Development, Industrial Policy, Environmental Sustainability

Amelia U. Santos-Paulino

Guanghua Wan

English

Research Papers in Economics

 
  
 
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Small Business Economics Vol. 34(1) 
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Industrial Policy and Environmental Sustainability: The Challenge After 
COP15 
Wim Naudé and Ludovico Alcorta. Full article 
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Industrial Policy and Environmental Sustainability: The 
Challenge After COP15 
Wim Naudé and Ludovico Alcorta 
Industrial policy is being reassessed in the light of the global financial crisis as well as the negotiations on a global 
agreement on the reduction of greenhouse gases – the fifteenth United Nations Climate Change Conference 
(COP15) which took place in December 2009 in Copenhagen. This conference took place against the concern (as 
the UN’s climate panel’s recent fourth report indicates) that human society is contributing significantly, through 
emission of greenhouse gases, to global warming, and that this will have an overall negative impact on global 
development. Kemal Derviş, in his WIDER Annual Lecture presented in Helsinki in March 2008, pointed out. 
‘Climate change will have a larger and more immediate negative impact on many of the world’s poor. Our concern 
for development and poverty reduction, as captured in the Millennium Development Goals, dictates that we 
mitigate climate change urgently to reduce the threats to the development prospects of the most vulnerable, as 
well as take action to help those already affected to adapt.’ 
Human-induced climate change and its effects on global development is part of the more general challenge of 
achieving environmental sustainability. It requires a rethink of the process and outputs of production and of 
distribution and consumption. As recently put by Jeff Sachs[i] ‘The global economy is literally unsustainable now 
and cannot absorb further economic and population growth without serious risks of global destabilization – even 
collapse’.  In addition to rising greenhouse gas emissions and its consequences, areas of concern include rising 
commodity prices, peak oil, pollution from agriculture, and increasing water scarcity to name but a few. 
Reassessing industrial policy is now necessary as (i) industrialization and industrial catch-up by industrially lagging 
countries will increasingly run into resource constraints and climate change impacts, and (ii) without appropriate 
forms of industrialization in both advanced economies and in developing countries, little progress will be made 
towards any agreement to replace the Kyoto Protocol. The Gordian Knot to be untied is how to achieve these 
changes in a manner that does not limit the development and industrial catch-up of the poorest countries, and 
which does not result in politically unacceptable job losses in advanced economies. 
Industrial policies – whether explicitly termed as such or referred to as ‘competitiveness’ policies – will increasingly 
take centre stage in governments’ responses as they grapple with rising commodity prices, growing inequality and 
sluggish growth. But given the dangers and failings inherent in industrial policy, extreme caution is required. Hence 
a new debate on industrial policy, supported by new research and new paradigms, is required to move forward. In 
recognition of this challenge, UNU-WIDER, UNU-MERIT and UNIDO held a successful workshop on the topic in 
Maastricht, The Netherlands on 22-23 October. Following this workshop,  we outline a number of considerations 
for environmentally sustainable industrial policies in this article. 
Industrialization still matters 
Our point of departure is that industrialization still matters. In particular, shifts out of traditional, low-productivity 
Page 1 of 5 UNU-WIDER : Industrial Policy and Environmental Sustainability: The Challenge Af...
30/03/2010 http://www.wider.unu.edu/publications/newsletter/articles-2010/en_GB/01-2010-wide...activities towards manufacturing and later services and out of low technology towards high technology activities 
within manufacturing are stylized facts of modern development. Very few advanced economies have not gone 
through such processes of structural change. 
There are a number of reasons why manufacturing contributes to development. In an earlier WIDER Angle article, 
Szirmai examined nine arguments for the importance of manufacturing for growth. One of the most important, also 
with respect to the current debate on the impact of climate change on developing countries, is that the 
manufacturing sector offers special opportunities for both embodied and disembodied technological progress. 
Technological advance is concentrated in the manufacturing sector and diffuses from there to other economic 
sectors such as the service sector. Though technological advance in service sectors continues to accelerate, this 
aspect of manufacturing continues to be very important for developing countries engaged in catch up. It is 
generally recognized that environmentally sustainable catch-up will now require more of technological advances in 
leading economies to be transferred to and adopting by countries in the catch-up phase. Herein, the role of 
industrial policy is necessary, and as such the comeback that industrial policy is starting to make may be 
welcomed. 
Industrial Policy Moving to the Forefront 
Industrial policy refer to the  intervention of governments to direct the structural development of their economies, 
from low to high productivity activities associated with economic growth, job creation and rising per capita incomes. 
Industrial policy has deep precedents. The very Industrial Revolution which heralded the modern world has been 
described as the result of the ‘mother of all industrial policies’[ii]. But it was more after the Second World War, with 
the reconstruction of Europe and Japan and the gaining of independence of many countries in Africa, Asia and 
Latin America, that industrial policy concerns became an explicit and central part of the development agenda – at 
first especially through the protection of infant industries through import tariffs and quotas. The strength of the 
theoretical case for selective government intervention in steering such structural development has long since been 
recognized: both market and co-ordination failures, as well as the need to sometimes deliberately create market 
failures to defy a country’s (static) comparative advantage imply that industrial catching up will not be automatic. 
As endogenous growth theory established, technological innovation provides a major stimulus for productivity 
growth. However, neither such innovation nor the transfer of technological know-how is automatic or easy – it 
requires absorptive capacity in lagging countries or regions which often requires firm and industry-specific learning 
by doing, as well as investment in human capital that will as result of  market failures be at less than  optimum 
levels. 
Industrial policy is now recognized, despite the inconclusiveness of empirical studies and the absence of 
counterfactuals) to have played an important role not only in the Industrial Revolution in Britain in the 17th and 18th 
centuries, and in the USA in the 19th and 20th, but also in East Asia in the 20th and currently in the rise of China. It 
is seen as having had mixed success in Latin America, and as having failed in Sub-Sahara Africa (with some 
exceptions in Mauritius and South Africa). By the late 1970s and 1980s mainstream economic thinking, and the 
policy advocacy by international development organizations and donors, turned extremely skeptical of industrial 
