Consider this blog post your periodic reminder to read an essay called “The Course of China’s Rural Reform”, by Dun Runsheng.
Who was Du Runsheng?
Du Runsheng (Chinese: 杜润生; pinyin: Dù Rùnshēng; July 18, 1913 – October 9, 2015) was a Chinese military officer, revolutionary leader, politician, and economist. He has been hailed as “China’s father of rural reform”. From 1982 to 1986, he drew up the annual “Document No.1 of the Central Government” about rural reform, which promoted the development of rural areas.
Well, a lot of things, but this is relevant for us today:
Du Runsheng held the post of secretary general, Rural Work Department, in the Chinese Communist Party (CCP) Central Committee at the time the nation was founded. Concurrently he was deputy director of the Agriculture and Forestry Department of the State Council. After the Third Plenum of the 11th Central Committee of the CCP (1978), he held the post of director, Rural Policy of the CCP Central Committee, and director of the Rural Department, Research Center for Rural Development (RCRD), State Council, where he was mainly responsible for China’s rural economic reforms and development policy research. Du was often asked by the leadership to draft rural-related policy documents for the Central Committee of the CCP and the State Council. He worked in particular on the drafting of “No. 1 Documents,” which were issued continuously for five years by the CCP Central Committee, and which made outstanding theoretical and practical contributions, deepening rural economic reform and setting up the rural household contract responsibility system that advanced the market reform of the rural economy.
So how did China do it’s rural reforms? Please read the whole document to get a sense of how they went about it, but to me, the key words are “gradual”, “incremental” and “choice”.
Here is what he says about overcoming resistance to the proposals (all three are direct quotes from the document, please note):
First, the reform would not initially call for abandoning the people’s communes, but rather would implement a production responsibility system within them. This approach enabled many who would have opposed the change to accept it.
Second, the responsibility system could take a number of forms, among which the populace could choose. One did not impose one’s own subjective preference on the populace but respected its choice.
Third, the reform began in a limited region, where it received popular support, and then widened step by step.
We economists are very good at saying that Farm Reforms Must Be Implemented. And the political parties will be in complete agreement about the importance of these reforms depending on whether they are in power or otherwise. Learn to take both of these things as a given.
But as with any good idea, it is not its inherent quality alone that matters. It is also the manner of its implementation.
I am not for a moment suggesting that we copy what China did for its land reforms.
But I am very much suggesting that learning more about how China did it (and other nations besides) might help us.
Without a successful implementation of agricultural reforms, we don’t develop. Our problem is that we are all focussed on the phrase “agricultural reforms”. Not enough of us are focussed on the phrase “successful implementation”.
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.
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:
Also known (copyright, Brad Delong, sorta) as the only important or useful economic question ever – "What the fuck happened in 1750?" https://t.co/8jwExGXfOK
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:
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?
How do you plan to work out the conditionalities associated with the program? Are they up for negotiation, or are they cast in stone?
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).
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:
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:
Protect it from whom?
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?
Let’s begin with an extract from one of my favorite books to have re-read this year, “Country Driving: A Chinese Road Trip”, by Peter Hessler:
At the end of the 1990s, the government of Wuhu, a city in eastern China’s Anhui Province, decided to set up a car company of their own. They hired an engineer named Yin Tongyao, who had previously been a star at Volkswagen. Yin had distinguished himself during the transfer of the VW Fox, when he helped move manufacturing equipment from Westmoreland, Pennsylvania, to northeastern China.
At his new job in Wuhu, Yin immediately put this international experience to good use. He first went to England, where he bought equipment from an outdated Ford engine factory. Then he traveled to Spain, where he acquired manufacturing blueprints from a struggling Volkswagen subsidiary that formerly made a car called the Toledo. The Toledo shared the same platform—the basic frame and components—as the Jetta. In secret, Yin moved the British Ford engine factory to Wuhu, incorporated the Spanish blueprints, and set up an assembly line. Strict national regulations forbade new auto manufacturers from entering the market, so the officials in Wuhu simply called it an “automotive components” company. The factory produced its first engine in May of 1999. Seven months later it turned out a car. It had a Ford-designed engine, a body that came from Volkswagen via Spanish blueprints, and many authentic Jetta accessories. The folks in Wuhu had simply tracked down Chinese parts suppliers who were supposedly exclusive to Volkswagen, and then they worked out deals on the side. Volkswagen was furious, and so were people in the central government.
Hessler, Peter. Country Driving: A Chinese Road Trip (p. 65). Canongate Books. Kindle Edition.
By the way, the next sentence in the book is one of my favorite sentences from it: “Everybody knew the basic principle of the Reform years: It’s easier to ask for forgiveness than permission”. If you are an Indian student reading this, and wondering what the big deal is, look up negative lists.
But anyways, the reason I began with this excerpt is because I was reminded of it when I read this:
Then, in 2007, the industry got a significant boost when Wan Gang, an auto engineer who had worked for Audi in Germany for a decade, became China’s minister of science and technology. Wan had been a big fan of EVs and tested Tesla’s first EV model, the Roadster, in 2008, the year it was released. People now credit Wan with making the national decision to go all-in on electric vehicles. Since then, EV development has been consistently prioritized in China’s national economic planning.
