As economists and policymakers increasingly question longstanding neoliberal orthodoxy, and with geopolitical tensions generating new threats to economic security, efforts by governments to take a proactive role in shaping the economy by intervening in selected industries has been gaining steam. But industrial policy’s record is mixed, particularly in the West, raising questions about whether – and in what form – it is useful.
The University of Chicago’s Raghuram G. Rajan has serious reservations about the state-led approach. While industrial strategy “brings sensible ideas to bear” on how to “manage government in the areas where government works best,” it “always saps the vitality of private economic efforts,” by undermining competition, disrupting price signals, and insisting that “corporate performance be judged according to criteria other than profitability.” Compounding the problem is “the lobbying, cronyism, and corruption that surrounds any government initiative where billions of dollars are on offer.”
But for J. Bradford DeLong of the University of California, Berkeley, context matters. For decades, he writes, opposition to “government-led development” – in the United States, at least – was driven by the sense that the state lacked the capacity to undertake it. Moreover, the “agencies that would manage and direct economic development” were “captured by investors, managers, or oligopolies of one sort or another.” In his view, however, new threats to economic security – including “the need to reorient the US economy from coastal finance and plutocracy to middle- and working-class prosperity nationwide” – have now made industrial policy in the US “unavoidable.”
Harvard’s Dani Rodrik identifies a major problem with this, warning that combating climate change and boosting the middle class in advanced economies – two key goals of industrial policy – might come at the expense of reducing global poverty. And yet this “new trilemma” is not inescapable, as long as policymakers recognize that the tradeoffs between combating climate change, boosting the middle class, and fighting global poverty are often “more apparent than real.” For example, the “vast majority of the good, middle-class jobs of the future” will have to come from largely non-traded services sectors, which can be promoted without creating trade tensions.
Designing good industrial policies, points out Yale’s Pinelopi Koujianou Goldberg, also requires us to recognize their limits. While government support can give selected firms or sectors a boost, success – particularly in high-tech industries like semiconductors – also requires access to foreign technology. In this sense, the US – with its “technological leadership and scale” – has a distinct advantage, though “it is unclear why chip manufacturing must be brought back to the US, as opposed to other allied countries that may be able to produce at a lower cost.”
As economists and policymakers increasingly question longstanding neoliberal orthodoxy, and with geopolitical tensions generating new threats to economic security, efforts by governments to take a proactive role in shaping the economy by intervening in selected industries has been gaining steam. But industrial policy’s record is mixed, particularly in the West, raising questions about whether – and in what form – it is useful.
The University of Chicago’s Raghuram G. Rajan has serious reservations about the state-led approach. While industrial strategy “brings sensible ideas to bear” on how to “manage government in the areas where government works best,” it “always saps the vitality of private economic efforts,” by undermining competition, disrupting price signals, and insisting that “corporate performance be judged according to criteria other than profitability.” Compounding the problem is “the lobbying, cronyism, and corruption that surrounds any government initiative where billions of dollars are on offer.”
But for J. Bradford DeLong of the University of California, Berkeley, context matters. For decades, he writes, opposition to “government-led development” – in the United States, at least – was driven by the sense that the state lacked the capacity to undertake it. Moreover, the “agencies that would manage and direct economic development” were “captured by investors, managers, or oligopolies of one sort or another.” In his view, however, new threats to economic security – including “the need to reorient the US economy from coastal finance and plutocracy to middle- and working-class prosperity nationwide” – have now made industrial policy in the US “unavoidable.”
Harvard’s Dani Rodrik identifies a major problem with this, warning that combating climate change and boosting the middle class in advanced economies – two key goals of industrial policy – might come at the expense of reducing global poverty. And yet this “new trilemma” is not inescapable, as long as policymakers recognize that the tradeoffs between combating climate change, boosting the middle class, and fighting global poverty are often “more apparent than real.” For example, the “vast majority of the good, middle-class jobs of the future” will have to come from largely non-traded services sectors, which can be promoted without creating trade tensions.
Designing good industrial policies, points out Yale’s Pinelopi Koujianou Goldberg, also requires us to recognize their limits. While government support can give selected firms or sectors a boost, success – particularly in high-tech industries like semiconductors – also requires access to foreign technology. In this sense, the US – with its “technological leadership and scale” – has a distinct advantage, though “it is unclear why chip manufacturing must be brought back to the US, as opposed to other allied countries that may be able to produce at a lower cost.”