The Quality of Industrial Policy

as a Determinant of Middle Income Trapsand How Latecomers Can Improve It

Policy Design and Formulation in Developing Countries

Hypothesis

The lack of quality in industrial policy is the main cause of a middle income trap (or any other long-term growth problem).

Installation of high-quality policy that actively supports value creation by the private sector, not just freeing and opening markets, is required to escape the trap.

Other factors such as natural resources, ODA and capital inflow are also important, but they do not critically determine a nation’s long-term growth path. Policy quality matters most in the long run.

Why Do Economies Diverge?

International Comparison of Industrial Policy Quality

The GRIPS Development Forum has visited Asia and Africa to compare industrial policy quality.

Asia—Vietnam, Singapore, Taiwan, Korea, Malaysia, Thailand, Indonesia, India, (Cambodia: next week)

Africa—Ethiopia, Rwanda, Mauritius, Mozambique, Zambia, Tanzania, Ghana, Uganda

We evaluate policy formulation, implementation and impact. Good performance due to private effort, foreign assistance or sheer luck is not counted as “good policy.”

Asia is not always superior to Africa. Some African countries (Mauritius, Rwanda, Ethiopia) practice much better industrial policy than Vietnam or Indonesia.

How to Measure Industrial Policy Quality?

1. Industrial human resource2. Domestic enterprise

development3. Business climate4. Power & logistics5. Export promotion6. Strategic FDI marketing7. Industrial parks8. Supporting industries &

FDI-local firm linkage9. Productivity, technology &

innovation10. Standards & testing

Common aspects1.Policy ownership2.Vision & commitment of top leader(s)3.Policy drafting procedure4.Authority & capacity of policy organizations5.Mindset & competency of implementing officials6.Budgeting & staffing7.Inter-ministerial coordination8.Involvement of key non-official stakeholders9.Monitoring & evaluating mechanisms10.Impact on the real economy

Specific aspects for each sub-component

×

Policy sub-components Evaluating criteria

5 – Excellent4 – Good3 – Moderate2 – Some1 – Little0 – Nothing or worse

Sub-component Specific Aspects Common aspects

Industrial humanresource

Science and technology engineering universities and colleges and technical andvocational education and training (TVET) in sufficient number that meets thenation's industrial human needs; raising popular mindset for quality, efficiency, andmanufacturing pride.

Domestic enterprisedevelopment

Existence of clear goals, policy organizations, and coordination among manyministries and policy areas; effectiveness of individual measures covering supportfor management, marketing, technology, finance, IT, and networking; interlink andsynergy among policies.

Business climate

Identification of the nation's current status, and serious effort for improvement;transparency and reliability of laws and procedures; tax, accounting, and customsclearance; foreign currency and capital control; comparative business costs;effective public-private dialogue.

Power and logistics

Status of power supply irregularities and remedying actions; status and plans fortransport infrastructure; efficiency of port, airport, dryport, and bonded warehouseoperation; export, import, and border-crossing procedure; logistic service qualityand competition; IT use.

Export promotion

Appropriate export targets; integrated export promotion mobilizing many measuresand ministries rather than temporary and ad hoc actions; a regular and effectivemonitoring and problem-solving forum; support and use of policy by targeteddomestic exporting firms.

Strategic FDImarketing

Full understanding of foreign investors' needs; effective one-stop investor serviceand follow-up; appropriate incentives; selectivity proper to development stage;quality of promotional information and presentation; actual results in projectregistration and implementation.

Industrial parks

Full understanding of investors' needs; proper division of labor betweengovernment and private sector in designing, building, and operating industrialparks; provision of necessary infrastructure and soft support; customersatisfaction and arrival of targeted foreign firms.

Supporting industriesand FDI-local firmlinkage

Clear recognition of importance of supporting industries and services in upgradingdomestic capability; effective database, match-making, incentives, and follow-upmeasures; close interaction with targeted domestic and FDI firms; actual growth ofsupporting industries.

