National Industrial Policy (NIP) in practice : other supporting policies

1. National Industrial Policy (NIP) in practice: other supporting policies Bineswaree Aruna Bolaky Africa Section Division for Africa, LDCs and special programmes United Nations Conference on Trade and Development UNCTAD

2. Contents of industrial policy

3. Complementary policies • Industrial policy is likely to be ineffective in the absence of complementary policies which support its objectives. In this regard, macroeconomic stability is critical, and in successful cases the macro-economic environment was characterized by domestic investment, domestic savings and exports all growing in absolute terms and as a share of GDP. In effect, the process of structural transformation was underpinned by a strong investment-profits nexus and a strong export-investment nexus. • The need for policy coherence calls for consistency between industrial policy and other domestic measures such as: exchange rate policy, monetary and fiscal policies, and policies that affect infrastructure development and the investment climate.

4. Structure of presentation • Macro-economic policy, infrastructure and investment climate, other policies • Institutions-Role of developmental state

5. Complementary policies 1. Avoiding exchange rate overvaluation • Exchange rate policy affects the development of manufacturing firms as well as their ability to compete in international markets. In particular, a competitive exchange rate promotes exports and allows domestic firms to seize opportunities created in international markets. • When the exchange rate is overvalued relative to its equilibrium value, it represents an implicit tax on exports and a disincentive for firms to invest in the export sector. If African countries want to make significant progress in achieving their industrialisation objectives, they will have to avoid exchange rate overvaluation through, for example, controlling inflation, managing natural resource wealth in a manner that minimizes the risk of the "Dutch Disease" and, where appropriate, adopting more flexible exchange rate regimes.

6. Complementary policies • Over valuation of exchange rate: exchange rate is overvalued with respect to purchasing power parity (PPP), or it may mean the exchange rate is overvalued relative to the rate presumed needed to balance the current account. • The PPP exchange rate is defined as that rate which equalizes the cost of a market basket of goods between two countries. The PPP exchange rate between the Tanzanian Shilling (TZS) and the US dollar ($) would be written as, which represents the PPP value of the US dollar in terms of TZS. • If the US dollar is overvalued with respect to the Tanzanian shilling then the spot exchange rate exceeds the PPP exchange rate,

7. Complementary policies • This will also mean the exchange rate exceeds the ratio of market basket costs, • and therefore the following will hold. • The left-hand-side (LHS) of this expression represents the cost of a US market basket converted to TZS at the current spot exchange rate. The right-hand-side (RHS) is the cost of the basket in Tanzania also evaluated in TZS. Since the LHS > RHS, goods and services cost more on average in the US than in Tanzania at the current exchange rate. Thus, for the US dollar to be overvalued with respect to the TZS means that goods and services are relatively more expensive in the US than in Tanzania. Of course it also implies that goods and services are relatively cheaper in Tanzania. • A simple guide to judge whether a currency is overvalued is to consider it from the perspective of a tourist. When the US dollar is overvalued, a US tourist traveling to Tanzania will find that many products seem cheaper there than in the US, after converting at the spot exchange rate. Thus an overvalued currency will buy more in other countries.

8. Complementary policies 2. Adopting appropriate monetary and fiscal policies • The effectiveness of industrial programmes and policy also depends in part on the extent to which monetary and fiscal policies are consistent with the objective of promoting industrial development. • In particular, the mix of monetary and fiscal policies has to be such that firms have better access to credit and real interest rates are not at a level that deters investment. This is particularly important given the fact that as a result of the poor access and high cost of credit in African countries, domestic firms tend to rely more on retained earnings rather than bank lending as a source of finance (Ramachandran, Gelb and Shah 2009). • There is the need to align the stance of monetary and fiscal policies with the objective of promoting industrial development while ensuring that the proposed measure does not lead to medium and long-term macroeconomic instability.

