Industry Related Government Policy and the Global Economic Crisis

FUJITA Masahisa (President and Chief Research Officer, RIETI / Professor, Konan University / Adjunct Professor, Institute of Economic Research, Kyoto University)

Although the global economy is now slowly heading toward recovery thanks to the intrepid economic policies implemented by each government around the world, there are many countries, China among them, which are being heavily supported by large-scale fiscal spending and financial mitigation measures. We cannot make any predictions based on current projections.

There needs to be a change in the structure of each country's socioeconomic system if there is going to be a correction of imbalances in international trade and the achievement of sustainable growth in the global economy. In order to foster growth in Asia, Japan as well must further change its socioeconomic systems. In addition, a change in the structure of each country's socioeconomic systems is called for if we are to overcome our shared problem of global warming in the 21st century. We also must not forget that in Japan we face falling birth rates and an aging society.

Appropriate industrial and corporate policies are vital to the realization of the kind of structural change needed to ensure the mid- to long-term development of societies and economies. In this symposium, I hope we can clarify each government's industrial and corporate support policies, examine the way industrial policy ought to be carried out given the state of the economy, and debate about the preferred shape of industrial policy following the end of the economic crisis.

Richard A. GITLIN (Chairman, Gitlin and Company, LLC)

• Governments should implement industrial strategies for three reasons. First there is currently more capacity than demand. Second, we will not solve unemployment without wisely positioning existing industries and supporting industries of the future. Third, other countries are implementing industrial strategies.
• There are four elements of an industrial strategy: policy, decisions, execution, and the stage in which investments are managed and then exited. First, policy means that you should be able to explain the reason for executing the strategy to society in an understandable fashion. Second, once a policy is established, decisions must be made by the right people. Third, by execution I am referring to how decisions are carried out is extremely important. Fourth, industrial strategy must be managed properly to consider any necessary adjustments, including how to exit.
• Looking at the auto industry and battery industry as examples, we can see these four elements of the U.S. government's response to the current crisis.
• For the auto industry, the policy was confusing. At best guess, it seemed to be decided that automobile manufacturing was critical to U.S. manufacturing industry as a whole, and as a result, Chrysler and GM should be bailed out. But should Chrysler have been saved? Would the automobile industry be stronger without Chrysler? The execution was brilliant, with top professionals brought into the government to efficiently restructure firms and require real changes. Exiting from these investments will be challenging as many of the experts brought into the government have since left, with the exception of Ron Bloom.
• The other example is the battery industry. Batteries are an integral part of hybrid and electric cars. The battery market is projected to grow from $7 billion currently to $170 billion in the next 10 years. The U.S. has the capability to become a leader in R&D and manufacturing of high-tech batteries in the future. In order for this to happen, the U.S. government must put significant resources behind this industry.
• Two companies, among many others, received money from the U.S. government to develop and produce batteries. The first, A123 Systems, was started by people from MIT and has good technology. It will likely receive almost $500 million dollars in grants and loans to continue its work, even though the company had next to no earnings to show for itself. The second company, Ener1, was $80 million in debt four years ago. With the help of angel investors, venture capital and public capital, the company was able to continue. This company, with a track record of losing money, was given over $100 million dollars in grants through the government stimulus program because of its excellent technology and its future promise. I think these examples say a lot about the U.S. approach to investing money. The U.S. does not put money into privileged or established companies, it looks for the companies with the best people; it invests for the future growth of society.
• Let me finish with a few observations about what is necessary for the execution of successful industrial strategy. First, successful execution requires collaboration between the government, industry, and the academic community. Second, it requires a commitment at the highest level. Third, it requires oversight - there must be someone or some organization making sure that the government does not chase after bad investments. Last, and this is the most important point I think, a successful industrial strategy is one in which the government enters to help the economy and then stops intervening once a recovery has been achieved to preserve competition in the economy.

Jacques HENROT
(Partner and Head of the Restructuring and Dispute Resolution teams, De Pardieu Brocas Maffei)

• In the past, France was often criticized for the excessive part taken by the State in the economy. Major banks or industries were either in part or even fully under the control of the State: France was for instance the last post-war economy to have until recently a completely state-owned major car manufacturer, Renault, the employees of which could not go on strike without creating an immediate problem for the government; which did not help improving its productivity at the time. Despite the criticism that this level of State intervention generated in the past, in the face of the current crisis, some of France's ancient support/intervention techniques are being resuscitated to help France weather the storm.
• Let's focus on three of these techniques: 1) increased funding through the European Investment Bank (EIB); 2) the stimulus package, which the government put together in 2008 and 2009; and 3) The Fonds Strategique d'Investissement (FSI).
• The EIB, of which the EU member states are automatically shareholders, is an institution set up in 1958 essentially to fund, through long term loans, projects in Europe. Before the crisis, the EIB was already providing around 60 billion euros/year of financing to SMEs infrastructure and other projects, R&D ventures, green industries, etc.... When the crisis hit, channels were in place to offer otherwise unavailable funding to a larger number of beneficiaries. For 2009 and 2010, the EIB should increase its total lending capacity by some 30% (EUR 15bn / 1,963 bn JPY)). Additional global investment value expected should reach around EUR 72bn 9,420 bn JPY). Lending to SMEs should rise by 50% compared to 2008.
• On the domestic side, of the 2 year 26.5bn euro stimulus package announced in 2008, 75% was injected in the system in 2009. One of the techniques used was to accelerate refunds of provisional corporate tax installments and VAT credits. A so-called 1,000 new projects program was launched; a New Deal type program in which the government funded 1,000 essentially public works projects. Within the list of more day to day measures, standard terms of payment of invoices were shortened by decree to 60 days. The government moved to backup insurers and increased its grant to OSEO (an existing state agency financing SMEs directly or through guarantees) by 5 bn euros.
• The FSI was established in December 2008 to act as an equity funding tool for the French State. Even though 100% controlled by the State directly, and through Caisse des Depots (a public institution past governments also used for missions similar to that of the FSI), it is incorporated and devised to function as an "ordinary" commercial company. The FSI takes a minority stake in strategic businesses when their share capital structure needs to be reinforced. It has a budget of 20 billion euros. So far it invested in a wide variety of companies such as Accord and EuroTel Group and in smaller companies facing difficulties especially car part manufacturers (through FSI's sub-fund FMEA).
• Did these policies work? Probably too early to say but apparently not too bad if you look at credit ratings of European countries, since only France and Germany still have a triple A rating and statistics show a growing number of new micro start-ups.
• One of the main lessons to draw from the various responses to the crisis is that stimulus measures have to be transparent, temporary, and of an assessable cost. They must be evaluated in a reasonably short time, otherwise taxpayers will sooner or later refuse the efforts requested from them to fund such.

