Yves here. Jomo describes the hypocrisy of advanced economies (with Western-dominated international institutions as amplifiers and enforcers) who opposed emerging nations engaging in industrial policy, particularly using tariffs to protect priority industries until they were able to compete internationally. Suddenly all this posturing has gone into reverse as the one-time colonial powers and their fellow-travelers have decided that Russia and China are such serious threats that a big arms buildup is necessary. Of course, what is unsaid is that they pursued a regime change project against Russia, with Ukraine as its blunt instrument. That initiative has massively backfired, resulting in supposedly second-tier Russia draining Western economies of weapons stocks, even as Russia has also been greatly increasing its military output as well as quickly improving key systems, such as drones and signal jamming.
I have one quibble with Jomo’s piece. He depicts the West as not engaging in industrial policy. At lest for the US, that is not the case. The US has industrial policy by default, with certain sectors benefitting from large tax breaks and subsidies: real estate, drug makers and health care, higher education, weapons manufacturers, and financial firms.
Another issue is whether these advanced economies will perform competently when executing supposedly official industrial policy. The performance of our arms contractors, who are great at profiteering by making fussy, breakage-prone systems that don’t perform all that well in combat, say we face major implementation hurdles even if these plans get off the ground.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website
Developing countries wanting to pursue industrial policy were severely reprimanded by advocates of the ‘neoliberal’ Washington Consensus. Now, it is being deployed as a weapon in the new Cold War.
Industrial Policy vs Colonialism
Industrial policy is often seen as pioneered by Friedrich List. But List was inspired by George Washington’s first Treasury Secretary, Alexander Hamilton. He advocated promoting manufacturing as the Industrial Revolution was beginning in England.
For List, post-colonial national development required tariffs. Despite a title deceptively similar to his earlier Principles of the Natural Economy, List’s Principles of the National Economy was quite different, clearly inspired by Hamilton.
The Meiji Restoration started in 1868, after a quarter millennium of Tokugawa shogunate military rule. Meiji emperor rule was no mere palace coup but involved industrial policy to catch up with the already industrialising West.
Meanwhile, public intellectuals like Dadabhai Naoroji and Sayyid Jamaluddin al-Afghani rejected Western imperialism. They criticised how parts of the global South were being transformed – and ruined – by Western imperialism.
Half a century later, Harvard’s Josef Schumpeter rejected the idea that capitalism had become imperialistic. The Austrian economist insisted imperialism was a pre-capitalist atavism that capitalism’s ascendance would wipe out.
Weaponising Industrial Policy
Today’s geopolitics has seen a renewed Western interest in industrial policy as a weapon in the new Cold War. US President Joe Biden’s National Security Adviser, Jake Sullivan, is widely credited with articulating its use as an economic weapon.
This contrasts significantly with longstanding interest in industrial policy in the global South over several decades. For many, industrial policy has long been associated with post-colonial development efforts.
Meanwhile, strong stagnation tendencies in the West after the 2008 global financial crisis underscored the failure of purported neoliberalism. Advocacy of transformative, including green industrial policies by Mariana Mazzucato and others in Europe, was well received by desperate governments keen to resume growth.
Developmental, Industrial Policy
However, in developing countries, there has long been interest in developmental industrial policy. Neoliberal economists and the many influential financial institutions they control have long frowned upon this.
Alfred Marshall, Petrus Johannes Verdoorn, Nicholas Kaldor and others urged Europe to industrialise. Selective industrial policy has been even more controversial, with the government favouring some manufacturing activities over others, e.g., due to increasing returns to scale.
Typically facing resource, including fiscal constraints, developing countries have had little choice but to be selective. However, with such powers associated with governments, there was understandable concern about the potential for abuse, arbitrariness and error.
Instead, the market was supposed to decide in the best interests of society without recognising its own inherent biases and ‘failures’, especially in highly unequal post-colonial societies. Neoliberal economists were quick to caricature industrial policy with dismissive metaphors (e.g., picking winners) rather than rigorous analysis.
Asian Miracles?
The East Asian Miracle was simplistically caricatured due to the abandonment of import-substituting industrialisation in favour of export-orientation. A more nuanced alternative narrative of ‘effective protection conditional on export promotion’ in Northeast Asia was thus ignored.
Industrial policy is much more than trade policy, involving a range of policy instruments. Recognising the variegated aspects, dimensions and tools of industrial policy is essential. Besides investment, finance, and technology, human resource development is also significant.
For instance, the Indian Institutes of Technology (IITs) were an important initiative to support its industry. However, with India’s gradual neglect of industrial policy, IITs have probably contributed more to the development of US hi-tech.
Evaluating Industrial Policy
For years, economists working on India have criticised industrial policy, usually referring to the Nehruvian experience. But rushing to such a conclusion solely referencing that experience requires cherry-picking evidence.
India’s pharmaceutical policy has been crucial to the health and well-being of its population. Affordable, often generic medicines in India have been central to its improved public health outcomes. However, unlike Western pharmaceutical transnational corporations, Indian companies have not been accused of price-gouging.
Bangladesh has since utilised its special dispensation as a least developed country (LDC) to export affordable generic medicines to many other poor countries. However, the West blocked the Indian-South African initiative to suspend patent royalties to address the COVID-19 pandemic for its duration.
Effectively, the West was reneging on its 2001 agreement to the Public Health Exception to Trade-Related Industrial Property Rights (TRIPS). This compromise was needed to restart WTO processes after the African walkout from the 1999 Seattle World Trade Organization (WTO) ministerial meeting.
If not for India and Bangladesh, the costs of medicines would have been much higher, and there would be more ill health in the world today. Defining industrial policy success solely in terms of the financial profitability of investments ignores such gains.
It is, therefore, crucial to build coalitions to create the conditions for sustained and appropriate but adaptive industrial policies. These are needed to accelerate growth and structural transformation to achieve sustainable development in the face of stagnation and regression in much of the world, especially the global South.
