Thru the Moebius Strip

Whether you like it or not, China has an industrial policy, which means it has a stated development goal organized, in part, on a sectoral basis. Critics state that any system that has the government picking winners and losers is bound to fail since the market is much better suited to that task. Supporters say that the government has a vital role to play since it is in a unique position to direct capital toward basic scientific research, infrastructure, and projects that may not be able to attract private investment in order to get off the ground and become profitable.

I guess I’m a lukewarm supporter of industrial policy, but only to the extent that a government can provide reasonable incentives to certain industries, allow those to take root, and then discontinue or modify those programs if development does not occur after a reasonable period of time. The government cannot have a perfect track record of picking winners and losers, and sometimes you can’t force these things.

Excellent example of the latter is China’s young animation industry, which has been identified as a key industry by the government, showered with subsidies, and is struggling mightily:

Chinese studios produced a combined total of 170,000 minutes of footage last year and has already surged past that figure this year.

Even with billions of yuan in government subsidies and policies designed to boost the animation industry, analysts say the country is still short on talent and creativity, as well as a business model that can sustain the sector’s growth.

During the first five months of this year, 221 Chinese-made cartoons (more than 270,000 minutes) were produced for domestic television channels, according to the State Administration of Radio, Film and Television (SARFT).

However, the output was met with apprehension by studio bosses, some of whom feel such mass production could erode quality.

So you have this infant industry that is incentivized to put out as much volume as possible (in contrast, Japan produced 80,000 minutes last year, with France at 40,000), but the talent is simply not there yet. Consequently the quality leaves a lot to be desired. In some cases, this would be acceptable; leave the crap on the cutting-room floor and chalk it up to an investment while the industry learns from the more experienced foreign producers.

There are also extremely generous regulatory gifts:

Within the domestic industry, 2004 is referred to as “year one”, as it was when the SARFT limited the use of foreign-made cartoons by television stations. New rules stated that Chinese-made animations should make up at least 60 percent of all cartoons broadcast.

Two years later, the authority banned foreign-made cartoons from being aired between 5 pm and 8 pm, and extended it to 9 pm in 2008.

There’s not much else the government can do to help these guys out. It’s a question of experience, and this industry is just too young at the moment. At this rate, the industry is going to limp along for quite a while. The question is whether this is the best way to protect and develop these companies or if there is a better way to turn this thing around in the short/medium term. China might consider the following:

1. This is all about talent and creativity, and that’s hard to force. You can throw money at it, but money doesn’t inspire people (well, maybe some people). To ensure that young potential designers and artists are exposed to top quality animation as early as possible, the government should remove those programming bans and allow foreign shows on China television.

2. Knowledge spillover is key to developing a new industry. That can sometimes to facilitated via an industry-intensive geographic area (think Silicon Valley). China has already done this for animation, but simply putting a bunch of inexperienced firms together, whose only exposure to foreign shows is outsourcing work, doesn’t count. Incentives for foreign producers, including a loosening of regulatory constraints by SARFT, would be a good first step.

3. Pricing is now completely nuts. With subsidies, local animation firms are literally giving their shows to television stations for free. Even if import bans on foreign programming were lifted, that’s quite a competition hurdle to overcome. If the government wants to continue making sure that local firms are profitable via subsidies, and yet would like the industry to benefit from the experience and quality of foreign producers, it might need to step in with price controls.¹

I don’t think China’s animation industry is clearly indicative of the failures of industrial policy in general. Sometimes you win some (cleantech?) and sometimes you lose some, and maybe that’s acceptable. However, once a loser is identified, the government should be willing to alter policy and try to turn that lemon into lemonade.
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1. Not my first choice to fix one market distortion with another, but it might be necessary in the short run.[↩]

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