Learning to Industrialize

Policy Learning and Policy Dialogue Kenichi Ohno National Graduate Institute for Policy Studies (GRIPS) May 2013

The Middle Income Trap

(More Generally, the Developmental Trap)

   A developmental trap occurs when a country is stuck at an income level dictated by given resources and initial advantages (location, natural resources, big projects, aid, FDI, etc) and cannot rise beyond that level — only luck and no effort.

The level of income where the trap may occur depends on the amount of given advantages relative to population size.

Low endowment  Poverty trap Moderate endowment  Middle income trap High endowment  High income Liberalization, privatization and integration can take a country to a given income level, but rising toward higher income requires more active policy effort ( “ proactive industrial policy ” ).

How to Overcome A Middle Income Trap

     Three policy capabilities must be acquired: (i) generation of sources of growth (ii) coping with new social problems created by fast growth (income gaps, urbanization, pollution, social change, etc.) (iii) macroeconomic control under global integration Internal value creation by human capital is key. Policies and institutions that encourage — even force — skills, technology and knowledge must be established.

Historically, only a handful of non-Western latecomers could install such policies and institutions — Japan, Taiwan, Korea, Singapore.

Resource-rich countries are less likely to overcome the trap (curse of natural resources/Dutch disease).

In Asia, three governments are seriously worried about middle income traps (Malaysia, China & Vietnam), but for different reasons and at different development stages.

How Can Early Achievers Teach Industrialization to Latecomers?

Policy learning

 International best policy practices (and failures) must be collected and compared systematically.

 Using them as references and building blocks, government must acquire general capability to create a policy most suitable for a particular country, time and sector.

Policy dialogue

  Candid, concrete and pragmatic discussion between developing country government and experts & officials from advanced economies, followed by concrete industrial projects to implement what was suggested.

Japan started policy dialogue in the 1980s (with Argentina). It is now one of Japan ’ s standard tools for knowledge  cooperation.

Japan ’ s policy dialogue is different from Korea ’ s KSP or “ policy discussions publicized.

” by WB or IMF. It is more practical, open-ended and tailor-made, and less standardized or

What to Be Learned?

We (Japan) can offer the following inputs to developing country governments:  East Asia ’ s development experience in general or on specific topics (citing from Japan or other EA countries)   Frank and practical comments on a national development plan or industrial master plans Joint creation/revision of a concrete policy or strategy with Japanese help (intellectual, technical or financial).

Through these, governments should improve: Policy content Policy procedure Policy organization Policy documentation

Japan

’

s Policy Dialogue with Developing Countries

Country Argentina Thailand Vietnam Vietnam Period 1985-1987 1994-1996 (folow up) minister) Head/key players Saburo Okita (former foreign Purpose and content Comperehesive study on agriculture and livestock farming, industry, transport and export promotion 1999 Shiro Mizutani (former MITI official) Study on the master plan for SME promotion policy 1995-2001 2000 Shigeru Ishikawa (professor) 2003-current Japanese embassy, JICA, JETRO, JBIC Shujiro Urata (professor) Large-scale joint study on macroeconomy, industry, agriculture, enterprise reform, crisis management, etc.

Bilateral joint initiative to improve business environment and strengthen competitiveness through 2-year monitoring cycle of action plans Policy recommendation for SME promotion Indonesia Indonesia Laos Myanmar 2002-2004 Takashi Shiraishi and Shinji Asanuma (professors) 2000-2005 Yonosuke Hara (professor) Policy support for macroeconomic management, financial sector reform, SME promotion, private investment promotion, democratization, decentralization and human resource development Study on macroeconomy, finance, state enterprise, FDI and poverty reduction, etc.

Study on agriculture, rural development, industry, trade, finance, ICT, etc.

Mongolia Ethiopia 1999-2002 Konosuke Odaka (professor) 1998-2001 Hiroshi Ueno and Hideo Hashimoto (World Bank economists and professors) 2009 GRIPS Development Forum and JICA Study on the support for economic transition and development Kaizen, basic metals and engineering, productivity movement, policy procedure and organization, export promotion, technology transfer, etc.

Japan

’

s Industrial Policy Dialogue with Vietnam

Program Ishikawa Project (Study on the Economic Development Policy in the Transition toward a Market-oriented Economy in Vietnam) Period 1995-2001 (3.5 phases) Principal actor(s) MPI-JICA Content Joint research on macroeconomy, fiscal and financial issues, agriculture, industry, integration, currency crisis, SOE reform, and PSD; based on the principle of country ownership and mutual respect, with emphasis on long-term real sector development.

