Governance and institutional design of industrial policy

© 2013 Deutsches Institut für
Tilman Altenburg
Governance and institutional design of
industrial policy
OECD / European Commission Workshop:
„Competitiveness and New Industrial Policy“
Paris, 19 September, 2013

© 2013 Deutsches Institut für 2
1. Industrial policy: What are the remaining controversies?
2. Governance and institutional design
3. Some lessons for latecomer development
4. Industrial policy challenges derived from a „green“
European agenda
5. Conclusions

1.
Industrial policy:
What are the remaining
controversies?

Starting point: Market failure justifies industrial policy …
– Coordination failure
– Dynamic scale economies & knowlege spillovers
– Information failure
– Environmental externalities
But also risks of government failure …
– Information: „Governments not better informed than markets“
– Rent-seeking: Self-interested governments, bureaucracies
and industries
Question is not whether IP, but what institutional design in a
particular context.
Industrial policy: Remaining controversies

Remaining dissent:
 Primacy of politics (transform structure of economies on the
basis of societal consensus) or economics (achieve Pareto
optimality)?
 Right balance between doing too little and intervening too
much
 Favouring sectors? Regions? Firm sizes?
 „Latent comparative advantage“ (Lin) & short-term subsidies
for ‚searchers‘ (Hausmann/Rodrik) widely accepted. But are
long-term interventions justified to develop new activities with
potential future knowledge spillovers? (defying comparative
advantages, addressing systemic failures)

Level of state interference in markets
Strict non-
intervention
Market-enhancing
policies
Non-targeted supply-side policies Targeted supply-side policies
Privatisation of
public
enterprises,
Reduction and
equalisation of
remaining
trade barriers
Labor market
deregulation
Simplification
of firm entry &
exit
Anti-trust policies
Provision of
business
information
systems
Demand-side
subsidies for the
development of
service markets
(e.g. vouchers)
Trouble-shooting
for investors
General export promotion
Incentives for R&D, innovation
Entrepreneurship development
Promotion of resource-efficiency
Promotion of particular activities or
technologies (e.g. leather industry;
solar energy), clusters or value chains;
dedicated labs, skills development
centres
Experimental
design, perfor-
mance-based,
private service
providers, com-
petitive bidding
Top-down
selection;
services
delivered
by public
providers
Experimental
design, perfor-
mance-based,
private service
providers, com-
petitive bidding
Top-down
selection;
services
delivered by
public
providers
Source: own
Not whether IP or not ... But a continuum of potential interventions

2.
Governance and
institutional design

Three governance capabilities crucial:
1. Strategic capability
2. Political capability (to create or remove protection when
needed while avoiding political capture)
3. Capability to deliver services effectively
Governance and institutional design

(1) Strategic capability
Vision matters ! Need to identify viable „corridors“ for
inclusive and sustainable growth (specific technologies, value
chain options ..)
• building on existing and gradually extending comparative
advantages
• identifying the right pace for reform: providing the
protection needed while allowing for technological learning

– Tools to develop visions/ viable corridors:
• Velasco/Hausmann/Rodrik analysis, „most binding constraints“
• Lin analyis of „latent comparative advantages“ …
• Value chain /subsector analysis
• Technology foresight
• Encourage search for new business models, diversity
• Private sector dialogue …
– Lead agency important !!!
– Ensure coherence of micro, meso, and macro policies

(2) Political capability
…to build societal consensus on a „national project of
productive transformation“
… to create / remove protection when needed while avoiding
political capture
– Collaborate closely with firms => good understanding
of industries, market options & appropriate support
– … without being captured by interest groups
(„embedded autonomy“)
• Tenders,
• Build industry groups including multiple interest groups
• Strong checks and balances !

(3) Implementation capability
… to translate strategies into efficient and effective action.
– Select appropriate forms of governance „between markets
and hierarchies“
– Use market-based services whenever possible (BDS)
– Make incentive systems of public service providers
business-like and customer-oriented
– Encourage competition among service providers
– Separate policy formulation, funding, implementation, M&E
– Clearly define timelines and exit options

(3) Implementation capability
– Make co-financing by beneficiaries compulsory …
– Feed evaluation results back into next round of planning
In sum: organise IP as an experimental and systematic
learning process !!!

3.
Some lessons for latecomer
development
Lessons for latecomer development

Key challenges and how to cope
1. Overcome fragmentation of production systems
2. Upgrading in Global Value Chains
3. Exploit new channels for technological learning

(1) Fragmented production systems
– Few links between modern large-scale enterprises and micro/SMEs
– FDI delinked from national business community
– Sometimes powerful SOE /industry groups with special political
connections
SOE
MSME
FDI
Larger
national
firms

Highly uneven access to policy
… likely to produce anti-poor outcomes
Political
decision-
makers
Medium &
large firms
Business
Associations
SOE, MNE,
politically
connected
firms
MSME

 Integration of „fragments“ rarely recognised in strategies
 Separation of „industrial policy“ from „SME policy“
 … may lead to inefficient resource allocation => lower
productivity
 … deepens fragmentation, reduces synergies & learning
opportunities => lower productivity
 Technology transfer & linkage programmes !!!

