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Smart public investments to enable post-crisis industrialization and jobs creation

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A policy brief exploring how to link the COVID-19 crisis responses and stimulus with long-term job-creation in new industries. As countries look to provide immediate relief to those most vulnerable and affected by the crisis, they should also direct investment to activities with the greatest potential to rebound, create jobs, generate higher wages and incomes in a post-crisis rebound. Many of these sectors and industries have long been identified, but have lacked adequate financing or political will to spur their success.
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Smart public investments to enable post-crisis industrialization and jobs creation
John Robert Sloan
_____________________________________________________________________________________
1. Proactive, forward-thinking investments must be a part of the COVID-19 response in order to
lay the foundation for equitable post-crisis growth and development
Unprecedented crises and threats to livelihoods call for aggressive responses. The most critical immediate
response to the COVID-19 pandemic is to combat its spread, take care of those most vulnerable and most
affected, find an eventual vaccine. Meanwhile, economic planners must take care to ensure that the
conditions are in place for a post-crisis rebound that will create jobs, raise wages, and refill State coffers,
and be more resilient to such crises in the future. Swift, serious and evidence-based actions are vital.
The projected short- and long-term economic impacts of this crisis are jarring as of April 6, there have
been over 1.2 million recorded cases of COVID-19 globally, and more than 70,000 deaths. Forecasters,
market watchers and economists have estimated worst-case losses of up to 3% of Gross Domestic Product
(GDP) in China, 7% in the US and 9% in the Euro Area
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, while the UN anticipates the first global economic
contraction since the 2008-09 recession
2
. UNCTAD estimates an unheard of 30-40% fall in Foreign Direct
Investment (FDI) for 2020-21
3
. Formal unemployment claims and a lack of informal job opportunities
affect poverty, hunger, mental health, and human welfare in general. United Nations Regional Economic
Commissions estimate significant impacts regionally (see figure below). These trends put further pressure
on State budgets which were already stretched, drives up unemployment and poverty, stifles economic
activity and innovation, and limits the financial resources necessary to progress towards a sustainable
development agenda. Unfortunately, these preliminary estimates may pale in comparison to the ultimate
impact of the crisis persisting in length and severity, dampening the global economic environment.
Select regional impact estimates of the COVID-19 Crisis
Source: ESCWA, ECA, ECLAC
As the scale of these issues can only be compared to other once-in-a-generation events World Wars,
the Great Depression, the 2008 recession the response must meet the gravity of the situation. This crisis
will prove to have outsized economic impacts due to the need to close businesses, limit human interaction
1
https://www.economist.com/finance-and-economics/2020/04/03/economists-forecasts-for-gdp-growth-in-2020-vary-widely
2
https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/publication/Monthly_Briefing_136.pdf
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https://unctad.org/en/PublicationsLibrary/diaeiainf2020d3_en.pdf
Arab States:
At least $42
billion decline in
GDP; 8.3 million
more in poverty
Africa:
Growth cut in
half, $100+ billion
in lost export
revenues
Latin America:
2% economic
contraction; 35
million more in
poverty
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and movement. The crisis response must be equally outsized. Even a month ago, a national stimulus
package measured in the trillions was unimaginable, and surely a complete political impossibility even if
deemed necessary. Flash forward one month, and not only has the US Government agreed on a $2 trillion+
plan one-tenth of GDP but this is already old news, with realists looking ahead to the need for future
stimulus measures. In countries across the world, governments are looking at how to boost spending to
address the COVID-19 crisis and to reach its victims.
This paper will argue that States should not settle for a return to the socioeconomic pre-crisis status quo,
but rather should guide investment to the sort of sustainable and productive sectors that have long been
on the agenda for growth and development, but have lacked sufficient financing and political will. A
massive global stimulus through national expenditure, debt forgiveness, pooled bailout funds and so
forth is ongoing. The question is, what will these funds promote, where will they be channeled, and how
can they ensure the quickest and most equitably distributed recovery?
We find ourselves in a rare moment where this policy advice applies to countries of all levels of income,
economic diversification and industrialization. Each country grapples with creating enough steady,
meaningful, high-income jobs for its people. Building export-oriented sectors is more vital than ever given
the need to earn greater foreign exchange, and opportunities presented by the reshuffling of global supply
chains in the wake of this crisis. Combatting climate change through the green economy and decoupling
of emissions from growth concerns us all. This paper therefore seeks to add to the critical thinking on how
to ensure a new paradigm for sustainable post-crisis recovery, and will serve as a basis for future, deeper
research.
