Letter IEDI n. 925–Criteria for a successful industrial policy
While in Brazil certain analysts are quick to decree the failure of any and all industrial policy, resorting to some mistakes and misunderstandings of the past, the debate around this theme in the rest of the world not only is not dead, but has been gaining momentum.
This results from a context in which new industrial strategies are being adopted by the main economic powers, as numerous IEDI studies have already emphasized, such as Letters IEDI n. 916, dated Mar 29, 2019; n. 914 of Mar 22, 2019; n. 898, Dec 28, 2018; n. 890, Nov 23, 2018; n. 891, Nov 30, 2018 and no. 881 of Sep 28, 2018, just to mention the most recent ones.
The present Letter IEDI deals with a study published by the IMF under the title "The return of the policy that shall not be named: principles of industrial policy", by researchers Reda Cherif and Fuad Hasanov. They discuss the important role of industrial policy in promoting growth and economic and social development. For a time repudiated by some academics and policy makers, industrial policy is once again the order of the day.
The authors examine the success of the so-called Asian Tigers —South Korea, Taiwan, Singapore and Hong Kong— in achieving per capita income levels similar to those of the select group of developed economies and conclude that there were three main reasons for these countries to be successful in this true "miracle":
• State support to domestic producers in sophisticated goods and services industries, in addition to their initial comparative advantages;
• Export orientation;
• Search for strong competition in the domestic and foreign markets, with strict controls on the fulfillment of pre-established targets.
A long and sustained trajectory of growth over time requires, in the IMF researchers' view, active industrial policies oriented to a continuous process of innovation.
Traditionally defended policies —such as greater trade liberalization, better institutions and infrastructure, macroeconomic stability, human capital and physical capital accumulation— play an important role, but are insufficient for transforming relatively poor countries into developed nations, according to Cherif and Hasanov.
The history of the Asian Tigers, but also of other countries such as Japan, Germany and the United States, would thus be emblematic of the transformative power of industrial policies.
The study argues that the technological leap toward sophisticated industries and the creation of technology by domestic firms are the determinants of successful results in terms of long-run growth. This, in turn, depends on the implementation of sound technology and innovation policies (TIP) at each stage of the economic development process; the authors consider these measures as the "true industrial policy". Countries that manage to follow this path are more likely to become high-income countries in a relatively short period of time.
In this sense, state interventions aim at reorienting factors of production, such as capital and labor, to activities that would otherwise not be pursued by the market. In other words, the state helps to create markets or even to expand the boundaries of existing markets.
According to the IMF study, there are three possible approaches to TIP, which correspond to different sets of policies. They are:
• Snail crawl approach: involves the conventional recipe for growth, based on a set of policies to improve the business environment, infrastructure, education and institutions, seeking to correct more "government failures" than "market failures", something that does not foster the development of sophisticated sectors and results in lower growth trajectories;
• Leapfrog approach: this is an intermediary strategy that provides steady growth and leads to the middle-income pattern by combining the attraction of foreign investment with government intervention to develop industries around sectors where the country has comparative advantages;
• Moonshot approach: it comprises an ambitious and riskier set of policies by which government interventions seek to correct "market failures" and develop both sophisticated sectors and domestic technologies, creating conditions for long run sustained growth, as was the case of the "economic miracles" observed in the Asian Tigers mentioned above.
In other words, according to the authors it is the degree of ambition, oversight and adaptability of state actions in implementing industrial policies that, given the rapid changes in the conditions under which they operate, leads to different economic results from country to country.