China's Industrial Policy: an Empirical Evaluation

Despite the historic prevalence of industrial policy and its current popularity, few empirical studies directly evaluate its welfare consequences. This paper examines an important industrial policy in China in the 2000s, aiming to propel the country's shipbuilding industry to the largest global...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Jia Barwick, Panle, Kalouptsidi, Myrto, Zahur, Nahim
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2019
Subjects
Industrial policy
Market shares
Shipyards
Subsidies
China
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Summary:Despite the historic prevalence of industrial policy and its current popularity, few empirical studies directly evaluate its welfare consequences. This paper examines an important industrial policy in China in the 2000s, aiming to propel the country's shipbuilding industry to the largest globally. Using comprehensive data on shipyards worldwide and a dynamic model of firm entry, exit, investment, and production, we find that the scale of the policy was massive and boosted China's domestic investment, entry, and world market share dramatically. On the other hand, it created sizable distortions and led to increased industry fragmentation and idleness. The effectiveness of different policy instruments is mixed: production and investment subsidies can be justified by market share considerations, but entry subsidies are wasteful. Finally, the distortions could have been significantly reduced by implementing counter-cyclical policies and by targeting subsidies towards more productive firms.