DISCUSSION PAPER:
INDUSTRIAL POLICY - PERSPECTIVES AND ISSUES


        Industrial Policy Unit - 26 October 2009
Discussion Paper: Industrial Policy, Perspectives and Issues



Background

One of the underlining features of the last tw...
services for the promotion of the Region’s economic and social development.” Against this
background, the policy will purs...
 Achieve optimal utilisation of resources

        Enabling manufacturing enterprises to attain world class status

    ...
designed to make industries more efficient and thereby stimulate the growth of the national and
regional output.



Sector...
than the commodities currently being exported. It should consist of the following elements: (i)
prioritisation of key indu...
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CARICOM - Regional Industrial Policy - Perspective And Issues

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CARICOM - Regional Industrial Policy - Perspective And Issues

  1. 1. DISCUSSION PAPER: INDUSTRIAL POLICY - PERSPECTIVES AND ISSUES Industrial Policy Unit - 26 October 2009
  2. 2. Discussion Paper: Industrial Policy, Perspectives and Issues Background One of the underlining features of the last two decades with respect to the economies of Member States is their dependence on agriculturally based activities. Agricultural development was predicated on the availability of large estates particularly located in rural communities; availability of relatively cheap labour; and the notion that their export markets would always provide some form of protective regime. The option for economic diversity was constrained by inward looking economic policies, poorly educated workforce, and under developed and in some cases nonexistent infrastructure to support industrial development. Protectionist policies of former colonial powers in support of export trade from the territories they once governed hardly provided any incentive for the development of the industrial sector. Succeeding years have engendered unprecedented paradigm shift in the international market. This has forced some Member States to reassess their position in respect of what was happening globally and the challenges they face. It was evident that Member States had to radically overhaul their economic and industrial policies to address the challenges of the global market. In several Member States, one main export crop successively gave way to another as market demand and trade conditions change. Within the last decade or so, there has been considerable change in market conditions as a consequence of liberalised trade dictated by the World Trade Organisation (WTO). This has engendered the removal of major trade protection regimes and the establishment of new protocols for some commodities. The impact of such decisions has created enormous challenges for small developing states of the CARICOM community. Other traditional industries such as sugar, rum, rice, etc. have struggled to survive in the face of aggressive and dynamic global competition. As a consequence, regional governments had to reprioritise and develop new strategies to support industrial activities and strengthen those that will now form the engine of economic growth for the future. In this context, it is imperative that new policy framework be devised within which timely interventions can be made to strengthen existing industries and encourage new developments in the sector taking advantage of regional production and available resources. CARICOM’s Agenda A regional industrial policy is not intended to impose policies on Member States, but must rather reflect national interest that feeds into a regional policy. This must be done in a manner that conveys the philosophy that functional cooperation on issues of mutual interest would be beneficial to all Member States. The converse would have deleterious effects if Member States pursue their individual agendas in a global environment that does not recognise the importance of small and micro states. A harmonised policy will advance CARICOM’s own position as mandated by the Treaty of Chaguaramas in promoting a regional industrial agenda on behalf of the Member States. Article 52 of the Treaty states that, “The goal of the Community Industrial policy shall be market-led, internationally competitive and sustainable production of goods and 2
  3. 3. services for the promotion of the Region’s economic and social development.” Against this background, the policy will pursue the following objectives:  cross border employment of natural resources, human resources, capital, technology and management capabilities, for the production of goods and services on a sustainable basis;  linkages among economic sectors and enterprises within and among the Member States of the CSME;  promotion of regional economic enterprises capable of achieving scales of production to facilitate successful competition in domestic and extra-regional markets;  establishment of a viable micro and small economic enterprise sector;  enhanced and diversified production of goods and services for both export and domestic markets;  sustained public and private sector collaboration in order to secure market-led production of goods and services;  enhanced industrial production on an environmentally sustainable basis;  balanced economic and social development in CSME bearing in mind the special need of disadvantaged countries, regions and sectors;  stable industrial relations. CARICOM does not intend to take ownership of Member States’ industrial agenda. However, as the main regional umbrella organisation, it must create a framework for healthy dialogue on the issues. That dialogue must address the way forward in respect of industrial policy development within Member States. The modalities for facilitating the process of achieving competitiveness could be facilitated in part by the CSME. Framework for Industrial Policy Development The overall goal of a national industrial policy is to increase a country’s production capacity and thereby the export potential of selected products as well as to increase the competitiveness among major industries. A regional industrial policy will provide the opportunity for CARICOM to capture and promote those common features imbued in the policies of Member States in a harmonised manner and to make technical and other interventions where practicable and feasible. A national industrial policy should have the following objectives:  Facilitate, foster and maintain sustained growth in productivity  Provide opportunities for gainful employment 3
