As the slow recovery from these crises continues -- amid heated debate about their causes and the effectiveness of government interventions to combat them -- there is an opportunistic movement afoot to extend this controversial government interventionism as a revival of national industrial policy aimed at strengthening the sector-specific competitiveness of a nation through sector-specific government policies. This movement is led not only by some politicians and academics who ideologically favor a more dominant government role, but also by some business leaders who are evidently confused about the ways companies and governments operate. Last month, a Wall Street Journal op-ed piece titled “The U.S. Needs an Industrial Policy,” by a former president of Shell Oil Company, attacking the “foolhardy fondness for ‘free market’ philosophies,” and arguing that the rest of the world does it, advocated government intervention to revive US manufacturing.
This worrisome trend can cause serious economic and political conflicts among nations without improving the welfare of any nation significantly. Concerns about macro or micro international competitiveness are often misguided by fallacious economic reasoning and ignorance of economic facts. Nations do not compete in the same the way companies do. There is scant empirical basis for the assertions that national industrial policies lead to sustained success. The costs of sectoral government interventions often exceed their benefits as most such interventions are based on faulty information and political motives to serve sectional interests under the disguise of improving national competitiveness of this or that sector.
Against this background the McKinsey Global Institute (MGI), the business and economics research unit of the consulting firm McKinsey & Company, issued a timely 54-page report last Friday titled “How to compete and grow: A sectoral guide to policy.” The MGI, through its self-financed independent research, combining the disciplines of economics, technology and management, investigates the long-term global trends that shape business, government and society. Its research synthesizes, using the “micro-to-macro” approach, the McKinsey consultants’ microeconomic experience and knowledge at the company and industry level with internal and external macroeconomic expertise.
The MGI report, researched by a 13-member international team, reflects the cumulative McKinsey industry expertise, enhanced by two decades of bottom-up detailed empirical studies in 28 agricultural, industrial and services sectors of more than 20 developed and developing countries. Specifically, it contains the results of the MGI’s latest research across several countries on competitiveness and growth in six sectors (retail, software and IT services, tourism, semiconductors, automotive and steel) with frequent references to Turkey. Its conclusions run against the conventional wisdom about the role and effectiveness of sectoral government interventions. They can be summarized as follows: (1) Economy-wide competitiveness is not meaningful. Competitiveness and growth analysis must be at the sectoral level. The report defines sectoral competitiveness as “a capacity to sustain growth through either increasing productivity or expanding employment.” Growth refers to higher value-added, i.e., the contribution to overall gross domestic product (GDP) growth. Productivity increases through managerial and technological innovations. Employment expands through increased demand for better quality or cheaper goods and services. (2) Governments should not worry too much about the “favorable” sectoral mix. What really matters is how competitive individual sectors are, not their mix. (3) In their efforts to create jobs, governments should focus on the service, not manufacturing sectors. Service sectors will continue to be the source of most net job creation. (4) The nature and effectiveness of government policies vary between nontradable (domestic) and tradable sectors. In the former, such as most services (e.g., retail) and infrastructure (e.g., telecommunications), governments can set the right incentives through proper regulation to raise productivity and employment, improving sectoral performance in two to three years. In the latter, such as manufacturing, however, governments confront a greater challenge, requiring policies to be more realistic about creating potential competitive advantage, to be based on business logic, and to be designed and implemented with close private sector collaboration. (5) Governments should not delude themselves in thinking that they can generate jobs and stimulate growth on any significant scale by targeting and promoting competitiveness in innovative emerging sectors such as clean and renewable energy, which are too small to affect economy-wide employment and growth substantially. (6) There is no one-size-fits-all policy. Governments have to customize sectoral policies to fit specific characteristics of individual sectors whose roles vary according to the stage of economic development of each country.
Based on the report’s results, the MGI researchers offer a new framework for governments as a pragmatic guide to restructure and rationalize sectoral policies, tailoring them to fit individual sectors, depending on whether they operate in competitive or noncompetitive markets or carry on nonmarket activities. This framework is based on six sector groups, according to degrees of differentiation and tradability, with common characteristics and similar responses to government policies. They are (1) infrastructure services, (2) local services, (3) business services, (4) research and development (R&D)-intensive manufacturing, (5) manufacturing and (6) resource-intensive industries. The level of government intervention across them should vary from low to high in terms of (1) setting the ground rules/direction, (2) building enablers, (3) tilting the playing field and (4) playing the role of principal actor. The MGI researchers provide wide-ranging and persuasive empirical evidence to support their framework. One particular policy guide especially relevant for Turkey is that in local services, regulations that permit free entry and rapid expansion of modern retail formats, such as large chains of supermarkets, convenience stores and drugstores, boosts competition and productivity. Laws that provide for flexible hiring and firing, lower minimum wages and employment taxes and part-time employment not only increase employment but also improve customer service.
