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Industrial policy and the road to recovery

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The COVID-19 pandemic is posing enormous challenges to economic development, yet it may also unveil new opportunities to ‘build back better’. Renewed industrial policies can play a significant role in shaping the road to overcome the crisis and set countries back on the path of economic development. 

Opening the second episode of the webinar series, “Future of Industrialization in a post-pandemic world”, LI Yong, Director General of the United Nations Industrial Development Organization (UNIDO) said, “Strengthening the industrial sector is the key to the recovery. To achieve this important goal, industrial policies must be at the centre of governments’ reactions.”

A similar view was shared by Mario Cimoli, Deputy Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), who emphasized that the post-pandemic recovery must be transformative and countries should place a primary focus not only on economic growth, but also on the direction of growth. “We need growth, but the quality of growth is important. Equality is the pre-condition for industrial policy, growth and development,” said Cimoli.

Drawing on her experience as a policy advisor on innovation-led inclusive and sustainable growth, Mariana Mazzucato, Professor of Economics of Innovation and Public Value at the University College London (UCL) and Founding Director of the UCL Institute for Innovation and Public Purpose, discussed the role of public-private partnership in providing an effective response to the global challenges accelerated by the pandemic – from decarbonization to the digital divide, to any issue around the health system.

Using examples from developing economies, such as Viet Nam and the Indian state of Kerala, Mazzucato stressed the importance of investing in state capacity for a more inclusive, sustainable and resilient recovery. “With COVID-19, we realized we need state capacity”, she said.

She also remarked on the need to place SDGs at the centre of industrial strategy by transforming them into missions to orientate governments’ actions. “SDGs are complex goals. We need to transform governments’ activities – even everyday ones, such as industrial procurement – to be SDG-focused”, said Mazzucato. Pursuing such outcome-focused industrial strategy requires a renewed collaboration across sectors and stakeholders to redesign policy instruments together. In this regard, Mazzucato highlighted the transformational purpose of attaching goal-focused conditions to recovery packages, and how this can lead to more sustainable solutions and social outcomes.

The crucial role of governments in supporting the recovery was also highlighted by Justin Lin, Professor and Dean of the National School of Development at Peking University. Building on his New Structural Economics approach, Lin discussed how industrial policies are necessary to sustain structural change and build more resilient and competitive economies. “To develop an industrial sector, we need a facilitating State,” he said. “If the government is not playing a facilitation role, a spontaneous structural transformation cannot occur.”

In discussing the main challenges to structural change posed by the COVID-19 pandemic, Lin emphasized that the pandemic recession will leave developing countries with less resources to allocate to industrial policies for structural change. For a fast, inclusive and sustainable recovery, “we need to aim for a quick-win,” he said. “This implies helping existing firms with trade credit, tax exemption and debt rescheduling to get back to production and to provide jobs, export and revenues.” Then, he concluded “the government can use industrial policy to identify priority industries and facilitate the investments to achieve sustainable industrialization”.

All panellists agreed that industrial policies will have a renewed role in shaping the road towards recovery from the COVID-19 crisis and in ‘building back better.’ Recovery packages should be shaped in a way to accelerate a transformative recovery towards a more inclusive and sustainable industrial development, acceleration that can be supported by the industrial application of advanced digital technologies of the Fourth Industrial Revolution. The importance of aligning efforts to achieve a resilient industrial development will be at the core of the next flagship report of UNIDO, the Industrial Development Report 2022, which will focus on the impact that the pandemic on the future of industrialization.

About 500 participants from diverse backgrounds followed the “Industrial policy and the road to recovery” webinar via Zoom and YouTube, and contributed to the discussion with a range of interesting questions.

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US Anti-Inflation Law threatens Europe

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Europe and the US are heading towards a serious trade and economic conflict, writes “Berliner Morgenpost”.

In the European Union hopes are fading that the US government will significantly amend the controversial subsidies law by providing billions in bailouts to US manufacturers. This forces the EU to protect domestic companies from threatening competitive advantages over US competition and to prevent investment from moving to America.

Fear of the “de-industrialization” of Europe is spreading. For example, buyers of a “Made in USA” electric vehicle with a battery also made in the USA receive a $7,500 subsidy. Subsidies also go to companies that make wind turbines or solar panels from American steel. Europeans are worried that not only will they have to contend with heavily subsidized US competition in future strategic sectors, but industrial cooperation with US companies could also be threatened.