New Miyazawa Initiative (Economic Reform Support Loan) JICA-NEU Joint Research on Vietnam’s Industrialization Strategy Vietnam-Japan Joint Initiative to Improve Business Environment with a View to Strengthen Vietnam’s Competitiveness Joint Work between Vietnam and Japan to Strengthen the Competitiveness of Vietnamese Industries Joint drafting of Motorcycle Master Plan under MOI and VJJI2 Drafting and implementation of supporting industry development action plan Vietnam’s Industrialization Strategy 1999-2000 2001-2003 2003 2004 2006-2007 JBIC Quick disbursing loan of 20 billion yen with conditionalities in PSD, SOE auditing, and tariffication of non-tariff barriers. Action plans in PSD were monitored and evaluated.

JICA-NEU with Japanese researchers Bilateral policy research by university researchers on selected industrial issues and sectors: AFTA, WTO, FDI, motorcycles, steel, textile and garment, footwear, electronics, and software.

MPI-4J, Keidanren Two-year cycle agreement and implementation of dozens of concrete action plans which were monitored and reported to high-level, with initial focus on removal of business impediments and added emphasis on strengthening of local industrial capabilities.

MPI-4J Analyses by Vietnamese and Japanese experts as inputs to the drafting of the Five year Plan 2006-2010, with attention on industrial policy formulation and competitiveness of individual industries (automobile, electronics, supporting industries, etc).

Joint Working Group Drafting of master plan following new content and method, with active participation of large motorcycle assemblers and interaction with other stakeholders; VDF (MOI, VDF, serving as facilitator. Master plan, after significant editing, was approved in August producers, experts) 2007.

2008 3J, MOIT, MPI To implement supporting industry development master plan of 2007, action plan with clear time schedule and executing agents, together with proposed Japanese assistance, was proposed. Agreement with Vietnam was not reached but Japanese assistance projects began to be executed and monitored.

2011 DPM Hai, MPI/CIEM, METI, 3J Based on past and current industrial studies, a small number of industries and/or regions are to be chosen to receive concentrate policy effort and Japanese cooperation to produce new industries in Vietnam.

Industrialization Strategy Initiative

(ongoing Vietnam-Japan cooperation)

     Purpose: creation of new industries in Vietnam through public-private partnership, Vietnam-Japan cooperation, selectivity & concentration, and concrete action plans.

Vietnam: DPM Hai, MPI Minister Vinh, related ministries.

Japan: METI, MoFA/Embassy, JICA, JETRO, business associations, Keidanren, Kankeiren, GRIPS, etc.

Agreed sectors: electronics, food processing, agricultural machine, environment & energy saving, shipbuilding, automobile Monthly working group meetings to draft action plans by 2013:Q3, with implementation to follow.

With DPM Hoang Trung Hai

Current Issues (2013)

    Vietnam ’ s policy method is outdated; Japan often finds it hard to understand or persuade Vietnam ’ s leaders.

DPM does not have sufficient authority to control relevant ministries (MOF, MOIT, MPI, etc.) A new mechanism must be devised for stronger policy coordination.

Automobile is strongly proposed by Vietnam but Japan is reluctant; two long-standing problems must be solved: (i) small demand, (ii) unpredictable and inconsistent policy.

Japan wants to create a regular bilateral mechanism to discuss substance in industrial policy and cooperation.

Monthly Working Group meeting

GRIPS-JICA Industrial Policy Dialogue with Ethiopia

Preparation

Industrial policy dialogue

Phase 1 Phase 2 IPD conference July 2008 Official launch June 2009 Final session May 2011 Launch Jan. 2012 New PM inaugurated

JICA’s industrial support projects

Kaizen pilot project (30 firms) Kaizen phase 2: creating national institution and experts Basic metal & engineering study (With Germans) Export promotion

Note: Black squares indicate policy dialogue sessions in Addis Ababa with the prime minister, concerned ministers and state ministers, and officials and experts at operational levels. IPD stands for the Initiative for Policy Dialogue, policy oriented meetings on various topics hosted by J. Stiglitz of Columbia University.