Productivity,technology, andinnovation

Proper targeting of needed technology and innovation for the nation; suitablepromotion measures in close cooperation with the private sector without coersion;protection of intellectual property rights; effective research and supportinginstitutions and mechanisms.

Standards and testing

Existence of organizations, laws and regulations, and human and physical capitalfor ensuring product quality, safety, environment, labor conditions, etc.; sufficienttesting facilities; actual effective use of standards and testing facilities by theprivate sector.

Evaluation Criteria for Industrial Policy Sub-components

The Scorecard for Ethiopia (Example)

Industrialhuman

resource

Domesticenterprise

development

Businessclimate

Power andlogistics

Exportpromotion

Strategic FDImarketing

Industrialparks

Supportingindustries &

FDI-local firmlinkage

Productivity,technology &

innovation

Standardsand testing

AVERAGE

Policy ownership 5 3 3 4 5 5 5 3 5 2 4.0

Vision & commitment of topleader(s)

5 3 3 4 5 5 5 4 4 3 4.1

Policy drafting procedure 2 1 2 2 3 4 4 1 3 2 2.4

Authority & capacity of policyorganizations

3 2 2 3 3 4 5 2 2 2 2.8

Mindset & competency ofindividual officials

3 2 1 2 4 4 4 2 3 2 2.7

Budgeting & staffing 4 2 2 4 5 5 5 1 3 2 3.3

Inter-ministerial coordination 1 1 1 3 3 3 3 2 3 1 2.1

Involvement of key non-officialstakeholders

2 2 2 3 3 3 3 2 3 2 2.5

monitoring & evaluatingmechanisms

3 1 1 2 5 5 5 1 3 2 2.8

Impact on real economy 2 2 0 4 3 5 5 2 3 2 2.8

AVERAGE 3.0 1.9 1.7 3.1 3.9 4.3 4.4 2.0 3.2 2.0 3.0

GRADE B D D B B A A B B C B

RemarkTVET,

engineeringuniversities

Fragmented

Limited actionto improvebusinessclimate

Infrastructurestill deficientbut improving

Good policy;execution

needs moreimprovement

Main policyfocus; good

results

Main policyfocus

Policy willexists; furtherdevelopment

required

Strong politicalwill; kaizen &

nationalmovement

TIDI, LIDI, etc.;but generally

under-developed

Notes: - Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent). - Evaluation of policy prepared and implemented by government only; results obtained by private effort, international cooperation or external conditions are not included. - Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1).

Date: May 2015 (based on policy research 2008-2015)

Quality of Industrial Policy vs. Income Performance

(preliminary results as of May 2015)

Industrialhuman

resource

Domesticenterprise

development

Businessclimate

Power andlogistics

Exportpromotion

Strategic FDImarketing

Industrialparks

Supportingindustries &

FDI-local firmlinkage

Productivity,technology &

innovation

Standardsand testing

AVERAGE GradePer capita

income (WB,2013, USD)

Singapore 5 4 5 5 4 5 5 4 5 5 4.7 A+ $55,183

Japan 5 5 4 5 4 3 3 … 4 5 4.2 A $46,330

Korea 5 4 4 5 5 3 4 … 4 5 4.3 A $25,977

Taiwan 5 5 5 5 3 4 5 … 5 5 4.7 A+ $22,597

Malaysia 3 4 4 5 4 5 4 1 4 4 3.8 B $10,538

Mauritius 4 4 4 4 4 5 4 3 4 3 3.9 B $9,478

Thailand 3 2 4 4 3 4 4 4 2 4 3.4 B $5,779

Indonesia 2 2 2 2 2 3 1 1 1 2 1.8 D $3,475

Vietnam 1.5 1.8 2 2.8 1.6 1.7 2.2 1.5 1.4 1.5 1.8 D $1,910

India 1 1 1 2 3 1 2 1 1 1 1.4 D $1,498

Rwanda 2 2 4 2 2 4 4 2 2 1 2.5 C $639

Ethiopia 3 1.9 1.7 3.1 3.9 4.3 4.4 2 3.2 2 3.0 B $505

(Cambodia & Mozambique to be added soon.)

