What is the best strategy for Catalonia?

(published at the +Valor supplement of El Periódico de Catalunya, 22/3/2011)

During the last decades in all developed countries new industrial firms have appeared that combine manufacturing activity with the services needed. Instead of traditional resources, this new industry is based on the intensive use of technological knowledge and the generation of value added through the design and the improvement of distribution channels and commercialization.

At an international level, and also partially in Catalunya, we can find this new industrial activity both at large corporations that develop specialized departments to implement it, as well as at small and medium sized firms, which provide engineering, consulting, management and production of specialized knowledge for industrial  use.

Is Catalonia well positioned to jump into these changes or will it loose its opportunity and will it have to put up with more traditional services like for instance those related with touristic activity? Fortunately o this new industry does not only appear in the most intensive knowledge sectors, such as biotechnology or aeronautic engineering, but also in sectors where Catalonia has an important installed base, such as cars or chemicals. We have to add also that the innovation possibilities of the more traditional sectors, such as the above mentioned touristic sector, cannot be underestimated.

It is true that is we could choose an industrial model for Catalonia we would like to have a network of firms with internationally competitive products, with high value added, and providing a network of services and suppliers that can create diverse jobs, ranging from the most qualified to the more basic jobs at the lower part of the chain.

Is industrial policy able to attract activities intensive in knowledge and occupation creation? Can the industrial structure of Catalonia be modeled through public policy?

It is clear that providing the industrial structure with the necessary infrastructure and improving the basic and vocational educational system can represent ways of support towards this new industrial model, but if there is something we economists have learned is that actual results can be very different from desired results , and in general quite unpredictable, when public policy tries to influence the decisions of economic agents without taking into account that private incentives align with social objectives.

Nevertheless, all European countries try to give support to their industries in order to keep the associated jobs, and countries such as the United States, where public policy has been traditionally regarded as interventionist and as giving to much power to the state, there is a direct support to many industries. At the United States, Internet and the associated industry could not be understood without the direct initial intervention of the Department of Defense, and nowadays the Department of Energy gives finantial support to private firms developing green technologies such as electric cars and solar panels. On the other hand the amazing growth of the Chinese manufacturing sector cannot be either understood without the public support to new industries, both initially from public firms where managing and technical capabilities were incubated and today where industries such as automotive of electronic products are given local support to generate a network of suppliers and appropriate infrastructure. In conclusion, wherever we look we can see a clear public support to local industries and an intention to keep some type of national industrial model.

In sum it is not a question of deciding to have or not to have an industrial policy strategy and specific policy measures implementing int, or what type of model we desire, but what type of strategy and what type of intervention is the most adequate.

If we analyze more deeply the successful models we can see that industrial policy is more an environment and an adequate climate than a set of policies and receipts that can be applied. In other words, the best industrial policy may consist of the creation of an adequate environment where the best opportunities can be visualized and taken advantage,  instead of trying to direct private decisions towards specific sectors or models. This is how it is being done in Germany, for instance, with incentives so that different industries can benefit from new opportunities. These incentives can be implemented with the contribution to the financing of research activities, fiscal incentives and grants for the collaboration between universities and industry.

Another important aspect that cannot be forgotten is that an adequate environment also implies each agent facing its own risks. That is, the worse policy is to try to eliminate the risks associated with industrial entrepreneurial activities. It is true that so that innovation is possible adequate returns have to be given to investors, but a wrong incentive policy may raise these returns above reasonable levels and eliminate a correct evaluation of risks, distorting investments towards activities that eventually will prove to be unprofitable. Therefor public policy should never assume private risks.

Finally another very important aspect towards and adequate industrial model is a competitive environment and the existence of opportunities for new entrants into industrial activities, because at the end of the day specific firms should not be favoured (a picking-the-winner policy) but ways should be facilitated so that everybody can take advantage of existing opportunities.