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Good Growth and Governance in AfricaRethinking Development Strategies$

Akbar Noman, Kwesi Botchwey, Howard Stein, and Joseph E. Stiglitz

Print publication date: 2011

Print ISBN-13: 9780199698561

Published to Oxford Scholarship Online: May 2012

DOI: 10.1093/acprof:oso/9780199698561.001.0001

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Tiger, Tiger, Burning Bright? 1 Industrial Policy “Lessons” from Ireland for Small African Economies

Tiger, Tiger, Burning Bright? 1 Industrial Policy “Lessons” from Ireland for Small African Economies

Chapter:
(p.406) 14 Tiger, Tiger, Burning Bright?1 Industrial Policy “Lessons” from Ireland for Small African Economies
Source:
Good Growth and Governance in Africa
Author(s):

David Bailey

Helena Lenihan

Ajit Singh

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199698561.003.0014

Abstract and Keywords

The chapter examines possibilities for industrial policy in African countries through the lens of lessons that can be learned from the industrial policy approaches pursued in Ireland as well as in East Asia. As latecomers to industrialization, the small African economies are well positioned to undertake such an exercise, we suggest. This chapter provides some novel insights by providing a comparison between Ireland and the small African economies. To our knowledge such a comparison offers a unique contribution. Cognizant of the fact that a “one size fits all” approach to industrial policy is not appropriate in the African context, we argue in favor of the adoption of a more “holistic” approach to industrial policy in these economies. Such an approach we argue should focus simultaneously on demand and supply factors of industrial development, and on microeconomic as well as macroeconomic factors.

Keywords:   industrial policy, Irish economy, African economies, East Asian economies, developmental state, SMEs, FDI, policy evaluation

…capitalism is not a system given to stasis. What works in one period is unlikely to work in the next; and even when it ‘works,’ its distribution of costs and benefits is never socially equal. So when deciding which tiger to ride, it is worth remembering that the choice is only between tigers, and that if a safe ride is what you want, you would do well not to ride tigers at all (Coates 2007: 193).

Introduction

There is a growing consensus in the development field that industrial policy really does matter and that the global crisis suggests both the necessity and the opportunity for change (UNCTAD 2009b). Taking a longer historical perspective, experience over the last half century indicates that whereas industrial policy has been highly successful in some countries, it has been equally unsuccessful in others, and that African countries need to draw appropriate lessons from both sets of experience. As latecomers to industrialization, the African countries are actually well placed to carry out such an exercise. Accordingly, this paper explores potential industrial policy “lessons” for small African countries (both negative and positive) from the experience of Ireland, as we feel researchers have relatively neglected such a comparison. In so doing, we reject a “one size fits all” approach and instead aim to add to the discussion on what range of policy tools are available to such countries so that an appropriate—and holistic—selection can be made according to local needs.

(p.407) There is, however, a prior question that obviously needs to be considered: should such countries have an industrial policy at all? The East and South East Asian countries’ experience indicates that industrial policy has played a key role in the extraordinary success of these economies in recent decades.3 In addition, there is another related and powerful reason for African countries to examine the Asian story. Many countries in the two regions at the time of independence from colonial rule had broadly similar economic structures and income levels. To illustrate, in the 1950s, around the time of the country's independence, Malaysia's economy was much like that of Ghana, based on exports of primary agricultural commodities: rubber in the case of Malaysia, and cocoa in relation to Ghana. Both countries shared the common legacy of British colonial rule. However, today, Malaysian per capita income is nearly US$5,000 at current exchange rates and US$10,000 at PPP rates, while the Ghanaian per capita income has risen very little over the same period. It is legitimate to ask how one can account for such a difference in the evolution of the two economies. Was it, for example, simply due to the fact that the Ghanaian economy was subject to greater economic shocks than Malaysia's? There is little empirical support for this hypothesis. Moreover, a large number of other East and South Asian countries also did very well using industrial policy and outperformed most African countries. For these reasons, comparisons of African countries with East and South Asian countries are commonly made and are often useful. However, in this paper we instead give detailed attention to Ireland as a comparator.

Close attention to the Irish case does not of course imply that other countries’ experiences are not significant or relevant, but we believe that Ireland's experience with industrial policy has particularly useful and significant lessons for Africa, and that this needs more attention. Nevertheless, for African countries, at a practical policy level, it is essential to be cautious. As Aiginger (2007) notes, “industrial policy is one of the most controversial policy fields. Its scope, instruments and rationale vary across countries, changing over time; intentions and outcomes often differ” (143).

The following sections will discuss in detail the political economy of development in Africa; the need to view industrial policy in a broad sense, taking a holistic approach, before detailing the role of industrial policy in the development of the Irish economy, together with the lessons for African countries. In so doing, we make reference to East Asian countries where such comparisons are useful in highlighting particular points of difference or similarity with experience elsewhere.

Why is Ireland a useful reference point for small African states?

There are, in fact, a number of reasons for using Ireland as an interesting reference point. First, when Ireland joined the then “Common Market” in 1973, the economy was in many senses a small, poor, peripheral, and agriculturally dominated economy with an overdependence on links to its former colonial master, the UK. (p.408) Trade was limited given ongoing protectionism (the European Union in particular had yet to fully open up). In fewer than three decades, however, the Irish economy has transformed itself from being one of the four cohesion countries of the EU to being considered an advanced high-tech enclave of the EU.

In addition, Ireland, like most African countries, is a small economy. It has the geographical size of Sierra Leone, as well as a similar population. Given its small size, clearly membership in the EU has played a major role in the evolution of the Irish success story. Apart from providing a far bigger market for Irish products so as to be able to reap the economies of scale, the EU has also provided Ireland with very large direct assistance for the development of its infrastructure. What could take the place of the EU even in a limited sense in the present context of small African countries? This issue will be taken up in this paper.

Furthermore, although Ireland is far from being a laissez-faire economy it is by no means as “dirigiste” as the East and the South Asian countries. It is more corporatist than the East Asian countries; various social partners, including unions, have played a major role in the determination of wages and prices. Compared with the East Asian model it is therefore more likely to be directly relevant to the African countries given the need for a “social contract” to underpin successful industrial policy. In addition, the East and South Asian pattern of development is heavily dependent on the outstanding qualities of the civil service. Such qualities are not simply inherited but are developed alongside the expansion of the economy (see Chang 2006). Nevertheless, the corporatist model makes comparatively fewer demands on administrative capacity.

It can also be argued that African countries potentially have more to learn from the experience of the operation of industrial policies in Ireland than in the East and South Asian countries. Irish industrial policy did not involve measures of coercion in the allocation of resources in the way it did in the case of East Asian countries during the prime of their industrial policy: for example, Japan between 1950 and 1973, and Korea between 1970 and 1990.4 It will be recalled that in Japan during this period, the government used the allocation of foreign exchange in coercive ways as a principal weapon to meet government's targets for specific firms and industries. Similarly in Korea during its main industrial policy period, there is evidence of coercion in the expansion and upgrading of country's exports by the large conglomerates that the government itself had created (see Amsden 1989, 1994; Amsden and Singh 1994; Singh 1995, 1998; and Chang 2006). It should not be forgotten that during the operation of industrial policy in a number of East Asian countries, industrial “peace” was ensured through the suppression of trade union rights. Some would argue that this alone makes the Irish example suitable as a role model for African countries.

