The return of Industrial Policy

1. The return of Industrial Policy Turin’s Conference September 2006 CAE-CNRS-SciencesPO

2. Contents • Introduction- Industrial policy : another come back, Why? • 1- Industrial Policy Definition, clarification, • 2- Old models of Ind. Policy : the french case • 3- The failures of the European model • 4- Patterns of the « new » french model CAE-CNRS-SciencesPO

3. Introduction : Industrial policy , the eternal come back • Dead concept • … 5 years ago when everybody was celebrating the « new economy », the new « spirit of entrepreneurship » • The use of the terms Ind.Po obsolete since Maastricht treaty which gave ind.py the kiss of death • and today it’s like a phenix revival, why? 3 reasons, historical, theoretical and political • 1- A classical debate in times of crisis of low growth • After WW2 Reconstruction the American challenge • After 1974 The Japanese chalenge • Today Chinindia • 2- A renewed theoretical debate • New thinking in economic development theories : competitive advantages are built • Outsourcing Offshoring and a renewed debate on free trade • 3- The european debate : what went wrong ? • The poor european growth performance: • Failure of horizontal policies (competitive environment policies) • The Lisbonne fiasco CAE-CNRS-SciencesPO

4. Theortetical debate 1 Outsourcing, offshoring and a renewed debate on trade • Offshoring & outsourcing : The big fear • Industry • Research • Services • In an open economy, in a free trade world =>losers and winners (regions, sectors, categories of skills etc…) • … but what if all the losers are in the same side , what if an immiseration process is developing Bhagwati/Samuelson • Issues of technology transfer to China. • China as the leader in high tech exports • India from call centers to Business process oursourcing CAE-CNRS-SciencesPO

5. theoretical debate 2 : Industrial policy for the XXIst century : • Market failures gave the rationale for industrial policy • Import substitution policies • State ownership • Strategic planning • Government failures laid the foundations of the Washington consensus and consequently of a hands off policy : • state can’t pick up the winners, • he may be captured • and there is a problem of allocative efficiency • Three theoretical reasons for targeted sectoral industrial policies • To solve coordination problems, the state must build appropriate institutions • Information and R&D Externalities have an inpact on productivity • Existence of high initial costs to enter certain markets and lack of financial resources due to risks and time frame (ex Airbus) • Reality is the only judge (D.Rodrik) • Import substitution, planning and state ownership did produce some successes • Over time they may lead to colossal failures and crises CAE-CNRS-SciencesPO

6. Vertical and horizontal policies • In contrast to general business environment policies that have an indirect impact on industry—including macroeconomic and social polices, as well as capital equipment and national defence policies—industrial policy in the strict sense is a sectoral policy; it seeks to promote sectors where intervention should take place for reasons of national independence, technological autonomy, failure of private initiative, decline in traditional activities, and geographical or political balance. • Depending on the country and the variety of capitalism there, any existing sectoral policy is the responsibility of the state (directly or indirectly), public banks, or local authorities. • Sectoral policy (for ex in the bio-tech sector) can be achieved by means of horizontal policies (cluster policy) when the agregation factor plays the key role CAE-CNRS-SciencesPO

7. Part Two : Industrial policy of the past : the french case. • High tech colbertism « The Grands Programmes Policy» • Public R&D and Public finance • Offensive Protectionnism • Agencies : Hybride bodies Administration & Entreprise • Public procurement and national equipment projects • National Champions (state owned in most cases) • Coordination through a homogeneous elite (Grands corps) • « Lameduck » policy • Progressive attrition through subsidies and social benefits • Restructuring with european help in certain cases Coal, Steel, … • National champions • Fiscal and legal incentives but with state blessing • This policy with its successes and failures shaped the french specialisation • Alcatel & FT, Alstom & EdF, SNCF, Total, EADS, Sagem-Snecma, Thales, Thomson, Arcelor, Renault, Lagardere, STMicroelectronics, Cap …. • Bull, Normed, MFL (Machine Tool Industry) CAE-CNRS-SciencesPO

