TFR 19 – Industrial Policy and the International Economy
The 1970s have been years of severe stress in our economies. Inflation in most countries has remained high. Unemployment has been stubbornly persistent. Many industries have suffered from slack markets, dismissals, low profits and low investment. There has been a search for an explanation of these troubles and for policies that will put them right. Many have stressed the supply of dollars and the coinciding of pre-electoral monetary excesses in several countries before 1974, which stoked the commodity boom and the upward thrust of energy prices. The consequent inflation, unemployment and external deficits posed an extraordinary problem for global demand management. There is a proper determination not to allow such excesses to recur. Yet when stagflation and industrial malaise are still so pervasive over five years after the abnormal turbulence began, it is natural to ask whether reasonably prudent demand management is by itself enough to cure these modern economic ills.
A. THE CHALLENGE OF STRUCTURAL CHANGE
It may well be that the difficulties are not only cyclical, and hence amenable to demand management, but also structural: They may require a reallocation of resources in the economy which takes time and money to achieve. So long as major structural changes are required, one could expect high unemployment or high inflation or both, as the forces for change press against established positions in the economy.
There are indeed grounds to believe that the contemporary economy is squeezed between growing pressures for change and growing resistances to them. There are great changes in the size and structure of populations, the composition of demand, the use of technology and the relationship of these with the earth's resources. While technological advance has been rapid for over a quarter of a century, a further acceleration is expected with the new developments in microelectronics.
The imbalance between the distribution of people and of production throughout the world is being adjusted by the emergence of the newly industrializing countries; and the imbalance is so big that the process still has a very long way to go, with vast implications for the economic structure of the industrialized part of the world. While this process is a continuing one, it is also more rapid than it used to be, because of the speed with which new technologies can be applied in a growing number of countries outside the old industrial centers.
Social and political changes have introduced strong new demands, such as protection of the environment, which also impose a need for industrial adjustment.
The cost of structural changes and the time they take have also escalated. Many industries have become so skill- and capital-intensive that costly investments are lost if production is wound up; and their replacement by new forms of economic activity may require still more costly and time-consuming investment in new skills and equipment. Rather than close down capital-intensive plant, manufacturers are inclined to continue production even if competition has forced prices down so that capital costs are no longer covered for some contribution to the capital costs is better than none. Legislation and practice on dismissals have extended this problem in many countries by giving labor some of the characteristics of a fixed cost. Thus overcapacity in an industry can last a long time, with firms that have big financial resources or largely written-off capital maintaining some production without generating the ability to invest in future development.
The costs and delays in structural change that are built into the modern economy are supplemented by social and political forces. Where a decent living standard is provided for the unemployed, this discourages occupational and geographical mobility. The immobility of workers contrasts with the mobility of enterprises, causing social tensions and unemployment. The workers' reluctance to accept the costs of change is articulated in many countries by strong trade unions. Interest groups press for subsidies to prevent the closure of plants. The large part of national product in the public sector is yet more open to political pressure, often from groups defending the status quo. Pressure for greater equality erodes the incentives for firms and individuals to accept the inconvenience of change. Many of these developments represent choices which societies and individuals are entitled to make. But they must recognize that there may be a price to pay, in a loss of economic efficiency and hence of real income.
Unemployment and low growth accentuate the resistance to change. People will defend their jobs more tenaciously if a new one is hard to find. Firms seek protection more readily if new competitors enter a static market. There is now a school of "growth pessimists" who expect that growth will continue at present rates and unemployment persist for many years. If economic and social resistances to structural adaptation are a brake on growth, this brake may be lifted by policies to reduce the economic and social costs of change and to increase the rewards for accepting it. The growth rate could in this way be increased and the costs and inconvenience of change thus further reduced. But because the structural characteristics of the modern economy will still be there when employment and growth are high, the need for policies for structural adaptation will remain, even if the demand for them may be less intense.
B. STRUCTURAL AND INDUSTRIAL POLICIES
Whether this rationale for policies to influence the structure of the economy is accepted or not, it can hardly be denied that such policies exist. The writers of a report about them are not confronted by scarcity: The problem is, on the contrary, their abundance and variety.
It is hard to define a target which is so complex and moving so fast. In a sense, almost all policies are relevant since they affect the various industries differently. For instance, reflation and deflation have a disproportionate impact on sectors of engineering. Since the costs of adjustment to such swings are borne both by particular sectors and by the economy as a whole, these costs need to be assessed and the system of policymaking should be able to take them into account. But the structural effects of global demand management are not the subject of this report. Nor can we give adequate attention to one of the measures of greatest importance to industry: taxation. We are concerned here with policy whose main purpose is to influence the economic structure.
A number of branches of such policy have a powerful influence on the structure of industry, including regional, capital market and manpower policy. These can be used to achieve the same objectives as industrial policy more narrowly defined, and the greatest impact on an industrial problem will often be made by a combination among them. An effective policy system must coordinate them closely. But here again, a report of moderate length cannot explore all of these complex issues in any detail.
We concentrate, therefore, on industrial policy that aims directly to affect the structure of industry rather than influencing it indirectly through a primary emphasis on regions, capital markets, the labor force, or health, safety, and the environment. Thus we include policies directed at sectors of industry or types of enterprise; promotion of innovation or research and development; the encouragement of mergers; and not least importantly, in market and enterprise economies, competition and antitrust policies. Rather than use more space on definition, we hope the reader will recognize this ungainly animal in the examples and analysis that follow.
