Yves here. Jomo describes the hypocrisy of advanced economies (with Western-dominated international institutions as amplifiers and enforcers) who opposed emerging nations engaging in industrial policy, particularly using tariffs to protect priority industries until they were able to compete internationally. Suddenly all this posturing has gone into reverse as the one-time colonial powers and their fellow-travelers have decided that Russia and China are such serious threats that a big arms buildup is necessary. Of course, what is unsaid is that they pursued a regime change project against Russia, with Ukraine as its blunt instrument. That initiative has massively backfired, resulting in supposedly second-tier Russia draining Western economies of weapons stocks, even as Russia has also been greatly increasing its military output as well as quickly improving key systems, such as drones and signal jamming.
I have one quibble with Jomo’s piece. He depicts the West as not engaging in industrial policy. At lest for the US, that is not the case. The US has industrial policy by default, with certain sectors benefitting from large tax breaks and subsidies: real estate, drug makers and health care, higher education, weapons manufacturers, and financial firms.
Another issue is whether these advanced economies will perform competently when executing supposedly official industrial policy. The performance of our arms contractors, who are great at profiteering by making fussy, breakage-prone systems that don’t perform all that well in combat, say we face major implementation hurdles even if these plans get off the ground.
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Jomo’s website
Developing countries wanting to pursue industrial policy were severely reprimanded by advocates of the ‘neoliberal’ Washington Consensus. Now, it is being deployed as a weapon in the new Cold War.
Industrial Policy vs Colonialism
Industrial policy is often seen as pioneered by Friedrich List. But List was inspired by George Washington’s first Treasury Secretary, Alexander Hamilton. He advocated promoting manufacturing as the Industrial Revolution was beginning in England.
For List, post-colonial national development required tariffs. Despite a title deceptively similar to his earlier Principles of the Natural Economy, List’s Principles of the National Economy was quite different, clearly inspired by Hamilton.
The Meiji Restoration started in 1868, after a quarter millennium of Tokugawa shogunate military rule. Meiji emperor rule was no mere palace coup but involved industrial policy to catch up with the already industrialising West.
Meanwhile, public intellectuals like Dadabhai Naoroji and Sayyid Jamaluddin al-Afghani rejected Western imperialism. They criticised how parts of the global South were being transformed – and ruined – by Western imperialism.
Half a century later, Harvard’s Josef Schumpeter rejected the idea that capitalism had become imperialistic. The Austrian economist insisted imperialism was a pre-capitalist atavism that capitalism’s ascendance would wipe out.
Weaponising Industrial Policy
Today’s geopolitics has seen a renewed Western interest in industrial policy as a weapon in the new Cold War. US President Joe Biden’s National Security Adviser, Jake Sullivan, is widely credited with articulating its use as an economic weapon.
This contrasts significantly with longstanding interest in industrial policy in the global South over several decades. For many, industrial policy has long been associated with post-colonial development efforts.
Meanwhile, strong stagnation tendencies in the West after the 2008 global financial crisis underscored the failure of purported neoliberalism. Advocacy of transformative, including green industrial policies by Mariana Mazzucato and others in Europe, was well received by desperate governments keen to resume growth.
Developmental, Industrial Policy
However, in developing countries, there has long been interest in developmental industrial policy. Neoliberal economists and the many influential financial institutions they control have long frowned upon this.
Alfred Marshall, Petrus Johannes Verdoorn, Nicholas Kaldor and others urged Europe to industrialise. Selective industrial policy has been even more controversial, with the government favouring some manufacturing activities over others, e.g., due to increasing returns to scale.
Typically facing resource, including fiscal constraints, developing countries have had little choice but to be selective. However, with such powers associated with governments, there was understandable concern about the potential for abuse, arbitrariness and error.
Instead, the market was supposed to decide in the best interests of society without recognising its own inherent biases and ‘failures’, especially in highly unequal post-colonial societies. Neoliberal economists were quick to caricature industrial policy with dismissive metaphors (e.g., picking winners) rather than rigorous analysis.
Asian Miracles?
The East Asian Miracle was simplistically caricatured due to the abandonment of import-substituting industrialisation in favour of export-orientation. A more nuanced alternative narrative of ‘effective protection conditional on export promotion’ in Northeast Asia was thus ignored.
Industrial policy is much more than trade policy, involving a range of policy instruments. Recognising the variegated aspects, dimensions and tools of industrial policy is essential. Besides investment, finance, and technology, human resource development is also significant.
For instance, the Indian Institutes of Technology (IITs) were an important initiative to support its industry. However, with India’s gradual neglect of industrial policy, IITs have probably contributed more to the development of US hi-tech.
Evaluating Industrial Policy
For years, economists working on India have criticised industrial policy, usually referring to the Nehruvian experience. But rushing to such a conclusion solely referencing that experience requires cherry-picking evidence.
India’s pharmaceutical policy has been crucial to the health and well-being of its population. Affordable, often generic medicines in India have been central to its improved public health outcomes. However, unlike Western pharmaceutical transnational corporations, Indian companies have not been accused of price-gouging.
