COVID-19: how to transform the industrial policy toolkit in developing nations

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COVID-19 presents some leeway for countries to pursue industrial policy on their own terms. However, as crisis conditions dissipate, current economic theory is of little help. Current perspectives range from the almost theological to the overly positivistic. Mainstream economists who have tried to ‘mainstream’ industrial policy in recent times offer simple econometric-centred reasoning that seeks to find cross-country regularities instead of nuanced and real-world application based on a country’s economic history. They apply highly positivistic and proscriptive worldviews claiming industrial policy should reveal latent ‘comparative advantage’. On the other hand, and perhaps equally misguided, heterodox scholars who reclaim the structural roots of industrial policy have anchored it in increasingly irrelevant empirical foundations that would only be useful for countries with already existing manufacturing bases. The latter have opted for the more theological approach that presupposes classical growth as an end of any industrial policy as a positive development. I hope that we seize the chance to encourage a new paradigm for industrial policy beyond narrow prescriptions and dominant worldviews.

Industrial policy in times of COVID-19

COVID-19 offers an unexpected opportunity for scholars and policy makers to re-consider industrial policy in developing countries. As countries run out of personal protective supplies, hand sanitisers, testing kits, and ventilators, which in some cases have been pirated by the ever-imperialistic United States, we must take these lessons seriously. Countries that have applied some form of import substitution have fared better to ramp up testing and meet their population’s healthcare needs. Senegal for instance, has produced its own diagnostic tests. South Africa and Kenya are also dabbling in manufacturing of ventilators and hand sanitizers. Open source options for ventilators can currently be easily replicated in Latin American and African countries and then 3-D printed. Industrial policy is central to the role of the state in the economy, but how we imagine it is critical beyond the present circumstances. 

After the crisis, one wonders what will happen next. These capabilities need to be preserved so that countries are not caught out during the next public health emergency, especially as owners of capital may wish to enforce their ‘property rights’ in the future. Despite these supposed low-hanging fruit and short-term gains in production of required supplies in some developing countries, the fact remains that countries like China and Germany with strong manufacturing sectors are doing better. Many have noted that things cannot return to ‘business as usual’, and the same is true for industrial policy. In recent times, economists sadly do not have clear, suitable guidance for countries starting from a low manufacturing base or those countries hoping to transition into manufacturing, especially as they face an even harsher global economic environment. 

Misguided prescriptions offer little hope 

Mainstream economic analysis is restricted by the neoclassical assumptions that form the foundation of the discipline. An implication of this is that the government’s role is thought to be to set up efficient institutions and leave it to markets, and trade according to whatever the country is efficient in producing. Some economists in the mainstream have come round however to accepting industrial policy. This new camp of the industrial policy ‘mainstream’ believes it should fix certain problems like coordination between governments and private capital, research infrastructure or education systems, known as market failures. In this view, policy makers should be more “pragmatic” i.e. not too bold. While this advice might sound fine, much of it is too prescriptive and does not fit the realities of developing countries. These advocates also could not have predicted the kind of policy changes or industrial manoeuvres this pandemic has helped bring about. 

What is even more incredulous, these advocates for minimal and circumspect state intervention have not only joined the cause of industrial policy, but in some instances, it becomes an exclusive thing only for “advanced economies” like the United States. For them, this would reduce the chance of moral hazard and it is something that should not be tried at home. By implication, they suggest that only rich countries can have nice things. They opposed up until recently broad state interventions, until calls to tackle the immense production shortfalls became necessary, like in the US to invoke the Defense Production Act

The mainstream approach likewise suggests that industrial policy is only good when used sparingly, with certain limitations, and only after evidence of market failures. COVID-19 has posed the most challenging market failure and supply shortages ever, that even the United Kingdom’s health minister had to appeal on Twitter for manufacturers of ventilators. The UK is now applying an indemnity, and rightly, so that manufacturers who wish, in pursuit of producing much needed supplies may infringe intellectual property. 

Prior to this crisis, these economists believed that the conditions needed to be specified. They were only marginally less dogmatic than neoclassical economists of the “old” guard like Anne Krueger – the longstanding sceptic of any government intervention whatsoever – to suggest that too much intervention will encourage profligacy and corruption. Nowadays, the question is not what, but how to do industrial policy according to a recent perspective. These ideas start from a deficit position based on supposed failures in developing countries. 

In addition, the argument follows that developing countries do not have the tools, right culture, or institutions and should therefore be less ambitious. Based on some rather positivist and highly technical interpretations drawn from econometrics, they simply pay little or no attention to analysing history, institutions, politics or context. 

