Current Issues in Economics
New Industrial Policy
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New Industrial Policy
“Are we becoming a nation of hamburger
flippers?”
Ronald Regan
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New Industrial Policy
Reasons for industrialization - manufacturing has special properties as an
engine of growth:
• dynamic economies of scale;
• strong backward and forward linkages between manufacturing and other
sectors of the domestic economy;
• strong properties of learning-by-doing; innovation and technological
progress;
• the importance of manufacturing for the balance of payments
• way of catching-up for developing countries
Evidence
• US becomes a superpower with standards of living unmatched in history
• early success of Soviet Union
• success of Asian Tigers (Korea, Taiwan, Singapore)
• unprecedented success of China
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New Industrial Policy
Short History of Industrial Policy:
• 40 – 50ties post-IIWW reconstruction effort
(Marshall Plan, IBRD)
• 60 – 70ties post-colonial catch-up effort
• 80 – early 00 anathema (Washington
Consensus)
• Over the last few years revival of the industrial
policy as a legitimate part of economic policy
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New Industrial Policy
Explanations of deindustrialization
• specialization, referring to the domestic outsourcing
of activities previously performed in house in
manufacturing to specialized service providers;
• statistical effect: fall in the relative prices of
manufactured goods means that they account for a
smaller share of consumer expenditure
• “barber effect”: higher rate of productivity growth in
manufacturing relative to services is associated with
slower employment growth in manufacturing than in
services, even if output increases at the same rate
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New Industrial Policy
Explanations of deindustrialization (cont)
• international trade negatively affects manufacturing
employment in advanced economies by:
– increasing productivity through higher competitive pressures,
eliminating low-value added activities or inefficient firms,
– by replacing relatively labor intensive activities subject to import
pressures with less labor-intensive activities producing
sophisticated exports
• decrease in the rate of investment tend to decrease the
share of manufacturing (in both employment and GDP),
since a disproportionately large share of investment
expenditure is accounted for by manufactures.
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New Industrial Policy
Globalization: Ricardo’s Comparative Advantage at
Work:
• Developed countries have comparative advantage
in high value added parts of the production
stream: design, financing, marketing
• Developing countries have comparative
advantage in low value added parts of
production
• Technological progress in transport and
communication make it feasible
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New Industrial Policy
Forces at the firm level
“The defining challenge for competitiveness has shifted,
especially in advanced countries. The challenges of a decade
ago were to restructure, lower cost, and raise quality. Today,
continued operational improvement is a given, and companies
in many countries are able to acquire and deploy the best
current technology. In advanced nations with relatively high
labor costs and equal access to global markets, producing
standard products using standard methods will not sustain
competitive advantage. Instead, advantage must come from
the ability to create and then commercialize new products
and processes, shifting the technology frontier as fast as their
rivals can catch up.” National Innovative Capacity; Porter, Stern
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New Industrial Policy
Over the last few years revival of the industrial
policy as a tool for reindustrialization
WHY?
It is essential to increase productivity in
manufacturing industry and associated services
to underpin the recovery of growth and jobs,
restore health and sustainability to the EU
economy and help sustain our social model (EC
2014)
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New Industrial Policy
Gene from the bottle:
• In the last decade the global business
environment has changed radically. EU industry
competes with China, Brazil, India and other
emerging economies also on high-value products.
And putting it back:
• You can produce comparatively expensive
product in developed countries b/c of
automatization and robotization reduce
dramatically labor component of costs
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New Industrial Policy
Conservative Agenda for NIP
“Government on its own cannot create growth. It is
the decisions of business leaders, entrepreneurs
and individual workers which build our economy.
What the Government can do is provide the
conditions for success to promote a new economic
dynamism — harnessing our economic strengths,
removing the barriers which prevent markets from
supporting enterprise, and putting the private
sector first when making decisions on tax,
regulation and spending. “ UK Treasury 2010
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New Industrial Policy
Radical Agenda for NIP
“A far more proactive role of the state is required. The
state can proactively create strategy around a new high
growth area before the potential is understood by the
business community (from the internet to
nanotechnology),funding the most uncertain phase of the
research that the private sector is too risk-averse to
engage with, seeking and commissioning further
developments, and often even overseeing the
commercialization process. In this sense it has to play an
important entrepreneurial role.” M. Mazzucato, 2011
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New Industrial Policy
NEW APPROACH TO EU INDUSTRIAL POLICY
Strategy framework for a new industrial competitiveness policy must
put the competitiveness and sustainability of European industry at
center stage. This requires that industrial policy is understood in its
wider sense:
• First, it is about those policies that have an impact on the cost, price
and innovative competitiveness of industry and individual sectors,
such as standardization or innovation policies, or sectoral policies
targeting e.g. the innovation performance of individual sectors.
