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IMF changes tune on industry policy – shamelessly – Part 2

In Part 1, I introduced the discussion about the use of industry policies in the Keynesian period after World War 2. Most nations adopted a mixed planning-market based system for allocating productive resources and the state was always central in setting out planning parameters, direct ownership and employment, and regulation. It was a system that researchers described as being “highly successful”. Two approaches to industrialisation were taken: (a) export-oriented (for example, South Korea); and (b) import-substitution (for example, India), although in most cases, nations used both strategies. As neoliberalism emerged and the fixed exchange rate system broke down in the early 1970s, the IMF, whose purpose was intrinsically tied to providing foreign reserves to nations under the fixed

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In Part 1, I introduced the discussion about the use of industry policies in the Keynesian period after World War 2. Most nations adopted a mixed planning-market based system for allocating productive resources and the state was always central in setting out planning parameters, direct ownership and employment, and regulation. It was a system that researchers described as being “highly successful”. Two approaches to industrialisation were taken: (a) export-oriented (for example, South Korea); and (b) import-substitution (for example, India), although in most cases, nations used both strategies. As neoliberalism emerged and the fixed exchange rate system broke down in the early 1970s, the IMF, whose purpose was intrinsically tied to providing foreign reserves to nations under the fixed exchange rate system, no longer had a purpose. They reinvented themselves as the neoliberal attack dog for corporations and global capital. They also provided cover for governments who were embracing the Monetarist ideas of Milton Friedman and intent on imposing fiscal austerity. These governments had become captured by corporate interests and by appealing to external demands from bodies such as the IMF, these governments could depoliticise harsh policy shifts away from Keynesian full employment. I used Britain as an example. Tony Benn, a Left Labour member in the British Parliament and Secretary for Industry, proposed an alternative industrial plan to revitalise British industry in 1975. It was rejected at the time by Harold Wilson and Denis Healey, who were intent on imposing fiscal austerity and deregulating. They used the scare that the IMF would have to bailout Britain as a ruse to force their Monetarist ideology onto the British Labour Party. It was no surprise that in an era where governments started abandoning fiscal support to maintain full employment, deregulated labour and financial markets, and abandoned domestic protections for their industries, many industries would go to the wall. The IMF claimed that this shows industry policy focused on import-substitution can never work. But the culprit was not flawed industry policy. Rather, it was the withdrawal of all the accompanying support structures that made it work, but which ran counter to the neoliberal ideology of ‘free markets’. Now the IMF is having a rethink based on the devastation that neoliberalism has caused. On March 26, 2019, the IMF published a new working paper (19/74) – The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy. Now, we are reading that the IMF has conceded that industry policy interventions that were the basis of economic planning in the Keynesian era were highly successful and only stopped being so, in some cases, when fiscal austerity was imposed and trade controls were abandoned in the 1970s. This is Part 2 of the two-part series on this topic.

The point is that industry policies didn’t just become failures then but are okay now. They were always successful ways to use the capacities of the sovereign government to develop industry, provide well-paid employment and help insulate the currency from speculative attacks (especially when combined with capital controls).

History might have been very different – and the evolution of social democratic governments might have been very different – if bodies such as the IMF and the World Bank hadn’t lied about the effectiveness of such policies in the 1970s.

There would have been no basis for rejecting Tony Benn’s Alternative Economic Strategy, for example.

Industry policies will always work if they are supported by coherent policy structures.

The problem for the IMF is that these supportive policy structures are the opposite to those typically proposed by them. Which is why their latest revelations about the effectiveness of industry policies is only a conditional admission.

They bias their findings by arguing that only export-oriented policies should be used.

That is because they know that import-substitution industrial strategies are highly effective but require fiscal support, regulations and elements of protection.

If they conceded on that point, they would have role to play at all.

So, ultimately, yes, the IMF is adjusting to their dramatic failures of the past. But they are not abandoning the frameworks that delivered those failures.

Instead, they are searching around for ways to embrace the empirical reality without jettisoning any of their ideological baggage.

