Summer School 5: The many ways governments influence industry

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Speaker 2 Welcome back to Planet Money Summer School. We're hanging out here every Wednesday until Labor Day, just like an ice cream truck that plays a catchy jingle of knowledge.

Speaker 2 In the first half of our short political economy semester, we talked about the things that the government pretty much has to do.

Speaker 2 Provide basic infrastructure, pay for things the market won't provide, like national defense and a social safety net, and set the rules of competition.

Speaker 2 But today, we discuss what happens when the government really wants to get their hands dirty and shape the direction of the economy.

Speaker 2 Even decide which companies should prosper and which ones should fail. This is class number five, industrial policy.

Speaker 2 Traditional economics says that the market is guided by the forces of supply and demand. Customers decide what they want to buy, and private enterprise responds to that need.

Speaker 2 So what makes government think that it's smarter than capitalism? Why offer tax breaks to Hollywood or incentives to build silicon chip factories in Arizona, of all places?

Speaker 2 Why those industries and not others? Joining us to help answer that question is Professor Juan Ricard-Huget, who teaches political science at Loyola University, Maryland. Welcome back, Juan.

Speaker 4 It's great to be back, Robert.

Speaker 2 You're coming to us from Barcelona. Why Barcelona?

Speaker 4 I was born and raised in a city called Girona, which is about 60 miles away, both of them in Catalonia, where I'm from.

Speaker 2 Excellent. Because today's class is very international in focus.
In the global economy, every country wants the world to buy their products. But there's a challenge.

Speaker 2 How do you build up your car industry, let's say, when Japan and America are already so good at it? How do you develop tech companies when the U.S. has so much of the talent in Silicon Valley?

Speaker 2 Often this is where the government steps in to help private companies. It's called industrial policy.
And Joan, let's define that first.

Speaker 4 Industrial policy is a set set of economic policies that the government undertakes to influence domestic industries with the goal of fostering economic development.

Speaker 2 All right, so let's break that down. Government-influencing industries can include really basic things, right? Like building roads and power plants.
But sometimes industrial policy is a lot more

Speaker 2 vigorous, shall we say, right? Tax breaks for certain businesses, subsidies for research, even telling the owners of factories factories what to produce.

Speaker 2 The funny thing is, we in the United States do this all the time, but when another place, when Europe or China does industrial policy, you know, we cry, oh, it's not fair for you to subsidize your airplanes, subsidize your cars.

Speaker 2 But is industrial policy necessarily a bad thing? Is it anti-competitive?

Speaker 4 Industrial policy generally limits competition. Whether it's good or bad depends on who we're asking.
So industrial policy should be good for the companies that are being favored.

Speaker 4 Whether it's good for the citizens of the country doing industrial policy as a whole, that depends on whether industrial policy is successful. The U.S.

Speaker 4 has a long history of industrial policy in the 19th century.

Speaker 2 Well, and not just the 19th century. You know, I like to think that NASA and our space race to the moon, that was the government supporting a lot of industries in aerospace, right? The internet.

Speaker 2 The internet's a great example of the government developed something and helped create all these companies around it.

Speaker 4 DARPA was the big project project tied to the Department of Defense, the OD, that eventually led to all these scientists collaborating and creating kind of the early version of the Internet.

Speaker 4 The question, of course, that someone may ask is: well, had the government not helped, would we have Internet anyway? And the answer is probably yes.

Speaker 4 The question is whether we would have had it earlier or later.

Speaker 4 And many people may argue that it would have come later because the amount of initial capital you need for some of these big breakthroughs are stuff that sometimes only very big companies or big governments like the US can fund.

Speaker 2 So Professor, we have two stories today. Should we start with the cautionary tale, the things that can go wrong with industrial policy, or should we start with the wild success story? Up to you.

Speaker 4 I'd say let's start on the cautionary tale so that we can end up on a happier note.

Speaker 2 That is a wise, wise pick. We will start with the wild story of what happened when a certain government decided it wanted to manufacture its very own mobile phone after the break.

