The world’s foremost heterodox economist, Professor Ha Joon Chang from the University of Cambridge, says it is important for government to take deliberate actions in order to develop industrial capabilities which can drive economic growth.
Professor Chang is in South Africa to lecture at the Department of Trade and Industry (the dti) sponsored African Programme on Rethinking Development Economics (APORDE) and was speaking at the dti’s economic policy dialogue series in Pretoria, on Tuesday 3 September 2013.
The dialogue was held under the theme: “Historical perspectives on trade and industrial policy to locate the theory and importance of manufacturing in economic development”.
Professor Chang said that justifications for industrial policy entail coordination of complementary investments, creating linkages through starting off chain reactions by stimulating sectors with particularly strong inter-dependence with others, and facilitation of structural change by temporarily shielding ‘losing’ sectors from full market forces.
He added that the governments of today’s richest countries played a major role in developing their economies through purposive industrial policies. All of today’s rich countries, except for the Netherlands and (pre-WW1) Switzerland used protectionism for substantial periods.
Britain and the USA were the most protectionist economies in the world in their ‘catch-up’ periods. Germany, France, and Japan the supposed homes of protectionism were much less protectionist than Britain or the USA. Even in the post-WWII period, protection was quite high until the 1960s,” stated Professor Chang.
He noted that the apparent need for developing countries to provide unfettered latitudes to Foreign Direct Investment (FDI) was a relatively new phenomenon. ‘The USA in 19th century regulated FDI in finance, shipping, mining, logging and especially banking.
Only American citizens could become directors in national (as opposed to state) banks and foreign shareholders could not even vote in AGMs. Japan (Korea and Taiwan to a lesser extent) virtually banned FDI until the 1980s. “All rich countries have used tariff protection and regulation of FDI for substantial periods in their industrialisation phases,” said Chang.
According to him, central banks in today’s rich countries played a key role in the economic development of their countries by directing investment funds to particular sectors in pursuit of industrialisation. “Even before WWII, when most of them were private banks with special relationship with the state, they funded the state and lent directly to priority sectors.
After WWII, they were made public institutions and some of them actively engaged in development policy (especially, but not only, in France, Belgium, Italy, Japan, Korea, and Taiwan). Keeping real interests low, to promote investment (for example, 1% in Switzerland to 2.6% in Germany during 1960 to 73).
Lending at favourable rates to, or taking equity stakes in, development banks and special purpose banks (e.g., for agriculture, SMEs, housing) Rediscounting of bills at preferential rates for priority sectors.
Encouraging lending to priority sectors by setting differential reserve requirements (for assets) and differential credit ceilings (for sectors)”, he highlighted. Chang further said developing countries need to look at their capabilities and not focus only on incentives.
Enhancement of productive capabilities in developing countries requires putting emphasis on exports but he noted that many multilateral organisations have simplistically assumed that there is only way strategy to achieve this, namely free trade.
Speaking at the same event, the Minister of Trade and Industry, Dr Rob Davies stated that South Africa’s economy needs to become more reliant on the ‘productive sectors’ such as mining, agriculture and manufacturing as there were no other realistic strategies to develop the SA economy, create employment and raise the economic growth rate substantially. Davies said that the greatest economic potential was in the industrialisation of both South Africa and Africa as a whole.
The purpose of the dialogue was to stimulate intellectual discourse on contemporary economic issues pertaining to the South African economy.
Caption: Left to right: Professor Ha-Joon Chang, Minister Rob Davies, D-G Lionel October, and dti Economist: Stephen Hanival
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