Wednesday, March 16, 2011

Industrial policy and political economy now....

James Robinson has a relatively interesting take on industrial policy which gives a lot more weight to political economy issues than has previously been the case. I like the following summary:
I agree that there are many market failures in the world, that there can be important externalities from having a thriving industrial sector and that potentially industrial policy can be a powerful tool to promote rapid economic growth and development. I also believe that this was the case in South Korea, Taiwan and many of the other cases studied by the revisionists in the late 1980s...However, I also believe that industrial policy can totally fail, as it did in Ghana in the 1960s and all over Latin America from the 1940s onwards.
But the difference between these cases is not that the Japanese or South Koreans got lucky, were clever or had better economists advising them, it was because the political equilibrium of these societies differed... rather  it was adopted in political circumstances where it had no chance of succeeding in actually industrializing the country.
 This then leads once again to the need to understand special interest groups, the various incentive sets being faced, the nature of political institutions etc., i.e. into nasty territory. That is, industrial policy will only be successful if all the institutions and incentives are correctly aligned with the aims of society in general.

Comparing some successes (Taiwan) with failures (Ghana), the issue seems to be related not so much to capital accumulation but its allocation (something also concluded by Devarajan, Easterly and Pack in a 2005 cross-country analysis entitled "Low Investment Is Not the Constraint on African Development"). In addition to the examples he mentions from Ghana and Zambia, a fruit cannery in Lesotho also springs to mind which, despite supposedly abundant supplies of asparagus and pears (I think), basically ran out of supplies and was closed after much Government support.

Anyway, the point being made, is that investment allocations are made on a political basis. The difference between success and failure "lies in the objectives and functioning of the institutions implementing the policies and these are determined by the political system". This, in turn, depends on power relationships between the different elements of society, with those in power maximising their ability to stay in power.It may also depend on the degree of egalitarianism - something which may have been important in Taiwan. Or could it be unforeseen circumstances, (as it may have been in the Lesotho case although more analysis of that could be revealing)?

In any case, Robinson's  enlightened industrial policy is based on the following:
     1) Support those with a vested interest in seeing a successful industrial policy (that is, presumably, business associations and the like)
     2) Bring greater political competition - presumably by increasing democratic freedoms, no easy task
     3) Work within the existing political context by creating incentives for existing political elites to change policy  - no mention of what those might be....

How does all this sit with the New Industrial Policy approach advocated by Rodrik and Haussman?
In some respects, their whole binding constraints approach actually avoids this issue, unless of course you include political factors in the analysis. Indeed, this might be an interesting approach to take.

Overall though, based on a reading of most political economy analyses of development in Africa the probability of success is pretty dire... Is there really any way of establishing a functioning industrial policy, free from political pressures and abuse in Lesotho or Kenya??


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