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The Quality Of Industrial Policy

Adil Sahin
By Adil Sahin
6 years ago
The Quality Of Industrial Policy in Emerging Markets (esp. Malaysia and Indonesia)

Ard, Mal


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  1. The Quality of Industrial Policy as a Determinant of Middle Income Traps and How Latecomers Can Improve It Policy Design and Formulation in Developing Countries
  2. Hypothesis n   n  n  The lack of quality in industrial policy is the main cause of a middle income trap (or any other longterm growth problem). Installation of high-quality policy that actively supports value creation by the private sector, not just freeing and opening markets, is required to escape the trap. Other factors such as natural resources, ODA and capital inflow are also important, but they do not critically determine a nation’s long-term growth path. Policy quality matters most in the long run.
  3. Why Do Economies Diverge ?
  4. International Comparison of Industrial Policy Quality n   n  n  n  n  The GRIPS Development Forum has visited Asia and Africa to compare industrial policy quality. Asia—Vietnam, Singapore, Taiwan, Korea, Malaysia, Thailand, Indonesia, India, (Cambodia: next week) Africa—Ethiopia, Rwanda, Mauritius, Mozambique, Zambia, Tanzania, Ghana, Uganda We evaluate policy formulation, implementation and impact. Good performance due to private effort, foreign assistance or sheer luck is not counted as “good policy.” Asia is not always superior to Africa. Some African countries (Mauritius, Rwanda, Ethiopia) practice much better industrial policy than Vietnam or Indonesia.
  5. How to Measure Industrial Policy Quality ? Policy sub-components 1.  2.  3.  4.  5.  6.  7.  8.  9.  10.  Industrial human resource Domestic enterprise development Business climate Power & logistics Export promotion Strategic FDI marketing Industrial parks Supporting industries & FDIlocal firm linkage Productivity, technology & innovation Standards & testing 5 4 3 2 1 0 – – – – – – Excellent Good Moderate Some Little Nothing or worse Evaluating criteria × Common aspects 1.  Policy ownership 2.  Vision & commitment of top leader(s) 3.  Policy drafting procedure 4.  Authority & capacity of policy organizations 5.  Mindset & competency of implementing officials 6.  Budgeting & staffing 7.  Inter-ministerial coordination 8.  Involvement of key non-official stakeholders 9.  Monitoring & evaluating mechanisms 10.  Impact on the real economy Specific aspects for each sub-component
  6. Evaluation Criteria for Industrial Policy Sub-components Sub-component Specific Aspects Science and technology engineering universities and colleges and technical and vocational education and training (TVET) in sufficient number that meets the nation's industrial human needs; raising popular mindset for quality, efficiency, and manufacturing pride. Existence of clear goals, policy organizations, and coordination among many Domestic enterprise ministries and policy areas; effectiveness of individual measures covering support for management, marketing, technology, finance, IT, and networking; interlink and development synergy among policies. Identification of the nation's current status, and serious effort for improvement; transparency and reliability of laws and procedures; tax, accounting, and customs Business climate clearance; foreign currency and capital control; comparative business costs; effective public-private dialogue. Status of power supply irregularities and remedying actions; status and plans for transport infrastructure; efficiency of port, airport, dryport, and bonded warehouse Power and logistics operation; export, import, and border-crossing procedure; logistic service quality and competition; IT use. Appropriate export targets; integrated export promotion mobilizing many measures and ministries rather than temporary and ad hoc actions; a regular and effective Export promotion monitoring and problem-solving forum; support and use of policy by targeted domestic exporting firms. Full understanding of foreign investors' needs; effective one-stop investor service and follow-up; appropriate incentives; selectivity proper to development stage; Strategic FDI quality of promotional information and presentation; actual results in project marketing registration and implementation. Full understanding of investors' needs; proper