Industrial Policies and Protectionism = The New Normal

In a parliamentary speech by PM Lee Hsien Loong on 19th Apr 2023, he said that “countries are no longer talking about trade being win-win” and “we are heading towards…a world where protectionism is the default.” Indeed, this is also seen in the Straits Times article also on 19th Apr, “The Perils of the West Embrace of Industrial Policies.”

We are living in a dark age = The New Normal.

Thankfully, I have a docile companion and assistant in ChatGPT.

If you do not know how IT went through thick and thin with me, read: “How AI will affect the Economy and Unemployment” as well as “Can ChatGPT teach Economics?“

Frantic about the world ahead, I turned to IT:

Me: What are some real world examples of industrial policies?

IT: Industrial policies refer to government interventions or actions aimed at promoting the development of specific industries or sectors within an economy. Here are some examples of industrial policies from different countries around the world:

1. China’s “Made in China 2025” policy: This policy aims to upgrade China’s manufacturing industry and promote the development of high-tech industries such as robotics, aerospace, and biotechnology.
2. Germany’s “Industry 4.0” policy: This policy focuses on the digitalization of manufacturing and the development of smart factories that use advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI).
3. South Korea’s “Green New Deal” policy: This policy aims to create new jobs and promote sustainable economic growth by investing in renewable energy, eco-friendly transportation, and the restoration of natural ecosystems.

These are just a few examples of industrial policies from different countries. Industrial policies can take many different forms depending on the country, the industry, and the goals of the policy.

Me: Any in Singapore and the US?

IT: Yes, there are also examples of industrial policies in Singapore and the United States.

Singapore:

1. Research, Innovation and Enterprise (RIE) 2025 Plan: This is Singapore’s national strategy for research and development (R&D) and innovation. The plan focuses on developing key sectors such as healthcare, urban solutions, and advanced manufacturing, and provides funding support for R&D activities.

United States:

1. The National Institutes of Health (NIH): The NIH is a federal agency that is responsible for conducting medical research and promoting public health. The NIH provides funding support for research projects and helps to commercialize new technologies developed by academic institutions and private companies.

These are just a few examples of industrial policies in Singapore and the United States. Industrial policies can take many different forms depending on the country, the industry, and the goals of the policy.

Me: [The NIH??? Fauci? Funding vaccines research and pushing for nationwide vaccination? Conspiracy? But I refrain from digressing.] Does industrial policy include protectionism?

IT: Industrial policy can sometimes include elements of protectionism, but protectionism is not a necessary component of industrial policy. Industrial policy is generally understood to be a set of government interventions or actions aimed at promoting the development of specific industries or sectors within an economy. These interventions can include a wide range of policy tools, such as tax incentives, subsidies, investment in infrastructure, and support for research and development.

Protectionism, on the other hand, is a trade policy that seeks to protect domestic industries from foreign competition by imposing tariffs, quotas, or other trade barriers. While protectionism can sometimes be used as a tool to promote the development of domestic industries, it can also have negative effects on overall economic growth by reducing competition, increasing prices, and limiting access to foreign markets.

Therefore, while industrial policy may sometimes include measures to protect domestic industries, such measures should be designed to support the development of those industries in a way that is consistent with broader economic objectives and does not harm overall economic growth.

Me: [Impressed! How many students would have gotten that right?] Please share examples of success as well as failure.

IT: Sure, here are some examples of both successful and unsuccessful industrial policies:

Successes:

1. South Korea’s “Export-Oriented Industrialization” policy: In the 1960s and 1970s, South Korea implemented a policy that focused on developing its export-oriented manufacturing sector. The policy included government-led investments in key industries such as steel, shipbuilding, and electronics. As a result of this policy, South Korea’s economy grew rapidly and the country became one of the world’s largest exporters of manufactured goods
   
2. Germany’s “Renewable Energy Sources Act” (EEG): The EEG, which was introduced in 2000, provides financial incentives for the development of renewable energy sources such as wind and solar power. As a result of this policy, Germany has become a global leader in renewable energy, and the share of renewable energy in the country’s electricity mix has increased significantly.

Failures:

1. India’s “License Raj” policy: In the post-independence period, India implemented a policy of heavy regulation and protectionism that made it difficult for private companies to operate and stifled innovation. The result was slow economic growth and widespread poverty. It was only after the liberalization of the Indian economy in the early 1990s that the country began to experience significant economic growth
   
2. Japan’s “Bubble Economy” policy: In the 1980s, Japan pursued a policy of easy credit and expansionary fiscal policy that led to a speculative bubble in the stock and real estate markets. When the bubble burst in the early 1990s, it resulted in a prolonged period of economic stagnation known as the “Lost Decade.”

These examples demonstrate that while industrial policies can be successful in promoting economic growth and development, they can also be unsuccessful if they are poorly designed or implemented. The key to successful industrial policy is to have a clear understanding of the goals of the policy, to develop policy tools that are appropriate for achieving those goals, and to implement those policies in a way that is consistent with broader economic objectives.

Me: But those failures are not really failures of industrial policies. Please try again. (Just like with my students…)

IT: You are correct, the examples I provided earlier were not failures of industrial policies per se, but rather failures of broader economic policies. Here are some additional examples of successes and failures of industrial policies specifically:

Successes:

1. The United States’ Defense Advanced Research Projects Agency (DARPA): DARPA is a research agency of the U.S. Department of Defense that has been responsible for developing many advanced technologies, including the internet and GPS. The agency’s focus on long-term research and development has helped to spur innovation and create new industries.
   
