Reflection :

Mainstream economics had emphasized the need for macroeconomic stability, good governance (in general), and a good investment climate [in general) to achieve economic development. Read this article concerning the industrial policies in the Philippines. After reading, answer this question: 1. Provide a summary of the salient ideas. 2. Using at least one of the dominant approaches and ideas in social sciences, critique the article about the Philippine policies in industry by listing its strengths and weak points. 5:12 Issues, Views, Action 51 Institutional Issues Concerning Industrial Policy for the Philippines: Learning from Other Countries Dr. Joseph Anthony Lim Professor, Economics Department, Ateneo De Manila University and Trustee, Action for Economic Reforms Action for Economic Reforms November 2012 Co XXX' Contents 2 Introduction 3 Review of the Shift in the Mainstream Development Paradigm: From Interventions to Free Markets and Trade 5 Institutions and Industrial Policy of Successful Countries FRIEDRICH EBERT 8 Conclusion References ACTION FOR ECONOMIC REFORMS STIFTUNG Introduction The World Bank (WB, 1993) book of industrial policy. This should include The East Asian Miracles: Economic changes in industrial programs, insti- Growth and Public Policies acknowletions and governance regulating edged that High Performing Asian and guiding industrial policy, and a Economies (HPAEs) - Hong Kong, change in the mindset and ideology Indonesia, Japan, Malaysia, the Re- of the state concerning markets and public of Korea, Singapore, Taiwan, government interventions. and Thailand - in the period before the Asian crisis, undertook not just st Mainstream economics had empha market reforms but industrial policy sized the need for macroeconomic and strong unorthodox government stability, good governance (in gen- interventions to achieve success in eral) and good investment climate both growth and equity. The WB (in general) to achieve economic however called the whole econom- development. This is precisely the ic strategy of these countries 'market S strategy of the current administration friendly' and claimed that the more in the Philippines in achieving its cur- sophisticated political and intellect rent high growth rate and investment tual institutions in these countries are upgrading. There is a roadmap being unique and make their interventionist developed for the manufacturing policies practically impossible to rep- sector financed by the Department licate by other developing countries. of Trade and Industry (DTI) and being developed jointly by the Philippine But growth literature in the 1990s till Institute for Development Studies the present - endogenous growth (PIDS) and the Federation of Philip- theories, multiple equilibrium theo- pine Industries (FPI). But this roadmap ries, first mover problems, coordinais taking a low profile in the govern- tion failures - points to market failures ment's economic agenda. How to that lead to the necessity of sector- achieve productivity growth and specific interventions by the gov- technological upgrading is not clear ernment and the need to stimulate in the vision and thrust as the govern- technological upgrading through ment relies more on the markets, the XXX government interventions. Thus, de- private sector and public-private- veloping countries, if they want to in- partnership (PPP) investments and dustrialize and develop economical- projects for its main economic pro- ly, will have to undertake some form grams.Review of the Shift in the Mainstream Development Paradigm: From Interventions to Free Markets and Trade In the 1950s and 1960s, most devel- vanced countries. For the suc- ing and corruption. This perception oping countries were trying to in- cessful industries, the protection was heightened with the rise of Mon- dustrialize and achieve economic and subsidies may last decades etarism and the political emergence development through develop- to succeed (e.g. auto industry in of Reagan in the US and Thatcher in ment economics theories that favor Japan, Nokia) the UK. strong state planning and interven- tions to stimulate industrialization The Philippines' golden age of indus- At that time, most developing coun- and growth sectors. Some of these trialization was during the import sub- tries had not developed and indus- theories are: stitution period of 1950s, when the trialized except for the East Asian manufacturing sector began to grow tigers (Japan, Korea, Taiwan, HK, Sin- . Neoclassical (Solow) Growth and prosper. This gave rise to strong gapore) and later on Chile. Thailand model that says that developing supporters of import substitution and and Malaysia later joined them as countries must increase their cap- protection of industries, such as Ale- Japanese investments poured into ital labor ratios - i.e. industrialize jandro Lichauco and