Industrial Policies and Economic Integration

Learning From European Experiences

Patrizio Bianchi

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134750573
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

This volume examines what industrial policies are, and what role they play in the context of European integration. It provides a clear analysis of the process of integration from the Treaty of Rome to the Maastricht Treaty and beyond. Key issues covered include:
* the theory of economic integration
* policies to create a single market
* the role of European Community institutions
* policies to guarantee and promote market competition
* policies of industrial development and innovation
Industrial Policies of Economic Integration develops a new range of policies, aimed at allowing a new common market to enter the global marketplace effectively.
This volume will be essential reading for students of European economics and policy makers interested in economic integration.

1 Introduction: economic integration and industrial policy

Basic concepts and plan of the book

Modern States and the Process of Economic Integration

This book studies the nature and role of industrial policies - i.e., what they are and what they are for - in the context of regional integration agreements such as customs unions and the more complex economic unions. In particular, it concerns itself with the industrial policies implemented by the European Community after the new impetus given to integration beginning with the 1985 White Paper, and which has continued to be provided by the Single European Act of 1987, the Treaty on the Union signed at Maastricht in 1992, and the Turin Intergovernmental Conference of 29 March 1996. The latter also made a start in outlining the Union's ambitions beyond the new century.

Our particular focus can be defined as the design and implementation of instruments to accelerate the process of industrial and corporate adjustment to an increased extent of the market, given by the decision of nation-states to integrate themselves within a transnational context regulated by a political agreement. This problem is not strictly European, but it concerns all the experiences of economic integration emerging around the world, from Nafta to Mercosur, to the various experiments looking to reaggregate the independent states of the former Soviet Union. Nevertheless, Europe pioneered and experienced the most articulated and advanced case of economic integration. Thus, this book has the ambition of offering suggestions not only for further development of this European experience but also to those who are currently embarking upon new experiences of aggregation at the territorial level connected to regional integration agreements.

We will state straight away that by 'industrial policy' we mean a variety of public actions aimed at directing and controlling the process of the structural transformation of the economy. The basic assumption is that the process of industrialisation serves as a guide for the whole process of transformation of the economy, and that by acting on such a process, therefore, it is possible to orient the more general mechanism governing the structural transformation of the country. According to this definition, industrial policies are deeply rooted in the consolidation of the modern state and the emergence of capitalism. In fact, it is with the development of capitalism that the capacity to organise production becomes a source of wealth for nations, because industry becomes the mechanism for accumulation and growth, which permits the establishment of a type of exchange based on efficiency in the production of reproducible goods and not on the fortuitous availability of scarce resources. With this comes also the growth of the modern state, i.e., the affirmation of political power as an organisation which defines expressly created structures - a group of rules, a series of roles, a set of resources - aimed at serving a unitary whole, specific in its choice of interests and ends (Poggi 1991).

Industrial organisation is also a part of these specifically created structures, such that the modern state, which consolidates its position by identifying itself as both a territory and a structure of social powers, cannot afford not to guide and, if necessary, to exercise direct control over the development of this machine. This in turn determines collective growth and at the same time establishes the internal power relationships between social classes and interest groups, and external power relationships among nations themselves.

The set of instruments to stimulate and regulate the development of production activities was already vast and well established in all countries, with examples dating back to ancient times, but their use was significantly transformed within the new context. This was so because the motivations and possibilities for putting them into action were founded on the definition of national interests uniting sovereigns and their champions in a process of economic competition which necessarily turned into trials of strength among countries (Supple 1973).

With the birth of capitalism the nation-state affirmed itself because the new productive classes emerged as the forces of social change that wanted to see political recognition of the rights of citizenship - entitlements which their economic abilities/capabilities had affirmed in the economy.

Smith asserts that the wealth of nations consists in an organisation of production (the division of labour), that - by specialising productive functions and by coupling them according to their complementarities cumulates knowledge and skills and transforms them into productive capacities. He states that the development of this division of labour should only be limited by the power relations of equally entitled individuals, competing for their own interests, that is to say by the extension of the market. Smith explains that there cannot be feudal laws, or monopolistic rights hindering the individual's initiatives (Smith 1976 [1776]: 31).

The market according to Smith is a nexus of horizontal relations in which relative power is not given, but is contestable on the basis of the ability to organise productive activity. The organisation of production and industrial competition are therefore the instruments for affirming the rights of individuals in society. The economic dynamic is therefore connected to institutional change, and this is linked to the existence of a multiplicity of subjects, free of institutional constraints and economically independent, able to compete to affirm their power and their social position. Social interaction in the Smithian scheme was not only competitive, but also co-operative so that the division of labour was based on the complementary specialisations of various individuals and various firms. Smith himself recalls that an economy based on the development of market forces requires a strong state to guarantee property rights and to legitimate private contracts, but also to guarantee those positive externalities that no one individual citizen could activate by himself, like defence, justice and public works, and those necessary for collective growth such as communications, educational and health systems, and finally to prevent any risk of monopolisation (Smith 1976 [1776]: 689; Robbins 1978: 37).

