TWN Info Service on UN Sustainable Development (Oct16/02)
6 October 2016
Third World Network

United Nations: South urged to pursue active industrial policies
Published in SUNS #8317 dated 22 September 2016

Geneva, 21 Sep (Kanaga Raja) -- Highlighting the role of industrialisation and growth in manufacturing in particular as an engine of sustainable and inclusive development, the UN Conference on Trade and Development (UNCTAD) has called on developing countries to pursue active industrial policies which has long been neglected in these countries.

In its Trade and Development Report 2016 (TDR-2016), released on Wednesday (21 September), UNCTAD also called on developing countries to build up domestic demand, use regulation to protect themselves from the risks of financialisation in their domestic contexts and protect their policy and fiscal space in order to manage any unforseen shocks.

The TDR-2016 called for a more sophisticated approach to industrial policy, including the construction of linkages and capabilities to build a production base fit for purpose in a rapidly changing world where sufficient space is available for experimenting and learning, both in the public and private sectors.

According to UNCTAD, standalone industrial policies are unlikely to deliver and instead the key to success lies in the effective integration of macroeconomic, financial, trade and industrial policies.

In order to help kick-start sustainable global growth, UNCTAD urged developed economies to combine proactive fiscal policy, both in spending and taxation, with supportive monetary and credit policies, stronger financial regulation and redistributive measures including income policies, minimum wage legislation, progressive taxation and welfare-enhancing social programmes.

In an overview, the TDR-2016 said that in order to promote a structural shift towards manufacturing and industrialisation, governments need to adopt policies with the objectives of ensuring high levels of aggregate demand, high-levels of investment and a stable exchange rate; cultivating the capabilities needed to change the composition and sophistication of production activities and promoting a strong learning environment; and pursuing intermediate input substitution industrialisation, particularly in middle-income countries that have entered Global Value Chains (GVCs) but are struggling to upgrade their industrial capacities.

Other objectives include avoiding adopting export strategies that rely on compressing wages; promoting development-oriented competition rules that can offset the global dominance of MNEs; bolstering access to finance for structural transformation, not only in terms of supporting particular lines of investment, but also as a useful vehicle for monitoring and influencing corporate behaviour in support of long-term decision-making; and closing tax loopholes through fiscal and regulatory measures at national, regional and international levels and requiring greater transparency in corporate decision-making.

On the issue of trade, the TDR-2016 said under current structural conditions and policy stances, assuming that no significant changes in the direction of policies are implemented, trade growth will continue to be sluggish as the global wage share will continue to decline.

There are strong connections between the long-term deterioration of global wage shares and both the trade surge in the 1990s and 2000s and the slowdown of trade and economic activity since 2011. If these trends persist or worsen, then the threat of more determined protectionist responses could become real, the TDR-2016 said.

“However, like the boy who cried wolf in Aesop’s fable, blaming protectionism for current trends runs the danger of not only distracting policymakers from making inclusive growth the axis of a globally coordinated programme but, as in the 1930s, of being ignored when a real protectionist threat emerges,” warned UNCTAD.

(An article on the TDR’s assessment of current trends and challenges in the global economy will appear in a forthcoming issue of SUNS.)

“LOPSIDED RELIANCE ON MONETARY POLICY”

Speaking at a media briefing on Friday (16 September), ahead of the release of the TDR-2016 on Wednesday, UNCTAD Secretary-General Dr Mukhisa Kituyi said that one of the promises of Nairobi (the venue of the July UNCTAD-14 conference) is that UNCTAD’s work is going to continue as much as possible addressing the challenging issues of the moment particularly those related to inclusive prosperity, in line with UNCTAD’s long-term mandate since the 1960s, but also consistent with the new interest in “leaving no one behind” as in the Agenda 2030.

In this context, he highlighted the state of the world’s economy “as we continue through a flat spell” now getting into its sixth year.

Dr Kituyi pointed to political anxiety which is a reflection of the absence of adequate gainful employment and job insecurity, translating into a political challenge which is partly reflected in an angry electorate in the US and Britain.

The absence of a clear explanation and a clear answer to the deficit in gainful employment is resulting in tirades against globalisation. “In some cases, even tirades against global trade,” he said.

As an institution, UNCTAD has found that it is necessary that its analytical work should contribute in a positive way, hopefully, to look at what are the challenges and what are the issues that are underlying this phenomenon that is giving globalisation a bad name.