9. Complementary policies 3. Strengthening infrastructure development • The inadequate and poor quality of infrastructure in Africa is a major obstacle to the development of competitive industries in the region. It is estimated that Africa loses 1 percentage point per year in per capita economic growth as a result of its infrastructure deficit. • The infrastructure problem is evident in areas such as power, water supply, transport, and communications, which are all critical to the successful development of manufacturing enterprises. Furthermore, the problem is not limited to poor network coverage but also manifested in the exceptionally high price of infrastructure services in Africa relative to global standards. • The high cost of infrastructure in Africa increases trade costs and reduces productivity of African firms by about 40 percent (Foster and Briceno-Garmendia 2010).

10. Complementary policies

11. Complementary policies • Public investments will be needed to address Africa's infrastructure problem. However, since governments do not have the resources they need to address all infrastructure needs, the private sector should also be provided incentives to either participate or contribute more to infrastructure development in the region. • In addition, the setting up of special economic zones (SEZs) could enhance firms' access to infrastructure. When SEZs are provided with good infrastructure, have management sensitive to the needs of firms, and are supported with effective public institutions they can be effective vehicles for promoting industrialisation. • Furthermore, African countries should be aware of the fact that not all manufacturing industries necessarily require the same infrastructure. Based on the selection of specific target sectors and in close consultation with the respective domestic private sector, a pragmatic prioritization of required improvements may thus be expedient.

12. Complementary policies 4. Improving the investment climate • The 2010 Ministerial Statement adopted at the 3rd Joint Annual Meetings of the African Union Conference of Ministers of Economy and Finance and the ECA Conference of Ministers of Finance, Planning and Economic Development recognises the importance of a good business environment for promoting domestic as well as foreign investment. • This reflects the fact that Africa's relatively burdensome regulatory environment increases trade costs and militates against the development of competitive manufacturing firms in the region. While this is just one of the many obstacles to investment in the region, there is the recognition by African policymakers that it has to be dealt with to enhance prospects for manufacturing development. • In this regard, there is the need to strengthen efforts to reduce the regulatory and administrative burdens associated with investment in the region. In addition, the sectoral dimension of investment climate perceptions and requirements should also be taken into consideration.

13. Complementary policies Some data from the Africa Competitiveness Report 2009 (chapter 1.4) • By some estimates, as much as 25 percent of sales of firms in some African countries are lost because of impediments to the investment climate such as unreliable infrastructure, contract enforcement difficulties, crime, corruption, and poor regulation. These losses are, at times, much higher than taxes paid. • Additional evidence estimates the indirect costs faced by African firms at around 20 to 30 percent of total costs, a value often higher than labor costs. The impact of such production costs on Africa’s competitiveness seems to be above and beyond what is experienced by other regions in the world. • ACR looks at Three types of costs: direct costs, indirect costs, and invisible costs.

14. Complementary policies • Direct costs— that is, those factory floor costs associated with the production process itself such as labor, capital, and electricity. • Indirect costs—that is, those costs associated with getting what is produced to market as well as those associated with the broader business environment in which the firms operate. • Invisible costs—that is, those losses experienced by firms as consequence of the poor quality of the business environment. More specifically, look at losses due to excessive collateral requirements to access credit, poor infrastructure services (power interruptions and transport delays), unpredictable regulatory environment, corruption, and lack of security. • Shows that firms in Africa are almost 20 percent less competitive than firms in the other regions, although considerable variation exists across countries. Compared to firms in East Asia, for example, it costs African firms 19 percent more to produce one unit of sale—a considerable competitive disadvantage. With the unfolding global crisis, this finding implies that Asian firms enjoy a much higher margin to absorb price shocks than African firms, while remaining viable producers. • The evidence presented in that chapter provides some hierarchy to a number of bottlenecks to the emergence of a competitive private sector in Africa: the high cost and lack of access to credit, the poor quality of infrastructure services, and lack of a transparent and friendly regulatory environment.

