Understanding Zim’s economic puzzles: Reconfiguring industrial policy

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SAMUEL MAPURANGA

Centuries ago, a Chinese King was sitting in his cabinet meeting discussing about the poor economy of his country. One economist said, “Sir, we can’t do anything about it. It’s the Law of Supply and Demand.” The King said, “I’m the King. I will repeal that Law!” The Cabinet kept quiet, but one brave soul said, “Sir, you cannot repeal the Law of Supply and Demand. It’s like the Law of Gravity.” And the King said, “I’m the King. I will also repeal the Law of Gravity!” Obviously, this story is purely fictional. But the message that comes out is clear – You cannot repeal some laws that govern this universe. Like the law of gravity, and the law of the farm. There are natural laws and principles that govern agriculture and determine the harvest, the same applies to the industrial sector. But, ironically, in social and corporate cultures, we somehow think we can dismiss natural processes, cheat the system, and still win the day. And there’s a great deal of evidence that seems to support that belief.

The main purpose of industrial policy is to speed up the process of structural change towards higher productivity activities. This has to be presented as an overall design for the conduct of industrial policy in Zimbabwe, in a bid to propel the nation from a low- to- upper middle-income country by 2030. It is stimulated by the specific problems faced by Zimbabwe such as low productivity, high unemployment rate and based more on key discussions and reports from business, industry as well as government officials in the country. Building on previous reflections, an overall design for the conduct of industry policy requires a holistic approach, thus this is a major challenge faced by Zimbabwe.

The policy problem

The traditional way in which economists think about policy is to first identify distortions which prevent market prices from signalling real marginal social costs and then to design taxes or subsidies that can reduce the identified gaps. Market failures of this sort are presumed to be few and far in between, and therefore the need for intervention by the government tends to be the exception rather than the rule. Private actors in the traditional view play little or no role in designing these public solutions: either they free ride on the efforts of others who are presumed to have an interest in addressing the problems, or they prefer to lobby for solutions that serve their particular interests at the expense of the public. This way of thinking about policy leads to the long-standing and by now entirely familiar debate on the pros and cons of industrial policy. On the one side, we have advocates who point to the magnitude of the observed or presumed market failures and call for robust interventions in response. On the other, we have the skeptics who point to the near-impossibility of precisely locating the imperfections in question and to the likelihood that rent-seeking firms can and will take the government for a ride. The writer, departs from the traditional framework in a number of ways and believe the departure will offer a better handle on industrial policy while helping the nation move beyond the stale debates about its feasibility and desirability.

The writer holds on the assumption that in a developing country like Zimbabwe, the relevant market failures are not a rarity but, rather a rampant feature of the landscape. Consequently, the market failures that demand industry policy – that is, interventions that have differentials effects on some economic activities over others – take three forms in particular. These three are self-discovery externalities, coordination externalities and missing public inputs. In reality, missing public inputs are a form of coordination externality with added complexity that the requisite public inputs lack proper markets to generate information and incentives and even if they did exist, the government, not being a profit maximising would not automatically respond to the signals generated.

In most cases, the above three times of market failures lie behind slow structural transformation, and hence low economic growth. There is no need to minimise the role of obvious government failures such as poor governance, corruption, and lousy macroeconomic management, however, the latter are inadequate to explain slow growth in general. Secondly, other assumptions made include, that neither economists and public officials, on the one side nor private actors, on the other, know where the relevant distortions are. Thirdly, these are very high dimensional. They, thus, implicate many different market inputs, each relatively specific to a variety of existing and potential activities. Solutions to the distortions correspondingly require complex bundles of measure of various kinds. The space that needs to be searched to assemble such bundled solutions is therefore very large. It is imperative to acknowledge monetary policy reforms initiated by the Reserve Bank of Zimbabwe as one of the bundle.

Consequently, most of the distortions cannot be addressed through appropriate first-best Pigovian cash subsidies or money transfers, as an illustration, the recent ZUPCO model initiative. Instead, they reflect missing markets or public inputs (infrastructure, industry-specific skills, regulation, property rights, and social norms). So seen from this vantage point too, the requisite solutions involve a portfolio of measures or activities for example, building specific infrastructure while passing certain laws, regulating certain markets, and providing certain services) which cumulate into purposeful capabilities (for example, being able to transport and sell fresh meat in a foreign market). Transfers of money do not create the equivalent effect.

