Tag: brad delong

All About Industrial Policy, Part 1

In 1961, India’s income per person was $86, South Korea’s was $94 and China’s was $76. India was right in the middle of a very poor pack of countries. India’s income per person today is around $2300, China’s is around $12,500 and Korea’s is around $35,000.

Rajan, Raghuram; Lamba, Rohit. Breaking the Mould: Reimagining India’s Economic Future (p. 47). Penguin Random House India Private Limited. Kindle Edition.

Pictures are worth a thousand words, no?

And as I always say whenever this chart comes up in a class I’m teaching, I don’t think it is possible to look at this chart and not ask “Saala, what did they do that we didn’t?”. And because I like to play around with words, I say that some of the students might also wish to ask what we did that they didn’t.

So what did they do?

They enacted “government policies directed at affecting the economic structure of the economy”, in the words of Joseph E. Stiglitz and Justin Lin Yifu. Or if you prefer shorter, simpler phrases, they had better industrial policy.

So what are these government policies directed at affecting the economic structure of the economy? Why are they needed, what effects do they have, who came up with them, and is there anything special about industrial policy as regards India? Let’s deal with each of these questions in turn, one at a time:

What is industrial policy?

Rapid sustained economic development, Rodrik and Stiglitz tell us, requires an explicit strategy.

And almost always since we came up with the idea of rapid (it’s not always been sustainable in more than one sense of the term, alas, about which more later) economic development, the strategy has always had one goal: how can we industrialize better?

Why industrialize at all is a fair question to ask, of course. And the answer is that it is painfully clear to us that you cannot hope to be a developed nation without industrializing first. This becomes clear by doing lots and lots of complicated econometric studies, or by looking at a chart with a lovely title.

It’s a chart called What The Fuck Happened in 1750? And the answer is industrialization. Industrialization happened, starting 1750. Or there and thereabouts, at any rate:

And so what we would like to do is make sure that as many countries industrialize as quickly as possible, so that the citizens of all countries can live a longer, healthier and more productive life. Or that’s the plan hope, at any rate.

So what is industrial policy? It is a policy aimed at industrializing a country as quickly as possible. And if you go and take a look at the India, China and South Korea chart again, you can now look at it as three separate industrial policy experiments. One of them clearly worked when it was implemented, one figured it out a little while later, while the third is beginning to hit its straps only now.

So did these three countries differ in terms of their industrial policy, or did they have the same type of industrial policy, but different qualities of implementation?

Think diets, if that helps. If three of your friends are comparing their weight loss, were they on different diets, and therefore lost weight at different rates? Or was it the same diet, with some of your friends being better at sticking to it? And in the case of the the countries, it turns out they were implementing wildly different types of industrial policy.

Which begs the question: how many types of industrial policy are there anyway?

Types of Industrial Policy

Dani Rodrik and Mariana Mazzucato present a framework for evaluating the different types of industrial policies in their paper, Industrial Policy with Conditionalities: A Taxonomy and Sample Cases. On pp 8 and pp9 of their paper, they present a simple framework, based on which I have created that picture you see above.

Industrial policy depends, they say, on the answer to these four questions:

  1. What type of firm behavior are you targeting through your industrial policy?
    • Do you hope to ensure equitable access to the products and services that will result from your industrial policy?
    • Or do you hope to direct firms’ activities towards socially desirable goals?
    • Or do you hope to get the successful firms to share their returns with you, the government (via royalties, perhaps, although other options are also available)
    • Or do you plan to require that profits be mandatorily reinvested into productive activities?
  2. How do you plan to work out the conditionalities associated with the program? Are they up for negotiation, or are they cast in stone?
  3. Is the upside from the program split? Is the downside split? (When I say split, I mean between the firm in question and the government).
  4. Finally, what about measurement criteria?

Using this framework, Rodrik and Mazzucato say, you can figure out the type of industrial policy at play.

Here’s how their framework can be applied to the case study of the now famous Oxford/AstraZeneca vaccine program, for example:

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/conditionality_mazzucato_rodrik_0927202.pdf, Table 2

So all right, there’s industrial policy, which is about industrialization, and South Korea seems to have done a better job of it than China and India (so far), and that’s because they used a type of industrial policy that worked better. Speaking of types, there’s lots of different types possible. But it still begs the question: what was South Korea’s industrial policy, exactly?

