Jump to ContentJump to Main Navigation
The Practice of Industrial PolicyGovernment—Business Coordination in Africa and East Asia$

John Page and Finn Tarp

Print publication date: 2017

Print ISBN-13: 9780198796954

Published to Oxford Scholarship Online: April 2017

DOI: 10.1093/acprof:oso/9780198796954.001.0001

Show Summary Details
Page of

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 18 January 2022

Overview and Insights

Overview and Insights

Chapter:
(p.1) 1 Overview and Insights
Source:
The Practice of Industrial Policy
Author(s):

John Page

Finn Tarp

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198796954.003.0001

Abstract and Keywords

There is increasing recognition that the market imperfections on which theoretical arguments for industrial policies rest are widespread in low-income countries, and that well-designed government policies can contribute to improved economic outcomes. There is also greater understanding that the private sector has a central role to play in formulating and implementing industrial policy. Because much of the information relevant to policy-making is held by firms, some form of structured engagement—often referred to as close or strategic coordination—between the public and private sectors is needed, both to assist in the design of appropriate public actions and to provide effective feedback on their implementation. This introductory chapter provides an overview of common themes and outlines a set of forward-looking ideas for strengthening public–private coordination in Africa. It argues that these ideas must form part of any development agenda for Africa in the years to come.

Keywords:   Africa, industrial policy, low-income countries, strategic coordination, development agenda, public and private sectors

1.1 Introduction

Industrial policy is finally moving away from the fruitless debate on ‘picking winners’ versus ‘levelling the playing field’ towards the development policy mainstream. There is increasing recognition that the market imperfections on which theoretical arguments for industrial policies rest are widespread in low-income countries and that well-designed government policies can contribute to improved economic outcomes. There is also greater understanding that the private sector has a central role to play in formulating and implementing industrial policy. Because much of the information relevant to policy-making is held by firms, some form of structured engagement—often referred to as close or strategic coordination—between the public and private sectors is needed, both to assist in the design of appropriate public actions and to provide effective feedback on their implementation.1

There is, however, less agreement on how government–business coordination should be structured, how its objectives should be defined, and how success should be measured. In fact, the academic literature on close coordination provides little guidance on how governments interested in developing a framework for public–private engagement should go about doing it. This is unfortunate, especially for Africa. Nowhere in the developing world is effective industrial policy more needed.

A key role for industrial policy in developing economies is to speed up the process of structural transformation, the movement of labour from lower- to (p.2) higher-productivity sectors.2 In Africa, structural transformation has contributed little to growth and job creation. In fact, until the turn of the 21st century, an increasing share of African workers found themselves in low-productivity, low-wage employment. Since then, Africa’s economic structure has begun to change, but the shift has consisted largely of workers moving from agriculture into services such as trade and distribution. This is movement from very low-productivity to marginally higher-productivity jobs. In sub-Saharan Africa (SSA), services workers are, on average, only about twice as productive as farmers, while output per worker in manufacturing is more than six times that in agriculture. Yet, industry, and especially manufacturing, has stagnated.

In 2014 the Korea International Cooperation Agency (KOICA) and United Nations University World Institute for Development Economics Research (UNU-WIDER) launched a joint research project on ‘The Practice of Industrial Policy: Lessons for Africa’. The objective of the project was to help African policy makers develop better coordination between the public and private sectors in order to identify the constraints to faster structural transformation, and to design and implement policies to remove them. This book presents the results of that research. It is structured in three main parts. Part 1 presents four framing chapters that survey key topics in the practice of industrial policy. Part 2 consists of four case studies from Asia addressing the evolution of business–government coordination, while Part 3 contains five case studies of efforts to build business–government engagement in Africa. This introductory chapter provides an overview of common themes and outlines a set of forward-looking ideas for strengthening public–private coordination in Africa. We believe that these ideas must form part of any development agenda for Africa in the years to come.

1.2 Industrial Policy and Public–Private Coordination

The dominant view among economists during the past thirty years has been that industrial policy is a bad idea. The underlying argument is based on two lines of reasoning. First, governments do not have the information needed to ‘pick winners’. Most economists have regarded the allocation of resources in an economy as too complex and too information intensive a process to be handled effectively by the public sector.3 Second, even if governments could solve the information problem, rent-seeking behaviour by private agents would undermine their well-meaning efforts. For this reason, the prevailing argument has been that private actors should be excluded from designing (p.3) public policies because they will lobby for actions that serve their particular interests (Krueger 1974).

Where market failures are present, the mainstream view has been that policy makers should identify the distortions and then design taxes or subsidies to reduce the gaps between market prices and marginal social costs or values. As Rodrik (2009: 17) notes:

Economists tend to think of policy design as a top-down process…the principal (government) designs a rule that provides the incentive to the agent (the firms) to act in a socially desirable manner in view of the private information (e.g., costs) that the agent (but not the principal) has. This approach takes the informational asymmetry as given, while keeping the private-sector at arms’ length. The bureaucrats simply have to issue the rules and then step aside.

There has been considerable rethinking of this conventional wisdom in the last decade. Information, learning, and geography combine to make a powerful theoretical case for industrial policy (Stiglitz 1996, 2001; Rodrik 2008). There is greater agreement in the profession that markets do not by themselves lead to economic efficiency or a desirable distribution of income, and that market imperfections in low-income countries impede structural transformation. Many markets are incomplete and suffer from coordination failures. Collateral constraints combined with asymmetric information in credit markets can limit investment; and there are potentially large spillovers associated with learning, not just among firms, but also among institutions.4 In addition, the new economic geography has drawn attention to a major collective action problem—agglomeration (UNIDO 2009; Howard, Newman, and Tarp 2016).

