Thursday
Apr122012

Industrial policy déjà vu 

Much of development economics is about coming up with ways of solving the problem of development. Some people emphasize the need to create more randomized experiments to validate specific programs. Others advocate foreign aid and other outside interventions. Yet others draw inferences from macroeconomic success, for example from the East Asian experience, and advocate “industrial policy” — government support for specific industries or firms that create jobs or generate positive spillovers on others.

All countries use some sort of industrial policy. Moreover, one specific type of industrial policy is clearly much needed all around the world today: support for clean energy to reduce global carbon emissions.

Is industrial policy the next big thing in economic development? Perhaps even for the United States? Some people think so (see, for example, this Washington Post column by Ezra Klein).

Actually, the real question is not whether industrial policy is the next big thing, but whether it should be.

Industrial policy is not new as a solution to development problems. Indeed, it was all the rage in the early 1960s as many former colonies became independent nations. Just at this time a young English economist, Tony Killick, straight out of university, went off to work for the government of Ghana just as it launched its own industrial policy. It did this in the light of the then existing state of the art economic theories, such as the Big Push (see our blog post on this).

But it all went terribly wrong.

In a sense the government did achieve a big push. It presided over an 80% increase in the capital stock between 1960-1965, 60% of which being by the public sector (80% of non-residential investment). The problem was in the way this investment was allocated. Years later Killick sat down and wrote one of the most important books on solving the problems of poverty Development Economics in Action.

The book starts by describing the theories and then shows how they all went wrong because they ignored politics. Take his description of a big public project designed to be part of the big push: a fruit canning factory “for the production of mango products.” Unfortunately “there was recognized to be no local market” and the output of the factory “was said to exceed by some multiple the total world trade in such items” (p.229). The government’s own report on this factory is worth quoting at some length (from p. 233 Killick’s book)

Project: A factory is to be erected at Wenchi, Brong Ahafo, to produce 7,000 tons of mangoes and 5,300 tons of tomatoes per annum. If average yields of crops in that area will be 5 tons per acre per annum for mangoes and 5 tons per acre for tomatoes, there should be 1,400 acres of mangoes and 1,060 acres of tomatoes in the field to supply the factory.

The Problem: The present supply of mangoes in the area is from a few trees scattered in the bush and tomatoes are not grown on commercial scale, and so the production of these crops will have to start from scratch. Mangoes take 5-7 years from planting to start fruiting. How to obtain sufficient planting materials and to organize production of raw materials quickly become the major problems of this project.

Killick’s acerbic comment on this, stated a whole year before the factory was constructed, sums it up:

it is difficult to imagine a more damning commentary on the efficiency of project planning.

This was not an isolated case. Such “white elephants” of development were widespread and Killick discusses many more. What on earth was going on?

The Ghanaian government had good economists advising them, like Killick and even Nobel Laureate Arthur Lewis. The problem was that the whole industrial policy was subservient to politics. If the government of President Nkrumah needed support in Brong Ahafo, for example, then he needed to give people jobs, and he built a factory there to achieve that. Politics came before economic efficiency. This, unfortunately, has been the general pattern with industrial policy. The problem is not thinking of situations in which industrial policy might be a good thing, of which there certainly are some. The problem is trying to identify the political situations in which industrial policy can actually be used to address these situations, and that is a much taller order.

There is little reason to think that the new version of industrial policy in the developing world or in the United States will be any different. 

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