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Speaker 2 And we are back with our class on the do's and the don'ts of industrial policy. Our first case study is definitely in the don't category.

Speaker 2 It takes place in Argentina, in particular the region at the very tip of Argentina near the South Pole, and an attempt to build an Argentinian cell phone.

Speaker 2 Professor, what should the students be listening for in this episode?

Speaker 4 So one of the things they should keep in mind is whether it makes economic sense to

Speaker 4 try to industrialize in the South Pole, far away from the economic center of activity. in Argentina and for that matter, in all of Latin America.

Speaker 2 Great. This story takes place around 2010, and it was hosted by Jacob Goldstein and Stacey Vannick-Smith.

Speaker 6 A few years ago, Argentina was in this situation that might sound a little bit familiar.

Speaker 6 The country had just elected this charismatic populist president who said she was going to fix the Argentine economy. Her name was Christina Kirshner.

Speaker 3 She said, Argentina isn't making things. We need to make things.
And so she had this idea. She was going to bring manufacturing from Asia and Mexico to Argentina.

Speaker 7 En tiempos de globalización. Sigen gen más vigentes que nunga representar los interestes de los argentinos.

Speaker 6 Kirshner started pressuring companies to make things in Argentina. She put huge taxes on things that were manufactured overseas, taxes of like 30 and 40 percent.

Speaker 3 And for some other things, including certain kinds of electronics, say, Kirshner went even further. She said, you cannot import these at all.

Speaker 3 If you want to sell them in Argentina, you have to make them in Argentina.

Speaker 6 Hugo Bonifaccini saw this firsthand.

Speaker 8 Okay, sorry, sorry for my English, Stacey.

Speaker 6 No, your English sounds great.

Speaker 8 No, no, it's not true.

Speaker 6 Hugo was a systems engineer at a manufacturing company in a remote part of Argentina.

Speaker 6 It was a pretty small operation, about 60 employees.

Speaker 3 And then right around 2010, give or take, the president of Argentina makes this law that says all these things have to be made in Argentina. And suddenly Hugo's world is like completely transformed.

Speaker 3 Like overnight, these giant shipping containers full of parts and machinery for all this new manufacturing start showing up outside his office.

Speaker 8 We don't have warehouse to store us.

Speaker 6 So all the parts would arrive and you didn't have anywhere to put them. Yes, yes.

Speaker 3 A lot of those containers full of equipment had cell phone parts, smartphone parts, because one of those things that Kirchner said you cannot import at all has to be made in Argentina was cell phones.

Speaker 6 And some companies, like Apple and the iPhone, for example, would not play ball. But other companies said, okay, we will give it a try, including the company that made BlackBerries.

Speaker 6 This was back in 2011, and BlackBerry was a hot phone. In fact, it was the most popular phone in Argentina at the time.
Argentine celebrities and politicians were all carrying BlackBerries around.

Speaker 6 It was kind of like the it phone.

Speaker 8 Here in Argentina, everybody was crazy for BlackBerry. BlackBerry was an icon.

Speaker 6 At the time, BlackBerries were assembled in Mexico and Hungary. So BlackBerry agreed to try and make phones in Argentina.

Speaker 6 It partnered up with Hugo's company, and suddenly this company in this little town was responsible for making all of the BlackBerries for all of Argentina. Millions of phones.

Speaker 8 All production explode. Explode, Stacey.
It was amazing.

Speaker 6 Now, when Kirshner would tell companies, you have to make stuff in Argentina, it didn't always stop there. She would sometimes get very specific.

Speaker 6 In the case of BlackBerry, she had a very particular part of Argentina in mind. Wes Nickel ran BlackBerry's South America operations.

Speaker 9 The law was that you had to manufacture it down in the very south southern tip of Argentina.

Speaker 3 Tierra del Fuego. Land of fire.

Speaker 6 Just makes you want to set up shop there.

Speaker 3 Nothing says manufacturing hub.