What UNCTAD’s work, published in the TDR this year, has done is first of all to look at the core issues relating to this continued joblessness.

Dr Kituyi asked: “Why are enterprises not creating enough jobs. Where is the engine of global recovery that in a way will start creating inclusive sustainable prosperity?”

He said one of the main explanations is the reluctance of the major corporations to invest in gainful productive investments.

Substantial attention has to be given to the discourse about the impact of the form of use of profits on the possibility of the potential of enterprises creating gainful employment.

He noted that as financial markets get more and more integrated the vulnerabilities that come with monetary decisions and policies in one place trigger effects in other areas of the world. This is becoming increasingly real, as a challenge.

A lot of the emerging economies and many of the developing countries have been very substantially subdued by the flat commodity prices.

The ease of borrowing money over the past decade, as UNCTAD has warned in a number of recent publications, made a lot of those countries more vulnerable to policies undertaken elsewhere.

Referring to the possibility of the US Fed raising interest rates (this week), the UNCTAD S-G said the potential of such a decision affecting adversely countries that are already stretched with the possibility of new flight of capital and slipping into an unsustainable debt crisis is very much with us.

Also at the media briefing, Richard Kozul-Wright, Director of the UNCTAD Division on Globalisation and Development Strategies, and lead author of the report, said while the audience for the TDR is the developing countries, “it is quite clear that much of what we have to say in this report also speaks to the concerns of developed countries.”

He said that UNCTAD is worried about the current health of the world economy. “We call it a year of living dangerously. It remains a year of living dangerously.”

He highlighted several potential fault lines that could cause serious problems in both developed and developing economies.

As UNCTAD has been insisting, the real problem for the global economy is the failure of the advanced economies to find a sustained recovery from the financial crisis of 2007-2008 and “we attribute that largely to a lopsided reliance on monetary policy.”

In this context he pointed to the continued fixation with, or at least flirting with, austerity fiscal policy and a very limited - although increasingly more sophisticated - willingness to deal with issues of a structural nature in the developed countries themselves.

Structural reforms continue largely to be about the liberalisation and de-regulation of markets. The structural problems that the developed countries face are rather of a more profound nature than that.

In particular, he said that there is a major imbalance of a distribution nature in the advanced economies between wages and profits - wages being on a downward trend as a share of national income for many years now and they have not been reversed since the crisis.

That distributional imbalance continues to feed into a weak growth performance in many developed economies.

“And if there is any structural problem that needs to be addressed urgently in the advanced economies, it is that distributional issue,” said Kozul-Wright.

“TRADE SLOWDOWN DUE MORE TO WEAK GLOBAL DEMAND”

A lot of the tensions that these imbalances have given rise to have recently focused on the issue of trade and there has been a significant slowdown in global trade over the last four or five years, Kozul-Wright said.

“We expect that to continue this year. Our take on that is that it is very much linked to the problem of insufficient global demand. Although there has been a lot of talk recently about protectionism, we don’t actually see very much evidence in the numbers for that right now.”

“If you don’t deal with your structural imbalances properly, [there] is always the danger that protectionism will come back and make things worse for most people,” he said.

“It’s the knee-jerk reaction that many countries will use as other policies seem to fail in dealing with these kinds of imbalances. But that has not been the problem so far, i. e. protectionism. The numbers don’t suggest that the slowdown of trade is to do with protectionism. But it is everything to do with a very weak global demand and slow growth in the advanced economies,” said Kozul-Wright.

Asked about the fact that the World Trade Organisation keeps repeating the mantra that trade protectionism is the source of the current problem and that legitimate trade measures also constitute protectionism, Dr Kituyi said his sense is “not that we are devaluing the significance of protectionism but the statistics are not bearing out” that the current problem is because of growth in protectionism.

Asked about the fact that WTO Director-General Roberto Azevedo says that anti-dumping and countervailing measures (which are legitimate) constitute protectionism, Dr Kituyi remarked in jest that “journalistically of course it would be interesting if you quote Kituyi and Azevedo as disagreeing.”

However, his sense is that protectionism “is not a solution but the scale of the issue that we are dealing with is not directly the product of any rise in protectionism.”

As much as protectionism can be an issue, the challenge is more related to declining aggregate demand, Dr Kituyi added.

“Not that it devalues protectionism as a problem, but under the current circumstances it’s not as bad a problem as it could be. Looking for solutions by declarations against protectionism is only partially the solution. But it’s not addressing the core challenge of flat economic growth and joblessness,” he underlined.

