Letter IEDI n. 898–Industry and Development Policy
The IEDI presents a retrospective of a series of studies published during 2018 on topics of great relevance for Brazil, such as economic development, technological innovation, the industry of the future, industrial strategies, etc. This initial edition addresses the industry's central role in the economic and social progress of countries, for it has the ability to create new products that revolutionize markets and production patterns not only in the sector itself but also across all economic activities.
For this reason, the most successful countries in raising the standard of living of their populations have not given up defining industrial development strategies, with increasing emphasis on research, development and innovation (R&D&I) actions. To a great extent, the transformations under way promising to bring about the Fourth Industrial Revolution stem from such actions.
To address this topic, this Letter IEDI draws on three papers that have already been synthesized in previous analyzes. The first of them, released by the World Bank, is "Why Manufacturing Has Been Important for Development" by Mary Hallward-Driemeier and Gaurav Nayyar.
According to the World Bank researchers, the industry is a key element for development because it presents factors that, although not exclusive to it, do not appear at the same intensity in other sectors. The combination of five criteria opens the possibility for a given sector to promote dynamic productivity gains that transcend the entire economic system of a country:
1. Ability to absorb less skilled labor from other sectors;
2. Weight of industrial employment in the economy;
3. Level of productivity that the industry can extract from labor;
4. Degree of participation of the sector in the international markets;
5. Scope for innovation and diffusion.
Following this set of criteria, the industry is the best positioned sector, for presenting high levels of productivity and great capacity to absorb less qualified labor from other sectors, while being the main responsible for the activities of innovation and the international integration of economies. As a consequence, countries have much to gain from establishing development strategies that promote an internationally competitive industry.
How to promote industrial development in an effective and intelligent way? This is the purpose of the second work analyzed: "The fundamentals of industrial and innovation policies", by Mario Cimoli, Giovanni Dosi and Joseph E. Stiglitz, the latter the 2001 Nobel Prize Winner in Economics. The article is one of the chapters of "Industrial and Technological Policies in Latin America", a report published by the Economic Commission for Latin America and the Caribbean (ECLAC).
The authors argue that policies to support infant industries, defining international trade and intellectual property regimes, distributing sectoral incomes, and aligning industrial policies with macroeconomic policies are fundamental elements for national industrial and economic development.
In this sense, they advocate a modern industrial policy, whose aspects have long been raised and defended by the IEDI: government support to businesses must involve deadlines and results requirements, such as investment in technology and export goals, so that the incentive granted —for example, via taxation and preferential loans— does not merely result in the appropriation of rents by specific groups. Last but not least, the need for coordination between industrial policies and macroeconomic policies is also necessary to produce virtuous development trajectories.
Only then will industrial policies be able to stimulate companies in emerging countries to have the technological capabilities necessary to compete with developed countries’ firms already established in the international market.
Fostering the creation of new technologies, especially disruptive ones, implies a virtuous interaction between the public and the private sectors, as Mariana Mazzucato emphasizes in her article "Industrial and technological policies in Latin America", also published by ECLAC. This is the third work dealt with in this Letter.
According to Mazzucato, innovation is a fundamental means to foster smart, fair and sustainable economic growth and, therefore, is one of the main challenges that States can not afford to ignore.
Given the complexity of the innovative phenomenon, its high degree of uncertainty, the financial volumes required for its funding and the cumulative nature of learning processes, public sector involvement is an important part in the creation of technological revolutions and trajectories. Its effectiveness is greater as the policies are directed to the fulfillment of missions, that is, towards solving social, economic or technological problems.
However, Mazzucato argues that the challenges posed by these missions are not sufficiently addressed by the traditional public policy framework, as it suggests that state action should be confined to situations where the proper functioning of the market is not verified. In other words, this framework continues to emphasize a mutual exclusion of the presences of the state and the market.
With a view to overcoming such limitations and promoting smart growth, Mazzucato defends the centrality of public-private alliances, capable of functioning as a basis for a new institutional arrangement that will boost innovative efforts to foster new disruptive technologies rather than just enabling incremental innovations.