South Korea’s Industrial Policy

Understanding South Korea’s industrial policy requires a book length treatment, and there are more than a few that have tried to tackle the subject. As you might imagine, it is difficult to compress all of that material into a single blog post. But here’s what can be said:

  • South Korea’s industrial policy was inspired in part by the Meiji Reformation in Japan
  • The Meiji Reformation was in part based on the historical school of economics from Germany.
  • This historical school took part of its inspiration from… and this might surprise you a bit… Alexander Hamilton(!)
  • In particular, you might want to focus on a specific report:

One that has become especially well known was the ‘Report on the Subject of Manufactures’ submitted to Congress in 1791. In the report, he stressed that the United States needed to develop its manufacturing sector in order to grow its economy, bolster its military, secure its sovereignty, increase productivity, and absorb labour. He also stressed that industrialization was necessary to avoid being disadvantaged in trade with European nations, especially Great Britain, the industrial superpower at the time. The way to do this, according to Hamilton, was for the United States to protect and nurture its manufacturing sector through active use of industrial and trade policy. More specifically, industrialization was to be achieved by strategically applying tariffs and import bans on imported manufactured goods.

Hauge, Jostein. The Future of the Factory: How Megatrends are Changing Industrialization (p. 35). OUP Oxford. Kindle Edition.

And so the outline of South Korea’s industrial policy was to protect and nurture its manufacturing sector. Here are two questions worth asking:

  1. Protect it from whom?
  2. Nurture it for what purpose?

It is the answers to these questions that helps us understand where India and South Korea differ in terms of their industrial policy from the second half of the twentieth century.

The Carrot and The Stick

Both South Korea and India, you see, were clear about the answer to the first question. Both of their domestic industries needed to be protected from foreign competition.

But their answer to the second question could not have been more different. South Korea said that the protection and the nurturing was necessary so that South Korean firms could one day become world-beaters.

India, on the hand, ended up protecting its domestic manufacturers in perpetuity. Or least until 1991, at any rate.

We have names for both policies (of course we do). The South Korean policy was about export promotion – protect domestic firms until they learn to play with the big boys on their own turf. The Indian policy was about import substitution – if you’ve ever seen a mollycoddled spoilt Indian kid, that was India’s domestic firms until 1991. (As always, it’s a more complicated story than that, but hey, this post is long enough already. Some other day, maybe, we’ll dive deeper into this)

In other words the South Koreans got their incentives right – they held out the carrot, but didn’t hesitate to wield the stick when necessary. The carrot was pretty much whatever it was that the South Korean firms asked for – cheap labor, state supported finance, guaranteed power, great roads, you name it.

But Rodrik and Mazzucato’s framework comes into play here, because access (pillar 1) was given to export oriented firms, based on strict and non-negotiable conditionalities (pillar 2), with explicit and clear measurement standards (pillar 4):

The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used to encourage exporters.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 76-77). Grove Atlantic. Kindle Edition.

And if the measurement in pillar 4 didn’t come up to the expected level, pillar 3 kicked nito play, and how:

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.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (p. 77). Grove Atlantic. Kindle Edition.

India? We have the Industrial Disputes Act, which makes it difficult for us to shut down loss making firms, let alone those firms that are not exporting.

The protection to labour in larger firms is extremely high in India and translates into excessively high effective labour costs. As an example, Chapter V.B of the Industrial Disputes Act of 1947 makes it nearly impossible for manufacturing firms with 100 or more employees to lay off workers under any circumstances. Such high protection makes large firms in labour-intensive sectors, in which labour accounts for 80 per cent or more of the costs, uncompetitive in the world markets. Small firms, on the other hand, are unable to export in large volumes.

Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.

So we’ve learnt:

1. What Industrial Policy is…

2. What types of industrial policy there are…

3. What South Korea’s Industrial Policy looked like back in the day…

4. The importance of negative incentives in designing effective industrial policy (and that India sucked at getting the negative incentives right)

OK, cool. So CTRL-C and CTRL-V the South Korean awesome sauce idea into India and we’re sorted. Right?

Right?

To be continued tomorrow!

Brad DeLong’s Learnings from the Pandemic Years

Office hours on Zoom, for one, which strikes me as a pretty good idea too.

