A recent article by Trinh Nguyen of the Carnegie Endowment for International Peace (which can be accessed for free here) describes Vietnam’s recent development success story, its lessons for other late-developers and its prospects for the near future. According to the author, this success has been based on a rapid growth in manufacturing exports, much of it from foreign invested firms. This is in turn down to a liberal approach to international trade and investment, incentives for foreign firms to invest, including the provision of “industrial parks, infrastructure building, and tax breaks”, and more widespread “improvements in its electric system, national highways, and air and sea ports”. Continue reading
Last week I finished some lockdown reading, following my perennial interest in industrial policy and how it impacts development. This time it was the edited 2019 volume How Nations Learn, subtitled Technological Learning, Industrial Policy and Catch-Up.
HNL explores industrial policy in the context of ‘learning’ by governments and firms in ways which can accelerate industrial growth and development. That is, learning by governments in the process of policy making for development and learning by firms in the form of using and adapting already existing technologies to drive productivity growth in the catch-up process.
It is fair to say that most of the chapter authors hold to the idea that industrialisation and the growth of the manufacturing sector in late (relative to today’s advanced countries) developers is a primary driver of learning and of development. In this vein development is seen as more than periods of growth, but as an economic transformation. It is this continuous transformation in economic structure which makes long term growth and broad increases in living standards possible. Continue reading
Successful developing countries that have made the transition to advanced country status are relatively few in number. Those that have ‘made it’ in the wake of already rich countries have tended to adopt polices which encourage firms and sectors to ‘catch up’ over a sustained period.
When economies are far from the technological frontier they can achieve more when firms learn to use and adapt already existing technology rather than innovating themselves. Historically this has taken place in countries from the US and Germany to South Korea and Taiwan. One would expect firms to imitate technology more at an earlier stage of development, assuming that there are economies, sectors and firms ahead of them and closer to or at the frontier, while as they approach the frontier, innovation should become more important.
A recent article in the journal Industrial and Corporate Change looks into this process at the firm level. Ching T. Liao explores the differences between those firms that imitate others and those that innovate, and the effect this has on productivity. Continue reading
There has been a resurgence of interest in the theory and practice of industrial policy in recent years. To many, the financial crisis of 2008 exposed a general failure of the ideology, if not the practice, of a minimal state. Although the interventions that resulted were necessarily imperfect, they reawakened among more mainstream economists and other social scientists ideas that had for some time been confined to the heterodox margins of academia, at least in economics.
Meanwhile, the experiences of economies in East Asia, such as Japan, South Korea, Taiwan and Singapore, which all experienced significant periods of rapid catch-up growth to advanced country status, revealed that, if one cared to look closely enough, industrial policy had never really gone away.
Moving to the present day, policy-makers all over the world have engaged in unprecedented intervention to try and protect parts of the economy during the Covid-19 pandemic and subsequent widespread lockdown. While these are more general than traditional industrial policies, those economists more sympathetic to state intervention are making the case that economies should learn some lessons from the current crisis, such as that there is very often a need for the state to work with the private sector to tackle public ‘missions’ at the national and international levels. Continue reading
The IMF recently published a refreshing paper on the principles of industrial policy. The paper is quite lengthy, so I will summarise and discuss some of the main points here. The authors do not speak for the IMF of course, and it merely reflects their current research, but it remains important.
The paper is important because it unambiguously makes the case for an active industrial policy in developing countries to enable them to catch up with the richest countries.
They argue that successful examples of such a development strategy have been extremely rare in recent decades, but that it is vital to learn from them. They use the case studies of the ‘Asian miracle’ economies of South Korea, Taiwan, Singapore and Hong Kong, which were relatively poor some decades ago, but managed to industrialise and grow rapidly, enabling them to catch up and graduate into the club of advanced economies.
They also note that most if not all of today’s rich countries, including the US, Japan and Germany, followed such a strategy during their catch-up phases of growth, and continue to employ industrial and technology policies, albeit in different forms.
The paper is also refreshing because the IMF, and the World Bank, are not known for supporting the principles of industrial policy as a viable development strategy. In their dealings with financial crises and developing countries in recent decades, they have tended to promote and enforce an anti-developmental state neoliberal policy agenda, known as the Washington Consensus, with often dire results for levels of poverty and inequality and the ability of governments to encourage successful development. Continue reading
In Tuesday’s post on China’s industrial policy I mentioned the country’s lack of enforcement of Intellectual Property Rights (IPR) as a feature of its development. The US in particular, but also other rich countries, have complained about this for many years.
