Synthesis documents

Strategic Industrial Policy and Business Environment Reform: Are they Compatible? John Weiss, DCED, 2013

    The importance of Business Environment Reform (BER) has been a key theme of the donor community for many years. However, industrial policy (IP) is back on the policy agenda of many countries with concerns over national competitiveness in a globalized world, and this report addresses the compatibility of BER and IP approaches.

    Summary of results
    BER and strategic IP have in common a focus on a dialogue with the private sector. Also, horizontal IP measures are designed to correct for market failures and are thus compatible with the ‘level playing field approach’ of BER. It is where vertical (selective) measures are used in IP that the potential for contradiction is greatest. Differences can be mimimized by focusing on a limited number of priority areas where an economy has a latent comparative advantage that can be turned into an actual competitiveness with relatively modest and short-lived support.

    The experiences of four countries (Singapore, Ireland, Malaysia and Chile) are reviewed in which it is widely agreed that IP operated successfully whilst at the same time the economies maintained a relatively high ranking in terms of the quality of their investment climate. The capabilities required to implement IP are often very similar to those for BER. IP requires a public bureaucracy which has the capacity for independent initiative, where promotion and placement is on merit and where remuneration is high enough to retain high standard staff. The operating principles that governments need to strive to apply cover transparency, credibility, reciprocity and trust.

    The report ends by proposing a series of recommendations to donors wishing to apply IP, including: establishment of an institutional framework based on an over-arching competitiveness or deliberation council; support for business associations; a series of policy initiatives such as a fund to provide public inputs needed for new activities, a fund for feasibility studies, tax incentives for new activities, risk capital funds and a process of sector reviews to identify bottlenecks in new sectors; creation of regular industrial policy reports for individual countries; and establishment of a regular monitoring process.