WEBVTT - This Is How Industrial Policy Can Go Bad 0:00:02.720 --> 0:00:17.320 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.760 --> 0:00:22.239 Hello and welcome to another episode of the odd Locks podcast. 0:00:22.320 --> 0:00:24.639 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:25.120 --> 0:00:27.240 Tracy, you know, we obviously talk a lot on the 0:00:27.280 --> 0:00:31.000 show about US industrial policy and these various investments we're 0:00:31.000 --> 0:00:34.360 making in things like chips, clean energy, batteries, and so forth. 0:00:34.520 --> 0:00:36.479 Did you see there were some actually good news on 0:00:36.560 --> 0:00:37.839 the chips front recently? 0:00:37.960 --> 0:00:38.599 Oh? What was that? 0:00:39.120 --> 0:00:44.199 The new fab that TSMC is building in Arizona is 0:00:44.240 --> 0:00:49.080 getting as good yields as their existing fabs in Taiwan, 0:00:49.640 --> 0:00:54.120 at least in theory. It looks like Americans are capable 0:00:54.200 --> 0:00:56.200 of building as well as anyone else in the world, 0:00:56.280 --> 0:00:57.080 at least in theory. 0:00:57.480 --> 0:01:02.080 That is fab Joe, Oh, that's fabulus less fab productivity news. 0:01:02.280 --> 0:01:04.200 Have I told you, by the way, since you joked 0:01:04.240 --> 0:01:07.479 about that, I really think fab apostrophe less, like fab 0:01:07.600 --> 0:01:10.320 less semiconductor would be a really good name. 0:01:10.319 --> 0:01:12.400 For Oh yeah, I think I think you've pitched that 0:01:12.440 --> 0:01:14.720 fabless so far. I agree with you that'd be good. 0:01:15.080 --> 0:01:18.440 But okay, so sitting aside that one plant, which hasn't 0:01:18.480 --> 0:01:21.480 actually opened yet, I believe I think that it's scheduled 0:01:21.520 --> 0:01:24.520 to open in twenty twenty five. Setting aside good signs 0:01:24.560 --> 0:01:29.760 of positive yields there, like, I remain anxious about whether 0:01:29.840 --> 0:01:32.640 any of this is going to ultimately work, or whether 0:01:32.680 --> 0:01:34.800 we're going to have a lot of billions and billion 0:01:34.840 --> 0:01:39.720 dollars spend and either unproductive plants or plants producing stuff 0:01:39.720 --> 0:01:42.680 that there really isn't in demand market for. Like, if 0:01:42.720 --> 0:01:45.119 it all turned out to be a waste of tens 0:01:45.200 --> 0:01:47.000 and tens of billions of dollars, let's just say, I 0:01:47.000 --> 0:01:47.840 wouldn't be shocked. 0:01:48.200 --> 0:01:51.080 Well, I don't think you're alone in your concern. I 0:01:51.080 --> 0:01:55.160 think there is a wider recognition nowadays that there are 0:01:55.480 --> 0:01:58.800 areas of the economy or certain businesses that might be 0:01:58.840 --> 0:02:03.800 strategically important where not enough capital is flowing into through 0:02:03.840 --> 0:02:06.640 the private market, and so maybe the government wants to 0:02:06.680 --> 0:02:09.440 do something to build up those industries. It feels like 0:02:09.600 --> 0:02:13.359 in general there is more of a recognition or perhaps 0:02:13.400 --> 0:02:17.560 acceptance of that idea. But as you say, there remains 0:02:17.600 --> 0:02:21.320 some very very big questions about the specific design of 0:02:21.400 --> 0:02:24.960 industrial policy and the idea of well, you know, maybe 0:02:25.000 --> 0:02:27.800 there's good and bad industrial policy. Maybe if you throw 0:02:27.880 --> 0:02:31.359 money at a particular industry through subsidies or whatever. Then 0:02:31.400 --> 0:02:35.400 all you're doing is building up over capacity that eventually 0:02:35.680 --> 0:02:38.080 is not going to be able to compete on the 0:02:38.080 --> 0:02:41.520 global stage. And I think those are very valid critiques, 0:02:41.520 --> 0:02:44.320 and we have seen a number of examples throughout history 0:02:44.800 --> 0:02:49.240 of industrial policy that hasn't quite worked out as intended totally. 