Forced vs. harmonious growth in building a European battery industry

Dóra Győrffy

Keywords: battery production, industrial policy, quantitative targets, state aid

TL;DR: The paper examines the various models of building an EV battery industry using the theory of János Kornai and warns about the dangers of excessive focus on simple quantitative targets.

Abstract:

The European Union set the target date of 2035 to stop selling internal combustion engine (ICE) cars. Given the competition from the US and China the EU envisions substantial amount of state aid for this purpose. The setting of quantitative targets as economic policy goal eerily resembles the planning processes during the Communist regime. Does it work better this time?
The paper answers the question through using the theory of János Kornai on forced vs. harmonious growth, which was published in 1972 providing an early elaboration of the conditions of sustainability. It argues that the excessive focus on a single target brings substantial disharmony into the economy and ultimately provides worse long-term outcomes than following more moderate objectives on a wider set of indicators.
The second part of the paper applies the theory to the state-led project of building a European electric vehicle (EV) battery industry. It contrasts the illiberal industrial policy of Hungary with the network-based approach by Sweden. It calls attention to the dangers of homogenous treatment by the European Union of the two models for producing EV batteries, and elaborates on a set of institutional preconditions, which can prevent the forced misallocation of resources in this sector.