Navigating Industrial Policy: Industrial policy involves government investments in specific sectors to promote growth, but must be carefully designed to avoid waste and inefficiency, differentiating it from general state interventions.
In exploring industrial policy, it's recognized that governments sometimes invest in specific sectors like technology, clean energy, and manufacturing to stimulate economic growth. However, concerns arise about the effectiveness of such investments. Successful examples exist, but history offers lessons where interventions led to wasted funds or overcapacity. This complexity highlights the need for careful design and execution of industrial policies to ensure they genuinely support economic development without creating inefficiencies. Experts emphasize the importance of distinguishing industrial policy from general state interventions, focusing on targeted support for particular manufacturing sectors to bolster national competitiveness. Learning from past successes and failures can help formulate effective strategies for future investments.
Industrial Policy: Countries can boost their economies by protecting and supporting local industries to transition from low-profit sectors to high-end manufacturing. However, they must balance this support to ensure competitiveness and avoid complacency in the global market.
Successful industrial policy involves countries moving up the economic ladder rather than sticking to low-profit sectors. By protecting local industries from foreign competition, governments can give them space to grow. Through tariffs and incentives, countries can develop high-end manufacturing, transitioning from labor-intensive to more dynamic industries, which leads to stronger economies. However, while this approach can boost growth, it also risks creating complacency among domestic firms that may struggle to compete globally without continued support. Therefore, a balance is essential to ensure that these companies remain accountable and disciplined, ultimately fostering sustainable growth without excessive reliance on government aid.
Policy Dynamics: Import substitution can create monopolies that lack innovation. Successful countries combine subsidies with export competition to encourage productivity, but political challenges often prevent this approach from being implemented effectively.
Import substitution industrial policy aims to protect local industries by reducing competition, but it can lead to inefficient monopolies when these firms are not pushed to innovate. Successful examples from East Asia show that combining subsidies with the need to compete in export markets can lead to productivity and growth. However, many countries struggle to implement this competitive pressure due to political complexities, as influential firms can resist changes that threaten their profit. Therefore, while the economic principles are understood, political dynamics often hinder the necessary reforms to promote competitiveness.
Economic Partnerships: Korea, Japan, and Taiwan succeeded in exports due to partnerships that opened markets. Unlike India, which faced restrictions, these nations adapted and thrived. A country's wealth impacts export potential more than population size, as seen in India's limited opportunities despite its large population.
Countries like Korea, Japan, and Taiwan succeeded in exporting due to unique partnerships that allowed them access to competitive markets. Unlike India, which faced restrictions from Western firms wanting to keep the domestic market for themselves, these nations used strategic partnerships. Their growth wasn't due to US support but rather their ability to adapt and navigate market barriers. Importantly, a country's wealth is more significant than its population size. India, with a large but poor population, found limited opportunities in its domestic market, causing firms to focus on exports. In contrast, Korean and Taiwanese firms thrived on finding new avenues within various sectors despite ongoing challenges. Their story is one of resourcefulness in overcoming economic adversity and finding the right partnerships to enable growth in global markets.
Market Dynamics: Domestic businesses in countries like India overpower the government, hindering efforts to promote international trade, while countries like South Korea successfully negotiate for growth. High banking costs in poorer nations also pose significant challenges to industrialization.
Countries in Central America and Haiti have not effectively expanded their markets due to the overwhelming power of domestic businesses over governmental policies. In contrast, South Korea and Taiwan managed to negotiate a better partnership with their governments, facilitating their growth. In India, however, the business class has too much influence, making it difficult for the government to encourage them to explore international markets or improve regional trade. This dominance hinders India's ability to gain the benefits of global competition, as local firms prefer to stay reliant on domestic markets. Additionally, high banking costs and underdeveloped financial systems in poorer nations remain significant barriers to industrialization, further complicating the efforts of governments to guide investment toward promising industries. Effective industrial policy requires not only investment and direction but also access to affordable capital to stimulate competitive industries.
