Critically Assess Why Some Countries Appear To Have Been Able To More Successfully Deploy Industrial Policy Than Others.

'The most literal interpretation of industrial policy is any policy that affects industry' (Chang et al 2013). As a result, assessing why some countries appear to have been able to more successfully deploy industrial policy than others involves the examination of a number of variables. There are many examples of countries with successful industrial policies, for instance Japan, Germany, the US, Korea, Brazil and China, and each represents the use of a different set of policies in a unique environment. There are are many different reasons for why a country may find it easier or difficult to deploy industrial policy. For example, physical factors, such as the climate and environment (see Huntingdon 1945 and Semple) and an abundance or scarcity of natural resources can hinder or benefit a country's industrial policy. Human factors also determine the success of industrial policy. These include population health/growth and structure, corruption, aid, structure of trade and the economy, the role of the state and its institutional structure, the level of capital and a history of colonisation. In this essay I will touch on all of these but will concentrate on assessing the role of population, natural resources, the structure of trade and the economy and the role of the state and its institutional structure in why some countries have succeeded in executing industrial policy whilst others have failed.

When it comes to assessing its role in the deployment of industrial policy, population plays a conflicting one, having the potential to act as both catalyst and impediment. It is, what Thirlwall (2006) terms the 'paradox of labour'. Whilst population growth may reduce living standards and capital per head, conversely, it can raise living standards, widen markets and serve to produce a higher volume of output. However, when specifically looking at the relationship between population growth and the deployment of industrial policy, the predominant view is that high rates of population growth represent a problem due to an increased use of scarce resources and a growth of the employment problem. This stance originates from the views of Malthus who describes how unchecked population growth is exponential and the dangers of which preclude progress towards a utopian society: "The power of population is indefinitely greater than the power in the earth to produce subsistence for man' (Malthus 1798). High birth rates, for example, are shown to correlate with poor education and a lack of employment opportunities, particularly for women, (though correlation does not equate to causation). Furthermore, population growth can lead to reduced savings, consequently diluting capital per head, placing pressure on government expenditure and leading to congestion and overcrowding. All of these serve as an obstacle to development and are problematic to the successful deployment of industrial policy. There is however much theory and empirical evidence that suggests a positive relationship between population growth and the growth of output, particularly in the case of industry and manufacturing. Verdoorn's Law, for example, 'hypothesises a positive relation between the growth of population, employment and output on the one hand and the growth of production per head on the other' (Thirlwall 2006). Explanations for such a relationship suggest that growth of employment and output allows for a rise in the rate of technical progress and allows for a faster rate of growth of labour productivity. Thirwall (2006) asks a number of important questions in relation to this&

'Would the world be as rich today if the population had remained static? Would Britain have been the first country to industrialise if the size of its population has been static? Would the United States have become the richest country in the world without the great influx of people from beyond its shores to exploit its abundant natural resources?'

Thus it is sensible to conclude that whilst 'In the longer run, population growth may stimulate investment and technical progress, and may not pose such a problem provided there are complementary resources and factors of production available, …&the short-run costs may outweigh the advantages for considerable time' (Thirlwall 2006).

Natural resources represent another factor which influences a country's success in deploying industrial policy, with both the absence and abundance of resources proving fruitful or adverse. In Africa, for example, natural resource windfalls, have tended to be more of a burden than a blessing. For instance, Nigeria is extremely well endowed in oil, possessing the largest petroleum industry on the African continent. However, having squandered its oil windfall of the 1970s, it experienced three decades of economic stagnation and degradation of public institutions. Furthermore, today, the Nigerian economy is heavily dependent on the oil sector which accounts for over 95 percent of export earnings and about 40 percent of government revenues. Despite such well endowment, its GDP per capita in 2014 was US$3,203.3 compared to a world average of US$10,724.8. Often referred to as "the curse of natural resources', 'it seems to be the case that the more natural resources a country has, the poorer it performs' (Thirlwall 2006). A number of factors lie behind this. For example, it may draw attention from other activities as the attraction of higher wages in the natural resources sector attracts talented and educated members of society and thus impairs entrepreneurial activity and innovation in other sectors. Additionally, "Dutch disease' poses a potential problem whereby revenues obtained from natural resource exports supports an artificially high exchange rate, consequently making the rest of the economy uncompetitive. Furthermore, abundant natural resources links with the issue of corruption, as revenue from natural resources may be misused by politicians and bureaucrats. Wealth obtained from natural resources is susceptible to theft and provides countless and extensive opportunities for personal wealth accumulation. Gylfason (2001), for example, shows corruption to be more widespread in natural resource abundant countries (cited Thirlwall 2006).

