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A “True” Industrial Policy for All

Whether one looks to the United States or the "miracle" economies of China and East Asia, state-led industrial strategies have played a key role in economic growth and development. And after decades of industrial policy being consigned to the fringes of economic-policy debate, it is now back on the agenda – as well it should be.

WASHINGTON, DC – In the January 1954 issue of The Atlantic, John F. Kennedy, then the junior US senator from Massachusetts, argued that the ongoing migration of industries from New England to the American South should not be hindered. He called on the government instead to provide loans and other forms of support to assist New England-based businesses, retrain industrial workers, and fund local industrial development agencies.

Kennedy recognized that the government had an important role to play in both lifting the South and spurring new industries in New England. Today, industrial policy is back on the agenda, after having spent decades on the fringes of the policy debate. In addition to China’s Made in China 2025 initiative, the United Kingdom’s recently released Industrial Strategy, and a new Franco-German policy manifesto, Gulf Cooperation Council countries have also adopted strategies to develop non-oil sectors, and many developing countries are pursuing similar diversification efforts.

These policies have emerged as a response to pressures from international competition, a broad slowdown in productivity growth, manufacturing job losses, and rising inequality. But industrial policy has always stirred an intense debate among policymakers and academics. Critics argue that such strategies have not worked in many countries, and have instead resulted in cronyism and corruption. A better approach, they argue, is to reduce the role of the state in the economy, improve the business environment, and invest in infrastructure and education. Under favorable conditions, firms and entrepreneurs will emerge and grow in multitudes. The real-world failures of industrial policies in Latin America and elsewhere attest to the validity of this view.