19. Complementary policies

24. Complementary policies-Investment promotion • UNCTAD Investment Policy Review Tanzania 2002 offers policy recommendations t Tanzania for increasing attractiveness to FDI and increasing economic contribution of FDI • Objective 1: Strengthening the investment framework • Objective 2: Reducing the cost of doing business • Objective 3: Ensuring continued success of privatization • Objective 4: Implementing effective infrastructure development… • Instead of pursuing the path of creating separate industrial parks and export processing zones (EPZs) in mainland Tanzania, consideration should be given to a Multi-Facility Economic Zone to cater for domestic production and partial export- and fully export-oriented industries. The MFEZ concept is to provide the best possible business environment within a limited geographical area, including infrastructure, a regulatory regime and efficient administration. The cost can be shared with the private sector, particularly if the project is offered a special package of incentives, including a 10-year tax holiday • Objective 5: Stimulating human resource development and linkages

25. More Complementary policies – human resource development, regional integration • Objective 6: Building a dynamic enterprise sector • Modernizing the present National Science and Technology Policy to bring it into line with policy changes in other economic areas, particularly investment policy. • Undertaking a major restructuring and overhaul of the existing technology infrastructure with a view to identifying those technology-related institutions that provide essential services and need strengthening and those that are ineffective and should cease to operate. At the same time, private sector involvement in technology-related support services should be actively encouraged

26. More Complementary policies – human resource development, regional integration • Objective 7: Enlarging markets through regional integration Tanzania should continue efforts to build a stronger East African Community (EAC) and Southern African Development Community (SADC). A larger market size ensures stronger commitment by investors and leads to a greater level of strategic investment. The following issues are important: • In order to obtain gains from the EAC, Tanzania requires a sustained effort to improve its cost competitiveness, and to focus on areas of actual or potential competitive advantage. Greater attention needs to be paid to encouraging export orientation in indigenous industry and attracting export-oriented FDI to exploit the larger EAC market. To facilitate this, export and import procedures must be improved and streamlined. Implementing the recommendations of the BEST Programme is important in this respect. • In the short term, Tanzania needs to recognize the problems faced by foreign and indigenous producers in manufacturing in competing with Kenya. Moves to eliminate tariffs and non-tariff barriers need to be made cautiously to avoid a surge of imports, but it is important to resist demands for continuing protection. •

27. More Complementary policies – human resource development, regional integration • In respect of SADC, foreign investors are unlikely to see significant opportunities for intraregional FD in the short to medium term, but if Tanzania improves its transport (road, rail and port) infrastructure in the south of the country, it could achieve its potential as a gateway to the region in the longer term. • Tanzania should take the initiative in encouraging regional FDI promotion events, particularly for East Africa. • Tanzania should take full advantage of the “window of opportunity” that WTO offers for tariff protection, to encourage import substitution industries, but with the full understanding that these are strictly short-term “booster” measures to help incipient manufacturers. • Objective 8: Imparting a new strategic thrust to investment promotion

28. More Complementary policies (Source: Cimoli, Dosi, Stiglitz) Competition policy v/s Industrial policy. • Objectives and scope of competition policy: the main goal of competition policy is to sustain or increase competition within a market environment with a view to preserving or enhancing economic efficiency or social welfare. Both productive and allocative efficiency are expected to increase with the degree of competitiveness of markets • But trade off between static efficiency v/s dynamic efficiency??? • Competition policy may have many other objectives: promotion of SMEs, protection of consumers and their interests • Tensions and complementarities between competition and industrial policies. Competition policy may conflict-and often does-with 2 other typical public policies: trade policy and industrial policy. • Given that trade policy is designed to protect local industries against foreign competition, not to protect local competition or consumers, some degree of conflict is inevitable and the problem is how to manage it as it occurs

29. More Complementary policies (Source: Cimoli, Dosi, Stiglitz) Competition policy as part of an industrial policy • Competitive pressures on individual firms must be strong enough not only to dissipate monopolistic rents but more importantly to induce firms to adopt active competitive strategies instead of just profiting from the incentives provided by industrial and technology policies • Different trade offs and complementarity requirements characterize different stages of development. History tells a general story whereby economies in their early stages of industrialization require significant measures of infant industry protection. Competition policies tend to appear much later along the development process. • Industrial development paths, at least from a minimum level of industrialization already achieved, are consistently characterized by some degree of interaction between competition and industrial policies, although this relationship changes over time.

