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Extractive IndustriesThe Management of Resources as a Driver of Sustainable Development$

Tony Addison and Alan Roe

Print publication date: 2018

Print ISBN-13: 9780198817369

Published to Oxford Scholarship Online: November 2018

DOI: 10.1093/oso/9780198817369.001.0001

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New Industrial Policy and the Extractive Industries

New Industrial Policy and the Extractive Industries

(p.137) 7 New Industrial Policy and the Extractive Industries
Extractive Industries

Evelyn Dietsche

Oxford University Press

Abstract and Keywords

Industrial policy is back. Advocates for industrial policy argue that the important question is not whether such policies should be applied at all, but how to design and implement them. This chapter explores the new debate on industrial policy in relation to the extractive industries and the extractives-led development agenda. First, there is the argument that host countries should reduce their dependence on the extractive resources sector and diversify their economies. But there is little consensus over how countries should go about this. Second, the universal climate agreement reached at the Paris COP21 in November 2015 mandates that all economies have to move towards more sustainable and resource-efficient growth, with (green) industrial policy playing a critical part in achieving this structural transformation. Third, the liberal capitalist system underpinning the current global economy is under pressure with some political forces now making the case for more inward-looking economic policies and protectionism.

Keywords:   industrial policy, extractive industries, extractives-led development, sustainable growth, structural transformation, climate

7.1 Introduction

Industrial policy is back. Many development economists are now arguing for a new approach to industrial policy to achieve economic and social development in low- and middle-income countries.1 This revival has been prompted by several developments. First, the pro-poor development agenda of the 2000s has been criticized for failing to develop a sustainable private sector (Whitfield 2012). For example, this is reflected in the Sustainable Development Goals (UN 2015a), placing greater emphasis on economic transformation and sustainable development compared to the more poverty-focused agenda of the preceding Millennium Development Goals.

Second, international climate policy has provided an impetus for a new approach to industrial policy. The climate agreement reached at the Paris COP21 in November 2015 has mandated all signatories to change course and accelerate their move toward more sustainable and greener growth (UN 2015b). This calls not only for cleaner energy, but also for improved resource and material efficiency (OECD 2015). And it exposes the fossil-fuel sector to the risk of ‘unburnable carbon’ and ‘stranded assets’ (Lahn and Bradley 2016; Mitchell et al. 2015). ‘Green’ industrial policy is seen as central to driving the structural transformation towards a more sustainable and greener economic system (Aiginger 2015; Hallegatte et al. 2013; Lütkenhorst et al. 2014; Rodrik 2014). Meanwhile, minerals and metals are seen as critical for a low-carbon future (World Bank 2017).

(p.138) Third, on both sides of the Atlantic rising disappointment with the social outcomes of economic liberalism and globalization are influencing political agendas towards restrictions on trade and the movement of people (Bailey et al. 2015; Rodrik 2016a, 2016b, 2017; Smart 2017).

Yet, opinions on industrial policy are deeply divided. Associating the term with the interventionist import-substitution policies that were widely applied in the post-World War II and post-independence era, re-introducing industrial policy into economic policy and development debates is seen as encouraging unproductive rent-seeking by politically favoured companies thriving under protectionism.

Proponents of new approaches to industrial policy maintain that investing in productive knowledge and technological capabilities is key to achieving sustainable economic and social development. As explained more fully in Dietsche (2017b), they define industrial policy in broader terms than either the old import-substitution policies, or the inward-looking policy ideas of the new national populism. This means that new industrial policy constitutes a ‘broad church’ of ideas and people. This chapter asks what the implications of this debate are for the extractive industries and their potential to contribute to inclusive (and sustainable) development.

7.2 The Case for Industrial Policy

The theoretical case for industrial policy arises from the problem of transaction costs and how these should be dealt with. Dietsche (2017b) discusses this in more detail by distinguishing between (a) the typical cases of ‘market failure’ that neoclassical economics identifies on the basis of assuming that transaction costs are zero and (b) the real-life situation where transaction costs are always positive and, therefore, are a problem that is inherent to all markets in which unrelated individuals exchange goods and service.

The general case for industrial policy builds on the argument that there are situations in which markets rely on the public sector to achieve broadly desirable economic and social outcomes. These situations include, but are not limited to, those cases where clear ‘market failures’ can be identified. In essence, this means that industrial policy sits at the heart of the relationship between markets and states, and it also shapes economies and the social outcomes they produce.