Bangladesh has since utilised its special dispensation as a least developed country (LDC) to export affordable generic medicines to many other poor countries. However, the West blocked the Indian-South African initiative to suspend patent royalties to address the COVID-19 pandemic for its duration.
Effectively, the West was reneging on its 2001 agreement to the Public Health Exception to Trade-Related Industrial Property Rights (TRIPS). This compromise was needed to restart WTO processes after the African walkout from the 1999 Seattle World Trade Organization (WTO) ministerial meeting.
If not for India and Bangladesh, the costs of medicines would have been much higher, and there would be more ill health in the world today. Defining industrial policy success solely in terms of the financial profitability of investments ignores such gains.
It is, therefore, crucial to build coalitions to create the conditions for sustained and appropriate but adaptive industrial policies. These are needed to accelerate growth and structural transformation to achieve sustainable development in the face of stagnation and regression in much of the world, especially the global South.
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Another early example of Western double standard was British/French intervention against 19th century Egypt industrialisation attempts, as described by Afaf Lutfi Al-Sayyid Marsot. While Champollion returned with the Stone of Rosetta as part of the Napoleon expedition, Napoleon had participated in the subjugation of a potential rival in the Mediterranean by defeating Egyptian Armed Forces.
Funny how those that gain, or hope to gain, elevate capitalism to something divine. Yet whenever something bad is pointed out, it is some element at work that undermines capitalism’s self-correcting divinity.
“The US has industrial policy . . . benefitting from large tax breaks and subsidies: . . . higher education, weapons manufacturers. . .
our arms contractors, who are great at profiteering by making fussy, breakage-prone systems that don’t perform all that well in combat.”
The items in the second para are the products of the persons denoted in the first para – doesn’t seem like a winning strategy. The facts are that Russia and (especially) China are producing multiples of engineers and patents more than the US.
I was reading a US naval blog the other day which claimed that US naval shipbuilding is now reduced to 4 yards from at least 12 or so, and there is practically no large commercial US shipbuilding facility at all. Boeing is the only large commercial plane maker left, and it’s downgrading of engineering has led to it’s well know present position.
Decay is well on the way. Tension, apprehension and dissension have begun, as Alfred Bester would put it.
A headline in the NYTimes says “Intel to Receive $8.5 Billion in Grants to Build Chip Plants” while another headline in theregister.com says “Alibaba’s research arm promises server-class RISC-V processor due this year”.
So clearly the US is doing industrial policy by bolstering Intel. But there is a spectre is haunting Intel — the spectre of RISC-V.
I think RISC-V is going to put Intel and ARM out of business. I think that western countries have been able to dominate a number of high margin businesses for years through first mover advantages and those first mover advantages are starting to crumble.
For me, Intel and ARM are the poster children for these first mover advantages … and they are in deep, deep trouble.
“Alibaba’s research arm promises server-class RISC-V processor due this year”.
Interesting and indeed important comment. Industrial policy should be generic, from my perspective. Locking policy to a specific product, will likely be problematic. I need to think carefully about this now.
Thank you for the fine comment.
https://twitter.com/RnaudBertrand/status/1769511551269208272
Arnaud Bertrand @RnaudBertrand
Another great example of sanctions backfiring.
In 2019, due to US sanctions, Huawei was banned from using Android, the operating system on which most of its devices ran. The US thought this would be a killer blow to the company.
Undeterred, Huawei decided to develop its own homegrown OS – HarmonyOS – something everyone at the time said was impossible, due to the enormous complexity of the task.
Fast forward 5 years, HarmonyOS is now running on no less than 700 million devices in China and is about to overtake Apple’s iOS.
https://fortune.com/asia/2024/01/04/huawei-homegrown-os-harmonyos-second-most-used-in-china-apple-ios/
Huawei’s homegrown operating system, launched after the company was put on a U.S. blacklist, may soon overtake Apple’s iOS in China
7:50 PM · Mar 17, 2024
A headline in the NYTimes says “Intel to Receive $8.5 Billion in Grants to Build Chip Plants” while another headline in theregister.com says “Alibaba’s research arm promises server-class RISC-V processor due this year”.
[ Also, please do add to this comment when possible. ]
Also, there is a significant second mover advantage in industries like this, per the observation by Alexander Gerschenkron a long time ago.
The second movers learn from successes and failures of the first movers the broad parameters for future development and the potential mistakes to avoid. When that happens, the West will decry “Chinese (or whoever) copycats,” but it’s simply a matter of learning from history rather than “copying” anything.
Also, there is a significant second mover advantage in industries like this, per the observation by Alexander Gerschenkron a long time ago…
[ Excellent, and agreed from my experience. Another excellent incisive comment. ]
hk
There are second mover advantages in a lot of industries – but not, I would argue, microprocessors or any other industry that has both perfect economies of scale AND strong network externalities.
There are second mover advantages in a lot of industries – but not, I would argue, microprocessors or any other industry that has both perfect economies of scale AND strong network externalities.
