Trade & Industrial Policy Strategies and World Bank Conference
Pretoria, South Africa – October 27, 2011

Ladies and gentlemen, it’s a pleasure to join you this morning. Let me echo my colleague, Irina Astrakhan, in welcoming you – on behalf of the World Bank – to this important and timely conference.

The topic we’ll examine today – improving competitiveness, as a way to promote stronger job creation – could scarcely be more critical. That’s true for the global economy in general, and for South Africa in particular.

In both developed and developing nations, the continuing impact of the prolonged economic downturn has suppressed growth rates, exerted downward pressure on incomes, and caused chronically high unemployment.

That economic pressure has re-opened old, dangerous fault lines in many national and regional economies.

Many have noted that South Africa has two economies, side-by-side: a technologically advanced “first economy,” requiring a relatively small number of highly skilled workers – and a lower-productivity “second economy,” made up of labor-intensive micro, small and medium-sized enterprises. These two economies, together, are not generating jobs in numbers large enough to reduce today’s unemployment, much less meet the demographic challenge ahead.

The agonizing pace of job creation adds to the urgency of pursuing a wide-ranging discussion of strengthening competitiveness, with the goal of spurring job creation.

As we confront that challenge, I’m sure that today’s conference will make a strong contribution to the deepening policy dialogue between the World Bank and South Africa.

I understand that you have all received copies of the six World Bank publications that explore, in detail, various aspects of this topic. These Bank analyses offer insights into technology absorption and innovation, entrepreneurship and SME finance.

I especially want to reference one of them – the paper by Shahid Yusuf, on “the East Asian Experience with Industrial Policy and Its Implications for South Africa.” As someone who grew up in Singapore – and who has seen East Asia become a dynamic driver of wealth creation – this topic is very close to my heart. East Asia’s success has certainly been supported by two of the factors that today’s presentations will explore: technology innovation and technology absorption.

I’ve seen how industry-based strategies, focusing on investments in specific sectors, can lift millions of people out of poverty, and into jobs.

For the past couple of years, I’ve been actively engaged in the debate on these and related topics within the Bank – where we have been reflecting, and gradually evolving our thinking in the area of competitiveness.

In leading our Private Sector Development efforts, I’ve overseen the recent creation of an entirely new Practice within the Bank: promoting what we call “competitive industries.” Our approach is to help our client countries focus on making well-calculated decisions to enable industry based sustainable growth.

The depth and duration of the global economic crisis has forced policymakers to rethink old dogmas. It has led us to revisit topics that had long been considered taboo among academics, among policymakers . . . and, yes, among multilateral development institutions, like mine.

This morning, I’d like to take a shot at answering three questions. I don’t pretend to have the definitive answers, but these thoughts may help inspire debate.

The first question is: Why is there all this renewed interest on competitiveness and the role of the state, in the first place?

The second question requires some soul-searching. Should we really be focusing our time and energy on competitiveness, at a time when the development agenda is struggling to keep up with so many other challenges that are staring us down?

The third question is this: If the topics we’re discussing in this conference are, indeed, our foremost priorities, then how should we go about addressing them?

By the way, all three of these questions have troubled us at the World Bank, just as they have troubled so many of our client countries, for a number of years – to be precise, since about 1944, when the Bretton Woods organizations were founded.

I believe that a new understanding is emerging. It is not merely the fashion of the day. It is underpinned by our thinking about why long-term sustainability requires us to answer these questions correctly.

The crisis has thrown into the spotlight the conventional wisdom that saw the development process as linear, and with predetermined outcomes. Instead, it has pushed us to adopt more nuanced views on strategies for development – particularly, the relative importance of markets, institutions and the state.

The United States and Europe, having pumped billions of dollars into faltering banks and failing car-makers, are talking about strategic industries and are working on industrial strategies. Britain, France, Germany and Japan have turned toward more aggressive industry-level interventions.

Much of the discussion I have with development partners in various client government agencies are centered on the topic of industrial competitiveness. Blue-chip consulting firms are advising governments on how to get it right. Bookstore shelves are groaning under the weight of tomes examining the growing momentum toward “state capitalism.”

In fact, The Economist magazine proclaimed, not long ago, that “Industrial policy is back in fashion.” On this point, I emphatically disagree: Promoting industrial competitiveness is not back in fashion – because it never went out of fashion.

Be it in electronics and palm oil in Malaysia, or biotechnology in Singapore . . . be it in automobile parts and assembly in Morocco or in Central and Eastern Europe . . . be it in wine from South Africa, salmon from Chile or fresh asparagus from Peru . . . in all these cases, governments played an active role in creating the foundation for sustained private-sector expansion and job creation.

China, of course, is another strong case. Looking at China’s rise in manufacturing, we clearly see how public support has benefited new industries.

For that matter: What about the United States? We should not forget the origins of Silicon Valley, or even the origins of the Internet – which was heavily funded by DARPA, the Defense Advanced Research Projects Agency.