There are, as well, broader industrial policy objectives at work. In Chapter 2 (this volume) Stiglitz argues that in addition to addressing market failures, industrial policies should attempt to influence the trajectory of growth in favour of greater income equality. Such an objective clearly flies in the face of the traditional ‘arm’s-length’ relationship between the public and private sectors. As he points out, however, the incentives embodied in the price system often favour the interest groups that shape the institutions and regulations governing market transactions. Indeed, as Stiglitz puts it: ‘not having an industrial policy—leaving it to the market, structured as it is by special interests—is itself a special-interest agenda’ (Chapter 2, this volume).

As the theoretical case for industrial policy has strengthened, new insights have also challenged the traditional top-down model of policy-making. Industrial policy must, in practice, identify and respond to the need for public actions across a very broad front of industries and possible interventions. The growth of global value chains has blurred the boundaries between (p.4) manufacturing, agro-industry, and tradable services; and these ‘productive sector’ activities share a number of traits. They rely on export markets for scale, are subject to agglomeration economies, and depend on the knowledge of managers and workers to raise productivity and quality (Newman et al. 2016). Faced with this complexity, public officials cannot know where all of the relevant constraints and distortions are in an economy.5 Firms have information crucial to policy design and implementation, making coordination with the private sector essential at two levels: first, to identify and remove constraints to the more rapid growth of the current set of high-productivity industries, and, second, to design and implement strategies to transform the economy.

1.2.1 Extending a Helping Hand

Understanding the constraints on firm-level performance requires detailed industry-level information and an ability to come to grips with the environment within which firms operate. Production of a particular good or service often requires a set of specific public inputs (Hausmann, Rodrik, and Sabel 2007). Lemma and te Velde argue in Chapter 4 (this volume) that strategic coordination with the private sector can identify the public actions needed for more rapid enterprise growth. They label this the ‘helping hand’. A structured engagement between government and the private sector is used to identify the constraints to the growth of existing high-productivity firms. With the growth of global value chains, the helping hand has become increasingly important in assisting domestic firms to engage with the multinational lead firms that drive them.6 An equally important contribution of close coordination to the helping hand is in giving feedback on which interventions work and which do not.

Tu-Anh Vu-Thanh argues in Chapter 9 (this volume) that in post-reform Viet Nam the government actively worked to create a dialogue between the public and private sectors. State actors sought private sector inputs on economic reforms, and at the same time enterprises lobbied for responsive and effective government. Even though there was no formal public–private coordination mechanism, this engagement meant that many domestic and foreign firms actively collaborated with the government to reform policies. In (p.5) Chapter 8 (this volume) Hinh Dinh describes how local authorities in China ‘backed winners’ through public investments and public–private initiatives to remove constraints to their growth. Once a firm was established and doing well, the local government offered streamlined administrative procedures, support for technological upgrading, and access to market information through networking. Mulu Gebreeyesus shows in Chapter 10 (this volume) how public–private coordination in Ethiopia facilitated the entry of domestic firms into the global cut-flower value chain.

Lemma and te Velde in Chapter 4 (this volume) also survey quantitative and case-study evidence regarding the impact of public–private coordination on firm-level performance. They find that, in Ghana, measures of effective state–business relations (SBRs) are positively correlated with higher firm-level total factor productivity (TFP). In Zambia, membership in a business organization increased firm productivity by 37 to 41 per cent, due to business organizations’ capacity to lobby for relevant public actions and, to a lesser extent, to their ability to reduce information asymmetries and coordination failures among their members. Firm-level data for fifteen Indian states show that stronger SBRs boost productivity growth in both formal and informal manufacturing firms.

1.2.2 Shaping Strategic Directions

In their contributions, Joseph Stiglitz and Justin Lin and Khuong Minh Vu remind us that the process of structural transformation also requires moving in new directions, including, as Stiglitz argues in Chapter 2 (this volume), creating a learning society. Dani Rodrik (2009) refers to this approach as ‘industrial policy in the large’. Beyond the helping hand, industrial policy in the large implies thinking of an industry or an activity one would want to see develop, and then putting in place all the public inputs needed for it to succeed (Hausmann, Rodrik, and Sabel 2007). The economic rationale for this type of industrial policy rests on the presence of imperfect markets. In Chapter 2 (this volume) Stiglitz also argues that markets are not well suited on their own to support structural transformations. Imperfections in risk and capital markets mean that individuals, who should move from old to new sectors in low-income countries, cannot get access to the resources needed to make the shift; yet they have to bear the inevitable risks associated with the transition.

Information externalities and coordination failures further inhibit structural transformation. Because there are high costs to private firms with regard to discovering the next new area in which an economy will be competitive—a process that Hausmann and Rodrik (2003) have famously labelled ‘self-discovery’—firms will tend to underinvest in new activities, even if they have high social returns. For this reason, implementing industrial policy in (p.6) the large implies giving incentives to compensate first movers in a new sector for the positive information externalities they create by going where no business has gone before. Rent transfers can be in the form of a subsidy, such as trade protection or fiscal transfers, or by the provision of venture capital.7

In making industrial policy in the large, governments have used coordination with the private sector to identify promising new activities and build consensus on new strategic directions for the economy. Drawing on their understanding of the experience of a number of East Asian economies, Lin and Vu argue in Chapter 3 (this volume) that ‘an effective economic strategy plays a crucial role in identifying the country’s comparative advantage…and proposing strategic directions and priorities for fostering structural change’. Citing the examples of Singapore and Viet Nam, they argue that a strategy must align the country’s economic development efforts across sectors and regions, and strengthen their coherence, consistency, and efficiency. Eun Mee Kim in Chapter 6 (this volume) highlights the central role the Five-Year Economic Development Plans (FYEDPs) and their implementation through the deliberation councils played in the early industrialization drive in South Korea. Rasiah in Chapter 7 (this volume) discusses how the Malaysian Industrial Master Plans shaped business–government relations in the electronics industry.

