The New Rules for Industrial Organization: The Problems with Picking Winners

“Picking Winners,” as it’s called in economic circles, is the process of governments deciding on certain sectors and promoting their growth. Typically, this is done with sectors that the government deems strategic, and takes the form of subsidies, trade protection, guaranteed loans, and other forms of directed credit.

For subsidies and credit to be directed toward specific industries, these resources must be taken from other industries, and the rest of society. Occasionally, governments do bet on a sector that manages to stand on its own two feet, and even thrive, but more typically this strategy results in a serious misallocation of resources. In China, it’s easy to see immense overcapacity in many sectors, which become increasingly reliant on government directed credit to stay afloat. Meanwhile, other areas of the economy and small businesses are often starved of credit they need to grow.

Shipbuilding, automobiles, and electronics are common examples of industries that governments often deem strategic for various reasons; particularly in Asia’s export-oriented economic regimes. Overcapacity, cheap credit, and subsidies may make these products artificially cheap, but they benefit those who are involved in those sectors, at the expense of everyone else. This preferred treatment creates an artificially high supply of products that do not necessarily benefit the broader population, using the resources that could have otherwise been used to make products that do; or at least ones that consumers demand. In some cases, such as agriculture, the subsidies are often combined with price floors, which create a situation where consumers are hit doubly hard, by both high prices as well as taxes to fund the subsidies.