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Odd Lots Podcast Episode Summary: "This Is How Industrial Policy Can Go Bad"
Episode Overview In this episode of the Odd Lots podcast, hosts Joe Weisenthal and Tracy Alloway discuss the resurgence of industrial policy in the U.S., particularly focusing on the administration's efforts to revitalize sectors like clean energy and semiconductors. They explore the complexities and potential pitfalls of implementing industrial policy, with insights from Vivek Chibber, a sociology professor at NYU.
Key Themes
- Definition of Industrial Policy
- Concept: Industrial policy refers to a specific type of government intervention aimed at bolstering particular sectors within a country's economy, especially manufacturing, rather than general economic intervention.
- Distinction: It's crucial to differentiate between general state intervention and targeted industrial policy, which specifically seeks to change investment flows towards selected winners in the economy.
- Historical Context and Successful Examples
- Successful Cases: Historical examples of successful industrial policy include Japan, South Korea, and Taiwan. In Europe, France post-World War II is also noted as a case of effective industrial policy.
- Critiques of Industrial Policy: Many countries have attempted industrial policy, but numerous have failed, leading to concerns over whether the U.S. approach will yield positive outcomes.
- Political and Economic Dynamics
- Political Systems: The effectiveness of industrial policy is heavily influenced by the political systems in place. Democracies can mobilize public opinion to hold businesses accountable for using government subsidies effectively.
- Economic Context: The U.S. is not a developing country, which adds complexity to its industrial policy situation. The conversation also contrasts the experiences of countries like India, where the political and economic structures led to less successful outcomes than in East Asia.
- Challenges of Implementing Industrial Policy
- Market Competition: A fundamental risk of industrial policy is the potential for creating monopolies and reducing competitive pressures on firms, leading to inefficiencies and low productivity.
- Discipline Mechanisms: Successful industrial policy requires mechanisms to ensure firms use subsidies productively. Countries that succeeded managed to enforce competitive pressures even while providing support.
- U.S. Industrial Policy Today
- Current Endeavors: Recent U.S. legislation such as the CHIPS Act and the Inflation Reduction Act aims to create a more conducive environment for manufacturing through subsidies.
- Institutional Limitations: The U.S. government lacks the robust administrative capacity to effectively manage and monitor the intended use of these subsidies, leading to concerns about the distribution of funds and accountability.
- Recommendations for Improvement
- Transparent Agency Creation: Chibber suggests establishing an agency dedicated to industrial policy that includes representatives from labor sectors, ensuring a broader perspective in decision-making.
- Engagement with Workers: Involving employees in industrial policy discussions could foster a sense of ownership and accountability, aligning private benefits with public good.
Conclusion and Key Takeaways
- The episode emphasizes the complexity and risks associated with U.S. industrial policy. While historical examples of success exist, the unique political and economic landscape of the U.S. presents both opportunities and challenges.
- Key points include the importance of maintaining competitive pressures on firms, the role of political systems in enforcing accountability, and the need for a more transparent approach to industrial policy that includes diverse stakeholder perspectives.
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Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
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2:01Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, you know, we obviously talk a lot on the show about U.S. industrial policy and these various investments we're making in things like chips, clean energy, batteries, and so forth. Did you see there was some actually good news on the chips front recently? Oh, what was that? The new fab that TSMC is building in Arizona is getting as good yields as their existing fabs in Taiwan. At least in theory, it looks like Americans are capable of building as well as anyone else in the world, at least in theory.
2:39That is fab, Joe. That's fabulous fab productivity news. Have I told you, by the way, since you joked about that, I really think fab apostrophe less, like fabulous semiconductor would be a really good name for. Oh, yeah. I think you've pitched this before. I agree with you. That would be good. But OK, so setting aside that one plant, which hasn't actually opened yet, I believe, I think that it's scheduled to open in 2025, setting aside good signs of positive yields there, like I remain anxious about whether any of this is going to ultimately work or whether we're going to have a lot of billions and billion dollars spend and either unproductive plants or plants producing stuff that there really is an end demand market for.
3:24Or like if it all turned out to be a waste of tens and tens of billions of dollars, let's just say I wouldn't be shocked. Well, I don't think you're alone in your concern. I think there is a wider recognition nowadays that there are areas of the economy or certain businesses that might be strategically important where not enough capital is flowing into through the private market. And so maybe the government wants to do something to build up those industries. It feels like in general, there is more of a recognition or perhaps acceptance of that idea. But as you say, there remain some very, very big questions about the specific design of industrial policy and the idea of, well, you know, maybe there's good and bad industrial policy.
4:09Maybe if you throw money at a particular industry through subsidies or whatever, then all you're doing is building up overcapacity that eventually is not going to be able to compete on the global stage. And I think those are very valid critiques. And we have seen a number of examples throughout history of industrial policy that hasn't quite worked out as intended. Totally. And, you know, I think there's a few other dimensions here that I think are important. So one is when we talk about industrial policy throughout history or development strategy for a lot of countries, it's like, A, a lot of it has failed.
