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«Green industrial policy Dani Rodrik* Downloaded from at Princeton University on February 5, 2015 Abstract Green ...»

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Silicon prices had already begun their precipitous drop before the loan guarantee was approved, which should have raised some concerns. As a subsequent Congressional report put it, the lack of available competitor information for Solyndra and the rapidly dropping price of polysilicon and panel prices should have prompted DOE to reconsider the Solyndra loan guarantee or, at the least, postpone the Solyndra closing so it could examine how the Solyndra loan guarantee would be impacted by the Chinese pricing pressures.8 And as Solyndra’s financial difficulties mounted, it seems that DOE officials justified the losses by arguing that this was common in all start-ups. In July 2010, the Office of Management and Budget (OMB) sent the DOE specific questions relating to Solyndra’s financial status and productivity. The DOE apparently never responded, despite repeated OMB requests.9 Similarly, a memo prepared for the President on the DOE loan guarantee programme by Lawrence Summers, among others, in October 2010 did mention the need for ‘clear policy principles—and associated metrics for evaluation’ as one of the options to be 7 http://www.whitehouse.gov/sites/default/files/blueprint_secure_energy_future.pdf 8 http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/analysis/ 20120802solyndra.pdf, p. 132.

9 http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/ analysis/20120802solyndra.pdf, p. 135.

482 Dani Rodrik considered. But Solyndra was not mentioned as a potentially problematic case, and no action seems to have been taken in response.10 More damagingly, the administration invested substantial political capital in the company’s success, making a potential cut in support difficult to contemplate. The provisional loan commitment to Solyndra in March 2009 was marked by joint appearances by Energy Secretary Steven Chu and Vice President Joseph Biden (Datla, 2012). And, as noted previously, President Barack Obama himself showed up at the company’s headquarters in California in May 2010 to publicly celebrate Solyndra’s apparent success.

Then there were Solyndra’s own political activities, which were substantial. As the New York Times notes, ‘Solyndra spent nearly $1.9 million on lobbying activities over a period Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 of 43 months from 2008 to 2011.’11 This is a large number, which placed Solyndra in the top tier of lobbyists among comparable energy companies.12 The scale of lobbying for a firm of its size and with such financial difficulties should have been a warning sign. Moreover, the principal private investor in Solyndra, George Kaiser, was an important fundraiser for Obama and he clearly had access to the White House. Congressional investigators found that Kaiser had discussed Solyndra with the White House staff in February 2010 in Vice President Biden’s office.13 The Obama administration would maintain throughout that the loan guarantees were approved by the DOE purely on the merits of the case.

So there is plenty to criticize in the manner in which DOE managed Solyndra— and the loan guarantee programme as a whole. The lesson, however, is not that the administration should not have subsidized a company that eventually failed. There is no economic reason that the government should recover every loan. In view of the environmental and technological externalities, there is not even a case for insisting that the loan portfolio as a whole should make a profit or break even. The real lesson is that there were no safeguards in place against political manipulation and to ensure DOE could pull the plug if circumstances warranted it. Worse yet, the administration made it harder to reverse course by committing itself to the project politically.

The DOE’s loan guarantee programme would eventually grow (by May 2013)  to encompass 28 companies. Proponents would argue that, Solyndra notwithstanding, these companies had collectively created more than 20,000 jobs (Bump, 2013) and played a role in ‘kickstart[ing] a fresh, promising, and environmentally responsible sector of the economy’ (Oremus, 2013). Many of the firms had begun to pay back their loans. As the portfolio approach would suggest, there were some notable successes alongside losers like Solyndra.

Tesla Motors, an electric car company whose fortunes turned around thanks to a $465m loan guarantee from DOE in 2009, presents a good example of the upside.

The company was running record losses and had been forced into layoffs prior to 10 To illustrate some of the potential problems that may arise, the memo discussed another project, the Shepherd’s Flat loan guarantee. For the text of the memo see http://abcnews.go.com/Blotter/obama-talksbig-clean-energy-money-removed-key/story?id=12048872#.UaN5XndFVK0.

11 http://www.nytimes.com/gwire/2011/09/16/16greenwire-solyndra-spent-liberally-to-woo-lawmakersunti-81006.html.

12 To compare Solyndra’s lobbying expenditures to other energy firms’ lobbying activities in 2011, see http://www.opensecrets.org/lobby/indusclient.php?id=E07&year=2011 and http://www.opensecrets.org/ lobby/indusclient.php?id=E01&year=2011.

13 See http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/analysis/20 120802solyndra.pdf, p. 145.

Green industrial policy 483 government support. By 2013 it had turned into a phenomenon. Its shares soared on Wall Street, and its Model S was selected Motor Trend’s 2013 Car of the Year. The company paid its loan back in full, 9 years early. So successful was Tesla that critics chided the government for not having extracted venture-capital benefits from the company’s rise (Woolley, 2013). The DOE came under fire this time because a company it financed had become a big financial success!

Solyndra is clearly only part of a bigger picture. However, it will be years before we can reach a clear judgement as to whether the loan guarantee programme as a whole performed well or not.

Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 V. Better rules for industrial policy The theoretical justification for industrial policies to promote green industries is strong.

But such policies can be exploited by powerful insiders and overwhelmed by informational asymmetries between the private and public sectors, as the Solyndra case well highlights. Sceptics rely on these arguments to argue for a hands-off approach.

However these pitfalls are not special to industrial policy. Virtually any area of government policy is subject to similar challenges.

