Export-Led Industrial Policy for Developing Countries: Is There a Way to Pick Winners?

Key Question Being Explored in This Insight:

Tristan Reed argues that industrial policy can successfully target key sectors for growth, despite the debate on governments' ability to "pick winners." His essay highlights that governments can identify tradable sectors where public investment drives economic growth, focusing on those that are either highly productive or aligned with existing technologies and offer expanding markets. For developing countries, this strategy is particularly valuable. Export promotion agencies play a key role in coordinating efforts, offering a cost-effective and trade-compliant alternative to protectionism. Many nations have adopted this approach in their development strategies.

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Tristan Reed argues that industrial policy can successfully target key sectors for growth, despite the debate on governments’ ability to “pick winners.” His essay highlights that governments can identify tradable sectors where public investment drives economic growth, focusing on those that are either highly productive or aligned with existing technologies and offer expanding markets. For developing countries, this strategy is particularly valuable. Export promotion agencies play a key role in coordinating efforts, offering a cost-effective and trade-compliant alternative to protectionism. Many nations have adopted this approach in their development strategies.

Image courtesy of interviewee. October 14, 2024

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This video discusses the concept of industrial policy, which refers to government actions aimed at fostering the growth of specific sectors within an economy. It contrasts traditional notions of industrial policy, such as protectionism (like tariffs and subsidies), with recent approaches that emphasize productive development by targeting particular industries for growth and productivity improvements. The speaker cites examples, particularly from Latin America and Peru's aquaculture sector, to illustrate how diverse and adaptive policies can be effective.

Evidence from microeconomic literature over the past two decades is presented, indicating that targeted policy interventions can enhance firm growth and productivity. The speaker explores the distinction between supply-side interventions (like providing better credit and training) and demand-side interventions (which enhance market access for firms) and argues that understanding the unique characteristics of an industry is crucial for successful intervention.

There is a debate about the ability of governments to "pick winners," with the author suggesting that while predicting the success of individual firms is difficult, assessing the potential of entire industries is feasible. Performance metrics, such as market growth, international competition, and comparative advantage, are proposed as guideposts for identifying promising sectors for policy focus.

Finally, the discussion highlights the importance of institutional frameworks and collaboration between the public and private sectors in formulating effective industrial policies, particularly for developing countries. The emphasis is on adaptive strategies that avoid direct market interference which might provoke retaliation from trading partners, contrasting the experiences of wealthier nations. Future research opportunities are identified in areas such as branding, market access, and effective institutional design for industrial policy.

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Here are five key points from the video about industrial policy:

1. **Definition and Scope of Industrial Policy**: The video defines industrial policy as government actions aimed at growing specific sectors of the economy. This includes various approaches beyond traditional protectionism, like tariffs and subsidies, focusing on targeted advancements within particular industries (e.g., aquaculture in Peru).

2. **Historical Convideo and Effectiveness**: It discusses the historical challenges of protectionist import substitution policies, particularly in Latin America in the 70s and 80s, and mentions a shift towards rebranding industrial policies to focus on improving productivity in specific sectors rather than generalized protectionism.

3. **Targeting Strategies for Industrial Policy**: The speaker emphasizes the importance of selecting the right sectors for intervention by considering market growth, international competition, and a country's comparative advantages. They argue that understanding specific constraints and opportunities for industries is crucial for effective policy design.

4. **Microeconomic Interventions**: The video contrasts supply-side and demand-side interventions, pointing out that while supply-side support (like training and capital) is important, demand-side factors (such as market access and sales opportunities) greatly influence the effectiveness of these interventions.

5. **Institutional Framework for Implementation**: It highlights the need for effective institutional frameworks to coordinate industrial policies, suggesting roles for export promotion agencies and public-private dialogue in facilitating market access, certification standards, and infrastructure investments to support the growth of targeted industries.

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Here are some key quotes extracted from the video, focusing on the main ideas and themes presented:

1. **Definition of Industrial Policy**:
- "Industrial policy means specific government action that's targeted at growing a specific sector of the economy."

2. **Traditional Views on Industrial Policy**:
- "When a lot of people have in mind industrial policy, they think of ... protectionism like tariffs to protect an infant industry or subsidies for firms."

3. **Historical Perspective**:
- "From an international perspective, there actually wasn't a lot of success with these sort of protectionist import substitution policies... a lot of failures in the seventies and eighties."

4. **Example of Successful Policy**:
- "In Peru... they set up these working groups with key government officials to grow aquaculture or fish farming."

5. **Effectiveness of Policies**:
- "If you have a government with some capacity, bandwidth and sophistication, you can be effective in growing certain sectors and making them more productive."

6. **Microeconomic Literature Evidence**:
- "We’ve gotten a good bank of evidence that specific programs can improve firm growth."

7. **Supply Side vs. Demand Side Interventions**:
- "There's been a focus on... demand side interventions... if the firm doesn't have a large market that they can access, they won’t be able to benefit."

8. **Challenges of Targeting Industries**:
- "At some level that's true... you can’t pick winners... there is this industry going to succeed?"

9. **Importance of Understanding Capabilities**:
- "For poorer and smaller economies, it’s very important for the government to have a clear understanding of what it is good at producing."

10. **Market Growth and International Competition**:
- "Market growth and international competition... are crucial measures for identifying viable industries."

11. **The Role of Export Promotion Agencies**:
- "Export promotion agencies... seem to predict greater exports."

12. **Asymmetry in International Trade Policies**:
- "Rich countries impose these sorts of anti-dumping tariffs on developing countries much more than the other way around."

13. **Value of Infrastructure and Quality Certification**:
- "Common infrastructure... investments are essential for specific industries."

14. **Reflection on Academic Research**:
- "I don’t want the discussion of industrial policy to be focused just on these sort of measures... I want to recognize the work that multilateral development banks have been doing."