4:44Countries have tried to industrialize or rise to some level where they have competitive manufactured goods without working out. Two is the fact that one thing that's unique is we're not a poor country and we're not a country that's like trying to rise per se in the development ladder. So a lot of theory of industrial policy is sort of talking about countries, many of them in East Asia that have succeeded or others that have failed. But those were countries that were when they started quite poor relative to us. And we're rich and a lot of our anxiety is about specific sectors rather than the sort of wealth of the economy as a whole.
5:19So there is a lot to dive into. Well, the other difference that comes up a lot is political systems. Yes. Right. So we're a democracy and a lot of countries that have, to some extent, successfully democratized. You often hear the argument that they were only able to do it because they either had a command economy or perhaps they had authoritarian leaning regimes and things like that. So I think the design of industrial policy, its success, its failure is definitely a worthy topic. Totally. Well, there's a lot to dive in on. So we should get right into it. We really do have the perfect guest today.
5:54We're going to be speaking with Vivek Chibber. He is a sociology professor at NYU, and he's written a lot on development and industrial policy, among many other things. So thank you so much for coming in. Thanks for having me. Why don't we start with what I guess would be a definitional question that I'm not sure if we've ever actually asked anyone on the show, but what is industrial policy? We talk about it all the time, and I realize, like, I actually don't know what that term means. Yeah, it's actually an important question because a lot of times when people are debating industrial policy, they assimilate it into a wider set of phenomena, a wider set of state actions, which really makes it hard to have a kind of a productive discussion around it.
6:37So industrial policy is a particular kind of state intervention in the economy. That means you can have forms of state intervention. States are involved in economies all the time. They affect its sectoral balance. They affect its place in the global economy. They affect trade flows without necessarily, however, being forms of industrial policy. So industrial policy is a specific sort of state intervention and it shouldn't be confused with state intervention per se. All right. So what's specific about it? I mean, there isn't a kind of a consensus, a universal consensus around what we mean when we use the term, but by and large, what people mean by it, and there's sort of an agreement, is that when states intervene to bolster particular sectors of the manufacturing base of the economy, rather than affecting the general structure, the general, the proportion between manufacturing and agriculture and such things.
7:33So the term goes, when you're selecting winners, when you say that sector or that plant or that area of manufacturing should be supported and change, therefore, the balance of investment flows from one sector to the other. When you think about successful industrial policy, give us some examples of a particular country or economy that comes to mind. The kind of the universally accepted examples are Japan, South Korea, Taiwan. And interestingly, in Europe, among people who study European political economy, France from, say, the early years after Second World War into the late 60s is another example that people take up as successful industrial policy.
8:18Say more about what that looks like. So we look back at some of these East Asian countries or France, we say, OK, they did successful industrial policy. I mean, I'm sure we could talk for hours and hours just about any one of these specifics. But when you say, or when people generally say, this is what success looks like, well, give us the contours. All right. So industrial policy, if you know a little bit about economics, it's kind of a step away from and an explicit repudiation of what's called comparative advantage. So traditional economic theory said what countries should do is not what they do better than other people.
8:54It's what they do best in the range of activities that they can manage. So you may be not very good at producing textiles, if you're Korea, compared to, say, Japan. But if producing textiles is the best you can do, then you produce the textiles, right? And how do you find out what you're best at? Well, you let the market tell you. You let the market tell you, and you discover that by opening up your economy and see where rational investors are taking their money because they want to make profits. They'll take the money wherever they think they can do best with that money. All right. So the idea then was countries will choose those specializations in which they have the factor endowment that makes sense.
9:36So if you're a country that's poor, it means you got not very much capital, but you got a lot of people. You got a lot of land. So you specialize with those factors that you have a lot of, which is land and people. What does that mean concretely? It means poor countries should specialize in labor-intensive industries or agriculture. Now, from the standpoint of the poor countries, they looked at this and they said, well, geez, that means basically we're being asked to lock ourselves into the least productive, least profitable, and those sectors that are the least propitious for growth. Because agriculture doesn't generate high growth, nor does labor intensive industry.
10:09So they said, essentially, what this looks like is a rationalization for rich countries to hoard and keep to themselves all the best sectors, and we get the scraps. Right. And commodities exploitation as well. Exactly. Commodity exploitation, oil, cheap clothes, corn, wheat, that sort of thing. And that's what was associated with being poor in the global economy. All right, so what do you do? Starting in the 1940s, what some countries started doing was to say, we're going to try to move up the value chain. Instead of just making cheap shirts, cheap shoes, leather goods, what we're going to try to do is move into high-end consumer goods, automobiles, even capital goods like steel, heavy chemical.
10:49But how do you do that? The thing is, in those economies, if you try to move into auto and you're a private investor, you'll get clobbered because you don't know how to do it. You don't know how to make a car. Ford's making them, GM's making them, and they make them a lot better than you. If you try to make your stupid little cars and you throw them into the global economy, no one's going to buy them. And if you try to do it by first producing them for your domestic market, why would consumers buy your cars when they can get top of the line GM cars, we're talking about the 1950s. The US auto economy dominates everything.
