Productivity in a Changing World seminar series: Industrial Policy: The Old and the New

Caralee McLiesh:

[speaking in te reo prin 00:00:04] … kaikōrero o te rā. Tēnā koe. Nau mai, haere mai ki Te Tai Ōhanga.

Welcome everyone. It's wonderful to see so many of you join us for today's Treasury guest lecture. My name is Caralee McLiesh, I'm the Secretary of the Treasury, and I have the pleasure of introducing today's seminar and our speaker, Professor Dani Rodrik. Professor Rodrik, welcome. Thank you so much for joining us today. It's a real privilege to hear from you.

This seminar is part of a series in our current theme, Productivity in the Changing World. We chose this theme a year ago as a focus for our guest lectures. Productivity is of course a key long-run driver of our economic performance and living standards. And as the Treasury highlighted in a paper we published last week, the world has been experiencing a productivity slowdown and New Zealand is not exempt from this. Not only has our productivity been slowing down, our productivity performance overall is weak relative to countries that we'd like to compare ourselves to.

There appears to be no one factor behind New Zealand's productivity slowdown, but instead a range of drivers from weak investments, lower benefits from innovation, slowdown in trade, declining education performance being among them. We also face the challenge of improving our productivity performance in the context of a number of significant economic, social and environmental trends, from climate change, to changing demographics, to shifting geopolitics. And so with the help of wide-ranging expert speakers, this seminar series has been exploring how these trends will impact New Zealand's economic performance productivity, as well as the sustainability and the resilience of our economy. And today we really are honoured to have world-renowned economist, Professor Dani Rodrik with us. Professor Rodrik is the Ford Foundation Professor of International Political Economy at the Harvard Kennedy School. He is recipient of numerous awards, including the inaugural Albert O. Hirschman Prize of the Social Science Research Council. Professor Rodrik is co-director of the Reimagining the Economy Programme at the Kennedy School and of the Economics for Inclusive Prosperity Network. He was President of the International Economic Association during 2021 to '23, and he also helped found the IEA's Women and Leadership in Economics Initiative. He's published widely in the areas of economic development, international economics and political economy. And his current research focuses on employment and economic growth in both developing and advanced economies. So today, Professor Rodrik will provide an overview of his recent paper on the new economics of industrial policy, which highlights the complexity of industrial policy and that is policies that target the transformation of economic structure and economic activity.

Industrial policy is an area that's regularly debated, including here at the Treasury. It was a hot topic at the recent World Bank IMF Spring Meetings in the context of increasing industrial policy announcements and activity in various countries, including recently in our region in Australia. More broadly, increasing global headwinds have fuelled the discussion of how governments can use industrial policy to address issues such as climate mitigation adaptation, supply chain resilience, economic security, and utilisation of emerging technologies. So, Professor Rodrik will discuss the standard rationales and critiques of industrial policy and review these in light of new empirical approaches to measurement and evaluation. Professor Rodrik will present for around 25, 30 minutes and then we'll have the remainder of time for questions. So, as he presents, please feel free to enter any questions you might have in the Q&A function. Diana Cook, the Treasury's Deputy Chief Economic Advisor, will moderate the Q&A session and then close the seminar at 10:30 sharp Wellington time, or 6:30 PM in Boston time where Professor Rodrik is. Welcome again, Professor Rodrik, over to you. Thank you.

Dani Rodrik:

Thank you very much, Dr McLiesh. I hope you can hear me.

Caralee McLiesh:

Yes, we can.

Dani Rodrik:

I hope you can also see me. We're having some difficulties with that, but I have not managed to share my presentation, so I think it will have to be done from there. So, if we can move to the first slide, please. The next slide. So, I thought I would begin from what, in many ways, I think is the most significant success story of industrial policy in over the last decade or decade and a half or so. And that's the success story, with regard to renewables. The collapse, the very sharp drop in the prices of solar, wind, electric batteries have a lot to do with essentially industrial policies of one country, even though none of these important innovations in green industries originated from China. From around 2010, China made a very determined effort to subsidise and engage in a whole variety of government supports for these industries, which result that we had in this industry, kind of a virtuous cycle of government supports leading to investment and capacity increase and then with firms in China travelling down the learning curve, which in turn reduced costs, prices and increased demand.

