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Are “New Normal” Industrial Policies in South Asia Well-Manufactured?

March 9, 2022

The disruption of the COVID-19 pandemic has caused worldwide shocks in both supply and demand over the past two years. This has been particularly evident in South Asia – a global manufacturing hub and home to some of the largest and fastest growing countries in the world. Governments in the region have found themselves challenged to strike a balance between continued production of key exports, procurement of critical goods to support new industries and respond to the health crisis, and creation of good, well-paying jobs. This is nothing new. Government intervention through industrial policy has been a contentious issue throughout economic history, particularly in an increasingly globalized world. The pandemic environment may have simply exacerbated the recent tendency of South Asian governments toward implementation of strategies of import-substituting industrialization – that is, a focus on incubation of new domestic industries that will compete with and, in theory, replace imports from developed partner countries. The goal is to create an economy that is more self-sufficient and is more valuable for workers, be they Sir Lankans, Bangladeshi, Indian, or Thai.  

But are these industrial policies structured to allow for long-term success? The emphasis on import-substitution has created a regional economic environment in which governments focused on the protection of select industries through aggressive tariff regimes. Governments hope increasing the price of traditional imports, along with cultivation of stronger domestic production, will lead to a significant shift in demand and create value for the home economy. In Sri Lanka, the government attempted to pick “winners” in the agricultural sector that can produce competitive exports and have designed additional interventions with a goal on shrinking the country’s significant trade gap by increasing restrictions on import suspensions and choking demand for non-essential goods. As a result, firms and workers were incentivized to ramp-up domestic manufacture of agriculture and manufacturing to accommodate for lost imports. Similarly, in Bangladesh, the government has instituted strict import controls in the garment and agricultural sectors, coupled with stimulus packages focused on competitive exportability of key products.  

India represents a particularly clear example of government-driven industrial policy through it’s “Made in India 2.0” initiative. The government has introduced a Performance Linked Incentive (PLI) scheme to increase domestic production, albeit one that fails to account for continued challenges like high electricity prices, labor market inflexibility, and infrastructure bottlenecks. Geopolitical realities and critical supply chain shortages have also prompted the government to support electronics production and seek to achieve self-sufficiency in semiconductor manufacturing.  

Today, it’s unclear how these various insular approaches to industrial policy are impacting the individual and regional economies. What is clear, of course, is a prevailing desire on the part of governments to play an outsized role in steering the development or expansion of key industries. Given this reality and the likelihood of continued economic growth challenges presented by pandemic-related disruptions, there are several considerations countries should account for in seeking to implement a measured industrial policy under the “new normal.” First, when supporting industries or “winners,” governments should not lose sight of welfare and equitable resource allocation, particularly in bureaucratic structures that have not previously demonstrated a high level of competency in identifying successes and backing efficient outcomes. In doing so, industrial policy should emphasize dynamic comparative advantage and serve as a path for transformation that promotes economic growth and job creation that can be sustained.  

Second, if selective industrial policies are the preferred path forward, the initiatives must be stringent, proactive, and focused on the long-term. Conversely, they should avoid overemphasizing “solutions” that are tied to COVID-19 impacts, domestic elections, or efforts to shore-up popular legitimacy in the short-term. The government must seek solutions to the problems faced by industry and bolster its support for business to upgrade or add value toward more productive activities. Planners and policymakers should consider the optimal role their country and its industries can play in the “tasks” of various markets, supply chains, and more in the region and globally. They must be pragmatic and clear-eyed in designing strategies that allow for maximal long-term growth and value.  

Third, functional policies – those that are the least interventionist and support the operation of markets – tend to work better for middle- and low-income countries like those in South Asia. One example is policy measures that facilitate entry of firms through a competition initiative – a process that emphasizes capacity building and continuous upgrading of workers’ skills supported by better physical infrastructure. The government should emphasize the availability of more reliable energy and electricity, as well as lowering transportation and communications costs to encourage establishment and growth of firms that will be competitive and positively impact the domestic economy.  

South Asian countries should take a measured approach to introduction of industrial policies, with the goal of generating dynamic effects by restructuring the economy and trade specialization towards activities with higher technological content and promotion of innovative activities. These innovative activities should be understood as new technologies, new markets, industrial structures, or exploitation of previously underutilized natural resources. Governments must also understand that tension exists between promotion of changes that enhance productivity and those that increase the quantity and quality of jobs. They must strike a balance in achieving these two fundamental objectives and the most promising targets for doing so will likely continue to be manufacturing and agriculture throughout the region.  

Industrial policy will continue to play a key role in the economic development and continued growth of South Asia in the years to come. This has been particularly evident over the past two years and will only be more important as the region plays an increasingly important geopolitical role. It is critical that governments are pragmatic in their use of industrial policy and consider how they can strike a healthy balance between protecting and cultivating domestic industry while also remaining well-connected to the regional and global economies, with minimal disruption. They should focus on long-term growth and make logical, data-driven decisions that seek to create equitable growth in key industries; avoiding the pitfalls of short-term or reactionary measures that may miss the mark or “pick” the wrong winner.  

WBD is proud to play a role in working to orient South Asian economies in the right direction through the USAID Cross-Border Infrastructure and Connectivity (CBIC) project. In this capacity, WBD is providing technical assistance and capacity building support to hundreds of government officials from India, Nepal, Sri Lanka, Bangladesh, Thailand, and Bhutan. Our team has conducted dozens of trainings for these participants, which have covered topics like trade policy and analysis, development in the context of COVID-19, infrastructure connectivity, and bilateral and regional trade agreements. In doing so, WBD is helping equip many of the key regional economists and practitioners with the ability to make better decisions about the future of their country’s economic planning and growth, while enhancing intra-regional ties and trade.  

Author: Nihal Pitigala is WBD’s Lead Economist and is engaged with international development and the firm’s Private Sector Engagement Support award with the United States Agency for International Development. Trey Fields is the secondary author and a  Lead Consultant at WBD, engaged with the firm’s Private Sector Engagement Support award with the United States Agency for International Development.

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