Speaker 3 Like the land of fire.

Speaker 6 Tierra del Fuego is an island in the south of Argentina. It is actually where boats leave for Antarctica.

Speaker 3 It is one of the... Also, a promising sign for a manufacturing hub.

Speaker 6 It's one of the most remote places on earth, and it has a really harsh environment. It's cloudy all the time.
Apparently the wind is always ripping through and it's hard to get to.

Speaker 6 The roads are terrible. There aren't many flights in or out.
Argentines call it the end of the earth. It would be like if Apple suddenly had to make iPhones on a little island off the coast of Alaska.

Speaker 3 But Wes Nichols says there was a logic to this. It wasn't an economic logic.
It was political logic.

Speaker 9 That was one of the population bases that was really supportive of Christina Fernandez de Kirchner, helped her get elected. And so she wanted to pay back those constituents and provide jobs for them.

Speaker 9 And so she was really forcing this issue.

Speaker 3 And so they wound up setting up shop in Tierra del Fuego and working with Hugo's company.

Speaker 6 And even though Hugo had spent his entire career working in manufacturing, he says BlackBerry's operations were just on another level. The factory, he said, was like a work of art.

Speaker 6 There was a clean room with all these very sophisticated monitors that would like keep track of tiny particles of dust. There was state-of-the-art machinery.
There was really high security.

Speaker 6 And all this stuff, getting it all set up, took like a year.

Speaker 3 And even once they had the factory, they were missing another key thing, another key element, people.

Speaker 3 They needed like 2,000 workers to come and make all these phones. So they started having to recruit people from halfway across the country to come move to this town to work in the factory.

Speaker 6 Oh, so in order to get people to come to Tierra del Fuego to fill all these jobs, they had to offer really high salaries.

Speaker 1 Clado.

Speaker 8 Very high salary, yes.

Speaker 6 Three times what that job would pay in another part of the country. Not to mention really great pension benefits.

Speaker 3 They make all these changes, they recruit all these workers, and within a year, Hugo says, the manufacturing company he's working for goes from 60 workers to more than 2,000 workers.

Speaker 6 And two years after Argentina's cell phone ban, the first Argentine Blackberry rolls off the line. Hugo still remembers the moment.

Speaker 8 Yes, yes, sure, sure. Everybody was in the line to see the first Blackberry.

Speaker 6 Really? Everybody was crowded around to see it?

Speaker 8 Yes, everybody.

Speaker 3 This was a moment of triumph for President Kirshner. She had created thousands of jobs, and these are, you know, good, high-end, manufacturing jobs.

Speaker 3 They're creating this product that everybody loved, and it's super high-tech.

Speaker 6 Christina Kirschner made a big announcement about the first Argentine Blackberry, and people went crazy. In the news clip we found of her speech, there is just four full minutes of just cheering.

Speaker 6 Everybody's waving Argentine flags and jumping up and down and and dancing.

Speaker 7 Gracias companieros.

Speaker 6 Kirschner starts delivering this really impassioned speech about how Argentina is going to become a great center for manufacturing, about bringing jobs in from overseas.

Speaker 7 El primer BlackBerry que ze fabrica la República Argentina en Tierra del Fuego!

Speaker 3 BlackBerry, Argentina was doing great. And it, you know, it wasn't just BlackBerry, right? These new rules that the president had put in place drove all kinds of manufacturing to Tierra del Fuego.

Speaker 6 Yep, laptops, flat-screen TVs, microwaves, air conditioners, pretty much everything you can think of was being manufactured in Tierra del Fuego.

Speaker 3 The population's growing, stores are opening, money is flowing in, you know, people are driving around in Range Rovers.

Speaker 6 And the rest of Argentina was doing pretty well, too. In fact, the New York Times and the Guardian published editorials about what a great job Kirschner was doing.

Speaker 6 One headline called it the turnaround tango.

Speaker 3 That's a terrible headline.