15. **Institutional Effectiveness**:
- "What are the types of institutions that are most effective in organizing industrial policy?"

These quotes capture the essence of the discussion on industrial policy, its implementation, challenges, and examples from specific countries. They highlight both theoretical and practical aspects of driving economic growth through targeted government action.

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I think let's first define industrial policy,

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which is a lot of what this paper is about.

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Um, that means specific, government action

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that's targeted at growing a specific sector of the economy.

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So exports particular industry.

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And that's quite a broad definition.

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I think when a lot of people have in mind industrial policy,

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they think of, say, protectionism like tariffs

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to protect an infant industry

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or subsidies for firms

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that use domestically produced inputs.

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I think that's what's gotten a lot

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of attention in the United States recently.

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You know, they have an initiative to, with, with tariffs

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and subsidies to produce solar panels domestically.

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Um, but you know, from an international perspective,

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there, there actually wasn't a lot of success,

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with these sort of protectionist import

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substitution policies.

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Um, a lot of failures in the seventies and eighties

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and in particular in Latin America.

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And there's been an effort, I think,

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before industrial policy became popular again to,

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to rebrand, policies that target specific sectors

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as productive development.

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So this is a term you hear in, in Latin America a lot,

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but, but the idea there is the same as industrial policy.

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We want to grow a particular sector

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and improve its productivity and maybe,

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or maybe develop new industries, that are,

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that are more productive.

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And so, so I'll just give you an example, from Peru,

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where, you know, Peru is a major exporter of fish.

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Um, and, in the last, decade,

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they set up these working groups,

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with key government officials

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and members of the private sector to think about how

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to grow, aquaculture or fish farming.

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And the policies that they implemented were quite diverse.

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They included, you know, deregulation in some cases,

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moving, removing a requirement

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to get a permit every time you discharge wastewater,

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you know, which was cumbersome.

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Uh, but they also dispersed, innovation grants, one, one

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of which helped, develop a, domestic source of,

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of fish eggs so they wouldn't be reliant,

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on imports anymore.

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So that kind of bundle of policies were, you could think of

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as industrial policy, you know, designed to grow the,

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the fish farming sector in this case.

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Um, but it's not the, the, the traditional approach of, say,

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tariffs and, and subsidies that,

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that the US is using right now.

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And that, you know, countries used,

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historically as well.

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Um, and, and I'd say overall, you know,

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and we can get into this, obviously the effects

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of these policies are gonna differ from context to context,

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and that that's part of what the paper is about.

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But I think we do have, you know, examples of successes,

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that suggest that, you know, a government

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with some capacity, bandwidth

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and sophistication, you know,

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can be effective in growing, certain sectors,

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and making them more productive.

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I'll focus mainly on the, the microeconomic literature and,

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and development from the last 20 years.

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Um, we, we've gotten

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Now I think, a, a, good bank of evidence,

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that specific programs can improve firm growth

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and productivity, in certain contexts.

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Um, and where, where my paper, comes in is,

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is thinking about how you should target those at the,

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at the sector level.

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So I'll give an example of the interventions

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and then talk about targeting.

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Um, you know, I think there's been, there was first a lot

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of focus, on

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what you could call supply side intervention.

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So this is, you know, helping firms improve productivity

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by giving them inputs.

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So cheaper credit, training, you know,

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skills training for workers.

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Um, I think most of that literature does focus on,

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on very small microenterprises,

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but there are some studies that look at,

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you know, larger firms.

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Um, you know, a notable one is this,

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does management matter, evidence from India,

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in the QJ in 2013, which gave, you know,

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consulting services to textile manufacturers

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and found that these improved productivity.

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Um, you know, the puzzle there though was

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that even though this is effective, a limited number

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of firms agreed to, to sort of do the work, to,

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to implement the and,

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and take on the, consulting services,

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it seems like you can give people, supply side support,

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but uptake may not be that high.

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Um, I think more recently there's been a focus on,

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demand side interventions, which is saying that,

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the idea is that, you know,

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even if you get all the things on the supply side, right?

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Credit training, consulting,

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if the firm doesn't have a large market

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that they can access, you know, they, they won't be able

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to benefit, from those.

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And so, you know, GA b and,

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and Daniel Zoo have a paper, looking at Ali Express,

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in, in China, and,

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and they, they give, you know, random orders to,

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certain, firms.

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Uh, and so it's kind of an experiment.

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You can compare who, who got the orders and who didn't.

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Uh, and they find that these do lead

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to persistent impacts, on sales.

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Um, but, but only for a small number, of firms,

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that and those that have a big impact.

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So, so again, you know, demand seems important,

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but it's a small step that that benefit.

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Um, and so, so I think the question is, is, you know,

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economists are doing these experiments in specific settings,

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but how should a government target these, in a,

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in an aggregate, sense?

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And so, you know,

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and this is where the, the, the title of the paper comes in.

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And, you know, initially people say, okay, well,

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you can't pick winners.

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And so at some level that's true.

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David McKenzie and, have a have a paper where they show

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that in Nigeria, you know, expert, you know,

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judges cannot predict whether a firm will succeed

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or fail in three years, whether it will grow.

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Um, there's no way to tell, you know,

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if you work in private investment in venture capital,

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you know, it's very difficult to predict with certainty,

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which, you know, firms will succeed.

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Um, but at, at the same time, and,

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and the point of the paper is to say, well,

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but if you look at the industry level, there are,

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are actually reasonable ways of thinking through,

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is this industry going to succeed?

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My policy may not work in the industry,

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but I at least know that the industry, is viable.

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Um, going back to that, the consulting experiment in,

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in India where they gave consulting services to firms,

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those were textile manufacturers, which is a sector

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where India has a comparative advantage.

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Um, you know, some of the firms were,

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were already exporting per, perhaps

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that program would've been, you know, less effective.

