OIT - The return of the visible hand Social dialogue and the making of 21st-century industrial policy

X The return of the visible hand Social dialogue and the making of 21st-century industrial policy Authors / Duncan Campbell, Kee Beom Kim, Ted Clayton

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Authorization for publication: Sangheon Lee, Director, EMPLOYMENT ILO Working Papers can be found at: www.ilo.org/research-and-publications/working-papers Suggested citation: Campbell, D., Kim, K., Clayton, T. 2025. The return of the visible hand: Social dialogue and the making of 21st-century industrial policy , ILO Working Paper 153 (Geneva, ILO). https://doi.

org/10.54394/SIMS131201 ILO Working Paper 153 Abstract Industrial policy has returned amid geopolitical rivalry, supply-chain fragility, and contemporary grand transitions, but its performance hinges less on ideology than on governance and design. By examining three comparative cases (Germany, Republic of Korea, South Africa), this paper argues that structured social dialogue improves targeting, monitoring, and legitimacy. The mechanism reduces information asymmetries, aligns incentives via reciprocal accountability, and anchors commitments beyond political cycles, reducing capture and execution risk. For these potentials to be realized several conditions are crucial: institutional permanence; social partners that possess both capacity and legitimacy: and patient and pragmatic engagement by stakeholders. About the authors Duncan Campbell is the former Director of the Employment Strategy Department at the International Labour Organization. Kee Beom Kim is the Macroeconomic and Employment Policies Specialist at the International Labour Organization. Ted Clayton is the Workers’ Capital Research Officer at the Australian Council of Trade Unions.02 ILO Working Paper 153 Abstract 01

International Labour Organization. Kee Beom Kim is the Macroeconomic and Employment Policies Specialist at the International Labour Organization. Ted Clayton is the Workers’ Capital Research Officer at the Australian Council of Trade Unions.02 ILO Working Paper 153 Abstract 01 About the authors 01 Acronyms 04 X Introduction 05 X 1 Industrial policies reimagined 06 1.1 Industrial policy: A definition 06 1.2 Industrial policy addresses market failure 06 1.3 Economic development as the reallocation of capital and labour and the role of the state 07 1.4 Industrial policies: An ideological era of decline 08 1.5 The devil might be in the detail – not in the concept 10 1.6 “Embeddedness” in industrial policies 10 1.7 Industrial policy returns to the forefront 11 X 2 Social dialogue and industrial policy in theory 13 2.1 The multi-layered benefits of social dialogue 13 2.2 Addressing information asymmetries to improve policy design and implementation 13 2.3 Social dialogue allows social partners to mitigate negative externalities 14 2.4 Social dialogue can drive employment and economic stability 15 X 3 Social dialogue and industrial policy in practice 17 3.1 Case study 1: The Republic of Korea, social dialogue and demographic trends 17 3.1.1. Social dialogue and industry policy in the Republic of Korea (1950s–2019) 17 3.1.2. Gwangju Job Creation Model (GJCM) 17 3.1.3. Mutually Beneficial Regional Job Creation Initiatives (MBRJCIs) 18 3.2 Case study 2: Germany’s collaborative model of social dialogue and industrial development 19 3.2.1. German industrial policy and social dialogue (1950s–1990s) 19 3.2.2. Social dialogue and industrial policy (2000s–Present) 20 3.3 Case Study 3: South African Masterplans driving more effective policy delivery 21

3.2.1. German industrial policy and social dialogue (1950s–1990s) 19 3.2.2. Social dialogue and industrial policy (2000s–Present) 20 3.3 Case Study 3: South African Masterplans driving more effective policy delivery 21 3.3.1. South African industrial policy and social dialogue (1994-2010s) 21 3.3.1. Masterplans (2018–Present) 21 3.3.3. Participation and capacity 22 3.3.4. Impact 23 3.4 Reflections 23 Table of contents03 ILO Working Paper 153