Some Observations

Governments are not created equal. There is a huge gap in industrial policy quality from excellent to poor among governments.

Income level and policy quality are positively correlated. This suggests, but does not prove, causality.

Within each country, policy quality is similar across different measures. If one policy is bad, others are likely to be also bad. There is a common policy culture that permeates entire government.

Rich resource endowment often impedes policy improvement, vindicating the curse of natural resources.

Proactive Industrial Policy Even under globalization, industrial policy is both necessary

and possible. In fact, many countries already practice industrial policies consistent with WTO and FTAs.

But new policy must be different from old ones: planning, laissez-faire, infant-industry promotion (Korea), FDI-led industrialization with slow integration (ASEAN4).

Proactive industrial policy must satisfy the following:1. Promotion of markets and integration2. A strong state to guide the private sector3. Having sufficient policy tools for catching up4. Dynamic capacity building of both government and private sector

through concrete actions & projects5. Internalization of skills & technology6. Effective public-private partnership7. Deep industrial knowledge shared by government and businesses

Policy Learning International best policy practices (and failures) must be

collected and compared systematically. East Asia abounds in good examples, but we can also learn from other regions.

Using them as references and building blocks, government must acquire general capability to create a policy most suitable for a particular country, time and sector.

Do not copy other countries uncritically, or reject their experiences as irrelevant. Learning (knowledge collection) and thinking (adaptation to your country) must be combined.

Learning steps: Collect and analyze policy documents of other countries Seminars & advice by invited foreign officials and experts Policy missions to foreign country governments (and write reports) Discuss how foreign examples can be used in formulating home

policies

Policy Dialogue with Foreign Experts & Officials

Developing countries can learn by self-study, but a better way is to have a private tutor who understands your country as well as has broad & pragmatic knowledge of international best policy practices.

However, not many foreign experts can teach nitty-gritty of industrial policy making; most can preach general ideas, cases & history only.

Japan has conducted industrial policy dialogue with many developing countries. The Japanese method is case-by-case and flexible, unlike Korea’s more systematic (but mechanical) approach.

Long-term interest, commitment & mutual trust, substance over formality, and mobilization of ODA to realize some of the discussed issues (not just talk) are key to success.

The GRIPS Development Forum & JICA have conducted Industrial Policy Dialogue with Ethiopia since 2009 (Phase 2 ends this year).

Japan’s Industrial Policy DialogueCountry Period Head/key players Purpose and content

Argentina1985-19871994-1996(folow up)

Saburo Okita (former foreignminister)

Comperehesive study on agriculture and livestock farming, industry,transport and export promotion

Thailand 1999Shiro Mizutani (former MITIofficial)

Study on the master plan for SME promotion policy

Vietnam 1995-2001 Shigeru Ishikawa (professor)Large-scale joint study on macroeconomy, industry, agriculture,enterprise reform, crisis management, etc.

Vietnam 2003-currentJapanese embassy, JICA, JETRO,JBIC

Bilateral joint initiative to improve business environment andstrengthen competitiveness through 2-year cycle of action plans

Indonesia 2000 Shujiro Urata (professor) Policy recommendation for SME promotion

Indonesia 2002-2004Takashi Shiraishi and ShinjiAsanuma (professors)

Policy support for macroeconomic management, financial sectorreform, SME promotion, private investment promotion,democratization, decentralization and human resource development

Laos 2000-2005 Yonosuke Hara (professor)Study on macroeconomy, finance, state enterprise, FDI and povertyreduction, etc.

Myanmar 1999-2002 Konosuke Odaka (professor)Study on agriculture, rural development, industry, trade, finance, ITC,etc.

