The new IMF working paper on industrial policy, by Reda Cherif and Fuad Hasanov, has gotten a lot of notice, and indeed it is very clear, comprehensive, and useful. But for anyone who has already done some reading on the history of successful Asian economies, particularly Taiwan and South Korea, it is not exactly surprising stuff. Here for instance is their quick summary of the key characteristics of these economies’ successful industrial policies:
- Intervene to create new capabilities in sophisticated industries: Pursue policies to steer the factors of production into technologically sophisticated tradable industries beyond the current capabilities to swiftly catch up with the technological frontier.
- Export, export, export: A focus on export orientation as any new industrial product was expected to be exported right away with the use of market signals from the export market as a feedback for accountability. As conditions changed, both the state and the firms adapted fast.
- Cutthroat competition (at home and abroad) and strict accountability: No support was given unconditionally although performance assessment was not necessarily based on short term profits. While specific industries may get support, intense competition among domestic firms was highly encouraged in domestic and international markets.
The combination of a focus on exports with tough competition sounds a lot like what Joe Studwell, in his 2013 book How Asia Works (which is not cited in the IMF paper’s bibliography), called “export discipline.” His explanation is clearer and punchier:
Governments in all the major economies of east Asia tried at some stage to nurture domestic manufacturers. That those in north-east Asia succeeded, while those in south-east Asia failed miserably, turned on a small number of policy differences. By far the most important of these was the presence – or absence – of what I call ‘export discipline’.
This term refers to a policy of continually testing and benchmarking domestic manufacturers that are given subsidies and market protection by forcing them to export their goods and hence face global competition. It is their level of exports that reveals whether they merit state support or not. …
Where export discipline has not been present, development policy has become a game of charades, with local firms able to pretend that they have been achieving world-class standards without having to prove it in the global market place. In south-east Asia, the energies of entrepreneurs were directed towards fooling politicians rather than exporting.
I would still recommend Chapter 2 of How Asia Works as the definitive comparison of successful and unsuccessful industrial policies in Asia.
The point of such a comparison is to move beyond sterile debates over whether industrial policy can ever work, since in fact basically all countries have some kind of policy for promoting particular industries. As Cherif and Hasanov put it, “The key question is, if many countries have been conducting industrial policy anyway, what should the right way to do this be.” The presence or absence of export discipline should be a useful way to evaluate whether industrial policy is likely to be successful.
Even within Asia this lesson is not as widely appreciated as it perhaps could be. For instance, former Chinese finance minister Lou Jiwei recently made a surprisingly harsh public criticism of Made In China 2025 (for which he has apparently been forced into early retirement). He called it a waste of taxpayers’ money and an unwarranted intrusion of government: “those industries are not predictable and the government should not have thought it had the ability to predict what is not foreseeable.”
While I have a lot of respect for Lou, I’m not sure this is the strongest criticism of Made in China 2025. It’s not clear that “the market” would necessarily pick different industries as being desirable to invest in now: the ideas that people have about what technologies are going to be important in the future don’t seem to be that different across the public and private sectors. The Chinese government have have a plan to promote artificial intelligence, but private venture capital firms are also throwing plenty of money at that sector as well. Semiconductors are one of the key sectors targeted by The Made In China 2025, and I don’t think many people are seriously arguing that semiconductors won’t be important in the future.
This is not to say that venture capital investors are necessarily going to be right about the future either, just that both government officials and venture investors can read the same things and are influenced by the same conventional wisdom. This point is not original to me: I picked it up from Brad DeLong’s 2010 book with Stephen Cohen, The End of Influence:
Americans like to say scornfully that industrial policy is about “governments picking winners.” Picking winner industries is not that hard—even for governments. Most countries trying to climb the ladder of quality and industrial sophistication through selective promotion compiled pretty much the same lists at the same time. Even at the leading edge of the technological frontier, the industries that governments are tempted to promote are largely the same ones picked by the analysts and brokers at investment firms such as Merrill Lynch, Nomura, or Rothschild’s. …
Picking “winner industries” is not the hard part; winning is. It is difficult to create actual winners, companies that develop into successful competitors.
And that, of course, is where export discipline comes in.
The Tangled Woof 
Great to see a paper which emphasizes the need for governments to promote industries higher up the value chain.
It’s true that picking broad industry areas isn’t so difficult, but the specific technologies which become very successful- e.g. deep take a lot of experimentation and selection; – something which markets may be more effective at; since the feedback loop is tighter.
I agree, and should have said this more clearly – picking the broad direction is probably fairly straightforward, but excessive specificity is at much greater risk of going wrong.
Sorry pressed submit too soon…
As an example I was going to suggest deep Q learning as an example of a specific approach in AI which became very successful, and which was developed by what was a small company which would have likely escaped government attention. But as someone who works in tech it’s clear that investors and companies jump on the bandwagon for trending technologies as much as governments do.
I’d be interested to hear your thoughts on how support from government can be optimized, personally I think it’s most effective when it’s focused on fundamental, capital intensive work which aren’t easy to commercialize, e.g. nuclear power.
I’m surprised to see that the Cherif and Hasanov paper ignores the writing of economists on Japan, and instead leans on Chal Johnson, who was trained as a Sovietologist and then worked on China and was convinced that government was powerful. MITI (the Min of Intl Trade and Industry, now METI) said they were promoting industry, it happened and therefore they were effective – which is nonsense. Your own analysis of the BRI closer to what happened inside MITI, where in response to the domestic political economy in the “high growth era” the resources were devoted to the largest industries, such as coal and textiles and shipbuilding, and not electronics, light consumer goods or motor vehicles. Agriculture though was supported, because the US-imposed electoral system gave disproportionate weight to rural-based politicians. (With up to 5 members of the Diet elected from a district, a candidate with 1/6th + 1 vote was sure to be elected, making the farm lobby and the construction lobby the 2 strongest in the polity.)
The 1988 volume Ryutaro Komiya, Masahiro Okuno and Kotaro Suzumura (eds.), Industrial Policy of Japan, Academic Press, is particularly good with chapters written by experts on individual industries. I find it odd that later proponents of industrial policy systematically ignore that and other parts of the literature. My own work though has focused on Japan (for research) and China (for teaching), so I have to admit to having a row of books on Korea that remain unread. Oh, and the core players in the Japanese motor vehicle industry until 1936 were Ford and General Motors, both of which had factories there. Then protectionism kicked in, as the Army focused on domestic companies as “secure” sources of military transport, and their favorite national champion, Isuzu, never did very well. But after the war, behind high tariffs, 30-odd producers sprang into being, turning out small farm vehicles and 3-wheelers, alongside a large array of motorcycle producers (which, in general, were uninterested in turning out cars & trucks).