IPR policy, such as the creation of patents, is intended to encourage innovation by allowing firms to reap profits from the creation of new knowledge and therefore provide them with incentives to innovate. This sounds like a good thing. But managing an IPR regime requires careful judgement. If new ideas are protected for only a short period, firms may not have sufficient monetary incentives to innovate; if they are protected for too long, competition will be stifled and the diffusion of the innovation across the relevant sector or economy, as rival firms compete for a share of the market by copying or adapting it, will be slowed.
Badly designed IPR regimes can therefore slow growth in economy-wide productivity. Innovating firms often have an incentive to lobby policymakers to introduce lengthy and comprehensive patent protection, to their benefit, but to the detriment of the economy and society as a whole. Continue reading
The rapid growth and transformation of the Chinese economy since 1978, when policymakers began a programme of economic reforms, has been extraordinary. Up until the last few years, GDP growth averaged around 10% per year, lifting hundreds of millions out of poverty. This represents the largest episode of poverty reduction in human history. China, as the largest manufacturing nation, has become the ‘workshop of the world’.
With a population of 1.4 billion, and an economy relatively open to international trade, these changes have and will continue to have an enormous impact on the rest of the rest of the world. For this reason, we should take a great interest in China’s continuing evolution.
Donald Trump, both on the campaign trail and since becoming US President, has placed great emphasis on getting some sort of ‘better deal’ between the US and Chinese economies. His administration has criticised China for taking advantage of the US on trade and the use of technology. But should China’s rise be a worry in these respects? Or is the US being hypocritical? In fact today’s rich countries all intervened in the economy and used forms of trade, industrial and technology policy to promote their growth and enable periods of ‘catch up’ with those at the frontier. China has been no exception. Continue reading
Will Hutton gets passionate about the failure of laissez-faire ideology in UK economic policy-making. He harks back to the heyday of interventionism during World War II and the post-war period. Of course, the right likes to think of this as the time when the UK economy was in decline. In fact, we had full employment, no major financial crises and prosperity was more widely shared than before or since. Growth in output and productivity was only poor relative to our competitors in Europe and Japan, many of whom were rebuilding after wartime destruction and ‘catching-up’ with the technological leader, the US.
State interventionism and industrial policy in particular can work, but not always. One can always pick and choose examples to back up one’s argument. Continue reading
The key to a successful industrial policy, one which promotes the growth and structural change in a ‘late-developing’ nation and enables it to catch up with much richer countries, is one which stimulates technological learning by firms and industrial sectors, rapid productivity growth across the economy, and a leap up the technology ‘ladder’.
Industrial policies which have been at least to some degree successful in achieving catch-up growth and development have been carried out in a number of countries, albeit in different forms. In Japan, South Korea and Taiwan for example, policies involved a mixture of import substituting industrialisation and (later on) export promotion. Particular industrial sectors were supported as infant industries which needed to ‘grow up’, even if this meant going against these countries’ comparative advantage, or those industries which were ‘naturally’ price-competitive in national and international markets. Thus these countries’ governments ‘got the prices wrong’, through such policies as tariffs, subsidies, public ownership of particular enterprises and enforced credit allocation through state-owned banks. This strategy, which promoted domestic firms and sectors as a route to development, resulted in rapid GDP and productivity growth and structural change and a catching-up with much richer countries during the post war period.
By contrast, countries such as Malaysia in the 1970s and 1980s and China in the 30 years since reforms began in 1978, relied more on foreign direct investment (FDI), as a route up the technological ladder. Multi-national corporations (MNCs) were encouraged to invest in special economic zones through a mixture of tax incentives, infrastructure provision and the promise of political stability which, although not a purely economic issue, is surely vital to sustained investment. These zones were intended to be used for production for export. However, in order to achieve technological progress beyond simply the foreign firms themselves, which could have simply imported components for assembly and exported the finished product, with minimal spill-over benefits for the wider economy, these countries’ governments pushed hard for a minimum level of local content inputs to production, in order to stimulate the growth of domestic firms and encourage broader indigenous growth and transformation. Backward linkages from MNCs to local firms were thus an important part of the industrial strategy. The size of the Chinese market and a well educated and cheap labour force were also a factor in its attractiveness to foreign investors.
While growth in Malaysia was never as fast as the East Asian Newly Industrialising Countries (NICs) of South Korea and Taiwan, as well as Japan, it nevertheless grew quickly and achieved its own measure of catching-up development during the last quarter of the 20th century. Growth in China has been more rapid, at an average of around 10% for 30 years.
Thus different types of industrial policy can be compatible with rapid development. In all cases, the state is able to encourage a broad pattern of technological learning and catching up in firms and sectors which act as an engine of growth.