division of labor between government and private sector in designing, building, and operating industrial Industrial parks parks; provision of necessary infrastructure and soft support; customer satisfaction and arrival of targeted foreign firms. Clear recognition of importance of supporting industries and services in upgrading Supporting industries domestic capability; effective database, match-making, incentives, and follow-up and FDI-local firm measures; close interaction with targeted domestic and FDI firms; actual growth of linkage supporting industries. Proper targeting of needed technology and innovation for the nation; suitable Productivity, promotion measures in close cooperation with the private sector without coersion; technology, and protection of intellectual property rights; effective research and supporting innovation institutions and mechanisms. Existence of organizations, laws and regulations, and human and physical capital for ensuring product quality, safety, environment, labor conditions, etc.; sufficient Standards and testing testing facilities; actual effective use of standards and testing facilities by the private sector. Industrial human resource Common aspects
  7. The Scorecard for Ethiopia (Example) Date: May 2015 (based on policy research 2008-2015) Supporting Productivity, industries & Standards technology & FDI-local firm and testing innovation linkage Industrial human resource Domestic enterprise development Business climate Power and logistics Export promotion Strategic FDI marketing Industrial parks Policy ownership 5 3 3 4 5 5 5 3 5 2 4.0 Vision & commitment of top leader(s) 5 3 3 4 5 5 5 4 4 3 4.1 Policy drafting procedure 2 1 2 2 3 4 4 1 3 2 2.4 Authority & capacity of policy organizations 3 2 2 3 3 4 5 2 2 2 2.8 Mindset & competency of individual officials 3 2 1 2 4 4 4 2 3 2 2.7 Budgeting & staffing 4 2 2 4 5 5 5 1 3 2 3.3 Inter-ministerial coordination 1 1 1 3 3 3 3 2 3 1 2.1 Involvement of key non-official stakeholders 2 2 2 3 3 3 3 2 3 2 2.5 monitoring & evaluating mechanisms 3 1 1 2 5 5 5 1 3 2 2.8 Impact on real economy 2 2 0 4 3 5 5 2 3 2 2.8 AVERAGE 3.0 1.9 1.7 3.1 3.9 4.3 4.4 2.0 3.2 2.0 3.0 GRADE B D D B B A A B B C B Remark TVET, engineering universities Fragmented Limited action to improve business climate Infrastructure still deficient but improving Good policy; execution needs more improvement Main policy focus; good results Main policy focus Policy will exists; further development required AVERAGE Strong political TIDI, LIDI, etc.; will; kaizen & but generally national undermovement developed Notes: - Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent). - Evaluation of policy prepared and implemented by government only; results obtained by private effort, international cooperation or external conditions are not included. - Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1).
  8. Quality of Industrial Policy vs . Income Performance (preliminary results as of May 2015) Industrial human resource Domestic Business enterprise climate development Power and logistics Supporting Productivity, Export Strategic FDI Industrial industries & Standards technology & AVERAGE promotion marketing parks FDI-local firm and testing innovation linkage Grade Per capita income (WB, 2013, USD) Singapore 5 4 5 5 4 5 5 4 5 5 4.7 A+ $55,183 Japan 5 5 4 5 4 3 3 … 4 5 4.2 A $46,330 Korea 5 4 4 5 5 3 4 … 4 5 4.3 A $25,977 Taiwan 5 5 5 5 3 4 5 … 5 5 4.7 A+ $22,597 Malaysia 3 4 4 5 4 5 4 1 4 4 3.8 B $10,538 Mauritius 4 4 4 4 4 5 4 3 4 3 3.9 B $9,478 Thailand 3 2 4 4 3 4 4 4 2 4 3.4 B $5,779 Indonesia 2 2 2 2 2 3 1 1 1 2 1.8 D $3,475 1.5 1.8 2 2.8 1.6 1.7 2.2 1.5 1.4 1.5 1.8 D $1,910 India 1 1 1 2 3 1 2 1 1 1 1.4 D $1,498 Rwanda 2 2 4 2 2 4 4 2 2 1 2.5 C $639 Ethiopia 3 1.9 1.7 3.1 3.9 4.3 4.4 2 3.2 2 3.0 B $505 Vietnam (Cambodia & Mozambique to be added soon.)
  9. Some Observations n   n  n  n  Governments are not created equal. There is a huge gap in industrial policy quality from excellent to poor among governments. Income level and policy quality are positively correlated. This suggests, but does not prove, causality. Within each country, policy quality is similar across different measures. If one policy is bad, others are likely to be also bad. There is a common policy culture that permeates entire government. Rich resource endowment often impedes policy improvement, vindicating the curse of natural resources.
