The return of industrial policy

1. The return of industrial policy Robert Wade, LSE, Apr 2011

2. Neoclassical vision of price system • Prices in well-functioning price system a necessary & sufficient condition of efficient coordination • Prices accurately reflect relevant knowledge of constraints & opp’ies. • Prices direct self-interested actors to own and societal advantage. • Goal of policy: to protect system fr distortions & establish system in DTCs

3. Larry Summers • “The laws of economics, it’s often forgotten, are like the laws of engineering. One set of laws works everywhere”. Summers subsequently set out the laws as the “three –ations: privatization, stabilization, liberalization”. • These ideas are so accepted as to be beyond discussion, like “the idea that a huge spending program is the way to stimulate the economy”.

4. Gregory Mankiw • “Adam Smith was right when he said that ‘Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice’” . • (The Wall Street Journal, 3 January 2006).

5. Gary Becker • “The best industrial policy is none at all”, whether for advanced or developing countries. • (Business Week, August 25, 1985).

6. More • World Bank: “For every Korea there are 100 failures. Who would you put your money on?” (World Bank economist speaking to Wade, 2010) • “The government should be providing conditions that help all businesses – namely, effective infrastructure, a skilled workforce and better planning. We should make no attempt to pick winners – whether individual companies, specific sectors, or manufacturing as a whole” (Tim Leunig, Reader in Economic History, London School of Economics, 2010).

7. World Bank • Country Policy & Institutional Assessment formula crystallizes neoclassical / Washington Consensus policy norms.

8. Stylized facts against neoclass view • C’ies (DTCs) tend to become what they X, mainly b/c faster learning. Costs of not learning in one period multiplied by costs of opp’ies foregone in later periods. • X success not come automatically fr good endowments, instns, foreign techy • Xs of a ctry “arbitrary” within broad categories: eg Pakistan, BD • Exploring new products full of uncertainty, requires continuing learning.

9. Stylized facts (contd) • Imported T needs (costly) adaptation • Costs of discovering viable new products & adapting foreign T generally not recoverable by pioneers • Therefore big problems of appropriation & coordination in industrial diversification & upgrading.

10. Policy response: IP • IP = array of public supports: some sector-neutral, some sector-specific. • Protection, credit subsidies, tax subsidies, extension service, VC, public support for R&D, fostering of networks of collaborating firms • Distinguish: hard & soft; micro & meso IP

11. East Asia IP • A lot of hard IP (protection, subsidies, SOEs, central planning implemented through price system) • Also a lot of soft-meso IP • Eg Industrial Devt Bureau in Taiwan • More recently, science parks for post-WTO world

12. East Asia push into science • Surge of “fraud in science” in Jpn, SK, China. Why? • (1) State has deployed IP tools in way wh creates perverse incentives. Grants, prizes given for publication in Western journals (not exports). Encourages falsification • (2) Authoritarian lab culture (German model) provides little internal discipline on lab bosses

13. US IP: ineffective? • “There is no serious American industrial policy; this is left to the post-war powerhouses of the US economy, the large corporations. Much of this [industrial policy failure] is due to the radical separation of powers enshrined in the US constitution. A coordinated political economy cannot easily be run by a President and his cabinet, two Houses of Congress, a Supreme Court and fifty ‘states’ (which are also fragmented by the same separation of powers) – especially when they belong to different political parties”. (Michael Mann, 1997)

14. US IP: ineffective • General argument: IP (targeting specific industries) ineffective in the context of • (1) a federal structure, • (2) strong separation of powers between legislature, executive and judiciary.

15. US IP: corrects network failures • “The federal government has been pursuing industrial policy within decentralized political institutions for well over a generation… American industrial policies go beyond preservation of market competition, maintenance of macro stability, and provision of public goods to address firm-specific needs in a host of different ways and through a variety of different agencies”. (Schrank & Whitford, 2009)

16. US IP • Operates at “meso” level. • Comprised of programs run by national, state, local govts, themselves uncoordinated. • National level: NIH, ARPA, NIST, SBA, etc. • Eg NIST organizes Manufacturing Extension Partnerships, to link firms in specific locations • SEMATECH as classic example.

17. US IP • “Below the ideological surface, a powerful ‘jerry-built’ substrate has emerged of federal, state and local government innovation support programs each filling gaps in the other”. • An official involved in these programs said, “We definitely see the programs as a de facto industrial policy, but we cannot use that term, so we usually call it R&D policy”.

18. US IP: effective? • Difft to evaluate effects of scattered programs. • Programs have developed valuable products & processes • Able to withdraw benefits from “losers” • Publicly-supported networks have lower rate of breakdown than others.

19. WB & return of IP • WB sanctioned IP in 1950s-70s. • Then devt economics merged with mainstream neoclassical  “mono-economics” & Washington Consensus • From 2008 Justin Lin, chief economist, Chinese, PhD Uni Chicago, nudging thinking towards “development as production” (not just “as consumption”) & towards IP.

20. WB & IP • Lin conceives economy as vast, continuously improving Toyota-like production system, with constraints & opp’ies being discovered over time. Learning & self-discovery central processes. • 6 steps for strategic government intervention.

21. WB & IP • Finance & Private Sector VP piloting IP in several countries, including Kenya. Called “competitive partnerships initiatives”. • Many economists in WB strongly resist Lin’s initiative.

22. Conclusion • J. K. Galbraith:“The conventional wisdom” gives way not so much to new ideas as to “the massive onslaught of circumstances with which [it] cannot contend”. • GFC, uprisings in MENA (also about jobs), “middle income trap”, and more, combine to make massive onslaught. • Opening way to rethinking of IP.