Industrial Policy As An Impetus To Stability In Times Of Upheaval

Data from the Global Trade Alert database demonstrates a significant rise in industrial policy interventions globally, from 481 to 34,248 between 2009 and 2022. A majority of these interventions are selective and distortive, which, in turn, are adversely impacting global trade and investment flows.

The role of the state in industrial development is critical, given that the relationship between economic development and industrialisation has significantly changed. Technological disruptions, ecological concerns, geopolitical contestations and national security are changing the nature of industrialisation. This has created the need for countries to explore different pathways to develop their economies, which in turn requires adopting industrial policies that promote industrialisation, innovation, and, more broadly, economic development. However, the central question in this context is whether rapidly changing industrialisation pathways demand new approaches and perspectives for industrial policies to address the challenges of technological disruption, the green transition, economic nationalism, geopolitical competition, and national security concerns. To make the industrial policy more effective and successful, it needs to be reimagined in both national and international settings.

A recent study, titled The Future of the Factory: How Megatrends are Changing Industrialisation, provides some interesting insights regarding industrial policy priorities and directions for developing economies of the Global South. Some of them are worth discussing. 

Adding Value To The Economy

Firstly, in the national context, the core focus of industrial policy should be on how it adds “value” to the economy. Value added can be conceptualised at three levels: the firm, the sector, and the economy-wide. Industrial policy should focus on enhancing value added at different stages of the value chain to increase the overall value-added output of the economy. A focus on value-added not only enhances productivity but also fosters innovation. This, in turn, generates positive externalities for the broader social and economic development. It is important to note that value added does not come solely from manufacturing-related activities. Services play a bigger role in enhancing the value added in the final product. It is therefore crucial that the role of industrial policy should encompass both manufacturing and services, with a clear emphasis on promoting value added and thus industrial development.

Secondly, the global environmental crisis poses a serious risk to the Global South's pursuit of traditional industrial strategies for its economic development. They are under high pressure to reimagine their industrial pathways to make sure they meaningfully contribute to addressing global environmental challenges. Technological developments in industrial production have created new promises and can play a crucial role in addressing the global environmental crisis. The development of clean technologies such as solar PV, wind, electric vehicles, and turbines can help countries move towards sustainable, environmentally friendly industrial development. Interestingly, most of these technologies have largely been produced and commercialized in developed economies.

These countries enjoy ‘first mover advantage’ in most of technologies and demonstrate greater reticence for their global diffusion. In fact, they are pushing for creating global rules, standards and regulatory frameworks that allow them to maintain their technological leadership in these technologies, thereby further exacerbating existing asymmetries. Given the technological edge and unequal burden of ecological breakdown on developed economies, there is a need to think about “ecological policy space” in global development discourse to ensure countries that contributed less to the global ecological crisis enjoy more flexibility to pursue industrial policies to develop their manufacturing capabilities in green technologies. It is therefore important for policymakers to think beyond a narrow market access logic and focus on protecting policy space in free trade agreements, particularly pertaining to green energy transition and critical minerals. Preserving policy space would allow countries of Global South to pursue strategic policies such as local content requirements, subsidies and public procurement preferences that are critical for building domestic capabilities in clean technologies.

Automation Technology

Thirdly, industrial policy has a very important role in addressing the looming challenges of automation technologies in the labour-intensive manufacturing sector. There is perceptible fear that automation can contribute to large-scale displacement of workers in labour-intensive manufacturing in developing and low-income economies, thereby contributing to jobless growth. This creates the potential risk of countries getting trapped in the emerging trends of deindustrialisation. To address the potential adverse implications of automation on employment, industrial policy plays a crucial role in shaping policies that facilitate occupational transition, manage adjustment costs and reskilling and upskilling of workers. Targeted financial support, technical extension services and shared digital infrastructure to Small and Medium Enterprises (SMEs) can encourage them to adopt automation gradually and inclusively. This would help them to avoid the potential risk of labour shedding shocks.

Policymakers in the Global South need to understand that industrial policy continues to be one of the most effective instruments to address entrenched economic, technological and power imbalances in global economic governance. Strategically independent and targeted industrial policies can help countries of the Global South to develop their domestic productive capacities, structural dependence and industrial upgradation. This certainly needs preserving policy autonomy to formulate policies that are more coherent with national development goals and priorities. 

(The writer is an Associate Professor at O.P. Jindal Global University, Sonipat. Views are personal.)