Neither black nor white

Mahmoud Mohieldin
Tuesday 11 Jul 2023

More and more countries around the world are adopting new forms of industrial policy, writes Mahmoud Mohieldin


The US, the European countries, and other industrialised nations have begun to apply a new economic policy, the measures for which have been hastily put in place in the wake of a succession of crises and which will have major impacts on the economies of the developing nations as well as trade and investment and the role played by governments in these activities.


International studies had already begun to observe the policy’s constituent measures before the economic fallout from the Covid-19 pandemic and the war in Ukraine notched up the pressure to intolerable levels.


In 2019, an International Monetary Fund (IMF) working paper called “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy” took another look at the Asian economic miracles and maintained that there was more to be learned from their successes. They had relied on support for domestic producers in sophisticated industries, an export orientation, and the pursuit of fierce competition with strict accountability, the paper said.


In 2020, a forum of economic experts discussed the possibility of a return to a new form of industrial policy that would include, but not be limited to, spurring major growth in the advanced industries. The results of the discussions were published in Public Purpose: Industrial Policy’s Comeback and Government’s Role in Shared Prosperity by economist Mariana Mazzucato.


The new industrial policy would include “government efforts to shape the economy by targeting specific industries, firms, or economic activities. This is achieved through a range of tools such as subsidies, tax incentives, infrastructure development, protective regulations, and research and development support,” as economist Ruchir Agarwal wrote in an article titled “Industrial Policy and the Growth Strategy Trilemma.”


Over the last few years, the debate has swung back-and-forth between two camps. One side has dismissed any new industrial policy out of hand as a bad idea that in the past has wasted economic resources on pet projects that have ended up causing huge losses for the public sector, mounting debt, a loss of competitiveness, declines in investment and exports, and the spread of masked unemployment.


The other side championed a new approach based on public-private partnerships and identifying new and ambitious areas.


I discussed the latter approach in a speech at the Arab Economic and Social Development Summit held in Beirut in 2019, where I noted that “the world is undergoing changes in the global and regional balance of economic power, necessitating a practical and realistic approach to achieving progress.”


“As we mark the anniversary of the first landing on the moon, we should follow the example of what US President Kennedy did with NASA. The famous American space agency was founded in 1958 to engage in space exploration and develop aerospace-related technologies, and it was allocated a certain amount of resources and staffed by scientists and technicians to achieve these ends.”


“It was Kennedy who rescued NASA from an inevitable bureaucratic fate by assigning it a specific mission, without which it would have continued to wander without guidance.”


What Kennedy did was to identify NASA’s mission: to land the first man on the moon and bring him back to Earth safely. Suddenly, the agency’s multipurpose vagueness was given a new clarity of aim and ambition. It had a task to accomplish in a set timeframe that was easy to envision and that could be assessed in terms of success or failure.


That task was accomplished in 1969 when US astronaut Neil Armstrong took mankind’s first step on the surface of the moon. That great achievement could not have been made without, as the expression goes, “moon shot”.


The idea of setting such goals and ambitions is gaining traction in the US, notably in the field of semiconductors. After having relied on importing 90 per cent of its semiconductor needs from Taiwan, the US recently earmarked $39 billion to support domestic semiconductor production.


The money came from the $280 billion stimulus package recently approved by the US Congress to support the semiconductor and similar industries that have a heavy research and development component. Recipients of grants under the package will be prohibited from participating in the development of these industries in China for a period of ten years.


Another protectionist and inward looking law recently passed in the US, the Inflation Reduction Act, has allocated $370 billion to subsidise clean energy projects and manufactures. During her recent visit to China, US Treasury Secretary Janet Yellen attempted to mitigate the impact that these policies will have on Washington’s relationship with Beijing by claiming that the security-related curbs would be restricted to the narrowest possible limits.


Meanwhile, there are mounting calls in the EU for measures to protect the European economies from the repercussions of US industrial policy. One such measure is to allocate 160 billion Euros from the EU’s Pandemic Recovery Fund to subsidise innovative projects in digital transformation, battery manufacture, and climate action.


Across the Pacific, approximately 60 of top companies have also received $500 billion in government support to promote domestic investment and reduce the country’s dependence on China.


It is essential that the developing countries come to terms with this new reality quickly, instead of wasting precious time bemoaning the vicissitudes of different economic outlooks and methods. This is not the first time in modern history that the pendulum of economic management has shifted from one view to its opposite.


The economic historian Max Hartwell has shown how the pendulum swung between the 18th and 20th centuries from blatant state interventionism to unrestrained mercantilism and then, when that proved to be inefficient, to free trade and economic liberalism, which though more efficient for some also led to greater injustice.


The post-World War II era brought further swings between government interventionism and dependence on the free market for resource allocation. Whenever one approach failed, attention turned to the other. The only difference we see today is the speed with which the pendulum swings between the two.


Another factor should be born in mind, which I have discussed in a joint study based on applied research. The influence of economic schools such as capitalism, socialism, and all the shades in between has declined in importance when shaping public policy priorities and the ways of achieving them.


We are in a world that applies in different ways former Chinese leader Deng Xiaoping’s practical approach of pragmatism: “it doesn’t matter whether a cat is black or white as long as it catches mice.”




This article appeared in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 13 July, 2023 edition of Al-Ahram Weekly

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