By: Siyanda Pali
The continent of Asia is considered to have the world's highest total GDP figure, coming in at over $42 Trillion US. North America, on the other hand, leads the world when it comes to per capita GDP, which currently exceeds $71 140 US according to the International Monetary Fund. Nevertheless, the continent of Africa is the wealthiest continent on earth when it comes to its resource endowment, with the United Nations stating that it possesses 30% of the world's mineral reserves.
San Francisco (Popular Science)
The African continent is endowed with 8% of the world's natural gas, 12% of global oil, 65% of all uncultivated arable land, as well as more that 70% of the world's platinum and cobalt deposits. In addition, while other continents such as Asia face overwhelming population decline, Africa has the world's youngest population, with approximately 1 in 4 (25%) of all young people on earth aged 15-35 projected to be African by 2050. Nevertheless, despite these impressive fundamentals, the continent has not translated its potential from the end of the colonial era to significant present-day gains for the population at large, accounting for about 2%-3% of global GDP to date. This necessitates inquiry.
To paraphrase South Korean-born Economist, Prof Ha-Joon Chang, the aim of this article is to 'discuss a contemporary problem with the help of history', mainly, how a large number of mature economies today followed a certain trajectory or path of development in order to achieve industrialisation, and later, when they had ascended the summit, prescribed a totally different recipe for success to newer entrants or developing economies following their independence from colonial rule, with Bretton Woods Institutions such as the World Bank and International Monetary Fund being central actors. The impact or outcomes of such industrial policy will also be examined and discussed.
Industrial Policy in Action
One would be forgiven for thinking that bastions of 'free market' and neoliberal economic policies such as OECD nations eg the United States of America and Britain developed their economies along such lines from the outset. Alas, the record of history portrays a markedly different approach. In Professor Ha-Joon Chang's "Kicking Away the Ladder: The Real History of Free Trade", a reference is made to "Economics and World History: Myths and Paradoxes" by Paul Bairoch, which illuminates how the levers of industrial policy, ie targeted state intervention, were used to protect or boost certain domestic industries, ultimately shaping their economies.
Bairoch (1993)
The table above with data provided by Bairoch (1993) provides approximate average percentage levels of custom duties (tariffs) on manufactured goods, as a weighted percentage of value for specific nations during the early years of their industrialisation period. From the above, it is clearly evident that in the early 19th century, the United States of America and the United Kingdom had some of the most well-protected industries and economies, with tariff regimes which ranged from 35% to well over 50%. In line with above, a nation such as Belgium, despite having an average tariff rate of 9%-10% in the late 19th century, in reality, had tariffs as high as 60% and 80% for industries such as iron and textiles respectively. In the early 20th century, Italy had customs duties averaging 46% and Russia had duties averaging 84% in the same period. Similarly, Spain had tariffs averaging 63% in the early 20th century. Furthermore, the 'R' in the abovementioned table denotes the word, 'Restricted', meaning that highly restrictive import barriers existed, or that outright import bans were in place. Thus, calculating an average tariff rate in those years was not possible. This was the case for Austria, Japan, France, Russia, Spain and Sweden in the early 19 century. Therefore, it is evinced that protectionism was not the exception, but the norm, as a means to industrialise what are now developed nations today.
(Bairoch 1993)
The abovementioned trade policy remained in the aforementioned countries, all the way up until the second world war. After this point, it is only then that tariff rates started to decline. It was only in the 1970's that developed nations had tariff regimes which are similar to today's tariffs. Therefore, it is important to note that by the time that the relaxation of high tariff rates occurred, these nations were already well-off, having obtained decades, if not over a century of protection from international competition. In addition to a copious use of high tariffs, the range of industrial policy instruments was widened from the 1950s to the 1980s in nations such as Norway, France Finland, Japan, Austria and Italy, strictly regulating foreign direct investment, in order to protect domestic industry. Japan and Finland in particular had highly regulated and restricted foreign direct investment up until the 1980s. In fact, it was not permissible without special government approval. The former-mentioned countries, bar Japan, used State Owned Enterprises in specific sectors at the time.
In an attempt to thresh out their economic vision for the future, Japan and France had indicative 5-year plans, pointing out which industries would be promoted, what type of support they would receive from the government, as well as how these priority industries would link or relate with other industries. Regional governments in Germany and Japan also used industrial policy to promote and support small enterprises. eg the Germans used publicly owned banks to provide affordable, long-term financing for SMMEs (Chang H-J 2019). There was also a synergy with local industry associations to supply inputs which are normally too expensive for individual firms eg research and development, worker training, and export marketing, which normally require large, fixed costs upfront, a notable barrier for small firms.
The Role of the State
The United States of America, contrary to popular belief, actually had one of the world's strongest industrial policies, albeit it being called R & D Policy. As per Mazzucato (2011), although the level of technological innovation is critical for economic growth, there is no clear correlation between the size of companies, R & D spend, the number of patents and the level of innovation in an economy. However, what is unequivocal is that a requisite precursor for innovation to occur is a highly networked economy with dynamic feedback loops between individuals and organisations, in order to facilitate information exchange and for its barriers to be broken, and for its horizons to be broadened ie what in literature is referred to as a ''national system of innovation''.
At the forefront of knowledge, simply possessing a system of innovation is not enough. With time, more substantial or remarkable results can be achieved when the state is a significant, active participant within the system (Mazzucato 2011). The state can, through its different laboratories and agencies, be agile, utilising its commissioning, procurement and regulatory functions to steer or direct markets, and to propel technological advancement. Thus, it can be a protagonist for change in a networked system which already has the potential to spread new ideas rapidly.
The Defence Advance Project Research Agency (DARPA) is a classic example of the similarity of the United States of America with other developed countries, with military involvement playing an important role in economic growth and development. In Germany, automobile maker Volkswagen was formed in 1937 as a state-owned company meant to meet the transportation needs of the German population. The Manhattan Project was a major scientific collaborative effort between the governments of the USA, Canada, and the UK, leading to the creation of the atomic bomb. The US experience in latter decades has been to apply lessons learnt in broader industrial policy.
Contrary to the prominence given to Franklin D Roosevelt's New Deal as a turning point in US economic history by laissez-faire stalwarts, World War 2 became a period of great significance for development and innovation in the USA. It was after World War 2 that the Pentagon collaborated with other national security agencies such as the National Aeronautics and Space Agency (NASA) and the Atomic Energy Commission which then precipitated the development of technology such as jet planes, computers, biotechnology, civilian nuclear energy and lasers (Block 2008, Mazzucato 2011). This was championed by the Advanced Projects Research Agency (ARPA), a Pentagon-spawned office in 1958.
Established with the aim of giving the US supremacy in certain industries or sectors, DARPA has a budget of over $3 billion US per annum, 240 staff members and variable or limited overheads. It has successfully managed to recruit skilled programme managers who have the license and willingness to take risks. The formation of DARPA also led to a portion of US military R & D spend being allocated for 'blue sky thinking' ie, ideas which went beyond normal time horizons, and might not achieve results in 10 or 20 years. Consequently, DARPA's mandate allowed it to prioritise the propagation of innovative technological development with nuanced strategies.
Such is the history of industrial policy in what are now developed countries. Targeted state intervention through protectionism was a mainstay during the early years of their industrialisation. Following this, there were specific measures which provided targeted support, further fostering the growth and development of certain sectors and industries. It is difficult to imagine what might have been of Silicon Valley and other conglomerates today, were it not for the decisive role of the state.