The structure of trade and the economy represents another fundamental factor which influences the success of industrial policy. One such argument looks at the agricultural sector of an economy. When the agriculture sector reaches a point where it begins to specialise and produce goods for export, the sectors of agriculture and industry become interdependent. Whilst the industrial sector adds to the demand for goods from the agricultural sector, rising incomes as a result of the agricultural sector, provides a market for industrial goods. Thus agriculture provides the potential for capital accumulation in industry by providing marketable surplus. If a country can manage this effectively it makes the deployment of industrial policy much more successful. For example, during the beginning of its reforms in the late 1970s and early 1980s, the Chinese government reduced mandatory delivery of output to the state by farmers (Ahya and Xie, 2004 cited Kniivilä& 2007). Such reforms saw agricultural growth average almost 10 per cent per year during 1980-1984 and significantly contribute to the expansion of the manufacturing and industrial sector. Due to increased productivity in agriculture, surplus labour became available to migrate to the manufacturing sector and as a result of increased incomes, farmers were able to increase their expenditure on goods and services produced by the domestic manufacturing sector (Dutta, 2005 cited Kniivilä& 2007). Thus the expansion and success of industry is, to an extent, reliant on improvements and success in the agricultural sector. There are however some countries which struggle to harness the benefits the agricultural sector offers for industrial policy. Reasons for this include a high proportion of subsistence farmers, tenant farmers or landless labourers who have no incentive to invest and increase output, the existence of urban bias in the treatment of agriculture and the allocation of resources, unfair competition in world markets (see Common Agricultural Policy), the structure of rural societies and the predominant land-tenure system. As a result, agriculture can prove to be a diminishing returns activity and damage the deployment of industrial policy.

Additionally, the exports of a country are an important factor to consider, as trade dominated by exporting primary commodities, such as agricultural produce, and importing manufactured goods is seen to harm industrial policy. What is termed the 'Prebisch-Singer thesis' contends that the falling price of exports relative to imports reduces the real income of a country because more exports have to be exchanged to obtain a given quantity of imports. Therefore, those countries who rely on the exportation of goods for a primary source of income, will over time, see a fall in their real income, leaving less to be invested to develop infrastructure and technology in order to put the country in a suitable position to deploy industrial policy.

The level of state support is also a key reason for why some countries appear to have been able to more successfully deploy industrial policy than others. According to Thirlwall (2006) the state has five key roles& the provision of public goods, the correction of market imperfections, protection of the vulnerable, ensuring an equitable distribution of income and providing an institutional environment in which markets can flourish. The effectiveness and success with which it manages to achieve these will determine the success of industrial policy. An active government which can support industry through various forms of protection and subsidies is thus important as failure to have a strong political base will ultimately lead to the failure of industrial policy. Those countries with successful industrial policy show a strong commitment to innovation and technological developments. However, innovation is an uncertain, risky process in which the private sector investor is often not willing to invest, and as a result many high-risk projects need subsidisation, of which only the government is capable. Thus, one of the key ways the state can support industrial policy is to provide financial support. Furthermore, in the case of developing economies, the risk of entering technologically demanding industries is often so significant that establishing state-owned enterprises (SOEs) is the only solution. Korea's steel-maker (POSCO), and Brazil's aircraft manufacturer (EMBRAER) provide classic examples of this (Chang et al 2013). Singapore provides another example of a country with a large SOE sector, estimated to represent 21.8% of GDP in 1998, (SDOS, 2001 cited Chang et al 2013).

In addition to financial aid and state ownership, policies used for governmental support include taking an equity stake, state-mediated mergers, loan guarantees, favourable tax treatment and restrictions on foreign investment. The Japanese government, for example, provided long-term finances to Japanese companies and provided targeted industries with preferential tax breaks in addition to subsidies for export, investment, RD and utility bills. Similarly, the Chinese government has used export subsidies and currency devaluations in order to enhance its export competitiveness in international markets.

One of the main arguments for the role of the state in supporting the deployment of industrial policy is the need to protect new domestic industry from advanced firms, particularly in those industries seen to be critical to the industrial process. This is known as the infant industry argument, whereby the state protects new producers from the competitive forces of the market. Infant-nurturing measures have been a major component of development policies throughout the history of industrialisation as such protection allows new industrial producers to grow, thus increasing the success of industrial policy. "Almost all of today's rich countries used tariff protection and subsidies to develop their industries' (Chang 2002). For example, after gaining its independence, Infant Industry theory was the basis of U.S. policy, using tariffs and duties to increase the price of British and other European products. From the 1830s to WWII, the US was the most protectionist country in the world (Chang et al 2013), giving the U.S. the opportunity to successfully deploy domestic industrial policy. For instance, in the late 19th and early 20th centuries, the U.S. steel industry was granted protection from international competition through tariffs and quotas that kept other steel producers out of the U.S. market, allowing the U.S. steel industry to dominate its own domestic market and eventually compete effectively in international markets. Looking at such examples, it is clear that a proactive state is a critical factor in the successful deployment of industrial policy.

