Developing Industrial Policy

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Table of Contents

Introduction
Literature review
Methodology and data
Analysis and results
Discussion and conclusion
Bibliography
Footnotes

Introduction

According to Dani Rodrick, the author of the article, “Industrial Policy for the Twenty-First Century”, conventional economists held the view that developing economies are characterized by numerous market failures. Additionally, economists were of the view that it was only through government interventions that poverty level in such societies could be reduced¹. Some of the interventions considered relate to state ownership, import substitution and planning. However, this view was short-lived due to the extensive government failures and crises experienced, which led to increased consideration of market forces as an important factor in a country’s economic development.

Adoption of economic liberalization and open trade policy led to economies experiencing a number of benefits. Some of the benefits include increment in the volume of exports, development in quality of human capital by gaining new skills and knowledge, and improvement in financial interests. One of the elements of economic development that the author has cited to be enhanced by market forces relates to the existence of entrepreneurship.

The author asserts that entrepreneurship encourages diversification of productive structures. However, the resulting economic growth rates were lower than what had previously been experienced under the old policies. Thus, market forces were not free of failures. In light of this, this paper illustrates the importance collaboration between the private and public sectors in formulating policies. Additionally, market forces are also cited as an important consideration in the policy formulation process.

Literature review

The author notes that both the developed and the developing economies have a responsibility to ensure that they develop a high comparative advantage. A strong relationship exists between development of a high rate of economic growth and nurturing the competitive advantage. Incorporation of a governed-market model is one of the elements cited by various scholars to contribute to high economic development².

Development of a market-oriented economy is an important tool in attaining a high rate economic growth. Integration of growth-oriented entrepreneurship is regard as one of the avenues through which economies can stimulate industrial growth. The author hypothesizes that it is critical for the private sector and the government to collaborate in formulating policies that culminate in development of a market-oriented economy.

Entrepreneurship is regarded as one of the essential elements of economic organization³. Entrepreneurship is an important component in developing a market economy. In spite of its importance, both traditional and modern economists have continuously neglected the subject.

Different economists are of the opinion that industrial policies should be formulated in such a manner that they enhance productivity. Additionally, investment in research and development should be taken into consideration in country’s quest to attain a high level of economic development. The policy formulated should ensure that they result in the creation of an optimal economic environment.

Upon instituting an environment that fosters research and development, it is paramount for stakeholders in the private and the public sector to institute effective protection mechanism. One of the ways through which this can be attained is by recognizing and implementing intellectual property rights. This will stimulate innovation across the various sectors. Specialization has also been cited as a major factor in enhancing a countries’ comparative advantage.

Methodology and data

In a bid to illustrate the need for governments and private sector collaborating in the development of entrepreneurship and market-oriented economy through effective policy formulation, the author has integrated qualitative research design. Decision to incorporate this research design was informed by the need to impart a comprehensive understanding on the hypothesis under investigation. Additionally, the design was selected in order to give the study a wide scope, as illustrated by the fact that the author evaluates the hypothesis by considering different developing economies around the world.

The author appreciates the importance of effective data collection in order to improve the credibility of the study. Consequently, secondary method of data collection has been used. The data used in conducting the study is collected by reviewing the literature from credible published materials.

Analysis and results

The author cites entrepreneurship as one of the most important aspects in developing policies that can culminate in the creation of a market-oriented economy. However, existence of high-cost discovery has been cited as one of the major factors that has continuously hindered its development. Another major challenge that limits the effectiveness and efficiency of entrepreneurs in their quest to stimulate economic development by introducing new products and services arises from the existence of information externalities.

Information externalities in developing countries are relatively high as compared to the developed economies. Information and knowledge externalities limit entrepreneurship in developing countries through two main ways. Firstly, they limit the effectiveness of entrepreneurs by identifying what to produce. Secondly, they negatively affect the production processes and technology. Discovery costs in developing economies are increased by the existence of information failures⁴. Subsidizing investments in new and non-traditional industries is one of the best policies that should be incorporated in pursuit of lowering information externalities.

The existence of coordination externalities is also another major challenge that hinders entrepreneurship. For example, implementing a particular project requires an entrepreneur to take into consideration more than one aspect. Thus, a high level of coordination is an essential. Nonetheless, entrepreneurs may not be able in a position to coordinate the project effectively, hence its failure.

In a bid to deal with coordination and information externalities, it is paramount for governments to provide the necessary support to investors in both the public and the private sector, which will culminate in lowering the probability of a project or investment failure. In the process of formulating policies, it is fundamental for the involved parties to ensure that the interventions considered in countering coordination and information externalities target specific activities effectively, such as the training to be offered and the new technology to be incorporated. Thus, the policies should not only focus on the sectors per se.

In addition to government interventions, economists are of the opinion that it is essential to incorporate private initiative. The private sector plays a pivotal role in stirring economic development. Firstly, the private sector contributes significantly with regard to provision information. This aspect emanates from the fact that the public sector may not have access to a wide range of information compared to the private sector.

Accordingly, one can assert that the private sector aids in reducing information externalities that might be experienced in the public sector. The development of effective industrial policies is an important consideration in a country’s quest to attain a high rate of economic development in the 21^st century. Thus, it is essential for the public sector to consider eliminating bureaucracies that might limit interaction of the private and the public sector.