  10. Proactive Industrial Policy n   n  n  Even under globalization, industrial policy is both necessary and possible. In fact, many countries already practice industrial policies consistent with WTO and FTAs. But new policy must be different from old ones: planning, laissez-faire, infant-industry promotion (Korea), FDI-led industrialization with slow integration (ASEAN4). Proactive industrial policy must satisfy the following: 1. Promotion of markets and integration 2. A strong state to guide the private sector 3. Having sufficient policy tools for catching up 4. Dynamic capacity building of both government and private sector through concrete actions & projects 5. Internalization of skills & technology 6. Effective public-private partnership 7. Deep industrial knowledge shared by government and businesses
  11. Policy Learning n   n  n  n  International best policy practices (and failures) must be collected and compared systematically. East Asia abounds in good examples, but we can also learn from other regions. Using them as references and building blocks, government must acquire general capability to create a policy most suitable for a particular country, time and sector. Do not copy other countries uncritically, or reject their experiences as irrelevant. Learning (knowledge collection) and thinking (adaptation to your country) must be combined. Learning steps: n  n  n  n  Collect and analyze policy documents of other countries Seminars & advice by invited foreign officials and experts Policy missions to foreign country governments (and write reports) Discuss how foreign examples can be used in formulating home policies
  12. Policy Dialogue with Foreign Experts & Officials n  n  n  n  n  Developing countries can learn by self-study, but a better way is to have a private tutor who understands your country as well as has broad & pragmatic knowledge of international best policy practices. However, not many foreign experts can teach nitty-gritty of industrial policy making; most can preach general ideas, cases & history only. Japan has conducted industrial policy dialogue with many developing countries. The Japanese method is case-by-case and flexible, unlike Korea’s more systematic (but mechanical) approach. Long-term interest, commitment & mutual trust, substance over formality, and mobilization of ODA to realize some of the discussed issues (not just talk) are key to success. The GRIPS Development Forum & JICA have conducted Industrial Policy Dialogue with Ethiopia since 2009 (Phase 2 ends this year).
  13. Japan ’s Industrial Policy Dialogue Country Period Head/key players Purpose and content Argentina 1985-1987 1994-1996 (folow up) Saburo Okita (former foreign minister) Comperehesive study on agriculture and livestock farming, industry, transport and export promotion Thailand 1999 Shiro M izutani (former M ITI official) Study on the master plan for SM E promotion policy Vietnam 1995-2001 Shigeru Ishikawa (professor) Large-scale joint study on macroeconomy, industry, agriculture, enterprise reform, crisis management, etc. Vietnam 2003-current Indonesia 2000 Indonesia Japanese embassy, JICA, JETRO, Bilateral joint initiative to improve business environment and JBIC strengthen competitiveness through 2-year cycle of action plans Shujiro Urata (professor) Policy recommendation for SM E promotion 2002-2004 Takashi Shiraishi and Shinji Asanuma (professors) Policy support for macroeconomic management, financial sector reform, SM E promotion, private investment promotion, democratization, decentralization and human resource development Laos 2000-2005 Yonosuke Hara (professor) Study on macroeconomy, finance, state enterprise, FDI and poverty reduction, etc. Myanmar 1999-2002 Konosuke Odaka (professor) Study on agriculture, rural development, industry, trade, finance, ITC, etc. Mongolia 1998-2001 Hiroshi Ueno and Hideo Hashimoto (World Bank economists and professors) Study on the support for economic transition and development Vietnam 2008-2010 Japanese embassy, JICA, JETRO, Produce supporting industry development action plan for joint businesses, GRIPS/VDF implementation Ethiopia 2009- Vietnam 2011-2013 GRIPS Development Forum and JICA Kaizen, basic metals & engineering, productivity movement, policy procedure & organization, export promotion, plan documents, etc. Japanese embassy, JICA, JETRO, Select and intensively promote a small number of indutrial sectors; M ETI, GRIPS/VDF draft and implement detailed action plans
  14. Ethiopia-Japan Policy Dialogue & Kaizen 2008 2009 2010 2011 2013 2012 2014 2015 2016 PM Hailemariam PM Meles Industrial Policy Dialogue Preparation Africa Taskforce Meeting Jul. 2008 JICA’s Industrial Cooperation Phase 1 (2009-11) Official launch Jun. 2009 Phase 2 (2012-15) Final session May 2011 TICAD V Start   Jan. 2012 PM Abe visit Last session Aug. 2015 Malaysia mission Kaizen Phase 1 Kaizen Phase 3 (30 pilot companies) (Advanced level) Kaizen Phase 2 (Institution & human resource) Metal industry survey Champion Products Branding & promotion (With Germany) Note: Black boxes indicate three-level policy dialogue in Addis Ababa (PM, ministers, operational level).