Dietsche (2017b) discusses in some detail the ideal-type situation where transaction costs are assumed to be zero (i.e. case (a)). Even under this assumption, there are ‘special’ cases of goods and services that warrant interventions because they are marred by the problems of non-rivalry and non-excludability. (p.139) Congruently, interventions are aimed at designing policies and establishing institutions that address non-rivalry and non-excludability. Dietsche (2017b) also discusses real-life examples to demonstrate that today’s production and use of extractive resources are heavily and fundamentally entangled with the characteristics of non-rivalry and non-excludability. This means that the markets associated with extractive resources are contingent on how institutions have shaped them, not just over the past couple of decades, but at least since the era of the industrial revolution.2 Equally important is how these markets will work in the future, as not only governments but also social organizations challenge and seek to re-shape existing institutions.

This chapter focuses only on case (b), where the case for industrial policy centres around the question of how transaction costs can be reduced to encourage economic exchanges over distance and across time. With economic historians and institutional economists having spelt out the critical role that ‘institutions’ play in reducing transaction costs and, thus, in establishing markets (Dietsche 2017a), the probing question is: Who makes and shapes the institutions that reduce transaction costs to support sophisticated market transactions over distance and across time? The answer points not only towards collaboration and collective action, but also to the critical role that is played by collective entities with monopoly power over the use of force. In the modern world, this power is held by nation-states, where public authorities provide the institutions that allow the private sector to thrive and, in the best-case scenario, produce broadly acceptable economic and social outcomes.3

It is on this discussion that the real-life situation of case (b) builds. The challenge is that the analysis of this situation produces not only more nuanced conclusions but also no consensus on what industrial policy should really entail. A critical initial proposition, well established at the philosophical level, is the case for collective authorities to provide institutions whenever economic agents interact with each other beyond personal relationships. In today’s world, nation-states and their public authorities have become the key collective entities that shape and maintain the institutions underpinning economic systems and their economic, social, and political outcomes. Thus, the proponents of industrial policy take the position that public authorities not only can, but effectively do play a fundamental role in how economies are structured and how they perform. Yet, proponents differ over how that role should be played. The analysis in Dietsche (2017b) has identified several themes that run across this ongoing debate.

(p.140) 7.2.1 The Risks of ‘State Failure’

Neoliberal economists have strong reservations against any type of ‘policy interventions’, because they see ‘state failure’ as a bigger risk that any type of ‘market failure’. This concern stems from their interpretation of some of the negative experiences with interventionist policies prevalent in Latin America as well as in newly independent states in the 1960s and 1970s, which were referred to then as ‘industrial policy’.4

While some countries found success—notably South Korea and Taiwan (China)—many did not, and by 1980 much of Latin America and many newly independent countries in Africa and Asia faced serious crises. Neoliberal economists concluded that the risks of state failure arising from import-substituting industrialization outweighed any gains from containing market failures. Industrial policy was then seen through the ideological lens of socialism’s failure and market liberalism’s triumph, reinforced by the decline of the Soviet Union.

Industrial policy came to be seen as a means for creating rents for the benefit of political and economic elites, without delivering many, if any, of the expected economic and social returns. These ideas and experiences were reflected in some new economic theory focusing on rational individuals exploiting their power over public policies to seek unproductive ‘rents’, thereby maximizing their self-interest.5 Against the background of these theories, governments were advised to avoid unproductive ‘rent-seeking’ by keeping their hands away from industrial policy, and instead to open up to foreign investment and trade. To date, ‘state failure’ and ‘rent-seeking’ remain two contentious subjects that proponents of the new industrial policy must still confront.

7.2.2 Industrial Policy as a Discovery and Learning Process

Discovering and learning are core themes in new industrial policy. The argument is that industrial policy should create a network of linkages between public- and private-sector representatives and institutions where processes guide information flows and joint learning. In order to shape the structure of an economy, bureaucrats need to be closer to business. At the same time, the public sector should not simply end up serving particular companies or exclusive business elites. Instead, it must retain its independence from (p.141) individual private interests and focus on the provision of public goods and services that benefit the private sector more broadly.

The question is what role should public authorities play in leading a discovery and learning process that identifies where transaction costs are high and pose a hindrance to productive entrepreneurial activities? There are many views on the specifics. One argument is that the public sector carries a responsibility for coordinating and aligning stakeholders’ interests towards reducing transaction costs—and enhancing positive externalities so that the private sector can develop, thrive, and diversify. For example, Rodrik (2007) argues that successfully identifying the true cost structure of an economy takes public policy makers one step closer to removing impediments to ‘doing business’ and enhancing positive externalities. He suggests a corporatist approach where the public sector brings together and aligns multiple interests across different levels of policy, thereby improving the environment for private-sector activities. Industrial policy is then not the sole responsibility of a separate ministry or department, but a responsibility shared across the public sector. In addition, this view also speaks to encouraging (or nudging) private-sector interests to organize and identify common constraints and impediments that (only) the public sector can address.

