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July 03, 2007

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aly k

Type A's suffer from incredible confusion. They seem to ignore the abundant lessons in economic history... AND, despite the fact that many of their models may be cool, they fail to realize those very models are often USELESS when applied to the intricate circumstances of the real world. If I had to make a choice, it would definitely be B.

cvj

I'm not an economist (i work in IT) but i'll stick my neck out and would say 'Type B'. (Is there a subsequent post with the answer forthcoming?)

terence

Could I put my hand up for camp 'C' - confused (again)?

I ask because, to me, the story seems illustrative of one of the distributive perils of globalisation.

Once upon a time, to an extent, firms had to live with the laws where they lived. Because of this, it was possible (in theory, at least) to charge true costs and to offset negative externalities through taxing and spending.

Now, to an extent, companies can go country shopping using as leverage when negotiating, the "we could go elsewhere" factor.

Of course, it may well be the case that having the firm there, public subsidies and all, ends up being a greater welfare maximiser than not having them there. So my argument isn't one against globalisation, per se, I'm just pointing out that the balance of power has changed and this may lead to less *equitable* outcomes.

Oh - and a question - vis a vis domestic savings and firms how significant was foreign investment in the rise of the Asian Tigers and China?

jsalvati

I'll say a, with reservations. I recognize the reallity of B's position, but I am skeptical about government's ability to consistantly pick which situations require greasing and to avoid the temptations of corruption. I don't think it's impossible, just hard.

Also, in your example, wouldn't a more generic policy be better? Maybe some sort of generic subsidy on investment. That way the government wouldn't have to figure out specifically which companies should get subsidies.

tom

I guess it boils down to whether you believe that the government should be engaged in industrial planning and picking winners and losers; or you believe that government central planning has been proven a failure and the market should pick the winners and losers.

I think central planning, even on a small scale, is a bankrupt policy and should be avoided.

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Ofcourse the ansewr is easy and can be found in some places! I found it long ago at
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BJ Feng

I am very skeptical of B. Rarely do government projections turn out as expected, just look at our own budget predictions. We can't even get next quarter's GDP right, but this government minister's projections over 10 years are to be trusted? And the correct measure of benefit is NOT the amount of extra taxes that can be collected by the government. Just by this minister's thinking, I would guess the real benefits aren't going to be as great as expected. That's what I think given the information available.

Idaho_Spud

Throw me (yet again) into the distrustful/unbelieving/OMG camp.

IMHO this anonymous country should send these rent-seekers packing and follow up with a swift kick in the a$$. If these alleged capitalists can't cut the grade without corporate welfare, they can Cheney themeselves.

How on earth will home-grown businesses compete with the government perks that are tendered to the multinational? Is this anonymous mid-sized nation prepared to offer identical tax advantages to home-grown business in direct competition with the mulinational?

Gabriel M.

I don't see the point of this pigeonholing...

It all depends on the opportunity cost of that public land, no?

João Castro

Let me guess. I would say the country is Portugal, the minister is Manuel Pinho, the multinational is Nokia, and the purpose of the investment is to create a research center in the University of Aveiro. At least the description fits nicely this case. Please note the amount of the subsidy was not publicly disclosed.

Vasco R

Mr João, what's the point of calling this exercise out of its abstract principles, as the author wanted it?

reason

Theory of second best...
It depends on what other countries are doing (unfortunately). Prisoners dilemma, being good is better for everybody, being good when others are bad is a fools errand.

Cormac

Because the original question is too easy :-) (Type-B for me)

However I don't think Portugal has averaged 4% growth for 40 years; I'd classify it as small- not mid-sized; and high- not middle income. How about Malaysia?

reason

Most probably the firm was looking somewhere cheapish and attractive to young graduates, to set up a facility and thought "while we are at it we will see how much leverage we have on the government". They don't really need the subsidy, but knowing the government will dance for them is a definite plus.

paine

nice choice a or b
not a or z

they both share a common willingness
to attach no weight to why this is on the table at all

it/ip tnc monopoles

and tnc controled
north market access

neither is a sharply
drawn
fact in any
formal models
of development i've seen

where tnc firms are seperated out from
the other cross border players

this tax arbitrage game can be seen for what it is

a vicious race to the bottom by states desperate to win the contest
to host the next
tnc landing pad

if i'm by default
a type b
its with a type a fury

jmdesp

"Prisoners dilemma" : That's exactly it. If every country on earth does the same, then they don't win anything by doing it, but they have highered the profit of companies and lowered what the states get.

robertdfeinman

If the country is a capitalist democracy then giving special favors to a single firm violates the principles behind both philosophies.

