Industrial Policy

By Steve Coulter

Well-designed industrial policies can improve a nation’s economic performance. Using a range of tools, such as subsidies, tax incentives, infrastructure development, protective regulations, and R&D support, governments are able to support specific industries or economic activities.

Steve Coulter examines the patterns of industrial policymaking across late capitalist societies. Drawing on case studies from a range of countries, each with different growth models, national capabilities, policy traditions, and political/welfare state regimes, he is able to offer a nuanced comparative assessment of states’ responses to specific economic challenges. The book draws broad conclusions about the trajectories of industrial policy and highlights key technical and political drivers that policymakers consider when addressing whether best practice should centre on general or nationally-specific approaches. The book also focuses on fresh challenges and opportunities for industrial policy and questions the sustainability of current policy practice.

• Language: English
• Publisher: Agenda Publishing
• Release date: Jul 6, 2023
• ISBN: 9781788215381

Steve Coulter

Steve Coulter is Head of Industrial Strategy and Skills at the Tony Blair Institute for Global Change, and Visiting Senior Fellow at the European Institute of the London School of Economics.

Book preview

The Economy | Key Ideas

These short primers introduce students to the core concepts, theories and models, both new and established, heterodox and mainstream, contested and accepted, used by economists and political economists to understand and explain the workings of the economy.

© Steve Coulter 2023

This book is copyright under the Berne Convention.

No reproduction without permission.

All rights reserved.

First published in 2023 by Agenda Publishing

Agenda Publishing Limited

PO Box 185

Newcastle upon Tyne

NE20 2DH

www.agendapub.com

ISBN 978-1-78821-110-9 (hardcover)

ISBN 978-1-78821-338-7 (paperback)

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan

Printed and bound in the UK by 4edge

Contents

Preface and acknowledgements

1

Introduction: industry, economy and industrial policy

2

States, markets and growth: the economics of industrial policy

3

Implementing industrial policy: the experiences of five countries

4

New horizons for industrial policy

5

Conclusion

Further reading

References

Index

Preface and acknowledgements

This book is intended as a brief, but hopefully interesting and informative, guide to industrial policy for students, academics and policymakers. As such, it covers the main economic theories relevant to the topic, but also shows how policies have been, and can be, applied in concrete settings to tackle a host of familiar economic challenges as well as emerging ones like decarbonization.

Although at times controversial, almost every economically successful country became so through deploying industrial policies at some point or other, whether their governments admit to doing so or not. Examining how such interventions are done, in particular policy domains, and by different countries at different times, is therefore an important and useful exercise.

Being a short book that tries to cover a lot, there are necessarily some gaps in coverage. I have mainly focused on the policies and strategies of relatively advanced countries in Europe, North America and East Asia, as these have mostly gone through the early stages of industrialization and now face common problems of adjusting to an increasingly technologically sophisticated future. This unfortunately means glossing over the challenges of how low-income countries can achieve initial industrial take-off.

I would like to thank my publisher at Agenda, Alison Howson, and several reviewers, especially Bob Hancké, who provided valuable feedback at various stages, although any errors are mine alone. David Britto provided valuable help with some of the data and charts. The book itself is fondly dedicated to Sunita and Lucas.

1

Introduction: industry, economy and industrial policy

The question of the government’s role in market societies has loomed large since at least Adam Smith’s day. There is a wide political and academic consensus today that well-designed economic policies delivered by the state or its agents can increase the well-being of societies through higher growth rates and greater efficiency. However, it is not always clear what these policies are, or should be, and how they can be put into effect.

This book explores some of these economic and policy questions through an examination of one particular strand of economic policymaking known as industrial policy. Industrial policy is a distinct policy domain which includes a wide range of measures aimed at developing productive and technological capabilities in industry and related sectors, building and supporting new industries, and increasing the productivity and competitiveness of the economy generally.

Industrial policies are separate from macroeconomic policy, which is concerned with the broad balance and direction of whole economies through tools like interest rates. But they are not necessarily synonymous with microeconomic policies either, as they can be directed at altering the structure of the productive sector of the economy by nudging domestic industries towards certain activities and developing broad attributes, such as higher productivity or greater R&D intensity.