There is significant congruence between this view of industrial policy and the proposals by international mining companies to partner with governments, local enterprises, and third parties to enhance mining’s positive contributions to development, and minimize any negative impacts on host countries and communities (ICMM 2011; McPhail 2017). Similarly, proponents of the notion of ‘shared value’—a concept that has emerged within the debate on extractives-led development—argue that governments, companies, and third parties need to work together to remove impediments that hinder local companies from participating in project supply chains (e.g. bureaucratic, financial sector-related) and to encourage positive externalities by providing training and support to local entrepreneurs and workers (e.g. skills, management, HSE compliance). In addition, industrial policy as a discovery and learning process is also relevant for the challenge of climate change, because it suggests identifying and addressing the impediments and disincentives that discourage the private sector from developing and investing in cleaner and alternative energy sources.

The case for encouraging collaboration for joined-up discovery and learning has been supported by three further observations. First, many Western industrialized countries look back on a long history of experimenting with decentralized approaches to industrial policy, where the development of particular sectors and industries has been supported by fostering innovation and competitiveness through networking across private- and public-sector entities (Keller and Block 2015; Warwick and Nolan 2015).

(p.142) Second, there are the Asian latecomers to the industrial revolution that successfully supported the structural transformation of their agrarian economies and societies during the second half of the twentieth century. It is now generally accepted that East Asia caught up with the West by actively supporting and networking the export-oriented sectors, industries, and firms—contrary to mainstream policy advice to keep the public sector’s hands off the private sector (Amsden 1989; Khan and Jomo 2000; Lin 2012; Lin and Chang 2009; Strom 2017; Wade 1990).

Third, there is the observation that, as countries get richer, so their economies typically diversify (Imbs and Wacziarg 2003). They get richer not by producing more of the same using what resources they already have, but by learning how to produce more of an increasingly diverse range of goods and services. Moreover, more diversified economies have not seen a withdrawal of the public sector: ‘learning to produce a more diverse range of goods and services’ has often been supported by a higher level of public goods and service provision, supplying inputs that have allowed a broader range of economic activities to prosper. Some see this achievement of structural transformation and diversification as the essence of the development process (Mkandawire 2012; Rodrik 2007).

However, for industrial policy as a discovery and learning process, there is no presumption that the public authorities can always get things right—at least not first time around. It is expected that mistakes will be made and that, as part of learning, these can and will be corrected. What matters is that the incidence of overall successful cases of private–public collaboration eventually exceeds the unsuccessful cases. Indeed, if no mistakes are made it can be taken as a sign that industrial policy is not daring enough and that the country might have missed potential gains. Even in the presence of rent-seeking special interests, leaving market failures unaddressed does not by itself change that order for the better. Stiglitz (2015) argues that not pursuing any industrial policy may also serve special interests, namely those interests that cherish the institutional status quo and benefit from the absence of state support that broadens access to economic opportunities.

7.2.3 Setting and Pursuing Socio-economic Objectives

A third theme involves the setting and pursuing of socio-economic objectives. This complements the second theme, because it raises awareness that, first, the process of discovery and learning must serve a purpose and, second, that economic theory on its own cannot decide what the desirable outcomes actually are. Objectives must be guided and set by political processes at various levels. Furthermore, this theme also rejects the binary framing of whether or not countries should pursue industrial policies. It replaces it with the much (p.143) more exploratory question of how individual countries can go about designing industrial policies in support of the objectives that their respective political leadership has set, as well as how their respective public sectors can implement such policies efficiently and effectively.

For example, in the context of climate change, a green industrial policy for structural transformation and diversification is often seen as paramount to achieving the global objective of limiting greenhouse gases (GHGs). Altenburg (2011) and Lütkenhorst et al. (2014) see green industrial policy as part and parcel of tackling the daunting challenge of transforming economies and the entire global economic system towards greater energy and resource efficiency and ‘beyond GDP’ objectives. They also see the past as a problematic benchmark by which to judge contemporary strategies.

7.2.4 Improving Productivity

A fourth theme is focused on improving productivity. It rests on the argument that, due to positive transaction costs, the private sector is unable to address structural challenges that hold back growth. An example is large-scale investment with high fixed costs, such as the provision of utilities or transport infrastructure that can serve a wide range of economic activities. For these to be built, it may be necessary to incentivize the simultaneous expansion of upstream and downstream activities. For example, in the context of the extractive industries, public investments in infrastructure may not only raise the productivity of a site where extractive resources are produced, but also that of other industries in adjacent areas, such as agricultural and other land-based natural-resources sectors.