30. More Complementary policies (Source: Cimoli, Dosi, Stiglitz) Competition policy as part of an industrial policy: Examples from Asia • Japan/Korea: subordinated competition policy and its enforcement to industrial policy objectives. • India: Competition law passed in 2002 gives the Competition Commission of India (CCI) powers to take action against restrictive trade practices (such as cartels) but at the same time expressly allows firms that “contribute to economic development” to cause “adverse effects on competition” • Once a dynamic view of competition is acknowledged, in which market success and profitability is related to more to the innovativeness of firms and their ability to cope with ever-changing environments than to the number of competitors and to static allocative efficiency effects, industrial and competition policies are more easily seen as complementary rather than opposed to each other.

31. More Complementary policies (Cimoli, Dosi, Stiglitz) • Strategies for managing intellectual property? • Intellectual property regimes (IPRS) are a set of legal regimes of a broad scope that range from patents that protect inventions, to copyrights, which relate to original forms of expression such as literary and artistic work, and among others, trademarks that protect works and symbols that identify goods and services • Frontier countries have been using and use IP as a de factor industrial policy measure to sustain the competitiveness of their industries and to protect dynamic advantages in certain technological trajectories. Developing countries should learn from them and strategically fine-tune IP regimes according t their industrial development needs. • Increasing relevance of IP in in multilateral and bilateral trade negotiations and in international disputes between countries. Adoption of TRIPS agreement in 1994 marked a milestone in the big push towards homogenization of IP minimum standards of protection.

32. More Complementary policies (Cimoli, Dosi, Stiglitz) • TRIPS: establishes homogenous minimum standards of protection among WTO members introducing 2 basic principles in IP management: the national treatment and the most favored nation treatment (TRIPS articles 3 and 4) • According to these principles, each WTO member is required to treat nationals of other member states at least as well as its own nationals and to treat all other member states on an equivalent basis in relation to the protection of intellectual property. • The adoption of TRIPS raised concerns regarding its implications for developing countries including the risks of homogenizing IP systems among countries with asymmetric technological capabilities and at different development stages • IPRs affect appropriability conditions of various technologies: harder conditions for imitation • Need to know the flexibilities that exist in the TRIPS agreement and to identify the effective policy spaces which might allow countries to use IP management strategically according to their industrial development priorities.

33. More Complementary policies (Cimoli, Dosi, Stiglitz) • Examples of flexibilities • Special and differential treatment (SDT) provisions –but SDT do not eliminate the one-size fits all nature of the agreement. It simply grant a time lag for implementing the homogenous minimum standards established by TRIPS. SDT do not confer the right to implement an IP regime in accordance with the stage of development of the country, but simply recognize the right to benefit from transitional periods for the implementation of the agreement • Article 66.2: Provisions related to technical and financial cooperation and technology transfer open a window of opportunity but they are not legally binding, hence their effectiveness in practice is scant unless countries decide to exert it • Article 31: establishes the conditions under which the governments of member states are allowed to issue a compulsory licence. A government may authorize a party other than the patent holder of an invention to use that invention, even without the consent of the patent holder, when that party has unsuccessfully tried to obtain such a license on “reasonable commercial terms within a reasonable period of time” • but requirements for use are restrictive and interpretation of “reasonable” is subjective

34. More Complementary policies (Cimoli, Dosi, Stiglitz) • Article 30: “exceptions to rights conferred”. Article recognizes the right to provide limited exceptions to the rights conferred by a patent, including the Bolar exception, also known as early working, which allows generic producers to import, manufacture and carry out experiments on patented products before the patent expires. In other words, the Bolar exception allows firms to carry out experimental R&D to produce generic products without violating the patent. • Certain thresholds of technological and production capacities as well as public and private incentives in such research effort are needed to engender a demand for using this flexibility and most developing countries lack the first that is the production capacities or the second that is the incentives and the appropriate set of policies.

