Industrialisation through use of policy space

Over the last few months, there has been increasing public discourse about two strategic documents. One is global with national implications - the proposed Sustainable Development Goals (SDGs), the post-2015 framework that will replace the much-celebrated Millennium Development Goals (MDGs). The other is the key national development strategy of Bangladesh -the 7th Five Year Plan (FYP). Both of them are immensely important in charting the development pathways for the coming years.
The proposed SDGs are more comprehensive and broader in scope than its predecessor MDGs.  What are distinctive in the SDGs are the two specific economic goals: sustainable economic growth and productive employment (goal 8) and infrastructure, industrialisation and innovation (goal 9). Such direct targeting of economic development is somewhat trailblazing for global development agenda-setting.
The SDG 8 stipulates at least 7 per cent annual growth for LDCs to be achieved through production diversification, technological upgrading and innovation in higher value addition and labour-intensive sectors. If that is to be realised during the 2016-30 period, an industrial transformation led by manufacturing sector expansion during the lifetime of SDGs has to happen.
LESSONS: Industrialisation as the core of National Development Strategy (NDS) is also a lesson from economic development trajectory over last three plus decades. While some developing countries have excelled in human and social development by complying well with MDGs, the real success stories are the ones which could industrialise effectively and extensively. China is the best example that continues to do better. In about two decades, China's share of global GDP rose from 3.5 per cent in 1995 to 14.9 per cent in 2013. The country has become the world's largest manufacturer. It is roughly a month now that China has surpassed the US to become the world's largest economy and is set to be even 20 per cent bigger than the US economy at the end of this decade, according to the IMF. Although China is way ahead even among major economies, other success stories are also showing similar trends. Both Brazil and India are among the world's top ten manufacturers whose shares in global manufacturing output steadily increased since 2000.
Coming back to Bangladesh's long-term development goals, where do we stand? The country has been a poster child first for NGO-driven social development and micro-credit and then for MDG achievements. Bangladesh is also famed as a global sourcing hub for ready-made garments (RMG).  Despite the latter, the country is still not in the throes of industrialisation.
Bangladesh has a history of compliance with neo-liberal prescriptions. It is one of the first countries to accept structural adjustment policies (SAPs) in the late 1980s and was also the first country in South Asia to introduce extensive trade liberalisation in early 1990s. Bangladesh was also a founding member of the WTO. The country became integrated with global economy over the years. There has been removal of quantitative restriction (QR), reduction in tariff and custom duties and implementation of flexible exchange rate policies. There is an increasing export volume and economic growth but at the cost of overall decline in manufacturing and constrained industrialisation.
The contribution of industry to the GDP has increased from over 17 per cent in the FY1980-81 to nearly one-third in the current fiscal. However, this figure that includes construction sector in definition of industry, disguises our real rate of industrialisation. Minus construction, the real extent of industry that emerges is much smaller. In the FY2013-14, the manufacturing sector's contribution to GDP is 12.1 per cent while the target set for FY2014-15 is 21.1 per cent. There is still no reason to believe that the 9.0 per cent gap can be bridged in a single fiscal year. Again, our Manufacturing Value Added (MVA) is stuck at 18 per cent from 2007 onwards. To sum up, there is no notable industrial development that indicates progressive industrialisation. However, as suggested by development success stories like China, India and Brazil and, considering the necessities like domestic resource mobilisation and employment generation, there is no alternative to industrialisation.
NEO-LIBERAL PARADIGM: Our current industrial policy regime that conforms to neo-liberal development paradigm is generally understood as 'favourable.' Question arises that if the country's industrial and allied policies are so favourable, why does our MVA remain stuck at 18 per cent for about a decade? During the same time, our economy grew on average 6-7 per cent every year. So, our overall economic development is not matched by expansion of manufacturing.
To boost our industrial production capacity, we have to think out of the box. We have to go beyond the policy prescriptions of the WB-IMF-WTO troika. Following the footsteps of China, India and Brazil and earlier successful industrialised countries like South Korea, Taiwan and Malaysia, Bangladesh has to sufficiently utilise its policy space through pursuing an activist/selective industrial policy instead of current neutral one.