2. Sustainable industrialization for broad-based inclusive development
A voluminous literature has been written on the need for economic and structural transformation to shift
a society’s trajectory towards sustainable growth and development. To differing extents across the globe,
a broadly transition from a low-productivity rural agriculture base to productive, clustered and export-
oriented industries has been experienced. New industries whether in manufacturing, industrial-services
and other ventures are critical to creating jobs to absorb new labour market entrants, provide a standard
and predictable wage, produce outputs which will initially compete with imports domestically and can
eventually compete in global export markets. This was clear in the industrial development witnessed first
in Europe and North America, East and Southeast Asia and indeed worldwide. Such developments are not
only historical but ongoing, with new innovations pushing the boundary of modern industries in
developed and developing regions alike
4
. Importantly, within the general label of industry, our focus is on
job-creating manufactures, rather than extractive activities such as oil and mining which have far lower
employment elasticities. Innovative industrial strategies can harness existing assets and establish new
ones to build dynamic competitive advantages, and to foster diversification
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.
How States can pursue such strategies sheds light on the need for active industrial policy in order to meet
these ambitious goals. Indeed, the development of industries reliant on large inputs of capital, technology
and labour cannot happen in a vacuum. Rather, proactive measures and coordinated investments have
proven necessary for industrialization. Chang (2002) established that State-supported industrialization
4
Rodrik, Dani (2011). The Manufacturing Imperative.
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Hirschman, A. (1981). A generalized linkage approach to development, with special references to staples. Essays in trespassing,
pp. 59-96. Cambridge.
3
efforts were critical to those countries which today instead espouse the importance of laissez-faire
policies and continue to be important in promoting new endeavors
6
. Dependency Theorists long posited
that orthodox economic advice to focus on static comparative advantages would keep countries reliant
on the export of low-value commodities, based on Prebisch-Singer Hypothesis. Indeed, ECA (2018) notes
that economic policies supporting the conventional economic status-quo are insufficient to fuel
industrialization and transformation, and that large returns from oil, minerals and other resources have
provided a disincentive to industrialize
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. While fast growing and high-value services are also vital, it should
be noted that attempts to ‘leapfrog’ industry may result in the dominance of vulnerable low-skill services,
rather than apex-level services based on the accumulated human capital, utilities, funds for investment
and other outputs of a successful industrial sector.
As noted, the need for such industrial policy is not unique to one country or region. State support was
vital for the survival and eventually the thriving of the automotive sector in the United States after the
2008 recession. East Asia is often cited as a best practice in transitioning from a largely agrarian to a heavy
machinery and high-tech economy based on concerted government efforts, as illustrated by the growth
of manufactures as a share of its merchandise exports, particularly compared with other regions and the
global average (See figure below). Light manufacturing opportunities are opening up for Africa to take
advantage of offshoring in Global Value Chains (GVCs) as States directly promote industrialization, and
due to regional trade opportunities of the African Continental Free Trade Area. Actors across the globe
are looking to take advantage of opportunities to build more job and income-generating industries.
Source: Author’s calculations based on World Bank World Development Indicators (2020)
3. Matching the public stimulus and private investment with industrialization opportunities
Once a strategic direction or vision for industrialization is agreed upon through cooperation amongst
industrial stakeholders the government, private sector, labour groups, CSOs and a whole host of others
these policy options can be linked with financing opportunities. Here is where the global stimulus can
be matched with identified opportunities, industrialization plans and projects. Meanwhile, private
6
Chang, Ha-Joon (2002). Kicking Away the Ladder: Development strategy in historical perspective. Anthem, ISBN 978-1-84331-
027-3.
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https://www.uneca.org/sites/default/files/PublicationFiles/final_era2014_march25_en.pdf
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investors, looking for safer bets and better returns in these tumultuous times, would be enticed by plans
which are ready to go online and start producing on day-one of the re-opening of the global economy for
business. The unique opportunity here is clear States never discuss pumping trillions of dollars directly
into the global and national economies, nor is there sufficient political will to propose doing so. Given that
this is an imperative under the circumstances of COVID-19, the funds being made broadly available should
be considered for some sorts of specific industrial initiatives to maximize long-term socioeconomic
impact. Some proposed areas and tangible opportunities include the following:
a. Enabling local industries to link-in to GVCs which will face a major post-COVID reshuffle. Well-
formulated industrial policy seeks to build capabilities of local firms to link-in and advance across
GVCs, an ambition which often proves difficult due to entrenched interests and suppliers. Yet it is
clear that these chains will be dramatically reshuffled following the current crisis. Actors from
policy makers to consumers are realizing the vulnerability in relying on one country or even one
region to occupy an entire step in the production of any good. Shortages in pharmaceuticals,
hospital equipment, automotive supplies, food products and other goods have resulted, leading
to a serious re-think on the need to diversify sources of production. Such diversification presents
opportunities for new entrants who may have been previously out-competed on price or scale by
entrenched producers. Firms, governments, labour groups and other concerned parties must
identify strategic industries to promote within these GVCs, means to ensure a greater capture of
higher-value activity, sharing of revenues, welfare for workers and other knock-on effects.
