Can Governments Create Industries?

It is an old debate. Back in the '50s and '60s, from Asia to Latin-America, an idea caught fire among development economists: governments should try to create industries.
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It is an old debate. Back in the '50s and '60s, from Asia to Latin-America, an idea caught fire among development economists: governments should try to create industries. Typically, civil servants would pick industries that could employ lots of people or substitute imports, required huge upfront investments, were considered strategic, or just smacked of modernity. Those industries were then treated like "infants" -- in need of all kinds of support until they could survive on their own. They were given tax breaks, protection from foreign competitors, cheap credit, subsidized energy, public contracts, even capital injections courtesy of the taxpayers. Think of toys, trucks, refrigerators, cement, steel and petro-chemicals - -they were all going to be produced locally, whatever it took. (If you are over 50 and grew up in a developing country, fond memories of your family's car or TV set are surely coming to your mind: it carried a national brand, cost a fortune and broke down all the time.)

The experiment ended in tears. Yes, there were a few successes in East Asia that astonished naysayers. (Legend has it that one of the world's leading banks told Japan in the 1960's that it would never be competitive at making cars.) But in most cases, the infants failed to grow and dragged the economy down with them. Consumers were saddled with lower-quality products at higher prices, banks with unpaid loans, and governments with covering the losses of uncompetitive companies, year after year. Corruption added an ugly veneer to the whole thing -- after all, you were giving away benefits to a chosen few. By the late 1980's, countries were busy selling off their public enterprises, opening their economies, and letting markets decide what was produced where. That, we thought, would be the last we would hear about "industrial policy."

Well, you'd be surprised. Today, developing countries rich in oil, gas or minerals are desperately looking for policies to diversify their economies, not just because the price of natural resources could unexpectedly tank, but because the business of extraction does not create enough jobs. They have money to invest -- think Africa. Even in countries that are doing well, governments are searching for ways to make their industries more high-tech and avoid being trapped half-way up the technological ladder -- think Brazil. But everyone wants a new -- read, smarter -- industrial policy, one that avoids the mistakes of the past. They just might be on to something.

To start with, new industrial policy is not about bureaucrats picking products to manufacture domestically. If anything, it is about the private sector pointing out to policy-makers the obstacles that make it unable to sell abroad -- from a flickering electricity supply to corrupt customs officials. Far from closing the economy, the goal is to join the global market. Enterprises remain private. Everyone in the industry can compete for public support; it is not a privilege given to a favored firm or businessman. When public money is involved, it is mainly to improve logistics, infrastructure or technology. Obviously, regulations that restrict trade are done away with first. A good example: a $10 million a year public investment in controlling skin parasites in cattle could unlock Ethiopia's potential as a major exporter of quality leather, assuming the virtual ban on leather exports was lifted.

In fact, the new approach is really about information and coordination. If a public agency knows something that can help businesses prosper -- say, a better technique to get organic certifications -- it passes it along for free. If some regulation or procedure hurts investors -- say, customs clearances that take too long -- they have a friendly ear in a ministry to get it fixed quickly. The corrective actions usually call for coordination among many parties: it is not practical for hundreds of producers by themselves to try to negotiate free-trade agreements, build ports or draft laws. Instead, the government takes the lead on those initiatives. Of course, all this assumes that private business and public officials get along, share a common objective, and have a system in place to communicate. And it is almost impossible when the basics to operate an industry -- from a stable currency to respect for property rights -- are not in place. That's why industrial policy, new or old, no matter how well-intentioned, doesn't works when the rest of your economic policy is in shambles.

But how about new products? Who decides what else to export? There are some mathematical calculations that technocrats can make to sniff for markets where their country could do well, where it has "comparative advantage." (To get a sense of what comparative advantage means, ask yourself this: if you can mow the grass much better than your gardener but are also an attorney making $1,000 an hour, would you ever touch the lawnmower? Lawyering is your comparative advantage.) But, in general, it is better to let business-people do what they do best: to find opportunities to make money. You can help a bit by, for example, letting them locate close to each other -- in what are called "clusters." In Silicon Valley, Guadalajara or Seoul, creative people feed on each other. Still, don't expect that totally out-of-the-blue products will always emerge; more likely, your industries will branch out gradually into ventures where they can use some of the knowledge they already have -- from shoes to handbags, not satellites.

So, will this "new industrial policy," which sounds less exciting and less revolutionary than its previous version, work? Let's say that it cannot hurt. If done in the open, private-public collaboration is a win-win. But you are entitled to be skeptic, especially if your government has not been able to deliver simpler services -- like a teacher in every class, clean water and a decent police force. That is, if you live almost anywhere in the developing world.

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