0:02:49.280 --> 0:02:52.040 And you know, I think there's a few other dimensions 0:02:52.080 --> 0:02:54.400 here that I think are important. So one is when 0:02:54.440 --> 0:02:58.480 we talk about industrial policy throughout history or development strategy 0:02:58.600 --> 0:03:01.320 for a lot of countries, it's like a a lot 0:03:01.400 --> 0:03:04.639 of it has failed. Countries have tried to industrialize or 0:03:04.960 --> 0:03:08.200 rise to some level where they have competitive manufactured goods 0:03:08.639 --> 0:03:11.800 without working out. Two is the fact that one thing 0:03:11.840 --> 0:03:14.119 that's unique is we're not a poor country, and we're 0:03:14.120 --> 0:03:16.960 not a country that's like trying to rise per se 0:03:17.040 --> 0:03:19.360 in the development ladder. So a lot of theory of 0:03:19.400 --> 0:03:23.200 industrial policy is sort of talking about countries, many of 0:03:23.240 --> 0:03:25.720 them in East Asia that have succeeded or others that 0:03:25.840 --> 0:03:28.480 have failed. But those were countries that were when they 0:03:28.520 --> 0:03:31.120 started quite poor relative to us, and we're rich, and 0:03:31.200 --> 0:03:34.800 a lot of our anxiety is about specific sectors rather 0:03:34.880 --> 0:03:37.440 than the sort of wealth of the economy. As a whole, 0:03:37.800 --> 0:03:39.920 So there is a lot to dive into on them. 0:03:39.960 --> 0:03:42.200 Well, the other difference that comes up a lot is 0:03:42.400 --> 0:03:45.920 political systems. Yes, right, so we're a democracy and a 0:03:45.960 --> 0:03:50.240 lot of countries that have to some extent successfully democratized. 0:03:50.480 --> 0:03:52.680 You often hear the argument that they were only able 0:03:52.720 --> 0:03:54.920 to do it because they either had a command economy, 0:03:55.200 --> 0:03:59.960 or perhaps they had authoritarian leaning regimes and things like that. 0:04:00.280 --> 0:04:04.320 So I think the design of industrial policy, its success 0:04:04.480 --> 0:04:07.400 its failure, is definitely a worthy topic totally. 0:04:07.400 --> 0:04:09.360 Well, there's a lot to dive in on who we 0:04:09.360 --> 0:04:11.360 should get right into it. We really do have the 0:04:11.400 --> 0:04:14.280 perfect guest today. We're going to be speaking with Vivig Chibber. 0:04:14.320 --> 0:04:17.240 He is a sociology professor at NYU and he's written 0:04:17.360 --> 0:04:21.960 a lot on development and industrial policy, among many other things. 0:04:22.080 --> 0:04:24.440 So thank you so much for coming in, Thanks. 0:04:24.279 --> 0:04:24.800 For having me. 0:04:24.960 --> 0:04:27.200 Why don't we start with what I guess would be 0:04:27.320 --> 0:04:29.960 a definitional question that I'm not sure if we've ever 0:04:30.040 --> 0:04:34.120 actually asked anyone on the show, but what is industrial policy? 0:04:34.120 --> 0:04:36.160 We talk about it all the time, and I realized, 0:04:36.200 --> 0:04:37.960 like I actually don't know what that term means. 0:04:38.279 --> 0:04:40.919 Yeah, it's actually an important question because a lot of 0:04:40.960 --> 0:04:46.400 times when people are debating industrial policy, they assimilated into 0:04:46.400 --> 0:04:50.000 a wider set of phenomena, a wider set of state actions, 0:04:50.040 --> 0:04:53.120 which really makes it hard to have a kind of 0:04:53.160 --> 0:04:57.680 a productive discussion around it. So industrial policy is a 0:04:57.680 --> 0:05:02.080 particular kind of state intervenetion in the economy. That means 0:05:02.120 --> 0:05:04.560 you can have forms of state intervention. States are involved 0:05:04.600 --> 0:05:08.360 in economies all the time. They affect its sectoral balance, 0:05:08.400 --> 0:05:11.000 they affect its place in the global economy, the effect 0:05:11.040 --> 0:05:16.000 trade flows without necessarily, however, being forms of industrial policy. 0:05:16.800 --> 0:05:20.520 So industrial policy is a specific sort of state intervention, 0:05:20.560 --> 0:05:23.600 and it shouldn't be confused with state intervention per se. Okay, 0:05:23.640 --> 0:05:26.040 all right, so what's specific about it? I mean, there 0:05:26.080 --> 0:05:30.080 isn't a kind of a consensus, a universal consensus around 0:05:30.080 --> 0:05:32.080 what we mean when we use the term, but by 0:05:32.120 --> 0:05:34.560 and large what people mean by it, and they're sort 0:05:34.600 --> 0:05:38.480 of an agreement, is that when states intervened to bolster 0:05:39.160 --> 0:05:44.159 particular sectors of the manufacturing base of the economy rather 0:05:44.200 --> 0:05:49.279 than affecting the general structure, the general the proportion between 0:05:49.279 --> 0:05:52.200 manufacturing and agriculture and such things. So the term goes 0:05:52.240 --> 0:05:55.560 when you're selecting winners, when you say that sector or 0:05:55.600 --> 0:05:59.479 that plant or that area of manufacturing should be supported 0:06:00.000 --> 0:06:03.719 and change. Therefore the balance of investment flows from one 0:06:03.760 --> 0:06:04.560 sector to the other. 