Finally, the development of small and medium-sized enterprises (SMEs)—given their importance in both Ireland and small African states—suggests as well that (p.409) Ireland can be regarded as a worthwhile case study. Certain characteristics of Irish SMEs are of particular relevance here:

  1. (1) Irish SMEs were focused primarily upon the home market. Indeed, export-oriented SMEs were an uncommon occurrence in the Ireland of the 1970s.

  2. (2) Ireland's small manufacturing firms in the past were mostly found in traditional industries such as food, beverages and tobacco, textiles, and wood products. These industries were characterized by low productivity, skills, and research and development (R&D).

  3. (3) Small firms in Ireland were then faced with barriers similar to those facing small firms in Africa today (albeit on a different scale), namely financial barriers (particularly at the business start-up stage), poor macroeconomic conditions, and a poor business environment.

On the latter point, several studies on the barriers encountered by small firms in Ireland have pointed to access to finance as being the single most critical issue (Forfás 1994; Goodbody Economic Consultants 2002; Fitzsimons et al. 2001). Very recent work on the Irish case shows that small businesses continue to experience difficulties in obtaining appropriate levels of finance for start-up and growth (Small Business Forum 2006). This finding has been reiterated in recent work with regard to small firms in Africa (see below).

Until recently, there has also been no well-defined, structured, or focused policy for support of SMEs in Ireland. As we shall see below, industrial policy in Ireland has mostly been geared toward foreign direct investment (FDI) and it could reasonably be argued that this has been at the expense of indigenous companies. This has some similarities to Africa, where an adverse business environment (with little support from government agencies, the regulatory offices, and the managers of state enterprises) is an additional impediment for small firms.

Despite these apparent similarities, one key aspect missing in the African case is the benefit of European integration in the form of the single market. When Ireland joined the Common Market, there were lacunae of developed common policies outside the Common Agricultural Policy (which at the time absorbed three quarters of the European Community's budget). Over time, though, there have been two major ways in which EU economic integration has brought substantial opportunities for small firms: (1) through the Acquis Communautaire and (2) through the benefits emanating from structural funding, particularly in the sphere of infrastructural development. The latter has brought significant benefit to Ireland. Beyond the costs associated with the Acquis, it can generate many advantages to small firms in the medium to long run. These firms will be able to benefit from the entire (completed) internal market of about 450 million consumers. The Single Market and deregulation in the EU will also ameliorate cross-border trade by small firms engaging in flexible specialization. The Single Market can also be helpful in (p.410) attracting market-seeking FDI, an element that is very much missing from the African case, in which thirty-one countries have a population of ten million or less, and most less than five million (UNCTAD 2009a).

From its post-Second World War beginnings, the EU has evolved into an integrated single market of some 450 million people. Many of its member states have also adopted a common currency and a common monetary policy together with many other measures of deep political integration. Such far-reaching integration is clearly beyond the capacities of Sub-Saharan African (SSA) countries. However, there are substantial benefits, economic as well as political, even from the limited regional integration that some countries have attempted. There are also a few reasonably well-functioning examples of integration in African countries, notably in Southern Africa. The emphasis in the more successful of these late integration projects has been less on trade integration and more on integration of transport, as well as in other spheres of infrastructure. Over time these countries may be able to cooperate on monetary matters as well as on trade and investment. The possibilities of African economies being able to benefit from the kind of assistance that Ireland received from the EU may not appear to be a practical proposition for African countries.

The political economy of African development

The African economies, particularly those in Sub-Saharan Africa, stand today at an important crossroads. During the 1980s, for the average African country, GDP per capita fell at a rate of 0.5 percent per annum; in the 1990s it rose slightly at a rate of 0.3 percent per annum (see Table 14.1). However, in the last four years, the average growth rate of this variable has been a respectable 3 percent per annum. In 2007, the GDP growth rate in Africa was estimated to be 6 percent per annum, one of the highest rates recorded during any year over the last quarter century. Apart from indicating the recent recovery in African economic growth, the table also highlights the poor long-term performance of the African economies relative to other developing countries. Over the entire twenty-six-year period, 1981–2007, for which the data are presented in the table, per capita GDP in African countries rose only by 16 percent compared with a more than 100 percent rise for all developing countries. For the East and South Asian economies, the growth in GDP per capita has been spectacular, a rise of well over 300 percent.

It is very much a moot point whether this recent reversal of fortunes for the African countries has been due to the late success of structural adjustment programs (SAPs) of the World Bank and the IMF, as is implicitly claimed by the two Bretton Woods institutions (World Bank 2007; IMF 2008). These programs, which have been the dominant influences on SSA economies during much of the 1980s and all of the 1990s, have embodied the Washington Consensus and its aftermath. (p.411)

Table 14.1 Per capita GDP growth by region and economic grouping, 1981–2007 (percent)

Average Annual Growth

Overall Growth

1981–1989

1990–2002

2003–2007

1981–2007

World

1.4

1.2

2.3

41.4

Developed economies

2.5

1.8

2.1

67.5

Economies in transition

1.9

–4.0

7.3

–25.8

Developing economies of which:

1.7

3.0

5.0

112.5

Africa

0.5

0.3

3.0

16.4

America

–0.3

1.1

3.5

22.7

West Asia

–1.7

1.1

4.1

16.0

East and South Asia

5.1

5.3

6.3

317.5

Source: UNCTAD (2007).

Table 14.2 World primary commodity prices, 2002–6 (percentage change)

Commodity group

2002–6

Food and Tropical Beverages

48.4

Agricultural raw materials

62.3

Minerals, ores and metals

219.9

Crude petroleum

157.6

Source: UNCTAD Secretariat calculations, based on UNCTAD Commodity Price Bulletin, various issues, and UNSD, Monthly Bulletin of Statistics, various issues. Adapted from UNCTAD (2007).

According to independent economists (UNCTAD 2005, 2007; ILO 2007; McKinley 2005; and Lall 2005), although many countries implemented these programs, there has not been much success in enhancing their economic growth on a sustained basis. Indeed Thandika Mkandawire (2005), a leading scholar of African economies, argues persuasively that the SAPs were in fact counterproductive and often led to the wrong kind of structural change, which would hinder rather than help economic development.

The most plausible reason for the fast growth of African economies in the last four years would appear to be the huge increase in international commodity prices up to 2008–9. Information provided by UNCTAD (2007) reveals how the prices of various commodities have changed over this period (see Table 14.2).