1.2.3 Embedded Autonomy

Any system of incentives designed to help private investors by removing constraints or through a system of incentives, may end up serving as a mechanism to transfer rents to corrupt businessmen or bureaucrats. This is what lies at the heart of some objections to public–private coordination: the fear that the state will be corrupted in the process. While a highly insulated state that holds the private sector at arm’s length will lack access to information essential to policy formulation, close public–private relationships without some check on private rent seeking can leave it incapable of transcending individual interests. Managing the tension between coordination and capture is one of the central challenges in implementing industrial policy in practice.

Peter Evans’ (1995) influential study of South Korea introduced the term ‘embedded autonomy’ to describe a way of achieving balance between coordination and capture. The success of the Korean model, he argued, was due to the fact that the public institutions charged with industrial policy design and implementation were both autonomous and embedded in private sector networks. In Chapter 9 (this volume), Tu-Anh Vu-Thanh, gives an example of such embedded autonomy from Viet Nam. The Prime Minister’s Research (p.7) Commission (PMRC) and a very small group of highly dedicated technocrats in the Central Institute for Economic Management (CIEM), led by Dr Le Dang Doanh, were the team behind the 1999 Law on Enterprises. At the heart of the PMRC was a core group of a dozen advisors. Most had served as senior experts or researchers in the party-state system, but at the time they held no executive posts in the administration. Since the PMRC members neither held official power nor were in business, they were able to maintain a very high level of autonomy, both in relation to the government and vis-à-vis the enterprise community, while remaining embedded in both.

Lin and Vu list a number of institutions drawn from the experiences of successful early Asian industrializers, and Kim describes in some detail in Chapter 6 (this volume) the role played by the Economic Planning Board (EPB) as the super ministry in South Korea’s early industrialization push. While these institutions were highly structured ‘deliberation councils’, incorporating public officials and private entrepreneurs, Lemma and te Velde argue in Chapter 4 (this volume) that organizational structures used to achieve embedded autonomy vary significantly, ranging from formal, regular coordination arrangements to informal, ad hoc interactions. In some cases, the formal aspects matter most and the forms are highly visible, as in South Korea. In other cases, such as the reform programme in Viet Nam, informal arrangements, rules, and norms dominate. In sum, while individual country circumstances will define institutional structure, the objective is, in all cases, the same: to set up a framework that (i) engages the public sector in an ongoing conversation with the private sector; and (ii) has the capacity to respond selectively, using a range of policies, to the economic opportunities these conversations identify.

1.2.4 State Capacity

A defining characteristic of the East Asian deliberation councils was the high capacity of the bureaucracy charged with managing the process and with implementing decisions. As Lin and Vu note in Chapter 3 (this volume): ‘institutional initiatives that establish and support highly competent organizations dedicated to coordinate efforts for industrial diversification and upgrading, efficiency and productivity improvement, and export promotion, are critical to the success of a developing country’s industrial policy implementation’. They argue that a number of emerging Asian economies have developed such high-quality implementation mechanisms: Malaysia’s Performance Management and Delivery Unit, the Committee on Economic Development Acceleration and Expansion of Indonesia, the National Development and Reform Commission (NDRC) of China, and the National Steering Committee on Information and Communication (p.8) Technology (ICT) of Viet Nam. Each of these serves as a major link between the government and the business community.

One important question is whether embedded autonomy can be achieved in settings where the quality of the public administration is markedly lower than that found in emerging Asia. Rachel Gisselquist introduces a cautionary note in Chapter 5 (this volume) to: ‘be careful with attempting industrial policy in fragile settings—and Africa has many fragile settings’. She argues that more attention must be paid to the role of the state in weak institutional settings, and concludes that a relatively high level of coherence within the bureaucracy is needed to achieve embedded autonomy. Tu-Anh Vu-Thanh makes a similar point. Reflecting on the experience of Viet Nam, he argues that business–government coordination requires effective coordination within the state system itself, as well as with the business sector.

Precisely how incoherent does a bureaucracy have to be for it to stand in the way of successful industrial policy? Gisselquist provides no definitive answer. Instead, she notes that there is considerable variation in the coherence of bureaucracies across SSA; she goes on to ask whether efforts to improve business–government collaboration can succeed in circumstances where the bureaucracy is incoherent. She implicitly concludes it is unlikely. The thrust of her warning is that not all countries in Africa will be immediately successful in efforts to implement industrial policy; country context matters. This point is reinforced in the case studies by Farole and Moberg in Chapter 12 and by Page in Chapter 14 (both this volume), in which state capacity—in particular the ability to undertake coordinated policy actions across government—is identified as a major constraint to effective policy implementation.

