Stanford vs Watson on Industrial Policy
Bill Watson might just be my very favourite right-wing economist.Â (He might disagree with that moniker.Â Or he might not.Â He probably thinks he’s just beingÂ “rational.”)Â 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).Â He even (sometimes) acknowledges when we’re right.Â I remember one memorable Post column, in which he reported fairly on an economists’ roundtable meeting sponsored by the Alternative Federal Budget.Â The column wasÂ Â titled “Good Ideas From the Left … No, Really!”Â (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.Â I knew it would be fair, honest, and provocative.Â And it was.
The sponsor was this new journo coming out of York U called Global Brief, and its entrepreneurial editor Irvin Studin.Â 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.”Â It invokes an old-fashioned notion of chasing smokestacks.Â A better term, I submit, is “sector development policy.”Â (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):
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.Â They don’t leave it to markets and comparative advantage.Â 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.Â In aggregate quantity terms, we’ve fallen into deficit.Â In qualitative or compositional terms, we’ve gone clearly backwards — toward the old staples model we’ve been trying to escape since Confederation.Â Exports have fallen dramatically relative to total output; and primary exports have grown dramatically as a share of total exports.Â Productivity is stagnant.Â Pollution is rampant.Â 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.