  4. 4.  Achieve optimal utilisation of resources  Enabling manufacturing enterprises to attain world class status  Attaining the level of international competitiveness In light of the discussion in question, it would be useful to define an Industrial Policy. An Industrial Policy can be defined as a set of actions or interventions by the state in order to affect the way factors of production are being distributed across national industries. In shaping an industrial policy for the region, cognisance must be taken of the overall competitive status of manufacturing enterprises vis a vis technology transfer policies, labour cost, the productivity gap, the impact of past and existing policies, current market dynamics, etc. The traditional framework for the analysis of industrial policy is based on the notion that government interventions may be desirable in the face of significant failures. That is, where markets lead to misallocations of resources, corrective government actions can, sometimes improve economic efficiency. Market failure is not of course seen as a sufficient condition for intervention, but as a screening criterion to identify areas where such interventions may be beneficial and where further analysis of feasible policy options would typically be justified. In such circumstances the role of government’s intervention is to correct such failure and to put the market on a freely competitive track. The rationale for industrial policy is based on the notion that market forces by themselves without the support of the state, cannot suffice to bring about sustained development of the productive base of the economy. Macroeconomic Policies Industrial policy initiatives must take cognisance of the macroeconomic policies and the existential economic circumstance of Member States. Such macroeconomic policy goals should include:  Sustained economic growth  High employment  Stable price (low inflation)  Rising living standards  High productivity Today, most industrial policies are subordinated to tax, tariffs and trade rules of the WTO and the General Agreements of Tariffs and Trade. Government’s intervention through its fiscal, monetary and supply side policies must be geared towards stimulating the market and making the investment and production climate more enabling. These policies are designed to influence taxation, promote government’s spending and borrowing which would impact on industrial activities with respect to investment and government spending. Its supply side policies are 4
  5. 5. designed to make industries more efficient and thereby stimulate the growth of the national and regional output. Sectoral Policy Several aspects of industrial development would impact or have some relationship with other sectors of the economy. Hence, industrial policy needs to be cross sectoral in scope and provide the contextual framework for synergies and complementarity. It must therefore address issues such as intellectual property rights, competitiveness, energy and the environment, information and communication technology (ICT), technology transfer, standards and quality, etc. Policy initiatives should address the issue of Infrastructure development which will provide the framework for aligning sectoral policies, designing national development plans, harmonising regulatory regimes and investment codes, attracting seed capital, and mobilising investment resources. It must also speak to initiatives to integrate transport, communications, and energy infrastructure and services across the Region. Such policy initiatives must focus primarily on reducing the cost of conducting business within the Region and facilitating cross border mobility, which will redound to increase investment and competitiveness. An industry policy should delineate the need for sustainable infrastructure systems that meet economic demand and provide basic services for Small and Medium Enterprises (SME) development. These infrastructure systems must be reliable, efficient, affordable and environmentally sound and should provide the opportunity for growth that will enable all enterprises to compete in regional and international markets. To meet these requirements, policies must outline appropriate regulatory framework for monitoring performance and liberalising access to infrastructure service markets. The natural endowment and peculiarities of Member States should be recognised in crafting an industrial policy. Moreover, there must be provision for cross border cooperation and integration. An industrial policy must also establish linkages to important sectors like the agriculture, services and energy. It must provide the framework for state intervention particularly in infrastructure development to address extant concerns and facilitate growth in the sector. Traditional Approach It would be useful to develop an industrial strategy which should accompany an industrial policy. The strategy requires a creative and innovative approach, and close public sector and private sector partnership and participation. The overall goal of the strategy should focus on enhancing the productivity and efficiency of manufacturing firms, diversifying export products and markets, identifying new markets for niche products with a higher processing and value-added content 5
  6. 6. than the commodities currently being exported. It should consist of the following elements: (i) prioritisation of key industries (ii) budgetary allocation to foster rapid manufacturing growth; (iii) investment to support physical infrastructure and allied industries (iv) improvement of macroeconomic, business and legal environments; (iv) emphasis on private sector-led growth, export-oriented manufacturing production and foreign direct investment or any other policies that will provide the impetus for sustainable growth in export trade. Traditionally, industrial policy positions have been accentuated in position papers (white, green papers, etc.). Several sectoral studies have been conducted in selected areas to determine the competitive status of selected commodities. Except in the case of Jamaica and Trinidad and Tobago, there have not been comprehensive industrial policy documents in Member States. In the past, industrial policy was dictated primarily by government with little input from the private sector. Most policy positions have largely been reactive, inward looking (driven by import substitution policies), bureaucratic and demand side based. The introduction of new policy measures has engendered little institutional change except for regulatory capacity. Issues such as capacity building and institutional strengthening were ignored for the most part. This was because such policy changes have primarily based on price interventions through taxes, import tariffs or subsidies. Modern industrial policy requires pro-active intervention on key developmental issues including adding value to primary products as well as relevant changes for its implementation. Change which supports institutional repositioning and strengthening should reflect new policy direction. Policies require continuous monitoring of the operating environment in order to identify and address policy bottlenecks that would stymie its effectiveness. Inhibiting factors and constraints within the framework of the implementation of the policy must be identified and removed to achieve sustainable and competitive development. Lessons to be learned There are lessons that small developing countries like those of Member States of CARICOM can learn from the experience of the South East Asian countries (Newly Industrialised Countries) (NIC) like Singapore, Taiwan, Malaysia and Hong Kong. These countries are all relatively small, with little endowment in natural resources. All of them had a colonial past. Their industrial policies were basically inward looking. They initiated export oriented policies and domestic utilisation of resources for the creation of an efficient modern infrastructure conducive to foreign investment. Most of them have undergone very rapid economic restructuring changing from export-oriented industrialisation of traditional labour intensive products to more complex and sophisticated export-oriented industrialisation based on the export of capital and technology intensive manufactured products. These governments prioritised the promotion and development of advanced technologies and innovation to enable them to maintain their competitiveness in the face of competition from their industrialised neighbours. These countries also made significant investments in the human resource capital especially in the field of engineering and science to pursue their sophisticated export oriented industrialisation. 6

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