The increased value of SSA exports as a result of the commodity price rise helped to relax the balance of payments constraint, which in turn led to faster growth. The central issue is whether or not the African countries can translate this recent improved performance into sustained, fast, long-term economic growth. Here the economic history of these countries in the last half century does not provide much ground for optimism. The good record of African economic growth between 1950 and 1973, when these economies expanded at a rate of nearly 5 percent per annum, could not subsequently be sustained. Similarly, during the 1990s, a number of countries were successively selected as the “African success stories” by the Bretton Woods institutions, none of which could actually maintain fast growth for (p.412) more than two or three years (Mkandawire 2005). Such economic history invites skepticism about the ability of African countries to convert their recent favorable changes in the terms of trade into lasting progress. The case of the skeptics is straightforward. Apart from all the other handicaps, the African countries have been further debilitated by two decades of stagnation or worse, and are therefore unlikely to achieve fast long-term growth.

There are however important counter arguments that are equally an essential part of the story. The African countries are today much better equipped for initiating and sustaining fast growth, with a far greater endowment of human and material resources than they were twenty-five years ago.

  • The educational level of Africa's citizens is much higher today than it was in the early 1970s. This is particularly notable at the tertiary level. There were for example only seven university graduates in Tanzania in 1964 at the time of the country's independence from British colonial rule. Today, after independence there are literally thousands, as a result of the establishment of the University of Dar-e-Salam, a splendid institution of higher education.

  • There is a network of science and research institutions and engineering colleges throughout the continent. A number of business schools have also been established and they are in close collaboration with the best business schools in the US and the UK (Pfeffermann 2008).

  • There are signs of an emerging middle class in the African countries. There is evidence also of the evolution of entrepreneurship in these countries (ibid.).

  • Moreover, as The Economist (2008) notes, “an unexpected and overlooked continent may benefit from its very isolation” (33). It suggests by way of illustration that African banks are normally regarded as being very conservative and excessively regulated. “Now, however,” observes The Economist (2008), “this very de-linkage from the Western financial system has turned out to Africa's advantage. Its banks have almost no exposure to the sub-prime market causing such havoc elsewhere…” (33).

Finally, it is also worth noting that countries such as Mauritius, Botswana, and Uganda have demonstrated that late development is indeed feasible (Rodrik 2007; UNCTAD 2009b).

Viewing development in the Round: the need for a holistic approach to policy

In line with UNCTAD (2009b), we suggest that commonly adopted definitions of industrial policy are too narrow, especially when looking at countries embarking on major structural change in the economy.5 The focus has too often been on (p.413) providing grant aid to firms and intervention with respect to particular sectors, even with a more recent focus on policies directed at the promotion of R&D and innovation and FDI and SMEs. Rather, we argue that good practice in industrial policy is in fact much more “holistic” in its approach and focuses simultaneously on both demand and supply-side factors of industrial development; on microeconomics as well as macroeconomics.6 Such an approach is in line with that suggested by the Culliton Report (1992) in the context of Irish industrial policy. Culliton (1992) emphasized the provision of infrastructural needs; reform of the tax system; a refocusing of the education and training system; increased funding for science and technology (coupled with greater involvement by industry in steering the use of these funds); and a greater emphasis on technology acquisition. In so doing, the report stressed that the role of the industrial promotion agencies should be kept under review, and the desirability of fostering clusters of related industries building on “leverage points” of national advantage was also highlighted.

As for indigenous industry, Culliton saw the widespread existence of grants as being often counterproductive (the argument being that it encourages a hand-out mentality). In this vein, more emphasis should be placed on the increased use of equity finance as opposed to non-repayable cash grants; an emphasis on the need for the expansion of the indigenous sector; a reorganization of grant-awarding agencies into two main agencies, one of which would address the needs of foreign-owned industries, the other the needs of indigenous ones. Culliton was also at pains to stress that the Irish Department of Industry and Commerce was overly focused on operational matters and needed to place industrial policy formulation and evaluation at the centre of its activities. We argue that a “good practice” definition of industrial policy includes all of these but also needs to encompass other dimensions such as support for well-functioning labor and credit markets, an appropriate macro-environment, and attempts to build consensus over appropriate policy direction.

We broadly agree with Hitchens and Birnie (1992) that the real challenge is to try to weigh the importance of the above factors with regard to the overall “competitiveness problem” (we would however be more inclined to see this as the industrial or economic development challenge). With reference to improving competitiveness (or in our case industrial or economic development) the authors correctly point out that there is little point calling for the need to improve competitiveness “without any satisfactory definition that can be operationalised” (29). They proceed to argue that “this lack of identification of its causes and hence effective solutions is an impediment to a satisfactory industrial development policy” (ibid.). Therein of course lays the challenge for policymakers regardless of country.

Thinking back to Ireland's less favorable times, the preface to the Culliton Report (1992) opens its narrative with the following comment: “Over the past six months we have considered industrial policy bearing in mind the 260,000 (p.414) people who are unemployed. We have concluded that there are no short-term solutions, no quick fixes and no soft options left” (7). In addition, it notes, “Ireland's economic problems are deep-rooted and persistent. Their resolution will require patience, determination and a fundamental re-appraisal of our strengths and weaknesses” (7).

Following on from this broad and holistic view of what industrial policy should comprise, in the Irish case we can identify a range of factors that played a significant part in Ireland's recent catch-up:

  1. (1) Currency devaluations in both 1986 and 1993 which were then locked into the single currency; the Euro's post-2000 depreciation in turn benefited outward-orientated states such as Ireland.

  2. (2) A series of corporatist social pacts from 1987 when trade unions limited wage increases in return for income tax cuts. These have allowed rapid growth without inflation raising too high and have also enabled rapid employment growth.

  3. (3) A rapid expansion in labor supply, in part through net in-migration.7 More widely, the demographic shifts Ireland has experienced are unique within the EU, with an even balance between natural growth and migration (Salt 2005: 49).8

  4. (4) An interventionist industrial policy that has targeted certain sectors for FDI but has also recognized the limitations of FDI-based growth and—somewhat belatedly—has sought to better link foreign plants with domestic firms and has also tried to develop indigenous capabilities and improvements in entrepreneurship, labor skills, and research and development.

This analysis has implications for the design of industrial and other policies in other small, open, and peripheral economies. We suggest that whilst important lessons may be learned, they may not be those picked up by mainstream commentators such as Sapir et al. (2003). Furthermore, it should be noted that a range of factors came together: some more by luck than by judgment, and that the Irish catch-up should have happened much earlier, had it not been for previous policy mistakes, particularly at the macro level (Bailey et al. 2007).

Indeed, on the macroeconomic side, stabilization was an important part of finally “getting things right” in Ireland. By the mid 1980s, the fiscal deficit in Ireland had grown to more than 12 percent of GDP and the public debt ratio was approaching 120 percent. The recognition of the need to address these imbalances led to both the social pacts after 1986 and a process of fiscal consolidation achieved by the government reducing expenditure; over the two-year period 1988–9, the ratio of expenditure to GDP was reduced by 9 percent (see Bailey et al. 2007). The pain of this adjustment was eased both by EU funding and an improved external environment with reduced interest rates and improving demand (Lynch 2005).9 (p.415) Of key relevance, the impact of EU structural funding assistance starting in 1988 should not be underestimated: one study suggests that the cumulative effects of funding may have been to raise the level of GDP by more than 4 percent (Schweiger and Wickham 2005: 50). Another suggests at least approximately 0.5 of a percentage point to GNP growth during the 1990s (Barry et al. 2001: 549). In other words, external funding gave Ireland just enough room to stabilize its economy and to make investments (especially in infrastructure) designed to boost competitiveness; this may be relevant for African economies in the context of overseas development assistance. Similarly, in the Africa case, UNCTAD (2005: 34) notes that overseas development assistance (ODA) could trigger such a “growth process if it is focused on financing pro-growth public investment such as economic infrastructure.”