“Industrial policy” is an easy phrase to bandy about, but very few countries have managed to successfully execute industrial policy. Whatever your opinion about the Chinese economy (especially in the present instance), even the most pessimistic China observer will happily admit to the fact that China deserves to be put in the small group of countries that has managed to successfully execute industrial policy for some sectors. And as we have covered earlier, the EV sector is certainly one of them. Remember how Volkswagen was “furious”, back in 1999?
In July, Volkswagen paid $700 million for a 4.99 percent stake in XPeng, a money-losing Chinese electric car start-up, putting a valuation of $14 billion on XPeng. Nio received assistance from the Hefei local government, but XPeng has acknowledged assistance from the local government in Wuhan, also in central China. Volkswagen announced in April that it would build a $1.1 billion car development center in the central China city of Hefei. VW will hire 2,000 engineers to do work previously performed at its headquarters in Wolfsburg, Germany, for cars manufactured in China.
So what exactly did China do when it comes to industrial policy regarding automobiles?
They played the long game: “They realized … that they would never overtake the US, German, and Japanese legacy automakers on internal-combustion engine innovation,” says Tu. And research on hybrid vehicles, whose batteries in the early years served a secondary role relative to the gas engine, was already being led by countries like Japan, meaning China also couldn’t really compete there either. This pushed the Chinese government to break away from the established technology and invest in completely new territory: cars powered entirely by batteries.
They used the ability to provide subsidies in myriad ways: subsidies for production, but also an implicit guarantee of purchase of EV’s, and nudge-nudge, wink-wink tweaking of “regulations” to make sure demand for EV’s remained in place.
China utilized it’s home ground advantages judiciously when it came to economic geography.
And if you’re looking for a metric that exemplifies the success of this industrial policy, look no further: “Chinese automakers like BYD and Chery, and the European and Singaporean shipping lines that transport cars for them, have placed almost all of the orders now pending worldwide for 170 car-carrying vessels. Before China’s auto export boom, only four a year were being ordered, said Daniel Nash, head of vehicle carriers at VesselsValue, a London shipping data firm. The incentive to build more ships is clear. The cost per day for an automaker to hire a car-carrying ship has soared to $105,000, from $16,000 two years ago, Mr. Nash said. BYD is spending close to $100 million apiece for the construction of what will be the six largest car carriers ever built. Most of the vessels are scheduled for completion in the next three years.”
And that brings us to the inevitable question: can we (India, that is) replicate what the Chinese did for their automobile industry?
“I think the interesting question is, would a country like India or Brazil be able to replicate this?” Mazzocco asks. These countries don’t have a traditional auto industry as strong as China’s, and they also don’t have the Chinese government’s sophisticated background in handling massive industrial policies through a diverse set of policy tools, including credits, subsidies, land use agreements, tax breaks, and public procurements. But China’s experience suggests that EVs can be an opportunity for developing countries to leapfrog developed countries.
“It’s not that you can’t replicate it, but China has had decades of experience in leveraging these [systems],” says Mazzocco.
“The Chinese government’s sophisticated background in handling massive industrial policies” is a phrase I do not disagree with, but one of the many reasons to read Hessler’s excellent book is so as to understand that this sophistication was earned. It didn’t fall out of the sky:
When Deng came to power, China’s auto industry faced the same basic challenge that characterized so much of the Reform period: How do people learn to do something completely new? From the government’s perspective, it was critical to learn from foreign automakers, but nobody wanted to relinquish profits and control of the industry to outsiders. As a result, Deng invited foreign manufacturers to set up shop under strict regulations. In order to produce cars in China, a foreign company had to find a state-owned partner, and outside ownership was limited to 50 percent. The American Motors Company jumped at the opportunity. In January of 1979, less than a week after President Jimmy Carter formally recognized the government of the People’s Republic, AMC was already sending a delegation to work out a deal. Over the next decade they learned to regret their pioneering status. While other companies such as Toyota stayed out of China, biding their time, AMC forged ahead and got nowhere. The partnership structure was awkward: two sets of management, each with its own culture, goals, and values. The AMC experience became so notorious that it eventually inspired a book called Beijing Jeep by the journalist Jim Mann. It’s a story of one misunderstanding after another; the chapter titles include “Getting Nowhere,” “A Very Long Haul,” and “An Outpouring of Grievances.” Even the index conveys a sort of taut frustration—it begins with “Absenteeism” and continues through “Xenophobia,” an alphabetized testimony to cultural differences of the 1980s.
Hessler, Peter. Country Driving: A Chinese Road Trip (p. 63). Canongate Books. Kindle Edition.
And if you ask me, the best place to start is to internalize my favorite sentence from Country Driving: sometimes, it is easier to ask for forgiveness than ask for permission.
Nike says it more pithily, and therefore better, but the message remains the same in either case.
