Industrial Policy or Economic Democracy?

Japan’s historic election Sunday gave the Democratic Party an overwhelming victory over the Liberal Democrats that have dominated Japan’s government for 55 years. The Liberal Democrats oversaw Japan’s industrial policy that supported Japan’s dominant firms during Japan’s rise as a major economic power during the 1960s, 70s, and 80s. Indeed, many American economists argued the U.S. should do more to emulate Japanese industrial policy and have the government actively involved in supporting dominant corporations to enhance their international competitiveness.

American support for industrial policy, where the government actively picks the winners in economic competition, died off in the 1990s when the Japanese economy began stagnating. It appears that Japanese support has now died off too.

The Democratic party, now in the majority, favors worker-friendly policies, including raising the minimum wage, providing income support for farmers, giving job training to those out of work, and providing free high schools. Economic democracy is the alternative to industrial policy.

This struck me because two weeks ago I was in Seoul, Korea, for a conference on “Institutions and Global Competitiveness.” The Koreans there were free-market oriented, but also were supportive of the Korean industrial policy that has in many ways emulated Japan’s industrial policy. In both cases the government identified those companies they viewed as potentially successful in global competition and supported them. The rise of Samsung and Hyundai in the global marketplace are examples they would give of the successes of Korean industrial policy.

In Korea, as in Japan, the alternative to industrial policy is viewed as economic democracy; maybe even more in Korea. Article 119 of the Korean Constitution, added in 1987, explicitly says the government should regulate the economy to prevent monopoly power and the abuse of economic power, and to achieve economic democracy. While not explicitly defining economic democracy, that provision has been a matter of strong debate.

Should government promote industrial policy, or economic democracy?

Looking at Asian economic policy from the other side of the globe, what is interesting (and a bit disheartening) is that economic liberalism and economic freedom are not considered as alternatives. Their question is: Should government support big business, or should it support workers? Little thought is given to the idea that the appropriate role of government is to protect people’s rights and allow the invisible hand of the market to guide economic outcomes.

When I discussed this with the Koreans at the conference I attended, all expressed support for free-market principles, but all also expressed their belief that it was Korean industrial policy that was responsible for Korea’s substantial economic growth.

There is another possibility, which is that the entrepreneurial actions of some Korean businessmen enabled them to build world-class companies that could succeed in global competition. At Samsung, company founder Byung-Chull Lee is held in reverence—and should be—for his entrepreneurship that enabled a small company to become a major global competitor. As the company grew the Korean government supported it, but was the company’s growth mainly due to the government’s industrial policy, or due to the entrepreneurial activities of its management? A good case can be made that the answer is the latter.

If I am right, the industrial policy that supported the big Japanese and Korean firms toward global competitiveness will also undermine those nations’ economies by stifling any emerging competitors. That may offer a partial explanation for Japan’s stagnation, and could foretell a similar outcome in Korea.

Imagine if, in the 1960s and 1970s, the U.S. had a similar industrial policy of supporting dominant global competitors like IBM. Would new companies like Microsoft and Apple have been able to emerge, or would they have been subsumed under a dominant IBM, which would have lost market share to foreign competitors rather than American start-ups?

To see the alternatives as either industrial policy that supports big business or economic democracy that supports workers creates a false dichotomy. In fact, a policy of economic freedom that protects rights and has minimal tax and regulatory interference in economic activity is what produces prosperity.

I can understand why the Japanese, at this time, would hope for change, but it does not appear that the economic democracy proposed by their newly-victorious Democratic Party will provide the kind of change that is needed to reignite Japan’s economic growth.