They should be disbanded.

The IMF and industry policy

In its Post-Bretton Woods incarnation (post 1971), the IMF was implacably opposed to industrial policy interventions by governments.

It has bullied governments into abandoning planning frameworks, where policy initiatives would help domestic industries grow through public subsidies, tariffs, partnerships in R&D, etc.

In particular, import-substitution industrial development strategies were particularly discouraged and declined as the IMF forced governments to deregulate, privatise, impose fiscal austerity and eschew any sense of ‘picking winners’.

The new emphasis was on export-bias with free flow of capital (in and out) with the requisite domination of foreign capital in local ownership. The corresponding outflows of resources and income flows to foreign owners were lauded as being the exemplar of development as health and education spending was cut and environmental degradation accelerated.

Key historical shifts occurred in this time – for example, this is the point period when social democratic governments and political parties started to embrace neoliberalism and we know how that has ended.

In its latest working paper, the IMF admits that industry policy interventions, which were the basis of economic planning in the Keynesian era, were highly successful and only stopped being so, in some cases, when fiscal austerity and trade controls were abandoned in the 1970s.

Quite an amazing denial of their past narratives, even though they don’t frame their new found enthusiasm for planning in that way.

This is another case of imagine what might have been had the IMF not been so ideologically blinkered as it was trying to reinvent itself in the 1970s once the Bretton Woods system, that defined the IMFs existence, collapsed.

When Tony Benn proposed the AES he was crudely rejected by mainstream economists, global capital interests, and his fellow Labour Party members, who were being seduced by the growing popularity of Monetarism (neoliberalism).

As the new IMF paper cited in the Introduction notes that “in the recent past”:

… the consensus view among many economists is that industrial policy usually fails, so any resurrection of these ideas is taken with great skepticism.

I love the way the mainstream presents their mantra as a “consensus”.

I have a PhD in economics so I am an ‘economist’ and I have always supported industrial policies as a way of planning outcomes that align with public interest.

I have have also studied Korea and Japan in detail (and visited and discussed with officials in both nations) and always appreciated the fact that the great industrial transformation stories in history were not the result of the sort of development strategies promoted by the IMF in its neoliberal era.

For some background on that see the following blog posts:

1. The case against free trade – Part 1 (October 27, 2016).

2 The case against free trade – Part 2 (November 8, 2016).

3. The case against free trade – Part 3 (November 22, 2016).

For example, the state-motivated development of industry in South Korea (such as, The Heavy and Chemical Industrialisation (HCI) program), would never have occurred if self-regulating markets were prioritised. Other examples, include the watchmaking industry in Switzerland).

As Ha-Joon Chang wrote in his 2007 book:

This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy …

The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business—credit …

The Korean government also had absolute control over scarce foreign ex- change (violation of foreign exchange controls could be punished with the death penalty). When combined with a carefully designed list of priorities in the use of foreign exchange, it ensured that hard-earned foreign currencies were used for importing vital machinery and industrial inputs. The Korean government heavily controlled foreign investment as well, welcoming it with open arms in certain sectors while shutting it out completely in others, according to the evolving national development plan …

The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period – things like simple garments and cheap electronics—were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market.

The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction.

(Reference: Chang, H-J (2007) The Myth of Free Trade and the Secret History of Capitalism, London, Bloomsbury Press.)

Now the shameless IMF, short on self-reflection and strong on trying to dominate agendas, is admitting that:

… one cannot ignore the preeminent role of industrial policy in their development … Not only did they succeed at catching up with the advanced world, the Asian miracles’ economic model resulted in much lower market income inequality than that in most advanced countries.

Yeh, we knew that all along, while the IMF was forcing nations to do exactly the opposite.

There is no sense of self-reflection in the IMF.

Imagine if it had never been so vehemently opposed to industrial planning!

Would Tony Benn have been so easily dismissed by the growing mainstream view that free markets were the way to go?

History might have been very different if these ideologically-motivated institutions had not advocated neoliberalism.

