«Green industrial policy Dani Rodrik* Downloaded from at Princeton University on February 5, 2015 Abstract Green ...»
This way of looking at green industrial policy highlights another important implication: the right way of thinking about it is as a process of discovery, by the government no less than the private sector, instead of a list of specific policy instruments. This perspective focuses attention on learning where the constraints and opportunities lie and responding appropriately, rather than on whether the governments should employ tax breaks, R&D subsidies, credit incentives, loan guarantees, and so on. It is important, of course, to evaluate the effectiveness of these specific instruments. But the prior, metaquestion on green industrial policy is whether a government has put in place the appropriate processes and institutions of engagement with the private sector.
(ii) Discipline The embedded nature of green industrial policy makes the need for disciplining devices against abuse all the more imperative. Firms and industries that receive help from the government must know that they cannot game the system, and that underperformance will result in the removal of assistance. Carrots must be matched by sticks. This was indeed a key ingredient of East-Asian style industrial policy. In South Korea firms that did not meet their export targets saw their subsidies cut, and in some cases even became targets of government recrimination in the form of aggressive tax audits, for example.
In democracies, discipline has to take a form that is different from the one in which it came in the ‘hard states’ of East Asia (as exemplified by South Korea and Taiwan during the 1960s and 1970s, especially). It has to be less ad hoc and firm-specific, and more institutionalized. But since each case is different and the nature of green technology is inherently uncertain, a certain element of discretion is unavoidable. The trick is to exercise discretion in a manner that can be justified by the facts on the ground.
486 Dani Rodrik A principled discipline requires first and foremost clarity in objectives. If the objectives of a programme to support green technologies have not been explicitly specified ex ante, it will be difficult to know whether the programme is working or needs revision.
This seems to be a rather obvious principle, but it is frequently flouted in practice. For example, the DOE loan guarantee programme was touted on account of its contribution variously to jobs, global competitiveness, technological benefits, external spillovers, and contribution to curbing climate change. It is certainly possible to meet one or more of these objectives while failing on account of the others. Technological benefits and spillovers can be reaped without attaining competitiveness at the same time, as was possibly the case with Solyndra. Similarly, jobs may be created without gains either in Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 technology or competitiveness.
Politicians may naturally want to kill multiple birds with one stone. But multiplicity of goals—or confusion about them—does not contribute to discipline. It becomes possible to justify any range of results after the fact, by latching on to the least problematic aspects of performance. The greater the multiplicity of goals and the hazier their definition, the less the ability to recognize failure, remove support, and change course.
What then are appropriate goals for green industrial policy? As discussed in the introduction, public support is justified by the need to foster private investment in green technologies and contribute to reduction of GHG emissions, in view of the likely market failures in both areas. This is a largely technological goal. It has to be distinguished from employment creation, competitiveness, profitability, and other commercial aspects. A promising new technology may be worth supporting even if it does not generate many jobs; employment objectives are better served through other policies.
And it may be worth supporting even if the pioneering investor ends up bankrupt; if the technological learning and spillovers from the pioneer spawn a new industry, its own commercial failure is of little consequence.
Unlike jobs and commercial profitability, however, a technological objective is very difficult to monitor. Within firms and industries, probably the best single observable indicator would be cost. The progress of, say, a solar-cell firm in meeting its technological objectives can be measured by its rate of cost reduction in producing energy.
Therefore cost-reduction targets make much more sense in general than employment or investment targets. (Interestingly, by this measure, Solyndra’s performance was quite solid.) But other measures of technological development can be used as well, many of which necessarily require judgement and discretion. Patenting activity, cluster development, and indicators of beneficial spillovers to other firms can all be scrutinized.
Ultimately, monitoring overall technological progress needs to rely on periodic audits by professional specialists who can render their independent judgement.14 The next step is evaluation, which goes beyond tracking observable indicators and monitoring performance. Evaluating whether a programme is meeting its objectives requires an explicit counterfactual: what would have happened in the absence of the 14 As Jaffe et al. (2004, p. 14) note for the US: ‘systematic assessment efforts are woefully lacking. Because success is uncertain and difficult to measure, most agencies engaged in support of research and technology adoption have resisted efforts to measure their output against quantitative benchmarks, as is required in the United States by the Government Performance and Results Act’ (reference omitted). See Martin et al. (2009) for an interesting study on Britain, which finds negotiated targets on carbon abatement produced fewer gains than a non-discretionary tax because of the tendency of the regulators to set targets that were too flexible ex post, and ultimately too lax.
Green industrial policy 487 programme? Technically the most sophisticated (and credible) evaluations of public programmes are based on randomized trials, regression discontinuity, or instrumental variables methods (Jaffe, 2002; Van Reenen, 2013). The first of these approaches compares firms that were randomly selected to receive support with those that did not.
The second compares outcomes just above and below the threshold of qualification for public support. The third identifies the programme effect through an exogenous component of variation in qualification. These techniques can be quite useful in some settings, when the intervention is relatively specific and the potential number of beneficiaries is large. Criscuolo et al. (2012) provide a useful application to regional state aid in Britain. As Jaffe notes (2002), building such evaluation protocols into support Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 programmes from the outset are an important safeguard.
