30 September 1993 - 02 October 1993

Industrial Productivity, Competitiveness and Growth: What Roles for Government?

Chair: Mr Michel Bélanger

(A conference in Canada, hosted by Canadian Ditchley)

We met in the splendid surroundings of a Laurentian autumn to consider the significance and wisdom of the ebbtide - most evident in the utterances of the new US Administration, but detectable also across most of the older developed world - away from the purism (at least in theory) of the 1980s’ policy attitude whereby Government aid to industry was generally presumed to be distorting and wasteful.

Despite this shift, most of us remained sceptical of the idea that Governments could usefully pick and back industrial winners among firms, projects or sectors. No institution was good at this; the lemons, it was well said, ripen faster than the plums. The market itself chose only by the harsh discipline of multifarious trial and error, and Government selection was further hampered by less clarity of bottom-line objective and by all the pressures of voting constituency - pressures inescapably biased, as reflecting the known actualities and the big employers of the present and the past, towards “sunset” protection rather than stimulation of the speculative future. And even if (questionably) mechanisms like groups of non-elected sages, enlisted to provide distance from electoral process, proved able to function, it was not evident that they would do much better.

That said, it was recognised that in political reality there would always be episodes of Government support intervention. Could we find principles or directions for, at least, a better standard of meddling? Research and Development - activities of proven general importance in economic growth - seemed to offer a natural candidate area. At the R. end of the R&D spectrum, where it was often difficult for private investors to capture the benefits of “blue skies” work, we accepted the need for Government-funded effort through the universities and otherwise. We recognised also that in “public-good” fields like environmental protection and the treatment of AIDS - indeed wherever the scale of non-capturable externalities had to import essentially political judgments of priority - the case for such effort might properly extend well downstream of R. We were however not agreed about how far it should reach into the D. zone in more directly industrial activity. Some participants, concerned about the difficulty North American and Western European countries (as contrasted with, say, Japan) seemed now to have in translating good technological concepts into prompt and efficient production process, saw a role here for stimulus by Government investment - albeit even then with private business leading the choice and committing its own funds; others remained sceptical of the likely merits of investment where private business did not regard the true cost as worth bearing. And scepticism was at least equally strong in respect of protection used for sector-stimulation purposes; aside from repercussive effects on trade frameworks, these could easily result, through extra costs, in damaging the competitiveness of other sectors dependent on the products.

We noted the particular problems of defence industries in the post-Cold-War contraction. Not all of us accepted the case for special Government help here. Much depended on whether the specific scale was too large or the pace too abrupt for normal economic adjustment processes; and if there were to be special measures, we thought they must be focused on helping the individual worker’s mobility, not on protecting firms or management structures - if these latter could not adapt successfully, their resources were best left for the market to re-assign.

We were more united in believing that - especially in an era of global trade where knowledge and skill rather than physical assets were the crucial resources - Governments had a key role in sustaining the pool of educated talent upon which business must draw, though even there awkward judgments arose about whether or on what basis governments should seek, by supply constraint or otherwise, to modify individual choice. We were less sure about how far Governments should be involved in job-related training; it was suggested that Government training and re-training schemes, though they might provide near-term help to morale and relief to political pressures, had a mediocre placement record and too easily became holding pens for unemployment; training closely related to specific prospective jobs - and accordingly most naturally provided by the employer - was much more cost-effective.

The challenge of large-scale and apparently structural unemployment was an undercurrent in most of our discussion. The pressure as productivity improvement outpaced GDP growth, in conditions of mounting international competition, imposed severe strains upon the ability of governments to sustain the open trading system and to persuade their peoples to tolerate the pain - often acute and immediate for the individual - of flexible job transition as the concept of life-time one-firm or even one-trade employment faded; the problem of low-skilled workers in high-wage economies was especially acute. We were in two minds about systems for alleviation. Both human compassion and the limits of political tolerance required that welfare safety nets be widespread and not ungenerous; yet if they were too comfortable - and still more if they were then combined with strong job-protection mechanisms - the effect was to make adjustment slower and more costly, to the long-term detriment of the whole economy. We found no formula but recognised an inescapably difficult political trade-off whose optimum point might vary widely from one society to another.

We found consensus that government had a key role in providing some of the physical infrastructure for successful business, though national differences, often rooted in long-standing attitudes to public-private complementarity, were evident both on how widely its responsibility might reach vis-á-vis private-sector effort, and on the location and extent of serious existing deficiencies - some countries might need better roads, others more modem and extensive telecommunications; there could be no general presumption that investment in common infrastructure was inadequate and needed increase. We all agreed however on the crucial importance of Governments in providing a healthy non-physical infrastructure for business - objective and dependable legal systems and judicial institutions, corruption-free public administration, environmental safeguards and the reasonable protection of intellectual property.