0:06:05.360 --> 0:06:09.000 When you think about successful industrial policy, give us some 0:06:09.080 --> 0:06:13.119 examples of a particular country or economy that comes to mind. 0:06:14.120 --> 0:06:20.200 The kind of the universally accepted examples are Japan, South Korea, Taiwan, 0:06:20.720 --> 0:06:25.200 and interestingly, in Europe among people who study European political economy, France, 0:06:25.440 --> 0:06:29.520 from say the early years after Second World War into 0:06:29.560 --> 0:06:33.560 the late sixties is another example that people take up 0:06:33.600 --> 0:06:35.320 as successful industrial policy. 0:06:36.440 --> 0:06:38.640 Say more about what that looks like. So we look 0:06:38.680 --> 0:06:41.360 back at some of these East Asian countries or France, 0:06:41.360 --> 0:06:46.240 where we say, okay, they did successful industrial policy. I mean, 0:06:46.279 --> 0:06:48.599 I'm sure we could talk for hours and hours just 0:06:48.640 --> 0:06:50.920 about any one of these specifics. But when you say, 0:06:51.040 --> 0:06:54.320 or when people generally say, this is what success looks like, 0:06:54.480 --> 0:06:55.400 give us the contours. 0:06:55.440 --> 0:06:58.640 All right. So industrial policy, if you know a little 0:06:58.640 --> 0:07:02.159 bit of economics, it's kind of a step away from 0:07:02.240 --> 0:07:06.680 and an explicit repudiation of what's called comparative advantage. So 0:07:06.800 --> 0:07:10.360 traditional economic theories said what country should do is not 0:07:10.400 --> 0:07:12.960 what they do better than other people. It's what they 0:07:13.000 --> 0:07:16.080 do best in the range of activities that they can manage. 0:07:16.480 --> 0:07:19.920 So you may be not very good at producing textiles 0:07:20.120 --> 0:07:24.400 if you have Korea compared to say Japan. But if 0:07:24.440 --> 0:07:27.080 producing textiles is the best you can do, then you 0:07:27.120 --> 0:07:29.960 produce the textiles, right. And how do you find out 0:07:30.000 --> 0:07:32.080 what you're best at, Well, you let the market tell you. 0:07:32.080 --> 0:07:34.640 You let the market tell you, and you discovered that 0:07:34.760 --> 0:07:39.240 by opening up your economy and see where rational investors 0:07:39.400 --> 0:07:41.760 are taking their money. Because they want to make profits, 0:07:41.800 --> 0:07:44.120 they'll take the money wherever they think they can do 0:07:44.160 --> 0:07:47.160 best with that money. All right. So the idea then 0:07:47.320 --> 0:07:52.240 was countries will choose those specializations in which they have 0:07:52.320 --> 0:07:54.480 the factor endowment. That makes sense. So if you're a 0:07:54.480 --> 0:07:57.560 country that's poor means you got not very much capital, 0:07:57.720 --> 0:07:59.120 but you've got a lot of people, You've got a 0:07:59.160 --> 0:08:02.760 lot of land, so you specialize with those factors that 0:08:02.840 --> 0:08:04.520 you have a lot of, which is land and people. 0:08:05.320 --> 0:08:07.600 What does that mean concretely, it means poor country shirts 0:08:07.600 --> 0:08:11.440 specialize in labor intensive industries or agriculture. Now, from the 0:08:11.480 --> 0:08:13.120 standpoint of the poor countries, they looked at this and 0:08:13.160 --> 0:08:16.280 they said, well, that means basically we're being asked to 0:08:16.320 --> 0:08:20.800 lock ourselves into the least productive, least profitable, and those 0:08:20.840 --> 0:08:24.200 sectors that are the least propitious for growth, because agriculture 0:08:24.200 --> 0:08:27.320 doesn't generate high growth, nor does labor intensive industry. So 0:08:27.360 --> 0:08:29.920 they said, essentially, what this looks like is a rationalization 0:08:30.320 --> 0:08:33.120 for rich countries to hoard and keep to themselves all 0:08:33.160 --> 0:08:35.400 the best sectors, and we get the scraps. 