Industrialisation revisited: Enabling policy environment
View(s):Just a few days before the event, during a phone conversation with a friend of mine, I mentioned about my forthcoming speech. He is more matured and more experienced than me. He asked me what I would be speaking on. I said that it’s about the role of industrialisation in economic recovery and progress of the country.
The artificial beach at the Colombo Port City, a development the authorities hope would expand industries and services through foreign and local investment.
He responded: “I have heard it so many times during the past 50 years or so”. Apparently, he must have heard it so, after serving long years in the government, particularly with the Ministry of Finance as well as the Ministry of Industries.
I replied: “I’m sure you have; even though it had been preached repeatedly for so long, you know how and why where we went. So, this time too we must preach it again.” He gave me a piece of advice: “It would be better, if you can explain at least what we must do to become industrialised.” I said, “yes, that will be my concluding remarks of the speech”.
Pre-conditions and
presumptions
But there are some pre-conditions too. It is true that we must address the key issues, but we must avoid ad-hoc and piecemeal-type work. When an old vehicle needs an overhaul repair, fixing nuts and bolts here and there will not serve any purpose.
There are widely held beliefs in favour of protectionism and state intervention in fostering industrialisation. The old debate between ‘import substitution industrialisation’ and ‘export-oriented industrialisation’ during the 1980s, was of course, in favour of the latter. But some of their elements continue to remain active.
A government can protect few individual businesses or companies from import competition, allowing them to flourish by exploiting customers in the local market. There is no question that you may find plenty of case studies in many countries including Sri Lanka to prove the success of this strategy. Neither have I any reason to disagree.
The problem arises when you try to scale it up as a ‘national strategy’ anticipating that the country would be industrialised when there is a protective regime. For instance, the fact that someone can become rich by “robbing a bank” does not mean that it could be a national strategy to make everyone rich! This is what we mean by ‘fallacy of composition’ in Economics.
Government intervention
Government intervention is a highly misunderstood or misinterpreted term mostly by non-economists, but some economists too are not excluded (from this belief). The problem arises when you take “the market and the government” as substitutes – one could be substituted with the other.
The labels such as neo-classicals or neo-liberals all are loaded with “anti-interventionist” ideas and opinions by their opponents. In fact, we know that competitive markets work for “efficiency” which might not be the desirable outcome from a different angle. It gives an opportunity for the government to intervene.
Furthermore, markets too work efficiently, if the underlying preconditions for efficiency exist. We know that it is not always the case, because all such conditions don’t exist in reality. It gives another opportunity for the government to intervene in addressing market deficiencies and inefficiencies.
An important empirical observation is the fact that the government can pick up or set up some business companies, subsidise them using taxpayers’ money, and nurture them with various forms of government assistance. There is no doubt that you can find many examples of successful cases of this nature from many countries.
Individual cases
We may also find many examples of ‘unsuccessful cases’ of such companies too in spite of government support. But the problem is that such unsuccessful cases are rarely recorded for us to study, because naturally what is recorded are only the successful ones.
At the same time, we find many successful companies from the same countries, which have become successful without receiving any specific support from the governments. In fact, the number of these companies is much larger than those which have received government support. A simple reason is that the government of any country is not capable of providing special support from taxpayers’ money to every potential business company.
The question now is which type of cases from the above examples, should we quote in order to build a ‘national industrial policy’. Apparently, one may not be able to build a ‘doctrine’ out of a few individual cases ignoring all the other cases.
Our discussion on ‘picking up some businesses’ teaches us a lesson: It is the ‘overall policy environment’ that leads to industrial development, because individual cases guide policymakers who have nowhere to turn. Within such an enabling policy environment, of course, we may find some individual cases preferred by the governments or the political leaders for a variety of reasons.
Enabling policy
environment
An enabling policy environment to foster industrialisation must eliminate the existing barriers to industrialisation and promote its international competitiveness. These are the areas where the government has an active role to play. Apart from that a related feature is to incorporate modern features which would strengthen competitive vigour of emerging industries.
There are three most important aspects of an enabling policy environment: The first is a set of reforms aimed at simplifying and rationalising regulations, institutions and procedures which determine the ‘ease or difficulty of doing business’.
The second is about both primary and secondary inputs to industrialisation ensuring their availability, affordability and quality. Primary inputs include finance, human resources, land, technology, infrastructure and logistics. Secondary inputs include raw materials, parts, components, communication, energy, and other utilities. It is the role of the government to ensure the availability of all these inputs of both types at competitive prices and in required quality standards.
The third is a set of reforms aimed at cross-border policies, regulations, and procedures which determine the country’s integration to the global economic environment. This is important for facilitating international trade and investment flows, eliminating barriers to input supply and output sales and enabling the country to enter global value chains.
21st Century
industrialisation
Over the past few centuries, industrialisation itself has been a dynamic process. A country that enters industrialisation today cannot rely on the past, but needs to look into the future. There are two most important elements that we must add into our industrialisation drive: modern technological and environmental factors.
The world industrialisation episode has gone through various stages from the 18th century to-date: mechanisation stage, mass production stage, automation stage, and the current smart industrial stage with digital technology. The “late comers” cannot go through the stages but need to leap forward to the most modern stage in order to be globally competitive.
We understand that the world concern over the environmental aspects of industrialisation in terms of climate change, biodiversity loss and pollution have never been so great in the past than today. The “late comers” cannot ignore it too, because the global demand for industrial outputs is increasingly turning to “green industrialisation”.
Government’s role
The above are the essential elements of an enabling policy environment for industrialisation. A careful investigation into each of them would reveal a few more important considerations, which would guide our policy formulation.
There is no country in the world which can meet all the requirements to establish an enabling policy environment on its own by isolating from the rest of the world. This means that global integration is a necessary condition though not sufficient. These requirements, further confirm that there is an important role for the government to play, not to replace the market, but to enable the market.
By the way, what about government intervention offering special favours to specific ones? In fact, the governments or the political leaders do that for either economic or non-economic reasons. Even providing special favours to SMEs or pushing industries to lagging areas are widely justified. However, the underlying condition is that such measures neither reverse nor distort the overall policy environment.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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