Industrial Policy: Balancing Growth, Stability, and National Champions

 Governments Reconsidering Market Forces in Pursuit of Economic Goals

In a recent podcast, Ruchir Agarwal, an economist on sabbatical from the IMF, discussed the concept of industrial policy and its implications for governments. Industrial policy refers to a set of targeted policies used by governments to achieve specific economic or social objectives, going beyond traditional support measures like research and development subsidies. Agarwal emphasized that not all national champions (successful industries or firms) are the same, and understanding the circumstances surrounding them is crucial in evaluating the effectiveness of a more interventionist approach to the economy.

Historically, countries like China, the United States, Russia, and various European nations have utilized industrial policy to create global economic giants such as Alibaba, Airbus, Volkswagen, General Electric, and Huawei. However, the question arises: Does government intervention disrupt market forces when it seeks to bolster its own industries?

Agarwal highlighted the need for economists to develop a comprehensive framework for assessing the advantages and disadvantages of implementing industrial policy. His interest in this topic arose from years of working with different countries and observing the central role of growth strategies in their economic conversations. Agarwal likened industrial policy to a dashboard of levers that leaders can manipulate, making it an attractive tool for shaping economic development.

The discussion then shifted to the shift away from industrial policy in the past. Agarwal explained that it stems from the longstanding debate on the role of government in economic activities. While the United States favors a more hands-off approach, setting rules and offering subsidies for research and development, some European countries like France have pursued a more intrusive approach, aiming to create national champions through targeted subsidies. Over time, there has been a gradual recognition that such targeted subsidies may not be as productive as initially thought, leading to a shift closer to the market-oriented policies of the US.

The conversation delved into the concept of national champions, which involves selecting or promoting specific industries or firms deemed crucial to a country's economic, social, or national security goals. Agarwal differentiated between "picking winners" and "creating national champions," with the latter emphasizing the broader societal benefits these entities can bring. National champions often encompass large firms or groups of firms, sometimes owned by the government, and are regarded as vital players in their respective industries.

Agarwal discussed the trilemma of growth strategy faced by governments. They must navigate the objectives of promoting growth, maintaining stability, and supporting national champions. Balancing these three objectives presents challenges, as pursuing one often requires sacrificing some aspects of the others. For example, promoting national champions may involve sacrificing growth or financial stability. It becomes a delicate balancing act for governments to find the right equilibrium while considering various constituents and their interests.

The recent resurgence of interest in industrial policy can be attributed to several factors. Firstly, there is a renewed focus on inclusive growth, driven by the growing voice of vulnerable and oppressed groups and a desire for government action to address social and economic inequalities. Secondly, the COVID-19 pandemic exposed vulnerabilities in global supply chains and highlighted the need for resilience in trade systems during emergencies. Finally, geopolitical tensions and the fragmentation of the multilateral system have led to a reevaluation of international cooperation, prompting countries to reassess their growth strategies and consider industrial policy as a potential solution.

Agarwal concluded by emphasizing the challenges faced by leaders in finding the right balance between growth, stability, and supporting national champions. Fear of instability and a desire for resilience can drive governments to adopt more protectionist policies, while growth anxiety may lead to a greater focus on industrial policy. The complex interplay between economic objectives and political survival makes this a nuanced and challenging task for policymakers.

As countries navigate these complexities, they must consider several key factors. First and foremost, they need to define their economic goals and identify the industries or sectors that align with those goals. This requires a comprehensive analysis of the country's strengths, weaknesses, and competitive advantages. Once the target industries or sectors are identified, governments should assess the existing market conditions and barriers to entry. They may need to address regulatory issues, invest in infrastructure, or provide financial incentives to stimulate growth and innovation.

Additionally, it is crucial for governments to maintain transparency and accountability in their industrial policy initiatives. Clear criteria for selecting national champions should be established, and the decision-making process should be based on merit rather than political favoritism. Regular evaluation and monitoring of the chosen industries' performance are essential to ensure effective implementation and avoid potential pitfalls.

Collaboration between the public and private sectors is also vital. Governments can create an enabling environment for businesses to thrive by fostering partnerships, facilitating knowledge transfer, and supporting research and development efforts. Engaging with industry stakeholders and seeking their input can lead to more informed and effective industrial policy decisions.

At the same time, governments must be mindful of the potential risks and unintended consequences of industrial policy. Excessive intervention can distort market mechanisms, hinder competition, and create inefficiencies. It is essential to strike a balance between government support and allowing market forces to operate freely. Furthermore, international cooperation and coordination are crucial in an interconnected global economy. Countries should strive to align their industrial policies with international trade rules and norms to avoid trade disputes and foster a level playing field. Collaborative efforts can also promote technology sharing, innovation diffusion, and sustainable development.

In conclusion, navigating the complexities of industrial policy requires careful consideration of economic goals, market conditions, transparency, collaboration, and international cooperation. By striking a balance between government intervention and market forces, countries can pursue sustainable economic growth, stability, and the development of national champions that contribute to broader societal benefits.

Navigating Global Trade: Should Developing Economies Emulate US and China's Industrial Policies?

