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Reda Cherif and Fuad Hasanov argue that a true industrial policy is essentially a technology and innovation policy, with technology and innovation key to economic growth

Reda Cherif and Fuad Hasanov argue that a true industrial policy is essentially a technology and innovation policy, with technology and innovation key to economic growth

By Reda Cherif & Fuad Hasanov*

In the January 1954 issue of The Atlantic, John F. Kennedy, then the junior US senator from Massachusetts, argued that the ongoing migration of industries from New England to the American South should not be hindered. He called on the government instead to provide loans and other forms of support to assist New England-based businesses, retrain industrial workers, and fund local industrial development agencies.

Kennedy recognized that the government had an important role to play in both lifting the South and spurring new industries in New England. Today, industrial policy is back on the agenda, after having spent decades on the fringes of the policy debate. In addition to China’s Made in China 2025 initiative, the United Kingdom’s recently released Industrial Strategy, and a new Franco-German policy manifesto, Gulf Cooperation Council countries have also adopted strategies to develop non-oil sectors, and many developing countries are pursuing similar diversification efforts.

These policies have emerged as a response to pressures from international competition, a broad slowdown in productivity growth, manufacturing job losses, and rising inequality. But industrial policy has always stirred an intense debate among policymakers and academics. Critics argue that such strategies have not worked in many countries, and have instead resulted in cronyism and corruption. A better approach, they argue, is to reduce the role of the state in the economy, improve the business environment, and invest in infrastructure and education. Under favorable conditions, firms and entrepreneurs will emerge and grow in multitudes. The real-world failures of industrial policies in Latin America and elsewhere attest to the validity of this view.

In contrast, proponents of industrial policy argue that we live in a world of market failures that require some sort of state intervention. Otherwise, new sectors, especially advanced technology sectors, simply would not emerge, even in a good business environment. Naturally, this camp focuses on past successes, particularly in East Asian economies.

In a recent International Monetary Fund working paper, we use these past successes to identify three principles that underlie what we call a “true” industrial policy. In the Asian “miracle” economies – such as Singapore and South Korea – as well as in Japan, Germany, and the United States, the government intervened early on to support domestic firms in emerging, technologically sophisticated sectors. The successful policies placed special emphasis on export orientation, and held firms accountable for the support received. Given the strong focus on cutting-edge sectors, this “true” industrial policy is essentially a technology and innovation policy (TIP).

Technology and innovation are key to economic growth. China’s Made in China 2025 program essentially emulates the strategy used by South Korea (and Japan before it) to escape the so-called middle-income trap. Likewise, the new UK and Franco-German industrial strategies focus on the industries of the future: renewable energy, artificial intelligence, and robotics.

Capitalizing on the potential of disruptive innovation is an option for advanced and developing countries alike. Regardless of one’s place on the global value chain, producing cutting-edge technologies creates opportunities not only for domestic investors and businesses but also for consumers and industries elsewhere. Moreover, technological advances in the US, China, the UK, France, Germany, and other countries could be beneficial to all, contributing to competition, innovation, and living standards globally.

Just as it takes two wings to fly, both the state and the market are needed to implement an effective TIP. Indeed, “state vs. market” is precisely the wrong way to think about it. As we argued in our 2016 book Breaking the Oil Spell, the state must take the lead in steering resources toward activities that the market might not initially support on its own. At the same time, governments also must adhere to decision-making processes based on market signals, in order to guarantee space for an autonomous, competitive private sector. As economist Mariana Mazzucato argues, “When the public takes the lead and is ambitious, not just facilitating or being meek, it can push the frontier.”

As Mazzucato explains in The Entrepreneurial State, back when the US was dealing with the disappearance of New England’s old industries, it was also actively promoting technological innovation and spurring the creation of new sectors through public investment in research and development, as well as through government procurement policies. Indeed, in 1979, US federal government procurement accounted for over half of total purchases of aircraft, radio, and television equipment.

More broadly, there are many theoretical and empirical reasons for the state to support the maturation and commercialization of new technologies through public R&D, provision of risk capital, and investments in infrastructure and skills. Such outlays not only benefit existing innovation hubs, but also help to create new ones. The impact of state-led development is best illustrated by Kennedy’s call in 1961 for a moonshot: a seemingly impossible task became a reality by the end of the decade.

America’s drive to support technology and innovation has led to pathbreaking advances in science and disruptive technologies, and to the birth of the world’s leading high-tech industries. Following in its footsteps, many Asian economies have achieved economic miracles of their own by pursuing a “true” industrial policy. Now, all countries have a chance to find a niche in which to implement a TIP. If they succeed, the knowledge spillovers will benefit us all.

*Reda Cherif is a senior economist at the International Monetary Fund.  Fuad Hasanov is a senior economist at the International Monetary Fund and Adjunct Professor of Economics at Georgetown University.

Copyright: Project Syndicate, 2019.

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I doubt we'd see anything like that in NZ. Or it will be a few millions thrown at it "aka" we did something she'll be right

John Kennedy was a smart guy, brought up in a business household and understood what was good for the wider business environment and people. Unfortunately, JFK along with his family paid a high price for disturbing the industrial military complex.

The industrial military complex are a handful of seriously deluded white men, who are behind the western banking and oil cartel that control the US political system. They have been behind the US defence policy; largely funded by the poor US taxpayer. US defence policy main purpose is to create Chaos everywhere, to allow the deluded white men to continue to aggregate wealth at the expense of the masses.