1.3 Strategic Coordination in East Asia

The four chapters in Part 2 deal with a variety of country experiences in implementing strategic coordination between the public and private sectors in East Asia. The country cases span China, Malaysia, South Korea, and Viet Nam. The studies of Malaysia and China focus mainly on interventions designed to remove the obstacles to existing industries. Those of South Korea and Viet Nam are more about ‘industrial policy in the large’. They demonstrate that there is no single ‘East Asian Model’ of industrial policy and public–private coordination. The objectives and instruments of industrial policy and the nature of the coordination process between government and business has varied across countries and over time within the same country. For example, Eun Mee Kim documents in Chapter 6 (this volume) how South Korea has adapted its approach to industrial policy several times over the past forty years in response to growing democratization and a changing power (p.9) dynamic between the state and business. While there is considerable diversity, there are a number of common threads that run through the country cases. Four of these are of particular relevance to understanding business–government coordination in East Asia: commitment, focus, experimentation, and feedback.

1.3.1 Commitment

A high level of commitment of senior government officials to the coordination agenda has been characteristic of Asian economies, ranging from Japan to Viet Nam. Senior members of the political and government elite were publicly committed to and accountable for industrial development outcomes. The public officials charged with coordination programmes were sufficiently senior to make the decisions needed for implementation and in most cases reported directly to the highest political authorities. In Japan, a powerful technocratic bureaucracy drove the early industrialization effort, supported by a consistent pro-industry, pro-export policy of successive Liberal Democratic Party governments (Johnson 1982). In the cases of Indonesia, South Korea, Malaysia, and Singapore, the champion was the head of state or government. In Chapter 6 (this volume) Kim argues that in South Korea the ascension to power of President Park Chung Hee resulted in both the creation of a comprehensive developmental state and transformation of the SBR.

In China, party and government officials at all levels ranging from the national to the municipal are actively engaged in the industrial development agenda and they are judged on results achieved. As Dinh notes in Chapter 8 (this volume), provincial governments are likely to be promoted or terminated based on the economic performance of their provinces. In Chapter 12 (this volume), Thomas Farole and Lotta Moberg point out that Viet Nam gave its successful economic zone programme the highest level of political attention. The prime minister championed the scheme, which came directly under his purview, during the early years of its development.

1.3.2 Focus

One way in which the flow of information between the public and private sectors was encouraged and the risk of capture was reduced was by focusing on specific constraints to firm performance. Although the practitioners certainly would not have recognized the terminology, they were in effect attempting to address constraints, externalities, or failures of collective action. These types of industrial development problems proved to be best dealt with at the level of specific objectives that could be monitored. The key elements of the process were agreement with the private sector on a specific objective (p.10) and the proposed course of action. A timetable for resolution of the problem was announced and progress in implementation was monitored and reported, often within the context of a deliberation council.

Another way in which focus was achieved was by creating localized enabling environments and extending the improvements across regions and sectors gradually in line with the government’s available resources and implementation capacity. In Malaysia and Viet Nam export-oriented industrialization was promoted through the opening of free-trade zones (FTZs) that operated independently from the domestic policy environment. Dinh points out that, in China, various policy approaches have been adopted at the provincial and municipal level depending on the local context and the particular stage of development. Vu-Than argues that the recent decentralization in Viet Nam has caused local governments to become more active in improving the business environment by moving the focus of business–government dialogue closer to the provision of local public inputs.

1.3.3 Experimentation

East Asian industrial policy makers have shown a striking willingness to experiment. Ideas were often generated by observation of successful examples from elsewhere. Public actions were identified, developed, and then implemented. The results—measured in terms of specific outcomes—were subsequently carefully observed. When the chosen course of action failed to accomplish the desired outcome, it was usually modified or abandoned. Policies that were deemed successful were frequently replicated in other settings. This almost ‘pharmacological’—observe, experiment, implement—approach to policy-making was heavily dependent on a strong two-way flow of information between firms and the government and a high degree of pragmatism on the part of the policy makers concerned.

Kim documents the extent to which South Korea has shifted the focus and instruments of its industrial policies in response to changing circumstances. By the 1980s, private business in general and the chaebol in particular had become too big to be dependent on the state for resources. Recognizing this, Korean policy makers changed from efforts to dominate the private sector, to building a symbiotic relationship with it, and finally to efforts to promote competition among domestic firms. The changes included: shifting industrial targeting from selecting sectors for heavy government subsidies to supporting sunset industries; making industrial policies take backstage to regulatory policies; and abolishing such important institutions as state-owned banks, policy loans, and industrial licensing. In Chapter 8 (this volume), Hinh Dinh shows how China’s local industrial policy of ‘backing winners’ evolved by experimental design and was adapted to local circumstances.

(p.11) 1.3.4 Feedback

Feedback was an essential element of the Asian industrial policy process. Partly this was done, as Kim notes, by measurement of observable outcomes, for example, the rate of growth of jobs, output, or exports. Partly it depended on information gleaned from the private sector. In Chapter 9 (this volume), Tu-Anh Vu-Thanh argues that a top priority of Viet Nam’s PMRC in the late 1990s and early 2000s was to observe the economy and society closely through daily interactions with institutions, businesses, and practitioners, as well as through field trips at the local level. Meetings with the business community were held every year to identify obstacles to the operation and development of business, and equally importantly, to build trust. Hinh Dinh notes that in China local governments (prefectures, counties, townships, and villages) are directly connected to industrial clusters. By focusing on individual clusters and communicating frequently with local entrepreneurs, local governments devise policies clearly targeting specific industries. Stiglitz characterizes the combination of experimentation and feedback as institutional learning, writing ‘countries that have been successful…have learned how to conduct industrial policies as they have gone along—there has been institutional learning. Industrial policies that work at one stage of development and in one environment do not work in another.’8

