All the dogs that didn't bark

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Sleeping dog Rising protectionism, over-regulation of markets, nationalization of private industry! All these were shouted as warnings about the probable consequences of the financial crisis. But as we have seen, many of these dogs simply haven't barked. The first case in point is protectionism. As Harvard Professor Dani Rodrik argued in a column late last year, rising protectionism is simply a myth. Or as he rather colorfully put it:

The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors. Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands.

But rising protectionism wasn't the only dog that didn't bark. A new note on privatization trends from the World Bank (based on data through early 2009) finds that governments did not nationalize (or re-nationalize) large chunks of private industry (with the notable exception of the financial sector, and this in most cases on a temporary basis). In fact, although considerably slowed down, privatization continued at a decent clip in 2008—32 developing countries carried out nearly 200 privatization transactions worth around $38 billion. Preliminary data for 2009 suggest that privatization transactions began to rebound from the low point of 2008.

These findings run partly counter to a more recent editorial from Professor Rodrik, who opined on Project Syndicate that industrial policy is back. He argues that successful economies have engaged in it around the world, from the U.S. to Chile and to China:

China is a case in point. Its phenomenal manufacturing prowess rests in large part on public assistance to new industries. State-owned enterprises have acted as incubators for technical skills and managerial talent. Local-content requirements have spawned productive supplier industries in automotive and electronics products. Generous export incentives have helped firms break into competitive global markets.

It is difficult to judge Rodrik's argument one way or the other. Although industrial policy has traditionally been understood as a set of protectionist trade policies to incubate new industries, that clear meaning has given way to a grab-bag of definitions. Judging from the article, Rodrik includes in his definition of industrial policy everything from the highly interventionist approach of funding state-owned enterprises to the rather hands-off concept of sectoral round tables.

If industrial policy is nothing more than government agencies organizing conferences with private sector players, I'm all for it. If we include in the definition of industrial policy the supply of classic public goods like infrastructure and education in coordination with the needs of the private sector, I am still fully in support. However, I tend to part ways when the state gets involved to the point of picking winners, which must inevitably be the case when more heavy-handed interventions are put on the table. 

But judging by the available data, I see little evidence that the world is shifting rapidly toward the more interventionist types of industrial policy that Professor Rodrik mentions in the article (with the exception of a handful of countries that have veered off into populism). And as many governments around the world face a debt hangover due to stimulus policies and/or bailouts of the financial sector, I see little fiscal room for these types of policies in the immediate future. This dog may yet bark, but it still looks pretty sleepy to me.

(Photo credit: Flickr user Zevotron)


Ryan Hahn

Operations Officer

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