Learning to Industrialize Policy Learning and Policy Dialogue

1. Learning to Industrialize Policy Learning and Policy Dialogue Kenichi Ohno National Graduate Institute for Policy Studies (GRIPS) May 2013

2. The Middle Income Trap(More Generally, the Developmental Trap) • A developmental trap occurs when a country is stuck at an income level dictated by given resources and initial advantages (location, natural resources, big projects, aid, FDI, etc) and cannot rise beyond that level—only luck and no effort. • The level of income where the trap may occur depends on the amount of given advantages relative to population size. Low endowment  Poverty trap Moderate endowment  Middle income trap High endowment  High income • Liberalization, privatization and integration can take a country to a given income level, but rising toward higher income requires more active policy effort (“proactive industrial policy”).

3. How to Overcome A Middle Income Trap • Three policy capabilities must be acquired: (i) generation of sources of growth (ii) coping with new social problems created by fast growth (income gaps, urbanization, pollution, social change, etc.) (iii) macroeconomic control under global integration • Internal value creation by human capital is key. Policies and institutions that encourage—even force—skills, technology and knowledge must be established. • Historically, only a handful of non-Western latecomers could install such policies and institutions—Japan, Taiwan, Korea, Singapore. • Resource-rich countries are less likely to overcome the trap (curse of natural resources/Dutch disease). • In Asia, three governments are seriously worried about middle income traps (Malaysia, China & Vietnam), but for different reasons and at different development stages.

4. How Can Early Achievers Teach Industrialization to Latecomers? Policy learning • International best policy practices (and failures) must be collected and compared systematically. • Using them as references and building blocks, government must acquire general capability to create a policy most suitable for a particular country, time and sector. Policy dialogue • Candid, concrete and pragmatic discussion between developing country government and experts & officials from advanced economies, followed by concrete industrial projects to implement what was suggested. • Japan started policy dialogue in the 1980s (with Argentina). It is now one of Japan’s standard tools for knowledge cooperation. • Japan’s policy dialogue is different from Korea’s KSP or “policy discussions” by WB or IMF. It is more practical, open-ended and tailor-made, and less standardized or publicized.

5. What to Be Learned? We (Japan) can offer the following inputs to developing country governments: • East Asia’s development experience in general or on specific topics (citing from Japan or other EA countries) • Frank and practical comments on a national development plan or industrial master plans • Joint creation/revision of a concrete policy or strategy with Japanese help (intellectual, technical or financial). Through these, governments should improve: Policy content Policy procedure Policy organization Policy documentation

6. Japan’s Policy Dialogue with Developing Countries

7. Japan’s Industrial Policy Dialogue with Vietnam

8. Industrialization Strategy Initiative(ongoing Vietnam-Japan cooperation) • Purpose: creation of new industries in Vietnam through public-private partnership, Vietnam-Japan cooperation, selectivity & concentration, and concrete action plans. • Vietnam: DPM Hai, MPI Minister Vinh, related ministries. • Japan: METI, MoFA/Embassy, JICA, JETRO, business associations, Keidanren, Kankeiren, GRIPS, etc. • Agreed sectors: electronics, food processing, agricultural machine, environment & energy saving, shipbuilding, automobile • Monthly working group meetings to draft action plans by 2013:Q3, with implementation to follow. With DPM Hoang Trung Hai

9. Current Issues (2013) • Vietnam’s policy method is outdated; Japan often finds it hard to understand or persuade Vietnam’s leaders. • DPM does not have sufficient authority to control relevant ministries (MOF, MOIT, MPI, etc.) A new mechanism must be devised for stronger policy coordination. • Automobile is strongly proposed by Vietnam but Japan is reluctant; two long-standing problems must be solved: (i) small demand, (ii) unpredictable and inconsistent policy. • Japan wants to create a regular bilateral mechanism to discuss substance in industrial policy and cooperation. Monthly Working Group meeting

10. GRIPS-JICA Industrial Policy Dialogue with Ethiopia Industrial policy dialogue Preparation Phase 1 Phase 2 IPD conference July 2008 Official launch June 2009 Final sessionMay 2011 LaunchJan. 2012 New PMinaugurated Kaizen pilot project (30 firms) JICA’s industrial support projects Kaizen phase 2: creating national institution and experts Basic metal & engineering study Export promotion (With Germans) Note: Black squares indicate policy dialogue sessions in Addis Ababa with the prime minister, concerned ministers and state ministers, and officials and experts at operational levels. IPD stands for the Initiative for Policy Dialogue, policy oriented meetings on various topics hosted by J. Stiglitz of Columbia University.

11. At the Prime Minister’s Office Presenting JICA’s Kaizen Report to PM Meeting with Senior Economic Advisor to PM

12. High Level Forum (minister & state minister level) Meeting with Industry Minister At the Ministry of Finance, Economy and Development

13. Issues Discussed at High Level Forums (Phase 1)

15. Current Issues (Phase 2, 2012-) Integrated export promotion • Past review and reform advice • Joint creation of champion products for Japanese market • Inviting Malaysian & Thai officials to share experience Strategic FDI policy • Policy advice and introducing JICA assistance menu • Critical review of new FDI law and one-stop service • Sending high-level mission to Japan (TICAD V) • Sending technical mission to Malaysia for further learning Upgrading planning method (requested by PM Hailemariam) • Interim review of GTP (5-year plan) • Reforming drafting procedure and organization for the next 5-year plan (planning commission & think tank)

