Industrial Policy for Sustainable Growth in MENA: Lessons learned from the Asian Experience

Understanding the Asian economic growth miracle has been -and continues to be- a topic of great interest for economists around the globe. East Asian countries have witnessed dramatic economic as well as social development, following an unconventional path from the perspective of the free market orthodoxy that prevailed during the last three decades of the 20th Century. This growth has been largely characterized by sustained macroeconomic stability, large-scale industrialization, improved human welfare, and equitable growth.   Closing in on a decade since the beginning of the Arab spring, governments of the Middle East and North Africa (MENA) are now endeavoring to adjust to the “new normal” with all that it entails from restructuring of the economic order to rethinking of the social contracts. Moreover, the MENA economies are now on the brink of a new challenge associated with an eventual low and declining oil prices, which could have daunting consequences for the region, especially for those countries that are yet to start serious institutional and policy reforms.   So the question that we raise in our first plenary session is whether there are lessons learned from the Asian experience that can lay structural foundations for sustainable growth in MENA in light of the current regional context and challenges. To answer this question, Prof. Dr. Keun Lee (Seoul National University) discusses the fundamentals of industrial policies in Asian countries and highlights the relevant aspects within the MENA context where there are opportunities for driving sustainable growth.   Breaking with the conventional: What did Asian countries do to attain sustained growth?   “Innovation is the bottleneck for growth in middle-income countries”   Investment in human capital, innovation and R&D have been the key to the remarkable growth of East Asian countries. But still, the right institutional environment had to be established to pave the way for promoting knowledge-based innovation and entrepreneurship, which in-turn should give special attention to the quality of education and capacity building. Another important aspect of the East Asian development model is the drive toward building the capability of the private sector with the help of government intervention in mobilizing resources.   Dr. Lee highlights the following four essential tools of South Korea’s industrial policy: 1. Protecting infant industries through tariff policy 2. Import substitution, with a measurable performance criteria (protected firms must eventually become successful exporters) 3. Foreign technology licensing import policies 4. Creating rents for strategic industries through controlling market entry 5. Public-private joint R&D to promote higher-end production (not subsidies)   The main challenge facing MENA economies in Dr. Lee’s opinion is having been stuck in the “Middle Income Trap” (MIT) since the 1960s. He argues that MENA countries are in a sort of strange equilibrium, and without some outside shocks like government policies, the equilibrium cannot be broken. Lee emphasizes various forms of industrial policies to break the equilibrium, and move into a high end segment of Global Value Chains. These include:

• Smart specialization: not a targeted top-down strategy, but rather designing entrepreneurship-promoting policies
• Short cycle innovation to achieve similar to the growth divergence of S. Korea and Taiwan in 1985
• Space for industrial policy under WTO

Reality Check: What fits and what can’t in the MENA Context    Reflecting on the East Asian development model, as epitomized in the experience of the Republic of Korea, two perspectives from MENA were articulated by two ERF commentators. Professor Gouda Abdel Khalek (Cairo University) strongly endorses the Korean model and stresses the need for state-led development strategies in MENA. On the other hand, Dr. Diaa Noureldin (The American University in Cairo) argues that South Asia was fortunate to have a winning combination of good institutions and good luck, which is far from the case in MENA, where we have bad institutions and slim luck -let alone both combined!   Another important challenge that Dr. Noureldin highlights, is the disruptive nature of today’s technology and its rapid advancement, which leaves shorter windows for state-driven innovation policy to bare its fruits. Rather, he argues that innovation should be left to entrepreneurship and the eco-systems at the national level.   In a nutshell   There are great differences in the context and initial conditions for development between MENA and Asian countries. Nonetheless, the key tenets of the East Asian development remain of high relevance, though perhaps in some form that accounts for the new normal in the global economy, technology and the particular conditions of MENA.