We Need Contests, Not Cooperation
Can U.S. Car--the Administration’s proposal for a government-Big Three research and development consortium--build the car of the future? Proponents say yes. They contend that making government expertise and research available to U.S. car makers could help triple fuel efficiency within a decade and restore U.S. leadership in this critical, beleaguered industry. Skeptics--among them columnist Michael Schrage--argue that competition, not cooperation, drives innovation.
The trade-off between the benefits of cooperation and the benefits of competition is well known. But there is a way of combining the benefits of both: contests.
In a very simple contest, say a footrace, athletes cooperate with the organizer and each other by accepting certain rules: They start at the same moment, they head for the same finish line, they refrain from shoving. Within this framework, they compete like mad. In a close race, each runner runs faster than if he or she were running alone--or running against others without any rules.
What does this mean for U.S. Car? The program, intended to counter the challenge posed by Japanese car makers, appears to be based in part on the perception that Japanese automotive industry success is due to government-sponsored cooperation.
Cooperation is half the story, but only half. Japanese manufacturers have cooperated with the government and, to a limited extent, with each other. But they have also competed like mad. The mechanism for combining cooperation and competition has been the government-sponsored export contest.
The role of export contests in the economic success of Japan and several other East Asian economies is little understood. How the contests work is described in a recent World Bank study, “The East Asian Miracle: Economic Growth and Public Policy.” World Bank economist John Page, the leader of the research team that prepared the study, says that successful economic contests, like successful athletic contests, require three elements: clear rules, worthwhile rewards and honest referees.
Establishing rules, rewards and referees for a footrace is simple. Doing so for an economic contest is much more complex and requires, among other things, a high level of government competence, since government officials must set the rules and rewards and serve as referees.
Some might argue that governments have no business running contests. Yet in most countries, including the United States, governments run contests all the time, awarding to the most competitive bidder contracts to provide the government with goods or services.
The innovation in Japan, copied in Korea and to a lesser extent elsewhere in East Asia, was that the government ran contests in a wide range of manufacturing activities--and linked them to the broadest possible market by making exports the yardstick of success.
Thus, Japanese car makers who hoped to obtain government benefits such as subsidized credit, foreign exchange or access to government information and technology, were expected to play by certain rules--among them cooperating with the government and other companies by sharing some forms of information.
To win, however, companies had to prove their mettle by exporting. The requirement that companies export to obtain government benefits pushed Japanese car makers into extremely fierce competition, against each other as well as car makers in every open economy in the world. The resulting success of the Japanese automotive industry can be seen as a validation of the contest approach.
As U.S. Car rolls forward, the government could insist that companies benefiting from government-sponsored cooperation demonstrate their ability by competing successfully in the marketplace, ideally in the international marketplace. Rewards--be they tax breaks or continued access to government information and technology--should go to the real winners, the companies that not only design the car of the future but manufacture and sell it profitably throughout the world.
LAWRENCE MacDONALD
MacDonald, a journalist who worked in Asia, edited “The East Asian Miracle: Economic Growth and Public Policy” for the World Bank Policy Research Department.
