While industrial policies can help countries cope with rising economic and political uncertainty, the details matter. Any guidance by the International Monetary Fund on the issue must highlight fiscally prudent tools and emphasize the importance of striking the right balance between protection and market discipline.
SEOUL – I recently gave a talk about industrial policy at the International Monetary Fund. That is a sentence you probably would not have read even a few years ago: historically, the IMF has been a sharp critic of industrial policy. But as many of its client countries embrace the concept, the Fund has recognized the need to clarify its position and update its guidance.
IMF economists have long worried that industrial policy can cause undue harm to a country’s fiscal position. But while some industrial-policy tools do demand significant fiscal resources, others do not. For example, entry control – when the government permits only a certain number of qualified firms to operate in strategic sectors – costs very little.
The logic behind entry control is simple: a few firms earning profits in an oligopolistic market is better than many firms reaping no profits in perfect competition, not least because profits can be re-invested in the selected firms. The policy also causes the rate of return to exceed interest rates – good for boosting private investment in manufacturing, which typically offers lower rates of return than services, with longer time horizons.
SEOUL – I recently gave a talk about industrial policy at the International Monetary Fund. That is a sentence you probably would not have read even a few years ago: historically, the IMF has been a sharp critic of industrial policy. But as many of its client countries embrace the concept, the Fund has recognized the need to clarify its position and update its guidance.
IMF economists have long worried that industrial policy can cause undue harm to a country’s fiscal position. But while some industrial-policy tools do demand significant fiscal resources, others do not. For example, entry control – when the government permits only a certain number of qualified firms to operate in strategic sectors – costs very little.
The logic behind entry control is simple: a few firms earning profits in an oligopolistic market is better than many firms reaping no profits in perfect competition, not least because profits can be re-invested in the selected firms. The policy also causes the rate of return to exceed interest rates – good for boosting private investment in manufacturing, which typically offers lower rates of return than services, with longer time horizons.