He was asked recently about three ideas that he (Arnold Kling) is known for, and these are the three that he came up with:
Subsidize demand and restrict supply: Government intervention might well be thought of as the subsidization or provisioning of what the market fails to provide. But in practice, he says, the political process tends to be controlled by incumbent producers or owners. These guys are going to lobby the government for subsidized demand and restricted supply. He cites the example of housing: subsidize demand (subsidized home loans, for example), and restrict supply (zoning restrictions). Might higher education be another? Do we end up restricting the supply of quality higher education, and subsidizing demand for it by giving subsidized student loans? If you distrust the private sector, now would be a good time to say, “Hah! See? Big bad incumbents derail well-meaning government” If you distrust the government, now would be a good time to say, ”Hah! See? Government is as corrupt as big bad incumbents” If you agree that incentives matter, you might want to think about how to redesign various systems with better incentive design front and center. But that’s boring work. Saying “Hah! See?” is much easier.
His second idea is that “price discrimination explains everything”. Given high fixed costs in so many different industries (especially Internet-based businesses), the marginal cost of serving an additional consumer is zero. So if marginal-cost pricing makes no sense, what to do? Announce Big Billion Day sales, for example. How’s that price discrimination, you say? That’s just low prices all around for all goods, you say? Well, what about the rest of the days in the year, when the Big Billion Day sale isn’t around? Who do you think is buying then? Are those folks paying the same price for the same good? And that’s just one example. You could teach a semester’s worth of micro by using nothing more than the Amazon app on your phone!
And his third idea is to do with the true role of the central banks. In the 2008 financial crisis, he says, the main concern of the Fed wasn’t forestalling a recession, but rather to focus on the health of the primary dealers. Or more simply put (although you should read the whole blog, as always), the central bank’s top priority is “always going to be enabling the government to borrow more money”. His last paragraph is worth quoting in full: “The Fed’s job is to make sure that the Treasury can market its debt. For that purpose, it has to be much more concerned with keeping banks healthy than with hitting a target for inflation, unemployment, nominal GDP, or any other supposed goal.”
Fascinating ideas, all of them. But the last one in particular mad me think about the phrase “the true role” more generally.
What is the true role of:
Educational institutes?
Hospitals?
The Patenting System?
YouTube?
Students?
Ask yourself, and the people around you, these questions. And add to the list! Try answering them yourself. See if the answers differ, and ask yourselves what that reveals about the items on these lists, and about the respondents.
“So although the leaders of Bangladesh and India have similar goals, the difference in the country’s development models is making for an interesting experiment. Countries in Africa hoping to follow these two South Asian giants’ growth trajectories should be watching keenly. If Bangladesh grows faster, it will suggest that manufacturing, starting with textiles, is still the ticket to industrialization; but if Bangladesh falters and India sustains its growth, it will imply that poor countries should look to services first.” Noah Smith compares and contrasts India’s developmental trajectory with that of Bangaldesh’s. This is a topic with great relevance for anybody who is a student of India’s recent economic history.
“The phenomenon of the modern economic crisis, however, consists of the world abruptly discovering that the surpluses we thought we had — and in many cases pre-emptively consumed — don’t really exist. And the reason they don’t exist is because the new modes of industry or technology we deployed (and convinced ourselves were economic) were in fact not economic after all.” Izabella Kaminska traces the etymology of the word “economy”, and highlights how the word has meant different things over time – and reaches a less than pleasant conclusion about the digital economy.
“Born in 1845, Nobin was always prone to experimentation. A failed attempt saw him being kicked out of work with a local confectioner. He set up his own shop to attempt the rosogolla, but was soon mired in debt as the sweet would keep crumbling. In 1868, he figured that the trick lay in the right consistency of sugar syrup—not too thick—to hold it together. But commerce was the last thing on his mind and he would distribute the rosogolla at local addas. Till a Marwari timber merchant who was driving by stopped at his shop for his son to have water, and the father and son were given the sweet to taste. They loved it and, almost fortuitously, rosogolla was extricated out of a neighbourhood and introduced to the community at large. “It may sound ironical but the popularisation and commercialisation of the rosogolla came through a non-Bengali,” says Dhiman.”
If a tree falls in a forest… Put another way, did a Marwari invent the rosogulla? In a lovely article in Forbes magazine, a loving biography of the rosogulla.
“In sum, the structure of the economy—and the key driver of structural change and growth—has moved from the agricultural sector to the service sector for both Haryana and all India. For Jats, who have been historically associated with land and agriculture, this shift has profound significance.”
Markets and Mandals is a useful way to think of the issue that Christophe Jaffrelot highlights in this paper in the EPW – the article may be paywalled for some of you. But it worth trying to dig out the issue and read it – a good introduction to the subject.
“Dubai, on the other hand, is a surreal alternate universe version of Las Vegas if Nevada were a Muslim country, right down to the desolate desert setting. The Dubai fountains, a giant choreographed-to-music attraction in front of the Burj Khalifa, was even designed by the same person who did the Bellagio fountains. Instead of casinos there are uber-fancy malls, and instead of prostitutes there are Victoria’s Secrets with no softly-pornographic ads or any lingerie on display at all, but in either place you will be blinded by opulence and easily parted with your money.” Travel notes from a visit to the UAE – a useful way to think about the UAE, and Dubai in particular. My own sense is that it is certainly worth a visit, but probably not more than that.
EconForEverybody 