A mission-oriented industrial policy

‘While it is generally true that mainstream economists have responded to industrial policy with knee-jerk hostility since at least the 1970s, things have been changing fast, owing to new academic research that is less driven by ideological hostility to government intervention and better grounded in rigorous empirical methods.’ – An excerpt from a recent Project Syndicate (PS) published article ‘Economists reconsider industrial policy’ by Dani Rodrik, Reka Juhasz, and Nathan Lane

It was significantly emphasized during the neoliberal assault of around the last four decades that government should take a step back in terms of their role in economic planning, including industrial policy, and should only limit itself to fixing market failures, and mainly incentivize private sector.

Having said that, experience indicated over the years, especially since the Great Financial Crisis (GFC) of 2007-08 that market fundamentalism led to mainly short-termism and profits in terms of signals that primarily determined production and consumption decisions.

As some of the main outcomes, this led to weakening public sector to deliver – suffering from perpetuation of outsourcing, instead of in-house capacity build-up – in terms of both service delivery, and in better pre-, and post-distribution of income and wealth; where in both cases inequalities sharply increased, not to mention the lack of necessary interventions from strengthening supply-chains; for instance, to effectively preparing and dealing with climate change crisis, and the related Pandemicene phenomenon.

Realization of the above, manifested both in the below-satisfactory response of public sector in general to Covid pandemic, and climate change crisis, and also in terms of the macroeconomic consequences such as sharp increase in global debt – especially in developing countries –and strong stagflationary outcomes, along with greater evidence produced by research in recent years indicating the deep effectiveness of active pursuing of industrial policies by governments, for instance, in the case of China, South Korea, and in the case of ‘East Asian Miracle’ economies.

Indeed, things have come a long way from the mainstream economic consensus of a few decades ago of being strongly against pursuing of industrial policy, indicating that ‘market knows best’, where while the International Monetary Fund (IMF) reportedly went so far against adopting industrial policy so as to assert about it as a policy that ‘shall not be named’, in a reversal of direction at the back of years of a number of country experiences amply highlighting the negative impact of market fundamentalism, published a working paper in 2019 titled ‘The return of the policy that shall not be named: principles of industrial policy’ pointing out the benefit of pursuing an industrial policy as ‘Based on theoretical, empirical, and historical evidence… we argue that the development paths of the Asian Miracles as well as Japan, Germany, and the US before them, provide us with important clues to their success. We contend that standard growth policy prescriptions are not sufficient.

We find strong commonalities in policies pursued by the Asian Miracles, and one cannot ignore the preeminent role of industrial policy in their development. Not only did they succeed at catching up with the advanced world, the Asian miracles’ economic model resulted in much lower market income inequality than that in most advanced countries.’

On the contrary, there is a strong consensus that is coming to the fore in favour of adopting purpose-driven, mission-oriented industrial policies, where the public sector plays a leadership role, and in a well-capacitated way. The same article pointed out in this regard: ‘The more recent research uses modern statistical techniques to avoid misleading inferences.

Such techniques have been applied to a wide variety of cases, including historical episodes of promotion of infant industries (such as textiles, shipbuilding, and heavy industries); large-scale public research and development efforts (as in the “space race” between the United States and the Soviet Union); and selective place-based policies targeting specific firms or industries (as in the US manufacturing drive during World War II and contemporary regional European subsidies).

The results of this research are much more favorable to industrial policy, tending to find that such policies – or historical accidents that mimic their effects – have often led to large, seemingly beneficial long-term effects in the structure of economic activity.’

Pakistan, which is looking to increase its exports and attract foreign investment on the one hand, and create a more inclusive, green, and sustainable high economic growth, on the other, needs to shift its primarily decades-old economic policy paradigm – both under the active influence of ‘Chicago boys’ styled policymakers, and IMF programme conditionalities – away from Neoliberalism to a social democratic styled economic policy that gives a greater role to government in influencing the direction, depth, and scope of industrial policy. This is immensely important in terms of dealing with economic polycrisis it finds itself in, like a recurring balance of payments crisis, burgeoning public debt situation, rising income inequality, and low domestic resource mobilization outcomes, and the negative impact this has in terms of increasing exports and attracting investment.

