Category: Industrial Policy

Want to understand industrialisation in resource-rich countries such as Uzbekistan? Read Marx (and Iñigo Carrera)

fgaldini1 Comment

The commodity supercycle of the 2000s and 2010s gave rise to a rich debate in the academic literature about the possibility for resource-rich countries to muster the primary commodity price bonanza for development. As in past debates on the rise of Asia as the ‘world’s factory’, industrial policy was once again at the forefront of discussion.

On the one hand, orthodox scholars insisted that the use of market distortions to channel resources towards industrialisation would be a risky gamble with little guarantee of success. Instead, as the Asian ‘tigers’ and China before them, developing countries would do well to make good use of the market to identify their comparative advantages. In this view, industrial policy continues to be inefficient and wasteful, especially as it creates plenty of opportunities for corruption rather than development. On the other hand, heterodox researchers argued that state intervention was crucial to divert resource rents to specific nascent industries that would never be able to withstand international competition without sustained support. As both the Asian ‘tigers’ and China more recently used robust industrial policy to develop globally competitive industries, developing countries should also use targeted policy intervention to ‘upgrade’ to higher value-added manufacturing for export.

Still, one question that eludes both orthodox and heterodox literature concerns why, for decades, multinational corporations would consistently invest in manufacturing in resource-rich countries such as, for instance, Argentina, Brazil, and Egypt. This has been the case despite the small scale and high costs of production in these markets (making them inefficient, per orthodox scholars), whose output is mostly sold domestically rather than exported (pace heterodox scholars).

In a recently published open access article in Competition & Change, I applied Argentinian scholar Juan Iñigo Carrera’s original elaboration on Marx to the under-researched case study of the car industry in Uzbekistan to answer precisely this question. I found this same orthodox-heterodox binary to dominate the literature on ‘transition’ from the command to the market economy in Uzbekistan, too. Orthodox researchers averred that state-owned auto company UzAvtoSanoat failed to develop due to inefficiency and corruption, in particular due to the distortions of the government’s industrial policy. Heterodox scholars instead found industrial policy to be the very reason behind the creation of a successful export-oriented car industry, in particular during the commodity supercycle when part of total output was exported mostly to Russia. Neither, however, could explain why Korean Daewoo Motor Company (DMC) and American General Motors (GM) entered into a joint-venture with UzAvtoSanoat, despite the small domestic scale (hence high costs) of automobile production in the country, which is mostly purchased domestically.

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Who’s in control? Wall Street Consensus, state capitalism, and spatialised industrial policy

Ilias ALAMI1 Comment

By Seth Schindler, Ilias Alami and Nick Jepson

Recent trends may well have puzzled critical observers of global development policy. On the one hand, we witness the rise of what Daniela Gabor has aptly termed the ‘Wall Street Consensus,’ an emerging paradigm promoting the mobilisation of private finance as a developmental priority. Southern states are encouraged to re-engineer their domestic financial systems around securities and derivatives markets, create ‘investable’ opportunities in sectors such as infrastructure, water, climate adaptation, health and education, as well as deploy policies that specifically ‘de-risk’ investment for global investors. In this formulation Southern states are subordinated to global financial capital and their policy space is significantly constrained.

On the other hand, however, we observe a tendency towards state capitalism, wherein states are increasingly active within markets, as entrepreneurs and owners of capital as well as regulatory agents in the world economy. Across the income spectrum states have embraced the role of agents of transformation and development. In the global South, one way these trends manifest is in the proliferation of new modalities of spatialised industrial policy underpinned by large-scale development projects. Examples include the China–Pakistan Economic Corridor, Indonesia Vision 2045, the Plan Sénégal Émergent, Morocco’s New Development Model, and the developmental aspects of Mexico’s Fourth Transformation such as the Tehuantepec Isthmus Interoceanic Corridor. Some of these plans have benefitted from the rise of China and its multitrillion-dollar Belt and Road Initiative, which traditional development actors now increasingly seek to counter by providing alternative initiatives.