C. INDUSTRIAL POLICY AND THE INTERNATIONAL ECONOMY
At least some of the industrialized countries find it hard to adapt their systems of economic management to make effective structural and industrial policies. This difficulty is compounded by the internationalization of the modern economy. The growth of trade, of capital movements, of multinational companies, and of technological transfers relates to these policies in two ways.
First, the international movement of goods or factors of production can undermine national policies. Monetary policy can be upset by international movements of capital, and industrial policy by international trade or multinational companies. The reaction can be either to abandon the affected national policies, to seek the same result through international cooperation or integration, or to protect the national economy from the international influence.
Second, national industrial policies can undermine the international economic order. They can distort international trade by impeding imports or subsidizing exports, either of which invites retaliatory distortion. Where national governments exclude international influence by means of protection, the separation of markets can be brutal and direct. An accumulation of such acts erodes the system of trade cooperation that has been so carefully built up since 1945 and raises the specter of a return to the condition of the 1930s, with escalating political conflicts and a return to autarky and hence to a lower economic and technological level.
The conventional response in the GATT has been to try to remove the national policies that distort trade. But their social and political importance and the character of the instruments with which they are implemented carry some of these policies beyond the reach of this conventional approach. The new codes drawn up in the Multilateral Trade Negotiations do reach beyond the classical instruments of trade policy (tariffs, quotas, export subsidies) to apply to some major instruments of industrial policy (domestic subsidies, public procurement) and aim not to suppress the policies but to modify them in so far as they affect the trade of partner countries. To resolve the international conflicts while achieving the legitimate aims of industrial policy, however, it may be found necessary to go farther towards cooperative or even integrated industrial policies, as has been done within the European Community.
The experience of the Community, while it shows that this can be done, also demonstrates the obstacles in the divergences of national policies and, behind them, the diversity of national economic structures, political systems, societies, cultures and histories. If this diversity is wide among the Community countries, it is wider still among the industrialized countries as a whole. Since the divergent national policies stem from these diverse national contexts and consequently differing national needs, the conflicts to which they give rise can hardly be resolved without a full understanding of the differences. This may require economists to concentrate more on the old subject of political economy than some of them have done in recent years.
Our report makes a modest attempt to illustrate the differences that must be understood. After giving some examples of industrial policy to help flesh out the definition of the subject, and then examining some of the reactions and worries to which such policies give rise, we include a chapter on industrial policies in each of our three regions. We then consider various types of industrial policy and criteria to evaluate them. To save the reader from any unnecessary suspense, we can say at the outset that we as a group are fairly agnostic as to specific policies, partly because we differ somewhat among ourselves on the issue, and partly because of a certain prudence about laying down general principles to govern highly complicated particular cases. We do, however, agree on a number of criteria which we hope may be of some help to those who have to deal with the particular problems.
We end with a chapter on the international aspects of industrial policy. Here again we are reluctant to lay down the law on specific industrial cases. But we are united in a profound conviction than an international framework must be established to resolve the potentially dangerous conflicts and to help our countries harmonize and support their mutual objectives and those of their partners in the other regions of the world.
John Pinder, Director, Policy Studies Institute, London
Takashi Hosomi, Advisor, Industrial Bank of Japan, Tokyo
William Diebold, Senior Research Fellow, Council on Foreign Relations, New York
Eisuke Sakikibara, Associate Professor of Economics, Saitama University, Urawa (Special Consultant)
Wolfgang Hager, Senior Fellow, Research Institute of the German Society for Foreign Affairs, Bonn (Special Consultant)
Table of Contents
A. The Challenge of Structural Change
B. Structural and Industrial Policies
C. Industrial Policy and the International Economy
II. The Rise of Industrial Policy
A. Examples from Earlier Decades
B. Proliferation in the 1970s
C. Worries about Industrial Policy
D. Trilateral Stereotypes
III. Japan, North America, Western Europe
- Stages of Postwar Industrial Policy
- Need for a New Guiding Concept
C. United States
- Past Cases
- Adjustment and Investment
- Energy and Steel
- United Kingdom
- European Community
IV. Guideposts for Industrial Policy
A. Aims and Values
B. Background Factors
- Government-Industry Cooperation
C. Types of Policies: General and Sectoral
D. Types of Policies: Defensive, Stabilization, Positive
Defensive and Adaptive Policies for Old Sectors
Stabilization in Capital-Intensive Industries
Innovation and New Industry
E. Criteria for Implementation
V. International Aspects
A. The Multilateral Trade Negotiations (MTN)
B. Investment and Multinational Corporations
C. Developing Countries
D. The Soviet Union and Eastern Europe
E. Sectoral Arrangements and Competition Policy
- Competition Policy
F. General Industrial Policy Measures
G. An Institutional Focus: A Working Party on Industrial Policy
VI. Summary of Conclusions and Recommendations
Appendix I: The OECD "Orientations"
Appendix II: Summary of Discussion in Trilateral Commission Meeting
- Topics: Economics, Trade
- Region: North America, Europe, Middle East, Africa, Pacific Asia
- Publisher: The Trilateral Commission
- Publication Date: © 1979
- ISBN: 0-930503-35-X
- Pages: 82
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