It also called off the support for the auto industry as a strategic sector or "global niche" due to the absence of comparative advantage, high dependency on foreign investment and technology, and high protectionism. The auto industry is therefore the second industry after textiles and clothing for which the government has discontinued support as a strategic industry for Thailand. (It should be noted that the government recently terminated the Bangkok Fashion City project.)

Such measures reflect the previous government's failure in formulating industrial-development policy. This is confirmed by the outcome of my research on Thailand's industrial competitiveness, submitted to the National Defence College in 2005, which clearly indicates that both industries should not have been supported as "global niche" strategic industrial sectors in the first place.

Such failure made me ponder whether, in order to make the domestic manufacturing sector competitive and self-reliant in technology, the government should intervene in market mechanisms to determine which industries need support and which do not.

This question has been a major topic of controversial debate, with the "Chicago school" economists believing in market mechanisms and disagreeing with the use of government intervention and the "Harvard school" seeing some merit in government intervention.

As I had a chance to conduct some research work at Harvard University and exchange opinions with Harvard academics, I know that "Harvard school" economists believe that pure market mechanisms are likely to result in market failure, which in turn makes government intervention necessary.

Market failure is caused by the fact that firms usually face high risk if they want to turn out new products because they will only understand the production function after they have invested their capital in producing those products. The problem is that once the investment has been made, other firms will learn the production function without having to face the same risk as the original firms. The result is that those pioneer firms have to bear the high costs of risk while other firms can make huge profits from making imitation goods. As such, new investment to manufacture new products seldom emerges.

Due to the above phenomenon, governments need to intervene by making policy that increases the pay-off for the initial investors in order to encourage investment in new businesses.

In this context, industrial-support policies can be divided into two types; namely, compensation to innovators in case of business collapse and increase in pay-off in case of business success.

The advantage of compensation policy for innovators, such as government guarantees or government loans, is that it allows for the distinction between innovators and copycats. However, its disadvantage is that it may cause moral hazard, since firms will not have to worry too much about their success or failure. ["Moral hazard" is the risk that a party to a transaction has not entered into a written or tacit contract in good faith.]

On the other hand, the strength of a policy that increases pay-off in case of business success, like export subsidies, is that it does not generate moral hazard. However, it does not allow for a clear distinction between innovators and copycats (because tariffs or subsidies apply across-the-board to all domestic manufacturers).

Nevertheless, government intervention will not be beneficial in the long run, as it does not encourage the subsidised industries to improve their productivity. Therefore, the government should gradually pull out these supportive measures in the long term to enable industries to remain competitive in normal circumstances where market mechanisms operate freely.

Given the above scenario, the Harvard school's thinking should be useful for Thailand's industrial policy-making. This is because it suggests the conclusion that the previous government's market-intervention policy may be the right direction, but the mistake lies in the wrong choice of industrial winners based primarily on the opinions of certain leaders rather than on academic research.

Therefore, my view is that we should not shy away altogether from picking the "global niche" industries. However, the government should be able to invest in research and development to identify these winners without conflicts of interest. In so doing, the government can pinpoint a clear direction to give the private sector more confidence in making their investment decisions. Such clarity in policy direction would also benefit the overall national economy in the long run.

Dr Kriengsak Chareonwongsak

Dr Kriengsak Chareonwongsak is vice-chairman of the Democrat Party's economics committee.