However, while in the presence of positive transaction costs public authorities have a key role to play in supporting the private sector to achieve such improvements, this role does not equate to the proposition that the economy should be led or actively run by the state. Nor does it support the proposition that states should own and run industries that are subject to natural monopolies. Rather, the theme highlights the problem that the private sector requires the institutionalization of solutions that address structural market failures and enable positive externalities. Industrial policy becomes the medium to identify the nature of structural market failures and to develop and trial solutions: an example is strengthening education and training systems to deliver highly skilled tradespersons, technicians, and professionals.

Several authors have discussed the role of public authorities in improving productivity with reference to developmentally oriented states, as opposed to ‘predatory states’ captured by narrow elites (Strom 2017; Wade 2010, 2014). In an earlier UNU-WIDER publication, Auty and Gelb (2001) distinguished (p.144) between two stylized political-economic models to explain why resource-rich countries had not kept pace with other countries that had started off with similar productive capabilities. These models suggested that economic transformation and diversification on the back of exploiting natural resources hinges on what happens around these sectors, as opposed to what happens more narrowly in these sectors. A highlighted characteristic of developmentally oriented states is political elites that actively pursue structural transformation and manage to avoid possible capture by economic elites. They also exercise self-restraint in using authoritative power for gains that accrue only to themselves.

However, while proponents of industrial policy agree that improving productivity is a key objective, there is little agreement on how to do it. In this context, an intensely debated question has been whether countries should comply with, or defy, their comparative advantages based on their existing factor endowments.6

7.2.5 Building Comparative Institutional Advantages

A fifth theme centres on static versus dynamic comparative advantages. A country’s current comparative advantages are not only, nor even necessarily, down to its endowments of physical resources, but reflect policies and broader institutional arrangements relative to those of other countries. They underpin factor productivity and how it is maintained and improved.

Essentially, this theme emerged from studies tracing the specific characteristics of advanced industrialized countries to their particular institutions and how these have evolved over time as the outcomes of political-economic processes.7 Historically minded social scientists have focused on the institutional characteristics shared by countries that have managed to transform and diversify their economies. Respective research has included comparative analyses on the economic structures of OECD countries and the ‘varieties of capitalism’ that these countries display, even though they are all similarly well off.8 It has also included comparative studies on the successes of East Asian countries.9

(p.145) As this research views comparative advantages as the outcome of the comparative institutional advantages that a country has built over time, the focus is on the question of how countries have got to where they are, rather than accepting—as a fait accompli—their existing comparative advantages. Importantly, it is not assumed that advantageous institutional arrangements are a given. Hence, this fifth theme links back to the second and third themes regarding discovering and learning, driven by the pursuit of clear socio-economic objectives. Together, these themes indicate that the task is not merely one of quickly designing and announcing industrial strategies and policies, but one of more slowly and purposefully re-shaping existing institutions and building new ones.

7.2.6 The Political Economy of Transaction Costs and Institutional Change

The last theme is arguably the most controversial: at stake is the issue that—given the positive transaction costs that exist in the real world—there is no guarantee that institutional change per se will reduce these costs. Instead, institutions reflect the political-economic interests of those who were able to shape them in the past and those who are able to re-shape them in the future. Political power-holders may use industrial policy for their own interests and those of their respective political constituencies. Hence, the risk is that of ‘rent-seeking’ and ‘state failure’ discussed earlier as the first theme.

However, there are signs that the overtly pessimistic view on the omnipresence of ‘state failure’ and ‘rent-seeking’ is being replaced with a more nuanced understanding, which recognizes that the social order, underpinning how political power-holders behave and what they see as their legitimate role in society, is critical to outcomes. Thus, this view concludes that what matters is how policy makers and state institutions deploy industrial policy: positive institutional change can be a possible outcome, but it is not guaranteed. As a consequence, recommendations on industrial policy should be judged not from an ideological perspective, but on the basis of whether they address systemic challenges that hinder an economy from delivering positive socio-economic outcomes.

Quite clearly, the narrow position that governments should disengage completely from the pursuit of industrial policy is in decline. In part, this is because few still maintain the view that markets are perfect. In addition, industrial policy now has such a wide range of interpretations that economists of different persuasions can subscribe to it. When it comes to the empirics, however, we should expect to see variance in outcomes: the pursuit of industrial policy will fail in some countries, while in others it may well deliver positive results.

