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The Intricacies of Industrial Policy

In 1987, the United States faced severe challenges in their semiconductor manufacturing industry, with Japan encroaching on market share and employment opportunities, thereby posing a threat to national security and economic growth. Attempts were made to salvage the situation with the inauguration of Sematech, an R&D consortium bolstered by the government’s annual subsidy pledge of $100 million (about $250 million in today’s money). However, according to a 1994 research by Douglas Irwin and Peter Klenow from Dartmouth College and Stanford University respectively, the consortium didn’t substantially alter the investment plans in the semiconductor sector, attesting to the difficulty governments face in mobilizing viable industries. This information comes from Reader Wall.

A Look At Industrial Policy

Industrial policy is a term that is often ambiguously defined but it broadly encompasses aspects ranging from tax incentives to training programs. A positive spin to the concept is the example of the Defense Advanced Research Projects Agency (DARPA), a government institute responsible for groundbreaking research following World War II. Furthermore, South Korean automobile company, Kia, successfully started a car plant near Atlanta in 2009 with significant government assistance. However, the rate of success stories related to industrial policies doesn’t paint a very optimistic picture.

A prime example is a report by the Peterson Institute that critically examined American industrial policy between 1970 and 2020. The report, authored by Gary Hufbauer and Euijin Jung, found no competitive advantage generated through government intervention. European countries, too, do not fare much better. In fact, Geoffrey Owen from the London School of Economics suggests in his review of post-war European industrial policy that Britain fell significantly behind its European counterparts when it adopted such approaches most eagerly in the 1950s.

A Glimpse of Successful Industrial Policy?

Proponents of industrial policies often highlight South Korea as a success story. A research study conducted by Nathan Lane of Oxford University on South Korea’s industrialization drive between 1973-79 revealed the critical role played by the government’s targeted industrial policies in creating the economy that we know today. The research found that over the following two decades, South Korea’s real GDP per head increased by an impressive 349%.

Conversely, China’s more recent industrial policy under Xi Jinping’s “Made in China” drive since 2015 has led to mixed results. While the government’s increased subsidies and tax relief on high-tech industries have propelled many domestic firms to a dominating position in the global market, the overall benefits of such an industrial policy for China as a country remain uncertain. Studies have failed to identify any productivity improvement, increased R&D expenditure, or profitability in companies that were on the receiving end of these policies.

The Price of Industrial Policies

Can the new wave of industrial policies prevent the pitfalls of the past? Governments seem to think so, boasting of their efforts in bolstering factory constructions and opening new manufacturing facilities. However, some developments raise concerns. For example, there is India’s “production-linked incentives” (PLI) scheme, which provides manufacturers with a sum for every unit produced. While exports of mobile phones escalated following the scheme’s introduction, so did imports. Lightyear, a Dutch solar car company backed by the government, and Britishvolt, a British government-supported battery company, have also experienced financial difficulties recently.

Industrial policies also come with other economic costs, the most notable of which is retaliation from countries like China, which imposes export controls on critical materials. Furthermore, these policies seem to promote a problematic cycle of dependency, where promises of subsidies today raise expectations of more in the future.

Questions Regarding Value

In the end, it remains to be seen whether the purported benefits of the industrial policy will outweigh the costs. Concerns have been raised about the value of schemes like India’s PLI, and monitoring bodies like Britain’s National Audit Office have expressed the need for improvement in the administration of funds. Therefore, the question remains, can countries afford such costly errors, especially when they’re running a budget deficit of 4% of GDP on average?

Others, like Joe Biden’s national security advisor Jake Sullivan, argue that not “all growth is good growth”, emphasizing the need for equitable distribution of wealth. If industrial policies can reduce inequality and improve the lots of the working class, perhaps rapid GDP growth might not be as necessary. Yet, the extent to which this ‘homeland economics’ can make a significant difference still seems overly exaggerated.

Anna Parker

Anna Parker, a distinguished author in the realm of business literature, brings a wealth of expertise to ReaderWall. With a profound understanding of corporate dynamics, Parker's insightful works offer invaluable insights into leadership, strategy, and organizational excellence. Explore her thought-provoking writings on ReaderWall's Business category and elevate your understanding of the business world.