Wk. 6 L.11 Industrial Policy and Economic Security

Collective action likelihood and effect of scarcity?

What is industrial policy?

-       OECD: “government assistance to businesses to boost or reshape specific economic activities.”

-       Firms chosen based on their activity, technology, location, size or age.

-       To address “economic, social and environmental challenges that markets cannot address on their own.”

o   Accelerate green transition

o   Improve the robustness of value chains for critical products and services.

industrial policy today vs historically?

-       Historically:

o   Support new manufacturing -> fostering economic development

o   Support industries critical to the military

o   Try to get ahead in new technologies.

-       Today

o   Try to get ahead in new technologies.

o   Establish supply chain resilience

Industrial policy is often associated with East Asia — elaborate on example of Japan, specifically MITI?

-       MITI: Ministry of International Trade and Industry (Japan)

o   Central role in Japan's post-war recovery and growth.

-       Key Functions:

o   Industrial policy: Directed resources toward strategic industries
(e.g., electronics, automotive)

o   Government-business cooperation: Facilitated collaboration between government, business, and banks

o   Technological development: Promoted R&D and technology transfer from abroad

-       Tools of MITI:

o   Subsidies, low-interest loans, and tax incentives for targeted industries

o   Regulation of imports and promotion of exports

-       Argument: MITI helped shape Japan's rapid industrial growth, making it
a global economic power by the 1970s

 

CME – gov facilitates economic development and growth

Countries of the East Asian miracle?

-       Countries in Focus:

o   Hong Kong, Indonesia, Japan, Republic of Korea, Malaysia, Singapore, Taiwan, Thailand

-       Key Takeaway:

o   “Not a formula or recipe, but a list of ingredients.”

What policies/choices allowed these miracles to emerge?

-       High savings rate

-       High human capital accumulation (education)

-       Market-oriented environment

-       Active government intervention

-       Investment in technological development

-       Stiglitz’s Summary:

o   "High savings rates interacting with high levels of human capital accumulation in a stable, market-oriented environment, with active government intervention conducive to technology transfer."

What are Stiglitz’s four key questions?

-       Why were savings rates so high?

-       Why was investment so efficient?

-       How was the technology gap reduced so quickly?

-       How was relatively low inequality achieved?

Stiglitz Q1 Why were savings rates high?

-       Household savings

-       Weak capital markets.

-       Government creates institutions to promote savings and extend credit.

o   Japan Post Bank: Used to be largest financial institution in the world.

o   Fiscal Investment and Loan Program

  Funds distributed through FILP totalled 1/2 to 1/3 of national budget.

o   Government creates bond markets.

 

Stiglitz Q2 Why was investment efficient? Meritocratic democracy

-       Directed to places that would increase growth and stability.

-       Allowed FDI – foreign direct investment was not restricted

-       Impeded capital movement into unproductive or speculative sectors.

Saved ingovernment-run institutionsthat could invest in key sectors.

Stiglitz Q3 How was technology gap reduced?

-       High investment in human capital

-       Focused (subsidized) investment in technologically advanced sectors.

Builtscience centresand tech-orientedindustrial parks.
• Give one firmtechnological licensing agreement: but make them
share technology later.

Stiglitz Q4 How was relatively low inequality achieved?

-       Kuznets curve suggests growth should come with inequality.

-       Limit salaries of top managers.

-       Limited housing speculation.

-       High investment in (universal) education.

-       Land reforms

o   Large landholdings redistributed to tenant farmers.

o   Reduces rents and promotes efficiency and productivity.

Note that agricultural also often received protections and
subsidies.

Is industrial policy like central planning?

Central planning?

-       No, still a market-based approach.

-       Imperfect information, incomplete markets create externalities (e.g., under- investment in tech, education, health) (Greenwald and Stiglitz 1986).

o   Some positive externalities not adequately rewarded.

Some risks uninsurable and unavoidable.

What is the government’s role in IP?

-       Government’s role is:

o   To correct for market failure.

o   Provide or create information.

o   Minimise risk through subsidies, regulations, and guidance.

o   Build markets (e.g., bond, equity).

Subsidise sectors with positive externalities.

Recognize limits of markets while limiting government to:

-       Recognize limits of markets while limiting government to:

o   Ensuring macroeconomic stability (Keynesianism)

o   Regulating financial markets

o   Creating new markets

o   Directing (private and government) investment

  (Small) government investment has spillovers.

o   Courting private investment (domestic and foreign)

 

What is marketcraft?

-       Central planning replaces markets

-       Industrial policy creates and regulates them (marketcraft).

