Leviathan Inc

The Economist, which devotes the cover story of its current issue to the return of industrial policy, provides a useful reminder that it is the private sector initiatives and not government attempts to pick winners and losers which foster economic growth:

The overwhelming reason for China’s miracle is that the state released its stifling grip and opened the country to private enterprise and to the world. The likes of Li Shufu, who runs Geely, the car firm that has just bought Volvo, are entrepreneurs, not bureaucrats. India’s wildly successful software and business-process-outsourcing industries blossomed not because of help from the government, but precisely because its Licence Raj did not understand these nascent fields well enough to choke them off.

In Brazil, where it is often said that an activist industrial policy helps to explain why the economy has been thriving, a surging state-owned development bank, BNDES, is probably crowding out other sources of finance. The likes of Petrobras (oil), Vale (mining) and Embraer (planes) were indeed created by the government. But they have all flourished because they were privatised, to a degree, and forced to compete with foreign firms in the 1990s. Part-privatisation and competition created in a short time what decades of industrial policy had failed to do.

In the rich world, meanwhile, the record shows, again and again, that industrial policy doesn’t work. The hall of infamy is filled with costly failures like Minitel (a dead-end French national communications network long since overtaken by the internet) and British Leyland (a nationalised car company). However many new justifications are invented for the government to pick winners, and coddle losers, it will remain a bad old idea. Thanks to globalisation and the rise of the information economy, new ideas move to market faster than ever before.

No bureaucrat could have predicted the success of Nestlé’s Nespresso coffee-capsule system—just as none foresaw that utility vehicles, vacuum cleaners and tufted carpets (to cite examples noted by Charles Schultze, an American opponent of state planning) would have been some of America’s fastest-growing industries in the 1970s. Officials ignore the potential for innovation in consumer products or services and get seduced by the hype of voguish high-tech sectors.

The universal race to create green jobs is the latest example. Led by China and America, support for green tech is rapidly becoming one of the biggest industrial-policy efforts ever. Spain, blinded by visions of a solar future, subsidised the industry so lavishly that in 2008 the country accounted for two-fifths of the world’s new solar-power installations by wattage. This week it slashed its subsidies, but still has a bill of billions.

Hopefully someone in the White House picked up a copy of the issue.