  15. With Former PM Meles at PM Office High Level Forum (Aug. 2014) Lecture at Civil Service University
  16. Letter to Prime Minister Hailemariam of Ethiopia (March 2015, 18 pages) GRIPS advice on next five-year plan (GTP2) 2016-2020 1. Enhancing people & firms must be the core objective 2. How to strengthen MOI over time 3. Kaizen as the principal productivity tool 4. Mobilizing multiple support measures to start “handholding” for selected SMEs during GTP2 5. Business climate is poor; Ethiopia needs an improvement plan 6. Our view on promoting heavy industries 7. FDI-local firm linkage formation strategy must be added 8. Concepts of “quality manufacturing” & “quality infrastructure” 9. How to draft the Productivity & Competitiveness Chapter (new) 10. How to draft the Industry Chapter
  17. Policy Learning : What Needs to Be Learned? Basics n  Policy n  Policy n  Policy n  Policy content procedure organization documentation More advanced n  National leadership n  National movement for mindset change n  Developmental state (politics & development) n  Exit to an advanced society
  18. Standard Policy Making Procedure (Five Necessary Conditions) 5. A secretariat with sufficient authority and responsibility to coordinate the entire process Top leader 1. Vision 2. Consensus building 3. Documentation Brainstorming Studies & surveys Set broad goals & direction Drafting work Comments & revisions (Drafting may be outsourced) Stakeholder consultation 4. Substantive stakeholder participation Ministries &agencies Businesses Academics & consultants Regions & localities Finalize & approve
  19. Taiwan : Statute for Industrial Innovation, 2010 Brainstorming; agreeing on goals & directions Task force under Ministry of Economic Affairs Minister providing vision & key ideas The 3-year process was managed by Chung-hua Institution for Economic Research (a think tank winning competitive bidding). Stakeholder consultations Documentation Private sector hearings with six sectoral business associations Interministerial meetings Drafting by MoEA official with lawyer’s help for wording Further revision & approval by National Assembly with MoEA chairing Dissemination (“Island Tour”)
  20. Thailand : Automotive Industry Master Plan 2007-2011 Brainstorming; agreeing on goals & directions “CEO Forum” FDI & local firms Exporters MoI, MoST, MoEdu Professors’ team (Chulalornkorn Univ) The whole process (1 year) is managed by Thailand Automotive Institute (TAI) è Set up formal committee for drafting M/P M/P Steering Committee Organized by MOI Subcommittees study identified issues Human resource Productivity M/P Drafting By TAI staff Businesses Officials Experts Marketing Engineering Business Gov’t Experts (Informal) Business Gov’t Experts (Formal) Investment & linkage Comment & dissemination Implementation
  21. Vietnam : Traditional Policy Drafting Process Prime Minister Review for approval Order Submit Drafting Team Minister Interministerial review Submit MPI & other Ministries Data Internal review MPI & other Ministries Government Appeal letter to Prime Minister when problems arise Contact Ministry when necessary Interviews, symposiums (sometimes) Technical assistance (sometimes) International experts Business Community No permanent channel for continuous policy dialogue (case-by-case, temporary, ad hoc)
  22. Alternative Policy Organizations Who will draft and execute policies , and how? The following approaches are not mutually exclusive; some countries use more than one. n  Technocrat group directly under PM or President n  National Councils or Committees n  Super-ministry n  Coordination ministry above line ministries n  Sector/issue-specific institute acting as a hub n  Strong leader without institutionalization
  23. Technocrat Group Approach - Elite technocrat group with full planning authority given by top leader - Members are selected officials , business leaders & experts with good education & experience Korea – Econ. Planning Board Malaysia – Econ. Planning Unit Thailand – NESDB Taiwan – Kuomintang Elites Indonesia – “Berkeley Mafia” Chile – “Chicago Boys” President or Prime Minister Direction, full authority for policy making Faithful execution and reporting Technocrat Group (Policy Maker) Policy, guidance and monitoring Businesses Academics Experts Faithful execution and reporting Ministries (Policy Implementers)
  24. Korea in the 1960s-70s : Economic Planning Board under President Direct presidential control over economic policy President (Blue House) Economic Secretariat Gov’t-business meetings - Export promotion - Economic briefs - HCI drive, etc. State Council Economic Minister’s Council Very close gov’t-business relations Performance-based rewards & penalties Chaired by Deputy PM Korea Development Institute Economic Planning Board Policy analyses Headed by Deputy PM Min. of Commerce & Industry Economic ministries and agencies Businesses Super ministry charged with: - Development planning -  Public investment planning -  Budget -  Monitoring -  Aid management Banks
  25. National Council /Committee Approach PM or President Chair, give mandate Businesses Academics Experts National Council or Committee Plan Support working groups or task forces for specific issues and sectors Ministries and agencies Implement