So, the answer to the first question – about why this renewed interest in industrial competitiveness has arisen – is partly related to the soul-searching that we have had to go through, because of the financial crisis.

This brings me to the second question: Should industrial competitiveness feature as a major priority in our development agendas? Private-sector development is arguably the cornerstone of sustainable poverty alleviation, through the creation of jobs and incomes. At the practical level, private-sector development requires more than just broad policy reforms. It means building industries that can compete in global markets and create demand at home for labor, inputs and services.

In most developing countries, the private sector provides up to 90 percent of all jobs. But most firms are small and often informal, with limited opportunities to grow. The financial crisis has further constrained growth opportunities for the private sector by shrinking the accessible market.

At a time when global and regional competitiveness has become vital, countries are looking for practical solutions to create new growth and employment opportunities.

At the World Bank, our views have also evolved. We have now made competitive industries one of the key pillars in our work toward poverty alleviation.

For those who still doubt whether or not industrial competitiveness plays a role in development: Let me put it this way.

Where does wealth creation take place? In the public sector? No. Does it happen magically? No. Wealth creation takes place in the private sector – and the private sector is made up of enclaves of industries, sectors – or call it what you want – families of like producers feeding off each other. Yes, wealth creation takes place in viable industries. And how does it occur there? Through job creation. And where, significantly, does this job creation take place? Well, in SMEs of growth industries. Yet SMEs don’t thrive on their own: They are part of industrial ecologies or ecosystems. So, if you want wealth creation, let’s get with it: It is in industrial sectors where that happens – the place where things get produced or serviced.

So, that brings us to the final and most difficult question: the “how” of getting this process right.

The model prevalent today is to create a level playing field through policy interventions – based on removing constraints and strengthening the broader policy environment for all businesses. This has met with some degree of success, as reflected in the strong reform momentum in many developing countries. The World Bank Group’s “Doing Business” indicators – whose ninth edition was published just last week – have had a tremendous impact in focusing efforts to streamline regulation. We have been committed to supporting developing countries in reforming their investment and business environment for no less than 25 years.

Yet the challenge confronting us calls for something even greater. The working-age population in the developing world is projected to expand from today’s 3.8 billion to 5.1 billion by 2050 – with especially strong growth in Africa and South Asia. Employing them all will require almost 35 million new jobs – each year.

Governments are urgently searching for solutions through more targeted or strategic interventions. They are increasingly turning to direct collaboration with the private sector to help unlock the potential of industries that can compete in the global economy.

This is not a new challenge for the development community as a whole, or for the World Bank.

Empirical and analytical work at the industry level, undertaken by the World Bank Group and others, shows that close collaboration between governments and the private sector holds great potential to define opportunities and remove constraints.

But, let me be frank: For a long time, the development community did not approach private-sector development in a holistic way. We ignored the multi-dimensional macro and micro complexities in delivering a programmatic private-sector development approach. Too many times, we dealt with removing only those binding constraints that damaged the investment climate. That is certainly important, but insufficient by itself.

What is needed? A slew of changes at the level of the industry ecology.

The real challenge – and one where we in the World Bank have been refocusing our role – lies in the government and private sector jointly identifying the existing industries and products, where a country can begin to unlock and fully leverage its comparative advantage.

Driven jointly by public- and private-sector champions, partnerships can drive the agenda of identifying specific opportunities, as well as constraints that impede firms from competing effectively. Such partnerships can formulate clearly defined and goal-oriented work programs, specifying the individual reforms and initiatives required to improve industry competitiveness.

The promise of the development partners should then be to make use of all the tools at our disposal – be it financial support from the government through lending operations, analytics and advisory services, or direct investments with the private sector – to deliver across all these dimensions.

Let me say simply: The world has not changed radically. Instead, our understanding – or, rather, our recognition – of successful policies has changed. A new paradigm is emerging – focusing on competitive industries as a source of growth, jobs and wealth creation. Competitive industries that are organized well to compete in the global economy.

We must be careful: We must not present this approach as a one-size-fits-all set of policies. Each country will have to find its own balance between the government and the market – and will have to be pragmatic.

We must ensure, instead, that we nurture this new approach. We must base it on strong and durable partnerships among the public sector, the private sector and their development partners.

Ladies and gentlemen: Allow me to conclude by underscoring the urgency of the task we face.

Simply put: The world is in a race against time.

A demographic, economic and social collision may occur, due to the global economy’s inability to create enough jobs to keep up with population growth – or to generate incomes that begin to close the glaring gap of social inequality.

The economy here in South Africa reflects that reality as starkly as anywhere.

We simply have no time to lose, in trying to meet the job-creation challenge.

By pursuing a well organized industries framework, I feel certain that we can vastly improve our chance of success.

In a sobering economic era, the competitive industries approach i’ve described offers, at least, the hope of creating jobs, generating wealth, and building a more resilient economy.

I’m looking forward to a creative dialogue with you at today’s conference, and to our work together in the challenging years to come.

Thank you very much.