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An uptake would've been even lower had they targeted an

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industry like solar panel manufacturing, where,

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where India is not, sort of

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yet succeeded, at all.

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Um, so, so that, that's where the paper comes in.

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I think that, and, and we can talk about

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the specific measures.

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Um, I think there another point is that

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over the last 20, 30 years,

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governments have really improved, aspects of the macro,

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and, and regulatory environment to make it easier

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for firms to operate, right?

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So you have lower inflation, banks, you know, have,

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have expanded, capital greatly.

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Um, you know, the, the World Bank as

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for a long time measured, you know, regulations

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that make it hard to start a business.

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We've seen huge improvements in that, over,

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the last decades.

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And so what that tells me is that,

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if there are still constraints

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and firms being able to access demand or,

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or the inputs that they need, th those are likely going

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to be specific to a particular industry.

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You know, going back to the, the Peru example, it's,

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you know, I need to get this particular type of egg,

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and I'd like to not have to import it.

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Um, and so a government needs a way of targeting industries

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to say, you know, how am I going to invest in learning about

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what the, you know, constraints and opportunities are?

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Um, and, and how am I gonna do that with, without just sort

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of, you know, targeting the whole economy at once,

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which would, which would, you know,

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not give you very much focus.

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The question of the paper is,

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you know, can you pick winners?

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And so, so I, I suggest these measures that,

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that countries have used, to, to identify,

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industries to target in the past.

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And I think the starting point is that there are a lot

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of theories that have been out there about which sectors,

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you should pick.

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Um, you know, complexity is, is often emphasized

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or products that rich countries export, you know,

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because they're more sophisticated somehow or upstream,

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Uh, sectors, green sectors, for instance, that,

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you know, have some end use related

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to the carbon transition.

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The problem with these theories is

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that they rank sectors in general,

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and they don't talk about,

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the particular market potential facing a particular country.

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So is there demand for that product?

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And can my country actually, you know,

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grow an industry given its capabilities?

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I run through, several measures that,

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that countries have used.

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Um, I think first two to, to start out, are,

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market growth,

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and, you know, international competition.

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Um, if you look at, you know, electric vehicles,

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which have been a focus in several countries, you know,

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China and Korea have succeeded in exporting these,

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and gaining market share.

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Um, you know, they anticipated that growth 10, 15 years ago,

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and they said, this is a sector that that's growing.

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Now, there are sectors that, that are not growing,

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that, could have less success, for various reasons.

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I think one thing I see a lot in low income countries is

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that they'll try to prioritize hides

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and skins, you know, leather products,

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but as it turns out, demand for that,

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globally is falling.

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Um, and so, you know, it, it, for that reason,

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it's maybe less, less of worth focus of a focus,

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competition is another, variable to look at.

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Um, I think there's a recent paper by, David Atkin

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and co-authors,

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and cast, that, that looks at complex products,

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and it, and it shows that complex products measured in,

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in, in a particular way,

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are actually produced by more countries.

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So, so if you were moving into a market

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for complex goods on average,

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that's also a more competitive market,

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which could be harder to break into.

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So this is kind of a first principles argument, but it,

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but it's thing, it's something

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that hasn't been considered in the past.

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Um, we then move to, comparative advantage and,

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and technological relatedness.

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Um, comparative advantage is something that, you know,

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you can measure, by looking at a country's exports,

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how specialized a country is.

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Um, but what you do is you,

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you don't necessarily look at the largest exports,

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but you look at the largest exports relative to, you know,

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how big that industry is, in the world.

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And so, you know, you can find that, you know,

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perhaps there's a very small product, like I, I love

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to use the example of, you know, the Republic

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of Chad is the second largest exporter of gum Arabic,

254
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which is a food additive that,

255
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that goes into many things.

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Um, you know, that's a relatively small

257
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market in the country,

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but it's something where that particular country has a lot

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of natural resources

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and a lot of, ability to be competitive.

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And so from that perspective, you know,

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focusing on building that industry as opposed to, say,

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cotton, which is in Chad very large, but

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but also produced by many other countries and,

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and that, you know, they don't have as high, sort

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of market share relative to other countries.

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Um, the, the, there's, sort of,

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you know, perhaps, you know, less

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of an opportunity there.

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Going back to that, the India textiles example, that

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that's a, a sector which, which has, measured,

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revealed comparative advantage.

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Um, tech relatedness, is another thing where,

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you know, I I just wanted to highlight the work of,

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Ricardo Houseman and, and Bailey Klinger,

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where they just set up this way of saying, okay,

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if you have a comparative advantage in this set of products,

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what's the likelihood that you have a comparative advantage

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in another set of products?

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That's a measure that countries have used.

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The idea being that if I know how to make, you know,

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car parts, maybe I can move to making,

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you know, an entire car.

284
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Um, the key point about all of these measures is

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that they're actually more valuable for poorer

286
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and smaller economies.

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So if you don't have very many comparative advantages

288
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and you don't have very much technology,

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it's even more valuable for you to look

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and say, what am I really good at?

291
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What could be the things that I, you know, could move into,

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compared to a country which is, you know, very large

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and already producing many things.

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And so, a a point of the paper is saying that for,

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in particular, developing countries low income,

296
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lower middle income, it's very important for the government

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to have a clear understanding of

298
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what it is good at producing and, and,

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and make a educated guess about what it might be,

300
00:13:42.715 --> 00:13:44.715
good at producing in the future.

301
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The World Bank, you know, does do a lot of programs.

302
00:13:49.855 --> 00:13:53.275
You know, the IFC invests in private companies in specific

303
00:13:53.385 --> 00:13:54.595
sectors,

304
00:13:54.885 --> 00:13:58.555
particular value chains are targeted in agriculture or,

305
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or, manufacturing for reforms.

306
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But, people have always been, I think,

307
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pretty ambivalent about selecting sectors.