The first because firms should invest only when they see a clear way to make a profit. Governments should only subsidize enterprises where the conditions are not going to be profitable, such as in fundamental scientific research.

The second because it is undemocratic. It violates "all men are equal before the law". If there was a policy of any firm moving into a region, such as with development zones than one could make a case for it being "more" democratic. It would still be anti-capitalistic.

So the issue boils down to one of societies really believing the doctrines they preach to the populace or just doing what seem expedient at the moment.

Of course, violating either precept leaves the field open to corruption. This is one of the issues now in the US with the revolving door between government and K Street.

ocean

ok. i cant determine a or b based on the above info. my decision will be based on personal assessment of the govt's ability (though may be wrong or emotionally/idealogically biased) or at least i have to understand their track record. i am worry abt govt failure too, but it seems more sensible to do sort of valuation with available info. i dont know if this tyoe of question is actually testing your ideological inclination or whether you could shake your bias off to be as rational as possible(?).

unarmed

I'm on the B side, but I can't wait to hear what Professor Rodrik has to say.

Ricardo

If the investment can possibly bring about knock-on effects, such as:

– People recruited by the company gain experience in working for a multinational IT company which they can then use in other ventures
– Wider exposure for national IT innovations and companies
– Boost other, possibly national companies, that provide complementary services
– An increase in tax revenues

Then providing rent free space for 10 years is a very small price to pay.

Eric H

A year from now, it turns out that the company benefiting from this arrangement has a near monopoly position in that country, is accused of abusive practices in dealing with its employees, suppliers, distributors/customers and competitors, and is found to be involved in a public official corruption scandal.

A1. Just because this one abused its position does not mean every business acts like this.

A2. It took a year?

B. The period of laissez faire must end, so here is a laundry list of regulations and interventions designed to stem such problems while promoting industry: ....

I'll also throw in with Gabriel.

dissent

The number of 'A's above does indeed show the influence of anti-govt ideology on policy here in the United States, and explains the shriveled state of public investment, outside of the military. In the long run this is a competitive disadvantage for the United States.

Kit

Emphatic Type A

The first economics book I ever read was Hazlitt's 'Ecomonics in One Lesson' - I never forgot that lesson.

Mayank

My vote is for B types, but with reservations. I believe in the fact that industrial policy guided by policymakers have 50-50 chance of success and failure. But a small, middle income country growing at 4 percent definately needs some boost in terms of FDI's and policymakers facilitating it seems like let's give it a try. However, i would still like to know about the investment climate in the country to make a better decision.

paine

its not about investment
financing
unless there is a payments deficit and
foreign machines need to be bought

mostly its about technical skill transfers
and ultimate
dependence on external markets

both
transfers and foreign markets
are controled
by the trans nats

get this straight

emerging mid level nations can self finance
if the investment
is in progress
ie
in home building the capacity to produce
world class products
and
leads to
higher value added
per hour

Cho

Its a hard one. One thing I know for sure how the country has performed so far (4% growth year on) has nothing to do with the answer.

The issues are many and these must include the longterm crowding out effect of the IT firm on domestic indigenous growth - this is important because it is a MULTI NATIONAL and it could leave any time!!!

Maurice Pigaht

Since most of us will agree that the aim here is to develop the private sector, why don't we try to imagine the point of view of a local private business. Let's call it point of view "C". It would go something like this:

On rent-free space:

C. What the heck? Why don't I get a land lease reduction?? These guys are going to be able to undercut my prices and overun my market. Damit!

On justifying the subsidy with higher property tax revenues:

C. These guys are ALSO going to push up my long-term lease costs and the rent costs of my employees. The government is subsidising my competitors costs with the hope that it pushes up my operating costs, personal living costs and the living costs of my employees. AARRGGHH!

