Industrial Policy - it's back

We've recently heard quite a lot about "industrial policy" on both sides of the Atlantic. Mentioning it can often raise eyebrows, because the idea had been distinctly out of favour for a long time. So, what is (or was) industrial policy and why has it resurfaced?

Briefly, the concept is that governments should actively participate in the economy by supporting specific industries or sectors. On first look that doesn't seem a bad idea; after all, countries are supposed to prosper when they emphasise their comparative advantages, i.e. the things they do best.

However, the problems arise when governments involve themselves too deeply and try to out-think the market, which usually leads to a misallocation of resources. A common accusation against over-active governments is that they seek to "pick winners", whether among industries or specific firms, so-called "national champions". That type of industrial policy reached its high water mark in the former Soviet Union, where there were ministries for specific industries and strongly favoured enterprises. In the UK, partly as a legacy of war, government was active as an owner and strategic partner in a number of manufacturing sectors until the 1970s and beyond.

The reappearance of industrial policy can be explained in a number of ways. Leaving aside politics, there is a strong perception in advanced economies that there have been serious "market failures" of late. That may be due to such factors as technical change and the operation of financial markets, as well as outright discrimination by foreign states.

The above barely scratches the surface of this important topic and there are also arguments for a more benign, less sector-specific approach. We will return to it shortly and look at some of the managerial and financial issues that it raises.


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