The merger between the industry and foreign trade ministries is not enough. Salah El-Amrousi urges a more interventionist approach The ministries of industry and foreign trade were merged in the recent cabinet reshuffle. The move is reminiscent of measures taken by Japan, South Korea and Taiwan. But in the Far East, things were done differently. Egypt is no stranger to the concept of ministerial merger, especially when it comes to economic affairs. The ministries of foreign trade and economy were merged before, then separated, then the latter was abolished. But these institutional changes did not evolve from rigourous studies or at least such studies were never made public. The most the public was offered was curt statements laced with optimistic rhetoric that the changes would be good for the economy. Each time, the optimism was premature and the economic crisis continued. Will the merger of the industry and foreign trade ministries fare better, or will it be as disappointing as previous ones? Superficially, the merger seems to be a step in the right direction. The step mirrors precedents in successful Asian economies. Everyone can agree that industry and foreign trade are closely linked. Industry can be smothered by unfair competition from imports. It needs technologically appropriate imports in order to survive and prosper and exports in order to cover its needs, as well as those of society. It makes sense, therefore, for industry to have a clear strategy for competing in the global market. It is only fair to be sceptical about the ability of the Egyptian bureaucracy to pull off the merger in an effective manner. The whole thing may end up being a cosmetic change, with one minister running two ministries, as has happened in the past. Scepticism aside, the merger should be linked to economic policy or it will be meaningless. Asian countries that pioneered such mergers had a clear economic and industrial policy. They had a national policy that subjugates trade to the requirements of industrial development. The state intervened with a temporary protection programme for industry and various measures to encourage industrialisation, improve the industrial structure and raise the competitiveness of local products. American author Chalmers Johnson traced the history of the post-war Japanese Ministry of International Trade and Industry (MITI) in his book MITI and the Japanese Miracle. The book reviews the history of MITI's industrial policy, noting that it had roots going back to 1925 (when it was called the Ministry of Commerce and Industry, before its name was changed to the Ministry of Munitions during the war). What is significant is that Japanese industrial policy predates the merger between industry and foreign trade. It can be traced back to the policies of the Meiji era in the last quarter of the 19th century, when Japan's modern industry began its rapid growth with state sponsorship. Some attribute the Japanese Miracle to free market forces, but Johnson begs to differ. In the course of his book, he focuses on the role of the developmental state and especially of MITI in bringing about the Japanese Miracle. Johnson argues that the reason Western economists overlooked the state's role is ideological prejudice. Western economists did not wish to admit that a developmental state exists outside the realm of the communist bloc. Japan's political economy, Johnson says, was inspired by neo-mercantilism, which was not particularly popular in English- speaking countries. That is why Western economists tended to erroneously approach Japan as an alternative form of a market economy. According to Johnson, during the first wave of industrialisation in the West, the state played a small role in sponsoring industry. (This point is debatable, as several studies show that the state played a developmental role even in the countries that first launched the Industrial Revolution, although this role was not particularly forceful). Once an economy is adequately industrialised, the state steps back to assume the role of coordinator, through market rationalisation. In other words, the state issues legislation to reinforce competition, but without interfering in direct economic issues. In second-wave countries, Johnson argues, the state has little option but to vigourously lead the industrialisation process through a policy designed in accordance with economic and social priorities. Japan's industrial plan involved a cocktail of policies aimed at protecting local industry, develop strategic sectors and restructure the economy in response to (or anticipation of) domestic and foreign conditions. This was the task MITI assumed in Japan. MITI followed a protectionist policy, restricting imports through tariff or quota systems, and limiting foreign investment. Meanwhile, it encouraged the procurement of foreign technology through franchising. The state forced foreign companies to accept franchising as the easiest way to penetrate the Japanese market, which was firmly sealed to direct foreign investment. This pattern characterised Japan's policy on the import of technology. It was later adopted by both South Korea and Taiwan. However, protectionism carries the risk of making an economy too complacent to compete (this being the case in most protectionist experiences in developing countries). Japan's developmental state was aware of such consequences and it took measures from the start to ensure industry would strive to achieve international competitive standards. The state intervened in various aspects of technological development. It enticed private businesses to improve their performance through state monitoring of imported technology. The state kept a close eye on heavy and knowledge- intensive industry. It was involved in negotiations for the purchase of franchises from trans-national companies. The state even monitored the creation of new industries and advised private businesses in matters of merger and takeovers, in order to create giant companies capable of international competition. Through a policy of import substitution and export-oriented industries, MITI was able to create a solid industrial base, one capable of penetrating foreign markets. For all its efficacy and clout, Japan's state intervention did not involve the creation of a large public sector. Following the privatisation of state- owned companies in the latter decades of the 19th century (after the Meiji restoration), industrial development depended primarily on the private sector. But the state did not leave the private sector totally free, nor did it confine itself to indirect guidance through various incentives and indicators. The state adopted a wide array of direct and indirect measures, particularly at the micro level, the level of individual projects, to rationalise industry. According to a 1957 MITI report, the state was aimed at encouraging private projects to adopt new technology, invest in hardware, reduce costs, and improve management. The state took part in determining the terms of technological agreements with foreign companies. On the micro level, the state devised policy on water, soil, transport, and industrial location. The state restricted the entry of new projects in certain sectors to avert excessive competition and it intervened in deciding the optimum firm size, to ensure maximum viability for each project. Japan's industrial policy was particularly radical when it came to deciding the industrial structure of the economy as a whole, that is, the share of various sectors in the national economy. The government decided the proportion of agriculture, mining, manufacturing and services within the economy. It decided the ratio of light to heavy and of labour-intensive to knowledge-intensive industry. MITI was convinced that the required structural changes would not come about as a result of market forces alone. While sponsoring heavy, knowledge-intensive and capital-intensive industry, Japan did not focus on relative advantages but on the shape of the industrial structure, the dynamics of long-term productivity and the requisites of international competition. The policy of merging foreign trade and industry, as applied in Japan and other Asian Tigers, is one radically different from the free trade policy of current and former Egyptian governments. The ministerial merger reflected a sense of the importance of foreign trade to industry, but this sense has not been translated into effective policy, as the government still adopts a free trade policy, which has thus far been a hindrance to industry. The government is still miles away from orchestrating the creation of a comprehensive and effective industrial base, one capable of competing in foreign markets. I am not suggesting that one has to copy the experiences of others without adapting them to local circumstances. What I am saying is that there is a general lesson to learn and the details can differ according to the conditions of each country and the innovativeness of each experience. The social circumstances may differ from one country to another, and therefore the social content of the methods applied may differ. The general lesson, however, is that late-comers to industrialisation need the guidance of a developmental state, not the randomness of market forces. Germany has learned this, so has China. Now it's Egypt's turn.
