You don’t have to follow me for long on Twitter to realise I rate the Economist, and also have an interest in industrial strategy, so this week’s special section hammering it is essential reading for me. It is worth summarising and keeping it to hand – because for an industrial strategy to be any good, it cannot just ignore these sorts of criticisms. The author has done his research. I find this well worth re-reading.
Personally, I think there are a fair few straw men in here, but the case for such a piece is strong: Bidenomics comprises a pretty vast field of action, and the backlash against free-trade that most people date to the fateful year of 2016 is showing no signs of abating. And The Economist was created to fight that very fight.
What are the arguments? Here, at a rush:
Globalisation has helped to create huge numbers of winners. This is certainly true and there are clear signs (shameless plug for previous blog) that it slowing down has contributed to slowing gains in prosperity, right here in the UK.
The combination of the financial crisis, geopolitical shocks, energy price rises and generative AI has created the pretext to go after the assumed downsides of globalisation. As description I think this is broadly fair, though I think events like the tsunami of 2011 also contributed to a sense that we had undervalued resilience, and the naivety of policy makers towards China back then seems truly odd in retrospect. (Let alone towards Russia).
Money “is sloshing around in huge quantities“. I find this, in fiscal terms, is often exaggerated (see “Birth a Lion”). Even if Labour reaches the full £28bn, it will be around 1% of GDP, and in truth it is going to be just “a slightly higher capital budget”. The UK needs more investment, and the erosion of two or three tax breaks would fund it halfway. The big learning from the OECD “Quantifying Industrial Strategies” work, for me, is that the UK has casually given away giant amounts in breaks like the Employment Allowance without any supporting analysis at all. Industrial strategy is definitely affordable, the question (which the Economist poses so well) is: is it effective, wise, good at achieving its objectives?
People are overstating how much neo-liberal economics has failed, and overconfident about how easily they can tear free from China – and storing up trouble, because the invisible losers from bad policy will eventually learn about it. I have a lot of sympathy for this, though I do wonder at the end-of-history flavour of assuming the model that worked for 1998 is forever the right one. “Permanent West Wing World” is my mental bookmark.
I think the accusation that it is really hard to make supply chains resilient is one of the strongest (in this section). Ever since reading about how hard it is to make a pencil I have wondered at how much magic takes place in the market that we just don’t see (see the classic 1958 essay). Also read Ed Conway’s book to see how staggeringly complex the silicon supply chain is. We maybe exaggerate how badly supply chains broke during the quite extraordinary shock of Covid. It is right to point out that separating from China can only be partial and will certainly be costly.
So, as they argue in the next section, there is a real risk of the worst of both worlds: less efficiency means we are poorer, but no more resilient. Bad policy can do that! But the case for the current phase of industrial policy being bad is cloudy. The piece passes rather quickly over examples of failed interventions, like Sematech, and successes like DARPA and South Korea, before a literature review that one can only call inconclusive. I simply cannot chose which of the papers should be given the final word on this. But the author is right to warn against the Nelson-eyed approach people often take to this topic: looking simply at the industry being helped, and not the productivity of the whole country. And we should be constantly aware of failures, like the difficulty that America has had trying to get TSMC to set up on its shores. Even where they succeed, the ongoing cost of subsidies needs to be considered very carefully.
But ultimately, given how halting, new and in my view small the efforts have been so far, I think the word “inconclusive” is the best verdict we can make at this stage.
Causes of the longstanding fall in productivity growth since the mid 2000s will keep economists arguing for years and years. Unlike what I think is the gist of this piece, I see much more to be blamed on the financial crisis, demand weakness and a certain structural inevitability than the West suddenly rushing towards industrial strategy. And I know plenty of people who draw the opposite conclusion, that too long a period mired in neoliberal, low-investment policy world is finally bearing its rotten fruit.
This brings me to a possible incoherence in the overall argument, made clearer in the next section. The author, persuasively, argues that the jobs impact of China’s entry into global trading networks is exaggerated, and at 2m out of 130m in the case of the US is easily absorbed. OECD employment rates are near record highs. So neoliberalism is unfairly tarnished. OK – so is the assumption that neoliberalism has been in charge, or resurgent industrial strategy? It feels like it was the latter when the issue was declining productivity growth, but the former when it is robust employment. Ultimately, it is hard to disagree that the most important structural fact is the continuing decline in manufacturing, virtually inevitable given its productivity growth and a relative shift away from physical product (I would also throw in energy costs).
Another really important criticism is that “Green Protectionism” will undermine the cause it is meant to further. While I don’t think the author pushes the mega-naive argument that all we need is a high carbon price and the market will do the rest, he worries that efforts to divert business from overseas suppliers will undermine attempts to reach economies of scale and raise global costs, citing valuable ECB research. He also worries that starting NEW industries will slow the transition. In short: quicker to trade with the existing lowest cost provider than try to learn-by-doing.
But even here I think The Economist realises it has to pull its punches. Climate policy, away from a political podium, is a second-best world. Political opportunities have to be seized when they can be. Highly visible winners must be created to prevent the inevitable losers stopping difficult, expensive investments from even getting started. So much needs to be done, and so much of it is inherently local (can the UK buy off the shelf a whole new transmission grid?) that trade alone feels like an inadequate answer to targets that quite rightly have a very hard date on them. In fact, I think the Economist puts it very well:
Any plan to free an economy from fossil-fuel dependence will create losers. To succeed politically, it must therefore mobilise groups of winners more powerful and passionate than those losers. Millions more people working in clean energy could mean millions more people with an economic incentive to resist attempts by fossil-fuel interests to roll back the clock.
As I see it, the Green Transition is the ultimate example of a kind of wicked policy dilemma that cannot be solved without vigorous intervention. The natural economic incentive to free-ride is very strong – you hear it from recent Conservative policy announcements – and the investments are very, very long term. I just cannot accept the case against, and am not sure The Economist can make it.
The last chapter, warning against promises from Governments to prevent future instability, is perfectly sound. Even during the heyday of industrial strategy that was not achievable. The 1970s and 1930s were faily tumultuous, I do believe. But I think you don’t have to believe – as the Economist accuses its antagonists of thinking – that globalisation of the 1990s and 2000s ‘failed’ for there to be a call for new policies now. I loved those decades but don’t think that the circumstances they existed in can be bottled up and re-released today. It is a huge challenge that productivity has stuttered since the gigantic event of the financial crisis, and some of this may be put down to a misconceived retreat from globalisation, but surely not most of it.* The facts on the ground have changed, the challenge posed by Net Zero and a newly hostile world is real, and – I hate to face this – perhaps some of the benefits of globalisation had a natural end-limit. How much cheaper could clothes and food get?
Ultimately, of all the sayings I find myself repeating on this topic, the one that I keep returning to most of all is this: both the advocates and critics of industrial strategy tend to grossly exaggerate their case. Its advocates can over-promise, and its critics often pretend that a policy often focused on just 5-10% of the economy is responsible for damage to 100% of it. We can re-introduce elements of industrial strategy without becoming anti-trade. Small countries like the UK will have no choice but to take that approach. Calm down everyone.
*and the only point at which the piece is rather too glib is when it attempts to ‘solve’ this problem with “Productivity growth in the rich world is weak. And yet the fault lies not with globalisation per se, but elsewhere: badly designed welfare states, a lack of retraining, and restrictive planning systems which prevent the construction of new housing or commercial space.”. Can we not all agree to avoid simple diagnoses here?
Freethinking Economist 
I agree with every factor that you have pointed out. Thank you for sharing your beautiful thoughts on this.