8. A dirigist end to french dirigism • New economic conditions : The Single market, the Maastricht treaty The WTO agreements, • Horizontal policies instead of vertical industrial policies • The dismantling of the state-led finance economy • Disintermediation, universal banking, .. The big bang of 1984 • Department of Industry = « Grenelle Consulting Group » • End of the « grands projets » • Globalisation of the french groups • Deregulation of the big utilities which were at the heart of the french colbertist model • EDF, FT, Elf • Privatization Step 1 : failure of the rheineland bankled model • The inverted control scheme, interlocking directorates, former statist oligarchy • Privatisations step 2 : the adoption of a financial market led capitalism • Proceeds of the privatizations 100 Billion euros, the american pension funds as the main holders of newly issued french equity CAE-CNRS-SciencesPO

9. Part 3 : The three stages of european industrial policy • Principal stages of the European community since 1982 and how competition policy succeeded in disqualifying the industrial policy gradually. • 1- The Davignon balance between Industrial policy(Esprit-Race -...) and the competition policies • Esprit Race Brite Euram as means of industrial policy through precompetitive research programs • 2- Maastricht or the dedication-prohibition of the industrial policy • The Eureka initiative and the Failure of Eureka 95 (HDTV) • 3- Policies of competitive environment. • Policies designed to enhance competition through sound macroeconomic policies, a true internal market and proper incentives in the research field • Referring to the Sapir Report, the Kok report, the Beffa Report, one can see that this policy was a failure if one judges by different criteria (rate of growth, evolution of specialization (high tech component) etc… CAE-CNRS-SciencesPO

10. Horizontal european industrial policies • Competition is the best stimulus for innovation Research incentives Sound macroeco policy : Structural Market reforms Entreprise Competition policy IP policy CAE-CNRS-SciencesPO

11. Part 4 The « new » french industrial policy • Pression put on Brussels • The big « 3 » letter to Prodi on Industrial policy • The demand for an easing of rules of the Stability Pact for investments • Horizontal policies • Fiscal reform of the « taxe professionnelle » • Social end of the 35 hours work week CAE-CNRS-SciencesPO

12. Why? : the decline of french industry • Erosion of the industrial base, Erosion of the french spécialisation in high tech products • Industrial activity at a disatvantage • Industry is more heavily taxed • Industry is more socialy constrained • Industry suffers heavy regulations • The distribution, services and banking sectors are less taxed and socialy constrained they enjoy better economic and financial situations CAE-CNRS-SciencesPO

13. How? French U turn • The collapse of the intervention state apparatus in the industry sector • The privatisation of the state owned sector • The end of public funding for equipment, exports, innovation, etc… • The end of the « grands projets » • What was maintained • a program in the nanotech field which absorbed 80% of the appropriations of Min of Industry (crédits non affectés aux grands programmes digitip) = > Rules of WTO, UE aid policy, budgetary constraints, lack of state expertise make impossible the true return of industrial policy CAE-CNRS-SciencesPO

14. The new industrial policy • The Chirac initiative : What problem do we have to adress ? 4 reports • Beffa’s answer : « lack of specialisation » « need of new « grands programmes » • Blanc’s answer « lack of coordination » « need of a cluster policy » • Denis’s answer « ecology of businee » « how can we help the growth of SME’s » • Cohen’s answer « institutions designed for imitation policies don’t fit when the challenge » is innovation • The « new industrial policy » the sum of diverse proposals with small amount of money • Sectoral targeted policies : Beffa A2I Modèle ARPA, NASA • 10 programs in health, energy, environment, transportation, IT, • Clusters : Pôles de compétitivité • SME trageted measures: Oseo Sba • Project oriented R&D : ANR Modele NSF CAE-CNRS-SciencesPO

15. Conclusions • There is an urgent need of an industrial policy in Europe • This policy has to be multifaceted , it is not possible to maintain an exclusive horizontal policy • Nation states can no longer afford a national sectoral policy in energy, health, transportation etc.. • But national governments can wreck the single market • In designing its industrial policy the EU has to take into account the political economic arguments, its worthless to persue policies that can’t deliver more growth and that are at the same time politically costly • Innovation & research policies, higher education policies, european « grands programmes »  like gallileo etc… can deliver a double dividend in terms of growth and legitimacy. • Cluster policies can do the same at the local level provided that their choice is based on sound economics and not red tape CAE-CNRS-SciencesPO