Presentation at the Quarterly Monitor 31
If we want to truly develop Serbia's reindustrialization programs, it is necessary to:
1. first establish mechanisms for good governance of the country, which we do not have today. Without new mechanisms for conceptualizing, planning, and implementing policies, the reindustrialization program will lead to even greater waste of public funds than we have today, and to an even faster fall into a debt crisis.
2. Good governance of economic, in this case industrial, policies of the country also presupposes a more explicit, different, and much more organized cooperation between the economy and the state than we have today. This cooperation must include all essential segments of the economy, rely on binding mechanisms and criteria in agreeing upon and implementing policies, as well as on strengthening the expertise of the state.
3. Industrial policy, like all others, must be constantly subjected to a check of its success according to previously defined criteria, and its adoption and implementation must be completely open to unimpeded public insight.
The Kopaonik consultation has, by all accounts, launched the planning of Serbia's reindustrialization strategy. What it will consist of, I, at least, still do not know, but I hope that today's comments will arrive in time to have an influence.
It is entirely understandable that there is a growing consensus among businessmen, economists, and the political elite that „something must be done“ about the paralysis in the country's economic activity. Serbia is stuck at around 85% of GDP from 1989, and there is no light at the end of the tunnel. Overdue debt to banks has already reached one-fifth of the total approved loans. It is of little consolation that banks have adequate provisions. The problem is that banks, with their tightened lending conditions, have joined the factors that stifle, rather than lubricate, economic activity.
Something must be done, and whatever it is, the state and the economy will have to cooperate on it. Therefore, it is good that we saw something at Kopaonik that resembled the beginning of a dialogue, although both good and completely dangerous proposals were heard. Let's be clear, the thought of an industrial policy in Serbia hastily grafted onto existing institutions is frightening – and loyalty to a real budget and a real exchange rate, which were discussed at Kopaonik, remains just words. At best, this leads to further waste of increasingly valuable resources, and in the most likely scenario, it leads to a debt crisis. Because today in Serbia, in addition to corruption, we can find examples of waste of public funds at every step, even when corruption may not have been involved: a school for 8 students is being renovated, and a bus to a school 10 km away could have been purchased for much less; wastewater treatment plants are being built in places without a sewage system; subsidies are given for the production of berries in an area without cold storage, so producers cannot market the surplus afterwards. Our country simply lacks the necessary planning and coordination mechanisms to ensure that funds are spent meaningfully. Such mechanisms are also necessary for the meaningful action of the state, and if we want to fight corruption more seriously. Tender procedures are not enough.
The idea of what kind of industrial policy Serbia could have, with such a state, truly frightens me. However, I do not join my colleagues who believe that such policies should be abandoned, that they should not even be considered, that the only good state for Serbia is much smaller than it is today. I think it must primarily bedifferent, much better, much , more productive..
The complete absence of the state from the economy, as recommended by the simplified Washington consensus, does not actually exist. The fact is that even the most developed countries in the world, in facing the financial crisis, have resorted not only to very interventionist macroeconomic policies but also to active industrial policies. Even in the USA, stimulus fiscal spending has been directed particularly towards renewable energy sources and the development of high technology.
There is no successful economic development without state intervention, i.e., without state activities that go far beyond merely ensuring respect for property, contracts, and market competition rules, as assigned to it by the Washington consensus. Let's take Taiwan as an example. When its industry faced great difficulties about ten years ago, due to low world prices and domestic reasons, the Taiwanese state did not subsidize them but supported the development of the orchid industry with investments in: a) a genetics laboratory; b) packaging and shipping facilities; c) new roads; d) access to water and electricity for private greenhouses; and e) exhibition space. In fact, the state undertook the investment for all the necessary fixed costs of a quality orchid production system, except for the cultivation itself. Today, these investments are paying off – Taiwan is one of the world's largest exporters of orchids. This example of the Taiwanese state's intervention is a classic example of industrial policy. (Here, a terminological clarification is in order: industrial policies do not necessarily have to relate strictly to industry; in this case, it relates to the promotion of agricultural production. It is important that production desirable for the country's development is promoted. This is how I interpret the term „reindustrialization“ of Serbia.)
Let's imagine how much could be achieved in Serbia with such intelligent and thoughtful policies in depressed areas where former manufacturers have closed their gates?
My first message today is that economic progress requires a „good“ state, whether the country opts for an interventionist or a liberal model of the relationship between the economy and the state. A bad state, such as we have today, cannot lead to progress, neither within the utopia of the Washington consensus nor with intervention.
