Industrial Policy: Not a bad word

By Annalisa Primi, Senior Economist and Head of the Policy Dialogue Initiative on Global Value Chains, Production Transformation and Development at the OECD Development Centre

Today, economic transformation is a concern in OECD and non-OECD countries alike. The Action Plan for Accelerated Industrial Development in Africa, included inAgenda 2063 or the Africa Union’s vision for the continent’s development, states that:”No country or region in the world has achieved prosperity and a decent socio-economic life for its citizens without the development of a robust industrial sector.” Similarly, the United Nations Economic Commission for Latin America and the Caribbean has long called for diversifying production and promoting innovation to achieve higher equality in the region. Chile, an OECD country, is aiming at raising productivity by promoting the creation of domestic innovative enterprises. The national corporation for industrial development (CORFO) is investing in improving technology transfers, start-ups and social innovation.

Sluggish growth in OECD countries, discontent about inequalities and heightened attention to protecting the environment are pushing governments to increase innovation and re-launch and re-shape manufacturing. Many emerging and developing economies are looking to make their growth job-rich, inclusive, sustainable and capable of reducing their dependency on natural resources. Countries as diverse as Brazil, Costa Rica, Chile, China, Ethiopia, France, Italy, India, Turkey and South Africa are all looking at how to strengthen their domestic industrial capacities by mobilising public and private investments. The time is over when industrial policies were considered words not to be spoken in decent circles. Such policies are back in fashion to support economic transformation and capabilities’ development.

Thus, around the world, we see industrial policies at work.

Africa: South Africa intends to strengthen its industrial base, advancing technological development and mobilising finance for long-term investment. Ethiopia saw the rise of a globally connected textile industry in a rather short period of time thanks to a mix of business incentives and strategic management of foreign direct investment. Today, the very top two world cities for FDI (foreign direct investment) inflows in textiles and garments are the Ethiopian cities of Alem Gena and Addis Ababa, which account for around 10% of total global FDI inflows in the sector during 2013-15.

Asia: China is working to increase domestic innovation capacities. India launched “Make in India” to strengthen the domestic manufacturing base by creating new companies and attracting more foreign direct investment. Singapore and Malaysia are looking at ways to continue moving up value chains. Malaysia entered the electronics value chain in the 1970s as a low-cost location for assembly; now, that industry is one of the 12 National Key Economic Areas, projected to generate an incremental gross national income impact of USD 14.8 billion and 157 000 new jobs by 2020.

Latin America: Peru is pointing to increase its global positioning in higher value-added segments of production. Between 2011 and 2013, it achieved an 80% increase in exports of quinoa-based products through coordinated action between producers’ associations, government institutions and trade unions because of effective implementation production development programmes. Peru’s National Strategic Export Plan 2013-21 fosters diversification out of resource-based development by investing in innovation, mobilising clusters and centres of excellence and promoting the participation of small- and medium-enterprises in value chains.

As these examples suggest, in many countries, the emphasis is no longer if policies are needed but more often what is needed and how to proceed. Learning from other experiences and from the past can help. Moreover, governments are often looking at how to align the quest for competitiveness with the values of social inclusion and environmental sustainability. So, how do we make industrial policy work? In many cases, these policies break from the past. They take into account the interconnectedness of economies. They each try to cope with the new global context, which is more uncertain, fast-changing and complex than ever. The diffusion of new manufacturing techniques, the new geography of production shaped by evolving production networks and the rise of China and Southeast Asia and the growing consumer attention on how goods and services are produced call for bolder policies. Multi-annual planning and budgeting are essential ingredients for success. So are effective monitoring systems, adaptation capacity to change direction when policies do not work and control mechanisms to avoid rent-seeking.

Yet, many issues need to be addressed. It is difficult to identify sectors in which both the growth potential and the learning potential are high. This is true not only because data are missing, but also because the future is uncertain. How do we capitalise on investments in skills, technology, infrastructure and entrepreneurial capabilities when people, technology and firms are mobile and the universe includes national and foreign actors? How do we identify the right stakeholders to bring to the table in global economies?

The industrial policies at work today start to offer some interesting examples of new forms of transparent and participatory prioritisation processes, increased dialogue between governments and the business community and the mobilisation of local and regional governments in planning and implementation. Fewer examples exist, however, on how to make industry work for social inclusion and environment preservation. More data, new forms of partnerships and strengthened abilities to forecast and plan are needed to design and implement industrial policies that deliver now and that make sense for the future.

In the face of growing complexity and uncertainty, many governments welcome a more robust dialogue on industrial policies with diverse stakeholders. The OECD Development Centre’s Initiative for Policy Dialogue on Global Value Chains, Production Transformation and Development, chaired by Costa Rica, Chile, France, Uruguay and Turkey, is making just such a dialogue possible. It re-opens the debate on industrialisation and development in today’s interconnected economies. As a global partnership to promote change, the initiative works hand-in-hand with governments from Africa, the Americas, Asia and Europe to increase evidence and to identify good lessons to design and implement production development policies that deliver the jobs, innovations, wealth and quality of life that citizens demand.

Industrial policy is not a bad word. With pragmatism and increased global dialogue, it can be a concrete way to contribute to inclusive and environmentally sustainable growth.

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