Xu Xiaonian: Superstition industry policy is driven by planned economic inertia and departmental interests

Wen|Xu Xiaonian Professor of Economics and Finance, China Europe International Business School
When the two key assumptions on which the necessity and rationality of industrial policy depend are not established, the long-term superstition and enthusiasm for industrial policy can only be explained as the inertia of the planned economy or the driving of the interests of the department.
The least discussed in economics and the most common in practice are industrial policies. There are few theoretical studies on industrial policies in the search of new and old economics literature, but in the real economy, administrative interventions under the name of industrial policies are everywhere.
From the theory of economics, it is only when external effects, natural monopoly, public goods or information asymmetry cause market failure, government intervention is possible (rather than necessarily) to supplement the market's shortcomings and improve the efficiency of resource allocation. Despite all the factors that have caused market failures, the proponents of industrial policy have found some arguments—usually the assumption that people are used to it but can't stand the scrutiny, as the theoretical support of industrial policy.
The first argument for demonstrating the necessity of industrial policy is to adjust and optimize the industrial structure, inheriting the legacy of the old creeds such as “planned and proportional” before the reform and opening up. To optimize, you must know what is optimal, otherwise you don't know where to optimize. However, whether the optimal industrial structure exists or not is still inconclusive.
In a market economy, the industrial structure depends on resource endowments, national demand preferences, technological levels, international trade, institutional characteristics, and historical conditions of economic development. The reserves of mineral resources have determined that the oil industry in the Middle East is developed, and China is the world's largest coal producer. Guided by demand preferences, agriculture is dominated by the production of meat and dairy products in Europe and food in China. Douglas North, the Nobel laureate in economics, pointed out that Britain took the lead in establishing a system of property rights protection, so the first one completed a major economic transformation from agriculture to industry. Under the influence of these factors, the industrial structure is formed by natural evolution. There is no such thing as a good or bad. Of course, there is no adjustment or optimization.
Regardless of the optimal meaning, even if there is an optimal industrial structure, whether the government can recognize the optimal structure is also a big question mark. In the era of planned economy, the industrial policy of “agriculture with grain as the key and industry with steel as the key” was implemented. History has proved that this policy has not been optimized but has distorted the industrial structure and caused a large amount of mismatching and waste of resources.
The second statement of industrial policy is called supporting the pillar industry and cultivating companies with international competitiveness. What is the pillar industry? There has never been a clear definition. Today, when the social division of labor is extremely developed, every industry is an indispensable part of the national economy. Identifying pillar industries is just like talking about the relative importance of various organs of the human body. It has little meaning. Is the vertebra more important than the skull and should be prioritized as a pillar? In the same way, in what sense is the oil industry more important than agriculture? Aerospace is the pillar. Why is the service industry accounting for 40% of GDP not the pillar? To take a step back, even if there are pillar industries, such as the train, electricity, automobile, electronics, computer and information industries that occupy an important position in the history of modern world economy, none of them is supported by the government's industrial policy. In the market competition and the protection of good property rights, enterprises and individuals chasing profits have created and promoted the development of emerging industries, from Henry Ford, the originator of the automobile industry, to Bill Gates, the software giant. I have never heard of anyone who has received industrial policies. support.
The experience of Chinese companies has also proved that the effect of industrial policies is at least doubtful. The long-term implementation of the policy of tilting to the big manufacturers in the auto industry, which can compete with foreign businessmen in the international market today, is not the key support object, but a small private enterprise that could not enjoy preferential policies or even restrictions in the past. Looking at the home appliances, computers, communication equipment, the Internet and other industries, which of the companies with certain international competitiveness is the result of industrial policy support?
The third statement of industrial policy is to relieve bottlenecks and control overcapacity. In fact, industrial policies aimed at this are neither necessary nor effective. Where there is a shortage of supply, there must be an increase in prices and an increase in the profits of suppliers. At the attraction of profits, more manufacturers enter, expand production capacity and eliminate shortages. Conversely, when overcapacity occurs, profits fall with prices, manufacturers exit, supply decreases, and without government intervention, the market automatically restores supply and demand balance.
The adjustment of marketization often leaves people with the impression of “blindness” and “waste”. They do not know that they can actively control through industrial policies, and the effect may be worse. In the past few years, the government worried about excess installed capacity and strictly controlled power plant investment. It did not want to accelerate economic growth, insufficient power supply, and cut power restrictions everywhere. Industrial policies expanded rather than narrowed supply and demand imbalances.
The failure of industrial policy is most clearly reflected in the practice of the planned economy. The government has arranged production in a unified manner. As a result, supply and demand are seriously out of touch. On the one hand, there is a shortage of consumer goods. On the other hand, there is a shortage of industrial products that are not in demand, which is reflected in the warehouse. It is reflected as a macro indicator. The proportion of new inventories to GDP is about 7% on average. 13%. With the development of urban economic reforms in the late 1980s, the market has played an increasingly important role in connecting supply and demand. The ratio of inventory to GDP has been declining, and it has fallen below 2% in this century.
Logically speaking, the necessity and rationality of industrial policy depend on two key assumptions: one is that there is an optimal industrial structure in the world; the other is that the government is better than the market, can understand the optimal industrial structure, and can formulate policies. Adjust the structure to achieve the goal that the market cannot achieve. When these two assumptions are not true, the long-term superstition and enthusiasm for industrial policy can only be explained as the inertia of the planned economy or the driving of the interests of the department.

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