Working Paper: CEPR ID: DP13889
Authors: Myrto Kalouptsidi; Panle Barwick; Nahim Zahur
Abstract: Despite the historic prevalence of industrial policy and its current popularity, few empiricalstudies directly evaluate its welfare consequences. This paper examines an important industrialpolicy in China in the 2000s, aiming to propel the country’s shipbuilding industry to the largestglobally. Using comprehensive data on shipyards worldwide and a dynamic model of firmentry, exit, investment, and production, we find that the scale of the policy was massive andboosted China’s domestic investment, entry, and world market share dramatically. On the otherhand, it created sizable distortions and led to increased industry fragmentation and idleness.The effectiveness of different policy instruments is mixed: production and investment subsidiescan be justified by market share considerations, but entry subsidies are wasteful. Finally, thedistortions could have been significantly reduced by implementing counter-cyclical policiesand by targeting subsidies towards more productive firms.
Keywords: industrial policy; investment dynamics; welfare; China
JEL Codes: L1; L5; L6; O2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| China's industrial policy (O25) | domestic investment (E22) |
| China's industrial policy (O25) | entry (Y20) |
| China's industrial policy (O25) | China's world market share (F14) |
| entry subsidies (Z38) | industry fragmentation (F12) |
| entry subsidies (Z38) | idleness (J22) |
| countercyclical policies (E63) | distortions (H31) |
| policy package (entry subsidies + consolidation) (L53) | profit gains (D33) |
| policy package (entry subsidies + consolidation) (L53) | costs of subsidies (H20) |
| China's industrial policy (O25) | welfare (I38) |