By Tony Ditta
Discussions of industrial policy by economists inevitably get to the topic of state capacity and then stop there. Capacity is either treated as fixed - an inevitable consequence of history and institutions - or inscrutable. To help unpack how different countries and regions have built the capacities of their institutions to design and implement productive development policies, we convened three key voices from research and practice, and different disciplinary backgrounds.
The panel on Institutions and Governance for Industrial Policy featured Matt Andrews, Edward S. Mason Senior Lecturer in International Development at the Harvard Kennedy School; Yuen Yuen Ang, Alfred Chandler Chair of Political Economy at Johns Hopkins University; and Piero Ghezzi, current International Consultant on productive development issues and former Minister of Production of Peru. The panel was moderated by Alisha Holland, Professor of Government in the Department of Government at Harvard. Here are some of the main takeaways from the discussion.
- Every country faces its own challenges and opportunities, so the best form of governance will vary from place to place and requires learning by doing
Ang is an expert on China, Ghezzi served in the government of Peru, and Andrews has worked in over 50 countries in various capacities. Their experiences highlight the major differences in problems that countries face and the solutions that are available to them. China is a large, autocratic state with a huge amount of resources, while Peru is a middle-income democracy with a history of failed industrial policy. They face vastly different capabilities and expectations from the public. China can make huge investments in firms and innovative activity, while Peru must use dialogue between the private and public sectors and more narrowly framed action. Each policy tool has its own strengths and weaknesses. Good governance must be attuned to these strengths and weaknesses and how they will interact with local conditions.
Sometimes this means being open to failure and trying new things. All the panelists emphasized the importance of learning by doing. Governments can’t always know in advance how a particular policy will play out in their country, so they have to try it and see: accepting that both failure and success are valuable for the learning process.
- Industrial policy based on solving problems can work anywhere
Although countries are very different, there are some policy principles that can be applied anywhere. The most important principle is orienting around problem solving — Andrews’ implementation framework is called Problem Driven Iterative Adaptation. It’s easy for governments to get lost in lofty goals or protracted studies of what’s going wrong, but effective governance requires picking a specific problem and acting on it. In particular, it acts in a targeted way. Ghezzi has found that if you ask the private sector to identify their barriers to growth they’ll provide excellent insight, but if you ask them to suggest a solution, they’ll fall back on generic tax breaks and subsidies. The government has to do better than that; it has to tailor the solution to the problem.
This may be challenging, and it may require some experimentation and iteration, but solving a problem with tangible results quickly reaps benefits. Andrews noted that he has seen many cases in which solving one problem — even a relatively small one — has kicked off a virtuous cycle of building legitimacy for the process, which increases buy-in (both within the government and among the public), and helps expand the information and resources available for the next problem. This process can happen in any country — big or small, rich or poor — so the focus on problem solving is a viable tool for any government.
- Government capacity can grow and change
While state capacity is often seen as static, Ghezzi’s Mesas Ejecutivas (MEs) approach serves as an excellent example of how capacity can grow and change. A mesa is a “working group that includes private and public actors around a sector or a factor of production… aim[ed] at identifying and removing the constraints affecting the productivity of the sector or factor.” Ghezzi saw the failure of past policy and set out to do things the opposite way when he created these mesas . Instead of keeping the private sector at an arm’s length, he invited them to the table to share their knowledge. Instead of delegating tasks to particular ministries, he created a dedicated team of officials whose authority spanned multiple ministries. He connected people in the private sector with a lot of knowledge but not a lot of power to those in the public sector without the knowledge but with the power to coordinate activities and change policies. Importantly, the new way of doing things didn’t cost any more than the old way. He employed new methods with the same resources, making improvements within existing constraints. The mesas were extremely successful at identifying problems faced by the private sector and implementing solutions by the public sector. The Peruvian government has learned from this success; since Ghezzi’s tenure as finance minister, the country has had 7 presidents and 14 finance ministers, but the mesas have endured.
