Amber Huber

 Government intervention to give economic opportunities to production sectors that wouldn’t have occurred without said intervention.  Three main arguments in favor of it:  The infant industry argument  Coordination failures  Informational externalities  Sources  Pack, Howard, and Kamil Saggi (2006), “Is There a Case of Industrial Policy? A Critical Survey,” World Bank Research Observer 21 (2),  Westpal, L. (1990), “Industrial Policy in an Export-Propelled Economy: Lessons from South Korea’s Experience,” Journal of Economic Perspectives 4,  Nam, Sang-Woo, and Se-Jong Kim. "Evaluation of Korea's exchange rate policy." Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7). University of Chicago Press,

 Foreign competitors in established industries have the upper hand.  Industrial policies foster infant industries and protect them until they can become successful (via lowering production costs and learning by doing).  If infant industries have comparative advantage, becoming successful can raise national income.  Baldwin’s Argument  Period of learning is an initial fixed cost.  Capital markets finance investment if future returns > initial loss.  Investors hesitant to invest in initial learning due to spillover potentially benefitting competitors.  Knowledge spillover is an externality that occurs when a firm’s innovation creates economic benefits in other firms.

 Infant industries and independent agent investment.  Rodrick’s Model  High-Tech and Low-Tech good sectors.  High-Tech needs access to intermediate goods, coordination required.  Okuno-Fujiwara’s ideal industrial policy for goods x and y (where y is intermediate good of x)  Government intervention on facilitating information exchange (planned production of x and planned demand of y).

 Rodrick  Goal of industrial policy is strategic collaboration between private and public sectors to determine comparative advantage.  Level of investment/entrepreneurship the market delivers isn’t enough.  Initial producers provide benefits to subsequent producers.  Mayer  Information asymmetry with new products to foreigners.  Beneficial industrial policy of subsidizing exports.  Foreign Direct Investment  Blalock  Positive impact from FDI on domestic productivity growth.  MNC source simple inputs from local firms.  Technology Transfer

 Downward growth spiral in late 1950s.  Export-led industrialization strategy.  Export composition of GNP up from 3% (1960s) to 40%(1990s)  Virtual free trade regime for exports. Capital and intermediate inputs used in exports free from import tariffs.  Exporters borrowed working capital in proportion to their export activity.  Preferential access to credit and tax/tariff exemptions for infant industries.  Chaebols (Hyundai, Samsung)

 Credit rationing denied financial institutions the experience needed to make independent decisions.  Over targeted intervention in the 1970s in developing heavy engineering industries, causing performance to deteriorate. Inadequate labor and capital.  Changed exchange rate system in 1980s to peg Korean won to basket of currencies for major partners to maintain more stable REER.  However, authorities failed to disclose weights applied to currencies of major trading partners. Caused REER of the won to fluctuate during the 1980s.  Trending away from selective intervention, imports have been liberalized. Government still has large control over bank lending.

 Lawrence and Weinstein – relationship between policies and TFP growth from in Japan.  Subsidies/Loans negatively associated with TFP growth.  Imports positively associated with TFP growth.  Why? Imports allow domestic firms to use specialized intermediate inputs.  Imports create competition, domestic firms have to cut cost and increase quality.  Japan’s growth would have benefitted from cutting tariffs and expose domestic firms to competition.  Pack asserts that governments should focus away from complex industrial policy and instead focus on negotiation with MNCs.  Changing political climate and international policy constraints.  World Trade Organization constraint examples:  Trade-Related Aspects of Intellectual Property Rights (TRIPS), signed in  Trade-Related Investment Measures (TRIMS), signed in  Lengthy dispute settlement procedure.

 No guarantee that low production costs will lead to foreign sales.  Rather than protecting infant industries, competition from the global market may force them to become more competitive.  Trade constraints may not allow the same industrial policies that benefited countries in the past to be used today.  In developing countries, policies to help coordination failures may be beneficial to prevent being stuck in a low tech rut.