Comment on Josh Lerner’s
“Industrial Policy and Entrepreneurship”
By Indermit Gill
May 22, 2012
Industrial Policy as Stone Soup
It is a pleasure to comment on this paper, which is essentially chapter 1 of the 2009 book by
Josh called “The Boulevard of Broken Dreams.” I liked the book very much when I read it, and I
have recommended it to many people. And I recommend it to all of you today, if you haven’t
already read it.
In preparing for this comment, I did some research on the subject on industrial policy. I came
across a piece by Dani Rodrik called “The Return of Industrial Policy”, though Dani contradicts
his own headline by asserting (correctly) that industrial policy never went out of fashion. Dani
writes:
“British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs.
French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The
World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in
developing nations. McKinsey is advising governments on how to do it right.”
I have a feeling that McKinsey will be in this business for a long time, because it will take a lot to
get governments to do this right. And that brings me to my comment.
As I read the paper, especially the parts where Josh lists his lessons, I was reminded of the old
folk tale popularly known as “Stone Soup”. Hence the title of this commentary.
I am sure you know the story. One version has a young smart traveler who is hungry. He
comes to a village, starts a fire, puts a pot full of water on top of it, and puts a bright-looking
stone in it. Soon a villager comes by and asks what he’s cooking. He says its stone soup, which
will be delicious, but he could use some garnish. The villager said he had some carrots that he
could spare. Another brings turnips, another one onions, another a chicken and so on. At the
end they all enjoy delicious soup.
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The moral of the story of course is that it’s not the stone that helped to make good soup, but all
the other naturally good stuff. A clever villager would have taken notes, and jotted down the
list of ingredients that went into the cauldron.
Replace the clever traveler with Josh or McKinsey—indeed, one version of the story has a group
of travelers rather than just one fellow—and you have successful industrial policy as stone
soup.
Josh writes: “If we have heard too many pronouncements of Silicon Valley patriarchs, we might
begin with the view of new ventures as an activity where the government has nothing to
contribute. A review of the history of Silicon Valley and several of the pioneering venture
capital groups suggests that reality is far more complex than some of our more libertarian
entrepreneur friends might have us believe. In each case we look at, the role of the government
as an initial catalyst was critical in stimulating the growth of the region, sector, or firm.”
The reader led to believe that Josh will tell us the magic ingredient—a new industrial policy
policy that works. He starts making soup, and the villagers gather around. Josh lists the things
he needs the villagers to put into the pot. I will abuse his work a bit to summarize the “policy
levers” he identifies, which are essentially a set of reminders for governments who want to do
successful industrial policy:
1. Remember that entrepreneurial activity does not exist in a vacuum. You need
experienced lawyers, skilled marketers and engineers, and investors. And robust public
markets. And capital for investment. Essentially, Josh concludes, you have also to get
rid of all “other barriers that limit the creation of a productive arena in which
entrepreneurs could operate.”
2. Leverage the local academic scientific and research base more effectively. Technology
transfers etc.
3. Respect the need for conformity to global standards. Unless you are as big as China.
4. Be sure to let the market provide direction. When providing subsidies, make sure you
do this in a way that the funded agencies don’t compete with independent venture
funds. Use the same evaluation criteria as what the market uses. Cast the net widely.
Pick good leaders. Best of luck.
5. Resist the temptation to over-engineer initiatives. Like specifying the location of firms.
6. Recognize long lead times associated with public ventures. Don’t be impatient (it
takes time to make soup).
7. Avoid either too large or too small initiatives. Whatever that takes to decide.
8. Understand the importance of global inter-connections.
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9. Realize that these programs need creativity and flexibility. These are not two things
that government agencies have in abundance, I imagine.
10. Recognize that agency problems are universal, and take steps to minimize their
danger.
11. Make education of everybody an important part of the policy package.
12. Institutionalize careful evaluations of these initiatives.
If you do all this, industrial policy works. You can have sector-specific interventions, and they
will do no harm. They might even make policymakers hurry up a bit to get the other
ingredients into the pot.
I could not possibly object to these lessons. But it is a difficult list to remember. The question
is: is there another that is easier to remember, but which still provides the necessary
ingredients for making good soup?
It turns out that there is. It is based on the things that an enterprise needs for doing business,
things that help a government to create a good investment climate. Here is the list of ten
things that we have good information about, with a couple of examples for each:
1. Make it easy to start a business. Put procedures online, have a one-stop shop, etc.
2. Make it easy to register property. Set time limits for registration, have fixed transfer
fees.
3. Make it easy to pay taxes. Allow electronic filing and payment, have one tax per tax
base.
4. Make it easy to get electricity and to hire the right workers. Doing things electronically
will require having power….
5. Realize that getting credit can be made easier. Through things like allowing out-ofcourt enforcement, and distributing both positive and negative credit information.
6. Make it easier to deal with construction permits. Have an organized set of building
rules, and using risk-based building approvals.
7. Make it easier to trade across borders. Using electronic data interchange, using riskbased inspections.
8. Remember to protect investors. Even if you are as big as China. Allow access to all
corporate documents, require detailed disclosure.
9. Make it easier to enforce contracts. Have a specialized commercial court or judge, and
make judgments publicly available.
10. Recognize that insolvency is part of healthy business. Provide a legal framework for
out-of-court settlements…
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Of course, you will recognize that this is the list from the World Bank’s Doing Business report. I
think it should be in the toolkit of every policymaker charged with industrial policy. It is a
relatively easy list to remember, and even easier to look up. If you have managed to get
governments to add these ingredients to the mix, you can add the magic stone of industrial
policy. It won’t make much of a difference.
Josh has a telling comparison in his paper between Jamaica and Singapore. In the early 1960s,
when Singapore and Jamaica became independent, their per capita incomes were slightly less
than $3,000, in 2006 US dollars. By 2006, Singapore’s per capita GDP was more than $30,000,
while Jamaica’s was less than $5,000.
How do these countries do in facilitating business? Singapore is the best in the world: it tops
the World Bank’s Doing Business ratings. Jamaica is 88th out of 180 countries. Both must have
got better over time, but Singapore is clearly outstanding. By the way, Spain is 44th, Italy is
87th, and Greece is 100th.
You could say that India is doing fine, and it is 132nd,. so these rankings don’t mean too much.
Brazil is 126th. Russia is 120th. China is doing fantastically, and it is 91st. Actually, the only
“policy implication” of these rankings is that it pays to be a big country. I won’t say more.
So what is the difference between Josh and Justin?
Josh appears to know that the stone is a just a good way to get the attention of policymakers,
so that they make it easier to do business. The stone is optional. I read in his CV that he has an
undergraduate degree from Yale University. That should tip you off, since Yalies are usually
very bright people. Dani, Justin have tasted delicious soup often enough to believe that they’ve
found a magic stone, and the carrots and onions and the other naturally good stuff are
optional. Go with the Yalie.
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