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Why grand plans don’t work

  • Published at 11:52 pm July 14th, 2018
  • Last updated at 11:54 pm July 14th, 2018
It doesn’t make sense to have a national car these days Bigstock

Mahathir’s plan to have a national car company is a bad idea

Dr Mahathir appears to be repeating the mistake of his first premiership, creating a national car company - again, like Proton - in Malaysia. We do sometimes say that wisdom comes with age, although it’s rather more common that people become more stubborn in their mistakes with it.

For that idea of having a national car company was a mistake. Firstly, the government spent billions upon trying to develop it, but much more importantly, they compounded the error by trying to protect it from foreign competition. That meant that Malays had to either pay large import tariffs upon foreign cars, or put up with over-expensive and, frankly not very good, domestically produced cars. This made the people of Malaysia poorer of course, to no good end.

There are really three different sets of errors here. The first is this idea that there can be such a thing as a national company anymore. Certainly with cars, there is no country that is capable of producing one. The EU and North American car markets are entirely integrated - separately that is - it’s impossible to find any one car entirely built in any one country anymore.

The same is true of computers, as another example. The capital costs of building the basic platform for a car, the investment required to design a chip, or to build a chip factory, these are just too, too, high to be carried by the market in any one country.

Of course, people always do say that we can export to regain those expenses - but if everyone is trying to have national companies protected from foreigners, then who can export to anyone?

That is, any one country is just too small these days to support the development of any complex technology. Any attempt to insist upon it just leads to either vastly expensive or inferior technologies being deployed.

The second mistake is to think that a government can plan what it is that a place should specialize in. Economic development does indeed mean moving up the value chain, increasing labour productivity. But who knows which technology, which industry, a place should specialize in?

The true answer here being that no one does, in advance. It’s not even predictable, let alone knowable, in that advance. For much of what does happen is purely a matter of happenstance.

The analogy here to evolution is exact. It is random mutation which changes the palette from which species can be painted. But it is the environment in which they live which determines whether they are successful or not. That environment is changing over time. So it is, exactly so, with business and production.

Ideas come and go, people try different things. But who succeeds and when is a matter of luck concerning that external environment.

Another way to put this is to insist that what a place or country should specialize in is emergent from what people do, not something we can tell them to go and do. Because it just does depend upon what else is happening out there, whether a particular specialization will succeed or not.

Bangladesh is a massive success in ready-made garments, entirely true, and at least some of that comes from the low wage environment. But there are many low wage places out there which are not similarly successful. And the RMG sector really did start in Bangladesh as a result of one particular person making an experiment. It worked, he and others did more, it was emergent that success, not planned.

The third error is more subtle. The idea of infant industry protection is that -- whether this is planned activities, or those emerging from market experimentation - the new and small industries have to be protected from the blasts of international competition. This ignores the manner in which it is competition itself which improves productivity, but leave that aside.

The argument then goes on that sure, the protection against imports, those necessary tariffs, make the people poorer. But it’s worth it because as those industries grow up, then the future will be richer.

But that’s to ignore what actually does happen - the people doing the suffering now aren’t the same people as those who will be richer in the future. This is not just the passage of time either, us suffering now so that the children may be better off.

It’s not just that the infant industry protection, the strategic plans, don’t work. It’s that the people who suffer from the import protection are the consumers. And the people who benefit are the capitalists who own the protected industries. We’re now actually, flat out and outright, insisting that the poor should be made poorer so that the rich can become richer.

Sure, I’m a capitalist and all that, but not even I think that’s the way to run an economy. The aim is to make all richer - the poor especially perhaps.

All of the above then tells us how we should be approaching this problem of economic development. We’ve got to get the basics right. Educate people, certainly, get the basics of infrastructure right - make sure the water doesn’t kill children, and that it’s possible to travel about, move goods.

After that, we need a system which allows the maximum of experimentation to take place. So that we can find out - as we cannot determine beforehand - what it is that a people or a place are good at. What we cannot do, for it doesn’t work, is have a grand plan about who must do what and when.

There is, of course, that final point. A politician knows how to win votes. Quite why that’s a good guide to what the industrial structure of a society should be is unknown. Which is why all such political plans tend to fail.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

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