Webinar Summary: The Role of Industrial Policy – A Discussion Through its Application in China

Photo by Angela Compagnone via Unsplash.

By Yangsiyu Lu

Industrial policy has been applied as a tool of state intervention in governing economic development in many East Asian countries after World War II. However, the basic argument that it is difficult for the government to “pick winners” makes adopting industrial policy a very disputable issue among policymakers and academics. Despite its controversy, industrial policy has always been an important topic in development economics, both in practice and research.

In the first session of the Spring 2022 Global China Research Colloquium, Zhu Xian, Vice President and Secretary General of International Finance Forum and former Vice President and Chief Operations Officer of the New Development Bank (NDB), shared observations of the application of industrial policy in China through his experiences working at the NDB. In particular, Zhu highlighted some practices at the local level in the recent decade, as he believes local governments play a critical role in implementing industrial policies in China.

Zhu started with a look back at the evolution of industrial policies in China. When China launched the reform and opening-up policy in the late 1970s and early 1980s, the country became more market-oriented and open to the global economy. Nevertheless, even at the peak of China’s market-oriented reform, decision makers did not abandon industrial policies. Zhu emphasized that the key is to understand how to make industrial policy effective and what sort of policy instruments to use, rather than debating whether industrial policy as a central plan could work.

In recent years, Chinese decision makers and government institutions have prioritized competition and technology upgrading in the context of industrial policy. Lessons from a closed economy like the Soviet Union show enterprises have little motivation to innovate in the absence of competition. The quality of their products will gradually deteriorate to the point that their products are no longer competitive in the global market. China’s policymakers nowadays focus on promoting competition and fostering benefits, such as technological advancement, when applying industrial policies.

China’s industrial policymaking is influenced by other Eastern Asian economies. Located in the region, China is influenced economically and culturally by its neighbors Japan, South Korea and Singapore. For example, in the 1970s-80s, some industrial policy tools adopted by China in its market reform were inspired by Japan. Another prominent example is the information technology industry. The experiences of some Eastern Asian economies moving from labor-intensive industries to the electronic industry have shown the role of industrial policy in leading the private sector and business communities towards developing new industries locally.

One notable case showing how China’s industrial policy measures have been evolving at the central level is the National Development and Reform Commission’s (NDRC) category of industries. Each year, NDRC publishes a category of industries, divided into three classes: 1) encouraged, i.e., governments promote these industries; 2) restricted, i.e., governments no longer encourage these industries, probably due to overcapacity or limited competitiveness; 3) prohibited, i.e., governments do not allow these industries to be further developed. This categorization is seen as a guideline for investments, both for domestic and foreign investors. For example, when investing in encouraged industries, investors could benefit from a range of policy concessions; while investing in restricted sectors, the policy support from the government is very limited.

According to Zhu, local governments play an important role in implementing industrial policy. Contrary to the impression of those unfamiliar with China’s economic decision-making that Chinese industrial policy is made by the central government, Zhu posits that while the national government works with the local governments to establish goals and policy measures, local governments are in charge of the detailed policy implementation. Local leaders have a number of tools at their disposal to attract investments and could select which policies to pursue based on the comparative advantages of the local region. Such practices could increase local employment and tax revenue and speed up the transition from rural to industrial and post-industrial economies, and this motivates local governments to integrate economic activities into their governance. In addition to the conventional strategies like providing subsidies, local governments have applied a variety of more sophisticated incentives to attract business investment, such as land use policies and tax holidays.

Zhu also shared several practical cases of local governments implementing industrial policies in China, based on his experiences at the NDB. One example is how a leading international offshore wind manufacture was attracted to Fujian province to form a joint venture and build an assembly factory. When Zhu revisited the industrial site several years later, the location developed into an offshore wind manufacturing industrial park, with major offshore wind manufacturers opening branches. The other case he cited was when Guangdong province developed a plan to increase offshore wind capacity, the local government offered land and tax concessions to attract foreign investors. Drawn by the vast market potential, foreign manufacturers relocated their operations to China. Zhu also discussed the opening of a Tesla factory in Shanghai, and how Chongqing became a major Apple assembler and manufacturing hub from scratch. While these stories spotlighted the success of industrial policy, Zhu noted there have also been several failures. For example, investors did not always satisfy expectations, resulting in idle industrial parks. Rather than concluding whether the approach of industrial policies is good or bad, these case studies show that the value of industrial policies depends on whether the specific policy conditions can be applied and implemented in a fitted manner to correct market failures.

Zhu’s discussion aimed to enhance understanding of China’s fundamental logic and motivation of industrial policies. His message was not to give a full assessment of industrial policy, but rather to share some thought-provoking experiences in an objective manner and trigger further thinking, debates and reflections on industrial policies. Zhu noted that industrial policy should be considered on a case-by-case basis, but hopefully, the on-the-ground experiences from China’s industrial policy applications could be helpful for both emerging economies and industrialized countries.

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