Speaker 3 Well, I think in Argentina, they're like, every time it's got to be be the 10. It's got to be the 10.

Speaker 6 The point, though, Jacob, is that Kirshner's plan of like strong-arming companies to start producing things in this remote part of Argentina, it was working.

Speaker 3 My spidey sense is tingling. Well, I feel like it's not going to keep working.

Speaker 6 There were a couple of problems. So first of all, all this setting up took a long time.

Speaker 6 And so by the time the first BlackBerry rolled off the line, the model was two years old, which in the world of cell phones, as you know, is like totally outdated.

Speaker 6 And in addition to that, it was expensive. In fact, the Blackberry in Argentina was twice as expensive as newer Blackberry models in the US.

Speaker 3 So now President Kirshner, who set up this manufacturing miracle, has a new problem, right?

Speaker 3 She's made companies manufacture phones in Argentina, but she cannot make people in Argentina buy those phones.

Speaker 6 And this created a very interesting business opportunity for some enterprising Argentines. I talked to one guy who smuggled Blackberries into Argentina.

Speaker 6 He would hide them in pairs of shoes in his suitcase or stuff them into into his socks before he walked through Argentine customs.

Speaker 3 And not surprisingly, with enterprising Argentines walking through customs with their socks full of phones, sales of the original Argentine Blackberry started to drop.

Speaker 3 Why would you get a worse phone for more money?

Speaker 6 And Wes Nicol, the guy who worked for BlackBerry, said the Tierra del Fuego manufacturing plant just started making less and less economic sense.

Speaker 9 It just came to a point where the business case wasn't justified. We just couldn't afford to do it.

Speaker 3 Less than two years after Christina Kirshner held that first Argentine Blackberry up to the cheering crowd, the last Argentine Blackberry rolled off the line.

Speaker 6 Hugo Bonifaccini remembers it well. How did you feel when BlackBerry left?

Speaker 8 It was not easy for us.

Speaker 6 Oh, it left a bad taste in your mouth.

Speaker 3 Yes, yes.

Speaker 8 That raised sabora margo.

Speaker 4 Bitter.

Speaker 3 Bitter taste. Bitter taste.

Speaker 6 Kirshner's government had invested $23 million in the BlackBerry Project, not to mention $6,000 per worker per month. That was all up in smoke.

Speaker 3 This is happening at factories all over Argentina. Sales are going down.
People are getting laid off. And more broadly, the Argentine economy is starting to fall apart.

Speaker 6 All of Kirchhner's economic controls unraveled kind of all at once. It got really bad.
Inflation hit 40%.

Speaker 3 40% in a year.

Speaker 10 Yeah.

Speaker 6 And prices rose for everything. Food prices more than doubled.
And a lot of companies that had been strong-armed into setting up shop in Argentina started pulling out.

Speaker 2 Jacob Goldstein and Stacey Vannick Smith from 2017. You can now buy an iPhone in Argentina.
The import restrictions were lifted, although for many years, tariffs made iPhones wildly unaffordable.

Speaker 2 But still, today on the streets of Buenos Aires, nobody has a cell phone made in Argentina. They're all foreign.

Speaker 2 Let's bring back in our professor Juan Ricardo Goette for a post-mortem of the Argentinian BlackBerry. Hi, Robert.

Speaker 2 Well, this is one of the dangers of industrial policy, right? You have politicians deciding what to make and where to make it. And politicians...

Speaker 2 have their economy as one of their interests, but they also have these political constraints they have to do.

Speaker 4 Yeah, I mean, to give Argentine governments a benefit of doubt, I would say, from a national security standpoint, protecting the southern tip of your country may make some sense, right?

Speaker 4 It's next to Antarctica. There may be things that Argentina wants to protect down there.

Speaker 2 Sure, against the penguins.

Speaker 4 Right. Whether it should be the industrial core of Argentina is far from obvious.

Speaker 2 Yes. And what they're trying to do in Argentina is something that has been fairly unsuccessful for many countries.
It's called import substitution. What is import substitution?

