There are few economists today who would not subscribe to the view that a trade policy that ensures fair play, avoids monopolistic tendencies and discourages rent-seeking is a necessary if not a sufficient condition for economic growth. The same, however, may not be said for industrial policy.
For it tends to concentrate on notions of what politicians, bureaucrats and special pleaders regard as appropriate investment for the future well-being of a country. Their notion of well-being usually coincides with their own interests. More often than not, therefore, industrial policy is presented as government intervention to correct their idea of markets failing to allocate resources as some would like to see them allocated.
Invariably, those who advocate an interventionist industrial policy look to Japan for justification. The interventions of the fabled Miti, the ministry responsible for intervention, have been credited with supernatural comprehension of the future.
Yet the massive intervention in Japan’s steel industry in the Sixties and Seventies led in the Eighties to lay-offs of 50 000 steelworkers and the massive scrapping of plants. In fact, in 13 industrial sectors in Japan between 1955 and 1990 there was a negative correlation between growth and the level of policy support.
The European Union’s policy of picking winners has proven no more successful. Bureaucrats allocated taxpayers’ resources to selected industrial clusters. They failed to understand that markets are spontaneous mechanisms and fell victim to the fatal conceit that civil servants can do better. While they were doing this, the Chinese began to recognise that bureaucrats do not have the complete knowledge of time, place and circumstance that is a prerequisite for efficient economic choices.
In Britain during the Sixties an industrial policy in many ways similar to the EU approach was tried without success by Harold Wilson’s Labour government. In contrast, the Thatcher policies in Britain in the late Seventies were of benign neglect. They gave that economy nearly three decades of sustained growth.
Government intervention, however, is needed in two very important instances: to foster competition and to counteract government failure when it masquerades as market failure.
Ronald Coase, the American Nobel Prize-winner, developed the Coase Theorem in the Sixties. Simply put, it is that markets will operate efficiently if transaction costs are low and property rights are specific. If they are not, then interventions are needed to restore both incentive and certainty.
Coase is of that school of public choice economists who have demonstrated that government failure too often causes markets to malfunction. An example is the ‘red-lining” of which banks in the housing market are accused. Yet it is a rational response to being unable to repossess their properties in areas where the government has failed to maintain law and order. The banks allegedly respond by drawing a red line around the no-go area, and refuse to lend to those living within the encirclement.
Politicians and bureaucrats have a bias towards intervention and regulation to gain political support and expand career prospects under the guise of doing social good. They suffer neither swift nor direct personal losses from errors in misdirecting capital resources.
The cost of their mistakes, in terms of fewer alternative products, lower prices or jobs lost, is not easily visible. Moreover, they seldom if ever focus on the interests of consumers and taxpayers, who drive savings, investment and entrepreneurial endeavour.
The appropriate agents for growth and prosperity are entrepreneurs who have an incentive to satisfy consumers. Entrepreneurship creates previously unrevealed profit opportunities by exploiting continuously changing consumer preferences and producer tech- nologies that are largely beyond anticipation. The experience of recent decades is that long-term strategies that try to foresee innovation are bound to be wrong.
So the crux of industrial policy should be to find the means of releasing entrepreneurial endeavour and providing appropriate incentives to investors in innovative enterprises. The trick is to be able to do this when no one has yet perceived the innovative possibilities.
These incentives must centre on the right to own and exchange property and to keep transaction costs low. They should not include cash handouts or sweetheart loans, for these encourage rent-seeking and corrupt practice, rather than competitive profit-driven behaviour.
Last year the Department of Trade and Industry produced its draft industrial policy. Essentially, it is to foster the manufacturing industry through market-related interventions without necessarily inhibiting the exploitation of natural resources or upsetting the government’s social and political agenda. Subsequent parliamentary hearings, which were all but ignored by the industrial giants, revealed a predilection among government supporters for black economic empowerment and gender equality in mining.
Trouble is that the growth in manufacturing value added declined from 9,85% in 1960 to 1,11% in the late Nineties. Policies of inappropriate intervention by the government to allocate resources were the main cause of this decline. They choked off the investment necessary for its sustenance. Yet manufacturing is the key to survival. Neither agriculture nor mining are capable of supporting 40-million people by providing mass employment.
However politically desirable black economic empowerment and gender equality may be, they will be traded off against growth. For they reward race or gender, regardless of experience or skill, at the expense of entrepreneurship. That is a fact universally acknowledged — except within government corridors.
Minister of Minerals and Energy Phumzile Mlambo-Ngcuka told a questioner from JP Morgan, the US investment bank, in London recently that given a choice between growth and black economic empowerment, the African National Congress government would always choose the latter.
In that case, an industrial policy, even if it embraced appropriate intervention, is of limited relevance.
Nigel Bruce is a Democratic Alliance MP