Trump’s tariffs: is there a better way?

Donald Trump has said that “trade wars are good, and easy to win”. I posted on the issue of protectionism in the wake of his election victory here, and on ‘beggar-thy-neighbour’ policies here, and stand by my arguments.

Contrary to the claims of mainstream economics, free trade is not always mutually beneficial for the nations involved. In particular, the historical record suggests that particular ‘infant’ industries in developing countries can benefit from temporary and selective protection, until they are competitive enough to succeed on world markets.

There are plenty of examples of infant industry protection which have failed, so it is by no means a universal panacea. Success requires the management of a particular balance of power in a developing country between particular groups such as the state and social classes, which might include emerging industrial leaders or the middle class. It will also be context-specific: it depends on the historical evolution of the groups and society involved.

Trump’s tariffs on steel and aluminium imports are not an example of protecting an infant industry. They may protect some jobs in those sectors, but most economists argue that by increasing the costs of these products as inputs for other industries, many more jobs will be lost in the latter, so that the net employment impact will be negative. Continue reading


A Keynesian case for industrial policy

DSC00234Keynesian economics emphasises the primacy of aggregate demand or expenditure in driving the growth of output and employment. More mainstream neoclassical Keynesians, and the New Keynesians, tend to argue that inadequate demand is a short run phenomenon. The more radical post-Keynesians argue that it can be a problem in the long run too.

To varying degrees, these economists make the case for demand management via some combination of monetary, fiscal and exchange rate policy. The more radically minded have also long argued for incomes policies to manage wage and price inflation, and reform to the international monetary system in order to allow national governments the space to manage demand and promote full employment while preventing excessive and destabilising current account imbalances.

While Keynesian economics focuses on demand and, traditionally, macroeconomics, industrial policy aims to impact more on the supply-side of the economy and draws on microeconomics. Continue reading


Joseph Stiglitz: industrial policies are becoming “in” again

In the video below, Nobel prize-winning economist Joseph Stiglitz describes the comeback of industrial policies in economic debate and policy. Stiglitz comes from the centre-left politically, and certainly takes progressive views on issues such as inequality and state intervention.

He has chosen to critique mainstream neoclassical thinking from ‘within’ by focusing on market failure and imperfections, which opens the way to policies designed to make the market work better. It remains a market-centric viewpoint.

While taking on the mainstream is admirable, this necessarily leaves out the interdisciplinary perspectives of political economy, which in my view offer a richer understanding of socioeconomic phenomena. For those more wedded to the latter, coming from outside the mainstream, industrial policy has been studied in depth for some time.

Despite this, Stiglitz remains an interesting and influential figure.


‘Modern’ industrial policy in brief

In the short video below, Evelyn Dietsche outlines what she calls a ‘modern’ approach to industrial policy that developing countries can apply to their policymaking. She contrasts the lessons of those countries in East Asia that industrialised successfully in the post war period, with the relative failures of such policies in other nations.

Although she mentions rent-seeking as a potentially bad outcome of industrial policy, the video misses the point that rent-seeking can lead to value-creating rents which benefit development. All economies have rents and rent-seeking, broadly defined, although they tend to be more formal and legalised in advanced countries, taking forms such as lobbying rather than bribery and other forms of corruption.

The video does discuss the need to look at the specific contexts in which industrial policy takes place in different countries. This is an important point.  In some cases, a successful industrial policy may require some kind of prior political reform; in others, a particular economic policy may be implemented straight away. In both situations, governments and other institutional actors need to adopt an experimental approach, and learn from successes and failures as they go.

Overall the video makes some helpful points in introducing some of the modern research findings on industrial policy. The latter has had something of a bad name in mainstream circles, but the tide has been shifting in recent years.


Justin Lin on ‘jump-starting’ development: what’s good and what’s missing

LinMongaBeatingTheOddsJustin Lin, a former Chief Economist at the World Bank, is the author of several works on what he calls ‘new structural economics’. His latest book, Beating The Odds, is co-written with Célestin Monga, the current Chief Economist at the African Development Bank. It is ambitiously subtitled Jump-Starting Developing Countries.

The book contains some useful ideas on development policy, although for those more wedded to a political economy of development, rather than neoclassical economics, and all the self-styled ‘new’ branches of neoclassical theory, it is necessarily limited, compared to a more interdisciplinary story of development theory and policy.

I shall start with what is good in the book, and move on to what is missing, from the perspective of what I find to be a richer framework of political economy. Continue reading


Industrial policy in developing countries: some key issues

Tilman Altenburg of the German Development Institute discusses a range of issues related to industrial policy in developing countries. He is promoting his book, but that aside, he highlights some important points in the debates on industrial policy and its role in accelerating development.

The book itself is sitting on my bookshelf, and I hope to post on it at some point. In my view industrial policy, or at least state intervention to promote development, remains vital in both rich and poor countries. If it is to be successful, its form must necessarily change as countries approach the technology frontier in particular industrial sectors, but the need for it never really goes away.

It will also tend to vary depending on the structure of industry, the nature of technology and institutional and political factors.