Letter IEDI n. 1230—The new industrial policies in the world
Today's Letter IEDI addresses the article “The New Economics of Industrial Policy”, published in Aug'23, by Dani Rodrik (Harvard University), Réka Juhász (University of British Columbia) and Nathan Lane (University of Oxford). The study is part of the reflections of The Industrial Policy Group, which brings together researchers from several internationally renowned institutions.
The authors argue, based on national experiences in recent years, that contemporary industrial policy has become much more complex than in the past, due to the diversity and magnitude of the problems it tries to address.
Among its current objectives are the transition to an environmentally sustainable productive structure, the construction of resilient supply chains, the generation of quality jobs, the provision of public services and the guarantee of national security in a scenario of growing geopolitical tensions.
This view is widely shared among different institutions in the world, as shown by many IEDI works, such as Letters n. 783 “Industrial policy experiences in the XXI century” of Apr'17; n. 823 “Industry 4.0: National policies and strategies under the new productive revolution” of Dec'17; n. 881 “Industrial strategy is the rule and not the exception around the world” of Sep'18; n. 916 “New Innovation Policies in the Digital Age” of Mar'19; n. 925 “Criteria for a successful industrial policy” of May’19; and n. 1159 “OECD Recommendations for Industrial Strategies” of Sep'22, among others.
Thus, as Rodrik and his co-authors emphasize, there is no room for a restricted and simplistic view as the one many analysts and academics developed regarding the industrial policies adopted in 1960–1970, which confused their objectives with mere protectionism and subsidies to internationally non-competitive sectors.
The new strategies also differ from and are more complex than the previous ones because they imply constant interaction with all stakeholders involved (instead of a top-down policy, coming from the State) and seek to build innovative capacities in a systemic way. In addition, to meet their objectives, they need to develop a systemic approach, beyond the issues associated exclusively with manufacturing.
Based on these characteristics, the authors note that, between 2010 and 2022, the number of industrial policy actions in the world was multiplied by 46 and the vast majority of them (almost 80%) were concentrated in high-income countries, which mainly used the following instruments: public financing, export financing and economic subsidies. The CHIPS & Science Act and the IRA in the US are paradigmatic examples of this revival.
The study by Rodrik, Juhász and Lane brings theoretical and empirical arguments from a new wave of studies that point to this rescue of industrial policy.
From a theoretical point of view, among the most accepted justifications in the economic literature are: generation of positive externalities, reduction or elimination of market coordination failures and promotion of public goods.
Externalities refer to the ability of an industrial policy to generate broader social benefits than the specific support granted to an economic activity.
These externalities can be technological (for example, the development of a new vaccine that improves public health), related to increased job quality (such as the public promotion of R&D in the Silicon Valley that enabled a productive ecosystem capable of generating thousands of well-paying jobs), or related to national security (when local technological development reduces dependence on unstable supply chains, as in the case of semiconductors).
In the case of market coordination failures, interdependent activities may not fully develop without a coordinating public action. This is the case, for example, of the transition to electric cars, which is only possible if there is previously a wide network of charging points. However, investments in this infrastructure will only be triggered when investors already identify the presence of a significant number of electric cars in the national fleet.
Finally, industrial policy is also justified insofar as it is an important provider of public goods. These can be horizontal, such as infrastructure, or specific to certain challenges, such as support for R&D and training of human resources for the industries related to healthcare, defense, etc.
Rodrik and his co-authors also present a synthesis of recent empirical studies, using new tools, which seek to evaluate the results and efficiency of industrial policy in several countries and sectors. The authors show that this literature indicates that such policies have had positive effects and consistent impacts over time to encourage the birth of new industries and technologies.
The analyzed studies indicate, for example, that public innovation policies enhance private R&D, instead of replacing it, and that their results contribute to the technological development of specific regions, with lasting effects. They highlight cases in South Korea, China, Vietnam, the US etc.
The authors also warn of some characteristics that policymakers need to pay attention to:
1. It is necessary that construction of the policy be based on intense public-private collaboration, which ensures legitimacy among the various stakeholders, rather than top-down initiatives by governments.
2. Policies should seek the binomial “autonomy-embeddedness.” Autonomy for policymakers to resist lobbies of interest and embeddedness in the demands and social problems to be faced, with institutional channels permanently open to the private sector and the civil society. The US Defense Advanced Research Projects Agency (DARPA) is an example of success cited by the authors.
3. Emphasize the provision of public services that increase productivity, such as extension programs aimed at increasing the productivity of small and medium-sized enterprises, job training and infrastructure investments.
The authors point out that empirical studies in the US indicate that 1 job is generated for every US$34,000 invested in training and extension services, while US$196,000 are needed as subsidies to have the same impact. It is worth remembering that the "Brazil More Productive" Program is a policy of manufacturing extension, as discussed in Letters IEDI n. 918 “The 'Brazil More Productive' Initiative: advances and limitations” and n. 1173 “Productivity: the Brazilian challenge”, for example.
4. Finally, Rodrik and his co-authors emphasize the need for policies to increasingly incorporate the interaction between manufacturing and services, given the deindustrialization process that many countries have gone through and in the face of the challenges to industrial job creation that digitalization can bring.