2. Brazil’s “Programa Minha Casa Minha Vida” (My House My Life Program): This program, launched in 2009, provides subsidies and financing for low-income families to purchase homes. The program has helped to stimulate the construction industry in Brazil, create jobs, and reduce poverty.

Failures:

1. Japan’s “Industrial Policy 2000”: In 2000, the Japanese government introduced an industrial policy aimed at promoting the development of new industries, such as biotechnology and nanotechnology. However, the policy was criticized for being too broad and unfocused, and it failed to produce significant results.
   
2. Mexico’s “Maquiladora Program”: The Maquiladora program, which allows foreign companies to establish manufacturing facilities in Mexico, was initially successful in promoting economic growth and job creation. However, the program has been criticized for creating low-wage jobs with poor working conditions, and for failing to promote higher-value manufacturing activities.

These examples demonstrate that while industrial policies can be successful in promoting economic growth and development, they can also fail if they are poorly designed or implemented. The key to successful industrial policy is to have a clear understanding of the goals of the policy, to develop policy tools that are appropriate for achieving those goals, and to implement those policies in a way that is consistent with broader economic objectives.

Me: [Smirking from correcting IT] How come Japan failed while Singapore succeeded in developing a Biotech / Biomedical sector?

IT: Here are some reasons why Japan has struggled to develop a successful biotech/biomedical sector:

1. Lack of entrepreneurship and risk-taking: Japan’s business culture has traditionally been conservative and risk-averse, with a strong emphasis on incremental improvement rather than disruptive innovation. This has made it harder for Japanese companies to take the risks necessary to succeed in the biotech/biomedical sector, which requires significant investment and long development timelines.
   
2. Insufficient funding and support for biotech/biomedical research: Despite government efforts to support the sector, Japan’s investment in biotech/biomedical research and development (R&D) has been relatively low compared to other countries, such as the United States and Singapore. This has limited the country’s ability to attract and retain top talent in the field and to develop innovative products and technologies.
   
3. Fragmented biotech/biomedical ecosystem: Japan’s biotech/biomedical industry is characterized by a fragmented ecosystem, with many small companies and academic institutions working independently rather than collaborating to build critical mass and achieve scale. This has made it harder for Japanese companies to compete with larger and more integrated players in the global biotech/biomedical market.
   
4. Complex regulatory environment: Japan’s regulatory environment for biotech/biomedical products is considered to be one of the most complex and time-consuming in the world. This has created significant barriers to entry for small and medium-sized companies, which may lack the resources to navigate the regulatory process.
   
5. Cultural and language barriers: Japan’s business culture and language can be challenging for foreign companies and investors to navigate, which has limited the country’s ability to attract foreign investment and talent in the biotech/biomedical sector.

Overall, Japan’s failure to develop a successful biotech/biomedical sector is a complex issue with multiple contributing factors. However, the factors outlined above provide some insight into why Japan has struggled to compete with other countries in this field.

Me: What are the consequences of a failed industrial policy?

IT: The consequences of a failed industrial policy can be significant and long-lasting, both for the government that implemented the policy and for the economy as a whole. Here are some possible consequences of a failed industrial policy:

1. Wasted resources: If an industrial policy fails, the government and private sector may have invested significant resources in developing an industry or sector that does not succeed. This can lead to a waste of resources, including financial resources, human capital, and physical infrastructure.
   
2. Economic inefficiency: A failed industrial policy can lead to economic inefficiency, as resources are diverted away from more productive uses and towards industries that are not competitive or sustainable. This can lead to slower economic growth and lower living standards.
   
3. Loss of international competitiveness: If an industrial policy fails, the country may lose international competitiveness in the targeted industry or sector. This can have a ripple effect on other industries and sectors, as the country’s overall economic competitiveness is weakened.
   
4. Negative impact on employment: A failed industrial policy can have a negative impact on employment, as companies may scale back their operations or go out of business. This can lead to job losses and economic hardship for workers and their families.
   
5. Political backlash: If a government’s industrial policy fails, it may face political backlash from voters and interest groups who feel that their interests were not served by the policy. This can lead to loss of public trust in the government and can make it harder to implement future industrial policies.

Overall, the consequences of a failed industrial policy can be significant and can have long-lasting effects on a country’s economy and society. It is therefore important for governments to carefully consider the potential risks and benefits of industrial policies and to monitor their implementation and impact closely.

Me: Is Jurong Island in Singapore, part of industrial policy?

IT: Yes, Jurong Island in Singapore is an example of industrial policy in action. The island was developed as part of Singapore’s broader industrial policy strategy to promote economic growth and diversification through the development of key industries. Jurong Island is now home to a wide range of petrochemical and specialty chemical companies, as well as supporting infrastructure such as pipelines, storage facilities, and power plants. The government’s industrial policy approach involved providing incentives such as tax breaks, access to funding, and streamlined regulatory processes to encourage private investment in the sector. This has helped to create a world-class hub for petrochemical and specialty chemical production in Southeast Asia, contributing significantly to Singapore’s economic growth and development.

Me: [Woah, me impressed! How many students know that? Hopefully mine?!] Thank you. You have worked hard today.

IT: You’re welcome! It was my pleasure to assist you today. Don’t hesitate to reach out if you have any more questions in the future. Have a great day!

Me: [What a lovely companion. My New Normal. But cannot see cannot touch.]