COVER STORY • 5IInterview with Dr. Karl Aiginger, Director of the Policy Crossover Center: Vienna-Europe

ndustrial Policy to Be
Highlighted in the Age of thePandemic

By Japan SPOTLIGHT
Industrial policy is today attracting growing attention mostly due to emerging nations’ economic
progress, in particular China. In this age of Covid-19, industrial policy will have significant implications for
economic performance through its diverse impact on productivity, growth, competition, employment, andsocial needs. The range of its impacts on economy and society will be noteworthy compared withmacroeconomic policy, the impact of which is limited to growth and employment. With the pandemic,
there will be significant changes to industrial structure, such as a rise in IT software business due to theexpansion of teleworking and a decline in face-to-face services deriving from a change in social needs.
Dr. Karl Aiginger is the director of the Think Tank Policy Crossover Center Vienna-Europe and teaches at
the Vienna University of Economics and Business Administration. He served as director of the Austrian
Institute of Economic Research (WIFO) from 2005 to 2016, is a distinguished expert on industrial policy,
and has contributed to many studies commissioned by the European Commission and the OECD. Ourinterview with him via email is as follows.
(Interviewed on July 17, 2020 by email in answer to our questionnaire)

Background to the Growing
Interest in Industrial Policy
JS: Could you please explain thebackground to the increasing interest
in industrial policy worldwide?

Success & Failure of Industrial
PolicyJS: You have done research onindustrial policy success stories.
Could you tell us about somesuccessful cases or cases of failure?

Aiginger: A variety of trends have contributed tothe renewed interest. In the developing world,Aiginger: As the greatest success we can mention
there has been a pushback against the marketEast Asian countries like South Korea, Japan andfundamentalist approach, typically associated with
their type of market-driven approach, combined
the Washington Consensus. Even when growthand directed by technocratic state planning (dualrates have been high, economies in Sub-Saharanapproach). In Europe remarkable progress hasAfrica and Latin America have experienced
been seen in Ireland, where a lagging country
Dr. Karl Aiginger
unsatisfactory rates of productive transformationachieved high per capita income that led to theand shortfalls in generating quality jobs in manufacturing or modern
return of emigrants. The success was built on inward investment andservices. And growth is too low relative to high population growth. This
low corporate taxes – where the latter would have been punished byhas created a demand for proactive government policies to diversify
competition policy if Ireland was not so small (see the struggle about
and upgrade economies beyond simply freeing up markets. In thetax exemption for Apple, where a European court recently cancelled aadvanced economies, generalized labor market malaise and thehigh penalty caused by forbidden subsidies). But Ireland insisted also
lingering effects of the financial crisis have produced similar effects.
that multinationals investing in Ireland cooperated with Irish small andLow growth dynamics occurred especially in the eurozone, as countries
medium-sized firms and it upgraded its educational system fromwith trade and budget double deficits with a common currency
preschool to vocational training and universities to provide an excellent
struggled to come out of the crisis. The continuing decline in theworkforce.
employment shares of manufacturing in the United States andThe biggest failure we saw was in France. Here a small insider grouppersistent high unemployment in Western European countries and theof mainly male managers and civil servants, trained in elite universities,
increasing competitive threat posed by China on world markets have
all unused or unwilling to speak English and opposing diversity,
pushed in the same direction. Interest in industrial policy is beingsupported domestic champions in the airline, space, nuclear energy
further stimulated by disruptive technological change – fromand armaments, and finally heavy industries. The French have always
automatization to digitalization, Industry 4.0, and the Internet of Things.
advocated a sectoral approach in industrial policy, originating in
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COVER STORY 5

planification. This defines sectors thought important in the future, apolicy approach which becomes more and more difficult in a time ofquick technological change and digitalization. Thus, the share ofmanufacturing has declined to less than 15% due to a lack of firms inmachinery and consumption industries. High-speed trains and Airbus
are the rare success stories. France now has a trade deficit, low
research expenditures, large regional differences and suburbs burstingwith nonintegrated migrants. Italy has lost a lot of successful industries
too, since it could not industrialize the south of the country and did not
engage in partnerships with countries on the other side of theMediterranean (called Mare Nostrum but neglected by industrial policy
as a driver of exports), and its governments based on unstablemajorities aggravated the problems.
The backlash in Japan is another sign of failure. In the 1990s, USuniversities where I had the opportunity to research and lecture had
been focusing their industrial development efforts on high value-added
and sophisticated industries like the car industry. But two lost decades
followed in which growth was anemic. Japan discovered that highresearch efforts and good schools do not suffice if the workforce isdeclining, management is aging and forced to retire at the obligatory
retirement age, immigration is restricted and industry is dominated byold-boy networks and the advantages of change and diversity areneglected. No changes have been seen in the planning system, chances
to pursue renewable energy have been neglected (remaining at between
5% and 10%) and the country has the lowest rate of females inparliament and the media.
JS: What major factors do you think are key to thesuccess or failure of industrial policy?

