Will industrial policy fail India again?

[ad_1]

Industrial policy is, tragically, back in fashion. Governments across the world are convinced that they can successfully steer their economies through subsidies, regulations, and tariffs towards a greener, more resilient, and more industrial future. This is being sold essentially as a response to the “failures” of the past two decades of globalisation — in which manufacturing jobs have left certain areas of the developed world, in exchange for merely vastly increased purchasing power for all sections of Western society and an enormous reduction in poverty across the developing world. This is seen as an unfair exchange.

Some developing countries with a history of lordly bureaucrats and servility to Western intellectual trends have also shifted towards industrial policy. India, for example, is putting into a place an architecture of production-linked incentives (PLIs), controls over the terms of foreign investment, arbitrary tariffs (such as on white goods, for example) and outright bans and licensing (such as on laptops). These may not be simultaneously planned so much as improvised in response to industry demands or apparent shortages and surpluses. But they are the instruments of industrial policy, and are justified by officials and sympathisers as  being similar to policies being wielded in the West.

When faced with the reminder that such policies have in fact been tried in India in the past and left us destitute and crisis-ridden, the answer is if anything a little louder: this is not the past. We have a stable and sensible government now, unlike one-party rule under the Congress. The currency is in a managed float, and remains convertible on the current account. (This defence seems to ignore the various attempts to control such convertibility in practice, such as the introduction of tax deducted at source on amounts exchanged.) Foreign firms are still allowed to enter the Indian market with a nominally level playing field. (Nominally because, in practice, policies such as data localisation and the control of foreign investment in inventory-based e-commerce in fact tilt the playing field in favour of Indian firms.) Most importantly, the claims continue that, in the end, industrial policy worked for East Asia; surely it is time for us to give it another try?

Let us take this claim at face value. Let us assume, for the sake of this column, that industrial policy has in fact worked in some places and at some times. What could we learn from those supposed successes that are of importance to Indian policy choices today?

First, industrial policy requires state capacity and expertise. Consider Japan. What was then known as the Ministry for International Trade and Industry, a mega-ministry that oversaw industrialisation and commerce, had over 12,000 employees in the ministry and associated bureaux in 1960, the overwhelming majority of whom were active in policy and administration. Almost all were sector specialists, rather than the generalists we have in India. The sanctioned strength of the Union Ministry of Commerce and of the Ministry of Heavy Industries put together is about 400.

Second, industrial policy requires open and transparent policy-making that involves experts. MITI, now called the Ministry for the Economy, Trade and Industry, or METI, had ten major committees designing energy policy alone in the 1980s that use a consensus-based decision-making policy. In 1988, the 250 or so members of these councils had a 40 per cent representation from industry and another 40 per cent consisting of independent experts and academics. There was also a civil society presence. Government representation was limited to just over five per cent. The difference with how policy is designed in India should be obvious.

Third, industrial policy forces the government to not just allow foreign firms in, but to give them an oversized say in public policy choices. This is a particularly hard pill to swallow, and no doubt disqualifies the whole process in many eyes. Yet the academic work on Korea’s development makes it clear that the domestic government’s policies and choices were enablers. The secret sauce was that Japanese companies in particular, after the normalisation of relations between the two countries in 1965, began to seek out Korean subcontractors for their lower-value work as they moved up the supply chain. The choices of Japanese companies — for example, to specialise in wigs and plywood in Korea — were more determinative of Korean export success in the next decade than those of bureaucrats in Seoul. Entering global supply chains unfortunately requires the enthusiastic consent and approval of the companies that currently dominate those chains. Those companies are not currently Indian companies.

Fourth, industrial policy requires the domestic private sector to collaborate and access shared basic research and technology. This was a very important component in Japanese successes in research and development that moved them swiftly up the value chain in the 1950s. Under MITI supervision, Japanese conglomerates collaborated and shared the costs of large-scale technological upgrade projects. One signal success here was the Very Large Scale Integration project launched in 1975, which ended with the country taking pole position in semiconductor production from the United States.

Fifth, industrial policy requires the possibility of high intra- and inter-sector labour mobility. During Korea’s industrial policy era, 60 per cent of new jobs in the manufacturing sector lasted less than a year, and labour turnover was higher in the sector than in other parts of the economy. A large share of the returns must go into increasing manufacturing wages. In this period, migrants from agriculture were not hired into manufacturing; they went into service and support sectors, and new jobs in manufacturing went almost entirely to new workers just leaving the educational system. Is this a natural fit for India’s current politics and its economic structure?

Sixth, industrial policy requires high availability of savings. China achieves this today through open financial repression, in which household consumption is controlled thanks to the government’s overlordship of the financial system. Crypto-taxes on bank deposits were also part of the financial strategy in other East Asian countries. Real interest rates were kept artificially high as well. Interest rates in Korea in the 1970s could be maintained at above 10 per cent a year in real terms, helped by the fact that the domestic public debt ratio was between three and four per cent of gross domestic product.

Seventh, industrial policy demands a depoliticised private sector. I do not mean it is independent in the classical sense of being kept at arms-length by policy makers — in fact, the opposite may be true. But if companies are seen as doing the will of particular politicians or a particular political dispensation, then they are subject to serious political risk. The conglomerates in Korea survived major political upheavals and even the assassination of the president who oversaw the introduction of its industrial policy, Park Chung-Hee, in 1979. They thrived during the violence and pro-democracy transitions of the 1980s and 1990s, and only faced serious requirements to reform after the Asian crisis of 1997.

Very few of these seven requirements can be said to be met in India today. Even if industrial policy has worked in some Asian miracle economies — which I do not concede — the lessons from this success should cause us to question the return of such policies in New Delhi in 2023.

The writer is director, Centre for Economy and Growth Programme, Observer Research Foundation, New Delhi

[ad_2]

Source link