1. The Quality of Industrial Policy as a Determinant of Middle Income Traps and How Latecomers Can Improve It Policy Design and Formulation in Developing Countries

2. Hypothesis The lack of quality in industrial policy is the main cause of a middle income trap (or any other long- term growth problem). Installation of high-quality policy that actively supports value creation by the private sector, not just freeing and opening markets, is required to escape the trap. Other factors such as natural resources, ODA and capital inflow are also important, but they do not critically determine a nation’s long-term growth path. Policy quality matters most in the long run.

3. Why Do Economies Diverge?

4. International Comparison of Industrial Policy Quality The GRIPS Development Forum has visited Asia and Africa to compare industrial policy quality. Asia—Vietnam, Singapore, Taiwan, Korea, Malaysia, Thailand, Indonesia, India, (Cambodia: next week) Africa—Ethiopia, Rwanda, Mauritius, Mozambique, Zambia, Tanzania, Ghana, Uganda We evaluate policy formulation, implementation and impact. Good performance due to private effort, foreign assistance or sheer luck is not counted as “good policy.” Asia is not always superior to Africa. Some African countries (Mauritius, Rwanda, Ethiopia) practice much better industrial policy than Vietnam or Indonesia.

5. How to Measure Industrial Policy Quality? 1. Industrial human resource 2. Domestic enterprise development 3. Business climate 4. Power & logistics 5. Export promotion 6. Strategic FDI marketing 7. Industrial parks 8. Supporting industries & FDI- local firm linkage 9. Productivity, technology & innovation 10. Standards & testing Common aspects 1. Policy ownership 2. Vision & commitment of top leader(s) 3. Policy drafting procedure 4. Authority & capacity of policy organizations 5. Mindset & competency of implementing officials 6. Budgeting & staffing 7. Inter-ministerial coordination 8. Involvement of key non-official stakeholders 9. Monitoring & evaluating mechanisms 10. Impact on the real economy Specific aspects for each sub-component × Policy sub-componentsEvaluating criteria 5 – Excellent 4 – Good 3 – Moderate 2 – Some 1 – Little 0 – Nothing or worse

6. Evaluation Criteria for Industrial Policy Sub-components

7. The Scorecard for Ethiopia (Example) Notes: - Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent). - Evaluation of policy prepared and implemented by government only; results obtained by private effort, international cooperation or external conditions are not included. - Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1). Date: May 2015 (based on policy research 2008-2015)

8. Quality of Industrial Policy vs. Income Performance (preliminary results as of May 2015) (Cambodia & Mozambique to be added soon.)

9. Some Observations Governments are not created equal. There is a huge gap in industrial policy quality from excellent to poor among governments. Income level and policy quality are positively correlated. This suggests, but does not prove, causality. Within each country, policy quality is similar across different measures. If one policy is bad, others are likely to be also bad. There is a common policy culture that permeates entire government. Rich resource endowment often impedes policy improvement, vindicating the curse of natural resources.

10. Proactive Industrial Policy Even under globalization, industrial policy is both necessary and possible. In fact, many countries already practice industrial policies consistent with WTO and FTAs. But new policy must be different from old ones: planning, laissez-faire, infant-industry promotion (Korea), FDI-led industrialization with slow integration (ASEAN4). Proactive industrial policy must satisfy the following: 1. Promotion of markets and integration 2. A strong state to guide the private sector 3. Having sufficient policy tools for catching up 4. Dynamic capacity building of both government and private sector through concrete actions & projects 5. Internalization of skills & technology 6. Effective public-private partnership 7. Deep industrial knowledge shared by government and businesses

11. Policy Learning International best policy practices (and failures) must be collected and compared systematically. East Asia abounds in good examples, but we can also learn from other regions. Using them as references and building blocks, government must acquire general capability to create a policy most suitable for a particular country, time and sector. Do not copy other countries uncritically, or reject their experiences as irrelevant. Learning (knowledge collection) and thinking (adaptation to your country) must be combined. Learning steps: Collect and analyze policy documents of other countries Seminars & advice by invited foreign officials and experts Policy missions to foreign country governments (and write reports) Discuss how foreign examples can be used in formulating home policies

12. Policy Dialogue with Foreign Experts & Officials Developing countries can learn by self-study, but a better way is to have a private tutor who understands your country as well as has broad & pragmatic knowledge of international best policy practices. However, not many foreign experts can teach nitty-gritty of industrial policy making; most can preach general ideas, cases & history only. Japan has conducted industrial policy dialogue with many developing countries. The Japanese method is case-by-case and flexible, unlike Korea’s more systematic (but mechanical) approach. Long-term interest, commitment & mutual trust, substance over formality, and mobilization of ODA to realize some of the discussed issues (not just talk) are key to success. The GRIPS Development Forum & JICA have conducted Industrial Policy Dialogue with Ethiopia since 2009 (Phase 2 ends this year).

