Growth Strategies and Industrial Policy Motivation Asian experience Possible lessons

for Turkey Derived from

research with Howard Pack

Why the resurgent interest in industrial policy (IP)? Disenchantment with

globalization/Washington consensus Notion that Japan/Korea/Taiwan

“beat the West at its own game”

Requirements for Successful IP Identify market failure Design correct policy intervention Implement

Calibrate intervention, Alter as changing circumstances require, Terminate as need be.

Note: IP justifications are most often due to internal market failure; some are international rent-shifting models, and in these cases one must consider possibility of retaliation

Four questions regarding the Asian experience: What was the impact of industrial

policy? Are these results likely to be

reproduced elsewhere today? Does the international system

impede implementation? Is the pursuit of an industrial policy

advisable?

Major Policies Actually Applied Capital channeling: direct and

indirect subsidies, tax breaks R&D promotion International trade and investment

protection Lax competition policy

Evaluation of impact Regression results (Beason-Weinstein

and Noland for Japan, Lee and Noland for Korea)

Input-output results (Pack)

Case studies

Political economy and ineffectiveness Benefits went predominantly to

declining natural resource sectors Net fiscal flows to manufacturing

were negative

On-budget subsidies went to declining sectors…

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yea

r

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

year

sect

or

per

cen

t o

f to

tal

Sea Transport

Coal Mining

Small Business,Textiles, ectHigh Tech

Agriculture, Forestry andFisheriesSea Transport

Coal Mining

Small Business,Textiles, ectHigh Tech

Agriculture, Forestry andFisheries

Source: Ogura and Yoshino, 1988, Table 1

As did off budget subsidies…

0

5

10

15

20

25

30

35

40

45

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

Year

% o

f to

tal F

LIP

fu

nd

s Health, Education Welfare

Infrastructure

Small Business

Agriculture

Regional Development

Industry and Technology

Export and ODA

Postal Saving Own Inv

Source: Fiscal and Monetary Statistics Monthly

(FILP Volume), Ministry of Finance

Net subsidy to manufacturing was negative Tax incentives to

most manufacturing sectors were negative

Industrial policy amounted to partial compensation

IndustryNormalized Tax Rate

Industry Rank

Normalized Tax Rate

Industry Rank

Normalized Tax Rate

Industry Rank

Electrical Mach. -0.403 8 -0.26 8 -0.56 10General Mach. -0.403 8 -0.26 8 -0.56 10Trans. Equip. -0.403 8 -0.13 7 -0.56 10

Fabricated Metal

-0.069 7 -0.26 8 -0.35 8

Pet & Coal -0.009 3 0.3 3 0.14 3Precision Inst. -0.403 8 -0.26 8 -0.35 7

Cer/Stone/Glass -0.009 3 0.3 3 -0.56 10Pulp & Paper -0.891 13 -0.13 6 0 5

Chemicals -0.009 3 -1.72 13 0.04 4Basic Metals -0.069 6 0.3 3 -0.35 8

Processed Foods

-0.736 12 -1.52 12 0 5

Mining 6.658 1 0.92 2 1.04 1Textiles 0.719 2 11.68 1 0.5 2

Source : Beason and Weinstein (1996), Table 1.

1955-1990 1955-1973 1974-1990

A saving grace: targeting exports Clean standard not subject to

manipulation “these were the only statistics that

could not be faked” Local firms could not rig international

competition like they could domestic markets

Possible externalities Support to laggards terminated

Possible lessons for Turkey Modest positive impact at best If industrial policy pursued, are

these results likely to be reproduced in Turkey?

Does the international system impede implementation of Asian-style policies today?

Are the results likely to be reproduced? Three possible sources of “Asian

exceptionalism”: “Deceptively poor” Political upheaval, US-led land reforms,

and legitimacy through growth Land scarcity and “growth with equity”

v. “growth without development”

“Deceptively poor” Unusually high

levels of human capital

Low contemporaneous income due to lack of physical capital

Rapid convergence

Country YearHuman

Capital Index

Per Capita Income

Ratio of Human Capital Index to

Per Capita Income

Japan 1955 1673 519 3.2Korea 1955 494 217 2.3The Philippines 1956 738 277 2.7Israel 1954 1200 609 2Thailand 1955 302 181 1.7Greece 1956 693 468 1.5Malaysia 1957 334 351 1US 1955 2293 2443 0.9Italy 1956 787 971 0.8Turkey 1955 267 365 0.7Argentina 1955 760 1059 0.7Mexico 1955 352 637 0.6Spain 1955 389 652 0.6

Unusually egalitarian Unusually equal

distribution of income

US-led land reforms and relatively equal distribution of land

Legitimacy through prosperity

Gini Coefficient for Income

Gini Coefficient for Land

Japan 0.4 0.47Korea 0.34 0.39Taiwan 0.31 0.46Simple Average 0.35 0.44

Argentina 0.44 0.87Brazil 0.53 0.85Egypt 0.42 0.67Hong Kong 0.49 n.a.India 0.42 0.52Indonesia 0.33 n.a.Kenya 0.64 0.69Malaysia 0.42 0.47Mexico 0.53 0.69The Philippines 0.45 0.53Singapore 0.4 n.a.Thailand 0.41 0.46Turkey 0.56 0.68Simple Average 0.46 0.64

Source: adapted from Rodrik (1994)

Unusual endowments—the implications of land scarcity

Chi

ItaUK Isr

Grc

Spa

Mex

Ger

Fra

FinDen

CanBra

Aus

Arg

Tot

US

JapHK SngTai

Kor

Tun

Pak

IndPhl

SwdMal

Tha

Per

Nor

Tur

2

2

1

0.25

0.25

0.25

1

2

4

4

4

Physical K

Land

Labor 1

Replacing Physical Capital with Human Capital (1968 data)

Tur

Nor

Per

ThaMal

Swd

Phl

Ind

PakTun

KorTai

SngHK

Jap

US

Tot

Arg

Aus

Bra

Can

Den

Fin

Fra

Ger

MexSpa

Grc

Isr

UK

Ita

Chi

4

4

4

2

1

0.25

0.25

0.25

1

2

2

HK

LaborLand 1

Is it possible to reproduce? Are there new constraints imposed

by the WTO? New rules and disciplines—the

subsidies code The end of the Cold War and the

dispute settlement mechanism Ideological opposition by the IFIs

Weighting costs and benefits Modest benefits Possible

drawbacks: Encouragement of

corruption Dumbing down the

financial system

Corruption Rankings - Japan, Korea, Taiwan, Turkey

0 10 20 30 40 50 60 70 80 90 100

Percentile

Japan

Korea

Taiwan

Turkey

Japan

Korea

Taiwan

Turkey

Japan

Korea

Taiwan

Turkey

Note: A larger value indicates less corruption.

Transparency International

PriceWaterhouseCoopers

World Bank

Governance Rankings - Japan, Korea, Taiwan, Turkey

0 10 20 30 40 50 60 70 80 90 100

Percentile

Japan

Korea

Taiwan

Turkey

Japan

Korea

Taiwan

Turkey

Japan

Korea

Taiwan

Turkey

Note: A larger value indicates more effective government, less time spent with bureaucracy, and more competent public officials.

Government effectiveness(World Bank)

Time spent with government bureaucracy

(Global Competitiveness

Report)

Competence of public officials(Global

Competitiveness Report)

Estimated Net Cost of Financial Sector Clean-Up Korea: 16 percent of GDP Taiwan: 11 percent of GDP Japan: 10-15 percent of GDP?

Bottom line: While the odds of

developing successfully through selective interventions are better than those on piyango ticket, they are not particularly favorable.