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Three Keys to Successful Industrial Policy in Developing Countries

Charles Arthur's picture
UN Industrial Development Organization

Editor of UNIDO's magazine, Making It: Industry for Development. Making It is a quarterly magazine to stimulate debate about global industrial development issues. It discusses the role of...

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  • Feb 4, 2016

Amanda Janoo on the three major obstacles that must be overcome in order to make industrial policy in developing countries more successful.


Industrial PolicyIn recent years, we have seen the reemergence of industrial policy, which can broadly be understood as the molding and directing of the economy by the state in line with its societal objectives. However, despite industrial policy’s comeback and the acknowledgement of the failures of the “free market”, “growth-first” approach to development, we have not yet seen many states breaking the mould and implementing radically different economic policy agendas. What then is inhibiting greater experimentation and self-determination in industrial policymaking? And how can developing countries move towards more successful and innovative industrial policies in the future?

As a way of stimulating debate, I suggest that there are three major obstacles that must be overcome in order to make industrial policy in developing countries more successful:

Beware bad economic advice
One of the primary challenges facing industrial policymakers in developing countries is the constant bombardment of economic advice which simply replicates past development failures. Most developing countries would like to utilize industrial policy to tackle the most pressing socio-economic issues facing their populations, such as high underemployment, poverty or economic volatility. However, the majority of economists are still peddling the same market-freeing policy prescriptions (e.g. trade liberalization, economic deregulation and privatization of state-owned enterprises) which dominated development for the past three decades and which delivered disappointing societal outcomes. An industrial policy practitioner from a sub-Saharan African country recently expressed her frustration with the “industrial experts” who keep coming in and telling them to liberalize trade. “What is the point of more trade if we don’t produce anything?” she sighed with exasperation.

With a growing demand for industrial policy advice, economists are increasingly re-packaging the same “free market”, “business enabling environment” agendas under the stamp of industrial policy. The past three decades have illustrated the strengths and weaknesses of this approach and if developing countries wish to experiment with new policy prescriptions oriented towards new objectives they would be wise to learn through trial and error, rather than depending on economic advice, which derives from the same abstract, outdated models.

Beware of those who would do the work for you
There is no shortage of development agencies and private consultancies which say that they have identified the best practice and can provide you with a golden ticket to economic prosperity if you simply stand aside and let them get to work. Across the globe, industrial policies are being crafted, drafted and implemented by bi-lateral and multilateral development agencies which believe that what worked in Country A will work in Countries B-Z. At best, these programmes lead to an over-reliance on development agencies, as the logic underpinning them is not embedded in the local government and therefore lacks sustainability. At worst, the programmes completely disregard the development objectives of the country in question and are simply based on the ideology or interests of the implementing party. In both situations, developing country governments are once again made spectators of their own economic transformation, which defeats the point of industrial policy altogether.

Beware roaming capital
One of the greatest challenges facing industrial policy in developing countries is that the space to institute effective regulatory or taxation policies is constrained by the allure of foreign direct investment (FDI), the threat of relocation if their demands are not met and, perhaps most importantly, the idea that they can never compete with the economic giants even if they try. This approach only highlights the benefits of a globally fragmented production system, suggesting that now countries can easily insert themselves into global value chains without having to build their own competitive industries from scratch. However, this argument denies the very important fact that, by “chasing FDI”, developing countries become passive recipients of the manias and innocent
victims of the panics which characterize global business and financial flows. Due to their weak negotiating position, they are frequently exposed to high risks with little prospect of reward.

The success of industrial policy in developing countries will be greatly enhanced by recognition of the wealth latent in their own national value chains and of their right and responsibility to limit foreign presence when it infringes on their capacity to build an economy which serves their populations’ needs.

Industrial policy provides a unique opportunity for developing countries to assert greater self-determination over the shape and form of economic development and to pioneer new blueprints for the better world we envision. However, the space for innovative industrial policy is being constrained by external influences which come under the guise of benevolent economists, development agencies and transnational corporations. To enhance the success of industrial policy, developing country governments should strive to emancipate themselves from these influences so that they have the space to experiment and adapt their industrial policy programmes in a manner which serves the needs and desires of their society.

Amanda Janoo works for The Industrial Policy Organization. She was previously an industrial policy analyst in UNIDO’s Industrial Policy Advice Unit. Prior to joining UNIDO, she worked in India and Indonesia on issues relating to economic development, employment generation and enterprise development.

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