Depending on circumstances, the objectives of industrial policy can include export promotion, development of linkages between firms in an industry and support for upstream technology development. Policy tools for achieving these objectives can include infrastructure spending, tax incentives for R&D, creation of intermediary institutions such as institutes for applied technology, vocational training programmes focused on high-technology, and direct intervention to protect or promote specific industries and even individual firms.

Done successfully, industrial policy can have a significant effect on economic well-being. Britain, the industrial pioneer, used industrial policies to nurture and guide its nascent manufacturing industries from the mid-eighteenth century (contrary to persistent myths that its industrial take-off was an entirely free-market affair; see Figure 1.1). South Korea went from being one of the world’s poorest countries in the 1950s to an advanced industrial nation in little more than 30 years through judicious use of industrial policy to develop its economy through planned, export-led growth. France used industrial policies to rebuild after the Second World War by developing global leadership in industrial sectors like high-speed rail and nuclear power. And the ostensibly free-market USA has long used industrial policy to transfer and diffuse technologies from its enormous defence sector to its private sector.

In fact, most, if not all, rich countries have successfully employed industrial policy at various stages in their economic development – whether they admit to doing it or not. But the results overall have been mixed. Numerous historical and empirical studies show that governments can influence the growth rate of national or regional economies through such measures. Ha-Joon Chang argues that advanced nations in North America and Europe used industrial policy to catch up on Britain in the years following its industrial revolution in the eighteenth century. The Asian tiger economies such as Japan and South Korea then used industrial policy to develop their economies after the Second World War, with spectacular and far-reaching success (Chang 2003).

Figure 1.1 GDP per capita (US dollars) in Britain, 1400 to present

Source: Our World in Data.

But many Latin American and African countries also used industrial policy and failed to see similar results. US and European experience of industrial policy during the period of the globalization of finance and trade (from the 1980s onwards) has a patchier record than earlier periods, leading to bouts of scepticism about the whole enterprise of politicians intervening in industry. Recently, industrial policy has once again come into fashion in advanced economies as their governments wrestle with the aftermath of the Global Financial Crisis (GFC) and the Covid-19 pandemic. This chequered set of experiences suggests there is no single blueprint for industrial policy and that outcomes depend on nationally-specific and contingent factors.

Indeed, like any policy area, there are costs and trade-offs to be managed and expensive mistakes can be made. Industrial policy in the UK and US in the 1970s became synonymous with clumsy and politicized attempts by governments to prop up sunset industries like shipbuilding, along with ill-fated projects to steal a march on their rivals by using technology to develop what they assumed were the industries of the future. The Anglo-French supersonic jet, Concord, was a classic example of a bright idea dreamed up in government that was a technological triumph but commercial disaster.

The key point is that neither the South Korean nor British experience presents a solid case for either championing or rejecting use of industrial policy. They simply make it imperative to properly understand the particular contexts in which it can be successful, and how appropriate policy tools can be devised to put it into effect, depending on the circumstances.

What is industrial policy?

An initial step, therefore, is puncturing a couple of myths about industrial policy. First is the ideologically driven claim that state and market are entirely separate domains. If so, this would imply either that industrial policy is doomed to fail, or that it is pointless as it entails bribing the private sector with public money to do things it would have done anyway, entailing potentially ruinous deadweight costs. In fact, the two – markets and state – are inseparable. There has never been an entirely market domain and economic history shows time and again the importance of the state in driving industrialization (see Chapter 2).

Markets in advanced economies depend heavily on government action to function through the provision of infrastructure, security and human capital. Governments also guarantee property rights and structure the operation of markets via the legal and regulatory framework they provide. The interesting questions are therefore not about whether or not governments intervene in markets, but why this differs across time and place and why similar policy efforts can produce very different outcomes depending on circumstances.

Inevitable policy failures have also led to a second myth – that industrial policy involves the government picking winners. This is allegedly where policymakers choose specific industries or sectors to nurture, ignoring the wider economic context and the impact on competition. The assumption here is that the government is generally bad at doing this as it lacks inside information about the market required to be effective and its actions crowd out the private sector (Miller 1984). Certainly, governments can make mistakes. But taking this objection too far ignores the fact that firms may also lack information and face coordination problems in their market sector that can prevent them upgrading their strategies, for example through spending on R&D to develop new products for which the future market is uncertain.

