Industrial Policy

 

Quiz
– “What is a successful industrial policy? Identify four key outcomes for the Cambodian economy. Explain clearly”
– Name 4 key factors that makes industrial policy successful
– Name 4 key factors for lack of industrial policy success
– Provide evidence support your case

Literature Review
There has long existed the utilization of a so-called “industrial policy” by states to stimulate industrialization, thereby enhancing economic growth and development. According to Shanta Daravajan, throughout history, governments undertook industrial policies in a bid to bolster industrial growth, eventually resulting in the transformation of the economy from low-productivity agriculture to high-productivity manufacturing and service.

(Martorano, B., Sanfilippo, M., & Haraguchi, N., 2017), the keys to long-term economic growth encompasses, amongst other things, industrialization. The working paper further argues that promoting industrialization remains a vital element for developing countries to increase the capacity to absorb workforce, enhance diversification and structural transformation in manufacturing sector.

(Kniivila, M.), to a great extent, industrial development contributes to economic growth, leading to the reduction of poverty rates, alongside income inequality. Case studies have attached focus on several newly emerging economies namely China, Korea, Taiwan, Indonesia, Brazil and Mexico. The authors also indicate the pattern of industrialization also has impacts on poverty reduction and income inequality narrowing and that trade and investment liberalization has involved in such endeavors.

(Altenburg, T., 2011), case studies involving several lower-middle-income countries such as Egypt, Ethiopia, Mozambique, Namibia,27 Syrian Arab Republic, Tunisia, and Vietnam to determine and assess the successful industrial policy. The assessment was conducted by the German Federal Ministry of Economic Cooperation and Development (BMZ) using two criteria: (1) Competitiveness including, but not limited to, some other factors such as macroeconomic stability, infrastructure, health, efficient market for goods, finance and labor, and technology readiness; (2) Government effectiveness, measuring the quality of public services, the quality of the civil service and so on.

(Khan H.M., 2015), the design of industrial policies takes into account three following interrelated issues: (1) industrial policies may vary amongst countries. It may therefore address different economic and social objectives in different countries; (2) the design of industrial policy also requires the identification of the constraints and contracting failures that may be preventing the achievement of particular objectives; and (3) the design of industrial policy is also subject to initial institutional and political conditions. For the industrial policy to be successful, adopting the suitable industrial policy instruments to specific country contexts is also important.

Khan also illustrates that there are a couple of contracting failures affecting the competitiveness of the industries, particularly technology capacity driven competitiveness. The most important contracting failure, amongst the others major contracting failures affecting technology acquisition, is contracting failures in learning organizational capabilities.

(Devarajan, S., 2016), there are pointed out to be three reasons why industrial policy fails: (1) existing distortions and market failure, (2) political capture, and (3) firms not sectors, picking winners

Four key outcomes for the Cambodian economy

Cambodia implemented the Industrial Development Action Plan (1998–2003) which was aimed at the development of export-oriented industries and the development of import-substituting production of selected consumer goods. In 2015, Cambodia introduced its new Industrial Development Policy 2015-2025 to overhaul the current system and to put in place a proper policy. However, the outcomes of its industrial development since the first action plan, over decades, have turned out very good.

1.- As illustrated in the literature review, Matleena indicates that growth from the industrial development results in reduced poverty rates and narrowed inequality gap. That reflects the success of the industrial policy.

Despite the fact that Cambodia is a least developed country (LDC), its population is growing rapidly, and rose to roughly 15 million in 2016, 77% of which live in rural areas, while only 13.5% live below the poverty line. According to the Cambodia’s Government Report for its 2nd Trade Policy Review, the poverty rate, being 53% in 2004, and 21% in 2010, decreased further to around 13.5% in 2014.

2.- As regards, its welfare, the infant mortality rate experienced a substantial drop, from 45 deaths per 1,000 live births in 2010 to 28 deaths per 1,000 live births in 2014. The literacy rate rose from 79.9% in 2011 to 80.5% in 2015. During the 2015 United Nations’ review of LDCs, Cambodia’s human assets index, which measures levels of health, nutrition, education and adult literacy, reached for the first time the threshold allowing graduation from LDC status. The unemployment rate of Cambodia is also low. According to an ILO-backed 2010 report by the Cambodian National Institute of Statistics, the rate was 1.6 only. However the report shows a concern that more than 80 per cent of workers are in vulnerable employment, such as unpaid family work and own-account work.

