Summer School 5: The many ways governments influence industry

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0:25Welcome back to Planet Money Summer School. We're hanging out here every Wednesday until Labor Day, just like an ice cream truck that plays a catchy jingle of knowledge. In the first half of our short political economy semester, we talked about the things that the government pretty much has to do. Provide basic infrastructure, pay for things the market won't provide, like national defense and a social safety net, and set the rules of competition. But today, we discuss what happens when the government really wants to get their hands dirty and shape the direction of the economy, even decide which companies should prosper and which one should fail.

1:03This is class number five, industrial policy.

1:11Traditional economics says that the market is guided by the forces of supply and demand. Customers decide what they want to buy, and private enterprise responds to that need. So what makes government think that it's smarter than capitalism? Why offer tax breaks to Hollywood or incentives to build silicon chip factories in Arizona, of all places? Why those industries and not others? Joining us to help answer that question is Professor Juwan-Rikard-Uguet, who teaches political science at Loyola University, Maryland. Welcome back, Juwan. It's great to be back, Robert. You're coming to us from Barcelona.

1:48Why Barcelona? I was born and raised in a city called Girona, which is about 60 miles away. Both of them in Catalonia, where I'm from. Excellent. Because today's class is very international in focus. In the global economy, every country wants the world to buy their products. But there's a challenge. How do you build up your car industry, let's say, when Japan and America are already so good at it? How do you develop tech companies when the U.S. has so much of the talent in Silicon Valley? Often, this is where the government steps in to help private companies. It's called industrial policy. And, Juan, let's define that first.

2:27Industrial policy is a set of economic policies that the government undertakes to influence domestic industries with the goal of fostering economic development. All right. So let's break that down. government influencing industries can include really basic things, right? Like building roads and power plants. But sometimes industrial policy is a lot more vigorous, shall we say, right? Tax breaks for certain businesses, subsidies for research, even telling the owners of factories what to produce. The funny thing is we in the United States do this all the time. But when another place, when Europe or China does industrial policy, you know, we cry, oh, it's not fair for you to subsidize your airplanes, to subsidize your cars.

3:12But is industrial policy necessarily a bad thing? Is it anti-competitive? Industrial policy generally limits competition. Whether it's good or bad depends on who we're asking. So industrial policy should be good for the companies that are being favored. Whether it's good for the citizens of the country doing industrial policy as a whole, that depends on whether industrial policy is successful. The U.S. has a long history of industrial policy in the 19th century. Well, and not just the 19th century. I like to think that NASA and our space race to the moon, that was the government supporting a lot of industries in aerospace, right?

3:51The internet. The internet's a great example of the government developed something and helped create all these companies around it. DARPA was the big project tied to the Department of Defense, the OD, that eventually led to all these scientists collaborating and creating kind of the early version of the internet. The question, of course, that someone may ask is, well, had the government not helped, would we have internet anyway? And the answer is probably yes. The question is whether we would have had it earlier or later. And many people may argue that it would have come later because the amount of initial capital you need for some of these big breakthroughs are stuff that sometimes only very big companies or big governments like the US can fund.

4:32So, Professor, we have two stories today. Should we start with the cautionary tale, the things that can go wrong with industrial policy, or should we start with the wild success story? Up to you. I'd say let's start on the cautionary tale so that we can end up on a happier note. That is a wise, wise pick. We will start with the wild story of what happened when a certain government decided it wanted to manufacture its very own mobile phone. After the break.

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6:07And we are back with our class on the do's and the don'ts of industrial policy. Our first case study is definitely in the don't category. It takes place in Argentina, in particular the region at the very tip of Argentina near the South Pole, and an attempt to build an Argentinian cell phone. Professor, what should the students be listening for in this episode? One of the things I should keep in mind is whether it makes economic sense to try to industrialize in the South Pole, far away from the economic center of activity in Argentina, and for that matter, in all of Latin America. Great. This story takes place around 2010, and it was hosted by Jacob Goldstein and Stacey Vanek-Smith.

6:52A few years ago, Argentina was in this situation that might sound a little bit familiar. The country had just elected this charismatic populist president who said she was going to fix the Argentine economy. Her name was Cristina Kirshner. She said Argentina isn't making things. We need to make things. And so she had this idea. She was going to bring manufacturing from Asia and Mexico to Argentina. En tiempos de globalización siguen más vigentes que nunca. Representar los intereses de los argentinos. Kirshner started pressuring companies to make things in Argentina. She put huge taxes on things that were manufactured overseas, taxes of like 30 and 40 percent.

