(Part 1)

Industrial policy formulation or industrial strategy is very much the rage all over the global economy today. It has gone much beyond its earliest form in the middle of the last century when the governments of what countries that eventually rose as the “tiger economies” — such as Singapore, Hong Kong, Taiwan, and South Korea — adopted specific economic policies that favored the growth of certain sectors that were considered “most likely to succeed” because of perceived competitive advantages. Examples of such government policies were tariff protection, subsidized interest rates, undervalued currencies, or depressed wages.

Today, the ones most aggressive in adopting industrial policies are no longer the developing countries but the more developed countries like the United States and the United Kingdom. The very high tariff rates being imposed by the Trump Government on imports from China, India, and other countries are examples of modern-day industrial policy. Such protectionist moves are clearly meant to bring back to US soil the many manufacturing sectors such as automotive, electronics, and pharmaceuticals that migrated to Asia and other regions with lower wage costs. In the UK today, the centerpiece of industrial policy is a set of strategies for the eight industrial sectors which, on various metrics, offered the greatest growth potential, such as advanced manufacturing, life sciences, the creative industries, and financial services.

China has been the target of many of the US efforts to “bring jobs home.” Most recently, however, China has been fighting back, especially in sectors belonging to the so-called Industrial Revolution 4.0 (e.g., artificial intelligence, robotization, Internet of Things, data analytics, etc.). For example, China’s internet regulator has banned the country’s biggest technology companies from buying the artificial intelligence chips produced by US company Nvidia. The Cyberspace Administration of China recently told Chinese companies such as ByteDance and Alibaba to end their testing and orders of the RTX Pro 6000D, Nvidia’s tailor-made product for the country.

Meanwhile, in the US, Nvidia has agreed to invest $15 billion in its struggling rival Intel as part of a plan to develop chips for PCs and data centers, the latest reordering of the tech industry spurred by artificial intelligence. The deal comes a month after the US government agreed to take a 10% stake in Intel, as Donald Trump’s administration tries to secure the future of American manufacturing.

These examples show that industrial policy is getting more sophisticated. What guidelines can we suggest to our government in formulating our own industrial policies in the coming years? In the remaining three years of the administration of President Ferdinand Marcos, Jr., it is important that business, civil society, and the academe get together with the government to agree on the economic sectors that should be favored with specific financial, policy, and infrastructure support because they are perceived to contribute most to poverty reduction and employment generation as well as maximum GDP growth.

A LITTLE BIT OF HISTORY
But for a historical perspective, let us dwell on a brief history of industrial policy that began with the first industrial revolution in the late 18^th century in England and later in the rest of Western Europe.

The first country to industrialize, Britain, followed a relatively laissez-faire approach to industrialization, with minimal state interference. The role of the State was through the enclosure acts (allowing private ownership of large tracts of land that used to be subject to fragmentation during the period of feudalism). This enclosure movement freed labor for the manufacturing sector which resulted from the mechanization of textile production (the spinning jenny), the use of steam power, and the mining of coal and iron. We must remember here that the word “industry” encompasses not only manufacturing but also mining, public utilities, and construction (especially infrastructure). The State also facilitated through the protection of property rights, navigation laws (mercantilist trade rules), and the protection of colonial markets from other colonizing countries like Spain and Portugal. The first examples of public-private partnerships (PPP) were infrastructure investments in canals and railways.

Then came the Second Industrial Revolution (mid-19^th century to early 20^th century in Europe and North America). The technologies that were invented were in the steel, chemicals, electricity, and internal combustion sectors. Industrial policy was refined, especially by Germany and the US, that pursued active promotion of specific sectors by protecting so-called “infant industries” with tariffs (following the ideas of Friedrich List). In Germany there was active support for research institutes (e.g., German technical universities, industrial laboratories, etc.). This was the period of massive infrastructure expansion (e.g., railroads, telegraphs) financed partly by government. In Japan, during the Meiji Restoration (1868 to 1912), there was strong state-led industrialization through a very active importation of technology, especially from Western Europe, and the creation of the so-called Zaibatsus (industrial conglomerates) which were the origins of today’s Japanese international conglomerates like Marubeni, Mitsubishi, Mitsui, and Sumitomo.

During the period between the First and Second World wars (1918 to 1945), industrial policy turned more interventionist. The Soviet Union introduced Central Planning with Five-Year Plans prioritizing heavy industry. In Fascist Italy and Nazi German, the focus was on state-directed rearmament industries. In the US as an aftermath of the Great Depression, the government introduced the New Deal program for industrial recovery through massive public works projects, especially those undertaken by the Tennessee Valley Authority (TVA).

After the Second World War, there was the “Golden Age” (1945 to 1970s) of industrialization. In Europe, reconstruction was actively pursued by both the victors and the defeated through the so-called Marshall Plan. In Japan, the Ministry of International Trade and Industry (MITI) led the industrialization efforts through directed credit, technology imports, and export promotion. France pioneered in what was called “indicative planning” through the Commissariat General du Plan. In the US, a more free-enterprise approach was followed in industrial strategy, but the government played the leading role in investing in defense-related R&D (the military-industrial complex).

In the present millennium, we can discern the resurgence of state activism as a result of globalization, recurring economic crises, and the advent of new technologies. Examples of these are massive state subsidies for high-tech sectors under the “Made in China 2025” strategy. In the US, even before the very aggressive tariffication move under the second Trump Administration, there were industrial policies like the CHIPS and Science Act (2022) and the Inflation Reduction Act (2022) to promote high-value semiconductors and green industries. In Europe, there were parallel moves in the forms of the Green Deal and industrial strategies for digital and renewable energy sectors. In both high-income and middle-income economies, there is a clear focus on climate transition, digitalization, artificial intelligence, and supply chain.

To summarize, industrial policy was pursued in different countries and different historical stages under, on the one hand, free-enterprise or market-based conditions or, on the other hand, under active state intervention depending on historical needs. Britain’s early industrialization was market-led but later successes (Germany, the US, Japan, East Asia, China) show strong state guidance was crucial at various stages of the industrialization process.

Before we try to learn some lessons from this historical review of industrial policy, let us go into greater detail on how industrial policy partly explain the well-known success of the “tiger economies” of East Asia in the second half of the last century to transition from low-income to high-income economies in record time. And, more importantly, let us try to understand why the Philippines failed to join the band wagon!

(To be continued.)

Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is professor emeritus at the University of Asia and the Pacific, and a visiting professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.

bernardo.villegas@uap.asia