Mr Khan said:
Not necessarily outright run by the public sector, but funded by them. Let's take the argument for emerging industries for instance: X-Corp in Canada is the only producer of regional jet planes of consequence. Y-Corp in Brazil seeks to enter the industry, but the infrastructure for this industry in Brazil is not there, and there is no free-market reason for the infrastructure to be there. If Y-Corp forces its way into the industry anyway, supply will rise, demand will go down, and prices will go down, meaning that the market has been harmed for both players by Y-Corp's entry in the short run, as prices still go down for regional jets altogether, and Y-Corp isn't getting much money. Brazil chooses to subsidize Y-Corp, and now while prices have been forced down across the board, Y-Corp is making money while X-Corp has to eat the lowered prices due to higher supply. Since there is now a financial incentive for Y-Corp to continue working in this industry, it begins to build infrastructure, bringing a network of jobs in related fields to Brazil and expanding opportunities for other Brazilian companies (what we might call a semi-public good, purely business in concern but benefitting more than just Y-Corp). Ideally, of course, Y-Corp can eventually be weaned off subsidies and compete in an industry that is now viable on its own A business that is out-and-out state-run could fill in for a business receiving subsidies in this scenario, but in either case, the market needs a push in the right direction. Obviously it cannot be undertaken recklessly, but the payoffs are there |
In order for Brazil to subsidize Y-Corp they have to tax somewhere else. While Y-Corps costs have gone down, the costs for other companies, elsewhere, will go up. This will mean that their investment will fall, as will the infrastructure development that goes with it. So, whilst Y-Corp is bringing in jobs related to its industry, another industry in Brazil will be suffering for it.
The difference between the two scenarios (where Y-Corp receives subsidies, and where it doesn't) is what determines where investment flows. In the case where Y-Corp receives subsidy, it is essentially a guy in an office making the decision, and his decision enforced by law; while in the free-market solution, Y-Corp success will be determined by thousands, if not millions, of micro-decisions - each taken because both participants will benefit.
You talk about how it will create thousand of jobs in the jet-manufacturing network, but fail to realize that this can only come by taking the jobs away from somewhere else. Ultimately, if Y-Corp want to make jets, they should relocate to Canada. If Y-Corp want to be successful in Brazil, they should focus on doing things that Brazil is good at.
