Making the most of ISID

Manuel Albaladejo on the key elements for the successful implementation of inclusive and sustainable industrialization

Inclusive and sustainable industrial development (ISID) is at the core of Sustainable Development Goal number 9: build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation. Strategies and policy instruments to boost ISID are not new and can be broadly classified into two groups: macro-economic and industry-specific. While broad macro-economic policy instruments provide the foundations for industrialization, ISID strategies place an emphasis on industry-specific instruments, including technology and innovation, investment in manufacturing, skills, industrial financing, infrastructure and competition policy.

Mainstreaming ISID in national policies calls for governments to have a sound understanding of the relationships, synergies and trade-offs of industry-specific strategies and policy instruments leading to economic growth, social inclusiveness and environmental sustainability. On the basis of this broad vision, ISID strategies should guide governments in defining the policy mix to achieve this three-dimension goal.

Conceptually ISID makes a lot of developmental sense. However, many developing countries, particularly least developed countries (LDCs), face severe challenges when it comes to its implementation. It is not just the complexity and trade-offs of the policy choice, but also the lack of key factors related to government’s capabilities and leadership, long-term commitment, and ISID experimentation and learning.

Linking structural transformation, inclusiveness and sustainability

Understanding the relationship and trade-offs between structural transformation, social inclusiveness and environmental sustainability is possibly the most important factor for governments in developing countries to integrate ISID in their national policies. In the case of LDCs, given their incipient industrialization stage, the focus has to be structural transformation policies that generate jobs while not compromising the environment. At low income levels, industrialization improves not only the number of jobs but also their quality. Hence, structural change can play a catalytic role for inclusive industrial growth by substituting the source of growth from agriculture to manufacturing.

Evidence indicates that developing countries, especially at an early stage of industrialization, have more opportunities to pursue inclusive industrial development with a potential for rapid growth and limited environmental damage. Once industrialization takes off, countries at low and lower-middle-income levels have opportunities to create a large number of formal manufacturing jobs because their cheaper wages provide them with comparative advantage in labour-intensive industries, such as textiles and wearing apparel. Further, at this stage, a relatively limited output volume and a lower concentration on less polluting activities tend to make the manufacturing sector less damaging for the environment than at a later stage.

“Inclusive and sustainable industrial development (ISID) is at the core of Sustainable Development Goal number 9.”

As countries acquire skills and expand their infrastructure, the opportunities for growth and employment generation rise in other industries, but usually proceed in an extensive manner by drawing in increasing amounts of production factors, as well as natural resources and energy. Most industries emerging during the middle-income stage are resource-intensive with relatively poor emission performance. Thus countries emerging from the low-income stage have good prospects for continuing the path of inclusive and fast development, but start facing sustainability challenges.

Developing countries’ governments need to make conscious efforts on all three fronts – sustained economic growth, social inclusiveness and environmental sustainability – if they are to embrace the benefits of ISID. Challenges vary depending on the income level. The foremost challenge for low-income countries is sustaining the process of industrialization; for middle-income countries, it is environmental sustainability, and for deindustrializing high-income countries, it is continued employment generation and inclusive industrial development.

Leadership and long-term commitment

Mainstreaming ISID in national policies and programmes requires political leadership and government’s long-term commitment. Political leadership at the top is crucial for raising the profile of ISID and ensuring the required coordination, oversight and monitoring. Inter-ministerial competition for resources and policy incoherence can only be prevented by strategic leadership at the highest levels. It is also essential for high-ranking government officials to be responsible for the implementation of ISID so they can be held accountable if these policies fail.

Strong leadership implies that ISID has to be championed at the highest possible level and not as an aspiration by individual ministries. Without it, the likelihood of having ISID included in governments’ national policies is limited. Successful ISID policies need powerful ministries or dedicated commissions or boards chaired by the President. In this regard, developing countries have lots to learn from the East Asian experience. The importance of industrial development was reflected in the power vested in the ministries responsible for the sector. Economic Development Boards were established and endowed with the authority to coordinate all activities relating to industrial competitiveness. They were also given the resources to hire qualified and well-paid professional staff, which is an essential prerequisite to manage discretionary policies efficiently and honestly.

LDCs also need to have a long-term commitment to ISID. Trade-offs in terms of ISID policies can have a negative short-term impact that can only be compensated in the long-run if governments continue to pursue sustained and inclusive industrial growth. Most governments tend to be shortsighted and seek quick policy wins ignoring the long-term benefits that ISID may bring along. True political commitment requires LDCs to include ISID policies in the country’s long-term vision and goals.