11:18So they said, if we're going to do this, we need to do two things. First of all, we need to open up a space in the domestic economy for our own manufacturing firms by protecting them. That's tariffs. We protect them so that foreign goods become more expensive and therefore our goods have some breathing space because when you start making a good for the first time, it's going to cost a little bit more to the consumer. The second thing we do is as governments, we make it attractive for investors to move into these lines because they're high risk. So what East Asian countries started to do was they did this twofold thing where they had what's called import substitution, which means you're trying to substitute for imports, your domestic goods.
12:01That means tariffs and protection. And then you try to plow money and incentives to domestic producers to promise them essentially you won't take a loss. And now what you've got is countries, instead of just specializing in cheap clothes and shoes and things like that, they start producing more high-end goods. And these are goods that produce more profits, have higher rates of growth, and propel that country into the ranks of first middle-income countries and then later high-income countries on the back of a dynamic and high-end manufacturing sector. That's basically what it amounts to. So how do you, and I alluded to this in the intro, but I think a traditional critique of industrial policy is that by subsidizing certain industries and maybe encouraging capital to pour into them, you perhaps sacrifice competitiveness in one way or another.
12:56And so the worry is that, well, when the subsidies eventually end or when companies are asked to stand on their own two feet and compete with global juggernauts, so Ford or whoever, they won't be able to do that. How do you balance, I guess, the need for discipline with the desire for successful industrial policy? Well, there's the general principle of what you ought to do. And then there's the tricky part of can you actually do it? So the problem, as you're saying, is that you hit it on the head. The problem is this. It's built into the model that there's a strong tendency towards failure. Now, where does this come from?
13:36Remember, what you're trying to do is figure out a way of making your economy more dynamic, more productive, so that you can move up in the global hierarchy of nations, okay? All right, so you're doing that by essentially insulating your domestic producers from competition and giving them lots of free money. Now, this, in some ways, takes away what is best about the market, right? Because why do capitalists, why do firms worry about productivity? It's that if they don't worry about productivity, they're going to go under. Well, what is it that punishes them? What's the instrument that punishes them if they forget about productivity?
14:10It's market competition. If you don't play the best game you can, you're going to be out of the game pretty soon because others are going to out-compete you, out-sell you. Now, what import substitution industrial policy does in principle is take away that competitive mechanism and substitute government oversight for that stuff. Now, the danger there is that you're essentially giving people monopolies. They're giving them a monopoly over certain sectors, insulating them from competition, and you're giving them free profits. And when they have free profits, why are they going to innovate? They have no direct incentive to innovate.
14:42So there are two possibilities. One is you deploy industrial policy and these artificial monopolies, and you end up getting a fat cat industrial sector that's gobbling up national resources, but not delivering a lot in terms of productivity and growth. The second possibility is that you give them these free profits, but then you also figure out some way to crack the whip so that they're forced, they're compelled to use those profits productively. Now, a lot of countries try, everybody knew this. This isn't rocket science. Everybody knows, every economist knows monopolies are bad for growth. So what happened?
15:17And in spite of the fact that they knew it, in a lot of these countries, the monopolies did in fact lead to a lot of low productivity, sloppy, flabby firms that are living high off the hog but not doing much with it. India was one. Brazil was another. Then there were countries where you actually had more abject failures like the Philippines. But then there was a small subset of countries like these East Asian ones where they do the same thing with monopolies and tariffs and subsidies, but you don't get the same outcome. The question is why, and the reason is they managed to complement the subsidies with some kind of enforced competitive pressures.
15:54Well, how do they do that? What they did was to say, okay, we'll give you these subsidies. We'll protect you from foreign competition at home, but in order to keep getting the subsidies year after year, investment cycle after investment cycle, you need to show us that you're using it productively. How do you show that? We want to see you succeed in export markets. Take this money, invest it, and now don't just produce your Hyundai or your Kia for the home market. We want to see you, and the Toyotas for the home market, we want to see you selling it in the US, in Europe, which are really, really competitive.
16:26Either you innovate or you die in those areas. So now you had an unambiguous metric by which you could say whether or not you're succeeding in picking these winners and whether or not they're in fact winners. And it turned out some of them failed, but others succeeded.
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19:20Because when you know what's really in your policy, you can plan, protect, and avoid surprises. Before you trust your policy to protect you, let My Policy Advocate tell you what it really says. Visit MyPolicyAdvocate.com today. Peace of mind starts with knowing the truth. mypolicyadvocate.com. The intuitions of what you say sound incredibly obvious and clear. I get the idea of like, okay, you need to clear some space in the domestic market so that companies have a chance to get off the ground and breathe. That giving companies free money is only going to accomplish your goals if companies use the money to invest and improve their productivity and innovate, et cetera.