0:08:36.240 --> 0:08:38.199 So commodities exploitations exactly. 0:08:38.240 --> 0:08:43.319 Commodity exploitation, oil, cheap clothes, corn wheat, that sort of thing, 0:08:44.040 --> 0:08:46.360 And that's what was associated with being poor in the 0:08:46.360 --> 0:08:49.560 global economy. All right, so what do you do? Starting 0:08:49.559 --> 0:08:52.160 in the nineteen forties, what some countries started doing was 0:08:52.200 --> 0:08:54.640 to say, we're going to try to move up the 0:08:54.760 --> 0:08:58.280 value chain. Instead of just making cheap shirts, cheap shoes, 0:08:58.720 --> 0:09:00.360 leather goods, what we're going to try to do is 0:09:00.400 --> 0:09:04.880 move into high end consumer goods automobiles, even capital goods 0:09:04.880 --> 0:09:07.800 like steel, heavy chemical. But how do you do that? 0:09:08.520 --> 0:09:10.920 The thing is, in those economies, if you try to 0:09:10.920 --> 0:09:13.400 move into auto and you're a private investor, you'll get 0:09:13.440 --> 0:09:15.200 clawbird because you don't know how to do it. You 0:09:15.200 --> 0:09:16.840 don't know how to make a car. Ford's making them 0:09:16.880 --> 0:09:18.360 GM's making them, and they're making them a lot better 0:09:18.360 --> 0:09:20.520 than you. If you try to make your stupid little 0:09:20.520 --> 0:09:22.800 cars and you throw them to the global economy and 0:09:22.880 --> 0:09:24.920 no one's going to buy them, and if you try 0:09:24.920 --> 0:09:27.760 to do it by first producing them for your domestic market, 0:09:28.040 --> 0:09:30.200 why would consumers buy your cars when they can get 0:09:30.400 --> 0:09:33.319 top of the line GM cars. We're talking about the 0:09:33.360 --> 0:09:36.960 nineteen fifties, yeaes, the US auto economy dominates everything. So 0:09:37.040 --> 0:09:38.880 they said, if we're gonna do this, we need to 0:09:38.880 --> 0:09:41.040 do two things. First of all, we need to open 0:09:41.120 --> 0:09:43.240 up a space in the domestic economy for our own 0:09:43.760 --> 0:09:48.199 manufacturing firms by protecting them. That's teriffs. We'd protect them 0:09:48.440 --> 0:09:52.960 so that foreign goods become more expensive and therefore our 0:09:53.040 --> 0:09:56.319 goods have some breathing space, because when you start making 0:09:56.320 --> 0:09:57.920 a good for the first time, it's going to cost 0:09:57.960 --> 0:10:00.440 a little bit more to the consumer. Second thing we 0:10:00.480 --> 0:10:04.319 do is as governments, we make it attractive for investors 0:10:04.400 --> 0:10:07.959 to move into these lines because they're high risk. So 0:10:08.320 --> 0:10:11.640 what East Asian countries started to do was they did 0:10:11.640 --> 0:10:15.000 this twofold thing where they had what's called import substitution, 0:10:15.320 --> 0:10:19.160 which means you're trying to substitute for imports your domestic goods. 0:10:19.760 --> 0:10:22.360 That means tariffs and protection. And then you try to 0:10:22.520 --> 0:10:27.120 plow money and incentives to domestic producers to promise them 0:10:27.240 --> 0:10:30.280 essentially you won't take a loss. And now what you've 0:10:30.280 --> 0:10:33.960 got is countries instead of just specializing in cheap clothes 0:10:33.960 --> 0:10:36.440 and shoes and things like that, they start producing more 0:10:36.520 --> 0:10:40.440 high end goods. And these are goods that produce more profits, 0:10:40.480 --> 0:10:43.920 have higher rates of growth, and propel that country into 0:10:44.000 --> 0:10:47.120 the ranks of first middle income countries and then later 0:10:47.240 --> 0:10:50.840 high income countries on the back of a dynamic and 0:10:51.040 --> 0:10:54.520 high end manufacturing sector. That's basically what it amounts to. 0:10:55.120 --> 0:10:57.880 So how do you And I alluded to this in 0:10:57.920 --> 0:11:01.119 the intro, but I think a traditional critic of industrial 0:11:01.160 --> 