According to Kozul-Wright, the danger in the discussions on globalisation right now is that a lot of it is focused on the advanced economies and electoral politics in the North, and there is a tendency to assume that the South is doing extremely well, and that somehow the South doing well is why the North is doing badly.

That is “a very crude interpretation” of the last 30 years of global economic development.

“We want in this report in particular to highlight what we see as some serious weaknesses in the patterns of structural transformation in the developing world which if not dealt with could hold back sustainable and inclusive growth moving forward,” said Kozul-Wright.

In particular, he added, it is around the longstanding question of the role of industrialisation and in particular manufacturing growth as an engine of sustainable and inclusive development.

“We believe that manufacturing still has that role”, he said, noting that the problem is that outside of East Asia, manufacturing performance in the South has been very weak even as growth has been strong.

In many respects, manufacturing in the South outside of East Asia has fallen behind manufacturing in the North in terms of productivity performance, in terms of innovation, etc.

Kozul-Wright highlighted that part of the success of East Asia was that it was a very successful exporting region.

Export-led growth was part of the reason why East Asian economies did do so well in the 1970s and 1980s, unlike most of the rest of the developing world.

He said that in the TDR, UNCTAD has raised a series of concerns about the ability of the export-led growth models to deliver that same kind of performance under the current situation that we see in the global economy.

And this has to do with the problems of weakness of global growth and global demand and increasing competition amongst developing countries in the lower ends of value chains, and their ability to export more, but to earn less from those exports.

While exporting was key to success in East Asia, it was not exports alone that drove growth in East Asia, it was the relationship between exports and investment - very fast rates of capital formation leading to strong productivity growth and to technological upgrading were intimately linked in the East Asian model.

The profit-investment nexus is a key complement to any sort of investment-export nexus that drives sustainable growth and in this report “we raise serious concerns about the weakening of the profit-investment nexus in emerging economies.”

“We have seen that weakening already in the advanced economies because of the impact of financialisation and unregulated financial markets,” said Kozul-Wright.

A weakening of the profit-investment nexus in the South combined with a weakening of the potential for export-led growth is a very worrying combination for many developing countries.

He noted that there has been a neglect of domestic markets in many developing countries in the belief that they can replicate the kind of East Asian experience.

What UNCTAD has emphasised in its report is the need to re-visit, re-think and re-engage with the industrial policy discussion.

“The industrial policy has long been neglected in developing countries. It was kind of identified as the kind of problem-policy in the Washington Consensus, as somehow typifying the problems of developing countries in the 1970s and 80s, and it was unfairly neglected as a consequence ...”

Finding ways of combining industrial policy with traditional macroeconomic policy with traditional trade tools is the big challenge for many developing countries moving forward over the next few years. It is a challenge that many developed countries also need to take seriously, he said.

Asked whether there should be paradigm shift away from export-led economic growth which has been the thesis of the neo-liberal economic policies over the past decades and has downgraded import substitution and industrialisation, Kozul-Wright said that it is already happening in what China is doing.

One of the explanations for why trade has slowed, and which is addressed in the TDR, is that China is now starting to essentially substitute for the intermediate goods that it previously imported by producing them itself.

Part of the reason why China has been successful as an industrialising power is precisely because it has engaged - just like the Koreans, Taiwanese and Singaporeans did - in a combination of import substitution and export orientation, Kozul-Wright explained.

“It’s the combination that works. Not one or the other,” he said. “We believe that is a model that has wider resonance but in a sense we are simply reflecting on the Chinese experience and suggesting that is something that needs to be looked at more generally by other emerging and developing economies.”

He also pointed out that there are a number of economies that have experienced premature de-industrialisation, i. e. that they have been losing industrial capacity at a level of income which is much lower than has been seen in the advanced economies.

INDUSTRIALISATION, PROFIT-INVESTMENT NEXUS, INDUSTRIAL POLICY

In some overall conclusions, the TDR suggests that public sector involvement in the process of industrialization is essential for both productivity growth and linkage creation.

Another argument in favour of State involvement is based on the recognition that domestic infant industries need to be supported and protected from more advanced competitors until they develop their own capacities to compete.

“Since the key to productivity growth and upgrading of manufacturing activities lies in sustained capital accumulation, a favourable macroeconomic policy stance and a well-functioning financial system that provides adequate long-term investment are of the utmost importance for the industrialization process and the realization of productivity gains.”

