Saturday, March 06, 2010

Lessons from McKinsey: new industry promotion

Ever since reading The Power of Productivity, a book I can't recommend enough, I've been a big fan of the McKinsey Global Institute. Funding studies out of their own pockets, McKinsey's hard-headed analysis serves as a welcome antidote to much of the economic idiocy which poisons the public debate. While their conclusions typically support the case for economic freedom, it should be stressed that they have no obvious partisan or ideological axe to grind. Indeed, The Power of Productivity's author William Lewis is a registered Democrat.

I was therefore happy to discover yesterday that McKinsey has released a new report. Entitled How to Compete and Grow: A Sector Guide to Policy, the publication contains a number of economic lessons which our politicians would do well to heed.

In this blog post I will focus on the report's insights regarding government-led efforts to promote particular industries. The report's conclusions are rather timely as the Obama Administration busies itself using the levers of power in order to assist the "clean/green energy" sector, frequently cited by observers such as Thomas Friedman as the next great engine of economic growth.

President Obama's enthusiasm for clean energy technology isn't terribly surprising. Politicians frequently call for various measures to promote industries seen as sexy or innovative. During the 1990s a number of locales fell all over themselves to promote their high-tech credentials, coming up with names such as Silicon Mountain (Colorado Springs) or the Silicon Dominion (Virginia). A visit to the Maryland Department of Business and Economic Development's website, meanwhile, shows that the first industry mentioned is biotechnology.

As McKinsey points out, however, efforts by government to promote particular sectors of the economy tend to meet with rather disappointing results (click text to enlarge):

This is particularly true, McKinsey notes, for industries which are already established and feature heavy competition. With countries such as Spain, Germany and China already making high-profile moves to become clean energy powerhouses and $500 billion committed worldwide to promote cleantech, this sector certainly qualifies.

Using the semiconductor industry as an example, the report points out that even successful examples of government-led efforts to foster the growth of particular sectors have been of dubious value:

Beyond government's doubtful ability to successfully incubate and promote cutting-edge industries, McKinsey raises another superb point in its report -- they tend to be of relatively little consequence in the context of the broader economy. It's a point well-illustrated by this graph:

As the report states:

Thus, even if government were somehow granted the competence to guide new industries to fruition, it wouldn't even matter very much (except providing ribbon-cutting photo ops for politicians).

In my next blog post I will highlight some additional findings from the McKinsey report, explaining where the real jobs are to be found, why lax labor laws are the American worker's best friend and why politicians should be more focused on encouraging the development of retail stores such as Wal-Mart rather than cleantech.

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