Industrial Policy and Developing Countries

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Industrial Policy and Developing Countries

• Trade Analysis Branch
• DITC/UNCTAD

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Industrial Policy and WTO

• What is Industrial Policy?
• Objectives, justification, instruments
• How has it changed?
• Domestic and external factors
• How will it change?

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What is Industrial Policy? Objectives and scope
multiple objectives

• Alter industrial structure
• long run productivity improvement (WB)
• technological capacity
• promote exports
• strategic industries
• employment and distribution
• national pride and prestige
• Importance of clear objective

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What is industrial Policy?Justification to alter
industrial structure

• 1. Protect infant industry tariff or subsidy on
  output because of dynamic externality
• Qualifications and caveats
• cost reduction over time
• link to performancephase out
• appropriateness of instrument not output based,
  but on externality
• economy wide effect ERP

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What is industrial Policy?Justification to alter
industrial structure

• 2. Second best argument presence of distortion
• why not first best
• second best requires perfect knowledge
• 3. Technology development
• should focus on technology development and
  policies to encourage FDI

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What is Industrial Policy? Wide range of
instruments

• External market interventions
• Import protection tariffs, NTB, local content
• export promotion subsidies, EPZ,
• Product market interventions
• competition policy and domestic market entry
  regulations
• Factor market interventions
• FDI, financial sector, labor

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How has industrial policy changed? Point 1 -
change in development strategy

• Changes in development strategy
• limitations and failure of industrial policy
• protected industry never become efficient
• lack of transparency in allocation
• not based on performance or clear exit
• import subst. to export oriented
• compete for FDI pressure for market access

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How has industrial policy changed? Change in
development strategy

• Changes in development strategy liberalization
  trend
• import subst. to export oriented limits of
  market size, adverse shocks
• compete for FDI pressure for market access
• Shift focus to complementary policies RD,
  infrastructure, strategic industries, industrial
  clusters, HRD

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How has industrial policy changed? Point 1 -
change in development strategy

• South East Asia pattern differ from Northeast
  Asia more open and less activist industrial
  policy
• Focus on complementary policies infrastructure,
  RD, strategic industries, industrial clusters

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How has industrial policy changed? Change in
development strategy

• Asian crisis
• collapse in demand
• IMF sanctioned programs
• Technological change
• mass production less important
• shorter product life cycles
• ability to divide up process of production
• marketing, transportation, distribution

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How has industrial policy changed?Point 2 -
external factors

• GATT/WTO
• reduce tariff and non tariff meas. average
  decline, but remain in sensitive sectors and
  increase other ntm (anti dumping)
• eliminate export subsidy, use of domestic vs
  imported inputs
• TRIMS local content, trade balancing
• better protection IPR
• open up services sector

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How has industrial policy changed?Multilateral
rules and industrial policy

• Import protection tariffs, NTB, discipline on
  antidumping, safeguards
• Export promotionsubsidies prohibit export and
  input subs.
• TRIMS
• TRIPS
• GATS
• Infant industry
• SD

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How has industrial policy changed?Point 2 -
external factors

• Asian crisis
• collapse in demand
• IMF sanctioned programs
• Technological change
• mass production less important
• shorter product life cycles
• ability to divide up process of production
• marketing, transportation, distribution

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Case study ASEAN auto sector

• Most had higher tariffs or bans on import of
  built up compared with components and local
  content program
• Desire to produce everything in the country
• Effects
• high effective protection
• increase final cost, inefficient
• uneconomic output levels
• firms no incentive to acquire knowledge increase
  output only

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Case study ASEAN auto
sector

• Shift in strategy Initial moves 1990s reducing
  tariffs, allow CBU imports, less reliant on local
  content, and change NTB to tariff.
  Liberalization strategy and response to WTO/AFTA
• Thailand tariffs 180-300 to 42-85, incentive for
  export orientation, cbu imp
• Philippines reduce entry barriers, phase out
  local content, promote parts

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Case study ASEAN auto
sector

• Indonesia reduce tariffs and entry barriers,
  phase out local content, imp. CBU -- (set back
  national car policy)
• Except Malaysia extension of local content for
  two years, two year delay to join AFTA, increase
  tariffs, launch third national car.

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Case study ASEAN auto
sector

• Since mid 1990s major changes changing nature of
  industry from national to global
• global change - over capacity and reduced demand
  led to consolidation (MA)
• Technology/e-commerce global sourcing of
  materials and on line bidding, just in time
  inventory, facilitate differentiated product and
  services

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Case study ASEAN auto
sector

• Global and regional car centralize RD and
  reduce cost through greater standardization, with
  flexibility to taylor made models for markets.
  Different models share same major parts.
  Outsourcing of parts.
• Challenge overcome weakness in technology and
  human capacity to take part in the globalized
  industry

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How will industrial policy change?Point 1--
changing conditions

• Paradigm shift activist and specific industrial
  policy to neutral policies
• infrastructure
• importance of services sector (market access,
  right of establishment, movement people) and also
  privatization and regulatory policies.
• RD, human capital dev.
• policy environment
• competition policy

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How will industrial policy change?Point 2--
future rules

• Multilateral rules discipline use of government
  intervention
• discipline trade related instruments (subsidies
  on regional development, RD and environment
  allowed)
• national treatment
• special treatment developing countries same
  rule, longer transition

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How has industrial policy changed?Implications
due to multilateral rules

• Rules are based on effect on trade
• Ownership neutral
• Generic not just specific policy instruments
• SD mainly longer transition or less stringent
  discipline, not exemption

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Conclusions industrial policy for developing
countries in 21st century

• Paradigm shift activist and specific industrial
  policy to neutral policies
• infrastructure importance of services sector
• RD, HRD development
• policy environment stable macro, certainty etc
• competition policy

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Conclusions industrial policy for developing
countries in 21st century

• Multilateral rules continue discipline use of
  government intervention to promote particular
  industries/ companies
• discipline trade related instruments
• national treatment
• generic instruments
• SD for LDCs