When the bourgeoisie became the dominant class, collective interest was identified with the nation as a whole, and the central state assumed the role of internalising, administering and often repressing social conflict in the name of a concept - the nation - which was as abstract as the God of the feudal kings. The nation-state and national industry grew up together in an increasing interlacement of social and economic interests and bureaucratic and productive structures. Hobsbawm (1990) describes the forced march towards the construction of the nation-state, by constraining languages, local cultures and social practices through a bureaucratic apparatus regulating the entire life of the people.

In the meantime the state intervened to accelerate the structural change of the organisation of production in order to resist and oppose the increasing economic and political power of the other nation-states. The industrial revolution in Britain stimulated the continental emulation of those states which realised that economic and technological dependency on the new economic leader meant becoming political minorities. Landes depicts the variety of actions promoted by the King of Prussia in order to protect national industry, in the stage of structural change of production organisation, to face the British challenge (Landes 1969: 125). A wide variety of instruments to enlarge the market through a regional trade agreement among the German states, the so-called ZollVerein, was created (1831-1871).

List (1841) provides the economic theory explaining the necessity of protectionism to permit the consolidation of a strong national industry. List illustrates how protectionism has political aims, to prevent strong English firms from eliminating young German firms, and thereby imposing English domination on the new Germany. On the other hand in England, Mill theorises the return to protectionism to permit infant industries to grow and to prevent competition with already consolidated competitors that would destroy newborn industries (Mill 1844).

Social Coalitions, Regional Integration Agreements and Industrial Policy

The opening and closing of the economy has had important social and economic consequences on the internal equilibria of countries involved in trade. For example, the relationships among different social classes change if markets are opened, and this can result in coalitions of interests which differ according to the type of opening that is realised. Different coalitions can be formed not only within the country to resist or to promote trade liberalisation, but also throughout the countries involved in the trade. For instance, if we look at a Ricardian scheme of international trade, based on relative advantages, that is, on the relative advantage of specialising oneself in a relatively more efficient production area (Ricardo 1817: 128), we discover that opening the market implies a social turmoil among the established social interests.

In a closed economy we can assume that both in England and in Portugal manufacturers can be considered to be emerging and innovative classes, the opposite of the conservative class of landlords; but, if the English manufacturers are much more efficient than the Portuguese, the advantage of trade occurs if English capital moves to the production of cloth and Portuguese capital specialises in the production of wine. They may be less efficient than the English competitors, but this would be relatively more advantageous than concentrating on the production of cloth. In this case there would be a transnational coalition of English manufacturers and Portuguese landowners who have a common interest in market opening, and English landowners and Portuguese manufacturers would form a coalition against the opening, asking for protection in order not to lose their own political power inside the society. The decision to open the market, therefore, results from the social conflict between these coalitions of interests. In the next chapter we will explore further the possible conflict emerging from a sudden opening of the market.

Of course if we have perfect capital mobility, the reallocation of interests between the different sectors and the different countries could be very rapid, but we have important social rigidities, derived from each country's history and framing national society. Before exiting from a sector, involving a reduction of the political power implicit in an economic and social position, people can express their voice to protest and try to stop the social change, if this social change can imply a possible failure in adapting their own productive and organisational structure to the new situation (Hirschman 1970).

There are two possible ways to oppose social innovation: either to resist the change, by grouping all those who expect to be the losers; or to induce potential losers to reorganise their own capacities and collectively organise a positive response to the challenge. We use the term 'regressive coalition' to refer to an aggregation of individuals united by a common interest in opposing a selection process, but who are incapable of inducing alternative forms of the social division of labour. A regressive coalition therefore unites actors who do not have interests or capacities to develop complementary specialisations. Thus, it only requires a little effort since it is enough to oppose the prospective change individually, but this form of coalition is not able to develop any alternative paths towards a stable social aggregation. On the other hand there is a 'progressive coalition' if the process of aggregation of individuals induces a progressive transformation of the capacities and abilities of the individuals, such that a relative complementarity of action among them is generated. This ability to adjust the division of labour allows a system to be stable, since the members are interdependent and complementary, and consider the need for change as a collective good (Bianchi and Miller 1995).

Traditional industrial policies were interventions with which nation-states tried to create a progressive coalition inside the country in order to respond to an international challenge. In the European experience, nation-states strengthened their own champions, assuming that they could be capable of defending the national interests in an economic conflict, bearing in mind political confrontation among countries. At the same time nation-states guaranteed the survival of national enterprises which might otherwise have been defeated in the course of the process of economic conflict among countries. The progressive coalition was identified in terms of the national interest, and internal competition was reduced in favour of the international competitiveness of the country.

Nevertheless, when these nations stop promoting internal capacity to react, and de facto they defend the only interest to resist change in order to protect the existing internal power positions, the evolutionary process is blocked. In this situation industrial policy becomes simply the expression of the existing regressive coalition, using the state to 'freeze history'. The government itself can be the expression of this regressive coalition or it can be captured by this group of interests without future.