3.- Macroeconomic stability

According to the Cambodia’s Government Report for its 2nd Trade Policy Review, the GDP has seen a significant growth over decades an average annual rate of around 7.7% and in 2016 the GDP per Capita reached US$1,302, as compared with US$911 in 2011. In 2016, Cambodia passed the World Bank’s gross national income per capita graduation threshold, and passed from low-income-country status into lower-middle-income-country status. What is worth noting is that, even before the launch of the IDP 2015-2025, there was a rise in Garments, growing at an average rate of about 8% per annum during 2012-16. Further, the Price inflation declined from 5.5% in 2011 to 1.2% in 2015.

4.- Competitiveness, and Government effectiveness: streamlined government procedures

It is well established that undertaking industrial policy/action plan would bring about 2 folded effects: enhancing comparative advantage – specialization to contribute to growth; and the government system itself will be streamlined, thereby reducing the Costs of Complying with Government Regulations and Procedures. Some of the fundamental changes resulted from industrial policy are:

Customs Automation: The system of ASYCUDA is currently deployed at 74 major border posts and offices and processes 99% of customs declarations. Further, other customs procedures have also been automated, such as transit and simplified declarations. The result in reduced clearance time of shipment i.e. the time between the lodgment of the SAD and cargo release, is less than two hours.

Certificates of Cambodian Origin: In 2016, the Ministry of Commerce launched an on-line facility designed to simplify and speed up its issuance of certificates of Cambodian origin.

Trademark Registration: In 2017, the Ministry of Commerce also took further step in automation system, launching the Online Marks Filing System allowing the applicant to file their trademark applications for registration online, reducing the time and cost associated with making such applications.

Four key factos for successful industrial policy

Human capital and innovation

It is true that in most low-and middle-income countries, what lack in the process of promoting industrial development are “Human Capital” and “Innovation”, the most important ingredients. This is especially true for at least two interrelated grounds: (1) when a country wishes to enhance its comparative advantage, specialization to boost production and enlarge export diversification; and (2) the shortage of skilled labours, professionals and experts would impede innovation and technology promotion in some way. It is no use having a perfect industrial policy in place but the feasibility is no where near being capable of implementing it. We can learn from the experiences of some emerging economies like Japan and Korea, where enormous investment in education was put so as to promote R&D and industrial activities.

Inclusive industrial policy

Industrial policy must be inclusive, meaning every player in the game could benefits regardless of their status, the size and the challenges. In this sense, structural change is to enhance competitiveness and productivity growth while at the same time raising revenue for the poor. With this efforts, some issues must be taken into account: certain safeguards may be required to protect the most vulnerable groups. It is no contention that in poor countries where technology and learning organizational capacity are still very limited, there are unwanted consequences left when there is engagement from foreign competitor with far more advanced technologies. The consequence is that the engagement kicks out the local industries/firms because they cannot adapt the technology, increasing the specialization skills and compete. This is true in the case of China’s footwear and garment imports from China to some African and Latin American countries.

Involving Increased linkage between international trade and investment

This may sound more like trade policy. However, this has significant correlations. First, integrating into the regional economy, the pathways to bigger markets is wider. With sound legislative and institutional framework, there will inflows of FDI with brings about technology transfer and skilled labour. That makes it important to put forward appropriate services limitation in way that it would help to increase the capacity of local firms/SMEs. Secondly, regional integration would result in increasing interaction between local and foreign manufacturing activities and cooperation, linked value-chains, which allows more opportunities for local firms/SMEs promote their manufacturing capacity, thereby increasing employment opportunities as well.

Effective monitoring and evaluation mechanisms

To ensure effectiveness and practicality, there must be a system of effective monitoring and evaluation mechanisms in place. This agreed with the Cambodia Industrial Development Policy 2015-2025, who also seeks to establish such system. Why is it needed?

Extracted from the The Magenta Book used in United Kingdom Government, four ways in which evaluation evidence can be used are:
– Immediate decisions about policy options; for example, whether to roll-out a pilot as a national or local programme;
– Longer term decisions about the policy/programme; for example, informing Government Spending Reviews and the future scale of investment;
– How the programme/policy could, or should, be improved; for example, if the evaluation identifies major flaws; and
– How future policies should be designed and implemented.