Using feedback was also an important means of building accountability. In Chapter 3 (this volume) Lin and Vu write: ‘Putting an economic strategy into a concerted course of action requires not only a strategic vision but also operational skills…and…effective management of performance.’ Lin and Vu and Kim both point to the formation of South Korea’s tripartite Economic and Social Development Commission, involving the public sector, the private sector, and labour unions as a key element in the country’s successful globalization drive. Between 1998 and 2011, over 80 per cent of the deliberations made by the Commission were implemented under the oversight of a Committee for Assessment of Implementation set up to guarantee effectiveness. Dinh documents the multiple ways in which the local authorities accountable for industrial development outcomes in China sought feedback from private firms, frequently located in nearby industrial clusters.

1.4 Coordination Efforts in Africa

The five African case studies in Part 3 fall into two groups. Three are studies of industrial policy and SBRs in individual countries: Ethiopia, Ghana, and South (p.12) Africa. Two are pan-African studies of specific public–private institutions, special economic zones (SEZ), and the ‘deliberation councils’ formed in five countries under the sponsorship of the World Bank and the International Monetary Fund (IMF). As in Asia, despite their diversity, the individual studies reveal some common characteristics.

1.4.1 Uneasy Partners

Lemma and te Velde suggest that one important outcome of public–private coordination is trust building. The African case studies reveal an uneasy partnership between the state and the business community, often characterized by shifting perceptions, mistrust, and lack of mutual comprehension. In Chapter 13 (this volume) Ernest Aryeetey and Nkechi Owoo describe perhaps the most extreme example of such an uneasy partnership. Under the military and civilian Ghanaian governments headed by President Jerry Rawlings the private sector was excluded from the policy- and decision-making processes. The government refused to engage in a dialogue with long-standing business organizations. It believed that these institutions themselves were part of the culture of corruption that was endemic to the country.

Bhorat, Cassim, and Hirsch note in Chapter 11 (this volume), that one of the first acts of the new South African parliament was to establish the National Economic Development and Labour Council (NEDLAC), a statutory social partnership institution modelled on Singapore. NEDLAC was a ‘deliberation council’ in all but name. Labour, business, and government were to meet, consider challenges, jointly commission policy research, and agree on policy recommendations. However, cooperation and trust between the three social partners weakened after mid-1996. The 2003 Growth and Development Summit, hosted by President Mbeki, was an attempt to rebuild the social partnership, but the uncertain commitment of the partners to implementation has continued to undermine its effectiveness.

Mulu Gebreeyesus and John Page both point to a bipolar relationship between the state and the private sector in Ethiopia. In 2002, on the government’s initiative, a ‘Government and Business Community Joint Consultation Forum’ was created. The Forum came to an abrupt end in 2005, when lack of government support and political unrest led to its complete abandonment. As the Forum was winding down, however, the government was running highly structured consultations with private investors in priority areas such as cut flowers, leather, and textiles. Meetings with investors in these subsectors were frequent and attended by high government officials, including, many times, the prime minister. Actions were agreed and followed up, often on the spot.

(p.13) 1.4.2 Right Hand–Left Hand

Effective coordination with the private sector and implementation of the public actions derived from the state–business dialogue require effective coordination within government. This is a critical manifestation of the state capacity flagged by Gisselquist in Chapter 5 (this volume). In the African case studies it often appears that the right hand of government is not aware of what the left hand is doing. Bhorat, Cassim, and Hirsch point out in Chapter 11 (this volume) that while industrial policy was on the agenda of the African National Congress both before and during the transition to democracy, several factors undermined its effectiveness, including poor coordination within government. Signs of poor policy coordination emerged in South Africa as early as 1996, when three different and conflicting economic policy frameworks were developed and published by different parts of the government. The Department of Trade and Industry (DTI), which was nominally in charge of industrial policy, faced opposition from the National Treasury on the basis that it was trying to ‘pick winners’.

Lack of intra-government coordination is also an important cause of the poor performance of SEZ programmes in Africa. Thomas Farole and Lotta Moberg document in Chapter 12 (this volume) how institutions with vastly different objectives and incentives often failed to work towards a common goal. A lack of alignment in the incentives between people promoting exports and those responsible for fiscal matters, such as the Ministry of Finance (MOF) and the Customs Authority, has contributed to failure of several zone projects. In Tanzania, Nigeria, and Kenya the lack of formal institutional links between investment promotion agencies and those charged with SEZ programmes, such as sitting on each other’s boards or forming joint committees, contributes to an operational disconnect. In Chapter 14 (this volume), Page points out that a major cause of lack of impact of the World Bank–IMF Investors’ Councils was lack of coordination across ministries in implementing Council decisions.

1.4.3 Rewards without Referees

The coordination mechanisms that evolved in Asia to manage the inevitable tension between coordination and capture have been likened to a contest. While the institutional forms varied, they featured three elements essential to all contests: rules, referees, and rewards (World Bank 1993). Kim emphasizes the role that ‘carrots and sticks’ played during South Korea’s early industrialization drive. As the Park administration sought to transform the SBR it used both access to resources and discipline. Dinh documents the role of contests in implementing China’s decentralized industrial policies. The African case (p.14) studies suggest that, in many cases, the rewards have been present while the rules and the referees have not.

