Industrial policy is back — except in Ontario

Industrial policy — government interventions to grow and improve the competitiveness of select industries — is back in fashion, according to a new paper by John M. Curtis and Dan Ciuriak published by the Institute for Research on Public Policy (IRPP).
In fact, industrial policies never really went out of style, except in the Anglo-American democracies. For the past three decades governments in the Anglosphere — regardless of the party in power — have shied away from industrial policies and embraced the notion that state interventions to promote specific economic sectors usually do more harm than good. This is allegedly because governments don’t have the necessary information to “pick winners.” The market, according to this view, is always far superior at allocating resources than any government ever could be.
Under this paradigm, the best thing governments can do to promote investment, industrial development and economic growth is to get the so-called economic fundamentals right and let the market — that supreme and venerable vehicle for the efficient allocation of resources — take care of the rest. In practice, the prescription calls for low taxes on capital and income, balanced budgets, low debt, low and stable inflation and a light regulatory touch. These are the necessary ingredients that will permit the market to work its magic on the economy.
Governments in this country have by and large bought into this mainstream view for over two decades, and have implemented this policy agenda, to varying degrees. Successive governments in Ottawa, for example, have rarely missed an opportunity to brag that Canada has the best economic fundamentals in the G8.
In the context of this conventional wisdom, the industrial policy light has barely flickered in this country.
But now, according to Curtis and Ciuriak, industrial policy is resurging, even in the more skeptical Anglo-American countries. They argue this is due to the global financial crisis/recession, and the slow and uneven economic growth that has followed. Governments are increasingly looking for some way — any way — to get growth back onto a decent trajectory, and in particular to regenerate manufacturing industries that were hit very hard during the recession.
This marks a big shift in attitude. For decades, governments in this country wouldn’t utter the phrase industrial policy for fear of being labelled economically illiterate by the high priests of mainstream economics and their apostles in the business media. Today, however, the competency of the economics profession is in serious question given its role in creating the intellectual foundations for the policies that brought on the global banking crisis of 2008-09 and the worst recession many countries have experienced in 80 years. Not to mention the fact that mainstream economics’ remedies to the crisis have produced scant growth in most countries thus far.
We might now, therefore, be on the cusp of a new economic policy paradigm. As Curtis and Ciuriak claim, it is those countries with robust industrial policies — especially in Asia and other emerging markets — that have seen superior growth performance post-recession. Those are the kind of facts — as opposed to theory — that tend to catch the attention of governments struggling for an economic narrative to put to citizens in a slow-growth and relatively high-unemployment context.
Canada is no exception. The Harper government, on paper the most free market administration in living memory, is adopting a more industrial policy-friendly mindset. There is evidence of this in policies to promote extractive industries, but also with significant new initiatives in the aerospace and defence sectors, both of which are well-known candidates for industrial strategies in almost all advanced countries. The relatively new Federal Economic Development Agency for Ontario is also to a degree an industrial policy instrument.
Curiously, though, the one government in Canada that you would expect to be embracing industrial policy seems lukewarm to it. Ontario has experienced the most alarming economic transformation of any Canadian province in recent years. Its manufacturing sector lost 255,000 jobs over the last decade. The province’s share of Canadian GDP fell from 41 per cent to 37 per cent over that same time period. For three years now, Ontario, traditionally the milch cow of Confederation due to its powerhouse industrial economy, has been officially a “have not” province, receiving billions of dollars in equalization payments from Ottawa annually.
Yet we seem to see more enthusiasm for industrial policy in blue Ottawa than in red Queen’s Park, which still emphasizes deficit reduction as the key to Ontario’s economic prosperity. While the Wynne government is pursing an aggressive transit agenda, it seems less enthusiastic than its predecessor in developing “green” manufacturing to offset some of the decline in the auto industry, and shows little interest in policies aimed at other sectors that offer promising growth opportunities.
Now is probably the time for the Ontario government to embrace the industrial policy paradigm and advance an economic agenda for the province that works in practice but maybe not so well in theory.