35. More Complementary policies (Cimoli, Dosi, Stiglitz) • Developing countries face the challenge of strategically managing IP systems in order to use them as complementary tools in their industrial development strategy. • One suggestion is that countries should have a clear vision for their industrial development and second, countries should balance IP regimes in order to cope with the needs of the different segments and stages of their production and scientific structures. Awareness and political will in these fields are the keys to moving forward.

36. Institutions See UNCTAD LDC Report 2009 • Critical role for the state • Building Developmental States - A state that puts economic development as the top priority of government policy and seeks to design policies and institutions to promote this goal” (Mkandawire, 2001). -It is not assumed that that the developmental State inevitably achieves developmental outcomes, but rather that there is a constant commitment, effort and orientation to achieve developmental outcomes. This is a very complex process that requires policy experimentation, policy learning and institutional adaptation and innovation. Thus in developmental States, policies and institutions are constantly evolving and being adapted to new external circumstances and changes in internal structures, and policy-makers are always in danger of failing. - Examples: successful East Asian developmental States, notably the initial four Asian tigers — Hong Kong (China), the Republic of Korea, Singapore and Taiwan Province of China — and also more recent successes — Malaysia, Thailand and Viet Nam — as well as China. Democratic developmental States of Botswana and Mauritius

37. Developmental StateSee UNCTAD LDC Report 2009 Key roles of Developmental States -Engaging in Development Governance: They should aspire to a kind of good governance that delivers developmental outcomes, such as growing income per capita, structural transformation, expanding employment opportunities in line with the increasing labor force and reduced poverty. In short, they should aspire to good development governance. - Building productive capacities and achieving structural transformation - Achieving policy space and policy experimentation

38. Development GovernanceSee UNCTAD LDC Report 2009 • Good development Governance -Governance will be broadly understood as “the processes through which individuals and State officials interact to express their interests, exercise their rights and obligations, work out their differences and cooperate to produce public goods” (Brinkerhoff and Goldsmith, 2005). -This covers both what Governments do (the nature of policies) and how they do it (the nature of institutions). - Over time, the development dimension has evaporated from many definitions of good governance.

39. Development GovernanceSee UNCTAD LDC Report 2009 • Good development Governance • Development governance, or governance for development, is about creating a better future for members of a society by using the authority of the State to promote economic development, and in particular to catalyze structural transformation, create productive employment opportunities and raise living standards for present and future generations. In general terms, governance is about the processes of interaction between the Government — the formal institutions of the State including the executive, legislature, bureaucracy, judiciary and police — and society. • Development governance is governance that is oriented to solve common national development problems, create new national development opportunities and achieve common national development goals. This is not simply a matter of designing appropriate institutions but also a question of policies and the processes through which they are formulated and implemented.

40. Complementary policies-Building developmental State • A pragmatic approach to building developmental State capabilities in LDCs would involve the adoption of a small number of institutional reforms that fit well within the existing context • Both technical and political capacities matter. It is necessary for Governments to have an overall development vision that maps where they are going. But developmental State capabilities should be built up over time through a strategic incrementalist approach, building on islands of excellence in public administration or executive agencies, promoting policy learning and nurturing growth coalitions • Particular effort should be focused on building the governance requirements to address factors that are slowing down capital accumulation, technological upgrading, sectoral diversification and structural change