-       Markets require creation and nurturing

-       Savings markets (postal savings or other banks)

-       Credit market (development banks)

Bond and equity markets (regulations and exchanges)

Cooperation and coordination in market economies?

-       Remember coordinated market economies?

-       Future returns to cooperation higher than short-term gains from defection.

-       Cooperation between government, business, workers, and firms.

o   Creation of business cooperatives.

o   Lifetime employment, firm-wide performance bonuses

o   Government rewards for cooperation (subsidies, technological licensing, etc.)

o   Example, Taiwan: subsidies for brand recognition.

  Why? Spillovers to rest of economy if Taiwanese firms known for high quality.

What is export oriented growth?

-       Investment in infrastructure to support exports

-       Preferential credit and subsidies for export-oriented industries

-       Marketing schemes promoting quality products abroad.

-       Why focus on exports?

o   Forces firms to be competitive.

o   Note geopolitical factors

Key factors of export oriented growth?

-       Investment in education and technology

-       Discouraging capital allocation to unproductive sectors.

-       Encouraging and subsidizing capital allocation to productive sectors.

-       Promoting export-oriented industries.

-       Encouraging FDI

 

Challenges of industrial policy?

-       Imperfect information may lead to wrong investments

-       Corruption, regulatory capture, and rent-seeking distort investments

-       East Asia’s solution:

o   Performance-based government subsidies and investment

o   Merit-based civil service

Criticisms of industrial policy?

-       Government intervention is distortionary

o   Duh, that’s the point.

-       Picking winners and losers

o   May pick losers and therefore allocate resources inefficiently.

o   Misallocation of capital

o   Successful industrial policy requires letting losers go.

-       Risk of corruption and rent seeking

o   Firms focus on getting government aid, leading to bribery and inefficiency.

-       Inefficiency and lack of competitiveness

Global trade conflicts

Picking losers?

What about modern industrial policy?

-       Less about catching up, more about staying ahead.

o   Fostering technological innovation, digital transformation, and green energy.

o   Classic focused on heavy industry and intermediate goods.

-       Government more of a facilitator than guider

o   Supporting R&D, innovation, and infrastructure.

o   But subsidies and low-interest loans still exist.

-       Focus on facilitating leading in cutting-edge technologies (AI, semiconductors, etc.)

What about alternative industrial policies?

-       Import-substitution industrialization (ISI)

o   Aimed at reducing dependency on imports and foster domestic self-sufficiency.

o   Barriers to trade (tariffs and/or quotas).

o   Discourage FDI

o   Overvalued currency to help manufacturers import capital intensive equipment.

o   Outcomes

o   Mixed to poor.

o   Inefficiency, limited innovation, low global competitiveness.

o   Many countries shifted to export oriented models.

Success of Chinese industrial policy and criticisms?

-       Focus on becoming a leader in clean energy products.

o   75% of clean-energy manufacturing investment.

-       Much higher spending as a percentage of GDP on industrial support.

o   Low-cost loans from state banks

o   Under market rate land deals

-       Criticisms

o   Undermining trade deals

o   IP theft

o   Forced labour use

Micro vs macro economic security?

Micro:

-       Focus on households and individuals (income stability, access to safety nets, job security, etc.)

Macro:

-       National or supranational economies Maintaining national economic stability and reducing risks.

EUROPEAN commission on economic security?

-       “Promoting the EU's economic base and competitiveness; protecting against risks; and partnering with the broadest possible range of countries to address shared concerns and interests” (European Commission, 2023).

-       Acknowledges economic risks as a dimension of national security.

-       Backup plans for crises

o   Pandemics

o   Wars

Climate-change related disruptions and disasters.

What is ES about?

-       Building resilient supply chains

-       Building resilient critical infrastructure

-       Responding to nonmarket policies and practices

-       Addressing economic coercion

-       Countering harmful practices in the digital sphere

-       Cooperating on international standard setting

Preventing leakage of crucial and emerging technologies

ES for a nation and key aspects?

-       Ability of a nation to safeguard economic interests, ensure economic growth, and protect against threats such as supply chain disruptions, financial crises, and trade conflicts.

-       Key Aspects:

o   Stable access to resources (energy, raw materials, food).

o   Resilient supply chains that withstand global shocks.

o   Protection from financial or trade vulnerabilities.

o   Sustained technological and industrial capacity.

Link of ES and IP?

-       Industrial policy used to strengthen economic security by developing self- sufficiency in key industries.

-       Objectives:

o   Develop strategic industries (e.g., technology, manufacturing).

o   Reduce dependence on foreign supplies for critical goods.

o   Enhance domestic innovation and production capabilities.

