Resurrecting industrial policy

Can governments play a positive role in boosting their countries’ industrial sectors?

“Industrial policy has often been criticised as “picking winners”; it is argued that the government is particularly ill-suited to that task (…) The objective of government policy is to identify winning projects with large externalities. In this, they have had a history of notable successes.”

These words by Nobel economics laureate, Joseph Stiglitz, in 1999, point to the crux of a common debate: Do governments need to use “industrial policy” to stimulate new sources of growth?

The term “industrial policy” is itself divisive: to some it means meddling governments, choosing national champions and cramping markets, to others it means simply that governments will sometimes need to make strategic choices about where to invest, be it in research and innovation, infrastructure or skills.

To be sure, any form of industrial policy has its risks. Subsidies and the promotion of industrial champions leave governments open to capture from vested interests, just as has happened with certain fossil fuel companies today. This leads to the dangers of lack of competition or allowing protectionism to creep in, with costs for producers, consumers and the wider economy. In fact, most evidence shows that losers are more likely to receive government support than winners, perhaps because they lobby harder.

On the other hand, since governments often end up helping losers, researchers may have underestimated any positive effects, leading to an over-pessimistic assessment of industrial policy. In other words, industrial policy can be made to work.

For a variety of reasons, there is a resurgence of interest in industrial policy, with some of it moving away from subsidies and the promotion of national champions, to “softer”–and potentially less distorting–forms of support or encouragement. Governments are also seeking to become more strategic in their policies, aiming to support the rebalancing of economies in the wake of the crisis.

Boosting renewable energy usage is the kind of project where such strategic interventions by governments could make sense: private returns may be (at least initially) low; its aims have a social and public benefit (clean air, lower carbon emissions, less fossil fuel depletion); there could be economic spinoffs (retrofitting buildings, new jobs), and it involves technologies that require further development and R&D funding.

Government may also have a strategic role to playing fostering clusters for regional development purposes, or to overcome market failures, in finance for instance. The OECD has started to look at the resurgence of industrial policy recently with an eye to improving its evaluation. The aim of this work is not to rehabilitate “old-style” industrial policies, but to strengthen the evidence on how governments can make strategic choices, and what measures are most likely to be successful and in what circumstances.

Good policy should avoid the inertia that can come with targeting particular firms, be based on competition, and support a range of technologies and players instead. They should deal with issues such as skill shortages and supply chain effects, promote accountability, assure public access and evaluation, and protect tax-payers money. They should set realistic goals–there is no point in trying to replicate Silicon Valley, but there is value in supporting basic research in local universities. In short, good design, competition and oversight are a winning formula for sensible “industrial” policies.


For more information on industry issues, contact:

©OECD Observer No 292, Q3 2012

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