governance and institutional design of industrial policy

© 2013 Deutsches Institut für Entwicklungspolitik

Tilman Altenburg

Governance and institutional design of industrial policy

OECD / European Commission Workshop:

„Competitiveness and New Industrial Policy“

Paris, 19 September, 2013


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1. Industrial policy: What are the remaining controversies?

2. Governance and institutional design

3. Some lessons for latecomer development

4. Industrial policy challenges derived from a „green“ European agenda

5. Conclusions


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1. Industrial policy:

What are the remaining controversies?


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Starting point: Market failure justifies industrial policy …

– Coordination failure

– Dynamic scale economies & knowlege spillovers

– Information failure

– Environmental externalities

But also risks of government failure …

– Information: „Governments not better informed than markets“

– Rent-seeking: Self-interested governments, bureaucracies and industries

Question is not whether IP, but what institutional design in a particular context.

Industrial policy: Remaining controversies


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Remaining dissent:

Primacy of politics (transform structure of economies on the basis of societal consensus) or economics (achieve Pareto optimality)?

Right balance between doing too little and intervening too much

Favouring sectors? Regions? Firm sizes?

„Latent comparative advantage“ (Lin) & short-term subsidies for ‚searchers‘ (Hausmann/Rodrik) widely accepted. But are long-term interventions justified to develop new activities with potential future knowledge spillovers? (defying comparative advantages, addressing systemic failures)



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Level of state interference in markets

Strict non-intervention

Market-enhancing policies

Non-targeted supply-side policies Targeted supply-side policies

Privatisation of public enterprises,Reduction and equalisation of remaining trade barriersLabor market deregulationSimplification of firm entry & exit

Anti-trust policiesProvision of business information systemsDemand-side subsidies for the development of service markets (e.g. vouchers) Trouble-shooting for investors

General export promotionIncentives for R&D, innovationEntrepreneurship developmentPromotion of resource-efficiency

Promotion of particular activities or technologies (e.g. leather industry; solar energy), clusters or value chains; dedicated labs, skills development centres

Experimental design, perfor-mance-based, private service providers, com-petitive bidding

Top-down selection; services delivered by public providers

Experimental design, perfor-mance-based, private service providers, com-petitive bidding

Top-down selection; services delivered by public providers

Source: own

Not whether IP or not ... But a continuum of potential interventions



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2. Governance and

institutional design


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Three governance capabilities crucial:

1. Strategic capability

2. Political capability (to create or remove protection when needed while avoiding political capture)

3. Capability to deliver services effectively

Governance and institutional design


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(1) Strategic capability

Vision matters ! Need to identify viable „corridors“ for inclusive and sustainable growth (specific technologies, value chain options ..)

• building on existing and gradually extending comparative advantages

• identifying the right pace for reform: providing the protection needed while allowing for technological learning



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– Tools to develop visions/ viable corridors: • Velasco/Hausmann/Rodrik analysis, „most binding constraints“

• Lin analyis of „latent comparative advantages“ …

• Value chain /subsector analysis

• Technology foresight

• Encourage search for new business models, diversity

• Private sector dialogue …

– Lead agency important !!!

– Ensure coherence of micro, meso, and macro policies



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(2) Political capability

…to build societal consensus on a „national project of productive transformation“

… to create / remove protection when needed while avoiding political capture

– Collaborate closely with firms => good understanding of industries, market options & appropriate support

– … without being captured by interest groups („embedded autonomy“)• Tenders, • Build industry groups including multiple interest groups• Strong checks and balances !



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(3) Implementation capability

… to translate strategies into efficient and effective action.

– Select appropriate forms of governance „between markets and hierarchies“

– Use market-based services whenever possible (BDS)

– Make incentive systems of public service providers business-like and customer-oriented

– Encourage competition among service providers

– Separate policy formulation, funding, implementation, M&E

– Clearly define timelines and exit options



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(3) Implementation capability

– Make co-financing by beneficiaries compulsory …

– Feed evaluation results back into next round of planning

In sum: organise IP as an experimental and systematic learning process !!!



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3. Some lessons for latecomer

development

Lessons for latecomer development


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Key challenges and how to cope

1. Overcome fragmentation of production systems

2. Upgrading in Global Value Chains

3. Exploit new channels for technological learning



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(1) Fragmented production systems – Few links between modern large-scale enterprises and micro/SMEs

– FDI delinked from national business community

– Sometimes powerful SOE /industry groups with special political connections

SOE

MSME

FDI

Larger national

firms



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Highly uneven access to policy

… likely to produce anti-poor outcomes

Political decision-makers

Medium & large firms

Business Associations

SOE, MNE, politically connected firms

MSME



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Integration of „fragments“ rarely recognised in strategies

Separation of „industrial policy“ from „SME policy“ … may lead to inefficient resource allocation => lower

productivity

… deepens fragmentation, reduces synergies & learning opportunities => lower productivity

Technology transfer & linkage programmes !!!



