Stagflation: Manufacturing a way out (2)
In a lecture earlier this year in Oxford, the renowned South Korean economist, Ha-Joon Chang, highlighted one of the biggest anomalies in his profession: the visceral yet mindless dismissiveness toward any kind of proactive industrial strategy. Having come from a formerly war-stricken and impoverished nation, professor Chang, who spent the bulk of his academic career at the University of Cambridge, personally observed how resource-poor South Korea literally created its own “comparative advantage” in both heavy and cutting-edge industries.
Thanks to a tight synergy between the state and the private sector, South Korea gradually saw the transformation of its oligarchic chaebols into world-class technological behemoths. The Samsungs and Hyundais of today, however, would have likely looked more like multibillion-dollar conglomerates in places such as the Philippines had they not been pressured and incentivized to systematically switch to production of increasingly high-value-added products. No wonder, then, Chang decided to study his country’s “Miracle on the Han River” story.
“In those days when people ask me what my PhD was about and if I told them it was about industrial policy, they would look at me as if I just told them that it is about establishing that Elvis Presley is still alive,” Chang shared with his audience. Decades later, the world’s most dynamic economies, from Vietnam to China, have largely copied the South Korean industrialization-focused model of development with various iterations. In fact, as Harvard economist Dani Rodrik has noted, no country in recent memory has made it from “Third World” to “First World” without embracing manufacturing as a core national development strategy.
For cutting-edge economists, such as Chang (from South Korea) and Rodrik (from Türkiye), the experience across the developing world shows that industrial strategy is both indispensable to growth and iteratively improvable. Successful cases show five key patterns: (1) strict government controls to ensure no wastage of subsidies as well as identification and prioritization of core industries; (2) robust, time-bound, and verifiable performance-based support mechanisms, which focus on optimal capacity-building in critical sectors rather than giving “handouts” to cronies; (3) state-driven creation of the right investment and market conditions to ensure long-term growth of infant industries and national champions; (4) constant focus on technical capacity-building and bureaucratic modernization; and (5) long-term institutionalization of national developmental goals across administrations.
One of Chang’s most fascinating research findings is this: industrial strategy spurs state capacity and good governance. The more the state exercises its pro-manufacturing muscle, the more it is forced to enhance its own capacity for oversight, meritocratic recruitment, and corruption reduction. After all, the state’s very legitimacy will primarily rely on sustained growth and high-value-added exports, which are sine qua nons for poverty alleviation and inclusive development.
As Nobel-laureate economist Professor Joseph Stiglitz has argued, “the design of the institutions” has a fundamental impact on how markets operate, and that markets alone “are only one instrument and a very limited instrument for achieving social objectives.” In short, one can’t just rely on the private sector to abandon high-margin, low-productivity extractive sectors in favor of high-risk, high-productivity manufacturing, which is indispensable to long-term prosperity.
Stiglitz has rightly argued that the “big mistake” of not only mainstream economics but also global economic regimes (i.e., the World Bank, the International Monetary Fund, and the World Trade Organization) is ignoring industrial policy and the need for creating a level playing field in manufacturing. The upshot is the emergence of a few but highly successful industrial juggernauts, such as China, which are squeezing out other developing nations from high-value-added export markets. Leveraging decades of successful industrial strategy, most notably the “Made in China 2025” initiative, Beijing is not only presenting a “second shock” to high-tech Western companies but also “squeezing out” other developing nations on the lower rungs of the industrial supply chain. As one steel magnate in our country recently told us, “the Chinese [steel manufacturers] are out to kill us” by dumping highly subsidized and sometimes even substandard steel into Philippine markets.
For decades, we neglected our manufacturing base in favor of low-value-added services, speculative sectors, and labor export. Fearing a repeat of the Marcos-era cronyism, we abandoned any kind of state support for industrialization altogether. Shockingly, we have not had a single major political candidate, including those trained in economics, who has provided any viable solution to our structural economic crisis. Yes, let’s fight corruption, but not having any industrial strategy condemns our country to low-equilibrium economics even if we elect the most well-meaning people into office.
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