The same article gives a number of examples, where such mission-oriented, and purpose-driven industrial policy has brought a number of sectors together in reaching an overall objective, rather than just picking and choosing one sector over the other, and not having a well-targeted objective, and timeline.

For instance, it indicated: ‘Studies of recent public programs to subsidize investment in lagging regions of Britain and Italy have similarly found strong positive effects on employment creation. …The early economic literature on East Asia’s rise had argued that industrial policies were at best ineffective.

Newer analyses paying closer attention to the structure of upstream and downstream linkages in these economies reach considerably more sanguine conclusions. To cite one example, studies of South Korea’s Heavy-Chemical Industry Drive (HCI)… found that the policy promoted the growth of targeted industries, both in the short and long run. HCI’s effects on productivity and export performance were both positive.

Critics of East Asian policies thought governments could never pick the right sectors because they lacked information on where market failures were more prominent.

Princeton economist Ernest Liu has recently provided a useful guide for policymakers confronting an economy where market imperfections occur across multiple, linked sectors. In such settings, subsidizing upstream sectors generally minimizes policy mistakes. Liu shows that the actual policies used in China and during South Korea’s HCI were in line with this guidance.’

Hence, just like the mission-oriented policy of putting the man on moon in a decade brought together a score of economic sectors all working towards a common goal, it is therefore important that to deal with existential threats, and the deep negative outcomes of the neoliberal assault, to have mission oriented industrial policy, with a well-defined timeline, and a public sector playing an active leadership role as equal partner – in terms of reaching effective public-private contracts that protected the long-term needs of the economy, and safeguarded the interest of the demos against ‘profit-over-people’ mindset – and effective regulator to the private sector, and for which the public sector builds its own in-house capacity, rather than relying too much on the consulting industry, working in turn on the profit motive primarily overall.

In a 2021 published book ‘Public purpose: industrial policy’s comeback and government’s role in shared prosperity’, and within the book the importance of adopting a mission-oriented industrial policy in one of its chapters titled ‘Economic policy with a mission’ was emphasized as: ‘By undertaking well-defined missions, investing in a wide range of sectors, and nurturing new economic landscapes, policymakers can steer the overarching course of economic growth while leaving it to private enterprise to fill in the details.

Indeed, a great deal of success is already being made in this direction, from Germany’s impressive green transformation to Sweden’s decarbonization of its food systems. This framework – what we call a mission-oriented approach to industrial policy – rejects many of the basic premises of market fundamentalism, especially its extremely limited vision for government.’

An important element in this approach is, therefore, to have a smart government with a well capacitated public service. Hence, when the government is looking to prioritize its focus on attracting foreign investment to the country, it is important to have a parallel industrial policy, and public service reform, all formed in a mission-oriented spirit – both individually, and collaborating together – seeing the role of the government, and the overall orientation of the economy in a non-neoliberal way.

Some of the ways in which the public sector – both in terms of building in-house capacity, and in effectively engaging with other economic stakeholders – is being made more efficient in the European Union for instance, a book chapter ‘Neoliberalism, innovation bureaucracies and the reinvention of missions’ in a 2022 published book ‘How to make an entrepreneurial state: why innovation needs bureaucracy’ highlighted different ways in which the mission-oriented approach is being followed in this regard in the European Union (EU), whereby the book chapter pointed out: ‘Thus we can see a typology of mission-oriented policies and practices emerging in the EU: [1] Top-down coordination approach to better align existing policy mixes for incremental upgrading. …this approach to missions is oriented towards stability and long-term agreements in investment strategies and other policy aspects. [2] Sectoral coordination and implementation approach takes missions as a way to recharge essentially corporatist or coordinated market economy type sectoral coordination mechanism.

In this iteration, missions as an approach enable the widening of sectoral policies to include non-traditional policy goals and stakeholders. [3] Design-led approach reframes siloed policy goals and builds deeper civic and stakeholder engagement.

In this approach, missions are a tool to build new capabilities within innovation agencies… focused on rethinking the policy design process. [4] Smart specialisation-based approach to missions is found in predominantly regional policies, building on smart specialisation policies developed during the 2010s in many European regions.

Key to such missions is a focus on ‘just transitions’, regions moving from carbon-heavy specialisation to a greener and more sustainable specialisation.’

Copyright Business Recorder, 2023