Week 10 lesson 2 Flashcards
What is industrial policy, and what are its objectives?
Definition:
- Industrial policy refers to a policy agenda that shapes a country’s industrial structure by promoting or restricting specific sectors.
Forms of Industrial Policy:
- Protectionism: Import tariffs and quotas to protect domestic industries.
- Export Subsidies: Incentivizing firms to sell abroad.
Examples of Industrial Policies:
1. Post-WWII US and Europe: Rebuilding industries.
2. Japan (1950s-60s): Promoting technological development.
3. South Korea and Taiwan (1960s-70s): Subsidizing export-driven growth.
4. China (2000s): “Made in China 2025” policy.
5. US: The Inflation Reduction Act supporting green energy.
Key Takeaway:
Industrial policies aim to address market failures, improve competitiveness, and foster economic growth.
What are market failures addressed by industrial policy?
Definition:
Market failures occur when the market alone fails to allocate resources efficiently.
Key Failures Addressed:
1. Underinvestment:
- Productivity, R&D, and infrastructure.
2. Public Goods Provision:
- Insufficient funding for education and infrastructure.
3. Negative Externalities:
- Pollution from industrial activity.
Key Takeaway:
Industrial policy aims to correct market failures and foster long-term economic growth.
What is the infant industry argument?
The infant industry argument justifies temporary protection for new industries in a country to help them develop and compete with established foreign industries. Emerging industries often lack the economies of scale, experience, and resources that more mature industries in other countries have already achieved. Without government intervention, these infant industries may fail to survive against established foreign competitors.
To support these industries, governments may impose tariffs on imports, offer subsidies, or enforce quotas to reduce foreign competition and create a favorable environment for domestic firms. Over time, the protected industries can gain experience, improve efficiency, and achieve economies of scale, making them globally competitive. Once the industry matures, the protection can be gradually removed.
Critics argue that the infant industry argument has risks. Some industries may never become competitive and remain reliant on government support, creating inefficiencies. Additionally, political pressures may delay the removal of protection, and consumers often bear higher costs due to reduced competition. There is also the risk that governments may not choose the right industries to protect.
Despite these challenges, the argument remains relevant for fostering innovation and structural transformation in developing economies, provided the protection is carefully implemented and temporary.
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- Example: South Korea’s electronics industry during the 1960s-70s.
Key Takeaway:
Temporary government support allows industries to gain competitiveness and achieve economies of scale.
What is strategic trade policy?
Definition:
Governments provide subsidies to firms in oligopolistic markets to gain strategic advantages.
Key Concept:
- First-Mover Advantage: Early subsidies can establish dominance in global markets.
Example - Boeing vs. Airbus:
Boeing (USA) and Airbus (EU) dominate the global aircraft market, which is an oligopoly.
Both firms have historically received government subsidies (e.g., R&D support, tax breaks). These subsidies influence production costs, pricing strategies, and profitability.
For instance, subsidies to Airbus helped it compete with Boeing in markets where Boeing initially had a stronghold.
Key Takeaway:
Strategic trade policy helps domestic firms compete in markets with few global players.
What are the characteristics of China’s industrial policy?
Definition:
China’s industrial policy refers to government-led strategies aimed at transforming its economy into a global leader in key sectors, such as technology, manufacturing, and clean energy. These policies involve a high degree of state intervention.
Key Features of China’s Industrial Policy:
1. Financial Support:
- Direct subsidies, tax breaks, and low-interest loans are provided to firms in targeted industries.
- Example: The solar panel industry received billions in subsidies, enabling China to dominate the global market.
2. Land Provision:
- Local governments offer land at heavily discounted prices to attract investment in industrial zones.
- This ensures companies have the necessary infrastructure to scale up production.
3. Technology Transfer Requirements:
- Foreign companies seeking access to China’s market must share their technologies with domestic firms.
- Example: Auto manufacturers like Tesla had to form joint ventures with local firms and share intellectual property.
4. Dominance of State-Owned Enterprises (SOEs):
- SOEs are heavily supported to lead key sectors such as steel, telecommunications, and aerospace.
- They benefit from preferential loans and policies but are often inefficient compared to private firms.
5. Sectoral Prioritization:
- Industries like semiconductors, electric vehicles, and artificial intelligence (AI) are prioritized under initiatives like Made in China 2025.
Key Impacts:
1. Global Dominance:
- China has become a leader in sectors like renewable energy (solar panels, wind turbines) due to subsidies and export incentives.
2. Trade Tensions:
- Policies like forced technology transfer and state subsidies have led to trade conflicts, especially with the US.
