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Industrial policy redux Robert H. Wade LSE Feb 2011 Rising


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 ... – PowerPoint PPT presentation

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Title: Industrial policy redux Robert H. Wade LSE Feb 2011 Rising

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 dont 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 Banks chief economist Justin Lin

  • (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
  • 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 didnt
    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 dont 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 Banks Country Policy Institutional
    Assessment (CPIA) crystallizes out Washington
    Consensus policies instns as BEST for ALL
    deving cies.
  • World Banks 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 cant 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 RD, cheap credit for all
    SMEs. No sectoral preferences

(2) Hierarchists I deval state
  • Johnson, Amsden
  • Mkt failure very common, esp in basic industry
    stage of devt frontier industries in deved
  • 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 deving
    cies 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 deved
    deving cies, 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 cant pick winners. Parliamentary
    instns necessary but not sufft condn of serious
  • Policy in decentralized polities horizontal
    (not sectoral) intervention to make mkts work
    better anti-trust, macro stabn, PGs, RD
    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
  • 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 dont 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 Taiwans Industrial Devt Bureau,
    free-standing Task Forces.
  • Functions (1) 3way 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
    generationAmerican 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 RD, bld networks b/w firms, b/w
    scientists, entrepreneurs, VC.
  • Also state city levels.

US IP decentralized
  • No apex (top-down planning) agency to MITI
    MoF in Jpn
  • IP decentralized orgally geographically
  • Contrary to hierarchists, this has advantages
    fits USs 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
    low-road (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 RD 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
  • 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

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.
  • Lins 6 steps for strategic govt intervention

6 steps to industrial upgrading econ
  • (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 deving cies 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 WBs various policy tools (infra
    investment, training, credit, policy reforms) at
    specific industries, to build up their
  • 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),
  • 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.

  • Wade, Governing the Mkt (1990, 2004) After the
    crisis industrial policy the developmental
    state in low-income cies, 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),