0:11:07.319 policy is that by subsidizing certain industries and maybe encouraging 0:11:07.400 --> 0:11:12.920 capital to pour into them, you perhaps sacrifice competitiveness in 0:11:12.960 --> 0:11:16.079 one way or another. And so the worry is that, well, 0:11:16.360 --> 0:11:20.280 when the subsidies eventually end, or when companies are asked 0:11:20.320 --> 0:11:23.320 to stand on their own two feet and compete with 0:11:23.520 --> 0:11:27.480 global juggernauts so forward or whoever, they won't be able 0:11:27.520 --> 0:11:30.320 to do that. How do you balance I guess the 0:11:30.320 --> 0:11:35.280 need for discipline with the desire for successful industrial policy. 0:11:36.120 --> 0:11:39.679 Well, there's the general principle of what you are to do, 0:11:40.120 --> 0:11:42.360 and then there's the tricky part of can you actually 0:11:42.360 --> 0:11:44.880 do it. So the problem, as you're saying, is that 0:11:45.000 --> 0:11:46.800 you hit it on the head. The problem is this, 0:11:47.160 --> 0:11:51.440 it's built into the model that there's a strong tendency 0:11:51.480 --> 0:11:54.440 towards failure. Now where does this come from. Remember, what 0:11:54.480 --> 0:11:56.520 you're trying to do is figure out a way of 0:11:56.559 --> 0:11:59.600 making your economy more dynamic, more productive, so that you 0:11:59.600 --> 0:12:02.600 can move up in the global hierarchy of nations. Okay, 0:12:02.960 --> 0:12:06.280 all right, So you're doing that by essentially insulating your 0:12:06.520 --> 0:12:11.960 domestic producers from competition and giving them lots of free money. Now, 0:12:12.120 --> 0:12:15.240 this in some ways takes away what is best about 0:12:15.240 --> 0:12:18.319 the market, right, because why do capitalists, why do firms 0:12:19.280 --> 0:12:22.360 worry about productivity? Is that if they don't worry about productivity, 0:12:22.520 --> 0:12:24.880 they're going to go under. Well what is it that 0:12:24.880 --> 0:12:27.360 punishes them. What's the instrument that punishes them if they 0:12:27.360 --> 0:12:31.640 forget about productivity? It's market competition. If you don't play 0:12:31.840 --> 0:12:33.640 the best game you can, you're going to be out 0:12:33.640 --> 0:12:35.680 of the game pretty soon because others are going to outcompete, 0:12:35.679 --> 0:12:39.880 you out sell you. Now, what import substitution industrial policy does, 0:12:40.600 --> 0:12:44.920 in principle is take away that competitive mechanism and substitute 0:12:44.960 --> 0:12:48.679 government oversight for that stuff. Now, the danger there is 0:12:48.720 --> 0:12:51.439 that you're essentially giving people monopolies. They're giving them monopoly 0:12:51.480 --> 0:12:54.160 over certain sectors, insulating them from competition, and you're giving 0:12:54.200 --> 0:12:56.440 them free profits. When they have free profits, why are 0:12:56.480 --> 0:12:59.360 they going to innovate? They have no direct incentive to innovate. 0:12:59.760 --> 0:13:03.960 So there were two possibilities. One is you deploy industrial 0:13:04.000 --> 0:13:06.720 policy and these artificial monopolies, and you end up getting 0:13:06.720 --> 0:13:10.520 a fat cat industrial sector that's gobbling up national resources 0:13:10.520 --> 0:13:13.920 but not delivering a lot in terms of productivity and growth. 0:13:14.840 --> 0:13:18.360 The second possibility is that you give them these free profits, 0:13:18.360 --> 0:13:20.559 but then you also figure out some way to crack 0:13:20.600 --> 0:13:24.319 the whip so that they're forced they're compelled to use 0:13:24.320 --> 0:13:28.760 those profits productively. Now, a lot of countries try everybody 0:13:28.840 --> 0:13:31.760 knew this. This isn't rocket science. Everybody knows every economist knows 0:13:31.800 --> 0:13:36.120 monopolies are bad for growth. So what happened in spite 0:13:36.160 --> 0:13:37.839 of the fact that they knew it in a lot 0:13:37.880 --> 0:13:42.400 of these countries, the monopolies did in fact, lead to 0:13:42.480 --> 0:13:47.319 a lot of low productivity, sloppy, flabby firms that are 0:13:47.360 --> 0:13:49.440 living high off the hog but not doing much with it. 0:13:50.480 --> 0:13:53.880 India was one, Brazil was another. Then there were countries 0:13:53.920 --> 0:13:56.600 where you actually had more abject failures, like the Philippines. 