But in many instances, such techniques are not easily applicable, either because of small numbers of support beneficiaries or because the programme components differ too much across recipients to render comparison meaningful. Inability to undertake evaluations that are rigorous enough to satisfy journal referees should not stop governments from implementing certain monitoring routines which are useful early-warning signals and can flag blatant programme failures. A particularly useful practice would be to establish explicit cost, productivity, and other targets ex ante. Such targets cannot eliminate the influence of unforeseen, exogenous changes (such as unexpected technological and market developments) that take place once the project is rolled out. But at least they allow outcomes to be evaluated against a particular benchmark—the baseline established by ex ante expectations. Significant under-performance relative to that benchmark would then call for either the abolition of support or an explicit countervailing argument as to why unanticipated developments warrant continued support.
As long as there remains fuzziness about objectives, targets, and results—which seems inevitable, in light of the nature of green industrial policies—firms will always try to make a case for continued subsidies—either before the programme agency or through political lobbying. As Matsuyama (1990) shows in a related context, the threat to remove support when a firm does not perform as expected is often not credible.
Appropriate rules can help alleviate the dynamic inconsistency that bureaucracies face in these circumstances. For example, automatic sunset clauses would reverse the burden of proof by requiring positive action to renew support schemes, and make it harder for failing projects to be propped up. The requirement that agencies must provide an explicit accounting—preferably of a public kind—for continuing support when initial targets are not met would raise the bar similarly. Formal independence may also help, by enabling industrial policy agencies to recruit professional talent and resist political interference.
Experience with central banking shows that it is professionalism and reputation that ultimately safeguard an institution’s independence from day-to-day politics rather than formal or legal independence. A similar reality holds for agencies in charge of industrial policies as well. The vaunted Defense Advanced Research Projects Agency (DARPA) provides an apt illustration in the United States. DARPA has been behind some of the most dramatic technological breakthroughs of our time, including the Internet, GPS, and satellite imagery. Few doubt its capacity to experiment with highly speculative technologies—as well as pull back from efforts that are not paying off. It works closely with private-sector firms in so-called ‘dual use’ technologies. But it is not known for being manipulated by commercial firms or politicized. DARPA has managed to retain high 488 Dani Rodrik levels of professional competence and political insulation, despite lacking formal independence. It has been protected by the technical competence and esprit de corps of its staff and, ultimately, by its repeated successes (Greenwald, 2013).
In summary, discipline requires clear objectives, measurable targets, close monitoring, proper evaluation, well-designed rules, and professionalism. With these institutional safeguards in place, it becomes easier to revise policies and programmes along the way, and to let losers go when the circumstances warrant it.
(iii) Accountability Downloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 Embeddedness and discipline are two sides of the same coin, establishing the acceptable boundaries of the relationship between public agencies and the private sector. They facilitate communication and collaboration between the two while ensuring that public officials retain sufficient autonomy and have the ability to deploy a stick when needed.
However, the purpose of green industrial policy is to further the public good at large, not the interests of the two parties in this relationship, bureaucrats and private firms.
Therefore a third element of the institutional architecture must be public accountability. Public agencies must explain what they are doing and how they are doing it. They must be as transparent about their failures as their successes. Accountability not only keeps public agencies honest, it also helps legitimize their activities.
Accountability is an integral feature of democracy. One of the puzzles of East Asia is how state bureaucracies maintained their integrity and public-spiritedness despite the absence of democratic controls. One explanation is that there were alternative mechanisms of accountability in place. In South Korea, bureaucrats setting and implementing export targets during the 1960s and 1970s were closely monitored by higher-ups, including most notably President Park Chung-hee himself. In Singapore, one may surmise that the very high level of pay (and, relatedly, professionalism and skill) of officialdom prevents corruption and abuse. In China, despite rampant corruption, regional competition for investment and fiscal revenue compels local officials to remain business-friendly.
Even within democracies, accountability can be improved in a number of ways. The appointment of a high-level political champion for green industrial policies not only helps with coordination, but also identifies a clear figure who can be held politically responsible. A vice-president, minister, or other political official with visibility can serve in such a role. Transparency can be enhanced by a pro-active communication strategy.
Agencies can publish, among other things, minutes of meetings with firms and industry groups, regular reports on activities and budgets, and periodic audits by independent experts. The greater the openness and transparency at the outset, the less likely that industrial policies will be overwhelmed by real or imagined scandals down the line.
embarked on such policies for reasons of international competitiveness or job creation provides a mixed opportunity. On the one hand, it engages governments in certain useful activities that they might not have been interested in on account just of climate change or control of GHGs. On the other, it makes it difficult for the policies to be targeted on the right targets and designed appropriately.
In practice, we are unlikely to get purely green industrial policy, focusing directly on the development and diffusion of green technologies instead of competitiveness, commercial, employment, or fiscal motives. Indirect, but politically salient objectives such as ‘green jobs’ will likely continue to present a more attractive platform for promoting industrial policy than alternative energy or clean technologies. This may result in investDownloaded from http://oxrep.oxfordjournals.org/ at Princeton University on February 5, 2015 ment in the ‘wrong’ industries—wind turbines, say, being built in countries like Britain rather than in developing nations. Occasionally, such objectives will clash directly with technological goals, as in the case of American and European protectionism in solar panels.