In Defense of Industrial Policy
At a time of rising geopolitical tensions and supply-chain fragmentation – when national-security considerations are shaping economic policy, and the risks of war seem to be intensifying – industrial policy is all but inevitable. The question is how to do it well.
MILAN – Industrial policy has always been a controversial dimension of growth and development strategies in emerging economies. Now, the introduction of the CHIPS and Science Act and the (misnamed) Inflation Reduction Act in the United States has reignited a similar debate in advanced economies. Unfortunately, it’s a debate that often generates more heat than light.
The objective of industrial policies is to alter market outcomes in ways that align them better with a country’s broader economic and social objectives. Free-market purists may bristle, but in the real world many relatively uncontroversial – and even widely supported – government interventions shape market outcomes.
For example, public-sector investment in infrastructure, education, and the economy’s science and technology base is considered an essential complement to private investment, mitigating risks, increasing returns, and bolstering overall economic performance. Other widely accepted interventions that alter market outcomes include antitrust or competition policy, measures to overcome information gaps and asymmetries, and regulation to address negative externalities, protect user data, and guarantee the safety of everything from airplanes to food.
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