308
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And so part of the argument here is to just say, you know,

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we do have these things, market growth competition,

310
00:14:13.365 --> 00:14:16.965
comparative advantage, tech relatedness that, you know,

311
00:14:16.965 --> 00:14:19.125
can probably build a pretty good business case,

312
00:14:19.125 --> 00:14:22.885
for focusing on an industry idea of focus on exports at all.

313
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Um, that's because you, you need some, you need firms

314
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to need to be able to achieve some kind of scale.

315
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And if you're a, a smaller developing country, you're,

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you're not able to achieve that domestically.

317
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Um, and so you reliance on exports,

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00:14:39.465 --> 00:14:43.405
is gonna lead you to take a, different approach

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to industrial policy than say,

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a very large economy like the United States, that that isn't

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as, as reliant on exports.

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Um, what I mean specifically is that if you're trying

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to export, you can't,

324
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anger your trading partners in ways that might,

325
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force them to punish you.

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Right? So with the Trump tariffs in, in the United States,

327
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we saw that countries

328
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or China retaliated in particular, you know,

329
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but maybe the US has a big domestic market we can borrow,

330
00:15:14.905 --> 00:15:16.605
to compensate the losers.

331
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They did actually do that.

332
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Um, but,

333
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but that's much harder if you're a,

334
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if you're a poorer country.

335
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Um, and, and there's one example of a, the

336
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Vietnam catfish dispute.

337
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So, the us imposed tariffs on catfish,

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from Vietnam, basically with allegations

339
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that they were being dumped, you know,

340
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at low prices on the US market

341
00:15:39.505 --> 00:15:42.645
and harming us, catfish farmers.

342
00:15:43.145 --> 00:15:45.405
Um, and, and there's a paper by G***o Porto and,

343
00:15:45.405 --> 00:15:48.765
and some other co-authors, showing that, you know,

344
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that led to really large declines in the income growth

345
00:15:52.105 --> 00:15:53.285
of, of, of farmers.

346
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If you're trying to promote a sector, you need

347
00:15:56.085 --> 00:15:58.445
to do it in a way that's gonna invo avoid

348
00:15:58.835 --> 00:16:00.245
that type of retaliation.

349
00:16:00.505 --> 00:16:03.405
Um, and, and by the way, it, it's the case

350
00:16:03.515 --> 00:16:06.525
that rich countries impose these sort

351
00:16:06.525 --> 00:16:09.405
of anti-dumping tariffs on developing countries much

352
00:16:09.405 --> 00:16:10.525
more than the other way around.

353
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So there, there is a real asymmetric,

354
00:16:13.245 --> 00:16:14.405
power dynamic there.

355
00:16:14.985 --> 00:16:17.885
Um, so, so the question is, what are the types of policies

356
00:16:17.885 --> 00:16:20.765
that sort of don't run afoul of, of,

357
00:16:21.395 --> 00:16:22.685
your trading partners?

358
00:16:23.185 --> 00:16:25.205
Um, there's some ambiguity.

359
00:16:25.405 --> 00:16:27.765
I, I think it, in general, if you're smaller

360
00:16:28.105 --> 00:16:30.965
and you know it, it's going to be less likely

361
00:16:30.995 --> 00:16:33.005
that you offend, you know,

362
00:16:33.005 --> 00:16:34.845
another country than, than if you're bigger.

363
00:16:35.385 --> 00:16:37.965
Um, but, but there are a set of policies I go through that,

364
00:16:37.965 --> 00:16:40.245
that, that seem to be less controversial.

365
00:16:40.625 --> 00:16:45.525
Um, so these include, access to new markets.

366
00:16:45.705 --> 00:16:49.125
So doing, doing workshops to, to introduce firms

367
00:16:49.225 --> 00:16:52.085
and help them make connections in, in other,

368
00:16:52.265 --> 00:16:53.565
in other markets.

369
00:16:53.785 --> 00:16:56.165
Um, you know, there's evidence from Peru, for example,

370
00:16:56.165 --> 00:16:59.725
which shows that when firms get services from an export

371
00:16:59.725 --> 00:17:01.445
promotion agency,

372
00:17:01.595 --> 00:17:04.045
they have more growth on the extensive margin.

373
00:17:04.145 --> 00:17:07.805
So they're exporting an, a greater number of products also

374
00:17:07.805 --> 00:17:09.645
to a greater number of countries,

375
00:17:09.645 --> 00:17:11.805
rather than on the intensive margin of, you know,

376
00:17:12.165 --> 00:17:13.245
existing, existing products.

377
00:17:13.245 --> 00:17:17.425
So, so matching firms with, with new markets,

378
00:17:18.095 --> 00:17:21.595
quality certification is something that,

379
00:17:22.395 --> 00:17:24.115
I think is increasingly important.

380
00:17:24.415 --> 00:17:27.355
We know about this in food, for example, where you have

381
00:17:27.355 --> 00:17:30.635
to satisfy certain standards to have access to a market.

382
00:17:30.745 --> 00:17:32.355
Sometimes, you know,

383
00:17:32.615 --> 00:17:34.875
the importing country will actually have to send regulators

384
00:17:34.875 --> 00:17:38.995
to inspect factories in your country, to, to give them

385
00:17:38.995 --> 00:17:39.995
that qualification.

386
00:17:40.295 --> 00:17:44.555
Um, that's something only government can facilitate,

387
00:17:45.135 --> 00:17:46.355
in many, in many cases.

388
00:17:47.055 --> 00:17:49.780
Um, you know, common infrastructure is another thing.

389
00:17:49.825 --> 00:17:54.325
You know, firms need natural gas, high purity water,

390
00:17:54.825 --> 00:17:57.285
irrigation in agriculture.

391
00:17:57.285 --> 00:17:59.045
These types of investments are essential

392
00:17:59.045 --> 00:18:01.085
for specific industries, but,

393
00:18:01.825 --> 00:18:03.365
and are, are something that governments can do.