#Budget2013 – Market intervention, conservative style

The reviews of Budget 2013 are in.  It is a big yawn.   A nothing Budget, a one- day wonder in terms of press interest, most of the new measures in it having been leaked beforehand.
This misses a core point.  Budget 2013 is remarkable for one thing—the Conservative government has embraced a degree of market intervention we have not seen before.
Conservative commentators like Andrew Coyne, the Canadian Taxpayers Federation, the Fraser Institute and the National Citizens Coalition have lamented for years that the Harper government has strayed from conservative principles because it has been big spending and state expanding.  The Harper government’s fiscal record, say these critics, is anathema to conservative principles and history.  The critics are of course wrong.  Big spending has been the hallmark of every national level conservative government in North America for going on thirty five years.  Ronald Regan, George Bush 1 and 2 and Brian Mulroney delivered to their electorate massive deficits, ballooning national debts, and major expansions in the size of the state.  If you believe the critics that the Harper government has been big spending and has expanded the size of the state you can be secure in the knowledge that this sits squarely within mainstream North American conservative governance history.
What is new for conservative governments in this country, however, and what runs afoul of three centuries of conservative orthodoxy—all the way back to Adam Smith–is micro economic market intervention, what is sometimes pejoratively referred to as “picking winners” or “industrial policy”.  Too its credit, the Harper government’s 2013 Budget shows a willingness to depart from the conservative orthodoxy that the free, unfettered market always delivers the superior economic outcome.  Fortunately, this orientation sits squarely in the wheel house of most governments, regardless of political stripe, in most advanced industrial countries.
The 2013 Budget, then, gives us a glimpse of a government that is acting much less like a tribe that subscribes to the theology of Milton Friedman and Frederick Hayek, and much more like a government that wants to experiment with ideas that actually work.  In this connection, Budget 2013 contains three welcome market interventionist initiatives of note.
The first relates to the well-known problems of the Canadian labour market, specifically the skills mismatch that exists across the country, in which many employers cannot find workers with the requisite skills to fill jobs.  Five years ago, the Conservatives introduced Labour Market Agreements (LMAs), whereby Ottawa transferred, with no strings attached, $500 million per year to the provinces to improve labour market outcomes in their jurisdictions.  Half a decade of this hands- -off approach has evidently left the feds underwhelmed, as the skills mismatch has intensified.  As a result, going forward, Ottawa will play a more active role in labour markets through the creation of a new Canada Jobs Grant—funded out of the LMA envelope—a $5,000 grant to individuals to be matched by employers and provinces to help ensure workers get the training they need to fill the jobs the labour market is offering.  The free market and the provinces will no longer be left to their own devices in resolving Canada’s skills mismatch.  Ottawa is coming to the rescue.
The second welcome market intervention contained in the 2013 Budget is the response to the panel headed by David Emerson, former Minister of Industry and Trade, mandated to review Canada’s aerospace policies and programs.
It is a truism that the global aerospace industry is dominated by government interventions of various types.  Governments the world over have concluded that aerospace is an industry worth having and worth spending taxpayers money on because of the relatively unique positive spillovers that accrue to the economy as a whole from this sector.  Subsidizing aerospace is even supported by a body of serious economic theory—so-called strategic trade theory—that Nobel prize winning economist Paul Krugman pioneered thirty odd years ago.
To its credit, the Harper government seems to have been persuaded that a new, yet modest, market intervention in the Canadian aerospace sector is warranted.  Hence, Budget 2013 has committed to establish an Aerospace Technology Demonstration Program, with funding of $110 million over four years.  This program will help Canadian aerospace firms bridge the financing gap for large scale technology demonstration projects, which if left un-bridged can cost business opportunities.  This is a relatively low-cost and welcome market intervention that could make a big difference for the competitiveness of Canadian aerospace firms in the global marketplace.
Finally, after decades of neglect from both Conservative and Liberal governments alike, Budget 2013 is embracing the notion that Canada needs some kind of defence sector industrial policy.  This follows on the heels of the recent report led by Tom Jenkins, CEO of Opentext, which basically called for Ottawa to put in place, on an urgent basis, a number of measures that cumulatively amount to a Canadian defence industrial strategy.
Market intervention in the defence sector is of course also contrary to free market orthodoxy.  Yet governments the world over have recognized at least since the Second World War that this industry operates in a managed market, where governments are the main, and sometimes only, customers.  And for a variety of complex national security, economic and sovereignty related reasons, most governments around the world have chosen to put in place various types of market interventions to support domestic defence suppliers.  Canada has been a weird and almost inexplicable outlier in this respect.  Budget 2013 fixes our outlier status with its commitment to implement the Jenkins panel report and establish a Canadian defence industrial policy.
This, then, is why Budget 2013 matters.  Like all budgets, you can criticize it on many levels.  But the idea that it is a pretty meaningless document misses a core feature of it.  Budget 2013 signals an important shift—a maturing if you will– in the Harper’s government’s approach to economic policy, from one largely bound by free market orthodoxy to one that is more interested in policies that work in practice, but maybe less so in theory.