According to Bhorat, Cassim, and Hirsch (Chapter 11, this volume), an unintended consequence of the structure of the South African economy has been to encourage rent seeking between key players. The corporate sector and trade unions have settled into a stable equilibrium, defined by high rents distributed between organized labour and big business. The strong alliance between the union movement and the ruling party has made it difficult to counter trade union and business interests. Gebreeyesus points out in Chapter 10 (this volume) that even in the case of the Ethiopian flower industry, which is generally regarded as one of the region’s outstanding industrial policy successes, the government made thousands of hectares of very cheap land available for floriculture. Not all investors, however, developed the land they acquired from the government, preferring to hold it in anticipation of rising land values. Aryeetey and Owoo (Chapter 13, this volume) point out that Ghana’s Local Content Bill, designed to ensure that local companies are active participants in the operations of multinational petroleum companies, gives wide discretionary powers to the Minister of Energy, creating room for subjective contract allocations and potential abuse of power.

1.5 Improving Close Coordination in Africa

The case studies in Part 3 indicate that Africa still has some distance to travel in terms of putting in place effective public–private coordination mechanisms. This is so whether governments only want to extend a helping hand to the private sector or have more ambitious plans for industrial policy in the large. While the practice of industrial policy is both complex and country specific, the chapters in this volume provide useful guidance on how to strengthen business–government coordination in Africa. We can identify four key areas for action.

1.5.1 Leaders Must Lead

High-level political commitment has been the hallmark of successful strategic coordination. One virtue of having a high-level champion is that it identifies the person who has the job of explaining the policy agenda and who can be held politically responsible for things going right or wrong (Rodrik 2008). When the responsible party is the head of state or government, it raises both the visibility of the coordination process and the level of accountability for its implementation. Gebreeyesus points out that, in Ethiopia, Meles Zenawi, the late prime minister, was personally involved in the successful promotion of (p.15) the flower sector, holding regular meetings with investors and seeking immediate solutions to the business constraints they faced. When the prime minister showed less direct personal interest, as, for example, in the case of basic metals and engineering industries (BMEI), the coordination process was far less effective, even within the same political system and bureaucracy.

Page suggests that President Museveni of Uganda signalled his commitment to the Presidential Investors’ Advisory Council (PIAC) by actively participating in meetings and following up on Council decisions. As a result, assessments of the Council in Uganda tend to receive high marks from the private sector. Ghana represents the opposite case. Because President Kufuor could not find time in his schedule to conduct a meeting in more than two years, the Council was abandoned and written off as a failure. Aryeetey and Owoo argue in Chapter 13 (this volume) that this may be symptomatic of a larger problem: there is the perception in Ghana that although the political elites have expressed strong rhetorical support for the private sector, there is not much actual commitment. They suggest that long-term strategic plans which clearly define the SBR would be a more credible mechanism to signal commitment and improve the continuity of policy.

A second reason why high-level leadership is critical to the success of strategic coordination is the need for coherence within government in following up and implementing the decisions reached as a result of public–private problem solving. One of the failings of the Investors’ Advisory Councils in Page’s view was a lack of follow-up and accountability on the part of the public administration. Where the top leadership was engaged, as in Uganda, government officials were regularly tasked with implementing Council decisions. Where the top leadership showed little engagement, poor implementation was often ascribed to ‘lack of capacity in the public administration’. Farole and Moberg (Chapter 12, this volume) note that successful SEZ regimes generally have been linked closely to the head of state or of the government, thereby facilitating coordination across various government ministries and agencies. In Africa, most political leaders have failed to champion SEZs, with the result that lack of coordination within government has seriously impeded their development.

1.5.2 Go Local

A defining feature of the public–private coordination mechanisms in such countries as China, South Korea, Viet Nam, and Ethiopia is that they were the result of a national effort to shape institutions and set policy objectives. While the need for national solutions to industrial development problems sounds self-evident, national control of the industrial policy agenda is more often the exception than the rule in Africa. Aid continues to contribute significantly to (p.16) national budgets and donors exercise an outsized level of external influence on public policy. Since about 2000, the World Bank and many bilateral donors have promoted reform of the ‘investment climate’ as a way to accelerate structural transformation, but these efforts have had little impact on Africa’s industrial development (Newman et al. 2016).

This is largely because, as Aryeetey and Owoo point out in Chapter 13 (this volume), the public actions which should form industrial policy have been developed in Washington, instead of being a result of locally driven coordination between government and business. Page contends that the policy agenda for the Investors’ Advisory Councils was often set by the World Bank with little or no meaningful consultation. Because the objectives were not owned by the participants, the coordination mechanisms degenerated into ‘chat shops’. To make progress, African governments will need to undertake the difficult task of wresting their industrial development agenda away from donor control.

Where local initiatives have occurred in Africa, they have been most successful when business has taken a leading role. Aryeetey and Owoo argue in Chapter 13 (this volume) that the establishment of a number of business associations such as the Association of Ghana Industries (AGI) and the Private Enterprise Federation (PEF) led to increased dialogue and engagement between the state and business community. Gebreeyesus points out that the potential of the Ethiopian flower industry was revealed by the private sector. The flower growers association was self-organized, and its aims were not simply to extract rents from the government. It also actively mobilized its members and other stakeholders to help resolve coordination problems. In contrast, in the Ethiopian metals sector, which consists of highly diversified industries, the initial idea of establishing an industry association came from the government and not from the private sector. The objectives of the association were too broadly defined to make an effective industry action plan, and the association’s activities mainly focused on lobbying the government for support.