In addition, in the Irish case, currency depreciations, which took place in 1986 and 1993, assisted Irish competitiveness; the latter in particular was a 10 percent depreciation, which was then locked into Euro entry. Whilst there was a revaluation of the Punt before Euro entry in 1998, the depreciation of the Euro after its launch delivered a further 20 percent boost to Irish competitiveness given its external orientation in trade toward non-Eurozone economies. That this did not feed through into higher inflation is in part due to the corporatist social pacts.

Such corporatism has been a long-standing central feature of Irish economic policy, with the establishment of the National Economic and Social Council (NESC) in 1973. As noted, by the early 1980s, Ireland faced a crisis as the government had embarked on deficit-financed expenditure programs after the oil price rise of the early 1980s (and indeed the early 1970s). The existing development strategy based on attracting FDI was also criticized for its failure to support domestic industry (Telesis 1982; Culliton 1992). Transnational firms responded to the crisis by cutting investment and repatriating profits, contributing to a deficit on the balance of payments amounting to around 10 percent of GNP. Meanwhile, unemployment rose to around 20 percent of the labor force.

At this crisis point, the major political parties recognized that an expansionary fiscal policy was no longer an option for Ireland as a small open economy. A social consensus for change emerged. Key to this was the proposal by the trade unions in 1984 for a coordinated approach involving restrictive income policies, or “partnership agreements.” Indeed, Kennedy (2001: 135) argued that without partnership agreements, it is unlikely that unions would have tolerated a rise in the profit share of national income (see below). Developing a shared view of what needs to be done certainly seems to have been a key element in enabling the Irish catch-up.10 Given UNCTAD's (2009a) reflection that successful industrial policy is an expression of the social contract and a partnership of different segments of society, this Irish experience would seem to be especially relevant to developing countries. Senegal, for example, is seen as one country in which the lack of a social contract contributed toward undermining industrial policy efforts (ibid.).

(p.416) Between 1988 and 2005, there were six social partnership agreements between government, unions, and employers. The first, the Programme for National Recovery (PNR), ran from 1987 to 1990.11 The PNR set out a strategy to raise competitiveness with four main components, which have been retained and developed over time in each of the subsequent partnership agreements, with later agreements having broader coverage (including chapters on greater social inclusion, equality, enterprise culture, small business, agriculture, public-service modernization of and a commitment to support partnership at the enterprise level):

  • A commitment to reduce the level of public debt and maintain the internal and external stability of the Irish currency. This has focused on creating low inflation and interest rates and a positive climate for investors. From the mid 1990s onward, this has tied into the EU's Maastricht Criteria and Stability and Growth Pact (SGP).

  • Restraining wage rises in order to improve cost competitiveness. An incomes policy became an essential part of the “new development strategy.” Through the pacts, the government has compensated for wage restraint by lowering income taxes, although recently this has perhaps reached the limits of what is achievable.

  • To boost competitiveness, the pacts have included structural reforms in several areas, such as industrial policy and taxation. The latter was seen as needing reform to encourage employment creation, being seen as biased toward capital and property.

  • Social justice has been seen as important and there have been improvements in welfare payments for the least well-off.

The Irish experience, then, would suggest the importance of strong institutional arrangements in fostering sound economic performance and social cohesion around development objectives. In addition to this, as Andreosso-O'Callaghan and Lenihan (2006) detail, a range of other factors came together to enable Ireland to catch up with other European economies, including:

  • Developing a modern telecommunications network reduced the real costs associated with firm location in a peripheral economy such as Ireland.

  • Human capital accumulation: in contrast to other peripheral host countries for foreign investment, Ireland had a relatively skilled (and English-speaking) labor force. Yet it is worth noting that rapid economic growth in Ireland has taken place without much investment in innovation. By EU and international standards, and in spite of its relative current wealth, Ireland still suffers from a low R&D to GDP ratio (and R&D/GNP ratio). In contrast with one of the key lessons advocated by mainstream commentators, modern economic growth in Ireland does not owe much to innovation.

  • (p.417) Competition policy and deregulation: the introduction of competition policy and deregulation in the early 1990s was important in terms of delivering on cost competitiveness for firms using Ireland as an export platform (see Braunerhjelm et al. 2000).

  • A shift in the type of products being traded internationally: geographical disadvantage may not count as heavily anymore. As Krugman outlined, “changes in both the nature of what nations trade and in how they carry out that trade have shifted the balance of geographical advantage in a way that is favourable to Ireland” (Krugman 1997: 44).

In referring to this well-trodden ground on Irish growth, we simply wish to highlight that there were many factors that contributed to the success of the Irish economy, particularly from the mid 1990s onward. The industrial policy approach adopted by the Irish government was only one feature in the myriad of factors that contributed to the Irish success story. Almost all of the factors alluded to above would have impacted to a very large extent on the Irish business environment at the time. We would still suggest (see below) that there might be potential for government intervention in the SME sector in small African economies to lead to significant improvements in the key growth indicators of these countries. Indeed, the example of industrialization in Mauritius is seen as a good exemplar of combining selective industrial policies with broader support for SMEs and entrepreneurship, thereby setting the scene for job creation and a more inclusive growth pattern (UNCTAD 2009b).

Using foreign direct investment—and involvement—intelligently

It is recognized that FDI flowing into Africa, although increasing, remains too limited—both in geographical coverage and by being focused narrowly on extractive industries—to bring significant benefits in terms of employment creation and poverty alleviation (UNCTAD 2009a; UNCTAD 2007). A key cause of this is the high degree of risk and poor business environment, which deters FDI. According to UNCTAD (2007: 46), these impediments include “(a) poor infrastructure, (b) high entry costs, (c) labour market constraints, (d) low investor protection, and (e) high taxes and a cumbersome tax system.” On the tax front, UNCTAD (ibid.) notes that a typical firm in sub-Saharan Africa pays the equivalent of 71 percent of its profits in taxes, some 15 percent higher than the second-highest rate, paid in Europe and Central Asia.