The nature of market failures in any country is determined by and embedded in the pre-existing patterns of specialisation of that country. These market failures are not universal or free floating. What a country produces successfully reflects its current capabilities. Given the difficulty in coordinating the creation of capabilities for activities that do not yet exist, productive transformation tends to favour “nearby” goods, in other words goods that require capabilities that are similar to those that already exist in the country.

With the expectation that rapid development will continue to go hand in hand with vertiginous changes in products and production processes, public inputs regarding practices such as regulation and certification must increasingly allow and even encourage differentiation in their application and on-going specification of their central purposes. Thus in domains as diverse as financial regulation, phytosanitary conditions, air traffic safety, and water quality, the state, or the state acting under the umbrella of an international agreement, now sets minimal and explicitly provisional framework goals. One important tool is the self-discovery process.

Self-discovery – investigation of what markets an enterprise or entrepreneur can (come to be able to) serve – is an on-going process in the economy. Firms are constantly trying to identify the market opportunities arising from changing social needs and patterns of economic cooperation and to exploit them by designing products that incorporate novel production, social, and organisational technologies. Nonetheless, the self-discovery searches of firms and entrepreneurs are subject to distortions and coordination problems of their own. Search is costly, and its returns uncertain. Finally, many forms of Pareto-improving cooperation among private firms are not self-enforcing. They are voluntary at the time of agreement, but require enforcement at the time of execution. The private sector needs the government to help internalise the various externalities associated with the cost-discovery process and to provide many of the public inputs (standards, infrastructure, certification, property rights) that only the government can. The government in turn requires the cooperation of firms and entrepreneurs because it needs to elicit the relevant information about the obstacles and opportunities they face and because it has to be able to influence their behavior in the desired direction. Hence the necessity of collaboration between the two sectors in the search for distortions and their solutions. In this regard, a “good” industrial policy to consist of those institutional arrangements and practices that organise this collaboration effectively.

From principles to policies

In order to facilitate the climb of domestic industry up global supply chains. The government’s approach, by contrast to the traditional theory, therefore must put much emphasis on getting the strategic collaboration with the private sector which directs policy to work right. The policy therefore, can say very little ex-ante about either the instruments to be used or the economic activities to be promoted. Thus, recommendations therefore tend to be oriented towards processes and procedures for selecting (and correcting selections) of both, rather than specific policy instruments or sectors.

However, this is not a weakness: it is central to how governments ought to be organising their industrial policies. A government of Zimbabwe must evaluate its industrial policy framework not by asking questions of the type: which tax breaks or subsidies are we using? which sectors have we identified? what is the budget we have allocated for industrial promotion? The relevant questions the government ought to ask are: have we set up the institutions that engage the bureaucrats in an ongoing conversation of pertinent themes with the private sector, and do we have the capacity to respond selectively, yet also quickly and using a variety of updated policies, to the economic opportunities that these conversations are helping identify? Currently, the answers in Zimbabwe to both of these questions are, at present, no and no.

With this background in mind, Zimbabwe’s industrial policy activities should be oriented around two different axes, one that works “locally” to improve the performance of existing industries through stepwise increases in their capacities, and the other that works “globally” through strategic bets on new industries whose success depends on bigger capacity leaps. In order to provide some concreteness to the approach, the following can be adopted;

  1. Industrial policy “in the small.”

A parsimonious strategy for industrial policy would focus on existing economic activities, and consist of putting mechanisms in place to ensure that roadblocks facing these activities can be identified and removed. Such a strategy is based on improving the provision of public inputs to existing activities with the hope that this will lead to higher productivity and quality for existing activities and a higher likelihood that nearby products will emerge. As argued above, the best sources of information for the identification and co-development of public inputs are existing firms. This differentiates this approach from strategic bets (discussed next), where the relevant actors may not yet exist.

  1. Industrial policy “in the large”: strategic bets

Institutional arrangements under industrial policy in the small may be good for enhancing production possibilities around existing capabilities, but they will not produce the leaps that are often required to sustain economic growth – from coffee to garments, from garments to electronics, or from to biotechnology thus propel the nation to an upper middle income country.

A major difference here is the degree to which intentionality is required. Industrial policy in the small largely entails the improved provision of public inputs. It neither supposes nor produces anything resembling a master plan. The hope is that, as the provision improves, more productivity and quality improvements will result, and more jumps to nearby “trees” in the forest of productive activity will take place. By contrast, industrial policy in the large implies thinking of an industry or an activity (for instance, an entrepot of certain kind) one would want to see develop, and then backing up all its public input needs plus some subsidies to get the private juices going. This requires more centralisation and more prioritisation. It calls, therefore, for a second set of institutions that can range much wider in its exploration along the frontiers of the production space than can deliberation councils, and which are thus able to stimulate capacity-building “jumps.” What might such institutions look like?

