Unclear gain: mirage or modest improvement?
South Korea's Boom and Industrial Policy: A Closer Look
Did South Korea's economic boom from 1960 to 1989, average annual GDP growth of 6.82%, stem from industrial policy? That question is up for debate after an innovative study by four scholars, including two MIT economists. Using global trade data, they found industrial policy to contribute only 1.08% to 4.06% to long-run GDP under optimal circumstances, much less than South Korea's legendary growth rate.
While the numbers might be eye-opening, the reasons behind this finding could be even more intriguing. For instance, local consumer demand can counteract industrial policy's impact, limiting the potential benefits.
As MIT economist Arnaud Costinot notes, "The gains are not enormous. They are there, but in terms of magnitude, they're nowhere near the full scope of the South Korean experience."
The study blends empirical data and economic theory to assess scenarios where industrial policy might seem most effective. Opponents of industrial policy have long advocated for a more market-driven approach to economics. Yet, over the years, even countries openly backing a laissez-faire approach have still found reasons to support specific industries.
The scholars' research targets the "textbook case" for industrial policy, a scenario where some sectors exhibit external economies of scale while others do not. This means firms within an industry can potentially impact the productivity of other firms in the same sector via knowledge sharing. If an industry expands and becomes more productive, it may produce cheaper goods for exports, giving the country a competitive edge.
The study utilizes global trade statistics to analyze changes in industry-specific capacities within countries and determine the overall gains from those changes. The results indicate that, on average, industrial policy raises long-run GDP by 1.08%. However, in favorable conditions, it can boost GDP by up to 4.06%.
Small, trade-open countries may realize larger proportional benefits. The study acknowledges that, while the contribution of industrial policy might not be as significant as some may assume, there is still potential for targeted interventions to yield positive results in specific sectors and regions under suitable policy and trade conditions.
The paper, "The Textbook Case for Industrial Policy: Theory Meets Data," was published in the Journal of Political Economy. The authors are Dominick Bartelme, Arnaud Costinot, Dave Donaldson, and Andres Rodriguez-Clare.
The Limits of Industrial Policy and Beyond
The study raises questions about the extent to which industrial policies can influence long-run GDP growth, particularly in the face of relatively fixed demand. Additionally, it hints at broader issues concerning growth limitations in our global economy. Without increasing demand, enterprise of all kinds may ultimately encounter growth obstacles.
Critics of industrial policy argue that it can lead to inefficiencies and encourage protectionism. On the other hand, proponents maintain industrial policy can address social issues like wealth inequality, environmental concerns, and regional development. In the US, industrial policy has been discussed as a means to revitalize deindustrialized areas and reskill workers.
Overall, the study underscores the importance of understanding the dynamics of industrial policies, providing insight into their potential advantages and limitations. As Costinot notes, "Industrial policy has the potential for gain, but the textbook case doesn't seem to be there. At least not to the extent some have assumed."
- The study published in the Journal of Political Economy, titled "The Textbook Case for Industrial Policy: Theory Meets Data," focuses on the limits of industrial policy in influencing long-run GDP growth, particularly when demand remains relatively fixed.
- Critics of industrial policy argue that it could lead to inefficiencies and promote protectionism, whereas proponents believe it can address social issues such as wealth inequality, environmental concerns, and regional development.
- The research reveals that, under optimal conditions, industrial policy can enhance long-run GDP by up to 4.06%, but its impact is not as significant as some might presume.
- The study's findings imply that small, trade-open countries may realize more substantial proportional benefits from targeted industrial interventions under suitable policy and trade conditions.
- In the context of the US, industrial policy has been proposed as a strategy to revitalize deindustrialized areas and reskill workers, but it requires careful understanding of its potential advantages and limitations.
