Danilo Freire

In defense of industrial policy

A couple of days ago, Shanta Devarajan, World Bank chief economist for Africa, posted this interesting piece on industrial policy in Africa:

Like others, I have been skeptical about industrial policy in Africa, where the government selects certain industries for support in order to trigger a process of structural transformation. It’s been tried before—with disastrous results. 

The selected industries were captured by political elites who continued to receive subsidies without generating anything close to labor-intensive growth (the Morogoro shoe factory in Tanzania never exported a single pair of shoes). Furthermore, most of the constraints to industrial growth in Africa are man-made: policies or regulations that stand in the way of poor workers’ employment prospects. 

[…] A recent study by my colleagues Hinh Dinh and Vincent Palmade on light manufacturing in Ethiopia confirms the point that the constraints to the apparel and leather goods industries are largely existing policies and regulations—trade policies that inflate input costs by creating local monopolies, and land and financial regulations that favor large firms. But they also show that, should Ethiopia remove these constraints, it could expand employment in these industries by two orders of magnitude. 

[…] This is the best case for industrial policy that I have seen. By focusing on particular sectors and showing the employment benefits of addressing some of the government failures, there is a better chance that the government will undertake these reforms. 

I think he has a good point here. I agree that government failures are frequently more serious impediments for growth than market inefficiencies, since they are notoriously difficult to correct and its economic consequences may be dismal for the civil society. I am not sure, however, whether the expansion of employment is an incentive strong enough for a corrupt government to change its behaviour. It may well be (and I hope so), but I would like to see more empirical evidence of that. Nevertheless, like Mr Devarajan, I also have a feeling that the main cause of the low economic performance in developing countries is actually crony capitalism. In other words, it is not capitalism per se, but rather the lack of it.