Wednesday, 29 February 2012

Should developing country governments support national champions by allowing them monopoly rents?

By Carlos Fortin

I recently attended a seminar in Geneva organised by the United Nations Conference on Trade and Development (UNCTAD) to mark the thirtieth anniversary of its flagship annual publication, the Trade and Development Report (TDR). The Report is regarded as the main alternative in the United Nations system to the mainstream approach represented by the World Bank, the IMF, the WTO and the OECD.

My paper ‘Keynes, Schumpeter and the Macroeconomics of UNCTAD's Trade and Development Report*’ for the event, generated some controversy over dinner and drinks.  I point out that Joseph Schumpeter, economist and political scientist, thought that some degree of monopoly in the economy is necessary for innovation. I had quoted him as writing:
… because perfect competition is impossible under modern industrial conditions—or because it always has been impossible—the large scale establishment or unit of control must be accepted as a necessary evil inseparable from … economic progress … What we have got to accept is that it has come to be the most powerful engine of that progress and in particular of the long-run expansion of total output.1
Put it bluntly, the policy question is:

Should developing country governments support national champions by allowing them monopoly rents, as in the East Asian miracle?  As it tends to be the case with all important questions of economics and economic policy, the opinions of the economists present were deeply divided.  Due reference was made to Krugman’s iconoclastic view that the so-called East Asian Miracle is in effect a myth:
“Asian growth, like that of the Soviet Union in its high-growth era, seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency”;2
and to Stiglitz’ riposte that:
“in the extreme, and in my view, unlikely event that East Asia had no total factor productivity growth, the region still would have demonstrated a remarkable ability both to maintain high saving rates and to allocate that capital to productive uses”.3 
What came closest to a majority opinion is that developing country governments should not forgo the option of supporting national companies, particularly for purposes of making them internationally competitive, but should only exercise it with two significant caveats:

  1. support should not be a blank cheque, but contingent on performance; 
  2. support should be consistent with international obligations and disciplines, notably those of the World Trade Organization.
I myself subscribe to that view.

1 Schumpeter, J. A. (2003) Capitalism, Socialism and Democracy, Taylor and Francis e-library: 106
2 Krugman, P. (1994) ‘The Myth of Asia's Miracle’, Foreign Affairs 73.6: 70
3 Stiglitz, J. (1998) ‘Sound Finance and Sustainable Development in Asia’,  Keynote Address to the Asia Development Forum, The World Bank Group, Manila, Philippines, (accessed 28 February 2012) 
*The paper will be published in April by UNCTAD in a volume entitled "Thinking Development: Three Decades of the Trade and Development Report", which will be presented at the XIII UNCTAD Conference in Doha in April.


Hubert Schmitz said...

I agree with Carlos Fortin. Governments wanting to push innovation, need to provide space for earning rents. The space might be occupied by one or by several enterprises. Determining the number in advance would not be practical. But providing a time limit or performance target seems essential.

A realistic approach to innovation policy includes what Mushtaq Khan calls rent management. Such rent management seems needed where we hope to bring about big change. Think of the much talked about transition from high to low carbon development. Denmark has made more progress than most – partly because it has a national champion. The Danish firm Vestas is World No. 1 in windpower but facing stiff competition from national champions of Germany, China and India.

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