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  • From: Tvoivozhd <tvoivozd AT infionline.net>
  • To: homestead AT lists.ibiblio.org
  • Subject: [Homestead] Picking winners when every country does it
  • Date: Fri, 01 Oct 2004 22:39:28 -0700



The International Herald Tribune

*Commentary: Asia must weigh the rising cost of picking winners*
*Andy Mukherjee* Bloomberg News
Friday, October 01, 2004

<http://www.iht.com/cgi-bin/search.cgi?key=>The next time an investor promises a developing country new jobs and export earnings in return for a tax break or other concessions, policy makers must be on the alert for hidden costs.

Tempting as it may be to forgo a little revenue for the sake of jobs or hard currency, "such strategies are far from straightforward and can go spectacularly wrong," the World Bank cautioned in a report this week.

That message should resonate with Asian finance ministers who for decades have devoted themselves to "picking winners" - granting tax breaks and import protection to export-focused industries that promised a quick cure for joblessness and poverty.

Japan's post-World War II push to raise exports of textiles, steel and automobiles, followed by semiconductors and computers, became an Asian model.

South Korea nurtured its conglomerates with subsidized credit. Singapore pursued foreign investors who brought electronics jobs to the city. China attracted multinationals to its special economic zones with tax breaks and flexible labor laws.

It was state intervention, and not so much free-market policies, that created the East Asian growth miracle, the economist Robert Wade argued in a controversial 1990 study.

After the Asian financial crisis of 1997-98, the same policies were blamed for the sorry state of the region's lenders. State intervention had forced banks to lend too much to exporters and too little to other sectors, especially small businesses.

The export push also made Asia a hostage to the American consumer.

The Asian reluctance to let home currencies appreciate against the dollar stems from an overriding preference for exports. In Singapore, where there has been too much emphasis on foreign investment, entrepreneurship has suffered.

Export-led growth is now becoming too expensive because many more countries have joined the game.

Since 1962, the number of countries exporting electrical equipment has tripled, and the number of nations shipping vehicle parts has more than doubled, the World Bank says. More than 3,000 "economic promotion zones" now exist in 116 countries.

"When East Asian countries experimented with selective interventions to support their export-oriented industries, few other developing countries were doing the same," the bank's World Development Report for 2005 says. "Today it's difficult to find a government without the same ambitions."

Ditto for foreign investment. With 160 nations now having some kind of an investment promotion agency, the rivalry has gotten so fierce that countries lacking the environment to attract investors are giving away too many concessions.

In 1997 Ford Motor received $420,000 in incentives per job created in India, but only $138,000 per job created in Britain in 1998, according to a study by a Carleton University professor, Maureen Molot.

Rather than trying to back potential winners with expensive tax breaks, it may be a better strategy for Asian governments to create conditions that help all investors.

That doesn't mean the government has to waive taxes for everyone. A separate World Bank survey has estimated that companies lose as much as a fourth of their sales - three times more than they pay in taxes - to theft, corruption, over-regulation, poor infrastructure and inadequate legal enforcement.

It may not be politically feasible to do away with preferential treatment altogether. The World Bank says policy makers must ask three questions before they accept any demand for concessions to a particular industry:

Is it the right candidate for help? That is usually the case only when the investor seeking assistance plans to build on the country's natural competitive advantage, as when Thailand's beaches invite investment in tourism, or India's colleges provide skills for software writing.

Will assistance to an industry be hard to turn off? American sugar-import quotas keep world prices of the sweetener depressed, hurting sugarcane growers from Thailand to Brazil. The market-distorting quotas are hard to repeal because of the U.S. sugar industry's lobbying power.

Will benefits of the intervention be canceled out by the total cost to the economy? The cost of supporting a particular industry is not just foregone government revenue. The burden of import protection, for example, is borne by consumers who pay the higher tariffs.

The questions are tricky because, as some economists will argue, no bureaucracy can ever have the complete knowledge to predict all consequences of its actions.

It's not even certain that an active industrial policy can lift a country's growth rate.

As Jonathan Krieckhaus of University of Missouri-Columbia points out: "One can find statistical evidence to support liberalism but not statism."

Asian finance ministers must remember that picking winners is a policy with unproven benefits and hidden costs. Any development strategy that looks too good to be true, usually is.

Bloomberg News


IHT Copyright © 2004 The International Herald Tribune | www.iht.com <http://www.iht.com>










  • [Homestead] Picking winners when every country does it, Tvoivozhd, 10/01/2004

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