0:13:57.480 --> 0:13:59.360 But then there was a small subset of countries like 0:13:59.400 --> 0:14:01.920 these East Asia ones where they do the same thing 0:14:01.920 --> 0:14:04.400 with monopolies and tariffs and subsidies, but you don't get 0:14:04.400 --> 0:14:06.520 the same outcome. The question is why, and the reason 0:14:06.640 --> 0:14:10.360 is they managed to compliment the subsidies with some kind 0:14:10.400 --> 0:14:13.679 of enforced competitive pressures. Well, how do they do that? 0:14:14.120 --> 0:14:15.760 What they did was to say, Okay, we'll give you 0:14:15.800 --> 0:14:19.320 these subsidies. We'll give you protective from foreign competition at home. 0:14:19.800 --> 0:14:22.640 But in order to keep getting the subsidies year after year, 0:14:23.040 --> 0:14:26.160 investment cycle after investment cycle, you need to show us 0:14:26.640 --> 0:14:29.240 that you're using it productively. How do you show that. 0:14:29.400 --> 0:14:32.280 We want to see you succeed in export markets. Take 0:14:32.280 --> 0:14:36.240 this money, invest it and now don't just produce your 0:14:36.480 --> 0:14:38.880 Hyundai or your Kia for the home markets. We want 0:14:38.920 --> 0:14:40.400 to see you in the toyotas. For the home market, 0:14:40.440 --> 0:14:42.000 we want to see you selling it in the us 0:14:42.040 --> 0:14:44.880 in Europe, which are really really competitive. Either you innovator, 0:14:44.880 --> 0:14:49.000 you die in those areas. So now you had an 0:14:49.120 --> 0:14:53.200 unambiguous metric by which you could say whether or not 0:14:53.280 --> 0:14:55.960 you're succeeding in picking these winners and whether or not 0:14:55.960 --> 0:14:57.520 they're in fact winners. And it turned out some of 0:14:57.520 --> 0:14:59.000 them failed, but others succeeded. 0:15:14.440 --> 0:15:19.440 The intuitions of what you say sound incredibly obvious and clear. 0:15:20.120 --> 0:15:22.120 I get the idea of, like, okay, you need to 0:15:22.160 --> 0:15:25.320 clear some space in the domestic market so that companies 0:15:25.360 --> 0:15:27.640 have a chance to get off the ground and breathe 0:15:28.040 --> 0:15:31.760 that giving companies free money is only going to accomplish 0:15:31.840 --> 0:15:35.920 your goals if companies use the money to invest and 0:15:35.960 --> 0:15:39.240 improve their productivity and innovate, et cetera. And that the 0:15:39.400 --> 0:15:43.040 test for whether they're improving and innovating and creating competitive 0:15:43.080 --> 0:15:46.760 products are those foreign markets in which the local country 0:15:46.760 --> 0:15:49.480 has no control and therefore you're just on your own 0:15:49.520 --> 0:15:52.480 and you're free competing against the forwards and et cetera 0:15:52.520 --> 0:15:56.040 of the world. A. Why didn't every country go down 0:15:56.320 --> 0:15:59.240 that route? And sort of what has to happen I 0:15:59.280 --> 0:16:04.560 guess politically such that the capitalists who build these factories 0:16:05.040 --> 0:16:08.480 accept that premise and don't just sort of try to 0:16:08.520 --> 0:16:11.800 scroll away the money without ever having competed internationally. 0:16:11.960 --> 0:16:15.040 Yeah, perfect questions, and the answer to both is actually 0:16:15.040 --> 0:16:19.160 the same answer. Okay, The dilemma was essentially a political dilemma, 0:16:19.240 --> 0:16:21.560 not a technical one, and not an economic one. And 0:16:21.600 --> 0:16:25.200 this is where the critics of import substitution kind of 0:16:25.240 --> 0:16:27.720 kept scratching their heads and saying, look, we know that 0:16:27.800 --> 0:16:30.720 the answer to how to make this a successful policy 0:16:31.480 --> 0:16:35.680 is to discipline these firms that are getting all this money, 0:16:35.680 --> 0:16:38.840 to discipline them with competitive pressures. So the best way 0:16:38.880 --> 0:16:41.400 to do that is through export promotion. And by the 0:16:41.520 --> 0:16:45.960 late sixties early seventies, you saw the World Bank, the IMF, 0:16:46.000 --> 0:16:48.440 all both of what's called the Bretton Woods institutions, but 0:16:48.680 --> 0:16:52.040 also the Economic Commission on Latin America, which was the 0:16:52.160 --> 0:16:56.800 godfather of import substitution, and also the planning agencies in 0:16:56.840 --> 0:16:59.920 the Global South, all saying we need to promote exports 0:17:00.040 --> 0:17:03.360 in our economies to push these guys into competitive regions. 