An outline of industrial policy and strategy

Structuralist glance on assessing promotion of economic activities that allow socio-economic development to increase both productive capacity and national income in underdeveloped countries.

Overview

What do we think of when we hear the word industry? Depending on the scope we give to this word it will be the focus of the policy that we must think about. A first approximation to its meaning is the classical conception which holds that industry is the manufacturing industry and also which has behind it a certain economic conception of what the limits of this industry are. That meaning comes from the hand of an accounting theory that separates economic activity into three large groups.

  • Primary activities: they are related to the reproduction, capture, collection of primary goods and raw materials. Humans intervene in many of those activities but fundamentally the production processes are carried out by nature.
  • Secondary activities: this involves manufacturing and non-manufacturing industry. Manufacturing has to do with productive processes of industrial transformation of raw materials generated by the primary sector and the assembly of intermediate and final goods. Non-manufacturing industry has to do with energy, gas, and certain goods-producing activities which are not manufactured.
  • Tertiary activities: basically is the service sector. Service can be defined as the action of doing some specific work. Also, the service is not an independent product in itself, due to it is marketed together with its production process.

Historically, this definition served to think about economic development. Economic development within the classical approach is to increase industrial participation. The fundamental idea is that the manufacturing industry has some relevant properties (classical perspective):

  1. Diffuser of knowledge in capital goods
  2. Scale. Scale processes associated with increasing returns
  3. Industry was supposed to have the property of expanding the scale of production and employment at the same time. While a nation by industrializing the primary activities expels labor.
  4. Large oligopolistic structures are concentrated that allow capturing the extraordinary benefit of innovation since there are oligopolistic structures, unlike agriculture, which are commodity markets, more competitive with normal benefits.

Problems and discussion to the classical approach

There are other visions of what the industry is. The Anglo-Saxon term Industry refers to the productive activity as a whole. In a more dynamic perspective, one may think about the productive system transforming itself from its historical processes. From this point of view, it is difficult for production processes to remain anchored in fixed economic categories. We must look at the historical processes from which the productive processes change: for example, we cannot ignore the fact that the automation of industrial processes expels employment; a source of high productivity and high innovation but a good part of generation of employment is taking place in the service sector.

On the other hand, the processes of historical transformation at the productive level made industrial activities to acquire characteristics of mature sectors; that is, they tended to the commoditization of goods, with the logic of commodities, this means industrial goods produced in many places of the world using low wages with very low barriers to production, so their profit margins and wages are very low because in the market they compete for very low costs.

These logics will go through both the service sector and the primary sector, in the latter with high innovation inner the primary activities, thus the dynamic productive forces of this era of current technological revolution of the new forms of organization will have a certain transversality between sectors.
So, our object of study, traditionally known as industrial policy, involves that to really understand current processes we must make more flexible the idea of ​​what should be promoted to promote socio-economic development, and it refers not necessarily to the activities that frame this traditional vision of the manufacturing industry. It is going to be in itself part of the industrial policy to understand which activities should be promoted and which ones should not: in other words, the classic idea that postulates that what should be promoted is industry and what should not be promoted is what is not industry is going to be out of place. And the discussion starts from industrial transformations in the sense of the productive activities.

​​[…] what should be promoted to promote socio-economic development?

Finally, industrial policy should focus on activities which are crossed by higher levels of innovation and that allow, based on international insertion, to obtain a greater income from innovation. If our country has an economic structure basically associated with the fact that its international participation is based on primary commodities, the challenge and the main question is how to transform the economic structures towards activities that have greater development potential, but without taking for granted that this is the industry. Rather, it is necessary to investigate what activities will allow underdeveloped countries, begining from their international insertion, to be able to solve the problem that Prebisch raised in relation to the terms of trade: increase productive capacity and obtain more income.

Distinction between strategy and policy

There are no stringent definitions around what is a policy and what is strategy.

To think about the problems raised above, it would be clearer to think that politics are the measures and initiatives that are taken from the Nation State, at all levels, to improve the productive capacity of the productive sector -as we defined it-; in other words, explicit policies aimed at improving the country’s productive capacity.

However, the policies of a country are not only the measures that are taken from a secretariat of industry towards the productive sector, but there are other ministries and other agencies that in turn take measures that have effects on the productive sector and industry although are not aimed directly at that sector. For example, the decisions made about the exchange rate are not made only because of their effect on the productive sector, but also because of their effect on inflation. In some developing countries, especially during electoral periods, it happens that in order to generate a consumption effect, the exchange rate is contained and this has very important negative effects on the productive sector. Likewise, health policies, education, science and technology policies have effects on productive activities as well. Ultimately, other agents make decisions and make policies that have a direct or indirect impact on the productive sector (such as the exchange rate and exchange rate policy).

From the above, then we can call strategy the idea of ​​how all policies are coordinated in a way that has a desired and coherent effect on how the productive network of a country is transformed.

There may be cases of government that have a consistent industrial policy but do not have a strategy, thus this is inconsistent with the rest of the policies; industrial policies are conditioned because the rest of the policies are designed at opposition to its goal. Or on the contrary, it may be the case of a government that has a strategy well defined but fails on policy design.

By defining it in this way, it provides us with tools to make interpretations about the functioning of the policies, and allows us to take the strategy in a broader sense: the idea of ​​a more strategic definition on how to design the productive network, as well as, thinking on to what extent policies as particular measures consider this strategic characteristic in their own definition.

In most of underdeveloped economies policies the strategy fails.

A method that is based on world historical logic should be followed. It is not intended to present an abstract, universal model of how industrial policy should ideally work, this would be the orthodox neoclassical approach. Contrary to the vision that common people has, orthodoxy has foundations for industrial policy, it is not true that the orthodox theory postulates that one should not intervene, they have a particular conception of when it is necessary to intervene to what they call market failures — for the orthodox theory one have to intervene when market failures occur.

On opposite to the orthodox neoclassical approach, there is a perspective which argue of the need for structural change. This approah holds that the intervention is not based on whether the market works well or works badly, but on the need to think about a role and a place in a structure -global capitalism structure-: this is the structural approach belonged to heterodox perspective. These are different theoretical foundations.

Summary

Based on a structuralist perpective, rather than go deeper in the manufacturing activities promotion in order to specialize the economy that kind of industry as the classical approach argued, we need to think about the historical process of transformation in productive activites to get a clearer picture of what kind of role would be better to play in the capitalism global structure.

It is regarded a more historical-based and dinamically approach to assess promotion of economic activities crossed by higher innovation levels which increase productivity and that allow socio-economic development from an international insertion to increase both productive capacity and national income in underdeveloped countries.

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