Josef BROICH (Partner, Broich Bezzenberger)

• Germany in 2007/2008 was in a relatively good position to deal with the financial crisis. When it hit, Germany's answer was not as strong as those of French or U.S., it was reluctant. The German government did not want to do equity investments. The reason for this was that Germany had privatized many of its state-owned companies a few years earlier, and people were reluctant about possibly moving back to a time when there was too much state control.
• In the end, there were two main features in Germany's response. First, Germany created Sonderfonds Finanzmarktstabilisierung (SOFFIN), which is a special fund designed to prevent insolvencies in the financial sector. Second, Germany implemented two stimulus packages.
• Actually, the stimulus packages were implemented mainly by SOFFIN and KfW Bankengruppe, a banking group. Both packages were implemented with the strong belief that Germany wanted to maintain and strengthen its industrial backbone.
• Package one offered 50 billion euros for investments and orders and an additional 20 billion euros to help maintain the financial resources and liquidity of enterprises.
• Package two offered 14 billion euros for infrastructure improvements and education and then put 36 billion euros into the financing program. Two important results of package two were the "debt brake" and the effect on unemployment.
• The so-called "debt brake" is a policy that will come into effect in two years. It limits the ability of the government to take on more debt. German people want the government to do something, but not at the expense of greater future debt.
• Package two was also implemented to minimize unemployment. Germany offered money to companies through the package in order to implement short hour work programs, in which employees work less hours per week, thereby allowing companies to avoid lay offs. It is estimated that Germany avoided approximately 600,000 cases of unemployment this way. Whether the package has prevented a rise in unemployment in a way that is sustainable in the long term or not is yet unclear.
• SOFFIN is a special fund designed to prevent insolvencies in systematically relevant companies in the financial sector. The most prominent applicant to it has been Commerzbank, which received close to 20 billion euros.
• SOFFIN is interesting in the context of the German discussion on the financial crisis. Most Germans regard the crisis as the fault of a highly distorted financial market in which risk, excessive leverage, and dubious risk management theories combined with greed for power and money to create toxic assets and bubbles. So there is not much support for programs perceived to only be helping the German equivalent of Wall Street. Germany wants to avoid two scenarios: 1) going back to have huge nationalized companies, and 2) having financial institutions so large that they cannot be allowed to fail and an organization like SOFFIN has to come in and bail them out. These have led to two developments.
• First, Germans are now discussing a proposal which provides for dissolution of banks or companies considered to be getting too large to fail.
• Second, Germany's Finance Minister is now working on a new roadmap for industrial policy. This roadmap seems to focus especially on new technologies, green industries, and industries which are open to international investors.
• To conclude, it is not yet clear whether Germany's policies have been successful or not. Over the next year we will have to come to a conclusion as to whether we have solved our problems or just papered over them. However, no matter what happens, the government will probably stick to its principles, avoiding overexposure and restricting public debt.

Q: For Dr. Richard GITLIN, what is the valid reason to support, for example, the battery industry rather than other industries?

Dr. Gitlin:
You have to select which industries you believe in. President Obama made a statement that he wanted 1 million electric cars on the road by 2015. So in effect the examples I gave are part of comprehensive programs to make that happen. I emphasized the battery industry because I found the nature of the companies being supported interesting, but in fact, there is a comprehensive program for electric vehicles.

Q: For Mr. Jacques HENROT, are there any lessons on what kind of policy may be suitable for certain solutions? I would be interested in any merits or demerits of the various policies or the coordination among those policies.

Mr. Henrot:
The good thing about the stimulus packages is that they are so big that people have realized that money has to go where it is supposed to go or the taxpayer will not vote for a third or fourth stimulus package. There was a total lack of coordination in the past. Now priorities are set. The FSI as well is saying to the government and companies, "Restructure first, restore the confidence of your bankers, and if you do, we will see."

Q: To Mr. Joseph BROICH, I would like to know what the asset strategy is for Germany. Also, in this kind of crisis, do you not follow the Maastricht criteria temporarily?

Mr. Broich:
Regarding your first question, for the time being, I tend to believe that we will not see huge growth initiatives. We may see another stimulus package that will focus on environmental technology, but I think there will be a lot of resistance within the government to engage in new industrial policies. Germany recently introduced a bad bank act, enabling commercial banks, and in particular state banks, to get rid of toxic assets.

It is almost certain that Germany will not meet the Maastricht criteria next year. Will this lead to the abolishment of the criteria? Probably not. The German approach is "Let us stick to the Maastricht criteria. Once the worst is behind us, let us reduce debt again and go back to the principles of sound financial circumstances."