In development economics, the central question often asked is what the correct strategies are for states to achieve higher levels of development and prosperity for their citizens. Over the last century, many economic systems and policies have been implemented in this vein, from centrally planned communism to laissez-faire capitalism. An important factor in all of these development strategies has been the varying use of industrial policy.
Industrial policy has many definitions and is often considered to encompass large swaths of a country’s economic agenda. Most commonly, it refers to governmental efforts and interventions to direct economic activity towards industries deemed important for future growth. This can include regulation or deregulation, government procurement for areas like defense, and providing incentives and subsidies for certain industries like car manufacturing. It is important to note that industrial policy is not uniformly implemented across the economy like lowering or raising the tax rate might be. Rather, it is targeted at providing support to critical industries that the government seeks to grow, or to industries still in their early stage of development. This differs markedly from the dominant view of the 1980’s onward, in which the economic policies of the “Washington Consensus” assumed that markets were efficient, and privatization and minimal government intervention in the economy would lead to the highest levels of growth.
Industrial policy’s perceived importance has waxed and waned in the eyes of governments and intellectuals in recent decades. However, many still consider it a crucial component of a country’s development and are predicting a resurgence of its adoption by developed and developing countries alike. And while industrial policy has historically focused on manufacturing and trade, its future will likely include the next wave of innovation that will disrupt traditional manufacturing. These changes may cause governments to formulate new industrial policies and to calculate which sectors to target in order to remain globally competitive.
History of Industrial Policy
A prominent early example of industrial policy was President Franklin D. Roosevelt’s New Deal of 1933, and the subsequent production of military equipment to supply the Allied forces in the Second World War. By regulating wages and procuring unprecedented amounts of weapons and vehicles used for war, the United States was able to climb out of the Great Depression that had plagued the country for years.
Another example is a strategy adopted by many Latin American states in the 1960’s and 70’s known as Import Substitution Industrialization (ISI). Feeling overly reliant on the imports of advanced manufactured goods and unable to develop these industries themselves, countries such as Brazil heavily subsidized and controlled imports on goods like cars so they could be manufactured domestically. The verdict on the outcomes achieved by ISI is mixed, however, it is clear that it was largely unable to stimulate competitive and lasting industries.
Perhaps the most celebrated case of industrial policy is attributed to the ‘East Asian Tigers’: Japan, South Korea, Taiwan, and Singapore. In the 1950s, these four countries had GDP levels of under $1000 per capita. Beginning in the 1960s, these governments steered towards the development of heavy industries like steel and chemicals, and later semiconductors and computers by subsidizing and helping successful firms become export-oriented. Today, the “East Asian Tigers” enjoy high levels of per capita GDP of around $40,000 per capita and continue to be world leaders in high-tech manufacturing. This export model is typically seen as a greater success than ISI. It intentionally sustained the competition in manufacturing firms domestically and on the global market unlike firms under heavy protection of the ISI model.
Looking to the Future
Catalysts for the resurgence of industrial policy dialogue are plentiful. Increasingly dire warnings on the time remaining to avoid the worst effects of climate change have made it clear that market mechanisms like the carbon tax will be insufficient in reducing emissions. This signals a need for state investment into new technologies and sustainable energy. Others recall the effects of years of deregulation and market liberalization, which culminated in the Great Recession of 2008, to urge for a new industrial policy. The fourth industrial revolution, which some believe is underway, will see manufacturing and other areas of the global economy become more automated and connected through artificial intelligence. This technological shift may tempt some governments to intervene in industry to retain a competitive edge against adversaries.
Lastly, China’s decades-long rise, due in part to its own brand of industrial policy, has prompted Western leaders to worry that they may be too dependent on the country for their supply of critical goods. The COVID-19 pandemic made this apparent when the United States and other Western states relied heavily on China for medical supplies. This and the broader trend of a decrease in the share of manufacturing in Western countries’ economies has led to calls for a rejuvenation of industrial policy..
These are just some of the factors that governments globally will have to consider when deciding to pursue an industrial policy. However, some degree of industrial policy will be necessary if countries do not wish to fall behind in innovation and global competitiveness. The key will be finding the correct balance between state intervention and allowing the market some degree of freedom, so as to avoid the worst pitfalls of both state-centric development and blind trust in free markets.