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Business News/ Opinion / Columns/  The world requires inoculation against statist policies

The world requires inoculation against statist policies

No country could be a more vivid example for the G20 than India of the damaging effects of industrial and trade policies that continue to handicap the ingenuity of millions

The heads of G20 nations will meet in New Delhi. (ANI)Premium
The heads of G20 nations will meet in New Delhi. (ANI)

In just over a week, the heads of G20 nations will meet in New Delhi. Along with issues such as climate change and sovereign debt, the global pandemic of industrial policy initiatives deserves to be on the agenda. From Magdeburg in east central Germany, where Intel was reportedly given subsidies of €7 billion to build a semiconductor factory, to a Taiwanese battery factory near Dunkirk in France lured by subsidies of €1.5 billion to the Micron Technology factory in Gujarat, more than two-thirds of which will be financed by the central and state governments, subsidies in the name of fostering strategic industries have gone viral. These examples are just from announcements made in May and June.

The justifications continue to grow apace, from the urgent and expensive goal of arresting climate change to preparing for the very real threat that Beijing could impose a blockade on Taiwan, the world’s undisputed leader in semiconductors, or even go to war to reclaim it in the next few years. Both are valid concerns, but many statist measures are being introduced under this umbrella. It is unclear in the case of India’s production-linked incentive (PLI) programme—which could be nicknamed ‘popular lazy ideas’ since it unoriginally draws on the 1970s’ Licence Raj, apart from global industrial-policy fads—why it has been extended to textiles and the automobile industry. In the US, last year saw both the CHIPS and Science Act and the Inflation Reduction Act passed with bipartisan support; the first targets self sufficiency in semiconductors, while the second seeks to speed up a transition to clean energy.

To slow this epidemic of economic interventionism or at least ground it in past experience, G20 leaders should table and even memorize an excellent research paper by Dominick Bartelme of the University of Michigan and Arnaud Costinot as well as Dave Donaldson of MIT. After surveying industrial policy globally, they concluded: “Even under our optimistic assumption that governments maximize welfare and have full knowledge of the underlying economy, our baseline analysis points towards gains from optimal industrial policy that are, on average across all countries, equal to just 0.69% of GDP, and only amount to 1.36% for the country that gains the most." Governments would do much better working on optimal trade policy, by which they mean reducing barriers to trade.

The weaknesses of government ministers and bureaucrats crafting industrial policy are varied and many. Grand ambition is prone to mission creep and justifying industrial policy under all manner of objectives, from creating somehow ‘superior’ manufacturing jobs, to favouring large capital investments in seemingly shiny semiconductors over labour-intensive industries that are deemed less high-tech, such as garments and tourism. This sets governments up for failure because generalists are placed across the negotiating table with hard-nosed businessmen who are specialists in their fields. Tesla’s factory for solar roofs in New York is a case in point. The state government gave it subsidies of almost $ 1 billion more than five years ago to build solar roofs for homes. The Wall Street Journal’s story on it last month came with the headline: “New York State built Elon Musk a $1 billion factory. ‘It was a Bad Deal.’" To prosper, semiconductor factories, the cause celebre of the moment, require huge quantities of clean water, climate-controlled conditions, billiard top roads and speedy customs processing. Chasing after this industry would not play to India’s strengths.

Smartphone manufacturing for exports also requires fast customs processing, which is partly why countries such as Vietnam and China have succeeded at it. They are members of free trade agreements such as the Regional Comprehensive Economic Partnership, which means that components like touch-screen displays and cameras can speedily cross borders from Korea and Taiwan into these countries of final assembly and pay no duties. As the University of Michigan-led study underlines, governments would be better off concentrating on devising sensible trade policies rather than obsessing about industrial policy. Instead of a PLI for textiles, India would have done much better signing a free trade agreement with the EU more than a decade ago. Linkages for textiles and garments as well as factory jobs would have grown manifold by now. Have our bureaucrats spoken with IT majors about the possible fallout of the licensing regime announced in July on the import of laptops, tablets and certain computers? Aside from the complexities of IT giants having the responsibility to destroy foreign-made computers or being forced to re-export them once they’re deemed obsolescent, I hope it hasn’t been overlooked that many outsourcing contracts from the financial industry have digital-security preconditions. As the Michigan study observes: “Governments simply do not know which sectors should be subsidized at the expense of others." To boost clean energy, India, abundant in sunshine, should allow duty-free import of solar panels.

Indeed, no country could be a more vivid example for the G20 than India of the damaging effects of industrial and trade policies that continue to handicap the ingenuity of millions. This makes India’s G20 presidency especially poignant. It is not too late for Ambassador cars to be prominently displayed as a symbolic inoculation against the global epidemic of statist intervention.

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Published: 31 Aug 2023, 01:12 AM IST
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