Quebec is not the only one that has projects like that of its battery sector. Industrial policies are more fashionable than ever these days, even if their chances of success depend on narrow and strict conditions, and they should be accompanied by other complementary policies that are often neglected, particularly in Canada.
In a sign of the times, the cherry trees bloomed earlier than usual in Washington this year. They will have largely lost their beautiful colors next week for the traditional meetings held there every spring by the International Monetary Fund (IMF) and the World Bank. This time again, the meeting of the Bretton Woods institutions comes with its anthology of forecasts, analyzes and economic studies. One of the topics of discussion will be the enthusiasm for industrial policies.
The number of countries that have adopted industrial policies and the importance that these measures take in their trade policies have continued to increase in recent years, particularly in developed economies, observes the IMF in an analytical chapter of the next edition of its Public finance monitor, revealed in advance this week. The examples most often mentioned were adopted in the United States, Europe, Japan or China and aim to encourage the green transition and the development of new computer technologies and artificial intelligence. But there are others, including in Canada.
On the one hand, this trend is understandable. Innovation is “the ultimate long-term driver” of productivity and prosperity, notes the IMF. However, productivity growth continues to slow down at the very time when we need it most, particularly to face the challenges posed by the climate crisis, demographic aging and government debt. Geopolitical tensions and the desire for greater economic security also make us dream of having our own champions in strategic sectors. What’s more, these are the kinds of considerations and missions for which we cannot count on companies and private investors, obsessed with more mundane and short-term economic objectives.
As was to be expected, the green technology and advanced technology sectors are among the first to benefit from these industrial policies. They come in front of steel and aluminum, medical products and semiconductors, but still behind industries linked to the military sector.
These industrial policies are also very expensive for governments because they rely largely on subsidies or tax breaks. The issue is important, the IMF says, because history and research have shown how difficult it is to succeed with such policies and the examples of errors, waste of funds and perverse effects are legion.
Strict success conditions
To work, industrial policies must respect strict conditions. The targeted sector must first be able to generate “measurable social benefits”, such as the reduction of carbon emissions or a transfer of knowledge to other sectors. We must also protect ourselves against the games of influence which would distort the rules of politicians and the allocation of their resources for the benefit of the cronies of power. We must also be careful not to discriminate against foreign companies so as not to expose ourselves to commercial reprisals and because the ingredients of the recipe we are trying to make will often have to come from abroad.
If industrial policies respect all these conditions and we know how to regularly reassess their relevance and effectiveness, they can produce the positive effects hoped for, notes the IMF. Particularly when it comes to green transition, where the economic and social benefits are very high. And on condition, in this case, that their operation is transparent and that it is accompanied by a “robust carbon pricing system in order to minimize budgetary costs”.
The positive effects will be greater in large economies within which a sort of virtuous ecosystem can develop. More dependent on the outside, small open economies will inevitably have more difficulty and will have to try to find foreign partners to approach this effect, note IMF experts.
In the tables these experts draw up, Canada seems to fall closer to the latter category. And they say nothing about Quebec and its battery industry.
Rather, what they add is that industrial policies should not come alone.
Need for fundamental research
This is because we are quickly reaching the limit of governments’ capacity to recognize and finance research and innovations that will have the greatest future scientific, economic and social repercussions, they explain. Too busy with its commercial objectives and the quest for small innovations made on the margins, the private sector is also not capable of embarking on the quest for the next great scientific discovery. To do this, governments must fund basic research.
Unfortunately, this funding has stagnated since at least the early 2000s in developed countries while spending on more applied or commercial research has tripled. However, it would be enough for developed countries to double their current efforts in favor of fundamental research to generate economic benefits four times greater than the additional sums invested.
Unfortunately, Canada is far from being a leader in this area, more than a hundred Canadian researchers recently deplored. In fact, already lagging behind the developed country average, it has lost further ground over the past 20 years.
In summary, industrial policies are a delicate operation to carry out and will not be “a miracle cure for low growth”, says the IMF. We understand that this will also be, and perhaps even more so, the case in Canada.