Industrial Policies in a
Changing World
What Prospects for Low-Income
E15 Second Expert Group Meeting
Reinvigorating Manufacturing: New Industrial Policy and the Trade System
Isabelle Ramdoo
Deputy Head of Programme
Trade and Economic Transformation
Geneva, 4-5 December 2014.
Structure of Presentation
1. Background
2. Industrial policies in LICs
• What distinguishes LICs from other developing countries?
• What has worked? Why and under what conditions?
3. Industrial and trade dynamics: What is changing?
4. What then for LICs?
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1. Background
The Paper focuses on the specific case of low-income countries,
zooming on some specific cases where targeted industrial policies
have been used to promote specific economic sectors.
In particular, the Paper looks at particular policies taken to address:
 Market failures (pharmaceuticals in Bangladesh);
 Economic diversification and productivity gaps notably through
industrial upgrading (Ethiopia and cut flowers and RMG in
Bangladesh) and;
 Economic diversification (Mozal in Mozambique)
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2. Industrial policies in LICs:
a. Key features to bear in mind
1. Domestic policy challenges: experience of industrial
policy has generally been uneven and inconclusive due to:
 Systemic factors: Cost of addressing market failure higher and
ability of public sector to address these is more limited;
Institutional/ governance weaknesses; poor private-public
 Structural factors: Low-income, under-diversified, underindustrialized; significant productivity gaps; weak private sector;
Significant weaknesses in hard and soft infrastructure and
business/ investment climate; competitiveness is a major challenge
although low labour cost is an advantage; access to finance
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2. “Policy space paradox” :
In the multilateral trading system, Policy space is NOT an issue:
LICs have a lot of flexibility to undertake policy measures. Problem
is how best to use such policy space;
But most often domestic policies are influenced by external
pressures (eg conditional loans at IMF, WB; donor driven agenda
LICs have rarely used up all available space to conduct industrial
policies; Those who have, have never been challenged under the
DS at WTO;
With increasing bilateral FTAs, they are themselves now
constraining their policy space
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b. What has worked? Why and under what
In the specific case of LICs, the policy paradigm is still driven by
the need to develop economic activities around labour/ resource
intensive activities with the view of broadening the economic
structure (incl for local consumption) and improving the
competitiveness of exports. Why? Because industrial deficit large!
As such: objectives and focus of industrial policies and the need
to overcome certain gaps/ constraints are somewhat guided that
that logic of “take off” and “catching up”.
Policies guided by (i) need to acquire industrial capabilities; (ii) move
up the value chain; (iii) promote and develop new industries
Most popular policies remain (new forms of) ISI, EOI and RBI types
of policies, although new global challenges imperatives certainly call
for more innovation and technological-based policies
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Examples of ISI-types of policies
1. Bangladesh: Pharmaceutical sector (generic drugs)
Primary objective (1982): Public health to address market failure
preventing provision of affordable medicines for the poor;
Host of measures to encourage local production and restrict imports
of certain drugs by MNEs; Price regulations; Transfer of know-how
and skills from foreign to local firms; Training of local cadres;
Successful: covers 97% domestic demand & exports to 85 countries
Overtime: some restrictive market conditions relaxed
Key factors of success:
• Policies framed in a way to limit rent capture (price caps & market
• technological learning, transfer of know how and skills upgrading
• TRIPS waiver for LDCs conferred production advantages
Potential challenges:
• Protection is not time bound; Expiry of TRIPS waiver in 2016
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EOI-type of policies
Cut flower in Ethiopia
Incentives under export promotion strategy in four areas:
Land acquisition: Govt-owned land leased at cheap rates;
Low-interest rate long-term credit
Subsidized key logistics (namely cargo space if using national
carrier and post-harvest cold chains)
Upgrading capabilities, through strategic partnership with Dutch
Key factors of success:
• Targeted support through some sort of cluster approach (close to
• Government acted as a facilitator by removing key barriers
• Subsidies contributed to cost advantage compared to regional rivals
• Market access to EU DFQF due to EBA
• Technological capabilities and partnership were key to attract and
retain investment
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RBI type of policies
1. Aluminum smelting in Mozambique
• RBI is quite specific: favourable resource endowment does not
translate automatically into competitive advantage in RBI
• Mozambique developed aluminum smelting without producing a
single tonne of Bauxite (imported mainly from Australia). Objective
economic diversification from agriculture
• Yet, largest FDI in history of independent Mozambique
Factors of success:
• Political will!
• Cheap inputs – essentially electricity and provision of logistical
infrastructure (railways and port)
• Fiscal and financial incentives
• Strategic Joint venture combined with market factors (initially
secured market for aluminum in Japan thanks to JV with Mitsubishi
Is it really a success??? Quite an enclave sector, little linkages
created, limited employment
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3. Industrial and trade dynamics: What’s changing?
Changing nature of industries (increasingly driven by global buyers
and suppliers) and trade frameworks (proliferation of FTAs, in partic
among big economies) pose additional challenges to LICs;
Fragmentation of production structures led to (i) global dispersion
of activities and (ii) shift of invt focus from country to value chain
Few are well integrated in GVCs; Those who are, are trapped at the
lower-rung of the value ladder;
GVCs: Linking to GVCs require a different logic. Moving from
industrial policies from the prism of government’s responsibility to
diversify to one that focuses on firms and how to accompany them
to remain competitive, upgrade and evolve?
Trade dynamics – has been discussed thoroughly but mega
regionals will change the rules of the game and have significant
impact on LICs
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4. What then for LICs?
How are LICs prepared to adopt this paradigm shift in the way they
put forward industrial policies? Advantage of LICs : late comers
(potential to leapfrog); disadvantage of LICs: late comers (getting
more complicated)
Important to match policies against performance: some forms of
support need to be time bound with clear sunset clause for
ineffective ones
Not a question of policy space
• Rather a question of:
1. policy scope: using existing policy breadth and depth in an
effective and creative manner to broaden support and which are
adapted to the new global challenges;
2. Policy mix: “hard” vs “soft”; “vertical” vs “horizontal”
3. Policy shift: trade policy is now dictating industrial policy, no
longer the other way round. But in a smart way
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The question of inclusiveness is important – if industrial
development is driven by firms, then policies need to be guided by
firms. Addressing coordination problems with private sector is key
LICs are not expected to be LICs forever:
 Needs an adaptive strategy: how can policy evolve to move
away from LICs ‘logic’ i.e from border restrictions to policies to
build markets and capabilities
 Needs different sets of logic that guide objectives and focus of
industrial policies (eg. Policy space start to become real issues;
less flexibility etc);
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Thank you
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