This document discusses vertical industrial policy and argues that it is an illusion for poverty reduction. It defines vertical and horizontal industrial policy. Vertical policy selectively favors certain industries while horizontal policy benefits all industries equally through public goods. The document outlines several arguments against vertical policy, including rent-seeking, information problems, inflexibility, targeting the wrong sectors, and susceptibility to shocks. It also discusses preconditions like governance, institutions, and development framework that are often lacking. Case studies of Malaysia and Sierra Leone show how horizontal policies may be better for building capabilities and innovation. The conclusion is that the best vertical policy for poverty reduction is no policy at all.

2. Vertical Industrial Policy:
An illusion for poverty reduction!
Elena Pici, Yunji Choi, Julia Tory, Hadil Siklawi,
Merve Ozcan, Abdul Malik Omar

3. Table of Content
1. Define Industrial Policy
2. Arguments against Industrial Policy
3. Preconditions of Industrial Policy
4. Case Study: Malaysia
5. Case Study: Sierra Leone
6. Regional Policy Recommendations

4. Vertical vs Horizontal Industrial Policy
1. Vertical Industrial Policy – ‘selective’ or ‘targeting’ policy which deliberately
favors particular industries/sectors (or even firms) over others, against market
signals, usually (but not necessarily) to enhance efficiency and promote productivity
growth, for the whole economy as well as for the targeted industries themselves (
Pack & Sagi, 2006)
2. Horizontal Industrial Policy - policy focus on ‘public goods’ that benefit all
industries equally but are likely to be under-provided by the market – e.g.,
education, research and development (R&D), and infrastructure – and not involve
‘picking winners’

5. Vertical top-down industrial
policies are inefficient for poverty
reduction

6. 1. Arguments Against Vertical
Industrial Policy

7. Embeddedness of vertical industrial policy in an institutional
framework of a region
Countries at early stages of institutional development should avoid selective policies
and focus instead on reforming the overall investment climate.
As a strong supporter of vertical industrial policy would suggest, “in general, the lower
the capabilities, accountability and commitment of the government the lower the
degree of selectivity it can be safely entrusted with” (Lall, 2004).

8. Arguments Against:
1. Sectional interests, rent-seeking and corruption
2. Asymmetric Information/ Lack of coordination
3. Inflexibility of industrial policy
4. Lack of government and private sector capabilities
5. Opportunity costs
6. Targeting the wrong sector
7. Susceptible to shocks

9. Argument Against
6. Targeting the wrong sector and Misallocation of
resources
“...number of industries that were apparently
producing negative value added at world prices, …
shutting these industries down would have
increased national output”
Rodrik (2008)

10. Argument Against
Example: Case studies of industries in India, Pakistan,
Mexico, and Brazil
● 6 cases where market yield was higher than the
social yield
● 3 were actually harmful to the economy

11. Argument Against
7. Susceptible to external or macroeconomic shocks
Example: Uruguay’s Forestry and Wood Industry
● Involved long-term investment
● Subsidizing planting costs and Tax exemptions
● As financial crisis hit Uruguay, subsidy payment
was postponed

12. 2. Preconditions for Industrial
Policy

13. The Three Preconditions for Industrial Policy
Sustainable Development
Framework
Effective Governance Inclusive Institutions

14. Oppositions’ lacking preconditions for Industrial Policy
Unsustainable
Development
Weak governance
Weak Governance Extractive Institutions

15. 3. Case Study: Malaysia

16. Data on Malaysia
• Current economic situation in Malaysia
• Some growth signals
• Malaysia:upper middle-income country

17. • Definition of middle-income trap
• World Bank’s 2014 thresholds for upper middle-income class (GNI per capita) :
$4,125-$12,746
MIDDLE-INCOME TRAP: Case Study: Malaysia

18. MIDDLE-INCOME TRAP: Case Study: Malaysia
• Real GDP Per Capita and Total Factor Productivity:

19. MIDDLE-INCOME TRAP: Case Study: Malaysia
Technology creation in Malaysia is
really low!
• Innovation-driven growth is the key!
• Development of new technologies for new goods
• Production of the same set of goods

20. The Missing Links: Case Study:Malaysia
Reasons of patents & technology scarcity:
Lower levels of education Lower R&D Spending
Conclusion: Malaysia needs horizontal industrial policies!

21. 4. Case Study: Africa

22. The Case of Africa
By 2030, Africa will be home to 80% of the
world’s population living below the poverty
line (African Economic Outlook, 2015)
Ultimate goal is structural transformation
towards higher-productivity areas outside of
commodities (AE) 2015; Altenburg and
Melia)

23. Problem with Narrow Sectoral Policies
“Narrowly-defined sectoral approaches tend to almost exclusively frame
governmental action, hampering effective problem-solving at the local
level” (AEO 2015)

24. Regional Policies Looking Forward
Innovation needed in structural transformation approach for
Africa

25. Regional Policies Looking Forward
3 main policy strategies of the African Economic Outlook 2015 Report:
1. Focus on local assets
2. Various sectoral policies within a regional
framework
3. Multi-level government involvement with
different actors and active participation of
local stakeholders
“Place-based, multi-sectoral,
participative development strategies”

26. The Case of Sierra Leone
Sierra Leone has rapidly improved its business environment
and begun to implement successful government initiatives in
recent years
Success so far:
Diagnostic Trade Integrated Study (DTIS) (2006 and 2013)
Economic Diversification Pillar in the Agenda for Prosperity
(A4P) (2013-2018)

27. The Case of Sierra Leone
According to the 2013 DTIS Report: “A holistic approach is needed for
trade related strategies and investments to truly achieve their intended
purpose. Such an approach entails investments and strategies be
underpinned by institutional reforms... This has not been the case in Sierra
Leone’s experience with the implementation of the 2006 DTIS, therefore,
the full benefits of progress made in areas like building of hard
infrastructure and adoption of numerous trade related national strategies
have not translated into lower trade costs, value added exports, and reliable
supply chains” (11).

28. Conclusion
The best industrial policy is none
at all! - The Nobel laureate Gary
Becker
With a few modification of it to adapt to the circumstances of our debate, we claim
that: The best vertical industrial policy for poverty reduction is none at all!

30. Thank you for your attention!