Discussion and conclusion

Despite the existence of government failure in stimulating economic development, public investments are essential driving force in economic development⁵. Additionally, integrating private and public initiatives would result in increased encouragement of technological dynamism and diversification, which are fundamental forces in driving economic development. Therefore, public and private sectors in both developed and developing economies should collaborate in order to improve their country’s economic growth. Neither of the two sectors can succeed by operating autonomously of each other.

The author is of the opinion that the most effective model that should be adopted in the process of designing industrial policy entails strategic collaboration between governments and the private sector. Through collaboration, the probability of identifying possible obstacles that would hinder policy formulation is increased. Thus, effective restructuring is undertaken. Additionally, the policy designing process should not only focus on attainment of the right policy outcome but also on ensuring that the right policy process is followed.

Considering the hindrance to entrepreneurship by the high cost of discovery, it is imperative for industrial policymakers to concentrate on the discovery process. Stakeholders in private and the public sector should focus on developing a comprehensive understanding on the underlying costs and opportunities. This will significantly result in improvement in the establishment of a market-oriented economy in addition to stimulating growth-oriented entrepreneurship.

In spite of the importance of the two sectors interacting in developing industrial policy, the policy developed should be shielded against being used by either private or public parties for self-interests. Establishing an intermediate position whereby the private and public parties can effectively utilize the formulated policy is necessary. Therefore, custodians of industrial policies should ensure that a transitional position between full embeddedness and autonomy is established.

The analysis illustrates that market failure can occur in the event of intense or minimal government interference⁶. Over the past two decades, most development policies formulated focused on how to deal with the error of commission by governments. Consequently, the policies have greatly emphasized on getting rid of trade restrictions, public ownership, regulations, and financial repression. The importance of government involvement in the process of undertaking industrial restructuring has been highlighted. One of the major challenges faced by industrial policies in developing countries arises from the fact that they are prone to corruption and political capture. However, the success of a particular industrial policy is dependent on the extent of political support provided.

Sufficient coordination and deliberation should be incorporated in order to nurture effective flow of information amongst the involved parties. The importance of coordination and deliberation arises from the fact that it enhances integration of requests and opinions of the various parties. A mechanism to enhance transparency and accountability of the formulated industrial policies is necessary in order to increase their implementation.

When formulating industrial policies, it is necessary for parties to consider a number of principles. Industrial policies aim at increasing a country’s comparative advantage. Consequently, it is fundamental to include incentives that would culminate in development of new areas, which enhances development of comparative advantage. Subsidizing the cost of discovery is one of the incentives that should be considered coupled with the development of a mechanism to deal with financing risks.

Secondly, a benchmark to assess the success or failure of the formulated policy should be instituted on top of setting a timeframe within which support for publicly policy should be withdrawn. This aspect will aid in ensuring that resources do not remain tied to a particular project. The support provided during the policy formulation process should focus on the activities rather than the sector, which will play an important role in correcting possible market failures. In addition to the above principles, it is important to ensure that subsidization is undertaken on activities characterized by a high potential of demonstration and spillover effects.

This aspect means that a crowding-out effect should be taken into consideration. The responsibility to formulate and implement industrial policies should rest on agencies that have previously demonstrated a high degree of competence. Continuous and effective monitoring of the implementing agency or agencies should be conducted. In a bid to improve awareness of industrial policies by the target audience, a comprehensive promotion strategy should be designed to enhance the decision-making process of private and public entities.

In summary, developing industrial policy plays an important role in the 21^st century with regard to the provision of public goods. Therefore, industrial policies are an important factor to take into consideration because they stimulate economic development. To achieve a high rate of economic development, both the private and the private sector should collaborate in the formulation of industrial policies.

Bibliography

Acs, Zoltan, and David Audretsch. Handbook of entrepreneurship research: An interdisciplinary survey and introduction. New York: Springer, 2010.

Bianchi, Patrizio, and Labroy Sandrine. Industrial policy after the crisis: seizing the future. Cheltenham: Edward Elgar, 2011.

Blakely, Edward, and Nancey Leigh. Planning local economic development: theory and practice. London: Sage, 2009.

Szirmai, Adam. Entrepreneurship, innovation and economic development. Oxford: Oxford University Press, 2011.

Smith, Heather. Industry policy in Taiwan and Korea in the 1980s: winning the market. Cheltenham, UK: Elgar, 2000.

Tucker, Irvin. Macroeconomics today. Mason, OH: Cengage, 2011.

Footnotes

¹Patrizio Bianchi and Labroy Sandrine, Industrial policy after the crisis: seizing the future (Cheltenham, UK: Edward Elgar, 2011), 36.

² Heather Smith, Industry policy in Taiwan and Korea in the 1980s: winning the market (Cheltenham, UK: Elgar, 2000), 65.

³ Adam Szirmai, Entrepreneurship, innovation and economic development (Oxford: Oxford University Press, 2011), 87.

⁴Zoltan Acs and David Audretsch, Handbook of entrepreneurship research: an interdisciplinary survey and introduction (New York: Springer, 2010), 89.

⁵Edward Blakely and Nancey Leigh, Planning local economic development: theory and practice (London: Sage, 2009), 43.

⁶ Irvin Tucker, Macroeconomics today (Mason, OH: Cengage, 2011), 55.

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