x Abu Dhabi, UAEFriday 19 January 2018

US desperately needs a viable industrial policy

Whereas the Asian economy was planned, the US economy evolved naturally in faith with the cultural conceit of rugged individualism and contempt for federal control.

A little more than a decade ago, South Koreans who wanted to buy a home appliance had few options other than patronising the boutique stores owned by the country's top three electronics makers. There was little in the way of competition; the relatively high prices were more or less fixed and the quality was uniformly poor. Imported wares were rendered unaffordable to all but the wealthy by high duties, or locked out of the market altogether by non-tariff barriers. Alternatively, there was the black market, but only for those with contacts inside the huge US military base in downtown Seoul.

It was hardly a consumer-friendly culture, which is just what the government wanted. The fewer the items to buy, the greater the incentive to save and the larger the pool of capital available for the nation's large conglomerates, the foundries of a great export machine. The Samsungs and the Hyundais concentrated on foreign markets, not domestic ones, and they invested their revenue into more factories and raw materials for the production of more exports.

That, in a nutshell, was the corpus of South Korea's industrial policy. It was transparently mercantilist and patriarchal, enabled by the traditional East Asian respect for authority. For a time, the so-called Asian model for growth worked beautifully - for Korea, as well as Japan before it, just as it is working well for China today. The US had an industrial policy in the wholesale rejection of industrial policies. Instead, it embraced something called the Washington Consensus, a liberal orthodoxy of free trade and lightly regulated markets that organically winnowed away inefficient enterprises. Whereas the Asian economy was planned, the US economy evolved naturally in faith with the cultural conceit of rugged individualism and contempt for federal control. It, too, worked for a time.

The Great Credit Collapse of 2008 and the Asian Currency Implosion of 1997-1998 exposed the critical - and as it turns out, antipodal - flaws in both systems. While Asia emphasised industrial might at the expense of financial flexibility, the US did just the opposite. Asia's reservoir of liquidity is still under-served by primitive credit markets and its monetary authority is inhibited by a Pavlovian impulse to rig currencies. The US, meanwhile, is paying a stiff price for its high-finance fetish. Having allowed services, property speculation and exotic investment vehicles to replace manufacturing as the driver of growth, or at least the illusion of it, Americans are more adept at online shopping than they are at building things.

True, the US remains one of the world's top manufacturers, but the trend is clear. The "supply side" revolution - the Reagan-era line that lasting prosperity could be purchased with a strong dollar, tax cuts and financial deregulation - shooed factories abroad and made debt finance the coin of the American realm. The value of US debt - public, corporate and household - amounts to 350 per cent of GDP, a burden disturbingly similar to the one that Japan confronted after the 1990 collapse of its real estate bubble, which was followed by a generation of flat growth. "Our model for what's happening in the US is Japan," says Fareed Mohamedi, the chief economist for PFC Energy. "This is a 10-year debt workout."

Is it time for a US industrial policy? Some economists and politicians, including the US President Barack Obama, think so. Entrepreneurs make a strong case for government help in developing germinal green technology. Beyond that, however, there is little known precedent for the re-industrialisation of a post-modern economy. Short of fixing wages, subsidising raw materials and erecting import barriers - which would be illegal under international trade law - it is difficult to see how the US could replenish a desiccating industrial landscape.

What Washington could do - for the good of society as well as the economy - is guarantee high-quality, affordable health care, education and public transport for all its citizens. Should that swell an already overstretched public dole, so be it. America's free-market pretensions notwithstanding, the US economy is lousy with subsidies, be they defence budget handouts to arms makers, bailouts for car makers or credits for farm combines.

Employee-based health insurance has proved itself to be an abysmal failure, so much so that the once mighty General Motors is characterised as a "health-care company that makes cars". American secondary schools are in crisis and US students are rapidly falling behind other nations in mathematics and the sciences. Transportation grids are in disrepair and grossly favour the very hydrocarbon fuels from which the rest of the developed world - and China for that matter - is trying to wean itself.

It may be too late for the US to resurrect itself as a labour-intensive industrial powerhouse, but it may also be that a healthier, better educated and more mobile workforce is all the industrial policy it needs. @Email:business@thenational.ae