
certain sectors. He also pointed to the need to align
different elements of policy: trade and industrial
policies, financial strategies, exchange rates, fiscal
and monetary policies. The firm commitment of the
Brazilian government to industrial policy geared towards
productive diversification was strongly evident.
This is sharp contrast to India, where industrial
policy is still explicitly criticised and apparently
sought to be dismantled and avoided by governments
- not just the current government, but most previous
governments for the past two decades. Indeed, the
conventional narrative about the Indian economic growth
story is that it is all about ''economic reforms''
that liberated productive forces in the economy from
the shackles of government intervention. It is generally
believed that the previous import substituting industrialisation
strategy created a high cost economy that stifled
enterprise and innovation, and so opening up to domestic
and international competition was the critical force
making for growth. In other words, moving away from
industrial policy is seen as the cause for success.
Despite some elements of truth in this argument, it
is also far too simplistic. Indeed, it can plausibly
be argued that many of the more sustainable elements
of the Indian growth success actually reflect the
effects of past and present industrial policies, even
when these are not officially recognised.
This can be illustrated with examples of four sectors
that are currently seen as examples of India's economic
achievement: software, pharmaceuticals, chemicals
and automotive ancillaries.
Representatives of the software industry tend to be
the biggest exponents of the argument that they ''did
it all by themselves'', without any support from government,
and only because they were freed from the deadening
hand of the state. Yet the emergence of this industry
in India cannot be imagine without the Nehruvian higher
education policies that created institutions like
the IIT and universities that could provide the skills
required. (Incidentally this was in the teeth of opposition
from the World Bank and others who argued that India
should only focus on primary education.) And the industry
has benefited for decades from prolonged tax holidays
and a range of other incentives, all of which can
be seen as examples of industrial policy.
In the case of pharmaceuticals, the fundamental factor
behind the expansion is clear: the patent regime until
2001-05, which allowed only process patents in pharmaceutical
products. This enabled domestic firms to engage in
reverse engineering to produce generic alternatives
to existing drugs, and thereby created the cheapest
drug industry in the world with significant economies
of scale. There is no question that such a law (which
was both an industrial policy and a means of ensuring
affordable drugs for the population) was critical
in the growth of the industry to enable it to compete
globally.
The auto ancillary industry was the unusual child
of two very different parents: a liberalisation of
the production of final products, including more FDI;
and a strategy of first insisting on and then encouraging
increasing levels of indigenisation among the domestic
players in the newly liberalised industry. The chemical
industry too, especially in its large-scale petrochemical
form, cannot be imagined without the many trade policy,
fiscal and infrastructural benefits that certain players
(such as Reliance) received from the state.
All of these are certainly forms of industrial policy,
and while the specific policies in turn may have various
drawbacks, it would be foolish to deny their role
in the growth of these sectors. The point is, however,
that these occurred under the aegis of a state that
was officially in denial about industrial policy,
and therefore these were mostly ad hoc or individual
decisions rather than part of a more systematic and
developed aggregate strategy. This in turn has been
associated with several weaknesses or even failures
of the overall economic strategy, which are now becoming
even more prominent as the Indian growth story loses
some of its shine even for those who have not been
excluded from its benefits.
The first major failure is in employment, which has
simply not kept pace either with the GDP expansion
or with the requirements of the growing labour force.
This in turn has meant that incomes of the majority
of the population have not risen sufficiently to enable
broad-based growth of consumption demand. Instead,
the market has been delivered by increasing income
and asset inequality and credit-driven bubbles.
The second major weakness of this ''industrial policy
that wasn't'', is the lack of synergy between industrial
sectors. Small and medium enterprises have mostly
been the Cinderellas of the expansion, doing most
of the work but denied even the ability to survive
with dignity, and any systematic strategy for SMEs
has been conspicuous by its absence. Other gaps resulting
from lack of synergy are also evident: for example,
the domestic steel industry does not produce auto-grade
steel, so the automobile industry must import its
requirements.
This leads to the third significant failure: the growing
lack of positive synergies between agriculture and
non-agriculture, and the continued languishing of
the agricultural sector (which continues to employ
at least half of the labour force despite its shrinking
share of GDP) even in period of high product prices.
Another major lacuna has been the lack of sufficient
development of infrastructure, which has so many direct
and indirect effects on economic diversification that
the point does need to be laboured upon. Finally,
this has been inadequate as a really positive industrial
policy also because there has been no technology policy
and until very recently, no attempt at taking the
issues of research, development and innovation seriously.
Indeed, the most basic way of improving aggregate
productivity – providing credit and access to technology,
inputs and new knowledge to the small producers who
generate the bulk of the productive activity in India
– is still ignored.
So India has much to learn from other developing countries
that have explicitly and successfully employed industrial
policies even in largely market-driven economies.
Indeed, if India does not learn from these very different
experiences to develop its own more coherent and sustainable
industrial strategy, its future economic trajectory
is likely to be even more uncertain.
* This
article was originally published in Frontline, Volume
29 - Issue 09: May. 05-18, 2012 and is available at
http://www.frontlineonnet.com/stories/2012051829
0910300.htm
