Now that Communism has vanished as an economic system and almost vanished as a political system, we can assess how the alternative has fared without stirring up fears in the heart of some people that the dreaded system will be allowed to creep back into the World if we do not lambaste it at every turn. The faint hearted can rest assured that no one is advocating moving anywhere near the slippery slope that will lead to a centrally planned economy.
However, no matter which way we tackle the subject, the discussion will always come back to asking a simple question: Do the advanced industrial economies such as Canada and the United States need an industrial strategy? The free market ideologues say no, there is no need for that under any circumstance. They explain that an industrial strategy will mean the setting up of a centrally planned approach to industry which would violate the free market system and lead to disaster. They give as example the bankruptcy of the centralized economies in the former Soviet Union and its satellites.
At the core of these people's ideology is that the success of an economy depends on the choices that are made for it by one of two entities. One entity is the marketplace which rewards the industries that deliver what the market wants while punishing those that fail to do so. The other entity is the committee of government bureaucrats whose job is to choose winners and losers. Needless to say the ideologues put their faith in the marketplace and scorn the idea of a government involvement in the process.
In my view these people got it almost right but not quite. What they neglect to include in their views are the distortions that always creep into the marketplace, a pernicious problem that never fails to manifest itself in every situation. Because there is this problem, you either leave it to the marketplace to correct the distortions or you intervene just a little to help the economy deal with them. And the moment you do intervene - however little this may be – you set yourself on the road to working up an industrial strategy. But rest assured this will not signify the end of the World.
Of course there are alternatives to intervening just a little in the marketplace. They are to intervene massively or to refrain from intervening at all. To see why neither of these options is desirable, we need to understand how and why a distortion develops in a marketplace driven by the modern phenomenon of Globalization. What we are facing here are two paths to industrialization, the organic path and the artificial path both of which exist at the same time; each of which capable of affecting the other in a measurable way.
When no one was yet industrialized some two centuries ago, those that began the process had no choice but to embark on the organic method of industrialization. Having no model of an industrial product to copy and no production machine to produce it with, these people improvised everything as they moved along not knowing where exactly they will end up.
Beginning from scratch, the pioneers of industry invented, designed and constructed both the products and the machines that make them. As the products evolved so did the machines which then changed the products that required new machines and so on. This is organic growth which is still going on today in the countries that are at the leading edge of science, technology and industry.
The developing countries, on the other hand, know exactly where they are going as they follow the model of those who preceded them. And to get there, they acquire existing machines with which they copy existing goods. When these countries put down a plan to develop and to expand their industrial base, they do not grow by the organic method. Rather, they expand in a well thought out artificial manner leapfrogging their way to the leading edge of science, technology and industry. Once there, however, they will start to grow organically in lockstep with the advanced players because they too will be so advanced that there will be no one for them to copy.
As long as the two Worlds were kept separate economically, the underdeveloped East remained the East, the developed West remained the West and the twain never met. But then Globalization happened and the rules of the game changed because neither the developed World nor the underdeveloped one are now immune from the distortions that the other is imposing on the marketplace.
However capitalistic some developing economies seem to be, they are in reality planned economies by the mere fact that they grow artificially and not organically. Also, they rely on reverse engineering which is less expensive than forward engineering. This gives them a considerable competitive advantage over the developed economies that pay for the forward research and development. This situation defines the distortions that the developing economies introduce into the marketplace and it is why the developed economies must adopt an industrial strategy and counter the effects of these distortions.
What is needed is a minimum intervention that will be proactive rather than reactive. To reach this goal, the developed World, which now includes the newly industrialized countries, must come together with the developing World and discuss a regime of free trade which will encompass the entire Planet. The regime will be made of incentives to encourage everyone to follow the rules, and provisions to protect everyone from the consequences of the distortions. The main points to consider when hammering the rules will be the following.
In theory, if everyone that has a competitive advantage in one thing took full advantage of the thing, there will remain in the long run only a handful of industrialized nations left on the Planet. Since most nations will not allow this to happen, everyone will work to defeat the situation with the known consequences that include trade wars. We must therefore set up a kind of international safety net not for individuals to fall back on but for countries to fall back on.
We begin with the recognition that every country has the right to set priorities for itself. For example, the auto industry is important to countries like the United States, Korea, Spain and so on. Another example would be the cultivation of rice which is important to countries like Japan, Bangladesh and other nations.
Consequently, all countries will have the right to protect a certain number of agricultural and industrial products they consider important to them. They can do so only up to a certain percentage of their local consumption of these products. For example the Americans could say we consume 16 million cars a year and we must absolutely produce 25% of that number for our economy to remain healthy. We shall therefore protect our local auto industry up to that level with all the means we have at our disposal including the leveling of new tariffs on imports, with subsidies and everything else we deem necessary. The Asian countries will do the same with rice and so on.
How many items and what sort of products can be included on the protected list by each country will have to be negotiated in a forum like say, the World Trade Organization. Also the level to which those products will be protected should be negotiated. The 25% level was used here as an example only.
In return for this, the advanced countries will make available to the developing countries leading edge technologies concerning the protection of the environment. And for the countries that are just beginning the process of industrialization there will be massive educational, technical and advisory assistance made available to them. This assistance will be designed to help them catch up with the rest of the World in the shortest period of time.
As everyone develops, each will discover areas where they have a competitive advantage and will concentrate on them. In the meantime, if products are important to them but they lack any sort of advantage in the area, they will fall back on the safety net and protect those products. Thus, with incentives for everyone to take advantage of their strength and a safety net to protect them from being overwhelmed where they are weak, no one will try to defeat the system or cause chaos.
In conclusion I ask the question again: Do industrial countries such as Canada or the United States need an industrial strategy? And the answer is yes. But we must be mindful that the strategy can exist only to remedy the distortions of the marketplace, made more acute by the phenomenon of Globalization in a World that has not yet been evened out between the developed economies and those on their way there.