Growth Strategies and Industrial Policy

1
Growth Strategies and Industrial Policy

• Motivation
• Asian experience
• Possible lessons for Turkey
• Derived from research with Howard Pack

2
Why the resurgent interest in industrial policy
(IP)?

• Disenchantment with globalization/Washington
  consensus
• Notion that Japan/Korea/Taiwan beat the West at
  its own game

3
Requirements for Successful IP

• Identify market failure
• Design correct policy intervention
• Implement
• Calibrate intervention,
• Alter as changing circumstances require,
• Terminate as need be.
• Note IP justifications are most often due to
  internal market failure some are international
  rent-shifting models, and in these cases one must
  consider possibility of retaliation

4
Four questions regarding the Asian experience

• What was the impact of industrial policy?
• Are these results likely to be reproduced
  elsewhere today?
• Does the international system impede
  implementation?
• Is the pursuit of an industrial policy advisable?

5
Major Policies Actually Applied

• Capital channeling direct and indirect
  subsidies, tax breaks
• RD promotion
• International trade and investment protection
• Lax competition policy

6
Evaluation of impact

• Regression results (Beason-Weinstein and Noland
  for Japan, Lee and Noland for Korea)
• Input-output results (Pack)
• Case studies

7
Political economy and ineffectiveness

• Benefits went predominantly to declining natural
  resource sectors
• Net fiscal flows to manufacturing were negative

8
On-budget subsidies went to declining sectors
9
As did off budget subsidies
10
Net subsidy to manufacturing was negative

• Tax incentives to most manufacturing sectors were
  negative
• Industrial policy amounted to partial
  compensation

11
A saving grace targeting exports

• Clean standard not subject to manipulation
• these were the only statistics that could not be
  faked
• Local firms could not rig international
  competition like they could domestic markets
• Possible externalities
• Support to laggards terminated

12
Possible lessons for Turkey

• Modest positive impact at best
• If industrial policy pursued, are these results
  likely to be reproduced in Turkey?
• Does the international system impede
  implementation of Asian-style policies today?

13
Are the results likely to be reproduced?

• Three possible sources of Asian exceptionalism
  
• Deceptively poor
• Political upheaval, US-led land reforms, and
  legitimacy through growth
• Land scarcity and growth with equity v. growth
  without development

14
Deceptively poor

• Unusually high levels of human capital
• Low contemporaneous income due to lack of
  physical capital
• Rapid convergence

15
Unusually egalitarian

• Unusually equal distribution of income
• US-led land reforms and relatively equal
  distribution of land
• Legitimacy through prosperity

16
Unusual endowmentsthe implications of land
scarcity
17
Replacing Physical Capital with Human Capital
(1968 data)
18
Is it possible to reproduce?

• Are there new constraints imposed by the WTO?
• New rules and disciplinesthe subsidies code
• The end of the Cold War and the dispute
  settlement mechanism
• Ideological opposition by the IFIs

19
Weighting costs and benefits

• Modest benefits

• Possible drawbacks
• Encouragement of corruption
• Dumbing down the financial system

20
Corruption Rankings - Japan, Korea, Taiwan, Turkey
21
Governance Rankings - Japan, Korea, Taiwan, Turkey
22
Estimated Net Cost of Financial Sector Clean-Up

• Korea 16 percent of GDP
• Taiwan 11 percent of GDP
• Japan 10-15 percent of GDP?

23
Bottom line

• While the odds of developing successfully through
  selective interventions are better than those on
  piyango ticket, they are not particularly
  favorable.