Only days after the Alliance Summit of the African National Congress, the South African Communist Party and the Congress of South African Trade Unions reaffirmed the position that South Africa required a “well-resourced State-led industrial and trade policy”, one of the world’s leading industrial-policy advocates addressed Department of Trade and Industry officials, including Minister Rob Davies, in Pretoria.
In his presentation, University of Cambridge economist Professor Ha-Joon Chang stressed that the issue was not whether a country should pursue industrial policy, but how to make such a policy work.
He provided an exhaustive list of examples of how leading economies – including the US, the UK, Japan, Singapore and Korea – had employed various mechanisms to foster infant industries and had deliberately built their technological capabilities. The instruments ranged from protectionism and the creation of State-owned companies, to placing limitations on foreign direct investment and the sanctioning of large-scale incentives.
Debunking arguments that the US became a superpower on the back of free trade, Chang asserted that the country had, instead, succeeded largely as a result of deliberate industrial policies – policies it now dismisses as archaic and persuades other to eschew.
Displaying a ten-dollar bill with the image of American founding father and President George Washington’s Treasury Secretary, Alexander Hamilton, Chang asserted that Hamilton was in fact the first person to theorise around infant-industry protection – the argument that countries should protect and nurture their young manufacturers until they are ready to compete with mature industries abroad.
He describes Hamilton’s 1791 Report on the Subject of Manufactures as the “first-ever comprehensive development plan”, which went against Adam Smith’s explicit warning that the US should avoid trying to develop a manufacturing industry by artificial means. The document included tariff policy and subsidies, but went well beyond to deal with investment in infrastructure, the development of banking and patent systems, as well as a government bond market.
The lesson, he argues, is that the “real history of capitalism” offers ample examples of and justification for industrial policy. However, policy success depended more on detailed policy design and implementation issues than the validity of “some abstract economic theory”.
Therefore, constant review is critical, as well as being open to lessons from others and to experimentation. Developing countries should also interrogate their capabilities as much as the incentives and ensure that capability-enhancing investments are made during any protectionist phase.
Ultimately, though, pragmatism was held up as a critical success factor, even when this results in some “unusual” policy combinations. “The world is too complex for any single theory, so successful policies are always pragmatic combinations of different theories.”
It is a strong case for industrial policy and Chang’s message was well received. But, then again, he was preaching to the choir.