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June 07, 2007

Industrial Policy

Dani Rodrik suggests that China's recent successes should trigger a reevaluation of smart industrial policy:

I would point to role of industrial policy as a key ingredient in China's success. In this particular case--the automotive industry--industrial policy seems to have made three contributions. First, the government required foreign companies to enter into joint ventures with local enterprises, ensuring the transfer of technological capacities. Second, domestic content requirements compelled vehicle manufacturers to source more of their inputs domestically than they would have chosen to do at the outset. Economists normally think this is a terrible policy because it breeds inefficient domestic suppliers. (Such requirements are also now banned by the WTO). But this has evidently not happened in China (and also in India), where first-tier suppliers have reached near-frontier levels of productivity. John Sutton, who has analyzed the auto industry in China and India in detail, credits in part the domestic content requirements for this achievement. Finally, state-owned enterprises have been a breeding ground for private entrepreneurs....A good dose of market discipline combined with a government bent on enhancing industrial capabilities beats either one taken on its own.

Industrial policy has, in recent years, fallen into disrepute. But Rodrik's right: The examples of China, India, and various parts of Europe (not to mention Japan) suggest that it can be deployed effectively. Given the rapidly deteriorating state of our own industrial base, this is an approach we could learn some lessons from.

June 7, 2007 | Permalink


but didn't Japan's policy end up having them prop up all these shitty companies, which helped lead (along with real estate bubble) to their 1990s deflation and liquidity trap issues?

Posted by: Goldberg | Jun 7, 2007 1:24:27 PM

Japan's problem was in the banking system primarily, and it still is to a substantial extent.

There's a major reason why the US has a low likelihood of doing some version of industrial policy: The US interest in trade is based in the financial industry, with the pressure they place on industrial firms to cut costs. It doesn't matter where something is produced to the financial guys, as long as they get a major chunk of the action.

On the other hand, policy in China, India et al is directed at improving the countries' overall economic power, with industry driving the truck and finance just providing gas when needed. If the money comes from outside for industrial investment and growth, and the share of ownership is kept in the minority, then money is just fuel - because they care about overall growth more than financial returns to investors.

The US has substituted its financial reach and return for our previous industrial prowess post-WWII. The result is a greatly reduced capacity to actually make things that have value. We will pay the price for that in future generations, as other countries develop enough to become capital providers competing with the US to invest - since money is money, and money doesn't have a conscience. Money also doesn't care if people are fed, clothed, healthy, and have a good mix of work and leisure, and a retirement with dignity after a lifetime of work.

Now, we've gotten ourselves into the bind where we don't even have enough trade-sales cash to pay for our trade purchases. Result: Empty cash box and empty factories.

Posted by: JimPortlandOR | Jun 7, 2007 2:09:44 PM

There has never been a nation that industrialized without a deliberate or de facto industrial policy. Ever. Look it up.

Posted by: arbitrista | Jun 7, 2007 3:54:56 PM

America has an industrial policy as well: "move all non-defense-related manufacturing to low-wage, low-regulatory environments".

Of course, once WalMart gets their lawyer into the White House, all that will change.

Posted by: RLaing | Jun 7, 2007 4:23:40 PM

JPO is correct but I am not sure this would not be reparable. Industrial policy would be a later part of it, but first you would need to return capital to domestic industry. Very high Fed rates and high corporate and marginal taxes, maybe. There is a lot of competition out there, but Sweden and Denmark manage, and America should find a comparative advantage somewhere, if our best & brightest are forced to.

One obvious problem will be paying for commodities(copper, titanium) in a competitive environment. We have loads of wood and good land tho.

Posted by: bob mcmanus | Jun 7, 2007 5:36:59 PM

A fair share of Japan's problems did come from its banking industry, but industrial policy red tape designed to "manage" growth and shield companies from risk played a significant role.

The stagflation of the '70s also had a great deal to do with Galbraithian-style industrial policy. This idea that technocrats can "plan" things better than individual actors resulted in slow growth, low numbers of jobs created, and an unripe environment for entrepreneurship and "creative destruction."

It is worth studying the role of governments as countries move from the third world to the first world. But it is important to emphasize flexible policy that leaves room for dynamism and little room for bureaucrat corruption.

Posted by: Jason | Jun 7, 2007 5:58:04 PM

Stagflation had a lot less to do with industrial policy and a lot more to do with oil shocks.

Posted by: arbitrista | Jun 7, 2007 8:53:41 PM

No nation has ever become industrialized without protectionism and an active industrial policy.

Britain, the birthplace of the industrial revolution, forbade all its colonies from manufacturing (instead requiring them to purchase finished goods from the mother country), and even went as far as to prohibit the emigration of skilled mechanics.

The United States developed a strong industrial base under Hamiltonian industrial policy, which included high tariffs. Indeed, most of the Federal government's revenue in the 19th century came from tariffs. When America's leadership was seduced by the siren song of "free trade," our industrial base started crumbling.

Bismarck's "marriage of iron and rye" made Germany a great power.

All the "Asian tigers" made extensive use of protectionism and active industrial policies to join the First World.

History is clear: globalization and the WTO model is for suckers; protectionism and an active industrial policy is the path to prosperity.

Posted by: Josh G. | Jun 7, 2007 10:46:15 PM

Wow, Josh, I'm convinced. Let's reintroduce Hawley-Smoot without delay.

Posted by: Sanpete | Jun 7, 2007 10:53:10 PM

Many of Japan's companies are fairly odd conglomerates. Rather than have a system of venture capital, a big company will support in house development of products completely unrelated to their core business.

So, you end up having companies that produce motorcycles also producing pianos. Or, a small car company that also makes rock drilling / mining equipment.

Then, in order to justify these investments, there will be shady Enron style accounting maneuvers. Since many of the companies are too big to allow to fail, they get propped up by the large banks.

This system is very good at the industrializing phase of an economy -- the so called capital deepening phase, but it causes malformed investments after the return on capital slows down.

If the US wanted to help our trade deficit, then balance the federal budget and create a national health system with no opt outs.

These two things would add profit to the bottom line of every big old line industrial corporation in the USA.

Posted by: stm177 | Jun 7, 2007 11:53:38 PM

There's no evidence, outside the fever dreams of laissez-faire advocates, that Smoot-Hawley had anything to do with the Depression. It's fairly clear that the Depression was started by the bubble burst and greatly exacerbated by atrocious monetary policy (tight money during an already severe recession, due to a misguided adherence to the gold standard). Bank panics (due to the lack of federal deposit insurance) were another factor in the Depression, as was the dangerous opacity of the stock market which made people understandably reluctant to invest there.

Posted by: Josh G. | Jun 8, 2007 10:08:36 AM

There's no evidence, outside the fever dreams of laissez-faire advocates, that Smoot-Hawley had anything to do with the Depression.

The Smoot-Hawley tariffs turned the Great Depression into a worldwide phenomena. Imagine today if we placed huge import tariffs on foreign goods, and other countries reciprocated with tariffs on our goods. Are you telling me there wouldn't be serious negative economic repercussions?

The genesis of the WTO, in fact, was not the product of some neoliberal dream, but an accepted agreement that retaliatory tariffs helped worsen the Great Depression and led to World War II.

Protectionism is an evil scourge that only hurts the people it tries to help.

Posted by: Jason | Jun 8, 2007 10:28:17 AM

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