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From semiconductors to electric vehicles, governments are identifying the strategic industries of the future and intervening to support them – abandoning decades of neoliberal orthodoxy in the process. Are industrial policies the key to tackling twenty-first-century economic challenges or a recipe for market distortions and lower efficiency?
Excessive taxation can dull incentives and hinder growth. But too little taxation can do the same. Governments with meager tax revenues can't provide basic public goods. Worse yet, low tax revenues in poor countries often result from defects in tax collection systems (rather than low tax rates) that also promote unproductive enterprise.
India illustrates the importance of a well-designed tax system. In Bangalore, high-tech companies have built world-class campuses replete with manicured lawns and high-speed data communication networks. Outside these campuses, however, lie open sewers, uncollected garbage, and roads in acute disrepair. Whereas technology companies instantaneously transmit terabytes of data to remote continents, local transport proceeds at an almost medieval pace.
As a result, businesses in Bangalore run their own bus services, contract with private suppliers for drinking water, and install generators to protect themselves from interruptions in electricity supply. The state can't fix the shambles because it is broke. India's government debt exceeds 70% of GDP, so more than half its tax receipts go to paying interest.
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