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Big business’s response to the COVID-19 pandemic highlights a problem of incentives in South Africa

jasonfbellLeave a comment

The COVID-19 pandemic has swept across the global economy, causing havoc and leaving many economies teetering on the brink of economic and social collapse. Moreover, the arrival of a second and now third wave of infections and a further mutation of the virus is driving the economy further into peril and uncertainty. The announcement by Cyril Ramaphosa, back in March 2019, that two of South Africa’s wealthiest families and the pinnacle of big business, the Rupert and Oppenheimer families, would be donating R1 billion each was met with admiration from all corners of the country. These commitments have since been matched by the Motsepe group of companies and Naspers, donating R1.5 billion. To date, the fund has amassed over R3.22 billion in pledges from a wide array of private, public, and political donors.

Responses of this type are understandable when combining the already bleak outlook for the South African economy with a significant and potentially catastrophic supply shock. However, a question that may be playing on many South Africans minds is: why, given the fact that South Africa’s economy has long struggled with growth and several structural issues, is this response from big business only coming now in the face of a global pandemic? An easy answer may be that there has not yet been an event of this magnitude for big business to respond. However, a counter to this argument is that businesses should continuously be re-investing their profits regardless of the economy’s health.

South Africa has a long history of the inefficient use of profits, which favours hording cash and conducting unproductive investments such as mergers and acquisitions. These uses of profits are a direct result of the skewed incentives facing the agents of many large companies. For instance, many CEOs are incentivised through sizeable bonus packages to maximise the shareholders’ value rather than focusing on the long-term health and sustainability of the business. This short-term view causes CEOs to opt to retain earnings rather than embark on risky research, development, and innovation endeavours that often fail but may result in enormous payoffs if they succeed economically and socially. Short-termism is a result of a corruption of the idea of value creation where price is associated too closely with true value, nuturing an entrenched system of extraction that contributrs to worsening economic and social conditions. This is something the professor in the Economics of Innovation and Public Value at University College London, and director of the Institute for Innovation and Public Value, Mariana Mazzucato laments in her book The Value of Everything.

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Investment, Sustainability, Decent Jobs: Challenges and Promises for the Sub Saharan African Auto Industry

lmonacoLeave a comment

In a comparative research recently conducted for IndustriALL Global Union/ FES South Africa, we[1] tried to shed light on the high potential of the automotive industry in Sub Saharan Africa. At the same time, we explored the key challenges and pressing issues that need to be addressed for a sustainable industrial development path in the region. Our research report focuses on seven countries, identified as promising, fast-growing or broadly committed to supporting their Auto sector: Ghana, Kenya, Ethiopia, Namibia, Nigeria, Rwanda and South Africa.

First and foremost, the report claims attention towards these economies, and industries,  that are still largely underexplored, that still enjoy very limited visibility, whereas the largest portion of research on industrial development and on the Automobile industry is often addressed to traditionally established industries in the Global North (Europe, US, Japan) or to emerging giants in the Global South (China, Mexico, Brazil etc.). Our objective was thus to emphasise the increasingly important role that these seven industries, and the Sub Saharan African region more broadly, can play within the Global Auto Industry. Despite structural weaknesses that do persist, and despite the heavy impact of the Covid-19 pandemic, these seven countries share a willingness to own their industrial development trajectory, and to widen their participation in Global Production Chains. In this regard, the local auto industry remains an important bet.

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Debunking the ‘Free Market Miracle’: How industrial policy enabled Chile’s export diversification

amirlebdioui4 Comments

Assessing industrial policies in Chile remains a rather contentious and divisive topic. Chile has long been held up as an almost‐textbook example of the success of ‘letting the market work’, as there was a broad agreement among mainstream economists that Chile has largely succeeded in promoting strong and stable growth because it has embraced free market policies. At first glance, this may seem believable.  Afterall, Chile has one of the fastest growth rates in Latin America since its neoliberal turn in the 1970s. Despite the continuing significance of copper, it has also managed to diversify into other sectors and acquire new competitive advantages between the 1960s and 1990s. The dominant view sustains that the successful emergence of new competitive sectors in Chile’s export basket are the result of four decades of commitment to liberalization and free market policies. However, this post, which is based a recent study, shows that Chile’s export diversification was not the result of free market policies, but of carefully crafted government interventions. The idea of Chile as a ‘free-market miracle’, as first described by Milton Friedman, is therefore one of the most enduring myths associated with recent economic development history.

