Concern for industrial competitiveness is growing in the midst of liberalization and globalization. The potential growth from globalization is being tapped by only a small number of countries, while liberalization is dividing countries that are performing from those that are not.
Neoliberal and structuralist policy approaches address this problem. The neoliberal approach states that the best strategy for all countries and in all situations is to liberalize. It assumes that integration into the international economy will let them realise their natural comparative advantage, optimize dynamic advantage and result to maximum attainable growth. It further argues that government intervention is not needed. On the other hand, the structuralist view puts less faith in free markets and more in the ability of governments to impose interventions. It argues that reliance on markets needs government intervention.
The kinds of intervention needed are changing; globalization reduces the viability of some strategies while it increases that of others. Structural changes are supported by new rules of the game. Some rules are necessary to facilitate the changes, but it must take into account the different strengths of countries.
The New Dimensions of Industrial Competitiveness
Structural Features
To survive competitiveness in rapidly changing economic environment, producers must use new technologies at or near best practice. As technical change is shifting industrial and trade structures towards more complex, technology-based activities, it was observed that developing countries have done better in all branches of technological activities[1] than industrialized economies. Also, exports have grown faster than production, and complex activities have grown faster than other branches of manufacturing over the past two decades.
Organizational structures and the location of production are changing in response to technical change. Industrial firms are becoming less vertically integrated and more specialized by technology. Technical progress allowed firms to locate processes and functions in different parts of the globe, modifying the geography of industrial activity. New technologies also modify the institutional and policy structures needed for competitiveness.
Globalization also causes more transfer of productive factors across economies. However, they do not spread to low-wage locations. Instead, they only stay in places where competitive production is plausible. Nowadays, cheap unskilled labour or raw natural resources are no longer enough to sustain industrial growth. Strong local capabilities are now needed for competitive success.
Industrial performance can differ across countries and continue to diverge over time. There are no inbuilt forces to return them towards greater convergence. Reversing these trends entails intensive policy action to shift economies from one growth and technological trajectory to another.
Rules of the Game
Liberalization has been partly enforced in response to the changes to the rules of international economic relations. These rules, in general, allowed for exceptions, carry the threat of sanctions, and possess a long-term trend towards greater liberalization. The issues of multilateral agreements include services, performance requirements on transnational companies, and intellectual property rights.
Trends in Industrial Competitiveness in the Developing World
By observing world market shares in manufacturing value added (MVA) and manufactured exports, it was found that:
· MVA performance is correlated with manufactured export performance (though the fit is not perfect). East Asia (excluding China) and Mexico perform better in exports than in MVA in the 1990s, while the opposite is true of South Asia and Middle East and North Africa.
· Neither MVA nor export growth is strongly related to liberalization in the Washington consensus sense. China, in particular, is hardly a neoliberal paradigm.
· Industrial success remains concentrated. Liberalization is not leading to convergence. This goes against the neoliberal idea that liberalization would promote industrial growth and competitiveness.
Why the World Differs from the Neoliberal Ideal
Neoliberalism is having a hard time analysing industrial development because of its treatment of technology. While neoliberal economists accept that the state should provide basic public goods and that the government must provide non-selective or functional support, developing countries are thought not to undertake technological activity because they do not innovate at the frontier. The neoclassical model, on the other hand, assumes that there are no additional costs, risks or other constraints to using technologies. Thus, it does not raise any policy issues: by assumption there can be no significant market or institutional failure.
The Washington consensus, the moderate position, agreed with the World Bank’s position that selectivity would do more harm than good because even if selectivity has worked in East Asia, the circumstances had been unique. Other governments did not and could not have the kinds of capabilities. It posits that all markets affecting technology are efficient and firms choose the right technology if faced with free market prices. In this model, policy intervention affecting prices is distorting it moves society away from the optimum allocation from free markets. It claims that industrial policy should only be concerned with learning and capability building.
To establish a case for selectivity, showing market failures in importing and using technology is not enough. It is necessary to show that failures are important in practice. Furthermore, it will be required to establish that governments can remedy failures in real life and that government failures are not more costly than market failures.