Larry Henares. their countries in the late 1980s, ac- companied by good development . Big Push models point to the In the late 1950s, the Philippines planning and policies. The lack of need to promote key important faced a balance of payment prob- industrialization of developing coun- industries (such as basic industries lem as it ran out of dollars due to the tries was ascribed by the conserva- and technologically strong indus- import dependence of the import tive economists to market distortions, tries) to give push to economy substitution industries (mainly assem- rent seeking, and government inef- bly of imported inputs using imported . Balanced Growth models: Sev- ficiencies machinery). This led to RP turning to eral key and connected indus- the IMF for money in 1962 and an Marcos reinforced Philippine main- tries and investments should be IMF program was instituted, which stream economists' belief that gov- undertaken up simultaneously for slowed down our import substitution ernment interventions and rent- overall industrialization and de- development, and shifted our eco- seeking are synonymous. These were velopment nomic strategy to a more market- proclaimed as government failures. . Unbalanced Growth models: A oriented, private sector-based ap- Thus, trade liberalization (initially, re- few key industries should be set proach. moval of import quota restrictions). up that will spur growth in the financial liberalization, privatization In the 1970s and 1980s, the devel- economy - particularly key im- of state enterprises and deregulation oped countries and multilateral port substitution industries - again were undertaken unilaterally in the agencies (WB, IMF, ADB, etc.) in- basic sectors and technologically post-Marcos governments of Aquino sisted that the economy be ruled by strong sectors and Ramos. markets and the private sector. The . Infant industry arguments. Basic government should no longer pro- The specter of rent-seeking and as- and technological sectors have fect or subsidize industries. This will sociating protecting monopolies to be protected from imports just distort the market prices, lead to with industrial policy (government from more developed and ad- inefficiencies and lead to rent seek- failures) remains a very strong belief of mainstream economists in the Phil- ernment corporations, tax incentives don't move because of pos- ippines today. were some of the government inter- sible losses (uncertainties on ventions use to promote successful their success), or if they suc- The creation of WTO and the entry development of their industries and ceed, imitators will just cut of all countries into the organization exports. The important thing is that into their markets. Govern- made it more difficult for industrial the industries have to perform well ment has to give them sub- policy to be achieved due to: le.g. export penetration of world sidies or tax incentives and Abolition of import quotas and markets or a certain level of scale general support. significant tariff reductions production and sales after a period of time). . Coordination Problem Prohibition of subsidies to exports A beneficial sector will not and tradeable goods New theories arose that point to market failures rather than govern- develop unless the right The bigger power given to de- ment failures. Market failures occur infrastructure, legal gov- veloped countries in its decision because if things are just left to the ernance, quality inputs, in- making (the Green Room) and market and the private sector, there stitutions for standards and developed countries' continued will be inefficiencies and lack of de- quality, etc are in place. use of protection while develop- velopment. Some of these theories These requirements may be ing countries are forced to 'de- are embodied in the endogenous sector-specific so that the protect'. growth theories: government will have to pro- vide assistance to achieve At the same time, developed Sectors with positive externalities these. countries use the anti-dumping have multiplier beneficial effects rule against developing coun- in economy. These need state Thus, growth theories have moved tries support and promotion since the back towards the theories of the firms undertaking these (if any) original development economics of - The rules concerning intellectual do not reap all the benefits of the 1950s and 1950s. But the interna- property rights (IPRS) - the TRIPS the sector. tional context - WTO and various free - no longer allowed develop- trade agreements as well as compe- ing countries to access sophisti- There is a need to develop hu- tition among many newcomers -- cated technologies developed man capital, quality education have made it more difficult for devel- in the developed countries (Ja- geared to industries, develop oping countries to achieve success. pan, Korea and Taiwan had