And then you could keep increasing the cycle all over. And this is a significant success in industrial policy for the world as a whole because, in a world where carbon is not being priced at the right level, green industrial policies, green subsidies provide a very important substitute role. And I think this is in many ways something that the entire world ought to be very happy about. If we can move to the second slide. Even though when we think about industrial policies in China, we usually think of subsidies. In fact, the range of policies that the Chinese government... in fact it wasn't just a national government, it was also provinces and cities that played a very, very large role. And there's a variety of instruments that were used from credit to public investment, to R&D infrastructure spending, government procurement, to the many governments, the municipal governments acting as essentially as public venture capital firms, changes in regulations to privilege green industries.

And one of the features of this sort of extensive range of industrial policies is also that against the background of our usual thinking of industrial policies, a kind of a very top down picking winners and ex-ante selection of activities, kind of presentation of industrial policy, which most Western economies think of when they mention industrial policy, the actual process of industrial policy in China, and in fact in most successful countries as well, has been much more collaborative with private firms, at arm's length but collaborative, with lots of iteration, lots of revision of policies over time, stepping into change policies when they're not working in consolidating the industry when they seem to be overextended. And so, there was a significant role of revision and flexibility and implementation. And it's clear that China's motive in this were a mix of competitiveness motives, reckoning with the necessary change in the global context that fossil fuels would have to be eventually phased out. And also of course increasingly more so geopolitical motives as well.

I'm not going to say much about the kind of trade tensions that these policies have caused over time in solar and wind, but of course increasingly now in electric vehicles and batteries and many of the trade tensions that are the result of these industrial policies. And if there are questions about that in the Q&A, we can discuss them. I'll just mention the IRA of course in the United States, and I call the IRA the US essentially trying to replicate the Chinese green industrial policies. So, it's really the US version of what China did. Next slide please.

So let me not step back from green industrial policies and talk a little bit more broadly about industrial policy and how economists tend to think about industrial policy and how some of our views have changed over time. But first I think it's useful to recognise that even though we might think that industrial policy is something that has come back into fashion only recently. In economic thought, there has always been a kind of two parallel lines of thinking on the desirability of industrial policy.

The kind of view that has been much more fashionable among professional economists in recent decades of course is the one that we associate with Adam Smith and David Ricardo emphasising the role of markets and the role of comparative advantage, de-emphasising the role of government intervention to alter the structure of the economy. But I guess that background in a lot of... There's a contending, or a parallel intellectual tradition, which goes all the way back of course to Alexander Hamilton when the United States was a young republic, also represented in the views of the German-born economist, Friedrich List, which always has been very popular in countries that are not at the technological frontier. And the idea is that in countries that are actually not at the frontier may benefit from government intervention, government supports to catch up with countries that are technologically more advanced, and you cannot rely, markets might be very good to allocate resources in a kind of static sense, they're not necessarily very good at motivating and incentivizing longer term dynamic changes in the structure of the economy.

And it is also the case that the actual practice of industrial policy always existed, even in the advanced countries of the world. We think of the period since the 1980s as a period when industrial policy having gone out of intellectual fashion was also not being practised, but that is not the case. Reagan, during the 1980s, engaged in protection of key industries like steel and autos, and motorcycles. Margaret Thatcher went to Japan begging Japanese auto companies to invest in the UK and even Pinochet in Chile we think is the high point of market liberal thinking, engaged in significant subsidisation and support of the agroforestry sector in Chile, which is actually one of their major export success stories. So, in practise the industrial policy really never disappeared, and the difference today is that it is being done in a very self-conscious fashion that countries are happy to say that they're doing industrial policy. And I think that's pretty much a good thing because I think if you're doing these policies in a more self-conscious way, maybe you'll do them a little bit better than otherwise.

Industrial policy I think is currently being undertaken when per sort of lots of different objectives. And I think even though I'm not going to be able to get much into these different domains, I started out with the green industrial policies, but obviously innovation, fostering innovation, fostering either industrialization or re-industrialization have always been behind industrial policies. The security of supply chains, geopolitical competition are some of the more recent motives. And the idea of generating good jobs in terms of... has always been a significant one. And I think for countries today where the middle-class has hollowed out, all kinds of social and political consequences, threats to the future of democracy, I think thinking about industrial policy as a way of increasing good productive middle-class jobs as a way of restoring the middle-class is also potentially significant factor driving industrial policy. I will just say that I think it's important to keep these various objectives in mind and it's also dangerous to think that any particular form of industrial policy can hit all these targets simultaneously.

