hausmann108_Kent Nishimura  Los Angeles Times via Getty Images_chipsandscienceact Kent Nishimura/Los Angeles Times via Getty Images

Why Industrial Policy Is Back

For decades following the Reagan-Thatcher revolution and the emergence of the Washington Consensus in the 1980s, economic orthodoxy was allergic to policies that imply "picking winners," rather than letting the market decide. But we now know that the real question is not whether such policies should exist, but how to manage them.

CAMBRIDGE – After decades of relegation to the fringes of economic thinking, industrial policy is making a comeback. With more countries enacting measures to support certain industries and establish new ones, the revival of industrial policy was a major topic at this year’s meeting of the World Economic Forum in Davos.

The United States’ $280 billion CHIPS and Science Act is a case in point. The new legislation aims to expand the US semiconductor industry in order to reduce America’s dependence on China and ensure its technological supremacy. Similarly, the Biden administration’s misnamed Inflation Reduction Act (IRA) includes $370 billion in energy-transition subsidies.

European Union countries, up in arms about the US programs’ discrimination against foreign suppliers and violation of international and EU rules prohibiting industry-specific state subsidies, plan to respond by relaxing their own subsidy rules. Meanwhile, one-third of the €1.8 trillion ($2 trillion) in investment funding in the NextGenerationEU Recovery Plan will finance the European Green Deal, introduced in 2019, which will help member states invest in clean-energy projects. And the trend is not confined to Western countries: Indonesia imposed a ban on nickel-ore exports to promote its electric-vehicle battery industry.

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