In contrast, FDI, notably from the United States, has been a major trigger for economic growth in Ireland. Indeed, relative to the size of the economy, Ireland has one of the highest levels of FDI inflows in the world. Whilst successive Irish (p.418) governments have welcomed FDI (“industrialization by invitation”) since the 1950s, from the early 1970s onward, the government approach shifted toward a greater emphasis on selectivity and careful targeting, with pharmaceutical and electronics especially targeted as possessing promising opportunities. These industries were ideal for peripheral locations in that they were characterized by relatively low transportation costs and high growth rates (Braunerhjelm et al. 2000). Furthermore, the US was targeted as the most probable market for such projects given the likely benefits that would accrue to US companies using Ireland as an export base within the EU. It is important to note that the promotion and assistance of particular sectors was well timed. For example, the extension by the Irish government of financial incentives to internationally traded services, just as they were about to grow in importance, was a particularly timely intervention. Later, during the 1990s, industrial clusters in such sectors began to develop that involved linkages, spillovers, and sub-supply relationships with SMEs (see below). There was also a demonstration effect in operation, whereby the positive experiences of foreign investors in Ireland stimulated further FDI. If strategic targeting and a more focused approach to FDI were a key part of the success of FDI, this raises the question as to what sectors small African countries should now be targeting.12

Whilst the high levels of FDI were largely brought about by a corporate-friendly environment offering the lowest corporate tax rate in the EU, it should be noted that these tax breaks had existed for decades with limited impact on economic success; indeed the corporate tax rate on manufactured exports was zero from 1957 to 1981, then 10 percent and later 12.5 percent. Furthermore, other European economies have had such rates without attracting such levels of US FDI; in part, this may be because of the cultural links between Ireland and the US, where many citizens trace their ancestry back to Ireland, a factor that cannot be replicated or seen as a “lesson” for others. In a similar vein, House and McGrath (2004) note that the emphasis on education and training and the favorable corporate tax environments were both already in place before the mid 1980s when the economy was still stagnant (ibid.).

Of particular note was the recognition by the Irish government in the late 1970s and early 1980s that foreign transnationals were in effect branch plant operations and that the policy of heavily subsidizing FDI was producing little in the way of wider spillovers for the economy. Because of this, policy began to adopt an even more selective approach to FDI, focusing more on high-tech and higher-value-added firms. This is a key problem in terms of African development; as UNCTAD (2009b) notes, a failure to design appropriate policies runs the risk of FDI-led enclave development. Policy should instead be more “balanced and strategic” and tailored to the needs of local economic conditions. In the Irish case, it should be noted that problems and challenges remain and the picture of FDI-induced “transformation” is challenged by some. As Honohan and Walsh (2002) noted, “the huge profits recorded by the Irish affiliates have very little to do with the (p.419) manufacturing activities being conducted in Ireland.” A key lesson, as we show below in more detail, would actually be that spillovers from FDI are not generated automatically and that an industrial policy that targets and positions FDI is vital to ensure wider spillovers and to benefit the domestic sector. The case is not anti-FDI per se; indeed we recognize the value of high-quality FDI in assisting economic development. Rather, it needs to be stressed that this should not come at the expense of ignoring domestic firms. In a related vein, Buckley et al. (2006) argue that the contribution of transnationals to the Irish economy can also be overestimated by failing to take account of the high level of imports (including payments for patents, royalties, and other tangible inputs) and also repatriated profits.

Attracting high-quality FDI and positioning it seems crucial. Here, lessons with FDI experiences in peripheral regions of the EU seem highly relevant in taking on board elements of good practice. This includes targeting strategic sectors and linking FDI to cluster development, building trust with local managers in order to try to upgrade local plants, undertaking sector-specific research on the strengths and weaknesses of local industry, providing aftercare support, targeting financial assistance at specific upgrading needs (e.g. investment in R&D rather than general support), and the monitoring of performance (see Amin and Tomaney 1995; Bailey et al. 1998). The Irish experience of selectively targeting FDI seems very relevant here and raises the issue more generally of using selective as well as horizontal industrial policy.13

There was a general belief, hope, and anticipation in Irish industrial policy circles that indigenous SMEs would “grow from foreign firms through linkages and spillovers” (Andreosso-O'Callaghan and Lenihan 2006: 280). This “spillover argument” is often used by governments to justify subsidies for FDI, but such spillovers are not guaranteed. It is to this issue that we now turn, asking how successful (where they existed) were Irish government policy interventions in achieving successful linkages and spillovers between incoming transnationals and indigenous (largely SME) firms. This is significant as some see this link as a key element of the Irish success story. For example, Pike et al. in their well-balanced review of local and regional development (2006: 233) suggest that, “the role of industrial policy…seems important, with the Irish state and its governance institutions proving adept at providing the kinds of territorial assets that attract the sorts of TNCs that will contribute to development. Ireland may provide an example of a somewhat ‘strategic coupling’ between domestic and foreign owned firms….”

The wider FDI literature tells us that, if present, positive spillovers from transnationals can lead to increases in the productivity of domestic firms. This can happen via three main routes: (1) demonstration effects; (2) competition effects; and (3) labor market effects. As noted, spillovers are not an automatic occurrence but are in essence driven by the characteristics of the host economy, such as its degree of economic development, its ability to assimilate imported technology, and more generally, its absorptive capacity (see Blomström and Kokko 1996 and Blomström (p.420) et al. 2000). The lack of absorptive capacity in Africa has been noted by a number of researchers (UNCTAD 2009a). In this section we briefly highlight the key evidence regarding the prevalence of such linkages and spillovers in Ireland. Most notably, despite the rhetoric of “FDI-led adjustment,” there is significant evidence to suggest that the Irish economy operates according to a Lewis-type dualism “with little relationship/interdependence between MNEs and (local enterprises) and each developing according to its own pattern” (Ugur and Ruane 2004: 3). As such, each sector appears to have developed according to its own pattern. Such problems of dualism of course remain a major problem in many developing economies; for example UNCTAD (2007: 6) notes that in Africa, FDI is “relatively volatile and tends to focus on extractive industries with very few linkages to the domestic economy.”

In the Irish case, there is evidence from some sectors at least of improved linkages over time, such as in electronics (see Görg and Ruane 2000, 2001), even if foreign (particularly large) firms have lower linkages—perhaps due to the necessary scale needed to supply such firms (ibid.). For high-technology sectors, the evidence of spillover effects is even more evident (Görg and Strobl 2002, 2003 and Barry and Van Egeraat 2008). Here, there is evidence to suggest that the presence of transnationals in high-technology sectors has had a “life-enhancing” effect on indigenous plants in Ireland, improved indigenous entry rates, and has improved links between manufacturers and components suppliers in sectors such as IT. Other contributions (Heanue and Jacobson 2003; Forfás 2004; Lenihan and Sugden 2008) have explored the issue of linkages in Ireland. Lenihan and Sugden (2008) argue that the National Linkages Programme introduced in 1985 was partly in response to criticism of an industrial policy approach by the Irish government that relied on transnationals and was subsequently restructured by Enterprise Ireland with a focus surrounding the issue of the globalization of local supply industry. This approach resulted in a move toward the building of supply networks and chains as opposed to actual direct local company linkages. Forfás (2004) in analyzing the impact of the National Linkages Programme argued that it stopped short of reaching its potential, while Heanue and Jacobson (2003) argued that there was some success up to the 1990s, but thereafter the impact was insignificant. In terms of more traditional sectors, Culliton (1992: 31) argued that only a small proportion of potential linkages between foreign and traditional firms were being realized; and that “[i]n general…policy to promote industrial linkages has not lived up to its expectations. It is only a mild exaggeration to say that most of the newer foreign firms operate here as essentially an industrial enclave” (ibid.). The overall conclusion on the success or otherwise of linkages in Ireland is succinctly summed up by Ruane (2001): “it is hard to either totally prove or disprove” whether linkage policies have been successful.