1.5.3 Clarify the Rules

Successful coordination requires that both government and the private sector are clear about objectives and how success will be measured. Gebreeyesus provides an illustration in Chapter 10 (this volume) by comparing the successful industrial policy process in cut flowers with a far less successful attempt to promote the growth and diversification of the BMEI in Ethiopia. In the Ethiopian flower sector, the government institutions responsible for the sector developed mechanisms to monitor the performance of interventions. In contrast, no clear pattern of systematic feedback was developed in the BMEI. This was partly due to the fact that the original metals and engineering programme lacked a clear focus and measurable indicators of success.

(p.17) Clarity and transparency are also important tools for fostering accountability. Requests made by firms or business associations for government assistance should in principle be public information. Publication of the activities and decisions of coordinating bodies and periodic accounting of the expenditures made to implement their recommendation can increase public scrutiny. Farole and Moberg make the point in Chapter 12 (this volume) that making feasibility studies of large-scale interventions, such as a new SEZ, open to public review is an important tool for increasing transparency. Ensuring that the government–business dialogue remains open to new entrants can reduce the perception that the process is being monopolized by incumbents, and broader representation can provide a check against conflicts of interest. In Chapter 14 (this volume), Page suggests that one of the design flaws of the World Bank–IMF initiative to establish advisory councils was in excluding small and medium firms. This seriously limited the Councils’ legitimacy in the eyes of the local business community.

1.5.4 Limit the Rewards

The financial incentives offered under any industrial policy framework need to be commensurate with their social returns. Where governments have often erred in the past—and not just in Africa—is in overestimating the returns to the economy of new industrial activities. Set against that, however, is the risk of doing too little. In Chapter 2 (this volume), Joseph Stiglitz argues that conventional economic wisdom has generally favoured the latter over the former. The helping hand and industrial policy in the large have quite different implications with respect to rewards. In the case of the helping hand, the objective of close coordination is to identify and remove specific constraints to the growth of existing industries. The public actions needed include institutional and regulatory reforms as well as investments in infrastructure and human capital.

There is a significant risk of doing too little to extend the helping hand. Donors and governments in Africa have shown a tendency towards only pursuing regulatory and institutional reforms due to their low fiscal costs, ignoring the physical aspects of the investment climate. The result has been that enterprise surveys consistently find that firms in Africa suffer from major deficiencies of infrastructure and other public inputs (Newman et al. 2016). Coordination with the private sector should be used to identify which public investments in infrastructure or skills receive priority. At the same time, any proposed investments should be subjected to rigorous cost–benefit analysis. While coordination failures are potentially important, solving them need not be costly to the government. The challenge is to get all the investments made in the first place.

(p.18) Industrial policy in the large presents a different challenge. It is concerned with the identification and promotion of new activities. This is inherently a more risky endeavour because it is designed to respond to information externalities by subsidizing first movers in new areas of economic activity. The presence of an externality only justifies providing incentives to initial investors and not to those, who learn from the first movers. To limit the scope for misappropriation these incentives must be subject to a performance test. As Kim shows in Chapter 6 (this volume), manufacturing and export volume and growth rate goals were used in the case of South Korea. If firms failed to reach agreed targets, they faced loss of access to public subsidies.

These considerations suggest four rules that should govern the use of incentives in implementing industrial policy:

  • Incentives should be limited to new activities where there is evidence that social returns exceed market values.

  • There should be clear criteria for success and failure.

  • There must be a built-in sunset clause.

  • There must be monitoring, benchmarking, and periodic evaluation.

These rules are not beyond the capabilities of many African states. Setting specific targets for jobs, growth, or exports and making them available to the public can increase transparency and public scrutiny. Requiring that an incentive expire unless a review recommends that it be extended places the burden on advocates to show why it remains relevant. A regional peer review process, such as that present in New Partnership for Africa’s Development (NEPAD), can be used to strengthen evaluation.

1.6 Concluding Remarks

Industrial policy remains a term that regularly generates more heat than light among economists and development practitioners. However, there appears to be a growing consensus that markets can fail both when governments interfere too much and when they engage too little.9 Governments have now begun to look for a more balanced strategy to accelerate structural transformation and growth, one that includes active coordination with the private sector. Such a balanced approach is critically needed in Africa, where twenty years of efforts to level the playing field have failed to produce robust structural transformation.

(p.19) The institutions that shape government–business relations and foster close coordination are an integral element of industrial policy. Without an effective dialogue with the private sector the government is operating largely in the dark. It will remain ignorant of the constraints faced by existing firms and unable to offer an effective helping hand. It will also lack understanding of new opportunities and the means to build consensus around a long-term development strategy. For the private sector, a constructive engagement with the state offers the chance to help shape public policy and address the most severe constraints to success. For both parties, coordination offers the prospect of greater policy certainty, which is essential to building trust.

The chapters in this book describe successful and unsuccessful attempts to implement industrial policy. They reinforce the truism that there is no single model of success, no ‘global best practice’ in terms of business–government coordination or industrial policy. At the same time, and in each case studied here, the relationship between the state and business has been a critical element of success or failure in accelerating structural transformation. To this point, the experience of successful coordination between the public and private sectors in Africa has been disappointing. This need not remain the case. With committed leadership, African policy makers can develop the institutions of public–private coordination needed to push the pace of economic progress.

References

Bibliography references:

Amsden, A. (1989). Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press.

Campos, J. E., and H. Root (1996). The Key to the Asian Miracle: Making Shared Growth Credible. Washington, DC: Brookings Institution.

