Industrial Policies Rebound: Significance and Insights from EBRD Economist's Perspective
BABYLON-6 - Reemergence of Industrial Policies: A Double-Edged Sword
The world is witnessing the return of industrial policies, causing quite the stir. The latest report from the European Bank for Reconstruction and Development (EBRD), their Transition Report, sounds the alarm that while these policies may be justified in addressing clear market failures, their success rate remains hit-or-miss. Let's delve into this modern-day phenomenon with Beata Javorcik, EBRD's chief economist, in a candid discussion with The Astana Times.
The Big Comeback
Industrial policies, old hat, rebranded, or simply regilded – call it what you will. The 1970s-80s saw heavy use of these policies, but by the 1990s, there was a popular opinion that governments aren't great at picking winners. Now, they're back from the dead with a bang, with countries from the U.S. and China to Brazil and India embracing them with open arms.
Driving Forces
So why the sudden fixation? Javorcik sheds light on the matter. Tired of the status quo, nations seek to give their economies a competitive edge, and speed up the decarbonization process. Governments are following suit to what their competitors are doing, with Europe making industrial policy a priority in response to U.S. inflation reduction laws and China's subsidies to specific industries.
Public opinion also plays a role, with more people favoring a larger state presence, from intervention to expanded public sectors and generous subsidies.
Pressure Cooker
This steaming surge in industrial policies isn't happening in a vacuum. Major economies pursuing strategic interventions are causing other countries to jump on the bandwagon. According to the report, domestic political economy pressures, escalating geopolitical tensions, and the actions of others are pushing policymakers away from optimal economic strategies and undermining international cooperation. This leads to distortionary outcomes, particularly in low-income countries with weaker institutions and limited fiscal space.
American trade policies, for instance, send shockwaves throughout the global economy. While Central Asia is comparatively unaffected, countries like the Slovak Republic or Hungary are on the hot seat, due to their significant car exports to the U.S.
However, the indirect fallout could be substantial, especially through the German economy, which has intricate supply chains woven through Central and Eastern Europe.
Hard to Pull Off
While industrial policies may seem like a quick fix or silver bullet, Javorcik gives a dose of reality, stating in the report that "while industrial policy may be effective, it is actually hard to do it right."
Governments often use the same policy tool to pursue multiple and at times conflicting objectives, which can compromise its effectiveness. Another common pitfall is the absence of a clear sunset clause. Poorly designed industrial policies can undermine the broader economy, and even create bottlenecks and negatively impact other industries.
For effective industrial policies, two essential elements are required: administrative capacity and funding.
What Makes a Good Industrial Policy?
Governments should approach industrial policy with focus and transparency, articulating clear objectives, building in competitive pressures, and setting specific expiry dates. Instead of open-ended commitments, policies should be designed to be temporary, with periodic reviews to assess progress and make necessary adjustments.
Effective implementation of industrial policies is heavily dependent on proper governance, investment in administrative capacity, and deep-rooted reforms in the business climate. Private sector collaboration and investment are also critical for success.
Key Takeaways
Industrial policies are making a comeback after a long hiatus, driven by factors like responding to intense global competition, managing climate change, and technological advancements. While these policies hold the potential to drive growth and diversification, their success hinges on thoughtful design, smart implementation, and collaboration with the private sector.
To maintain a balanced approach and avoid protectionism, countries need to carefully weigh their strategies, engage in international cooperation, and keep their eyes on the bigger picture – fostering a global economy that's inclusive and sustainable.
Stay tuned for our YouTube channel where you can catch a full interview with Prof. Javorcik coming soon!
Enrichment Insights: Embracing industrial policies is a global trend, with countries seeking to strengthen their economies in an increasingly competitive and complex world. However, administering effective industrial policies requires strong administrative capacity, significant resources, and transparent governance. Furthermore, necessary reforms in the broader business climate and (P)PPP frameworks can play a crucial role in ensuring successful outcomes. A delicate balance must be maintained between competing interests, cooperation, and adapting to international challenges such as climate change and rapid technological advancement.
- Industrial policies have reemerged as a focus in countries like Astana, acclaimed to give their economies a competitive edge, particularly in the race for decarbonization.
- The surge of industrial policies poses challenges, especially in low-income countries, with domestic political economy pressures, escalating geopolitical tensions, and the actions of others pushing policymakers away from optimal strategies.
- While Javorcik suggests that industrial policies can be effective, their successful implementation hinges on ensuring transparency, building competitive pressures, and setting clear objectives with specific expiry dates – aspects crucial for avoiding protectionism and fostering a sustainable global economy.
- Effective industrial policies rely heavily on proper governance, investment in administrative capacity, deep-rooted reforms in the business climate, and collaboration with the private sector. Central Asian countries may face indirect fallout from American trade policies and should engage in international cooperation to maintain a balanced approach.