X Conclusions: Enhancing industrial policy through social dialogue 25

References 27 Acknowledgements 3104 ILO Working Paper 153 Acronyms AFC Asian Financial Crisis AFI Alliance for the Future of Industry AFL-CIO American Federation of Labor─Congress of Industrial Organizations COSATU Congress of South African Trade Unions DTIC Department of Trade, Industry and Competition GFC Global Financial Crisis GJCM Gwangju Job Creation Model ILO International Labour Office ISI Import Substitution Industrialization MBRJCI Mutually Beneficial Regional Job Creation Initiatives NDP National Development Plan NEDLAC National Economic Development and Labour Council R&D Research and Development RCFTL Retail-Clothing, Textile, Footwear and Leather05 ILO Working Paper 153 X Introduction Few topics have been more discussed in economics than the determinants of economic growth, structural transformation, and the role of the state in a market economy. Industrial policy is intertwined with all three. It is a controversial topic in which views diverge. In theory, industrial policies either distort efficient market outcomes, or they improve them, depending on one’s view

on the ideal role of the state in the economy. In practice, industrial policies have both succeeded and failed. What is certain is that there is presently a resurgent interest in industrial policy. The resurgence is most surprising since there is an impressive record of failure of industrial policies. Some governments have “picked losers” rather than winners, while others have allowed rent-seeking self-interest to “capture” government resources. Furthermore, even when industrial policies work as they are supposed to, there are a range of questions concerning fairness to be considered. Is free trade fair trade if exports receive government support? How far can a government go to protect domestic industries from competition? When does temporary support become life support for uncompetitive firms? And, since wealthy countries can afford to spend more shoring up their markets than poorer countries, does industrial policy frustrate development efforts and entrench between-country inequality? Despite these lingering questions, the astonishing speed with which some countries, such as those in East Asia during the late 20th century—using industrial policies—were able to accelerate economic growth and increase standards of living is often seen an endorsement of industrial policy. Proponents of industrial policy thus argue that a more active approach to economic development yields better results than the free market because markets sometimes fail, and such failures can be fixed. Others, including Juhász, Lane and Rodrik (2024), argue that this binary debate between proponents and detractors is flawed, because all countries have used the visible hand of the state to assist the invisible hand of the market at one point or another. For these observers, the real issues concern what kinds of policy support work best and how governments can best deliver it. As Rodrik (2008) notes: “most governments do carry out various forms of industrial policy already, even if they call it by other names (“export facilitation,” “promotion of foreign investment,” “free-trade zones,” and so forth). Consequently, it is far more productive for the discussion to focus on how industrial policy should be carried out than on whether it should be carried it out at all” (p.2).

foreign investment,” “free-trade zones,” and so forth). Consequently, it is far more productive for the discussion to focus on how industrial policy should be carried out than on whether it should be carried it out at all” (p.2). The discussion of industrial policy has become an increasingly empirical one. The success or failure of an industrial policy depends on whether it has been rightly targeted, how it is designed and how it is implemented. This paper explores these questions, and in particular, how industrial policies are informed. Since industrial policy seeks to guide the allocation of capital and labour, the central question is whether that guidance is more effective when informed by the representatives of those most likely to be affected, that is, workers and employers. The paper proceeds as follows. Following this introduction, section 2 defines industrial policy and provides a brief overview of structural transformation toward economic development itself and the role of the state. Section 3 looks at the reasons for the decline and resurrection of interest in industrial policies at the present time. Section 4 then considers the theory and potential role for social dialogue in industrial policy. In section 5, we dissect three contemporary case studies of social dialogue in industrial policy and then discuss them through comparative analysis. Section 6 draws conclusions and identifies several policy implications.06 ILO Working Paper 153 X 1 Industrial policies reimagined

