Stanford vs Watson on Industrial Policy

Bill Watson might just be my very favourite right-wing economist.  (He might disagree with that moniker.  Or he might not.  He probably thinks he’s just being “rational.”)  Prof at McGill, punchy commentator for the National Post, and always game for a fair debate (unlike most of his ilk who just try to ignore us in hopes we’ll go away and stop bugging them).  He even (sometimes) acknowledges when we’re right.  I remember one memorable Post column, in which he reported fairly on an economists’ roundtable meeting sponsored by the Alternative Federal Budget.  The column was  titled “Good Ideas From the Left … No, Really!”  (The idea of ours he really liked was to eliminate some federal tax expenditures, go figger.)

So when I was asked to participate in an e-mail debate with Bill on the subject of industrial policy, I agreed in an instant.  I knew it would be fair, honest, and provocative.  And it was.

The sponsor was this new journo coming out of York U called Global Brief, and its entrepreneurial editor Irvin Studin.  The topic was whether it makes sense to support “national champions” (which I interpreted in the broad sense as referring to entire industries, not just particular companies).

I don’t actually like the term “industrial policy.”  It invokes an old-fashioned notion of chasing smokestacks.  A better term, I submit, is “sector development policy.”  (That’s the term we’ve been using for a while now in the AFB process.)

Here’s the link to the full Stanford-Watson exchange (he went first, but then I got the last word … I’m still trying to figure out which was better):

http://globalbrief.ca/blog/2010/06/14/betting-on-big-companies-%e2%80%93-en-vogue-again/

The Coles Notes storyline from my side of the fence goes like this:

  • Tradeable industries are strategically important (affecting a nation or region’s balance of payments constraint on growth, a la Thirlwall).
  • A region has to have enough export success to support high employment levels (the fallback is to reduce output to balance external accounts, which is painful).
  • Some tradeable industries are better than others (demonstrating preferable trends in productivity, terms of trade, innovation, supply chain externalities, etc.).
  • Most tradeable industries have nothing to do with traditional comparative-advantage factors; modern manufacturing and tradeable services reflect competitive advantage, not comparative advantage, and nations or regions construct their success, rather than it being endowed upon them like manna from a Ricardean heaven.
  • It is smart for governments to promote the domestic location, success, and expansion of desireable tradeable industries (those with high and growing productivity, high innovation content, higher than average incomes, and positive externalities).
  • Countries which have done well in global trade in recent decades (from Korea to Finland, China to Germany) have done exactly that.  They don’t leave it to markets and comparative advantage.  They jump right in and get their collective hands dirty (relying on contributions and direction from all stakeholders, not just business) to build a greater presence of better tradeable sectors.

Canada’s performance in tradeable sectors since the FTA in 1988 has been abysmal.  In aggregate quantity terms, we’ve fallen into deficit.  In qualitative or compositional terms, we’ve gone clearly backwards — toward the old staples model we’ve been trying to escape since Confederation.  Exports have fallen dramatically relative to total output; and primary exports have grown dramatically as a share of total exports.  Productivity is stagnant.  Pollution is rampant.  We’ve relied on terms of trade gains to keep us in the ballpark … but history shows strongly that that can’t last for long.

Now that Canada’s government owns 2 auto companies (by accident much more than design), it’s a great time to rethink the “leave it to the comparative advantage beaver” approach that has dominated our industrial policy (non-policy) for over two decades.

10 comments

  • Hi Jim,

    What do you think is the blockage to a broader, more sustained adult conversation about developing serious sectoral developmental policies in Canada?

    I ask because if we go back to the McDonald Commission it is pretty clear that the industrial leaders of the time decided to wash their hands of even Trudeau’s limp attempt at developing an industrial policy. As the 80s and 90s wore on the regional development plans became little more than sorely executed unemployment management schemes. To my mind neoliberalism in Canada (free trade with private sector led development founded on coercive labour markets) can almost be read as the LCD solution to tensions between regional elites and between the feds and the provinces.

    If the above at all reflects a certain reality then industrial policy becomes a massive political challenge. Sectoral development strategies require careful planning and integration which do not always map well onto regional and provincial elites sense fairness and balance. Constitutionally speaking there is not much the feds can do to impose a coherent developmental strategy on the regions. The mantra of free trade and private sector led development might just have been, and continues to be, the ideological resource ready-to-hand that provides cover for what may fact be an intractable reality of constitutionally sanctified inarticulate relationship between the regions.

  • I think to the extent that our resistance to developmental policies has specifically Canadian roots, it has a lot to do with so many of our large corporations being US branch plants. The high proportion of foreign ownership tends to mean the parent companies are more interested in selling to Canada than doing things here. The result is that the CEOs of the Canadian branch plants are basically traitors, and exert their influence directly to the detriment of Canadian development.

    But more generally, there really aren’t a lot of national capitalists any more, and few who care much about the concept of economic growth. When it comes to national development, everyone would rather chase the lowest labour costs globally. And while there’s lots of lip service paid to growth, elites play the game as if it were zero sum (less for the poor means more for them) and don’t really care that it’s actually negative sum (high inequality, greater share for the elite and less for everyone else, shrinks demand and hence the economy) as long as the result is they’re more firmly in control.