The idea of policy space - as articulated by the Trade and Development Report 2014 of UNCTAD - refers to the freedom and ability of governments to identify and pursue the most appropriate mix of economic and social policies to achieve equitable and sustainable development in their own national contexts, but as constituent parts of an inter-dependent global economy. So, policy space is a combination of policy sovereignty and national policy control. Policy sovereignty is formal authority of policy-makers over national policy goals and instruments while national policy control is the ability of national policy-makers to set priorities, influence specific targets and weigh possible trade-offs. Industrial policy is an important manifestation of policy space. Leading economist Robert Wade defines industrial policy as targeted efforts to change the production structure of an economy in order to accelerate economic development.
SHRINKING POLICY SPACE: Policy space of countries, especially those from global south like Bangladesh, has been shrinking from the late 1980s with neo-liberal ascendancy. Beginning with SAPs reform of Washington Consensus era followed by Post Washington Consensus and then sustained by WTO regime, successive trade and financial liberalisations have stripped much of the policy space of developing and least developed countries.  A stalled WTO process due to hitherto failed Doha Round, coupled with other shifts in global political economy, has further eroded policy space. The WTO still allowed policy sovereignty and national policy control up to a certain threshold. Even that threshold is often withering under Free Trade Agreements (FTAs) and Bilateral Investment Treaties (BITs) exacerbated amid stalled WTO process.
Policy space is not about blind faith in free trade, financial liberalisation, privatisation, credit and inflation controls, export promotion, FDI and such other neo-liberal policy prescriptions. Instead of comprehensive trade liberalisation, trade protection should be deployed selectively and strategically as and when necessary. Sector-specific trade protection should continue along with targeted programmes for increasing competitiveness of concerned firms. There should be capital control as opposed to financial liberalisation in order to protect the economy from rapid outflows and destabilising inflows. It should be realised that FDI without any strings attached cannot bring much benefit. FDI should incorporate technology transfer to domestic firms and domestic content requirements. There has to be greater emphasis on domestic and public investments.
Industrial policies, often in exception to neo-liberal policy orthodoxy, were in the core of national development strategies followed by all successful industrialised countries. Those were the policies of early industrialized nations like the UK, Germany, the US and Japan, late industrialized economies like South Korea, Taiwan and Malaysia and more recent industrial powerhouses like China, Brazil and India.
Renowned development economist and Cambridge University professor Ha-Joon Chang elaborated historical examples of industrial policies in his famous book Kicking Away the Ladder. He showed that the path of successful industrialisation by the early industrialisers was not free market policies but policy space.    
Now, if Bangladesh has to industrialise - effectively, extensively and of course rapidly - the country has to take the historically proven path of policy space, not the free market policies which performed dismal so far.    
WTO RULES: One argument that our leaders and decision-makers often make on industrial policy support to domestic industries is that their hands are tied by WTO rules.  W e again heard this very recently from the Commerce Minister at a panel discussion of the Dhaka Apparel Summit. This is half-truth at best. It is true that WTO rules constrain member-countries' policy space in ways that they can't adopt industrial policies to the extent of Japan, South Korea and Taiwan during their take-off stages. But that is not the end of story.
As noted by LSE economist Robert Wade, "WTO rules are more constraining for some policy instruments than for others." For tariffs, quantitative restrictions and local content requirements, WTO rules are indeed more constraining. However, for a handful of other policy instruments - government procurement, intellectual property, export subsidies in agriculture, devaluation, investment incentives, trade finance and export subsidies - WTO rules are medium to least constraining. In other words, even within the scope of WTO, there are still policy spaces available to countries for adopting industrial policies to modify their industrial production structures. In addition, there are further concessions for LDC countries like Bangladesh.
Inspired by goals 8 and 9 of proposed SDGs and maneuvering the policy spaces still allowed by WTO, Bangladesh should strive for activist industrial policies through full utilisation of policy space. The upcoming 7th FYP that is under preparation now should incorporate policy space and industrial policies leading to appropriate modification of industrial production structures. That is only how we can give birth to a 'Bangladesh Miracle' not through blind following of free market policies.   
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