1.1 Industrial policy: A definition We define industrial policy as a multi-stage process in which the government provides various incentives designed to guide the behaviour of private economic actors toward the attainment of an objective deemed a public good1 that the market alone would likely fail to produce. It is important to distinguish between “horizontal” and “vertical” policies, where the former refers to the state’s investment in physical and social infrastructure of common use, such as highways or education or research and development. Industrial policy of this sort provokes little disagreement, as many in the economics profession regard state intervention of this nature as appropriate and efficient. Despite the near consensus on horizontal industry policies, however, even they are not without industrial bias. As Chang (2002) observes, it matters whether a government

ment, as many in the economics profession regard state intervention of this nature as appropriate and efficient. Despite the near consensus on horizontal industry policies, however, even they are not without industrial bias. As Chang (2002) observes, it matters whether a government invests in roads or railroads or ports. This notwithstanding, most criticisms of industrial policy are focused on vertical policies. Vertical industrial policy refers to government support of specific industries. It is immediately apparent why such criticism might occur a priori. First, these are policies that intervene directly in competitive markets, rather than less controversial and more broadly shared public goods (e.g. infrastructure or research and development). Second, they are “exclusive” to the extent that they are not economy-wide, meaning that they target some industries and exclude others. A second, broad classification of industrial policies is whether they are predominantly protective— that is, offering “infant industry” protection against imports from established competitors—or export-promoting, the latter being the hallmark of the Asian “miracle” economies. Both are in the service of economic development, understood here as changes in the allocation of capital and labour in the pursuit of sustained and inclusive growth. 1.2 Industrial policy addresses market failure It is standard economic theory that the free market efficiently allocates resources that can produce economic growth, jobs, and higher standards of living. At the same time, it is widely recognized that the gains from market forces are not evenly distributed. Consequently, delegating economic development to the market alone will, in many cases, result in a low-level equilibria that permits widening inequality. Addressing inequality thus becomes a post hoc matter of the state’s tax and transfer policies that adjust the income distribution toward greater equality. While such action does not constitute intervening in markets per se, it does reflect that many states already act to correct undesirable outcomes. Industrial policies have as their primary objective to fix market failures. Markets can fail, ironically, for the same reasons they succeed—the pursuit of self-interest. For example, one should not expect millions of rational decisions at the microeconomic level to add up to an outcome

already act to correct undesirable outcomes. Industrial policies have as their primary objective to fix market failures. Markets can fail, ironically, for the same reasons they succeed—the pursuit of self-interest. For example, one should not expect millions of rational decisions at the microeconomic level to add up to an outcome equally in the interest of all, even if markets are better at allocating resources in an economy 1 In economics, a public good is a good that is both non-excludable and non-rivalrous. Users cannot be barred from accessing or using such goods for failing to pay for them. Also, use by one person neither prevents access by other people, nor does it reduce availability to others.07 ILO Working Paper 153 than alternative arrangements. Similarly, one should not expect individual actors in competitive markets to internalize the cost of actions from which they might not benefit. For instance, addressing climate change is a public good favoured by most. Mazzucato (2015) elaborates: “governments intervene to ‘fix’ markets by investing in areas with ‘public goods’ characteristics (such as basic research or drugs with little market potential) and by devising market mechanisms to internalize external costs (such as pollution)” (p.3). Early industrial policies operated principally through trade tariffs that protected domestically significant sectors such as agriculture or, as in Latin America, infant manufacturing industries. Infant industries face high initial costs because they learn by doing, which means that without protection, they are likely to fail when exposed to more cost-competitive firms. The main market failures addressed by industrial policies are listed in table 1.1. X Table 1.1. Key market failures addressed by industrial policy Type of Market Failure Description Coordination Failures A situation where the inability of agents to coordinate their behaviour leads to an outcome where all agents are worse off. For example, a critical mass of investment may be needed for a new industry to be viable, but no single firm is willing to be the first mover. Information Asymmetries When one party in a transaction has more or better information than the other. In research and development

off. For example, a critical mass of investment may be needed for a new industry to be viable, but no single firm is willing to be the first mover. Information Asymmetries When one party in a transaction has more or better information than the other. In research and development (R&D), for instance, the high uncertainty and risk of failure may deter private investment, even if the potential societal benefits are large. Externalities Costs or benefits of an economic activity experienced by an unrelated third party. Climate change is the quintessential negative externality, where the social cost of carbon emissions is not borne by the polluter.

