Industrial policy redux
Robert H. Wade
LSE
Feb 2011
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
Outline
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(1) 4 positions in IP debate.
(2) Capitalist East Asian IP
(3) US sub rosa IP
(4) New thinking in (part of) World Bank
IP debate: 4 positions
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Opponents
(1) Mkt fundamentalists
Champions
(2) Hierarchists I
(3) Hierarchists II
(4) Mesoists
(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)
(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
(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
(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
(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: antitrust, macro stabn, PGs, R&D subsidies (but not
sectorally targetted).
(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
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.
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, & freestanding 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
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).
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
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 lowroad (cheap wages) and lift them to compete on
high-road (high skills, innovation)
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”.
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).
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.
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”.
Missing theory
• We have theories of (1) mkt failure, (2)
organizational failure. But no theories of
network-of-firms failure.
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
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”
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
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;
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).
“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.
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).
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.
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.