March 3, 2009 / 12:05 PM / 10 years ago

Aid to carmakers a waste of scarce money: OECD

PARIS (Reuters) - Governments worldwide must resist the temptation to bail out car manufacturers, steel producers or any sector other than the systemically crucial finance industry, OECD chief economist Klaus Schmidt-Hebbel said on Tuesday.

Even if it looks politically expedient in the time of recession, protectionism in all shades ultimately does more harm than good as the Great Depression and trade friction that preceded World War Two show, Schmidt-Hebbel said.

The Organization for Economic Co-operation and Development issued a report on Tuesday where it suggested that governments should pursue policies that promote both short- and long-term economic growth while avoiding steps that shelter national industries from international competition.

Commenting on the implications of the report, Schmidt-Hebbel dismissed the idea that the troubled auto sector, which in some countries accounts directly and indirectly for one in 10 jobs, should be considered as systemically important like banks.

ONLY FINANCE IS SYSTEMIC

“If you let your financial sector go down, as a sector or the main players ... an entire economy goes from recession to deep crisis and deep recession. That’s what the late ‘20s and early ‘30s was about,” Schmidt-Hebbel told Reuters during an interview on the report.

“If you let one or two big car producers, or in the extreme you let your entire national car industry go down ... then demand for domestic cars would be substituted by higher imports,” he said.

“It’s not systemic from the point of view that if you let it go down the rest of the economy goes down.”

“If you let Ford go down, then demand for Ford vehicles goes elsewhere — to General Motors or another competing auto producer,” Schmidt-Hebbel said by way of hypothetical illustration.

“When you let Lehman Brothers or Citibank go down, the demand for financial services, or the supply of deposits to other banks goes down too because everybody is scared and leaves their money under the mattress.”

TOO MANY CARS

Schmidt-Hebbel highlighted the car sector as getting government money in many countries such as the United States, France, Spain, Italy and Germany.

This did not make economic sense because the industry had made too many cars for too long and would have to shrink in the years ahead, not because of recession but overcapacity.

Additionally, public aid for specific sectors was not a good idea because other sectors would queue up for similar aid from a limited pool of public funds, said Schmidt-Hebbel, arguing that broad-ranging macro-economic measures were preferable.

“So where do you stop? It’s totally arbitrary,” he said.

“The car industry is 10 pct of GDP in some countries ... but what about the next largest? Say, consumer durables in Germany or in the U.S., where they produce maybe not 10 but 7 percent of jobs. Then comes construction at 5 percent, and so on.”

The OECD report recommended anti-recession measures such as rapidly deployable public spending on infrastructure and particularly in areas where the money was invested in the future, notably in schools for example.

That is the case in the plans formulated by U.S. President Barack Obama and in Germany, Schmidt-Hebbel said.

Schmidt-Hebbel acknowledged that massive job losses in the car industry made it difficult for politicians to resist the temptation to provide short-term aid. Where that happened, it should be as short-lived as possible, he said.

He said statements committing large groups of countries such as the G20 club of industrialized and emerging market economies to sustained free trade were positive and should help to limit the spread of protectionism even if some countries were not fully living up to those commitments.

For an OECD statement on its report click on the link below: www.oecd.org/document/52/0,3343,en_2649_34487_42252276_1_1_1_1,00.html

Editing by Greg Mahlich

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