Source: Authors. 1.3 Economic development as the reallocation of capital and labour and the role of the state Industrial policy is about guiding the allocation of capital and labour toward specific ends. Of course, economy-wide, the (re)allocation of capital and labour serves the broader end of economic development. Economic development occurs through the continuous process of (1) moving labour and other production factors from lowerto higherproductivity sectors (structural transformation); and (2) within-sector productivity growth. The movement of labour and capital from lower productivity to higher-productivity activities (labour reallocation), and an increased sophistication and complexity of tasks and jobs within sectors are the key drivers of economic development and job creation.

Nonetheless, these processes are neither automatic nor guaranteed. Structural transformation can in fact be productivity-reducing when the reallocation of resources across sectors takes place from higher-productivity activities to lower-productivity activities (McMillan and Rodrik, 2011). In several low-income countries, much of the labour reallocation has occurred from agriculture to traditional market services (such as trade and hospitality sectors), which contribute only modestly,08 ILO Working Paper 153 if at all, to aggregate productivity growth and are often characterized by poor working conditions and widespread informality (Dasgupta and Singh, 2006; Dasgupta, Kim and Pinedo Caro, 2017). Sustaining productive structural transformation requires continuous increases in productivity

if at all, to aggregate productivity growth and are often characterized by poor working conditions and widespread informality (Dasgupta and Singh, 2006; Dasgupta, Kim and Pinedo Caro, 2017). Sustaining productive structural transformation requires continuous increases in productivity through innovations, improved technology and production methods, finding new market niches and graduating out of low-cost production to technology and knowledge-based production with higher value added. To this end, smaller economies often pursue specialization to exploit competitive niches, while larger economies tend toward diversification. Some rely more on manufacturing, others on modern services. Yet, beneath this diversity lie common imperatives: achieving competitiveness, producing tradable goods and services, moving up the technology ladder and the product cycle, and reducing transaction costs. The transition from extensive to intensive development is notoriously difficult—hence the notion of the “middle-income trap.” Navigating the trap requires strategic coordination to direct capital, labour, and innovation toward higher-productivity activities. In this context, the role of the state—particularly through well-designed industrial policy—becomes pivotal in steering economies toward sustained, innovation-led growth. 1.4 Industrial policies: An ideological era of decline A variety of recent publications refer to the return of industrial policy, which begs two obvious questions: Where did it go? And why is it back? The decline of interest in industrial policy has some factual basis (i.e. failure) but it was also propelled by a shift in ideological winds. Each deserves separate discussion, although the two are not entirely unrelated. As Eichengreen (2023) notes, the empirical basis for industrial policy effectiveness has been limited and instances of rent-seeking were not hard to find. If a beneficiary of government spending is not closely monitored and held accountable for the use of the public funds, then public funds are often wasted propping up inefficient companies. A property of effective industrial policies is that they are temporary and performance-monitored, with support continuing only until beneficiaries beitored and held accountable for the use of the public funds, then public funds are often wasted propping up inefficient companies. A property of effective industrial policies is that they are temporary and performance-monitored, with support continuing only until beneficiaries become self-sustaining, or withdrawn once it is evident that firms are unproductive (Rodrik, 2008). By the 1980s, it had become clear that import substitution industrialization (ISI)—an industrial policy model harnessed by many Latin America countries—had for the most part failed, culminating in and partially contributing to the debt crisis and “lost decade.” The 1980s debt crisis in Latin America seemed to serve as an example of “government failure”, its industrial policies of ISI waning in support. In fact, as Williamson (2004), the author of the Washington Consensus, would later explain, the “consensus” was intended to refer to Latin America and what not to do to further development. Among other lessons to conclude from these failures was the inward-looking policy of ISI, as highlighted by Prebisch (1964) as quoted in Irwin (2020): “The relative smallness of national markets. . .has often made the cost of industries excessive and necessitated recourse to very high protective tariffs; the latter in turn has unfavorable effects on the industrial structure because it has encouraged the establishment of small, uneconomical plants, weakened the incentive to introduce modern techniques, and slowed down the rise in productivity” (p. 22). The ISI model, directed toward the development of domestic manufacturing, could only be achieved through the import of intermediate industrial goods. Latin American exports were concentrated in agricultural products, the sector in which the region had comparative advantage. But the revenue gains from the agricultural exports were inadequate to make up for the revenue loss of more expensive imported industrial inputs, resulting in chronic current account deficits. Moreover, domestic manufacturers came to rely on subsidies without which they could not survive.09 ILO Working Paper 153 The mistrust of industrial policy was broadly contemporaneous with the resurgence of laissez-faire,

