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«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»

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Geoffrey Owen

Industrial policy in Europe since the Second World War:

what has been learnt?

Occasional paper

Original citation:

Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been

learnt? ECIPE Occasional paper, 1. The European Centre for International Political Economy,

Brussels, Belgium.

This version available at: http://eprints.lse.ac.uk/41902/

Originally available from The European Centre for International Political Economy Available in LSE Research Online: February 2012 © 2012 The Author LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research.

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ECIPE OCCASIONAL PAPER • No. 1/2012

INDUSTRIAL POLICY IN EUROPE SINCE THE SECOND

WORLD WAR: What Has Been Learnt?

By Geoffrey Owen Department of Management, London School of Economics www.ecipe.org info@ecipe.org Rue Belliard 4-6, 1040 Brussels, Belgium Phone +32 (0)2 289 1350

ECIPE OCCASIONAL PAPER

EXECUTIVE SUMMARY

Prompted by the revival of interest in industrial policy in several European countries, this paper considers what lessons can be learned from earlier European experience. The focus is mainly on sectoral or targeted industrial policy, designed to improve the performance of particular industries.

Since the Second World War European industrial policy has passed through two phases. The first, starting in the 1960s, saw a series of attempts by governments, especially those of the UK and France, to create national champions in industries deemed essential to the health of the national economy. Among the favoured sectors were high-technology industries such as aerospace and computers; part of the motivation was to narrow the “technology gap” between Europe and the US. There was also a widely held belief in scale as the key to international competitiveness.

With some exceptions these interventions were generally unsuccessful. Policy-makers tended to overrate the risks and costs of market failures and to underestimate those associated with government failures. There was also a mistaken assumption that there were certain technologies which a country somehow needed to have, and that they were more likely to be acquired through centralised direction than through competitive markets. The cost to the taxpayer of ill-judged industrial policy was high.

From the 1980s, with the UK setting the pace, there was a shift towards horizontal, nonselective policies aimed at improving the environment for all firms. Both at the national and at the European level (through the Single Market Programme), more emphasis was placed on competition. The ability of governments to support their industries was curtailed, and previously protected sectors such as telecommunications and electricity were partially liberalised. At the same time new institutions were established – the Framework Programme and Eureka – to promote intra-European cooperation in research.

The surge in US productivity growth from the mid-1990s, linked to the rapid application of information technology, led European governments to rethink their approach to industrial policy. The new priority was to encourage the growth of entrepreneurial high-technology firms on the American model, to develop the venture capital industry and to make stock markets more accessible to younger companies.

By the early 2000s some progress had been made, but there was still a wide productivity gap with the US, and in several high-technology sectors, such as information technology and biotechnology, European firms were lagging behind their American counterparts. (The aerospace industry, through Airbus, was a notable exception.) There was also a growing concern about de-industrialisation, attributed in part to the shift of manufacturing to China and other emerging economies.

The financial crisis of 2008-09 heightened these anxieties, causing governments not only to provide short-term help to ailing industries such as the car manufacturers but also to consider whether a more active industrial policy might be needed in the longer term. Some economists argued for a revival of sector-based policies in a form that would avoid the mistakes of the past.

The events described in this paper cast serious doubt on the notion that governments can create competitive advantage through direct intervention, and on their ability to select winning technologies or industries. The main conclusion of the paper is that industrial policy

–  –  –

should be horizontal rather than sectoral, and embedded in a set of policies and institutions which promote competition, encourage innovation and facilitate industrial change.

1. INTRODUCTION Industrial policy in Western Europe has gone through two phases since the end of the Second World War and may now be in the early stages of a third. In the first phase, governments sought to improve the performance of their national industries and companies through targeted intervention, using a variety of tools that included subsidies for research and development, preferential procurement by public agencies, and the promotion of mergers.





The second phase, which began in the 1980s and continued into the 1990s and early 2000s, saw a shift towards horizontal or non-selective policies aimed at improving the business climate for all firms, and a greater reliance on competition. This period was marked by a deepening of economic integration within the European Union. Barriers to cross-border trade and investment were reduced; state-controlled sectors such as electricity and telecommunications were partially liberalised; and curbs were imposed on the ability of governments to protect or support their indigenous companies.

The events of the last few years suggest that the trend towards non-intervention may have come to a halt. The financial crisis of 2008-09 and the severe recession that followed prompted governments to give financial support, not just to banks, but also to other industries, principally the car manufacturers, which had been hard hit by falling demand. These interventions were in response to exceptional events, but seemed to indicate a greater willingness on the part of governments to support industries or companies that were deemed to be too important to fail. There has also been a growing anxiety, apparent before the financial crisis, about the ability of European industry to adapt to the changing international division of labour and, in particular, to the shift of manufacturing to China and other emerging economies.

This has encouraged the view that the active involvement of governments is necessary if European industry is to strengthen its position in knowledge-intensive sectors that are less vulnerable to competition from low-wage countries.

