Industrial policy has re-emerged as an area of policy discussion in the light of recent trends and development in the global economy. Newly emerging patterns of trade and global value chains and marketing networks have profoundly changed the global economic environment. Now the US led economic sanctions on Russia have created new turmoil in the global economy and more broad based global economic integration has widened the avenues through which these sanctions spill over to non-targeted countries such as a developing countries like Bangladesh.
In the Global South there has also been a push back against the neo-liberal orthodoxy or more popularly termed as market fundamentalism closely linked with the Washington Consensus, an economic ideological construct espoused by the International Monetary Fund (IMF), the World Bank (WB) and the US Treasury Department. However, the rise of China and its rapid export oriented industrialisation and impressive manufacturing sector have created renewed interest to have a fresh look at Industrial policy in countries in the Global South.
Even countries that espouse economic liberalism do engage in various forms of industrial policy when they provide research and development (R&D) funds targeted at specific industries which are in effect a subsidy. Even the provision of selective protection of specific industries in developed countries remains very much on the political agenda to protect employment in uncompetitive industries.
Industrial policy is, however, also a highly contested arena. There is also considerable confusion surrounding the concept of industrial policy, starting at the definitional level. The economic analytical case for industrial policies is based on the concept of market failure that is preventing industrialisation, so some from of government intervention such as subsidy (e.g. energy) or tariff or some other form of protection is necessary to correct that failure. In reality, all economies are full of distortions as reflected in many state interventions.
Therefore, the economic argument eventually rests on the application of the theory of second best in welfare economics to make a case for industrial policy. In the real world, industry policy is a set of policies designed to favour certain industries. The identification of those industries is sometimes akin to picking winners but usually based on some variants of comparative advantage for receiving preferential treatment. At the same time it may also involve propping up or easing the fall of declining industries. It is also argued that state intervention in the form an industrial policy is necessarily sub-optimal and allows for rent seeking among special interest groups, thereby impeding growth.
The reason the comparative advantage criterion is used to identify industry or industries based on the argument that a country has a comparative advantage in producing goods that require a larger share of its abundant (and hence least costly) resource. While other factors are also important but a nation should export goods using resources that are relatively inexpensive and import goods that are relatively expensive to produce domestically. In the case of Bangladesh, the country has abundant low skill labour relative to capital and technology. Bangladesh thus should focus on producing low skill labour intensive product like ready made garments (RMG).
But comparative advantage does not remain static over time. Bangladesh can acquire and develop new comparative advantage through innovation and technological advances. Bangladesh can also lose low wage based comparative advantage to some other even lower wage countries. In fact, the World Bank in a recent report pointed out that Bangladesh's trade competitiveness based on low wages is eroding.
Furthermore, the proposition based on comparative advantage also breaks down as most developed countries in the Global North import and export a wide range of goods within the same industry such as motor vehicles. This type of trade is called intra-industry trade or trade in similar products having different market characteristics. That trend is also seen in a much smaller scale in the Global South involving manufactured and non-manufactured products.
Therefore, industrial policy is essentially taking responsibility for national manufacturing effort which involves adopting policy measures to deal with challenges which arise in a world of rapidly developing and potentially transformative new technologies and innovation opportunities.
A number of technical and organisational conditions ought to be met if a country is to move forward in achieving successful industrialisation. In a rapidly changing technological and business environment, industrial organisations need to be constantly established, modernised, rationalised or expanded and reintegrated into the manufacturing sector.
A country's macroeconomic environment affects all aspects of national economic activity. More precisely, macroeconomic policies are broadly based and affect everyone, not just the industry. Therefore, when policy makers focus exclusively on economic problems affecting a particular segment or particular type of economic activity such as an industry, the orientation of those policies are much more focused.
Industrial policy is not a form of central planning but it complements market mechanisms enabling firms to make medium to long term decisions. What is really problematic is whether there exists an institution or movement to promote and devise industrial policy, and if so, for what purpose. This is because industrial policy is ultimately a question of political will. That political will entails creating an enabling environment for sustainable economic development through fostering inclusive growth for a developing country like Bangladesh.
The current standard account of economic growth by a country is GDP. According to the Bangladesh Bureau of Statistics (BSS), International Monetary Fund (IMF), World Bank (WB) and Asian Development Bank (ADB), Bangladesh's GDP growth over the last three decades or so has increased steadily. GDP growth data, however, neither anticipates nor explains rising joblessness, stagnant to declining wages in real terms. income insecurity, rapidly rising income inequality and poverty in the country.
Also, the word "recession" does not really convey what is going on, since it refers to a drop in GDP, a theoretical calculation relevant to economists but no one else. People are concerned about only whether one has a gainful job or not. According to the BBS, 85.1 per cent of the working population in Bangladesh are employed in the informal sector. The informal sector in Bangladesh is unregulated and offers no legal protection.