Regional agreements and joint-ventures in partnership with neighboring firms is a parallel
approach to use in tandem with this.
b. Take better advantage of physical and human assets that are already in place. Even before COVID-
19, productive factors were neglected by investors and governments in favor of high-rent, high-
return sectors ranging from natural resource extraction to financial activities. Now that those
sectors are particularly hurt by the current crisis, there must be a wake-up call to reinvest in
traditional job- and income-creating sectors. People have productive capacities and have been
under-employed, and idle physical capital has not yet suffered debilitating depreciation in these
senses, the post-crisis investment needs may not be as immense. Mapping exercises of needed
assets to spur industrialization should be matched with new funds available in order to ensure
that skills and machinery needed is finally met by supply. Again, financing would finally be
available to help close a gap that has long been recognized.
c. Invest in green technologies that will be a win-win for post-crisis recovery and combatting climate
change. Now is not the time to neglect the imperative of sustainable development. Maintaining
commitments will prove difficult in light of record-low hydrocarbon prices and a glut in supply of
oil. However, such trends do not have to deter progress, but rather require very strong economic
incentives and regulations to still push ahead with renewable energy sources. These new energy
sources will be a huge boost to industry, replicating for example the falling input costs that were
witnessed due to, for example, the rise of US Shale producers, but instead based on worldwide
renewable sources. As has been noted, this climate-friendly industrialization supports wide job
creation in new fields, as well as growth in staple activities such as mining (for minerals important
for renewable energy copper, cobalt, lithium and others) and heavy manufacturing (now based
on and supplying new energy sources).
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These are just some potential and broad approaches, amongst the many industrial policy actions that can
be taken. Importantly, such investments are no substitute for the needed immediate reliefs aid to
hospitals, direct transfers to the poor and the unemployed, etc. But they do represent the best means to
lay the foundation for an inclusive post-crisis rebound.
4. Immediate action to start a sustainable industrial rebound on day-one
To tie the arguments for industrial policy here together with a stimulus to overcome the economic effects
of COVID-19, the most vital element of any proposed strategy is that it begins yielding dividends in output,
employment, productivity and export as soon as possible. Here, States should harness plans which have
been drawn up in the past, are based on past or existing State and firm capacity, and can particularly take
advantage in the post-crisis resumption of market activities. As factories and businesses come online to
provide goods and services deemed “nonessential”, a host of manufacturing activities will need to fill gaps
in supply chains, dwindled inventories and growing demand for new materials.
These interventions would also be mutually reinforcing with the overall response to the health, social and
economic effects of COVID-19, to build a society more equitable in its economic opportunities and access
to health care, which will be better equipped to withstand future pandemics. Efforts would need to be
coupled with parallel policies such as making transfers to firms contingent on employment retention as
undertaken for example in France to ensure that the human and economic impacts of a fiscal stimulus
are maximized.
Importantly these strategies will go hand-in-hand with a stronger multilateralism and cross-border
cooperation. Industrialization is not mutually exclusive, but rather creates new opportunities for partner
countries and surrounding communities who link-in and provide needed inputs and related activities.
Regional integration and the movement of ideas, persons, goods and investment can help us capitalize on
the effectiveness of these industrialization approaches. Global and regional COVID-19 response funds
which are currently being discussed particularly for developing countries will be vital, as many
governments lack the disposable funds needed for the sorts of interventions proposed here. Savings and
reserves will be particularly impacted due to the dominance of tourism, commodity and trade rents in the
central budget, and speaks to the need for long-term diversification of revenues.
Post-COVID recovery can serve as a catalyst for sustainable growth and socioeconomic development if we
make advanced preparations for smart, evidence-based initiatives in new industries. Future research
should build on these policy recommendations and explore specific projects that could yield employment
and income dividends.
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