As Peter Drysdale and Rojan Joshi write in this week’s lead article, ‘security-driven economic policy in industrial countries’ has seen ‘an explosion of trade interventions, industrial policies and subsidies, exacerbating the threat to the world economy posed by the widespread derogation from the global trade rules’.
They argue that ‘developing economies, constrained by their fiscal capacity, should recall the waste and futility of past industrial policies that picked industry champions rather than creating public goods to lay the base for broad-based industrial growth’.
This is important to remember as developing countries rush to seize a share of the economic opportunities created by the global effort to decarbonise electricity grids and transport, and the huge investments required for the manufacture of new technology goods — electric cars, batteries, and the like — that facilitate decarbonisation.
Respect for markets and the importance of integration with the global economy underpinned the ascent of Northeast Asia’s ‘miracle’ economies to high-income status in the decades after the Second World War. Despite myriad differences in their strategies, fundamentally, ‘[t]he rapid trade growth enjoyed by these economies was supply-driven, built on the expansion of market share in old, established industries, not expansion of trade in new, high-growth sectors of the global economy’.
A key part of this story was countries working their way up the value chain by taking advantage of the process of capital formation initially kicked off by export-oriented low-end manufacturing (and its social accoutrements like urbanisation, and huge government investments in education and physical and social infrastructure). Some would point to questions around what automation means for industrialisation strategies based upon labour-intensive industries. But regardless of the precise path of industrial upgrading, the fundamental economic logic remains the same — governments need to shape light-touch industrial policy to the signals that markets are sending, rather than seek to engineer against market realities by trying to dominate in industries where their comparative advantage does not lie.
India and Indonesia will be key players in determining which scenario triumphs in the Asian region in coming years. As flawed but nonetheless resilient democracies, governments being able to create jobs for a rapidly growing working-age population isn’t just a critical challenge for development but an overriding electoral imperative for their leaders — who risk future socio-political instability if they fail.
As Drysdale and Joshi highlight, ‘both countries now stand in danger of being caught in the undertow of industrial policy 2.0’. Indonesia’s ‘downstreaming’ approach to encouraging the growth of manufacturing industries off the back of its mineral resource endowments and the way Indian Prime Minister Narendra Modi’s signature ‘Make in India’ policy has lately been ‘repackaged’ in a ‘Nehruvian foil of a self-reliant India’ are not good omens for development success.
Both domestic and international politics can grease the wheels of wasteful industrial policy and approaches more attuned to import substitution rather than competing on global markets.
Northeast Asia’s economic miracle wasn’t just predicated upon policy elites’ understanding of what it would take for their exports to find global markets, but also political leaders’ control of unusually strong and capable states that could corral together bureaucracies and private stakeholders towards national economic goals.
But national leaders in the developing world mostly operate in environments where such coalitions for developmentalism cannot so readily be assembled, because political authority is fragmented and bureaucracies are captured by myriad rent-seeking interests — in short, the political economy of the middle income trap. In these political contexts, protectionism and industrial policy can seem like attractive second-best industrialisation options for political leaders. Such policies find a ready audience in domestic business communities who seek the opportunity to be ‘picked as winners’ by the states with which they are deeply enmeshed.
Given the difficulty of conjuring the sorts of domestic political coalitions that underpinned Northeast Asia’s state-abetted (yet resolutely market-based) developmentalism, reformers in the developing Asia-Pacific will need to find allies on the international stage, using multilateral commitments as battering rams against vested interests at home — just as China’s reformers did through the process of WTO accession and appear to seek in Beijing’s application to join the Comprehensive and Progressive Trans-Pacific Partnership agreement.
The trouble is that unlike in decades past, developed economies have abrogated their leadership role in building and maintaining the multilateral commitments that empowered reformists in developing countries in the decades after the war. Instead, Western governments (and the United States in particular) have been at the heart of a global shift towards onshoring, industrial policy and the subordination of market logic to arbitrarily defined ‘national security’ goals.
Governments in developing Asia, if they fall under the spell of discredited industrialisation strategies, will in part be responding to the precedents and incentives with which developed countries are presenting them.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.