20:03And that the test for whether they're improving and innovating and creating competitive products are those foreign markets in which the local country has no control, and therefore you're just on your own and you're free competing against the Fords and et cetera of the world. A, why didn't every country go down that route? And sort of what has to happen, I guess, politically such that the capitalists who build these factories accept that premise and don't just sort of try to squirrel away the money without ever having competed internationally? Yeah, perfect questions. And the answer to both is actually the same answer.
20:40Okay. The dilemma was essentially a political dilemma, not a technical one and not an economic one. And this is where the critics of import substitution kind of kept scratching their heads and saying, look, we know that the answer to how to make this a successful policy is to discipline these firms that are getting all this money, to discipline them with competitive pressures. So the best way to do that is through export promotion. And by the late 60s, early 70s, you saw the World Bank, the IMF, both what's called the Bretton Woods institutions, but also the Economic Commission on Latin America, which was the godfather of import substitution, and also the planning agencies in the global south, all saying, we need to promote exports in our economies to push these guys into competitive regions, but it only happened in two or three countries.
21:30In country after country after country, you found them hanging on to the subsidies and the general import substitution long after everyone realized, look, we've reached about as far as we can go with the subsidy side. Now we need to push these guys into competition. Long after they understood that, they stuck with a self-defeating policy. The question is why, and the answer is political. Basically, it's this. All the economists assumed was a government and a state that's essentially free to do and powerful enough to do whatever it wants, to tell firms to do whatever it wants them to do, and they're going to step into line.
22:06But the fact is, in any modern industrial capitalist economy, these firms who you're trying to push into exports are also the people with the most political power, the most political influence. They have the lobbyists, they have all the money, they fund elections, and they run the economy. So here's the trap you were in. You gave them a bunch of free money, and now you're asking them to give up that free money and go into essentially shark-infested waters. And country after country, what most of them said was, nah, we're not going to do it. Actually, we like it just the way it is. And since we fund all the politicians, whoever gets into power, we're going to make sure they keep plowing this money towards us.
22:43Now, in the countries where that didn't happen, Korea, Taiwan, Japan, why did it not happen? some very, very special circumstances allowed them to get into these shark infested waters in a way that was safe. So I'll give you the example of Korea. Korea switches to a heavy reliance on exports in the mid to late 60s. Why does it do that? Essentially what happened was it entered into these partnerships with Japanese firms who already had a foothold in the highly competitive and thereby dangerous American market. Foothold in what? In the lower end manufacturing export sectors, exports for Japan, imports for the United States, where they had established sales networks, banking facilities, they knew the market, they knew they had customer relations.
23:29And what Japan wanted to do is essentially move out of these lines into more high end lines of high end consumer products and capital goods. So what they said was, actually, we don't have to give up all the contacts and all the money we're making in these low-end lines, because what we can do is have joint ventures with Korean firms. They come in, we shepherd them into selling shirts and shoes and all this. And the way we make money is we give them the bank loans that enables them to open up the factories in Korea that produce this stuff. So now we're making money in the higher end goods that we're entering in the United States for the first time.
24:07But in the lower end sectors, we switch from selling products to selling loans. And that way, the Korean firms take advantage of our sales networks, overcome a lot of the entry barriers, and they're good on the loans that we're giving them. And now we've got money coming from two ends instead of one. Now, the thing is, take a country like India. India had partnerships with British and American firms, just like Korea has partnerships with Japanese firms. The difference is the British and American firms explicitly forbade their Indian partners in India to sell in export markets because they wanted to keep them for themselves.
24:42So now, whereas Korea is getting a free entry into these deadly competitive markets through the good fortune, essentially it's just good fortune, of having a Japanese partner. Yeah. Indians - So there's a fundamentally different type of Japanese and a US partner when the US is the market you're going for. It's a historical accident. Korea happened to be in the Japanese economic sphere of influence. Now, I should say one thing. There is this myth out there that because of the Cold War, because the United States favored Korea and it essentially opened the doors to them and allowed them entry into these markets.
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25:16And that's really not true. Because again, when you're entering these markets, you're displacing American firms. Why would American firms let their congressmen just open up the doors to their competitors? And they didn't. what I found when I did the research was every time the Koreans succeeded in some part of the country, the firms from that part of the country got their representatives to put up tariff barriers, keeping those Korean firms out. What the Koreans did that was really amazing was they kept switching from one line to the other. So if you're, you know, textiles is a hierarchical sector.
25:47So if they put up barriers on the lowest end of textiles, you move up the value chain into They're synthetic. Monkeys swinging from tree to tree. Yeah, exactly. So it wasn't the Cold War. It wasn't America handing these countries free markets. I mean, they would have done that with India. In the 50s and 60s, India was the golden child of American foreign policy because they wanted it to be an example against China. They couldn't do it. These countries succeeded not because the US opened up their markets to them, but because they had the wherewithal to get over American tariffs. Since you brought up India, I feel I need to perhaps preface this question with a caveat, which is everything I know about Indian industrial policy came from the Bollywood film, The Guru, where I think Abhishek Bakchan plays like a polyester manufacturer that becomes a business tycoon.