ac- specific specialized skills, R&D cess to these f and technologies for key indus- Most developing economies had gies before WTO since they were tries with positive externalities moved towards a more open econ- early-comers) omy in trade and capital/ financial Rodrik and Hausmann (2006) further accounts. They are now more prone In the 1990s, many economists - in- provide the reasons for market fail- to volatilities and contagion from cluding the WB - started analyzing ures global crises originating more and the Asian Miracles and concluded more from the developed world. that they used both market-friendly . First Mover Problem The global financial crash has led to policies and government promotion A beneficial sector will not the call for both capital controls and of key sectors (i.e. picking winners) be developed by innovative 'rebalancing' the economy towards more domestic demand. This is after Direct subsidies, credit subsidies, gov- entrepreneurs if first moversdeveloping countries were forced to open up to free trade and shift to ex- Institutions and Industrial Policy port production. of Successful Countries Ha-Joon Chang (2009)_criticized economists' penchant of dichoto- mizing export promotion and import The theoretical and empirical justifi- domestic firms (employing the infant substitution. An industrial policy in- cation for industrial policy within the industry arguments) differ much from cludes a decision on the right mix of academy is clear. But the institution- Taiwan's reliance on technology li- free trade (no interventions), export al and organizational mechanisms to censing and linking large multination- promotion (with interventions) and undertake industrial policy had not als to efficient small and medium do- domestic industry promotion (includeen explored more thoroughly. mestic firms for technology transfer. ing import substitution and protect Definitely, there is no one-size-fits-all Japan and Korea shared some simi- tion of infant industries). It is not an set of political and social institutions larities in having super-ministries in 'either or' strategy. and governance framework for in- charge of industry, giving licensing The most heated debate now dustrial policy. In fact there is no one- to large conglomerates (zaibatsus, among economists is: size-fit-all for the type of industrial chaebols) for special privileges in re- policy itself. tum for fulfilling strong performance . Should the state just provide sup- indicators, and relying on imitating port - e.g. help in the coordina Ohno (2009) shows how different foreign advanced technologies in- tion problem - or give actual East Asian 'Miracles' undertook dif- stead of relying on multinationals subsidies or tax incentives to par- ferent industrial policies under differ- and foreign direct investments. They ticular industries or firms ent organizational and institutional differ in the fact that Japan relied on arrangements. It is important that its super-ministry for organizational Another debate is should the the industrial policies undertaken be leadership whereas Korea was more picking of 'winning' sectors come suited to the organizational institu- dependent on a personal leader- from the government - with a |tions and political power relations in ship of Park Chung Hee and his pro- long-run view and plan (road- the country. The industrial policy must motion of the Economic Planning map?) for industrialization (creat- of course be in tune with the human Board under a Deputy Prime Minister ing new industries) - or should the skills and education and potential hand-picked by President Park. They, government just base its decision capabilities of the economy. In fact however, use similar protective de- on the best performing sectors the planning of industrial policy and vices such as credit subsidies, export seen as the comparative advan- the institutions and relationships that subsidies, technological support and tage of the country (facilitating |are involved in industrial policy are promotion and infant industry pro- winners) ? actually one and the same set of tection. processes. The following lifts heavily The debate between Justin Lin and from Ohno (2009) in the cases of Ja- Japan's institutional capacity for Ha-Joon Chang (2009) highlights this pan, Korea, Malaysia and Thailand. industrial policy from the late 1950s debate. But the active role of the to the 1970s consisted of a super- state is now accepted more and Japan and Korea ministry, the Ministry of International more among the academics. Japan's and Korea's strategy of high Trade and Industry (MITI), that imple- government profiles in industrial poli- mented the medium and long term cy and licensing privileges for large plans formulated in cooperation with the Prime Minister's Office. The b) The President is the real power Malaysia role and functions of the MITI