Industrial policy

The industrial policy of a country, sometimes denoted IP, is its official strategic effort to encourage the development and growth of part or all of the manufacturing sector as well as other sectors of the economy.[1][2][3] The government takes measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation."[4] A country's infrastructure (transportation, telecommunications and energy industry) is a major part of the manufacturing sector that often has a key role in IP.

Industrial policies are sector-specific, unlike broader macroeconomic policies. Examples of the latter, which are horizontal, economywide policies, are tightening credit and taxing capital gains, while examples of industrial policy, which involves vertical, sector-specific policies, include protecting textiles from imports and subsidizing export industries. Industrial policies are interventionist measures typical of mixed economy countries.

Many types of industrial policies contain common elements with other types of interventionist practices such as trade policy and fiscal policy. An example of a typical industrial policy is import-substitution-industrialization (ISI), where trade barriers are temporarily imposed on some key sectors, such as manufacturing.[5] By selectively protecting certain industries, these industries are given time to learn (learning by doing) and upgrade. Once competitive enough, these restrictions are lifted to expose the selected industries to the international market.[6]


The traditional arguments for industrial policies go back as far as the 18th century. Prominent early arguments in favor of selective protection of industries were contained in the 1791 Report on the Subject of Manufactures[7] of US economist and politician Alexander Hamilton, as well as the work of German economist Friedrich List.[8] List's views on free trade were in explicit contradiction to those of Adam Smith,[9] who, in The Wealth of Nations, said that "the most advantageous method in which a landed nation can raise up artificers, manufacturers, and merchants of its own is to grant the most perfect freedom of trade to the artificers, manufacturers, and merchants of all other nations."[10] The arguments of List and others were subsequently picked up by scholars of early development economics such as Albert Hirschman and Alexander Gerschenkron, who called for the selective promotion of key sectors in overcoming economic backwardness.

The relationship between government and industry in the United States has never been a simple one, and the labels used in categorizing these relationships at different times are often misleading if not false. In the early nineteenth century, for example, "it is quite clear that the laissez faire label is an inappropriate one."[11] In the US, an industrial policy was explicitly presented for the first time by the Jimmy Carter administration in August 1980, but it was subsequently dismantled with the election of Ronald Reagan the following year.[12]

Historically, there is a growing consensus that most developed countries, including United Kingdom, United States, Germany and France, have intervened actively in their domestic economy through industrial policies.[13] These early examples are followed by interventionist ISI strategies pursued in Latin American countries such as Brazil, Mexico or Argentina.[6] More recently, the rapid growth of East Asian economies, or the newly industrialized countries (NICs), has also been associated with active industrial policies that selectively promoted manufacturing and facilitated technology transfer and industrial upgrading.[14] The success of these state-directed industrialization strategies are often attributed to developmental states and strong bureaucracies such as the Japanese MITI.[15] According to Princeton's Atul Kohli, the reason Japanese colonies such as South Korea developed so rapidly and successfully was down to Japan exporting to its colonies the same centralised state development that it had used to develop itself.[16] Many of these domestic policy choices, however, are now seen as detrimental to free trade and are hence limited by various international agreements such as WTO, TRIM or TRIPS. Instead, the recent focus for industrial policy has shifted towards the promotion of local business clusters and the integration into global value chains.[17]

During the Reagan administration, an economic development initiative called Project Socrates was initiated to address US decline in ability to compete in world markets. Project Socrates, directed by Michael Sekora, resulted in a computer-based competitive strategy system that was made available to private industry and all other public and private institutions that impact economic growth, competitiveness and trade policy. A key objective of Socrates was to utilize advanced technology to enable US private institutions and public agencies to cooperate in the development and execution of competitive strategies without violating existing laws or compromising the spirit of "free market". President Reagan was satisfied that this objective was fulfilled in the Socrates system. Through the advances of innovation age technology, Socrates would provide "voluntary" but "systematic" coordination of resources across multiple "economic system" institutions including industry clusters, financial service organizations, university research facilities and government economic planning agencies. While the view of one president and the Socrates team was that technology made it virtually possible for both to exist simultaneously, the industrial policy vs. free market debate continued as later under the George H. W. Bush administration, Socrates was labeled as industrial policy and de-funded.[18][19]