One of the many critiques of international treaties and loans given to developing countries is that they have been increasingly used to prevent the use of such protectionist measures being used. Loans are tied to conditions that require the country to employ free trade policies, and are consequently seen by some as preventing the successful growth of industry in these developing economies. It is ironic that those countries whose success is founded on protectionist measures are such strong advocates of free trade policies for developing countries.

However, protectionist measures are not always needed for the deployment of industrial policy. For example, due to its small domestic market, Singapore relies heavily on external demand to stimulate and provide a market for industrialisation. As a result, it adopts a free-trade stance, significantly contrasting with the policy regimes adopted by its Asian counterparts. Yet, this isn`t to say that the government has not taken a proactive role, indeed, it has consistently supported the growth of the manufacturing sector in a number of ways. For example, it introduced mandatory saving schemes under which employers and workers were forced to contribute. As specified by Huff (1999) cited Chang et al 2013, this led to the highest national savings rate in the world during the 1980s (over 40%) and 1990s (48.2%) and led to higher levels of investment and capital accumulation. Furthermore, as a mode of labour market regulation, the Singapore government introduced wage repression to enhance the competitiveness of labour intensive industries. State regulation of the labour market can also be seen in the case of Germany where it proved effective at helping the deployment of industrial policy. For example, in the 1950s, the German government introduced a set of legally binding collective bargaining agreements which not only guaranteed a low level of wage dispersion amongst firms but also encouraged loyalty of employees, thus reducing uncertainty and increasing investment as a result of low turnover rates.

When it comes to examining the role of the government, another important element to consider is the presence of the welfare state. Individual workers in a rapidly expanding industry also face high levels of risk. Thus provision by the government, whether in the form of unemployment insurance, job search services or subsidised retraining, even though not industrial policies in themselves, can help contribute to the success of industrial policy deployment.

In addition to the points discussed, successful industrial policy also relies on the existence of and investment in suitable infrastructure, most of which is undertaken by the state. For example, one of the reasons behind UK industrial success was its unrivalled network of sophisticated railways and canals. The importance of infrastructure is further highlighted by the lack of acceptable roads in developing countries, seen to be extremely damaging to the economy. A strong infrastructure not only allows for an improvement in productivity but reduces production costs, diversifies production, expands trade and improves environmental conditions. Simple lack of access to clean water, sanitation and electric power can have detrimental impacts to the success of industrial policies. The Chinese government, for example, has played an important role in mobilising resources and developing infrastructure, investing heavily in rural infrastructure at the beginning of its reforms in the late 1970s and early 1980s (Kniivilä& 2007).

A strong administration and institutional structure is also highlighted as key in successful industrial policy. Rule of law, protection of property rights, land titling and constraints on power and corruption all need to be present should there be a desire to deploy industrial policy successfully. However, in many countries, the rule of law is not reinforced and the protection of rights and land titling remains limited. The World Development Report 1997 argued that many developing countries were not performing their core functions properly, failing to protect property, ensure law and order and protect the vulnerable. Indeed, some argue that weak institutional structures are the fundamental cause of industrial failure (Acemoglu 2003 cited Thirlwall 2006) as only when there is security of land and property will investment occur. Chinese reforms, for example, involved de-collectivisation of agricultural land and privatised land-use rights. It is, however, important to recognise that property rights are more complicated than the state simply enforcing them from the top down, as they actually arise from a decentralised search for solutions, 'Your right to your property is only as strong as those around you are willing to acknowledge' (Easterly 2007). However, Rodrik et al. 2002, cited Thirlwall 2006 suggest 'that the quality of institutions overrides everything else' so much so that 'even countries with "bad policies' do well with good institutions (Easterly and Levine (2002) cited Thirlwall 2006).

History of colonisation is also cited by various authors as posing problematic for the deployment of industrial policy in countries today. Two key arguments are put forward to explain this. Firstly, it is suggested that during colonial rule, judicial and economic structures were designed to funnel money and power upwards to the top of the political, hierarchical system, conferring tremendous power onto societal leaders. When countries were decolonized, the new generation of independent, indigenous, new leaders consequently sat on a system which channelled power upwards, and this power was abused. Secondly, certain colonies were given different economic functions. "Settler societies` which replicated pre-existing European countries, such as Australia and North America, were left in a situation suited to the deployment of industrial policy. However, other colonies, such as Jamaica, were locked into particular economic functions based on what was judged to be their comparative advantage, e.g. bananas and cotton. Therefore when gaining independence, such "extractive colonies' were left with a very limited, solely functioning infrastructural and economic base not suited for the deployment of industrial policy. Furthermore, colonialism had impacts on a country's future labour force. 'The loss to African societies trading in slaves is obvious, for it is difficult to believe that a captive sold would not have made a greater contribution to the social product through application of his or her labour in Africa than that which was received in commodities for his or her person' (Rodney 1972).