    So yeah, if you took neoliberal rhetoric at anything close to face value, you’d think they’d support development, but they really don’t want it. Successful development just leads to the proles getting uppity.

  • Travis, your points are 100% bang on. And that’s a nice bit of historical context, to show that the FTA (the McDonald Commission’s main output) was itself an active decision to renunciate activist industrial policy (as opposed to industrial policy being “overruled” by the new trade agreements).

    I think it will require the development of an underlying base level critique of the patterns and private sector development for there to be more support for the sorts of measures that would constitute a real sector development programme. We need more awareness of the failure of markets (domestically and globally) to generate more of the good jobs we need.

    Where will that awareness come from? Perhaps worry over the precariousness of a resource-dominated economy (though I wouldn’t get my hopes too high on that score). Perhaps from environmental activism: the green jobs that environmentalists always talk about certainly won’t come without a hugely energetic and supportive sector strategy. Perhaps from international comparisons: as the US and the EU stagnate, and China/Korea/Brazil/et al roar past them in terms of growth, perhaps there will be more questioning of the Anglo-Saxon laissez faire model.

    At any rate, you are correct to indentif politics (not economics) as the main barrier.

  • It is an easy money mentality that reminds me of Lord Don’t Just sit there Steal Something Strathcona.

    Even in Quebec with a near majority of the population supporting a more independent state of some form the trend has been towards dismantling (inside the PQ too) the states capacity to plan and thus engage in sectoral development schemes. Part of the Caisse fiasco was that it had been derregulated so that it could turns its gaze to international financial opportunities away from Quebec. They of course got sold a bunch of sullied toilet paper by the Yanks (so much for the lore of Montreal financiers). When it blew-up remarkably little was said (in the English press at least) about how the liberalizing of its mandate was to blame in good measure.

    When nationalist elites do not even want to have some control over access to investment funds it becomes clear they are not interested in national development. I think therefore what Purple mentions is important. There is a relative dearth of pan Canadian and even regionally orientated capitalists. Which would be fine if there were regionally and nationally orientated states to step in and fill the vacuum. The new industrial policy is a series of trade junkets with photo ops and market access agreements which are politically expedient, relatively cheap and do not involve much heavy lifting and certainly little planning capacity within the national and regional states.

    It would be nice to hear Mel’s POV.

  • I am not Mel, actually you can call me Paul, however,

    I really do like Jim’s last action item, i.e. what can be done.

    As he states, when the examples of other industrial policy, innovative, growth strategies, there will be, and there already are the seeds of business and corporate culture change needed to bring about the political change. But we do need to consider how deeply rooted these beliefs, customs and rituals of the Anglo Saxon model are and how far reachingly entrenched the ability to keep pretending that their is nothing wrong with the model but how the social needs to be massaged more into the required economic. i.e. less unions, more corporate control.

    However, with the BP icon loudly storming it’s destructive bolts of lightening throughout the venacular, maybe the reality is starting to overcome and break through the veneer. It surely is a diffcult spot for the mensch behind the pumping of the neo-con model to contain the contradiction- financial disaster, environmental disaster and now a huge hit to the applied science under laissez faire deregulation of productive processes. In agreggate, I am amazed tha the model all came tumbling down within such a short time period. Yes many had been saying for many years that we were heading for such disasters, but I guess it was only through the Laissez Faire Steriods under G. Bush and his admin, that much of the necessary storm could muster enough to throw off the shackles of such hastily built fences that contained the otherness and kept it all within somekind of manageable chaotic economic order.

    However will any of thise result in the winds for politcial change in the progressive direction- well it is precisely why I am reading what I can on the political movements of the depression era, China, adn what is happening in latin America. Potentially some good cultural imports.

    How strong are those roots that will prevent change- is my final question.

    hmmm pretty strong.

  • Bill mentioned your Global Brief debate in a recent column about how too many Crown corporations have not yet been privatized.

  • Bill Watson said, “Bill Gates became filthy rich by pursuing a career in research and development”

    He got rich by lucking into a industry, operating systems, that has a strong Network Effect leading to the dominance of one company. He used that dominance to dominate another industry, office software.

  • Hmmm . . . I looked at that column.
    He doesn’t make a lot of economic arguments, does he? Just general assertions that privatization is good, and a basically anecdotal account of the existence of crown corporations called this and that. For instance, he *said* that any reason for rail or airlines to be public was long gone, but didn’t have anything to say about the stellar performance of our privatized rail services or Air Canada. Presumably because there isn’t a lot positive to say about how rail and airline have fared in the private sector. Remember when Air Canada was a *good* airline? Oh, yeah, that was back when it was . . . publicly owned!
    Similarly in the debate, he basically repeated many times that private was better because it just had to be–he specifically said at least once that X must not be so simply because he “couldn’t believe” it, while blithely ignoring all questions of empirical evidence.
    And this is one of the better ones? Lordy, right wing economics is bankrupt.

  • Oh, yeah . . . and don’t get me started on Bill Gates. If ever there were an argument for stronger public oversight, Microsoft’s impact on the world of computing is surely it.

  • PLG, you must be kidding. It’s pretty hard to make the case that the (IBM mainframe/VAX/PDP) world was Utopia until Bill Gates came along. Neal Stephenson makes the case that ubiquitous cheap Wintel boxes were what paved the way for Linux to be such a big success, and I think he may be right.

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