ZEW President Franz on Industrial Policy

This piece appeared in the September 2004 edition of the ZEWnew

Industrial Policy

France’s interventionist economic policy, together with the merger of the two companies Avenis and Sanofi and the support of Alstom, have brought industrial policy back into the public eye. In particular the question has been raised over to the extent to which other countries ought to continue favouring an industrial structure based on competition when the government of one national economy is pursuing a policy intent on creating “national champions”.

Industrial policy intervenes through a variety of different measures in the allocation of resources between various sectors of the economy or seeks to change the organisational structure within the individual sectors. For example, it uses adjustment assistance and protection measures to support structural changes in individual sectors of the economy, from struggling branches to sectors on the rise. Industrial policy can also alter the competition structure within a particular sector, for example by promoting cartels and mergers. Industrial policy can be justified if a market really is on the verge of failing and government intervention will lead to an actual and considerable improvement in the welfare of the country and will not simply put other national economies at a disadvantage. Sensible industrial policy thus places considerable demands on policy-makers to be well informed of developments in the market and the economic efficiency and efficacy of individual industrial strategies. Viewed in this light, politicians are dispensing with economic justification in the pursuit of personal glory, or in the hopes of glorifying a particular economic policy or appealing to national pride.

Yet the question remains of how to proceed when a country seeks to put itself at an advantage by restricting competition through the reshaping of one sector into something resembling a national monopoly. Should other countries keep their markets open or should they also try to restrict competition? As long as there is evidence of a violation of competition restriction, for example as set out in EU law, the international reaction should consist of keeping markets open on the European level. This is because increasing monopolisation usually leads to welfare losses for all countries involved.

If there is no evidence of a violation or EU rules are not enforceable, the case must be considered carefully. On the one hand, competition restrictions in one country lead not only to that country gaining a potential advantage as a “first mover” but also to the other competition-oriented countries being at a competitive disadvantage, which can have undesirable consequences for areas such as employment. However, these consequences must be weighed against the advantages of keeping the market open for consumers. On the other hand, the alternative for these countries of implementing similar policies to restrict competition could in fact help them to become more competitive. However, this would go hand in hand with losses for consumers in the form of higher prices and less innovative products. There is thus clearly no easy answer. It would be irrational for those countries involved to constantly try to outdo each other in this arena.

A “national champion” is by no means guaranteed to be a financial success; on the contrary, there is plenty of evidence that such companies cost the “national taxpayer” dearly. Regardless, economic policy-makers should refrain from taking any drastic measures, since they are generally no better informed than the actual companies affected. Companies are in the best position to judge the benefits of mergers for themselves. As experience has taught us, this, of course, does not rule out large companies making disastrous strategic errors. But to say that government intervention would have improved such situations would be a pretty bold claim.