In addition, usually, industrial policy involves many agencies concerned that undertake a lot activities including government coordination, government intervention, and many other industrial policy tools. In this sense, the evaluation and monitoring mechanism is to take stock, check and balance and especially push the agencies to properly implement the policy.

Four key factors for lack of industrial policy success

1.-Contracting failures affecting technology acquisition
Learning organizational capabilities and related contracting failures

The main purpose of industrial policy is to drive industrial competitiveness by which production and exports, amongst other things, would increase. To this end, the lack of broad base of firms that have the technological and organization capabilities to adopt, adapt and use available technologies profitably is viewed as the most important constraint. According to khan, the said technological capabilities should be those acquired by learning and experimentation – that is tacit knowledge.

Appropriability problems facing innovators

This refers to less stringent protection of innovation rents which could discourage advanced technology investors. The industrial policy having no balanced flexibility concerning the protection of intellectual property rights (IPs) could be trouble some. The protection of IPRs in least developed countries is seen as a two-edged sword. On one hand, investors may have least incentive for technology diffusion due to weak protection of their innovation. On the other hand, stronger protection of IPR could in turn prevent the country from imitating the technology.

2.- Flaws in the Industrial Policy that lead to middle-income trap

Malaysia turned an upper middle-income country in 1996 and continued the same status until the present. According to the Economic Research Institute (ERI), the study demonstrates that the factors which caused Malaysia to fall in the middle-income trap are, but not limited to: a). the industries were more sensitive to wage change as the government was ensuring the continued presence of investors and b). weakness in commingling/ integrating the different sector products with the industrial products.

3.- Political capture

According to Shanta, it is argued that industrial policies would captured and manipulated by politically powerful groups in a way to serve their own purposes rather than for structural transformation. For example, certain sectors in Tunisia such as banking, telecommunications, and transport, which are of interests to the former President Ben Ali’s family business, are protected from domestic and foreign competition. That means monopoly power is granted to this family business which consequently causes the prices to increase, distorting the competitiveness of the market.

4.- Picking winners: Firms not sectors

Industrial policy is always associated with too much focus on sectors rather than firms. The practice is known “picking winners”. The downside is that the policy would eventually favour the wrong and unsuccessful firms while overlooking the potential ones. As PM Theresa May warned last year that the practice which was tried in the 70s made the government end up bailing out the failing companies. Even though it is a common practice, but considerable attention should be placed on firms too. The rationale is simply that sectors do not trade but firms do. Shanta furthers deliberates that industrial policy would be more effective if can identify potential firms across all sectors rather than particular sectors.

Bibliography

Altenburg, T., (2011), Industrial Policy in Developing Countries: Overview and lessons from seven country cases. Discussion Paper. Deutsches Institut für Entwicklungspolitik

Devarajan, S., (2016), Three Reasons Why Industrial Policy Fails. Future Development. Brookings. Retrieved from: https://www.brookings.edu/blog/future-development/2016/01/14/three-reasons-why-industrial-policy-fails/
Khan, H. M., (2015), Industrial Policy Design and Implementation Challenges, In Felipe, Jesus (ed) Development and Modern Industrial Policy in Practice: Issues and Country Experiences. Cheltenham: Edward Elgar pp. 94-126.

Kniivila, M., Industrial Development and Economic Growth: Implication for poverty reduction and income inequality. Industrial Development for the 21st Century. Retrieved from: http://www.un.org/esa/sustdev/publications/industrial_development/3_1.pdf

Konkakov, A., & Kurmanov, B., (2014), Industrial policies to escape from the middle income trap: cases of Uruguay and Malaysia. Economic Research Institute. Retrieved from: http://www.adb-asianthinktanks.org/sites/all/libraries/researchpapers/Industrialpoliciestoescapefromthemiddleincometrapalibekkonkakoveri.pdf

Martorano, B., Sanfilippo, M., & Haraguchi, N., (2017), What Factors Drive Successful Industrialization? Evidence and Implication for Developing Countries., United Nations Industrial Development Organization Working Paper7. Retrieved from: https://www.unido.org/sites/default/files/2017-07/WP_7_0.pdf

OECD, (2014), Evaluation of Industrial Policy: Methodologial Issues and Policy lessions.

Wallace, T., (2017), Industrial strategy risks return to picking winners, MPs warn. The Telegraph. Retrieved from: https://www.telegraph.co.uk/business/2017/03/03/industrial-strategy-risks-return-picking-winners-mps-warn/

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