Industrial development in a changing world

Amid renewed interest in industrial policy, Erik Solheim considers the role of development assistance.

***

The world has seen tremendous improvements over the past decades and industrial development has been a strong force for global development. Billions of people and entire countries have been brought out of poverty.

Chinese manufacturing increased from 3.5% of world total in 1990 to 20% today. It is not a coincidence that China has become the world’s biggest producer and brought 600 million people out of poverty in the same period.

Fifty years ago, the Republic of Korea was one of the poorest countries on the planet. Through industrialization, aided by good government policies, it became one of the most technologically advanced societies on Earth. Think of Samsung, the global market leader in phones, or Hyundai, one of the world’s most valuable brands. They have even brought us the all-time YouTube hit, Gangnam Style.

From the African continent, Ethiopia has set itself an ambitious target of becoming a middle-income country without increasing its carbon emissions. The plan is to increase agricultural productivity, strengthen the industrial base and produce green energy. Ethiopia recently opened Ashegoda Wind Farm, the largest in Africa. Economic growth has been above 10% over the past decade.

If governments frame the markets in the right way, industrialization can help grow economies, fight poverty and combat climate change. Successful industrial development requires good leadership, the right policies and sufficient investments.

Picture: Gavin Houtheusen/DFID

Countries have to be in charge of their own development and industrialization. Governments should set the directions and provide the right incentives for the private sector. As Norway’s Minister for Environment and International Development, I remember receiving Ethiopian Prime Minister, Meles Zenawi. I invited him to speak to our industrialists. “We need you”, he said. “We need your capital, your knowledge, your experience. But these are our priorities! If you cannot align with Ethiopian policies, there are plenty of opportunities elsewhere in Africa.” All the businesspeople told me that they liked this straight talk. Clarity and predictability is important when businesses invest. Countries are different and there can be many paths to development. Korea, Singapore and China have followed different models. But all have had strong government incentives to encourage the development of industry. National leadership is key. Companies should align behind the priorities of the host government, but also demand leadership and strategic direction from governments.

Choosing the right policies makes all the difference. The Chinese, Brazilian, Turkish or Ethiopian success stories are mainly about replacing bad policies with good. The rise of the South has renewed the interest in industrial policies. Industrial policies in developing countries are either designed to increase competitiveness of existing companies or support the creation of new sectors. Many countries are exploring cluster support to increase the competitiveness of existing sectors. For example, the Rwanda Development Board has identified six IT clusters, from cloud computing to app development, with the aim of turning Rwanda into a knowledge-based economy similar to that of Singapore. Last year, a deal was concluded with Korea Telekom to provide access to 4G internet across Rwanda!

Developing countries are also exploring ways to enter new sectors. Setting up investment funds and development boards are effective policies. Public procurement can also create market demand and foster innovation. Companies tend to embrace new challenges when there are money and contracts to bid for. Companies need skilled workers and skills helps countries move up the global value chain. In spite of improvements, access to a skilled workforce is of major concern. In Latin America, the Middle East and North Africa, more than 35% of businesses identify inadequately skilled workforces as a major constraint to their operations.

China was among the top five countries for trademark registration in 2010, but the capacity for innovation has a way to go in many developing countries. Korea and Japan spend more than 3% of GDP on research and development, while developing countries often spend less than 1% of GDP. However, South-South trade and investment are introducing new forms of technology transfers. In Africa, China has been particularly active in infrastructure, Brazil in agribusiness and India in generic drugs. We increasingly see that Chinese and Turkish clothing manufacturers are relocating to Africa looking for lower production costs. This represents a great opportunity for Africa to embrace manufacturing.

The renewed interest in industrial policy poses new opportunities for policymakers and industry alike. More information on this is available in the Organization for Economic Cooperation and Development (OECD) report, Perspectives on Global Development 2013 – Industrial Policies in a Changing World. The report presents a number of emerging issues in the development debate and highlights new policy trends in developing countries.

There are about 1 billion people in the world with no access to roads, 1.5 billion without electricity, and still many without access to the internet. Building infrastructure and creating jobs in developing countries will require large amounts of money. Most of it will come from the private sector and domestic resources, but development assistance can play an important role. Development assistance can work as a risk alleviation tool to mobilize private resources.

A loan guarantee for a hydropower plant can bring huge benefits without costing the guarantor a penny. Today, a development finance tool such as a guarantee would not be considered development assistance unless the project fails. Success should be encouraged. The OECD Development Assistance Committee is currently working on modernizing the way in which we measure and monitor development assistance to encourage more development flows. We must have a system that allows for innovation and does much better at leveraging additional money out of the private sector. One way to do this is to have broader, transparent measures of development finance from the perspectives of both what effort the donor is making and what the benefit is to the recipient. The Development Assistance Committee will be working on these measures through 2014 with inputs from partner countries, the private sector and civil society.

I look forward to working with United Nations Industrial Development Organization and the truly inspiring Director General LI Yong to figure out how we can use development assistance to mobilize more resources for industrialization.

• ERIK SOLHEIM is Chair of the Organization for Economic Cooperation and Development (OECD) Development Assistance Committee. Previously, from 2007 to 2012, he held the combined portfolio of Norway’s Minister of the Environment and International Development.