I think I’m going to keep my office hours remote and on zoom—make them mandatory for students I think I need to see. Calling people into the office if they aren’t showing up for office hours—that seems a little heavy-handed to me. Phone calls with people you do not already know—that is not terribly effective. But zoom! It is much better than a phone call, and does not (or does not any longer) seem too heavy-handed.

https://braddelong.substack.com/p/a-monologue-what-i-have-learned-about?s=r

But his other idea is something I would love to do, but have always failed at:

The other innovation I want to adopt is for courses in which each week is a book. Having the group “discuss” the book for an hour, and then call up the author on zoom—that seems to me to be a very good innovation. It is Barry Eichengreen’s. It is a wonderful thing. It should become the rule rather than the exception in the future.

https://braddelong.substack.com/p/a-monologue-what-i-have-learned-about?s=r

I have tried this in multiple ways over the years in my classes, but nothing has really worked. My utopian classroom would be one in which every single student walks in having read the prescribed book, and we run out of time while discussing different aspects of the book.

What usually ends up happening is an involved discussion with the three students or so who have read the book, while the rest of the class listens in politely for as long as they can bear to. I should be clear – I do not mandate attendance in my classes, and I don’t blame the students for not having read the book – but I sure wish they had!

From the Sokratic point of view, the purpose of the entire educational establishment can only be to create opportunities for the Dialectic to manifest itself—and question and answered dialogue between teacher and student, between student and student, and between student and figment of the student’s imagination. Good educational systems maximize those opportunities. Bad educational systems do not.

https://braddelong.substack.com/p/a-monologue-what-i-have-learned-about?s=r

Education is about conversations, and conversations cannot happen at scale. My best learnings have happened over relaxed conversations with professors in their offices, over cups of coffee, and on some especially delightful occasions, over mugs of beer – but not in a classroom.

But how to have those in-depth conversations with as many students as possible, as often as possible, without making the experience too expensive for all concerned is the trillion dollar question in higher education, and I don’t think we’re anywhere close to solving it.

But to circle back to the original excerpt, office hours on Zoom might be a good place to start.

Also, if you teach economics, and are looking for a wonderful syllabi to discuss in depth with your students, you couldn’t do much better than How to Change the World, taught by Chris Blattman.

RoW: Links for 3rd July, 2019

 

Five articles to help you understand China today a little bit better (well, one is on North Korea, axshually)

  1. “There is truth in this linguistic yarn; Chinese does deserve its reputation for heartbreaking difficulty. Those who undertake to study the language for any other reason than the sheer joy of it will always be frustrated by the abysmal ratio of effort to effect. Those who are actually attracted to the language precisely because of its daunting complexity and difficulty will never be disappointed. Whatever the reason they started, every single person who has undertaken to study Chinese sooner or later asks themselves “Why in the world am I doing this?” Those who can still remember their original goals will wisely abandon the attempt then and there, since nothing could be worth all that tedious struggle. Those who merely say “I’ve come this far — I can’t stop now” will have some chance of succeeding, since they have the kind of mindless doggedness and lack of sensible overall perspective that it takes.”
    ..
    ..
    A long, but fun read on how and why Chinese (both kinds) is so difficult to learn – and do think about what this might tell us about China.
    ..
    ..
  2. “But that is the wrong way to approach the challenge. In the near term (1-4 years), the US certainly could inflict a lot of damage on China through tariffs, bans on technology purchases, and other trade-war policies. But it would also inflict a lot of damage on itself; and in the end, the Chinese would suffer less. Whereas the Chinese government can buy up Chinese-made products that previously would have been sold to the US, thereby preventing mass unemployment and social turmoil, the US government could scarcely do the same for American workers displaced by the loss of the Chinese market.”
    ..
    ..
    Brad DeLong argues against the anti-China line that almost everyone in America seems to toe to these days (Biden almost excepted)
    ..
    ..
  3. “Total food production figures, however, are not the end of the story. The important question is who gets access to food, rather than just how much is harvested. Theoretically, North Korea could produce 10 million tons of food, but if all of it ends up in Pyongyang, there would still be massive shortages in the countryside. Here is where markets matter. The WFP assessments are based on the assumption that most food consumed in North Korea is still handed out by the government through the public distribution system (PDS); they do not take account of the role of markets in the food distribution system.”
    ..
    ..
    38North on how bad the food situation is in North Korea. Markets matter!
    ..
    ..
  4. “This is a useful reminder that decentralization is not an immutable feature of the Chinese system, or something that happened automatically just because China is a very large country. Clearly Gu saw that in the 1970s the Chinese system was too centralized to be efficient, and that it needed to be more decentralized. (Jae-Ho Chung’s book Centrifugal Empire: Central-Local Relations in China also argues that the Maoist emphasis on local autonomy in the 1970s was largely rhetorical, with most localities compelled to follow the same political campaigns and economic priorities.)”
    ..
    ..
    For a variety of reasons, decentralization really matters – here’s how China learnt this lesson.
    ..
    ..
  5. “At the heart of China’s Going Out policy is a media offensive launched in March 2018, an initiative coordinated by the broadcast group Voice of China and carefully monitored by Communist Party censors. In addition, the state-run news agency Xinhua was expanded and now claims to be the largest news wire in the world.”
    ..
    ..
    A fascinating read on how China is reshaping the media narrative in Africa.

