Abstract
This study explores Chinese realities of industrial policy. These facts attract global interest. They also caused China’s Debate of the Century between prominent Chinese economists, Justin Lin and Weiying Zhang. After commenting on this exchange with evidential assessments, three questions are explored for technology-followers: (A) Can industrial policy against market failure also minimize government failure? (B) Can catching-up create win–win outcome by complementarity, rather than substitution? (C) Can leapfrogging trigger global innovation by co-evolution? TSMC from Taiwan suggests affirmative answers for all these three. Although its game-theory basis appears challenging for replication, exceptions may prove rules for further studies.
Highlights
This study proposes that, against the afore-mentioned trilemma of industrial policy, technology followers can pursue the following strategy, successfully deployed in Taiwanese foundries, in the case of Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC): (i) against the soft-budget trap of Kornai: spinning-off by industrial policy to maximize market functions; (ii) against antipathy from advanced economies: focussing on win–win specialization; (iii) against the limit of emulation: innovating in business method to spur coevolution
A main difference between the two is that Lin believes that government can make positive contributions, better than laissez faire advocated by Zhang, who worries about government failure
Note that China and India together account for 1/3 of the world population, the well-being of these two economies is the concern for many economists, and their policies are consequential to global politics
Summary
We start with the integrated thesis against industrial policy by Zhang. This comprises a historic perspective on growth and development and ranges over a broad sweep of topics. Industrial Policy and TSMC 1059 discussed in modern economic theory: economic planning, uncertainty, creative destruction, entrepreneurship, rent-seeking, loss from distortion and the perversion of market signal and incentive, stimulants in recession and debt burden. To Zhang, economic history testifies for the serendipitous nature of innovation, and the process of creative destruction makes the modern times increasingly unpredictable. It follows that the planned economy does not work and that entrepreneurship and market mechanism must be left alone from government interventions. For the sake of rentseeking, economic planning is often brought back, in the guise as industrial policy for picking winners Such actions distort market incentives and cause repeated failures. After citing Chinese efforts in a sequence of sectors, from electric fans in earlier days to new energies in recent time, Zhang came down to the conclusion that with very few exceptions, all efforts in adopting industrial policy end up in failure and disappointment
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