## A New Economics of Industrial Policy

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### Revival and scope of industrial policy
- Industrial policy—state actions to change the composition of economic activity—is making a comeback in advanced economies to address the green energy transition, geopolitical competition, and supply-chain resilience.
- The United States has major new industrial policies; similar resurgence is occurring globally.
- The “new economics of industrial policy” (Juhász, Lane, and Rodrik, forthcoming) updates empirical understanding but highlights the need to consider political forces behind policymaking.

### Empirical evidence: successes and failures
- Success cases:
  - South Korea’s Heavy and Chemical Industry push under President Park Chung-hee in the 1960s increased output and export development in targeted sectors, shifted comparative advantage toward these sectors, and made the economy better off (Lane 2022).
  - Postwar Italy’s decades-long industrial policy to develop lagging southern regions launched durable clusters in high-skill manufacturing and knowledge-intensive services and is estimated to have raised national industrial production (Incoronato and Lattanzio 2023; Cerrato 2024).
  - Smaller-scale interventions in Latin America facilitated export-market entry (Sabel and others 2012): examples include state-supported cargo flights for Colombian flower exports and collaboration to bring soy cultivation to Brazil’s northern savannas.
  - Demonstration projects in Africa show signs of success, such as a multipronged policy promoting cut flower exports in Ethiopia (Bienen and Ciuriak 2015).
- Failure cases and skepticism:
  - Numerous postindependence African industrial policy debacles and disappointing outcomes from Southeast Asia’s “Look East” policies illustrate government failures that introduce inefficiencies and distortions.
  - Longstanding economic skepticism culminated in deterministic rejections of industrial strategy (example cited: Gary Becker’s 1985 assertion that “the best industrial policy is none at all”).
- Conclusion from evidence:
  - Some industrial policies have delivered large, positive, and sometimes transformational effects, while many have failed—outcomes depend on context and implementation.

### Political economy and governance constraints
- Political forces often dominate industrial policymaking because benefits are concentrated while costs are diffused, creating politically fraught allocation and rent-seeking opportunities.
- Key constraints:
  - Political constraints: political institutions, incentives of those with power, societal conflicts, incumbent interests, and the likelihood that politically powerful actors may resist growth-enhancing policies that threaten their rents.
  - State capacity constraints: the administrative ability to implement, monitor, and adapt policies (skilled administrators, detailed data, centralized bureaucracies).
- Historical illustration:
  - South Korea’s export-based industrial policy in the 1960s–1970s succeeded in part because enduring military threats from North Korea, recurring balance of payments problems, and aligned elites created a political climate that favored devaluation, investment in competitive bureaucracies, and an all-out export push.
  - Attempts to copy East Asian policies without accounting for local political constraints have often failed (incomplete adoption in Malaysia and Thailand cited).

### Policy design and implementation lessons
- Three key lessons for policymakers:
  - Align industrial policy with the domestic political environment:
    - Carefully evaluate who benefits and who loses.
    - Assess how policies will alter future political incentives and their durability across political cycles.
  - Tailor policies to administrative and fiscal capacity:
    - Recognize that countries’ abilities to implement industrial policies differ vastly; there is no one-size-fits-all approach.
    - Developing economies may lack fiscal capacity today to deploy green industrial policy tools used in advanced economies.
  - Invest in administrative capacity:
    - Industrial policy almost always requires investment in administrative capacity to deploy and monitor programs effectively.
    - Example: The US Department of Energy Loan Programs Office has expanded to disburse 10 times more funding since enactment of the Inflation Reduction Act and reports improved administrative processes and institutional safeguards since the Solyndra decision.
- Overarching implication:
  - Ignoring politics is perilous; industrial policy risks can be overcome when policies work within local political and governance constraints and when the state invests aggressively in required administrative capacity.
  - Smaller-scale, context-sensitive policies can succeed even if the exceptionally conducive political environment required for East Asian–scale interventions is rare.

### Research gaps and future focus
- The literature is only beginning to empirically explore the diverse global experience of industrial policy; more measurement and evaluation are essential.
- Economists and policymakers should focus not only on market failures and policy instruments, but on political economy and implementation capacity as central determinants of success.

*Juhász and Lane, “A New Economics of Industrial Policy,” F&D, June 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/06/juhasz.pdf_