The World Bank has a new report out, Industrial Policy for Development, designed not least to be an update and re-evaluation of the 1993 World Bank East Asian Miracle report that confirmed the institution’s broad stance against industrial strategy at that time. The preface of the new version, written by the Bank’s chief economist, suggests the advice offered in the Miracle report “has the practical value of a floppy disk today.” As the preface goes on to repeat much of the same advice, that might suggest something about the enduring value of magnetic storage at 1818 H Street. Overall, Industrial Policy for Development sees the Bank tiptoeing rather than striding away from the skepticism of thirty years ago. But even while it also shies away from specific implications for the World Bank Group, the report’s analysis and guidance do suggest that the Group’s private sector arm is doing industrial strategy wrong.
World Bank Views Haven’t Shifted That Far.
CGD founding President Nancy Birdsall managed the Miracle report team, and published a piece in the Journal of Economic Perspectives last year asking if it had gone too far. She suggested the original report was “a quiet endorsement” of limited industrial policy to encourage exports but:
“The book argued that East Asia’s success was grounded in the ‘fundamentals’: macroeconomic stability, high rates of investment in human as well as physical capital, free trade, policies that ensured growth was shared or inclusive, and government institutions and practices that minimized corruption….some of the steps the governments of the Miracle economies took to push exports [were] discouraged in other developing countries, such as (modest) protection of domestic industry substitutes, subsidized credit to selected industries, interest rates paid on private savings kept low”
Nancy argues “The bottom line [of the report] was not far off… that industrial policy programs could only make sense if and where macroeconomic stability was secure… and where rent-seeking… is not a major issue.” But quoting the Miracle report that “institutional demands are not compatible with other developing countries where the fundamentals are not in place” she notes that “30 years later there are… developing countries today where governance is in fact above average and some forms of industrial policy could be tried—including special export zones for industry and support for innovation in the service as well as manufacturing industries.”
Compare the preface to Industrial Policy for Development: “Resorting to industrial policy… does not relieve governments of basic housekeeping duties—the obligation, as our 1993 report put it, is to ‘get the policy fundamentals right.’ That includes a healthy and educated workforce, a strong infrastructure for transportation and energy, and a sound macroeconomic framework.” The preface also notes that while almost every country is pursuing some sort of industrial policy many have already gone too far, adopting “the bludgeon of sweeping tariffs and subsidies over the scalpel of industrial parks and skills development programs,” for example. As to skepticism of impact: “the record shows that, even under ideal conditions, [industrial policy] results in an average gain of just 1 percent of GDP.”
In short, at least on H Street in DC, the Washington Consensus remains pretty much intact (privatization of state-owned monopolies aside?) and we're still somewhere near the End of History when it comes to industrial policy. That’s a defensible position: there’s evidence that getting the macro fundamentals close to in order really is a common precondition for growth accelerations, even if very far from a guarantee one will occur. And the caution against creating an elaborate network of interventions to back industries in states with limited institutional capacity, and in economies with limited infrastructure or scale, is surely justified by a fairly extensive record of failed strategies.
Still, there are implications for the World Bank Group
To be sure, the full report moves further toward advocating for intervention than the preface suggests. But even the “industrial policy lite” advocated by the body of the document—industrial parks in the poorest countries, skills development, market access assistance and improved infrastructure as they get richer, and production and specific innovation subsidies where governments are capable and well-resourced and the domestic market is large—is by this point not even that far into the mainstream. Indeed, as both Nancy’s article and this report note, the World Bank itself is backing a fair amount of industrial policy already: financing matching grants in Jordan to upgrade manufacturing operations and improve product quality, credit lines in Nigeria to improve businesses’ productivity across the livestock value chain, subsidies for fertilizer, mortgages, and research and development, and export zones across many countries, to provide some examples.
Nancy wondered in her article how much the East Asian Miracle changed what the World Bank did, rather than reflecting a consensus within the institution. Given how much support for industrial strategy is already ongoing in the World Bank today, the same might be said of the new report. If anything, it might be read as cautioning against some existing lending practices in support of suboptimal strategies rather than as a clarion call for more.
But there may be more wide-ranging implications for the Bank’s private sector arm, the IFC. Surprisingly, Industrial Policy for Development has only a box on the World Bank Group’s role in industrial strategy, and it shies away from prescription. This is despite the report arguing IFC activities “can be considered quasi-industrial policies since they channel public resources into specific businesses.”
Given the report’s lessons on doing industrial policy right, this reticence might be a case of “if you can’t say anything nice, don’t say anything at all.” Industrial Policy for Development suggests a core principle for public finance and subsidy is to make it “available to all businesses within an industry to preserve competition.” And targeting should be on the basis of the industry’s development potential (including the size of the market and potential of positive spillovers) and feasibility (including revealed comparative advantage).
The IFC’s standard approach does rely on revealed comparative advantage to some extent, in that it requires a firm with a business plan that suggests potential profitability to ask for IFC financing. But while development potential and external impacts are considered in scaling the anticipated development impact of a project, that is downstream of the initial decision to consider the investment. And projects are bespoke—financing is certainly not offered to all businesses in an industry.
The IFC is also engaged in sectors ill-suited for industrial policy. The report notes that the top five sectors for industrial policy around the world are agricultural commodities, tourism, food and beverage manufacturing, heavy manufacturing and chemicals. Meanwhile, the IFC’s major investment sector is financial markets (accounting for more than half of IFC’s investment portfolio) followed by infrastructure. It is hard to build an industrial strategy on the back of lending to banks. Manufacturing as a whole only accounts for about 8 percent of IFC’s portfolio, agriculture 7 percent, and tourism and retail 3 percent.
It all suggests that the IFC is doing industrial policy, but doing it wrong. Instead, it should be working with countries—under the direction of World Bank staff that are supporting those countries—to back investments in export-processing zones and extend credit on an equal basis to industries with the potential public support to back structural transformation. If Industrial Policy for Development helps the IFC move towards that model, it would be a huge success.