Cimoli, M., G. Dosi, and J. Stiglitz (2010). Industrial Policy and Development: Political Economy of Capabilities, Accumulation. Oxford and New York: Oxford University Press.

Commission on Growth and Development (2008). The Growth Report: Strategies of Sustained Growth and Inclusive Development. Washington, DC: World Bank.

Evans, P. (1995). Embedded Autonomy: States and Industrial Transformation. Princeton, NJ: Princeton University Press.

Harrison, A., and A. Rodriguez-Claire (2010). ‘Foreign Investment and Industrial Policy for Developing Countries’. In D. Rodrik and M. Rosenzweig (eds), Handbook of Development Economics, vol. 5. The Netherlands: North Holland.

Hausmann, R., and D. Rodrik (2003). ‘Economic Development as Self-Discovery’. Journal of Development Economics, 72: 603–33.

Hausmann, R., and D. Rodrik (2006). ‘Doomed to Choose: Industrial Policy as Predicament’. Paper prepared for the first Blue Sky seminar organized by the Center for (p.20) International Development, John F. Kennedy School of Government, Harvard University, Cambridge, MA.

Hausmann, R., D. Rodrik, and C. F. Sabel (2007). Reconfiguring Industrial Policy: A Framework with an Application to South Africa. Cambridge, MA: Harvard Kennedy School.

Howard, E., C. Newman, and F. Tarp (2016). ‘Measuring Industry Coagglomeration and Identifying the Driving Forces’. Journal of Economic Geography, 15(6): 1055–78.

Johnson, C. (1982). MITI and the Japanese Miracle. Stanford, CA: Stanford University Press.

Khan, M., and S. Blankenburg (2009). ‘The Political Economy of Industrial Policy in Asia and Latin America’. In M. Cimoli, G. Dosi, and J. E. Stiglitz (eds), Industrial Policy and Development: The Political Economy of Capabilities Accumulation. Oxford: Oxford University Press.

Krueger, A. O. (1974). ‘The Political Economy of the Rent-Seeking Society’. American Economic Review, 64: 291–303.

Newman, C., J. Page, J. Rand, A. Shemeles, M. Soderbom, and F. Tarp (2016). Made in Africa: Learning to Compete in Industry. Washington, DC: Brookings Institution Press.

Pack, H., and S. Saggi (2006). ‘Is there a Case for Industrial Policy? A Critical Survey’. World Bank Research Observer, 21(2): 267–97.

Rodrik, D. (2007). ‘Industrial Policy for the Twenty-First Century’. In D. Rodrik (ed.), One Economics, Many Recipes: Globalization, Institutions and Economic Growth. Princeton, NJ: Princeton University Press.

Rodrik, D. (2008). ‘Normalizing Industrial Policy’. Paper prepared for the Commission on Growth and Development, World Bank, Washington, DC.

Rodrik, D. (2009). ‘Industrial Policy: Don’t Ask Why, Ask How’. Middle East Development Journal, 1(1): 1–29.

Stiglitz, J. E. (1996). ‘Some Lessons from the East Asian Miracle’. World Bank Research Observer, 11(2): 151–77.

Stiglitz, J. E. (2001). ‘From Miracle to Crisis to Recovery: Lessons from Four Decades of East Asian Experience’. In J. E. Stiglitz and S. Yusef (eds), Rethinking the East Asian Miracle. Washington, DC: World Bank.

Sutton, J. (2012). Competing in Capabilities. Oxford: Clarendon Press.

Szirmai, A., W. Naudé, and L. Alcorta (2013). Pathways to Industrialization in the 21st Century. Oxford: Oxford University Press.

UNIDO (United Nations Industrial Development Organization) (2009). Industrial Development Report 2009 Breaking In and Moving Up: New Industrial Challenges for the Bottom Billion and the Middle Income Countries. Vienna: UNIDO.

Wade, R. (1990). Governing the Market. Princeton, NJ: Princeton University Press.

World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press.

World Bank (2005). Economic Growth in the 1990s: Learning from a Decade of Reform. Washington, DC: World Bank.

Notes:

(1) See, for example, Hausmann and Rodrik (2006); Rodrik (2007, 2009); Khan and Blankenburg (2009); Cimoli, Dosi, and Stiglitz (2010); Harrison and Rodriguez-Claire (2010); Sutton (2012); Szirmai, Naudé, and Alcorta (2013).

(2) See Stiglitz (Chapter 2) and Lin and Vu (Chapter 3) (both this volume).

(3) See Pack and Saggi (2006) for a statement of the mainstream view.

(4) Stiglitz makes this point in Chapter 2 (this volume).

(5) See Hausmann, Rodrik, and Sabel (2007), Rodrik (2009), and Harrison and Rodriguez-Claire (2010). This literature shares much in common with an earlier generation of studies of business–government coordination undertaken in the wake of the ‘East Asian Miracle’ of the 1970s and 1980s (Amsden 1989; Wade 1990; World Bank 1993; Campos and Root 1996).

(6) This point is raised by Rasiah in Chapter 7 and by Dinh in Chapter 8 (both this volume). The integration of domestic firms into global value chains is a particularly significant challenge in Africa, where there are few linkages between foreign and domestic firms. See Newman et al. (2016).

(7) Bhorat, Cassim, and Hirsch note in Chapter 11 (this volume) that public venture capital has been an important source of such transfers in the case of South Africa.

(8) Emphasis in original.

(9) This is one of the major ‘lessons’ articulated in World Bank (2005) and by the Commission on Growth and Development (2008).