con- behind economic planning us- sisted of: ing the Deputy Prime Minister Similar to Korea, Malaysia had a strong personal leadership of promot- a) Inter-ministry coordination of as titular head of the Econom- ing industrial policy under Prime Min- industrial policies especially ic Ministers' Council, and the ister Mahathir. In the 1980s, Mahathir with the Ministry of Finance State Council. developed industrial visions with the and the agencies under the 'Look East Policy' in the 1980s and Prime Minister's Office: the c) These councils are, in effect the Industrial Vision 2020 announced Economic Planning Agency, deliberation councils that the Land Agency, etc. consist of strong cooperation to the Malaysian Business Council in and collaboration between the early 1990s. The industrial policy b) Deliberation councils where involved multi-layered inter-ministeri- the state and the big busi- the MITI and industries agree al coordination: ness sector (the chaebols) es- on an industrial vision, discuss pecially in export promotion, a) The Industrial Coordination industrial policies including fi- economic briefs, promotion Council (ICC) -- chaired by nance and technology, gen- of critical industries and the Minister of International Trade erates cooperation among like. The President was actu- and Industry (MITI) with mem- firms and industries on com- ally very active in these delib- mon strategies, share infor- bers from seven other minis- eration councils. tries including the Economic mation build and consensus. negotiate and sometimes Planning Unit (EPU), the De- d) The Korean Development In- provide the venue where MITI partment of Finance, the stitute (KDI) was very active flexes muscles with the private Central Bank, 15 business rep- in providing academic sup- sector firms. resentatives from the Cham- port and ideas to the medi- bers of Commerce, industry c) Business officials, government um and long term economic associations - coordinates the officials, academia and the plans, industrial policies and activities of industrial policy. media are active in the delib- policy analyses. It was criti- eration councils to generate cally linked to the entire state b) The Industrial Policy and In- best results and overall soci- planning and industrial policy centive Committee (IPIC) etal support for the strategies. structure. made up of the 8 ministries Korea's political institutional structure plan and operationalize in- e) More so than Japan, Ko- for industrial policy consisted of: centive schemes. rea's initial industrial policy, a) The Economic Planning Board despite reports of wide- c) The public-private coop- (EPB) is the super-ministry for spread corruption, was per- eration works through the industrial policy in charge of formance-based with good Public-Private Cluster Work- development, investment and performing industries and ing Groups and the Strategic budget planning, aid man- firms given further rewards, Thrust and Initiative Task Force agement, and monitoring. It and those not performing (STITF). The focus is on 18 in- is headed by a Deputy Prime given penalties and with- dustrial clusters and cross-cut- Minister directly reporting to drawal of privileges. ting issues the President.Unlike Korea and Japan, Malaysia state technology institutions in the and business collaborated involved multinational firms in tech- state industrial policy planning and and strongly participated in, nologically driven industries such as implementation. The Industrial Tech- electronics. Unlike the Philippines, nological Research Institute (ITRI). d) the Rural Development Com- Malaysia had gone up the techno- and under it, the Research Service mittee. logical ladder in electronics - going Organization (ERSO), played a key In the 1980s, the Thai Prime Minister into micro-chips and more sophisti- role. The Science and Technology himself chaired the committees and cated products. Malaysia's strategy Advisory (STAG) also played a crucial the committees were managed by included consultations with Malay, role in industrial policy. the National Economic and Social Chinese and Indian political parties and communities and included re- It must be pointed out that engi- Development Board (NESDB). Within the NESDB, the Secretariat of the gional development in the cluster- neers, scientists and lawyers played corridor strategy of development. very important roles in the industrial Eastern Seaboard Development Pro- planning and policy bureaucracy of gram was formed. Subcommittees Taiwan Taiwan and Korea (Ha-Joon Chang chaired by ministers of key agen- (2009)). cies were formed that planned and Taiwan's industrial policy followed a implemented the regional develop quite different approach and con- Thailand ment of the Eastern Seaboard and centrated on technological licens- the promotion of the chemical fer- ing and the participation of