Industrial policy is essential for global south development in the 21st century"
argue for and against using empirical evidence and case studies.
Revisiting industrial policy and the importance of institutional capacity has become
one of the major discussions in development economics. The need for new solutions
that would accelerate industrialisation and increase employment has brought the
topic to the fore in light of the increasing reliance on technology worldwide.
Throughout the session, I found it intriguing that industrial policy is no longer
perceived as old-fashioned interference in the market, but as a means of shaping
transformation in the economy if executed well. Nonetheless, the past shows that
industrial policy is not always the way forward as its effectiveness is highly
conditional upon the quality of institutions and good execution. This is why I believe
there are strong arguments both for and against the statement that industrial policy is
crucial for the development of countries in the Global South, as detailed in Rodrik,
(2004).
According to Amsden (1989), among the main reasons for adopting an industrial
policy is the ineffectiveness of the market in promoting structural transformation.
Lack of financing, technological capabilities and the risk of investments prevent new
industries from being established in developing countries without government
intervention. East Asian cases provide some of the strongest evidence for this
position. South Korea, for example, pursued targeted industrial policies in the second
half of the twentieth century by supporting key sectors including steel industry,
shipbuilding and electronics industry through coordinated investment and export
promotion, as well as through cooperation between government and business.
These interventions helped the country transform itself from a low-income country
into one of the most developed industrial nations. In my opinion, this is the best proof
that an industrial policy can help accelerate development as long as governments
are capable of implementing them effectively.
Another country that gives strong evidence in favor of industrial policy is China.
Instead of focusing only on the market mechanisms, the Chinese government
invested in manufacturing, infrastructure, technology and export sectors in the
course of many years. Recently, initiatives like “Made in China 2025” are aimed at
encouraging advanced manufacturing, renewable energy production and artificial
intelligence. Thanks to the industrial policies, China managed to become a world
leader in sectors vital for green and digital transition. According to the World Bank
(2022), the combination of long-term plans, investment in infrastructure and industrial
upgrading played a huge part in lifting hundreds of millions of people out of poverty
in China. Thus, industrial policy can help countries grow economically and undergo
structural changes when paired with good institutions.
At the same time, industrial policies did not produce all the expected benefits in the
past. In many developing countries, state interventions led to the protection of
inefficient companies and the use of political patronage and public money for
personal gains. Throughout the discussion during the session, I found it clear that
the effectiveness of industrial policy is dependent on the institutions executing it.
Several Latin American countries adopted the industrial policy called import
substitution during the twentieth century by implementing high tariffs and trade
barriers in order to protect domestic industries. Although these policies helped
develop local manufacturing, the lack of competition and further protection made
many businesses non-competitive. As Krueger (1990) states, such protection makes
firms innovative and productive.
The history of African countries is another example of the challenges associated with
industrial policy when the state is not capable of implementing it. After becoming
independent, many governments launched state-owned enterprises and introduced
industrialisation programs. Even though the aim of these policies was the reduction
of the reliance on foreign products, many projects failed due to the lack of technical
capabilities, corruption, insufficient infrastructure and the inconsistency of the policy.
Instead of creating competitive industries, some of the governments acquired debt
and the state-owned enterprises became unsustainable. Industrial policy may not be
wrong in such cases, but the experience shows that its effectiveness greatly
depends on institutions, accountability and realistic goals of the policy (Acemoglu &
Robinson, 2012).
In spite of all those critiques, I do not believe that the debate should focus on the
choice between interventionist and free-market strategies. As the experience shows,
successful development involves cooperation between the government and the
private sector. In this regard, the government needs to invest in infrastructure,
education, research and innovation, as well as creating a competitive environment
for companies. In my opinion, it is increasingly important now in light of emerging
industries that are related to renewable energy, digital technologies and critical
minerals. Modern industrial policy does not involve the selection of winners by
governments, but helping economies discover new productive capacities, as detailed
by Rodrik, (2004).
Overall, I agree that industrial policy is still necessary for the development in the
Global South as long as it is implemented with the help of capable institutions,
transparent management and performance measurement. South Korea and China
give the evidence of the efficiency of strategic interventions that accelerate
industrialisation, and Latin America and Africa provide an understanding of the risks
and challenges of industrial policy when state capacity is limited. The discussion
during the session showed me that industrial policy should not be treated as a
universal strategy, but as one element of the broader strategy. Thus, the
effectiveness of industrial policy lies not in government intervention, but in the
cooperation with the market in order to boost productivity and innovation (World
Bank, 2022).
References
Acemoglu, D., & Robinson, J. A. (2012). Why Nations Fail: The Origins of Power,
Prosperity, and Poverty. New York: Crown Business.
Amsden, A. H. (1989). Asia's Next Giant: South Korea and Late Industrialization.
New York: Oxford University Press.
Krueger, A. O. (1990). Government Failures in Development. Journal of Economic
Perspectives, 4(3), 9–23.
Rodrik, D. (2004). Industrial Policy for the Twenty-First Century. Harvard University,
John F. Kennedy School of Government.
World Bank. (2022). China Economic Update: Investing in Stronger Institutions for
Inclusive Growth. Washington, DC: World Bank.