394
00:18:03.945 --> 00:18:05.965
Um, and, and then I think finally this,

395
00:18:06.575 --> 00:18:09.245
these public-private dialogue forums, I,

396
00:18:09.325 --> 00:18:13.325
I mentioned again in the Peru case, you know,

397
00:18:13.345 --> 00:18:15.765
you had private firms and the regulators

398
00:18:16.025 --> 00:18:18.205
and government all working together

399
00:18:18.225 --> 00:18:19.605
to solve specific problems.

400
00:18:19.605 --> 00:18:22.285
And so, so these are the types of interventions that,

401
00:18:22.305 --> 00:18:23.405
can be done.

402
00:18:23.505 --> 00:18:26.925
And, and I should say, export promotion agencies,

403
00:18:27.465 --> 00:18:31.365
you know, they typically focus on, you know, these,

404
00:18:31.365 --> 00:18:33.925
these sort of market access interventions, you know,

405
00:18:33.925 --> 00:18:35.965
meeting, having firms meet new markets.

406
00:18:36.585 --> 00:18:39.285
Um, there's evidence that they're successful just,

407
00:18:39.825 --> 00:18:44.445
higher budgets for, export promotion agencies seem

408
00:18:44.445 --> 00:18:46.485
to predict, you know, greater exports.

409
00:18:46.645 --> 00:18:48.125
I can talk about how that's identified.

410
00:18:48.625 --> 00:18:51.655
Um, and, and,

411
00:18:51.715 --> 00:18:54.775
and I think that having a, perhaps broader mandate

412
00:18:54.995 --> 00:18:58.135
for these agencies, which they have the bandwidth

413
00:18:58.135 --> 00:18:59.535
to interact with many firms at once.

414
00:19:00.075 --> 00:19:03.575
And as a, if, if instead of just focusing on, you know,

415
00:19:03.595 --> 00:19:05.815
new market access, they could also coordinate

416
00:19:06.035 --> 00:19:09.215
infrastructure, public-private dialogue,

417
00:19:09.325 --> 00:19:10.575
quality certification.

418
00:19:10.895 --> 00:19:14.935
I think that's a good, institutional model for, for sort

419
00:19:14.995 --> 00:19:16.535
or a good institutional home.

420
00:19:17.195 --> 00:19:19.775
Uh, for, for organizing industrial policy.

421
00:19:19.885 --> 00:19:22.535
There's been a lot of academic attention,

422
00:19:22.635 --> 00:19:24.535
on industrial policy recently.

423
00:19:24.595 --> 00:19:28.575
And a, a paper that had, quite a lot of impact is one

424
00:19:28.675 --> 00:19:30.015
by, reha

425
00:19:30.035 --> 00:19:33.615
and, Nathan Lane, which, you know, claimed

426
00:19:33.615 --> 00:19:36.295
to identify, industrial policies.

427
00:19:36.295 --> 00:19:40.015
And, and one result they had was that rich countries,

428
00:19:40.115 --> 00:19:42.575
do this much more intensively than four countries.

429
00:19:42.875 --> 00:19:47.375
Um, now I'm a little skeptical of that result.

430
00:19:47.475 --> 00:19:50.335
And part of this paper is about trying

431
00:19:50.435 --> 00:19:52.215
to challenge that result.

432
00:19:52.475 --> 00:19:55.455
Um, it, it's due partially to the fact that they

433
00:19:56.375 --> 00:19:58.415
identify industrial policies only in this

434
00:19:58.975 --> 00:20:02.975
database called the Global Trade Alert, which looks at,

435
00:20:03.115 --> 00:20:06.335
measures, you know, to subsidize exports,

436
00:20:06.335 --> 00:20:08.335
from a particular country typically,

437
00:20:08.555 --> 00:20:10.975
or, you know, attract foreign investment or,

438
00:20:11.035 --> 00:20:13.735
or also discriminate against, imports.

439
00:20:14.315 --> 00:20:18.535
Um, but that doesn't include, you know, all of the things

440
00:20:18.645 --> 00:20:22.015
that I just listed, like infrastructure, investments,

441
00:20:22.355 --> 00:20:25.935
skills training, you know, these working groups to,

442
00:20:25.955 --> 00:20:27.615
to target specific industries.

443
00:20:28.035 --> 00:20:31.815
Um, it could also be that rich countries,

444
00:20:32.085 --> 00:20:34.215
have more capacity to,

445
00:20:34.505 --> 00:20:36.415
start policies and then remove them.

446
00:20:36.435 --> 00:20:37.655
And so there's more turnover.

447
00:20:37.715 --> 00:20:40.295
And so you see more activity among the rich countries,

448
00:20:40.355 --> 00:20:42.935
but the lower income countries are moving more slowly.

449
00:20:43.035 --> 00:20:46.255
And so in that data set, you see less variation. So,

450
00:20:46.835 --> 00:20:50.805
Um, I, I, I don't want the discussion of industrial policy

451
00:20:50.905 --> 00:20:54.805
to be focused just on these sort of,

452
00:20:55.295 --> 00:20:57.205
these measures in the global trade alert.

453
00:20:57.365 --> 00:20:59.245
I, I wanna recognize, you know, the work

454
00:20:59.275 --> 00:21:02.245
that multilateral development banks have been doing and,

455
00:21:02.305 --> 00:21:04.125
and developing countries have been doing

456
00:21:04.625 --> 00:21:07.965
for a very long time, under this umbrella of, you know,

457
00:21:07.965 --> 00:21:11.605
productive development, if not industrial policy,

458
00:21:12.305 --> 00:21:14.965
to, to, to develop new, new industries.

459
00:21:15.065 --> 00:21:18.405
And so, so I want to hopefully give more attention to that.

460
00:21:18.635 --> 00:21:19.845
This is something that,

461
00:21:19.935 --> 00:21:22.205
lower income countries are, are engaged in.

