Modelling a Systemic Industrial Policy Ecosystem: A Case Analysis of Singapore - Page 3

The Industrial Policy Ecosystem

Economic Impact of Industrial Policy

Industry policy-makers now realise that industrial development models based on the old economy paradigm of efficient “resource accumulation” only will not suffice and may eventually fail. In fact, as globalisation speeds up and cross-border barriers are dismantled, future industrial development of an increasingly globally-interconnected world will depend lesser on tangible and physical assets. Instead, intangible assets like intellectual capital are far outstripping traditional assets such as land and labour as the dominant drivers of rapid industrialisation. Industrial policy thinking has inadvertently shifted to embrace issues relating to efficient “resource allocation” that must take place in industrialisation for a market-driven economy to be truly sustainable. However, to most bureaucrats, it seemed that the developing economies were not, in general, optimally efficient and that there was a crucial role for governments to play in effective industrial policy-making (Padmanabhan, 1993; Adler, 1989). Nevertheless, one has to be realistic with what industrial policy could achieve in terms of economic impact. To give some insights into this, empirical studies on the contribution of aggregate economic growth attributable to industrial policy seem to put things in the right perspective. According to a World Bank Study on the manufacturing sectors of developing nations, the increase in GDP growth rates induced by industrial policy have reportedly reached 0.5 percent annually; and this was assessed to be "hardly trivial", but also not the "secret of success" for economic development (Stiglitz, 1996).

Selective Interventionist Model

To extract the full benefits of any industrial policy, one must recognise that governments should only facilitate and not be directly involved in all aspects of the industrialisation process. In many instances, the best form of governmental facilitation is to dismantle and minimise barriers and obstacles in industrial development. From the experience of the developed nations, it appears that governments have demonstrated tendencies of refraining to play the role of a "central actor", but instead that of a "facilitator" in industrial development (Hall, 1986). Fundamentally, this stems from the viewpoint that any form of industrial development, which involves complex activities associated with efficient resource allocation, basically originates from societal demands and should therefore rightly be derived from society rather than the state. Even if governments possess a highly efficient bureaucracy to implement policy alternatives effectively, the role of industrial policy is pre-emptive in nature - what really works may not be so explicitly known to the policy-maker at the outset and the industry players themselves know best. Thus, a more "neutral" approach to state intervention is generally favoured as many would advocate, one of the virtues of the free-market economy is that it rewards industrial developments that are efficient in serving markets and penalises those that are not (OECD, 1990; Bubb, 1986). While acknowledging that more state intervention should ultimately lead to lesser government involvement, advocates of pro-market forces strongly support the “selective interventionist model” for industrial policy-making, as the most successful achievements in industrialisation have taken place in economies where selective intervention by government has been the most pronounced [1]. For instance, governments may wish to intervene by slowing down the contraction of declining industries or speeding up the growth of new emerging industries, especially if there are strong compelling national reasons to do so. Even then, the rationale for selective interventionist industrial policy should be as transparent as possible.

Strategic Stance of Industrial Development

While what constitutes effective industrial policy-making is still subject to continuous debate, it seems that industrial development should avoid merely addressing resource accumulation concerns or factors of market efficiency or governmental direct involvement in industrialisation projects (Goh, 2004b; COM, 1994). Rather, one of the important outcomes of industrial policy is to empower industries and private firms to deliver industrialisation projects efficiently on their own – whose economic objectives are aligned to that of the state and the wider global economic community. If an industrial policy favours a particular industry sector or firm, besides being construed as unfair, there often exists a gap between the “market’s way” of “picking winners” and that envisaged by the state. In fact, history has shown that industrial policy that overly supports government’s participation in the “bolts and nuts” of industrialisation projects often leads to failure or results in industrial developments that are not commercially viable without state funding or in other words, uncompetitive (Bubb, 1986; Trezise, 1983; Schultze, 1983). To cite an example - although US government's US$1 billion involvement to help defence contractors develop high-speed integrated circuits (ICs) for military use was seen to be important in the pre-competitive phase of the project, it was found out later that Intel got there first on their own without any federal funding. What seems ostensibly clear is that the stance of industrial development should at least avoid “past mistakes”, where governmental actions are neither efficient nor needful. Three strategic aspects have been identified. First, it should depend less on policy alternatives centred on resource accumulation. Second, it should not rely overly on state involvement or participation in industrialisation projects. Third, it should neither diminish competition nor distort the influence of market forces in industrial development.

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