The IMF thinks it is reasonable to suddenly discover things that non-mainstream economists knew all along and not reflect on its own impact on politics and the destiny of nations.

And, in the process of reinventing the past, the IMF still cannot admit their framework is deeply flawed.

So, instead, the current paper uses the terminology “True Industrial Policy” or “Technology and Innovation Policy (TIP)”, presumably to differentiate their version of events from an ‘untrue industrial policy’ that non-mainstream economists have always advocated.

The IMF has also, it seems, discovered the “Asian miracles” as exceptional examples of transitioning from poverty to advanced nation status on the back of extensive state planning and non-market allocations.

Of course, the mainstream development economists have constructed these development miracles:

… as “accidents” that cannot and should not be emulated, at least from the point of view of standard development economics

Why? Because they are inconvenient to the standard neoliberal mantra because of the centrality of the State in the industrialisation processes.

The most recent manifestation of development theory supports policy interventions that transfer wealth and resources to the rich at the expense of the poor through deregulation, privatisation, public austerity (except in subsidising profit) etc.

The Asian miracles are terribly inconvenient for that sort of story.

The IMF also admit that industrial policies in the past that focused on state investment in “import substitution industrialization” – so-called “inward looking” policies:

… did yield a sizable increase in manufacturing production … during the height of industrial policies, many developing economies achieved relatively high growth rates in manufacturing spurred by the import substitution policies.

While the nations that took this path did not grow as fast as, say, South Korea, they still enjoyed strong improvements in material living standards.

Further, when neoliberalism sponsored by the IMF and the World Bank bullied developing nations to abandon import substitution, growth rates declined.

The IMF admit that:

During the later period, 1980–2010, when import substitution policies were rolled back in most developing economies, the average growth rates of manufacturing production dropped significantly, and manufacturing stagnated in many economies.

The point they want to make is that manufacturing in economies such as South Korea kept growing during this period because they “pursued an export-oriented industrialization policy on a large scale”.

But when export-oriented policies have been inflicted on developing countries with the accompanying neoliberal interventions – privatisation, deregulation, etc – the outcomes have often been disastrous.

The fact that the nations that chose a state-driven import-substitution approach to industrialisation grew strongly without an export-bias suggests these policies should be an important part of development strategies.

Nothing in the IMF paper establishes otherwise.

They try to claim that:

… although most developing economies had tried some sort of industrial policy in the 1960s–1980s, there are very few countries that had achieved sustained growth in their production of manufacturing, especially beyond the 1980s and had a clear export orientation view that was even remotely comparable to Korea’s …

But this doesn’t militate against a state-driven import-substitution approach.

The reason that growth was not sustained in many nations is because the likes of the IMF and World Bank bullied the nations into abandoning their supporting structures for the import-substitution strategies, not that such strategies failed.

Further, a nation that pursues import-substitution is also better placed to avoid the damage from currency fluctuations.

The IMF gets confused with a case study for India, which pursued “a particularly ambitious import substitution policy in the wake of its independence in 1947 and until the late 1970s”.

India’s “objective was to produce domestically a high proportion of its consumption of most manufactured goods”.

The evidence is that:

By 1970, this goal was achieved to a considerable extent … import-substitution policies have been highly successful.

The IMF though, trying to steer this situation to support their export-bias, claim that the policy didn’t improve India’s access to international markets.

A sort of non-criticism given the objective of India’s policy was the opposite – to increase self-reliance.

It is clear that India did achieve “self-sufficiency in most tradable final goods” but still had to import some “key imported inputs such as raw materials and machinery”, which, at times led to difficulties.

Which does not mean a nation abandons an emphasis on import-substitution. It just means that a strategy to access real productive resources that are not available locally also needs to be implemented.

It is very telling that the IMF concede, in a shameless fashion, that tariffs (protection) “can lead to some successes in the sense that production would increase, and capabilities would improve”.