7:35And for some other things, including certain kinds of electronics, say, Kirshner went even further. She said, you cannot import these at all. If you want to sell them in Argentina, you have to make them in Argentina. Hugo Bonifacini saw this firsthand. OK, sorry. Sorry for my English, Stacey. No, your English sounds great. No, no, it's not true. Hugo was a systems engineer at a manufacturing company in a remote part of Argentina. It was a pretty small operation, about 60 employees. And then right around 2010, give or take, the president of Argentina makes this law that says all these things have to be made in Argentina.

8:13And suddenly Hugo's world is like completely transformed. transformed. Like overnight, these giant shipping containers full of parts and machinery for all this new manufacturing start showing up outside his office. We don't have one house to storage. So all the parts would arrive and you didn't have anywhere to put them. Yes, yes. A lot of those containers full of equipment had cell phone parts, smartphone parts, because one of those things that Kirchner said you cannot import at all has to be made in Argentina was cell phones. And some companies like Apple and the iPhone, for example, would not play ball.

8:47But other companies said, OK, we will give it a try, including the company that made BlackBerrys. This was back in 2011. And BlackBerry was a hot phone. In fact, it was the most popular phone in Argentina at the time. Argentine celebrities and politicians were all carrying BlackBerrys around. It was kind of like the it phone. Here in Argentina, everybody was crazy for BlackBerry. BlackBerry was an icon. At the time, BlackBerrys were assembled in Mexico and Hungary. So BlackBerry agreed to try and make phones in Argentina. It partnered up with Hugo's company, and suddenly this company in this little town was responsible for making all of the BlackBerrys for all of Argentina.

9:28Millions of phones. All production exploded. Exploded, Stacey. It was amazing. Now, when Kirshner would tell companies you have to make stuff in Argentina, It didn't always stop there. She would sometimes get very specific. In the case of BlackBerry, she had a very particular part of Argentina in mind. Wes Nickel ran BlackBerry's South America operations. The law was that you had to manufacture it down to the very southern tip of Argentina. Tierra del Fuego. Land of fire. Just makes you want to set up shop there. Nothing says manufacturing hub. Like the land of fire. Tierra del Fuego is an island in the south of Argentina.

10:13It is actually where boats leave for Antarctica. Also a promising sign for a manufacturing hub. It's one of the most remote places on Earth, and it has a really harsh environment. It's cloudy all the time. Apparently the wind is always ripping through, and it's hard to get to. The roads are terrible. There aren't many flights in or out. Argentines call it the end of the Earth. It would be like if Apple suddenly had to make iPhones on a little island off the coast of Alaska. But Wes Nichols says there was a logic to this. It wasn't an economic logic. It was political logic. That was one of the population bases that was really supportive of Christina Fernandez de Kirchner, helped her get elected.

10:51And so she wanted to pay back those constituents and provide jobs for them. And so she was really forcing this issue. And so they wound up setting up shop in Tierra del Fuego and working with Hugo's company. And even though Hugo had spent his entire career working in manufacturing, he says BlackBerry's operations were just on another level. The factory, he said, was like a work of art. There was a clean room with all these very sophisticated monitors that would, like, keep track of tiny particles of dust. There was state-of-the-art machinery. There was really high security. And all this stuff, getting it all set up, took like a year.

11:24And even once they had the factory, they were missing another key thing, another key element, people. They needed like 2 ,000 workers to come in and make all these phones. So they started having to recruit people from halfway across the country to come move to this town to work in the factory. So in order to get people to come to Tierra del Fuego to fill all these jobs, they had to offer really high salaries. Claro. Very high salary, yes. Three times what that job would pay in another part of the country. Not to mention really great pension benefits. They make all these changes, they recruit all these workers, and within a year, Hugo says, the manufacturing company he's working for goes from 60 workers to more than 2 ,000 workers.

12:04And two years after Argentina's cell phone ban, the first Argentine BlackBerry rolls off the line. Hugo still remembers the moment. Yes, yes, sure, sure. Everybody was in the line to see the first BlackBerry. Really? Everybody was crowded around to see it? Yes, everybody. This was a moment of triumph for President Kirshner. She had created thousands of jobs, and these are, you know, good, high-end manufacturing jobs. They're creating this product that everybody loved, and it's super high-tech. Christina Kirshner made a big announcement about the first Argentine BlackBerry, and people went crazy.

