Where Swaminathan Aiyer is wrong about the Chinese “Industrial Policy”
Swaminathan Aiyer had recently, in his popular column swaminomics, while commenting on Government of India’s PLI scheme commented that, “India aims to copy China in what economists call “industrial policy”….. As in China, the government will pick sectors with the best potential for job and exports”.
He further goes on to state why this is a bad strategy for India, namely that while China is an autocracy, India is not and thus the above mentioned path is ill suited for Indian conditions.
Honestly, I agree with most of the reasons given by Mr. Aiyer, and while he has been wrong in the past as well in his predictions, who hasn’t? But in this case, he is wrong in one of his basic assumptions. Yes, India should not copy the Chinese ‘industrial policy’ model – simply because they *China* did not have any significant ‘industrial policy’ till very recently!
Wait! Before you stop reading further, let me elaborate on the controversial point I just made.
The idea that there is an ‘East Asian economic model’ based on State led ‘industrial policy’ whereby the State steers the market in a direction which leads to the most development is widely held among scholars. That China also followed the same model, particularly after the Deng era reforms is also agreed upon by many.
In fact, Francis Fukuyama, while making a case against libertarians in his The Origins of Political Order books, also claims that although State led industrial policies have been failures in many countries, they have been a resounding success in China. And he argues that this stems from the effective Chinese State. Basically arguing that libertarians are wrong when they claim that whenever the State tries to steer the economy is a particular direction, it is wasteful and counter-productive. Rather, Fukuyama argues that if the state is effective enough, it can actually enhance prosperity accruing out of the market dynamics.
This myth of the ‘Chinese industrial policy’ however was broken in my mind after I read a short book named The rise of China’s industrial policy by China-expert and specialist in the Chinese economy Barry Naughton.
Barry details the evolution of the Chinese Industrial policy from 1978 upto the Covid-19 pandemic. He begins by defining ‘industrial policy’ clearly. According to him, “Industrial policy is any type of selective, targeted government intervention that attempts to alter the sectoral structure of production toward sectors that are expected to offer better growth than would occur in the market equilibrium”.
Therefore, industrial policy is a ‘vertical intervention’ which seeks to change the sectoral composition of the economy by encouraging certain sectors at the expense of others. On the other hand ‘horizontal interventions’ like investing in physical infrastructure or ramping up facilities for human resources affect all sectors of the economy, and thus can’t be called ‘industrial policy’.
The Chinese State since the onset of the reform era has put in a lot of resources and effort in the latter, but hardly any in the former, atleast till 2007. It is not that the Chinese State suddenly stopped its interventionist tendencies after 1978, old habits die hard! In fact they did try to steer the market away from its ‘irrationality’ and towards ‘development’.
The Government carried out the 6th (1981-85), 7th (1986-90) and 8th (1991-95) five year plans. However, all of them ended in failure. They either overestimated ( Oil production for 1985 was estimated at 250 million metric tonnes, which turned out to be 125 million metric tonnes) or underestimated (the economic output targets set for 2000 were achieved in 1995) the Chinese economy.
As industrial policy after policy started failing, the government either dropped it or it never gained traction. It was clear by 1990s that industrial policies are futile. This realisation climaxed under the premiership of Zhu Rongji (1998-2003) when the State was almost completely ‘taken out of the way’.
Rumblings of industrial policy began again in 2006, but it was not till 2010 that all institutions for their effective implementation were in place. It was only after that that the Chinese Communist Party started encouraging ‘Strategic Emergent Industries’ and after 2015 began with the Innovation Directed Development Strategy. But the fact remains that decades of ‘miracle-growth’ in China was not produced by any industrial policy, but by the lack of it.
Interestingly, it is the ‘Industrial policy era’ that has coincided with the slowing of the Chinese economy. However, Barry Noughton doesn’t ascribe causality in this observation. According to him, It is too early to assess whether the Chinese experiment from 2010 onwards with industrial policy has been a success or a failure.
The ‘miracle growth’ of China was produced not by industrial policies but the simultaneous existence of the following:
- Steady freeing up of various aspects of the Chinese economy
- Massive investment in infrastructure and education
- Thousands of local governments competing with each other to produce more growth.
Seen together, the model resembles 19th century Europe (except the wars) more rather than ‘East Asian state’. Niall Ferguson in his book Civilisation: The West and the Rest, mentions competition amongst States to produce more growth, as one of the ‘Apps of prosperity’ as against the monolithic China in the 19th century.
Accordingly, the Chinese ‘miracle growth’ seems more of a vindication of Classical liberal ideas, rather than a repudiation of them, perhaps, much to the dismay of Fukuyama.
As such, to reiterate, Swaminathan Aiyer is right to the extent of arguing that India should not copy China’s industrial policy. Not just cause they are authoritarian, they are, but also because their growth over the years is due to the absence of a State intervention, and not due to it.
About the Author: Yuvraj is a part time researcher and aspiring public intellectual. He is an avid reader and leans libertarian. His interests include history, economics and philosophy.