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Did industrial policy drive Asian economic growth?
...there is considerable evidence that industrial policy has influenced the sectoral composition of output and trade in Japan. However, rather than being the forward-looking driver that proponents of selective promotion envision, at least in terms of measurable interventions, the evidence suggests that such policy was aimed overwhelmingly at internationally noncompetitive natural-resource-based sectors. Indeed, once general equilibrium considerations are taken into account, in all likelihood the manufacturing sector as a whole experienced negative net resource transfers.
That is from the very interesting Industrial Policy in an Era of Globalization: Lessons from Asia, by Marcus Noland and Howard Pack. This book is a good rebuttal to the claim that Asian economic success was fundamentally driven by industrial policy. I thank a loyal MR reader who sent me this book, as a supplement to exchanges with Dani Rodrik.
Addendum: Do see Rodrik's response in the comments...
Posted by Tyler Cowen on August 26, 2007 at 05:46 AM in History | Permalink
Comments
My problem with industrial policy isn't so much its results when it is done well as the distruptive incentives it creates. Industrial policy that does drive forward investments in important areas can have good results. The problem is that it all too often turns into corporate welfare.
Posted by: PEG at Aug 26, 2007 7:19:51 AM
Tyler-
Alas, this book is as intent on showing that industrial policy did not work as the earlier works by Amsden and Wade were on demonstrating that it did. Ultimately, none of them is really convincing for methodological reasons (no explicit counterfactuals and inability to handle endogeneity of policy interventions). There is a newer generation of work, that is much more explicit about counterfactuals and identification (such as the papers on directed credit in India by Banerjee and Duflo and on state aids in the U.K. by John van Reenen and his colleagues) which is much more credible and which does suggest that industrial policy sometimes works. Which is really the most we can say about it. If you will forgive the plug, I discuss the empirical evidence at length in my paper "Normalizing Industrial Policy" which is on my web page (http://ksghome.harvard.edu/~drodrik/papers.html).
Posted by: Dani Rodrik at Aug 26, 2007 8:46:46 AM
"suggest[s] that industrial policy sometimes works" - isn't that like saying "playing Blackjack is sometimes profitable"? Central planners are gambling with someone else's money. Even if the odds are against them, occasionally they'll come out ahead.
Posted by: Josh Sacks at Aug 26, 2007 4:00:40 PM
Did industrial policy drive Asian economic growth?
I'm not sure whether Japan is really a good example here, though, is it? Japanese modernisation occurred mostly between the Meiji Isshin and WWII -- after that point, it played catch-up from a fairly sophisticated base of human capital, and postwar industrial policy manipulations by MITI and suchlike were dealing with an economy that was already pretty mature.
When we think of industrial policy and Asia, though, we're usually thinking of places like Korea or the other "Asian Tigers," -- places that (at least in the case of South Korea) started from basically a feudal economy in 1945 (industrialisation under the Japanese Empire was primarily concentrated in the North) and developed into functioning industrialised states some time between 1960 (when Park Chung Hee really kicked off government-driven industrialisation) and the mid-80s, then experienced fantastic economic growth in the 90s (1997 notwithstanding). There were successes and failures, to be sure, but it's just hard for me to see how something other than the dictatorship's export-driven development programme could have developed the base of technical and managerial know-how that serves as the foundation of the chaebol and of the modern Korean economy. I guess there might have been development in other ways, in other directions, but I have difficulty imagining them being any more a success than, say, Bangladesh or wherever. There would be successful small businessmen and neighbourhood economies with no way to leverage that up.
Posted by: Taeyoung at Aug 26, 2007 4:24:17 PM
'isn't that like saying "playing Blackjack is sometimes profitable"?'
Not really. Even with an optimal strategy, the expected profitability of playing blackjack is presumably negative (at least assuming you can't count cards). Dani's whole point is that this isn't necessarily true of industrial policy: there may be strategies that make it's expected value positive.
Posted by: conchis at Aug 26, 2007 5:01:36 PM
Ok, now I'll have to contradict one of my recent posts and approvingly link to Krugman. The old Krugman, anyway: http://web.mit.edu/krugman/www/myth.html
Posted by: Bernard Guerrero at Aug 26, 2007 5:45:12 PM
If industrial policy is so great, how is it that the Asian "miracle economy" that has the highest GDP per capita GDP (and the lowest 2006 debt to GDP ratio) amongst those countries is also the one with the least top down policy over the past decades?
Show me a country that has excellent formal or informal protection for property rights, and has an excellent education system, and has a policy that plausibly favors investment, and is war-free, and I'll show you a country that has done quite well over the time period that those prerequisites have been in place, especially if it starts from a low base.
You don't need the industrial policy crutch to explain the growth of any country, they all fit the above to a pretty close degree.
Posted by: happyjuggler0 at Aug 26, 2007 6:59:33 PM
I interpret "industrial policy sometimes works" as meaning it sometimes is a value-positive proposition--hardly a ringing endorsement.
Furthermore, while Dani is fond of pointing out the dozen prerequisites and caveats for markets to "work," I would suggest that all those stars need to be aligned to make intervention "work." In other words, I believe (in first-best fashion, perhaps) that policy uncertainty favors lack of intervention far more than economic uncertainty might favor intervention.
