In a nutshell
Both the nature of industrialisation and the global economic environment have changed in the last two decades.
Effective industrial policy in this new environment requires high levels of coordination between government members and between the private sector and policy-makers.
Industrial policy needs to be flexible and dynamic with policy-makers learning from past mistakes and adjusting to new conditions; it should also contain regular evaluations of progress towards predefined goals.
Industrial policy has been defined in many different ways. For the purposes of our survey of economists living and/or working in one of the Arab countries, Iran and Turkey, we use Pack and Saggi’s (2007) definition as ‘any type of selective government intervention or policy that attempts to alter the structure of production in favor of sectors that are expected to offer better prospects for economic growth that would not occur in the absence of such intervention.’
We define regional policies as measures that aim to promote development in specific locations within a country through tax concessions, infrastructure incentives and reduced regulation.
Previous failures of industrial policy
Questions about the desirability of new industrial and regional policies stem from the recognition that ‘old’ policies of this kind have failed to deliver. Policies adopted in the past include import substitution, export promotion, resource-based industrialisation, export processing zones and innovation policies. They have often favoured vertical policies (which focus on a specific firm or industry and therefore tend to be more prone to rent-seeking and corruption) over horizontal ones (Nabli et al, 2006).
Despite wide differences in the characteristics of countries in the region in terms of size, economic structures and political situations, none have achieved significant structural change over the last two decades. For example, Loewe (2013) reports the damage of deficits in the effectiveness, fairness and efficiency of Egypt’s industrial policy between 2004 and 2011, while El-Haddad (2016) judges the country’s structural transformation to be modest. Morocco, Tunisia and, to a lesser extent, Turkey have also experienced very limited structural change (Atiyas, 2015; Atiyas and Bakis, 2013).
The failure of industrial policy to generate structural change in developing countries can be due to many causes, of which Devarajan (2016) emphasises three:
- First, there are numerous economic distortions and correcting one in an attempt to eliminate a market failure may make things even worse.
- Second, industrial policies can be captured by powerful interest groups for their own benefit.
- Third, industrial policies usually target sectors but they can affect firms differently within each sector.
In the Arab countries, Iran and Turkey, the political economy factors of rent-seeking and corruption appear to have played a major role in the consequences of economic policies in general and industrial and regional policies in particular (Nabli et al, 2006; Jaud and Freund, 2015).
But there are many theoretical arguments in favour of industrial policy. These include the existence of market failures, coordination problems and information externalities. These arguments have been used in many Arab countries in the early stages of development to support their industrial policies. After a period during which such policies were banned from economists’ discourse, they are again becoming popular in the region as evidenced by the answers to our survey.
Regional policies have also failed to reduce regional inequalities. Large disparities within countries were underlined during the Arab Spring; and today many countries in the region, including Egypt, Morocco and Tunisia, are making regional development a priority.
Our survey has been inspired by a series conducted by the Centre for Macroeconomics, which informs the public about the views of prominent economists based in Europe on important macroeconomic and public policy questions.
We received 34 responses to the survey, of which 28 experts provided complete answers. The countries covered include Algeria, Egypt, Iran, Kuwait, Lebanon, Morocco, Saudi Arabia, Sudan, Tunisia and Turkey.
A majority of respondents agree on the need for a new industrial strategy in their country. Of the 28 experts, 10 (more than a third) agree and 16 (over a half) strongly agree that their country needs a new industrial policy. So more than nine out of 10 respondents either agree or strongly agree on the need for a new industrial policy. Only two either disagree or strongly disagree.
A majority of respondents also agree on the need for a new regional strategy. Of the 28 experts, 10 agree and 13 strongly agree that their country needs a new regional policy. So more than four out of five respondents either agree or strongly agree on the need for a new regional policy. Only two either disagree or strongly disagree, with three neither agreeing nor disagreeing.
Effective industrial policy in a new economic environment
‘Old’ industrial policies are not only ineffective at generating positive change in the economies where they have been adopted: they are also not adapted to a changing world. Both the nature of the industrialisation process and the global economic environment have changed in the last two decades. Increasingly, the global trading architecture is changing and industrialisation operates via integration into global supply chains (Ramdoo, 2015; Guadagno, 2015).
In the Arab countries, Iran and Turkey, a large number of multilateral, bilateral and regional trade agreements have been signed and implemented. These limit the instruments that can be used to promote industrial development. The role of foreign direct investment (FDI) in the industrialisation process is also becoming more important.
According to Freund and Moran (2017), concrete actions are required for effective integration into global supply chains, with foreign investors more interested in the upgrading ‘of transport and logistics, access to skilled workers, technicians, and managers, and business climate reforms than with direct subsidies, tax breaks, or subsidized inputs’.
Their study of Morocco indicates that the country was able to attract substantial FDI in new sectors and to improve significantly the country’s revealed comparative advantages in airplane parts, automobiles and automobile bodies in the last decade.
Comments from the respondents to our survey focus on the characteristics of an effective industrial policy in this new economic environment. They believe that industrial policy should be part of a coherent economic development strategy. For that to be achieved, a high level of coordination between government members and between the private sector and policy-makers is required.
The respondents also feel that industrial policy should be flexible and dynamic with policy-makers learning from past mistakes and adjusting to new conditions. Implementation should include transparency to avoid rent-seeking and corruption. It should also contain regular evaluations of progress towards predefined goals.
Atiyas, Izak (2015) ‘Structural Transformation and Industrial Policy’, ERF Policy Perspective No.16.
Atiyas, Izak, and Ozan Bakış (2013) ‘Structural Change and Industrial Policy in Turkey’, ERF Working Paper No. 803.
Devarajan, Shanta (2016) ‘Three Reasons Why Industrial Policy Fails’, Brookings Institutions.
El-Haddad, Amirah (2016) ‘Government Intervention with No Structural Transformation: The Challenges of Egyptian Industrial Policy In Comparative Perspective’ (in Arabic), ERF Working Paper No. 1038.
Freund, Caroline, and Theodore Moran (2017) ‘Multinational Investors as Export Superstars: How Emerging-Market Governments Can Reshape Comparative Advantage’, Peterson Institute for International Economics Working Paper No. 17-1.
Guadagno, Francesca (2015) ‘Industrial Policies in Lower-Middle-Income Countries’, E15 Expert Group on Reinvigorating Manufacturing: New Industrial Policy and the Trade System.
Jaud, Mélise, and Caroline Freund (2015) ‘Champions Wanted: Promoting Exports in the Middle East and North Africa’, World Bank.
Loewe, Markus (2013) ‘Industrial Policy in Egypt 2004-2011’, German Development Institute Discussion Paper No. 13/2013.
Nabli, Mustapha, Jennifer Keller, Claudia Nassif and Carlos Silva-Jáuregu (2006) ‘The Political Economy of Industrial Policy in the Middle East And North Africa’, World Bank.
Pack, Howard, and Kamal Saggi (2007) ‘The Case for Industrial Policy: A Critical Survey’, World Bank Research Observer 21(2): 267-97.
Ramdoo, Isabelle (2015) ‘Industrial Policies in a Changing World: What Prospects for Low-Income Countries?’, E15 Expert Group on Reinvigorating Manufacturing: New Industrial Policy and the Trade System.