Speaker 4 So import substitution industrialization is an economic policy that promotes the development of some domestic industries to

Speaker 4 replace what were until then imported goods.

Speaker 2 Because a politician looks at this and says, wait a minute, why are we sending money abroad for these things that we can make in our own country?

Speaker 2 We should somehow stop the imports from coming in, either through tariffs or quotas or just stopping them, right? And we should force our industry to make that thing.

Speaker 4 Except it's kind of important to figure out what exactly is that the country should be making. There's no country that makes everything domestically and imports nothing.

Speaker 4 So the question is, what should a country like Argentina be making?

Speaker 4 And cell phones may not be the most obvious choice in the short run or even in the longer run to develop global comparative advantage.

Speaker 2 Comparative advantage, this is the first time it's come up, I believe, in summer school, at least this season. What is comparative advantage?

Speaker 4 Comparative advantage is

Speaker 4 something that country A is relatively better at doing than country B or for that matter most other countries.

Speaker 4 And so if you're country A, it makes sense to want to export that good and perhaps import others others where you have what's called a comparative disadvantage.

Speaker 2 And Argentina does some things really well. It does agriculture really well.
It does meat and wine, as we well know.

Speaker 4 Yeah, it makes sense that the Argentino government wants to industrialize the country.

Speaker 2 Sure, you want to have other industries for when beef prices go down. Plus, you want people to have better jobs than just working in a winery.
Rich countries have diverse economies as a rule.

Speaker 4 That's what we call structural transformation, moving from exporting bananas to exporting cell phones.

Speaker 4 But it really is incumbent on the government and private actors to determine what exactly is it that the country can invest in to develop competitive advantage globally in maybe the medium term in a few years.

Speaker 2 Sure, all that time and resources that Argentina spent on cell phones could have been used to make something that the rest of the world actually wanted to buy.

Speaker 2 So I guess if a country is thinking of industrial policy, they should first look around and ask, ask, okay, what area can we compete in? What is our comparative advantage?

Speaker 2 And it doesn't have to be top-of-the-line cell phones. You know, it could be tractors or something like that.
And then

Speaker 2 when they have that product, they can do import substitution while they grow their industry. They can subsidize for a while.
And then poof, in theory, you have a profitable, export-oriented business.

Speaker 2 South Korea did this with cars, others too, right?

Speaker 4 Yeah, and there are some good examples, in fact. Beyond large-scale agriculture, some countries in the 20th century became very good at making what we call heavy industries, like ships.

Speaker 4 Last time I checked, you know, Korea was not a big naval power in the 19th century, but you'd be surprised to know that

Speaker 4 in the 21st century, most of the top 10 or top five shipbuilding companies in the world are Korean and some are Japanese or Chinese.

Speaker 4 That was a conscious effort of developing an industry back then in the 20th century century that was not bananas, but it was not microchips. It was something in between.

Speaker 2 Coming up next, a great example of how structural transformation can work with China's embrace of green technologies, specifically solar panels. We've shown you how industrial policy can fail.

Speaker 2 What happens when it succeeds? We'll take you to China to meet the Sun King, a man who built a solar empire with a little help.

Speaker 2 Who am I kidding? With a lot of help from the Chinese government. After the break.

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Speaker 2 Okay, class, I am going to write a fact on the blackboard. Yes, we still have blackboards here at summer school.
China accounts for more than 80% of the global market in solar panels. 80%.

Speaker 2 This was not an accident. This was industrial policy.

Speaker 2 As you listen to this next case study, think about what the Chinese government did to make Chinese solar businesses succeed and how they avoided the mistakes of Argentina.

Speaker 2 The story comes from the Indicator podcast, hosted by Emily Feng and Adrienne Ma.

Speaker 11 To tell the story about the rise of China in terms of solar, I wanted to start with someone the industry has nicknamed the Sun King.

Speaker 12 I have been, you know, walking towards my goal of solar everywhere. This is like my dream.

