Mai Baap Sarkar, But It’s Not What You Think

Heather Wallace’s oldest son, 8-year-old Aiden, was driving his two brothers crazy in the car as they all returned from karate one afternoon in October 2021. Wallace asked Aiden to walk the rest of the way home—half a mile in quiet, suburban Waco, Texas—so that he could calm down.
For this she was arrested, handcuffed, and thrown in jail.
She was charged with endangering a child, a felony carrying a mandatory minimum of two years in prison.

https://reason.com/2022/11/16/suburban-mom-jailed-handcuffed-cps-son-walk-home/

Ridiculous, no? Read the rest of the article, if you like, but it only gets crazier and crazier. The state doth interfere too much in this instance, if you ask me.

But on the other hand, I don’t think the state should have no rules regarding parenting. Should a two year old toddler be allowed to fly alone, for instance? Definitely not, period. Now, if you are a libertarian, you might say that this need not be a rule imposed by the government, and that private airlines are perfectly capable of setting up and implementing such rules. Well, yes, ok, but I’m ok with the government setting up a rule that says that even if a private airline wanted to, it couldn’t allow a two-year-old toddler to fly alone. Not government overreach, this is fine (to me).

As with everything else in life, it ultimately comes down to that age old question: where should one draw the line?

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And so’s the case with industrial policy. Where should the government draw the line?

Should there be no interference at all, and laissez-faire all the way? Or should there be no free markets when it comes to industrialization at all, and state sponsored industrialization all the way?

Or (and you knew this was coming, didn’t you?) does the truth lie somewhere in the middle?

We started this blogpost with a parenting story, and I’d like to return to the same theme. The question that I asked re: industrial policy can also be repurposed as a deeply philosophical question to parents!

Should there be no interference at all, and laissez-faire all the way? Or should there be no freedom for decision-making on part of parents at all, and the state decides every damn thing all the way?

In fact, I’ll go one better, and put on my consultant’s hat and give you a nice shiny 2×2 matrix to play around with:

Each of us has a way of dealing with kids, regardless of whether we’re parents or otherwise. But parents in particular will tell you that parenting styles need to change as the kids grow older. My daughter, for example, turned ten recently, and now spends an increasing amount of time in her room, as opposed to hanging out with us. Folks with kids older than our daughter tell us that this will only get worse over time, and I don’t look forward to that phase at all. But our parenting style now cannot possibly be the same as it was, say, five years ago.

And as with parenting, so also with industrial policy. I don’t think there is, or ought to be, a one size fits all answer to the question “How should one think about industrial policy?”. Non-economists might not like this answer, but it really does depend!

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That being said, economists shouldn’t get a get out of jail free card either. It isn’t enough to say that hey, I cannot give you a one size fits all answer, and that it depends. “Depends on what?” is an entirely fair question to ask!

1. How dependent do you wish to be on other nations for the production of goods and services? A lot us (myself included) were forced to think about our answers to this question in light of the pandemic and the fragility of global supply chains. “Fragility” is a loaded word in this context, and it is doing a lot of work in the previous sentence. Did we worship too much at the altar of efficiency, and did we underrate resilience, when it came to global supply chains? As just one example, see API’s in the pharmaceutical industry. What about defence goods? What about semiconductors? What about AI? When global economic efficiency is thwarted by geopolitical considerations (or the other way around, if you prefer), how should we prioritize, and why?
   I should be clear, I don’t have the answer to this question for all countries at all points of time. But the answer to the question “How should one think about industrial policy” does depend on this aspect. That much I’m willing to take a stand on.
2. Are other nations, some of whom are your direct competitors, engaging in industrial policy? Should you stand idly by, and let firms in your country deal with this issue, or should you step in and “interfere”?
   I’m not asking if Japan should have practiced industrial policy in the 1960’s. I’m asking what the US government should have done when they saw IBM go up against Shigeru Sahashi.
3. Most Indian economists are rightly suspicious of the so-called infant industry argument, and with good reason. If you’ve grown up in the 1970’s (I’m not that old) or the 1980’s (I am that old), you’ve experienced the delights of watching sports events on Crown or Salora TV’s, among other wonderful treats afforded to us by genius level decisions regarding infant industries.
   But don’t make the mistake of throwing the baby out with the bathwater! We got our industrial policy wrong back then, and we’re doing a less than perfect job now – both are entirely reasonable statements. But the infant industry argument is a) a really old one and b) has been used well by some countries in the past, and in the present.
4. Finally, it depends on how you design your incentives. Industrial policy, like parenting, is about the carrot and the stick. Sure you need to put subsidies and other positive incentives in place, but what the good bureaucrat giveth, she also taketh away. And this is an inconvenient truth that most folks would rather not bring up in polite conversation when it comes to industrial policy – those countries that have done a good job of it have not picked winners. They have, instead, weeded out losers!
   “North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. This might have meant a forced merger with a more successful firm, the withdrawal of capital by a state-directed financial system, withholding – or threatening to withhold – production licences, or even the ultimate capitalist sanction, bankruptcy.
   
   Since the 1970s, there has been much talk about state industrial policy in western countries being an attempt to ‘pick winners’ among firms, something that most people would agree is extremely difficult. But this term does not describe what happened in successful developing states in east Asia.
   
   In Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers. Japan developed a government agency as early as the 1930s to ‘rationalise’ different manufacturing sectors through mergers after studying German practice, and reintroduced a similar agency after the Second World War.
   
   The South Korean state was still more direct in its disciplining of underachieving businesses. Most of the top ten chaebol (conglomerates) of the mid 1960s had disappeared through forced mergers and bankruptcy by the mid 1970s, and half of the new group had disappeared by the early 1980s. Few Koreans, let alone foreigners, now know the names of some of the biggest chaebol of the post-war era, such as Samho, Gaepong, Donglip, Shinjin and Dongmyung – and that is because they are long dead.
   
   Another group of huge firms, including Daewoo, Hanbo, Halla and Sammi, was culled by a process of state negotiation and fiat during the Asian financial crisis. In the car industry, half a dozen auto makers were set up in Korea with the help of direct and indirect state subsidies in the 1970s and 1980s. Over the next three decades, most of these firms were killed off. Today only one purely Korean car firm survives, Hyundai (with Kia as its subsidiary). However, the last company standing is the fastest-growing and one of the most successful car firms in the world.”
   
   (Source: Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (p. 77). Grove Atlantic. Kindle Edition.)

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So, should India go in for industrial policy or not?

Once again, it depends, but here’s the summary of what it depends on:

Given geopolitical considerations, game theoretic considerations, our stage of industrial development and incentive design, yes, India should engage in industrial policy.

Have we done a good job with our industrial policy in the past? No.

Are we doing a good job right now? No.

Will we do a good job in the near to medium future? Most likely not, alas.

But can we afford to not practice industrial policy at all? Absolutely not.

It is a long road, but we have no choice but to take it. And that is my take on India and industrial policy!