26:35And everything I know about Indian infrastructure comes from Sway Days with Shah Rukh Khan. And everything I know about cricket comes from Lagan. Anyway. That was good. Thank you. So essentially, you just advertised three Indian movies. Yes, they're all excellent. But one thing I was wondering is, OK, the temptation is to just play in your domestic market because it's easier. You're protected that way. I guess what I'm wondering is, does the size of the domestic market or the makeup of the domestic market matter here? Because if I also think about a thing that ties together Taiwan, Japan and Korea, it's that at those times, they were relatively small markets and not as wealthy as they are now, certainly.
27:20Definitely, South Korea was pretty poor in that time period. So I guess, is the temptation perhaps to look outside and maybe do more exports if your own domestic market is smaller or more limited? Maybe China is the exception here. Yes and no. It's a really good question. And on this too, I think people have misunderstood the dynamics of what was going on. So the size of the domestic market can play a role, but two points here. The first is don't confuse the size of the market with the size of the population. So people often think India has a huge market, but that's because it has a lot of people, but they're extremely poor people.
28:02So take England's population of what, 50 million or something, I think. that's what 1 20th the size of the Indian population, but the market is what 15, 20 times bigger. So what matters is your income, your national income, not so much your national population. So in that sense, the Indian market is actually quite small in the 50s and 60s and 70s and can't really explain why the firms continue to point their investments towards that market rather than export markets, because there actually wasn't a whole lot you could sell there. So the assumption is often made that Korea and Taiwan move outward because they have small markets.
28:41Well, countries in Central America have tiny little markets. They never moved outward. Haiti has almost no market and it didn't move outward. The thing is, it all comes down to not what's rational to do, but who's got the power. And even in these small countries with the small markets, since businesses had all the political influence, they kept their governments wedded to this free money for much longer than they ought to have. I want to clarify something because you're talking, and this is a really important point, which is the political dynamics within the country and essentially the ability of the government to discipline the capitalist class via export conditions upon subsidies or gifts or so forth.
29:23But at the same time, you've also said that the difference between, say, a Korea and India is just sort of the luck and coincidence of Korea's proximity to Japan's sphere of influence and the historical legacy of India's relationship with the UK and also kind of the US in the Cold War, which does not necessarily sound like a difference to me that is about the role of the capitalist class within society. So can you explain that a little bit further? What was the difference politically in Korea versus, say, in India? And then in India specifically, how does it look when the domestic capitalists or the domestic titans of industry are able to subvert the attempts at discipline?
30:07Right. Now, again, a very good question. You're right that it's putting all the burden on the historical accident of which country, advanced country you partner up with seems to take the politics out of it. But it doesn't in the following reason. If we bring in another set of cases, you see that merely having these foreign partners isn't enough, which is Southeast Asia. So Korea and Taiwan fall into Japan's, you could say, economic orbit. But so do Thailand and Malaysia, because the Japanese historically had dominated both Northeast and Southeast Asia. Now, Malaysia and Thailand also start out with import substitution and all this sort of stuff.
30:49And they also have access to Japanese firms and Japanese know-how technology and all that. But they're never able to make the same kind of movement upwards that Korea and Taiwan do. And why is that? It's because in those countries, while there was the opportunity to hazard these very competitive foreign markets, it was still a bit of a risk compared to the protected domestic markets. And the capitalists there were able to overwhelm and squelch the government's efforts to kind of prod them outward. Whereas in Korea and Taiwan, what happened was there was a kind of irreducible, absolute achievement of building a government, building a state that had the wherewithal and the power and the internal solidity to negotiate effectively with their domestic business class.
31:41Now, what happens in India is that the business class essentially overwhelms the state so that when the government is saying to them, let's try to at least build towards regional markets, if not the American market, the European market, if not the American market, they're unable to do so. And they're unable to have the internal coherence that makes government assistance even attractive to these capitalists. These businesses make their calculations and they say that for the time being, for the foreseeable future, we're going to stick with this domestic market. And the government just doesn't have the power to say no, to overwhelm them because they have too much of the influence.
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35:28Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank and a member FDIC. Could you talk a little bit more about how actual capital and investment fits into your framework? Because thinking back to your definition of industrial policy, you know, in order for this to work, you have to have the ability to direct capital to industries or businesses that you deem to be desirable for one reason or another. But you also have to have the capital to actually direct and move. And that capital presumably has to be somewhat competitively priced, I would imagine. So how do capital costs and availability kind of fit into your framework?
36:10They're an essential component of import substitution. And this is now pretty generically known. One of the big obstacles to industrialization in these poor countries is what's called the cost of capital, which is they have to try to raise money in a country where banking is really, really underdeveloped, which means loans are very expensive, which means it's another hurdle to be competitive in global markets. Now, so this is something that started actually in 19th century. I think Germany is the pioneer, but then Russia follows soon after, Russia before the revolution. Governments understood that banking and cost of capital is a huge obstacle, so they developed investment banks.
