Download International Economics Final Paper – Policy Memo

United States Department of State
Washington, D.C. 20520
MEMORANDUM December 6, 2012
TO: Professor Crook-Castan
FROM: Kathy Imbalzano
SUBJECT: Industrial Policy and Green Technology Industries: The United States and Germany
Summary
Industrial policies are government efforts to encourage manufacturing industries through
financial support. Although criticized for going against free market ideals, the current world
economy and successes of developing countries using industrial policy has revived such policies
in rich nations. Green technology is a relatively new industry which interests many nations
wishing to boost their economies. In the US industrial policy towards green technology comes
from the American Recovery and Reinvestment Act of 2009 and exceeds $27.2 billion. In
Germany, policy derives from the Renewable Energy Act and exceeds $41.2 billion. Policies in
Germany are more in line with national goals and follow patterns of previous industrial policy
success whereas policies in the US are aimed at creating jobs in the short run, deviate from
previous patterns of success, and face political opposition.
Industrial Policy – Overview
What Industrial Policy Is: A country’s Industrial Policy plan is its official strategic efforts
to encourage development and growth in manufacturing sectors of the economy. Policies vary by
country and by specific manufacturing sectors within each country. Industrial policy often comes
in the form of protection from foreign imports, subsidizing export industries, tax cuts for specific
industries, subsidized loans, or government grants.
Criticism of Industrial Policies: Industrial policies can be seen as interventionist and
against free market ideals especially when policies limit imports of competitive goods. The idea of
most industrial policies is to aim the policies at infant industries (industries that need assistance
and protection in order to develop to the point where they can be competitive in the global market)
and then remove the policies once enough growth has occurred and the industry has a stable
standing in the market. However, industrial policies often continue after an industry has reached
sufficient levels of growth. Furthermore, governments must pick and choose which industries to
support – governments are not omniscient and there is no way to know which industries will
succeed with a little government help and which will receive industrial policy help and still fail.
Many economists argue that focusing efforts on creating demand for products and services would
be more effective than industrial policies.
Forces Driving the Revival of Industrial Policy: After years of promoting free trade and
non-intervention in markets, rich countries and poor countries are leaning back towards industrial
policies. There are four main forces driving the revival of industrial policies in rich countries:
1) The weak world economy. Governments are under pressure to reduce unemployment
and stimulate growth and support for chosen industries can save jobs and help local firms against
foreign competitors.
2) Desires to rebalance economies. Rich countries, especially the US and Germany, want
to rebalance their economies away from finance and property to include older manufacturing and
new clean, green technology.
3) Emergency use of industrial policy leads to demands for more. Bailing out some
industries leads to other industries demanding assistance. An example is after the US bailed out
large industries (GM, AIG, etc.) complaints led to a $30 billion small-business lending fund.
4) Rich countries are responding to apparently successful policies of fast-growing
economies and mimicking industrial policies such as those in China and South Korea.
Why Green Technology?
Nearly every developed and developing country has invested in clean or green technology
initiatives, eager to stake a claim in this relatively new industry. Green technology is viewed as the
technology of the future, as it should be more compatible with maintaining growth, the limited
supply of natural resources, and maintaining the well-being of the planet. Furthermore, it is harder
for governments to promote companies effectively in industries that are more globally competitive
and open, which means the still-emerging green industry is seen as a prime target when compared
to other industries.
The United States’ Industrial Policy Towards Green Technology
The US has invested tens of billions of dollars into new green technology. The most recent
and relevant industrial policy towards green energy in the US comes from the American Recovery
and Reinvestment Act of 2009, otherwise known as the Obama Administration’s Stimulus
Package. The provisions of the act relating to energy efficiency and renewable energy research
and investment total to $27.2 billion of government aid. Of this aid, $6 billion is allotted for
renewable energy loan guarantees, $3.2 billion toward Energy Efficiency and Conservation Block
Grants, and $3.1 billion for the State Energy Program to help states invest in efficient and
renewable energy. The rest of the aid is directed to research (the largest amount towards research
being $3.4 billion for carbon capture and low emission coal research), training of green-collar
workers by the Department of Labor, and towards the manufacturing and development of specific
technologies (such as the allocation of $400 million to electric vehicle technologies). While this is
a substantial amount of funds, the US is not the top investor in green technology – China is the top
investor – and in 2010, the US fell behind Germany who increased their spending to $41.2 billion
while the US’s policies only rolled over to spend $34 billion.
