Officially out of favor for more than 40 years, industrial policies are making a strong comeback, especially where they were least expected. But were they ever really gone?
The American multinational Ford announced last week the construction in Bécancour of a new cathode plant that will be used in the manufacture of batteries for its Mustang sports cars and electric F-150 pickup trucks. Half of the funding for the 1.2 billion Canadian dollar project will be generously provided by the governments, at the rate of 322 million from Ottawa and the same amount from Quebec.
The news followed the announcement this spring of another similar plant in what has come to be known as the “Energy Transition Valley”, but from GM this time, and in exchange for 300 million from the federal and Quebec governments. We could also cite other projects, such as that of Volkswagen, which will set up in Ontario in exchange for just over $16 billion in public money over ten years.
The companies in question made no secret of the fact that, beyond clean electricity in large quantities, skilled labor and access to a large market, they had been attracted by the generous subsidies without which they would have gone to see elsewhere, in particular just south of the border.
Is that, only with his Inflation Reduction Act adopted last year, Washington dangles an average of US$290 billion in financial incentives per year to those who come to develop green energy in the United States, the American investment bank Goldman Sachs estimated this summer. Along with other policies aimed at promoting the US tech sector while blocking China’s (CHIPS and Science Act), or more simply to revive the economy and modernize American infrastructures (Infrastructure Investment and Jobs Act), the measure marks a turning point in American economic policy.
Another Kind of “Washington Consensus”
More than 40 years after Ronald Reagan said government was not the solution, but the problem, Joe Biden now says the best way to make the green transition, to create good middle-class jobs, to Ensuring the security of supply chains or staying ahead of the Chinese rival is not to make oneself as small as possible in front of the markets, but to take advantage of the state’s ability to intervene to help these markets to go in the right direction.
This transition from Reaganomics to Bidenomics in the United States had already begun, in a way, with Donald Trump and his all-out trade wars, observed this summer the FinancialTimes. It has not gone unnoticed in Europe, Japan or South Korea which, like Canada, have in turn been forced to deploy similar policies, if only so as not to see all their companies head for the United States.
“There is a lot of subsidy shopping going on right now,” noted an expert quoted the next day in the same British daily. Although Europe already had its own measures of the kind, the much more muscular policies in the United States today pose the risk of a kind of every man for himself within the European Union itself. There is also reluctance to follow the Americans too far in their desire to “decouple” with China, among other things, it is said, because we know the latter’s importance in the green technology sector and that the green shift remains the top priority.
Most economists will tell you that this resurgence of industrial policies is one of the worst things that could happen, warn experts Réka Juhász, Nathan Lane and Dani Rodrik in an update on the evolution of knowledge on the subject released this month by the National Bureau of Economic Research (NBER).
These opponents will explain to you in particular that because they are not omniscient and because they expose themselves, through this kind of policy, to all kinds of games of influence that have nothing to do with the reality on the ground, ” governments cannot pick the right winners”. They will cite a bunch of historical precedents that would show that at best these policies are costly and ineffective, and at worst they are costly and damaging.
Not what you believe
But that hasn’t stopped governments from often interfering in their economies, particularly in wealthy countries and even those of laissez-faire economic champions like Ronald Reagan and Margaret Thatcher, the NBER study notes. In fact, industrial policies have never disappeared and the new craze for them probably started half a dozen years ago.
This “ubiquity” of industrial policies is due in particular to the fact that it is not only in health, education or major public infrastructure that the markets cannot do things on their own. This is also the case for fundamental scientific research, the creation of new economic poles or the green economic shift.
For lack, until very recently, of sufficiently refined analytical tools, industrial policies have too often been associated with protectionism which would be driven by a vision turned inward and which would be decided by bureaucrats cut off from reality. ground. However, in reality, most of them aim rather to conquer external markets and are often the result of a collaborative process with the actors on the ground, report Juhász, Lane and Rodrik.
As for the effects of industrial policies, we note that they can be not only positive, but also long-lasting when we take the trouble to study them properly, they explain. This is more often true when these policies are not limited to costly and not always effective measures, such as subsidies and trade policies, but rather the aid takes the form of, for example, targeted public services.
Not only are industrial policies not the disaster that many economists describe, concludes the NBER study, but they should, if necessary, be extended to sectors other than the usual manufacturing industry. In particular that of services, whose relative weight in the economy is much greater and which also faces several challenges.
