Competition based Industrial Policy. Outline. What is industrial policy? What is industrial policy? Framework for Industrial Policy

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1 What is industrial policy? Competition based Industrial Mari Pangestu Jakarta, May 3, 2005 Source of growth often thought to matter: indigenous vs. foreign Is it confined to industries/manufacturing? How about agriculture, services, mining? Unprocessed vs. processed 1 Outline Objectives and defining industrial policy Instruments of industrial policy and experience Changes in use of Instruments What is competition based policy, including industrial policy What is industrial policy? Often multiple objectives: Economic: employment, exports, increased output, better income distribution, technological capacity Non economic: national pride, strategic industries What is industrial policy? World Bank: policy interventions to alter industrial structure to promote productivity based growth (so not necessarily on specific industries) Framework for Industrial Infant industry argument: policy intervention to achieve dynamic externality or market failure (policy issues: cost of intervention should be less than benefit or cost saving; temporary; performance requirements) Second best: intervention to offset distortions (why not remove distortions; assumption of perfect information - otherwise third best)

2 Framework for Industrial Technology development: direct or spillovers. Interventions such as domestic content program raises cost to downstream, lower effective protection encourages companies to increase output, not incentive to acquire more knowledge because intervention is output not technology based Experience with Industrial Southeast Asia: more liberal and market oriented Framework for Industrial Transfer of technology better through FDI, importation of technology/capital goods, complementary effect of FDI and human capital accumulation FDI policy - not performance requirements or R&D subs, but generic for conducive investment climate, competition and development of human and technological capacity. Instruments of Industrial Export promotion and import restrictions tariff, non tariff barriers on imports, import check price subsidize exports: interest rate, access to credit, direct and indirect subsidy general export promotion E.g Jetro to provide human and physical infrastructure for exports tax relief on inputs, R&D pref. policies for favored conglomerates: imp. capital goods and tech., raise finance outside Experience with Industrial Normal progression from import subst., export or. (OEM) and progressive dev. Japan Inc, Korea Inc East Asian Miracle Study -- growth period, ability to use certain now not possible, contest or performance based interventions (global market measures of competitiveness) Instruments of Industrial Industrial Instruments lax enforcement comp. pol, including cartels govt. creation and support of conglomerates fiscal incentives related to investment promote close and long term links between industry and financial sector labor repression establishment of state owned industries to enhance industrial development (e.g. steel) extensive administrative guidance - picking sectors

3 Instruments of Industrial FDI Performance requirements: local content, export performance, trade balance, Restrictions: foreign exchange, licensing, equity and mandatory local participation, sectoral Incentives: tax and other and WTO Import protection: tariff reduction, but peak tariffs and non tariff barriers remain (use of anti dumping and safeguards); less binding -- non agric. market access negotiation Subsidies: export subs not allowed, subs for technology, environment and regional development also now not allowed Investment: TRIMS, now want greater rules Due to regional, multilateral, structural adjustment loans, domestic reform program and greater competition Trends Pre Crisis: tendency towards trade and investment liberalization (fall av. tariffs), though have peak tariffs and core NTMsand rise in some types of NTM (a.dump) and WTO TRIPS: strengthen IPR protection -- encourage innovation GATS S&D: Article XVIII -- protection for infant industry, balance of payments Trends FDI: fall performance requirements, equity and sectoral restrictions, greater incentives greater emphasis on complem. Pol: R&D, infrastructure dev., strategic industries dev., form industrial clusters (e.g govt subs for R&D in Korea and Taiwan, development of knowledge based ind. in Singapore) and WTO General trends of disciplining any cross border or non border measure which has a trade effect rules are ownership neutral: apart from GATS and TRIPS, no distinction in discipline made between domestic and foreign firms promotion of industries for investment and export confined to generic rather than specific S&D is about longer transition periods not total exemptions

4 Indonesia: change in industrial policy Indonesia: Domestic reforms: unilateral tariff reductions, removal of import monopolies and approved importers, customs and export rebate ref., FDI 1995: sign on to Code on Subsidies and Countervailing Duty - eliminate export subsidy AFTA: 0-5% tariffs intra ASEAN, elimination of quantitative barriers; services liberalization; AIA, AFAS; ASEAN+1, bilaterals WTO: bind tariffs 40%, eliminate all non tariff barriers, TRIMS (local content requirements: milk, soybean, automotive) but Mobnas Industrial in today s context What policy space to conduct industrial policy? (given other considerations) Export promotion: beyond export subsidies - reduce fiscal and procedural constraints, trade facilitation and generic policies to enhance competitiveness of export industries (infrastructure, exchange rate pol, HRD, innovation policies etc.) Industrial in today s context Given globalization, greater competition (e.g. China) and rapid technological change And greater disciplines and rules under WTO (and possibly RTA) Generic rather than specific policies -- quality infrastructure, conducive business climate space? Industrial in today s context What policy space to conduct industrial policy? (given other considerations) FDI - fall performance requirements, more toward generic policies -- under WTO? How to develop a competition based industrial policy? Industrial in today s context: comp. policy implic What policy space to conduct industrial policy? (given other considerations) Transparent and objective implementation clear on objective (i.e protect sunset or promote sunrise ind., efficiency vs development and vested interests) performance requirements exit What is a competition based policy framework? Clear goal: efficiency through market oriented environment other goals, other policies and

5 What is a competition based pol. framework? Elements: Openness of markets : market access for all goods and modes of service delivery cross border trade and investment, behind border regulations -- domestic policies Government and private actions that are not anti competitive: appropriate competition law, corporate and public governance Why a competition based pol. framework? reform program need to be based on clear rationale or understanding of necessity of reforms; otherwise ambivalence ad hoc government and private actions in response to globalization, political pressures (increased democratization) and vested interests slow progress What is a competition based pol. framework? Principles non discrimination and comprehensiveness (same disciplines for all goods, sectors and actors) transparency and accountability to ensure public interest is served, prevent discretion and abuse, minimize uncertainty minimize exceptions/industry specific policies: also subject to caveats (clear target and, governance etc.) Way Forward Need clarity with objectives: efficiency vs equity, domestic vs foreign, state vs private, small vs big, central vs region conflicts e.g. competition law (pro market/competition or pro small) Why a competition based pol. framework? Lack of one led to vulnerabilities in the past (partial reforms, inappropriate sequencing, weak institutions); misspecified targets pre crisis: stimulus for reforms top down and driven by necessity -- not based on ideology or consensus Way Forward To Make progress on reforms need political will, champions (KPPU) Role for parliament Improve acity of bureaucracy and lack of coordination Improve new institutions legal system and enforcement Decent ralization

6 Main Recommendations Beware: consequences of not doing anything Domestic: stagnant economy, fiscal time bomb, another financial explosion, elections External: global competition especially CHINA, WTO ( ), AFTA and regional (now, and broader), sources of finance Consequence is another widespread CRISIS (another Argentina?) Main Recommendations Well thought out strategy for sequencing implementation -- policies and institutions given realities (political, rule of law and capacity are problematic in the foreseeable future) Main Recommendations Consensus on objectives: in past top down and told benefits, now divided and confused (believe in need for good governance, but not how liberalization strengthen good governance) need informed public debate, advocacy, training etc. --- consensus building Main Recommendations Finding and forming coalition of champions outside of the system e.g. civil society, NGOs, credit rating agencies, media