- Email: [email protected]
Industrial Policies for Pacific Economic Growth
JOURNAL
OF THE JAPANESE
AND
INTERNATIONAL
ECONOMIES
2, 199-203
(1988)
BOOK REVIEW HIROMICHI MUTOH, IPPEI YAMAZAWA,
SUEO
SEKIGUCHI,
KOTARO
SUZUMURA,
AND
Editors, Industrial Policies for Pacific Economic Growth, Allen & Unwin, London. 370 pp.
Industrial policy is a term that defineseasydefinition. If it meanspolicy designedto correct for market imperfections or, put another way, to allocate resources’moreefficiently than markets can be expectedto do, then one is hard pressedas to how to distinguish among the variety of decisions made in the name of economic policy in all national states. Consider, for instance, policy toward an industry known as agriculture. Here is a sector subject in most countries to an enormous amount of public intervention. In the developingworld it is usually the leadingcenter of economic activity. In all cases,choicesmade in agricultural policy cannot fail to affect for better or worse the ways in which an economy’s total resourcesare used.Yet the industrial policy literature rarely touches on the matter. Definitional problems of course have not prevented industrial policy from gaining a devoted band of followers in political and other quarters. The enthusiastscan point to economic successesin Japanand the newly industrializing Asian states where policies defined as “industrial” have indeedflourished. And in the Soviet Union, where industrial policy presumably hasbeenthe most comprehensive,rather high ratesof economic growth during much of the postwar period could be taken as demonstrating the efficacy of resourceallocation by official fiat; however, the Soviet model has lost what attraction it may have had as rates of growth have declined and the evidence of truly extraordinary inefficiencies in Soviet economic practice has accumulated.Then, too, we have the example of Hong Kong where an impressiverecord of economic successhasaccompanied an almost aggressivelynoninterventionistpolicy. The principal objection to giving weight to industrial policy lies in the areaof common sense.Why shouldone supposethat electedor appointed officials will do better than market forces in determiningwhere resources will be used efficiently? Granted that governments can hardly escape 199 0889-1583/88
$3.00
Copyright 0 1988 by Academic Press, Inc. All rights of reproduction in any form reserved.
200
BOOK
REVIEW
responsibility for grand economic decisions in the form of national budgets and monetary policies, how much should we expect of the same governments in the realm of microeconomic decision-making? Generally, economists will answer, not much. Even where markets can be shown to operate imperfectly, there is no necessary basis for believing that officials will know how to intervene effectively or, if they know, will have at hand suitable instruments of intervention. But economists’ views are regularly disregarded, in this and other respects. Governments, even in those states most committed to neoclassical economic ideology, continue to engage in particularist interventions, presumably because political pressures mandate them. So industrial policy becomes willy-nilly a proper subject for study and analysis. Industrial Policies for Pacific Economic Growth is the record of an ambitious conference held in Tokyo in 1985. Conference papers were written on industrial policy as a concept; on industrial policy as practiced in Canada, Japan, Taiwan, Indonesia, Malaysia, the Philippines, Thailand, China, the United States and “Europe;” on industrial policy as applied to textiles and clothing, to the American automobile industry, to steel, and to petrochemicals; and on regional industrial policy or “industrial cooperation” in the Association of Southeast Asian Nations (ASEAN). R. G. Gregory of the Australian National University has contributed a thoughtful introductory “overview” and the editors and others have provided a concise and very readable summary of the conference proceedings. It is fair to say that the prevailing attitude among the participants was in varying degrees the skepticism that I have remarked upon earlier. In his framework paper, Caves, after disposing of “dubious” proposed bases for industrial policies, suggests three “valid” problems of resource allocation-externalities in research and proprietary knowledge, international oligopoly, and failures in adjustment or adaptation to international disturbances. Still one has to wonder, as he obviously does, whether governments will often be able to identify these situations or to act usefully on them if they do. Okuno and Suzumura offer an elegant chapter in which they argue that industrial policies may be used to develop new industries which are likely to generate external economies; to capture rents that would otherwise accrue to foreign monopolies; or to regulate socially excessive investment in oligopolistic industries. Once more, the conditions for successful application of these policies are rigorous enough to raise questions as to their real world practicability. The authors in fact elect to end the chapter with a disclaimer: “Distortion and misuse of [theoretical] arguments is likely and may result in . . . policies that cause aggregate welfare loss while providing private gains to powerful special groups. ”
BOOK
REVIEW
201