policy. The main reason was that the practicality of industrial policy was being doubted. The problem was one of 
government failure: of governments not being able to have access to all the information in order to assess whether 
a particular intervention will be welfare enhancing or not, and being susceptible to rent-seeking, capture and 
corruption in the process of selectivity. During much of the 1980s and 1990s ‘industrial policy’ in many countries 
were replaced by trade and financial liberalization, the privatization of state-owned enterprises, and the 
harmonization and minimization of government policies towards improving the general ‘competitiveness’ of their 
economies, under the banner of the Washington Consensus. 
Now, industrial policy is moving to the forefront – or at least in some circles coming more into the open. This is 
perhaps nowhere more apparent than in the United States, where despite its long history of fostering industry in a 
developmental state (see Bill Lazonick’s article in the WIDER Angle April 2009), industrial policy experienced 
Page 2 of 5 UNU-WIDER : Industrial Policy and Environmental Sustainability: The Challenge Af...
30/03/2010 http://www.wider.unu.edu/publications/newsletter/articles-2010/en_GB/01-2010-wide...strong ideological resistance especially since the Reagan administration years of the 1980s. Now, it is clear that 
the deregulation and laissez-faire approach of the past decades has in fact been a de facto form of industrial policy 
which had shifted jobs and profits into the financial sector and out of the manufacturing sector. This has been 
made clear by the financial crisis which erupted in September 2008, following which the USA have resorted to 
various measures commonly associated with industrial policy to rectify the situation, such as direct subsidies to 
ailing firms (bank and automobile manufacturing firms being bailed out), import protection (e.g. the imposition on 
tariffs on tire imports), and domestic content measures (the ‘buy American’ clause in the Recovery Act). 
The global inequities re-emphasized by the financial crisis and subsequent global economic slowdown has also 
cast the spotlight again on the failure of much of the least development countries (such as those in Africa) to 
industrialize. This failure to industrialize and diversify their economies’ structure has been an important source of 
vulnerability to these countries. In the renewed debate about the need to reduce these, the fact that financial 
liberalization has gone too far, to rapidly, has been accepted. Also now there is the concern that trade liberalization 
and privatization did not aid industrialization in Africa, but have likely contributed to de-industrialization in the 
continent. There is little evidence on the success of privatization, and growing evidence that it has worsened 
inequalities. And rent-seeking and corruption flourished even in the absence of selective industrial policies. 
But there is one further and important reason for industrial policy to be moving to the forefront. That is the 
challenge of environmentally sustainability – in particular, of climate change. The nature of climate change and the 
responses required contains all the elements of market and coordination failure, and the dangers of government 
failure, that has been central to the debate on industrial policy. 
Moving to a low-carbon, low environmental impact world economy is going to require selective government 
intervention. It has to be selective, as neutrality towards all products and processes cannot be maintained. It has 
got to be driven by governments as coordination, subsidization, protection, information and large scale 
investments are at the core of the responses towards limiting the human impact on climate change. 
The need for making the right choices will become even more apparent as the world’s population increases to 
more than 9 billion people by 2050. A growing population with increasing purchasing power will demand new and 
more products and ways of making them that will not only have a heavy toll on the environment but will also put 
heavy pressure on the availability of natural resources to produce them.  The recent financial crisis was preceded 
by severe difficulties in the world supply of food and acute volatility and rises in the price of oil (for a good overview 
of the 'Triple crises' see the recent WIDER Working Paper 2010/01 by Addison, Arndt, and Tarp). If there are no 
international and domestic concerted efforts for manufacturing to become more resource efficient, larger 
populations, which are expected to be located mainly in the developing world, will only lead to further reductions in 
arable land, deforestation, overfishing, land pollution and water shortages. 
Hence, with the eminent resurgence of industrial policy and the dangers involved, it is encouraging that 
international development agencies, donors, academic and leading advanced economies, have started to actively 
debate the issue of what industrial policies should look like in the future and what configuration of institutional and 
political settings are needed to ensure better policies. For instance in the last quarter of 2009 the World Bank, the 
United Nations University, UNIDO as well as the German Development Institute hosted workshops on industrial 
policies. Also, the European Trade Union Confederation adopted a resolution in October 2009 calling for an ‘urgent 
need to launch the 3rd European industrial revolution based on green, sustainable and decent jobs’. And in the 
USA, President Obama proposed during his presidential campaign an industrial plan to create around 5 million 
‘green collar’ jobs, while the media today is carrying a growing number of debates about the need for a US 
industrial policy, particularly towards ‘green manufacturing’. 
Considerations for Environmentally Sustainable Industrial Policy 
Having dealt with the need for industrialization, and the resurgence or inevitability of industrial policies, the 
Page 3 of 5 UNU-WIDER : Industrial Policy and Environmental Sustainability: The Challenge Af...
30/03/2010 http://www.wider.unu.edu/publications/newsletter/articles-2010/en_GB/01-2010-wide...question arises as to the content of such policies, as well as the implementation and management thereof. Here 
we cannot offer any definitive answers. Successful industrial policies require both proper content, i.e. the policies 
should be addressing the appropriate binding constraints on industrial change, as well as implementation. Both 
depend on the particular conditions of individual countries as it is clear that ‘one size fits all’ policies are not 
effective as well as appropriate institutional settings to ensure that governments have the information, the 
capability, that political interference is limited, and that incentives are properly aligned. Many countries lack an 
adequate institutional setting, and may get both the content and implementation wrong. Moreover, the particular 
challenges which environmental and resource sustainability raise for industrialization would require a perhaps 
unprecedented degree of global coordination. These factors could understandably jeopardize any attempt at 
reaching any goals which may be agreed upon in any climate change agreement – indeed the very difficulties 
implied here may contribute to the reluctance of many of the poorest countries to agree to binding goals in the first 
place. Hence advancing our understanding of the process of industrial policy formation and its success and failure 
within the current global context remain one of the most important challenges facing researchers and policy 
makers. 
About the authors 
  
