If governments can and do pick winners with such regularity, sometimes with spectacular results, you may wonder whether there is something wrong with the dominant economic theory that says that it cannot be done. Yes, I would say that there are many things wrong with the theory.
First of all, the theory implicitly assumes that those who are closest to the situation will have the best information and thus make the best decision. This may sound plausible but, if proximity to the situation guaranteed a better decision, no business would ever make a wrong decision. Sometimes being too close to the situation can actually make it more, rather than less, difficult to see the situation objectively. This is why there are so many business decisions that the decision-makers themselves believe to be works of genius that others view with scepticism, if not downright contempt. For example, in 2000, AOL, the internet company, acquired Time Warner media group. Despite the deep scepticism of many outsiders, Steve Case, AOL’s then chairman, called it a ‘historic merger’ that would transform ‘the landscape of media and the internet’. Subsequently the merger turned out to be a spectacular failure, prompting Jerry Levin, the Time Warner chief at the time of the merger, to admit in January 2010 that it was ‘the worst deal of the century’.
Of course, by saying that we cannot necessarily assume a government’s decision concerning a firm will be worse than a decision by the firm itself, I am not denying the importance of having good information. However, insofar as such information is needed for its industrial policy, the government can make sure that it has such information. And indeed, the governments that have been more successful at picking winners tend to have more effective channels of information exchange with the business sector.
One obvious way for a government to ensure that it has good business information is to set up an SOE and run the business itself. Countries such as Singapore, France, Austria, Norway and Finland relied heavily on this solution. Second, a government can legally require that firms in industries that receive state support regularly report on some key aspects of their businesses. The Korean government did this very thoroughly in the 1970s, when it was providing a lot of financial support for several new industries, such as shipbuilding, steel and electronics. Yet another method is to rely on informal networks between government officials and business elites so that the officials develop a good understanding of business situations, although an exclusive reliance on this channel can lead to excessive ‘clubbiness’ or downright corruption. The French policy network, built around the graduates of ENA (Ecole Nationale d’Administration), is the most famous example of this, showing both its positive and negative sides. Somewhere in between the two extremes of legal requirement and personal networks, the Japanese have developed the ‘deliberation councils’, where government officials and business leaders regularly exchange information through formal channels, in the presence of third-party observers from academia and the media.
Moreover, dominant economic theory fails to recognize that there could be a clash between business interests and national interests. Even though businessmen may generally (but not necessarily, as I argued above) know their own affairs better than government officials and therefore be able to make decisions that best serve their companies’ interests, there is no guarantee that their decisions are going to be good for the national economy. So, for example, when it wanted to enter the textile industry in the 1960s, the managers of LG were doing the right thing for their company, but in pushing them to enter the electric cable industry, which enabled LG to become an electronics company, the Korean government was serving Korea’s national interest – and LG’s interest in the long run – better. In other words, the government picking winners may hurt some business interests but it may produce a better outcome from a social point of view (
So far, I have listed many successful examples of government picking winners and explained why the free-market theory that denies the very possibility of government picking winners is full of holes.
By doing this, I am not trying to blind you to cases of government failure. I have already mentioned the series of castles in the desert built in many developing countries in the 1960s and 70s, including Indonesia’s aircraft industry. However, it is more than that. Government attempts to pick winners have failed even in countries that are famous for being good at it, such as Japan, France or Korea. I’ve already mentioned the French government’s ill- fated foray into Concorde. In the 1960s, the Japanese government tried in vain to arrange a takeover of Honda, which it considered to be too small and weak, by Nissan, but it later turned out that Honda was a much more successful firm than Nissan. The Korean government tried to promote the aluminium-smelting industry in the late 1970s, only to see the industry whacked by a massive increase in energy prices, which account for a particularly high proportion of aluminium production costs. And they are just the most prominent examples.
However, in the same way that the success stories do not allow us to support governments picking winners under all circumstances, the failures, however many there are, do not invalidate all government attempts to pick winners.
When you think about it, it is natural that governments fail in picking winners. It is in the very nature of risk-taking entrepreneurial decisions in this uncertain world that they often fail. After all, private sector firms try to pick winners all the time, by betting on uncertain technologies and entering activities that others think are hopeless, and often fail. Indeed, in exactly the same way that even those governments that have the best track records at picking winners do not pick winners all the time, even the most successful firms do not make the right decisions all the time – just think about Microsoft’s disastrous Windows Vista operating system (with which I am very unhappily writing this book) and Nokia’s embarrassing failure with the N-Gage phone/ game console.
The question is not then whether governments can pick winners, as they obviously can, but how to improve their ‘batting average’. And contrary to popular perception, governmental batting averages can be quite dramatically improved, if there is sufficient political will. The countries that are frequently associated with success in picking winners prove the point. The Taiwanese miracle was engineered by the Nationalist Party government, which had been a byword for corruption and incompetence until it was forced to move to Taiwan after losing the Chinese mainland to the Communists in 1949. The Korean government in the 1950s was famously inept at economic management, so much so that the country was described as a bottomless pit by USAID, the US government aid agency. In the late nineteenth and early twentieth centuries, the French government was famous for its unwillingness and inability to pick winners, but it became the champion of picking winners in Europe after the Second World War.
The reality is that winners are being picked all the time both by the government and by the private sector, but the most successful ones tend to be done in joint efforts between the two. In all types of winner-picking – private, public, joint – there are successes and failures, sometimes spectacular ones. If we remain blinded by the free-market ideology that tells us only winner-picking by the private sector can succeed, we will end up ignoring a huge range of possibilities for economic development through public leadership or public–private joint efforts.
Thing 13
Making rich people richer doesn’t
make the rest of us richer
We have to create wealth before we can share it out. Like it or not, it is the rich people who are going to invest and create jobs. The rich are vital to both spotting market opportunities and exploiting them. In many countries, the politics of envy and populist policies of the past have put restrictions on wealth creation by imposing high taxes on the rich. This has to stop. It may sound harsh, but in the long run poor people can become richer only by making the rich even richer. When you give the rich a bigger slice of the pie, the slices of the others may become smaller in the short run, but the poor will enjoy bigger slices in absolute terms in the long run, because the pie will get bigger.
The above idea, known as ‘trickle-down economics’, stumbles on its first hurdle. Despite the usual dichotomy of ‘growth-enhancing pro-rich policy’ and ‘growth-reducing pro-poor policy’, pro-rich policies have failed to accelerate growth in the last three decades. So the first step in this argument – that is, the view that giving a bigger slice of pie to the rich will make the pie bigger – does not hold. The second part of the argument – the view that greater wealth created at the top will eventually trickle down to the poor – does not work either. Trickle down does happen, but usually its impact is meagre if we leave it to the market.
