Transcript Economists` view on Industrial Policy

MGTECON 580: Class 2
The size and scope of Government
- Cross European differences in government models
- Economists’ view on Industrial Policy EU versus US
- Indicators on the size of “government”
- Empirical facts and trends
- The rationale for government intervention in market economy
- Politics vs. economics
- Industrial policy: a variety of definitions
- The EU framework
- Examples and actors on the EU level
- Should government engage in Industrial Policy at all?
- Does business like government intervention?
Conclusion:
Government shapes competitive
environment; this impacts (to the good or
the bad) on firm performance
Cross European Differences in
Government Models
The French model:
- Enlightened state, elite schools for bureaucracy and
business
- Sectoral planning, cross ownership, European-lead
projects
The UK model:
- Liberalization and privatization; theory-based “new”
regulation
- Competition policy, corporate governance
The German model:
- Shaping the competitive environment; sector neutrality
- States, banks, trade unions; two-tier boards
The Southern model:
- Over regulation without monitoring
- Inconsistent approach limits catching up
The Northern model:
- Paternalistic, egalitarian, high cost
- Efficiency-focus plus large firm bias
Economists’ view on
Industrial Policy: EU vs. US
Survey: 101 economists Industrial Policy network EUNIP
24 US/CAN/UK; 70 Europe (predominantly EU)
“The government interference in manufacturing in the
US and in Europe differs in style, but not in its extent”
All Answers
in %
US/CAN/UK
EU and co
Completely
agree
8.1
0.0
9.4
Agree with
provisions
33.3
29.2
34.4
Indifferent
15.2
20.8
12.5
Disagree
38.4
50.0
35.9
Completely
disagree
5.1
0.0
7.8
Average score
2.99
3.21
2.98
Remark: Completely agree is 1; completely disagree is 5
Economists’ view on
Industrial Policy: EU vs. US cont.
Examples for US interventions:
- Import duties to save ailing steel industry
- Tax rules favoring exports
- Anti-dumping rulings
- Bailing out of Chrysler, Savings & Loan System
- Tax money for tobacco planting
- Defense and research money
- Subsidies for Japanese car transplants
Evaluation: Policy interference
is higher in Europe, but it’s not
“all vs. nothing”
Indicators on the size of
government
Most used indicators (2000)
Share of government expenditures in GDP:
Share of taxes in GDP:
Share of surplus/deficit in GDP:
Government debt/GDP:
from 33% in IRE to 58% in S; EU 47%, US 32%
from 35% in IRE to 62% in S; EU 46%, US 34%
slight surplus in 2000, deficit in 2002
from 40% to 120%
A bunch of statistical problems
- Double counting of expenditures
- OECD and EU numbers different
- Tax deductions vs. expenditures
- One-time revenues (privatization, telecom auctions)
- Federal, state, local budgets; off-budget funds
Full economic assessment depends on activities:
- Defense
- Health system
- Research and Development
- Education
- Security
- Poverty, unemployment prevention
Empirical facts and trends
Secular increase (Wagner’s Law) of government
share in GDP
Positive relation to per capita GNP
- Causality direction from income to government
- Outliers: CH, US
Surprisingly weak impact on growth
- Importance of activities
Trend reversal: eighties and nineties
Policy: since 1980/1990, smaller is better, but…
- Actually maximum 1993: 52.4%
- 1990 - 2000: from 48.4% to 47.1% - 1.3%
12% Ireland (to 33%), - 8% Netherlands (to 47%)
German +4% to 48.4%, F +2% to 52.9%
Success depends on growth acceleration
The future?
- Privatization of railroads, health, pensions, defense,
jails
- Or evaluation on merits?
The rationale for government
intervention in a market economy?
1. Correction of market failure
1.1 Monopolistic distortion
- Rent are maximized if p = MC = AC
Monopolies, oligopolies, monopolistic competition
p>MC
1.2 Natural monopolies
- Market too small for more than one firm
1.3 External effects
- Firms invest but do not fully profit from R&D
- Firms pollute, but do not carry full costs
1.4 Asymmetric information
- (Small) firms are sound, but do not get credit
- Cars are lemons, but buyer can’t know
2. Provision of public goods
- non payers cannot be excluded from consumption, be it
out of technical reasons or cost inefficiency
3. Social preferences
- Government/electorate overrules private preferences
- Health, education
4. Macroeconomic reasons
- Cyclical dampening
- Promoting growth and competitiveness
Politics vs. economics
The necessity of state interference in unquestionable
- Intervention in 1 increases welfare
- Intervention in 4 increases growth and stability
- Intervention in 3 is ordered by electorate
- Increases in 2 can serve all goals or be “too much”
There are alternative techniques to reach goals
- setting price, splitting firms, enabling entry
- competition for markets
- public production, provision, removing obstacles
There are questions about the size of problem, when the
intervention should start
- market failure has to be compared to government failure
- regulation authority can be seized by regulated firm
- special interests are extremely good organized
Government priorities (agendas) can be very different
- lower interest rates for small firms or
- reducing the risk for new technologies or
- untaxed benefits for executives (stock options, luxury
expenditures)
The challenge:
Does government intervention
promote growth or deter business?