more expensive imported industrial inputs, resulting in chronic current account deficits. Moreover, domestic manufacturers came to rely on subsidies without which they could not survive.09 ILO Working Paper 153 The mistrust of industrial policy was broadly contemporaneous with the resurgence of laissez-faire, free market ideology, as reflected, for example, in the election of Margaret Thatcher and Ronald Reagan. Over the 1980s, policymakers across the world embraced the primacy of the market and a more circumscribed role of the state. As Campbell (1991) highlights, it is not coincidental that the word “globalization” entered mainstream usage at the end of the 1980s, marking the diffusion of market-centric policy and cross-border integration. The dissolution of the Soviet Union and the birth of several independent states, each with fledgling private sectors, reinforced this shift. In Asia, Viet Nam’s Doi Moi (1986) and China’s post-1978 reforms institutionalized market mechanisms within socialist governance, while Mongolia and Cambodia embarked on market transitions. These developments in Asia, which coincided with pro-market reforms in the United Kingdom and the United States, underscored a period of growing policy alignment across the world. The Berlin Wall fell within a year of the codification of the ten principles constituting the “Washington Consensus”, which framed development policy around state retrenchment, that is, a state that would divest itself of participation in the economy through the privatization of state-owned enterprises; confine itself to the prudent macroeconomic management of a stable exchange rate; aim for responsible fiscal budget; promote trade and foreign direct investment; trim the state bureaucracy; and deregulate the economy—all remedies to “government failure” in short. Collectively, these changes signalled a “primacy of the market” moment: the centrality of the market economy as the source of a nation’s growth with the state’s role redefined and narrowed across many policy domains. Interestingly, policy debates in both the Soviet Union and advanced economies

these changes signalled a “primacy of the market” moment: the centrality of the market economy as the source of a nation’s growth with the state’s role redefined and narrowed across many policy domains. Interestingly, policy debates in both the Soviet Union and advanced economies increasingly converged on common themes of “too much state” and “too little market”. The ideological endorsement of a limited role for the state in the market economy, an endorsement shared by both the World Bank and the International Monetary Fund, helps explain the mistrust of industrial policy – epitomized by claims that the “the best industrial policy is none at all” (Becker, 1985). As Menocal (2004) observes: “The disillusionment(s) that led to the abandonment of state-led development in favour of the neoliberal model of economic recovery seems to have generated a process of learning by negative association: manipulating market forces, the state creates unsustainable distortions, and it must therefore be curtailed” (p.766). In the era of deregulation, the ascendency of the market was relatively widespread. Many markets, including labour markets, were being deregulated. “Eurosclerosis”, for example, attributed to labour market “rigidities” was identified as a priority problem in Europe. Command economies dwindled to a relative few globally. States redefined their role in the market. While neo-liberal “market fundamentalist” ideology and structural adjustment programs promoted by international financial institutions such as the International Monetary Fund (IMF) and World Bank pushed industrial policy to the margins of policy discussion—they did not eradicate it from practice. In an important counterpoint to the failures of Latin American ISIs, the state remained central in the previously discussed development state-led economic “miracles” of East and Southeast Asia. Furthermore, even as ideology undermined the rationale for industrial policy, horizontal policy was alive and well. The United States Defense Advanced Research Projects Agency, a R&D agency responsible for the development of military technologies, is credited with its contribution to the creation of the internet, global positioning system, Silicon Valley and advances in artificial intelliFurthermore, even as ideology undermined the rationale for industrial policy, horizontal policy was alive and well. The United States Defense Advanced Research Projects Agency, a R&D agency responsible