  26. Singapore : New Productivity Drive Economic Strategies Committee: Report Chaired by Deputy PM Members from ministries/agencies, business, unions Joint secretariat: MTI, MOM (ministers) National Productivity and Continuing Education Council (NPCEC) Review & submit Oversight Review & approval Working Committee for Productivity and Continuing Education (WCPCE) Sectoral “Productivity Roadmap” for the next 10 years Draft & propose Led by MTI, MOM (PS level) Inter-agency coordination Financial Incentives Scrutiny National Productivity Fund Productivity Skills Dvt. Fund & Innovation Lifelong Learning Credit E.F. Sector working groups (12 priority sectors) Construction BCA Unions Industry Electronics EDB Unions Industry Cross-cutting issues Low wage workers Research & benchmarking Infocomm and logistics Precision Eng. Transport Eng. General Mfg. EDB EDB SPRING Unions Unions Unions Industry Industry Industry F&B SPRING Unions Industry Retails SPRING Unions Industry
  27. My Proposal for Vietnamese Government Prime Minister Direct , give mandate Plan National Competitiveness Council Commission studies, reports Chaired by PM (or DPM) Secretariat: Government Office Members: Heads of concerned ministries Support, report, draft Working groups for specific issues or sectors SMEs Supporting industries Clusters TVET Higher Educ Secretariat: MPI Secretariat: MOIT Secretariat: MOIT Secretariat: MOLISA Secretariat: MOET Ministries, businesses, experts Ministries, businesses, experts Ministries, businesses, experts Ministries, businesses, experts Ministries, businesses, experts Ministries and agencies Implement
  28. Super Ministry Approach : Japan’s Ministry of International Trade and Industry, 1960s MITI Minister Politically appointed VM Administrative VM Deputy VMs Special assistants Main Bureau Minister’s Secretariat (incl. Research & Statistics) Int’l Trade Policy Bureau Int’l Trade Admin. Bureau Industrial Policy Bureau Industrial Location & Environment Protection Bureau Basic Industries Bureau Machinery & Information Industries Bureau Consumer Goods Industries Bureau Deliberation Councils Industrial Structure Export Insurance Textile Petroleum Electrical Works ......... Attached Organizations and External Bureaus Agency of National Resources & Energy Patent Office SME Enterprise Agency Agency of Industrial Science & Technology Trade & Investment Training Other (*) Industrial Structure Council: influential in the 60s (18 special committees): industrial pollution, int’l economy, consumer economy, heavy industry, chemical industry, etc. Int’l Trade Transaction Industrial Location & Water Product Safety & Household Goods Quality Indication Aircraft & Machinery Industry Traditional Crafts Industry ...................
  29. Documentation n   n  n  n  Drafting èImplementation èResults. Producing documents is the means, not the end, of policy formulation. Generally speaking, short & concise is better than long and complex. Large documents are usually not used or referred. Only include information and arguments necessary for the policy actions proposed. Drafters can be officials, consultants, academics or a mixed team. As long as rough contents are agreed and necessary studies have been prepared, anyone can draft policy documents.
  30. Action Plan Template n   n  n  The following template is actually used in Vietnam-Japan Industrialization Strategy (2011-2013). Purpose: foster new industries under the principles of PPP, bilateral cooperation, selectivity, and concrete action plans. Only essential items to save time & energy; total about 5 pages. Situation analysis (about 2 pages, essential facts only for promoting this industry) Vision for 2020 (one sentence) Targets (3-4 items, one phrase each) Policy issues (3-5 items, one phrase each, policy efforts required for targets above) Action plan (who, what, by when, success criteria in table format) Monitoring mechanism (1-2 sentences, common for all industries)
  31. Thailand Automotive M /P 2007-2011 Drafting team at Thailand Automotive Institute n  n  n  n  Vision 2011 è 4 Objectives è 5 Strategies è 12 Action Plans Strong coordination by Mr. Vallop of Thailand Automotive Institute Effective stakeholder networking – FDI, local producers, government, donors Process-based action mechanism – annual budget and projects for implementing actions (no matrix)
  32. Thai Automotive Vision , 5 Strategies and 12 Action Plans Vision—“Asia’s auto production base with value-added and strong parts industry” Source: Thailand Automotive Institute, The Automotive Industry Master Plan 2007-2011 Executive Summary, p.4.
  33. Malaysia ’s Industrial Master Plan 2 (1996-2005) n  n  n  453 pages (English) with the following chapters: - Overview & analytical framework (first 2 chapters) - Analysis & proposals for 8 indust. clusters (8 chs.) - Directions & institutional framework (last 2 chs.) Malaysian Institute of Economic Research (MIER) drafted a background paper, which gave IMP2 a lucid academic style (but not IMP3). Possible problems: (1) sectoral coverage is too wide, (2) method is too mechanical and uniform, (3) fullset industrial promotion is against globalization and specialization.
  34. Malaysia ’s Cluster-based Industrial Development and Manufacturing++ Malaysia’s IMP2 (1996-2005) aimed at raising and broadening the value chain. Leveling up of each industrial cluster -Core production -Supporting industries -Supporting services -Human resources -Logistics -R&D