Economists have reason to give industrial policy another chance

What was dismissed as lacking a solid economic foundation has been reopened for debate by recent studies on success stories

- DANI RODRIK

As policymakers around the world embrace industrial policy in pursuit of a wide variety of objectives supply-chain resilience, green technologies, a geopolitical advantage or good jobs-the debate over its effectiveness is reaching fever pitch. Typically, this debate is portrayed as one where sound economics is squarely on the sceptics' side. "There is a strong case against industrial policy in economics," intoned one recent commentary, and embracing it "just wastes money and distorts the economy." But this is an increasingly outmoded view. While it is generally true that mainstream economists have responded to industrial policy with knee-jerk hostility since at least the 1970s, things have been changing fast, owing to new academic research that is less driven by ideological hostility to government intervention and better grounded in rigorous empirical methods. This crop of research provides more evidence on how industrial policy really works, improving the quality of debates that in the past shed more heat than light on the issue. And researchers' more nuanced and contextual understanding of such policies yields a generally more positive assessment.

Industrial policies are complex, and quantifying them for the purposes of analysis can be difficult. Consider, for example, China's recent push for shipbuilding. Seeking to become the world's biggest shipbuilder within a decade, China deployed a multitude of policies, including subsidies for production, investment and even entry. There were many changes along the way, as in 2009, when policymakers turned away from promoting entry and instead focused on industry consolidation.