0:17:04.000 --> 0:17:06.159 But it only happened in two or three countries. In 0:17:06.200 --> 0:17:09.320 country after country after country, you found them hanging on 0:17:09.440 --> 0:17:14.040 to the subsidies, and the general import substitution long after 0:17:14.080 --> 0:17:17.439 everyone realized, look, we've reached about as far as we 0:17:17.480 --> 0:17:20.720 can go with the subsidy side. Now we need to 0:17:20.760 --> 0:17:23.560 push these guys into competition. Long after they understood that, 0:17:24.000 --> 0:17:27.360 they stuck with a self defeating policy. Question is why, 0:17:27.400 --> 0:17:31.440 and the answer is political. It's basically exists. What all 0:17:31.440 --> 0:17:34.200 the economists assumed was a government and a state that's 0:17:34.280 --> 0:17:37.159 essentially free to do and powerful enough to do whatever 0:17:37.200 --> 0:17:39.760 it wants to tell firms to do whatever it wants 0:17:39.760 --> 0:17:41.760 them to do, and they're going to step into line. 0:17:42.240 --> 0:17:46.199 But the fact is, in any modern industrial capitalist economy, 0:17:46.280 --> 0:17:49.200 these firms who you're trying to push into exports are 0:17:49.240 --> 0:17:51.520 also the people with the most political power, the most 0:17:51.560 --> 0:17:54.800 political influence. They have the lobbyists, they have all the money, 0:17:54.840 --> 0:17:58.000 They fund elections, and they run the economy. So here's 0:17:58.040 --> 0:17:59.960 the trap you were in. You gave them a bunch 0:18:00.000 --> 0:18:02.720 bunch of free money, and now you're asking to give 0:18:02.800 --> 0:18:06.040 up that free money and go into essentially shark infested 0:18:06.080 --> 0:18:09.320 waters and country after country. What most of them said was, ah, 0:18:09.320 --> 0:18:11.440 we're not going to do it. Actually, we like it 0:18:11.560 --> 0:18:13.879 just the way it is. And since we fund all 0:18:13.880 --> 0:18:16.479 the politicians, whoever gets into power We're going to make 0:18:16.480 --> 0:18:19.679 sure they keep plowing this money towards US. Now, in 0:18:19.720 --> 0:18:23.280 the countries where that didn't happen, Korea, Taiwan, Japan, why 0:18:23.280 --> 0:18:27.120 did it not happen. Some very very special circumstances allowed 0:18:27.160 --> 0:18:30.560 them to get into the shark infested waters in a 0:18:30.600 --> 0:18:32.959 way that was safe. So I'll give you the example 0:18:32.960 --> 0:18:37.080 of Korea. Korea switches to a heavy reliance on exports 0:18:37.800 --> 0:18:41.520 in the mid to late sixties, why does it do that? Essentially, 0:18:41.600 --> 0:18:44.520 what happened was it entered into these partnerships with Japanese 0:18:44.520 --> 0:18:48.639 firms who already had a foothold in the highly competitive 0:18:48.640 --> 0:18:52.119 and thereby dangerous American market, foothold in what in the 0:18:52.400 --> 0:18:57.359 lower end manufacturing exports sectors, exports for Japan, imports for 0:18:57.359 --> 0:19:02.160 the United States, where they had established sales networks, banking facilities. 0:19:02.359 --> 0:19:04.720 They knew the market, they knew they had customer relations, 0:19:04.800 --> 0:19:07.120 and what Japan wanted to do is essentially move out 0:19:07.119 --> 0:19:11.000 of these lines into more high end lines of high 0:19:11.080 --> 0:19:15.320 end consumer products and capital goods. So what they said was, actually, 0:19:15.800 --> 0:19:18.879 we don't have to give up all the contacts and 0:19:18.920 --> 0:19:20.880 all the money we're making in these low end lines. 0:19:21.080 --> 0:19:23.440 As we can do is have joint ventures with Korean firms. 