US Industrial Policy: The US aims to strengthen its manufacturing through industrial policy, by attracting investments in sectors like semiconductors, despite facing challenges in administrative capacities similar to those of developing countries.
The US is actively trying to boost its manufacturing sector through industrial policy, particularly in technology areas like semiconductors and electric vehicles. This involves providing financial incentives to attract private investment. While the US has an established industrial base to build upon, it struggles with the administrative capacity needed to effectively manage and direct these investments efficiently. This situation is similar to challenges faced by developing countries, which historically attempted to build their industrial capacity without the necessary government structures in place. However, unlike these countries, the US goal is not to create new industries from scratch but to accelerate growth in already existing ones, relying largely on its large domestic market to attract investment. Learning from China’s experience, the US could benefit by adapting its approach to enhance competition within its own market.
Industrial Policy Insights: To improve American industrial policy, it’s essential to invite global competition and involve workers in decision-making, ensuring public money supports industries that benefit everyone while maintaining democratic accountability.
American industrial policy should embrace competition by welcoming global markets into the U.S. Rather than just keeping foreign firms out, there should be targeted support for American companies, ensuring taxpayer money is spent wisely for public benefit. Improved industrial strategies require collaboration, with input from both workers and employers, making sure industries grow in ways that benefit everyone. Democratic values are crucial here, as they allow citizens to influence where their money goes, ensuring accountability and encouraging more productive use of resources. This approach highlights that a democratic system may better manage industrial policy than authoritarian regimes, where business interests can dominate political processes without public scrutiny.
Empowering Accountability: Empowering workers and ensuring accountability for industrialists is crucial for a fair economy. Transparent collaboration can create more fulfilling jobs while addressing public concerns about elite control in government and the economy.
To improve America's economic future, we need to empower workers and hold industrialists accountable. Many feel that elites dominate the economy without considering the broader impact of their decisions. Transparency and collaboration between investors and workers can create jobs that respect and engage employees, leading to better outcomes for everyone. This might help address the political crisis, where many believe that the government serves a narrow elite. Proper planning and accountability are vital, especially following lessons from the pandemic that revealed weak points in our economy. While successful industrial policies are rare, learning from past successes can guide future investment strategies that genuinely serve the public good.
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This Is How Industrial Policy Can Go Bad
Odd Lots
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Recent Episodes from Odd Lots
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This Is How Industrial Policy Can Go Bad
Right now, industrial policy is back in vogue in the US. The administration is making an effort at reviving specific sectors, notably in areas of clean energy and semiconductors. But despite all of the money being spent on subsidies of various sorts, there's no guarantee it will actually work. If it were easy, every country would do it. So what are the conditions that make it possible? And how can it go sour? On this episode of the podcast, we speak with Vivek Chibber, a professor at NYU, and the author of several books including Locked In Place, which compares the development experience of South Korea and India. We talk about the interaction of economic policy and domestic politics, as well as the specific political conditions that need to be in place that allow the government to provide "gifts" to companies, and for those gifts to actually turn into leading edge industrial leaders, rather than for that money to simply go into the pockets of investors. Among the things we discuss are: What industrial policy actually is and what it's going to take for the US endeavors to actually become successful.
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The Next Stage of the Credit Cycle with Oaktree’s Poli
This week, the Fed cut benchmark rates by 50 basis points. Lower financing costs should be a relief for companies that need to borrow in the form of bonds or loans. But, the weird thing about the previous few years of high rates and high inflation is how much corporate credit has defied expectations. While defaults increased slightly, there wasn’t a huge wave of bankruptcies. And most companies haven’t really had trouble finding financing, with a smorgasbord of options available to them — including from the booming private credit market. So what happens now that the Fed is lowering rates? In this episode, we speak with Danielle Poli, co-portfolio manager of Oaktree’s Diversified Income Fund and a founding member of the firm’s investment committee, about how she sees the next leg of the credit cycle unfolding, and how she decides between a multitude of potential investments in the space.
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