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Economic intervention still risky
By James Zhan |
March 19, 2011, Saturday
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Print Edition
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INDUSTRIAL policy (IP) is back - or rather, back in fashion. Of course, it never really went away, even in countries formally adhering to free-market principles. But the post-crisis world - in which government intervention in the economy has gained greater legitimacy - will see more of it.
Likewise, China's success, and the temptation to bandwagon on its development model, has reinvigorated IP's appeal, as we have better policy tools and greater experience of what works and what doesn't.
Indeed, a debate in The Economist last year, led by professors Josh Lerner and Dani Rodrik of Harvard University, ended with 72 percent of voters expressing faith in the merits of IP. Policy makers seem to be of the same opinion, and not just in developing countries, judging by the EU's launch of its 2020 flagship last year and the United States' green energy policy.
But, for developing countries, the old dangers of IP continue to apply. First, policy makers often get it wrong, both when picking which industries to support and in implementing support mechanisms.
Second, policy makers are prone to "capture" by vested interests, especially in relatively weak policy environments, leading to favoritism, inefficiency, and waste.
Moreover, compared to IP's previous Golden Age, there are several new risks nowadays.
The first concerns the temptation to follow China's lead unquestioningly. Policy makers must recognize that the Chinese model includes features peculiar to its gradual introduction of market mechanisms - which, compared to IP's new converts, represents a move in the opposite ideological direction.
Indeed, China's growth rate has been boosted over the last two decades by the country's demographic and land-resource "bonuses," which enabled it to maximize the benefits of globalization. Many other developing countries simply cannot emulate this success in all respects; they must formulate plans specific to their own natural endowments, institutions, and business environments.
The second risk stems from the globalized character of virtually every industry commonly considered a candidate for support.
Whereas the original concept of IP involved shielding industries from international competition, today's world requires integrating local productive capacity in global value chains.
The third risk is that industrial policies run afoul of international commitments and obligations.
Despite these additional dangers, none of the major multilateral development institutions could easily argue today that developing countries should not formulate a development strategy that envisions sector-specific sources of economic growth, priorities for industrial development, and government support of such development with fiscal, financial, and regulatory measures.
(James Zhan is director of the Investment and Enterprise Division of the United Nations Conference on Trade and Development (UNCTAD). Copyright: Project Syndicate, 2011. www.project-syndicate.org)
Likewise, China's success, and the temptation to bandwagon on its development model, has reinvigorated IP's appeal, as we have better policy tools and greater experience of what works and what doesn't.
Indeed, a debate in The Economist last year, led by professors Josh Lerner and Dani Rodrik of Harvard University, ended with 72 percent of voters expressing faith in the merits of IP. Policy makers seem to be of the same opinion, and not just in developing countries, judging by the EU's launch of its 2020 flagship last year and the United States' green energy policy.
But, for developing countries, the old dangers of IP continue to apply. First, policy makers often get it wrong, both when picking which industries to support and in implementing support mechanisms.
Second, policy makers are prone to "capture" by vested interests, especially in relatively weak policy environments, leading to favoritism, inefficiency, and waste.
Moreover, compared to IP's previous Golden Age, there are several new risks nowadays.
The first concerns the temptation to follow China's lead unquestioningly. Policy makers must recognize that the Chinese model includes features peculiar to its gradual introduction of market mechanisms - which, compared to IP's new converts, represents a move in the opposite ideological direction.
Indeed, China's growth rate has been boosted over the last two decades by the country's demographic and land-resource "bonuses," which enabled it to maximize the benefits of globalization. Many other developing countries simply cannot emulate this success in all respects; they must formulate plans specific to their own natural endowments, institutions, and business environments.
The second risk stems from the globalized character of virtually every industry commonly considered a candidate for support.
Whereas the original concept of IP involved shielding industries from international competition, today's world requires integrating local productive capacity in global value chains.
The third risk is that industrial policies run afoul of international commitments and obligations.
Despite these additional dangers, none of the major multilateral development institutions could easily argue today that developing countries should not formulate a development strategy that envisions sector-specific sources of economic growth, priorities for industrial development, and government support of such development with fiscal, financial, and regulatory measures.
(James Zhan is director of the Investment and Enterprise Division of the United Nations Conference on Trade and Development (UNCTAD). Copyright: Project Syndicate, 2011. www.project-syndicate.org)
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