Why industrial policy is doomed to fail

In August, at the Yabuli Summer Forum held in Xi’an, Professor Zhang Weiying gave a speech at the opening ceremony of the forum. The title of the speech was “Why is the industrial policy destined to fail”. At that time, I heard that this was actually the consistent view of Professor Zhang, so I did not have much to introduce to you. It was only later mentioned that when the new energy vehicle subsidy policy caused fraud, it was mentioned that some economists always believed that industrial policy would not have a good effect.

Later, his speech was published on the Internet. After a slow fermentation, he caused a rebuttal from Lin Yifu, an economist at Peking University’s National Development Institute. The two also issued separate debates. Economists including Huang Yiping and Xu Xiaonian also expressed their opinions. Among those who care about economics and macroeconomic policies, it is a heated debate in recent years. My feeling at the time was that I felt that Professor Zhang was really cute and unreasonable. Because the guests who spoke before and after him, such as Liu Mingkang, former chairman of the China Banking Regulatory Commission, and Jin Liqun, president of the AIIB, are talking about the Belt and Road and infrastructure investment, which is also a government-led industrial policy. But Professor Zhang still sings a cute tone.

1. Cognitive ability and incentive mechanism

What did Professor Zhang say about that day? He said that the success of industrial policy can be described as rare, for two reasons: the first is the limitation of cognitive ability; the second is the distortion of incentive mechanism. The limitation of cognitive ability, to be straightforward, is that Wanjin is hard to buy and knows that it is difficult for us humans to predict which industry will usher in the explosion of innovation, thus creating great commercial and social value. New technologies and new industries are unpredictable. Since it is unpredictable, according to the truth, the government certainly does not know which industry should focus on resources such as capital and policy advantages. Whether the people who make industrial policies are government officials, experts or successful entrepreneurs, it is difficult to predict. Government officials and experts are well understood because they are not entrepreneurs themselves. But even if successful entrepreneurs plan industrial policies, the results will not be good, because successful entrepreneurs are more likely to rely on the path and fall into the past industry experience. Professor Zhang Weiying said: “If China organized an entrepreneur-led industrial policy committee around 2000, the top ten economic figures elected by CCTV, and Liu Chuanzhi and Zhang Ruimin as co-chairs, I think China Internet Development may not be as good as it is today, and it is more likely to be overcapacity in the computer industry and the home appliance industry. In this case, if we insist on investing resources in the government-selected target in the form of industrial policy, it is one. Kind of gambling, gambling this industry will definitely break out.

Second is the distortion of the incentive mechanism. The market’s incentives for civil servants and entrepreneurs are different, which leads entrepreneurs to be willing to take risks, as long as things are done; civil servants will evade risks and get things right – the simplest “right” is to be impeccable in the process. . When the risk is exposed and things can’t be done, the entrepreneur will take responsibility and take steps to correct and stop the loss. Civil servants are more motivated to prove that they are not wrong. Zhang Weiying described it with “do not do it.” Although the lectures were all famous entrepreneurs, Professor Zhang was not afraid of offending people to say a few more words: “I want to make a special appeal. Entrepreneurs should strive for equal rights for everyone, not Give yourself the privilege. But I regret to find that some entrepreneurs are now vying for the privilege of the government, not for all entrepreneurs and all individuals.” This is to say that entrepreneurs who have made a name for themselves It will also use its influence to influence government policies. For example, a few years ago, there were big entrepreneurs in the retail industry who proposed at the two conferences to ask the government to regulate e-commerce.

2. Effective market, promising government

Professor Lin Yifu’s rebuttal should be written, not a statement. Because they use written language, rigorously gargle. Professor Lin came up and said: “Many countries have failed industrial policies, but they have not seen developing countries that have successfully pursued developed countries without industrial policies and developed countries that are sustaining development.” Why do we need industrial policies because, first, economic development Entrepreneurs are needed, and the government needs to do infrastructure and other work. Second, the resources available to the government are limited, so we must think about how to use the limited resources. “This measure of selectively using resources to help entrepreneurs in certain industries overcome externalities and coordination issues is industrial policy.” Lin Yifu said that economic development requires both an “effective market” and a “promising government.” He cited the example of “promising government” that should be “promising”, such as patent protection, and the government’s investment in the institutional environment and education.

He said that many industrial policies in developing countries often fail because of the ability to support industries that violate comparative advantage. “The result is that companies in these industries lack viability in an open competitive market. Survival by the government’s never-ending protection subsidy.” “Successful industrial policies must be directed at industries with potential comparative advantages. The so-called potential comparative advantage industry refers to the factor’s production costs in the open competition market. Advantages, but due to imperfect hardware and software infrastructure, transaction costs are too high, making the total cost uncompetitive in the open competition market. If the government can provide external compensation for the leading companies in these industries and help provide soft and hard With the improvement of infrastructure, such industrial policies can quickly turn industries with potential comparative advantages into competitive industries.”

After reading Professor Lin Yifu’s article, I think Professor Lin Yifu only clarified the need for industrial policy, and admitted that it is likely to fail, and pointed out that in order to succeed in industrial policy, it is necessary to find a company with potential comparative advantages; but it has not been able to Refuting Professor Zhang Weiying’s two reasons why industrial policy cannot be established, namely, cognitive ability and incentive distortion – and whether the government can find and support potential companies with potential comparative advantages, there are also cognitive and Motivation issues.