Related to this, how successful was the creation of clusters in Ireland? A focus on creating sectoral and spatial clusters in Ireland really only began in earnest in the (p.421) 1980s (Buckley and Ruane 2006). Such efforts were focused around two key high-technology sectors, namely, electronics and chemicals/pharmaceuticals. More specifically, four segments of the electronics sector were targeted: microprocessors, software, computer products, and printers. In line with this strategy, some of the key players in these sectors, namely Intel and Microsoft, were attracted to establish operations in Ireland (ibid.). With the location of such firms, and subsequently Hewlett Packard in printing, Ireland to all purposes had an “electronics hub” and the “spokes” were soon populated by dozens of smaller enterprises (ibid.: 1620). Ireland could thus be said to have been a significant beneficiary of the formation of clusters (Krugman 1997); with the presence of the above-named firms contributing to the average share of US FDI in electronics to Ireland increasing to 27 percent between 1994 and 2001, compared to a rate of less than 12 percent for Irish manufacturing as a whole (Buckley and Ruane 2006). The two other key sectors where industrial clusters were created are the chemicals and pharmaceutical sectors, with these firms clustering primarily in the Cork region of Ireland. However, in contrast to experience in the electronics sector, where production linkages between firms developed, this was not the case with the chemicals and pharmaceuticals clusters.

In general, the empirical evidence on the impact of clusters in Ireland is, however, limited, with what evidence there is suggesting that there has been relatively little sectoral clustering between transnationals and local firms, at least in low-tech sectors and manufacturing overall (Gleeson et al. 2005; Buckley and Ruane 2006). There does however, appear to have been some clustering between transnationals and local firms in certain high-tech sectors such as IT (ibid.). The Irish government (Report of the Small Business Forum 2006) has recognized, however, that as more low-value-added activities migrate to lower-cost countries, a greater proportion of GNP will have to be produced by indigenous firms (predominantly SMEs). Other reports commissioned by the Irish government (e.g. a study by Goodbody Economic Consultants 2002) have also focused on the importance of entrepreneurship and more specifically on eliminating the barriers to entrepreneurship in Ireland. Whilst welcoming this focus, we would argue that this should have come much earlier in Ireland's development, and we see this as an important “lesson” for other states as they look for lessons to be learned in terms of industrial policy trajectory. It is interesting that in looking at policy experience in Uganda, for example, the United Nations (UNCTAD 2009b) concludes that policy was not as effective as it could have been if policy had been more orientated toward the needs of domestic firms rather than foreign investors. An implication of this was that the potential benefits of FDI failed to properly materialize. Ireland offers important lessons in this respect.

This review only serves to reiterate our point that a holistic industrial policy needs to account for the limitations and fragilities of FDI-led growth and hence also promote measures to grow domestic capacity, and to deliver a variety of (p.422) growth drivers for the economy. It is accurate to say that the limitations of FDI-led growth have been increasingly (if belatedly) recognized. Ireland became vulnerable because of the downturn in the US economy, given its overwhelming reliance on US-based FDI. Ireland faces increasing competition for FDI from emerging economies, and Ireland is no longer a cheap country in which to do business, due to rises in wages and raw material costs, and declining price competitiveness. This has most recently been reflected in a wave of plant closures and downsizing by foreign transnationals. We suggest that a more holistic approach to policy development at the outset could have avoided some of these problems, thereby enhancing economic development, a point that small, peripheral economies elsewhere may wish to note.14

The discussion of this section will be seriously incomplete without reference to the fact that in the practice of industrial policy in East Asia, both Japan and South Korea discouraged FDI rather than sought it. Singh (1995) noted that among developing countries, the Republic of Korea was second only to India in its low reliance on FDI inflows (see UN 1993 for figures). In the view of World Bank economists, this discouragement was a self-imposed handicap, which was compensated for by the fact that both countries remained open to foreign technology through licensing and other means (Singh 1998: 21). Singh, however, noted that World Bank economists did not ask the following question: if the governments of Japan and the Republic of Korea were as efficient and flexible in their economic policy as they themselves suggested (to account for their long-term, overall economic success), why did they persist with this apparently wrong-headed approach for so long?

An alternative interpretation is that the approach was perhaps not so wrong-headed after all. It was “functional” within the context of the overall industrial policies that the two countries were pursuing. First, it would have been difficult for MITI or the authorities of the Republic of Korea to use “administrative guidance” to the same degree with foreign firms, as they were able to do with domestic ones. Second, as UN (1993) rightly emphasized, there was a link between the national ownership of large firms and their levels of investment in research and development. The Republic of Korea had, in relative terms, by far the largest expenditure on R&D among developing countries.15 Korea's performance in this area outstripped that of many developed countries—for example Belgium (1.7 percent in 1987), Denmark (1.5 percent in 1987), and Italy (1.2 percent in 1987). It was, of course, still below that of industrial superpowers: Japan (2.8 percent in 1987) and Germany (also 2.8 percent in 1987).

Third, Freeman (1989) stressed another important advantage of the policy of mainly rejecting foreign investment as a means of technology transfer. This, he argued, automatically placed on the enterprise the full responsibility for assimilating imported technology. This was far more likely to lead to total system improvements and broader spillovers than the “turn-key plant” mode of import or the foreign subsidiary mode.

(p.423) It is important to emphasize that Japan and South Korea's rejection of FDI for long periods did not mean that these countries were not interested in importing foreign technology. Quite the contrary. Japan after all has been attempting to obtain technology from abroad for a hundred years. The reason why it did not favor FDI as a source of technology was that it was inter alia comparatively much more expensive than licensing. The latter was a policy pursued by Japan up to the 1980s, when under pressure from the US, it began finally to dismantle such barriers and started to allow in FDI without requiring a Japanese joint venture partner (Bailey and Sugden 2007).

The above considerations may also be valid for those South Saharan African countries that prefer to import technology through licensing rather than through the medium of FDI.

Indigenous firms and domestic entrepreneurship

Some commentators, such as Bailey et al. (2007), have argued that the Irish government, on recognizing the limitations of solely focusing on FDI as an engine of growth, also sought to develop indigenous SMEs and entrepreneurship more generally. Whilst acknowledging the merits of this opinion, we would also suggest that the focus on indigenous SMEs and entrepreneurship by Irish policymakers should have come much earlier. Despite the fact, as outlined by Andreosso-O'Callaghan and Lenihan (2006: 282), that “even as far back as 1979, some 95 percent of all manufacturing units could be classified as SMEs,” it is nevertheless quite astonishing that there was no formal focus by the Irish government on the small firms sector per se until the mid 1990s.16 The “SME story” in Ireland is an indigenous one as a majority of all indigenous firms in Ireland are classified as SMEs.

