Industrial policy should target productivity, not specific firms and sectors

Industrial policy should target productivity, not specific firms and sectors

Industrial policy has re-emerged in Canadian economic policy as federal and provincial governments look for ways to enhance recovery in the post-recession era. As unemployment remains stubbornly high and productivity and growth continue to lag across the country, policymakers are looking toward a more involved approach to economic development, despite economists’ general skepticism towards the use of interventionist economic policies.

Industrial policy is an often misunderstood concept. Definitions of industrial policy vary widely and can take on narrow views of specific sectorial support or broad perspectives on economic growth and competitiveness strategies. The crudest definitions often describe industrial policy as the act of “picking winners and saving losers.” Much of the industrial policy literature explores interventionist government support of specific industries like manufacturing and the tech sector, as this has been the concept’s most associated application. Yet the call for a more robust industrial policy in Canada, as is frequently echoed in the media and reports, suggests that industrial policy entails more than simply targeting specific firms or sectors and instead is part and parcel with overall economic development.

While best known for protectionist policies that were phased out to varying degrees in the later 1980s, industrial policy in some form has proliferated in more recent years. The best example is the auto industry bailouts of 2008, when the federal and Ontario government committed $4 billion in auxiliary loan payments to auto manufacturers Chrysler and General Motors in order to save hundreds of thousands of jobs in Ontario. In addition, direct support to businesses in Ontario through loans, grants, and other funding programs nearly doubled between 2006 and 2012.

Most recently, the Ontario government combined its energy strategy with industrial policy to create the Green Energy Act in 2009. The controversial policy devised a feed-in-tariff program to bring renewable energy producers to the electricity market and issued over $1 billion worth of rebates to energy users to compensate for the rise in energy prices. The province claims the Green Energy Act has created 31,000 jobs since 2009 and brought more than 3,300 MW of renewable energy online, enough to power 900,000 homes. But this has come at a tremendous cost through higher electricity costs and greater grid unreliability prompting the need for additional power plants to compensate. In addition, the World Trade Organization has stated that Ontario’s local manufacturing requirement violates international trade rules. This greatly jeopardizes the industrial policy component of the government’s plan.

Last December, the Ontario government also awarded $220 million to American IT firm Cisco Systems as part of a plan to create “up to 1,700 jobs” in research and development and other tech sectors over the next six years in Toronto and Ottawa. Cisco claims the deal could lead to the expansion of its Ontario workforce by up to 5,000 by 2024. While this is a politically attractive plan, it is unclear whether these subsidies will amount to long-term job gains in the province. Without improvements to productivity, Ontario will likely continue to experience job losses amongst highly mobile firms operating in the province.

The Institute is wary of any policy that hampers the competitiveness of Ontario businesses. Industrial policy in the form of targeted measures to spur productivity and growth can be beneficial, but any form of protectionism is likely to bring long-term damage to Ontario’s competitiveness. The guiding principles of industrial policy should be that it’s neutral and temporary. Many current business supports give preferential treatment to certain industries and are unnecessary given the business’ profitability. This causes economic distortions as the cost of business in certain industries is artificially lower than others and businesses reap the benefits of government support even if they don’t need it. Moreover, these public dollars can be allocated to better uses in the budget.

The Institute supports strategies to improve the overall competitiveness of Ontario’s economy, but views specific sectorial or firm support with suspicion. It is crucial to consider any policy with the economy as a whole in mind and not individual industries. Building a sound industrial foundation is essential to Ontario’s prosperity, but industrial policy has yet to demonstrate itself as the best means to achieve it. With a more pragmatic and holistic approach, industrial policy can benefit Ontario, but not if it’s simply giving industries a boost.

Photo Credit: sorbetto, Getty Images

Category: Economic Progress, Industrial Policy, Productivity