Speaker 2 This Sun King is an amazing nickname. Does the Sun King, though, have a real name? I hope he kind of doesn't.

Speaker 11 Sorry to disappoint you, Adrian, but the Sun King does have a real name. His name is Shi Jinrong, and he's seen it all in the solar industry.

Speaker 11 He's seen the boom and the bust and then the boom again of China's solar.

Speaker 11 And I first met him several years ago actually in Shanghai at this noisy solar industry exhibition and he described to me then just what it took to create this industry in China from basically nothing.

Speaker 11 Because when he first started his company, Sun Tech Power Holdings in 2001, solar was dominated by Japan, the US, and Germany.

Speaker 10 Yes, markets in Europe and the US, but not here. And also there was no supply chain, all right? No capital.
I'm only back 20, 20 years, and

Speaker 10 it was so difficult to raise any money here.

Speaker 11 But Xi starts meeting with local governments in China, and they're all eager for high-tech manufacturing. So they ask him for a business plan, which he admits he'd never written before.

Speaker 11 In 2001, Xiu does get investment from a small city called Wusi, and Suntec starts making panels there within a year and a half.

Speaker 2 Suntec grows fast, but they get an extra boost in 2006. That's when China launches an important strategy, its 11th five-year plan.

Speaker 2 And in it, China declares renewable energy and particularly solar to be key economic priorities.

Speaker 11 That means there is now billions of dollars in state money to go to research and development on solar panels.

Speaker 11 And China starts giving basically free land and electricity and also tax breaks to solar companies like Suntec. And Suntec starts expanding even faster, but they have a problem.

Speaker 10 We realized the supply chain got a problem. We couldn't have enough to supply the industry at the pace of expansion, especially polysilicon.

Speaker 11 So polysilicon is this silicon crystalline like material that you melt down and you make panels with. And Suntech was actually growing so quickly they could not get enough of it.

Speaker 11 Xi tells me wait times were like one to two years for him to get big batches of polysilicon from the United States.

Speaker 11 So Xi eventually helps cultivate a network of new Chinese companies that today make about 80% of the world's polysilicon and solar wafers.

Speaker 2 And building your supply chain locally like this has a huge advantage.

Speaker 2 It keeps costs low, further driving down the price of Chinese solar panels, and it helps China maintain its stranglehold on all parts of the solar industry.

Speaker 11 Xu's company Suntec does really well through all of this. It listed on the New York Stock Exchange and at its peak, it was valued at $16 billion.

Speaker 11 Xu becomes a mega millionaire overnight. And then China takes another step.
It gives solar power a preferential rate.

Speaker 2 What a preferential rate means is that that the Chinese government starts paying more for solar energy that is sold to the grid than, say, energy derived from coal or nuclear power.

Speaker 2 So people who are generating solar energy and selling it to the grid are now making a lot more money.

Speaker 11 Lots of people living in China see an opportunity. They want to sell power to the grid too, and demand for solar panels that they can put on their roofs takes off.

Speaker 2 And this in turn leads to more opportunity for Chinese manufacturers. More domestic solar panel makers pop up and begin cranking out panels.
And this disrupts the global market in a big way.

Speaker 11 Remember, before China came on the solar scene, Japanese, American, and German companies dominated, and they were starting to see real results.

Speaker 11 But almost overnight, Chinese panels became so cheap and they were being made in such volume that these companies could not compete and they went bankrupt.

Speaker 2 And of course, the U.S. wasn't trying to let that happen to them.

Speaker 11 And that's why in 2012 and 2014 the U.S.

Speaker 11 Commerce Department slaps tariffs on Zuntec because it alleges the company was getting too much state support from the Chinese government and they were therefore unfairly out-competing American producers.

Speaker 2 But these tariffs didn't really work. Sophie Liu of Global Energy Monitor says China rocketed to the top of the global solar charts where it remains today.

Speaker 13 Today, the operating utility scale solar capacity is about more than half of the world's combined operating solar capacity. This capacity is nearly five times more than that of the U.S.

