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Growth Strategies and Industrial Policy Motivation Asian experience Possible lessons for Turkey Derived from research with Howard Pack Why the resurgent interest in industrial policy (IP)? Disenchantment with globalization/Washington consensus Notion that Japan/Korea/Taiwan “beat the West at its own game” Requirements for Successful IP Identify market failure Design correct policy intervention Implement Calibrate intervention, Alter as changing circumstances require, Terminate as need be. Note: IP justifications are most often due to internal market failure; some are international rent-shifting models, and in these cases one must consider possibility of retaliation Four questions regarding the Asian experience: What was the impact of industrial policy? Are these results likely to be reproduced elsewhere today? Does the international system impede implementation? Is the pursuit of an industrial policy advisable? Major Policies Actually Applied Capital channeling: direct and indirect subsidies, tax breaks R&D promotion International trade and investment protection Lax competition policy Evaluation of impact Regression results (Beason-Weinstein and Noland for Japan, Lee and Noland for Korea) Input-output results (Pack) Case studies Political economy and ineffectiveness Benefits went predominantly to declining natural resource sectors Net fiscal flows to manufacturing were negative On-budget subsidies went to declining sectors… 100% 90% 80% Coal Mining 70% Small Business, Textiles, ect High Tech 60% Agriculture, Forestry and Fisheries Sea Transport 50% Coal Mining Small Business, Textiles, ect High Tech 40% Agriculture, Forestry and Fisheries 30% 20% 10% Source: Ogura and Yoshino, 1988, Table 1 year 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 0% Year sector percent of total Sea Transport As did off budget subsidies… 45 40 35 Health, Education Welfare Infrastructure 25 Small Business Agriculture Regional Development 20 Industry and Technology Export and ODA 15 Postal Saving Ow n Inv 10 5 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 1965 1963 1961 1959 1957 0 1955 % of total FLIP funds 30 Year Source: Fiscal and Monetary Statistics Monthly (FILP Volume), Ministry of Finance Net subsidy to manufacturing was negative Tax incentives to most manufacturing sectors were negative Industrial policy amounted to partial compensation Industry 1955-1990 1955-1973 1974-1990 Normalized Industry Normalized Industry Normalized Industry Tax Rate Rank Tax Rate Rank Tax Rate Rank Electrical Mach. -0.403 8 -0.26 General Mach. -0.403 8 -0.26 Trans. Equip. -0.403 8 -0.13 Fabricated -0.069 7 -0.26 Metal Pet & Coal -0.009 3 0.3 Precision Inst. -0.403 8 -0.26 Cer/Stone/Glass -0.009 3 0.3 Pulp & Paper -0.891 13 -0.13 Chemicals -0.009 3 -1.72 Basic Metals -0.069 6 0.3 Processed -0.736 12 -1.52 Foods Mining 6.658 1 0.92 Textiles 0.719 2 11.68 Source : Beason and Weinstein (1996), Table 1. 8 8 7 8 -0.56 -0.56 -0.56 -0.35 10 10 10 8 3 8 3 6 13 3 12 0.14 -0.35 -0.56 0 0.04 -0.35 0 3 7 10 5 4 8 5 2 1 1.04 0.5 1 2 A saving grace: targeting exports Clean standard not subject to manipulation “these were the only statistics that could not be faked” Local firms could not rig international competition like they could domestic markets Possible externalities Support to laggards terminated Possible lessons for Turkey Modest positive impact at best If industrial policy pursued, are these results likely to be reproduced in Turkey? Does the international system impede implementation of Asianstyle policies today? Are the results likely to be reproduced? Three possible sources of “Asian exceptionalism”: “Deceptively poor” Political upheaval, US-led land reforms, and legitimacy through growth Land scarcity and “growth with equity” v. “growth without development” “Deceptively poor” Unusually high levels of human capital Low contemporaneous income due to lack of physical capital Rapid convergence Country Ratio of Human Capital Per Index to Human Capita Per Capita Year Capital Index Income Income Japan Korea The Philippines Israel Thailand Greece Malaysia US Italy Turkey Argentina Mexico Spain 1955 1955 1956 1954 1955 1956 1957 1955 1956 1955 1955 1955 1955 1673 494 738 1200 302 693 334 2293 787 267 760 352 389 519 217 277 609 181 468 351 2443 971 365 1059 637 652 3.2 2.3 2.7 2 1.7 1.5 1 0.9 0.8 0.7 0.7 0.6 0.6 Unusually egalitarian Unusually equal distribution of income US-led land reforms and relatively equal distribution of land Legitimacy through prosperity Japan Korea Taiwan Simple Average Gini Coefficient for Income 0.4 0.34 0.31 0.35 Gini Coefficient for Land 0.47 0.39 0.46 0.44 Argentina Brazil Egypt Hong Kong India Indonesia Kenya Malaysia Mexico The Philippines Singapore Thailand Turkey Simple Average 0.44 0.53 0.42 0.49 0.42 0.33 0.64 0.42 0.53 0.45 0.4 0.41 0.56 0.46 0.87 0.85 0.67 n.a. 0.52 n.a. 0.69 0.47 0.69 0.53 n.a. 0.46 0.68 0.64 Source: adapted from Rodrik (1994) Unusual endowments—the implications of land scarcity Land 4 0.25 Arg 2 Tun Bra 1 Can Tur 1 Pak Spa Tha Per Chi 0.25 Phl Mex Grc Tot US Den Swd Mal Ind 2 Fin Fra 4 Ita UK Tai Labor 0.25 Aus Isr Ger Kor HK 1 Nor Jap Physical K Sng 2 4 Replacing Physical Capital with Human Capital (1968 data) HK 4 Jap Ger Aus Kor 2 Swd Den 1 Fra US Can Bra Arg Tur Tun UK Sng HK Isr Phl Ita 1 Per Fin Ind Tot Grc Spa Tha 0.25 Nor 0.25 Tai Mal Mex 2 Chi 4 Pak Labor Land 0.25 1 2 4 Is it possible to reproduce? Are there new constraints imposed by the WTO? New rules and disciplines—the subsidies code The end of the Cold War and the dispute settlement mechanism Ideological opposition by the IFIs Weighting costs and benefits Modest benefits Possible drawbacks: Encouragement of corruption Dumbing down the financial system Corruption Rankings - Japan, Korea, Taiwan, Turkey Japan Korea Transparency International Taiwan Turkey Japan Korea PriceWaterhouse Coopers Taiwan Turkey Japan Korea World Bank Taiwan Turkey 0 10 20 30 40 50 Percentile Note: A larger value indicates less corruption. 60 70 80 90 100 Governance Rankings - Japan, Korea, Taiwan, Turkey Japan Korea Government effectiveness (World Bank) Taiwan Turkey Japan Time spent with government bureaucracy (Global Competitiveness Report) Korea Taiwan Turkey Japan Competence of public officials (Global Competitiveness Report) Korea Taiwan Turkey 0 10 Note: A larger value indicates more effective government, less time spent with bureaucracy, and more competent public officials. 20 30 40 50 Percentile 60 70 80 90 100 Estimated Net Cost of Financial Sector Clean-Up Korea: Taiwan: Japan: 16 percent of GDP 11 percent of GDP 10-15 percent of GDP? Bottom line: While the odds of developing successfully through selective interventions are better than those on piyango ticket, they are not particularly favorable.