The International Monetary Fund (IMF) has highlighted the potential trade-offs and benefits associated with industrial policies of governments and their optimal implementation.
The government of Ghana this year has initiated several industrial policies with the aim of promoting and developing specific sectors of the Ghanaian economy.
These interventions are focused on the industries the government believes will stimulate the right economic growth, improve competitiveness among businesses, and create employment opportunities for the citizenry.
The Effect of Industrial Policies on the Economy
The government of Ghana is using industrial policies to achieve its target in economic achievements and structural reforms. The government intends to “boost productivity growth, protect manufacturing jobs, improve self-dependence and the resilience of supply chains, and develop ‘infant’ industries to diversify the economy.”
This intervention is used by both advanced and emerging market economies to promote new policy initiatives for reforms in specific industries to achieve a targeted outcome. According to the IMF, industrial policies have surged in market economies over the past decade and a half.
Through industrial policies, the government is embarking on economic diversity to reduce Ghana’s dependence on raw material exports and economic growth that destroys the environment. The government is also working towards industrialization to promote manufacturing and value addition on the produced commodities in the country.
The government this year has been able to increase export of gold and cocoa through deliberate interventions and structural reforms in these sectors, improving Ghana’s trade balance. Industrial policies should also impact job creation by stimulating employment opportunities.
The introduction of the Agriculture for Economic Transformation Agenda (AETA), the 24-Hour Economy Policy, the Big Push, and the energy sector’s initiative to reduce import of oil and gas are all industrial policies the government of Ghana has set to reform these crucial sectors.
According to the IMF, “such policies can help jump-start domestic industries and transform the structure of an economy. But gains are not guaranteed and can come with costs—both to government budgets and economic efficiency.”
The Fund pointed out that industrial policies include trade-offs, and the government must be prepared for it – in terms of government funding, sacrifice, and the patience of Ghanaians to reap benefits, and staying focused amid political opposition pressures.
The Government’s Carriage – Maximize Impact, Limit Trade-offs
The impact on targeted sectors requires industry-specific interventions, the IMF stated. The implementation of industrial policies can help boost the domestic sector’s productivity, efficiency, and output.
Subsidies and trade protections can be useful tools for strategic industrialization and expansion of domestic productivity. The IMF established that, as a principle, precise and effective industrial policies can ensure dynamic gains, as well as long-lasting productivity improvements in sectors. Due to economies of scale and lower costs associated with mass production, the government can pioneer such growth to ensure global competitiveness.
A possible trade-off could be that the success of these interventions is not guaranteed due to the difficulty in predicting industry-specific traits. Prices may be higher than expected to offset investments and reforms in the sectors. The government can, otherwise, absorb the costs by incurring substantial budgetary costs.
Technology infusion in sectors may be challenged in informal situations, which characterize most of Ghana’s economy. Slow adaptation and difficulty in accessing markets can breed setbacks. More effort and intentionality are needed from the government and sector players to facilitate growth.
According to the IMF’s empirical analysis of industrial policies among countries, it suggested that “industrial policy is associated with better economic outcomes in targeted industries, particularly in countries with strong institutions. But the gains are small.” Direct subsidies generate a 0.5 percent improvement in value added and 0.3 percent higher total factor productivity after 3 years of implementation, reflecting higher capital accumulation and employment.
However, through structural reforms – such as making credit affordable to firms and boosting the business environment – the Fund is confident that larger gains can be achieved.
Furthermore, translating specific industry outcomes into national benefits and impact is another challenge. The IMF’s model suggests that employment, productivity, and output all improve in targeted industries. In transforming the targeted sectors, the untargeted sectors shrink, reduce productivity, and are neglected. This affects aggregate productivity negatively.
Therefore, the trade-off in implementing industrial policies is that “even if targeted support can boost priority sectors, increase resilience, cement independence, it can also create misallocation of resources and dampen aggregate outcomes, leaving the economy worse off.”
Industrial policies must be carefully designed and strategically implemented. The government must spend efficiently, weigh the opportunity cost of industrial policies against wider reforms, recognize and manage trade-offs explicitly, ensure regular evaluation and recalibration, and encourage market discipline.