12:40In the news clip we found of her speech, there is just four full minutes of just cheering. Everybody's waving Argentine flags and jumping up and down and dancing. Gracias, compañeros. Kirshner starts delivering this really impassioned speech about how Argentina is going to become a great center for manufacturing, about bringing jobs in from overseas.

13:07Blackberry Argentina was doing great. And it, you know, it wasn't just Blackberry, right? These new rules that the president had put in place drove all kinds of manufacturing to Tierra del Fuego. Yep. Laptops, flat screen TVs, microwaves, air conditioners. Pretty much everything you can think of was being manufactured in Tierra del Fuego. The population's growing. Stores are opening. Money is flowing in. You know, people are driving around in Range Rovers. And the rest of Argentina was doing pretty well, too. In fact, The New York Times and The Guardian published editorials about what a great job Kirshner was doing.

13:39One headline called it the turnaround tango. It's a terrible headline. Well, you think in Argentina they're like, every time it's got to be the tango? The point, though, Jacob, is that Kirshner's plan of like strong arming companies to start producing things in this remote part of Argentina, it was working. My spidey sense is tingling. I feel like it's not going to keep working. There were a couple of problems. So first of all, all this setting up took a long time. And so by the time the first BlackBerry rolled off the line, the model was two years old, which in the world of cell phones, as you know, is like totally outdated.

14:16And in addition to that, it was expensive. In fact, the BlackBerry in Argentina was twice as expensive as newer BlackBerry models in the U.S. So now President Kirshner, who set up this, you know, manufacturing miracle, has a new problem, right? She's made companies manufacture phones in Argentina, but she cannot make people in Argentina buy those phones. And this created a very interesting business opportunity for some enterprising Argentines. I talked to one guy who smuggled BlackBerrys into Argentina. He would hide them in pairs of shoes in his suitcase or stuff them into his socks before he walked through Argentine customs.

14:51And not surprisingly, with enterprising Argentines walking through customs with their socks full of phones, sales of the original Argentine BlackBerry started to drop. Why would you get a worse phone for more money? And Wes Nickel, the guy who worked for BlackBerry, said the Tierra del Fuego manufacturing plant just started making less and less economic sense. It just came to a point where the business case wasn't justified. We just couldn't afford to do it. Less than two years after Christina Kirshner held that first Argentine BlackBerry up to the cheering crowd, the last Argentine BlackBerry rolled off the line.

15:26Hugo Bonifacini remembers it well. How did you feel when BlackBerry left? It was not easy for us. Como dicen los americanos, sabor amargo. Oh, it left a bad taste in your mouth. Yes, yes, that's right. It's sabor amargo. Bitter. Bitter taste. Bitter taste. Kirshner's government had invested$23 million in the Blackberry Project, not to mention$6 ,000 per worker per month. That was all up in smoke. This is happening at factories all over Argentina. Sales are going down. People are getting laid off. And more broadly, the Argentine economy is starting to fall apart. All of Kirshner's economic controls unraveled kind of all at once.

16:09It got really bad. Inflation hit 40 percent. 40 percent in a year. Yeah. And prices rose for everything. Food prices more than doubled. And a lot of companies that had been strong-armed into setting up shop in Argentina started pulling out.

16:31Jacob Goldstein and Stacey Vanek-Smith from 2017. You can now buy an iPhone in Argentina. The import restrictions were lifted, although for many years tariffs made iPhones wildly unaffordable. But still, today on the streets of Buenos Aires, nobody has a cell phone made in Argentina. They're all foreign. Let's bring back in our Professor Juan Ricardo Get for a postmortem of the Argentinian BlackBerry. Hi, Robert. Well, this is one of the dangers of industrial policy, right? You have politicians deciding what to make and where to make it. And politicians have their economy as one of their interests, but they also have these political constraints they have to do.

17:15Yeah, I mean, to give Argentine governments benefit of doubt, I would say, from a national security standpoint, protecting the southern tip of your country may make some sense, right? It's next to Antarctica. There may be things that Argentina wants to protect down there. Sure, against the penguins. Right. Whether it should be the industrial core of Argentina is far from obvious. Yes. And what they're trying to do in Argentina is something that has been fairly unsuccessful for many countries. It's called import substitution. What is import substitution? So import substitution industrialization is an economic policy that promotes the development of some domestic industries to replace what were until then imported goods.