Recent literature on technological capabilities argue that industrial success in developing countries depends essentially on how enterprises manage the process of mastering, adapting and improving upon existing technologies. However, this process is difficult and prone to market failures.
The process of mastering technological in a new setting is not immediate, costless or automatic. It is risky, unpredictable, and filled with externalities. Selective intervention must be implemented as uniform protection makes little sense when learning processes and externalities differ by technology.
It is important to emphasize that infant industry protection is only a part of industrial policy. Protection cannot succeed if it is not balanced by competitive pressures on firms to invest in the capability building process. Also, firms need many new inputs into their learning; to do this, factor markets must selectively respond to these needs.
There is a risk of market failure in capability deepening because of the learning costs involved. To ensure socially optimal allocation, it will be necessary to selectively restrict technology imports in internalized forms (via Foreign Direct Investment) and promote those in externalized forms (licensing, equipment, imitation or OEM contracts).
The growth of global sourcing has made it easier to become competitive in some activities without developing local capabilities. But still, local capability development is important because tapping globalized systems needs stronger capabilities and more discretionary tools.
Industrialization Strategies in the Mature East Asian Tigers
Each East Asian country had a different model within a common context of export orientation, sound macro management and a good base of skills. Each model revealed different objectives and used different interventions. Each had a different pattern of industrial and export growth, reliance on FDI, technological capability and enterprise structure.
Industrial policy in the mature Asian tiger countries leads to the following conclusions:
· Selective as well as functional interventions played vital roles in the industrial and technological development of the most dynamic economies in the developing world.
· Each Asian country mixed selective and functional policies in each area of intervention.
· The extent of technological deepening in three Tigers (the Republic of Korea, Taiwan Province of China, and Singapore) is directly related to their selective interventions in industry.
· The Republic of Korea and Taiwan Province of China used trade interventions; export-orientation imposed a strict discipline on both industry and governments effectively. In Singapore, trade openness and the need to attract and retain FDI imposed also discipline.
· Government capabilities improved over time for the three tigers, with growing levels of skill, remuneration and insulation allowing bureaucrats to operate efficiently and autonomously.
· The nature and impact of interventions differed according to government objectives.
· FDI was treated differently by each of the countries and played varying roles in technology development.
· The options and compulsions applicable to the larger economies were different from those open to small states with weak indigenous entrepreneurship and a tiny internal market. Given the need to spread technological development more widely, the former had to take more direct steps to assist local firms.
The difference between the successes of industrial policy in the Tigers and its failures elsewhere suggests that there is no justification for the general Washington consensus case against selective interventions. It shows that the outcome depends not on whether governments intervene but how they execute intervention. There are many ways to design and implement industrial policy; there are also many levels of selectivity. The difficulties imposed by globalization and technical change strengthen the case for more intervention in some countries. Also, the mistakes of some industrial policies should not be allowed to overshadow the success of others.
Industrial Policy for the New Era
The rapid spread of information technology, the shrinking of economic distance and the skill and institutional needs of new technologies have made the competitive environment more demanding. The policy needs of capability building are direct - the infant industry case to provide space for enterprises to master new technologies and skills - and indirect, to ensure that skill, capital, technology and infrastructure markets meet their needs. There is also a need to coordinate learning across enterprises and activities when these are linked in the production chain and imports cannot substitute effectively for local inputs. More access to international technology markets must be provided due to technical change. The information needs of industrial policy rise with technological change and complexity. The greater complexity of technology does not necessarily make selectivity unfeasible. Technological progress may actually make industrial policy easier in some respects at the right level.
The neoliberal alternative, leaving capability development to free market forces, does not look very promising. It can result in slow technological development. Some upgrading may take place over time, but it is likely to be slower and more limited. Doing this can trap latecomers in low growth.