For example, education policy is motivated by arguments about educational externalities and social cohesion, even though there is much debate about how well it works, whether these ends are adequately served, and the extent to which insiders such as teacher unions distort its implementation. Health policy is driven also by a combination of social concerns and moral hazard/adverse selection considerations, but few would deny the role of organized political groups in shaping it. Infrastructure and telecoms policy are rooted in problems of natural monopoly, but insiders and lobbyists play a large role in their formulation. Stabilization policy is motivated by Keynesian theories and is marked by virulent debates about its effectiveness.

In all these cases, there are strong a priori, theoretical justifications for policy intervention, but inconclusive empirical evidence on whether policy works ‘on average’. However, debates typically focus not on whether the governments should have active policies in these areas but on how the requisite policies should be designed— whether government should run schools or simply finance them, or the appropriate mix between monetary and fiscal policies, for example. Green industrial policy needs to be approached in the same manner, as an important government function, that can be carried out better or worse. The useful debate to be had is not whether green industrial policies should exist but how they should be designed.

A serious debate about the design of industrial policy would bring it out of the shadows and allow it to be carried out in an explicit manner. It would save it from being carried out surreptitiously, as an appendage to other governmental functions and hostage to related, but distinct objectives such as employment or competitiveness. Doing industrial policy openly and explicitly would make it easier for government to acknowledge the failures (e.g. Solyndra) while taking credit for the successes (e.g. Tesla). It would also force policymakers to think harder about the appropriate institutional design for industrial policy.

Industrial policies must be built on three key ideas. First, the requisite knowledge on the existence and location of technological spillovers, market failures, and constraints that impede green investments is diffused widely within society across businesses, 484 Dani Rodrik entrepreneurs, and scientific communities. Second, private investors and others who are the beneficiaries of public support have strong incentives to ‘game’ the government, by bending the rules to their advantage through their informational advantage and political muscle. Third, the intended beneficiary of industrial policies is neither bureaucrats nor business, but society at large.

Each of these ideas has specific implications for the institutional design of green industrial policies. We can summarize these implications as (i) embeddedness; (ii) discipline; and (iii) accountability. I take up each design principle in turn.

Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 (i) Embeddedness When economists think about optimal policy design in the context of industrial policy, they typically home in on models of regulation based on agency theory. In these models, the principal (the regulator) aims to alter the behaviour of an agent (the firm) to pursue a public objective (an investment of a particular kind). The central feature of the set-up is that the agent has some private information (e.g. its costs). In light of this asymmetry in information, the principal has to cede ‘informational rents’ to the agent, and cannot obtain its unconstrained (i.e. perfect-information) optimum. Effectively, the principal has to offer the agent a reward to dissuade it from mimicking a less efficient counterpart (Laffont and Tirole, 1993).

In this top-down model of interaction between the bureaucracy and business, communication between the two is neither assumed, nor required. From the standpoint of minimizing rent-seeking and lobbying, this can be viewed as a distinct advantage. The policy-maker need not consult with business people, and can keep them at arm’s length.

Any direct interaction is unnecessary from the standpoint of carrying out the public purpose and hence can be judged as illegitimate. The autonomy that is built into the framework insulates the bureaucracy from pressure from below and protects them for it.

By the same token, the principal–agent perspective severely limits the flow of information from below. This is a serious shortcoming, especially in an area such as green technology where uncertainty is multifaceted and may often take Knightian characteristics. The agency framework assumes the principals already have a very good idea of what needs to be done to achieve public goals, and all that needs to be done is to provide the agents (firms) with the right incentives to carry out the requisite investments. But as Charles Sabel puts it, what if . . . there are no principals . . . with the robust and panoramic knowledge needed for this directive role? Then the problem for reform is at least as much determining ways actors can discover together what they need to do, and how to do it, as determining which actors ought to be the principals in public decision making. (Sabel, 2004) The principal–agent model presumes the existence ex ante of a well-defined social objective function—well-defined in the sense of not just what is being maximized, but also the types of instruments and strategies that are available. Businesses cannot communicate information about the constraints they face other than through their actions.

Neither can they communicate directly any new opportunities that may arise, or advance proposals as to how these might be pursued with the help of the public sector.

Green industrial policy 485 An appropriate industrial policy framework needs to make room for learning by government officials on all these counts. That in turn requires a significant amount of interaction and communication between the public and private sectors. This is what the term ‘embeddedness’ refers to. It was used first in the industrial-policy context by Peter Evans (1995), who described South Korea’s developmental state as one in which the bureaucracy exhibited ‘embedded autonomy’. The South Korean bureaucracy, he argued, operated along Weberian, meritocratic lines, but it was not insulated from the private sector. Quite to the contrary, it was ‘embedded in a concrete set of social ties that binds the state to society and provides institutionalized channels for the continual negotiation and renegotiation of goals and policies’ (Evans, 1995, p.  12). As Evans Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 wrote, ‘[a] state that was only autonomous would lack both sources of intelligence and the ability to rely on decentralized private implementation’ (1995, p. 12).

Clearly, the embeddedness that is required is one that falls far short of bureaucrats being beholden to and in the pockets of business. Government agencies need to be embedded in, but not in bed with, business. The right model lies between arm’s-length and capture. It is one of strategic collaboration and coordination between the private sector and the government with the aim of learning where the most significant bottlenecks are and how best to pursue the opportunities that this interaction reveals. There are multiple institutional settings within which this kind of collaboration can occur: deliberation councils, supplier development forums, search networks, regional collaborative innovation centres, investment advisory councils, sectoral round-tables, private-public venture funds, and so on.

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