Arguments for some form of industrial policy are also being made in the US, by economists as well as business leaders. One of the anxieties there is whether the offshoring of production (and some design tasks) to low-wage countries in electronics and other industries may have contributed to persistently high unemployment, as well as weakened the country’s innovative capacity. What the government can do to slow down this process is not clear, but there are some influential voices advocating targeted support for technologies that are likely to boost the manufacturing sector and to generate high-wage jobs.

How to define the government’s role, and what the balance should be between horizontal and sectoral policies, is the subject of active debate on both sides of the Atlantic. The purpose of this paper is to contribute to the debate by reviewing the evolution of industrial policy in Europe since the Second World War. The paper discusses industrial policy both at national level, focusing mainly on the UK, Germany and France, and at European level. The aim is to identify successes as well as failures, drawing on American and Japanese as well as European experience, and to draw some conclusions about what policies are likely to be effective in the current circumstances.

3 No. 1/2012

ECIPE OCCASIONAL PAPER

1.1. DEFINITIONS Industrial policy can be defined in several different ways. In this paper the term is used to refer to measures taken by governments to bring about industrial outcomes different from those that would result if markets were allowed free rein. These measures may be horizontal in character, affecting all firms, or specific to particular sectors or companies.

The latter may include: the promotion of “infant” or fledgling industries in the hope that, through government assistance, they will become profitable and internationally competitive;

support for the restructuring and modernisation of industries that are regarded as important because of their role as employers or exporters, or because of their links to national defence, or because they produce technology that will be used in other parts of the economy; the creation of national champions through government-induced mergers; and the rescue of failing firms.

Industrial policy is closely linked to technology policy. The latter refers to the policies and institutions through which governments seek to encourage the development and exploitation of advanced technologies.1 Here, too, the policy instruments may be horizontal – for example, tax incentives for research and development – or directed at particular industries such as biotechnology or information technology.

This paper treats industrial policy and technology policy together, since both are directed at the same objective, improving industrial performance, and both have been extensively used in Europe since the Second World War.2 The theoretical case for industrial policy is that it is necessary to offset market failures. Most economists accept that government support for basic scientific research, conducted principally in universities and public laboratories, is justified because the market – competition among private-sector firms – cannot be relied upon to generate investment in research at the socially desirable level. Successful inventors are not able to secure all of the benefits of their discoveries, even with an effective patent system; they share these benefits with customers, and with imitators. Thus the social benefits from basic research can exceed the returns that a private-sector firm can obtain from investing in this activity.3 A central question in the industrial policy debate is how far the market failure argument justifies intervention “downstream”, to support the production of goods or services which would normally be supplied through the market – for example, to create or enlarge industries which are potentially valuable to the economy but in which private companies are reluctant to invest.

Other policies which affect industrial performance, and which to some extent overlap with industrial policy, are competition policy, trade policy and education and training policy. Governments can choose, within the limits imposed by international trading rules, how much weight to give to competition, both internal competition and competition from imports, as a spur to industrial efficiency, and how big a role foreign companies should play in their economies. In education and training, countries differ in the way the supply of skills is organised, and in the extent to which universities serve the needs of industry. National policy in all these areas can have at least as big an impact on the structure and performance of industry as industrial policy.

4 No. 1/2012

ECIPE OCCASIONAL PAPER

2. THE FIRST PHASE: FROM THE 1950S TO THE 1980S The immediate task facing European governments after 1945 was to repair the damage caused by the war and to re-establish a well-functioning peacetime economy. The longerterm challenge was to exploit the technical and organisational innovations that had been made by American companies before and during the war, and to raise productivity closer to US levels. In steel, for example, an early priority was to install continuous hot strip mills, which had been widely adopted in the US for making high-quality sheet steel for the car manufacturers. Whether or not they were directly owned by the state, most European steel companies were given financial assistance, some of it coming from Marshall Plan funds, to finance the modernisation of their factories.4 Other industries which were seen as basic to the health of the economy, such as coal, electricity and railways, also received government support in the early post-war years. Some of them were taken over by the state, and remained in the public sector until the privatisations of the 1980s and 1990s. However, nationalisation was not linked to industrial policy in the sense in which that term came to be used in later years.

The impetus for greater government activism in the 1960s stemmed in part from disquiet over the “technology gap” between Europe and the US.5 European firms were losing ground to their American rivals in high-technology industries such as aerospace and electronics, and government support was thought to be necessary if the lag was to be corrected. At the same time some of Europe’s older industries such as textiles and shipbuilding were hard hit by competition from low-wage countries; some governments sought to slow down the decline through state-financed rationalisation schemes. This defensive aspect of industrial policy – the attempt to rehabilitate distressed industries - became more prominent in the difficult economic conditions that followed the increase in oil prices in 1973/74. Several industries, including steel and some branches of the chemical industry, were struggling with severe excess capacity.6 A painful adjustment was necessary, prompting intervention both from national governments and, towards the end of the decade, from the European Commission.



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