16. Standard Policy Making Procedure Top leader 5. A secretariat with sufficient authority andresponsibility to coordinate the entire process 1. Vision 2. Consensus building 3. Documentation Brainstorming Set broad goals & direction Drafting work Comments & revisions Finalize & approve Studies & surveys (Drafting may be outsourced) Stakeholder consultation 4. Substantive stakeholder participation Ministries ＆agencies Regions & localities Academics & consultants Businesses

17. Thailand: Automotive Industry Master Plan 2007-2011 The whole process (1 year) is managed by Thailand Automotive Institute (TAI)  Brainstorming; agreeing on goals & directions Set up formal committee for drafting M/P Subcommittees study identified issues Human resource “CEO Forum” FDI & local firms Exporters MoI, MoST, MoEdu Professors’ team (Chulalornkorn Univ) M/P Steering Committee Organized by MOI Businesses Officials Experts M/P Drafting By TAI staff Productivity Marketing Engineering Comment & dissemination Investment & linkage Business Business Gov’t Experts Gov’t Experts Implementation (Informal) (Formal)

18. Vietnam: Traditional Policy Drafting Process Order Submit Prime Minister Minister Drafting Team Inter-ministerial review Submit Review for approval Data MPI & otherMinistries Internal review MPI & otherMinistries Government Technical assistance(sometimes) Contact Ministry when necessary Interviews, symposiums (sometimes) Appeal letter to Prime Minister when problems arise International experts Business Community No permanent channel for continuous policy dialogue(case-by-case, temporary, ad hoc)

19. Alternative Policy Organizations Who will draft and execute policies, and how? The following approaches are not mutually exclusive; some countries use more than one. • Technocrat group directly under PM or President • National Councils or Committees • Super-ministry • Sector/issue-specific institute acting as a hub • Strong leader without institutionalization

20. Technocrat Group Approach - Elite technocrat group with full planning authority given by top leader - Members are selected officials, business leaders & experts with good education & experience Prime Minister Direction, full authority for policy making Faithful execution and reporting Technocrat Group (Policy Maker) BusinessesAcademics Experts Policy, guidance and monitoring Faithful execution and reporting Korea – Econ. Planning Board Malaysia – Econ. Planning Unit Thailand – NESDB Taiwan – Kuomintang Elites Indonesia – “Berkeley Mafia” Chile – “Chicago Boys” Ministries (Policy Implementers)

21. National Council/Committee Approach PM or President Typical configuration: Chair, give mandate National Council or Committee BusinessesAcademicsExperts Plan Support working groups or task forcesfor specific issues and sectors Ministries and agencies Implement

22. Singapore Now: New Productivity Drive Economic Strategies Committee: Report Chaired by Deputy PM Members from ministries/agencies, business, unions Joint secretariat: MTI, MOM (ministers) National Productivity and Continuing Education Council (NPCEC) Review & submit Oversight Review & approval Led by MTI, MOM (PS level) Inter-agency coordination Working Committee for Productivity and Continuing Education (WCPCE) Sectoral “Productivity Roadmap” for the next 10 years Financial Incentives National Productivity Fund Productivity & Innovation Credit Skills Dvt. Fund Lifelong Learning E.F. Scrutiny Draft & propose Sector working groups (12 priority sectors) Construction BCA Unions Industry Electronics EDB Unions Industry Precision Eng. EDB Unions Industry Transport Eng. EDB Unions Industry General Mfg. SPRING Unions Industry F & B SPRING Unions Industry Retails SPRING Unions Industry Cross-cutting issues Low wage workers Research & benchmarking Infocomm and logistics

23. Organizational Structure of Japan’s Ministry of International Trade and Industry, 1960s

24. My Proposal for Vietnamese Government Prime Minister Direct, give mandate Plan National Competitiveness Council Chaired by PM (or DPM)Secretariat: Government OfficeMembers: Heads of concerned ministries Commission studies, reports Support, report, draft Working groups for specific issues or sectors SMEs Supporting industries Clusters TVET Higher Educ Secretariat:MPI Ministries, businesses, experts Secretariat:MOIT Ministries, businesses, experts Secretariat:MOIT Ministries, businesses, experts Secretariat:MOLISA Ministries, businesses, experts Secretariat:MOET Ministries, businesses, experts Implement Ministries and agencies

25. Frequently Asked Questions 1. Are Asian experiences useful? Our country is unique and different.  Every country says “we are unique.” International cases are studied not for copying but as raw materials to build general capability to create your own policy. Without knowing concrete cases, policy becomes amateurish. 2. Is industrial policy possible today? The world is globalized and private flows are so huge.  Certainly possible. WTO and FTAs ban only a few policy measures (tariffs, NTBs, foreign discrimination, etc.) while there are so many policies consistent with current global rules that are not even known or tried. Learn them, and practice them well.

26. FAQ cont. 3. Government should not pick winners because it makes wrong choices or it is captured by political interests.  That’s the standard Washington argument. These are serious risks but can be avoided by proper policy learning. Many E. Asian countries avoided them. Moreover, sectoral promotion is already practiced globally under different names: PSD, HRD, TVET, science & technology, etc. 4. Should industrial policy conform to or defy comparative advantage? (Lin-Chang debate, 2009)  Following a country’s obvious advantage vs. jumping to a new possibility—this is only a theoretical debate. In reality, distinction is not clear (Nokia? Korean steel?) The important thing is whether government knows how to support private firms and promote an industry--whatever the chosen industry may be.