Singapore’s industrial policy promotes real economic growth

The Canadian and United States governments are engaged in one of the most intense exercises in industrial policy since the Second World War. On both sides of the border, government is promoting domestic investment in government-favoured industries including clean energy (particularly electric vehicle parts and assembly), artificial intelligence and semiconductor chips. These initiatives primarily involve direct and indirect financial subsidies to specific companies to build and operate manufacturing facilities, but also government regulations and protectionist measures to discourage imports and outward foreign direct investment (often justified on grounds of national security).

Every government throughout history has practised some form of industrial policy, usually with disappointing results. Why? Because politicians and bureaucrats have limited insight into the relevant benefits and costs. While private-sector investors are also far from omniscient, they have strong financial incentives to be more right than wrong regarding the circumstances that will affect their investments. Moreover, private investors have financial incentives to cut their losses if their expectations about the consequences of investments prove to be mistaken, whereas politicians and bureaucrats are rarely rewarded or punished (financially or otherwise) if the claimed benefits of government initiatives fail to materialize.

Industrial policies also typically fail because they usually link social policy goals to industrial goals, thereby increasing the costs of building and operating publicly subsidized businesses. For example, the Biden administration requires companies receiving federal subsidies for semiconductor manufacturing to provide affordable child care for their workers.

Another example is the recent demand by Francois-Philippe Champagne (federal Minister of Innovation, Science and Industry) and Vic Fedeli (Ontario’s Minister of Economic Development, Job Creation and Trade) that workers being brought from South Korea to help assemble NextStar Energy’s EV battery plant in Windsor, Ontario, be restricted to training unionized domestic workers and then return to South Korea. NextStar Energy is a joint venture between South Korea’s LG Energy Solutions, a battery manufacturer, and Stellantis, a multinational automobile manufacturer. The joint venture partners will receive up to $15 billion in subsidies from the federal and Ontario governments.

Indeed, it’s hard to find examples of successful industrial policy. Some analysts point to Singapore, which has enjoyed a remarkable increase in real economic growth since it gained independence in 1965. For example, in 1961 Singapore’s real gross domestic product (GDP) per capita was only about 20 per cent of that of the U.S. but by 2020 was virtually identical to U.S levels. During this period of remarkable economic growth, the Singaporean government subsidized domestic businesses in industries it wanted to develop. It also took ownership positions in so-called “government-linked” companies, and it was the primary developer of Singapore’s housing stock.

Whether and how much the Singaporean government’s industrial policies contributed to real economic growth, especially given Singapore’s market-oriented attributes such as low taxes and strong protection of private property rights, is a matter of debate. To the extent that Singapore’s industrial policies had a positive economic effect, it’s arguably because the government mitigated the primary causes of industrial policy failure. Specifically, industrial policy in Singapore has focused almost exclusively on promoting real economic growth. Social goals have not diverted this focus, in part because of a political consensus that social goals are best achieved by growing, rather than redistributing, the economic pie. As well, while politicians and bureaucrats in Singapore may not be more omniscient than those elsewhere, their employment and compensation is linked to the success or failure of their policies and programs. Likewise, executives of government-linked companies are expected to manage profitable businesses without the benefit of direct government subsidies or trade protectionism.

While industrial policies are almost always likely to benefit special interest groups at the expense of the broader population, Singapore’s unique approach to industrial policy might be the lone exception to this general experience.