Steel, Industrial Policy, and Economic Performance. Bruce Blonigen University of Oregon and NBER

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1 Steel, Industrial Policy, and Economic Performance Bruce Blonigen University of Oregon and NBER

2 Motivation The effects of Industrial Policy (IP) are controversial IP often consists of a multitude of programs, layered on over time, with possibility of countervailing effects IP typically targets only certain sectors of an economy - steel is often one of them May make the process susceptible to political economy factors Will have effects on non-targeted sectors

3 Motivation Research question for this paper: To what extent have IPs in the steel sector affected countries competitiveness in other (downstream) sectors Important for understanding the effect of IPs on a country s overall growth and development

4 Motivation South Africa s manufacturing sector has performed poorly over the past 10 years One of the reasons for this is monopolistic provision and pricing of key inputs into manufacturing, including steel. Almost 80% of steel sales in South Africa are directed at the manufacturing and construction sectors. In addition, basic iron and steel are significant inputs into one of the chosen sectors of the second Industrial Policy Action Plan (IPAP2) metals fabrication, capital and transport equipment. Government thus has a strong interest in ensuring South Africa gets iron and steel at competitive prices. (Financial Mail, March 12, 2010)

5 Why steel? Steel is a key input into many crucial sectors, including manufactured goods, capital goods, and construction Steel is often targeted by IPs Capital costs and infant industry arguments Important input for downstream manufacturers Historically important for national defense Important for national stature May be a gateway industry into more sophisticated manufacturing

6 Possible conflicting effects of IPs Different policies have opposing effects on prices Tend to lower domestic steel prices Production subsidies Tend to raise domestic steel prices Import protection Export subsidies National ownership and/or financial arrangements to keep inefficient firms solvent Which ones dominate? Empirical question.

7 Example: Steel and Fab. Metal Prods. Fabricated metal products sector 45% of input consumption is iron and steel A relatively low-tech, low-capital manufacturing sector Revealed comparative advantage in steel should be positively correlated with comparative advantage in fabricated metals unless IP distortions

8 Net exports of steel and fab. met. prods Steel Production (thousands of metric tons) Net Exports of Steel (000 s of $) Net Exports of Fabricated Metal Products (000 s of $) Country Japan China USA Russia Germany Korea Italy Brazil Ukraine India France UK Canada Belgium-Luxembourg Spain Turkey Mexico Poland Taiwan South Africa Australia

9 Net exports of steel and fab. metals Correlation of net steel exports and net fabricated metal product exports Top steel producers in table: 0.13 (p=0.56) All steel producers: 0.27 (p=0.01) Non-steel producers: 0.48 (p=0.00) Suggestive that there are some real distortions in at least some of the top steel producing countries

10 Proposed Empirical Methodology Regress measure of export competitiveness across industries and countries on measures of steel IP in a country interacted with how important an input steel is for that sector Similar in set-up to 2008 paper by Manova in the Journal of International Economics, which examines impact of financial markets and credit on export competitiveness

11 Proposed Empirical Methodology Estimating equation: T cit = β 1 IP ct + β 2 StSh cit + β 3 (IP ct StSh cit ) + β 4 GDP ct + η c + η i + η t + ε cit, T cit is log of country c s exports in industry i and year t IP ct is country c s IPs in year t StSh cit is share of steel in industry i, year t, country c GDP ct is country c s GDP in year t η terms are country-, industry-, and time-fixed effects ε cit is a mean-zero error term

12 Data and Specification Issues Measuring IPs 1 st Approach - Document and categorize when and where IPs are in place Advantage: Separately identify impact of various IPs: import tariffs, export policies, production subsidies, national ownership Disadvantage: Most of it is qualitative, not quantitative; i.e., significant measurement error. Data sources are also varied and thus, inconsistent

13 Data and Specification Issues Measuring IPs 1 st Approach - Document and categorize when and where IPs are in place Data collection to this point TRAINS NTB database Some key books written documenting IPs in steel Many country-specific studies of steel IP Issues No consistent source and time period coverage varies a lot This approach may lead to focusing on a specific set of countries where data is good

14 Data and Specification Issues Measuring IPs 2 nd Approach Measure the price gap between domestic price and world price for steel Advantage: Quantifiable measure of IPs after controlling for distance from world markets, etc. Disadvantage: Will not be able to separately estimate the effect of various types of IPs

15 Data and Specification Issues Measuring IPs 2 nd Approach Measure the price gap between domestic price and world price for steel Data collection issues Data sources for developed countries available from some commercial services Data on less-developed countries may need to go to country sources Optimistic on getting prices because there are common steel products (e.g., steel sheet) which are consistently defined in the industry

16 Data and Specification Issues Other controls needed for whether a country should be export competitive in a sector Inherent comparative advantage differences across countries depending on endowments and factor-intensities of the industry Existence of IPs in these other downstream industries? Example where both of these may be relevant: Automotives

17 Data and Specification Issues Potential endogeneity of IP Not clear there is likely endogeneity bias, or which way the bias would go Interaction with steel share measure is very helpful, as these determined by input-output matrix Potential instruments for steel IP in a country Proximity to iron ore deposits Measure of country s intervention across all sectors

18 Other Related Literature Trade restrictiveness index Anderson and Neary (1996) Kee, Nicita, & Olarreaga (2009) Measuring the effects of NTBs Bradford (2003) Effective protection Downstream effects of trade protection Feinberg and Kaplan (1993)

19 Possible Extensions The dynamics of IPs Overlapping of different types of IPs with potentially confounding effects Connections to country-level leadership changes and political economy Connection to IPs with downstream and upstream sector IPs Important for understanding the practice of IP selection and implementation

20 Possible Extensions Effects on non-manufacturing sectors Steel is important for construction sector Steel pipes important for oil and gas sector May be relatively easy to get data on growth of these sectors and examine the impact of steel IPs on these sectors as well