Why Industrial Policy needs monetary sovereignty

Note kindly translated by Anne-Marie de Grazia

The recent declarations of Theresa May on industrial policy are pointing to a real turn-about in perceptions and representations on the part of the political class in Britain. This turn-about, which also took place in France, but not at the « Socialist »Party (with the exception of Arnault Montebourg) and not among the « Republicans » (with the exception of Henri Guaino and Jacques Myard), has been uncontrovertibly accelerated by the vote of June 23.

This change of direction has been already perceptible among economists in recent years [1]. In fact, the importance of an industrial policy has been looming among heterodox authors for a long time [2]. The change has consisted in the « conversion » to this idea of authors who were operating within « standard » theory[3]. It comes together with the acknowledgement of the negative effects of globalization [4]. One needs then to rethink all the implications of this change of direction towards a true industrial policy.


Industrial policies and monetary sovereignty

We must first understand that industrial policy is fundamentally a « state of mind. » This is clearly expressed by Dani Rodrik : « First, industrial policy is a state of mind rather than a list of specific policies. Its successful practitioners understand that it is more important to create a climate of collaboration between government and the private sector than to provide financial incentives. Through deliberation councils, supplier development forums, investment advisory councils, sectoral round-tables, or private-public venture funds, collaboration aims to elicit information about investment opportunities and bottlenecks. This requires a government that is “embedded” in the private sector, but not in bed with it. »[5]. But this is not enough.

In order to develop an industrial policy with a reasonable chance of success, it is mandatory to control, wholly or in part, the system of financing. This implies recovering sovereignty over monetary and financial policy, not only through the control of the exchange rate, but also through measures aimed at orienting the financial system in a way that will make it serve the development of industry [6]. This is where one needs to look back at the French experience.

One peculiarity of the post-war French banking system was that the Treasury and the Banque de France, which had been nationalized and which were implementing the policy of the government (by way of the re-discount rate)[7], were the most important lenders during the 1950s. They played an essential role during the decade from 1948 to 1959 in « launching » the system, and creating trust among private actors. They were replaced by banks and specialized credit institutions during the 1960s. But such an evolution did not necessarily reduce the capacity of the State to intervene in the allocation of credits using other means, such as recommendations and the exemption from targeted controls for specific sectors [8], yet the element of compulsion was present in some of the measures taken by the CNC. In fact, this organism was, together with the « Direction Générale du Trésor » of the Ministery of Finances, the true « General Headquarters » of financing of the French economy, and the Banque de France, the (largely nationalized) deposit banks and the various financial companies, private as well as public, submitted to it. The role of the CNC can only be understood if one remembers the dynamic of the nationalization of credit occurring at that time [9].

It is clear that a system in which banks and establishments of specialized credit play a major role, and in which the Central Bank is nationalized, would not leave much room for the development of the financial markets.


The necessity of « financial repression»

This raises an important question. Could a government truly conceive such a change in model, and implement a real policy of re-industrialization of its economy, without a massive re-foundation of the system of financing ? [10] The presence of « market failures » is a well-known fact in economy [11]. These « market failures » impose specific regulatory and institutional measures. This is particularly the case with capitals controls, which would allow to « smoothen » out strong fluctuations in the exchange rate. We know, since the famous « monetary trilemma » has been formulated[12], that a country cannot have in the same time a stable exchange rate, an independent and active monetary policy, and open markets for capital. Every country, or every monetary zone, is therefore compelled to permanently adjust the exchange rate for the sake of the (eventual) reduction of an outstanding balance of payment, or to impose restrictions on capitals transfers, as the latter reveal themselves to be strongly pro-cyclical [13], or to build a monetary policy which will take into account the monetary policy of other countries (and which will then lose its autonomy in regard to the particular aims of the economic policy) if its wants to maintain a relatively stable exchange rate. The problem of financial stability is tied in with the one of monetary stability [14]. We also know that an exchange rate left to the sole forces of the market can be brought to drop or rise through short or very short term speculation [15]. This is what has brought about a return into grace of the idea of capitals controls, even within the IMF [16].

