Industrial Policy for Africa:
East Asian Lessons and Their
Applicability
Ha-Joon Chang
Faculty of Economics, University of Cambridge
hjc1001@cam.ac.uk
Theoretical justifications for policies increasing
productive capabilities through public intervention
• the infant industry argument
• various Neoclassical theories of market failure,
especially those related to knowledge generation
and the capital market
• the Big Push argument
• Hirschman’s linkages theory
• Arrow’s theory of learning-by-doing
• neo-Schumpeterian arguments on National
Systems of Innovation
• even the Austrian theory of tacit knowledge may
be re-formulated to justify industrial policy,
especially in relation to developing countries
Industrial Policy beyond East Asia I
• Successful industrial policy experiences in the
late 20th century are not confined to East Asia
– national industrial policies in France, Finland,
Norway, and Austria;
– regional industrial policies in Italy and Germany;
– industrial policy under another name in the US
through government R&D funding
• between the 1950s and the 1980s, the US federal
government financed anywhere between 47% and 65%
of national R&D spending, as against around 20% in
Japan and Korea and around 30% in Europe).
Kicking
away
the
ladderpicture
Industrial Policy beyond East Asia II
• In the 19th and the early 20th centuries, all of
today’s rich countries, except for the
Netherlands pre-WWI Switzerland, practised
protectionism and other forms of industrial
policy (subsidies, state ownership, regulation
on FDI).
– Interestingly, Britain and the US – the supposed
homes of free trade – had the world’s highest
levels of tariff protection during their respective
catch-up periods.
Average Tariff1
Rates
Table 1. Average Tariff Rates on Manufactured Products for
Selected Developed Countries in Their Early Stages of Development
(weighted average; in percentages of value)1
18202
Austria3
R
Belgium4
6-8
Canada5
5
Denmark
25-35
France
R
Germany6
8-12
Italy
n.a.
Japan7
R
Netherlands4
6-8
Russia
R
Spain
R
Sweden
R
Switzerland
8-12
United Kingdom 45-55
United States
35-45
18752
15-20
9-10
15
15-20
12-15
4-6
8-10
5
3-5
15-20
15-20
3-5
4-6
0
40-50
1913
18
9
n.a.
14
20
13
18
30
4
84
41
20
9
0
44
1925
16
15
23
10
21
20
22
n.a.
6
R
41
16
14
5
37
1931
24
14
28
n.a.
30
21
46
n.a.
n.a.
R
63
21
19
n.a.
48
1950
18
11
17
3
18
26
25
n.a.
11
R
n.a.
9
n.a.
23
14
Is Cold Climate Better?
“Those who live in a cold climate and in Europe are full
of spirit, but wanting in intelligence and skill; and
therefore they retain comparative freedom, but have no
political organization, and are incapable of ruling over
others. Whereas the natives of Asia are intelligent and
inventive, but they are wanting in spirit, and therefore
they are always in a state of subjugation and slavery. But
the Hellenic race, which is situated between them, is
likewise intermediate in character, being high-spirited
and also intelligent. Hence it continues free, and is the
best governed of any nation, and if it could be formed
into one state, would be able to rule the world.”
(Aristotle, Politics, Book VII, chapter 7).
“Undoubtedly, many factors played a
role, but … culture had to be a large part
of the explanation. South Koreans valued
thrift, investment, hard work, education,
organisation, and discipline. Ghanaians
had different values. In short, cultures
count.”
Samuel Huntington on culture and
development
The Germans are a “plodding, easily
contented people … endowed neither with
great acuteness of perception nor quickness of
feeling … It is long before [a German] can be
brought to comprehend the bearings of what is
new to him, and it is difficult to rouse him to
ardour in its pursuit.”
John Russell, an English traveller, on the
Germans in 1828.
“My impression as to your cheap labour was
soon disillusioned when I saw your people at
work. No doubt they are lowly paid, but the
return is equally so; to see your men at work
made me feel that you are a very satisfied
easy-going race who reckon time is no object.
When I spoke to some managers they
informed me that it was impossible to change
the habits of national heritage.”
An Australian engineer after visiting Japan in
1915
The Koreans are “12 millions of
dirty, degraded, sullen, lazy and
religionless savages who slouch
about in dirty white garments of the
most inept kind and who live in
filthy mud huts”.
