Letter IEDI n. 1171—Industrial policy efforts in comparative perspective
Today's Letter IEDI addresses the study “Estimating Chinese Industrial Policy Spending in Comparative Perspective,” recently released by the Center for Strategic & International Studies (CSIS), in which its researchers estimate and compare the amount of spending involved in certain industrial policy instruments in China, South Korea, Taiwan, the United States, Germany, France and also in Brazil.
Although it includes only the quantifiable and comparable instruments, the study—authored by Gerard DiPippo, Matthew Goodman, Scott Kennedy and Ilaria Mazzocco, working in public agencies, such as the U.S. National Intelligence Council, the U.S. National Security Council and the U.S. Department of State, and previously in American universities— highlights the following aspects:
• the distinction of Chinese efforts—in both absolute and relative terms—regarding the development of their industrial and, increasingly, technological skills;
• differences between the countries analyzed in the amounts allocated to various industrial policy instruments, making it possible to define a typology in this regard.
It should be noted that its authors employ a broad definition of industrial policy, which would consist of “any state intervention—whether explicit or implicit—that aims to reallocate resources to support certain firms or sectors to achieve one or more policy objectives.” Nevertheless, interventions classified as horizontal, that is, not specifically directed to the industrial sector, are not analyzed.
The policy instruments considered include subsidies and tax exemptions, public support for research and development (R&D), subsidized credit and state investments and the estimates refer to the period prior to the COVID-19 pandemic—in general, to the year 2019 or the most recent year available. In the Chinese case, there are also specific tools, such as sales of land at below-market prices, liabilities of state-owned companies owed to private suppliers (implicit zero-interest loans from private firms to the SOEs) and debt-equity swaps.
In absolute terms, according to the study, China and the developed countries in the sample are the ones that allocate the most public resources to industrial policy instruments. As a proportion of GDP, those that spend the most on these instruments are precisely the countries that have recently stood out as industrial powers: China and South Korea.
In any case, China stands out in this group of countries. In dollars, in purchasing power parity, US$406.5 billion was spent on the industrial policy instruments analyzed in 2019, which is equivalent to four times the amount spent by the US and almost 11 times the values of France and Germany combined.
In relative terms, the study points out that the magnitude of such instruments in China reached 1.73% of GDP, more than double the second place in the group of selected countries, South Korea, with 0.67% of GDP, and far ahead of the US, with 0.39% of GDP.
As for Brazil, whose data are from 2017, it was the second to last in spending in absolute terms among the countries in the sample: US$10.7 billion (in PPP), ahead only of Taiwan, with US$4.98 billion. Despite this, in relative terms, Taiwan spent 0.41% of its GDP on the instruments considered versus 0.33% in the case of Brazil. We were the country that spent the least as a share of GDP.
There are a few observations here. First, there are policy tools not considered, as pointed out by the study itself, such as subnational spending in the Brazilian case, direct subsidies to privately held companies in the Chinese case, certain tax exemptions in the Japanese case, capital investments in the Korean case (Korea Science & Technology Holdings), etc. It is necessary to see the exercise as an approximation, yet valid, given the difficulty to access detailed information.
Second, the volume of monetary resources spent on industrial policy instruments has no direct relationship with their effectiveness. Policies that are better designed, coordinated or with great synergy with other state actions can be more effective even with fewer resources. In any case, the magnitude of the expenditure signals the government's commitment to the industrial development agenda.
Finally, based on the relative share of spending in each instrument, the authors of the study classified the countries into three groups:
• “R&D First,” characterized by an emphasis on tax incentives and other government support for R&D. It includes, for example, France (0.47% of GDP), South Korea (0.30%), the USA (0.27%) and Taiwan (0.22%).
• "Large Investor," characterized by state capital investments in the industry. This group contains the Asian emerging countries: Taiwan (0.1% of GDP), China (0.07%) and South Korea (0.04%). It is worth noting that China's state-owned investment funds in absolute figures make other countries look as marginal examples.
• “Development Banks,” where public development banks are extensively used. It brings together Japan (0.32% of GDP), Germany (0.18%) and Brazil (0.14%), in addition to China.