At the Prime Minister’s Office Meeting with Senior Economic Advisor to PM Presenting JICA’s Kaizen Report to PM

High Level Forum (minister & state minister level) Meeting with Industry Minister At the Ministry of Finance, Economy and Development

Issues Discussed at High Level Forums (Phase 1)

1st HLF (Jun. 2009) 2nd HLF (Sep. 2009) 3rd HLF (Nov. 2009) 4th HLF (Mar. 2010) 5th HLF (Jul. 2010) 6th HLF (Oct. 2009) 7th HLF (Jan. 2011) 8th HLF (May 2011) (1) (2) (1) (2) (3) (1) (2) (1) (1)

Presentations by Japanese side

“JICA’s plan to policy dialogue and development study” (Masafumi Kuroki) “ADLI and future directions for industrial development” (Kenichi Ohno) “Cross-cutting issues on industrialization and policy menu under the age of globalization: examples from East Asia” (Kenichi Ohno) “Organizational arrangements for industrial policy formulation and implementation: examples from East Asia” (Izumi Ohno) “Planning and decision-making process for SME policies in Japan” (Go Shimada) “Designing industrial master plans: international comparison of content and structure” (Kenichi Ohno) “Industrial policy direction of Ethiopia: suggestions for PASDEP II and the next five years” (Izumi Ohno) “Basic metals and engineering industries: international comparison of policy framework and Ethiopia’s approach” (Toru Homma) “Result of basic metal and engineering industries firm-level study – parts conducted by MPDC and JICA” (Toru Homma) (1) “Singapore’s experience with productivity development: internalization, scaling-up, and international cooperation ” (Izumi Ohno) (1) “The making of high priority development strategies: international comparison of policy procedure and organization ” (Kenichi Ohno) (1) “Ethiopia's industrialization drive under the Growth and Transformation Plan ” (Kenichi Ohno) (2) “Achievements in the Quality and Productivity Improvement (Kaizen) Project ” (Go Shimada) (3) “Overview of national movement for quality and productivity improvement: experiences of selected c ountries in Asia and Africa” (Izumi Ohno) (4) “Taiwan: policy drive for innovation” (Kenichi Ohno) (1) (1) (1) (1)

Presentations by Ethiopian side

“Evaluation of current PASDEP focusing on industrial development and relate d sectors” (HE Tadesse Haile) “Comments and feedback by the Policy Dialogue Steering Committee on the presentations by GRIPS and JICA” (HE Tadesse Haile) “Concept for the industrial chapter of PASDEP II and the formulation plan” (HE Tadesse Haile) (1) (2) (1) (2) “Draft plan of industry sector for PASDEP II ” (HE Tadesse Haile) “Overview, contents of PASDEP II draft of chemical subsector” (Shimelis Wolde) “Report of kaizen training for capacity building of Kaizen Unit and pilot project companies in Osaka, Japan ” (Tola Beyene) “Report of kaizen training for capacity building of Kaizen Unit and pilot project companies in Chubu, Japan ” (Bekele (3) Mekuria) “Current status of kaizen project and institutionalization of k aizen” (Getahun Tadesse) (1) “Contents of industry sector in Growth and Transformation Plan ” (HE Tadesse Haile) (2) “Singapore’s productivity movement and lessons learned ” (Daniel Kitaw) (1) “Organizational structure of Ministry of Industry and linkage with other ministries ” (Ahmed Nuru) “MSE development strategy of Ethiopia” (Gabremeskel Challa) (2) “Kaizen dissemination plan and institutionalization plan ” (Getahun Tadesse) (3) “Botswana's productivity movement and its Implication to Ethiopia ” (Daniel Kitaw)

1st HLF (Jun. 2009) 2nd HLF (Sep. 2009) 3rd HLF (Nov. 2009) 4th HLF (Mar. 2010) 5th HLF (Jul. 2010) 6th HLF (Oct. 2009) 7th HLF (Jan. 2011) 8th HLF (May 2011) (1) (2) (1) (2) (3) (1) (2) (1) (1)

Presentations by Japanese side

“JICA’s plan to policy dialogue and development study” (Masafumi Kuroki) “ADLI and future directions for industrial development” (Kenichi Ohno) “Cross-cutting issues on industrialization and policy menu under the age of globalization: examples from East Asia” (Kenichi Ohno) “Organizational arrangements for industrial policy formulation and implementation: examples from East Asia” (Izumi Ohno) “Planning and decision-making process for SME policies in Japan” (Go Shimada) “Designing industrial master plans: international comparison of content and structure” (Kenichi Ohno) “Industrial policy direction of Ethiopia: suggestions for PASDEP II and the next five years” (Izumi Ohno) “Basic metals and engineering industries: international comparison of policy framework and Ethiopia’s approach” (Toru Homma) “Result of basic metal and engineering industries firm-level study – parts conducted by MPDC and JICA” (Toru Homma) (1) “Singapore’s experience with productivity development: internalization, scaling-up, and international cooperation ” (Izumi Ohno) (1) “The making of high priority development strategies: international comparison of policy procedure and organization ” (Kenichi Ohno) (1) “Ethiopia's industrialization drive under the Growth and Transformation Plan ” (Kenichi Ohno) (2) “Achievements in the Quality and Productivity Improvement (Kaizen) Project ” (Go Shimada) (3) “Overview of national movement for quality and productivity improvement: experiences of selected c ountries in Asia and Africa” (Izumi Ohno) (4) “Taiwan: policy drive for innovation” (Kenichi Ohno) (1) (1) (1) (1)

