The Western Balkans - A Role for Industrial Policy

Some scholars underline the need to foster industrial development in the Western Balkans. They also highlight the difficulties of such a strategy because of the lack of protectionism – which leads to a rather pessimistic assessment of economic prospects in the region.

In this short note, I recall the importance of manufacturing industries for growth and the renewal of interests for industrial policies. I also indicate that there is room left for active industrial policies in the context of liberalizing economies – what matters is not so much the label ‘industrial policy’, but the actual measures that can be implemented and may contribute to industrial development.

THE IMPORTANCE OF MANUFACTURING FOR ECONOMIC GROWTH

Nobel Prize Winner Nicholas Kaldor devoted much time analyzing economic growth, including the specific role of manufacturing industries. Thus, the first of the so-called ‘three Kaldor’s Laws’ underlines the strong linkages between GDP growth rates and the growth performances of the manufacturing sector. Considering the evidence, recent empirical findings based on 63 middle and high-income countries confirm “that output growth in the manufacturing sector is essential to increasing economic growth”. In the same study, the authors assess the second Kaldor’s Law, showing the positive links between manufacturing growth and labor productivity – in other words, the higher is manufacturing growth, the higher is labor productivity, which makes manufacturing products more competitive on international markets. These findings can help brainstorm about growth strategies in the Western Balkans, taking into account the context of transition in the region and related challenges.

TRADE-RELATED CHALLENGES

The Western Balkans countries are presently fully engaged in parallel processes aiming at the full liberalization of at least trade in goods. In other words, traditional protectionist policies, relying on high tariff levels, can hardly be promoted for boosting industries in the region.

Considering relations with the EU, the Stabilization and Association Agreements concluded between these countries and the EU aim at liberalizing trade in goods. Trade liberalization is also taking place among the members of the Central European Free Trade Agreement (‘CEFTA 2006’) and accession to the WTO entails lower tariffs for industrial goods.

THE RETURN OF INDUSTRIAL POLICY

The challenges created by international trade agreements are clearly presented by Dani Rodrick in a 2004 paper on industrial policy. Referring to the WTO framework, in particular the General Agreement on Tariffs and Trade (GATT), Rodrick presents the “restrictions imposed by international agreements on the ability of countries to undertake industrial policies”.

In another article, Rodrick writes about the ‘return of industrial policy’ in the UK and France, and also international organizations: “British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations”.

In addition, Rodrick underlines that successful development stories – for instance in East Asia – relied on industrial policies, including the key-role played by the large state-owned companies. Moreover, the ‘return' is needed to promote green industrial outputs and address the on-going climate change.

PROMOTING INDUSTRIAL DEVELOPMENT IN OPEN TRANSITION ECONOMIES

Despite constraints imposed by international trade agreements and the progressive opening of the national economies, there is room left for actions and initiatives to develop and strengthen the industrial basis of the Western Balkans, combining and coordinating the efforts of public and private institutions – which may require a shared vision about what is desirable.

Visions for the next decades

The SEE 2020 Strategy and the EU-oriented Berlin Process are already key-elements that may help elaborate visions about the future of manufacturing in the region, from country and regional perspectives. However, more could be done perhaps, relying on domestic resources and a debate with major stakeholders. When it is adopted, a vision has also to be transposed into a roadmap, with concrete actions and different time horizons.

Evidence-based indicators

Realistic visions about industrial development must be based on evidence, including quantitative indicators. A priori, the so-called ‘revealed comparative advantage’ indicator would make sense. However, it does not necessarily correspond to competitive products. Thus, it is important to integrate tendencies on world markets and look for niches corresponding to promising products, with fast growing markets when the world economy is expanding. The Geneva-based International Trade Centre proposes a set of indicators to identify the right products and sectors. The Boston Consulting Group classification of goods (or matrix) is another relevant scheme. Michael Porter’s ‘competitive advantage of nations’ paradigm is also useful.