13. Japan’s Industrial Policy Dialogue

14. Africa Taskforce Meeting Jul. 2008 Official launch Jun. 2009 Preparation Industrial Policy Dialogue Final session May 2011 Kaizen Phase 1 (30 pilot companies) (With Germany) JICA’s Industrial Cooperation Metal industry survey Kaizen Phase 2 （ Institution & human resource) Start Jan. 2012 Note: Black boxes indicate three-level policy dialogue in Addis Ababa (PM, ministers, operational level). Phase 1 (2009-11)Phase 2 (2012-15) Champion Products PM Meles PM Hailemariam Last session Aug. 2015 Kaizen Phase 3 (Advanced level) Branding & promotion 20082010 20092013 2012 2011 20142015 PM Abe visit 2016 Malaysia mission TICAD V Ethiopia-Japan Policy Dialogue & Kaizen

15. With Former PM Meles at PM Office High Level Forum (Aug. 2014) Lecture at Civil Service University

16. Letter to Prime Minister Hailemariam of Ethiopia (March 2015, 18 pages) GRIPS advice on next five-year plan (GTP2) 2016-2020 1. Enhancing people & firms must be the core objective 2. How to strengthen MOI over time 3. Kaizen as the principal productivity tool 4. Mobilizing multiple support measures to start “handholding” for selected SMEs during GTP2 5. Business climate is poor; Ethiopia needs an improvement plan 6. Our view on promoting heavy industries 7. FDI-local firm linkage formation strategy must be added 8. Concepts of “quality manufacturing” & “quality infrastructure” 9. How to draft the Productivity & Competitiveness Chapter (new) 10. How to draft the Industry Chapter

17. Policy Learning: What Needs to Be Learned? Basics Policy content Policy procedure Policy organization Policy documentation More advanced National leadership National movement for mindset change Developmental state (politics & development) Exit to an advanced society

18. Studies & surveys Brainstorming Top leader Set broad goals & direction Drafting work Businesses Ministries ＆ agencies Academics & consultants Comments & revisions Finalize & approve Regions & localities Stakeholder consultation 1. Vision 4. Substantive stakeholder participation 2. Consensus building3. Documentation Standard Policy Making Procedure (Five Necessary Conditions) 5. A secretariat with sufficient authority and responsibility to coordinate the entire process (Drafting may be outsourced)

19. Taiwan: Statute for Industrial Innovation, 2010 Task force under Ministry of Economic Affairs Minister providing vision & key ideas Private sector hearings with six sectoral business associations Brainstorming; agreeing on goals & directions Stakeholder consultations Documentation Drafting by MoEA official with lawyer’s help for wording The 3-year process was managed by Chung-hua Institution for Economic Research (a think tank winning competitive bidding). Dissemination (“Island Tour”) Inter- ministerial meetings with MoEA chairing Further revision & approval by National Assembly

20. Thailand: Automotive Industry Master Plan 2007-2011 “ CEO Forum ” FDI & local firms Exporters MoI, MoST, MoEdu Professors ’ team (Chulalornkorn Univ) M/P Steering Committee Organized by MOI Businesses Officials Experts Brainstorming; agreeing on goals & directions Set up formal committee for drafting M/P Subcommittees study identified issues Gov ’ t Business Experts Business Gov ’ tExperts Human resource Productivity Marketing Engineering Investment & linkage M/P Drafting By TAI staff Comment & dissemination (Informal)(Formal) The whole process (1 year) is managed by Thailand Automotive Institute (TAI)  Implementation

21. Vietnam: Traditional Policy Drafting Process Prime Minister Minister Drafting Team MPI & other Ministries Inter- ministerial review Internal review Order Submit Review for approval Submit Business Community International experts Technical assistance (sometimes) No permanent channel for continuous policy dialogue (case-by-case, temporary, ad hoc) Appeal letter to Prime Minister when problems arise Contact Ministry when necessary Interviews, symposiums (sometimes) Government MPI & other Ministries Data

22. Alternative Policy Organizations Who will draft and execute policies, and how? The following approaches are not mutually exclusive; some countries use more than one. Technocrat group directly under PM or President National Councils or Committees Super-ministry Coordination ministry above line ministries Sector/issue-specific institute acting as a hub Strong leader without institutionalization

23. - Elite technocrat group with full planning authority given by top leader - Members are selected officials, business leaders & experts with good education & experience Businesses Academics Experts President or Prime Minister Technocrat Group (Policy Maker) Direction, full authority for policy making Faithful execution and reporting Policy, guidance and monitoring Faithful execution and reporting Ministries (Policy Implementers) Korea – Econ. Planning Board Malaysia – Econ. Planning Unit Thailand – NESDB Taiwan – Kuomintang Elites Indonesia – “Berkeley Mafia” Chile – “Chicago Boys” Technocrat Group Approach