A more serious objection, however, is that even forward-looking industrial policy may degenerate into backing losers as unproductive but politically well-connected firms lobby politicians furiously for support, which locks in inefficiency. Both types of systemic policy error – picking winners and political capture – can happen. But governments have arguably learned from their mistakes and there are ways around both problems, for example, the creation of intermediary institutions to manage information flows between state and market and prevent government capture by lobbyists. In any case, neither objection appear to be serious enough to stop governments from doing industrial policy.

Probably the key theoretical underpinning of industrial policy is therefore that the market alone will not deliver dynamic efficiency in the non-financial sector of economies, as markets too often fail to provide the public goods – such as education, scientific research and the legal and regulatory environment necessary for free exchange – required for them to function. The idea that governments should shape the provision of these public goods, with a view to supporting particular economic sectors deemed valuable and helping them become more efficient, has become fairly mainstream.

An additional contention however, and one which tends to invite more controversy, is that governments can and should go beyond addressing market failures and assume a more strategic role in determining the future structure and trajectory of economic development. Dani Rodrik, for example, has argued that governments need to develop a vision for their economies, and can use industrial policy tools to deliver this vision. This approach can have major implications for the future shape of economies and the allocation of resources. Different activities imply different paths for technological adoption and productivity growth, meaning that today’s policies have an impact on tomorrow’s outcomes. Doing this successfully is obviously a major challenge as it hinges on the coherence of this vision and the presence of the tools and resources needed to achieve it.

What are the aims of industrial policy?

A key feature of industrial policy is therefore its continuing adaptation to shifts in the domestic and international environment, technological change and political dynamics. Industrial policy, in other words, never stands still, but is subject to continual reformation and re-evaluation. Its practice and effectiveness vary across time and place.

In the immediate postwar period, western governments were concerned with rebuilding economies and societies after the Second World War. In Asia, the goal was to achieve industrial take-off through central planning and protecting infant industries from global competition while they gathered strength and acquired know-how. Later, as global competition and economic integration increased, the focus of policymakers in both places switched to creating and enhancing comparative advantage. This was done to ensure the participation of domestic industries in the most important production networks, known as global value chains (GVCs), in order to shift industries to higher value-added economic activities as lower cost sectors and processes became vulnerable to competition from low-wage producers. Many governments therefore enthusiastically embraced the so-called knowledge economy, by nurturing the science and technology bases of economies and attending to deficiencies in education and training systems.

Governments have also recently begun to grapple with the social effects of deindustrialization, where declining industries leave unemployment and deprivation blackspots in their wake. As Figure 1.2 shows, all the advanced industrial economies have lost factory jobs over the last two decades, with Britain and France seeing particularly large declines. Even where industries continue to thrive, automation may mean they can get by with fewer workers, which can also contribute to local deprivation and joblessness. Deglobalization and trade wars are also now threatening the unravelling of GVCs, which have allowed the unbundling of different stages of production across countries in a way that maximizes efficiency and economies of scale. Some populist politicians welcome deglobalization as a chance to reshore jobs and industries. But this would likely mean sacrificing the efficiency advantages of GVCs and will bring back many fewer jobs than were lost originally.

Figure 1.2 Manufacturing employment as a percentage of total employment, 2000 and 2021

Further out loom other issues. In the short term, the aftermath of Covid-19 will shake up whole economies, particularly services sectors. There is also the need to decarbonize industry in order to meet climate change goals. These are both challenges, as well as huge opportunities that will require an enormous commitment to solve. All of these policy challenges – from deindustrialization through to decarbonization – are potentially amenable to addressing through industrial policy. This is because they are replete with the sorts of market failures that require government action to tackle them, while also being strongly suggestive of the need for new strategic vision about what the future economy should look like.

In summary, the issue facing most governments is not whether to do industrial policy but how to do it more effectively.

Defining the scope and meaning of industrial policy

At this point it is worth pausing to define our terms more precisely. Specifically, what is (and is not) industrial policy; and what is covered by the term industry? Much of the academic literature defines industrial policy, somewhat vaguely, as any government intervention affecting industry. In his extensive review, Ken Warwick (2013: 16) arrives at the following broad definition: