EDAS blog: It’s getting crowded in here
Public investment in a proactive industrial policy that aims to promote particular sectors is sometimes criticised for crowding out private investment. However, a recent White House blog by Heather Boushey, Chief Economist of the Investing in America Cabinet argues that smart industrial policy can do the opposite and help ‘crowd in’ private investment.
She was writing in relation to the Biden Administration’s focus on infrastructure, semiconductors, and clean energy as set out in the Inflation Reduction Act. While the sums of money involved are huge relative to Scotland’s public investment in economic development some of the principles are still be relevant.
She identifies two types of policy interventions, incentives to encourage private investment and direct government investment and she sets out a number of ways in which these policies work to crowd in investment, these include:
- Mobilising and focussing private investment on priority areas – this may attract investment from lower priority activities
- Incentivising investment in activities with positive externalities where private returns alone would result in sub-optimal investment
- Stimulating demand to encourage private investment to meet it
- Solving coordination problems e.g. ensuring critical infrastructure is in place to facilitate private investment
- Unlocking more risk averse private capital when there is little track record on which to base investment decisions
To have maximum impact, incentives and investment must be designed to reinforce each other and to align with other initiatives which are also important parts of the jigsaw, such as investment in skills development and education. It is only by having a systematic, joined up approach, which includes all those with a part to play in planning and implementing action, that there is a chance of generating a positive, upward cycle of development.
By definition this will involve many in the public, private and third sectors. So alongside a focus on what is done to crowd in investment, consideration also needs to be given to investing in how things are done to ensure that effective relationships are built within and between organisations to ensure the maximum return on any investment made.
To use an analogy, this will help ensure that this ‘crowd’ are not a discordant bunch of musicians but more of a tight knit band. The band may trust each other enough to allow a bit of improvisation, but they all know the tune they are ultimately following. EDAS is always happy to provide rehearsal space where such relationships may develop!
By Charlie Woods, EDAS Board member and Director, Scottish Universities Insight Institute