(p.146) 7.3 Industrial Policy and the Extractives-led Development Agenda

Since the mid-twentieth century, there have been three perspectives on the nexus between extractive industries and industrial policy. These pertain to three periods that have been more fully discussed in Dietsche (2017b).

7.3.1 The Unfulfilled Promise of State-led Industrialization

From the 1950s to the 1970s, the commonly held view was that state-led industrialization was needed to achieve catch-up with the more advanced economies. Foreign companies had dominated the resources sectors in the colonial era. Generous concessions granted to foreign companies had brought low-cost Middle Eastern oil to the global market and had pushed down prices. But newly independent governments in Asia and Africa sought to take control and transfer the assets of the Western-owned oil majors to newly created state-owned oil and mining companies. The ensuing battle between the governments and the companies prompted key producer countries to actively intervene in the pricing mechanism and encouraged further nationalization. The Organization of Petroleum Exporting Countries (OPEC) was established to tilt market power in favour of the producers. Many governments took control over the sector with a view to using the resulting revenues to finance ambitious industrial development projects as well as the expansion of public provision more broadly.10

At the time, some economists raised concerns that it would not be straightforward to industrialize and diversify economies on the back of exploiting and exporting unprocessed commodities.11 Their fear was that, although countries would be exploiting their current comparative advantages, specialization in primary commodity exports would ultimately lead to declining terms of trade. Economic historians referenced the eighteenth and early nineteenth centuries to point to a mixed picture of potential outcomes.12

Analytical tools were also developed to examine the potential connections between the resources-based industries and other economic sectors.13 For example, drawing on his linkage theory, Hirschman (1977) doubted the potential of export-oriented resources sectors to serve broader economic development and diversification.

(p.147) 7.3.2 Sector Liberalization in the Ascendant

By the 1980s many low- and middle-income countries faced fiscal and debt crises, compounded by the commodity price slumps of the time. Some needed to accept IMF and World Bank stabilization and structural adjustment programmes. While state-led industrialization on the back of the resources sectors was not always a failure, it had a high failure rate when political and economic elites abused it for their own advantages. This led to the rise of the microeconomic notion of ‘rent-seeking’ in the 1980s and 1990s.

This was also the time of the ‘Washington Consensus’, stressing that state-led industrialization had resulted in state failure. However, its proponents argued that the extractive industries could help countries return to growth by generating much-needed foreign exchange. The implicit industrial policy advice at the time was that countries should attract more foreign investment into the resources sectors, including privatizing and/or selling off their state-owned companies. During this time, almost all national mining and some oil and gas companies in low- and middle-income countries were privatized and sold off, thus removing their troubled finances from the public accounts. In several low- and middle-income countries, significant new private investment and some increased public revenues followed as a result of this approach: for example, in Ghana after 1986 and in Tanzania after 1996.

7.3.3 The Promise of the Extractives-led Development Agenda

Since the late 1990s, low- and lower-middle-income countries generally have received substantial foreign investment, funding large-scale oil, gas, and mining projects on an unprecedented scale. The construction and operation of such projects has boosted growth rates and per capita income. But they have often not delivered on the expectation that positive trickle-down effects would generate broader benefits, including more diversified economies and more economic opportunities at national, subnational, and community levels. This disappointment has prompted serious questions as to why this expectation has not been met.

Since the early 2000s, this questioning has taken place at two levels. At the community level, the environmental movement has highlighted the discontent of local communities, where negative impacts are felt most immediately and intensively. At this level, extractive companies have been pushed to improve their local impact management and their relationships with local communities.

Meanwhile, at the macro-level many resource-rich countries have done worse than those less well endowed with natural resources (the ‘resource curse’). To explain this, researchers initially focused on the macroeconomic (p.148) and fiscal challenges facing resource-rich countries and identified respective policy responses to counter these. But attention also shifted towards the political economy of resource rents as an explanation of why neoliberal policy-prescriptions had not resulted in broad-based socio-economic development. A consequence of this shift has been the emphasis placed on the ‘good governance’ of the sector and respectively targeted propositions on ‘appropriate’ sector governance. International initiatives, such as the EITI and the NRGI, have invested in gathering and disseminating information, and have encouraged greater transparency and better governance in the sector, especially in relation to resource revenues and the legal, regulatory, and contractual arrangements underpinning these.

However, despite these developments it has unfortunately remained rather unclear whether and/or to what extent these efforts have supported countries in diversifying away from the extractives sectors. As underlined in the introduction to this chapter, the very suggestion that it is possible to transform and diversify an economy on the back of extractive projects draws attention to what happens around the sector.