The Russian economist S. Glazyev has formulated thus one of the aspects of what he calls the « quadrilemma »: « If the national Bank does not have a monopoly on the question of the world reserve currency, and if it maintains cross-border capital movements open, it cannot control the exchange rates or the interest rates [17]. »


The pertinence of the French example

The policy and the financing system adopted by France at the end of World War Two constitute today a reference for some countries. This situation is occurring at a time when the Western countries find themselves mired in stagnation, and for some, in depression, and when one is noticing the increasing inefficiency of the traditional monetary policy, whether it be « orthodox, » or using means considered to be « heterodox » (such as successive monetary « easings »). This comes down to raising the problem of knowing what monetary policy one can have when one is in a situation in which interest rates are very low, even amounting to zero[18]. At this point it is indeed the particular experience of quantitative instruments (re-discount ceilings, volume of bonified rate effects, admission of some effects to the re-discount of the Banque de France) which will challenge researchers [19].

But it is just as important to note that these instruments could only be efficient because France was exerting it sovereignty in the financial domain and had put in place filters, such capitals controls and exchange rates controls, between the international financial sphere and the national financial sphere. The latter was never totally isolated from international financial relations. This system is more akin to a form of financial protectionism, rather than to autarcy. The parity of the Franc needed to be adjusted several times during this period. We must stress that this idea of “financial protectionism” is undergoing a return to grace, owing to the international financial crisis of 2007-2011[20].

The paradox between the existence of a situation said of « financial repression, » which one generally associates with a weak development of financial institutions, and the presence of a strong growth, which translated itself into a quantitative as well as a qualitative development in France, appears as an evidence when one looks at the French economic history during what is wont to be called the « 30 glorieuses »[21]. Growth in France appears very strong during these decades and is equalled only by the growth in Italy. In fact, French growth was then on average superior to German growth, but also to growth in the United States and in Britain.

It is interesting to remark that it is the specialists in political science who are stressing this link between measures of support to investment which are able to develop thanks to the «Financial Repression,» and the quick development of whole branches of industry [22]. This policy appears to be the necessary counterpart of an ambitious industrial policy.



[1] Imbs, Jean, et Romain Wacziarg, “Stages of Diversification,” American Economic Review, vol. 93(n°1), mars 2003, pp. 63-86. Lall, S., “Reinventing Industrial Strategy: The Role of Government Policy in Building Industrial Competitiveness,” G-24 Discussion Paper No. 28, April 2004.

[2] Wade, Robert, Governing the Market, Princeton University Press, Princeton, NJ, 1990.

[3] Rodrik D., http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4767

[4] Sapir J., La Démondialisation, Le Seuil, Paris, 2011.

[5] https://www.project-syndicate.org/commentary/the-return-of-industrial-policy?version=french

[6] Guillaumont-Jeanneney S., (1992), « La politique monétaire française pendant la présidence du général de Gaulle », in De Gaulle en son siècle, Plon, La Documentation française, tome III, p. 74-93.

[7] Quennouëlle-Corre, L., (2000), Chapitre II. Le tournant stratégique des années 1947-1952 In Quennouëlle-Corre, L., (2000), La direction du Trésor 1947-1967 : L’État-banquier et la croissance, Vincennes, Institut de la gestion publique et du développement économique, Available on the Internet : http://books.openedition.org/igpde/1948 .

[8] Monnet, E. (2011b), ‘Monetary policy without interest rates. the impact of credit control during the French golden age, 1945-1973’, PSE Working paper, Paris.

[9] Andrieu, C. (1984), ‘A la recherche de la politique du crédit, 1946-1973’, Revue Historique, vol.

271, n°(2), pp. 377-417. Feiertag, O. (2006), Wilfrid Baumgartner : Un grand commis des finances à la croisée des pouvoirs, Comité pour l’Histoire économique et financière, Paris. Margairaz, M. (1991), L’Etat, les finances et l’économie : histoire d’une conversion, 1932-1952, op.cit..

[10] Moiseev A. (2015), ‘« Импортозамещение« денежнокредитной политики’, [La politique Monétaire de substitution aux importations] Document de Travail de l’IPEN-RAN, Moscou, http://ecfor.ru/pdf.php?id=pub/moiseev01

[11] Or Market Failures. On this Stiglitz J.E. (1989), ‘Markets, Market Failures, and Development’, in The American Economic Review , Vol. 79, No. 2, Papers and Proceedings of the Hundred and First Annual Meeting of the American Economic Association (May, 1989), pp. 197-203. Besley T., (1994), ‘How do Market Failures Justify Interventions in Rural Credit Markets?’, in World Bank Research Observer, vol.9, n°(1), pp. 27-47. Rodrik D., (2008), ‘The Real Exchange Rate and Economic Growth’ in Brookings Papers on Economic Activity, Fall 2008, pp. 365-412.

[12] Obstfeld M., Jay C. Shambaugh et Alan M. Taylor (2004), ‘The Trilemma in History : Tradeoffs among Exchange Rates, Monetary Policy and Capital Mobility’, Working Paper 10396, NBER, Cambridge, Ma.

[13] Kaminsky G.L., C.M. Reinhart and C.A. Végh (2004), ‘When it Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies’, Paper prepared for the NBER 19th Conference on Macroeconomics, 13 August 2004, IMF, Washington DC.

[14] Goodhart, C.A.E., and D.P. Tsomocos (2007), ‘Analysis of Financial Stability’, Working Paper 2007 FE04, Oxford UK, Oxford Financial Research Center, Oxford.

[15] Calvo, Guillermo A., and Carmen M. Reinhart. (2002), ‘Fear of Floating’, in Quarterly Journal of Economics Vol. 117 (May), pp. 379–408. Borenzstein, E., J. Zettelmeyer, and T. Philippon (2001), See also Gallagher K., B. Coelho, (2010) ‘Capital Controls and 21st Century Financial Crises: Evidence from Colombia and Thailand’, PERI Working Paper Series, n° 213, Amherst (Ma.), University of Massachusetts Amherst, janvier, Monetary Independence in Emerging Markets: Does the Exchange Rate Regime Make a Difference ? IMF Working Paper WP/01/1, IMF, Washington DC.

[16] Ostry J. et al., (2010) ‘Capital Inflows: The Role of Controls’, International Monetary Fund Staff Position Note, Washington (D. C.), FMI. Voir aussi Buiter W., (2009), “The return of capital Controls”, in VoxEU, February 20th, 2009, URL: http://www.voxeu.org/index.php?q=node/3104 . Blanchard, O. and J.D. Ostry, (2012), ‘The Multilateral approach to capital controls’ on Vox EU, 11 Décembre, URL: http://www.voxeu.org/article/multilateral-approach-capital-controls . Beattie A. (2012), ‘IMF drops opposition to capital controls’, in Financial Time, 3 décembre, URL: http://www.ft.com/intl/cms/s/0/e620482e-3d5c-11e2-9e13-00144feabdc0.html

[17] Glaziev S. (2015), ‘Эксперименты ценою в суверенитет’ [Les expériences du coût de la souveraineté] in Ekspert n°28 (951).

[18] Monnet E., (2016), ‘Monetary policy without interest rates – The French experience with quantitative controls (1948 to 1973)’ in Rue de la Banque newsletter de la Banque de France, n°17, janvier.

[19] Margairaz M., (1991) L’État, les finances et l’économie. Histoire d’une conversion, 2 tomes, Paris, Comité pour l’histoire économique et financière de la France. Bruguière M, (1992) Pour une renaissance de l’histoire financière XVIIIe-XIXe siècle, Paris, Comité pour l’histoire économique et financière de la France.

[20] Stiglitz J.E. (2010), ‘Risk and Global Economy Architecture: Why Full Financial Integration May Be Undesirable’ in American Economic Review, vol. 100, n°2, (May 2010), pp. 388-392.

[21] Carré, J., Malinvaud, E. & Dubois, P. (1972), La croissance française , un essai d’analyse économique causale de l’après-guerre, Le Seuil, Paris

[22] Bonoldi, A. & Leonardi, A., edits. (2009), Recovery and development in the European periphery (1945-1960), Duncker & Humblot, Bologna. Loriaux, M. M. (1991), France after hegemony, Cornell University Press.


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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