Rationales for activist industrial policies

A question I had in my head today that I thought would be good to write about is this – why do some countries/jurisdictions engage in activist or interventionist industrial policies, as opposed to pacifist industrial policies a la neoclassical economics?

While this is not strictly based on the academic evidence, my research and thinking to date point to a few rationales. (Note: They are not mutually exclusive.)

  1. National/Political Will – Thinking about so-called late industrializers like Germany, Sweden, and Canada, why is there so much variation between these countries in terms of their industrial policies? Based on these three examples, one can find commonalities in two of these countries (e.g., sense of nationhood; a common or manufactured historical narrative that created a sense of community; a historical legacy of “exceptionalism”, etc.). Of course, I am speaking about Germany and Sweden. While I am no expert in German unification, proto-German entities like the Holy Roman Empire and the Hanseatic League are presumably seen as antecedents to modern Germany. More clearly for Sweden, the imperial successes of Sweden is likely a source of pride for some Swedes, and perhaps motivated a more active approach to industrial policy. Obviously, Hamiltonian policy in the US is another example. Contrast this with Canada, where ethnic nationhood has always been weak (which is one of the country’s social strengths), but may have come at the cost of a cohesive economic vision. While there have been periods of coherence (e.g., building of the railways post Confederation; the “National Policy” of more than 100 years), they may have been more rhetorical than a concrete vision.
  2. Political/Security Dilemmas – The Meiji Restoration in Japan and its subsequent entry into activist industrial policy seems like a good example of this rationale. It also seems like Singapore falls into this category following the break with Malaysia in the 1960s. The US Chips and Science Act and the Inflation Reduction Act seem to fall into this category, though it may be too soon to tell.
  3. Global Macroeconomic Instability – I may explore this in a future post further, but this is the rationale that I was thinking of the most today. Neo-mercantilist policies of countries like Germany, Japan, and now China seem to be a rational response to the disorderly way the global economy is organized. As Keynes indicated during the Bretton Woods negotiations, the system created by Harry Dexter White has led to political imbalances between creditor and debtor countries that overwhelmingly favour the creditors, unless you issue the global reserve currency (i.e., the US). Why have the Chinese followed the path that they have? As others have pointed out, the experience of the Asian Financial Crisis must have been alarming for the Chinese to watch, seeing that capital flight could lead to serious political repercussions and national embarrassments. German memories of hyperinflation seem to resonate still in the minds of policy makers – otherwise why would they depress living standards via the Hartz Reforms?

I wouldn’t say this list is comprehensive, but it gives us a good framework to group countries.

Of note, the Anglo-Saxon economic policies of Canada, Australia, New Zealand, Ireland and the UK from Thatcher onward seem not to have been informed by any of the above. While surely national pride is significant in Ireland, this does not seem to have translated into activist industrial policies resulting in a strong base of domestically-owned multinationals. Rather, this lot have generally deindustrialized, financialized, engaged in “race to the bottom” taxation policies, and in the case of Canada/Australia, been caught up in the commodity supercycle that helped gut their manufacturing sectors via Dutch Disease. Happy to hear if I am wrong about the ANZAC economies, but this lot does not seem to have been motivated by national will, or up until late, a security dilemma, and seems to have ridden the wave of global macro instability to tidy profits for the natural resources industries in Canada and Australia and financial services in the UK. Contrast this with countries like Germany, South Korea, Taiwan, Israel, Sweden, Finland, Singapore, Japan, China, and sometimes the US, who for some or lengthy periods of time, have been motivated by the above factors to engage in a more hands-on approach to their domestic economies.

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