The work highlighted today is a ‘Working Paper’ from the IMF. The authors: Daniel Garcia-Macia, Siddharth Kothari, Yifen Tao and Yutong Li have tried to fix a bead on just how Industrial Policy (IP, i.e. subsidies) in China ends up being a net disbenifit.
The IMF have urged China to give up this kind of interference but until now no study has tried to quantify its negative effects. In China’s case subsidies in the form of land or other resource grants on preferential terms have led to over production. Trade and regulatory barriers however have had the effect of curtailing output.
As none of the industrial policies that concern the researchers are hidden analysis is a ‘simple’ matter of going through public records and corporate filings looking for the most common interventions i.e. Cash Subsidies, Tax Benefits, Subsidized Credit and Subsidized Land.
Distortions show up most clearly in some of the so-called National Champions where impressive output, sales and profits often hide the fact that without IP many of these ‘impressive’ results could be more impressive if the government would clear out of the way.
To the bottom line. The paper concludes that China’s government spends around 4% of GDP on these IP distortions. In aggregate this ends up reducing total factor productivity by 1.2% and GDP by up to 2%.
The authors sign off noting not all IP is bad, but too much is. Moreover, their work can only be a rough approximation. The government is in a better position to do more granular work and this study may/should encourage such an undertaking.
Finally, there are signs the government has been scaling back this process but more transparency would help them, and business managers, identify where the most cost-effective nudges to the invisible-hand could be directed in future.
You can read the paper in full via this link Industrial Policy in China: Quantification and Impact on Misallocation.
Happy Sunday.