Among the country chapters, the Uekesa-Ida piece on Japan is similarly cautious. Acknowledging and even stressing that stated industrial policy of objectives were in fact achieved, the authors go on to observe that “the private sector deserves rather more of the credit for the success of Japanese industry.” I would have wished to find in this essay a discussion of industrial policy toward agriculture. In Japan and, I believe, in Korea, the actual policy has been conspicuously antiefficiency in that large direct and indirect subsidies were and are given to perpetuate smallscale farming. Yet, as I once suggested, a policy which amounted to bribing people to stay longer on the land may have been an indispensable underpinning for the political and social stability that permitted extended periods of feverish growth and spreading urbanization. English and McFetridge on Canada and Lawrence on the United States consider trade policy to have been the principal applicable industrial policy instrument; with some prescience, the Canadian authors look to a comprehensive free trade deal with the United States as probably the most promising of all industrial policies for Canada. As to Europe, Lawrence finds that the typical response to industrial stagnation or decline has been an effort to reverse market forces, an effort that (inevitably?) has been an expensive failure. Taiwan, discussed by Professors Ching-ing How Liang and Kuo-Shu Liang, has to be a prime example of seemingly pervasive governmental intervention that seemingly has worked. An important form of intervention, according to the Liangs, has been a host of export subsidies, together with extensive if gradually diminishing controls on imports. But the government also has used bountiful tax incentives and low interest loans to promote industries thought to be “strategic;” it has interfered in technical cooperation arrangements with foreign firms; and it has maintained tight controls over domestic capital markets. Official statistics show real GNP to have grown at an annual average rate of 8.9% over more than 30 years, 1952-1984, a rate that appears to have slackened little in 1985-1987. Taiwan’s is the example of an export driven economy, with a current account surplus close to 20% of GNP in 1986. Given this show of prowess in international marketing it can scarcely be said that industrial policy has strangled innovation and adaptation among this small island’s people. Even so, the Liangs worry, and cite Taiwan’s official Economic Reform Committee in support, that controls have been excessive and that the domestic economy must be made “more open and competitive” if it is to cope with the challenges ahead. Mu Yang of the Chinese Academy of Social Sciences reviews the Peoples Republic’s economic history, post-1949, and then looks at the decision, circa 1978, to change course from a heavy industry strategy to the objective of a more balanced economic structure. His comments about
202
BOOK
REVIEW
reforming the economic system illuminate the problems of moving from comprehensive planning to an economic system less officially administered. To have structural reform, he says, it is absolutely necessary to rationalize the price system. But “because any price change will affect both the national economy and the lives of individuals, great care must be taken at every point.” In short, prices must still be regulated. The chapters on sectoral industrial policies find little to commend and much to question. Professor Lloyd of the University of Melbourne takes up textiles and clothing, with special attention to policies in Australia and New Zealand. He finds the Australian policy (quantitative import restraints) has been irrational in terms of its stated objective (protecting employment) and inefficacious in practice. Lawrence White of New York University examines aspects of American industrial policy toward the automobile industry since 1979, touching on the Chrysler rescue, antitrust, regulatory measures, and import restraints. The loosening of regulations under the Reagan administration he considers to have been sensible; the Chrysler bailout questionable; the anti-trust blessing given the General Motors-Toyota joint venture unfortunate; and the so-called Voluntary Restraint Agreement on Japanese cars a nearly inexplicable gift of scarcity rents to Toyota, Nissan, er al. Industrial policies for steel and petrochemicals are the subjects of essays by, respectively, Chong Hyun Nam of Korea University and Ai Tee Koh of the National University of Singapore. Professor Nam says that for developing country governments to view steel as a “strategic” industry (because steel is a necessary input to a range of manufacturing industries) is as wrongheaded as have been the efforts of developed country governments to resist, by import curbs, the necessary restructuring of steel industries no longer internationally competitive. The petrochemical industries virtually everywhere have been to some extent initially or eventually force-fed by government actions (in the United States by tax laws and price controls); Japan’s industry, with no indigenous feedstocks, was notably vulnerable when petroleum prices rose rapidly. Professor Koh’s account suggests that much in the way of governmental promotional measures would not have survived careful cost-benefit analyses. Where does all this leave the reader? For one reader at least, a reasonable conclusion is that a full assessment of the costs and benefits of industrial policy for welfare in any economy would require an analysis in depth of economic and political developments over a significant period, and then with no assurance that the judgments arrived at would be widely accepted. The papers in the volume under review argue, as I believe, correctly for considerable caution about supposing that governments are possessed of the foresights and skills needed to improve on market outcomes. Or, indeed, that governments operating in a political milieu are
BOOK REVIEW
203
able to devise, other than by happenstance, microeconomic policies that taken together will contribute to the general well-being. At the same time, extensive interventionism has coexisted with rapid economic growth in enough instances to require the reflection that busybody governments may do less harm, or more good, than neoclassical analysis would admit. The jury in the case is likely to be out for quite a while. And, meanwhile, governments will continue to meddle and experiment with industrial policies, probably because that is what their citizens intend them to do. PHILIP H. TREZISE The Brookings Institute Washington, D.C. 20036
OF THE JAPANESE
AND
INTERNATIONAL
ECONOMIES
2, 199-203
(1988)
BOOK REVIEW HIROMICHI MUTOH, IPPEI YAMAZAWA,
SUEO
SEKIGUCHI,
KOTARO
SUZUMURA,
AND
Editors, Industrial Policies for Pacific Economic Growth, Allen & Unwin, London. 370 pp.
