What is “smart” industrial policy?
Can it be done successfully?
Can it be replicated?
Richard Newfarmer
International Growth Centre
October 13, 2011
What is industrial policy?
• Definition
– “Any deviation from
sectoral policy
neutrality…or deviation
from laissez faire”
– “Policy attempts to alter
the structure of
production …”
– Policy interventions to tilt
market prices in favor of
one activity over another
• Instruments (“hard IP”):
– Tariffs
– Tax breaks
– Subsidies through the
budget (including special
programs, procurement)
– State enterprise pricing
– Subsidized credit
programs
• Instruments (“Soft IP”)
– Standards
– Export promotion
– Infrastructure
Two conclusions ex ante:
• All countries have industrial policies (though they may
not call it that)
• Industrial policy to support one activity comes at the cost
of penalizing other activities – particularly “hard” IP
Many different objectives…
• Promote growth (including “competitiveness”,
productivity)
• Other objectives, sometimes as vehicles to growth:
– Moving into higher value added products
– Trade: Exports and import substitution
– Innovation
– Local employment
– Protecting the environment
Not unusual: Programs often have multiple objectives, and
many times lack quantifiable indicators of success.
Economic rationales for government intervention
center around “market failures”
• Latent comparative advantage: The sector protected through
industrial policy should soon be able to survive without protection
• Externalities: firms underinvest because they don’t capture spillovers
to other activities
• Lack of appropriability: firms underinvest (in technology or export
searches) because new entrants using the technology will soon erode
profits
• Informational asymmetries: government + private sector
• Complementarity between goods and inputs such as infrastructure
• Agglomeration economies: Silicon Valley, Bangalore, clusters
• Imperfect competition in product markets and capital markets
Does industrial policy work?
• Dani Rodrik (2004): Yes
• “…it is not surprising to observe that industrial restructuring rarely takes
place without government assistance. Scratch the surface of nontraditional
export successes anywhere in the world and you will more often than not find
industrial policies, public R&D, public support, export subsidies, preferential
tariffs arrangements, and other similar interventions lurking beneath the
surface” (2004).
• Pack and Saggi (2005): No
“[In recent industry successes], public interventions have played only a
limited role. Moreover, the recent ascendance and dominance of
international production networks in the sectors in which developing
countries once had considerable success implies a further limitation on the
potential role of industrial policies. Overall, there appears to be little
empirical support for an activist government policy even though market
failures exist that can, in principle, justify the use of industrial policy.”
Yes and no = Yo
Harrison - Rodriguez Clare (2010) review of
many studies: “Soft” industrial policy has
higher success rate…
“Hard” industrial
Policy:
?
– Tariffs
– Subsidies to specific
sectors
– Tax breaks for
foreign investors
– Domestic content
requirements
Soft” Industrial Policy:
√
– Special Economic
Zones offering lower
cost infrastructure
– Roads and ports
designed to increase
trade
– Special Credit for
exporters (Trade
Credit)
– Promoting clusters
in order to export
Source: Ann Harrison, “Growth Week” International Growth Centre Sept, 2011
…and increasing exposure to trade competition is
a common element of success…
“…trade and FDI policies have generated the greatest
welfare gains when they are associated with
increasing exposure to trade…
interventions that increase exposure to trade (such
as export promotion) are likely to lead to higher
welfare gains than other types of interventions (such
as tariffs or domestic content requirements).”
