Industrial policy dilemmas how much is too much

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• Industrial policy dilemmas how much is too much
• International conference on Industrial Policy as
  Factor Enhancing Competitiveness organized by
  Institute for Economics and Forecasting
• Presented by Marcin Swiecicki
• Kyiv, 20 November 2009

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Industrial Policy arguments for

• Markets are inefficient
• Foreign competition can destroy national
  industries
• Infant industries need initial government care
• Industrial policy can help to maintain jobs
• Need to create national superfirms (e.g. chaebols
  in Korea)

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Arguments against industrial policy

• Government makes even worse mistakes than markets
  in pickuping the winners
• Usually the more successful industries are
  financing the less successful
• Economic growth is slowed down
• Traditional, sunset industries prevail, human and
  other resources are stuck in inefficient branches
• Artificial preservation of the obsolete
  production or/and overcapacity
• Consumers and taxpayers are usual losers

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Market forces bring about radical changes

• Markets abandon uncompetitive industries and
  channel resources to the most competitive
  examples
• USA growth and decline in home appliances
  production
• TV sets in UK invented in 1926, end of
  production in 2009
• Employment in coal mining in UK dropped from700
  000 in 1947 to 13000 in 1997, in Poland from 400
  000 in 1990 to 128 000 in 2002
• personal car production abandoned in Holland,
  Austria

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How was Udevalla shipyard closed

• Swedish shipyard, one of the largest, but no
  future, 2500 employees
• Approach Protect workers but not obsolete jobs
• All employees got assistance
• Training to learn new skills
• Support to start own business
• Temporary incentives for companies creating new
  jobs in the region
• Support to move from Udevalla to other regions

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Examples of disputable industrial policy
initiatives in the past

• Japan MITI successful in 1950s and 60s, but
  contributed to stagnation from 1980s on too
  protectionist and paternalistic
• Republic of Korea oversized metallurgical
  sector
• France and United Kingdom Concorde jet project
• European Union Common Agricultural Policy
• United Kingdom before Thatcher large state
  sector huge subsidies to coal, metallurgy, light
  industry

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European Union approach

• Single European market
• Ban on public aid with some exceptions
• Liberalization of foreign trade
• Horizontal policies RD,
• Special treatment for SME
• Regional development modernization of backward
  regions
• Common Agricultural Policy successes and
  disasters
• Lisbon agenda nice targets, lack of instruments
• Energy policy
• Climate change challenges

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EU Single market

• Free flow of goods, capital, services, people
• Hundreds of directives and rules
• Competition Policy
• External trade policy
• Remaining agenda
• - Single energy policy
• Interoperability of transport
• Single financial services market

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Rules of public aid in EU

• Must be allowed by the EC
• Any aid granted by member state in any form which
  distorts or threatens to distort competition
  shall be incompatible with the common market
  rules
• Illegal aid has to be reimbursed
• Some exemptions horizontal aid, depressed areas,
  cultural preservation
• Some specific politics SME, agriculture policy
  different rules

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Trends in public aid in EU

• Total aid declined from 1.1 of GDP in 1992 to
  0.5 of GDP in 2007
• From sector and firm specific towards horizontal
  aid
• More R_at_D, environment protection, training
• Share of horizontal aid has grown from 52 in
  1992 to 80 in 2007 (as percentage of total aid)
• Less creating public enterprises more attracting
  private capital including to public services
• additionally during crisis
• Firm and sector specific aid to preserve
  employment and restore competitiveness
  temporary used again

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Aid instruments for industry and services in EU
2005-2007

• annual average, in mln EUR
• Grants
  23265
• Tax exemptions
  19483
• Equity participation
  326
• Soft loans
  1442
• Tax deferral
  582
• Guarantees
  1329
• Note Coal sector excluded

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Horizontal and sectoral state aid in EU in 2007

• EU 27 EUR 49,214 mln
  100
• Horizontal
  
  80
• environment and energy savings
  25
• regional development
  20
• research _at_ development
  15
• SME
  9
• training
  1
• employment and others
  10
• Sectoral
  
  20
• coal
  
  7
• financial services
  9
• manufacturing sector
  3
• services and other
  1

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Research and Development Expenditure in 2004
share of government
???????? Rocznik Statystyki Miedzynarodowej
2006, Warszawa 2007Science, technology and
innovation in Europe, Eurostat
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EU regional policy to modernize backward
regions. How funding is used?
(percent of GDP)
Some economists have doubts how efficient
regional policy is since huge agglomerations are
real engines of growth rather than backward
regions.
Source European Commission
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Common Agricultural Policy and US agro-support

• Contradictions
• Supporting producers price support and
  protection from external competitors resulted in
  too much supplies mountains of butter, lakes of
  milk and wine
• Contradicting stimuli to increase production and
  restrict it (milk quotas, idle fields,
  forestration)
• Negative distributional effect 20 largest farms
  consume 80 of support
• Losers consumers (higher prices for foodstuff),
  taxpayers, foreign competitors
• Developing countries loose 6 times more than gain
  from foreign aid

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Examples of disputable industrial policy
initiatives in the future

• Some climate change related measure
• 20/20/20 rule applied to reduction in green
  house gas emission, renewable energy, savings in
  energy consumption
• Support for biofuel, support for wind energy
• USA rapidly growing fuel efficiency requirements
  for cars in times of sales crisis
• Project of CO2 capturing, transportation, and
  storage

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Ukrainian challenges

• Active measures to attract foreign capital
• Remove double technical standards
• Increase RD expenditure
• Reduce number of licenses and permits (Ukraines
  low rank in World Bank rating on doing business)
• Information support of exporters
• Strengthen independence of judiciary

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Thank you