When ‘Success’ Breeds (Even Bigger) Failure
When pressed to suggest a country that the United States should emulate, industrial policy fans often point to South Korea. It has a relatively large and advanced manufacturing sector (in terms of both output and employment), a persistent trade surplus, and a government that hasn’t been shy about thumbing the economic scale to support favored industries. Thus, so the theory goes, the Korean government has been successful in using industrial policy not only to generate more “good jobs” and “strategic industries” than the United States, but also to be less “dependent” on foreigners for essential goods in times of crisis (war, pandemic, etc.). So, obviously, we can and should do the same.
Leaving aside the obvious perils of cross-country comparisons (nations and governments are very different), this line of argument contains a nugget of truth—one that I think some industrial policy critics ignore to their detriment: Dig into massive, globally competitive Korean companies like Samsung or Hyundai, and you’ll surely find some of the government’s fingerprints, and Korean policy probably has shifted the economy’s composition toward manufacturing and specific industries.
But that’s not where the “success” story ends, and recent events in Korea and elsewhere have revealed one of the big downsides of explicit government policies designed to tilt a nation’s economic playing field toward “strategic” or “essential” manufacturing industries and exports: It can actually boost a nation’s fragility, rather than reduce it.