Grassroots industrial policies

As an appetizer for the third issue of Making It, Alice Amsden, Professor of Political Economy at the Massachusetts Institute of Technology (MIT), shares some thoughts on industrial policy and poverty reduction.

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Today’s grassroots approach to poverty reduction shouldn’t be equated simply with boot-strap operations or self-help schemes. The bottom-up policies and institutions that are now being experimented with in Africa and other poor regions have highly innovative elements.

Professor Alice Amsden is a member of the UN Committee for Development Policy

One revolutionary element is that poor people today are no longer regarded as being lazy, as they were in the past! Instead, they are seen as being highly entrepreneurial. The latent entrepreneurship of the poor is supposed to be released with the application of greater human capital: health care, housing, education, training, and the ‘freedom to choose’, as Nobel Laureate Amartya Sen has emphasized.

New types of financial institutions, such as the Grameen Bank, and new types of financial instruments, such as micro-loans, can help get poor people started. This type of supply-side human capital formation can be further enhanced by combining state-of-the art, yet appropriate, technologies designed for small-scale operations. An example is the low-cost cooking stove that world-class inventors have been working on to help poor people around the world avoid environmental degradation and lung disease from indoor fumes.

The agent of change is no longer considered to be the government, but rather the non-governmental organization, or NGO. Instead of paid labour, socially conscious volunteers from developed, as well as developing countries can help advance the anti-poverty cause.

Yet, despite these innovations and enormous efforts at human capital formation, poverty in most poor areas of the developing world doesn’t seem to have decreased. World Bank data for Africa show that, between 1981 and 2005, the percentage of people below a socially accepted living standard (such as the equivalent of US$1.25 a day) has not fallen. Life expectancy in the poorest countries remains unbelievably low, at around only 40 or 50 years. Entrepreneurship has still not fundamentally changed the way poor people live.

Demand-side policies

Why this is so may be attributed to a fatal flaw in grassroots thinking: that supply creates its own demand, as first mistakenly conceived by a French economist, Jean Baptiste Say, in the eighteenth century. The supply of potentially productive entrepreneurs has not automatically created the demand to profitably employ them. The reason for this is that too few policies operate on the demand side (fiscal, trade, labour and industrial) to create more economic opportunities for entrepreneurs to exploit. Simply, no matter how healthy or educated a poor job-seeker might become, there are not enough good business opportunities or paid jobs to go around.

Opportunities for entrepreneurs have to be increased on the demand side. Can we use ‘grassroots industrial policies’ to create professionally-managed firms that will increase demand for the services of clerks and administrators, production workers, parts suppliers, and service providers?

One objective of such demand-side policies would be to create ‘professional’ business enterprises in rural regions and low-income urban communities that are larger than micro-enterprises, in order to diffuse modern management techniques and engineering practices to inexperienced entrepreneurs, thereby enabling them to gain hands-on business experience. Experience is probably what entrepreneurs in poor countries most lack when striving to export their products to neighbouring and world markets.

Role models

Just as grassroots poverty reduction has moved beyond self-help programmes, successful ‘role models’ now exist to help poor countries enter the charmed circle of experienced manufacturers and service providers. In terms of securing sources to finance such projects, there are now 40 or more poor countries that produce more than one million barrels of oil a day, and OPEC members provide a role model for creating excellently-managed national oil companies within political systems that were once regarded as highly corrupt. The national oil companies of OPEC members have managed to reverse brain drain, and create investment opportunities for small and medium sized parts and component suppliers in related sectors. Petrobras, Brazil’s oil giant, has a programme underway to create 80,000 such enterprises. As these companies become professionally managed, they will offer good opportunities for experienced managers, engineers, and shop-floor supervisors to return home from overseas, further increasing investment opportunities in a virtuous circle. Without industrial policies to raise investment prospects, such talent would be totally lost to countries that need it the most.

Meiji-era Japan (1868 -1912) is a good example of a country that accelerated the acquisition of hands-on experience by creating ‘model factories,’ especially in the labour-intensive silk industry, based on a natural resource. Although many such companies failed initially, their trained personnel went on to open factories that ultimately succeeded, creating Japan’s leading sector before World War One.

Reverse brain drain

Taiwan Province of China, small in population size like many poor countries today, built networks of small enterprises with the aid of government promotion policies, which then dotted the countryside and provided employment opportunities for under-employed farmers. Initially these firms were regarded as inefficient and backward, but they quickly improved as government techno-centres opened to assist them, and ‘brain drain migrants’ returned home to become owners of their own companies. These techno-centres offered higher salaries to experienced workers and engineers to reverse brain drain. But the costs ultimately paid off in the form of a more experienced and educated local workforce. To establish more entrepreneurial enterprises and paid jobs, the government provided incentives to the Singer sewing machine company to locate a subsidiary in Taiwan Province of China, which then acted as a tutor to local small and medium sized entreprises producing the thousands of parts that go into a sewing machine.

China’s ‘town and village enterprises’ (TVEs) were an ad hoc type of institution that combined the unemployed labour of rural regions with the excess capital equipment of large state-owned enterprises, coordinated by local political leaders. The TVEs are credited with the ultra-fast growth in both output and employment that followed China’s 1978 reforms. Today, modern second-hand equipment can be bought from abroad.

Most “investment climate” reports (that is, feasibility studies) undertaken by the World Bank and private consulting firms indicate the potential for profitable investment opportunities in poor countries. As the owner of one of The Republic of Korea’s big business groups remarked after he came back from Africa, all he could see growing on the trees was money, although he conceded that to get it would take hard work and coordination.

First step

Today, with role models around to emulate within the developing world itself, there are less grounds than ever for fatalism, or for thinking that nothing governments do can work. Although the grassroots is where new industrial policies and investments in small-scale modern industries must ultimately reside, the first step must be to bring the demand side back into the picture, and to look beyond the grassroots and strictly supply-side measures.