Proton in Perspective: Industrial Policy Gone Wrong

Proton has hit the headlines again (excerpt):

Proton must ‘graduate’ from govt protection, says Mustapa

PETALING JAYA: Proton needs to “graduate” from Government protection, says International Trade and Industry Minister Datuk Mustapa Mohamed (pic).

In a statement on Friday, Mustapa said that the Government could not continuously protect heavy industries, including the automotive sector, noting that although other countries such as Japan and South Korea have protected their automotive industry, these measures were short- and medium-term in nature, and were eventually abolished.

“Proton, which is our national car project, needs to graduate from this protection,” he said.

Industrial Policy: Picking Winners Works, Provided…

One of the interesting things about development in East Asia over the past half a century is the degree of government involvement in promoting certain sectors of the economy, notably export-oriented manufacturing. That’s been the guiding principle of Japan’s and Korea’s development for instance, and Singapore and Taiwan haven’t been far behind.

In Malaysia’s case, attempts at directing industrial policy has been a bit hit and miss – some industries (palm oil for instance) have been pretty successful, but others (heavy industry) much less so.

This new working paper published by the NBER helps to explain the reasons why (abstract; emphasis added):

Industrial Policy and Competition
Philippe Aghion, Mathias Dewatripont, Luosha Du, Ann Harrison, Patrick Legros

This paper argues that sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly. First, we develop a model in which two firms can operate either in the same (higher growth) sector or in different sectors. To escape competition, firms can either innovate vertically or differentiate by chosing a different sector from its competitor. By forcing firms to operate in the same sector, sectoral policy induces them to innovate "vertically" rather than differentiate in order to escape competition with the other firm. The model predicts that sectoral targeting enhances average growth and productivity more when competition is more intense within a sector and when competition is preserved by the policy. In the second part of the paper, we test these predictions using a panel of medium and large Chinese enterprises for the period 1998 through 2007. Our empirical results suggest that if subsidies are allocated to competitive sectors (as measured by the Lerner index) and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant. We address the potential endogeneity of targeting and competition by using variations in targeting across Chinese cities that are exogenous to the individual firm.

Fisheries And The Diesel Subsidy: Both Sides Are Missing The Point

Malaysia’s deep sea fishermen are on strike because the diesel subsidy has been reduced (excerpt, emphasis added):

Fishermen can’t afford to go to sea with steep hike in diesel price

More than 100 trawlers were docked at the Malaysia Fisheries Development Authority complex as fishermen said they could not afford to go to sea.

Kuantan Fishery Association chairman Chia Hee Juak said this was due to the sudden increase in diesel price to RM1.80 early this month.

“Even at the previous price of RM1.25, we were only earning a profit of RM2,000 per trip.

“With this steep increase, we can't even afford to fuel up,” he said.

Debating the China Model

de minimis yesterday posted about an article in The Economist last week regarding the failures of industrial policy. “Industrial policy” in this sense refers to the practice of governments attempting to choose “winners” that can help accelerate economic growth and development.

I’m pretty sure Malaysians can cite our own examples of failures in industrial policy.