Offering a prize is not the same as picking the winner

Offering a prize to encourage innovation has an impressive track record of success. Think back to the Daily Mail flying prizes at the beginning of the 20th century that rewarded Bleriot for crossing the English Channel or Alcock and Brown for crossing the Atlantic. More recently we have seen the effect of prizes to encourage the private development of space rockets... One way or another, there is plenty of evidence to suggest that the incentive of a prize can have an impact well beyond the value of the prize itself.

While our ambitions at ABIF might be slightly more down-to-earth, this broadly speaking, is the approach we have taken towards incentivising investment in innovation. The prize we are offering, in the form of a grant, is intended to encourage business owners to develop commercially viable investment projects that will have a wider impact on the markets in which they operate. Afghanistan desperately needs private sector investment to create economic growth and reduce poverty, our view is that ABIF grants can make a contribution to this process not by designing or implementing grand development plans, but by offering an incentive to Afghan investors to encourage them to do the thinking and the hard work and then take some of the risk.

For too long the debate on state/donor intervention has been too polarised. At one extreme we have the failed central planning dogma, and at the other we have the failed neoclassical free-market dogma. Unfortunately this polarisation has prevented a pragmatic and rational exploration of development approaches that lie somewhere along a spectrum of options between these two extremes.

The soviet style centrally planned economies have been swept away and now it would seem that the stultifying Washington Consensus may have had its day. So finally we have the opportunity to explore ways in which the state (whether the recipient or provider of development assistance) can implement a form of industrial policy that recognises both the potential and limitations of intervention.

Industrial policy has been characterised by its many detractors as "picking winners" and creating opportunities for vanity driven waste and corruption, it has been argued that such interventions will inevitably fail, and where they have been part of a success story, this is only because there were some over-riding special conditions. However, this view ignores the consistent developmental successes of those states that have used various forms of industrial policy to promote investment and economic growth.

Good examples of such states include the unashamedly interventionist economic giants of Great Britain (in the pre-free trade days of growth) and USA (pretty much throughout its history of economic growth and domination), to the new kids on the block Asian developmental states who largely ignored what they were told to do in the 1950's and 1960's, to China and India that today are pursuing very non-World Bank style development policies. The fact is that state intervention, used wisely (and it can be used wisely), is an essential ingredient of economic development.

So for the context of ABIF, it is not so much a question of whether industrial policy is right of wrong per se, as to what kind of industrial policy is likely to be most successful in Afghanistan. The matrix shown here is an attempt to describe a range of options to promote economic innovation according to two key policy dimensions - the scale of the intervention (firm or sector level) and the depth of the intervention (leading or following the market).

If we discard the negative connotations associated with the "picking winners" characterisation of industrial policy (actually, what is wrong with picking winners?) and instead look at how the developmental states achieved their gains (including picking winners), we see that a mechanism such as the ABIF grant is consistent with the main characteristics of successful industrial policy. For example:

1. We operate at a relatively small, firm-level scale, we are not about grand centrally planned schemes to manage or change large chunks of the national economy.
2. We offer grants, not loans, so we have to constantly renew our mandate by demonstrating success, we do not seek to be sustainable or self-funding in ourselves.
3. We identify problems (our challenge themes) that we want private sector investors to address, rather than designing and implementing solutions.
4. We support investments that will have a wider but incremental impact on the market that will benefit our target beneficiaries. 
5. We separate the original intervention from potential subsequent (process rather than end-game) scaling up interventions, which could involve entirely different players.

Looking at the matrix above, today ABIF, while very much in the tradition of industrial policy interventions, is firmly positioned in the bottom left corner. With time, and as individual investment projects mature and the potential for sector level scaling up emerges, it may be that we start to work in the bottom right corner. However, even when working to incentivise broader systemic change, we should support initiatives in a way that recognises the limitations as well as the potential of our interventions. By staying in the lower two quadrants, we use competitive forces to identify potential winners and avoid either defining specific innovations or creating specific entities to deliver those innovations.