hi-tech Finally, we look at the case of Thai- tilizer and petrochemical industries multinational corporations. The strat- land. Thailand does not have a strong and educational and social pro- egy consisted mainly of building the state structure for industrial planning grams. capacities and efficiencies of cost- and industrial policy. But in the 1980s, competitive small and medium firms industrial policy was achieved in the It must be pointed out that firms and to act as suppliers to the hi-tech multi- form of regional development of the industries that had been protected national firms (Fuller (2002)). The strat- country. The regional development or given special privileges must have egy included building the necessary strategy consisted of: a time horizon for such benefits. In the infrastructure and R&D requirements East Asian success countries, once a) large scale infrastructure build- to achieve technological upgrading state-supported firms and industries ing and setting up of industrial and linking Taiwanese firms to stra- became viable and successful, they zones; tegic customers. The outsourcing of are left to themselves to improve their MNC input requirements became a b) the Eastern Seaboard De- performance, their products and un- major source of technological learn- velopment Program (ESDP). dertake their own innovations and ing of Taiwanese firms. Through time which created the most dy- technological upgrading. That is why the small and medium firms were namic region in Thailand the East Asian countries were able to able to learn sophisticated technolo where high value goods and join WTO and the free trade era of gies from the MNCs and became Japanese multinationals (au- the 1990s and 2000s and adhere to major exporters themselves. Taiwan's tomobiles, electronics) and less government interventions in the strategy was complemented by pro- other high-tech export firms private sector. es moting the education of engineers moved to; and scientists schooled abroad. c) the setting up of the Joint Pub- The Taiwanese bureaucracy had the lic-Private Consultative Com- special feature of including strong mittee where government Conclusion The Philippines have the technical vestments to one where industries is there, the process may generate capabilities, potential institutional have to be strongly supported to its own institutional and organiza- structure and knowhow to under- achieve technological upgrading tional mechanisms based on the take selected and well-thought and competitiveness necessities of the program. out industrial policy for critical and progressive industries. It is in the po- It also depends on the insulation A concern of course is the free litical will and mindset of the gov- of government to strong lobbies of trade agreements that we have emment and private sector and powerful groups and blocks. signed. But there are always poli- society in general that change cies that are not included in the In a way there has to be a political, is needed in order that industrial free trade agreements, as well as social and economic transforma- policy can be effective and suc- vague interpretations of the agree- tion of the Philippine society. But cessful in the Philippines. This is from ments. That is why, just like Korea this doesn't mean that one should a mindset of achieving macro sta- and Taiwan, international lawyers, not proceed with 'roadmaps' and bility, having a good investment engineers and scientists would be industrial policy planning. Industrial climate through better gover- some of the critical people need- policy is a 'learning by doing' pro- nance and openness to foreign in- ed in the bureaucracy. cess and, as long the political will References Chang, Ha-Joon (2009), "Industrial Rodrik, Dani and Ricardo Hausmann Policy: Can We Go Beyond an Un- (2006). "Doomed to Choose: In- productive Confrontation?" Paper dustrial Policy as Predicament," for Annual World Bank Conference John F. Kennedy School of Gov- on Development Economics, 22-24 emment, Harvard University, Sep- June 2009. tember 2, 2006. Fuller, Douglas (2002), "Industrial Poli- World Bank (2003). The East Asian cy for High-Technology Products in Miracle: Economic Growth and Taiwan," Massachusetts Institute of Public Policy, World Bank Technology (MIT) Japan Program, Working Paper No. 02.02 Lin, Justin and Ha-Joon Chang, Action for Economic Reforms Ohno, Izumu (2009), "Organizational "Development Policy Review De- Unit 1403 West Trade Center Arrangements for Industrial Policy bate: Should Industrial Policy in 132 West Avenue, Quezon City, Formulation and Implementation: Developing Countries Conform Philippines 1104 Examples From East Asia," GRIPS to Comparative Advantage or Phone/Fax: (+63 2) 426 5626 Development Forum, A Power- Defy It?" Development Policy Re- Website: www.aer.ph . www.ifoi.ph point Presentation. view 27 (5): 483-502