41. Complementary policies-Institutions -Building developmental State • In terms of political capacity, a defining characteristic of successful developmental States is the existence of a developmentally-oriented elite, often consisting of “a small cadre of developmentally determined senior politicians and bureaucrats, usually close to the executive head of Government who was instrumental in establishing the development regime and its culture” (Leftwich,1995). • This elite provides vision and leadership for the achievement of national development goals. Unless it exists, there is no possibility of creating developmental State capabilities. If the elite is simply committed to personal enrichment and perpetuation of its own privileges rather than national economic development, the latter will be impossible. • The developmental elite cannot carry out a national development project in isolation. Solving development problems and creating development opportunities requires the participation of a wide range of informed and interested stakeholders. Democratic processes, which might take various forms, can provide the basis for a more inclusive societal mobilization behind a national development project. However, it is likely also that there is a need to forge growth coalitions • Growth coalitions arise when relations between business and Government elites take the form of active cooperation towards the goals of fostering investment and increasing productivity • The creation of mechanisms for business–Government cooperation through business associations should be an important element of building developmental State capabilities.

42. Complementary policies-Institutions -Building developmental State • Technical capacity: In building developmental State capabilities, it is important there is a pilot agency that is close to political power and that can provide overall vision and coordination. An institution dedicated to aid management is also critical. More emphasis should also be put on improving bureaucracies in ministries concerned with production sectors • Islands of excellence within the ministries and executive agencies of LDCs can provide lessons about what works and does not work in particular contexts and also models for spreading these practices. Such islands of excellences are hidden by the countrywide indicators of governance quality. But the few in-depth studies, based on interviews with civil servants, that have focused on this issue have found such islands of excellence in a number of LDCs including in Central African Republic and the United Republic of Tanzania • These studies find that what makes these institutions work well are: (a) leadership and management — in well-performing organizations, staff have a clear sense of purpose, management gives clear signals about expected work effort and quality and rewards accordingly, and there is some degree of participation, flexibility, team problem–solving and equity; (b) prestige, professionalism and a sense of service to the country; and (c) merit in recruitment, promotion, demotion and dismissal.

43. Complementary policies-Institutions -Building developmental State • Creating islands of excellence and spreading their ways of doing things to other parts of the public sector could thus be a viable approach to improving governance capabilities for development. • Policy learning is also important. Learning occurs by doing and in stages. • Errors will be made at all stages, but this is a key aspect of learning to improve. A focus on policy learning also implies a different style of planning. Rather than a linear planning approach to policy in which formulation precedes implementation, there should rather be sequential experimentation as policymakers learn what works and what does not (Justman and Teubal, 1995). • Development projects that are undertaken should thus be chosen not simply on a static cost–benefit analysis but in terms of the new information they generate, the capabilities they develop and their demonstration effects. • Since mistakes are inevitable (as with firms), the Government has to be flexible and responsive to evolving characteristics — policy has to allow adjustment and learning.

44. Complementary policies-Institutions -Building developmental State • See Box 2 in LDC 2009 Report on public sector reforms in Tanzania • Pay Reform: Uganda and the United Republic of Tanzania succeeded in improving pay in periods in the 1990s and early 2000s. Selective Accelerated Salary Enhancement, which aims to raise the salaries of key technical and professional staff • Human resources management reform: Thus in Uganda and the United Republic of Tanzania there has been a push for strategic plans, action plans, client service charters, carrying out of service delivery surveys and self-assessments, staff appraisals and the establishment of results-oriented monitoring and evaluation systems. These are very ambitious undertakings. • Performance-enhancement reforms: the United Republic of Tanzania and Zambia have experimented with performance improvement funds (PIFs) to encourage willingness to adopt new ways of doing things and also success in meeting performance targets

45. Complementary policies-Institutions -Building developmental State • Executive agency reforms: executive agencies are semi-autonomous contracting units that operate to achieve particular objectives under administrative accountability mechanisms. Such an agency can potentially recruit and offer appropriate incentives to qualified professionals. However, effective government management is needed to hold the agencies accountable to deliver the required services. Executive agencies have typically been established through the conversion of Government departments, previously operating in a hierarchical civil service, into semi-autonomous contracting units operating under administrative accountability mechanisms. This has been occurring in English-speaking African countries in particular. In the United Republic of Tanzania, 20 agencies were established in 2004.

