Making choices: a framework for industrial policy

Deciding how to configure relationships with the global economy is a difficult task for policymakers, given the many choices and pressures.  The essence of different policy regimes can be brought out by distinguishing between low and high support for industry on the one hand, and between low and high challenge levels on the other. A framework which uses information on marketing and technology gaps to identify ways forward will provide an effective but less complex basis for selecting policy options.

Most developing countries have undergone a process of trade liberalisation. The choice is not whether they should integrate into the global economy, but how they should manage the process and help domestic industry compete. Unsurprisingly, there are many viewpoints and interests involved in the debate. A paper in Development Policy Review suggests a way of framing discussions on what kind of industrial policies should be adopted.

Industrial policy can either challenge or support entrepreneurs. Enterprises can be supported by giving them access to resources or by protecting them from foreign competition, as in many developing countries from the 1950s onwards. Enterprises are challenged when they have to meet targets to qualify for resources, or by exposure to foreign competition. The Washington Consensus from the 1980s onwards prioritised challenge and neglected support.  Finding the right combination is the key to effective policy.

The classification of policies by the level of support and challenge provided helps policymakers visualise historical trends and predict what might be appropriate in a particular context. Governments are increasingly interested in strategies that combine challenge and support. But what form this combination should take depends on whether local enterprises face marketing gaps or technology gaps in trying to enter global markets:

• Where access to both technology and markets is a problem for local firms, such as in the automobile or micro-chip industry, foreign direct investment is the preferred strategy.
• If marketing is the issue, for example in the sports shoe industry where branding is key, enterprises should try to become part of chains coordinated by global buyers.
• Where the challenge is technology, as in industries making specialised machinery, acquiring technology through licensing or entering into joint ventures is recommended.
• If both technology and marketing gaps are narrow, local firms can export own-designed completed products directly, as in the furniture or garment industry.

Considering the challenge/support provided and the marketing/technology gaps involved allows for a framing of discussions between policymakers, entrepreneurs, advisers and researchers. While such a framework aims to reduce complexity, the author warns against over-simplification:

• If a way forward is identified, it may not be appropriate for an entire sector: Egyptian software enterprises might export their own designs to other Arab countries successfully, but may have to adapt to customer preferences for Western markets.
• Over time, marketing and technology gaps can change: some Taiwanese computer manufacturers that started producing to the specifications of US customers can now offer their own brands.

The framework provides a starting position for identifying the most promising options for the present.