Japanese industrial policy is not a good model for America

In many of the world’s capitals, industrial policy is back in fashion. That doesn’t mean it’s a good idea. In the 1990s, policymakers in Japan abandoned industrial policy because such policies were unsuccessful; the public finances needed for such a policy eroded and international relations worked against it. However, the emergence of China — and Japan’s declining semiconductor sector — has changed that, and industrial policy has gained renewed interest in Japan, the United States and elsewhere.

In a recent report for the National Foundation for American Policy, I analyzed economic data from the “golden age” of industrial policy in Japan (1955 to 1990), and found no evidence supporting the notion that industrial policies raised productivity growth among the more rapidly growing or technologically advanced sectors of the Japanese economy, including autos and electrical machinery. The data show that a disproportionate amount of government efforts actually went to slow growth or declining industries with political support. This should not be surprising, given the nature of the political process.

What is surprising is that policymakers seem not to have learned from the Japanese experience.

While various measures might be used by governments to promote some industrial sectors relative to others, the key (and quantifiable) measures of industrial policy used by the Japanese government during the 1955-1990 period included subsidized government loans to industry, direct subsidies, tariff protection and tax relief. In a 1996 paper with David Weinstein, we found these policies were negatively correlated with industrial growth rates.

Most policymakers want to use industrial policy to enhance “competitiveness.” Economists look at the concept of competitiveness by using the analogy of a foot race. If we had two identical firms and allowed them to use the same resource inputs over some period of time, one firm would undoubtedly come out ahead in the “race.” The firm would do this by squeezing more out of the same inputs over the period by using its resources more effectively to obtain higher productivity growth. For that reason, economists typically use measures of productivity growth in order to measure “competitiveness.”

The problem is that various industrial policy tools tried by Japan had no positive and significant impact on productivity growth (“competitiveness”) when measuring different time periods from 1955 to 1990. Overall, Japanese industrial policy did not enhance competitiveness of key sectors during the period. The only exception was for Japanese Development Bank loans, though the impact on productivity growth was small and relegated to mining, which was a declining and economically insignificant sector of the Japanese economy.

In sum, there is no evidence to support the claim that Japanese industrial policy during the 1955-1990 period enhanced growth by sector, industries with scale economies, nor productivity growth or “competitiveness.” The reality of the political process and government spending priorities makes it very difficult for such policies to be effective. Furthermore, even if political pressures had not intervened, it seems to be a questionable argument to suggest that government policymakers would do better than market participants in allocating resources and producing superior economic outcomes.

Challenges from China, Japan’s declining semiconductor sector and pressures in the United States have once again put industrial policy on the map. That renewed interest does not change the historical economic record: Industrial policy in Japan was not successful and was not responsible for the country’s economic success in the post-war period to the 1990s, or the international performance of leading sectors at the time.

Richard Beason is Professor of Business Economics and International Business in the Alberta School of Business, University of Alberta, Canada, and the co-author of “The Japan That Never Was: Explaining the Rise and Decline of a Misunderstood Country.”