A colleague, Bruce Blonigen, has a new paper at the Economic Journal:
When Industrial Policy Harms Performance: Evidence from the World Steel Industry, by Romesh Vaitilingam RES: The use of industrial policies to support a country’s steel sector has damaging effects on the export competitiveness of downstream manufacturing sectors that make use of steel. That is the central finding of research by Professor Bruce Blonigen, published in the September 2016 issue of the Economic Journal.
His cross-country analysis indicates that sectors in which steel is a major input, such as fabricated metals and machinery, suffer particularly badly. He also finds that export subsidies and government ownership are the industrial policies that have the most harmful effects on downstream export competitiveness – and the effects are most evident in less developed countries. He concludes:
‘My results are concerning given the popularity of industrial policies, but they are consistent with a couple of possible explanations.’
‘The first is that governments are not seeking to improve the welfare of their country, but have other objectives in mind, such as responding to political lobbies.’
‘The other possibility is that policy-makers do not understand or recognize the entire range of industrial policy effects and the need to coordinate overlapping policies so they are not at cross-purposes. This may be why the harmful effects seem to be largest in less developed countries.’
Throughout history, governments have used industrial policies to guide the development of key sectors in their economies and to spur economic development. These policies can vary substantially from subsidizing production to limiting import competition to promoting export sales.
One practical concern is that a layering of industrial policies often accumulates over time, leading to the presence of multiple policies at cross-purposes with each other. An additional concern is that targeted industrial policies may result from political pressure by particular sectors without regard to how they will affect other parts of the economy.
Recent efforts by the South African government to target industrial policies at its lagging manufacturing sector illustrate these concerns. The government found that a prior policy program targeted at its steel sector, which is a source of key inputs to many manufacturing sectors, had led to uncompetitive steel prices and hurt downstream manufacturing sectors. Rather than eliminate the industrial policies in their steel sector, the government layered additional policies in the steel-using sectors in the hope of restoring the health of these downstream sectors.
Is this South African example typical? Evidence is scant to non-existent on the net effects of industrial policies on economic growth and development. While there are many studies of the effects of specific industrial policies, particularly import tariffs, the difficulty of collecting the wide variety of industrial policies in a consistent fashion has hindered systematic analysis.
Using a new hand-collected database of industrial policies used in the steel sector in major steel-producing countries, the author of this new study is able to overcome a number of these data difficulties and provide estimates of industrial policy effects in one of the sectors most often targeted by governments for industrial policies.
Because steel is a primary input in so many manufactured goods, the research focuses on how industrial policies in a country’s steel sector affect the export competitiveness of downstream manufacturing sectors that use steel. Professor Blonigen finds that:
• The use of industrial policies is harmful to downstream sectors. A one standard deviation increase in steel industrial policy usage leads to an immediate 1.2% decline in export competitiveness for the average downstream manufacturing sector.
• This effect is five times higher (or roughly 6%) for major steel-using downstream sectors, such as fabricated metals and machinery.
• The long-run effect of increased industrial policy usage for the average downstream sector is over a 15% decline in their exports.
• These industrial policy effects on downstream export performance are largely driven by less developed countries in the sample, though country-by-country regressions show a negative and significant effects of steel industry policies on downstream competitiveness in a few developed countries as well.
• In general, the negative effect of industrial policies on downstream export values operates through lowered export quantities. But there is also evidence that export prices increase (or do not fall as much) in differentiated goods sectors from higher input prices from the steel industry policies, which is most likely due to market power effects.
• Exploring the heterogeneous effects of different types of industrial policy, the research finds that export subsidies and government ownership have the most harmful effects on downstream export competitiveness.