Interesting new paper by Bruce Blonigen from the University of Oregon:

Industrial policies (IPs) include such varying practices as production subsidies, export subsidies, and import protection, and are commonly used by countries to promote targeted sectors. However, such policies can have significant impacts on sectors other than those targeted by the IPs, particularly when the target sector produces goods that are key inputs to downstream sectors. Surprisingly, there has been little systematic analysis of how IPs in targeted sectors affect other sectors of the economy. Using a new hand-collected database of steel-sector IP use in major steel-producing countries from 1975 through 2000, this paper examines whether steel-sector IPs have a significant impact on the export competitiveness of the country’s other manufacturing sectors, particularly those that are significant downstream users of steel. I find that a one-standard-deviation increase in IP presence leads to a 3.6% decline in export competitiveness for an average downstream manufacturing sector. But this effect can be as high as 50% decline for sectors that use steel as an input most intensively. These general negative effects of IPs are primarily due to export subsidies and non-tariff barriers, particularly in less-developed countries.

The Kenyan government provides some support to the few steel industries in the country; as far as I know, it is mostly in the form of cheaper (or free) electricity and water. But that of course does little against growing international competition, especially from India and China. So the sector has stagnated: most firms have not expanded in any significant way, some have ceased their operations. (More info on this document, PDF).

The steel sector was (and still is) considered crucial for industrialization in China, so the government has protected it with heavy tariffs and subsidies. If I was the next President of Kenya, I would work day and night to find a market-friendly way to support innovation in this sector. I would definitely not let it collapse.

HT Circle Bastiat

About these ads