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   Industrial Policy for Africa East Asian
Lessons and TheirApplicability

• Ha-Joon ChangFaculty of Economics, University of
  Cambridgehjc1001_at_cam.ac.uk

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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
• Hirschmans linkages theory
• Arrows 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

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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 RD funding
• between the 1950s and the 1980s, the US federal
  government financed anywhere between 47 and 65
  of national RD spending, as against around 20
  in Japan and Korea and around 30 in Europe).

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Kicking away the ladder- picture

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Industrial Policy beyond East Asia II

• In the 19th and the early 20th centuries, all of
  todays 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 worlds highest
  levels of tariff protection during their
  respective catch-up periods.

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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
18202 18752 1913 1925 1931 1950
Austria3 R 15-20 18 16 24 18
Belgium4 6-8 9-10 9 15 14 11
Canada5 5 15 n.a. 23 28 17
Denmark 25-35 15-20 14 10 n.a. 3
France R 12-15 20 21 30 18
Germany6 8-12 4-6 13 20 21 26
Italy n.a. 8-10 18 22 46 25
Japan7 R 5 30 n.a. n.a. n.a.
Netherlands4 6-8 3-5 4 6 n.a. 11
Russia R 15-20 84 R R R
Spain R 15-20 41 41 63 n.a.
Sweden R 3-5 20 16 21 9
Switzerland 8-12 4-6 9 14 19 n.a.
United Kingdom 45-55 0 0 5 n.a. 23
United States 35-45 40-50 44 37 48 14
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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).

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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
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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.
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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
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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
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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

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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

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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)

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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 todays
  rich countries, ranging from 18th Britain through
  to 19th century US and 20th Korea.

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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.

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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
  solutions to their political economy problems and
  went on to implement policies, rather than
  sitting around bemoaning the imperfect nature of
  their political system.

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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

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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.

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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, RD,
  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, RD, etc.
  allowed.

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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.