Page 140 - Global Political Economy_Understanding The International Economic Order

NEW ECONO MIC TH EORIE S
statement attributed to Michael Boskin, chair ofthe Council of Eco-
nomic Advisors in the Bush Administration (1989–1993) that “chips
are chips” and that it is unimportant whether an economy produces
one type ofchip or the other. If a nation has a comparative advantage
in potato chips but not in computer chips, then it should export the
former and import the latter. Moreover, even if some economic activi-
ties may be intrinsically more valuable than others, critics ofstrategic
trade policy argue that governments are incapable ofpicking winners
and that any efforts to do so are very likely to be captured by special
interests. Favoring one sector, the critics charge, would ofnecessity
divert scarce resources and harm other sectors that might be even
more valuable to the economy over the long term. Finally, the critics
charge that subsidies and trade protection will only lead to foreign
retaliation, and then everyone will lose.
What can be concluded about strategic trade theory and the indus-
trial policy to which it provides intellectual support? The argument
that shifting profits from one economy to another can occur has nei-
ther been proved nor disproved; it is quite difficult to assess whether
or not government intervention in oligopolistic markets actually
works, because economists lack reliable models ofhow oligopolists
behave. However, the positive externalities argument for strategic
trade policy and the arguments for the related industrial policy have
support in the economics literature. Even though empirical evidence
for the success of industrial policy is admittedly mixed, government
support for particular industrial sectors has frequently been very suc-
cessful in creating technologies in sectors that do spill over into the
rest ofthe economy. Most importantly, there is strong evidence that
government support for R & D has a very high payoff for the entire
economy. Governments around the world certainly believe that sup-
port for high-tech industries produces a high economic return over
the long term.

Conclusion
The new economic theories significantly enhance our understanding
ofthe dynamics ofthe world economy and of the fundamental issues
ofinternational political economy regarding distribution ofeconomic
outcomes, states’ efforts to retain their national autonomy, and con-
flict among states over the nature ofinternational regimes. The pro-
cess ofeconomic growth, the concentration ofeconomic activities in
particular locations, and the diffusion of economic growth and eco-
nomic activities to new regions are fundamental elements in the evo-
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