Social and economic development in China is currently guided by the 13th Five-Year Plan, the guidelines issued by the Communist Party to shape the future of the world’s 2nd largest economy. An industrial strategy is a key component, and singles out favoured industries to be promoted and supported by government. This has been a cornerstone of communist rule since Soviet times. It is also a key pledge of Theresa May’s government and enjoyed broad backing from the CBI, the EEF (The Manufacturers Organisation) and the British Chamber of Commerce when announced in July. Debate is taking place though. Not in Westminster but at Peking University, where professors Justin Lin and Zhang Weiying has staged high-profile debates echoing the famous Keynes-Hayek debates in the 1930s. Mr. Zhang is speaking up for free markets, arguing that government is uniquely unqualified in predicting future industry trends and that an industrial policy is obstructing optimal resource allocation.
Industrial strategy (IS) is meant to further growth of selected sectors of the economy by providing direct subsidies, resources for research and innovation and protection from competition by tariffs or legislation. The arguments for an IS are as lifted from a communist text book: it allows for long-term strategic central planning and furthering of favoured industries. As it comes with a significant budget, it is not surprising that industry generally back the idea. Such programmes are usually popular with the beneficiaries.
But as with any government intervention in the economy, it builds on the ludicrous notion that central planners can beat the market in allocation of resources. It should seem obvious that government is poorly equipped to foresee the evolution of technological development, scientific innovation or consumer demand – that would require bureaucrats to second guess the collective sum total of information that constitutes market prices and guides resources allocation in a free market. So who is the super-human whom Mrs. May has entrusted with the responsibility of foreseeing these developments in the UK? Well, he’s called Greg Clark, the Secretary for the new Department of Business, Energy and Industrial Strategy.
Even if one ignorantly accepted the notion that government has unique insight, it is not hard to see other potential problems with an industrial strategy. Allocating funds to support of private industry obviously opens up ample scope for corruption, clientelism, corporatism, crony capitalism and other nasty ‘isms’. British industry will be frothing at the mouth at the prospect of getting their fingers in the pocket of the taxpayer and lobbying will already be well underway. It is unlikely that any industry will deem itself undeserving of support.
The Chinese seem to be waking up to the deficiencies of pursuing an industrial strategy, but as the debate rages in Beijing, the British government is turning back the clock to the mid 1970’s where the White Paper ‘The Regeneration of British Industry’ set out an ambitious agenda, implemented with enthusiasm by arch-socialist Tony Benn.
The concept of government shielding selected industries from competition, catering for perceived comparative advantages and funding scientific research with taxpayer money may seem alluring to some, but critical thought will expose the idea of taxpayer subsidies helping favoured businesses out-compete more efficient, but unaided foreign firms as no efficient use of resources, but simply a welfare programme. Packaging it in talk of strategic industrial planning does not change that.