Successful Industrial Policy Requires Industry Experts

Dec 14 , 2024
By Diane Coyle

---

Once relegated to the outskirts of economic discourse, industrial policy has made a striking comeback in recent years. Global supply chains have taken a hit due to the COVID-19 pandemic and geopolitical shocks, prompting the need for focused industry encouragement. In this commentary provided by Project Syndicate (PS), Diane Coyle, professor of public policy at the University of Cambridge, ponders whether these policies succeed where the state interventions of the past failed.

---

After decades on the fringes of economic debate, industrial policy has enjoyed a resurgence in recent years, with the United States (US), the European Union (EU), and China all ramping up their efforts to promote strategic sectors. Even the International Monetary Fund (IMF), once a vocal critic of industrial policy, has recently come around to endorsing it.

The reasons for this shift are obvious. The COVID-19 pandemic and geopolitical shocks, especially Russia's invasion of Ukraine, have disrupted global supply chains, causing shortages and fueling inflation. Transformative breakthroughs in artificial intelligence (AI) and clean-energy technologies have triggered a race between major powers like the US and China for dominance in these rapidly evolving fields.

The bigger question is what it will take for today's industrial policies to succeed. After all, the late-20th-century shift toward market-driven economic policies was largely a reaction to the failures of state interventions in the 1970s. Back then, efforts to promote national "champions" often led governments to prop up uncompetitive industries or back technologies that proved obsolete.

Why should this time be any different, given that politicians remain highly susceptible to corporate lobbying and influence campaigns?

To avoid repeating past mistakes, policymakers should resist the urge to pick winners, whether specific companies or favoured technologies. Sadly, politicians are often dazzled by wealthy and powerful executives, especially in an era marked by staggering fortunes and little-understood innovations like AI. Compounding this issue, many politicians today are less likely than their predecessors to have direct experience in business. Consequently, they may be insufficiently sceptical of the promises made by companies and executives seeking government support.

This ever-present risk shows the importance of independent and robust antitrust enforcement. Although independent competition authorities have long been recognised as a safeguard against corporate lobbying, the rise in market concentration across OECD countries over the past few decades suggests that competition rules have been severely under-enforced.

But times have changed. Recognising the risks posed by increasing market power, US President Joe Biden's administration adopted a more aggressive antitrust policy, while the EU and the United Kingdom (UK) have introduced new legislative frameworks to regulate digital markets. With AI and green technologies set to transform the global economy, sustaining this momentum is crucial to ensuring that new entrants and emerging companies have the space to innovate and grow.

Like competitive and open markets, industrial policies can play a vital role in boosting productivity and economic growth while helping governments resist undue corporate influence. But, their success hinges on a nuanced understanding of the challenges and opportunities facing specific industries.

Regrettably, the institutional expertise that characterised government agencies during the postwar era has steadily diminished since the 1980s. In the UK, for example, senior officials in the forerunners of the current Department for Business & Trade once had deep knowledge of key sectors like the auto industry. They were familiar with companies across the supply chain, maintained direct relationships with top executives, and were well-versed in the latest management practices and technical innovations. Many were engineers by training, giving them an invaluable perspective on the industries they oversaw.

By the 1990s, this expertise had largely vanished as industrial policies were abandoned. Many experienced officials – their roles diminished in importance – left public service. Today, senior civil servants oversee a wide range of industries, leaving them with little, if any, sector-specific knowledge.

For industrial policies to be effective, policymakers should move beyond the vague rhetoric about national strengths that characterises the current policy debate. Instead, they should focus on the specific products, services, and technologies for which their countries have a proven comparative advantage. This kind of industry-specific expertise is essential for any successful industrial policy.

Without these skills, today's industrial policies might fail to strike a "Goldilocks" balance between supporting strategically important industries and maintaining market competition. In other words, they could become overly influenced by corporate interests while lacking the specialised knowledge and technical understanding required to guide domestic industries effectively.

Acquiring the necessary know-how to craft effective industrial policies could be a long-term undertaking requiring significant commitment. But, as the world moves beyond the outdated notion that markets and governments operate in isolation, policymakers should develop the know-how and skills needed to work collaboratively with domestic industries. While capacity-building is never a simple process, ensuring that the new industrial policies succeed is critical.

---

PUBLISHED ON Dec 14,2024 [ VOL 25 , NO 1285]

---