Industrial policy redux

1. Industrial policy redux Robert H. Wade LSE Feb 2011

2. Rising interest in IP • Egypt & ME: Protestors denounce joblessness as well as oppressive rule. From university grads to day laborers, “I don’t have job”. Q: how to promote labor-intensive & energy-saving growth? • US: (a) stimulus package gave targeted help to industries; (b) worries abt unempt, loss of mfg base, rise of China • World Bank’s chief economist Justin Lin

3. Outline • (1) 4 positions in IP debate. • (2) Capitalist East Asian IP • (3) US sub rosa IP • (4) New thinking in (part of) World Bank

4. IP debate: 4 positions • Opponents • (1) Mkt fundamentalists • Champions • (2) Hierarchists I • (3) Hierarchists II • (4) Mesoists

5. (1) Market fundamentalists • Dominant voice for past 30 years. In DNA of most self-respecting economists • Becker, D. Lal, H. Pack, Bhagwati • “The best industrial policy is none at all” (Gary Becker, 1985) • “We know industrial policy did not work in East Asia b/c we tried the same thing here & it didn’t work” (senior UK Treasury official, 1990) • “For every Korea there are 100 failures. Who would you put your money on?” (World Bank economist, 2010)

6. (1) Mkt fundamentalists (contd) • “In Dubai we don’t believe in planning or what you call industrial policy. We believe in the free market.” (CEO of Dubai Chamber of Commerce, 2011, speaking to Wade) • World Bank’s Country Policy & Institutional Assessment (CPIA) crystallizes out Washington Consensus policies & instns as BEST for ALL dev’ing c’ies. • World Bank’s East Asia Miracle, 1992

7. (1) Mkt fundamentalists (contd) • Mkt – “natural”, “self-regulating”; competition best driver of effy & innovn. • Mkt failure occurs, but govt failure more likely & more costly. “Govt can’t pick winners, but losers can pick govts” • Policy: Growth formula: remove obstacles to mkt; build good institutions to protect price system; use foreign technology. • IP: Do it less, not better. At most, small subsidies to all basic R&D, cheap credit for all SMEs. No sectoral preferences

8. (2) Hierarchists I: “dev’al state” • Johnson, Amsden • Mkt failure very common, esp in “basic industry” stage of devt & frontier industries in dev’ed c’ies • Needs to be countered by coordination through hierarchy: apex pilot agencies, like MITI, MoF in Jpn, Econ Planning Brd in SK • Policy: “Do IP better, not less”. US & dev’ing c’ies must bld apex pilot agencies & target specific sectors for growth & contraction

9. (3) Hierarchists II: IP needs centralized polity • Robt Reich, Ira Magaziner, Peter Hall, David Soskice, et al • Accept that mkt failure common in dev’ed & dev’ing c’ies, & IP worked well in centralized polities of E Asia • IP ineffective where (1) federal structure, (2) strong separation of powers. Will be captured by vested interests. In THESE conditions, bureaucrats can’t pick winners. Parliamentary instns necessary but not sufft condn of serious IP. • Policy in decentralized polities: “horizontal” (not “sectoral”) intervention to make mkts work better: anti-trust, macro stabn, PGs, R&D subsidies (but not sectorally targetted).

10. (4) Mesoists • Rodrik, Sabel, Schrank, Block, Evans, Weiss, Mathews, lots of Brazilians • Distinguishes “meso” level from macro & micro. • Meso = supra-firm structures, especially networks, industrial districts

11. Mesoists (contd) • Firms relate through (a) markets (interactions governed mainly by price, courts or contracts: “one shot deals”), (b) hierarchies (interactions governed by ownership), & (c ) networks (“special relationships”). • Coordination other than thru mkts & hierarchies can have big private & social gains. Argt: (1) Physical proximity  agglomeration economies; & (2) intentional network construction (eg pooling skills b/w competing firms)  higher productivity, more innovation • But coordination/networks failures are common. Why? (1) Firms don’t like to coop. (2) Profit incentive motivates innovation, but discourages info sharing/collaboration.

12. East Asian IP • High centralization: apex coordination agency(ies), public officials + companies • Industry associations: dense • Also “street-level” industrial extension service: eg Taiwan’s Industrial Devt Bureau, & free-standing Task Forces. • Functions: (1) 3–way info flow. (2) bld networks b/w firms, (3) push import substitution • Import substitution in Taiwan: Eg Philips & specialized glass • Performance requirements

13. US sub rosa IP • Contrary to hierarchists, US IP (1) common, (2) quite successful (at high-tech end). • “The federal govt has been pursuing IP within decentralized pol instns for well over a generation…American IPs go beyond preservation of mkt competition, maintenance of macro stability, & provision of PGs to address firm-specific needs in a host of difft ways & through a variety of different agencies” (Schrank & Whitford, 2009).

