Industrial policy is once more on the agenda of many governments.
There is a long history of Industrial Policies (IP) aimed at promoting a particular sector of an economy. When Henry VIII abandoned Roman Catholicism, the practice of eating fish on Fridays lapsed. The change devastated the English fishing industry. Edward VI, Henry's son, reinstated meatless days ‘for the benefit of the commonwealth, where many be fishers, and use the trade of living’. There were many sector-promoting proposals in nineteenth-century New Zealand (such as prizes for finding gold or starting a new industry like export butter).
As the reach of the state broadened the sectoral interventions increased. By the 1970s they were at the point that no-one had the foggiest idea of their impact. A consensus began to form that they had to be rolled back.
One reason was that it was far from clear that the complicated plethora of interventions of the 1970s was doing anything to benefit the overall economy. During the Uruguay Round of trade negotiations, the New Zealand government agreed to reduce protection on strong beers in exchange for better European dairy access. The repercussions impacted badly on Hastings brewery workers even though they did not produce strong beers, Auckland steel workers who produced the beer cans, and Huntly and West Coast miners, who produced the coal to make the cans. The Taranaki and Waikato dairy sectors did well though.
A second reason was that industrial policies had to be rolled back as a part of our international trade deals. If we wanted our trade partners to grant more access to their markets, we had to reciprocate by lowering our barriers, including our industrial policies.
A third reason was that the policies often bordered on corruption. You see this in Trump’s America. A group from a particular industry contributes to funding one of his grandiose schemes – say the White House Ballroom – and shortly after, Trump implements an executive order which benefits the industry. I don’t think such instances were as widespread in New Zealand, but a complication here is that a sector often consists only of a single business, so a sector intervention frequently benefited a single business which may – or may not – have been providing political support.
By the early 1980s there was a widespread – but not unanimous – view that the government should wind back and rationalise its sectoral interventions. The Rogernomes who captured power went further than that consensus, when they eliminated as much intervention as they could.
Their extremism could be vicious. While I was director of the NZIER, I wrote a Listener column arguing that the current interventionism was excessive and needed to be wound back. (You can read it here.) It was a dangerous sentiment to go public with when Muldoon was bully Prime Minister. However, those in charge of Treasury research funding said that because of the column did not go far enough by denouncing the Muldoon policy regime, the NZIER would never get any more research funding. They kept their word. (Muldoon never retaliated.)
The Rogernomes were not alone. The conventional wisdom – the ‘Washington Consensus’ – which dominated world economic policy, was so antagonistic to IP, that key institutions suppressed the use of the term ‘industrial policy’ and repressed those who advocated it. IP was outside the Overton window – the spectrum of topics and arguments which were acceptable to those who controlled the discourse. ‘Horizontal policies’, such as tax reductions, infrastructure extension, more permissive business regulation and subsidisation of R&D growth were permitted, even if IP, which changed the sectoral composition of production, was not. (The upskilling of the workforce is a horizontal policy but it has been given little priority in English-speaking countries; I leave others to work out why.)
Not everyone adopted the Washington Consensus. East Asian governments, in particular, exercised economy-wide foresight about future sectoral growth opportunities and gave support to the sectors important for future growth. They implemented measures to promote them combined a shrewd balance of government and market drivers.
The Washington Consensus predicted that this strategy would lead to failure. However, the dissenting economies thrived, as is well illustrated by the success of the Chinese economy whose state-led ‘capitalism’ is the central factor in the deep structural change in the world economy; Chinese firms have often out-competed those in the West.
The rhetoric of the conventional wisdom in affluent economies now accepts, grudgingly, that some industry policies have a role. A recent IMF report concluded that ‘if industrial policy is pursued, it should be grounded in clear diagnostics of market failures, include mechanisms for regular evaluation and re-calibration, and be embedded in a strong institutional and macroeconomic framework. Market discipline should be encouraged through vigorous domestic and international competition.’ (It is not a very different sentiment from my Listener article, even if it was unacceptable to the Treasury neoliberals or Muldoon.)
The notion of ‘market failure’ used here is a bit naive. No market works perfectly so every market fails to meet the benchmark of the ideal. Taken superficially, the IMF argument that IP can be justified to deal with ‘market failure’ is an open invitation for a promiscuous industry policy. It is, of course, not their intention.
We can learn from the Chinese experience. They identified key future industries which, as the Western experience suggests, the market undervalued – including solar energy, electric vehicles and rare earths – and gave them assistance. (On the other hand, the Western markets have done better with computer chips – in part arising from the demands of the computer gaming industry – and AI, thus far.) The Chinese success has stimulated Western IP partly out of fear that the Western’s defence industries – and hence its military capacity – are being compromised.
A second major concern was the disruption of global supply chains suggested some – but not total – retreat from relying on international sourcing. The Washington Consensus implicitly assumed that there was an orderly world economy. Even neoliberals have to accept increased uncertainty about exports and imports reflecting the unreliability of global trade caused by geopolitics and compounded by climate change and various shocks. This reframing of ‘Make or Buy' decision by firms and economies, making them more open to 'heterodox' policies.
The last Productivity Commission report looked at the resilience of supply chains and found that countries with strong private-public institutions are best prepared to anticipate, prepare, absorb and recover from shocks; small countries with public-private ecosystems do better both in seizing new opportunities and responding to shocks. Sadly, in contrast to Denmark, Sweden, or Singapore which maintained reasonably transparent public-private institutions throughout the neoliberal era, New Zealand has lost the skills of intervening.
While we may learn from the Chinese experience, New Zealand should not naively imitate it. Size, location and resource base puts us in a niche in the world economy. Some obvious areas of our interests are value-added processing, where, despite talking about it for decades, we still underperform, and 3D manufacturing, which has the potential to reduce our isolation.
But New Zealand faces a serious implementation problem. One part of it is the lack of skills and experience needed to design the policy tools and implement them with appropriate accountability. The neoliberals, fronted by ACT, closed down the Productivity Commission, which was inching towards extending the Overton Window to include Industry Policy. Despite market intervention making a significant contribution to the historical success of the New Zealand economy and to the success of contemporary East Asian ones, there are parts of the New Zealand government which still insist on only 'horizontal' support measures, especially 'less business regulation'.
A second issue is that New Zealand has no well-institutionalised coalitions between state agencies dealing with the production side of the economy and business, trade unions, universities, think-tanks engaged in the same activities. Yet such public-private coalitions are vital for formulating and implementing - and terminating - IP.
Is one surprised that the New Zealand economy has not been doing well?