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A new Washington Consensus on the role of the state?

Ilias ALAMI5 Comments

By Ilias Alami, Adam Dixon and Emma Mawdsley

In a recent op-ed, Martin Sandbu of the Financial Times argues that “the conversion by the IMF and World Bank to support the activist state would put Saul of Tarsus to shame.” According to him, we may be witnessing the rise of a new Washington Consensus, which embraces deficit spending (by rich countries), “temporary solidarity surtaxes” on the rich and businesses, green public investment, and other forms of government intervention. This is not only to address the short-term effects of the pandemic, but also to stimulate demand across the world economy. Sandbu finds evidence of this new consensus in the benign view that the IMF has taken on Biden’s “rescue package”, and claims that “the new Washington consensus could prove as politically powerful as the old one.” In another op-ed in October 2020,

Sandbu characterised this new consensus as follows:

“After 1945, the guiding assumption was, first, that the state knew best, then that the private sector was best. We are about to transcend both, in favour of an economic worldview based on finding ways in which government intervention can guide the private sector to perform better. In that sense, economic planning and the activist state are back.”

It is indeed striking that the IMF, the World Bank, the OECD, the G20, and other multilaterals, have adapted their discourse on the role and place of the state in development. This predates the COVID-19 pandemic. In an open access paper recently published in Antipode, we document the emergence of this new vision of the state in development and outline its key features. Since the early 2010s, these institutions have produced a remarkable wealth of material explicitly concerned with old and new forms of state ownership and intervention. Witness, for instance, this November 2020 EBRD Transition report titled The State Strikes Back, or this chapter dedicated to state-owned enterprises in the IMF 2020 Fiscal Monitor. Our analysis of such policy documents and others suggests that we are witnessing a gradual yet fundamental reorientation of official agendas and discourses about the state. This emerging vision embraces a fuller role of the state in development (than the post-Washington Consensus), including as promoter, supervisor, and owner of capital. Our analysis expounds the material context in which this vision is emerging. Two interrelated transformations are particularly important.

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Economic Sovereignty for Developing Countries: What Role for Modern Money Theory?

basiloberholzer4 Comments

With modern money theory (MMT) receiving impressive attention, the implications this theory has for developing countries have also been discussed more intensely. Emphasizing both its strengths and gaps provides a great chance to further develop macroeconomic strategies for poverty reduction and environmental sustainability.

In brief, the theory starts from the statement that money is issued by the government and brought into circulation via its expenditures. The government does not rely on taxes to fund expenditures when it is itself the source of money. Therefore, money can be created upon demand, is not limited, and can be used by the government to finance all expenditures it considers necessary to achieve policy goals such as full employment or a Green New Deal. The reason why agents in the economy accepts this money only consisting of numbers without any intrinsic value is the obligation to pay taxes. Since the state has the power to impose taxes, individuals need to get hold of money as this is the only way to meet their obligations; this is how the currency is accepted as a means of payments. The government thus has the power to run unlimited deficits because the fact that money is needed to pay taxes guarantees its acceptance even if those taxes do not cover expenditures. In fact, the government should run deficits because it creates the demand required for full employment while a balanced budget constrains it. The government cannot go bankrupt because there is no lack of currency it issues itself. The conditions identified by MMT for the system to work are the following: 1) the country must be sovereign of its own currency and 2) inflation needs to be kept under control. Once the latter starts accelerating due to increased nominal demand stemming from government expenditures, taxes can be increased in order to withdraw money from circulation. However, as long as full employment is not achieved, prices are argued to remain stable.

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Developmental Agency under the Radar: Developmental States and Coalitions in Dependent Market Economies and Low-Tech Sectors

David KarasLeave a comment

In a recent paper co-authored with László Bruszt and published in a Special Issue of Review of International Political Economy, we identify a developmental state in the least likely  of times – the period of hegemonic neoliberalism in the 1990s and early 2000s –  and the least likely of places, namely the post-socialist Central Eastern European (CEE) economies conventionally described as FDI-dependent Dependent Market Economies (DMEs). 

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