Activist strategies to sharpen economies' competitive edge: When Bernanke & Company speaks, policymakers listen

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So much for the myth that Washington empties out during the month of August. A standing-room-only throng flocked to a Monday-morning Brookings Institution seminar this week featuring a relative newcomer to the think-tank communityBen S. Bernanke, the former chairman of the U.S. Federal Reserve System. His wide-ranging and nuanced analysis – with all the gravitas that he once brought to his graduate economics seminars at Princeton – explored not just Brookings’ main topic of the day (“The Defense Economy and American Prosperity”) but also such subjects as macroeconomic management, the gradual recovery from the Great Recession, and lawmakers’ need to avoid hasty budget-cutting that would damage vital investment in long-term priorities. Offering some of the wit of his new blog for Brookings, Bernanke’s whirlwind analysis whetted Washingtonians’ appetite for the October 4 publication of his latest book, “The Courage To Act.”

The economic impact of U.S. military spending was the focus of Monday’s seminar, chaired by Brookings defense-policy scholar Michael O’Hanlon – but an additional, broader theme was unmistakable throughout the discussion. The competitiveness of every economy is shaped by its ability to make sustained investments in productivity-enhancing technologies – and, as the panelists explored within the context of the U.S. economy, R&D-intensive industries (whether military or civilian) have been on the leading edge of innovation, patenting, productivity growth and job creation.

Competitiveness is the holy grail of economic policymakers everywhere – and activist strategies can help every economy hone its competitive edge. For both theorists and practitioners in development, working with economies large or small, the Brookings panel’s focus on pursuing far-sighted and pro-active investment strategies holds implications for every country’s competitive positioning.

Ben Bernanke on Economic Strength via Investment

“Decades of productive interaction” between the public sector and the private sector was a critical factor raised by panelist Mark Muro, the policy director of Brookings’ Metropolitan Policy Program. Public and private investment in STEM-inspired fields – science, technology, engineering and mathematics – may have initially focused on U.S. military priorities, yet they have had dramatic spillover effects that continue to drive innovation in such fields as semiconductors, medical devices, energy technologies (including hydraulic fracturing and renewable resources) and computer systems. Bernanke echoed Muro, underscoring that it’s a matter of “first-order importance” to understand the way that investment, both military and civilian, has helped drive technological progress.

Muro reminded the defense-minded audience of the need to “consider the rest of our economic strategy” and to pursue “systemic thinking about our economic base” – of which military priorities are just one part (albeit an enormous one). Cooperation between the public sector and the private sector, he said, have helped meet U.S. security needs and, over the long term, have strengthened the civilian economy.

In the absence of a “consistent, urgent, non-military economic strategy” – and with spending that's labeled as “defense” having been “beyond criticism for a long time” – Muro asserted that spending on U.S. military programs has long been used as a “stealth industrial policy” that helps spur the entire economy.

Well: There’s something you don’t hear every day – at least not in Washington’s political precincts: the idea that “industrial policy” is not just worth considering in theory but is already being successfully applied in routine practice. Just try asserting that idea nowadays across town from Think Tank Row, in certain congressional committee rooms on Capitol Hill: No matter that pro-active, pro-investment strategies have been successfully pursued for decades by governments worldwide, and indeed have been a major part of American economic behavior since Alexander Hamilton published his “Report on the Subject of Manufactures” in 1791. For a generation now, the term “industrial policy” has been almost unspeakable in polite company within dogma-driven Washington, as shrink-the-government minimalists purport to shun any type of government involvement in economic planning . . . except, of course, for projects draped in the cloak of “defense.”

Development practitioners have long since moved beyond the kind of dirigiste approach to industrial policy that was attempted, in some countries, half-a-century (or more) ago. Flexible, market-attuned approaches have proven their value. In the modern political-economy lexicon, they are often dubbed “competitiveness strategies,” putting the emphasis on the supportive (rather than commanding) role that government should play. Yet many advocates of laissez-faire passivity continue to caricature all activist strategies, however well-calibrated they may be, as if they were a throwback to the Brezhnev era.

Perhaps anticipating a hair-trigger reaction by free-market fundamentalists, Muro was quick to emphasize that, even with his call for “systemic thinking” and well-targeted public investments, “this is not an argument for heavy-handed ‘industrial policy’,” but is instead a call for a creative public-sector partnership with the private sector. Nonetheless, it was refreshing to hear an economist of Bernanke’s stature candidly assert that “ideally, there would be more civilian investment” – even while judiciously recognizing that investment through military channels has long had “a privileged place in our political system,” which generally “is not good in making investments with uncertain payoffs.”

As the Brookings scholars began to discuss various approaches to industrial policy, their analysis brought to mind an important recent work by the Inter-American Development Bank, which sounded a somewhat similar theme: the IDB’s flagship 2014 “Development in the Americas” study, “Rethinking Productive Development: Sound Policies and Institutions for Economic Transformation.” While rejecting old-fashioned forms of “industrial policy” – which, the authors contended, often did “more harm than good” in many economies in Latin America and the Caribbean – the study found that going too far in the other direction, by pursuing purist laissez-faire policies, is also no cure-all: “For a while, the prevailing view in the region was that the best industrial policy was the one that did not exist. However, shunning active policies has not produced the desired results.”

Dubbing its new perspective as “productive development,” the IDB report recognizes that such a hands-on approach can be “a valuable component of a broader development strategy. The question is not so much ‘whether’ countries should engage in these policies, but rather ‘which’ policies and ‘how’ to do it.” Offering “systemic ways of rethinking policies for productive development” with a “pragmatic, non-ideological view,” the IDB report seems to strike a careful yet activist note: emphasizing analytical approaches that seek solutions within the context of each economy’s specific conditions. For an institution that had been wary of any type of activist interventions, the IDB's embrace of “productive development” seems to be a noteworthy philosophical shift.

Those who have followed the World Bank’s work in recent years, with its pragmatic focus on “Competitive Sectors” and “Competitive Industries,” will recognize many familiar factors within the IDB’s analysis. Indeed, an IDB seminar on May 14 – entitled “Beyond the Washington Consensus: The Role of Productive Development Policies” – heard many panelists (including several competitiveness scholars familiar to World Bank audiences, like Dani Rodrik of the Institute for Advanced Study, Ricardo Hausmann of Harvard and Charles Sabel of Columbia) use the terms “industrial policy” and “competitiveness strategy” and “productive development” almost interchangeably.

“What’s in a name?” one is tempted to ask. Perhaps the IDB report makes a good point by suggesting, within a decorous footnote, that the very phrase “industrial policy” has “become ideologically charged.” Fair enough: The substance of the economic idea is more important than its political label. The term “competitiveness strategy” (which seems to have a bit more of an energetic ring to it than the IDB's “productive development”) will probably do just fine as a substitute.

As suggested by the Brookings scholars’ remarkable readiness this week to deploy a once-taboo term, discussing activist competitiveness strategies – and perhaps even occasionally invoking the term “industrial policy” – might no longer be quite as politically off-limits as Washington’s laissez-faire absolutists have insisted. If that’s the case, it’s certainly a welcome step that will open up some creative new territory for energetic exploration.



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