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Shenzhen experience casts doubt on role of ‘industrial policy’ in development
Shenzhen  Photo: VCG
Industrial policies have long been hailed by some academics as a key tool in the hands of the government to introduce phased initiatives to bring rapid development, or even transform some specific industries, in bid to create growth miracles across the board. It meets the need of government officials to compete with each other with GDP growth while catering to the urge of some economists to participate in decision-making. The Shenzhen experience provides a sound basis for reviewing the benefits of government’s macro-economic intervention to local economies and the society.

So, the concept of industrial policy is generally welcomed by both governments and economists. Especially in the current Chinese model built on “neo-authoritarianism”, advocates for the interventions have gained limelight.

At the same time, there exists vague but lasting criticism of the approach in both the academic and business circles in China. Some people argue that new industries could only be formed spontaneously along the innovation of entrepreneurs. And with local information, risk assessment and corresponding responsibilities lacking, government’s industrial policies are merely “planned economy in disguise”, as termed by Zhang Weiying, a Chinese economist known for his advocacy of free markets.

Zhang Siping, former deputy mayor of Shenzhen, recently delivered a speech titled “How Hi-Tech Industry Has Risen in Shenzhen with no Prestigious University” at a business summit. Zhang used convincing facts and proofs to analyze reasons behind Shenzhen’s rise as “China’s Silicon Valley”.

By the end of 2017, there were 11,200 national-level hi-tech companies headquartered in Shenzhen, and a total of 190,000 scientific businesses of various types or scales. The hi-tech sector created 735.9 billion yuan worth of industrial added value annually, accounting for 32 percent of the local GDP. The speech provides a good opportunity for us to reflect on the Shenzhen practice and the role of industrial policies in the process.

The focus of the debate over the industrial policies remains on the question of whether or not governments are capable of formulating the right policies. Those Chinese economists who’ll vote for it believe an able government should subsidize those who would brave into emerging industries, in order to encourage innovation and prop up the industries.

Those who’re against subsidy policies argue that the decision-making abilities of governments could be quite limited due to a lack of information. So, there is no way that governments could really find out if certain industry would prosper or if businesses applying for subsidies are not cheating for the money. Instead, the urge to build up a promising industry or business would embolden entrepreneurs to stand out voluntarily.

In the recent years, some Internet practitioners concluded that big data would solve the problem of information gathering on which a planned economy is highly dependent, so “big data will bring planned economy and industrial policies new life.”

For example, Lei Jun, the founder of Xiaomi Inc, said, “With tailwind, a pig could fly.” Still, with Internet technology and its business mode changing with each passing day, the problem is no one is quite sure the tailwind is coming or has already gone.

We can see that more and more Internet-related groups have restructured their business organization in order to be more innovation-orientated. Alibaba and Tencent provide good examples, in which their innovative systems like “Alibaba partners” and “endorsement by major shareholders” have made their powerful major shareholders relinquish control to the more adept entrepreneurs.

For example, even shareholders like SoftBank and Yahoo that boast some expertise have given up decision-making power in innovative business mode to more proficient Alibaba partners.

Even Softbank and Yahoo could not do that, not to say local governments which’re quite unfamiliar with innovative business patterns. Zhang Siping revealed, “Those businesses that followed the mayor everywhere to seek subsidy in any possible ways seldom succeeded.”

He said governments tended to be the last receiver of demands and information delivered by markets, and based on which, industrial policies formulated would usually lag behind market changes. “Although (Chinese) governments have long worked on raising efficiency, generally speaking, they have remained to be inefficient and it usually would take several years to map out plans, policies and establish funds. So, those businesses supported by industrial funds could seldom succeed in the market competition,” he said.

It would make more sense if we base our conclusion on the actual social and economic effect of subsidy policies already put in practice. 
It’s known that with governments staying back, some emerging industries have prospered.

One reason is that strenuous and intelligent Chinese entrepreneurs have created many innovation-orientated organization systems, while another key element is the changed focus of the government work. Amid the transformation from planning to market economy, Chinese governments gradually retreated from the emerging sectors like the Internet in order to be more focused on strategic industries.

It’s the reform and opening up that have brought vitality to the private sector, allowing start-ups in emerging industries to gain momentum.

Vice versa, government intervention has not been as helpful in fields where it has been applied. For example, the highly subsidized photovoltaic industry soon faced overcapacity after the government stepped in. Actually, the so-called supply-side reform mainly intends to resolve the problem of overcapacity caused by the previous round of industrial subsidies.

The government has also given a large amount of fiscal support to new energy sector. There are concerns that the sector could become the next aborted photovoltaic industry. Instead, if government retreats and allows private capital to identify valuable projects and shoulder corresponding risks, the decision-making would become much more sensible then.

According to Zhang, by the end of last century when teletron technology was gradually phased out by liquid crystal display products, the Shenzhen municipal government still decided to devote large patches of land, money and preferential policies to help certain enterprises scale up production of teletron lines. Without any doubt, the businesses were doomed to fail when they were given money.

At the beginning of the century, Shenzhen had planned to prop up the auto industry. With government officials taking the lead, the city tried to invite domestic car makers with large stretches of land, massive fiscal funds and preferential policies. The efforts also yielded only a small number of cars before many factories just shut down.

Milton Friedman, a Noble winner in economics, presents four ways that money can be spent. “You can spend your money on yourself, spend your money on someone else, spend someone else’s money on yourself or spend someone else’s money on someone else. The first is the most efficient way to spend money, the last is the least.” It’s obvious industrial policies is a typical case of “spending someone else’s money on someone else.”

Through Shenzhen practice, we could more clearly recognize how industrial policies would work, so that we’re reminded the government should focus on providing “services” and let the market play its role in allocating resources.

The article is translated and edited from a opinion piece by Zheng Zhigang. 

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