I think if I were to criticise some of the practises currently in the United States, I think is that there is a tendency to think that CHIPS and IRA can hit essentially all these targets at once and I fear that that's not going to be possible. Next slide, please.

So, I might as well, having talked already quite a bit, might as well define what industrial policy is. And I think my definition would be that government policies that explicitly target the transformation of the structure of economic activity in pursuit of some public goal, there has to be an explicit objective of transforming the structure of economic activity, whether it's investment, innovation, employment, output, in pursuit of some public goal, and this public goal could be any one of those in the previous slide. What's implicit in the conduct of industrial policy, although policymakers won't ever say it out loud, is that if some activities are being favoured, others activities are necessarily disfavoured, so there is an element of choice in terms of where the resources go.

And the resources could be financial resources in the form of subsidies, but it could also be in the form of government attention. A lot of, as I'll mention later, a lot of good industrial policies really talking to private sector stakeholders and understanding what the problems are in working jointly to alleviate those constraints that occupies government bandwidth and is as valuable a resource as physical resources or credit might be. So, in that sense there's choices that are being made. But at this point they may just note in passing again that the policy instruments could be quite diverse, and that's something I've already noted in the context of China's industrial policies, but there's not simply tariffs, import tariffs and subsidies, but also government efforts to coordinate investments, to change regulations, to provide specific public inputs or specific types of infrastructure, engage in customised training and so forth. And so, it's this wide range of possible interventions, again, I might come back to in a second. Next slide, please.

So, I think there is no shortage of good economic rationales for industrial policy. There are sort of three broad categories that I'll just note very quickly. One it has to do with externalities, that some sectors create externalities and might deserve support. And those externalities could be quite broad. Of course, they could be climate externalities, it could be technological externalities, or they could be what I would call good jobs externalities. And we know that when middle-class jobs disappear in local communities, the effects are felt by the social fabric as a whole. And you might want to think about subsidising good middle-class jobs or engaging in activities, governments engaging in activities to show up good jobs as being part of that objective as well. Second category are sort of coordination figures when there are scale economies upstream or downstream or across complimentary activities that there is a role for the government bringing together various investors, various firms together to coordinate their activities, whether it's on investments, or it's on standards, or it's on training. That would be kind of a second large category. A third category is, what I've called here, missing public inputs. Now we usually think about public inputs and public goods, like infrastructure or education, as not being industrial policy because we think of them as being horizontal rather than vertical policies that, in other words, serving the needs of particular firms or sectors. But a lot of these public inputs are actually very specific to the needs of sectors, or to needs of particular firms. So, education as a whole might be a public good as horizontal, but when we're talking about workforce development in IT, or workforce development for advanced manufacturing, or investing in training for physicians' aids, those are very specific forms of vocational training that one has to think in collaboration with firms. And there it really slides into the conduct of providing these inputs that are critical to a collection of firms that might be under-provided in the absence of government action. So, this might be a particular type of infrastructure, a road that goes to an airport for a particular cluster, specialised workforce skills and sector-specific regulations or administrative frameworks, which is of course very critical in the case of certain green industries in particular.

Next slide, please. So, the real debate among economists on whether industrial policy, how do we think about industrial policy has never been really about whether those rationales have merit or not. I think economists pretty much not only understand that those rationales exist, they've been going around documenting their presence for a very long time. So, in our debates, the debates among professional economists, I think the negative reputation of industrial policy has really been due to practical arguments about industrial policy. And there are two such practical objections to industrial policy. One is an argument about inadequate information. The other is an argument about politics, or political capture. The informational argument is that governments don't have adequate information, therefore they're going to be making consistently mistakes and they can never figure out where the market failures are, where the coordination needs to be provided or what type of customised public inputs they need to provide and therefore they'll mess things up, even if they're well-intentioned. The second argument is that they're not well-intentioned.

