In recent decades, developing countries have made impressive strides in enlarging their domestic markets and seeking international competitiveness. They have implemented a range of policies aimed at encouraging import substitution, Foreign Direct Investment (FDI) and stimulating innovation. There are, however, remarkable differences in growth rates between countries even in the developing world notably those of East Asia and Sub-Saharan Africa. The initial phase of industrialisation, which was ‘kick-started’ by Britain back in the Tenth century allowed other countries in Europe to follow similar paths leading to a transitional period in economic development. Throughout this essay, I will be analysing how countries in Latin America and Asia adapted to substantial development and transformed from the production of agricultural goods to one where the focus was primarily based on manufacturing goods, thus, coming to the conclusion as to whether industrial policy is effective or not.
Industrialisation is essential for economic growth and is often deemed to have a positive impact on developing countries. Firstly, the emergence of modern manufacturing became a catalyst for structural change within global economies, consequently, leading to a sustained increase in labour productivity and economic welfare. This offered extra opportunities for the accumulation of capital and the prospect of benefitting from economies of scale became increasingly common. Kaldor’s growth law indicates that as GDP levels and labour productivity levels grow, the use of capital-intensive methods instead of labor-intensive become increasingly popular. Secondly, Szirmai (2012, p.407) suggests that “Since World War 2, manufacturing has emerged as a major activity in many developing countries and the shape and structure of global manufacturing production and trade have changed fundamentally”. The end of World War 2 sparked major changes in terms of trade. Developing countries began specialising in the production of certain commodities allowing them to gain a comparative advantage. The prospect of trade between these nations came with a rise in international competitiveness and therefore foreign investment became increasingly popular. Wolf (2016) argues that “Specialisation in production corresponding to comparative advantages in factor endowments will equalise real wages and profit rates across countries.” Benefiting from comparative advantage became vital in the early stages of development because it was parallel with the countries factor of production. In addition to this, the expansion of foreign trade created conditions for the establishment of single markets, such as The North American Free Trade Agreement (NAFTA) and The European Union.
On the other hand, there are also different constraints when it comes down to industrial development. Altenburg (2011, p.1) states that “The question is not whether industrial policies should be adopted or not, but, more pragmatically, how they should be designed and how they can be implemented more effectively.” Developing countries face a constant dilemma because they need more proactive governments to implement policies aimed at correcting market failure, but their political systems are often built on favoritism or corruption. Having said this, developing countries tend to be faced with issues when competing on an international level, this is because, even though they try to implement several industrial policies, the other advanced economies, have a greater advantage, having established relationships with business partners and suppliers. Developing countries are often caught in poverty traps and with the imminent rise of China, they are unable to compete in terms of labour supply and market size. Altenburg (2011, p.42) denotes that, “Industrial policy thus faces the challenge of poverty traps, with deficiencies on the demand side and the supply side reinforcing each other”. Income levels in developing countries are often low, which can lead to a lack of diversification. Furthermore, different countries now impose restrictions on the flow of goods and services, Which, according to Altenburg (2011, p.42), “adds to the segmentation of markets and diseconomies of scale”. In terms of deficiencies on the supply side, developing countries do not often have the financial backing so there isn’t enough emphasis on education and training, which are the fundamentals to achieving sustainable economic growth. Due to this, firms are unable to invest in research and development, thus innovation is static, with Altenburg (2011, p.44) going on to mention that, “The depth of the productivity gap limits the scope for inter-firm specialisation and interactive technological learning”.
Yet it may be regarded as an emerging economy, Taiwan’s recent climb into one of the world’s most prosperous and stable economies became a momentous aspect of the way we perceive countries. The birth of Newly Industrialised Countries (NIC’s), notably The Four Asian Tigers which rose to prominence in the 1970’s having exploited the occurrence of new technology, as well as globalisation. Looking at Taiwan more specifically, its government took the chance to invest heavily and offered tax incentives to foreign investors, prompting a rise in Foreign Direct Investment which resurrected the picture of industrial policy around the world. Wolf (2016) implies that “East Asian NIC’s relied on simultaneous import-substituting and export-promoting industrialization strategies”. East Asian NIC’s began taxing their own imports in an attempt to endorse their own primary production. Taiwan’s emergence was heavily influenced by China, which allowed it to flourish. Furthermore, its government emphasised on stimulating economic growth through industrial promotion, which became a common feature of that used by emerging economies since. Rodrik (2017) claims that “South Korea and Taiwan, for instance, heavily subsidised their exporters, the former through the financial system and the latter through tax incentives”. Government intervention into markets in order to stimulate demand sparked major economic plans and made strides for its growth targets. The decision to remove import restrictions led to a freer movement of goods and services, which put together with Taiwan’s heavy industry which it developed in the late 1970’s allowed for a rapid growth rate to follow. As said by Syrquin and Chenery (1989, p.151), “This rapid rate of growth means that several countries traversed a large segment of the total range of per capita incomes seen across all countries.” According to the International Monetary Fund (2017), as of today, Taiwan’s GDP per capita remains at $47,790. Having established a firm economic status and cemented itself as a country where the industrial policy was deemed successful, there are other scenarios where industrial policy on developing countries did not work as well.
The next wave of emerging economies followed with the ‘MINT’ countries achieving a status of being the next economic giants. These emerging economies, especially that of Mexico, follow common features and replicate growth levels similar to that of the Asian Tigers. However, as comparable as it may seem, there are evident reasons as to why these two nations face different challenges during their period of industrialisation. Mexico’s growing population, together with having a lavish workforce, and being conveniently placed geographically allowed its economy to emerge and exceed expectations. In a recent article published by The BBC (2014) indicates that “the young president and his equally young colleagues are full of determination to change the place”. Being one of the leading commodity producers, Mexico sustained a period of strong expansion through several industrial policies that seemed to be working. However, these common characteristics that these emerging countries shared soon looked like problems, and here’s why. Political violence and instability soon followed, with the homicide rate in Mexico reaching almost fifty deaths a day. With crime rates soaring and government scandals proceeding, the economic outlook was not promising. In addition to this, according to Syrquin and Chenery (1989, p.157), “We have the case of random or unanticipated shocks, such as the quadrupling of the price of oil in 1973”. Mexico is currently a significant oil producer, has owed much of its economic growth to the oil industry, it now produces in an era of low oil prices and instability. Rodrik (2017) argues that “The efficiency with which an economy’s resources are allocated is a critical determinant of the economy’s performance”. In a period where government intervention is key to reviving the economy for example through achieving various reforms which they have attempted since.
To conclude, it can be argued that to some extent that the implementation of industrial policy on developing countries has somewhat been effective as we have seen in the instances with emerging countries. It is, however, visible, that there are fluctuations in growth levels and that the outcome of Taiwan and Mexico’s economy still remains unanswered. It can also be deemed that there are different levels of industrial policies used such as hard and soft methods which can affect countries in different ways. In many ways, industrial policy has been effective in developing countries in trying to achieve economic growth by attracting foreign direct investment for example, but it is the level of efficiency and sustainability that measures the real effectiveness of that policy. Furthermore, the trade-off between market failure and government failure is inevitable and remains imminent in our modern day lives.