14. US IP: boost networks • Rationale of a lot of US IP: boost networks, cure network failure. • National agencies (eg NIH, ARPA, NIST, SBA, et al): fund R&D, bld networks b/w firms, & b/w scientists, entrepreneurs, VC. • Also state & city levels. • Eg SEMATECH

15. US IP decentralized • No apex (top-down planning) agency = to MITI & MoF in Jpn • IP decentralized org’ally & geographically • Contrary to hierarchists, this has advantages: fits US’s increasingly decentralized prodn structure: decline of vertically-integrated firms, growth of smaller scale firms wh wld gain from being linked in networks. • IP can check firms’ strategy to compete on low-road (cheap wages) and lift them to compete on high-road (high skills, innovation)

16. US IP: advantages of decentralizn • Decentralization allows for experimentation at different levels & places. • US IP is mainly “following the market”, some of it “big”, a lot of it “small”.

17. US IP: Effects • Difficult to measure by cost-benefit analysis. • But IPs clearly linked to devt of valuable products & processes; & not easily captured by beneficiaries (cf defence).

18. US IP: effects of Long Slump • Eroded aura of invincibility & infallibility of “markets”, esp financial mkts, including as allocators of capital. • Raises legitimacy of “govt interventions” • Stimulus package: Fed govt  $ bns into energy, medical, info technologies, plus autos.

19. But IP dare not speak its name • Official: “We definitely see the programs as a de facto IP, but we cannot use that term, so we usually call it R&D policy”.

20. Missing theory • We have theories of (1) mkt failure, (2) organizational failure. But no theories of network-of-firms failure.

21. World Bank: new thinking on IP • WB – champion of Wash Con; CPIA; recruitment of economists. • But 4 new developments: • Justin Lin, Chinese chief economist, since 2008 (PhD Chicago) • Janamitra Devan, VP for Financial & Private Sector Devt, ex-McKinsey, since 2010. • Rising weight of middle-income states in Board. • Rising legitimacy of IP in USA

22. MICs interest in IP • MICs increasingly desperate for more employment; for beefing up manufacturing in face of China competition; for escaping “middle-income trap”. • Less interested in targeted “poverty reduction projects”

23. Justin Lin, chief economist since 08 • Chinese national, PhD in Econ from Chicago, first-ever non-G7 chief econ. • Directs attention to “devt = changes in production structure”. Argues that govts can push firms to diversify & upgrade within existing comparative advantage. • Lin’s 6 steps for strategic govt intervention

24. 6 steps to industrial upgrading & econ diversification • (1) Govt (G) identifies list of goods & services produced for 20 years in dynamically growing countries with similar endowment structures & GDPPC 100% higher; • (2) Among listed industries, G gives priority to those in which some domestic private firms have already entered, helps remove obstacles to their development; • (3) Some listed industries may be completely new to domestic firms; in such cases, G cld adopt specific measures to attract firms in the higher-income countries identified in step (1) to invest in these industries;

25. 6 steps • (4) G shd pay attention to private enterprises’ successful discoveries of industries not included in list, & provide support to scale up those industries; • (5) In dev’ing c’ies with poor infrastructure & unfriendly business environment, G can invest in industrial parks or export processing zones and make necessary improvements to attract domestic private firms and/or foreign firms willing to invest in the targeted industries; and • (6) Limited incentives for domestic firms or foreign investors that work within list of industries in step (1) to compensate for public knowledge created by their investments (Lin and Monga 2010).

26. “Competitive partnerships initiative” • FPSD VP sponsoring “competitive partnerships initiative” (= IP wh dare not speak its name) • Aim is to target WB’s various policy tools (infra investment, training, credit, policy reforms) at specific industries, to build up their competitiveness. • Now being piloted in Kenya. More pilots planned.

27. Fight inside WB • Many WB ecsts (esp macro, & research) reject. Skeptical of Lin. • But some WB operational economists desperate to respond to borrowing govts’ requests for help in building competitive industries. Open to IP ideas (though not the name).

28. Industrial Policy • IP can be “cut according to cloth available” • Distinctions: big/small, leading/following mkt, horizontal/vertical (sectoral), centralized/decentralized. • 2x2 matrix: big/small, leading/following. • Instruments, & risks of failure, vary b/w cells. • Apex pilot agency neither necessary nor sufficient condition. • IP can help build networks. Networks can have high payoff, but are vulnerable to defection.

29. READING • Wade, Governing the Mkt (1990, 2004); “After the crisis: industrial policy & the developmental state in low-income c’ies”, Global Policy, 1 (2), May 2010. • Lin, “Six steps for strategic government intervention”, Global Policy, 1 (3), Oct 2010. • A. Schrank & J. Whitford, “Industrial policy in the United States”, Politics & Society, 37 (4), 2009.