Industrial Policy for Africa: East Asian Lessons and Their Applicability

1. Industrial Policy for Africa: East Asian Lessons and TheirApplicability Ha-Joon ChangFaculty of Economics, University of Cambridgehjc1001@cam.ac.uk

2. Theoretical justifications for policies increasing productive capabilities through public intervention • the infant industry argument • various Neoclassical theories of market failure, especially those related to knowledge generation and the capital market • the Big Push argument • Hirschman’s linkages theory • Arrow’s theory of learning-by-doing • neo-Schumpeterian arguments on National Systems of Innovation • even the Austrian theory of tacit knowledge may be re-formulated to justify industrial policy, especially in relation to developing countries

3. Industrial Policy beyond East Asia I • Successful industrial policy experiences in the late 20th century are not confined to East Asia • national industrial policies in France, Finland, Norway, and Austria; • regional industrial policies in Italy and Germany; • industrial policy under another name in the US through government R&D funding • between the 1950s and the 1980s, the US federal government financed anywhere between 47% and 65% of national R&D spending, as against around 20% in Japan and Korea and around 30% in Europe).

4. Kicking away the ladder- picture

6. Industrial Policy beyond East Asia II • In the 19th and the early 20th centuries, all of today’s rich countries, except for the Netherlands pre-WWI Switzerland, practised protectionism and other forms of industrial policy (subsidies, state ownership, regulation on FDI). • Interestingly, Britain and the US – the supposed homes of free trade – had the world’s highest levels of tariff protection during their respective catch-up periods.

7. Table 1. Average Tariff Rates on Manufactured Products for Selected Developed Countries in Their Early Stages of Development (weighted average; in percentages of value)1 Average Tariff1 Rates

8. Is Cold Climate Better? “Those who live in a cold climate and in Europe are full of spirit, but wanting in intelligence and skill; and therefore they retain comparative freedom, but have no political organization, and are incapable of ruling over others. Whereas the natives of Asia are intelligent and inventive, but they are wanting in spirit, and therefore they are always in a state of subjugation and slavery. But the Hellenic race, which is situated between them, is likewise intermediate in character, being high-spirited and also intelligent. Hence it continues free, and is the best governed of any nation, and if it could be formed into one state, would be able to rule the world.” (Aristotle, Politics, Book VII, chapter 7).

9. “Undoubtedly, many factors played a role, but … culture had to be a large part of the explanation. South Koreans valued thrift, investment, hard work, education, organisation, and discipline. Ghanaians had different values. In short, cultures count.”Samuel Huntington on culture and development

10. The Germans are a “plodding, easily contented people … endowed neither with great acuteness of perception nor quickness of feeling … It is long before [a German] can be brought to comprehend the bearings of what is new to him, and it is difficult to rouse him to ardour in its pursuit.”John Russell, an English traveller, on the Germans in 1828.

11. “My impression as to your cheap labour was soon disillusioned when I saw your people at work. No doubt they are lowly paid, but the return is equally so; to see your men at work made me feel that you are a very satisfied easy-going race who reckon time is no object. When I spoke to some managers they informed me that it was impossible to change the habits of national heritage.” An Australian engineer after visiting Japan in 1915

12. The Koreans are “12 millions of dirty, degraded, sullen, lazy and religionless savages who slouch about in dirty white garments of the most inept kind and who live in filthy mud huts”. Beatrice Webb on the Japanese and the Koreans during her 1911-12 tour of East Asia

13. Natural Resources and Industrial Policy I • Most African countries are actually not that well endowed with natural resources. • In fact, fewer than a dozen African countries have any significant mineral deposits. • Only South Africa and the DRC are exceptionally well endowed with more than one mineral resources. • Most African countries may have low population density, but only a handful of them are exceptionally well-endowed with arable land. • Niger, Liberia, DRC, Chad, Senegal, Sierra Leone, and the Central African Republic

14. Natural Resources and Industrial Policy II No country, not even the US, Canada, and Australia, has been blessed by nature to such an extent that they can become rich only by doing things that come ‘naturally’. Moreover, it is not even as if all ‘natural’ products are really natural. Many of them are products of colonialism. = For example, many African countries export cocoa and tea, which were brought from, respectively, Central America and China to Africa by the colonisers

15. Natural Resources and Industrial Policy III When it comes to high-productivity activities whose existence determines whether a country is economically developed or not, countries become good at something only because they deliberately decide to become so. • Why should the Japanese should be good at building cars (Toyota) and the Finns at making mobile phones (Nokia)? • Why should Korea be good at making steel, when the it does not even produce any relevant raw materials - iron ore or coking coal? (POSCO)

16. Natural Resources and Industrial Policy IV Now, these high-productivity activities do not develop naturally in developing countries, if you left things to the market, because you already have superior competitors in more economically developed countries. - This is the logic of ‘infant industry promotion’, which was behind the successful industrial policy experiences of most of today’s rich countries, ranging from 18th Britain through to 19th century US and 20th Korea.

17. Political Economy Questions I • Successful industrial policy requires right “political” conditions – the commitment of the leadership to economic development, the coherence of the state machinery, and the ability of the state to discipline the recipients of its supports. • When considering the political realities of many African countries, it seems difficult to imagine how industrial policy, even if it were “correct”, can be implemented well in those countries.

18. Political Economy Questions II • But we should not let the best be the enemy of the good. • In the real world, successful countries are the ones that have managed to find “good enough” solutionsto their political economy problems and went on to implement policies, rather than sitting around bemoaning the imperfect nature of their political system.

19. Bureaucratic Capabilities I • No basis for the assumption that industrial policy is more difficult than other policies. • Industrial policy does not require sophisticated knowledge of economics, as often believed. • The industrial policy-makers of East Asia were not economists (lawyers in Japan and Korea, engineers in Taiwan and China today), and what little economics they knew was usually the “wrong” kind – Marx, the German Historical School, Schumpeter. • High-quality bureaucracies are not as impossible to build as people think. • France, Korea and Taiwan in the post-WWII period

20. Bureaucratic Capabilities II • There is also “learning-by-doing” in policy. • Without trying out “difficult” policies, capabilities cannot be improved. • The fact that something is “difficult” cannot be a reason not to recommend it. • After all, developing countries are routinely told to adopt “best practice” or “global standard” institutions used by the richest countries, when many of them clearly do not have the capabilities to effectively run such institutions.

21. Changes in the Rules of the Global Economy I • WTO rules not as restrictive as believed. • Tariffs are only ‘bound’, rather than banned, and the poorer countries have found only a limited number of tariffs • Infant industry protection allowed (although only up to 8 years) • Emergency tariffs allowed (sectoral surge, overall BOP problems) • Subsidies for environment, agriculture, R&D, regional policies, and (for LDCs, which include many African countries) export subsidies allowed • TRIPS constraining but not for older technologies that African countries need • TRIMS constraining but performance requirements for local labour, technology transfer, R&D, etc. allowed.

22. Changes in the Rules of the Global Economy II • Having said that, there do exist bigger constraints, especially in the case of the poorer countries, including many in Africa, in the forms of aid/loan conditionalities and bilateral/regional trade/investment agreements. • However, all these rules are ‘man-made’ and can be changed if deemed necessary.