The World Bank group building in Washington, DC. Photos: AFP/Getty Images

Picking winners: the return of industrial policy

By By Lanre Akinola | Published:  28 December, 2009

Widespread government intervention to combat the financial crisis is leading to a reevaluation of how the state can promote economic development

The current global economic slowdown is widely considered to be the most severe global crisis since the Great Depression.

In contrast to 1929, however, this slowdown has been marked by some of the most dramatic state interventions the industrialised world has ever seen. Comprehensive bailout packages have seen hundreds of billions of dollars poured into the global financial system, resulting in high profile nationalisations in the US and the UK. Interest rates in many industrialised countries have been lowered to zero or close to zero percent in order to stimulate domestic demand. Stimulus packages have been implemented from the US to Western Europe and China. In total, the countries that constitute the G20 have compiled a $1trillion global stimulus package to jumpstart the international economy.

Far from being criticised for such dramatic interventionism however, industrialised states have been hailed for their critical role in preventing a complete collapse of the global economy. Long confined to the margins of policy debate and considered ineffective, the positive experience of these interventions is drawing renewed interest towards the role of industrial policy, and by extension that of the state, in promoting economic development.

Heavy reliance on state intervention and protectionist industrial policies to promote economic development featured in many developing countries in Africa and Asia throughout the 1950s and 1960s. However, with a few exceptions, such as Japan and South Korea, these policies produced, at best, limited economic growth in many developing countries by the 1970s. In much of sub-Saharan Africa, heavy market distortion, an oversized state apparatus, corruption and inefficient industries were widely attributed to these policies.

The result was that international financial institutions such as the World Bank and the IMF, major agents of global development policy thinking, began to view the state and industrial policy as obstacles to economic development in regions such as sub-Saharan Africa. Under the ascendancy of so-called neoliberal economics in the late 1970s, this aversion to supporting state involvement in economic matters has come to dominate policy thinking and implementation under a strict set of free market policies that came to be known as the Washington Consensus.

With industrialised countries demonstrating the potential beneficial impact of state policy on economic development, this consensus may be up for review.

“The policy space [for industrial policy] has widened as a result of the response to the financial crisis by developed countries,” says Ludovico Alcorta, director of research and statistics at the Vienna-based United Nations Industrial Development Organisation. “Before, it was not the case that there was no industrial policy, but it was minimalist, it was limited to enabling a business environment.”

The scale and character of intervention in the industrialised world, Mr Alcorta argues, has undermined some of the assumptions that have underpinned international policy with regard to economic development. “What has caught the attention of many developing countries is that the industrial policy has partly been of the defensive kind. It has been about picking losers so to speak, which was a bit of what was being done by developing countries before, and was considered ineffective.”

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