Industrial Policy: Approaches and Experiences

INTRODUCTION

PUBLIC POLICY
o Principled guide to governmental action with regard to a class of issues
o Public problems are identified and addressed
o Laws and regulations, implementation and monitoring
o Dynamic, complex, and interactive system
o Local, national, or international level

Industrial (supporting)
Policies policy
(somehow)
affecting
General industry Policies NOT for industry
public policy (but still affecting industry)
Other
policies…
Industrial Policy definition

Grilli => “Industrial policy is any policy that affects a subset of firms and industries differentially from
the remaining group of firms and industries.
Any tax, subsidy, trade and other policy measure that affects some specific firms and industries
differently can be considered an industrial policy intervention.”
Ex. Support to young innovative companies

World bank => “Industrial policy is government efforts to alter industrial structure to promote
productivity based growth”.

To summarize, industrial policy is characterized by :

o Coordinated, focused, conscious effort by government(s)

o Using an array of policy tools (i.e. legislations)
o Encourage and promote a specific industry or sector
o Alter industrial structure or structure of production toward sectors
o Promote productivity based growth, industrial growth, efficiency, competitiveness, etc.
o Offer better prospects for economic growth than market equilibrium
o Typically focused on manufacturing
o Can apply to agricultural or service sectors too

=> The state is the main pillar : it should coordinate, intervene, cooperate !

Main issue: Governmental failure

o Solving market failure with governmental involvement is tricky – they can fail too
o Governmental failure is the most “expensive” one – it results in lower overall welfare
 o Governments often lack information and capability to design effective industrial policies
 often they invite rent-seeking and unproductive behaviour (Mueller, 2003).
o Difficult to measure and determine selection criteria
o Implementation depends on political and institutional system of a country
o Political and not merit based criteria
o Governments need to save declining industries to save employment
o Support of industries with low return of investment

Ex Francis Fukuyama : Democratic criteria (USA saved inefficient industries/favored by special

interests) different from efficiency criteria (TAIWAN)!

HISTORICAL PERSPECTIVE
3 broad eras
1. 1940s-1960s : Industrialization is recognized as necessary for development. Market
failures would prevent this from happening automatically, especially in developing
countries => Industrial policy is needed, particularly infant industry protection, state
ownership and state coordination => Traditional hands on industrial policy
2. 1970s-1990s : Practical obstacles to industrial policy considered significant+Too afraid of
government failure=> Focus on trade liberalization (exports), privatization, attracting FDI
and minimum government=> Market-driven/ ‘laissez-faire’ approach
3. 2000s-present : Role of government in fostering market systems recognized again
Building institutions and facilitating coordination. The ‘how’ rather than the ‘why’ of
industrial policy is important Focus on flexibility of industrial policy, innovation and
technological upgrading THE REJUVENATION OF INDUSTRIAL POLICY

EU GENERAL

o 1950s - 1960s
o Production driven by the industrial policy (only some sectors)
o Public and private efforts combined
o Development of knowledge, new technologies, new foreign markets, etc.
o 1970s - 1990s
o Industrial policy fell out of fashion (inefficient due to the lack of resources)
o Evolution of the economy was left to the markets – i.e. large MNEs with mainly
short-term profit goals – competition policy was dominant
o Industrial policy lost sensitivity
o 2000s – present
o Serious acknowledgement that industrial policy should be rejuvenated
o Promotion of innovation, knowledge and research (FP7 Framework),
entrepreneurship, diffusion of more environmentally friendly products, etc.
o However, this is still a sluggish process

EU EXAMPLE
 • Treaty of Paris (1951) and Treaty of Rome (1957) were the first Intended for the
European Coal and Steel Community and the related narrow industrial policy (Reduce coal
production and increase steel one) => no explicit legal basis till 72

• Maastricht Treaty (1991), Nice Treaty (2001) and Lisbon Treaty (2007)
First complete industrial-policy based treaties

Problem !
o Very formal and bureaucratic system
o Require all members states with very different political and economical
backgrounds and relationships to agree
o Instrumented through other policies and measures, increases complexity

 Sluggish stagnant and inefficient

European Union Industrial Policy

- No common industrial policy at the EU level
- Rather subsidiary and coordinating role to national policies
- EU economic integration is not enough to support more
- Enlargements of the EU make it more difficult: increasing heterogeneity in industrial structures
and developments among member states

o GOALS SHOULD BE TO
o Eliminate of the competition between states at the economical level
o Create EU champions, not just national champions
o PRO-ARGUMENTS:
o EU companies prefer to cooperate than to compete
o EU champions would have a positive impacts on overall innovation
o EU champions would strengthen the EU industrial structure
EU champions would strengthen the power of EU and attract FDI