The IPL newsletter: Volume 14, Issue 284

INTRODUCTION

This newsletter is published by The Innovation Policy Lab at the Munk School of Global Affairs, University of Toronto, and sponsored by the Ministry of Research and Innovation. The views and ideas expressed in this newsletter do not necessarily reflect the views and policies of the Ontario Government.

Paradox Lost: Explaining Canada’s Research Strength and Innovation Weakness

Council of Canadian Academies
This report examines two questions that have been of perennial concern to Canadian policy-makers, industry leaders, and economists alike: (i) Why has Canada’s research excellence not translated into more business innovation?, and (ii) How has Canada’s economy sustained relative prosperity despite weak innovation and correspondingly feeble productivity growth? In their examination of these questions, the report’s authors consider the complex ways in which research leads to innovation, and the factors that motivate Canadian business strategy. As such, the report explores Canada’s current paradox and identifies four megatrends that will pose challenges for Canadian businesses in the years to come.

The Rejuvenation of Industrial Policy

Joseph E. Stiglitz, Justin Y. Lin, and Celestin Monga, World Bank
This essay is about an important area in which there has been major rethinking — industrial policy, by which the authors mean government policies directed at affecting the economic structure of the economy. The standard argument was that markets were efficient, so there was no need for government to intervene either in the allocation of resources across sectors or in the choices of technique. And even if markets were not efficient, governments were not likely to improve matters. But the 2008-2009 global financial crisis showed that markets were not necessarily efficient and, indeed, there was a broad consensus that without strong government intervention — which included providing lifelines to certain firms and certain industries — the market economies of the United States and Europe may have collapsed. Today, the relevance and pertinence of industrial policies are acknowledged by mainstream economists and political leaders from all sides of the ideological spectrum. But what exactly is industrial policy? Why has it raised so much controversy and confusion? What is the compelling new rationale that seems to bring mainstream economists to acknowledge the crucial importance of industrial policy and revisit some of the fundamental assumptions of economic theory and economic development? How can industrial policy be designed to avoid the pitfalls of some of the seeming past failures and to emulate some of the past successes? What are the contours of the emerging consensus and remaining issues and open questions? The paper addresses these questions.

The consensus among economists and policymakers has grown wider on the need for governments to focus on promoting learning, infant industries and economies, exports, and the private sector, not only in manufacturing but also agriculture and services such as, health, information technology, or finance. Industrial policy is therefore not just about manufacturing. As President Obama argued, “[E]very dollar we invested to map the human genome returned $140 to our economy. Today, our scientists are mapping the human brain to unlock the answers to Alzheimer’s; developing drugs to regenerate damaged organs; devising new material to make batteries ten times more powerful. Now is not the time to gut these job-creating investments in science and innovation. Now is the time to reach a level of research and development not seen since the height of the Space Race. And today, no area holds more promise than our investments in American energy.”

While industrial policies which promote the structural transformation of the economy and which help create a learning economy are two of the central objectives of modern industrial policies, industrial policies may be used to pursue a number of other social objectives especially in developing countries.

Industrial policy has, for instance, been used to correct not only market failures, but also government failures. In some countries and contrary to popular belief, state enterprises have been islands of relatively good governance, even when the economy suffered from massive government failure. A case in point is Brazil’s Banco Nacional de Desenvolvimento Econômico e Social (BNDES, a development bank), which has resisted political pressures rather well through decades of poor political governance. It is credited for having helped quite a few industries take off.

Other new economic functions of industrial policy include addressing distributional issues effectively and promoting employment. Despite a wide convergence of views on these new theoretical underpinnings of industrial policy, there are still some important issues up for debate—especially regarding the scope, instruments, and implementation challenges in the often weak institutional context of developing countries. The competencies of government should affect the choice of instruments, and perhaps the “ambition” of industrial policy. Limited competencies suggest that broad based measures—like those associated with maintaining an undervalued exchange rate—may be preferable to more targeted measures. Important questions asare: If industrial policy is inevitable anyway, what should be done differently to avoid past mistakes? What institutional context is needed to mitigate the risks of state capture and rent-seeking? Is there a fine line between state capture versus most types of public-private partnerships? What is the optimal way of designing and implementing industrial policy in the context of fragile/unstable states where there are pervasive governance/rent-seeking problems?

The papers in Stiglitz and Lin’s new book (2013) debate these questions, identify some basic principles that successful industrial policy arrangements have in common, but also highlight the difficulties of moving from theory to practice. They are organized in four sections. The first one deals with conceptual issues and principles of industrial policy. The second section discusses some of the special issues that developing countries face when designing and implementing industrial policy. The third section of the book is devoted to the instruments of industrial policy, and the fourth section presents regional and country case studies of successful and unsuccessful industrial policies.