The return of industrial policy
What’s at stake: British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right. It seems that industrial policy is back for the better and the worse.
Dani Rodrik writes that, in fact, industrial policy never went out of fashion. Economists enamoured of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation. The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known: developing new industries often requires a nudge from government. The nudge can take the form of subsidies, loans, infrastructure, and other kinds of support. But scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath. The real question about industrial policy is not whether it should be practiced, but how. Here are three important principles to keep in mind. First, industrial policy is a state of mind rather than a list of specific policies. Its successful practitioners understand that it is more important to create a climate of collaboration between government and the private sector than to provide financial incentives. Second, industrial policy needs to rely on both carrots and sticks. Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives. The standard rap against industrial policy is that governments cannot pick winners. Of course they can’t, but that is largely irrelevant. What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go – a much less demanding requirement.
The World Bank PSD reports that William Easterly charges that Rodrik's support for industrial policy is based on a statistical fallacy - just because some states that have implemented industrial policies have been successful does not mean it's a particularly good path for a developing country to follow. Rodrik’s evidence is based on what he believes is the high probability that IF you have had steady growth for six decades, THEN you had industrial policy. This is interesting, but this is not the right probability in deciding whether to choose industrial policy, which is "IF you have industrial policy, THEN what is your chance of steady growth for six decades? This second, correct, probability would seem to be pretty low, since many other countries -- especially African and Latin American -- extensively tried industrial policies over the past six decades with low and erratic growth as a result.
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