Workshop on Industrial Development and
Globalisation
18 May 2011
National industrial policy in practice:
the vertical dimension
Milasoa Chérel-Robson
Africa Section, Division for Africa, Least Developed
Countries and Special Programmes, UNCTAD
Structure of the session
I. Definition and duration of vertical policies
II. Support to domestic products/sectors/subsectors:
principles
III. Selected measures to support domestic firms
IV. FDI and industrial policy: principles
V. FDI and industrial policy: instruments
3-4 minutes per slide including class discussion and
questions.
PREAMBLE: LEADERSHIP
• The design, implementation and
effectiveness of industrial policy depends
on strong national leadership from the
government in partnership with the private
sector and civil society at large.
• Africa has a strategic importance thanks to
its natural resources. Hence should not shy
away from being assertive in its policies.
I.
Definition and duration of vertical policies
Key points: understanding the definition of vertical
policies and how they differ from horizontal
policies.
Keeping in mind the importance of the temporary nature
of vertical measures.
I. Definition and duration of vertical policies
(1)
• Vertical policies refer to measures aimed at supporting
specific products or industries (sectors/subsectors).
Vertical policies are temporary.
• Measures originally aimed to support specific sectors can
be developed into policies that impact other sectors (more
technologically sophisticated) of the economy and
ultimately the whole economic system. Ex: the protection
of the electronics and computer industry in LA shifted to
supporting software, then ICTs and the promotion of the
information society in the region.
Definition and duration of vertical policies
(2)
• There is no formulae or a set of best practices that
work for all cases. There are examples of vertical
measures that aim to:
– Supporting domestic firms in specific sectors
for a well defined time period.
– Attracting and policing FDI in specific sectors
for a well defined time period.
II. Support to domestic products/sectors/subsectors:
principles and tradeoffs
Key points: Understanding the key principles behind the
choice of support for specific
products/sectors/subsectors.
Tradeoffs are necessary but simultaneous choices can also
be made.
II. Support to domestic
products/sectors/subsectors: principles and
tradeoffs (1)
• Combine temporary protection with temporary
subsidies
• Instil principle of gradual technology upgrading
through support of R&D
• Strengthen government’s administrative and
institutional capacity to implement and monitor
these measures.
Support to domestic
products/sectors/subsectors: principles and
tradeoffs (2)
• For commodity producing countries commodity
processing provides opportunities for early
industrialisation but there are other possibilities
that can be pursued simultaneously.
• Evidence from analytical work strongly suggests
that countries that delay industrialisation beyond
commodity processing delay the opportunities for
high income growth.
Support to domestic products/sectors/subsectors:
principles and tradeoffs (3)
• Early stages of industrial development requires
DIVERSIFICATION beyond exploitation of unskilled
labour and natural resources into a wider array of more
technologically advanced activities.
• Sectoral specialisation happens again at a later stage of
development.e.g. pc income of $9,000.
• Priority should be given to choosing sectors with stronger
linkages with other sectors of the economy.
III. Selected measures to support domestic firms
Key points: listing and discussion of a selection of
measures targeted to specific products or sectors
identified in industrial diagnosis analysis.
First target: domestic firms.
III. Selected measures to support domestic firms
(1): TEMPORARY/TIME BOUND protection
• Tariffs are used to protect a given industry and
kept at their initial maximum level for a given
time period. They can be brought down gradually
until the industry matures.
• These measures depend on government having
policy flexibility/policy space to undertake them
in the context of a growing trend for multilateral
discipline.
Selected measures to support domestic firms
(2): access to finance
• Subsidised credit, special credit lines favouring
particular sectors and/or regions within the
country
• Finance for marketing
• Finance for entire investment
• Loan working capital
• Financial mechanisms for leveraging funds: ex.
guarantee funds.
Selected measures to support domestic firms
(3): access to markets
Export markets used as a vent for surplus and
opportunities to understand global demand.
Support measures include:
• Creation of a trade promotion agency
• Export credit line at the development bank
• Export credit insurance
Selected measures to support domestic
firms (4): technology upgrading (1)
• Subsidies for research and innovation capacity
• Promoting joint ventures with TNCs through
contractual obligations
• Creation or support of existing clusters and
industrial parks. Support measures include
providing infrastructure and special prices for
power generation.
Measures to support domestic firms (4): technology
upgrading (2). Source: TDR 2006/Alkuz 2005
Timing of support to specific products
Measures to support domestic firms (4):
technology upgrading (3).
• support policies follow a non-linear path; that is,
any specific product category is a candidate for
public support policies only for a limited period of
time.
• level of support required to move from mediumto high-technology intensive products will be
lower than that required to move from traditional
industries to MTintensive products.
IV. FDI and industrial policy: principles
Key points: core principles for the elaboration of a
proactive FDI policy for development.
IV. FDI and industrial policy: principles (1)
• Evaluate the kind of externalities that FDI
generates.
• Embedd FDI policy in overall development
strategy.
• Success stories of impact of FDI on development
based on building domestic absorptive capacity
FDI and industrial policy: principles (2):
economic development (1)
• FDI generates economic development if there is an
active government involvement for ensuring that it
does result in technology transfer through the
following:
• Multinationals are linked with domestic firms
• Domestic firms internalise the spillovers
• domestic conditions support learning
• Favouring types of FDI that add to the host
country’s productive assets (ex: greenfield
investment)
IV. FDI and industrial policy: principles
(3): economic development (2)
• Most importantly: FDI generates economic
development if there are strong linkages with key
parts of the host economy.
Figure 1: Linkages between MNEs and the home country economy
(source: Rajneesh Narula, Henley, University of Reading)
Beware of…
• Excessive bias in attracting FDI generates the risk
of external integration versus internal integration
(Wade, 2003).
• Risk of FDI strengthening the host country’s
comparative advantage in natural resources and
hence no upgrading.
V. FDI and industrial policy: instruments
Key points: Some instruments that can be used in
attracting and managing FDI for development.
Target: foreign firms.
V. FDI and industrial policy: instruments (1)
Attracting FDI based on locational advantages:
• Export Processing Zones (EPZ)
• Fiscal incentives such as specific tax breaks
• Special trade agreements
BUT these are vulnerable to competition from other
countries based on costs
FDI and industrial policy: instruments (2)
Provide pecunary externalities to TNCs through:
Support policies for the creation of a dense
network of intermediate inputs suppliers of high
quality inputs at competitive prices.
Offer other auxilliary benefits.
Class discussion:
1. on leadership: government and private sector.
2. which sectors in Tanzania have strong
business associations?
3. what is the potential of these sectors for
creating strong linkages with other parts of the
economies?
Next step
• Use these elements to inform group exercise
2.
Thank you !
References will be provided in CD of the
course.