One possible model is that of a venture fund: an institution that is continuously scouting for opportunities, which has the technical capacity to evaluate projects and their proponents as well as the financial resources to get business plans off the ground; can recognise the new venture’s mistakes as they occur; can orchestrate their correction or, failing that, pull the plug; and is guided by the bottom-line concern to generate profitable companies that the private sector will want to take over. In these ways venture funds resemble the private-sector venture capitalists on which they are modeled. However, there are important differences.

The venture capitalists in a developed economy are typically many, and they compete for the best of the many deals presented to them. In developing countries like Zimbabwe, the public venture fund is likely to be a de facto monopolist, and to have to generate ideas for strategic projects rather than choose among them. More precisely, the venture fund has to oscillate between organizing coalitions to support its projects, or championing and developing the projects through loose and often fragile coalitions of innovators. Electronics and autos in Malaysia provide two illustrations, one successful, the other less so. Chile is one of the rare exceptions, where Fundación Chile has operated much like a public venture fund. It is said that five of the most successful projects undertaken by Fundación Chile, salmon being the best known, have paid for all the rest.

In some countries the requisite capabilities for developing a public venture fund are often lodged in development banks. Development banks, such as those in Brazil, Turkey, and South Africa, have technical expertise, close knowledge of the real sector, financial resources, and some degree of autonomy from the daily pull-and-push of politics – all of which make them suitable for the execution of the venture fund role.

Again, regular diagnostic review of project development may help in making sure that the balance is right. As projects crystallize, the development bank, as champion of an industry in the making, would undertake the broadest feasible search to identify missing or deficient public inputs and lobby the government for requisite changes. The public venture fund needs to base its decisions on clear benchmarks/criteria for success and failure. In Korea, Taiwan, Chile, and a few other countries, successes have more than paid for the mistakes. The objective should be not to minimise the risk of mistakes, but rather to minimise the costs of the mistakes that inevitably occur on the way to success.

An application to Zimbabwe

As mentioned earlier on, the acid test for an industrial policy framework is whether there exist institutions that engage policy officials in an ongoing conversation with the private sector; whether the government has the capacity to respond selectively, but also quickly and using a variety of policies, to the economic opportunities that these conversations are helping identify; and finally whether there are monitoring and evaluation procedures to ensure the policy process is self-correcting.

Zimbabwe, has at present a plethora of instruments and agencies involved in formulating and implementing industrial policies. The Ministry of Industry, Commerce and Enterprise Development is in charge of formulating, facilitating and implementation of industrial policies. The Ministry of Mines and Mining Development is in the midst of formulating policies to allure investors. The Industrial Development Corporation (IDC) of Zimbabwe Limited is engaged in financing, promoting and guiding new industries and industrial undertakings. IDC also assist and support the development of small – medium scale industries and industrial undertakings.

Despite this range of activities, it is believed that no current policies pass the acid test above. There is too much disconnect between the private sector and the government, information does not flow adequately, needs are not well identified, policy instruments are not appropriately targeted, and self-correction mechanisms are not in place. The good news, however, is that many elements of a better policy apparatus are already in place. In some important cases it is believed that it is possible to build on existing institutions, expanding some of their activities while substantially reducing others – in other words, rebalancing their portfolios. At the opposite extreme are programs that have outlived their usefulness and have to be re-founded to serve the purposes for which they were originally conceived. In between, as it were, are cases where current arrangements are so disorganised that it is advisable to create institutions with overlapping responsibilities and let competition between old and new bring out the best in both. Finally, there are initiatives needed to improve the background or framework conditions within which industrial policy takes place.

Conclusion

Industrial policy assists firms in their search and discovery processes for new lines of comparative advantage. The implementation of industrial policy itself is a process of discovery about the appropriate institutional practices that will bringthe desired results about. That is why benchmarking, monitoring, and experimentation are so important. Internalising what industrial policy is about—and continuously striving to bring practice in line with its objectives—is ultimately perhaps more important than making sure one starts with the “right” set of policies.

The most important lesson from East Asia is that industrial policy is a mindset—one that rejects big-bang, all-at-once reforms in favour of experimentation, gradual, but cumulatively transformative change through identification of bottlenecks and self-correction: small investments at the outset of projects (even when they involve strategic bets) but continuous, well organised attention to making them work.

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