2 responses to “The private sector and development”

  1. Roving Bandit

    ODI’s “practical proposals on this middle way” sound like standard industrial policy. What happens if the real growth sector doesn’t exist yet and so has no business advocates to talk to goverment? What if the businesses consulted have an interest in keeping down new dynamic industries?

  2. Lee Crawfurd

    Karen Ellis of the Overseas Development Institute suggests that “the time is ripe for a new kind of industrial policy,” based on extensive government consultation with business.There are however a number of flaws in this approach. First, if the nascent high-growth sector of the economy depends on a disruptive new technology, existing firms may actually have an interest in restricting market entry to these new competitors. And it is difficult to consult with firms that don’t yet exist.

    Second, the proposal suffers from Dani Rodrik’s “camel criticism” of business surveys. If you picked a random animal in the desert to ask about environmental challenges, you might pick a camel, which wouldn’t necessarily tell you about the lack of water as a key challenge. Similarly, the existing businesses are those which have figured out how to get around major operational challenges. Once again, it may be that the government should really be speaking to the businesses which don’t yet exist.

    Finally, it is not even clear whether anyone, be it government, business, or hypothetical potential business, can predict which sectors are ripe for growth. Neither is it clear that an aggregation of perspectives could do this. Growth is, to a large extent, random and unpredictable.

    Perhaps the best industrial policy is going back to the basics of, dare I say it, the Washington Consensus: provide a stable macroeconomic environment for all businesses and sectors, and let the market figure out where the best investments are.