Excellency, Mr. Julius Maada Bio, President of Sierra Leone,
Excellency, Mr. Narayan Kaji Shrestha Prakash, Deputy Prime Minister of Nepal,
Distinguished guests, ladies and gentlemen,
It is my honour to contribute to this round table on “Structural transformation as a driver of prosperity in LDCs.”
My intervention will revolve around three questions:
- First, what is an industrial policy? What sort of policies or interventions do they encompass?
- Second, why is industrial policy important, especially for LDCs, given their development challenges?
- Finally, what are some of the elements that should constitute industrial policy in LDCs, given their stage of development and aspirations?
To my first point, Industrial policy refers to government actions and interventions that aim to promote the growth and development of specific industries. Here, I am referring to industries in the broader context to including manufacturing as well as the services industry.
It can comprise precise instruments such as incentives, preferential credit access, prioritized energy access, and tax concessions designed for strategic sectors identified through certain criteria.
To my second point, Industrial policy is particularly important for least developed countries (LDCs) to generate employment and reduce poverty. In most LDCs large percentages of the working force are engaged in low-productivity activities, such as agriculture and low value-added services, particularly in the informal sector. Tackling high rates or poverty requires productive formal employment, not a heavy reliance on primary commodities and low-productivity informal services.
Many LDCs are also characterized by a fledgling private sector and by significant infrastructure and regulatory gaps requiring effective industrial policy to overcome these challenges.
Third, what elements should industrial policy include? While manufacturing success has eluded many LDCs. Cases exist in Asia and the Pacific which illustrate the strategic interventions and positive impacts of the sector.
These include Bangladesh, Cambodia and Myanmar. These countries have also been more successful than their peers in leveraging their preferential access to markets and in the process they have been able to generate formal employment in addition to export revenues.
The manufacturing sector in Cambodia and Bangladesh, in particular, accounts for 15 per cent of employment. These LDCs also account for 36 per cent of total exports by LDCs globally.
A combination of conducive regulatory and policy initiatives and strategic investments in infrastructure enabled them to harness their comparative advantage in labour intensive manufacturing while also leveraging their position as LDCs.
In the case of manufacturing, LDCs can position themselves to take advantage of the various regional and subregional trade agreements that are emerging. In the case of Asia, the Regional Comprehensive Economic Partnership presents significant opportunity to be part of the global and regional value chain. This framework encompasses 15 countries that includes ASEAN plus China, Japan, Republic of Korea, Australia and New Zealand.
As LDCs face significant gaps in infrastructure, regulations and skills, enhancing conditions across the board are challenging, given their resource constraints. In this case Special Economic Zones are effective in overcoming coordination externalities by providing the required facilities and policy environment in a geographically confined location.
SEZs can be instrumental in enabling domestic firms to enter global or regional value chains and have played an instrumental role in kickstarting and fostering structural change.
The growth of Asia-Pacific LDCs can be largely attributed to expanding output of existing sectors. But only few managed to improve the economic complexity of their exports over the last two decades. Most were unable to ascend the value chain and continue to produce unsophisticated good.
This suggests that technological development leading to improvements in productivity, innovation, and competitiveness has been limited.
To target new industries and services and shift a country’s production frontier outwards, the state should play a stronger role in facilitating industrial policy.
Particularly improvements in transport, communication, and energy infrastructure, in addition to enabling regulatory and policy frameworks, are important to reducing the cost of production.
However, more investment in education and vocational training to include upskilling and reskilling is also needed to promote more sophisticated and higher value-added services and exports.
For smaller LDCs, in particular those that are SIDS, the focus could be on modernizing the services sector rather than manufacturing. Here, digital technology will play a crucial role.
Finally, while industrial policy addresses coordination failures, it is also important to ensure coordination between the implementing authorities.
At the very least this requires a clear roadmap with clear success indicators and an accountability framework.