Back in the real world, the weight of historical evidence is heavily against government intervention. New York's success with the Erie Canal drew a half dozen other states into bankruptcy with their transport projects. The odds have hardly improved since.
Posted by: M. Hodak at Aug 26, 2007 9:08:28 PM
@happyjuggler:
Japan started from a higher base?
Posted by: JSK at Aug 27, 2007 6:04:34 AM
I'm curious, what natural resource industries did Japan and South Korea develop,
steel maybe?
Posted by: spencer at Aug 27, 2007 9:06:58 AM
Question: What's the correlation between industrial policy and land reform. As I recall, left-wing style land reform in Taiwan by the Kuomintang (originally a Marxist-lNeinist party themselves!) provided a nice set up for solid capitalist growth.
Posted by: Keith at Aug 27, 2007 10:30:33 AM
Show me a country ranked "Free" on the Index of Economic Freedom, yet unable to grow out of poverty, and then I'll be willing to look at the possibility that industrial policy is more useful than economic freedom to growth.
Posted by: Mr. Econotarian at Aug 27, 2007 12:48:20 PM
JSK,
I've reread my post a couple of times and can't discern where you got confused. I certainly did not intend to claim Japan started from a high base, and I don't think it reads that way now after rereading it.
My reference to starting from a smaller (per capita GDP) base being helpful is simply a reference to convergence theory. It is easier to grow by playing follow the leader than it is to grow by playing innovator. Especially if you want to grow quickly.
By the way, the "country" I was referencing as doing the best amongst the "Asian Miracle"'s, but inadvertantly left out its name, is Hong Kong, with a 2006 per capita GDP (PPP of course) of $37,300 and a 1% debt as a percent of GDP.
By comparison, other Asian countries GDP's via the same source, including those not normally considered "miracles" and including the bigger population countries, include Australia $33,300 per capita GDP, Japan $33,100, Singapore $31,400, Taiwan $29,500, New Zealand $26,200, Brunei (for perspective, it is oil rich and not rationally comparable) $25,600, South Korea $24,500, Macau $24,300 (2005), Malaysia $12,900, Thailand $9,200, China $7,700, Philippines $5,000, Indonesia $3,900, India $3,800, Viet Nam $3,100, Pakistan $2,600, Cambodia $2,700, Bangladesh $2,300, Mongolia $2,100 (ok, it's not a high population country, sue me), Afghanistan $800 (2004).
Posted by: happyjuggler0 at Aug 27, 2007 2:56:55 PM
Keith, was Kuomintang really Marxist-Leninist? I thought they were just nationalist & republican (and opportunistically left/right as circumstances dictated but without much of a coherent ideology). The communist party was a faction within it, but I don't think they ever really got along with the leadership of the party.
Posted by: TGGP at Aug 27, 2007 3:48:56 PM
Let's see, industrial policy was reasonably successful in Japan, South Korea, and Singapore, while laissez-faire was reasonably successful in Hong Kong, Taiwan, and China. Hmmmhhhmmhm ...
Maybe some other factor might possibly account for the common success of countries with Northeast Asian populations?
Posted by: Steve Sailer at Aug 27, 2007 9:37:18 PM
Let's see, industrial policy was reasonably successful in Japan, South Korea, and Singapore, while laissez-faire was reasonably successful in Hong Kong, Taiwan, and China. Hmmmhhhmmhm ...
Maybe some other factor might possibly account for the common success of countries with Northeast Asian populations?
Posted by: Steve Sailer at Aug 27, 2007 9:39:20 PM
Please, just stop dancing around delicate words and phrases and just come out and admit that you believe blacks are inferior to whites and Asians due to their low average IQ.
Posted by: David Alexander at Aug 28, 2007 2:13:10 AM
Keith,
I think the KMT's land polcies were actually Georgist. Hong Kong also socialized land rent, I believe. And MacArthur tried to do something along those lines in Japan, although my memory is hazy on the details.
Posted by: Kevin Carson at Aug 28, 2007 3:48:23 AM
Did industrial policy drive Asian economic growth?
I didn’t read the book “Industrial Policy in an Era of Globalization: Lessons from Asia“ yet and I do not know how Marcus Noland and Howerd Pack justify the growth in Asia, but fact is, that the GDP of the eight states (Japan, Hong Kong, Korea, Singapore, Taiwan, Indonesian, Malaise and Thailand, which constitute an informal trade association) grew since 1960 more then twice as fast as the rest of the east Asian states and thrice as fast as Latin America. Their fraction on global export rose from 1965 to 1990 from 9% to 21%.
The neo-classicism holds that these countries have achieved their extraordinary development by orientation at the market and the international competition, and that the state only created general conditions.
In my mind, these countries have achieved their extraordinary development by acting instead of running the discussion whether the state ought to interfere or not. For them there is nothing to it, if they pitch up a technology that is especial worth to assist and (at the same time) collaborate with the domestic economy. Every Asian state whether democratic or authoritarian is helpful to the national industry. The diverse departments horn in massively – ideally and financially.
The Japanese state plays especially in the fundamental research a decisive and delegated role; it spend twice as much as companies, about 15 billion dollar.
The Asian competitor studied the Japanese “success-model” particularly and copies it more or less.
On this account, nearly every country in East Asia designed an ambitious research program and mighty institutions were installed for control and for sponsorship of the process of innovation.
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