7.4 What Next on New Industrial Policy and Extractives-led Development?

Unfortunately, because the debate on new industrial policy is so multifaceted, it is also rather inconclusive and does not (yet) provide governments of countries with extractive resources with any sort of road map that could guide them on the strategies most likely to produce long-term sustainable benefits. Worse even, some proponents taking part in the various debates on ‘new industrial policy’ as outlined above probably regard the extractive industries as an almost irrelevant sideshow to these debates: they would see the focus areas for actions as being the manufacturing sector and its associated technologies.14 The review so far presented in this chapter—and in more detail in Dietsche (2017b)—has sought to demonstrate that this would be far too narrow a view: several strands in the newer literature suggest important potential roles for the extractive industries in contributing to economic diversification. The remainder of this section sets out four observations on new industrial policy and extractives-led development.

(p.149) 7.4.1 A Positive Role for the Extractive Industries

With broader global acceptance of the case for industrial policy and a more nuanced understanding of what such policy might comprise, there are no obvious reasons why considered governments would not choose to devote some part of their resource revenues to support other non-extractive sectors with appropriate policy measures. There is now an increased international understanding of the importance of, first, observing and, second, supporting what happens around the sector, as opposed to focusing more narrowly on what happens within the sector. This understanding has been reinforced by several years of insights distilled from observing the successes and failures of the extractives-led development agenda to which the UNU-WIDER project on ‘Extractives for Development’ also seeks to contribute (UNU-WIDER n.d.). This development makes it more likely that any host government that seeks to apply a new industrial policy approach in the interest of long-term sustainable economic development based on diversification will be able to draw on extensive international ideas and increasing support for these, including from development agencies that back respective initiatives such as, for example, the economic growth corridors of the World Bank.

Not least, this suggestion corresponds with the arguments of those proponents who associate new industrial policy with structural transformation, characterized by increased product and service sophistication and the transfer of resources towards more productive economic activities (Felipe 2015). Moreover, it is quite clear that in the period of high investment during the last super-cycle some lower- and middle-income countries have seen the transfer of some resources to higher-productivity activities associated with their increasing dependence on minerals and/or oil and gas. However, the challenge to which there has not yet been a generally good response is how to sustain such initial gains by spreading productivity gains to other sectors.

Contrary to the position that some host governments like to take, such spreading does not happen automatically. In fact, new industrial policy suggests it requires smart policies that support, for example, enterprise development, local skills training, and the promotion of new investments in non-extractive sectors that have the potential to become viable on their own. The more nuanced thinking that is now underpinning the debate provides several ideas on taking forward such policy interventions and developing supportive institutions. Mentioned earlier was the example of Rodrik (2007). Also noted above was that there is significant congruence between this view on new industrial policy and the proposals put forth by international mining companies to partner with governments, local enterprises, and third parties to enhance mining’s positive contributions to development, and minimize any negative impacts on host countries and communities (ICMM 2011).

(p.150) Another line of thought is suggested by Greenwald and Stiglitz (2014, 2017), who have cautioned that the East Asian model of export-led manufacturing growth may not be that relevant for the late developing economies of, for example, sub-Saharan Africa. However, Stiglitz also notes that, in addition to the key role the East African model assigns to manufacturing, several other of its features remain very relevant for new industrial policy. First, as an export-led model, the East-Asian model does not face significant demand constraints from small domestic markets. Second, it addresses the FOREX problem of countries that might otherwise have been limited by that constraint. Third, it provides a convenient basis for learning-by-doing and the absorption of new technologies from abroad, which are critical elements for discovering and learning (see 7.2.2 above). Fourth, the East Asian model provides relatively easily taxable revenues and so helps to boost public spending capacity. Finally, being centred on a discrete number of enterprise units, it provides for a relatively natural system of accountability for those revenues, as compared to the problem of taxing a huge and dispersed set of agriculture-based businesses. A quick glance at this list of key factors suggests their relevance for the extractives-led development model.

On the other hand, there is the question: If not manufacturing, what can serve as the basis for the industrial policy endeavours of the later developers? Stiglitz’s answer is that any new industrial policy needs to adopt a multi-sector approach and, with respect to this, in most countries the agricultural sector also needs to play a bigger role. This would require that more policy attention is paid to formalizing land rights, to promoting more advanced technologies, to encouraging non-labour-saving innovations, and to supporting respective skills development and learning across the relevant constituencies. The service sector can also be a key growth sector, but will typically need a lot of support for skills development and the opening up and development of selective tradeable services. Both the agricultural and the service sectors, if better supported by industrial policy, can provide important complementary activities to those of extractive industries. In essence, a multi-sectoral approach needs to be mutually reinforcing and encourage economic activities around a buoyant extractives sector in which private operators are willing to invest. Contrary to the view that was commonly held in development circles until recently, there is no reason for the extractives sector to be sidelined and treated as an embarrassing irrelevance alongside calls to industrialize and diversify economies. Instead, host governments should think of the extractives sector as an integral part of a broad-based, multi-sector approach to industrial policy.