The experiences of successful industrializers demonstrate that the promotion of structural transformation requires attention to different sources of growth, including boosting private and public investment, fostering technological progress, strengthening domestic demand and increasing the capacity of domestic producers to meet the exigencies of international markets.

This implies the need for interaction between several areas of public policy: macroeconomic management, financial policies, trade policies, technology policies and public education.

“The successful implementation of the 2030 Agenda for Sustainable Development in part rests on the full use of the available policy space for developing countries to expand their manufacturing sectors, accelerate productivity growth and actively support the creation of linkages between the most dynamic sub-sectors of manufacturing and the rest of their economies,” said the TDR-2016.

Structural change and higher rates of capital accumulation are impossible without adequate access to sources of finance. This is all the more relevant if, as has increasingly been the case, there is a steady rise in the minimum level of investment required to successfully launch an industrialization drive.

“A functioning profit-investment nexus is as vital for successful catch-up strategies and their continued financing as it was in early industrialization experiences,” said UNCTAD.

However, a number of current global trends militate against a strong profit-investment nexus, and, in particular, against establishing a strong nexus in developing economies.

Easier access to finance in the wake of capital account liberalization and financial market deregulation has not translated into increased financing for long-term investment for upgrading production capacities, especially in manufacturing.

What is more, an excess supply of credit finance is not generally conducive to improved capital allocation among sectors, and may favour sectors with lower labour productivity, such as services, as well as lending to households.

Moreover, the financialization of corporate strategies and the rise of shareholder primacy in developed economies may have contributed to the worsening of income distribution and a deflationary bias through slower growth of global demand.

A major feature of this trend has been that a growing share of corporate profits, rather than being used for corporate reinvestment, is being used for purposes such as dividend payments and equity repurchases. This ultimately strengthens the role of financial intermediaries in capital allocation, which in turn contributes to economic instability and financial imbalances.

In order to establish and strengthen the profit-investment nexus, it is necessary to find ways of ensuring that private finance is once again used for productive purposes, in developed as well as developing countries.

“Establishing a strong profit-investment nexus requires substantial institutional and policy initiatives and change, including the creation or deepening of the banking system, ensuring it has appropriate capacities for long-term credit provision, along with proactive industrial policies. Developing-country governments should design policies aimed at directly supporting their own process of catching up and structural transformation.”

Furthermore, governments can improve the macroeconomic environment through public investment on an appropriate scale to support infrastructural development and rapid economic transformation, thereby helping to increase private sector profitability.

It is therefore vital to counteract current tendencies that diminish the State’s investment capacities, including through taxation reforms both at the national and at the international levels. National initiatives in this regard are indispensable for the promotion of industrialization in developing economies.

However, these alone are insufficient. For developing countries to achieve successful structural transformation, much deeper reforms of the international financial and monetary system will also be necessary, aimed at delivering financial stability and reliable sources of development finance, said the TDR-2016.

The experience over recent decades echoes that of centuries past. No country has been able to achieve successful structural transformation without the visionary nudging and pushing of targeted and selective government policies.

Often called “industrial policies”, it would be more accurate to term them “production transformation policies”, because their role is equally important in agricultural, industrial and post-industrial transformations.

Despite being out of fashion in some quarters since the 1980s, they have made a strong come-back on the radar screens of governments in all parts of the world, including in the United Kingdom, where the term Industrial Revolution was first coined.

The TDR-2016 has sought to glean some of the major lessons that have been learned over many years with respect to the successful design, implementation and monitoring of industrial policies.

These include the creation of a particular geometry of State-business relations that ensure government support efforts aim at overcoming the right challenges and problems, and that business is only supported when it produces the right actions.

They also include the establishment of an integrated and coherent framework of interlinking policies that complement each other and serve the overall vision.

Such policies include, for example, macroeconomic policies that aim to create a pro-growth and stable environment alongside targeted industrial policies, fiscal policies that provide incentives to encourage long-term productive investment, and income and wage policies that promote skills, learning, and production and consumption goals.

“Getting these basics right is more important now than ever before, owing to the greater challenge of industrialization. It is not just the adverse impact of continued secular stagnation and the diminished prospects for international trade that are forcing further reflection; it is also because many of the policies that propelled earlier generations of catch-up growth are now proscribed under various international, regional and bilateral agreements.”

Nonetheless, significant policy space remains, and new products and product markets can offer various opportunities for countries that have yet to embark on the path to industrialization, as well as for others that have already made some progress but have reached an impasse and need to change direction, said UNCTAD. +