Aiginger: It is all important that industrial policy supports a high-roadpath. It has to be driven by technological, societal, and ecologicaldemands. Looking for low wages, restricting imports, and opposing
globalization yields only short-term relief and aggravates problems in
the long run. Research and lifelong training is an enabler, as isheterogeneity of managers, lifelong learning and sabbaticals. And
maybe the most important features of success are that industrial policy
does not fine-tune, but defines broad areas of advantages, and that thegoal of industrial policy has to be steered by societal goals. If fighting
climate warming is a priority, energy saving is an all important goal. Ifsociety is aging and the population shrinking, migration should bemade possible and technologies shared with the leading industrial
countries, and cooperation with rising stars should be seen as a sourceof innovation. Japan’s absence in Africa is a disadvantage for Africa, buteven more for Japan because its perspective is dwarfed.
JS: Do you think China’s industrial policy hasachieved great success?

Aiginger: China now enjoys the highest share in manufacturing, higher
than the US and Europe. It is lagging in natural resources and inresource productivity, and still has a high share of low quality products.
The government addresses these problems in the China 2025 strategy
and even more in its vision for 2050, in which it plans to lead in several
important industrial sectors by 2050 and has started to do so already inelectric batteries and photovoltaic panels. Its Belt and Road Initiative

will support its quest for raw materials and fossil fuels, but it is also avery egoistic project so that backlashes are to be expected. China willlearn that success in manufacturing cannot be combined withstrategies to extend its territory (such as in Hong Kong or artificial
islands in the South China Sea) or to suppress the Uighurs in the northor cheat on intellectual property rights.
JS: In the light of the current trend of evidence-based

policy making, do you think industrial policy needs tobe subject to cost-benefit assessments or can it beassessed by quantitative analysis of its impact on theeconomy?

Aiginger: Cost-benefit is a technical term. I would like to monitor thesuccess of industrial policy as a recurrent evaluation of its goals, what
instruments are planned ex ante and which worked or werecounterproductive. If you take as a societal goal not only income
growth but fighting climate change, you see immediately that anindustrial policy based on coal and oil is not sustainable, and it is evencounterproductive, as are resources imported from faraway countries
using ships and trucks with high emissions. Such a low-road path maylead to a short-term advantage but it reduces the quality of life andhealth in the long run and cannot be the result of an industrial policy
steered by societal goals.

Competition Policy & Industrial Policy
JS: If one of the key missions of industrial policy is toraise the overall productivity of the economy, should
it be devised to encourage inter-firm competition toachieve this goal? If so, would competition policy be
important as well?

Aiginger: My answer has two elements. First, increasing productivity isan essential element of a high-road policy, but it is important which
type of productivity is concerned. Increasing labor productivity makes
ever higher growth necessary to provide jobs for an increasing
workforce but may on the other hand increase greenhouse gases andomissions. Increasing energy and resource productivity yields the same
cost-saving and profit-increasing effect but lowers emissions andsmog. Redirecting productivity from labor saving to resource saving
should be a part of a renewed industrial policy.
Secondly, industrial policy has to be no silo policy but a policy withsynergies – e.g. with the competition policy. Without competition,
incentives for technological improvements would be very low, but it isalso important that firms which invest in innovation and training its
workforce have profits to recover the costs and risks of innovation. So
industrial policy, innovation policy and competition policy, and also
environmental goals, have to work together to yield the optimum
outcomes for society

Goals of Industrial Policy
JS: Do you think the objectives of an industrial policy

must be diversified, including goals such as job
security, energy saving, and health promotion? InJapan SPOTLIGHT • November / December 202023