7.4.2 Much Theory, Less Practice

Much of the debate on new industrial policy appears to happen in the intellectual space of economists hypothesizing what countries ought to be doing. This (p.151) comes at the expense of paying less attention to what countries have actually been trying to do and what in the process they have, or have not, achieved.

An example of this is the intellectual debate centred on the arguments about whether countries should be complying with or defying their comparative advantages,15 which merits the question of what these arguments hold for the extractives-led development agenda. First, the argument of complying with comparative advantages would broadly point to the following recommendation: low-income countries endowed with extractive resources should continue to focus on this advantage and encourage investment in this typically export-focused sector. For example, in the case of sub-Saharan African countries, this would entail pursuing policies that attract those export-oriented, low-skill, labour-intensive industries that China and other emerging market economies are moving on from. The assumption would be that over time both types of foreign investments will somehow contribute to countries advancing their productive knowledge and technological capabilities.

Second, the argument for defying existing comparative advantages would suggest that countries should strive to acquire concrete new production experiences via learning-by-doing and cross-sector collaboration. In the context of the extractive sector, this argument would point towards acquiring productive knowledge and technological capabilities that are transferable across sectors, so that ancillary sectors with growth potential could gain a basis from which to launch. This is the argument for focusing on selective work packages associated with the development phase of extractive projects to support enterprise and skills development that can be capitalized beyond the sector (such as in relation to civil construction, infrastructure development, or general business services work).

Notably, both arguments are preoccupied with advising on the ‘right’ policy interventions, but this comes at the cost of paying insufficient attention to how positive institutional change would be brought about as result of such interventions. In addition, both arguments assume the continuation of open trade and cross-border investment.

7.4.3 Local Content as Industrial Policy

A topic that the extractives-led development agenda has well embraced is ‘local content’, seen as a means to build linkages between foreign investment in extractives projects and the local economy.16 But let’s face it: local content strategies and policies are industrial strategies and policies by a different name. (p.152) And, as there is no universally agreed definition, local content practices can vary widely across countries: for example, some governments focus narrowly on the procurement of goods and services from companies that are owned by nationals, while others consider not only local procurement but also local hiring, skills development, community-based enterprise development activities, or shared infrastructure development (IPIECA 2016). In recent years, many countries hosting extractive industries have put much effort into developing local content strategies, policies, laws, and regulations with the objective of retaining more value in the country and in local communities. At the same time, there is still relatively little research that gathers and investigates empirical evidence on what local content policies have actually delivered.

7.4.4 Secondary Impacts of International Environmental and Social Policies

Concerns over climate change and associated international, national, and local environmental policies are driving the green industrial policy agenda, which has culminated in the universal climate agreement reached at the Paris COP21 in November 2015. This development has prompted observers to consider the impacts on the extractives-led development agenda. This thinking has shaped new terms, such as ‘stranded assets’ and ‘unburnable carbon’, where the low-income producers of extractive resources are often assumed to be the takers of the consequences of green industrial policies. At the same time, the extractives-led development agenda is assuming that economic growth will continue to be energy- and material-intensive.

The impacts of green industrial policy vary across the energy and the minerals sector: the former is likely to see a greater shift towards renewables, while at the same time some transformational green economy technologies are reliant on metals and minerals (World Bank 2017). Furthermore, some of the critical green technology minerals are produced as by-products of other, more conventional minerals as well as through various forms of mining: these include not only industrial mining but also artisanal and small-scale mining, which generates a lot of employment but comes with a range of additional environmental and social challenges. In particular, stricter regulations on sourcing minerals from conflict-prone and high-risk areas that are complementing green industrial policies may mean that the mining sector will see the expansion of new forms of so-called urban and/or flexible mining: that is, the recovery and recycling of secondary materials. Finally, as and when the structural transformation associated with green industrial policy progresses and a more circular economy evolves, there is the influence of the financial sector choosing more carefully what types of primary and secondary extractive (p.153) resources activities it will invest in, including funding the implementation of a more circular economy.

