Officials from France, Germany and Italy, who met last week outside Paris, pledged to pursue coordinated economic policies to counter increased efforts by the U.S. and Chinese governments to protect their companies.
The three European countries join a parade of other countries eager to adopt industrial policies (a collective term for a range of policies such as targeted subsidies, tax breaks, regulations and trade restrictions) aimed at steering their economies. Joined the.
More than 2,500 industrial policies were introduced last year, nearly three times as many as in 2019, according to new research. And most of them have been imposed by the wealthiest developed countries, many of which were previously expected to criticize such tactics.
Although the measures have been generally well-received at home, the trend has worried some international leaders and economists, who say such top-down economic interventions could end up slowing global economic growth. I'm warning you.
Economic Lollapalooza (also known as the International Monetary Fund and World Bank's annual spring meetings), which opens in Washington on Wednesday, is sure to feature some well-honed debate.
“There are many ways to shoot yourself in the foot,” M. Ayhan Kose, deputy chief economist at the World Bank, said of rich countries' tendency to pursue industrial policy. “This is one way.”
And IMF Managing Director Kristalina Georgieva warned in a speech last week that there is little basis for government intervention except in special circumstances.
Since the Industrial Revolution, there has been much debate about whether and how hard governments should strive to control their own economies. But the current wave of policy stands in stark contrast to the classic open market, no-government intervention ideology championed by the citadels of capitalism in recent decades.
That faith in the primacy of free market policies has been shaken in recent years by a series of global earthquakes: the pandemic, supply chain meltdowns, soaring inflation and interest rates, Russia's invasion of Ukraine, and rising tensions between the United States and China. . .
In many capitals, security, resilience and self-sufficiency have been pushed to the top of the list of economic policy objectives, along with growth and efficiency.
After years of complaints about China's subsidies to private and state-owned industries, the United States and Europe are increasingly copying Beijing's strategy to create multibillion-dollar industrial policies focused on critical technologies and climate change. We are starting on this.
The United States passed two huge pieces of legislation in 2022 to strengthen the nation's semiconductor industry and renewable energy sector. Europe passed its own Green Deal industrial plan last year to accelerate the energy transition. Shortly after, South Korea approved the K-chip law to support semiconductor production.
“A few years ago, when I was just starting out as finance minister, I couldn't even pronounce the words 'European Economic Policy' or 'European Industrial Policy,'” French Finance Minister Bruno Le Maire told his Cabinet last week. said after the meeting. meeting.
Positive reviews of this approach have increased in recent years. A team including Harvard University economist Dani Rodrik looked at the issue and found that, compared to the traditional “economists' perverse opposition,'' “a large body of recent literature generally takes a more positive view of industrial policy.'' It turned out that it was.
Nobel Prize-winning Columbia University professor Joseph E. Stiglitz said industrial policy was “a given.”
But many economists, such as the World Bank's Kose, remain skeptical, arguing that most industrial policies will ultimately suppress overall growth and make things worse, not better.
In response to the recent wave of interventions, the IMF has developed new guidelines on when and how industrial policy should be implemented.
The IMF says they can be profitable if done correctly and used to address extraordinary market failures, such as the dangers posed by climate change. That means clearly identifying social benefits such as limiting greenhouse gases, sharing innovation widely across borders, and refraining from discrimination against foreign companies.
But much of the analysis focuses on how easy it is to misallocate or waste funds, give powerful corporate interests undue influence over government decisions, and spark tit-for-tat trade wars. The focus has been on how to make mistakes.
“What stands out about this economic recovery is its reliance on high subsidies,” said Ella Dabra Norris, author of the analysis. And these are often “combined with other types of discriminatory measures against foreign companies.”
“The global economy suffers losses” when protectionist measures distort global trade and investment flows, he said.
Governments intervene in markets for all sorts of reasons. To prevent job losses, to encourage investment in certain sectors, or to freeze geopolitical rivals.
The research, carried out in conjunction with the IMF, found that of the 2,500 interventions introduced last year, protecting domestic industries accounted for the largest share, followed by climate action and supply chain strengthening, but what motivated them? The least likely answer was national security. share.
The data also suggests that once a country introduces a subsidy, there is about a 75% chance that another country will introduce a similar subsidy for the same product within a year.
Amid growing concerns about Europe's ability to compete with the United States and China, the European Union appears determined to pursue more coordinated economic interventions, even if member states do not necessarily agree on which interventions.
France has proposed the most aggressive measures, including a provision to reserve half of public spending from industrial policy for European-made goods and services, while Germany is more skeptical of a buy-Europe approach.
However, there is full support for increasing funding, removing burdensome regulations and promoting a single market for investment and savings.
In February, the European Parliament agreed to expand its own green industry capacity, and in March, the European Union adopted regulations to ensure the supply of essential raw materials and strengthen local production. Members also proposed a joint defense industrial strategy for the first time.
Economy ministers from France, Germany and Italy are meeting to develop policies to stimulate green and digital technologies before adopting a new five-year strategic plan at this year's EU summit.
French Finance Minister Le Maire said, “The word 'industrial policy' is no longer taboo,'' and “Europe needs to bare its teeth and show its determination to protect its own industries.''