[ Forgive my being confused, but I am unable to understand this argument. ]
This page talks about “natural barriers to entry” and the top two it lists are ‘economies of scale’ and ‘network effects’:
https://corporatefinanceinstitute.com/resources/economics/barriers-to-entry/
It costs n billion dollars to design a cpu and build a fab – but each chip you fab costs you pennies. This is extremely high economies of scale.
Network effects in the case of chips means that because ‘everyone’ uses Microsoft Windows, and Windows only works on Intel architecture, other architectures will struggle to gain market share.
Fortunately for the rest of us there is Linux.
Meiji emperor rule was no mere palace coup but involved industrial policy to catch up with the already industrialising West.
Michael Hudson wrote about E. Peshine Smith, who was also in the Hamiltonian-List tradition and participated in helping Japan develop their industrial policy.
Before industrial policy there needs to be a human capital policy. With regards to Japan preceding Meiji (& E. Peshine Smith), role of Satsuma clan & Thomas Glover (Scotsman) sending young Japanese overseas for training was key. Glover played a role in industrialisation preceding toppling of the Shogunate and afterwards. E.g. still surviving Mitsubishi Corp & Kirin Brewery Co.
I recently heard (cannot remember where or I would provide a link) that tariffs imposed back in the 1800’s were to protect the PEOPLE (or workers) in the industry rather than just “the industry”. I think this points out to a real lacking in what passes for current “industrial policy” such as the CHIPS Act. The CHIPS Act is almost the equivalent of throwing billions on the bonfire that remains after locking the horses in the barn and lighting it on fire. I’m sure that American CEOs and Wall St will profit handsomely, but as we’re finding out – building factories, running factories (especially the higher tech ones) takes a skilled and motivated work force. American elites have spent forty years working hard to destroy that, and have largely succeeded.
The US political and economic elite (more generally the western elite) are not particularly interested in making stuff or getting things to work.
They have created a financial system that defrauds America and shakesdown the planet.
America can’t fight a war with China without rare-earths and components from China
From submarine sonar to aircraft disk drive motors, the U.S. military is almost wholly reliant on China’s extensive rare-earth value chains
Chinese Parts in the F-35 Highlight Concerning Trend in the US Defense Sector
The contraction of U.S. defense and civilian industries since the end of the Cold War has made foreign inputs into key weapons programs indispensable.
Frédéric Bastiat summed up the reality of this system during the nineteenth century
“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”
Wasn’t it command economies and industrial policies of the US and the Soviet Union that conquered Germany in WWII (Which stuck with capitalist policy for too long)?
Not quite.
The USA, UK, and USSR had all switched to a command war economy, but so had Nazi Germany and its allies.
Remember that then, the economies of Germany and Italy were corporatist, not capitalist — the State supervised firms, imposed production objectives and prices in a variety of sectors (long before the war erupted), commandeered funding, personnel, and IPR to the projects it deemed of national priority, and maintained strict controls on external trade, currency exchange, and capital ownership.
The trouble for Germany is that it attempted to maintain some level of peace-time normalcy with higher standards of living for its population for quite a long time before switching to a full-fledged war economy under Albert Speer in 1942.
And when it comes to the USSR: it actually liberalized a part of the economy and gave some greater flexibility to production plant managers (I think regarding consumer goods), with less constraints by the central plan, while the Gosplan focussed on the essentials and war production. That liberalization ended just after WWII was over.
F35 report is quite the read. Basically, DOD was forced to do a 180 from their initial F35 plans of using private contractors, but now that money is tight and they need to cut costs, even if they want they can’t switch to “organic” government-managed maintenance model because of IP rights. Everybody is looking at this and saying smart things, but they never do anything about it. It’s quite obvious that the state needs to nationalize F35’s “data rights” and just demand from private contractors their secrets if they ever want to fix that mess
there are no advanced western economies anymore. they went out the window in 1993. from carter to the first bush, was reversible, what happened from 1993 on wards, is almost impossible to reverse. bill clinton took a meat axe to america, and turned us over to wall street, the banks, the fire sector, etc.
almost everyone in power, was either a direct participant in bill clintons quack economics, or direct descendants.
don’t hear much out of dim bulbs like gene sperling, but i bet he and others like him are still in some sort of power seat.
bill clinton abdicated the role of government, to self rational, self regulating, self policing markets/SARC!, they have almost complete 100% power now over western governments.
so in reality, to over turn this by dim wits that created this mess, is impossible. to over turn this mess may well never happen, and if by some miracle it is over turned, it will not be done by these dopes, and it might take a more rough way of doing it, and take decades.
someday the dim bulbs might figure out that supply chains, have supply chains. smoot-hawley, the additional tariffs FDR imposed, and trumans Gatt, sorta restored Hamiltons and lincolns dream.
maybe a hard liner nut case like a hitler gets into power in the west, all they will have to work with is the bomb and the dollar. not much to work with there.
so in reality, russia, china, iran and others are the advanced economies today.