7.5 Conclusions

There are at least three reasons why industrial policy is back on the agenda: the revision of the pro-poor development agenda of the 2000s; international climate policy pushing for a more sustainable and greener economic system; and disappointment with the social outcomes associated with economic liberalization and globalization. Yet, opinions on new industrial policy remain divided, ranging from evoking fears again over the risk of unproductive rent-seeking to populist calls for industrial policy as the panacea for all that might have gone wrong with neoliberal capitalism. Those in the middle of this wide spectrum maintain that investing in productive knowledge and technological capabilities is critical for economic and social development.

This chapter has sought to disentangle the debate on new industrial policy and how it relates to the resources-led development agenda, where the latter builds on the premise that the extractive industries can have a positive developmental impact provided that host governments pursue ‘appropriate policies’. The very suggestion that it is possible to transform and diversify an economy on the back of these industries draws attention to what is happening around the sector.

The chapter highlighted the challenge that its proponents hold different views on the role that new industrial policy should play. Picking up several themes that run across the ongoing debate, it drew the sobering conclusion that there simply is no consensus on new industrial policy. At best, it is at the philosophical level where a case can be made for the positive role of public authorities in providing institutions that reduce transaction costs. This left a rather incomplete picture of what new industrial policy could bring to the extractives-led development agenda. Looking forward, the chapter drew attention to four observations that re-emphasize some important points of connection between the new mainstream literature on industrial policy and the basic attributes of the extractive industries.

The first observation was that the evolving debate encourages new thinking on a positive role for extractive industries as part of a multi-sector approach to industrial policy. Second, a large part of the new industrial policy debate is focused on what countries ought to be doing and what the right policy interventions are that they should be pursuing. This has come at the expense of paying more attention to the subject of positive institutional change, underpinning the development of comparative advantages for the future.

(p.154) Third, increasingly popular local content strategies and policies are industrial strategies and policies by another name, but often with a particularly narrow focus and without tracking whether these strategies and policies have actually resulted in the positive institutional change that can sustain gains in productive knowledge and technologies over time.

Finally, the green industrial policy agenda has prompted observers to consider the impact of this agenda on the extractives-led development agenda. With the green industrial policy agenda focusing on the structural transformation of the largest and most industrialized countries and emerging market economies, low-income producers of extractive resources are cast in the role of passive takers of the consequences of these policies. Notably, the impacts vary across the energy and the minerals sector: the former is likely to see a greater shift towards renewables, while the latter, in addition to traditional mining, may see the strengthening of new forms of urban and flexible mining and a shift towards the circular economy concept.


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(1) Dietsche (2017b) provides a fuller version of this chapter, including a broader range of references on new industrial policy.

(2) Relevant here are resource property rights and associated sector legal regimes. On this subject, see also Daintith (2010), Dietsche (2017a), and Scott (2008).

(3) See Dietsche (2017a) for an introduction to some of the relevant literature and a discussion of the role that public authorities play in providing formal institutions.

(4) Specifically associated with such interventionist policies is the concept of ‘import substitution industrialization’ (ISI), which advocates that trade policy should aim to support domestic manufacturing, in order to reduce imports.

(5) See Congleton et al. (2008) for a review of research on rent-seeking.

(6) See the debate between two prominent East Asian economists, who hold opposing views on this (Lin and Chang 2009). This debate is summarized in Box 1 in Dietsche (2017b).

(7) See Thelen (2004) for a comparative analysis of the vocational and skills training systems in Germany, the United Kingdom, the United States, and Japan, and how these relate to the different structures of these countries’ economies.

(8) See, amongst others, Eichengreen (2007), Hall and Soskice (2001), Ostrom (2005), and Williamson (1985).

(9) See, amongst others, Chang (2007), Haggard (2004), Khan (2000), and Lin (2012). Some authors, such as Lange (2005), have traced the capabilities associated with such interventions to an institutional legacy of more direct colonial rule, as opposed to the indirect colonial rule exercised elsewhere.

(10) The history of Chile in these respects is discussed in some detail in Solimano and Guajardo (2017).

(11) See Prebisch (1950) for the Prebisch–Singer hypothesis.

(12) See also Auty (2001).

(13) See Roe and Round (2017 and Chapter 23, this volume) for a more in-depth examination of this subject.

(14) This observation does not mean that all proponents of industrial policy are set on reviving and encouraging manufacturing independently of the extractive industries. For example, Stiglitz (2015) recognizes that an economy based on natural resources can use those resources as a basis for diversification. He points to South Africa’s experience of moving from producing earth-moving equipment for the mining sector to producing automobiles.

(15) Elaborated in more detail in Dietsche (2017b) and Box 1 therein.

(16) Alternative terminology may refer to local procurement and local employment, or to local participation.