Articles >Trade and industrial policy
Trade and industrial policy must converge
live Mint, November 27,
By Pradeep S Mehta
The government should prioritize the design of industrial policies
that benefit the country from integrating with global value chains.
Economic development is essential for economic growth...thatís a
motherhood statement. But economic development cannot take place
without a sound industrial base and trade strategy. Both complement
each other. This is one of the reasons why globally trade and
industry are with one minister though the two departments can be
separate. In India, they enjoy working in silos (sometimes even
within the department itself). Thus Suresh Prabhu, the minister, has
an onerous role to run both of them as the two wheels of a
motorcycle without which there would be no forward motion.
In the last two-and-a-half decades, India has primarily used export
promotion policy (in the garb of trade policy) to reap benefits of
globalization. While this approach has benefited countless people,
it has also left many dissatisfied. The divide between rich and poor
has only increased, and so has the productivity gap between frontier
firms and the rest. The country is now staring at premature
deindustrialization and significant unemployment. To find a fix,
introduction of an industrial policy for a concerted push towards
industrialization and job-creation is being considered. The
objective of industrial policy, as traditionally understood by some,
conflicts with that of trade policy. Absolute clarity on the role of
these policies and the ability to achieve convergence will be
critical to achieve growth in the economy.
The use of industrial policy by advanced economies like Japan and
South Korea in their initial growth phase, before globalization
reached its zenith, is well documented. However, its impact on
growth is not entirely clear. While several experts have attributed
economic growth to government support of specific industries in
these countries, renowned economists Howard Pack and Kamal Saggi
have argued that Japan and Korea did not achieve success because of
industrial policy, but in spite of it.
They show that 80% of industry subsidies in Japan were given to
agriculture and mining. The idea that Japan provided significant
subsidy support to the industries that became strong global
competitors in sectors like auto, steel, and machine tools, is a
myth. Korea allowed relatively free imports of capital goods for
many years and relied quite heavily on foreign aid. For instance,
Posco, the state-owned Korean steel company, had access to capital
and then commissioned German companies to lay out the most
productive steel plant they could construct using state of the art
Despite different approaches to industrial policy, productivity,
research, technology and infrastructure investment have been the
critical keys to growth. As globalization was in its infancy, both
countries had restrictions on their financial sectors and broad
limitations on imports and foreign direct investment. This
channelled high rates of national savings into industrial
development and made sure domestic companies had a sound base of
domestic demand for their products without facing foreign
India cannot afford to replicate these success stories for two
primary reasons: the declining rate of domestic savings, and an
extremely interconnected world wherein unreasonable restrictions on
movement of goods and capital conflict with commitments under
international trade agreements. Given the prevailing limitations,
how can India design an industrial policy which promotes economic
growth with the trade dimensions upfront?
Economist Dani Rodrik points out that the answer lies in the process
of industrial policy design. Industrial growth can be constrained
due to diverse factors, which may differ with sector and time.
Consequently, an industrial policy aimed at uncovering the most
significant obstacles to restructuring and growth and identifying
interventions most likely to remove them, is essential.
This can be achieved through a setting in which all stakeholders
come together to solve problems in the productive sphere, each one
learning about the opportunities and constraints faced by the other.
Thus, focus needs to shift from industrial policy outcomes to its
processes. An industrial policy achieved through good processes can
encourage and support innovation, and help develop the companies of
the future. It can avoid limits on competition and thus need not be
antithetical to trade policy.
Nobel laureate Joseph Stiglitz argues that the role of industrial
policy can be much larger. Markets are not likely to produce
sufficient growth-enhancing investments, such as learning, knowledge
accumulation and research. This gap can be addressed by an
industrial policy through recording and fostering the diffusion of
best practices in research, entrepreneurship and skills throughout
an economy. An industrial policy focusing on right processes with
good professionals in command can easily achieve this feat.
Once necessary processes are put in place, the government can
prioritize the design of industrial policies to identify and address
constraints that keep the country from benefiting from global value
chains. By enabling the development of appropriate skills,
productivity enhancements, technological upgradation and catering to
specific infrastructure needs; integration in global value chains
and markets for manufacturing linked services will be possible. An
industrial policy will thus seamlessly complement trade policy for
rapid economic growth and the job creation agenda.
Pradeep S. Mehta is secretary general of CUTS International.
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