Friday, June 5, 2009

Industrial policy in the US

Any doubts that the ongoing series of bail outs of financial institutions and key industries in the West is not an industrial policy. Well, it is definitely an industrial policy (under different trade regimes) of a different form that somewhat resembles the policies of South Korea, Japan, Taiwan and China, writes Gallagher. This is not necessarily protectionism. And yes, the government can fill up the gap where the private sector cannot. The best way to do it: go for PPP but with more accountability.
Many will cry that industrial policy – government fostering of specific sectors, industries or firms – is protectionism. It certainly can be. These policies are justifiable only to the extent they correct for market failures in the economy. Of course we all know that the free market is failing to supply credit to firms in the real economy. There is also an underproduction of green technologies, because firms are not compensated for the environmental benefits they bring. This is accentuated because dirty producers don't have to pay for their environmental sins.

If US policy rectifies market failures, these policies should be seen as correctionism rather than protectionism. Asian countries such as Japan, South Korea, Taiwan and China have all successfully experimented with industrial policy. Conventional economic theories would have told these nations to produce rice, fish and perhaps some clothing for the world economy. However, over time governments enabled firms like Toyota, Kia, Hyundai, Acer and Lenovo to become household names across the world.

When countries succeed at industrial policy they usually form public-private partnerships, put conditions on favoured recipients and have systems for government accountability. Public-private partnerships help alleviate the problem of governments picking winners by creating mechanisms whereby governments get important input from the private sector. Enforceable conditions are also important, such as performance requirements to export a certain percentage of output before receiving additional support. Government accountability needs to be ensured as well.