3. Comparative advantage and entrepreneurship

In the second round of debate, Professor Zhang Weiying directly met Professor Lin Yifu’s core argument that the government should formulate industrial policies for industries with comparative advantages. His view is that playing a comparative advantage and emphasizing the role of the government itself is contradictory, because the market is the most effective means of finding and exerting comparative advantage. Professor Lin Yifu’s response is: “Comparative advantage has static and dynamic points. When playing a comparative advantage, the role of the government is crucial.” The so-called dynamic comparative advantage means that with the economic development, some industries that have no comparative advantage become I started to have some comparative advantages. “At this time, we need technology upgrades and industrial structure changes. We will face many external problems and face many coordination problems. For example, the requirements for infrastructure, financial support, and legal services will be corresponding. Changes, these changes are not something that individual entrepreneurs can do. They must be coordinated by the government or by the government.” In nominal terms, the industrial policy is debated. In fact, Professor Zhang Weiying and Professor Lin Yifu’s differences mainly lie in the government. The role in economic development, and the boundaries of the government’s hands.

Therefore, in the second round of debate, they will argue at two points: First, whether the government will help the establishment of comparative advantage; second, whether the government-led industrial policy is in conflict with entrepreneurship. The consensus is that there are few successful industrial policies. The most basic difference is that there is one thing that everyone thinks is important, but they all know that it is difficult to do it well. Therefore, one person jumped out and said that this matter should not be done again, because the consequences are very serious, and it is almost impossible to do well! But another person said: I think it is still possible to do it well. We should study how to do it well and then try again.

4. What effective government policy requires the government to do

Professor Huang Yiping, National Development Research Institute, Peking University

Huang Yiping, another colleague of the two professors, obviously also belongs to the “good study and then how to do it well” faction. But unlike Professor Lin Yifu, Professor Huang clearly agrees with the problem pointed out by Zhang Weiying. For example, the case of the Internet finance industry provided by Professor Huang is just like defending Zhang Weiying’s point of view. The government has not subsidized the development of this industry. The only “action” provided is actually “inaction”, that is, “the position of relative tolerance of the regulatory authorities provides a relaxed development environment, otherwise the Internet finance will not have today’s situation.” However, after the P2P industry risks appear, such as the phenomenon of frequent running like e-rental, “the regulatory authorities suddenly demanded that all P2P platforms be transferred from credit intermediaries to information intermediaries in the short term, which has caused great development in the industry. Troubled.” To be straightforward, the government has done nothing in this part of the act – establishing effective regulation to protect the interests of consumers; and when it comes to doing so, it has gone to the point where it should not be done.

This reminds me of a story told by an entrepreneur in the Internet car industry. At first, he always felt that what he was doing was a good thing for everyone, solving employment, facilitating travel, and even being environmentally friendly. He then tried to find some government agencies and hoped that the government could encourage and support them. If it was several times, the government did not respond. He is very discouraged. Until one day later, a government official said to him: It seems that you do not understand the government very much. Now we do not express any opinions. In fact, it is the greatest support for you!

Professor Huang Yiping pointed out that there are three obstacles to the development of emerging industries, technical thresholds, industry thresholds and exit thresholds.

  1. The technical threshold means that the research and development cost of new technologies is very high, and it is difficult for a single enterprise to break through;

  2. The industry threshold refers to the industry entry threshold established by the government;

  3. The exit threshold means that a company that should have gone bankrupt can not go bankrupt and become a zombie enterprise. In fact, it is also related to the government.

Industry thresholds and exit thresholds are the result of the government’s “action” in places where it should not be done. The technical threshold is the result of the government’s inaction at this point – but today’s rising Chinese companies, such as Huawei in telecommunications, Ali Baba also has a large investment in cloud computing, trying to overcome the technical threshold, which is also the hand of the market.

Professor Huang Yiping proposed that the formulation of an effective industrial policy requires five elements: compliance with the market, no restrictions on competition, careful intervention, and an exit mechanism and post-event evaluation. The subject of these five elements is the government. The government must conform to the market, the government must not restrict competition, the government must intervene cautiously, the government must establish an exit mechanism, and the government must evaluate the effects of industrial policies afterwards. Adapting to the market should be to solve the “cognitive” problem put forward by Professor Zhang Weiying, that is, the market recognizes the industry that is about to break out, and then the government goes to overweight; without restricting competition and cautious intervention, it is hoped that the market can operate effectively; the exit mechanism and the post-evaluation are I hope to solve the problem of incentive distortion.

5. Beautiful assumptions

Xu Xiaonian, Professor of Economics and Finance, China Europe International Business School

The five elements proposed by Professor Huang are of course not unreasonable, but they still cannot circumvent the two problems of cognition and motivation proposed by Zhang Weiying. That is, how to ensure that government officials have sufficient knowledge to identify the signals sent by the market, and how to ensure that government officials receive sufficient positive and negative incentives to establish these elements.

In commenting on industrial policy, Professor Xu Xiaonian said that industrial policy is based on a good assumption that “government officials can better identify future emerging technologies and emerging industries than enterprises and entrepreneurs. Under this assumption, The government mobilizes resources, invests in these emerging industries, accelerates their development, and drives other industries to upgrade and economic growth.” Unfortunately, although it is good, it is only a hypothesis. The reason why this hypothesis cannot be established is also the cause of cognition and the reason for motivation.

This question is further pushed forward, where is the limit of the government’s “promising”. In fact, the existence of the government itself is a kind of “promising.” The government exists because the government can provide services that the private sector cannot provide. The most basic, such as the formulation and maintenance of the law; the construction of public infrastructure; the avoidance of the “common disaster”; the establishment of medical and social security systems. In addition, as Professor Zhang Weiying said, the government’s self-restraint in the economic field is itself a kind of “promising.”

In one sentence, the government is doing a good job of infrastructure construction, including laws and regulations, basic social security, and protection of individual interests. Then, companies and individuals are encouraged to use these infrastructures to compete fairly for development. In addition, please note that the government is not doing nothing here.

Thanks for reading