A possibility to escape from this trap is given by an international agreement to regulate over time the structural adjustment process involved in the process of trade liberalisation. An economic integration agreement (or regional integration agreement, if we want to stress the territorial contiguity of the countries involved) is a political agreement among governments. Its purpose is to guide this process of economic integration among countries, in order to limit those effects of liberalisation which are considered negative, thereby making the economic impact of trade opening acceptable to the social structures of the individual countries. Within this agreement, governments can agree on a set of actions to direct and control the process of structural change connected to the market opening. These would be:

1. actions to increase the extent of the market, i.e., to create an effective single market among the countries involved in the agreement;
2. actions to develop the division of labour throughout the countries involved in the agreement, in order to increase individual specialisation, but also to establish a network of relations in a transnational context;
3. actions to regulate market power, in order to avoid the process of market integration being distorted by monopolisation attempts.

In the first chapter, there will be a description of the effects of an economic opening, and of the motivations which can lead to a search for a political agreement to accelerate the structural change connected to this international challenge, drawing from the opening the greatest possible advantage.

Functionalist vs. Federalist Approach

There is a transnational nature to coalitions involved in transforming the economic structures by using regional integration agreements to change the extent of markets. Thus, such an intervention in economic structure implies different national and transnational actions aimed at creating the conditions to favour the emergence of progressive coalitions throughout the entire area of the agreement. We shall state therefore that such agreements can establish different degrees of integration. The simplest entails a reduction of tariffs among countries which nevertheless intend to maintain their autonomy with respect to tariffs imposed on third countries, as in the case of a 'free trade zone'. Greater integration is given by an agreement which, besides pushing governments to draw up agreements liberalising trade among themselves, also commits them to a common policy towards third countries (the so-called 'customs union'). Finally we will reach the more complex forms of integration (such as economic unions), in which it is considered that the economies of different countries become assimilated to such an extent that capital and labour can be freely reallocated within the whole of the common area, until - as in the case of a monetary union - the institutional conditions are considered to be sufficiently integrated to permit all transactions to come under the same monetary regime.

The different forms of integration can be reached by following different procedures. As will be seen in chapter 3, these procedures can tackle the problems which emerge one by one, following a 'functionalist' approach, or they can tackle them all at once, following an approach which we may call 'federalist'. All of the common steps can be established from the very beginning, through a series of negotiations to define not only the successive objectives of integration, but also the compensation for those who feel that at each negotiation they are put at a disadvantage by the agreed mechanism for integration. We may refer to this as a 'constitutional' approach. Alternatively, an evolutionary process can be started in which, once the rules of the game are established, it is the very interaction among participants which determines the results and the subsequent direction taken. We will call this second line of action 'evolutionary'.

It is clear that the different phases of integration require different policies. This is because there are also differences in the constraints and the objectives which authorities set for themselves, pushing producers into accelerating their own normal mechanisms of production and competition in order to adapt to the new context created with the agreements.

The European experience shows clearly that the most critical phase is that which separates the creation of a customs union from the launch of an economic union. After a long and difficult period of gestation, the signing of the Treaty of Rome in the mid-fifties gave concrete existence to the agreement by the six countries of continental Western Europe. This agreement was to achieve, within an appropriate number of years - thirteen in the Treaty - a dismantling of internal tariffs, maintaining at the same time a common external barrier. This phase was achieved more rapidly than expected, so much so that the commitment had already been fulfilled by the early sixties. However, the subsequent phase which was to outline a more complete integration was significantly delayed and only after twenty years was a new phase launched, in which a new agreement and a new Treaty established the path for the development of an effective European economic and monetary union. However, this economic union has faced and appears to continue to face such difficulties that plans for monetary integration have been delayed, and the extent to which developmental conditions differ among European regions has been revealed.

Without recalling the details of the history of European integration, chapter 4 reconstructs the rules and institutions established to guide the process of European structural transformation, from the Treaty of Rome to the Treaty of Maastricht. It emphasises that the Single European Act, which launched a new integration phase, also marked a substantial change in the procedure of integration, replacing a functionalist and constitutionalist approach of markedly French origins with an approach of more federalist and evolutionary inspiration, strongly influenced by the German experience and presence.

Why is it precisely this phase which is most obviously critical, to the point that, in the European case, it has taken a long time and still presents so many difficulties for implementation? The answer lies in the nature and relevance of the structural and institutional transformati...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of illustrations
• Acknowledgements
• 1 Introduction: economic integration and industrial policy
• 2 The political economy of economic integration
• 3 Public policies in an opening economy
• 4 Rules and institutions: from the Community to the Union
• 5 Policies to create the single market
• 6 Policies to guarantee and promote market competition
• 7 Policies to foster industrial development
• 8 Structural policies and cohesion
• 9 Policies for industrial and corporate innovation
• 10 Conclusions
• Bibliography
• Index