Selective Government Intervention in Industrial Policies: A Revival

Recent scholarship has reignited the debate on selective government intervention in promoting specific industries in certain regions. While the economic efficacy of industrial policies remains a subject of discussion, it is clear that their success or failure transcends purely economic considerations.

The Resurgence of Industrial Policy

The United States, once known for minimal government intervention in the economy, has witnessed a revival of industrial policy. Legislative acts such as the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act all incorporate significant industrial-policy components, reflecting a shift in ideology. Similar measures have been adopted around the world by countries seeking to nurture and enhance their industrial bases.

A Historical Perspective

Industrial policy has a long history, with roots dating back to figures like Alexander Hamilton and Jean-Baptiste Colbert. However, by the end of the twentieth century, industrial policy had fallen out of favor. The prevailing belief was that market forces alone were sufficient for economic coordination, rendering selective government intervention unnecessary.

Reexamining Industrial Policies

Recent research has challenged these assumptions and provided theoretical and empirical support for industrial policies. Scholars have developed the “big push” model, highlighting the interdependence of complementary industries and the potential benefits of temporary protection for infant industries. Moreover, studies have demonstrated the role of government policies in fostering industrialization, both historically and in contemporary contexts.

The Broader Context

Current discussions on industrial policy have been prompted by two trends: domestic disparities and international geopolitical dynamics. Concerns about leaving certain regions and populations behind have led to a reevaluation of market-driven economic development. Additionally, tensions between China and the West have underscored the importance of safeguarding industries critical to national security.

Political-Economy Complexities

While economic justifications for industrial policies are compelling, political-economy objections persist. Rent-seeking behavior and uncertainty surround the selection of industries and firms deserving of financial support and national-security exceptions. These factors raise questions about the political processes involved in formulating and implementing industrial policies.

Beyond Economic Analysis

Complementing economic research, political economy analysis is crucial for successful industrial policies. Mechanisms such as independent commissions or program directors from relevant industries or academia must be established to ensure informed decision-making, stakeholder consultation, and effective performance monitoring.

The Nexus of Politics and Industrial Policies

While economic considerations are undoubtedly important, the success of industrial policies ultimately hinges on effective political processes. The complex interplay between economic rationales, political decision-making, and implementation mechanisms is crucial for achieving desired outcomes.