Source: Harrison and Rodriguez- Clare, 2010
Aid for trade …about 20% of WTO case stories concerned
some form of industrial policy
Private
Trade
Sector Facilitation
19%
18%
Industrial
Policy
17%
Building
Capacity
25%
Up-grading quality: Brazil’s projects in Cotton
4; tea in Rwanda; fish in Grenada
Spur new products: organic coffee in
Guatemala; phones to ladies in Bangladesh
Infrastructure
5%
Improving
Policy
16%
All increased exposure to
trade competition and to
learning economies from
exporting
What you promote matters…
• Some advocate focusing on specific sectors:
– Target emerging sectors (Clemens and Williamson 2001)
– Target skill-intensive sectors (Nunn and Trefler, 2006):
– Manufactured exports (Easterly et al, 2009)
– But… this literature routinely overlooks agriculture and
services
– and focus of policy depends on each country
• Other focus on types of activities:
– Rodrik (2004): only new activities (and not sectors)
– Harrison- Rodriquez Clare: activities with spillovers
– Rodrik (2008) suggests under-valuing the exchange rate to
promote tradeables
– Aghion, et al (2011): promote into competitively
structured sectors
How you promote matters even more…
10 principles of “smart” industrial policy
1. Begin: removing policy, institutional, and cost elements in the value
chain that limit production and exports
2. Transparency: Quantify amounts in budget to parliament; begin by
quantifying the industrial policy you have
3. Incentives/subsidies: Should be provided only to “new” activities
4. Objectives: clear with benchmark/criteria for success and failure
5. Sunset clause: phase out subsidies automatically over say 3 years
6. Projects should entail private risk commensurate with public risks
7. Competition: Avoid raising barriers to entry and import competition
8. Agency administering IP: must have demonstrated competence – with
clear political oversight and accountability
9. Ministry: Maintain channels of communication with the private sector
10. Evaluations: Subject portfolio to regular ex post external evaluation
•
Costs turned out to be higher than
anticipated
•
Prices of silicon panels fell
dramatically from 2008 highs
•
“…to put Americans back to
work…reduce dependence on foreign
oil…rewable energy…create millions
of new jobs…a new green energy
economy”
Both China and US rival First Solar
sell at 25% of the per watt cost of
Solyndra’s technology
•
DOE program, created in 2005, had
excess uncommitted funds..
•
“DOE take steps to ensure risks are
properly mitigated…performs due
diligence”
Solyndra goes for scale, and cash
out investors through IPO.
•
But company ceased operation on
Aug 31, 2011
•
DOEs program head resigns
•
Some US Congressmen call for
protection against China
Solyndra’s cautionary tale
•
•
•
•
Chu announces $535 loan guarantee
to Solyndra for its cylindrical solar
photovoltaic cells (March 2009)
“shows speed at which the DOE can
operate when barriers to success are
removed…”
Lessons:
• Even with DOE/OMB checks, (a) business plans subject to considerable
uncertainty, and (b) politics can trump good financial analysis
• But: Program did not curtail competition, and so prices to downstream
buyers were not adversely affected…and losses were limited
• Transparency helped hold political authorities accountable
So…
• What is smart industrial policy?
– Focus on removing obstacles & creating incentives
– Those measures that abide by the 10 principles
– Especially, competition, transparency, and sunset clauses
• Can it be done successfully?
– Yes, but soft industrial policies tend to have higher success
rates than hard policies
– Ojo: Little conclusive evidence that industrial policy by itself
explains high rates of growth of the fastest growing countries
• Can it be replicated?
– Yes…and since bad experiences can be replicated along with
the good, caveat emptor
References and Further Reading
Aghion, P., M. Dewatripont, L. Du, A. Harrison & P. Legros «Industrial Policy
and Competition” June 28, 2011
Nolan, Marcus and Pack, Howard, 2005. “The East Asian Industrial Policy
Experience: Implications for the Middle East”. Working Paper Series, 05-14.
Washington DC: Institute for International Economics
Harrison, Ann and Andres Rodriguez-Clare (2010) “Trade, Foreign
Investment, and Industrial Policy for Developing Countries” NBER Working
Paper 15261.
Pack, Howard and Saggi, Kamal, 2005. Is There a Case for Industrial Policy?
A Critical Survey. Oxford Journals, 21:267–297. Oxford University Press
Rodrik, Dani, 2004. “Industrial Policy for the Twenty-First Century”.
Discussion Paper Series No. 4767.
Rodrik,Dani, 2008. “Normalizing Industrial Policy”. Commission on Growth
and Development Working Paper No.3.