The past few decades have witnessed serious debate with respect to the relative roles of the market and the state. This debate has taken place especially in the developed world, where the advocates of a free market far outvoiced those in favour of a greater role for the government. There have been a few, including Nobel Laureate Paul Krugman and Dani Rodrik, who have consistently supported a greater role for the state, particularly in the context of framing an industrial policy, a view which, however, has not found much favour.
The recent economic crisis has brought the debate with respect to industrial policy and the role of the state into sharp focus. The gathering momentum of the debate has provoked even The Economist and the Financial Times into creating platforms for facilitating it. These winds of change in thinking appear to have influenced the developed world, which earlier believed predominantly in the ‘miracle of the market’ and had questioned the need and space for industrial policy.
The driving forces behind the perceptible change in thinking have been threefold — political pressure on governments arising from job losses; recognition of the need to rebalance the relative significance of the financial sector and the real sector of the economy, to be achieved through a greater role for the manufacturing sector; and the need for large-scale public funding for creation of new clean technologies in the wake of the climate change debate.
The past two years have witnessed increasing recognition of the need for an industrial policy. During this period, several developed countries — including the USA, UK, France and Japan — have actually implemented policies entailing increased state intervention in several fields, including banks, financial institutions and manufacturing companies as well. There is a clamour in favour of state intervention and a structured industrial policy. Many of these countries are even in the process of introducing legislative measures towards making this possible.
Passage of the National Manufacturing Strategy Act of 2010 by the US Congress with an overwhelming majority is most notable among them. This Act, which is now before the Senate, requires the US government to promote policies related to the manufacturing sector. These policies are aimed at promoting growth, sustainability and competitiveness, and focus on creating well-paying and decent jobs.
They also emphasise innovation and investment, and support national security. The Act enjoins the president and Congress to act promptly to pursue policies consistent with a national manufacturing strategy, to be prepared quadrennially. It requires the president, in preparing each annual budget, to include information relating to its consistency with goals and recommendations laid down in the strategy.
In Japan the ministry of economy, trade and industry (METI) has unveiled a new strategy to mitigate the impact of the industrial policies being put in place by the US, France, the European Union and other developed countries. The EU is also expected to adopt an active industrial strategy by the end of this year. Industrial policy in one form or another is becoming the norm in developed countries.
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With respect to the developing countries also, economists and intellectuals have started looking at the need for a balance between the roles of the market and the state in the backdrop of the growth experience of East Asian countries, including China. The report of the Commission on Growth and Development headed by Michael Spence, while discussing the relative roles of the market and the state, has left this to be decided by individual countries, being “country- and context-specific and responding to widely varying conditions.” Notwithstanding this, it recognised the “the role of the developmental state” after studying the experience of countries in East Asia, alongside other developing countries.
Justin Yifu Lin, senior vice president and chief economist of the World Bank, and Celestin Monga, adviser to the chief economist, have, in a policy research working paper of May 2010, recommended the need for a well-structured industrial policy for developing countries. However, they have said: “Indeed, historical evidence and economic theory suggest that while markets are an indispensable mechanism to allocate resources to the most productive sectors and industries, government interventions — through the provision of information, coordination of hard and soft infrastructure improvement, and compensation for externalities — are equally indispensable for helping economies move from one stage of development to another.”
They have made six recommendations for designing industrial policy for developing countries and suggested picking potential winners among industries from among those with latent comparative advantage. They advise removing “the constraints that impede the emergence of industries with latent comparative advantage” and creating “conditions to allow them to become the country’s actual comparative advantage.”
This debate on the role of the market versus the state has not so far evoked much attention in India, possibly because the global turmoil did not affect India to the same extent. However, the need for a manufacturing policy has caught the attention of policy makers for a different reason. The share of manufacturing in India’s GDP has hovered around 16 to 17 per cent, which is low for a country at this stage of development. The rate of growth of manufacturing over the past three decades has been around 7 per cent per year — much lower than in many other countries with whom India competes. This has been a cause for concern.
Prime Minister Manmohan Singh, in a farsighted move, constituted a group in January 2008 under the chairmanship of V Krishnamurthy, chairman of the National Manufacturing Competitiveness Council (NMCC), to examine why manufacturing had a relatively small share in the Indian economy, and for making recommendations to ensure robust growth of this sector in the coming decades.
The group, which submitted its report to the prime minister in September 2008, suggested that the government put in place a policy to refocus on manufacturing and address issues affecting the growth of the manufacturing sector. The goals recommended by the group include rapid growth, job creation for inclusiveness and creation of a strong technology base. The suggestions include those for horizontal as well as vertical policies, and are based on the experiences of some of the more successful countries. In this context, the announcement by the minister of commerce and industry of the intention of the government to put in place a national manufacturing policy during the course of this year is timely and welcome.
The author is member-secretary, National Manufacturing Competitiveness Council, Government of India