 Wim Naudé is Senior Research Fellow at UNU-WIDER. 
  
  
  
  
  
 
 
 Ludovico Alcorta is Director, Research and Statistics Branch 
 of the United Nations Industrial Development Organization 
 (UNIDO).  He has been a participant in WIDERs project on Building 
 Entrepreneurial Capacity and has been a co-organiser of the joint 
 WIDER-MERIT-UNIDO International workshop on Pathways to 
 Industrialization in the 21st Century: New Challenges and Emerging 
 Paradigms.
  
  
Notes 
[i] Sachs, J.D. (2009). ‘An Industrial Policy for Climate Change’, McKinsey What Matters, at 
http://whatmatters.mckinseydigital.com, 23 February. 
[ii] See Robinson, J. A. (2009). ‘Industrial Policy and Development: A Political Economy Perspective’, Paper 
prepared for the 2009 World Bank ABCDE Conference, Seoul, Korea, 22-24 June. 
WIDER-MERIT-UNIDO International workshop on Pathways to  Industrialization in the 21st Century: New 
Wim Naudé 
Ludovico Alcorta 
Page 4 of 5 UNU-WIDER : Industrial Policy and Environmental Sustainability: The Challenge Af...
30/03/2010 http://www.wider.unu.edu/publications/newsletter/articles-2010/en_GB/01-2010-wide...Challenges and Emerging  Paradigms. 
WIDER Angle newsletter, January 2010 
ISSN 1238-9544 
  
http://creativecommons.org/
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China and India.s Development Strategies: Lessons for Developing Countries

http://www.wider.unu.edu/stc/repec/pdfs/wp2010/wa2010-01.pdf

China and India.s Development Strategies: Lessons for Developing Countries

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