Presentations by Ethiopian side

“Evaluation of current PASDEP focusing on industrial development and relate d sectors” (HE Tadesse Haile) “Comments and feedback by the Policy Dialogue Steering Committee on the presentations by GRIPS and JICA” (HE Tadesse Haile) “Concept for the industrial chapter of PASDEP II and the formulation plan” (HE Tadesse Haile) (1) (2) (1) (2) (3) “Draft plan of industry sector for PASDEP II ” (HE Tadesse Haile) “Overview, contents of PASDEP II draft of chemical subsector” (Shimelis Wolde) “Report of kaizen training for capacity building of Kaizen Unit and pilot project companies in Osaka, Japan ” (Tola Beyene) “Report of kaizen training for capacity building of Kaizen Unit and pilot project companies in Chubu, Japan ” (Bekele Mekuria) “Current status of kaizen project and institutionalization of k aizen” (Getahun Tadesse) (1) “Contents of industry sector in Growth and Transformation Plan ” (HE Tadesse Haile) (2) “Singapore’s productivity movement and lessons learned ” (Daniel Kitaw) (1) “Organizational structure of Ministry of Industry and linkage with other ministries ” (Ahmed Nuru) “MSE development strategy of Ethiopia” (Gabremeskel Challa) (2) “Kaizen dissemination plan and institutionalization plan ” (Getahun Tadesse) (3) “Botswana's productivity movement and its Implication to Ethiopia ” (Daniel Kitaw)

Current Issues (Phase 2, 2012-)

Integrated export promotion

 Past review and reform advice  Joint creation of champion products for Japanese market  Inviting Malaysian & Thai officials to share experience

Strategic FDI policy

   Policy advice and introducing JICA assistance menu Critical review of new FDI law and one-stop service Sending high-level mission to Japan (TICAD V)  Sending technical mission to Malaysia for further learning Upgrading planning method (requested by PM Hailemariam)   Interim review of GTP (5-year plan) Reforming drafting procedure and organization for the next 5-year plan (planning commission & think tank)

Standard Policy Making Procedure

Top leader 1. Vision 2. Consensus building 5. A secretariat with sufficient authority and responsibility to coordinate the entire process 3. Documentation Brainstorming Studies & surveys Stakeholder consultation Ministries

＆

agencies Set broad goals & direction Drafting work (Drafting may be outsourced) Comments & revisions 4. Substantive stakeholder participation Businesses Academics & consultants Regions & localities Finalize & approve

Thailand: Automotive Industry Master Plan 2007-2011

Brainstorming; agreeing on goals & directions

The whole process (1 year) is managed by Thailand Automotive Institute (TAI) 

Set up formal committee for drafting M/P Subcommittees study identified issues Human resource “ CEO Forum ”

FDI & local firms Exporters MoI, MoST, MoEdu Professors ’ team (Chulalornkorn Univ)

M/P Steering Committee

Organized by MOI Businesses Officials Experts

Productivity Marketing Business Business Engineering Investment & linkage M/P Drafting By TAI staff Comment & dissemination Gov ’ t Experts (Informal) Gov ’ t Experts (Formal) Implementation

Vietnam: Traditional Policy Drafting Process

Prime Minister Review for approval Submit Inter ministerial review MPI & other Ministries

Minister

Order Submit Internal review Drafting Team Data MPI & other Ministries Government Appeal letter to Prime Minister when problems arise Contact Ministry when necessary Interviews, symposiums (sometimes)

Business Community

No permanent channel for continuous policy dialogue (case-by-case, temporary, ad hoc) Technical assistance (sometimes) International experts

Alternative Policy Organizations

Who will draft and execute policies, and how? The following approaches are not mutually exclusive; some countries use more than one.

