The Return of Industrial Policies to Developed Countries

The policy direction of the world’s leading economic giants is now clear. USA’s President Obama recently announced strategic decision-making and large budget for innovative industries, for instance, renewable energy, high speed trains and high tech vehicles. The Japanese Prime Minister wants a new “Japanese company,” to increase business and state inter-connections. The European Union’s industrial policy emphasizes manufacturing sectors more and service and knowledge sectors less.

Factors reactivating industrial policy interest in developed countries are:

1) Worldwide economic recession; many governments are pressured to reduce unemployment, stimulate domestic economies, support industries creating employment and assist entrepreneurial competence with foreign competitors.

2) Some countries, whether US or UK want to re-balance economically, prioritizing finance and real estate less and manufacturing more, particularly the highly popular green industry

3) Industrial policy implementation causes more industrial sector demand. Large companies - General Motors or AIG receive generous, though unpopular government budget to support them, causing President Obama’s 30,000 million USD lending fund to remain for small and medium businesses.

4) Developed countries have seen such developing nations as China or South Korea implement industrial policy important to rapid economic growth.

Industrial policy implementation is highly controversial, whether supporting restructured existing troubled industries, such as the steel or textile industries, or creating new strategic industries, such as robotic or nanotechnology industries. But rapid government expansion to support select industries or companies not only presents a chance for success or for failure, possibly costing state a fortune.

The US Government formerly supported Lockheed (aircraft) in 1971, Chrysler (cars) in 1979 and raised the automobile tax in 1983 to help Harley Davison. But with the failure of all these efforts, Ronald Reagan and George Bush Senior tried to abolish industrial policy. Some successful examples included the creation of Silicon Valley (USA), the promotion of nuclear energy and the high speed train industry (France), and a joint French, Spanish, German government venture to invest in Airbus.

Lessons from past experience could be summarized:

1) Industrial policy will likely succeed when governments select industries consistent with a country’s comparative advantage. For example, Chile changed from mining, forestry and agriculture to aluminum smelting, salmon farms and wine production.

2) Industrial policy has less chance to fail if governments select market trend industries, but try not to lead the market.

3) Industrial policy will more likely succeed if governments select industries within their competency or natural interest range, for example in military technology or energy.

4) One main cause for industrial policy failure is where politicians focus on short term benefit, selecting personally beneficial industries for an inflow of government budget, though these may be no-future, non-global industries inappropriate for support.

Nowadays, Thailand moves passively. Thailand’s government supports many industries without clear strategy. I see industrial policy as an important tool for economic development, and possibly accelerating national development. Governments should therefore focus on industrial policy. They should plan and research seriously, and learn from other countries’ past experiences. This will make industrial development truly lead to economic development for all Thai people.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com