Mongolia 1998-2001Hiroshi Ueno and HideoHashimoto (World Bankeconomists and professors)

Study on the support for economic transition and development

Vietnam 2008-2010Japanese embassy, JICA, JETRO,businesses, GRIPS/VDF

Produce supporting industry development action plan for jointimplementation

Ethiopia 2009-GRIPS Development Forum andJICA

Kaizen, basic metals & engineering, productivity movement, policyprocedure & organization, export promotion, plan documents, etc.

Vietnam 2011-2013Japanese embassy, JICA, JETRO,METI, GRIPS/VDF

Select and intensively promote a small number of indutrial sectors;draft and implement detailed action plans

Africa Taskforce Meeting Jul. 2008

Official launch Jun. 2009

Preparation

Industrial Policy Dialogue

Final session May 2011

Kaizen Phase 1(30 pilot companies)

(With Germany)

JICA’s Industrial

CooperationMetal industry survey

Kaizen Phase 2（ Institution & human resource)

Start　　Jan. 2012

Note: Black boxes indicate three-level policy dialogue in Addis Ababa (PM, ministers, operational level).

Phase 1 (2009-11) Phase 2 (2012-15)

Champion Products

PM Meles PM Hailemariam

Last session Aug. 2015

Kaizen Phase 3(Advanced level)

Branding &promotion

2008 20102009 201320122011 2014 2015

PM Abe visit

2016

Malaysia mission

TICAD V

Ethiopia-Japan Policy Dialogue & Kaizen

With Former PM Meles at PM Office

High Level Forum (Aug. 2014)

Lecture at Civil Service University

Letter to Prime Minister Hailemariam of Ethiopia (March 2015, 18 pages)

GRIPS advice on next five-year plan (GTP2) 2016-20201. Enhancing people & firms must be the core objective2. How to strengthen MOI over time3. Kaizen as the principal productivity tool4. Mobilizing multiple support measures to start “handholding”

for selected SMEs during GTP25. Business climate is poor; Ethiopia needs an improvement plan6. Our view on promoting heavy industries7. FDI-local firm linkage formation strategy must be added8. Concepts of “quality manufacturing” & “quality infrastructure”9. How to draft the Productivity & Competitiveness Chapter

(new)10. How to draft the Industry Chapter

Policy Learning:What Needs to Be Learned?

Basics Policy content Policy procedure Policy organization Policy documentation

More advanced National leadership National movement for mindset change Developmental state (politics & development) Exit to an advanced society

Studies & surveys

Brainstorming

Top leader

Set broad goals &

direction

Draftingwork

Businesses Ministries ＆ agencies

Academics & consultants

Comments& revisions

Finalize& approve

Regions & localities

Stakeholderconsultation

1. Vision

4. Substantive stakeholder participation

2. Consensus building

3. Documentation

Standard Policy Making Procedure(Five Necessary Conditions)

5. A secretariat with sufficient authority andresponsibility to coordinate the entire process

(Drafting may be outsourced)

Taiwan: Statute for Industrial Innovation, 2010

Task forceunder

Ministry of Economic Affairs

Minister providing vision & key ideas

Private sector hearings

with six sectoral business

associations

Brainstorming; agreeing on goals

& directions

Stakeholderconsultations

Documentation

Draftingby MoEA

official with lawyer’shelp for wording

The 3-year process was managed by Chung-hua Institution for Economic Research (a think tank winning competitive bidding).

Dissemination(“Island Tour”)

Inter-ministerial meetings

with MoEA chairing

Furtherrevision &approval

by National Assembly

Thailand: Automotive Industry Master Plan 2007-2011

“CEO Forum”

FDI & local firmsExporters

MoI, MoST, MoEduProfessors’ team

(Chulalornkorn Univ)

M/P SteeringCommittee

Organized by MOI

BusinessesOfficialsExperts

Brainstorming; agreeing on goals

& directions

Set up formal committee for drafting M/P

Subcommittees study identified

issues

Gov’t

Business

Experts

Business

Gov’t Experts

Human resource

Productivity

Marketing

Engineering

Investment& linkage

M/PDraftingBy TAI staff

Comment & dissemination

(Informal) (Formal)

