Tag: raghuram rajan

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!

Maximizing Soul: The Banana Edition

I ate a most delicious snack yesterday, and probably more of it than I should have. A student from Vasai had gotten along some fried surmai (which was also outstanding), but in a remarkable event where I am concerned, it was the vegetarian item that won the Kulkarni Tastebud contest yesterday.

The item in question was sukeli, and it looks like this:

https://craftoindia.com/sukeli-sun-dried-banana-of-maharashtra-1kg.html

This is what the website has to say about the product:

Dried bananas are 100% natural Dried Fruit, without any Artificial Flavor, Preservatives or Color. These are Soft, Chewy and full of Sweet Fruity flavor. These are rich in Potassium which regulates the Blood Pressure (BP). It contains Natural Sugar, Soluble Fiber, Minerals, Vitamins and Antioxidants which are essential to maintain good health. Dried Banana is great energy snack favorite of Athletes and Sportsperson. (sic)

https://craftoindia.com/sukeli-sun-dried-banana-of-maharashtra-1kg.html

I wouldn’t know about the nutritional qualities, but I can attest to the sukelis being soft, chewy and full of sweet fruity flavor. Think of it as an intensely addictive cross between bananas and jackfruits.

Ah, but which kind of bananas? Nendran or Rajeli varieties and no other.

Do you know which is the most popular type of banana grown the world over? It is the Cavendish banana, and we produce a lot – a lot – of Cavendish bananas.

Here’s Vikram Doctor in on old piece from the Economic Times:

To get good bananas in Mumbai you must go to CST station. Not to take a train, but because every evening a few hawkers bring baskets of bananas to sell to the evening commuter crowd. The bananas are grown just outside Mumbai and they are small, fat and full of creamy-sweet flavour. They are usually not quite ripe when sold, and tend to ripen unevenly, but nearly all get sold by end of day. It used to be easier to get good bananas.
Long Moira bananas from Goa, plantains from Mangalore that had to be kept till their skins turned black, several types of small bananas, thick red bananas, humble green Robustas and Rasthalis from Tamil Nadu so fat they were bursting out of their skin.
Today you mostly just find one cheap green banana, one small banana and then the type that now rules the market. It is perfectly shaped, perfectly yellow coloured and a taste that is perfectly boring, but just banana tasting enough to be acceptable.
Fruit vendors call it Golden Banana and push it hard, justifying its higher price by telling you it is meant for export. Which is correct since this is a kind of Cavendish, the banana variety that accounts for 99 per cent of the world market.

https://economictimes.indiatimes.com/blogs/onmyplate/no-getting-away-from-cavendish-in-banana-republic/

You might also want to listen to a podcast (now discontinued, alas, but it was truly excellent while it lasted) about the same topic. It used to be hosted by Vikram himself, and all episodes are worth a listen. It no longer seems to be online, more’s the pity, but perhaps the more intrepid readers might be able to surface a source for all of us? My top three episodes were about coffee, butter and bananas.

But back to bananas: as I said, we produce a lot of Cavendish bananas. Why? Well, economies of scale, in the jargon of my tribe. In English, we were optimizing for cost minimization:

Nature has a simple way to adapt to different climates: genetic diversity.
Even if some plants react poorly to higher temperatures or less rainfall, other varieties can not only survive – but thrive, giving humans more options on what to grow and eat.
But the powerful food industry had other ideas and over the past century, humans have increasingly relied on fewer and fewer crop varieties that can be mass produced and shipped around the world. “The line between abundance and disaster is becoming thinner and thinner and the public is unaware and unconcerned,” writes Dan Saladino in his book Eating to Extinction.

https://www.theguardian.com/food/ng-interactive/2022/apr/14/climate-crisis-food-systems-not-ready-biodiversity

The first two lines of that extract above are now a problem, because mass production of one type of banana is the agricultural equivalent of putting all your eggs in one basket. And this is a problem for the same reason that putting all your savings into one asset class is a bad idea.

If a pest comes along that is particularly bad for that particular variety, well, we’re in deep doo-doo (and the infographic in the Guardian article is an excellent way to understand how we refuse to learn from history). And well, such a pest is now with us:

…diversity boosts the overall resilience in our food systems against new climate and environmental changes that can ruin crops and drive the emergence of new or more aggressive pathogens. It’s what enabled humans to produce food and thrive at high altitudes and in the desert, but rather than learn from the past, we’ve put all our eggs in a few genetic baskets.
This is why a single pathogen, Panama 4, could wipe out the banana industry as we know it.
It’s been detected in every continent including most recently Latin America, the world’s top banana export region, where entire communities depend on the Cavendish for their livelihoods.
“It’s history repeating itself,” said banana breeder Fernando Garcia-Bastidas.

https://www.theguardian.com/food/ng-interactive/2022/apr/14/climate-crisis-food-systems-not-ready-biodiversity

And when they say “every continent”, they aren’t exaggerating:

Tropical Race 4 (TR4), the virulent strain of fungus Fusarium oxysporum cubense that is threatening banana crop globally with the fusarium wilt disease, has hit the plantations in India, the world’s top producer of the fruit. The devastating disease which surfaced in the Cavendish group of bananas in parts of Bihar is now spreading to Uttar Pradesh, Madhya Pradesh and even Gujarat, and threatening to inflict heavy losses to the country’s ₹50,000-crore banana industry.

https://www.thehindubusinessline.com/economy/agri-business/india-in-a-race-against-wilt-in-cavendish-banana/article23650060.ece

Well, OK, you might say, bring on the guys in the white coats and figure out the solution. Here’s Wikipedia on the topic, and the relevant section doesn’t have a reassuring heading: it’s called “Disease Management”. Personally, I would have felt better if it was more along the lines of disease eradication. But the first line of this section gives one a sinking feeling:

“As fungicides are largely ineffective, there are few options for managing Panama disease”

The Wikipedia article on Cavendish bananas is equally gloomy on the topic, save for a single line of some hope towards the end:

Cavendish bananas, accounting for around 99% of banana exports to developed countries, are vulnerable to the fungal disease known as Panama disease. There is a risk of extinction of the variety. Because Cavendish bananas are parthenocarpic (they don’t have seeds and reproduce only through cloning), their resistance to disease is often low. Development of disease resistance depends on mutations occurring in the propagation units, and hence evolves more slowly than in seed-propagated crops.[
The development of resistant varieties has therefore been the only alternative to protect the fruit trees from tropical and subtropical diseases like bacterial wilt and Fusarium wilt, commonly known as Panama disease. A replacement for the Cavendish would likely depend on genetic engineering, which is banned in some countries. Conventional plant breeding has not yet been able to produce a variety that preserves the flavor and shelf-life of the Cavendish. In 2017 James Dale, a biotechnologist at Queensland University of Technology in Brisbane, Australia produced just such a transgenic banana resistant to Tropical Race 4

https://en.wikipedia.org/wiki/Cavendish_banana#Diseases

It’s not just bananas, of course. The Guardian article is a lot of fun to read, and I would encourage you to arm yourself with a coffee and spend some time going through it. Corn is another great example!

https://www.theguardian.com/food/ng-interactive/2022/apr/14/climate-crisis-food-systems-not-ready-biodiversity

Cost minimization is a great idea, but as with food, it is the dose that makes the poison. Long time readers will know that I have a bee in my bonnet about this, but I honestly think it is an idea that has been taken too far across multiple dimensions.

So what is to be done? I have absolutely no expertise in what the agricultural/scientific solutions might be, but as with JIT supply chains that focus on China, office redesign that sucks all the fun out of work and so much else besides, so also with this.

Ask what you’re optimizing for, and begin to worry if the answer is a single-minded focus on cost minimization.

Raghuram Rajan got this one right, in a different context: what matters is risk-adjusted returns. And it applies across multiple dimensions, not just finance. Moreover, when you design systems, think of risk across large horizons of time, not just short term optimization.

Be clear about what you’re optimizing for, and realize that cost minimization can only take you so far.

Simple lessons, but oh-so-underrated!

But hey, if you get a chance to try the sukeli out, please do!

Links for 11th April, 2019

  1. “Who has the upper hand in bargaining for wages and employment benefits? Who dominates markets and who must submit to market forces? Who can move across borders and who is stuck at home? Who can evade taxation and who cannot? Who gets to set the agenda of trade negotiations and who is excluded? Who can vote and who is effectively disenfranchised? We argue that addressing such asymmetries makes sense not only from a distributional standpoint, but also for improving overall economic performance. Economists have a powerful theoretical apparatus that allows them to think about such matters.”
    ..
    ..
    Dani Rodrik makes the case for rewriting economics, rather than tinkering with it at the margins, in order to really tackle the problems that the world faces today. An article worth reading – I’d linked to their manifesto earlier.
    ..
    ..
  2. “In San Lucar, selfish behavior is unacceptable. But in New York, a city with 8 million people, selfish behavior is the norm. It’s a dog-eat-dog mentality. Policemen are everywhere and sirens are the sound of the city. During rush hour on 5th Avenue, pedestrians fight like soldiers on a battlefield. They step over homeless people, weave through strangers, and J-Walk through red lights.Why are people so cooperative in San Lucar, but so selfish in New York?”
    ..
    ..
    If you are a student of game theory, you already know that the answer is game theory. But the article is worth reading because it should prompt you to wonder if there is a deeper answer than the one provided – and Adam Smith might be a good place to begin.
    ..
    ..
  3. “First, declining growth is a key, albeit low-frequency, cause of today’s social and economic distress. Second, the unfortunate consequences of the ICT revolution are not inherent properties of technological change. Rather, as Rajan notes, they reflect a “failure of the state and markets to modulate markets.” Though Rajan does not emphasize it, this second point gives us cause for hope. It means that ICT need not doom us to a jobless future; enlightened policymaking still has a role to play.”
    ..
    ..
    Angus Deaton reviews Raghuram Rajan’s latest book, and leaves us with a sense of appreciation for the book (and in my case, a desire to read it), but also with a deep sense of foreboding about where we may end up as a society.
    ..
    ..
  4. “That leads to a broader point: “tech” is not simply another category, like railroads or telecom. Tech is a means, not an end, but Senator Warren’s approach presumes the latter. That is why she proposes the same set of rules for the sale of toasters and the sale of apps, and everything in between. The truth is that Amazon is a retailer; Apple a combination of hardware maker and platform makers. Google is a search and advertising company, and Facebook a publishing and advertising company. They all have different value chains and different ways of impacting competition, both fairly and unfairly, and to fail to appreciate just how different they are is a great way to make bad laws that not only fail to fix problems but also create entirely new ones.”
    Ben Thompson on how to think about tech (and in a very long article, this excerpt really matters): tech is the means to an end, and therein lies all the difference in the world.
    ..
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  5. “You may never have heard of Islamestan, in Chinese Turkestan, or its one-time “king”, Bertram Sheldrake. Islamestan is long gone, swallowed up in the historical shifts of a turbu­lent region, but for a brief and unlikely moment, an English pickle-factory heir ruled, with his wife, Sybil, over the newly independent Muslim country, to the far west of China.”
    Stories don’t get much better than this, and that’s putting it mildly.