Germany’s Industrial Policy Towards Green Technology
Germany surpassed the United States in 2010 to become the second largest investor in
green technology in the world behind China. The most recent and relevant industrial policy
towards green energy in Germany comes from the Erneuerbare Energien Gesetz – the Renewable
Energy Act (last amended in August 2012). The industrial policy from this act comes in the form
of feed-in tariffs. Feed-in tariffs are effectively subsidies to encourage investment in green
technology in which the government offers long-term contracts for renewable energy producers
based on the cost of generation of each technology (wind vs. solar) and the tariffs include “tariff
digression” which dictates that the price of the tariff goes down over time. This form of industrial
policy encourages greater use of green energy and innovations that make producing green energy
cheaper.
Industrial Policy Success and Failure Patterns: How US Green Technology Ventures Fit In
The effects of previous industrial policies have followed relatively consistent patterns.
Patterns:
1) If the policy is in line with an economy’s comparative advantage, the policy is more
likely to have successful results.
2) Policies are least prone to failure when they follow rather than try to lead the market.
3) Industrial policies tend to work best when a government is dealing with an industrial
sector where it has natural interest and competence.
The US has an advantage in research and development with a highly educated population
and incentives for entrepreneurship (bankruptcy policies, social admiration of entrepreneurs, etc.);
however, US industrial policy towards green technology is trying to lead the market and the green
sector is not one where the US government has a natural interest or competence.
US consumers do not have a large demand for green technology. Small ventures such as
promoting compact fluorescent light bulbs over incandescent bulbs have had relative success
because they are cost effective for consumers and a popular move, but larger ventures such as
electric cars and alternative energy do not have large demand among the population. Americans
like their large luxury cars and personal conversion to alternative energy is expensive and national
conversion is seen as an annoyance.
Furthermore, the US government is promoting green technology with the goal of creating
jobs. There is perhaps a natural interest to move to green technology so that the country can wean
itself off of reliance on foreign oil, but the government has little experience with green technology
ventures and primarily see the industrial policy in this sector as a way to reduce unemployment
and stimulate the economy.
How German Green Technology Ventures Fit In
Germany also has a highly educated population and a history of investment in research and
development, although their incentives for entrepreneurship are not as large as the US’s.
Consumers in Germany and throughout Europe demonstrate more demand for green products and
industrial policies for green technology follow the market as well as lead the market. Like the US,
Germany also has natural interest to reduce reliance on foreign oil. Their efforts are not focused on
reducing unemployment (Germany has a current unemployment rate of 6.2% - very low for
Europe and time of economic crisis) but rather at the goal of diversifying and boosting the
economy for the future. Furthermore, the country is still the only major economic power to have
had a green party in power (1998-2005) and Germany has progressed substantially forward across
interrelated aspects of environmental policy outlined in the United Nations’ Green Economy
Initiative.
Political Issues and Implications
As the US comes closer to facing the fiscal cliff in a few weeks, the funding for industrial
policy towards green technology remains in question. Funding through the 2009 stimulus package
for green technology was and has been debated since its proposal with strong opposition from the
Republican party. Opposition was increased after Solyndra (a company that manufactured solar
cells) went bankrupt after having received benefits from the stimulus package. Anytime more
industrial policies towards green energy are proposed, the media and opposition to the policies
remind the nation of failures such as Solyndra, and with a limited budget and growing deficit it
could be difficult to maintain green technology industrial policy in the US.
In Germany, Chancellor Angela Merkel is dedicated to maintaining green technology
growth and has set national goals that require green technology support. Germany plans to have
renewable energy account for 35% of all energy output by 2020, 80% by 2050, and close all 17 of
its nuclear power plants by 2022. Currently, Germany is the largest photovoltaic market
(consumer of solar energy) in the world and is the European leader in wind energy production.
There is also a set path for feed-in tariff reductions to incentivize future innovation and strong
support for the green industry in the population and Green Party.