Industrial policy is a term that defineseasydefinition. If it meanspolicy designedto correct for market imperfections or, put another way, to allocate resources’moreefficiently than markets can be expectedto do, then one is hard pressedas to how to distinguish among the variety of decisions made in the name of economic policy in all national states. Consider, for instance, policy toward an industry known as agriculture. Here is a sector subject in most countries to an enormous amount of public intervention. In the developingworld it is usually the leadingcenter of economic activity. In all cases,choicesmade in agricultural policy cannot fail to affect for better or worse the ways in which an economy’s total resourcesare used.Yet the industrial policy literature rarely touches on the matter. Definitional problems of course have not prevented industrial policy from gaining a devoted band of followers in political and other quarters. The enthusiastscan point to economic successesin Japanand the newly industrializing Asian states where policies defined as “industrial” have indeedflourished. And in the Soviet Union, where industrial policy presumably hasbeenthe most comprehensive,rather high ratesof economic growth during much of the postwar period could be taken as demonstrating the efficacy of resourceallocation by official fiat; however, the Soviet model has lost what attraction it may have had as rates of growth have declined and the evidence of truly extraordinary inefficiencies in Soviet economic practice has accumulated.Then, too, we have the example of Hong Kong where an impressiverecord of economic successhasaccompanied an almost aggressivelynoninterventionistpolicy. The principal objection to giving weight to industrial policy lies in the areaof common sense.Why shouldone supposethat electedor appointed officials will do better than market forces in determiningwhere resources will be used efficiently? Granted that governments can hardly escape 199 0889-1583/88
$3.00
Copyright 0 1988 by Academic Press, Inc. All rights of reproduction in any form reserved.
200
BOOK
REVIEW
responsibility for grand economic decisions in the form of national budgets and monetary policies, how much should we expect of the same governments in the realm of microeconomic decision-making? Generally, economists will answer, not much. Even where markets can be shown to operate imperfectly, there is no necessary basis for believing that officials will know how to intervene effectively or, if they know, will have at hand suitable instruments of intervention. But economists’ views are regularly disregarded, in this and other respects. Governments, even in those states most committed to neoclassical economic ideology, continue to engage in particularist interventions, presumably because political pressures mandate them. So industrial policy becomes willy-nilly a proper subject for study and analysis. Industrial Policies for Pacific Economic Growth is the record of an ambitious conference held in Tokyo in 1985. Conference papers were written on industrial policy as a concept; on industrial policy as practiced in Canada, Japan, Taiwan, Indonesia, Malaysia, the Philippines, Thailand, China, the United States and “Europe;” on industrial policy as applied to textiles and clothing, to the American automobile industry, to steel, and to petrochemicals; and on regional industrial policy or “industrial cooperation” in the Association of Southeast Asian Nations (ASEAN). R. G. Gregory of the Australian National University has contributed a thoughtful introductory “overview” and the editors and others have provided a concise and very readable summary of the conference proceedings. It is fair to say that the prevailing attitude among the participants was in varying degrees the skepticism that I have remarked upon earlier. In his framework paper, Caves, after disposing of “dubious” proposed bases for industrial policies, suggests three “valid” problems of resource allocation-externalities in research and proprietary knowledge, international oligopoly, and failures in adjustment or adaptation to international disturbances. Still one has to wonder, as he obviously does, whether governments will often be able to identify these situations or to act usefully on them if they do. Okuno and Suzumura offer an elegant chapter in which they argue that industrial policies may be used to develop new industries which are likely to generate external economies; to capture rents that would otherwise accrue to foreign monopolies; or to regulate socially excessive investment in oligopolistic industries. Once more, the conditions for successful application of these policies are rigorous enough to raise questions as to their real world practicability. The authors in fact elect to end the chapter with a disclaimer: “Distortion and misuse of [theoretical] arguments is likely and may result in . . . policies that cause aggregate welfare loss while providing private gains to powerful special groups. ”
BOOK
REVIEW
201