Bangladesh historically faced various constraints to pursue sustainable development objectives. According to a recent report published by the World Bank further highlighted that Bangladesh faces three major hurdles including declining trade competitiveness. It further added that Bangladesh's GDP could decline to below 4 per cent by 2035 and the country is in need of economic reforms (FE, September 26).
Therefore, Industrial policy for a country like Bangladesh needs to ensure how best to align and provide an urgent, coherent focus on innovation and competitiveness through productivity gains to achieve its economic development objectives while recognising that development is a moving target.
Bangladesh in pursuing its industrial policy needs to put a strong emphasis on innovation to avoid low value added traps to insulate itself from the effects low growth periods in its traditional trading partners in the developed world as it is happening now. As such reliance on low value added exports makes the country vulnerable to the business cycle effects of developed countries. In this context, trade policy needs ongoing adjustments to changing patterns of demand and international trade along with adopting export facilitation measures to ease entry into new markets.
While government policy can help innovation, enhance workforce skills, create jobs, markets and exports, governments are limited in their ability to sustain focused, coherent and clear goals to amplify innovation and productivity gains beyond fiscal policy incentives.
Many of the key industrial policy instruments such as local content, joint ventures, protecting infant industries, aligning government led research and development have been used routinely in the past. But the policy space for the use of these measures associated with industrial policy has already been constrained by trade and investment rules of the WTO and will increasingly become more so as Bangladesh transits to become a middle income country within a few years. The WTO rules have been devised to manage the spill over effects of the interventions on other markets, balancing legitimate interests.
But Bangladesh can not afford to turn its back on trade and must create domestic space to pursue its industrial policy objectives by negotiating through the policy space provided by the WTO. Despite all the limitations of the current global trading environment, global trade over the last two decades and a half has helped lifting hundreds of millions out of extreme poverty in developing countries including Bangladesh.
Dani Rodrik of Harvard University has been a leading voice warning the limits of trade, globalisation and the Washington Consensus. He has argued that industrial policy is best when it organises different policy objectives like fiscal treatment, infrastructure spending, research and development, job skills training and upgrading, and other areas around key goals.
In September, the Bangladesh government gave approval to the draft of national industrial policy-2022. It is stated that the objective of industrial policy is to create a framework for manufacturing of international standard competitive industrial products by exploiting the advantage of the fourth industrial revolution.
Rapid changes in information technology have been dubbed as the "fourth industrial revolution" by the World Economic Forum in Davos. However, exploiting the advantages of the fourth industrial revolution will require to overcome the shortcomings of the previous industrial policy as highlighted in a review report on Industrial Policy 2016 published in December, 2021 by the Ministry of Commerce, Government of Bangladesh.
The Report says "The legal non-binding nature of the Industrial Policy 2016 also acts as a significant hurdle for effective implementation of the policy, as there is no legal responsibility among the implementing agencies for fruitful implementation of the policy. Along with these issues, failure to attract domestic investments and FDIs, lack of appropriate quantification of the incentive mechanisms, poor functionality, and delay of completion of the economic and industrial zones, lack of efficient and need-based training for entrepreneurial development, lack of domestic industrial infrastructure, logistics, and supply chain, lack of capacity of the government agencies, lower productivity and product standards, lack of country branding, and inefficiency and lack of the industrial need-based technical education are some of the significant bottlenecks for effective implementation of the Industrial Policy 2016".
A common issue that also crops up regularly is that industrial policy is too easily captured by politically powerful groups who manipulate it for their own purposes rather than for structural transformation. Bangladesh is no exception to this - known as "political capture" which is the domination of state policy making process by private, often corporate power.
It is estimated that as many as 182 business persons have been elected as members of Parliament in the 11th general election held in 2018. This amounts to almost 61.07 per cent of the total members of Parliament indicating the dominance of business interests in Bangladesh's Parliament. Therefore, it is not unlikely that government support for an industry would be based more on political consideration than economic merits.
It is also likely that every industry would demand and possibly get a share of the pie, thus diluting the effects of any targeted policy. To further compound the problem, when support is no longer needed or when policy failure is clear, the support still continues due the interest groups political pressures. In this context, paraphrasing Milton Friedman possibly highlights the situation-- there is nothing more permanent than a temporary government support programme. Industrial policy formulation, therefore, needs thoughtful approach, supported by sound analysis, evidence-based reasoning and vigorous open debate to bypass political capture.
Industrial policy is not a mantra and by just chanting something as industrial policy does not lead to better outcomes. It has to be better designed to meet specific goals which include among others, targeted production and distribution of benefits to support a higher standard of living for the population at large.