That they'll be politically captured by vested interest and therefore they'll make decisions that are benefiting certain firms rather than benefiting the economy as a whole in pursuit of fixing those, addressing those rationales from the previous slide. So, in practice, the debates among professional economists on the merits of industrial policy has been largely really about knee-jerk judgments really about the practical significance of these obstacles, with one group saying, "Look, the governments can never get these things right," and other groups saying, "But look at East Asia, they did it and so forth," and back and forth. Now, next slide please. There has been significant empirical work on industrial policy, and one might have wished that empirical work would've resolved this question, but I think that's a hopeless task. I think there was several issues. One is that the early work on industrial policy through the 1990s was methodologically really flawed, was highly really correlational studies that looked at the extent of intervention in certain sectors and the extent of some measure of performance, TFB or something else, looking at those correlations and saying whether the correlation is positive or negative.

Or on the basis of very informal case studies where you could always find one case study that confirms your priors, and that literature wasn't really very, very satisfactory, didn't really convince anybody. Now we've had a more recent wave of empirical studies in the last couple of decades which are much more careful about attributing sort of about causal inference and attributing outcomes to policy interventions in particular. And I would say that on the whole, this more recent literature leaves us with a much more positive take on the effectiveness of industrial policy in the sense that we now have more than a dozen studies run a variety of settings that show that government interventions in the form of subsidies of various kinds, whether it's sort of regional policies or investment subsidies or policies towards innovation in particular sectors, or historical experiences where through some historical accident certain sectors have to go through a period of infant industry promotion and so forth where these have had long-term effects on the structure of the economy.

I think this most recent literature suggests a more positive take both on the ability of the government policies to affect economic activity, and also on the presumed presence of many of these types of learning externalities and so forth. But I would say that again, we need to be quite cautious about how much we can learn about the general case for industrial policy from studies that are very, very specific to individual locales. So, there's one issue of whether we can generalise or not. There's a second issue that's sort of a deeper methodological issue, which is that many of these studies, the way that they attribute causation, or can generate causal inference is by essentially identifying some exogenous variation, whether it's a historical accident or some instrumental variable to look at the relationship between some exogenous component of industrial policy and outcomes. And when you really think about it, that's really not what the debate has been.

The debate is not whether some exogenous or random sprinkling of industrial policy will produce an outcome or not it's whether actually governments consciously doing this, whether for good or bad reasons will actually produce outcomes of one kind or another. So, again, it's a question that we may want to come back to, but the basic, and this literature is discussed at much greater length in the paper that I co-authored with Nathan Lane and Reka Juhasz that was mentioned in the introduction. So, I won't say much more about that. Next slide, please.

So, I think where we are now is that we're probably having a much better debate now, a much more useful debate not on whether government should be doing industrial policy, but really what form industrial policy should take and what do we learn from the actual experience on what are some of the high-level takes on industrial policy that works. So, in the last five minutes or so, I just want to briefly make maybe four or five quick points about what I think is important about industrial policy, about how of the industrial policy that I want to leave you with.

So next slide, please. So, one issue is that we need to think about industrial policy as a kind of thing as a portfolio of government supports and services and inputs rather than simply like some subsidies. So, from studies particularly in the United States that looks at the effects of how do you attract investment, how do you create jobs in particular communities and locations. Tim Bartik especially has emphasised, and I think it's quite consistent with also more anecdotal evidence elsewhere, that subsidies, even when they work, are not necessarily the most effective way of achieving those goals in terms of redirecting investment, attracting investment or creating jobs or even really with respect to innovation. If you look at the DARPA-ARPA process in the United States that often customise public inputs, whether they take the form of coordination of workforce development or management training or access to particular technology or provision of green fields, the provision of regulatory assistance, specific types of financing when needed.

So, there's a whole portfolio of different kinds of services that are directly targeted to the needs of particular types of firms, particular types of investors that can be much more effective. Now this is important because when we look at how much, and again this is from the United States, how much is actually spent on subsidies versus some of those other categories, there's a huge, huge orders of magnitude difference that subsidies for annual subsidies in the United States, the firms are of the order of $50, $60 billion a year, whereas this is before CHIPS by the way and IRA. Whereas training on extension kind of assistance or customised workforce development or brownfield development, those are really very tiny, and we can bring these figures more up to date that as you know, CHIPS is in the order of 50, $60 billion, IRA is of the order of $800 billion to $1.2 trillion over 10-year period.