The whole process (1 year) is managed by Thailand Automotive Institute (TAI)

Implementation

Vietnam: Traditional Policy Drafting Process

Prime Ministe

r

Minister DraftingTeam

MPI & otherMinistries

Inter-ministerial review

Internal review

Order

SubmitReview for approval

Submit

Business Community

Internationalexperts

Technical assistance(sometimes)

No permanent channel for continuous policy dialogue

(case-by-case, temporary, ad hoc)

Appeal letter to Prime Minister when problems arise

Contact Ministry when necessary

Interviews, symposiums (sometimes)

Government

MPI & otherMinistries

Data

Alternative Policy Organizations

Who will draft and execute policies, and how? The following approaches are not mutually exclusive; some countries use more than one.

Technocrat group directly under PM or President

National Councils or Committees Super-ministry Coordination ministry above line ministries Sector/issue-specific institute acting as a hub Strong leader without institutionalization

- Elite technocrat group with full planning authority given by top leader

- Members are selected officials, business leaders & experts with good education & experience

BusinessesAcademics Experts

President or Prime Minister

Technocrat Group(Policy Maker)

Direction, full authority for policy making

Faithful execution and

reporting

Policy, guidance and monitoring

Faithful execution

and reporting

Ministries (Policy Implementers)

Korea – Econ. Planning BoardMalaysia – Econ. Planning UnitThailand – NESDBTaiwan – Kuomintang ElitesIndonesia – “Berkeley Mafia”Chile – “Chicago Boys”

Technocrat Group Approach

EconomicSecretariat

President(Blue House)

Economic Planning BoardKorea Development

Institute

Min. of Commerce& Industry

Economic ministries and agencies

Economic Minister’sCouncil

State Council

Chaired byDeputy PM

Super ministry charged with:- Development planning- Public investment planning- Budget- Monitoring- Aid management

Policyanalyses

Korea in the 1960s-70s: Economic Planning Board under President

Direct presidential controlover economic policy

Businesses

Gov’t-business meetings - Export promotion - Economic briefs - HCI drive, etc.

Headed byDeputy PM

Very close gov’t-business relationsPerformance-based rewards & penalties

Banks

National Council/Committee Approach

National Council or Committee

Ministries and agencies

working groups or task forcesfor specific issues and sectors

PlanSupport

Implement

PM or President

Chair, give mandate

BusinessesAcademics

Experts

National Productivity and Continuing Education Council (NPCEC)

Working Committee for Productivity and Continuing Education (WCPCE)

ConstructionBCA

UnionsIndustry

Low wage workers

Sector working groups (12 priority sectors)

Precision Eng.EDB

UnionsIndustry

ElectronicsEDB

UnionsIndustry

Transport Eng.EDB

UnionsIndustry

General Mfg.SPRINGUnionsIndustry

F & BSPRINGUnionsIndustry

RetailsSPRINGUnionsIndustry

Research & benchmarking

Infocomm and logistics

Cross-cutting issues

NationalProductivity

Fund

Productivity& Innovation

Credit

OversightReview & approval

ScrutinyDraft & propose Skills Dvt. Fund

Lifelong Learning E.F.

Chaired by Deputy PMMembers from ministries/agencies,business, unions Joint secretariat: MTI, MOM (ministers)

Led by MTI, MOM (PS level)Inter-agency coordination

Sectoral “Productivity Roadmap” for the next 10 years

Financial Incentives

Economic Strategies Committee: Report

Review & submit

Singapore: New Productivity Drive

My Proposal for Vietnamese Government

National Competitiveness Council

Ministries and agencies

Working groups for specific issues or sectors

Plan

Support, report, draft

Implement

Prime Minister

Direct, give mandate

SMEs

Commission studies, reports

Chaired by PM (or DPM)Secretariat: Government OfficeMembers: Heads of concerned ministries

