Picking industrial winners

In the UK, industry ministers of all political hues are expected to show their mettle by attesting ‘we are not in the business of picking winners’. This, in a world where market failure is pervasive and where competitor nations show no such scruples in providing direct or indirect industrial support to pursue their goals.

In 2011, I talked on ‘The Costs and Benefits of Industrial Support’ at the OECD. This is an organisation that in a recent working paper had said there was “a well-established consensus that government cannot pick winners”. Coming from the OECD, this assertion is dangerous. It lends credence to people whose scepticism is ideological rather than empirical; I also believe it is wrong.

The key contribution of my presentation is the idea that the public industrial policy problem is a very close relation of the private industrial investment problem. Unless we think all economic outcomes are random and all economic success is luck, we must believe that successful companies possess some ability to pick winners. The question is how they do it and what we can learn from it. I use the Grant for Business Investment (GPI) scheme in England as an example of how governments can successfully engage in selective industrial assistance by applying best practice in analysis and governance from the private sector.

Let’s assume government’s industrial goal is to deliver the highest path of per-capita GDP, constrained by some distributional equity objective; in other words, a high-wage economy. This means building and retaining high value-added activity, and it implies that any government must have preferences across technologies, sectors, and companies. Companies also search for value-added investment opportunities. Companies understand that sustainable competitive advantage is usually associated with the possession of valuable intangibles. Companies also rationally expect a high failure rate because the global economy is fiercely competitive and is characterised by extreme uncertainty. In the same way, past examples of policy failure should not in any way discredit the idea of selective industrial intervention by government.