Index > Research
Sunday, May 06, 2018
"Three Systems" Guarantee Industrial Policy Success

Industrial policy is a common feature of semi-developed countries. Developed countries and complete market economies usually do not need to rely on industrial policies, and even when they do have industrial policies, those policies differ from those of semi-developed countries as the former focus on the construction of market systems rather than on concrete industrial organization and enterprises. As for underdeveloped countries, industrial policy is not very useful because of weak economic foundations and imperfect industrial systems. Therefore, semi-developed countries like China are typical representatives, in which industrial policy is implemented.

During the Japanese economic takeoff, industrial policy was performing very well. In fact, the industrial policies implemented by Japan's Ministry of Economy, Trade and Industry (METI) have commonly been regarded as the main driving force behind Japan's post-war economic growth. This view has been reaffirmed by those from typical market economies like the United States. For example, Chalmers Johnson of the Japan Policy Research Institute (JPRI) at the University of California, San Diego sang the praises of METI and the usefulness of industrial policy after an in-depth study of METI. However, is industrial policy also a kind of competition policy? This is an extremely crucial question, for in its trade dispute with China, the USA considered China's industrial policy to be essentially a form of competition policy. Consequently, the USA government repeatedly pressured China to change its industrial policy. Professor Tatsuo Hatta, the former president of the National Graduate Institute for Policy Studies (GRIPS) in Japan, does not agree that industrial policy was the key reason for Japan's economic success. In his opinion, competition policy, not industrial policy, was the reason for Japan's speedy post-war economic growth. According to him, the role of industrial policy is more specific in the sense that it is industry-oriented and guides the industry. In the essay 'Competition policy vs. industrial policy as a growth strategy', Hatta points out that Japanese authorities started to become fascinated by industrial policy in the early 1970s, and this led to Japan's slow economic growth in the 80s. The scholars at Anbound Think Tank have also posed this question to an economist at a large financial institution in Japan. This economist is also of the opinion that Japan's success was not motivated by industrial policy, rather, it was a result of the competition within the market economy.

The discussion on the role and function of industrial policy also has phenomenological significance within China's theoretical community and policy practice. As a self-proclaimed 'socialist market economy', China's journey in the 40 years since its reform and opening-up, as well as its long-term achievements in economic growth, are undeniably great examples of economic practice at both the domestic and international level. While discussing China at the 2018 Berkshire Hathaway Annual Shareholders Meeting, US investment guru Warren Buffett said: 'what they've done in the past 50 or 60 years is a total economic miracle. I never would've thought it could've happened.' Several Chinese theorists are of the opinion that the economic success achieved by socialist China is sufficient to form some sort of 'Chinese model' that features the function of industrial policy.

Even in China, there is significant controversy with regard to the function of industrial policy. Take for example the 2016 debate on industrial policy between two Professors Justin Lin Yifu and Zhang Weiying from Peking University, which was very much in the public eye for some time. Lin believes a country with industrial policy should not only place emphasis on the market but also the function of the 'facilitating state'. In his opinion, good industrial policy can increase a country's economic growth. On the contrary, Zhang Weiying sees that industrial policy is a form of selective intervention and discriminatory policy carried out by the government, either for economic development or other reasons, on the production of private goods. Furthermore, he thinks that industrial policy has replaced the targets that were put forward during the planning of the economy, and industrial policy is no more than a different form of planned economy that reflects the government's intervention in economic life and the allocation of resources.

Moreover, Professor Lin also disagrees with Hatta's views. Lin is of the opinion that competition policy and industrial policy are deal with different dimensions of the economy. The former is implemented by the government for the protection and promotion of market competition, while the latter is employed for the purposes of promoting the development of a specific industry. If monopolization and administrative control often impede market competition in a country, it must utilize competition policy that aims to combat anti-competition and promote deregulation. In the process of economic development, industrial upgrading and the emergence of new industries will also require the government's assistance in the form of targeted policies, i.e., industrial policy, to overcome market failure obstacles that resulted from erstwhile externality as well as a lack of appropriate hard and soft infrastructure.

So, how exactly, in reality, should we comprehend the function of industrial policy in China's economy?

Firstly, industrial policy and competition policy actually differ in terms of their content, priorities, and goals. Secondly, we must not generalize when talk about the industry. Industrial policy is a field relatively independent. It also performs different functions at different stages of socioeconomic development. In the status of semi-developed countries, industrial policy can play a very good role. For developed countries and perfect market economies, where industrial sectors are complete, industrial policy is basically equivalent to competition policy.

Anbound Think Tank's chief researcher Chan Kung points out that the functions of industrial policy cannot be generalized; if two views that are too extreme contain biases. And finally, industrial policy can by no means be dealt with as a concrete and integrated entity.

