Opinion & Commentary
Picking Winners
In a recent article in The Evening Post (19/6/00), Michael Wilson advocated the selective promotion of new industries by government and ridiculed those in New Zealand who fear that this would only end in an exercise of ‘picking losers’. He waxed enthusiastic about the subsidisation of biotechnological applications by Singapore and Taiwan. Much of what he said was misconceived.
Admittedly, many of the fast-growing East Asian countries have pursued selective industry policies, trying to ‘pick winners’ at one time or the other. As long as the economy is low on the development ladder and as long as few governments target subsidies at promising activities, such a policy can be quite successful in terms of economic growth. You simply imitate what has been successful in countries higher up the ladder and underbid them on the basis of cheap labour cost and tax subsidies. Japan did that in the 1950s and 1960s with considerable success. There were a few lapses. The bureaucrats in the industry ministry told Sony that the transistor had absolutely no future and Honda, then a motorbike manufacturer, that they had no chance in the car market. When Japanese development levels approached those of the West, the policy was more or less abandoned.
It became apparent that industry-bureaucracy committees were channelling taxpayers’ money into ‘white elephants’: The heavy-chemicals industry was subsidised while the 1970s oil crisis drove up input costs; the plans to build a Japanese passenger plane and the development of mega mainframe computers came to naught because the technocrats had been ignorant of changes in world markets. They were more successful in Silicon Valley.
'Do New Zealanders really want to enter the subsidy competition?'
The ‘Japanese model’ reached its use-by date also because others, for example Korea, imitated the Japanese. By now, from Seoul to Singapore, committees of R&D bureaucrats and industry representatives are trying to pick future growth industries. Because they are ignorant of the many complex and dynamic circumstances in global markets, they imitate each other and rival with taxpayers’ money. In reality, they create excess capacity and inflict pioneer losses on one industry after the other. The policy has led to repeated trade conflicts and has done much to weaken the support for free trade in the US and Europe. More importantly, it has corrupted both industry and the bureaucracy, as became evident during the crisis of Asian crony capitalism.
New Zealanders fool-hardy enough to re-run experiments in Muldoonism, should look at the rate of return from Taiwans’ famous Top Ten Emerging Industries, an industry policy program. They are subsidising by 40 to 55% of the cost of a national motor cycle and 80% of the cost of building a national car engine. As one has to expect in the overcrowded world vehicles market, the bottom line in these industrial ventures is dripping with red. And for a very long time, there has been no confirmed sighting of the silk and camera industries that the Singapore government subsidised in the 1960s.
Do New Zealanders really want to enter the subsidy competition, taxing the public and subsidising the development divisions of multinationals? Would those citizens, who fear that biotechnology will produce ‘Frankenstein food’, really accept those same political controls that the Singapore government imposes in civic opposition?
Numerous studies of the reasons for fast economic growth in Asia have dismissed industry policy as a decisive factor and identified the real causes for the East Asian ascendancy: hard work, concentration on technical learning, high saving, low taxes, small government, stable money, no welfare state, a progressively more open
economy, and stable, trustworthy political and economic rule systems.
'Why do advocates of selective industry policies still try to peddle their snake oil?'
Industry development has been increasingly promoted by generic policies: the mobilisation of capital, skills and other resources, leaving it to private entrepreneurs to pick the winners at their own expense.
Why do advocates of selective industry policies still try to peddle their snake oil? Industry bureaucrats and politicians have a great interest in promising salvation, and the research establishment can expect career advantages if they run national industry committees, sectoral planning, and technology task forces. However, the rest of us should do what the majority of East Asians have been practising, namely to engage in the arduous, risky and often frustrating search for winners in markets. Talk of wondrous alternatives only distracts from the grind of competition, still by far the best discovery procedure for worthwhile and profitable innovations.
About the Author:
Wolfgang Kasper, an emeritus Professor of Economics in the University of New South Wales, Australia, has been an OECD Adviser concerned with industry policies and has worked and taught in most east Asian countries. He has just finished a monograph about labour market re-regulation and other reactionary policies in present-day New Zealand, Gambles with the Economic Constitution, which has been published by CIS.