Whereas if you look at the federal equivalent of some of these types of collaborative programmes of customised public provision of inputs in the Biden administration, those would be things like the Good Jobs challenge or the regional challenges of the federal government, they're really off the order of hundreds of millions of dollars. So, it's really hugely, I think, out of sync in terms of what might work. And I think this is something that holds lessons for all countries of not the thing of industrial policy as subsidies per se, but thinking about these collaborative relationships, trying to figure out what firms need and focusing on those. Next slide.

The second I think big issue, which again I think is important both for middle income countries and advanced economies, is that to the extent that you're focusing on creating good jobs and creating more productive employment. And so, on the middle class, which I do think is an important priority and I do think it needs its own industrial policies that I think it's a mistake to think of manufacturing as where those jobs are going to be created. I just give you... just recently TSMC got a $6 billion grant from under the CHIPS programme in the United States. TSMC in Arizona is going to be building three FAB facilities for a total of $65 billion. It's going to create 6,000 jobs, which is basically $10 million per job. So, I think it's a mistake for the US administration or any government to focus on manufacturing is where the jobs are going to be. And so, I've written on what industrial policy for good jobs might look like and would be mostly in services, care services, IT, retail and so forth. And that's going to be a very different types of policy. Next slide, please. I'll skip this one.

A third area where I think that we're paying too little attention to is with respect to how we can reorient technological change in a more labour-friendly direction. So, I think we understand that innovation can be directed towards strategic industries, towards defence industries, or defence-related industries. That of course was the rationale for DARPA, which is actually and then set off its own ARPA-type agencies. We've now recently also of course understand that technology can be directed towards green industries, renewables and so forth. I think an area where we haven't put enough focus on is thinking about innovation that can be particularly helpful to workers that are not necessarily university educators. So, the question here is what kind of technologies could assist workers with less than college education to enhance their skills and to enhance the range of tasks that they can perform. So, these would be technologies that are complementary to their skills rather than technologies like automation that would actually replace these workers. And I think this is an area where there is potentially quite important work to be done. Next slide, please.

And finally, and I think this is the last thing that I would say. I think this was already implicit in of these in a lot of the points I've made about industrial policy is that economists tend to think of industrial policies, a kind of very top-down relationship between the government and firms and under the best of circumstances, really. The government holds firms at arm’s length, simply selects ex-ante set of sectors and then selects ex-ante, a certain range of incentives. And that's the industrial policy. In reality, the kind of industrial policy that has been the most successful is really much less of this picking winners and then sticking with them kind of a policy but much more a policy that's intuitive and is based on a process of strategic collaboration. And these could range all the way from a model of roundtables as in Peru, there's the series of roundtables that the government set up with industry representatives in a lot of areas just basically sitting around saying, "Okay, what are the productivity bottlenecks this sector is facing and what is it that I, the government can do?

"And let's set some goals, let's set some timelines and see what we can do to models where the state or its agencies are actually acting like venture capital firms," which has been quite common in China. We're actually investing and taking equity stake in a lot of new firms with the understanding that not all of these will be eventually successful, but that the few that are will pay off. So, these relationships are very different from this top 10 or top-down length model of industrial policy. That requires much greater engagement with the private sector, requires monitoring and evaluation and learning where things are going wrong. And rather than sort of having the standard of picking winners, it's a much less demanding standard that you have the ability to let losers go so that if you figure out that some investments or some relationships aren't working out that you cut your losses and you move somewhere else.

And that's much more important than simply insisting that good industrial policy has to be able to consistently pick winners, which is not a reasonable standard, not really required for successful industrial policy. And these principles that I've highlighted on this slide might sound like pie in the sky, but the fact is that they actually do exist, and I just gave you a couple of examples. It's also the model under which that ARPA operates, the whole innovation system in the United States publicly supported. It also exists in those successful local economic development agencies at a very local level. So, these practices already exist, and I think while each country or locality has their own peculiarities and these old beliefs have to be adjusted to context, some version of these principles I think are always behind a reuse of successful industrial policy. So, with that, let me just stop.

Diana Cook:

Thank you, Professor Rodrik, for a very relevant and fascinating talk.

