Industrial policy's rebirth could endanger emerging economies, warns EBRD

Ghana did not have a single industrial policy at the dawn of the last decade. In Kenya, only nine government interventions in trade, investment, or labor mobility were identified, and just 12 in Nigeria, as the long era of global free trade and open markets held sway. Yet by 2022, just 12 years later, a dramatic surge has been uncovered by the European Bank for Reconstruction and Development, using Global Trade Alert data, counting 23 such policies in Ghana alone, 38 across the continent in Kenya — and 84 in Africa’s most populous country, Nigeria. Most are aimed at job creation, in agribusiness most commonly, they are almost certainly popular with citizens, and mirror the shift in the United States, China, and Europe, where industrial policy is “back with a vengeance?” the EBRD acknowledged. So why is the bank concerned? The problem, argued the bank’s chief economist, Beata Javorcik, is that industrial policy in lower-income countries is a very different beast to measures adopted in advanced economies — and brings with it “significant risks” of wasting scarce public resources, higher costs for local producers, and lower economic growth. Consider a high-income nation, able to favor its domestic companies with subsidies, export credits, and higher research and development budgets. Then contrast that with a low-income country without money to spend in that way — which instead resorts to tariffs and direct, draconian curbs on trade. “You need two things for an industrial policy: fiscal space and administrative capacity. Poor countries tend to have neither, so they go for the cheap and the easy type of policy — export bans, import bans, export licensing, import licensing,” Javorcik told Devex. “These are the most distortive kinds of policies and, if countries that are adopting them have weak control of corruption, as they often do, that poses the danger of capture of these policies by vested interest. This means their chances of succeeding at doing industrial policy are lower.” The warning comes as part of an EBRD study examining the rapid spread of industrial policies — in both advanced and emerging economies — as politicians respond to the perceived threat from China, to the need to act on market failure behind the climate emergency, and to popular support for intervention. The bank’s 75 members are urged “to take care,” because up to 90% of such policies discriminate against foreign companies — straining multilateral cooperation — and often have multiple, potentially contradictory objectives such as accelerating the transition to green energy while also protecting jobs. But that warning is underlined for emerging economies, including six sub-Saharan countries on track to become EBRD members. One, Benin, is already a shareholder, while applications from Côte d’Ivoire, Ghana, Senegal, Kenya, and Nigeria are being considered. For the first time, the annual transition report studies the six economies in detail, awarding “assessment of transition qualities,” or ATQ, scores for each — on the extent to which they are competitive, well-governed, green, inclusive, resilient, and integrated. The study identifies significant improvements since 2016 in the six countries in both competitiveness (including the growth of new firms and increased labor productivity) and resilience (sturdier banking systems) — but “little progress” in integration, with “a decline in observed levels of openness to trade and investment.” “Exports and imports have declined as a percentage of GDP in all SSA economies except Senegal, while FDI [foreign direct investment] and foreign portfolio investment have fallen as a percentage of GDP in Benin, Ghana and Nigeria,” it stated. Javorcik stressed the study had not investigated industrial policies in the six sub-Saharan countries specifically, but said lower-income countries tend to implement trade bans, quotas, or licensing requirements, adding: “Distortive measures typically have an adverse impact on growth. Broad international experience suggests these pitfalls.” Her foreword to the study reads: “When implemented poorly, these have the potential to cause a misallocation of labour and capital, increase costs for local producers and breed corruption. “If emerging market economies want to scale up the use of industrial policies, they will have to learn fast with little room for mistakes. The costs of failure — increased government spending, economic distortions and forgone revenue — can pile up quickly in the balance sheets of overburdened governments.”