For so many years, the very notion of industrial policy was such an anathema that almost nobody would advocate its usefulness. Much has been said about the fallacy of trying to “pick winners”, and about the shortcomings of import substitution policies and the damaging distortions they created in many cases. Very few would today consider that state planning can drive economic growth better than the power of private entrepreneurship and the sound play of market forces.
However, it is ample time to think again about the relevance of an updated notion of industrial policy in the present global economic context. First of all, there is no dismissing the significant results achieved, through a very effective industrial policy, in once again making Japan an industrial giant after the destruction of the Second World War — until this policy outlived its usefulness in its original form. In the same way, Taiwan would not be the remarkable economic success it is today without the industrial policy that the authorities pursued with much rigour and coherence. For another example of how successful a smart industrial policy can be, just look at Singapore.
In a different way, the actions and orientations initiated by the US’ “military-industrial complex” from the 1950s to the 1980s were a disguised form of industrial policy, which can be credited for some of the major technological and industrial breakthroughs that helped strengthen and expand America’s economic power. More recently, if Airbus is not an example of successful industrial policy, then one has to wonder what it would be. And let’s not forget that almost all the 61 Chinese companies on 2011’s Fortune 500 list are state-owned.
Globalisation — and the addition of many new players, each with their own interpretation of how to play the game, WTO rules notwithstanding — has called into question some assumptions about how free markets and international trade function, and how competitive advantages can be acquired and leveraged in this era of mega-competition. The notion, so prevalent in the 1990s, that globalisation would reduce the role and importance of governments in economic life has been proved wrong. In fact, globalisation has made the need for strong and effective governments even more crucial to the success and competitiveness of national economies, and to their attractiveness to investors.
The issue today is not whether government should be “big” or “small” — although nobody would want a bloated bureaucracy or government having a hand in running hotels or milk factories. The key difference is between governments that are efficient and those that are inefficient in their support of economic activity and inclusive prosperity. And there can be no mistaking the difference between regulatory frenzy and strong and efficient governance. Europe — today in the throes of the most severe crisis in its modern history — offers many striking examples of over-regulation and under-governance.
Efficient industrial policy starts, among other things, by political decision-makers asking themselves, again and again, what public policies will most encourage innovation and entrepreneurial dynamism in order to generate the kind of wealth creation that will benefit the largest number of people. They must then focus on implementing these policies, using all available resources. And this is the starting point of an industrial policy in the good sense of the term, which also requires establishing the kind of productive, win-win relationship with business that allows for each party to play its role fully.
If we consider that activities in sectors such as alternative energy, telecom, healthcare, nanotechnology, transportation and smart mobility enablers are among those that give access to, and control of, the “commanding heights” of the 21st century economy, there are few examples of success in these sectors that have been achieved without direct or indirect strong government involvement. In that respect the US is paying a price for the dramatic shrinkage of its manufacturing sector, partly because of government inertia and the absence of an effective industrial policy. Germany, on the other side, is an example of successful industrial policy — in which the central government’s policies reinforce and complement the Lander’s policies — which has been able to maintain a strong manufacturing base.
This is where a revamped notion of industrial policy — one for the globalisation era — comes into play: One that does not try to limit competition in order to “pick winners”, but rather puts the emphasis on an integrated approach to government decision-making. In this approach, economic, fiscal, monetary, education, labour, R&D, trade policies are devised to complement and reinforce one another, towards the key goal of enhancing the wealth creation potential of an economy and its international competitiveness. In that context, there is nothing wrong in identifying priority sectors, in defining the policies that will create the right environment for their expansion and, in some cases, allocating resources under strict criteria to support them.
The 2008 crisis has returned the issue of the role of government in the economy to the forefront, with a vengeance. The US and Europe — and no need even to mention China — have shown how far they would go in assuming a direct role in re-orienting some strategic industries, or in helping create new ones such as an alternative energy sector (as is the case in the US or in China) through a massive infusion of resources and preferential treatment for this sector.
This will not be a passing phenomenon. The pressure to ensure the sustainability of economies, to generate strong enough jobs creation, to remain at the top of the technology ladder in a context ever more competitive and fraught with volatility, will increasingly compel governments to play an active role in the economy — but without substituting themselves for what entrepreneurs need to do. Influential circles in Europe and the US pushing are more and more for a pro-active industrial policy. In his state of the Union speech, President Obama highlighted elements of his industrial policy to spur manufacturing, to incentivise companies to source back activities in the US and promote the clean energy sector.
In fact, whether they admit it or not, most countries already practise industrial policies. The real question is whether theirs is an efficient, updated, one — meeting the requirements of the global economy — or an outdated one, stuck in past practices of blind government interference.
The writer is president of a strategic advisory firm