36:49These are state-owned and state-directed investment banks. And the fundamental activity of all these banks was to provide artificially low and cheap credit to local firms to lower their entry barriers into these competitive markets. So that carried over right from the 1880s into the 1970s and 80s. All these countries had nationalized banking systems, the main function of which was to collect large pools of domestic savings and then bundle them up and funnel them towards investors. I want to talk a little bit about the present day in the U.S., which is sort of where we began our conversation. We talk about the CHPS Act and the Inflation Reduction Act and so forth.
37:32And what would you describe as just sort of the general basics of what the U.S. is trying to accomplish and how different is it or how similar is it to what many poorer countries have tried to do for maybe close to 100 years? What it's trying to do is, I think, industrial policy. It's definitely trying to do industrial policy in that the key to industrial policy is you're not letting the market on its own decide where investment is flowing. You're trying to manipulate the flow of investment. Now, what the US is doing is saying private investors on their own are not going into chip manufacture to the extent that they should, and they're not going into electric vehicles to the extent that They should.
38:12So we're going to make it more attractive to them. That's the subsidies component of it. And so you could say they're essentially what's called picking winners. Yeah. They've targeted a certain sector that they want to see grow, and they're doing what they can to make it more attractive. Okay? So that's industrial policy. And in that respect, it is like what the poor countries tried to do. It is also like what the poor countries tried to do in one other respect, which is they're trying to do it with a state that's not very well equipped at the outset to actually undertake such policies. Now, what do we mean by that?
38:44When India and Korea or Mexico and Brazil started their post-war industrial policies, they started it with a government that was good at doing certain things. And what it was good at doing was raising taxes to some extent, providing tariffs to some extent, and policing and some kind of credit. What it could not very well do was have an institutionalized relationship with leading firms, monitor their activities, and then impose some kind of discipline on them to make sure that the money they were getting was being used productively. They didn't have any of those things. So they had to build it up.
39:20So, but the fifties to the seventies was a period of what in social science we call state building, which is essentially these countries, once they decided they wanted to have planning and industrial policy, had to pull themselves up by their political bootstraps, as it were, create the administrative wherewithal, the bureaucratic capacity to effectively, A, deploy resources, B, negotiate with firms, and C, hold them accountable. The US is like those countries in that outside of defense, the American government really doesn't have a lot of what we call administrative capacity, state capacity. So it knows how to raise money.
39:57It even knows how to earmark that money for certain sectors. It's not yet fully equipped to get that money to the sectors, to then make sure that it's being used the way they want them to, and then to hold those sectors accountable. And if you know, I mean, I think this is pretty well understood now, two years after, two and a half years after the act was passed, a lot of the money is still sitting there. It hasn't really gotten to the firm that we're being targeted. Why? It's because what's called the absorptive capacity of all these monies has not really been built up. Now, it's different from the LDCs and these underdeveloped countries in one respect, which is that it is a country that's already developed, as you said in the beginning of this program.
40:37And because it's already developed, what you're doing is not trying to create sectors out of whole cloth the way Korea and Brazil did. There is already a chips manufacturing sector in this country. There is already EV manufacturing. So what you're doing, you're not trying to get industrialists, drag them kicking and screaming into new sectors. they're already kind of inclined towards to go into those sectors. You're simply trying to accelerate the flow of investment rather than redirect it altogether. So that means that the heavy lifting isn't quite as daunting as it was in these less developed countries.
41:10But there's no getting around the fact that even though it's less daunting, you still need to have a government that's equipped to undertake these tasks and not simply to announce them. And that gap hasn't yet been filled. Is the comparative advantage of U.S. industrial policy, though, going back to the domestic market point, the size of its own market? Because, I mean, the U.S. is the biggest market in the world. So even if the U.S. government can't make the U.S. semiconductor globally competitive, they can structure the business so that it is domestically very attractive. And maybe that's enough.
41:47Again, the biggest market in the world. So why not just do that? Yeah. It's interesting. You mentioned China. This is where I think you can take lessons from China. China has also been now involved in industrial policy for close to 20 years. And this sounds surprising because China is supposed to be a planned economy. So what do you mean that it's only 20 years? What happened after Mao's death was that the whole planning apparatus and system and China kind of fell apart for about 15 or 18 years. And it's surprising, even when I started reading up on this, even I was surprised to learn, it's really in the early 2000s that it gets going again.
42:24Now, what they did is something that's akin to what you're saying, which is, of course, they did promote exports up and down, but they also did something else, which is after about 2010, they really started emphasizing the domestic market. And what they've been doing in the past six or eight years, once they've targeted the highest end markets for themselves, information technology and AI and such things, what they're doing is they're basically using government finances as kind of venture capital. And they direct the state bureaucrats to give cheap loans to a fairly large number of firms. And then they kind of wait and see who survives in domestic competition.
43:09So they let firms start up. Some of them is through the venture capital. Some of these firms are doing it on their own. And then they essentially see, all right, who are the top three? Because how can they do that? The domestic market has grown to the point where it's intensely competitive. So you see who is winning the domestic battle. Then you essentially catch them in their infancy. And you say, we're going to bet on these guys. It's different from what the earlier generation of poor countries did where they actually created these firms from whole cloth and they hoped that they would play by the rules.