One could justifiably argue that the Irish government to a large degree overlooked the indigenous (largely SME sector) until the mid 1990s. As such, this represents a key policy “failure” and should be avoided by small African states. Admittedly, in the Irish case there were grants available to indigenous firms to start up and expand—but the focus on indigenous and SME firms was overshadowed by the prime focus of the Irish government on FDI. This is evident in comments from various reviews of industrial policy over the decades, most notably the Telesis Consultancy Group (1982), which highlighted an overemphasis on foreign industry. The Culliton Report noted above also emphasized the need to expand the indigenous sector, noting that “the focus instead must shift decisively to indigenous companies. The view of…Porter and his colleagues…is that in Ireland the shift has been ‘too little too late’ and that there has not been a full commitment to the slow process of developing a broader base of indigenous firms” (67). However, it was not until the “Task Force on Small Business Report” was published in 1994 that the focus on the SME sector by Irish policymakers truly began in earnest.

(p.424) Some of the problems facing small firms in Ireland are similar, albeit in a much more intense form, in Africa, most notably the issue of access to finance. As UNCTAD (2007: 15) notes, this is especially the case for the small domestic enterprises in the informal sector that represent the vast majority of firms. Indeed, it is thought that firms in SSA fund between one half and three quarters of their new investments from their informal savings. In order to address this, microfinance systems have emerged in recent years in order to rectify some of the shortcomings of the financial system in Africa. However, further action is needed with respect to the financial system in the African economies, as a poorly functioning financial system will continue to keep investment at low levels.17

More generally, Acs et al. (2007) suggest that entrepreneurs in Ireland are held in high esteem, and that this has been beneficial for the economy. This is questionable. Indeed, Culliton (1992) highlighted “the negative attitude toward enterprise that is prevalent in this country” (22) and proceeded to outline “a deep-rooted prejudice against failure in business. The stigma that attached to a failed enterprise very often inhibits the individual from ever trying again” (22). Perhaps it could be argued that such a negative attitude no longer exists. However, ten years after Culliton, Goodbody Economic Consultants (2002), although acknowledging an improvement, still noted that the “non-acceptance of ‘failure,’ both on the part of financial institutions and the general public is still perceived to be an issue by Irish entrepreneurs” (iv). They do, however, admit that “these attitudes are somewhat at variance with recent international studies which indicate that the general public's attitude toward entrepreneurship in Ireland is now highly favourable” (iv).

The role for policy evaluation

In view of the previously noted types of market failures that are likely to arise in the SME sector (e.g. the finance gap), a realistic route to help improve the efficiency of such markets is through the services provided by industrial development agencies. The extent to which development agencies in Ireland have produced the expected effects is an issue of significant and ongoing debate. One key issue that emerged in discussions (particularly pertaining to the 1990s) is that of agency duplication of services provided. The Industrial Evaluation Unit (1999) found that around 39 percent of firms that received support from more than one agency took up such support within the same time period. The prime lesson to be learned in this regard is that the support environment provided by government to firms needs to be clearly targeted and focused in its delivery. A clear underlying rationale for a specific type of intervention should be provided in all cases.

One of the outcomes of EU funding in the case of Ireland is that over time, there was increased pressure to engage in an evaluation of industrial policies (primarily to begin with for reasons of accountability). Indeed, guidelines from the European (p.425) Commission, as a result of Ireland being a Structural Fund beneficiary, were definitely a key driving force behind the much greater emphasis placed on evaluation in Irish policy from the early 1990s onwards. This is outlined by Andreosso-O'Callaghan and Lenihan (2006) in the context of the smaller, new EU member states, but here we argue that the same issues are also pertinent to small African states. A number of possible strategies can be adopted in the context of industrial policy evaluation (options 1–3 are not mutually exclusive and a mixed approach is possible):

  1. (1) Wait until pressure comes from outside to evaluate. In Ireland's case this was from the EU. In the case of the African economies, the impetus may come from agencies providing overseas development aid. This was the stance largely adopted by Ireland from around 1993 onwards.

  2. (2) Familiarize themselves with “best practice” or at least “good practice” evaluation frameworks and methodologies adopted internationally (reflecting on the key issues learned) so that they are in a position to know how (deciding on the methodological approach to be adopted is one of the key challenges for evaluators) to evaluate when requested to do so by external donors or organizations.

  3. (3) View evaluation as a useful tool in its own right. This would involve adopting a proactive approach whereby evaluation would take place at the three stages of the industrial policy process: policy formulation (ex-ante evaluation focusing on the market failure argument as a rationale for intervention and fundamental economic principles such as opportunity cost); policy implementation; and policy accountability (ex-post evaluation) (Rist 1995). Such an approach not only sees evaluation as something that must be undertaken due to an external pressure (e.g. donor or funder) but rather sees evaluation as a worthwhile activity in terms of lessons to be learned that can subsequently be incorporated into future policy interventions. There is no doubt that many would regard evaluation as a “luxury” in African economies where resources are already scarce. We would argue however, that if robust evaluations are carried out (which ask the right questions relating to issues such as deadweight, displacement,18 multipliers, and linkages) this may lead to improved future industrial policy interventions which in the long run could prove to be extremely cost-effective and efficient. Clearly, this is an area that merits further investigation.

Whilst Lenihan et al. (2005: 14) note that the “methodological rigor” of Irish industrial policy evaluations has been improving in recent years, it was not until pressure came from the European Commission that Irish policymakers and academics alike truly began to take industrial policy evaluation seriously. This is somewhat difficult to comprehend given that an interventionist approach to industrial (p.426) policy has been a feature of the industrial policy stance by successive governments in Ireland since the 1950s, with the first grant to firms actually being awarded as far back as 1952. In this regard, Storey (2000) argues that a prerequisite to any evaluation is that clear objectives be specified. More precisely, he highlights the “impossibility of conducting an evaluation in the absence of clearly specified objectives for the policy concerned” (177). This calls for a clearly defined set of policy objectives from the outset, and to allow for trial and error as an important part of policy development. As UNCTAD (2007: 87) notes, referring in particular to East Asian experience:

A simple replication of the East Asian developmental State, even if there were such a thing, would not do…Indeed, the intrinsic differences among the Asian experiences underscore the importance of “trial and error” as an important ingredient of policy formulation and implementation in developmental States. This process should benefit from constant monitoring and the feeding of the lessons learnt from monitoring into new policies to overcome earlier shortcomings.

An additional challenge (as with all calls for evaluation) is who should actually carry out such evaluations. The follow-on question is who should evaluate the evaluators. Clearly, in the face of the level of corruption and lack of resources to carry out some evaluations in some of the African economies, this issue is particularly pertinent.