Taking into account the collective experiences of industrial development of countries all around the world, Chan Kung believes that an objective analysis of industrial development and its corresponding effects on the market can be carried out by classifying industrial policy into three different types, namely, "non-system," "minor system," and "major system," according to the definition of the "scale and level of society's participation in the system." 'Non-system' refers to products that are produced on a small scale and have few participants. For example, in a production process like that of harvesting some bamboo to make a basket, industrial policy probably does not have any impact. 'Minor system' products involve a more extensive system and the systemic nature of the products is more obvious. As long as the system is organized effectively, the impact of industrial policy will be very prominent, such cases as rocket launching and high-speed rails. As for 'major system' products, such as automobiles and mobile phones, it will be completely futile to rely solely on industrial policy and 'national models'; yet, the environment of the social system, i.e., the entire market, must be utilized as well in order for it to succeed. If lot resources on industrial policy are invested in this regard, then industrial policy will turn into competition policy.

To put it simply, between these "three systems", industrial policy is highly unworkable at the two extremes and will even bring problems if implemented forcefully. However, for the systematic products in the middle, industrial policy could have a very beneficial impact especially in terms of overcoming the shortcomings in the system. Chan Kung noted this is an extremely fundamental framework in the study of industrial policy.

From a practical point of view, this classification of industrial policies into "non-," "minor," and "major" systems does indeed have practical significance.

As a consequence of the model of "using the nation's power to achieve great things," the example of China's successes, such as the "Two Bombs, One Satellite" program as well as the world-renowned high-speed rail, has convinced many people that industrial policy makes a practical significance in China and can be expanded. What's more, everything could be done, on base of this "national model" highly effective. In reality, sadly, this is impossible. Although rockets and rails are systemic products, in terms of scale systems and the market participation in the industrial sectors, relatively speaking, they are still "minor system" products. C919 super-jet that China is currently developing, despite having the word "super" on its name, is still considered a "minor systems" product with low market participation among the national industrial sectors. This means incentives from industrial policy aiming at developing the large aircraft manufacturing industry will be effective; this can truly be achieved by using the "national model".

Likewise, according to the "three systems" theoretical framework, we can see that the chip manufacturing industry, which became exceedingly animated as a result of the China-US trade war and the ZTE incident, belongs to the "major system" category, in which the use of industrial policy incentives alone does not work. On the surface, it seems like the chip manufacturing industry is very centralized, there are only those few assembly plants, but in fact this is not the case. The chip manufacturing industry has an extensive scope; there are software systems, optical systems, as well as wide-ranging semiconductor design. Moreover, the chip manufacturing industry has many participants from the industrial sectors; there are uncountable types of chips used in a wide range of things and sectors, from children's toys and mobile phones to aerospace engineering. This industry is thus a large-scale system with a high level of participation from both society as well as the industrial sector. It is very challenging for industrial policy to have much impact on such "major system" products; it is more essential to mobilize the forces of market at large in this case.

Therefore, it is necessary conduct a deeper level of scientific research and discussion on the function of industrial policy as a state incentive. Chan Kung proposed that only by first clarifying the three types of "systems" discussed here and subsequently defining industrial policy, we could cut down on resources that are put on the market, and allow industrial policy to be even more effective so that the country's precious resources will not be wasted.

Furthermore, when Chan Kung was explaining the three types of product "systems," Chan Kung also emphatically pointed out that these three types of "systems" are not static. By the maturity of industrial development and the improvement in the level of technology, these product systems would also undergo dynamic developments and changes. For example, "minor system" products might gradually become "major system" products, should the government invest in them. In fact, this is an example of effective industrial policy in action. The current launching of the space rocket demonstrates such a trend. During the era of the implementation of Project Apollo in the USA, the manufacturing and launching of rockets by private enterprises was unimaginable, but now Elon Musk's company is already able to manufacture rockets, and private enterprises in China and Russia are doing the same. In this way then, "minor system" products have become "major system" products.

A similar line of reasoning is also applicable to civil-military integration. The military industry in China was previously undertaken within the military system, a typical example of a "minor system" product. Civil-military integration is the inevitable course this industry going to the future, based on the "three systems" theoretical model. The "minor system" product will become a "major system" product when civil-military integration attracts large-scale participation from society. This is equivalent to withdrawing the industrial policy from the military field, permitting the "minor system" product to integrate with larger market forces, and them evolve into a "major system" product.

All in all, the research on and discussion of industrial policy in the field of economics is actually still in the preliminary stages. There is a lack of deconstructive research on industrial policy, and this is caused it to be called into question to the extent that it has disrupted the conducting of international trade. The actual role of industrial policy cannot be generalized, for its functions are related to the systemic nature of the industry. Industrial policy plays little in "non-system" or a minimal role for "major system" products, but for "minor system" products, it has a significant impact. Finally, the systemic properties of various industries could be changed dynamically, and "minor system" products might also turn into "major system" products.

Contact ANBOUND Malaysia Office at :  Suite 25.5, Level 25, Menara AIA Sentral, 30 Jalan Sultan Ismail, 50250 Kuala Lumpur

TEL : +60 3-21413678       Email : ;