24. Economic Secretariat President (Blue House) Economic Planning Board Korea Development Institute Min. of Commerce & Industry Economic ministries and agencies Economic Minister’s Council State Council Chaired by Deputy PM Super ministry charged with: - Development planning - Public investment planning - Budget - Monitoring - Aid management Policy analyses Korea in the 1960s-70s: Economic Planning Board under President Direct presidential control over economic policy Businesses Gov ’ t-business meetings - Export promotion - Economic briefs - HCI drive, etc. Headed by Deputy PM Very close gov ’ t-business relations Performance-based rewards & penalties Banks

25. National Council/Committee Approach National Council or Committee Ministries and agencies working groups or task forces for specific issues and sectors Plan Support Implement PM or President Chair, give mandate Businesses Academics Experts

26. National Productivity and Continuing Education Council (NPCEC) Working Committee for Productivity and Continuing Education (WCPCE) Construction BCA Unions Industry Low wage workers Sector working groups (12 priority sectors) Precision Eng. EDB Unions Industry Electronics EDB Unions Industry Transport Eng. EDB Unions Industry General Mfg. SPRING Unions Industry F & B SPRING Unions Industry Retails SPRING Unions Industry Research & benchmarking Infocomm and logistics Cross-cutting issues National Productivity Fund Productivity & Innovation Credit Oversight Review & approval Scrutiny Draft & propose Skills Dvt. Fund Lifelong Learning E.F. Chaired by Deputy PM Members from ministries/agencies, business, unions Joint secretariat: MTI, MOM (ministers) Led by MTI, MOM (PS level) Inter-agency coordination Sectoral “Productivity Roadmap” for the next 10 years Financial Incentives Economic Strategies Committee: Report Review & submit Singapore: New Productivity Drive

27. My Proposal for Vietnamese Government National Competitiveness Council Ministries and agencies Working groups for specific issues or sectors Plan Support, report, draft Implement Prime Minister Direct, give mandate SMEs Commission studies, reports Chaired by PM (or DPM) Secretariat: Government Office Members: Heads of concerned ministries Higher Educ TVETClusters Supporting industries Secretariat: MPI Ministries, businesses, experts Secretariat: MOIT Ministries, businesses, experts Secretariat: MOIT Ministries, businesses, experts Secretariat: MOLISA Ministries, businesses, experts Secretariat: MOET Ministries, businesses, experts

28. Super Ministry Approach: Japan ’ s Ministry of International Trade and Industry, 1960s

29. Documentation Drafting  Implementation  Results. Producing documents is the means, not the end, of policy formulation. Generally speaking, short & concise is better than long and complex. Large documents are usually not used or referred. Only include information and arguments necessary for the policy actions proposed. Drafters can be officials, consultants, academics or a mixed team. As long as rough contents are agreed and necessary studies have been prepared, anyone can draft policy documents.

30. Action Plan Template The following template is actually used in Vietnam-Japan Industrialization Strategy (2011-2013). Purpose: foster new industries under the principles of PPP, bilateral cooperation, selectivity, and concrete action plans. Only essential items to save time & energy; total about 5 pages. Situation analysis (about 2 pages, essential facts only for promoting this industry) Vision for 2020 (one sentence) Targets (3-4 items, one phrase each) Policy issues (3-5 items, one phrase each, policy efforts required for targets above) Action plan (who, what, by when, success criteria in table format) Monitoring mechanism (1-2 sentences, common for all industries)

31. Thailand Automotive M/P 2007-2011 Vision 2011  4 Objectives  5 Strategies  12 Action Plans Strong coordination by Mr. Vallop of Thailand Automotive Institute Effective stakeholder networking – FDI, local producers, government, donors Process-based action mechanism – annual budget and projects for implementing actions (no matrix) Drafting team at Thailand Automotive Institute

32. Vision—“Asia’s auto production base with value-added and strong parts industry” Thai Automotive Vision, 5 Strategies and 12 Action Plans Source: Thailand Automotive Institute, The Automotive Industry Master Plan 2007-2011 Executive Summary, p.4.

33. Malaysia’s Industrial Master Plan 2 (1996-2005) 453 pages (English) with the following chapters: - Overview & analytical framework (first 2 chapters) - Analysis & proposals for 8 indust. clusters (8 chs.) - Directions & institutional framework (last 2 chs.) Malaysian Institute of Economic Research (MIER) drafted a background paper, which gave IMP2 a lucid academic style (but not IMP3). Possible problems: (1) sectoral coverage is too wide, (2) method is too mechanical and uniform, (3) full- set industrial promotion is against globalization and specialization.

34. Malaysia’s Cluster-based Industrial Development and Manufacturing++ Malaysia’s IMP2 (1996-2005) aimed at raising and broadening the value chain. Leveling up of each industrial cluster -Core production -Supporting industries -Supporting services -Human resources -Logistics -R&D