Heterodox economists may also be complicit, and only marginally better  

In contrast, long-time advocates of government intervention, industrial policy is a sine qua non of expanding a country’s growth potential. These heterodox economists have however become a bit theological suggesting that “lessons” of industrial policy from East Asian manufacturing hubs may be suitable for other countries with only passing consideration of economic context and political struggles. Some heterodox economists incessantly draw upon “success stories” in East Asia to prove their point, in particular South Korea, Taiwan or modern-day China to show what contemporary laggards are not doing right. 

When they offer analysis about other developing regions, like the mainstream, they gloss over the economic history of those countries. These proponents, however, would have little advice for countries that have had little or no experience with manufacturing, and which are required to build institutions and generate new sources of fiscal resources from scratch. Industrial policy at this time has been about satisfying basic productive needs of the society as it should be, rather than promoting growth or exports without end.

This current crisis, on the one hand, has exposed the inadequacies of these two perspectives. It particularly reveals how dogmatic the mainstream has been up to now. Divergent advice can be very confusing for policy makers in developing countries and can lead to expensive and ill-fated misadventures. Given their own present fiscal constraints, developing countries may have to rely on multinationals or suppliers who may exploit the profit-making potential of the crisis in providing much needed supplies to address this pandemic and even their future productive needs. 

Taking reality seriously 

My recent paper offers some more advice for countries that start from a lower or medium-level productive base and have limited fiscal resources or malfunctioning institutions. Drawing upon work by political economists and other social scientists, first I analyse the social and economic foundations of the society using archives, macroeconomic and sectoral data, and other secondary sources. While delving deeply into first-hand source materials of past industrial projects and the institutions that were set up. The intention is to understand what happened in the country’s industrial history. 

This approach does not translate policy ‘lessons’ from one country to another, as some heterodox scholars tend to do (see here and here). While I appreciate the approach by Chang and Andreoni for instance, they often only use a rhetorical understanding of context. The approach I outline helps conceptualise the many structural, socio-political and technical and organisational factors that contributed to the performance of specific enterprises and industrial policy overall in context. It starts from the position that colonisation and its modern versions helped shaped certain industrial patterns of countries. Social groups that mobilized, or not, created new opportunities for rent allocation to productive sectors and new institutions for new industries.

The political economy approach contains four (4) analytical starting points: 

  1. Specification of basic needs and inventory of resources (natural and human resources)
  2. Identification of available materials, technological areas and research activities.
  3. Local and international search for appropriate technologies, diplomatic advocacy and coalition-building at an international level for shifting international regimes and protocols to support development.
  4. Assessment and enhancement of bureaucratic/governance arrangements and capabilities and management of rents for implementation across sectors of interest.

The political leeway that this crisis has opened up must be preserved. Any recent laws enacted to boost production or restricting the profit motive at the expense of the national welfare during this time must be therefore maintained and applied in sectors beyond public health, even after a vaccine is found. Other developing countries must enact similar laws, regulations and measures to grow their capabilities and adjust their governance arrangements in tune with their requirements and specific political situation.

Moving forward, after this crisis, countries must advocate for major changes after this crisis, starting with the international financial architecture. We have witnessed massive capital outflows of over US$96 billion in just a matter of weeks due to the coronavirus pandemic. Apart from reining in unfettered finance, institutional solutions do not lie outside of the countries themselves. Greater policy and research focus should be paid to understanding the country’s institutional and economic history and current situation on their own terms and designing policy accordingly. 

Where to from here

While criticism has been placed at the doorsteps of the economics profession for its many blind spots during this and previous crises, it has usually come from heterodox scholars. The notion that only rich countries should be allowed to try industrial policy, or that these countries are better at it has been shattered and exposed as a myth. Heterodox scholars need to also share some blame on the question of industrial policy regarding the type of research they carry out from which inappropriate and inconsequential policy advice comes. After this crisis, we should banish poor economics and economic advice to the dustbin of intellectual history. 

For better or worse, this crisis offers a new start for industrial policy. I hope that we emerge with contextual understanding of what has happened. That kind of honest introspection is not for the faint at heart, especially for economists. Despite the fact that we have heard less from historians or ethnographers during this time, their methods and approaches may actually offer us better insights about how to be less dogmatic and humbler. These lessons and a fuller understanding of political economic dynamics of development of countries may offer an optimistic pathway to the future of industrial policy – one that destabilises certainties and misguided dominant worldviews.  

Dr Keston Perry teaches economics at the University of the West of England, and in his research explores the sources of institutional and economic change and why some countries and social groups come to exercise agency, despite their marginalisation, to transform societies. He tweets at @kestontnt.

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