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Modelling a Systemic Industrial Policy Ecosystem: A Case Analysis of Singapore - Page 2

Introduction

The Endeavour of Industrial Policy-Making

Industrial policy has been characterised by a primary emphasis on attaining the desired macro-economic environment for industrial development, and at the same time, achieving the intended long-term economic performance for a country (Goh, 2005; 2004a). In practice, an industrial policy may constitute a wide range of governmental actions designed to promote industrial growth with the basic objective of improving the competitiveness of a particular sector or sectors in an economy. Implemented, led or directed by the state, such governmental actions usually imply preferential treatment for specific industries or individual firms (Goh, 2004b; COM, 1994). As many bureaucrats generally believe, industrial markets are inefficient and may cause an entire economy to falter, if not managed prudently. For this reason, increased policy efforts are now placed on optimising industrial structures, expanding industrial bases and rejuvenating “sunset industries”. Indeed, for more than four decades, the rapid phenomenal industrial growth of Asia's tigers: Hong Kong SAR, Singapore, South Korea and Taiwan had attracted much attention to the benefits of industrial policy. These economies were seen to be pursuing predominantly government-initiated industrial development, which resulted in rising optimism that industrial policy, if formulated and executed effectively, would make a significant contribution to industrial growth and economic progress (Goh, 2004b; Rodrik, 1995; Pack and Westphal, 1986; Trezise, 1983). Given the escalating pressure to enhance economic competitiveness, nations around the world are now urgently in need of identifying the “right approach” of industrial policy-making that would produce positive economic results. With this sense of well-placed optimism, coupled with lessons derived from the developed world, many developing nations are hoping to accelerate economic growth through the endeavour of industrial policy-making.

Industrial Policy Instruments

Conventionally, industrial policy instruments include tax incentives and subsidies, financial support to research and development (R&D), education and infrastructure improvement programmes, favourable anti-trust regimes, export assistance, and foreign trade and investment incentives (Goh, 2004a; COM, 1994). While these instruments have enjoyed a significant degree of success, government’s sponsorships or subsidies are still viewed with some suspicion by proponents of free market economies. This suspicion arose because industrial policy that intervenes by dispensing government incentives or subsidies is perceived as one of “picking winners", as it concerns decisions about which firms the government wishes to support (Goh, 2004a; 2004b; COM, 1994; Schultze, 1983). Nevertheless, the counter argument holds up that “picking winners" ahead of the market is the best result advocates of industrial policy could hope for; as the other alternatives may be propping up "losers" or worse still, a random distribution of recipients of taxpayers’ money. Besides, it was felt that with these incentives or subsidies, comes state control, which are repeatedly found to be detrimental to market efficiency of businesses. Furthermore, the existence of government's industrial policy instruments – whether for failing or successful businesses, for example, are often seen to be inefficient, unproductive, and sometimes even poses a hindrance to industrial growth. Hence, it is crucially important to take into account the wider impact of these instruments and to do this, industrial policy-making should be considered with a systemic view rather than as piece-meal policy alternatives to catalyse industrial development.

The Need for a Systemic View for Industrial Policy-Making

Seemingly, the current debate on efficient industrial policy continues to revolve around how the total factor productivity (TPF) of industries might be improved or how different structural changes in industries could be better implemented (Goh, 2004b; Rodrick, 1995; Grossman and Helpman, 1992). While politicians, industrialists and businessmen generally share the same opinion that industrial policy-making may bolster economic development, it is also recognised that industrial policy, if implemented solely to "cut off" competition, stands little chance of achieving efficiency gains or productivity increases. Past solutions of industrial development centred on government's fiscal incentives or subsidies alone to improve the costs of production and factors of efficiency in the creation of goods and services are seen to be less effective (Goh, 2005; Legge, 1993; Adler, 1989). Presently, as far as industrial development is concerned, all nations are undergoing a trying time due to new challenges of economic competition arising from changes such as labour productivity, industry structuring and international trade. It is also reported that while large government involvement has been present in some countries, it ended up without any positive impact on economic development. The supplementary objective of any industrial policy is thus to balance amongst various strategic concerns relating to “competitiveness issues” to ensure sustainable long-term industrial development. To evaluate whether an industrial policy may result in economic impact, it is proposed that a systemic view of an industrial policy ecosystem be adopted, as depicted in Figure 1. This underlying intention is to provide better insights into how policy alternatives could be considered with a strategic stance of industrial development based an institutionalised approach of broad initiatives.

Figure 1: A Systematic View of Industrial Policy-Making

A Systematic View of Industrial Policy-Making

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