The head of the trade committee in the European Parliament, Bernd Lange, told: “I assume that a few small changes to implement the IRA can still be agreed upon in the negotiations. But I do not think that anything will change significantly, because the Law has already been passed.”

The US IRA law goes into effect on January 1. By that time, the EU countries should have found a common line. France is already openly threatening a trade war and agitating for a tough counterattack: the EU should take a protectionist course and respond with the Buy European initiative. But there are also concerns in Berlin.

An EU trade expert argues that lower energy prices for industry should be considered, as they are currently ten times higher than in the US. European Commission economic policy spokesman Markus Ferber is also calling for a hard line: If the US side doesn’t give in now, the EU commission should “put all instruments of torture on the table” and consider boosting trade. Disappointment with the protectionist course of US President Joe Biden is great, Ferber says: “The American anti-inflationary law threatens Europe, and can make its economic situation much worse.”

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Macron vs U.S. Inflation Reduction Act

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Emmanuel Macron warned that the U.S. risked “fragmenting the West” with a flagship climate law that the French president said would distort competition by massively subsidizing American companies to the detriment of European industries, informs “The Financial Times”. The harsh words, which came on the first day of his state visit to Washington hosted by president Joe Biden.

In a speech at the French embassy in Washington, Macron said while he agreed with the objectives of Biden’s Inflation Reduction Act, it would have negative repercussions for Europe by making it less attractive for companies to invest there. “We need to co-ordinate and re-synchronize our policy agendas.”

Macron called the new U.S. Inflation Reduction Act (IRA) “super aggressive for our companies,” according to comments reported by Agence France-Presse and confirmed by a person present. “Perhaps this law will solve your problems but it will make mine worse,” he said, adding that many jobs would be destroyed.

Macron has also called on the EU to pass a so-called “Buy European Act” that would offer similar subsidies to local industries. Other countries such as Germany are less supportive of the idea.

U.S. President Joe Biden was forced to retract. He said that new laws that give incentives for domestic production of computer chips and renewable energy parts were never intended to exclude European allies and could be tweaked.

Speaking with French President Emmanuel Macron at a joint press conference at the White House, Biden said “There are tweaks that we can make that can fundamentally make it easier for European countries to participate and/or be on their own.”

The United States and France also announced the formation of ‘Joint task force’ between the Unites States and the European Union to deal with trade disputes around clean energy issues emerging from the IRA.

Europe’s industry fears that the bill, which gives tax credit for each eligible renewable energy component produced in a U.S. factory, would take away potential investment from the continent.

Biden said he makes no apologies for promoting American manufacturing of essential goods, but said large legislation often requires tweaks to deal with unintended consequences.

“We’re going to continue to create manufacturing jobs in America but not at the expense of Europe,” Biden said.

Macron told reporters that he was encouraged by his talks with Biden and is hopeful of a fair resolution.

…We’ll see whether Biden keeps his word or not.

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FOCUS: The German economy is in a dangerous pliers

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The politicization of trade relations is proceeding rapidly. German Economics Minister Robert Habeck said: “The phase where many thought markets should rule and politicians should stay out is definitely over. Previously, this idea was wrong,” –  quotes FOCUS.

The German economy is in a dangerous pliers. The craziness is that it is not the Russians or the Chinese who move with both hands in the tongs, but the Americans, who are clearly determined to organize their future prosperity at the expense of the Chinese and Europeans.

Pliers consist of two very different legs:

– On the one hand, the US Inflation Reduction Act (IRA) is primarily aimed at reducing US inflation. In fact, this is a gigantic program to subsidize new technologies. The legislative package plans to spend $369 billion over the next decade on energy security and climate change programs, putting pressure on European industry. The US wants to reinforce its industrial base again.

In some cases, subsidies offered by the US government are four to ten times the maximum government support allowed by the European Commission, French Finance Minister Bruno Le Mer said.

– On the other hand, US government sanctions against China’s semiconductor industry are putting pressure on China, and German industry is also suffering from restrictions. Chinese manufacturers make up one-fifth of the global semiconductor industry, and their European customers and suppliers are required to follow US policy.

Dutch company ASML was under pressure from US officials to stop selling individual chip-making machines to China, Bloomberg reported.

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