46. Complementary policies-Institutions -Building developmental State • Role of donors: greater aid effectiveness-enhancing country ownership, helping countries to build policy space through domestic resource mobilization and reorienting aid towards productive sectors • Brautigam, Rakner and Taylor (2002) and Mkandawire (2001) point out that African States have in the past often failed to allow local business classes an effective voice in policy–making. In some cases Governments have been more responsive to donors’ demands than to the interests of the local business class • Need for increased ownership and policies for bettering aid effectiveness • Shrinking policy space can jeopardize efforts at autonomous policymaking and impede an effective policy response. • Need for aid management policies, policies for increasing domestic absorptive capacities and debt management policies

47. Developmental Industrial Policy See UNCTAD LDC Report 2009 • Tailoring industrial policy to LDCs (Chapter 4, LDC2009) • It is a necessary condition for States to engage in developmental industrial policy (DIP), defined as any strategic intervention by the State that catalyses structural change and stimulates economic restructuring towards more dynamic, higher value added activities. • To mount such policies implies addressing institutional weaknesses, such as bureaucratic inertia and clientelism, institutionalizing and deepening developmentalism, freeing the bureaucracy from the rigid economic orthodoxy based on the Washington Consensus paradigm, but, most of all, creating a broad base of popular support for the economic and social change that development entails….NEED FOR SOCIAL POLICIES FOR INCLUSIVE INDUSTRIAL DEVELOPMENT…POLITICAL ECONOMY ASPECTS • Industrial policy, if successful, is an expression of the social contract, a partnership between different segments of society willing to share both the risks and benefits of change in an equitable manner. Accelerated growth tends to be turbulent and socially destabilizing. The multiple functions of the State include not only instigating the process of change, but also ensuring its viability through managing distributional conflicts..

48. Complementary policies • Social Compacts/Partnerships • The Nordic countries and Ireland enacted industrial policies that explicitly incorporated social inclusion, involving labour, business and civil society. The State led, but did not dominate, policy initiatives. In contrast, the NIC economies built their policies on the power of the bureaucratic–economic elites, discouraging or excluding other voices (Chang, 2006). • Example of Ireland: Social consensus stood behind the Celtic miracle in Ireland. Ireland’s severe 1980s crisis created the resolve to draft policies that incorporated the ideas from government, industry, unions and farmers on a consensual basis. The National Economic and Social Council consciously crafted policies that codified social partnerships in the 1987–1990 agreement on moderating wage growth, formulating consensual agreements on wide-raging economic and social policies, including tax reform, welfare, health expenditures and structural adjustment.

49. Complementary policies • Social compacts are vital for building a dialogue based on trust. Shared understandings between the State and other social partners allow concessions when needed, and can promote investment, where investors can be assured of harmonious relations. Inclusive cooperation can help re-establish the credibility of State institutions through social dialogue • “Networks,Trust and Innovation in Tanzania’s manufacturing Sector” (2002), by Murphy -Study examines the influence of social relations and trust on innovation among small and large-scale manufacturing firms in Mwanza, Tanzania. • it is found that Social networks of business people in Mwanza are found to support innovation in manufacturing firms. The findings show that trust strategies and degrees of social openness relate to the types and levels of innovation achieved by manufacturers in Mwanza. Firms can be classified in relation to the manager or owner’s use of social relations and his or her willingness and ability to trust others. • Trust is particularly important and the trust mechanisms used by these individuals are found to be indicative of a firm’s potential for innovation.

50. Complementary policies-Social networks and trust • Social relations can accelerate the transmission of market information, facilitate the creation of knowledge in an industry, foster systems of mutual assistance among competing firms, and help build social capital in communities. • Alternatively, however, social relations may limit access to information, ideas, and capital if information and mutual assistance networks are available to only a narrow group of individuals. • In assessing the quality of social relations, it is particularly important to understand how trust is established and maintained by the agents participating in them. Trust strengthens the bonds between individuals, facilitates information exchange, and enables risk taking by businesspeople. Moreover, trust contributes to social capital