462
00:21:22.385 --> 00:21:25.365
Um, albeit though maybe they're using different instruments,

463
00:21:25.745 --> 00:21:27.845
because they don't want to offend,

464
00:21:27.845 --> 00:21:28.965
their trading partners.

465
00:21:29.745 --> 00:21:34.325
Um, I think for, avenues

466
00:21:34.325 --> 00:21:38.925
of future research, I am, I'm, I'm really interested in,

467
00:21:39.465 --> 00:21:40.605
in quality,

468
00:21:40.705 --> 00:21:44.845
and how, firms can brand themselves,

469
00:21:45.105 --> 00:21:49.645
and how, firms, you know, branding

470
00:21:49.645 --> 00:21:52.165
and ability to enter,

471
00:21:52.435 --> 00:21:54.565
high income markets changes over time.

472
00:21:54.745 --> 00:21:58.485
And so I think that, interventions that,

473
00:21:58.835 --> 00:22:00.205
support large firms

474
00:22:00.465 --> 00:22:03.645
and expanding their markets, you know, could,

475
00:22:03.645 --> 00:22:04.845
could be very interesting.

476
00:22:05.625 --> 00:22:08.445
Um, I think we also need to know more about

477
00:22:09.035 --> 00:22:10.805
what are the types of institutions

478
00:22:10.955 --> 00:22:14.645
that are most effective in organizing,

479
00:22:14.815 --> 00:22:15.925
industrial policy.

480
00:22:16.245 --> 00:22:18.565
I, I think the challenge is, you know, if

481
00:22:19.585 --> 00:22:23.605
the constraints are very specific, to an industry,

482
00:22:23.605 --> 00:22:27.405
government needs a way of, of getting that information from,

483
00:22:27.405 --> 00:22:32.125
from firms, and, and,

484
00:22:32.385 --> 00:22:33.845
and, and then acting on it.

485
00:22:33.945 --> 00:22:35.845
Um, and I think, you know, we have some work from political

486
00:22:36.085 --> 00:22:38.965
scientists and sociologists about how to do this, but,

487
00:22:39.285 --> 00:22:40.325
but I think it's not something

488
00:22:40.325 --> 00:22:42.405
that economists have touched on, as much.

489
00:22:42.465 --> 00:22:43.565
So, so I think that's,

490
00:22:43.815 --> 00:22:46.085
these institutional design questions are something

491
00:22:46.085 --> 00:22:47.885
that I'd like to look at in the future.

Defining Industrial Policy and Its Implications

00:00:00 - I think let's first define industrial policy, which is a lot of what this paper is about. that means specific, government action that's targeted at growing a specific sector of the economy. So exports particular industry. And that's quite a broad definition. I think when a lot of people have in mind industrial policy, they think of, say, protectionism like tariffs to protect an infant industry or subsidies for firms that use domestically produced inputs. I think that's what's gotten a lot of attention in the United States recently.

00:00:34 - and subsidies to produce solar panels domestically. but you know, from an international perspective, there, there actually wasn't a lot of success, with these sort of protectionist import substitution policies. a lot of failures in the seventies and eighties and in particular in Latin America. And there's been an effort, I think, before industrial policy became popular again to, to rebrand, policies that target specific sectors

00:01:04 - So this is a term you hear in, in Latin America a lot, but, but the idea there is the same as industrial policy. We want to grow a particular sector and improve its productivity and maybe, or maybe develop new industries, that are, that are more productive. And so, so I'll just give you an example, from Peru, where, you know, Peru is a major exporter of fish. and, in the last, decade, they set up these working groups, with key government officials

Promoting Aquaculture Through Diverse Industrial Policies

00:01:35 - to grow, aquaculture or fish farming. And the policies that they implemented were quite diverse. They included, you know, deregulation in some cases, moving, removing a requirement to get a permit every time you discharge wastewater, you know, which was cumbersome. but they also dispersed, innovation grants, one, one of which helped, develop a, domestic source of, of fish eggs so they wouldn't be reliant,

00:02:05 - So that kind of bundle of policies were, you could think of as industrial policy, you know, designed to grow the, the fish farming sector in this case. but it's not the, the, the traditional approach of, say, tariffs and, and subsidies that, that the US is using right now. And that, you know, countries used, historically as well. and, and I'd say overall, you know, and we can get into this, obviously the effects of these policies are gonna differ from context to context,

00:02:37 - But I think we do have, you know, examples of successes, that suggest that, you know, a government with some capacity, bandwidth and sophistication, you know, can be effective in growing, certain sectors, and making them more productive. I'll focus mainly on the, the microeconomic literature and, and development from the last 20 years. we, we've gotten Now I think, a, a, good bank of evidence, that specific programs can improve firm growth

Targeting Interventions: Supply vs. Demand in Industrial Policy

00:03:10 - and where, where my paper, comes in is, is thinking about how you should target those at the, at the sector level. So I'll give an example of the interventions and then talk about targeting. you know, I think there's been, there was first a lot of focus, on what you could call supply side intervention. So this is, you know, helping firms improve productivity by giving them inputs. So cheaper credit, training, you know, skills training for workers.

00:03:41 - on very small microenterprises, but there are some studies that look at, you know, larger firms. you know, a notable one is this, does management matter, evidence from India, in the QJ in 2013, which gave, you know, consulting services to textile manufacturers and found that these improved productivity. you know, the puzzle there though was that even though this is effective, a limited number of firms agreed to, to sort of do the work, to,

00:04:11 - and take on the, consulting services, it seems like you can give people, supply side support, but uptake may not be that high. I think more recently there's been a focus on, demand side interventions, which is saying that, the idea is that, you know, even if you get all the things on the supply side, right? Credit training, consulting, if the firm doesn't have a large market that they can access, you know, they, they won't be able to benefit, from those.