Beatrice Webb on the Japanese and
the Koreans during her 1911-12 tour
of East Asia
Natural Resources and Industrial Policy I
• Most African countries are actually not that well
endowed with natural resources.
• In fact, fewer than a dozen African countries have any
significant mineral deposits.
– Only South Africa and the DRC are exceptionally well
endowed with more than one mineral resources.
• Most African countries may have low population
density, but only a handful of them are exceptionally
well-endowed with arable land.
– Niger, Liberia, DRC, Chad, Senegal, Sierra Leone, and the
Central African Republic
Natural Resources and Industrial Policy II
No country, not even the US, Canada, and Australia, has
been blessed by nature to such an extent that they can
become rich only by doing things that come
‘naturally’.
Moreover, it is not even as if all ‘natural’ products are
really natural. Many of them are products of
colonialism.
= For example, many African countries export cocoa
and tea, which were brought from, respectively,
Central America and China to Africa by the
colonisers
Natural Resources and Industrial Policy III
When it comes to high-productivity activities
whose existence determines whether a country
is economically developed or not, countries
become good at something only because they
deliberately decide to become so.
• Why should the Japanese should be good at building
cars (Toyota) and the Finns at making mobile phones
(Nokia)?
• Why should Korea be good at making steel, when the
it does not even produce any relevant raw materials iron ore or coking coal? (POSCO)
Natural Resources and Industrial Policy IV
Now, these high-productivity activities do not
develop naturally in developing countries, if
you left things to the market, because you
already have superior competitors in more
economically developed countries.
- This is the logic of ‘infant industry
promotion’, which was behind the successful
industrial policy experiences of most of
today’s rich countries, ranging from 18th
Britain through to 19th century US and 20th
Korea.
Political Economy Questions I
• Successful industrial policy requires right
“political” conditions – the commitment of the
leadership to economic development, the
coherence of the state machinery, and the
ability of the state to discipline the recipients
of its supports.
• When considering the political realities of
many African countries, it seems difficult to
imagine how industrial policy, even if it were
“correct”, can be implemented well in those
countries.
Political Economy Questions II
• But we should not let the best be the enemy of
the good.
• In the real world, successful countries are the
ones that have managed to find “good enough”
solutions to their political economy problems
and went on to implement policies, rather than
sitting around bemoaning the imperfect nature
of their political system.
Bureaucratic Capabilities I
• No basis for the assumption that industrial policy is
more difficult than other policies.
• Industrial policy does not require sophisticated
knowledge of economics, as often believed.
– The industrial policy-makers of East Asia were not
economists (lawyers in Japan and Korea, engineers in
Taiwan and China today), and what little economics they
knew was usually the “wrong” kind – Marx, the German
Historical School, Schumpeter.
• High-quality bureaucracies are not as impossible to
build as people think.
– France, Korea and Taiwan in the post-WWII period
Bureaucratic Capabilities II
• There is also “learning-by-doing” in policy.
– Without trying out “difficult” policies, capabilities
cannot be improved.
• The fact that something is “difficult” cannot be
a reason not to recommend it.
– After all, developing countries are routinely told to
adopt “best practice” or “global standard”
institutions used by the richest countries, when
many of them clearly do not have the capabilities
to effectively run such institutions.
Changes in the Rules of the Global Economy I
• WTO rules not as restrictive as believed.
– Tariffs are only ‘bound’, rather than banned, and the poorer
countries have found only a limited number of tariffs
– Infant industry protection allowed (although only up to 8
years)
– Emergency tariffs allowed (sectoral surge, overall BOP
problems)
– Subsidies for environment, agriculture, R&D, regional
policies, and (for LDCs, which include many African
countries) export subsidies allowed
– TRIPS constraining but not for older technologies that
African countries need
– TRIMS constraining but performance requirements for
local labour, technology transfer, R&D, etc. allowed.
Changes in the Rules of the Global Economy II
• Having said that, there do exist bigger
constraints, especially in the case of the poorer
countries, including many in Africa, in the
forms of aid/loan conditionalities and
bilateral/regional trade/investment agreements.
• However, all these rules are ‘man-made’ and
can be changed if deemed necessary.