43:43China lets them do this sink or swim for a few years. And then when firms have built up a certain degree of competence, shown that they're capable of managing the market, they start plowing money into them. And then they throw them out into the export markets where they're actually killing it right now. They're killing it so much that that's behind the American drive to protect themselves. That's That's why you won't see a Chinese EV because I think they would just clobber all the American EVs so that you protect them. Something like that is certainly possible for the American firms, as you're saying, which is you take the ones that are genuinely competitive in American markets.
44:18Now the thing about that is I think it would make more sense for the American state to not keep the Chinese out. You let them in and then you essentially bring the export market home. Instead of pushing American firms out into the export market, you bring the import into the U.S. And then when you see where your firms are weak, when you see where they need help, then you do targeted interventions. And that way you make sure that they cannot simply take the money and run, which is what happened in so many other countries. OK, so this is a really important point, which is that if the market discipline is a really important part of successful industrial policy, you know, American firms get the majority of their sales from the United States.
45:01There may not be, you know, there are probably some but not gigantic export opportunities for them. In your view, two questions is like one. So the idea would be, OK, bring the global market to the United States by letting in. And then B, when you look at the U.S. political system, setting even aside the bureaucratic infrastructure, do you think that we have an arrangement that allows for essentially capital discipline that are disciplining the business class? Okay, there are two elements to this question. One is that the US is a democracy and these countries weren't earlier on. And the second is that does it have the kind of internal coherence to government?
45:37Just like with the Cold War myth, there is another, I think, misunderstanding of industrial policy in the early post-war decades, which is that the countries that succeeded, they succeeded because they were authoritarian or because they were... So the way you want to settle this debate and say, okay, let's look out into the world and see which countries by consensus, everyone agrees these countries, A, used industrial policy, and B, were successful in doing so. So if the argument from authoritarianism is right, there should be a pretty high correlation between success in industrial policy and being authoritarian.
46:13Now, what are the cases that are unimpeachable successes? Korea and Taiwan, for sure, and those were both in fact authoritarian, but the other ones are Japan and France, both of which were democratic. So certainly in the four cases that everyone says are shining examples of successful industrial policy, it's a wash. It's two and two. Now I would go even further than that. I would say that actually authoritarianism is the obstacle and democracy is an advantage. And here's why. Remember what's happening in industrial policy. What's happening is you're taking public money, tax money, citizens' money, and you're giving it to people for their private benefits, which is industrialists, right?
46:54And you're essentially saying to them, we want you to use this money in a way that comports to the public good and not just the private good. We want you to invest it productively and then everybody gains because it's productivity enhancing, right? There's going to be higher growth, incomes go up, everybody gains. So there's a public interest in that money being used wisely. All right. If there's a public interest in it, in a democracy, you can actually mobilize public opinion behind the project to say, look, we promise all of you, citizenry, higher growth, because we're going to have this policy of enhancing and improving domestic industrial manufacturing capacity.
47:30Transparently, you say, we're going to actually provide subsidies for national industrial development, but these guys are taking your money. And listen, we're going to make sure on your behalf, we're going to make sure they use it wisely. So the thing that democracy does is a democracy gives citizens some kind of power over what's being done with their monies. Okay, what's a dictatorship? A dictatorship is a situation where democratic rights have been extinguished. Who relies most on democratic rights, the rich or the poor? It's the poor, because the rich always have access to what politicians are doing.
48:07A dictatorship doesn't give the government greater power over the wealthy. It gives the government greater power over the poor because the wealthy always have power. So in fact, in a dictatorship, you should see more difficulty in disciplining industrialists because now everything happens behind closed doors. There's no freedom of the press. There's no freedom of association. And essentially, the corporate community has unimpeached, unblocked access and power over the government. In all dictatorships, businesses run amok. It's the citizens who suffer. So in my opinion, the U.S. being a democracy is actually helpful if you have political parties that are actually sensitive to citizens' views.
48:51And the truth is right now, we live in some kind of oligarchic system where both parties are bought and paid for by the corporate community. So I would say the challenge to the U.S. is making this stuff more democratic, not seeing the democracy as a challenge. Just to hammer this point home, and this will be my last question, but if you could wave a magic industrialist policy wand over the U.S., what would be the one thing, specific policy measure that you would change in order to make, I guess, the risks of downsides to industrial policy, activist industrial policy, reduce? I think the United States should have a agency dedicated to targeting particular sectors and fostering their growth.
49:41But it should be a agency that is staffed not just by bankers and industrialists, but also by representatives of trade unions and the people, the employees in these firms, because they have a direct stake in how well those firms do. I think if you harness the energy of the employees alongside that of the industrialists, you're going to have a dynamism in the sectors because a more engaged class of employees is also going to be much more productive and will see itself as having a stake in what's happening with those investments. One of the downsides right now in the United States is that there is such a one-sidedness to investment decisions that industrialists are able to make their profits and make their investments without any regard for how private benefits that they're getting from those investments redounds to what's called their linkage effects, their wider impact on economic growth, and their wider impact on what's happening in the rest of the economy.