Privatization strategies

Not all state-owned (productive) assets have been privatized in the region, which implies that some remaining state plants, land or resources can still be sold, taking into account the needs of the countries in terms of industrial and economic development – employment, incomes (levels and distribution), trade, environmental, modernization (with technology transfers and new managerial styles) and spillover effects should be fully integrated to maximize the long term net benefits of the planned transfers of property rights.

Raw materials

Relying on domestic raw materials, metals, minerals and forest resources, with corresponding low transportation costs because of proximity, some industries may develop quickly, especially when there is a dynamic demand. Concerns about clean/green technologies underline the importance of finding the right partners in the more advanced and high-tech economies.

Value chains

Industrial development may rely on regional integration in the Western Balkans, especially with value chains involving several countries. Such an approach is supported by the EU, with the diagonal cumulation of rules-of-origin. It also requires cooperation between countries for removing trade obstacles, in particular the non-tariff barriers.

Small and Medium Enterprises

Industrial development does not only rely on large plants and companies; SMEs also contribute to it, with risk-taking initiatives, innovation, final products, and subcontracting. Small companies do matter also for the mobilization of young talents in countries characterized by high levels of unemployment.

Business incubators

Innovative ideas promoted by young entrepreneurs could be first developed in business incubators funded with public money and hosted by scientific and technology institutions or located in industrial parks. During the incubation period, free-of-charge or low costs services would be provided by professional advisers, including retired businessmen/women and engineers volunteering to help the younger generations.

Diasporas

Mobilizing the successful members of the diasporas should also be seen as a priority. They could directly invest and create new companies in the Western Balkans; they could participate in joint ventures or just meet, discuss and network with young entrepreneurs and students during specific events.   

Infrastructures and industrial parks

State involvement to promote industries can concentrate on infrastructures that matter for logistics, transports and telecoms. FDIs and local investors can also be attracted by well-equipped industrial parks (and free trade zones/FTZs) located near major airports, commercial harbors or highways; in addition, industrial parks may benefit from active interfaces with research institutions and academia.

Fostering quality

The quality infrastructure, namely series of accredited laboratories, with a capacity to test and certify products, is essential for manufacturing industries; in that respect, given the small size and the limited resources of the Western Balkans national economies, there could be more cooperation in the region to specialize and promote their own laboratories.

Business environment

Stimulating investments does require a conducive environment in terms of transparent legislation, competent courts and rule-of-law, good governance (with a permanent fight against corruption), registration of companies (including ‘single windows’), tax incentives, the rapid processing and protection of industrial property rights, banking, specific loans (the availability of venture capital), insurances, export credit guarantees, etc.

Learning from others and the role of international assistance

In the UK, France and Germany at least, industrial policies are being discussed and/or promoted. The German case is certainly interesting because massive support was provided to the eastern Länder after the fall of the Berlin Wall. The experience of the Baltic States is also interesting because of their size.

Considering the complexity of industrial policies, external technical assistance is definitely required. In that respect, UNIDO seems to be in a key-position because of its unique experience in the field of industrial development.

Strong political will as a ‘must’

All in all, trade liberalisation leaves space for policies aiming at industrial development and, de facto, the Western Balkans countries implement measures in line with industrial policies. Most importantly, political will is needed to prepare and move ahead with the right decisions to foster sustainable industrial development, which requires effective cooperation between all countries in the Western Balkans.

Daniel Linotte

Daniel Linotte holds a PhD in economics from Oxford University. He worked as adviser with international organizations and governments, and held teaching positions at Boston University, the Catholic University Leuven and the European Institute of Public Administration (Maastricht). Since 2008, he is a Senior Member of St. Antony’s College (Oxford). He is presently leading an EU project in the Balkans. He is the author of “The Eurasian Economic Union – Implications for Governance, Democracy and Human Rights”, The Central Asia Caucasus Analyst, publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center... Read more about the author

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