 The global trade landscape is undergoing rapid changes, prompting policymakers to rethink their approach. In the past, developing economies embraced globalization and opened their markets, but now concerns about trade fragmentation and rule flouting have emerged. This raises the question: should developing economies follow the United States and China's path by implementing industrial policies and trade restrictions to protect key sectors?

Historically, there has been a debate on whether developing economies should turn inward to safeguard their industries. Import-substitution policies were once favored to reduce reliance on foreign markets, but this perspective has been challenged. The success of countries like the United States and Western Europe indicates that openness, competition, and resource reallocation played a significant role in their economic growth. High tariffs did not prevent the US from becoming a global economic power, and Western Europe's transition from agriculture to industry and services was driven by market dynamics.

While the debate on industrial policy continues, it is important to consider the experience of successful East Asian countries. South Korea's remarkable export growth, for example, was driven by factors such as a realistic exchange rate and accessible credit for exporters, rather than targeted industrial policies. Quantitative models suggest that the impact of industrial policies may be limited in terms of productivity growth and transformative effects.

What sets the current situation apart is that major players like the US and China have explicitly embraced industrial policies. China's "Made in China 2025" initiative and the US's protectionist measures in the steel and aluminum industries are examples of this shift. The European Union also has its industrial strategy. However, it is crucial to recognize that these countries can afford such subsidies, which may not be viable for developing economies. Developing economies should be cautious about following this trend. Expensive subsidies can strain fiscal resources, and the benefits may not materialize as expected. Trade restrictions can lead to protectionism, reducing export earnings and impeding economic growth. 

Developing economies often benefit more from engaging with the global economy, attracting foreign investment, and acquiring technology. Scarce public funds might be better allocated to improving health, education, and poverty alleviation. China's shipbuilding industry serves as an example of how massive subsidies can be inefficient, leading to excess capacity and distorting markets. Developing economies have achieved significant progress by participating in the global market, rather than closing their doors to spur domestic innovation. The openness of the reform period since 1990 has contributed to convergence between rich and poor countries worldwide.

In summary, developing economies should carefully consider the potential implications of adopting industrial policies and trade restrictions. They should weigh the costs and benefits, acknowledging that the experiences of richer nations may not be directly applicable. Instead, continued engagement with the global economy offers substantial opportunities for growth and development, leveraging foreign investment, technology transfer, and export-oriented strategies.

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Source: IMF(International Monetary Fund) https://www.imf.org/en/Publications/fandd/issues/2023/06/the-return-of-industrial-policy-douglas-irwin?utm_medium=email&utm_source=govdelivery

Citizens Bank to Pay $9 Million Penalty for Mishandling Credit Card Disputes and Fraud Claims

CFPB Settles Allegations Against Citizens Bank for Violating Consumer Financial Protection Laws | May 24, 2023

In a recent settlement, Citizens Bank has agreed to pay a $9 million civil money penalty following allegations of violating consumer financial protection laws. The Consumer Financial Protection Bureau (CFPB) accused the bank of mismanaging and inadequately responding to customers' credit card disputes and fraud claims. The settlement, if approved by the court, will mark a significant penalty for the bank's actions.

Citizens Bank, a prominent financial institution headquartered in Providence, Rhode Island, operates branches and ATMs across 14 states and the District of Columbia. As a subsidiary of Citizens Financial Group, it holds assets worth $222 billion and ranks among the top 15 consumer banks in the country.

The CFPB's lawsuit, initially filed in January 2020, highlighted two major violations by Citizens Bank related to the Truth in Lending Act and its implementing Regulation Z:

1. Improperly denying customer reports: The bank allegedly mishandled billing error notices and claims of unauthorized credit card use by burdening customers with unnecessary requirements. These additional hurdles were not mandated by the Truth in Lending Act. Furthermore, when unauthorized use and billing errors occurred, the bank failed to fully refund finance charges or fees owed to customers, neglecting their rightful reimbursement.
2. Failing to provide required documents and referrals: Citizens Bank did not provide crucial acknowledgment and denial notices to individuals who submitted billing error notices, depriving them of the necessary updates on their disputes. Additionally, the bank failed to disclose mandatory credit counseling information to customers calling their toll-free number, often redirecting them to the collections department instead.

As part of the settlement, Citizens Bank has agreed to undertake the following actions:

1. Rectifying credit card practices: The bank must ensure that the handling, treatment, and resolution of billing error notices and unauthorized use claims align with the law. Employees are prohibited from demanding customers to provide fraud affidavits signed under penalty of perjury. Additionally, Citizens Bank is obliged to refund any fees or amounts owed to customers for valid billing error notices and unauthorized use claims, starting from the date of the error or unauthorized use.
2. Paying a $9 million fine: Upon court approval, Citizens Bank will be required to pay a $9 million civil money penalty to the CFPB's victims relief fund, serving as a significant consequence for their violations.

The CFPB, established to safeguard consumer interests in financial markets, holds the authority to take action against institutions that violate consumer financial protection laws. This settlement with Citizens Bank underscores the CFPB's commitment to ensuring compliance with regulations and addressing violations within the credit card industry.

As outstanding credit card debt in the United States approaches $1 trillion, the CFPB remains vigilant in monitoring the conduct of credit card issuers, aiming to uphold the rights and protections of credit cardholders in dispute resolution and fraud claims.

For more information, visit the CFPB's official website at www.consumerfinance.gov.