Evaluating Demand and Targeting in Industrial Policy

00:04:43 - and Daniel Zoo have a paper, looking at Ali Express, in, in China, and, and they, they give, you know, random orders to, certain, firms. and so it's kind of an experiment. You can compare who, who got the orders and who didn't. and they find that these do lead to persistent impacts, on sales. but, but only for a small number, of firms, that and those that have a big impact. So, so again, you know, demand seems important,

00:05:15 - and so, so I think the question is, is, you know, economists are doing these experiments in specific settings, but how should a government target these, in a, in an aggregate, sense? And so, you know, and this is where the, the, the title of the paper comes in. And, you know, initially people say, okay, well, you can't pick winners. And so at some level that's true. David McKenzie and, have a have a paper where they show

00:05:49 - judges cannot predict whether a firm will succeed or fail in three years, whether it will grow. there's no way to tell, you know, if you work in private investment in venture capital, you know, it's very difficult to predict with certainty, which, you know, firms will succeed. but at, at the same time, and, and the point of the paper is to say, well, but if you look at the industry level, there are,

Evaluating Industry Viability and Government Support

00:06:17 - is this industry going to succeed? My policy may not work in the industry, but I at least know that the industry, is viable. going back to that, the consulting experiment in, in India where they gave consulting services to firms, those were textile manufacturers, which is a sector where India has a comparative advantage. you know, some of the firms were, were already exporting per, perhaps that program would've been, you know, less effective.

00:06:47 - industry like solar panel manufacturing, where, where India is not, sort of yet succeeded, at all. so, so that, that's where the paper comes in. I think that, and, and we can talk about the specific measures. I think there another point is that over the last 20, 30 years, governments have really improved, aspects of the macro,

00:07:20 - for firms to operate, right? So you have lower inflation, banks, you know, have, have expanded, capital greatly. you know, the, the World Bank as for a long time measured, you know, regulations that make it hard to start a business. We've seen huge improvements in that, over, the last decades. And so what that tells me is that, if there are still constraints and firms being able to access demand or,

Targeting Industrial Growth: Identifying Key Sectors

00:07:54 - to be specific to a particular industry. You know, going back to the, the Peru example, it's, you know, I need to get this particular type of egg, and I'd like to not have to import it. and so a government needs a way of targeting industries to say, you know, how am I going to invest in learning about what the, you know, constraints and opportunities are? and, and how am I gonna do that with, without just sort of, you know, targeting the whole economy at once,

00:08:23 - not give you very much focus. The question of the paper is, you know, can you pick winners? And so, so I, I suggest these measures that, that countries have used, to, to identify, industries to target in the past. And I think the starting point is that there are a lot of theories that have been out there about which sectors, you should pick. you know, complexity is, is often emphasized or products that rich countries export, you know, because they're more sophisticated somehow or upstream,

00:08:59 - you know, have some end use related to the carbon transition. The problem with these theories is that they rank sectors in general, and they don't talk about, the particular market potential facing a particular country. So is there demand for that product? And can my country actually, you know, grow an industry given its capabilities? I run through, several measures that,

Market Growth and International Competition in Sector Selection

00:09:27 - I think first two to, to start out, are, market growth, and, you know, international competition. if you look at, you know, electric vehicles, which have been a focus in several countries, you know, China and Korea have succeeded in exporting these, and gaining market share. you know, they anticipated that growth 10, 15 years ago, and they said, this is a sector that that's growing. Now, there are sectors that, that are not growing,

00:10:02 - I think one thing I see a lot in low income countries is that they'll try to prioritize hides and skins, you know, leather products, but as it turns out, demand for that, globally is falling. and so, you know, it, it, for that reason, it's maybe less, less of worth focus of a focus, competition is another, variable to look at. I think there's a recent paper by, David Atkin

00:10:31 - and cast, that, that looks at complex products, and it, and it shows that complex products measured in, in, in a particular way, are actually produced by more countries. So, so if you were moving into a market for complex goods on average, that's also a more competitive market, which could be harder to break into. So this is kind of a first principles argument, but it, but it's thing, it's something that hasn't been considered in the past. we then move to, comparative advantage and,

Evaluating Comparative Advantage in Global Trade

00:11:02 - comparative advantage is something that, you know, you can measure, by looking at a country's exports, how specialized a country is. but what you do is you, you don't necessarily look at the largest exports, but you look at the largest exports relative to, you know, how big that industry is, in the world. And so, you know, you can find that, you know, perhaps there's a very small product, like I, I love to use the example of, you know, the Republic of Chad is the second largest exporter of gum Arabic,

00:11:36 - that goes into many things. you know, that's a relatively small market in the country, but it's something where that particular country has a lot of natural resources and a lot of, ability to be competitive. And so from that perspective, you know, focusing on building that industry as opposed to, say, cotton, which is in Chad very large, but but also produced by many other countries and, and that, you know, they don't have as high, sort

00:12:08 - the, the, there's, sort of, you know, perhaps, you know, less of an opportunity there. Going back to that, the India textiles example, that that's a, a sector which, which has, measured, revealed comparative advantage. tech relatedness, is another thing where, you know, I I just wanted to highlight the work of, Ricardo Houseman and, and Bailey Klinger, where they just set up this way of saying, okay,

Identifying Comparative Advantages for Economic Growth

00:12:41 - what's the likelihood that you have a comparative advantage in another set of products? That's a measure that countries have used. The idea being that if I know how to make, you know, car parts, maybe I can move to making, you know, an entire car. the key point about all of these measures is that they're actually more valuable for poorer and smaller economies. So if you don't have very many comparative advantages

00:13:13 - it's even more valuable for you to look and say, what am I really good at? What could be the things that I, you know, could move into, compared to a country which is, you know, very large and already producing many things. And so, a a point of the paper is saying that for, in particular, developing countries low income, lower middle income, it's very important for the government to have a clear understanding of what it is good at producing and, and, and make a educated guess about what it might be,