18:10Because a politician looks at this and says, wait a minute, why are we sending money abroad for these things that we can make in our own country? We should somehow stop the imports from coming in, either through tariffs or quotas or just stopping them, right? And we should force our industry to make that thing. Except it's kind of important to figure out what exactly is that the country should be making. There's no country that makes everything domestically and imports nothing. So the question is, what should a country like Argentina be making? And cell phones may not be the most obvious choice in the short run or even in the longer run to develop global comparative advantage.

18:56Comparative advantage. This is the first time it's come up, I believe, in summer school, at least this season. What is comparative advantage? A comparative advantage is something that country A is relatively better at doing than country B, or for that matter, most other countries. And so if you're country A, it makes sense to want to export that good and perhaps import others where you have what's called a comparative disadvantage. And Argentina does some things really well. It does agriculture really well. It does meat and wine, as we well know. Yeah. It makes sense that the Argentina government wants to industrialize the country.

19:33Sure. You want to have other industries for when beef prices go down. Plus, you want people to have better jobs than just working in a winery. Rich countries have diverse economies as a rule. That's what we call structural transformation, moving from exporting bananas to exporting cell phones. But it really is incumbent on the government and private actors to determine what exactly is it that the country can invest in to develop comparative advantage globally in maybe the medium term in a few years? Sure. All that time and resources that Argentina spent on cell phones could have been used to make something that the rest of the world actually wanted to buy.

20:12So I guess if a country is thinking of industrial policy, they should first look around and ask, okay, what area can we compete in? What is our comparative advantage? And it doesn't have to be top-of-the-line cell phones. You know, it could be tractors or something like that. And then when they have that product, they can do import substitution while they grow their industry. They can subsidize for a while. And then poof, in theory, you have a profitable export-oriented business. South Korea did this with cars. Others too, right? Yeah. And there are some good examples, in fact. beyond large-scale agriculture, some countries in the 20th century became very good at making what we call heavy industries like ships.

20:56Last time I checked, you know, Korea was not a big naval power in the 19th century, but you'd be surprised to know that in the 21st century, most of the top 10 or top five shipbuilding companies in the world are Korean and some are Japanese or Chinese. That was a conscious effort of developing an industry back then in the 20th century that was not bananas, but it was not microchips. It was something in between.

21:26Coming up next, a great example of how structural transformation can work with China's embrace of green technologies, specifically solar panels. We've shown you how industrial policy can fail. What happens when it succeeds? We'll take you to China to meet the Sun King, A man who built a solar empire with a little help. Who am I kidding? With a lot of help from the Chinese government. After the break. This message comes from Dell Technologies. Your new Dell PC with Intel Core Ultra helps you handle a lot when your holiday to-dos get to be a lot. Luckily, the Dell PC helps you get it all done. Get yours at dell.com slash holiday.

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22:46Some say Odoo is like fertilizer because it promotes growth. Others say it's a magic beanstalk, scaling with efficiency. Odoo, exactly what a business needs. Sign up today at odoo.com. This message comes from Insperity. Excellence takes drive, work, perseverance. Tiger Woods brings it to the course. Insperity brings it to your business. Want to be the best? Work with the best. Insperity. How you HR matters. Learn more at insperity.com slash tiger. Okay, class, I am going to write a fact on the blackboard. Yes, we still have blackboards here at summer school. China accounts for more than 80 % of the global market in solar panels.

23:3380%. This was not an accident. This was industrial policy. As you listen to this next case study, think about what the Chinese government did to make Chinese solar businesses succeed and how they avoided the mistakes of Argentina. The story comes from the Indicator podcast hosted by Emily Feng and Adrian Ma. To tell the story about the rise of China in terms of solar, I wanted to start with someone the industry has nicknamed the Sun King. I have been, you know, walking towards my goal of solar everywhere. This is like my dream. The Sun King is an amazing nickname. Does the Sun King, though, have a real name?

24:11I hope he kind of doesn't. Sorry to disappoint you, Adrian, but the Sun King does have a real name. His name is Shi Jinrong, and he's seen it all in the solar industry. He's seen the boom and the bust and then the boom again of China solar. And I first met him several years ago, actually, in Shanghai at this noisy solar industry exhibition. And he described to me then just what it took to create this industry in China from basically nothing. because when he first started his company, SunTech Power Holdings, in 2001, solar was dominated by Japan, the U.S., and Germany. Yes, the markets in Europe and the U.S., but not here.