-       Modern Focus:

Industrial policy now also addresses vulnerabilities in emerging technologies (AI, robotics) and critical sectors like pharmaceuticals and semiconductors.

Industrial policy for ES?

-       Strategic Technologies: Investments in sectors like semiconductors, AI, and green energy.

-       Key Legislation: European Chips Act, Critical Raw Materials Act, and Net-Zero Industry Act to strengthen strategic industries.

 

-       Arguments that Chinese EVs are more competitive due to state subsidies.

-       Protecting growing green industries.

-       Think back to industrial policy strategies for growth → is latter recommended?

What about energy security and key considerations?

-       Energy security = having reliable, affordable, and sustainable access to energy.

-       Key Considerations:

o   Diversification: Avoid reliance on a single supplier or type of energy (e.g., oil, natural gas).

o   Infrastructure upgrades (transmission and storage)

o   Energy independence: Ensure domestic energy sources (usually renewable)

  Positive returns that are underestimated by markets.

o   Energy can be used as a political tool (e.g., oil
embargoes, natural gas cutoffs).

 

-       US oil and steel embargo after Japanese invasion of China

-       80% of Japan’s oil came from the US

Heavy reliance on American oil made Japan highly vulnerable.

Critical minerals and challenges?

-       Energy security = having reliable, affordable, and sustainable access to energy.

-       Key Considerations:

-       Lithium, cobalt, etc. essential for modern technologies (e.g., batteries, electronics, renewable energy).

-       Challenges:

o   Geopolitical control: Certain countries (e.g., China) dominate the extraction and processing of critical minerals.

o   This creates supply chain vulnerabilities.

-       Sustainability concerns: Mining and refining can lead to environmental damage.

-       Response:

o   Diversify supply sources.

o   Develop recycling technologies.

-       EU Critical Raw Materials Act: Aimed at securing reliable supply chains and reducing dependency on non-EU countries for essential resources (rare earths, lithium, cobalt, nickel, silicon).

Supply chains and vulnerabilities?

-       Supply chains vulnerable to disruptions from pandemics, political conflicts, and natural disasters.

-       Risks:

o   Concentration of production: Over-reliance on one region or country for key components.

o   Just-in-time manufacturing: Efficiency but increases risk in the event of supply shocks.

-       Resilience Strategies:

o   Diversification of suppliers and production locations.

o   Onshoring, nearshoring, and “friendshoring”: Bringing manufacturing closer to home or to allies to reduce reliance on distant suppliers or geopolitical rivals.

o   Building buffer stocks of essential goods.

o   Making your own economy critical to global supply chains (“strategic indispensability”).

 

What is economic coercion?

-       Use of economic measures (e.g., sanctions, tariffs, trade restrictions) by one country to pressure another country into changing its policies.

-       Solutions:

o   Trade defense measures (anti-dumping duties, countervailing tariffs, temporary restrictions to protect domestic industries)

o   Retaliation

o   Limiting market access to counter economic threats.

Goal: Pre-defined deterrence from using

Link between ES and national defence?

-       Maintaining military capabilities requires secure access to critical goods like steel, semiconductors, and energy.

-       National Security Concerns:

o   Ensuring the availability of defense materials during crises.

o   Cybersecurity: Protection from hacking and cyberattacks.

-       Policy Response:

o   Government partnerships with the private sector to safeguard defense supply chains.

  Also increase compatibility of cross-national defense infrastructure.

  “the [European] Commission has a central role in economic affairs that it does not have in security or defence policy (European Parliament 2024).

o   Strategic stockpiling of critical materials.

 

What is technological sovereignty?

-       Ensuring control over key technologies (e.g., AI, semiconductors) increasingly seen as essential for economic security.

-       Government Support:

o   Investment in R&D to lead in emerging technologies.

o   Subsidies and incentives to strengthen domestic tech industries.

-       Strategic alliances with like-minded nations to collaborate on technological development.

o   E.g., semi-conductor production networks.

-       Risks:

o   Dependence on foreign technologies can expose a country to supply disruptions and espionage.

o   Falling behind in critical technologies can reduce global competitiveness.

Infrastructure for technological sovereignty?

-       Strengthen security of physical and cyber infrastructure against foreign interference.

Screen foreign investments and ventures to precent technological leakage and industrial espionage.

Summary/ conclusion

-       Industrial policy traditional thought of as a tool for guiding and increasing speed of development in emerging economies.

-       Recent resurgence as countries try to maintain competitive advantages in critical sectors.

-       Industrial policy tightly linked to economic security policy

-       Guiding state resources to critical sectors

-       Investing in education and infrastructure in chosen sectors.

-       Picking winners and losers to target with state support.