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(2) Upgrading in Global Value Chains

• Integration in GVC provides opportunities.

• Usually continuum of ugrading options:



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• … but upgrading is no automatism

• Strategic attraction of „developmental firms“

• Nudging lead firms and supporting suppliers: Linkage policies (Singapore, Penang, Ireland)

• Supporting meso-institutions

• „Walk on two legs“: domestic and global markets offer complementary learning opportunities



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• Assess pros and cons from a dynamic perspective

• E.g. retail liberalization:

Pro: • additional investment• higher productivity• better quality, more

diverse products• Less loss in supply chain

Con:• Concentration in retailing,

crowding out of small stores

• Concentraton in supply chain, crowding out of small producers

=> Sequencing, according to initial conditions and learning rate



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(3) New forms of technological learning

• Recently, new forms of technology appropriation

– Attract & exploit R&D outsourcing

– Return migration

– Mergers & acquisistions



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4. Challenges derived from a „green“ European agenda


EU industrial development increasingly driven by environmental (low carbon) concerns

Even if neighbouring regions (e.g. Western Balkans, Turkey) may have other immediate priorities, accession processes & value chain partnerships with Europe will bring this agenda in.

Green Industrial Policy is different from ‘business as usual’ industrial policy, because of four challenges:

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Challenges derived from green EU agenda


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1. Mixed objectives=> balance economic and environmental targets

2. Unprecedented urgency of low carbon transformation => rapid replacement of carbon-intensive technologies

3. Additional and more severe market failure => environmental externalities plus coordination failures in managing systemic changes plus capital market failures

Þ Each one calls for specific policy responses

Þ Green transformation requires urgent, radical and systemic structural change in the economies



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Competitive-ness/ jobs

Local air pollution

Energy security

Mitigation(1) Mixed objectives can have win-wins and trade-offs

Country A

Country B



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Explicit discussion of synergies and trade-offs

Agreement on priorities

Rethinking growth model; consumption patterns; accounting practices

Primacy of politics, not markets



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(2) Urgency, need to accelerate transformation: No time to wait for the market!

=> Much stronger role for governments than in ‚business as usual‘ IIP:

1. Proactively disrupt less sustainable incumbent technologies

2. Accelerate deployment of sustainable alternatives



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(3) Today’s markets fail to provide the incentives for radical, systemic and fast transformation:

– The obvious: environmental externalities

– ... but other market failures also much more severe when radical systemic changes are needed: coordination / information, capital market failure



Environmental externalities: Cap and trade systems, charges and taxes important:

– tax bad things (environmental degradation) and allow to reduce e.g. statutory pension contributions (=> lower labor costs, more employment)

– Mostly neutral, market drives choice of technology

... but as prone to rent-seeking as other policies: allocation of quota, prices, charges subject to lobbying ...

... and insufficient to overcome all market failures (short-term behaviour, non-appropriability issues ...)

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Coordination failure

Systemic change presupposes massive simultaneous investments. (E.g. electromobility: battery technology R&D, charging infrastructure, smart grids, new standards)

Þ Impossible without huge coordination effort by governments



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2005 2010 2015 2020 2025 2030 2035

Differential costs of electricity: Renewable/fossil in Germany

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aCapital market failure

… mobilise enormous upfront investments … against environmental externalities, uncertainty, non-appropriability …



„Business-as-usual“ IP economic objectives

incremental development of latent comparative advantage

supports innovation, leaves diffusion to markets

takes demand as given

mainly builds on existing markets

mainly lets market select technologies …

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Green IP complex system of objectives

partly radical path disruption

also subsidizes technology diffusion

tries to shape demand

creates markets for environmental goods

pushes for green solutions needed in future …

Don´t underestimate risks – but not doing enough is the largest one!



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5. Conclusions


Conclusions

All countries pursue Industrial Policy to shape structural change in desirable ways

There are risks of misallocation and political capture

Question not why but how:

Design principles: Organise as a learning process !!

Strategic capability/ vision matters: National project of transformation !

Industrial latecomers face specific challenges => cannot simply „copy“ strategies

The green agenda will increasinly define rules of the game, even for latecomers … and it requires different approaches

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Thank you for your attention !

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