Eun Jung _Jane_ Choi Lizhi Liu Holger Fabian Sahl Stephanie by hedongchenchen


									Eun Jung (Jane) Choi
Lizhi Liu
Holger Fabian Sahl
Stephanie Gimenez Stahlberg
Salvador Zepeda

Governments seldom know how to select industrial policies that lead to growth and
development. They analyze industrial policy solely from a public perspective, disregarding the
interdependence between the private sector and industrial policy.

That approach misses a key part of the process in designing industrial policy, and it may explain
some industrial policy failures.

We offer a different approach: our guidelines on the selection of policies and industries combine
public and private sector analyses in an innovative way to identify industries that will benefit
both sectors and will therefore prove successful and sustainable.

The guidelines we propose are a product of collaboration between Stanford graduate students
and staff from the International Finance Corporation (IFC), in response to various developing
country governments having requested the IFC to create guidelines to help them identify
potentially competitive industries and policies to develop them. The world economic crisis hit
some of the poorest countries hard, and in order to spur growth, these governments want to offer
a helping hand to specific industries. The continued success of the Chinese model also suggests
potential for a strong government role in the economy. With scarce resources in particularly
difficult times, the question that remains is which industries and policies are most appropriate for
growth and development.

Here is a good piece of advice: industrial policy needs to combine both the public and private
sector perspectives. The private sector perspective offers a profit-driven approach with two main
benefits. First, profit provides a criterion that attracts investors and, with them, their capital and
expertise. Second, to thrive in competitive markets, firms must focus on serving their markets
well. Attracting investors and being market-focused increases an industry’s chances to succeed
in the long-term.

We researched several case studies, and all of them confirmed the importance of including the
private sector perspective in industrial policy. In one of the case studies, the household
appliances industry in China, we discovered that policies such as the extension of tax holidays,
exemptions from import duties, and provision of direct subsidies, can attract critical foreign
investment and domestic capital. In another case, government support for smallholder tea
producers in Kenya, we found that government support has been critical in the rise of Kenya to
the position of world’s leading exporter of tea. In all other case studies the result was invariably
the same: it is critical to consider the private sector’s perspective and needs for industry growth.

The public sector perspective determines which policies provide the maximum benefit to society
at a reasonable cost. Because the public and private sectors have different approaches to

measuring value, we use two different methods of analysis: cost-benefit analysis for the public
sector, and portfolio analysis for the private sector.

By combining public and private sector analyses, policymakers can better understand how
government policies can impact the private sector and society as a whole. The guidelines’
rigorous analysis provides policymakers with a tool to make better-informed decisions with their
scarce resources. The need for smart industrial policy is urgent; it is time government and
business join hands in this effort.


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