Industrial policy:
a variety of definitions
The comprehensive one:
- subset of interventions that might affect a company
The old European one:
- promoting structural adjustment necessitated by changes in
comparative advantage
The new European one:
- measures increasing productivity and competitiveness of
industry
American fear, European reality, East Asian hope:
- targeting at “strategic industries”
steel, ships, textiles (passive)
defense, air & spacecraft (procurement)
pharma, biotech, ICT, content, design, (picking tomorrow’s
winners
Remark 1: Never included: fiscal policy,
monetary policy, environmental policy
Remark 2: Included in wider definitions:
regional policy, corporate governance,
competition policy, regional policy
Industrial policy:
a variety of definitions
The core rule for the competitive framework:
Subsidies are forbidden, if they distort trade, and
no exception applies
Treaty of Rome, Art 8
Specific definition for Industrial Policy: Amsterdam
Treaty Art 157
- IP ensures conditions necessary for the competitiveness of the
community’s industry
- in accordance with a system of open and competitive markets
The principal exceptions
- regional development
- projects of common European interest (Airbus, Ariadne)
- serious disturbance in a member state (after oil shock 1973)
- aids not effecting trade conditions (most often used)
National investment promotion programs have to be
“notified”
- specific cases have to be reported or are investigated into by
the commission
- quantitative limits for exceptions: maxima and extra points
Extent of state Aid EU (Kuyper in Darmer): Between 1
and 2% of GDP with declining tendency
- excluding agriculture, excluding cohesion and social funds,
tax exemptions
Examples and Actors on the
European Level
Examples
- 25% of investment according to regional map
- 50% in objective 1 regions (< 75% per capita income)
- 75% for research spec. if pre-competitive
- 15% for small firms even if not in preferred region
- 300.00 Euro (cumulated 3 years) have not to be reported
- 30% for environment even if not in preferred region
- 75% for information technology related expenditurs
The core actors
- DG ENTERPRISE
- DG COMPETITION
- DG INTERNAL MARKET
The final goal of Industrial Policy as defined by EU:
Mission statement of DG enterprise: Increasing
European Competitiveness
“to enable enterprises to strengthen their competitiveness,
grow and develop in a way that is compatible with the overall
EU goal of sustainable development”
Strategic goal set at European Counsel in Lisbon
To become the world’s most competitive and dynamic
knowledge-driven economy
Does business like government
intervention?
Disliked:
Business taxes
Restricting rules
Appreciated:
Stable environment
Good education, research basis, legal system
Divided opinion depending on position:
Entry regulation: insider vs. outsider
Competition policy: Microsoft vs. Java
Subsides: in general less subsidies vs. lower taxes
Evaluation: In general not, in specific cases very much
Should government engage in
Industrial Policy at all?
101 economists Industrial Policy network EUNIP
24 US/CAN/UK; 70 Europe (predominantly EU)
“The best Industrial Policy is no Industrial Policy?”
In % of
answers
All
US/CAN/UK
EU and co
Completely
agree
6.9
8.3
3.0
Agree with
provisions
11.9
16.7
10.6
Indifferent
5.0
8.3
3.0
Disagree
42.6
29.2
50.0
Completely
disagree
33.7
37.5
33.3
Average score
3.84
3.71
4.00
Remark: Completely agree is 1; completely disagree is 5
Economist’s view on the
efficiency of mergers
101 economists Industrial Policy network EUNIP
24 US/CAN/UK; 70 Europe (predominantly EU)
In the long run mergers are not efficient
In % of
answers
All
US/CAN/UK
EU and other
Completely
agree
8.1
0.0
13.8
Agree with
provisions
54.0
70.8
55.4
Indifferent
10.0
8.3
7.7
Disagree
17.0
4.2
21.5
Completely
disagree
1.0
0.0
1.5
Average score
2.29
2.00
2.42
Remark: Completely agree is 1; completely disagree is 5
Conclusions
In all market economies, government intervenes, albeit at a
different size
Some of the interventions are welfare maximizing and have to
be favored by most market friendly economists and by
business
In absence of a consistent approach vested interests and lobby
groups determine the agenda
Industrial policy often intervenes against demand trends and try
to preserve past structures
Country models are different, the specific model decides about
success
Interventions are decreasing, instruments are optimized
(auctions)
The emphasis shifts from sectoral interventions to encouraging
activities and increasing competitiveness
Competition policy is more lenient in Europe, but neither US nor
EU act despite of the convincing evidence on the
unprofitability of mergers
Evaluation: Knowing the differences in the
rules and making use of them greatly
impacts on firm performance
Divides in Industrial Policy (A1)
Indicative planning vs. mandatory planning
Passive vs. active
Troubleshooting - targeting future growth industries
Horizontal vs. vertical
Targeting industries - promoting activities
Output goals vs. resource development
Removing obstacles to change vs. lowering the burden of
change
Competitive environment versus part-time shelter
Targeting industries or picking the winners
Tendering research money - setting up trans European firms
Encouraging size, mergers or monitoring competitive variety
Instruments of Industrial Policy
(A2)
Public ownership
Subsidies
Tax exemptions contingent on activities
Tax structure
Infrastructure
Competition rules