Links for 15th May, 2019

  1. “Our science is past its childhood, but has not reached its manhood yet. On the one hand, our patience is still being tried by the phraseology of “schools ” and “-isms,” and there is still plenty of scope and shelter for the products of bad workmanship passing themselves off as new departures; but, on the other hand, the really living part of our science shows hopeful signs of, if I may say so, that convergence of effort, which is the necessary and sufficient condition of serious achievement. Those economists who really count do not differ so much as most people believe; they start from much the same premises; problems present themselves to them in much the same light; they attack them with much the same tools; and, although some of them have a way of laying more stress on points of difference than of points of agreement, their results mostly point towards common goals. This is not only true of fundamentals of fact and machinery, but also of what is going on within the precincts of every one of our time-honoured problems.”
    ..
    ..
    Professor DeLong treats us to an extended excerpt from Joseph Schumpeter on business cycles, and while the extract isn’t light reading for anybody, I found the “isms” quoted above to be of interest.
    ..
    ..
  2. “Oh, for sure. I’ve had three or four people tell me they called him on it on the first hole. He kicks the ball so much that caddies call him Pelé [a reference to the famous Brazilian soccer player]. He throws it out of bunkers, he retakes shots, he throws other people’s balls into the water.But every time people call him on it, he has the same answer, which is, “Oh, the guys I play with, you’ve got to do this just to keep it fair.” It’s the Lance Armstrong defense: Everybody’s doing it, so I have to do it just to keep up, otherwise I’m getting cheated. It’s the default rationalization of a cheater.

    But in reality, the National Golf Foundation says 90 percent of people don’t cheat when they play. But this guy cheats like a mafia accountant.”
    ..
    ..
    Guess the sport, the person being spoken about, and most important, the reason for including this article in today’s set (hint:it’s not the obvious answer). I’ll write down the answer after the fifth link today.
    ..
    ..

  3. “This assessment of BRI should not be taken to mean we can be complacent about other things that China does, some of which are most likely part of a conscious strategy. It’s just that we need to assess trends on their merits and not be led purely by conspiracy theories and our availability biases or preconceived notions.”
    ..
    ..
    Urbanomics shares a useful set of links to do with BRI, China and how there may well be a simpler set of explanations than a grand over-arching theory that is mostly about a conspiracy.
    ..
    ..
  4. “I think that what will take people by surprise will be:the failure of monetary policy to be adequately stimulative in the next downturn while

    there is so much polarity and conflict both within countries and between countries.

    I think that these things will be surprising to people because they’ve never happened before in their lifetimes though they’ve happened many times before in history. I suggest that you study the cause-effect relationships in the 1930s to see the mechanics that led to the outcomes of that period.”
    ..
    ..
    Ray Dalio does an AMA, and all of the answers are worth reading (the one on time, for example, while being a bit obvious, is still an excellent one)
    ..
    ..

  5. “When it had its premiere in 2011, “Now on My Way to Meet You” was a tear-jerking reunion program featuring families separated by the Korean War, but before the show had a chance to reunite anyone, it underwent a transformation. The way the producers tell it, in their scramble to recruit separated families, they kept running into a new generation of defectors. So they made the rather canny decision to reorient their show around appealing young women, whom they took to calling “defector beauties.” The show’s on-location backdrops of humble homes and noodle restaurants gave way to a glitzy game-show-type set, and estranged septuagenarians were replaced with girlish defectors. Pretty soon, the only thing left of the original program was its name and the desire for reunion.”
    ..
    ..
    Since I chanced upon this via MR, I’ll use the phrase “interesting throughout” – and for a variety of reasons!

    What does that article teach us about how to judge ourselves?