COVER STORY 5

this light, how do you assess Japanese industrial
policy? It seems to have been pursuing a variety ofpolicy goals, like dealing with the needs of an aging
society or promoting high value-added industrialstructures.
Aiginger: Japan has managed an extremely successful postwarperformance. A destroyed and occupied country achieved high growthover decades, approaching the technology frontier in 1990. An
ambitious industrial policy targeted sectors and supported horizontal
Keiretsu. Collusion between large firms steered by the industry
ministry, cross-ownerships and cheap finance were the pillars of thissuccess. Industrial policy was so impressive that the US questioned
what Japan did better, for example, in the automotive industry.
However, since the 1990s growth has decelerated and two lost decades
ensued. Fiscal deficits piled up to a public debt more than double GDP.
Up to now, corporate Japan, pension funds and citizens have been
willing to buy government bonds, despite their low returns.
But to answer this question I would repeat my remarks that industrial
policy should be directed by societal goals and must not be a silo policy
but one that develops synergies with competition, innovation,education, and climate policy, as well as an intelligent immigrationpolicy to prevent the aging and petrification of society.
JS: What issues do you think need to be urgently

resolved by industrial policy in Japan?

Aiginger: Japan had been in the vanguard of modern industrial policy
up to 1990. When I was a researcher at MIT everybody looked at Japan
since it was expected to surpass the US in various high-technology
markets. Industrial policy in Japan is no low-road policy: researchexpenditures and achievements in tertiary education are higher than in
the US and Europe, for example. Japan shifted its policy from sectoralpriorities to a cluster approach, trying to imitate the success of Silicon
Valley, which proved impossible for 20 clusters spread all over Japan.
Six reform priorities were set by the government of Prime Minister
Ryutaro Hashimoto in the late 1990s, among them corporate law, social
security, administration and regulation requiring government
involvement. Since then economic growth has remained slightly below
1 percentage point. Japan has given up some of the constituent
elements of its old industrial policy, such as targeting sectors andprotecting firms from competition, but it does not use the acceleratorsof a new industrial policy based on the driving forces of societal goals.
Japan signed the Paris Agreement on climate goals, but this isreflected in neither its industrial nor its tax policies. Small-particle air
pollution is above the recommended maximum and causes 500 early
deaths per million people. The share of renewable energy is half of theOECD average. Thirty new coal-fired power plants are still being
planned today, which makes it impossible to reach the Paris climate
goal neutrality by 2050. This is clandestinely acknowledged in thestatement asserting that neutrality should be achieved “as early aspossible” in the second half of this century. This is not justincompatible with the signing of the Paris Agreement; it is also to thedisadvantage of the economy. An ambitious policy would boost growth:a technology leader enjoys first-mover advantages and saves lives.

24 Japan SPOTLIGHT • November / December 2020

Pandemic’s Possible Impact on IndustrialPolicy
JS: Will the pandemic today possibly change thenature of industrial policy?

Aiginger: The pandemic helps us to discover hidden problems. Single
sourcing to exploit small-cost advantages make no sense, but thisshould not be the end of globalization but a change from a turbo
globalization to a responsible globalization. Countries in which anindustrial policy is not a silo policy but connected with healthmanagement, equality of races, and openness of hospitals for all strataof society have been much more successful in preventing the worst
negative consequences for the economy. The pandemic will increase
inequality and lead to racial conflicts and new waves of immigration if
leaders first deny the problems and then react abruptly to them.
JS: Would industrial policy be effective in restoring

global supply chains damaged by the pandemic?

Aiginger: Global supply chains will not be damaged by the pandemic
but will need to be reconsidered, such as the locations of production
facilities. But working conditions may also need to be considered underlabor policy, a kind of industrial policy, because there will have been
large differences in health support for the rich and the poor during thepandemic. There will also be competition between large companies andSMEs, in particular in the small service or retailer sectors, which could
push the latter out of the market.
JS: Like competition policy or intellectual property

rights, do you think there is a need for international
harmonization of industrial policy?

Aiginger: Harmonization of instruments and outcomes is neither
advantageous nor feasible. It is important that goals are defined andagreed, and then countries can define their priorities and preferences.
An international organization has to monitor the adequacy of country
strategies.
This three-stage approach is well documented and optimal in climatepolicy. Some 180 nations have agreed that the problem of climate
warming exists and that a large proportion of it is caused by humanbeings. Each country that has signed the Paris Agreement has topresent a strategy to contribute to the common goals. The strategies
are then evaluated and must be adjusted if the combined effect is notlarge enough.
This is for me the best combination of top-down elements which arenecessary with bottom-up elements which support commitment andsearching for the unknown. That may be a good summary of a forwardlooking industrial policy: it is a process of searching which will help
improve our societies and individual well-being.
Email: karl.aiginger@querdenkereuropa.at
Website: www.querdenkereuropa.at
Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT & executive
managing director of Japan Economic Foundation (JEF).