It is difficult to see how FDI can drive industrial growth in many parts of the developing world without developing local capabilities because: FDI tends to concentrate in technology and marketing intensive activities where enterprises can develop ownership assets; attracting manufacturing FDI into complex activities needs strong local capabilities; retaining an industrial base with a strong foreign presence needs rising capabilities; FDI is attracted increasingly to efficient agglomerations or clusters of industrial activity; and the cumulative nature of capabilities means that once FDI takes root in particular locations and global sourcing systems become established, it becomes more difficult to newcomers to break in.
The fragmentation of processes and functions across countries allows countries to develop competitive activities and reach huge markets. The capability requirements there are narrower and more specialized than those in traditional forms of industrial specialization. Transnational companies can transfer the missing elements of technology, skills and capital needed to complement local capabilities if they see a competitive product at the end of the investment. In the process, they develop new capabilities in the affiliates for efficient production.
Globalization does not do away with the need for all selective industrial policies; it only reduces the scope and raises the potential cost of some. FDI does not replace local enterprises or capabilities. Strong local capabilities raise the possibility of attracting high value systems and of capturing skill and technology spillovers from them. Moreover, attracting export-oriented FDI increasingly requires selective promotion and targeting.
Most poor countries lack the industrial capability, size, location. Most of them cannot use selective industrial policy to attract hi-tech FDI and source local inputs and skills. The prospects of complex global production systems spreading to most of Africa, LAC, South Asia or MENA are vague. So far only South Africa, India and Morocco seem to offer some potential.
It is possible that systems will emerge in other industries to spur the growth of FDI-driven production. For poor countries, these are likely to be in resource-based activities. However, these are likely to be demanding in terms of skills, technology and infrastructure. Given the advantages of clustering in locations with established capabilities, new systems are likely to gather in successful countries rather than to poorer ones.
The Desirable, the Practical and the Permissible
The new formal rules under WTO do not prohibit all selective interventions, only those that affect trade. However, there are other forces for liberalization that are not formal and rule-based: structural adjustment programmes, bilateral trade and investment agreements and pressures by rich countries. The main forms of selectivity permitted pertain to skill formation, technology support, innovation financing, FDI promotion and targeting, infrastructure development for IT, and all general subsidies that do not affect trade performance.
Development communities in industrialization face critical issues like: Is the degree of policy freedom left to developing countries enough to promote healthy industrial development? If East Asia offers lessons for industrial policy, will the new environment allow them to be implemented? Without strong policy intervention, will persistence with liberalization suffice to drive industrialization?
The answer to all these questions are: probably not. The permissible tools above are not enough to encourage rapid and achievable development of technological capabilities. For developing countries that have a capability base, the rules can discourage strategic diversification into new technologies and activities. They can prevent newly industrializing economies from diversifying into advanced activities where entry is particularly risky and costly.
While local capabilities are important in globalization this does not mean that all developing countries must repeat the selective policies used by Tigers. They must only draw lessons on selectivity from the experience of successful countries and adapt them to local needs and circumstances. This should be done in the following stages:
1. Provide policy makers with an objective and detailed analysis of what successful countries did to build industrial capabilities.
2. Create greater policy space for industrial policy. The move to liberalization has great momentum, but rules are man-made and can easily be reversed if a consensus exists. The assumption on which international development is based is that the industrial sector will develop best under the new rules, but further liberalization is necessary.
3. Develop the capability to launch industrial policy. There evidences showing that government intervention can work. What is needed is the building of the administrative competence, information and insulation.
4. Devise strategies appropriate to each country. Creating more policy space and strengthening government capabilities should not mean returning to import substitution. It should be used for policy making, with clear targets and checks aimed at specific forms of technology development.
Wholesale liberalization would support the strong and penalize the weak, on the assumption that globalization will be sufficient to catalyze industrial development. There is enough evidence that well-used industrial policy can transform economic prospects. The development community has to accept this, provide the space and help countries implement them.
Source:
Lall, Sanjaya, “Reinventing Industrial Strategy: The Role of Government Policy in Building Industrial Competitiveness” G-24 Discussion Paper Series, No. 28, April 2004.
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