Among the country chapters, the Uekesa-Ida piece on Japan is similarly cautious. Acknowledging and even stressing that stated industrial policy of objectives were in fact achieved, the authors go on to observe that “the private sector deserves rather more of the credit for the success of Japanese industry.” I would have wished to find in this essay a discussion of industrial policy toward agriculture. In Japan and, I believe, in Korea, the actual policy has been conspicuously antiefficiency in that large direct and indirect subsidies were and are given to perpetuate smallscale farming. Yet, as I once suggested, a policy which amounted to bribing people to stay longer on the land may have been an indispensable underpinning for the political and social stability that permitted extended periods of feverish growth and spreading urbanization. English and McFetridge on Canada and Lawrence on the United States consider trade policy to have been the principal applicable industrial policy instrument; with some prescience, the Canadian authors look to a comprehensive free trade deal with the United States as probably the most promising of all industrial policies for Canada. As to Europe, Lawrence finds that the typical response to industrial stagnation or decline has been an effort to reverse market forces, an effort that (inevitably?) has been an expensive failure. Taiwan, discussed by Professors Ching-ing How Liang and Kuo-Shu Liang, has to be a prime example of seemingly pervasive governmental intervention that seemingly has worked. An important form of intervention, according to the Liangs, has been a host of export subsidies, together with extensive if gradually diminishing controls on imports. But the government also has used bountiful tax incentives and low interest loans to promote industries thought to be “strategic;” it has interfered in technical cooperation arrangements with foreign firms; and it has maintained tight controls over domestic capital markets. Official statistics show real GNP to have grown at an annual average rate of 8.9% over more than 30 years, 1952-1984, a rate that appears to have slackened little in 1985-1987. Taiwan’s is the example of an export driven economy, with a current account surplus close to 20% of GNP in 1986. Given this show of prowess in international marketing it can scarcely be said that industrial policy has strangled innovation and adaptation among this small island’s people. Even so, the Liangs worry, and cite Taiwan’s official Economic Reform Committee in support, that controls have been excessive and that the domestic economy must be made “more open and competitive” if it is to cope with the challenges ahead. Mu Yang of the Chinese Academy of Social Sciences reviews the Peoples Republic’s economic history, post-1949, and then looks at the decision, circa 1978, to change course from a heavy industry strategy to the objective of a more balanced economic structure. His comments about
202
BOOK
REVIEW
reforming the economic system illuminate the problems of moving from comprehensive planning to an economic system less officially administered. To have structural reform, he says, it is absolutely necessary to rationalize the price system. But “because any price change will affect both the national economy and the lives of individuals, great care must be taken at every point.” In short, prices must still be regulated. The chapters on sectoral industrial policies find little to commend and much to question. Professor Lloyd of the University of Melbourne takes up textiles and clothing, with special attention to policies in Australia and New Zealand. He finds the Australian policy (quantitative import restraints) has been irrational in terms of its stated objective (protecting employment) and inefficacious in practice. Lawrence White of New York University examines aspects of American industrial policy toward the automobile industry since 1979, touching on the Chrysler rescue, antitrust, regulatory measures, and import restraints. The loosening of regulations under the Reagan administration he considers to have been sensible; the Chrysler bailout questionable; the anti-trust blessing given the General Motors-Toyota joint venture unfortunate; and the so-called Voluntary Restraint Agreement on Japanese cars a nearly inexplicable gift of scarcity rents to Toyota, Nissan, er al. Industrial policies for steel and petrochemicals are the subjects of essays by, respectively, Chong Hyun Nam of Korea University and Ai Tee Koh of the National University of Singapore. Professor Nam says that for developing country governments to view steel as a “strategic” industry (because steel is a necessary input to a range of manufacturing industries) is as wrongheaded as have been the efforts of developed country governments to resist, by import curbs, the necessary restructuring of steel industries no longer internationally competitive. The petrochemical industries virtually everywhere have been to some extent initially or eventually force-fed by government actions (in the United States by tax laws and price controls); Japan’s industry, with no indigenous feedstocks, was notably vulnerable when petroleum prices rose rapidly. Professor Koh’s account suggests that much in the way of governmental promotional measures would not have survived careful cost-benefit analyses. Where does all this leave the reader? For one reader at least, a reasonable conclusion is that a full assessment of the costs and benefits of industrial policy for welfare in any economy would require an analysis in depth of economic and political developments over a significant period, and then with no assurance that the judgments arrived at would be widely accepted. The papers in the volume under review argue, as I believe, correctly for considerable caution about supposing that governments are possessed of the foresights and skills needed to improve on market outcomes. Or, indeed, that governments operating in a political milieu are
BOOK REVIEW
203
able to devise, other than by happenstance, microeconomic policies that taken together will contribute to the general well-being. At the same time, extensive interventionism has coexisted with rapid economic growth in enough instances to require the reflection that busybody governments may do less harm, or more good, than neoclassical analysis would admit. The jury in the case is likely to be out for quite a while. And, meanwhile, governments will continue to meddle and experiment with industrial policies, probably because that is what their citizens intend them to do. PHILIP H. TREZISE The Brookings Institute Washington, D.C. 20036