Prior to the Great Recession and the strains of the prolonged Euro crisis, the ruling orthodoxy in advanced economies scorned industrial intervention, labeling such policies as ‘picking winners, saving losers.’ As the industrialized world continues to struggle in its recovery, the success of interventionist policies pursued by China and other emerging economies is impossible to ignore. Unwilling to be surpassed by the fast-growing Asian economies, Western nations are once again beginning to utilize industrial policies.
Reclaiming ‘Industrial Policy’
President Barack Obama declared in 2009 that the US government had to make “strategic decisions about strategic industries.” On March 20, 2013, the British Chancellor of the Exchequer, George Osborne, pledged to “back sectors that are global successes“ with £1.6 billion in long-term spending. On September 12, 2013, French President François Hollande unveiled a 10-year industrial strategy that commits the government to supporting 34 sectors. This recent wave of activist industrial policies has created a new economic battleground, one that requires the Canadian government to more actively steer its economy.
At first the Conservative government initiated a series of policies in response to domestic pressures to alleviate the effects of the recession. For example, in the 2009 budget, the government inaugurated the Economic Action Plan to fund infrastructure projects. However, in March 2013, the Conservative government signaled a greater turn in economic policy after unveiling its new budget. It features three interventionist initiatives, which are: the creation of a new Canada Jobs Grant to rectify the skills mismatch that plagues the labor market, the establishment of an Aerospace Technology Demonstration Program to help Canadian firms finance large scale projects and lastly, intervention in the defense sector.
To some economic commentators, the rejection of market forces to steer the aforementioned sectors carries potentially disastrous consequences. For others, the policies do not go far enough. According to Dan Ciuriak, former deputy chief economist at DFAIT, and John M. Curtis, former chief economist at DFAIT, a national industrial strategy needs to come next. Neither opinion is without merit. In fact, careful consideration of both is the precondition for a successful industrial strategy.
Looking Before You Leap
Despite the burgeoning economies of East Asia, industrial policy has an ambiguous past. In the 1970’s East Asian and Latin American countries received substantial international loans. While East Asian nations underwent rapid industrialization and development, Latin American economies collapsed. The latter were plagued by corrupt governments, which misallocated their borrowings. Latin American countries adhered to import substitution policies, which fostered inefficient industries that could not compete internationally.
More specifically, Latin American governments ignored the tenets of comparative advantage by entering a multiplicity of sectors and clung onto declining investments instead of abandoning ‘losers.’ The lessons of the Latin American experience are clear. There is a right way and a wrong way to do industrial strategy; investment can lead to domination in a selected sector or to financial unraveling.
Ciuriak and Curtis published a paper in June 2013 that incorporates the lessons from the Latin American experience in a blueprint for industrial strategy in the Canadian context. They argue that given Canada’s small domestic market, vast geography and proximity to the American economic powerhouse, the Canadian government has to develop policies that play to Canada’s strengths. Canadian niches, such as translation services based in Montreal, are suitable targets. In essence, the authors reflect that the economic playing field is not even. Therefore, to maintain a foothold in the competitive international market, Canada needs to identify and nurture next generation industries.
Industrial strategy isn’t without risks. However, the experiences of international players such as China and Japan demonstrate that institutional and economic transformation can accrue ample returns. Thus, the difficult task for the Canadian government is to craft a pragmatic and clear strategy.