3. Internal Challenges:
- Subsidy misallocation leads to overinvestment in unproductive sectors, creating inefficiencies and debt.
Key Takeaway:
China’s industrial policy drives its economic transformation but faces criticism for inefficiencies, trade frictions, and market distortions.
What is the Made in China 2025 policy?
Definition:
- A strategic initiative to enhance innovation-driven manufacturing and reduce reliance on foreign suppliers.
Goals:
1. Promote High-Tech Industries: Robotics, AI, and clean energy.
2. Increase R&D Spending: Raise the R&D-to-sales ratio.
Impact:
- Positive impact on R&D spending but no improvement in productivity or profitability.
Key Takeaway:
While ambitious, “Made in China 2025” faces challenges in achieving innovation-driven growth.
How has industrial policy impacted China’s shipbuilding industry?
Definition:
- The shipbuilding industry is one of China’s success stories in industrial policy, driven by subsidies and government support to dominate global markets.
Historical Context:
1. Pre-WWII Era:
- The UK dominated global shipbuilding with minimal competition.
2. Post-WWII Shift:
- Japan emerged as a global leader by subsidizing its shipbuilding industry.
- South Korea followed in the 1970s-80s, adopting similar policies to capture market share.
3. China’s Entry (2000s):
- China leveraged subsidies and state support to become the largest shipbuilder by 2010.
China’s Industrial Policies in Shipbuilding:
1. Production Subsidies:
- Cash payments to shipbuilders based on the size and number of ships produced.
- Encouraged mass production but led to overcapacity.
2. Entry Subsidies:
- Incentives for new firms to enter the market, increasing competition within the industry.
3. Export Credits:
- Financing for foreign buyers to purchase Chinese-built ships, enhancing export competitiveness.
4. Infrastructure Development:
- Creation of shipbuilding hubs in coastal provinces like Jiangsu and Guangdong, supported by state investment.
Key Impacts on the Industry:
1. Rapid Growth:
- Between 2006 and 2013, China’s share of global ship production increased from 14% to 41%.
2. Overcapacity:
- The influx of new firms led to excessive production, with many firms operating below cost.
3. Global Market Disruption:
- Subsidized pricing undercut competitors in Japan and South Korea, leading to trade tensions.
- Economic Inefficiency:
- Large subsidies went to unproductive firms, creating inefficiencies and waste.
Key Takeaway:
China’s shipbuilding industrial policy achieved global dominance but at the cost of overcapacity, inefficiency, and market distortions. This reflects broader challenges in subsidy-based industrial policies.
What were the results of Romania’ s IT sector industrial policy?
Definition:
Romania implemented industrial policies to develop its IT sector, focusing on tax incentives to attract talent and investment in technology industries.
Policy Details:
1. Income Tax Breaks for IT Workers (2001):
- IT workers were exempt from income tax, making Romania a competitive destination for skilled labor.
- Encouraged more professionals to join the sector and attracted foreign investors.
2. Expansion to Other Sectors (2013):
- The policy was broadened to include additional industries related to IT, increasing its impact across the economy.
Results by 2005:
1. Rapid Revenue Growth:
- IT sector revenues increased by 24% within four years.
2. Employment Expansion:
- IT workforce grew by 13%, with more professionals joining the industry due to favorable policies.
3. Global Competitiveness:
- Romania gained recognition as a competitive outsourcing destination for IT services.
Results by 2015:
1. Revenues Multiplied:
- IT sector revenues were 6.5 times larger compared to 2001, reflecting massive growth.
2. Employment Surge:
- The workforce expanded by 83%, highlighting the policy’s effectiveness in creating jobs.
Broader Impacts:
1. Spillover Effects:
- Other industries relying on IT services benefited from improved quality and variety of products.
2. Economic Diversification:
- Romania reduced its reliance on traditional industries (e.g., agriculture) by developing a high-tech sector.
3. Attracted Foreign Direct Investment (FDI):
- Multinational firms like Microsoft and Oracle established operations in Romania, boosting exports and global integration.
Key Challenges:
1. Talent Shortages:
As demand for IT professionals surged, Romania faced challenges in maintaining a steady pipeline of skilled workers.
2. Overdependence on Tax Breaks:
The sector relied heavily on government incentives, raising questions about sustainability.
Key Takeaway:
Romania’s targeted industrial policy transformed its IT sector into a high-growth industry, boosting revenues, creating jobs, and fostering economic diversification. However, sustaining this growth required addressing challenges like talent shortages and dependency on fiscal incentives.