[speaking in te reo Māori 00:38:54] Kia ora tātou. Ko Diana Cook ahau.

I am Diana Cook, Deputy Chief Economic Advisor at the Treasury. As Caralee mentioned, I'll facilitate the questions and the remainder of the seminar. Thank you again so much, Professor, there are so many important insights in your presentation. One of the important ones that I took away was thinking about industrial policy across the mix of policy settings that impact on the structure of the economy. It's not just about subsidies, but a range of public inputs.

And as you will discuss, these settings or public inputs are never really going to be completely neutral. So perhaps that idea of a level playing field is really a myth, which suggests that at the very least it's important that we understand how these policy settings are influencing the structure of the economy, and whether they can better support the transitions that our economy needs to make. So, thank you so much for such an insightful presentation. We have some interesting questions in the Q&A that... We've got about 15 minutes for questions, so we'll get through as many as we can within that time. So, are you happy, Professor, if we start with questions?

Dani Rodrik:

Yes, please.

Diana Cook:

Great. We have one on green industrial policy. So one of the things you talked about was using green industrial policy as a second-best solution because there's no global carbon price, how does the role that industrial policy should play differ between countries where there is a carbon price, like New Zealand, the UK, the UA and Canada, compared to countries that don't have one, a fully functioning price like the US and Australia?

Dani Rodrik:

Yeah, great question. I think countries that don't have probably and can't engineer one, can't engineer a carbon price, since it’s more Emission Trading System, probably need green industrial policy the most. But I would say that there are probably no countries or regions I can think of where carbon is currently priced at what would be considered its true social cost. I don't know what the carbon price, I should have checked, I don't know what it is in New Zealand, but I wouldn't be surprised. I think in Europe is about $50, $60 a tonne right now. China's now is about 10, because they started recently having one as well. And the EPA's estimate is about around $200 right now. And so, we are I think quite far from even in cases where we do have a carbon price from what would be an optimal one.

So, my guess is that there is room for green industrial policy even in countries that do have ETS. I would add something else, which I think is an important point that we want to think about green industrial policy, not simply as a second-best instrument while we don't have carbon pricing, it's also a useful policy to get us to carbon pricing. So, I think the way to think about it is, carbon pricing is the stick and industrial policy is the carrot. So, you start with the carrot, you provide some wins and then you will get more allies on your side and it's more likely that you can get some carbon pricing or more severe restrictions on carbon emissions than you would be able to get otherwise. Also, there's a political logic to green industrial policy that goes beyond the second-best economic logic.

Diana Cook:

Thank you. It's an interesting insight around some of the political economy challenges and how-

Dani Rodrik:

Let me give you an example of this actually, it just recently took place. The last week the EPA announced some relatively strict, as strict as it could be, restrictions on coal-fired power plants, which basically tell them that they either have to shut down in around 10 years, or they have to evade 90% of their emissions. Now, what makes this politically feasible for the EPA to be able to do that, to act so aggressively on emissions for coal plants, is that the IRA actually two years ago significantly raised the subsidies on CCS, on carbon capture, so that it's now much cheaper for these power plants to evade through CCS thanks to the pre-existing subsidies. So, it's really essentially taking composition away is also how some of these subsidies are working.

Diana Cook:

Right, that makes a lot of sense. Thank you. We actually got a much more technical question now, if that's okay, around modelling industrial policy. And the question was around, "So your definition of industrial policy targets the structural transformation of economic activity, and many calibrated multi-sectoral general equilibrium models, sectoral productivity is actually treated as exogenous." So, the question was, "Can we think of industrial policy as a means of endogenizing sectoral productivity changes in these types of models?" And if you think that makes sense, do you have any suggestions about how you might tackle all these types of issues?

Dani Rodrik:

Yeah, so one could do certain in certain sectors. I could imagine how you're doing that because you have some idea what the shape of the learning curve is. For example, in solar cells as output, as capacities have doubled, costs are supposed to fall by 20%. So, in some sectors where you have some engineering sense of what the shape of the learning curve is, and then you might be able to endogenize productivity changes over time. But in general I think I find that a very, very difficult thing to do because even in solar I think we've completely outperformed any and all projection. So, you can look at what the projections were with regard to cost declines at any point in time over the last 10, 15 years. And we've always overshot in terms of what the costs were going to be. So, I think it doesn't mean that we're always going to be too pessimistic, but I think there's too much technological uncertainty really to plug these various estimates into our quantitative general equilibrium models.