50:41So if I could wave a magic wand, I would make the American state more transparent in how it's intervening in the economy because it's always doing it. There's no such thing as a laissez-faire state, even within the neoliberal era. I would make it more transparent, more accountable to both the investors and to the workers because the investors also lose from all the sweetheart deals that occur behind the curtain in the defense sector. make the bidding more competitive. The winners ought to then be engaged to work with some sort of works councils and trade union partnership with them. And it ought to be seen as something that's redounding to the collective good, and not just on the assumption that if you make lots of profits, it'll trickle down to the rest of the citizens.
51:29Because the political crisis that we're in right now should be seen as problematic also for our economic future. And the political crisis is coming from one basic source, which is around 80 % of the people in the United States feel that their government and their economy is captured by a narrow elite that's unaccountable to them and which is going to lord it over them forever. To come out of that, you not only have to give them jobs, but you have to give them new kinds of jobs where they feel respected, engaged, and they feel they have a stake in what's going on. If I could wave the magic wand, that's what I would do.
52:03Great place to end it right there. Vivek Shibur, thank you so much for coming on the Outblocks. That was fascinating. It was my pleasure. Thanks for having me.
52:22Tracy, I really liked that conversation. Starting from the last point, I do think we sort of many people take it for granted that the U.S. political system is an inherent hindrance to any sort of planning. And I don't know, maybe it is because of the specific pathologies of U.S. politics right now or the specific dysfunctions. Maybe it kind of is. But I genuinely like the point about how democracy, at least per se, isn't bad given, for example, you know, the idea that there is some accountability for some of these deals that we're making. No, absolutely. I think the emphasis on political systems and political capture or regulatory capture is a really good one.
53:05And as Vivek pointed out, the idea of, you know, 80 percent of Americans feeling like the economy is overly influenced by elites or somehow captured by the wealthy, that's, you know, that's a pretty damning statistic. I do think, yeah, to your point, like, I don't know what the polling is actually on whether the public likes the idea of like EV investments or semiconductor manufacturing, et cetera. But I do think that, you know, probably to some extent, you and I might sort of get the case. But the general case about how it genuinely redounds to the public benefit that we are picking winners in these areas, you know, politicians do talk about jobs.
53:48And it's like, oh, this project created a thousand jobs here, et cetera. And it seems like the congressmen and the districts, even, say, Republican congressmen who opposed may have voted against the IRA, then tout the manufacturing that happens in their district. So there's some of that. But it does seem like the general story of like, OK, this is how we're spending public money and this is what we expect it to then deliver for the citizens in terms of material benefits does not strike me as having been particularly well articulated. No, I absolutely agree with you. Like, I guess there's always more that could be done.
54:24But if we're going to if we're going to say or if the government is going to say that industrial policy is more important, clearly the experience of the pandemic has exposed certain choke points in the economy or certain areas that we deem strategically important that we want to build up. Then it makes sense to also build up the accountability apparatus as well. Can I just say one last thing? You know, I get a little depressed when we talk about development or industrial policy because of, you know, there's so few success stories that can, you know, it's not like there was a success story in Korea.
55:00and then it went on and be replicated in 20 other countries in Latin America, Africa, you know, Eastern Europe and so forth. There's really only a handful. And I don't know, it sort of brings me down about the possibility of like general lessons that we can then extrapolate elsewhere, especially given also that for all of, you know, that Korea had a lot of luck, as our guest talked about, you know, with respect to its relationship with Japan and Japan wanting to outsource some of its lower end production. It seems very difficult and you need to get everything right, including the luck component.
55:32You're right, Joe. K-pop is very special. That's right. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracey Alloway. You can follow me at Tracey Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. And thank you to our guest, Vivek Chibber. Follow our producers, Carmen Rodriguez at CarmenArmand, DashelBennett at DashBot and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. And for more OddLots content, go to Bloomberg.com slash OddLots, where we have a blog, we post transcripts and a newsletter.
56:02And you can chat about all of these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we talk about the potential downsides of industrial policy, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.
57:07We'll see you next time.
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From the publisher
Right now, industrial policy is back in vogue in the US. The administration is making an effort at reviving specific sectors, notably in areas of clean energy and semiconductors. But despite all of the money being spent on subsidies of various sorts, there's no guarantee it will actually work. If it were easy, every country would do it. So what are the conditions that make it possible? And how can it go sour? On this episode of the podcast, we speak with Vivek Chibber, a professor at NYU, and the author of several books including Locked In Place, which compares the development experience of South Korea and India. We talk about the interaction of economic policy and domestic politics, as well as the specific political conditions that need to be in place that allow the government to provide "gifts" to companies, and for those gifts to actually turn into leading edge industrial leaders, rather than for that money to simply go into the pockets of investors. Among the things we discuss are: What industrial policy actually is and what it's going to take for the US endeavors to actually become successful.
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