Concluding thoughts

As outlined in this paper, there are indeed some interesting similarities and lessons to be learned (both good and bad) by the smaller African economies from Irish industrial policy experiences. Key amongst these is the concern expressed in this paper that industrial policy should not be seen purely in narrow terms; that is, with a sole focus on attracting FDI. We argue here that there is need for a more holistic approach to economic development that inter alia focuses on the development of domestic entrepreneurship and indigenous firm expansion more generally, as well as emphasizing the importance of other supply-side factors (e.g. infrastructure, well-functioning labor markets). It may be argued that this more comprehensive view of industrial policy and economic development could take a longer time to materialize. This is a difficult dilemma for African economies to face, given the extremely high levels of poverty and deprivation witnessed in many of these economies. We do, however, argue that such a holistic growth trajectory could lead to a more sustainable industrial development path, in contrast to that of Ireland, which because of its (over)dependence on US firms, is now suffering severe reverberations from the recent downturn in the US.19

(p.427) This paper has provided some novel insights by showing a detailed comparison between Ireland and the small African economies. As argued earlier, when comparisons are made in terms of industrial policy lessons to be learned, these tend mainly to rely on the East Asian experience (which, as indicated earlier, undoubtedly provides interesting economic development insights, but with certain caveats). The paper suggests that a very important contribution of the Irish model is its emphasis on corporatism rather than state direction of industrial policy. The Irish model can also be considered more democratic, having protected workers’ rights during the development process to a greater extent than in the highly dirigiste East Asia model. Bearing in mind the small size of the African economies, the paper recommends regional integration and sufficient ODA for infrastructural development.

Last but not least, it is important to bear in mind that the various small African economies each face their own industrial and economic development challenges, therefore we do not suggest a one-size-fits-all approach. As outlined by UNCTAD (2007), referring to East Asian experience, the path to sustainable growth and development is derived from “a pragmatic mix of markets and state action, taking into account the country-specific development challenges” (UNCTAD 2007: 61). It concludes:

The challenge for Africa (as for other developing countries), therefore, is not how to copy any model, but how to create “capitalisms” adaptable to the unique opportunities and development challenges in each country…. (UNCTAD 2007: 88)

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Notes:

(1) From a poem by William Blake (1757–1827).

(2) Lenihan is based at the Department of Economics, Kemmy Business School, University of Limerick, Ireland. She worked on this paper during her sabbatical leave as a Visiting Fellow at the CBR at Judge Business School, University of Cambridge, while concurrently a Visiting Fellow at Wolfson College, University of Cambridge, UK, and finally as a visiting academic at the CSME, Warwick Business School, University of Warwick, UK. Bailey is Professor of International Business Strategy and Economics at Coventry University Business School, UK. Singh is Emeritus Professor of Economics, University of Cambridge and Director of Research with CERF at the Judge Business School in Cambridge.

(3) Amsden (1989) and Wade (1990) are two well-known representative studies from the huge literature on this subject.

(4) These were the high-growth periods for the two countries. In 1973, Japan was still more like a developing country than it has been since (see Singh 1995).

(5) The UN (2009) identifies a range of dynamic objectives a “new developmental industrial policy” should aim for, such as creating a dynamic domestic comparative advantage in a more complex and sophisticated range of goods and services; upgrading human capital; upgrading productive capacity; building industrial policy capability; creating conditions (p.428) for inclusive growth; fostering the transformation from agrarian to post-agrarian societies; raising labor productivity through improved public inputs; diversifying natural-resource activities; and promoting learning and knowledge diffusion among firms and workers.

(6) Singh (1995) comments on the interrelationship between industrial policy and macroeconomic stability with particular reference to the experience of East Asian countries. To the extent that industrial policy was effective in Japan or the Republic of Korea in relieving the balance of payments constraint, it will also have aided macroeconomic stability. A current-account balance at the desired growth rate can help to avoid the stop-go cycles that many economies experience. This, in turn, will lower the cost of capital since for a given savings rate in the economy, other things being equal, the more variable and unstable the economic performance, the higher the interest rate. Similarly, faster economic growth also leads to faster growth of real wages, and hence enhances social stability and the political legitimacy of the socioeconomic order. Thus, macroeconomic stabilization and industrial policy interact with each other in a virtuous circle of cumulative causation.

(7) Ireland has the highest fertility rate in the EU, and between 1981 and 2001 experienced a population increase of 15 percent, from 3.5 million to just over 4 million in 2004 (NESC 2005: 1).

(8) UNCTAD (2007: 25) notes that monetary or non-monetary resource transfers by migrants to their home countries are increasingly recognized as an important source of financing for development in Africa, being the second largest source of development capital flows to developing countries.

(9) Quite why the Irish economy prospered at this time when the state pursued a very restrictive fiscal policy has been the subject of much debate. The European Commission saw it as an “expansionary fiscal contraction,” which led to improved confidence and greater consumption and investments (EC Commission 1991; McAleese 1990). Others have stressed the Lawson boom in Britain, which raised demand for Irish products and fall of the oil prices: “Irish policy makers were just lucky that their adjustment was carried out at a time when world growth became buoyant and world interest rates were falling” (Bradley et al. 1993). Kennedy (2001: 131–2) also suggests that growth in the US economy and the advent of the Single Market after 1993 were important factors.

(10) MITI (the Ministry of International Trade and Industry) in Japan may have played a similar consensus-building role after the Second World War through to the 1980s (see Bailey and Sugden 2007).

(11) The pattern applied in the PNR was followed in successive pacts. Successive social pacts have broadened stakeholders involved in the negotiation as well as the focus of agreements.

(12) Here, the selection of target industries needs to be realistic and related both to the country's technological capabilities and world market conditions. The success of East Asian countries for example “owe a lot to the fact that they did not attempt to make too big a step” (Chang 2006: 126).

(13) See Bailey and Cowling (2006), who note that industrial policy in the US and Japan has involved both vertical measures in targeting new technologies and emerging industries, and horizontal measures to support all industries, suggesting that the current focus in (p.429) Britain and the EU with the horizontal aspects of industrial policy has been largely misplaced.

(14) The role of large indigenous firms in the development process also needs to be noted here. In many countries, such firms, which are large by developing countries’ standards but rather puny in international terms, are the spearheads of spreading technical change and productivity growth. Amsden (1989) is the leading exponent of the critical role of large indigenous firms in late industrialization. What is, therefore, required in industrial policy for developing countries is the right balance between the promotion of large and small firms. To illustrate this point, Indian industrial policy in the period 1950 to 1980 is an example of a policy that encouraged small firms at the expense of large firms in order primarily to safeguard employment. Despite its good economic rationale, this policy is generally regarded as being a failure as it stopped the growth of large firms and thwarted their role in the development process. See further Joshi and Little (1994), Ahluwalia (1992), and Singh (forthcoming). The UN (2009a) notes that African firms tend to be mainly small firms, which in general do not network with other firms or organizations.

(15) At 1.9 percent of GNP in 1988, compared with 1.2 percent for Taiwan Province of China (1988), 0.9 percent for India (1986) and Singapore (1987), 0.5 percent for Argentina (1988), 0.6 percent for Mexico (1984), and 0.4 percent for Brazil (1985) (UN 1993).

(16) See the Task Force on Small Business Report (1994) and the Small Business Operational Programme (1995).

(17) On the development of stock markets and banks in Africa, see further Singh (1999b) and Singh (forthcoming).

(18) For a discussion of the concepts and estimation of deadweight and displacement, in the context of Ireland, see Lenihan (1999 and 2004) and Lenihan and Hart (2004).

(19) In 2001, the number of US companies in Ireland reached a peak at 531. This information is derived from the combined sources of UNCTAD WID (2005) Country Profile Ireland and various Annual Report from IDA Ireland (various years).