A New Economics of Industrial Policy
Source details
- Canonical URL
- A New Economics of Industrial Policy
Other formats
Bibliographic details
- Authors: REKA JUHASZ, NATHAN LANE
- Published: June 3, 2024
Overview
- Industrial policies—state actions to change the composition of economic activity—have returned to prominence globally, driven by the green energy transition, geopolitical competition, and supply-chain resilience.
- Debates over industrial policy often overlook variation in global practice, reasons for success or failure, and real-world feasibility.
- The “new economics of industrial policy” (Juhász, Lane, and Rodrik, forthcoming) emphasizes the need to account for political forces behind policymaking.
Evidence and case studies
- Positive, transformational episodes:
- South Korea: The Heavy and Chemical Industry push under President Park Chung-hee in the 1960s increased output and export development in targeted sectors, shifted comparative advantage, and improved the economy (Lane 2022; Choi and Levchenko 2023).
- Postwar Italy: A decades-long industrial policy aimed at the 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).
- Latin America and Africa: Smaller-scale policies contributed to export market success—examples include cargo flights by state-owned airlines to transport flowers from Colombia to the US, collaboration to bring soy cultivation to Brazil’s northern savannas, and a multipronged policy to promote cut flower exports in Ethiopia (Sabel and others 2012; Bienen and Ciuriak 2015).
- Failures and government-failure concerns:
- Debacles in postindependence African countries and disappointing results in some Southeast Asian “Look East” policies illustrate interventions that introduced inefficiencies and distortions.
- Historical skepticism culminated in strong deterministic claims, including assertions like Gary Becker’s 1985 statement that “the best industrial policy is none at all.”
Political economy constraints
- Politics plays a central role because industrial policies typically produce concentrated benefits and diffused costs, creating politically fraught allocations and opportunities for rent-seeking and lobbying.
- Government failure is most likely when industrial policy choices violate political economy constraints.
- Key constraints:
- Political institutions and actors: Policy choices reflect the incentives of those with power; policies that threaten incumbents or political benefactors may be blocked even if growth-enhancing.
- State capacity: Effective implementation requires administrative capabilities—skilled administrators, detailed data, and institutional processes—which may be lacking in low-capacity environments.
- Historical interpretation:
- East Asian example: The East Asian miracle depended as much on a fortuitous political environment as on policy mix. South Korea’s export push was enabled by external duress, alignment of political and industrial elites, and recurring balance of payments problems that made earlier import-substitution unsustainable.
- Partial adoptions (e.g., Malaysia and Thailand) demonstrate that duplicating policies without matching political constraints often leads to failure.
Lessons for policymakers
- Three key lessons distilled from the political-economy lens:
- Evaluate political alignment:
- Carefully assess how industrial policy aligns with the domestic political environment.
- Consider who benefits, who loses, how political incentives support good policies, how policies change future political dynamics, and which policies are likely to survive political cycles.
- Tailor to administrative and fiscal capacity:
- Recognize that countries’ ability to implement industrial policies differs vastly beyond direct political constraints.
- Avoid one-size-fits-all approaches; developing economies may lack the 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.
- Example: The US Department of Energy Loan Programs Office has expanded to disburse 10 times more funding since enactment of the Inflation Reduction Act; the office also claims that its administrative processes and institutional safeguards are much improved since the decision to fund Solyndra over a decade ago.
Implications and research needs
- Ignoring politics is perilous; political feasibility and governance constraints are central to whether industrial policy succeeds.
- Exceptional political environments may be necessary for large-scale policies like those in postwar East Asia, but smaller-scale, politically compatible interventions have shown success globally.
- The risks of government failure can be overcome when policies are chosen to work within local political and governance constraints and when the state invests aggressively in administrative capacity.
- The literature is only beginning to empirically explore the diverse experience of industrial policy; more measurement and evaluation are essential. Economists and policymakers must focus on market failures, policy mix, and politics.
A New Economics of Industrial Policy — REKA JUHASZ, NATHAN LANE; F&D Magazine; June 2024.
Content in this bundle
- A New Economics of Industrial Policy | JUNE 2024