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Will the New Industrial Policy Work?

Prompted by climate change and the rise of China, industrial policy has made an unlikely return to government agendas. While the challenges facing humanity clearly require increased state intervention, policymakers need to learn from past failures and provide companies with the right balance of support and discipline.

SEOUL – Industrial policy has returned to government agendas across the developed and developing world. While the US Inflation Reduction Act has shocked America’s Asian and European trading partners, the Biden administration’s signature climate-change legislation is just the latest in a series of recent policies that seemingly fly in the face of World Trade Organization rules.

At a time of growing economic and political uncertainty, it is hardly surprising that governments are increasingly embracing industrial policy. Massive government intervention, after all, underpinned East Asia’s “economic miracle” between the 1960s and 1990s. Political scientist Chalmers Johnson attributed Japan’s postwar economic boom to the Ministry of International Trade and Industry, which dominated Japanese policymaking from 1949 to 2000. Similarly, economist Alice Amsden argued that South Korea’s transformation into an economic powerhouse relied on subsidies and tariffs that encouraged the formation of giant, state-backed industrial conglomerates.

Despite the contributions of industrial policy to the East Asian growth miracle, the rise of neoliberal economics in the West made it taboo there. That began to change in 2008, however, as the global financial crisis created a seemingly insatiable appetite for government intervention. Faced with a rapidly growing China and a looming climate catastrophe, economist Mariana Mazzucato and others have reimagined industrial policy as a way to achieve a mission-oriented innovation economy guided by an entrepreneurial state.