There was a certain tension between that strand of discussion and the drive, very vigorously urged by some, to deregulate - to thin out the mass of government-led prescription (almost always, and virtually by definition, market-distorting and special-interest-reinforcing in some sense) which marked all our economies. At the most general level this drive attracted sympathy; but discussion increasingly noted not only that one man’s (or one firm’s) strait-jacket was another’s protection but also that some industries - pharmaceuticals and banking, for example - were universally recognised as requiring a considerable framework of regulation in society’s, and the economy’s, defence. The right approach was not sweeping anathema against regulation but rather a more careful calculation than was hitherto customary of likely costs and benefits, on a long-term basis, before it was put in place.

To our regret, we had with us no voice from East Asia; but the success (albeit not uniform) of their economies, especially Japan, was a constant comparator. We heard a good deal of scepticism about whether that success really owed much to direct-support measures - even the fabled MITI had some spectacular misjudgements to its name, and its distinguishing merit in this activity was perhaps a more clear-headed readiness than was found in some other countries to let losers go to the wall. The greater strength of such successful economies, it was argued, lay in societal characteristics, in high savings, and above all in sensible and stable macro-economic policies.

This last was perhaps, if not the most discussed, nevertheless the strongest single theme of the conference. We had reviewed a wide range of relatively specific instruments by which governments might influence the success and prosperity of business; but none matched in importance, for good or ill, the macro-economic setting which governments nationally - and increasingly internationally -shaped and sustained. This field of policy stood alongside the global maintenance of open trading systems as the key determinants of economic advance worldwide.

This Note reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression.

Chairman: Mr Michel Bélanger
Chairman: Canadian Pacific Forest Products Ltd


Sir Nicholas Bayne KCMG
High Commissioner to Canada

Mr Edward Carr
The Economist, London

Dr Walter Eltis
Chief Economic Adviser to President of the Board of Trade

Mr George Graham
Financial Times correspondent, Washington DC

Mr Alastair Macdonald CB
Deputy Secretary, Industry Policy, Department of Trade and Industry

Dr Malcolm McIntosh
Chief of Defence Procurement, Ministry of Defence

The Hon Mrs Sara Morrison
Director: General Electric Co

Sir Michael Quinlan GCB
Director, The Ditchley Foundation
Dr Ann Robinson
Head of Policy Unit, Institute of Directors

Dr Peter Sinclair
Tutor in Economics, Brasenose College, and Lecturer in Economics, University of Oxford

Mrs Heather Weeks
Deputy Director, The Ditchley Foundation

Mr John Banks
Vice President, Programme, The Canadian Ditchley Foundation

Mr Allan E Blakeney
President, World Federalists of Canada

Mr Derek K Burney
Chairman, President and CEO, BCE Telecom International Inc

Mr Bruce Campbell
Research Fellow, Canadian Centre for Policy Alternatives

Mr David Crane
Economics Editor, The Toronto Star

Professor Wendy K Dobson
Director, Centre for International Business and Professor, Faculty of Management, University of Toronto

Dr David Dodge
Deputy Minister, Department of Finance, Ottawa

Mr Stephen A Jarislowsky
Chairman, Chief Executive Officer and Former President, Jarislowsky, Fraser & Company Ltd. (investment management company), Montreal

Mr John Lane
Senior Vice President - Investment, Sun Life Assurance Company of Canada

The Hon Edward C Lumley PC
Vice Chairman, Bums Fry Limited, Toronto

Mr Leighton W McCarthy
Secretary-Treasurer, The Canadian Ditchley Foundation; President, Sanwa McCarthy Securities Ltd.

Mr Grant Reuber
President, Canadian Ditchley Foundation; Chairman, Canada Deposit Insurance Corporation

Ms Nancy Riche
Executive Vice-President for Technical Services, Political Action and Special Projects, Canadian Labour Congress

Mr Ronald S Ritchie
Corporate Director; formerly Chairman and Chief Executive Officer, The Canadian Depository for Securities

Mr Harry Swain
Deputy Minister, Industry & Science, Canada

Professor William Watson
Professor of Economics, McGill University, Montreal

M François Lagrange
Member, Conseil d’Etat

The Hon Kenneth L Adelman
Vice-Chairman, Newmyer Associates

Professor Robert Z Aliber
Professor of International Finance, University of Chicago

Mr John Alleruzzo
International Vice-President and Canadian Director, Amalgamated Clothing and Textile Workers Union (ACTWU)

Mr Donald W Davis
Retired Chairman, Executive Committee, The Stanley Works

Mr Joel Freedman
Assistant to President for Economic Development Programs, International Union of Bricklayers and Allied Craftsmen

Dr Mieczyslaw Karczmar
Economic Adviser, New York Office, Deutsche Bank

Mr Charles W Muller
Administrative Director, the American Ditchley Foundation

Mr William A Niskanen
Chairman, Cato Institute, Washington DC

Mr Erik R Pages
Manager for Policy and Programs, Business Executives for National Security, (BENS), and Director, BENS Defence Transition Project

Dr William J Spencer
President and Senior Executive Officer, Sematech (a research and development consortium jointly funded by semiconductor industry member companies and the US Department of Defense)

Dr Brian J Turner
President, Work & Technology Institute, Washington DC