Epstein was on the fringe of this deluded elite, and got too close for their likely. In essence, it goes beyond delusion; and thankfully China & Russia are now holding hands to ensure their rein terror is coming to an end.
Rome is now burning, and they no longer have anywhere to hide.

Not sure technology will provide jobs for everyone, and I still fear for those who are not part of it. Maybe labour intensive organic farming will help with redeploying the masses, who's jobs are disappearing and redisturbance of wealth through a fairer tax system will go someway to long term sustainably? Not sure artifical intelligence is going to be that good for mankind ever?

Sirimavo Bandaranaike, Indira Gandhi, Golda Meir, Margaret Thatcher, Corazon Aquino, Khaleda Zia, Benazir Bhutto, Chandrika Kumaratunga, Angela Merkel, Julia Gillard, Teresa May - all dupes of seriously deluded white men?

" thankfully China & Russia are now holding hands to ensure their rein terror is coming to an end."
Be careful what you wish for....

Vladimir Putin will be looking for Boris Johnsons hand , to hold in gratitude ... as PM Johnson has just banned fracking in the UK ... their enormous natural gas resource will lie untapped under Englands green and pleasant lands ...

... meaning , rather than being self sufficient in energy for the next 100 years plus , the Brits must trust and rely on nat gas from Russia ...

Oh Boris ... the things a pollie will do for votes !

The top 200 tech firms in NZ had combined revenues of $NZ 12 billion last financial year ... up 10 % on the previous year ...

... this is the future driver of our economy , and of jobs ...

Drying milk into a powder , and shipping it to the PRC , is not the way forward.... neither is planting radiata pine trees holus bolus to appease some dopey UN climate change protocol ...

I had an interesting talk to people in UK about education in China and Russia and the quality of the top graduates. Most of those ETF's are run by very smart Russians. In engineering it's the Chinese. Slightly dated articles.

Oil and gas industry engineers average around $NZ 118 000 p.a. .... one of the highest paid groups in our fair land ....

... until ... some ideologues shut down our offshore gas exploration industry ... an example of religion trumping science ... sigh !

You want a peak at the future,
Swap Auckland, or nz of California.

Just FYI...the industry hasn't been shut down. It's still going.

I think one dairy company will vastly exceed the revenues of the top 200 tech firms, but with some luck the current government can change that by regulating dairy into ruin and then finally our other sectors will dominate. Dairy is only 30% of our export earnings and we would be better off without it.

Is technology a silver bullet? There's now quite a body of research into technogy and productivity, it's not clear cut at all that one improves the other.

These guys miss effect and influence of the political structures and social hierarchy in the different areas. This is aside from 'free and fair markets' thinking.

There is a good case that globalisation and global supply chains have wripped out and suppressed profitable innovation from the outer nodes.

Notes on globalisation, identity politics and social progressives. That all drive economic effect.

Notes on globalisation, identity politics and social progressives. That all drive economic effect.

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If I was PM I'd be looking long and hard at the influence our dawdling primary sector holds over all policy making across our economy and change it to benefit higher value industries instead or at least equally. Right across our economy the influence of primary sector for ONLY the benefit of primary sector has been perversely affecting the rest of our economy and keeping us in the dark ages as a result. This desperately has to change.

That's terrible thinking.
Why is govt. looking to restrict use of economic and natural resources.
Where is the credible education and training/technical sector.
Why is there acceptance of low productivity in construction.
Why have the power of australian banks and home loans gone unchecked.
Why is policy being crowded out by activism agenda?

What are you doing to get yourself out of the dark ages?

"Right across our economy the influence of the banking sector for ONLY the benefit of realestate sector has been perversely affecting the rest of our economy and keeping us in the dark ages as a result."
That looks better.
Even the primary sector would love the rest of the economy to supply more than the less than 40% of export earnings it does. But no our best economic chance is to sell houses more efficiently so banks can lend more and make more money.
I'm currently sitting in the sunshine under a tree before afternoon milking, beautiful day.

Ultimately your farm is geared for capital gains too, most likely with an exit strategy of subdivision into rural lifestyle blocks.
So please, don't try that old 'back bone of the country' routine with me, that particular cow jumped the back fence long ago.
As for enjoying your milking, well each to their own... In more advanced economies they use these things called robot milking machines...have been for years...who'd have thought?

. . a robust economy needs a broad range of industries .. and that includes some primary production ... but we're better off to export value added products such as processed foods , rather than plain milk powders , frozen sheep carcasses , and tree logs . .

Twice the retail price.
Producer gets a couple of extra cents.

... orgasmic vegan free dairy products ... love it ... more jobs and allied tech created here in Godzone : butter than exporting raw product ...

Gummy, where do we sign up.

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Ah. No. As I've noted before I failed so don't own the farm. Those that do have absolutely no interest in capital gains or exit strategy, they're a Maori trust in it for the Long haul. As for robots, can't really see the point, there is no reduction in staff numbers but they need to be way more engaged, and the extra production struggles to pay for the cost.

Great to hear you are working for a multigenerational entity, they would be a great example to hold up for the more rapacious operators out there. As for milking robots, I think they would be a great step forward I can't see why they wouldn't be an advantage?