0:19:24.359 --> 0:19:27.359 They come in, we shepherd them into selling shirts and 0:19:27.400 --> 0:19:29.639 shoes and all this. And the way we make money 0:19:29.680 --> 0:19:32.800 is we give them the bank loans that enables them 0:19:32.840 --> 0:19:35.520 to open up the factories in Korea that produce this stuff. 0:19:35.840 --> 0:19:39.040 So now we're making money in the higher end goods 0:19:39.280 --> 0:19:42.800 that we're entering in the United States for the first time, 0:19:43.400 --> 0:19:45.560 but in the lower end sectors we switch from selling 0:19:45.600 --> 0:19:49.160 products to selling loans, and that way, the Korean firms 0:19:49.240 --> 0:19:52.040 take advantage of our sales networks, overcome a lot of 0:19:52.040 --> 0:19:55.439 the entry barriers, and they're good on the loans that 0:19:55.440 --> 0:19:57.880 were given them, and now we've got money coming from 0:19:57.880 --> 0:20:00.280 two ends instead of one. Now the thing is take 0:20:00.280 --> 0:20:04.360 country like India. India had partnerships with British and American firms, 0:20:04.400 --> 0:20:07.480 just like Korea has partnerships with Japanese firms. The difference 0:20:07.560 --> 0:20:11.520 is the British and American firms explicitly forbade their Indian 0:20:11.560 --> 0:20:15.960 partners in India to sell in export markets because they 0:20:16.000 --> 0:20:18.800 wanted to keep them for themselves. Ah So, now whereas 0:20:18.880 --> 0:20:22.960 Korea is getting a free entry into these deadly competitive 0:20:22.960 --> 0:20:27.000 markets through the good fortune Essentially, it's just good fortune 0:20:27.119 --> 0:20:29.800 of having had Japanese partner Indians. 0:20:29.920 --> 0:20:33.199 There's a fundamentally different DEVI of Japanese in the US partner. 0:20:33.359 --> 0:20:34.680 When the US is the market you're going. 0:20:34.760 --> 0:20:37.119 It's a historical accident. Korea happened to be in the 0:20:37.200 --> 0:20:38.960 Japanese economic sphere of influence. 0:20:39.000 --> 0:20:39.119 Yea. 0:20:39.520 --> 0:20:41.320 Now, I should say one thing, there is this myth 0:20:41.359 --> 0:20:45.000 out there that because of the Cold War, because the 0:20:45.119 --> 0:20:48.720 United States favored Korea and favored it, essentially opened the 0:20:48.760 --> 0:20:51.760 doors to them and allowed them entry into these markets. 0:20:51.800 --> 0:20:55.280 And that's really not true because again, when you're entering 0:20:55.320 --> 0:20:58.680 these markets, you're displacing American firms. Why would American firms 0:20:58.800 --> 0:21:01.680 let their congressmen just open up the doors to their 0:21:01.680 --> 0:21:03.959 competitors and they didn't. What I found when I did 0:21:03.960 --> 0:21:07.119 the research was every time the Koreans succeeded in some 0:21:07.200 --> 0:21:09.439 part of the country, the firms from that part of 0:21:09.440 --> 0:21:12.280 the country got their representatives to put up tariff barriers 0:21:12.760 --> 0:21:15.199 keeping those Korean firms out. What the Koreans did that 0:21:15.280 --> 0:21:18.520 was really amazing was they kept switching from one line 0:21:18.520 --> 0:21:20.840 to the other. So if you're you know, textiles is 0:21:20.840 --> 0:21:24.280 a hierarchical sector, so if they put up barriers on 0:21:24.320 --> 0:21:26.840 the lowest end of textiles, you move up the value chain. 0:21:26.760 --> 0:21:29.280 Into he's swinging from tree to tree. 0:21:29.480 --> 0:21:32.880 Yeah, exactly. So it wasn't the Cold War, It wasn't 0:21:32.920 --> 0:21:36.080 America handing these country free markets. I mean, they would 0:21:36.119 --> 0:21:38.320 have done that with India in the fifties and sixties. 0:21:38.359 --> 0:21:41.080 India was the golden child of American foreign policy because 0:21:41.080 --> 0:21:43.800 they wanted it to be a example against China. They 0:21:43.800 --> 0:21:46.960 couldn't do it. These countries succeeded not because the US 0:21:47.080 --> 0:21:49.320 opened up their markets tomb but because they had the 0:21:49.720 --> 0:21:52.480 wherewithal to get over American tariffs. 0:21:53.000 --> 0:21:55.560 Since you brought up India, I feel I need to 0:21:55.720 --> 0:21:59.600 perhaps preface this question with a caveat, which is everything 0:21:59.640 --> 0:22:03.680