The main criticism against industrial policy arises from the concept of government failure. Industrial policy is seen as harmful as governments lack the required information, capabilities and incentives to successfully determine whether the benefits of promoting certain sectors above others exceeds the costs and in turn implement the policies.[20] While the East Asian Tigers provided successful examples of heterodox interventions and protectionist industrial policies,[21] industrial policies such as import-substitution-industrialization (ISI) has failed in many other regions such as Latin America and Sub-Saharan Africa. Governments, in making decisions with regard to electoral or personal incentives, can be captured by vested interests, leading to industrial policy only supporting the rent-seeking political elite while distorting the efficient allocation of resources by market forces at the same time.[22]

Debates on the 'how to' of industrial policy

Despite existing criticism, there is a growing consensus in recent development theory that state interventions are often necessary when market failures prevail.[23] Market failures often exist in presence of externalities and natural monopolies. These market failures hinder the emergence of a well-functioning market and corrective industrial policies are required to ensure the allocative efficiency of a free market. Even relatively sceptical economists now recognise that public action can boost certain development factors "beyond what market forces on their own would generate."[24] In practice, these interventions are often aimed at regulating networks, public infrastructure, R&D or correcting information asymmetries. While the current debate has shifted away from dismissing industrial policies overall, the best ways of promoting industrial policy are still widely debated.[25]

One key question is which kinds of industrial policy are most effective in promoting economic development. For example, economists debate whether developing countries should focus on their comparative advantage by promoting mostly resource- and labour-intensive products and services, or invest in higher-productivity industries, which may only become competitive in the longer term.[26]

Much debate also still surrounds the issue whether government failures are more pervasive and severe than market failures.[27] Some argue that the lower the government accountability and capabilities, the higher the risk of political capture of industrial policies, which may be economically more harmful than existing market failures.[28]

Of particular relevance for developing countries are the conditions under which industrial policies may also contribute to poverty reduction, such as a focus on specific industries or the promotion of linkages between larger companies and smaller local enterprises.[29]

See also


  1. Graham 1994, p. 3.
  2. Bingham 1998, p. 21.
  3. Rodrik 2004, p. 2. Rodrik uses the term in a more extended fashion, such as to encompass "non-traditional activities in agriculture or services. There is no evidence that the types of market failures that call for industrial policy are located predominantly in industry".
  4. UNCTAD & UNIDO 2011, p. 34.
  5. Krugman 1987.
  6. 1 2 Gereffi & Wyman 1990.
  7. Hamilton 1827.
  8. List 1909.
  9. List 1909, Book III, Chapter 31: The System of Values of Exchange (Falsely Termed by the School, the 'Industrial' System)—Adam Smith.
  10. Smith 1904, Book IV, Chapter 9, para. 24.
  11. Prince & Taylor 1982, p. 283.
  12. Graham 1994, p. 27.
  13. Chang 2002.
  14. Wade 2003.
  15. Johnson 1982.
  16. Kohli 2004.
  17. Humphrey & Schmitz 2000.
  18. Smith, Esther (5 May 1988). "DoD Unveils Competitive Tool: Project Socrates Offers Valuable Analysis". Washington Technology.
  19. Markoff, John (10 May 1990). "Technology Official Quits At Pentagon". The New York Times. Retrieved 25 August 2012.
  20. See for instance, regarding the medias industries : Violaine Hacker, « Citoyenneté culturelle et politique européenne des médias : entre compétitivité et promotion des valeurs », NATIONS, CULTURES ET ENTREPRISES EN EUROPE, sous la direction de Gilles Rouet, Collection Local et Global, L’Harmattan, Paris, pp. 163–84
  21. Amsden 1992.
  22. Pack & Saggi 2006.
  23. Rodrik 2009.
  24. Rodrik 2004, p. 1. "Perhaps not surprisingly, this recognition is now particularly evident in those parts of the world where market-oriented reforms were taken the farthest and the disappointment about the outcomes is correspondingly the greatest—notably in Latin America".
  25. "Five Major Debates on Industrial Policy". The Donor Committee for Enterprise Development. Retrieved 25 August 2012.
  26. Lin & Chang 2009.
  27. Khan 2003.
  28. Kaufmann & Krause 2009.
  29. Altenburg 2011.


External links

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