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The Myth Of Industrial Policy

Economic Viewpoint


A bandwagon is getting rolling in the U.S. for a new type of industrial policy that involves government subsidies for early development of technologies that can help America compete in the global marketplace. But I doubt whether the public sector will do a good job of directing applied research toward projects with commercial value. Entrepreneurs and investors should risk their own money, not taxpayers', in the competition to work up profitable technologies.

The fascination with technology policy has gained support from a recent report, The Government Role in Civilian Technology. In it, a panel created by the prestigious National Academy of Sciences recommends, among other things, that the federal government establish a "civilian technology corporation" to support applied projects at an early stage. I am a member of the academy but disagree with the recommendation, although the panel's discussion is more judicious than most treatments of this subject.

I believe that state sponsorship of technologies is doomed to fail, because it encourages companies and industries that have new projects to compete in the political arena for taxpayers' assistance. Politicians will become advocates of pet projects, and bureaucrats will shy away from other ventures that have long lead times.

ASIAN MODELS. The Western world's experience with state efforts to promote novel technologies offers little support for such an industrial policy. In 1980, several years after the oil-price shock, the U.S. set up the Synfuels Corp. to develop synthetic fuels to replace oil and other fossil fuels. But Congress had not anticipated the sharp fall in oil prices and the politics involved in supporting alternative fuels. The corporation quietly went out of business in 1986.

Britain, France, and Germany, together poured billions into Airbus Industrie to help raise their technological base for the production of advanced aircraft. After years of turning in losses, Airbus is finally managing to sell a reasonable number of planes, but it is doubtful whether this has done much for the technological base of these countries. This joint venture came after the ill-conceived Concorde supersonic project sponsored by the French and British.

We are told by advocates of the new industrial policy to disregard these and other failures and to look instead to Asian countries for models. Singapore is singled out for praise for the central direction of its economy toward state-of-the-art technology. No one can doubt that its performance since the late 1950s has been remarkable in many ways, with annual growth in per capita income that averaged more than 6%.

Singapore started building a manufacturing base in the late 1950s with simple textiles but then rapidly upgraded--first to elementary electronics, including radio and tv production, then to advanced electronics involving computer chips. In recent years, Singapore has gained a major world position in international financial markets and is now targeting the biotech industry.

SWEET TALK. This rapid change in product mix was orchestrated by an explicit government policy of promoting advanced technologies through liberal subsidies to foreign companies in targeted industries. The government gave long tax holidays and low tax rates, controlled the unions and industrial disputes, and provided many other inducements.

Yet behind Singapore's glittering numbers and fancy industries is a bottom line that is not so impressive: In a recent study, economist Alwyn Young of Massachusetts Institute of Technology shows that Singapore has had almost no productivity gains in overall output of manufactured goods since 1960. The rapid growth of per capita income came almost entirely from an expansion of its capital stock, resulting from the generous subsidies to foreign corporations that invested there. These companies did very well but left little imprint on the economy's productivity.

Hong Kong, Asia's other trading entrept, had no industrial policy but experienced equally rapid growth in per capita income. Young shows that even without such a policy, Hong Kong had spectacular expansion in productivity and in domestic manufacturing companies.

No one advocates the new industrial policy without citing Japan. But private industry in Japan supplies more than 70% of the funds spent on research and development, which exceeds the private sector's share in Britain, France, or the U.S. I believe that the role of the Ministry of International Trade & Industry and other government bodies in directing and advancing technological developments in Japan has been enormously exaggerated. The Japanese government has no more orchestrated the productivity advance there than it has rigged prices on the Tokyo Stock Exchange.

The new industrial policy is the latest fad in the many proposals to give governments a bigger role in promoting economic development. We shouldn't be taken in by the sweet talk: Public support of r&d should concentrate on basic research without commercial value, while the private sector should finance and develop profitable technologies.GARY S. BECKER

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