Higher EducTVETClustersSupportingindustries

Secretariat:MPI

Ministries, businesses, experts

Secretariat:MOIT

Ministries, businesses, experts

Secretariat:MOIT

Ministries, businesses, experts

Secretariat:MOLISA

Ministries, businesses, experts

Secretariat:MOET

Ministries, businesses, experts

MITI

Main Bureau Attached Organizationsand External Bureaus

Deliberation Councils

Minister’ s Secretariat (incl. Research & Statistics)

Int’ l Trade Policy Bureau

Int’ l Trade Admin. Bureau

Industrial Policy Bureau

Industrial Location & Environment Protection Bureau

Basic Industries Bureau

Machinery & Information IndustriesBureau

Consumer Goods Industries Bureau

Agency of National Resources& Energy

Patent Office

SME Enterprise Agency

Agency of Industrial Science & Technology

Trade & Investment Training

Other

I ndustrial Structure Int’ l Trade TransactionExport Insurance Industrial Location & WaterTextile Product Safety & Household Goods Quality IndicationPetroleum Aircraft & Machinery IndustryElectrical Works Traditional Crafts Industry......... ...................

Minister

Politically appointed VM

Administrative VM

Deputy VMs

Special assistants

(* ) I ndustrial Structure Council:influential in the 60s (18 special committees): industrial pollution, int’ l economy, consumer economy, heavy industry, chemical industry, etc.

Super Ministry Approach: Japan’s Ministry of International Trade and Industry, 1960s

Documentation

Drafting Implementation Results. Producing documents is the means, not the end, of policy formulation.

Generally speaking, short & concise is better than long and complex. Large documents are usually not used or referred.

Only include information and arguments necessary for the policy actions proposed.

Drafters can be officials, consultants, academics or a mixed team. As long as rough contents are agreed and necessary studies have been prepared, anyone can draft policy documents.

Action Plan Template The following template is actually used in Vietnam-Japan

Industrialization Strategy (2011-2013). Purpose: foster new industries under the principles of PPP,

bilateral cooperation, selectivity, and concrete action plans. Only essential items to save time & energy; total about 5

pages.

Situation analysis (about 2 pages, essential facts only for promoting this industry)

Vision for 2020 (one sentence)

Targets (3-4 items, one phrase each)

Policy issues (3-5 items, one phrase each, policy efforts required for targets above)

Action plan (who, what, by when, success criteria in table format)

Monitoring mechanism (1-2 sentences, common for all industries)

Thailand AutomotiveM/P 2007-2011

Vision 2011 4 Objectives 5 Strategies 12 Action Plans

Strong coordination by Mr. Vallop of Thailand Automotive Institute

Effective stakeholder networking – FDI, local producers, government, donors

Process-based action mechanism – annual budget and projects for implementing actions (no matrix)

Drafting team at Thailand Automotive Institute

Vision—“Asia’s auto production base with value-added and strong parts industry”

Thai Automotive Vision, 5 Strategies and12 Action Plans

Source: Thailand Automotive Institute, The Automotive Industry Master Plan 2007-2011 Executive Summary, p.4.

Malaysia’s Industrial Master Plan 2 (1996-2005)

453 pages (English) with the following chapters:- Overview & analytical framework (first 2 chapters)- Analysis & proposals for 8 indust. clusters (8 chs.)- Directions & institutional framework (last 2 chs.)

Malaysian Institute of Economic Research (MIER) drafted a background paper, which gave IMP2 a lucid academic style (but not IMP3).

Possible problems: (1) sectoral coverage is too wide, (2) method is too mechanical and uniform, (3) full-set industrial promotion is against globalization and specialization.

Malaysia’s Cluster-based Industrial Development and Manufacturing++

Malaysia’s IMP2 (1996-2005) aimed at raising and broadening the value chain.

Leveling up of each industrial cluster

-Core production

-Supporting industries

-Supporting services

-Human resources

-Logistics

-R&D