00:13:45 - The World Bank, you know, does do a lot of programs. You know, the IFC invests in private companies in specific sectors, particular value chains are targeted in agriculture or, or, manufacturing for reforms. But, people have always been, I think, pretty ambivalent about selecting sectors. And so part of the argument here is to just say, you know, we do have these things, market growth competition,

Export Reliance and Trade Dynamics in Developing Economies

00:14:16 - can probably build a pretty good business case, for focusing on an industry idea of focus on exports at all. that's because you, you need some, you need firms to need to be able to achieve some kind of scale. And if you're a, a smaller developing country, you're, you're not able to achieve that domestically. and so you reliance on exports, is gonna lead you to take a, different approach

00:14:45 - a very large economy like the United States, that that isn't as, as reliant on exports. what I mean specifically is that if you're trying to export, you can't, anger your trading partners in ways that might, force them to punish you. Right? So with the Trump tariffs in, in the United States, we saw that countries or China retaliated in particular, you know, but maybe the US has a big domestic market we can borrow,

00:15:16 - They did actually do that. but, but that's much harder if you're a, if you're a poorer country. and, and there's one example of a, the Vietnam catfish dispute. So, the us imposed tariffs on catfish, from Vietnam, basically with allegations that they were being dumped, you know, at low prices on the US market and harming us, catfish farmers. and, and there's a paper by G***o Porto and,

Addressing Asymmetries in Global Trade Policies

00:15:48 - that led to really large declines in the income growth of, of, of farmers. If you're trying to promote a sector, you need to do it in a way that's gonna invo avoid that type of retaliation. and, and by the way, it, it's the case that rich countries impose these sort of anti-dumping tariffs on developing countries much more than the other way around. So there, there is a real asymmetric, power dynamic there. so, so the question is, what are the types of policies

00:16:21 - your trading partners? there's some ambiguity. I, I think it, in general, if you're smaller and you know it, it's going to be less likely that you offend, you know, another country than, than if you're bigger. but, but there are a set of policies I go through that, that, that seem to be less controversial. so these include, access to new markets. So doing, doing workshops to, to introduce firms

00:16:52 - in other markets. you know, there's evidence from Peru, for example, which shows that when firms get services from an export promotion agency, they have more growth on the extensive margin. So they're exporting an, a greater number of products also to a greater number of countries, rather than on the intensive margin of, you know, existing, existing products. So, so matching firms with, with new markets, quality certification is something that,

Enhancing Market Access through Government Facilitation

00:17:24 - We know about this in food, for example, where you have to satisfy certain standards to have access to a market. Sometimes, you know, the importing country will actually have to send regulators to inspect factories in your country, to, to give them that qualification. that's something only government can facilitate, in many, in many cases. you know, common infrastructure is another thing. You know, firms need natural gas, high purity water,

00:17:57 - These types of investments are essential for specific industries, but, and are, are something that governments can do. and, and then I think finally this, these public-private dialogue forums, I, I mentioned again in the Peru case, you know, you had private firms and the regulators and government all working together to solve specific problems. And so, so these are the types of interventions that, can be done. And, and I should say, export promotion agencies,

00:18:31 - these sort of market access interventions, you know, meeting, having firms meet new markets. there's evidence that they're successful just, higher budgets for, export promotion agencies seem to predict, you know, greater exports. I can talk about how that's identified. and, and, and I think that having a, perhaps broader mandate for these agencies, which they have the bandwidth

Rethinking Industrial Policy: A Comprehensive Approach

00:19:00 - And as a, if, if instead of just focusing on, you know, new market access, they could also coordinate infrastructure, public-private dialogue, quality certification. I think that's a good, institutional model for, for sort or a good institutional home. for, for organizing industrial policy. There's been a lot of academic attention, on industrial policy recently. And a, a paper that had, quite a lot of impact is one

00:19:30 - and, Nathan Lane, which, you know, claimed to identify, industrial policies. And, and one result they had was that rich countries, do this much more intensively than four countries. now I'm a little skeptical of that result. And part of this paper is about trying to challenge that result. it, it's due partially to the fact that they identify industrial policies only in this

00:20:03 - measures, you know, to subsidize exports, from a particular country typically, or, you know, attract foreign investment or, or also discriminate against, imports. but that doesn't include, you know, all of the things that I just listed, like infrastructure, investments, skills training, you know, these working groups to, to target specific industries. it could also be that rich countries,

Variability in Industrial Policy: A Focus on Rich vs. Low-Income Countries

00:20:34 - start policies and then remove them. And so there's more turnover. And so you see more activity among the rich countries, but the lower income countries are moving more slowly. And so in that data set, you see less variation. So, I, I, I don't want the discussion of industrial policy to be focused just on these sort of, these measures in the global trade alert. I, I wanna recognize, you know, the work that multilateral development banks have been doing and,

00:21:04 - for a very long time, under this umbrella of, you know, productive development, if not industrial policy, to, to, to develop new, new industries. And so, so I want to hopefully give more attention to that. This is something that, lower income countries are, are engaged in. albeit though maybe they're using different instruments, because they don't want to offend, their trading partners. I think for, avenues

00:21:39 - in quality, and how, firms can brand themselves, and how, firms, you know, branding and ability to enter, high income markets changes over time. And so I think that, interventions that, support large firms and expanding their markets, you know, could, could be very interesting.

Optimizing Institutional Design for Effective Industrial Policy

00:22:09 - what are the types of institutions that are most effective in organizing, industrial policy. I, I think the challenge is, you know, if the constraints are very specific, to an industry, government needs a way of, of getting that information from, from firms, and, and, and, and then acting on it. and I think, you know, we have some work from political

00:22:46 - but I think it's not something that economists have touched on, as much. So, so I think that's, these institutional design questions are something that I'd like to look at in the future.

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