Thursday 26 Nov 2020 | 10:04 | SYDNEY
Thursday 26 Nov 2020 | 10:04 | SYDNEY

Reader riposte: China\ industrial policy

21 January 2011 08:51

Kien Choong responds to Sam's post, which questioned whether China is making smart infrastructure choices:

The debate about industrial policy often seem stuck at the level of countering specific instances of allegedly good decisions with other examples of allegedly questionable decisions. Might it be time to move on and acknowledge that: (a) there are many decisions that governments simply cannot avoid making; and (b) the task for governments is not so much in avoiding any mistakes whatsoever, but in improving the government's capacity to make good decisions overall. 

A pharmaceutical company does not expect to make a profit from every research project it invests in; rather, the goal is to optimise the overall value of the portfolio of research projects engaged in by the company. It seems stupid to point to specific instances of failed projects or successful projects to evaluate how good the pharmaceutical company is doing. Yet, that seems to be the level at which we often seem to debate a country's capacity to make good decisions.

As for the notion that only China engages in industrial policy, let us hear what Professor Dani Rodrik has to say at Project Syndicate on 'The Return of Industrial Policy':

But when it comes to industrial policy, it is the United States that takes the cake. This is ironic, because the term “industrial policy” is anathema in American political discourse.  It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs.

Yet the US owes much of its innovative prowess to government support. As Harvard Business School professor Josh Lerner explains in his book Boulevard of Broken Dreams, US Department of Defense contracts played a crucial role in accelerating the early growth of Silicon Valley. The Internet, possibly the most significant innovation of our time, grew out of a Defense Department project initiated in 1969.

Nor is America’s embrace of industrial policy a matter of historical interest only. Today the US federal government is the world’s biggest venture capitalist by far. According to The Wall Street Journal, the US Department of Energy (DOE) alone is planning to spend more than $40 billion in loans and grants to encourage private firms to develop green technologies, such as electric cars, new batteries, wind turbines, and solar panels. During the first three quarters on 2009, private venture capital firms invested less than $3 billion combined in this sector. The DOE invested $13 billion...

...The standard rap against industrial policy is that governments cannot pick winners. Of course they can’t, but that is largely irrelevant. What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go – a much less demanding requirement. Uncertainty ensures that even optimal policies will lead to mistakes. The trick is for governments to recognize those mistakes and withdraw support before they become too costly.

Thomas Watson, the founder of IBM, once said, “If you want to succeed, raise your error rate.” A government that makes no mistakes when promoting industry is one that makes the bigger mistake of not trying hard enough.