Transforming economies

ILO-UNCTAD book uses case studies to probe how industrial policies can transform economies to create better jobs.

Comment | 03 February 2015
Ms. Irmgard Nübler, ILO Senior Economist and Mr. José Manuel Salazar-Xirinachs, ILO Assistant Director-General for Policy
A significant recalibration has occurred over the last decade for policy makers in developing and developed countries alike. The discussion has shifted from the quantity to the quality of growth, and from growth to economic and social development.

This was based partly on the fact that growth in many countries often did not translate into better jobs, higher wages, better living standards and development. And partly because of the devastating labour market impacts of the 2008-2009 financial and economic crisis.

Transforming economies to achieve sustained and inclusive economic growth and to create more and better jobs has therefore become a central theme in the policy debate at national and international levels. It is a major concern in the discussion on the United Nations’ post-2015 sustainable development framework as well as in the G20 debate.

While there is broad agreement on the importance of productive transformation, economists differ in their view on how to promote the dynamism of the process. The term "industrial policy" continues to create discomfort and debate among some economists and policy makers.

The ILO-UNCTAD book Transforming Economies: Making industrial policies work for growth, jobs and development, provides a deeper understanding of the process of structural and technological change, and distills lessons and principles for the design of policies that effectively create sustained and inclusive growth and quality jobs. The book is based on eight case studies (Costa Rica, Republic of Korea, Brazil, China, South Africa, Sub-Saharan Africa, the United States and the software industry in India), as well as cross-country and regional studies.

Range of economic traditions

Rather than focusing on one particular economic framework, the book analyzes various innovative approaches recently developed in different economic traditions, including mainstream, structuralist, evolutionary and institutional economics. These frameworks are portrayed as complementary, rather than competing, in explaining the forces driving structural and technological change, and in explaining the complexity of such processes.

The book identifies domestic productive “capabilities” as a fundamental driver of productive transformation, a factor largely neglected by mainstream economists.

Capabilities reside in the knowledge base of the labour force, enterprises and societies – the more sophisticated and diversified the mix of general, cultural and technical knowledge sets, and the “smarter” the routines and institutions, the more dynamic an economy can be to adopt more complex technologies, diversify into a wider range of products, accelerate the speed of productive transformation and create jobs.

Lessons learned

A major lesson is that it is not possible to have inclusive growth and successful employment policy, if these are not anchored in a clear productive development and capabilities-building learning strategy, which also integrates social and economic transformation.

Pro-active government policies are central to boost economic dynamism and to influence economic structures. After many years of policy advice that did a lot of damage to developing countries, wide agreement on this point is good news.

There is, however, no one-size-fits-all policy approach. Policy makers need to develop country-specific strategies, taking into account the country’s conditions, comparative advantages and initial capabilities. They can then formulate productive transformation policies in the light of the country’s development objectives and aspirations.

Four important lessons for sound design and implementation of industrial policy are also distilled from the country and regional studies:

  • Targeting preferred economic activities, industries and technologies has been a key element of all successful strategies to promote productive transformation. According to the book, the distinction between horizontal and vertical measures is blurred, since a lot of supposedly “neutral” measures do in fact favour one or another sector. The question therefore is not about whether targeting should happen, but how to achieve the most effective targeting.
  • Only a comprehensive, integrated and coordinated package of policies and institutions can adequately respond to the myriad challenges of learning and structural transformation faced by countries aiming at achieving growth, jobs and development objectives. This package needs to consider a coherent set of investment, trade, technology, education and training policies supported by macroeconomic, financial and labour market policies.
    In particular, macro-economic and trade policy needs to be aligned with industrial policies. Many successful economies have used smart combinations of trade opening, export promotion, and support for infant industries, combined with policies in order to promote investment and competitiveness.
  • Industrial policy fundamentally includes the challenge of boosting capabilities by accelerating distinct learning processes at the level of individuals, firms, society and the labour force, and to transform the knowledge base and collective knowledge systems underpinning routines and institutions. This requires an integrated learning strategy which embraces education, training, technology, trade and investment policies. It must also include institutions to promote individual and collective learning in schools, communities, production process, as well as in social, professional and organizational networks, or in value chains.
  • Industrial policies should mobilize not just business leaders and public policy makers but also academics, trade unions and civil society groups at national, regional and municipal levels. All these actors have a legitimate role to play and should include national competitiveness councils, sectoral councils or committees, informal networks of communities of practice and public-private partnerships. These are critical for effective coordination as well as for shaping consensus.