Category — Entrepreneurship

The port of Shanghai from WikiCommons

Dani Rodrik recently had a commentary where he argued that industrial policy is returning to the main stage.  Within the Tallinn School (i.e. the economic research associated with the Technology Governance program in Tallinn) active government policies are seen as essential in order to create the ‘virtuous circles’ of high value-added economic activities. Rodrik (not associated with Tallinn), argues that industrial policy is  (i) “a state of mind rather than a list of specific policies” (ii) “relies on both carrots and sticks” and (iii) “industrial policy’s practitioners need to bear in mind that it aims to serve society at large” As Erik Reinert has shown, history abounds with  examples of how almost every successful economy has at some point employed some kind of industrial policy. Skeptics usually reply, yes, but what about all the failures?   By no means is industrial policy always effective and how well it works in a specific case depends on an inordinate amount of variables. Importantly, it is “a state of mind” and one must experiment to see what works. I would rather ask: what is the alternative, if industrial policy is the only way we know to have worked? Recently, the World Bank has come off as a bit more positive towards industrial policy, but their understanding is quite narrow:

“If industrial policy is nothing more than government agencies organizing conferences with private sector players, I’m all for it. If we include in the definition of industrial policy the supply of classic public goods like infrastructure and education in coordination with the needs of the private sector, I am still fully in support. However, I tend to part ways when the state gets involved to the point of picking winners, which must inevitably be the case when more heavy-handed interventions are put on the table. ” from the World Bank Private Sector Development Blog.

Industrial policy is more than supplying basic infrastructure, but still it is not about picking winners. One aims to develop specific sectors of the economy, calculating that the spillover effects will benefit the economy as a whole. The Asian economies, of India and China,  but also Brazil are recent examples of how industrial policy has been implemented successfully. But Chris Blattman points to an interesting example of how it has been carried out for shoe manufacturing in Ethiopia.

From my experience, how one looks at industrial policy depends a lot on one’s view of economics: In the first post here at Evolution-Revolution, we argued that “understanding the dynamics that propel the economy into the unknown should be at the core of economics, rather than optimizing a static economy that only exists in the abstract.” As such if one believes the most efficient allocation of today’s resources is essential one quite naturally comes to the conclusion that any form of intervention is inefficient. By incorporating the dimension of time however, one can more easily conclude that its worth sacrificing a little efficiency today for what might be a much more prosperous tomorrow.

Der Spiegel has a very interesting article on three Swedish guys who have started their own jeans brand, Noko Jeans. Noko has chosen a quite unusual country for the manufacturing of its jeans: North Korea. Apparently the People’s Republic has its own web site where it offers opportunities for foreign investors. Maybe we are actually seeing the first few steps of a softening up of North Korea and its eventual emergence as a part-taker in the global community.

For Noko the deal was closed in the same way as most early investors in China did it. Heavy drinking and socialization with the locals to build trust and making a deal with a conglomerate that really seems to make everything. They couldn’t get all that they wanted though; the jeans had to be black since blue denim jeans were considered too much of an American symbol. Some old habits die hard after all.

- Jørund Holterud Aarsnes

The Wall Street Journal reports today that the United States Federal Government is dwarfing private investors in providing venture capital for new high-tech startups – in particular in “clean technology”. Predictably, many (Americans) are worried that this is another step in the direction of a socialist United States. This is worrying too much.  There are abundant examples of governments successfully investing in industry – especially “infant industry” – in non-socialist countries with weaker constitutional safeguards than the U.S. If anything, it is a much more sensible way to do stimulate the economy during a recession than having people paint lamp-posts or pick leaves.

More importantly, the surge of public investments into high-tech business is probably very good for the private sector, both in the long and short run. Already, private venture capitalists are eager to invest in companies that receive loans or equity investments from the government. This, of course, can simply be attributed to the fact that more access to capital and concessionary interest rates should make lower risks and higher returns more likely. However, the much more significant effect – especially over time – is the establishment of strong intrasectoral networks that are necessary for any advanced industry to flourish. Such networks – prominent examples are Silicon Valley and (until recently) the car manufacturing clusters around Detroit – allow for specialized production knowledge to be developed and disseminated, specialized suppliers and consumers to gain sufficient economies of scale, and for consumers to “learn” new products; all necessary ingredients for dynamic economic growth. Notably, a high degree of geographic concentration is not always necessary, but a fairly large number of firms and a significant industry size is.

The network dynamic also highlights a particular reason why it may be appropriate for taxpayers to be venture capitalists. Because many of the benefits of venture capital investments – such as new innovations or other “network benefits” as outlined above – are external to individual firms and investors, but still benefit the economy as a whole, VC investment incentives are in some ways more symmetrical with those of taxpayers than private VC firms.

Of course, the establishment of strong dynamic intrasectoral networks can and has many a time been achieved without government intervention. However, it has not been achieved without plentiful financing – plentiful financing clearly not available in the wake of a financial crisis, especially for small firms. When the Federal Government is able and willing to make the necessary investments, why not be pragmatic rather than paranoid and let it? If anything, in five or ten years the U.S. might just find that they paid off.

By Stephan Andreas Jensen

According to Reuters, a new stock exchange is at the center of booming economic growth in the Somalian coastal town of Haradheere. Lack of government interference in the region has allowed a highly profitable piracy sector to appear as an engine of economic development, turning the former fishing village into a bustling boomtown. A local ex-pirate named Mohammed, tells Reuters that “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said.”The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

The mention of weapons is of particular interest. Although Somalia is a one of the poorest countries in the world, it is awash with weapons – and these weapons are often the by far most valuable assets many Somalians possess. Through the piracy exchange, poor Somalians can make a return on these assets – without raiding their own countryside. For example, the Reuters article mentions a young woman who invested a rocket-propelled grenade launcher she received in alimony when she divorced her ex-husband – and made a $75 000 return on that investment in a little over a month. In a strange way, piracy is contributing to capital flows from rich to poor countries, as well as increased internal stability in Somalia.

The exchange also claims to be attracting foreign investments – FDI, if you will – in particular from the Somalian diaspora community. This is ironic. If true, it is not unlikely that western governments such as that of my native Norway indirectly are contributing to piracy financing through a.o. welfare payments – while at the same time paying for naval forces to fight the same very same pirates that are attracting investments.

The economic growth surrounding the Somalian piracy sector is extremely interesting for several reasons. Firstly, it is an example of how self-organizing economic systems coupled with rapid economic growth can appear under conditions of extreme laissez-faire in a basically ungoverned area. With little “external” interference, quasi-free markets allow productive resources to efficiently flow to sectors where returns are highest, and institutional mechanisms – such as the Haradheere stock exchange – “spontaneously” develop to grease the wheels of economic growth.

The Somalian Piracy sector is also interesting because it shows so clearly that the kind of growth described above can be – qualitatively speaking – utterly perverted and hollow. In particular, it can be totally unrelated to production. In the case of the pirates mentioned here, the high returns on investment and the resulting economic growth is actually a result of sabotage of production.

These qualitative features are obvious in the Somalian case because they are so extreme. However, there is little reason to believe that economic growth fueled by piracy is the only type which may be qualitatively undesirable. Speculative housing bubbles, for instance, come to mind. Perhaps qualitative aspects of economic growth should be paid more attention to in general, both in rich and poor countries.

By Stephan Andreas Jensen