Speaker 2 So what about the Sun King? What does he have to say about all this?

Speaker 11 So I caught up again with him recently. And she defends this price war.

Speaker 11 You know, he argues, with some controversy, that it was only China that had the scale to make solar energy cost-competitive with fossil fuels.

Speaker 11 And he argues that if solar did not become as cheap as it is now, because of China, we would not be seeing the global solar revolution that we have today.

Speaker 12 The global citizen should thank the Chinese

Speaker 12 entrepreneurs, engineers.

Speaker 2 And

Speaker 12 without this, really, we don't know

Speaker 12 how we can deal with climate change.

Speaker 2 But you know, this is not an overwhelmingly positive story for Xi and Suntec and even solar.

Speaker 11 No, it is not. The solar industry in China, it almost gets too successful.
There's too much being made for way too cheap. And that leads to a big bubble that eventually pops.
Xi's company defaults.

Speaker 11 Suntec has more than $2 billion in debt. And the board of his own company strips Xi of his leadership title.
It's a bit of a mess.

Speaker 12 There's ups and downs. And, you know, sometimes you need luck, right? If

Speaker 12 all unlucky things happen to you simultaneously, it probably is hard for you to deal with. So

Speaker 12 sometimes we call solar industries like a roller coaster.

Speaker 2 Xi's career with Suntec may be in ruins, but now that the dust is cleared, he can see his legacy.

Speaker 11 That supply chain for polysilicon, the preferential government policies, the cutright prices that companies in China are able to deliver. That's still all in place today.

Speaker 11 And entrepreneurs like Xi helped lay that groundwork for China's solar revolution.

Speaker 2 But that's not the end of the story. Not for the Sun King.

Speaker 11 No, not for the Sun King. He has started a new company, making a flexible lightweight panel he's invented.
And he's building a new factory, not in China, but in Indiana, because building in the U.S.

Speaker 11 has an advantage now. This year, President Biden doubled U.S.
tariffs on Chinese solar panels from 25% to 50%.

Speaker 11 And so Made in America, at least to the Sun King, is looking way more attractive.

Speaker 2 Emily Fang and Adrian Ma of The Indicator from 2024. After the break, we'll bring our professor back in to tell us why industrial policy worked better in China than it did in Argentina.

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Speaker 2 Back now with some final words from our guest professor of this class, Joan Ricard Uget.

Speaker 2 Hi, Robert. So Argentina did the brute force version of industrial policy.
Block all foreign cell phones, subsidize new factories. Simple.
Probably too simple. China was a lot more sophisticated.

Speaker 2 It took firms that were already good at developing technology and gave them a boost. It encouraged them to compete.
And of course, lots of subsidies. Why did that work better for China?

Speaker 4 The main thing that the Chinese government did was augment what already existed in the private sector, but was what we call an infant industry, an industry that was in its very early stages.

Speaker 4 The government came in and provided quite a lot of support so that Chinese solar energy would quite literally take the world by storm, and it did.

Speaker 2 There was another big difference between these two case studies I noticed. Argentina was...

Speaker 2 I'd say sort of anti-free trade. Like it wanted to stop cell phones from the outside and it wanted to manufacture its its own cell phones inside the country.

Speaker 2 Import substitution, the class I might remember. But China was very pro-free trade in developing these solar panels.
In fact, you could say that was the point.

Speaker 2 They wanted people, they wanted companies to send these solar panels to the world. They wanted to open up free trade.

Speaker 4 Yeah, the ultimate goal of industrial policy is often to develop comparative advantage globally. And the only way to do that is to make it better than others.

Speaker 4 Opening yourself up to international trade and most of all, exporting. A lot of countries, including China and its neighbors, they did some sort of combination.

Speaker 4 They protected the domestic market, knowing that their medium-term goal was to grow by exporting.

