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Industrial policy, East or West, for development or war?

Jomo Kwame Sundaram


NEEMRANA, Rajasthan, India. March 20, 2024 (IPS). Developing countries wanting to pursue industrial policy were severely reprimanded by advocates of the ‘neoliberal’ Washington Consensus. Now, it is being deployed as a weapon in the new Cold War.


Industrial policy vs colonialism

Industrial policy is often seen as pioneered by Friedrich List. But List was inspired by George Washington’s first Treasury Secretary, Alexander Hamilton. He advocated promoting manufacturing as the Industrial Revolution was beginning in England.

For List, post-colonial national development required tariffs. Despite a title deceptively similar to his earlier Principles of the Natural Economy, List’s Principles of the National Economy was quite different, clearly inspired by Hamilton.

The Meiji Restoration started in 1868, after a quarter millennium of Tokugawa shogunate military rule. Meiji emperor rule was no mere palace coup but involved industrial policy to catch up with the already industrialising West.

Meanwhile, public intellectuals like Dadabhai Naoroji and Sayyid Jamaluddin al-Afghani rejected Western imperialism. They criticised how parts of the global South were being transformed – and ruined– by Western imperialism.

Half a century later, Harvard’s Josef Schumpeter rejected the idea that capitalism had become imperialistic. The Austrian economist insisted imperialism was a pre-capitalist atavism that capitalism’s ascendance would wipe out.


Weaponising industrial policy

Today’s geopolitics has seen a renewed Western interest in industrial policy as a weapon in the new Cold War. US President Joe Biden’s National Security Adviser, Jake Sullivan, is widely credited with articulating its use as an economic weapon.

This contrasts significantly with longstanding interest in industrial policy in the global South over several decades. For many, industrial policy has long been associated with post-colonial development efforts.

Meanwhile, strong stagnation tendencies in the West after the 2008 global financial crisis underscored the failure of purported neoliberalism. Advocacy of transformative, including green industrial policies by Mariana Mazzucato and others in Europe, was well received by desperate governments keen to resume growth.


Developmental, industrial policy

However, in developing countries, there has long been interest in developmental industrial policy. Neoliberal economists and the many influential financial institutions they control have long frowned upon this.

Alfred Marshall, Petrus Johannes Verdoorn, Nicholas Kaldor and others urged Europe to industrialise. Selective industrial policy has been even more controversial, with the government favouring some manufacturing activities over others, e.g., due to increasing returns to scale.

Typically facing resource, including fiscal constraints, developing countries have had little choice but to be selective. However, with such powers associated with governments, there was understandable concern about the potential for abuse, arbitrariness and error.

Instead, the market was supposed to decide in the best interests of society without recognising its own inherent biases and ‘failures’, especially in highly unequal post-colonial societies. Neoliberal economists were quick to caricature industrial policy with dismissive metaphors (e.g., picking winners) rather than rigorous analysis.


Asian miracles?

The East Asian Miracle was simplistically caricatured due to the abandonment of import-substituting industrialisation in favour of export-orientation. A more nuanced alternative narrative of ‘effective protection conditional on export promotion’ in Northeast Asia was thus ignored.

Industrial policy is much more than trade policy, involving a range of policy instruments. Recognising the variegated aspects, dimensions and tools of industrial policy is essential. Besides investment, finance, and technology, human resource development is also significant.

For instance, the Indian Institutes of Technology (IITs) were an important initiative to support its industry. However, with India’s gradual neglect of industrial policy, IITs have probably contributed more to the development of US hi-tech.


Evaluating industrial policy

For years, economists working on India have criticised industrial policy, usually referring to the Nehruvian experience. But rushing to such a conclusion solely referencing that experience requires cherry-picking evidence.

India’s pharmaceutical policy has been crucial to the health and well-being of its population. Affordable, often generic medicines in India have been central to its improved public health outcomes. However, unlike Western pharmaceutical transnational corporations, Indian companies have not been accused of price-gouging.

Bangladesh has since utilised its special dispensation as a least developed country (LDC) to export affordable generic medicines to many other poor countries. However, the West blocked the Indian-South African initiative to suspend patent royalties to address the COVID-19 pandemic for its duration.

Effectively, the West was reneging on its 2001 agreement to the Public Health Exception to Trade-Related Industrial Property Rights (TRIPS). This compromise was needed to restart WTO processes after the African walkout from the 1999 Seattle World Trade Organization (WTO) ministerial meeting.

If not for India and Bangladesh, the costs of medicines would have been much higher, and there would be more ill health in the world today. Defining industrial policy success solely in terms of the financial profitability of investments ignores such gains.

It is, therefore, crucial to build coalitions to create the conditions for sustained and appropriate but adaptive industrial policies. These are needed to accelerate growth and structural transformation to achieve sustainable development in the face of stagnation and regression in much of the world, especially the global South.



Selected IPS readings

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