But (and this is the rub):

When eventually these protections and support are lifted, typically in a phase of fiscal consolidation or currency crisis, the ISI model becomes suddenly unsustainable and industrial policy ultimately doomed to be a failed experiment.

In other words, withdraw the supporting structures that made import-substitution industrialisation (ISI) effective, create further damage with fiscal austerity, and it becomes obvious the economies will not grow in any sustainable way.

The IMF want to blame the ISI, but, the reality is that it is the deregulation, dismantling of the industry protection, and fiscal austerity that does the damage, to a system that had previously been highly effective.

I found the comparison between “Korea’s Hyundai and Malaysia’s Proton” (the latter less successful because according to the IMF it was not construed as an export) interesting.

The IMF claim that:

Proton never experienced the kind of strong push for exports and competition Hyundai faced in Korea. The Korean conglomerate targeted aggressively foreign markets since the beginning following a strategy described as “move first, then learn and adjust”. One of the first factories built in the mid-80s had an annual capacity of 300,000 surpassing the total annual domestic demand of Korea of 250,000 and solely dedicated to the U.S. market.

But what they do not reveal, and maybe do not know, is that Hyundai saw its export market as a loss-making venture designed to give it sufficient scale to price their cars competitively in the local domestic market.

I was guest of the President of Hyundai some years ago and he explained to me in detail how their market segments worked. He joked at one stage when we were down on a wharf which had huge transport ships being loaded with cars for export.

He said the company lost on each one that was loaded but the production scale allowed them to reduce per unit costs which helped them make the profits in the domestic market, which was also highly protected.

Quite a different story to what the IMF is claiming.

The other point about industrial development and export strategies is that the IMF has typically forced poorer nations to engage in structural transformation of existing productive sectors so that they become export oriented.

For example, in the case of agriculture and forestry, while not part of an industrial strategy, previously sustainable domestic (subsistence) production was forced to adopt a ‘cash-crop’ export orientation as part of the ‘one-size-fits-all’ development strategy.

Not only were world markets flooded with produce, which drove prices down and led to an inability of producers to repay loans extended to them by the World Bank and the IMF, but, in the process, the fabric of subsistence was undermined and food poverty ensued.


There are two points to this paper from the IMF.

First, they demonstrate that a laissez-faire approach (they use Chile as an example) is a failed development strategy.

Second, while they claim an export-led industrial strategy is the only way forward for nations seeking to move into advanced nation status, they also admit that ISI strategies have worked in the past.

They dodge around the fact that their own policies (Structural Adjustment Programs, austerity, deregulation, abandonment of tariffs and capital controls) undermined the viability of previously effective ISI policies adopted by developing nations.

They are shameless in this regard.

The final point is that history has been significantly influenced by the actions of economists working in the academy and in multi-lateral institutions such as the IMF.

The increasingly neoliberal orientation of the IMF and the World Bank in the 1970s helped conservative politicians (and social democrat surrender monkeys) make the case against state intervention, against industry policy strategies in favour of free flows of capital, deregulation, and privatisation.

That is not the way Korea grew. Its state maintained a firm grip on the whole planning process.

At the time, the paradigm was shifting towards Monetarism and the expressions of that school of thought in development studies, there were still many of us who rejected the basic propositions of ‘free market’ economics that was becoming the policy orthodoxy.

Tony Benn in Britain was a firm critic of the Callaghan-Healey embrace of Monetarism and the IMF narrative against planning and industry policy.

Now, slowly, in the face of overwhelming evidence that the neoliberal approach fails nations, the IMF is conceding ground.

First on capital controls. Now, on industry policy.

They can’t quite bring themselves to jettison their neoliberal biases. But the evidence against that bias is powerful.

So, imagine, if the IMF had never embraced neoliberalism. Healey would not have been able to depoliticise his embrace of Monetarism.

Tony Benn’s call for a sophisticated industry policy may not have been so easily dismissed.

The world and Britain would have been very different.

And Brexit would have happened in the mid-1970s and so on.

The IMF and similar organisations have much blood on their hands.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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