Speaker 2 And this solves a big problem that traditional industrial policy has, which is competition. If you pick one factory and say, you're the Argentinian factory, then they're not competing against anyone.

Speaker 2 How do they get up in the morning and say, like, oh, we should really work harder? You know, the fundamental part of competition, right?

Speaker 2 China, by saying you need to compete both with each other, multiple companies competing with each other, but also you need to be the best in the world.

Speaker 2 You need to compete as an industry with everyone else making solar cells.

Speaker 4 Yeah, the Chinese government has had a very decisive intervention in the solar energy in the 2010s. And one driver was we have to export, we have to dominate the world market.

Speaker 4 The second one is how they did that. And what some people have argued, including the European Union, is that they artificially lowered prices to make their solar exports more competitive.

Speaker 4 That is maybe good for the Chinese economy, not so good for the rest of us.

Speaker 2 And not so good for some of the companies in China who can't operate, can't compete at the low prices. As we heard in the story, the Chinese government let the Sun King's business fail.

Speaker 2 And I know it's always tempting in industrial policy to try to prop up these companies that you've encouraged, keep them living, but you do have to let them fail sometimes.

Speaker 4 There's one concept that's helpful in understanding why sometimes industrial policy succeeds and sometimes it fails. And that's embedded autonomy.

Speaker 2 Embedded autonomy. I love that.
Embedded autonomy. What is that?

Speaker 4 Well, this sociologist, Peter Evans, wrote an influential book, and the basic idea is that the most effective states at promoting economic development through industrial policy have some combination of two things that seem a bit contradictory.

Speaker 4 Autonomy and embeddedness. Autonomy, meaning that the public sector should be sufficiently isolated from political pressures, from political elites.

Speaker 2 So that they can make decisions like where should the factory be located, not necessarily where I need political support.

Speaker 4 Exactly, exactly. But at the same time, embedded in that the state should not be isolated.

Speaker 4 The state should be embedded in society and especially the state should have a very good sense of how well companies are performing within each sector.

Speaker 2 So to put another way, you want your government to work collaboratively with businesses, but not so collaboratively that the government no longer has autonomy and can't do what's good for all of its citizens.

Speaker 2 These are good tips for the United States of America as we've been been moving in a direction of a lot more industrial policy and not just in the current administration but the last one too.

Speaker 2 Before you leave, we need to do some vocabulary words for this episode, Joan.

Speaker 4 Sure.

Speaker 2 What is industrial policy?

Speaker 4 Industrial policy is a bunch of economic policies that a government undertakes with the goal of promoting domestic industry and developing the economy.

Speaker 2 In the case of Argentina, we saw one form of this, which is called import substitution. Define that.

Speaker 4 Import substitution is making things domestically instead of importing them from abroad.

Speaker 2 Another option for a country is export-led growth. We talked about it in the China section, but really Taiwan, Japan, South Korea really exemplified this.
What is export-led growth?

Speaker 4 That's when the government incentivizes certain sectors through industrial policy sometimes

Speaker 4 to export to world markets in products where they develop a competitive advantage globally.

Speaker 2 Yeah, and it forces them to compete with the best of the best in order to get better. Professor Joanne Ricard-Huget from Loyal University, Maryland.
Thank you so much for being our professor.

Speaker 2 Two shows in a row. Bravo.

Speaker 4 It was a lot of fun, Robert.

Speaker 2 Thank you.

Speaker 2 Okay, students, time to start planning for the end of the semester. There's so much to do and so little time.

Speaker 2 If you are in New York City and there are still tickets left, make sure you join us for this year's graduation and party live in Brooklyn on August 18th.

Speaker 2 We have a great show planned, including a trivia contest to pick our valedictorian of the class of 2025. There's ticket info in the show notes.
Hope to see you there. Also, everyone start studying.

Speaker 2 No matter where you are located, you will be able to take an online final exam and get a souvenir diploma. manufactured not by the government, but by us.

Speaker 2 You might want to memorize the definition definition of embedded autonomy. Embedded autonomy.
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