Industrial policy: evidence

Summary

The video explores the effectiveness of industrial policy, particularly government efforts to pick economic winners through tariffs and trade protections. It finds that while tariffs generally hinder growth, greater international trade boosts economic performance. Success stories of industrial policy are more often seen in East Asia, particularly in South Korea, Taiwan, and Singapore, where strong investments in education, skilled labor, and flexible markets contributed to growth. However, industrial policy's success is often intertwined with broader reforms, such as liberalization, and fails when marred by corruption or poor implementation, as seen in Africa, Latin America, and India.

Takeaways

• 😀 Protectionist policies, such as trade tariffs, generally do not promote economic growth and may even hinder it.
• 😀 A larger share of the economy devoted to international trade tends to help economic growth.
• 😀 Successful industrial policies typically involve more international trade, education, flexible labor markets, and good infrastructure.
• 😀 Industrial policy has had more failures than successes globally, especially in regions like Sub-Saharan Africa, North Africa, and the Middle East.
• 😀 Import substitution industrialization worked for a time in Latin America but stopped being effective after the 1960s.
• 😀 The industrial policies of India post-WWII were largely unsuccessful due to corruption and inefficiency.
• 😀 India’s economic reforms in the 1990s, which reversed industrial policies, are considered successful and contributed to economic growth.
• 😀 East Asian economies, like South Korea, Taiwan, and Singapore, have seen more success with industrial policies, especially when combined with education and skilled labor development.
• 😀 In the case of China, it’s difficult to separate the impact of industrial policies from the broader liberalization efforts, but the former did accelerate the rise of a new entrepreneurial class.
• 😀 Japan’s industrial policies, while often cited as successful, primarily focused on sectors like agriculture rather than electronics and automobiles in the 1955-1980 period.
• 😀 East Asian success with industrial policy can be attributed to factors like low wages, high potential productivity, and a strong focus on public welfare from bureaucrats and government officials.

Q & A

What is industrial policy and how is it defined in the script?

Industrial policy refers to deliberate governmental efforts to pick 'winners' at the industry or firm level to promote economic growth. The policy involves selective government intervention in markets to favor specific sectors or companies.

What general observation does the script make regarding trade protectionism and economic growth?

The script observes that, on average, trade protectionism, such as tariffs, does not seem to help economic growth and may even hinder it. Protectionist policies are not generally conducive to fostering growth.

How does the share of an economy devoted to international trade affect economic growth according to the video?

The script highlights that having a larger share of the economy involved in international trade generally helps foster economic growth. Policies that encourage trade and integration with the global market tend to promote better outcomes.

What other factors, besides industrial policy, contribute to its potential success?

For industrial policy to succeed, it is often combined with strong investments in education, flexible labor markets, and good infrastructure. These factors create an environment conducive to the success of industrial policies.

Why is it challenging to evaluate industrial policy in a cross-country context?

Evaluating industrial policy across countries is difficult because the concept is hard to measure, and it is applied differently in various regions. The specific nature of industrial policy varies, making empirical analysis complex.

What does the script say about the success of industrial policy in Sub-Saharan Africa and North Africa?

The script suggests that industrial policy in Sub-Saharan Africa and North Africa largely failed after World War II, particularly following the departure of colonial powers. These regions faced significant challenges in making industrial policy effective.

What was the outcome of industrial policy in Latin America in the mid-20th century?

In Latin America, industrial policy, particularly the import substitution strategies used in the 1950s and 1960s, was somewhat successful initially but stopped yielding positive results after that period.

How did India’s industrial policies affect its economic growth after World War II?

India's industrial policies after World War II generally did not lead to good economic outcomes, largely due to corruption and inefficiencies in the system. However, India’s economic growth improved after the 1990s reforms, which reversed many protectionist policies.

Why is China’s industrial policy difficult to evaluate?

China’s industrial policy is hard to evaluate because it was implemented alongside significant liberalization reforms. While industrial policies in the short term may have promoted business growth, it is unclear how much of China’s success can be attributed to industrial policy versus the broader liberalization efforts.

What role did education and labor market flexibility play in the success of industrial policy in East Asia?

In East Asia, successful industrial policies were often paired with strong investments in education and training, resulting in a high-skilled labor force. Additionally, flexible labor markets allowed these economies to allocate resources efficiently, contributing to economic success.