Industrial policies should be designed to benefit the economy from integrating with global value chains…

Pradeep Mehta of CUTS writes on the topic. It is quite unbelievable how he has the energy to keep writing for so many years now.

He says industrial policy should be designed towards trade. Also points to research which says much of industrial policy talk in Japan and Korea was a myth:

The use of industrial policy by advanced economies like Japan and South Korea in their initial growth phase, before globalization reached its zenith, is well documented. However, its impact on growth is not entirely clear. While several experts have attributed economic growth to government support of specific industries in these countries, renowned economists Howard Pack and Kamal Saggi have argued that Japan and Korea did not achieve success because of industrial policy, but in spite of it.

They show that 80% of industry subsidies in Japan were given to agriculture and mining. The idea that Japan provided significant subsidy support to the industries that became strong global competitors in sectors like auto, steel, and machine tools, is a myth. Korea allowed relatively free imports of capital goods for many years and relied quite heavily on foreign aid. For instance, Posco, the state-owned Korean steel company, had access to capital and then commissioned German companies to lay out the most productive steel plant they could construct using state of the art German machinery.

Despite different approaches to industrial policy, productivity, research, technology and infrastructure investment have been the critical keys to growth. As globalization was in its infancy, both countries had restrictions on their financial sectors and broad limitations on imports and foreign direct investment. This channelled high rates of national savings into industrial development and made sure domestic companies had a sound base of domestic demand for their products without facing foreign competition.

Industrial policy discussions keep appearing and disappearing.

He says the Japanese and Korean variety cannot be used in India:

India cannot afford to replicate these success stories for two primary reasons: the declining rate of domestic savings, and an extremely interconnected world wherein unreasonable restrictions on movement of goods and capital conflict with commitments under international trade agreements. Given the prevailing limitations, how can India design an industrial policy which promotes economic growth with the trade dimensions upfront?

Economist Dani Rodrik points out that the answer lies in the process of industrial policy design. Industrial growth can be constrained due to diverse factors, which may differ with sector and time. Consequently, an industrial policy aimed at uncovering the most significant obstacles to restructuring and growth and identifying interventions most likely to remove them, is essential.

This can be achieved through a setting in which all stakeholders come together to solve problems in the productive sphere, each one learning about the opportunities and constraints faced by the other. Thus, focus needs to shift from industrial policy outcomes to its processes. An industrial policy achieved through good processes can encourage and support innovation, and help develop the companies of the future. It can avoid limits on competition and thus need not be antithetical to trade policy.

Nobel laureate Joseph Stiglitz argues that the role of industrial policy can be much larger. Markets are not likely to produce sufficient growth-enhancing investments, such as learning, knowledge accumulation and research. This gap can be addressed by an industrial policy through recording and fostering the diffusion of best practices in research, entrepreneurship and skills throughout an economy. An industrial policy focusing on right processes with good professionals in command can easily achieve this feat.

Hmm..

On one hand we want market driven economies and on the other there is always case for government driven industrial policies. In all these discussions on industrial policy we miss talking about unintended consequences. The government tries to make some things better and in the process there are all these side-effects of these interventions which are mostly negative and some are surprisingly positive as well.

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