My second message today is that we must harness the wave of willingness and expressed need for state and business to cooperate in transforming Serbia's economic structure in order to build a better state. The state can only be improved with a vision, and the vision of development goals is much more powerful than the goal of reducing the state to a sustainable level. A vision of development goals is necessary to define a meaningful industrial policy, and I believe it can motivate society to establish a „good“ industrial policy. And a „good“ industrial policy is defined by the process by which it is achieved, not by some absolute content. If we want a good industrial policy, we must changethe way we make policies on budget spending,the way the way we intervene in the economy, andthe way the way we implement them. If we manage to do this for the sake of approaching development goals, then we would probably more easily find the strength to implement those reforms that both liberal economists and interventionists agree are sine qua non, without which we really have no chance: and these are bringing state spending within more realistic frameworks and ensuring true market discipline. Of course, such an industrial policy would also eliminate the harmful interventions in the economy that we have today.
Let's look, then, at what a „good“ industrial policy looks like and what it depends on.
„A “good" industrial policy starts from the premise that the state and its officials, by the nature of their role, in principle know less about the market, and are weaker businessmen, than real businessmen. The advantage of civil servants, in an „ideal case,“ is not in knowing more, but in being in a position to see and deal with the big picture, to deal with coordination without self-interest, and to not worry about short-term profits. Good industrial policy carefully chooses to intervene only in those cases where the state has an advantage over the private sector. These are cases where externalities are created, i.e., when the benefit to society from an activity is greater than the costs and profits it generates. Therefore, if there is a possibility that an activity can create greater benefit for society than that activity earns, and if for some reason the private sector has no interest or ability to carry out that activity, then state support for that activity may be justified. For example, the knowledge produced in the Taiwanese Orchid Genetic Center benefits every producer, no matter how many there are, and if the number of producers grows sufficiently, it creates great benefits. Realizing this benefit took time, entering into a risk for which private investors would have no interest.
Since the state is not smarter than the economy, the key characteristic of a „good“ industrial policy is that it is made through a process of dialogue and cooperation between business and the state (including experts). That is why I emphasized the importance of the dialogue that began at Kopaonik. There is no single predetermined scheme through which such cooperation is organized. Textbook models of perfect resistance to corruption, or the Washington Consensus, recommend as little interaction as possible, as many rules as possible, as much distance as possible between civil servants and businessmen. Because industrial policy is very susceptible to corruption. But the reality is that successful countries still keep business and the state at a shorter distance. The secret to success lies in developing mechanisms, written and unwritten rules, that keep corruption under control, even though cooperation is genuine. First and foremost, a good cooperation mechanism must be open both for the participation of a wide range of business interests, without too much politics, and for public scrutiny. Such cooperation arises from a genuine need, like the one we feel today, and is built through the gradual realization by both sides of their mutual roles and possibilities.
Such cooperation also produces joint learning. A very important process characteristic is that a „good“ industrial policy does not expect to be „flawless,“ but reacts quickly to mistakes by abandoning them. The following important characteristics of good industrial policy are also mentioned in the literature: a) it is under the leadership of the political leadership, which takes responsibility and ensures coordination and control over departments; b) it is formulated and relies on public-private coordination and advisory bodies whose structure ensures representativeness and entry for outsiders; c) it is subject to clear mechanisms of transparency and accountability. Some other principles that a „good“ industrial policy should follow are: it supports only new, narrowly defined activities, measures success or failure with clear criteria, limits the lifespan of any support, and is implemented by competent bodies under the supervision of the highest political authority.
I know that developing such a process in Serbia seems utopian. Can we imagine the Government of Serbia, this or any other, establishing a mechanism for genuine, lasting, and representative consultations with the business community, investing in raising the expertise of its apparatus, investing in the development of knowledge at this and other universities that are needed to properly assess the effects of industrial policy, and thus attract funds that are currently being spent on maintaining the status quo in the capacity of our scientific community? Can we imagine establishing systems for policy consultation, planning, and coordination at the highest state level? To adopt development and investment programs that would be truly binding for all ministers in the Government and, to a good extent, for future Governments? For strategies to stop being wish lists? It is not easy to imagine all this.
But what is the alternative? The alternative is a vicious cycle in which, while we wait for inaction from the state, it is constantly acting – but wrongly. This is a sure path to ruin. A bad industrial policy grafted onto what we have today will only lead us to that ruin a little faster.
