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Updated: June 11, 2010 18:19 IST

Growth-shifting effect of lemon socialism

D. Murali
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The End of Influence by Stephen S. Cohen and J. Bradford Delong
The End of Influence by Stephen S. Cohen and J. Bradford Delong

Looking at the current economic crisis, Stephen S. Cohen and J. Bradford DeLong find a worldwide reaction against what are perceived to be the excesses and defects of neo-liberalism. They expect that governments, in an effort to stimulate the economies, will try to be strategically as well as macro-economically smart and to shift their economies toward bright and even virtuous new directions like clean energy.

Each government will be tempted and pressured to use its leverage for the national interest, as well as many special interests: to support and strengthen big, distressed industries and to promote investments in new industries, write Cohen and DeLong in ‘The End of Influence: What happens when other countries have the money’ (www.landmarkonthenet.com).

“After all, if the US, Germany, or Korea bails out its auto parts makers or its banks, insurers, or airlines, then shouldn’t France or Italy also do so? If they don’t, they risk letting their companies and workers pay the price of American or German market-distorting policy.”

The authors bemoan the fact that, in the current economic crisis, all of the industrial countries have lots of big lemons, in the form of offices and factories owned by both national and foreign companies in sectors that had worldwide overcapacity before demand suddenly collapsed. “Ensuring their operations and survival in one country squeezes the other countries’ lemons all the harder, and around it goes.”

Ships in troubled waters

An example given in the book is of the shipping sector, which has its ships sitting empty. Prices for ocean shipping have plummeted as volumes have fallen, while costs are overwhelmingly fixed, the authors inform. Orders for new ships spiked during the shipping boom of the past few years, but now orders are being cancelled as quickly as possible, putting the shipyards to trouble, they add.

The response of the Chinese government, one learns, is to push its shipping companies to buy new ships and keep the shipyards operating and the huge workforce employed. Maersk, one of the biggest ocean shippers, is a Danish company, but how can Denmark or Greece compete with China in a subsidy race, the authors ask.

Football helmet

Another poser, in the context of innovation, is about governments with ownership stakes in firms toying with the idea of tuning things so that spillovers of innovation happen not where the operations are currently located, but rather where the government would prefer the spillovers to be.

For instance, governments may like that totally new technologies are taken out of the start-up companies that create them and are shifted back home for next stage development into full-scale production, growth, and development into yet newer products and processes.

Most such efforts will probably fail, caution Cohen and DeLong; and when the failures do happen, damage will be inflicted on the innovating economy.

Defensive industrial policy – lemon socialism – can have a similar growth-shifting effect, they note. “Think of American football. The helmet was defensive at first, to protect players’ brains. But it then developed into the hard-shell helmet, an offensive battering ram…”

Instructive read.

***

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