Boosting institutional capabilities

Management capabilities for industrial policy in the LDC context have been traditionally very weak. The broader ISID concept makes it even more challenging as capabilities have to be spread across a larger number of design and implementing government agencies. Thus the mainstreaming of ISID in national policies stresses the need to strengthen the capacity of government institutions to design and implement public policy.

Countries need a certain technocratic capacity to realize ISID, both at its inception phase and implementation. However, many developing countries and most LDCs lack this capacity, which has to be built slowly and pragmatically. What are these capacities and how can they be built? Effective ISID policymaking requires adequate capacities for each step of the policy cycle. Strong analytical capacities are needed to thoroughly diagnose ISID performance, constraints and potential. Decision-making capacities are needed for the smart design of strategic directions, and the ISID policy mix needs to be understood to propose adequate instruments. Implementation requires strong management as well as technical and sectoral competencies. And forward-looking monitoring and evaluation requires not only adequate financial resources but also technical expertise.

“Least developed countries’ governments need to be supported with a conceptual framework, operational goals, indicators and targets that are related to inclusive and sustainable industrial development.”

This capability challenge is more severe in the industrial policy arena than others because the more centralized government agencies usually also succeed in securing the best talent. Particularly in many sub-Saharan countries, ministries of finance, planning commissions, development banks and other key players in cabinet are best placed to secure government resources.

International development agencies engaged in SDG 9 have a strong responsibility to make sure that the institutional capability gap is addressed properly. First, LDC governments need to be supported with a conceptual framework, operational goals, indicators and targets that are related to ISID. This is important for LDC governments to define their ISID strategies, how they relate to other economic policies and to assess impact. And second, capacity building programmes in LDCs should consist of targeted hands-on efforts to achieve concrete goals. The pragmatic idea is to concentrate the available resources on executing highest priority tasks, and to incrementally build additional skills when they are really needed so as to solve emerging problems when they arise.

Experimentation, learning and evaluation

Like in the case of industrial policy, successful ISID policy design and implementation should rely less on best practices and more on a combination of experimentation, learning by doing and evaluation. While learning from other cases is desirable, replication can lead to massive policy failure. Rather than simply emulating ISID policies that have worked elsewhere, countries have to go through their own learning process. This process necessarily involves experimentation, trial and error. For developing countries this experimentation phase is crucial as ISID has not yet been mainstreamed globally and there are fewer lessons to be learnt from more advanced countries.

For this approach to work, however, ISID experimentation has to be combined with rigourous impact evaluation of each implemented instrument to generate the evidence on which industrial policy measures work (and which do not) in a given context. Probably the most important role of ISID monitoring and evaluation in developing countries is to provide feedback for making the next cycle more innovative and effective.

“International development agencies engaged in SDG 9 have a strong responsibility to make sure that the institutional capability gap is addressed properly.”

In this regard the international community can support LDC governments in formulating realistic interventions that allow them experiment with ISID and learn from it. This approach would entail:

a) a clear definition of a target system that makes the ISID objectives concrete (including the trade-offs among different objectives) so that the policy instrument aims to have a long-term impact (increased employment or economic growth, for example);

b) realistic “target corridors” for judging success or failure with regard to each ISID objective ideally based on real-world benchmarks (for instance minimum and maximum expected increase in employment, based on prior achievements in the country or elsewhere);

c) an explicit impact model with a comprehensive depiction of the short and medium-term changes in industrial sectors (at the firm and sector levels) that are needed to reach these ISID long-term targets (such as required investments of manufacturing firms and structural changes in firms’ production activities);

d) a detailed description of the steps required to reach these ISID goals (impact paths), including a critical examination of whether it is realistic to expect to reach the goal with the time and resources available; and

e) an account of possible unintended impacts and side-effects of the policy instrument (risk factors), based, say, on consultations of experts and affected stakeholders before the intervention is carried out.

This approach ensures that ISID interventions are discussed and designed reflexively and that stakeholders are well aware of the actions and achievements expected of them. If this approach is combined with less complicated and less costly (non-experimental) monitoring and evaluation designs, such as reflexive comparisons and qualitative research, ISID interventions are likely to be much more evidence-based, consensual and effective, without overburdening the technical and budgetary capacities of LDCs.

– MANUEL ALBALADEJO is an industrial economist working for the Research and Industrial Policy Advice Division of the United Nations Industrial Development Organization (UNIDO). He joined UNIDO in 2007 and has led the programme on strategic industrial intelligence and governance implemented in several countries, including Viet Nam. Before joining UNIDO, he worked at the World Bank in Indonesia as a private sector development and trade specialist.