(2) Upgrading in Global Value Chains
• Integration in GVC provides opportunities.
• Usually continuum of ugrading options:

• … but upgrading is no automatism
• Strategic attraction of „developmental firms“
• Nudging lead firms and supporting suppliers: Linkage
policies (Singapore, Penang, Ireland)
• Supporting meso-institutions
• „Walk on two legs“: domestic and global markets
offer complementary learning opportunities

• Assess pros and cons from a dynamic perspective
• E.g. retail liberalization:
Pro:
• additional investment
• higher productivity
• better quality, more diverse
products
• Less loss in supply chain
Con:
• Concentration in retailing,
crowding out of small
stores
• Concentraton in supply
chain, crowding out of
small producers
=> Sequencing, according to initial conditions and
learning rate

(3) New forms of technological learning
• Recently, new forms of technology appropriation
– Attract & exploit R&D outsourcing
– Return migration
– Mergers & acquisistions

4.
Challenges derived from a
„green“ European agenda

 EU industrial development increasingly driven by
environmental (low carbon) concerns
 Even if neighbouring regions (e.g. Western Balkans,
Turkey) may have other immediate priorities,
accession processes & value chain partnerships
with Europe will bring this agenda in.
 Green Industrial Policy is different from ‘business as
usual’ industrial policy, because of four challenges:
25
Challenges derived from green EU agenda

1. Mixed objectives
=> balance economic and environmental targets
2. Unprecedented urgency of low carbon transformation
=> rapid replacement of carbon-intensive technologies
3. Additional and more severe market failure
=> environmental externalities plus coordination failures
in managing systemic changes plus capital market failures
Each one calls for specific policy responses
Green transformation requires urgent, radical and
systemic structural change in the economies

Competiti
ve-ness/
jobs
Local air
pollution
Energy security
Mitigation
(1) Mixed objectives can have
win-wins and trade-offs
Country A
Country B

 Explicit discussion of synergies and trade-offs
 Agreement on priorities
 Rethinking growth model; consumption patterns; accounting
practices
 Primacy of politics, not markets

(2) Urgency, need to accelerate transformation: No time to
wait for the market!
=> Much stronger role for governments than in
‚business as usual‘ IIP:
1. Proactively disrupt less sustainable incumbent
technologies
2. Accelerate deployment of sustainable alternatives

(3) Today’s markets fail to provide the incentives for radical,
systemic and fast transformation:
– The obvious: environmental externalities
– ... but other market failures also much more severe when
radical systemic changes are needed: coordination /
information, capital market failure

Environmental externalities: Cap and trade systems,
charges and taxes important:
– tax bad things (environmental degradation) and allow to
reduce e.g. statutory pension contributions (=> lower labor
costs, more employment)
– Mostly neutral, market drives choice of technology
 ... but as prone to rent-seeking as other policies:
allocation of quota, prices, charges subject to lobbying ...
 ... and insufficient to overcome all market failures (short-
term behaviour, non-appropriability issues ...)
31

Coordination failure
Systemic change presupposes massive simultaneous
investments. (E.g. electromobility: battery technology
R&D, charging infrastructure, smart grids, new standards)
Impossible without huge coordination effort by
governments

6
4
2
0
-2
-4
2005 2010 2015 2020 2025 2030 2035
Differential costs of electricity: Renewable/fossil in Germany
Differentialcosts,billionEUR/aCapital market failure
… mobilise enormous upfront investments … against
environmental externalities, uncertainty, non-appropriability …

„Business-as-usual“ IP
 economic objectives
 incremental development of latent
comparative advantage
 supports innovation, leaves diffusion
to markets
 takes demand as given
 mainly builds on existing markets
 mainly lets market select
technologies …
34
Green IP
 complex system of objectives
 partly radical path disruption
 also subsidizes technology
diffusion
 tries to shape demand
 creates markets for
environmental goods
 pushes for green solutions
needed in future …
Don t underestimate risks – but not doing enough is
the largest one!

5.
Conclusions

Conclusions
 All countries pursue Industrial Policy to shape structural
change in desirable ways
 There are risks of misallocation and political capture
 Question not why but how:
 Design principles: Organise as a learning process !!
 Strategic capability/ vision matters: National project of
transformation !
 Industrial latecomers face specific challenges => cannot
simply „copy“ strategies
 The green agenda will increasinly define rules of the game,
even for latecomers … and it requires different approaches
36

Thank you for your attention !
tilman.altenburg@die-gdi.de

Governance and institutional design of industrial policy

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