In addition to that discussed above, there are a number of other factors which influence a countries success to deploy industrial policy. One of these is the climate and environment of a country. This view commonly falls under "Environmental determinism' also known as climatic determinism. This is the view that the physical environment predisposes human social development towards particular trajectories. It is suggested that particularly harsh and extreme climates, be it polar, arid, tropical or desert, will limit that which a country can successfully deploy industrial policy. Environmental determinism does however come under repeated attacks as its claims are found to be severely faulted and often extremely wrong. Another factor often examined when looking at industrial policy is that of corruption. The World Bank defines corruption as 'the abuse of public office for private gain' and is seen to prevent growth in a number of ways. Fewer entrepreneurs will risk their money in business and investment ventures, talented members of the workforce are drawn into professions characterised by nefarious activities, contracts are awarded by those with the principle aim to divert as much money as possible back into their own pockets rather than to the most efficient and productive companies, the legitimacy of the government is undermined, and projects are chosen based on opportunities for bribes and diversion of funds rather than for the beneficial outcomes for public welfare and economic development. Thus, largely due to a lack of investment and credibility, a high level of corruption can seriously threaten the success of industrial policy. Linked to this is the issue of aid. Though there are many facilitators of corruption, aid is arguably one of its greatest aides. The 'Vicious cycle of aid' (Moyo 2009) argues that aid supports corrupt governments, leading to greater corruption which reduces economic growth and ultimately increases poverty levels. In response to growing poverty, donors give more aid and thus the cycle continues. The key argument here is that the provision of aid will shore up corrupt governments and provide less of an incentive to deploy industrial policy. Lastly, the level of capital is another determinant of a country's ability to deploy industrial policy. Human capital, (the skills, training, expertise, knowledge and education of a country's labour force), is often low in developing countries due to poor education. Combined with a low level of physical capital (machinery, buildings, or computers), this can prove to considerably limit the deployment of industrial policy and the absorption of new technologies. For example, 'The amount of physical capital that labour has to work with in a typical developing country is no more than one-twentieth of the level in Europe and North America' (Thirlwall 2006).

The importance of the factors which influence industrial policy varies between authors, with higher significance being placed on some rather than others. Different countries run different industrial policies in different institutional settings and as a result, whilst it may appear that some policy measures may be more favourable than others, there is no set method that ensures the success of industrial policy. Each country represents a unique environment of different players, cultures, forces and relationships and consequently, it is not easy to transplant industrial policy measures from one country to another, nor is it possible to definitively answer why some countries appear to have been able to more successfully deploy industrial policy than others. It would, however, appear that one of the most significant factors is the role of the state and activeness of the government. Though government intervention can be both advantageous and disadvantageous, it would seem that protectionist measures and state support, at least to begin with, are essential to the success of industrial policy. This is seen in several examples, be it Brazil successfully entering energy and technology industries, Korea and its steel industry or the US and China with manufacturing. Yet, with or without governmental support, 'all the success cases of industrial policy are countries that have actively learnt from the more successful countries…&most successful countries are those that willingly admit their shortcomings and do their utmost to learn from other more successful countries.' (Chang et al 2013).

References

Chang, H. (2002.) Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem Press.

Chang, H., Andreoni, A., Ming, K, L. (2013). International industrial policy experiences and the lessons for the UK. Future of Manufacturing Project: Evidence Paper 4. Foresight, Government Office for Science

Cimoli, M. Dosi, G., Stiglitz, E.,J. (eds.): Industrial policy and development. The Political Economy of Capabilities Accumulation, Oxford 2009, Oxford University Press

Easterly, W. (2007). The White Man`s Burden: Why the West`s Efforts to Aid the Rest Have Done So Much Ill and So Little: Why the West`s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Oxford University Press

Huntington, E. (1945) Mainsprings of Civilization. Oxford, England: Wiley.

Kniivilä& 2007& Industrial Development for the 21st Century: Sustainable Development Perspectives, DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS

Malthus T.R. 1798. An Essay on the Principle of Population. Chapter 1, p 13 in Oxford World`s Classics reprint.

Moyo, D. (2010) Dead Aid: Why aid is not working and how there is another way for Africa. Penguin

Rodney, W. (1972). How Europe Underdeveloped Africa

Rodrik 2007& Industrial Development for the 21st Century: Sustainable Development Perspectives, DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS

Thirlwall, P, A. (2006). Growth development : with special reference to developing economies Basingstoke : Palgrave Macmillan, 8th ed 2006