And on the growth rate of 4% per capita for the last 4 decades:

C. Yeah. That was hard working, unloved private sector business men like me. And we were working against these bone-headed bureaucrats that have no feel for a free market and what is required to develop it. Leave us the hell alone to do business.

Maybe it is better to leave the market to oversized, inefficient multinationals with political clout, and to instead invest in the S&P500.

Maurice Pigaht

I forgot to add. The above position would put me firmly in category "A". Although I regret the ideological tone in Professor Rodrick's depiction of this position. I take this position as a result of my experiences working in and with private sector SMEs in the face of such misguided government policies.

Kimmitt

I wasn't either until I noticed that the country was growing at 4 percent a year -- that implied that it was reasonably well-run but could really use a boost, so this sort of experimentation was perhaps worth a try.

It's not that I disagree with industrial policy; it's clearly the only way any nation has yet found to develop. It's that the line between industrial policy and outright rent-seeking is so very fine.

soullite

I think both types are pretty good examples of why people hate economists.

Type A is a bigotted know it all, while Type B is a corrupt plutocrat.

Ken Houghton

The country is the United States, guys.

And the benefactor is Wal-Mart.

I'm refusing to answer unless I'm assured that whatever is built there isn't going to cause more damage and clean-up costs to the local state after it's abandoned for a cheaper locale than the incremental gain from putting it there in the first place.

Sarosh

I would choose B.

cvj

Ken, but the United States is not a 'medium-sized, middle income country' and members of cabinet are not called 'ministers'.

J

I'm an A-level Economics student, and I'd go for B all the way. I actually live in a Third World country that has benefited a lot from FDI, and IMHO rent-free space is a very small price to pay for the jobs the MNC can create. What else is the land going to be used for anyway? A row of sundry shops? If we don't bring in MNCs to generate growth, someone else has to provide jobs - and it's usually government-aided/government-owned companies because the private sector in 3W countries don't have the guts/skills to go it alone. Either way the gov's going to distort the markets. I apologize if this doesn't make sense, I'm obviously out of my league here :P

ben

My knee-jerk reaction is B. In terms of applying economic theory to policy in developing economies, it's safe to assume that people will respond to incentives, and that you can create a market if you remove all the barriers. But it's never safe to assume that resources are being allocated efficiently (or even somewhat efficiently) economy-wide.

For some economists, if someone is going to claim that social values and prices aren't equal, the burden of proof is on the person making that claim to say why. In my opinion, exactly the opposite should be the case when we're talking about developing countries.

Krishna

The real question might be whether subsidizing rent for one player is the best policy response when it is assumed that there is underinvestment and absence of entrepreneurship. Maybe there's not enough information to figure this out.

Another question is: How would we measure success? Suppose this multinational does come to the country, and starts exporting "new" goods. In order to pronounce the policy a success would we have to find out that the country's cost structure was suitable for export of that good (even before the subsidy), but a that information asymmetries (or some other market imperfection) prevented that understanding? Does anyone know of empirical studies of industrial policy that show that such information was "discovered" ex post, by looking at return on capital numbers or some comparable measure? It seems that studies seem to cite the mere presence of a new export industry as evidence that industrial policy has "worked". But that might be due only to the subsidy itself and not any inherent strengths. Might it also reveal survivorship bias?

Lastly, industrial policy would seem to require bureaucrats skilled at knowing when certain policies, companies, or industries haven't worked, and cutting them off. In a democratic policymaking frameworking, especially in a poor country (or any country for that matter), it seems unlikely that once a policy decision is made to subsidize a particular industry or company that the decision could be easily reversed. Is industrial policy more suitable for non-democratic regimes? What do the examples of Korea, Taiwan and Singapore tell us? I don't know.

With respect to pruning out the bad apples, it seems as though one of the strengths of the market process is that it more readily weeds out failed ideas. I guess I would be skeptical about the attempt to replicate this element of the market process through a government one, even if it was marked by transparency and accountability.

I have very few answers but have enjoyed the discussion greatly.


Karl Smith

My first response is B though I am sympathetic to A.

My notion is that increasing there are increasing returns to localized investment, otherwise no one would pay NYC rent.

However, I am also sympathetic to the notion that government officials push development policies that don't meet a cost-benefit analysis.

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