 Technocrat group directly under PM or President  National Councils or Committees    Super-ministry Sector/issue-specific institute acting as a hub Strong leader without institutionalization

Technocrat Group Approach

- Elite technocrat group with full planning authority given by top leader - Members are selected officials, business leaders & experts with good education & experience

Prime Minister Direction, full authority for policy making Faithful execution and reporting Technocrat Group (Policy Maker) Policy, guidance and monitoring Faithful execution and reporting Businesses Academics Experts

Korea – Econ. Planning Board Malaysia – Econ. Planning Unit Thailand – NESDB Taiwan – Kuomintang Elites Indonesia – “Berkeley Mafia” Chile – “Chicago Boys”

Ministries (Policy Implementers)

National Council/Committee Approach

Typical configuration:

PM or President Chair, give mandate Businesses Academics Experts National Council or Committee Support

Plan

working groups or task forces for specific issues and sectors Ministries and agencies

Implement

Singapore Now: New Productivity Drive

Economic Strategies Committee: Report National Productivity and Continuing Education Council (NPCEC)

Review & submit Oversight Review & approval

Working Committee for Productivity and Continuing Education (WCPCE) Sectoral “Productivity Roadmap” for the next 10 years

Draft & propose

Financial Incentives

Scrutiny

National Productivity Fund

Chaired by Deputy PM Members from ministries/agencies, business, unions Joint secretariat: MTI, MOM (ministers) Led by MTI, MOM (PS level) Inter-agency coordination

Productivity & Innovation Credit Skills Dvt. Fund Lifelong Learning E.F.

Sector working groups (12 priority sectors)

Construction BCA Unions Industry Electronics EDB Unions Industry Precision Eng.

EDB Unions Industry Transport Eng.

EDB Unions Industry General Mfg.

SPRING Unions Industry F & B SPRING Unions Industry Retails SPRING Unions Industry

Cross-cutting issues

Low wage workers Research & benchmarking Infocomm and logistics

Organizational Structure of Japan

’

s Ministry of International Trade and Industry, 1960s

MITI Minister Politically appointed VM Administrative VM Deputy VMs Special assistants Main Bureau Minister ’ s Secretariat (incl. Research & Statistics) Int ’ l Trade Policy Bureau Int ’ l Trade Admin. Bureau Industrial Policy Bureau Industrial Location & Environment Protection Bureau Basic Industries Bureau Machinery & Information Industries Bureau Attached Organizations and External Bureaus Agency of National Resources & Energy Patent Office SME Enterprise Agency Agency of Industrial Science & Technology Trade & Investment Training Other Export Insurance Textile Petroleum Electrical Works .........

Consumer Goods Industries Bureau Deliberation Councils

Industrial Structure (*) Industrial Structure Council:

influential in the 60s (18 special committees): industrial pollution, int ’ l economy, consumer economy, heavy industry, chemical industry, etc.

Int ’ l Trade Transaction Industrial Location & Water Product Safety & Household Goods Quality Indication Aircraft & Machinery Industry Traditional Crafts Industry ...................

My Proposal for Vietnamese Government

Prime Minister

Direct, give mandate Plan

SMEs

Secretariat: MPI Ministries, businesses, experts

National Competitiveness Council

Commission studies, reports Chaired by PM (or DPM) Secretariat: Government Office Members: Heads of concerned ministries Support, report, draft Working groups for specific issues or sectors

Supporting industries

Secretariat: MOIT Ministries, businesses, experts

Clusters

Secretariat: MOIT Ministries, businesses, experts

TVET

Secretariat: MOLISA Ministries, businesses, experts

Higher Educ

Secretariat: MOET Ministries, businesses, experts

Ministries and agencies

Implement

Frequently Asked Questions

1. Are Asian experiences useful? Our country is unique and different.

 Every country says “ we are unique.

” International cases are studied not for copying but as raw materials to build general capability to create your own policy. Without knowing concrete cases, policy becomes amateurish.

2. Is industrial policy possible today? The world is globalized and private flows are so huge.

 Certainly possible. WTO and FTAs ban only a few policy measures (tariffs, NTBs, foreign discrimination, etc.) while there are so many policies consistent with current global rules that are not even known or tried. Learn them, and practice them well.

FAQ cont.

3. Government should not pick winners because it makes wrong choices or it is captured by political interests.

 That ’ s the standard Washington argument. These are serious risks but can be avoided by proper policy learning. Many E. Asian countries avoided them. Moreover, sectoral promotion is already practiced globally under different names: PSD, HRD, TVET, science & technology, etc.

4. Should industrial policy conform to or defy comparative advantage? (Lin-Chang debate, 2009)  Following a country ’ s obvious advantage vs. jumping to a new possibility — this is only a theoretical debate. In reality, distinction is not clear (Nokia? Korean steel?) The important thing is whether government knows how to support private firms and promote an industry--whatever the chosen industry may be.