Diana Cook:

Thank you. We also have a range of questions about how you might think about the governance of industrial policy and particularly about how you enable-

Dani Rodrik:

The what, I'm sorry?

Diana Cook:

About the governance of industrial policy.

Dani Rodrik:

Governance.

Diana Cook:

So, the questions are around thinking about the role of national governments and local governments and whether you see different levels of governments performing better in terms of playing a role in industrial policy and also around how you enable what are the best methods and examples of strategic collaboration to be less top down and design an industrial policy. Does that make sense?

Dani Rodrik:

Great question. So, one of the things that really I learned in the last few years is how important sub-national governments are for the conduct of industrial policy. And I think in some domains they're particularly important. So, I think one of the domains that I mentioned, which I do think is very important is sort of the employment domain is just creating sort productive good jobs as a basis for middle class in different, especially regions that suffer from falling behind or having been adversely affected by globalisation shock or fossil fuel intensive sectors, communities and so forth. There, the work that has to be done really is primarily local. And when we look at successful cases, it's very sui generis. There is a local coalition, the local leader, some elements of social capital. And because what you need is a kind of a cross sectoral collaboration for sort of generating a vision of what a declining region, what kind of new productive capacities it can acquire, where does its economic future lie.

So, it could be a political official, it could be a public official, it could be a business official, it could be the local chamber of commerce, it could be some civic-minded local leaders. And often you see, sort of say, coalescence of a vision and a process of bringing together and being able to coordinate typically a lot of national or federal sources of support that might be arranged in various silos. There might be a credit support, there might be a technology silo, there might be a kind of public infrastructure silo. And a lot of the work of getting action locally is just being able to coordinate across these various kinds of activities. So certainly, with respect to revitalising local communities and creating good jobs, I think a lot of that work is local. Again, in big, large countries, it's almost necessary that the policies will have to have an element of operating at sub-national. Much of China's industrial policies, I said earlier, was run by some national entities. And then you get some of the, I think you have the advantages and you have some of the disadvantages.

The advantages actually is that there's a lot of experimentation that happens. City government engages in acting as a venture capital and other governments copy it and good practises spread, but you can also get something that we know is endemic a little bit to the Chinese system, which you can get too much competition and you can get excess subsidisation locally and excess capacity. Now, typically I think the Chinese government, so where the role of them, the national government comes in, is to first provide the kind of a stage where these experimentation results are publicised and becomes sort of an information sharing platform. Providing that is important. But also, secondly, where you get to the stage where you have hundreds of TV companies, or you have hundreds of car companies, that the national government has to step in and consolidate and figure out a way of excessive subsidisation, excessive support, excessive capacity can be rationalised. Again, China has occasionally done that, in fact periodically has stepped in to consolidate overextended domestic industries. I know it doesn't feel that way in electrical vehicles and batteries these days, but it's been part of their DNA.

Diana Cook:

That's fascinating. Thank you, Professor. We've got lots of other questions, but unfortunately, we've run out of time, which is a shame. It'd be lovely to carry on this conversation. I'm sure we could go for hours, but unfortunately, we have run out of time today and we need to bring the event to a close. I'd just like to thank you again very much, Professor Rodrik, for taking the time to share your work and experience with us. It's been a fascinating presentation and a great contribution to our series and the Treasury's work on productivity. And thank you again to all of you online for joining us. Tomorrow, we will host Clare Lombardelli, the Chief Economist at the OECD for our closing session in the Productivity in the Changing World theme, and you can still register for this hybrid event today if you haven't so far. So, I just-

Dani Rodrik:

Thank you for having me.

Diana Cook:

Thank you, Professor.

Dani Rodrik:

Thank you.

Diana Cook:

Thank you, it's been a pleasure. I would just like to finish with a karakia.

[speaking in te reo Māori 00:52:59] Piki te kaha, piki te ora, piki te wairua, Hui e, tāiki e!

Thank you for everyone for attending.

[speaking in te reo Māori] Mā te wā.