• Second, it is necessary to consider the competitiveness effects of all
other policy initiatives such as transport, energy, environmental or
social and consumer-protection policies, but also the single-market
policy or trade policies. They are crucial components of the overall
package as they can have an important influence on the cost, price
and innovative competitiveness of industry.
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New Industrial Policy
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New Industrial Policy
Reindustrialization as a challenge
• Reindustrialization a sustained increase in both the
share of manufacturing in total employment and the
share of manufacturing in GDP.
• Reindustrialization, not simply a case of ‘inverse
deindustrialization’ as there would be different
dynamics at work
• There is an asymmetry in that reindustrialization is less
likely to ‘just happen’ under market forces than is the
case with a similar magnitude of deindustrialization
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New Industrial Policy
Why picking the winners sometimes works but
mostly not?
Government agencies are always at risk of putting
money into “bad bets” and “bad apples.” They are
also inherently rigid, risk-averse, and reluctant to
innovate, because they know that if they deviate
from the letter of the law, or if an innovation goes
awry, they will be chastised politically. And costly,
ineffective programs are notorious for surviving
indefinitely because they develop powerful
defenders.
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New Industrial Policy
Political economy of Industrial Policy
• The challenge is not to:
– Pick a few winners among the existing industries, but
rather to facilitate the emergence of more winners by
broadening the business ecosystem and enabling it to
nurture new activities.
– It is not the policymakers’ role to hasten death of less
efficient firms. Competition inevitably tends to remove the
less efficient firms and industries
• State task is to identify productivity-enhancing
interventions that can strengthen economies by adding
new activities and productive capabilities
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New Industrial Policy
Developing countries that have deindustrialized face more acute
challenges than developed ones.
• Deindustrialization in developing countries can be considered
‘premature’ in the sense that of commencing at lower levels of
income per capita than was generally the case for
deindustrialization in advanced economies.
• Furthermore, deindustrialization in developing countries resulted
from policy shifts—in particular trade and financial liberalization—
rather than just with the ‘maturation’ of their economic structure;
• Competition from China and other low-cost manufacturers in Asia
affects developing countries especially hard, as competing in the
manufacture of similar types of goods. Developing countries can be
unable to compete with China on cost grounds, yet lacking the
technology, skills, and market access to compete higher up the
value chain with developed countries.
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New Industrial Policy
When old-style industrial policy works: Taiwan,
Korea, China
• The global segmentation of the value chain of the
biopharmaceutical industry has provided
industrializing countries of Korea, Taiwan an
China with a window of opportunity.
• States have modified their former catching-up
industrial policies by establishing a more effective
institutional platform that can attract/nurture an
innovation-based industry.
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New Industrial Policy
Taiwan state’s promotion of the
biopharmaceutical industry has been based on
an incremental approach:
• existing state policies have been modified to
cope with the demands of the existing
industry,
• which has resulted in the continuation of its
SME-based industrial structure.
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New Industrial Policy
Korean state have been more radical:
• the policies that previously favored the
chaebols have been reoriented toward the
promotion of smaller, science-based firms
• SMEs science-based firms co-exist alongside
the chaebols.
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New Industrial Policy
Chinese state and local governments have
sought to promote the innovation-based
industry by building biotech parks.
This approach has resulted in a boom in new
science firms.
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New Industrial Policy
Instead od summary
Monty Python’s “Life of Brian.” Galilee 32 Ch.E.
“What have the Romans ever given us in return?”
fulminates John Cleese, playing a Judean revolutionary.
“The aqueduct,” concedes a co-conspirator. “And
sanitation,” says a second, as others add even more
examples.
“All right,” Cleese erupts in exasperation. “But apart from
the sanitation, the medicine, education, wine, public
order, irrigation, roads, the fresh-water system, and
public health, what have the Romans ever done for us?”
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