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Industrial policy

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Title: Industrial policy  
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Industrial policy

The Industrial Policy plan of a country, sometimes shortened IP, is its official strategic effort to encourage the development and growth of the manufacturing sector as well as other sectors of the economy.[1][2][3] The government takes measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation."[4] A country's infrastructure (transportation, telecommunications and energy industry) is a major part of the manufacturing sector that usually has a key role in IP. It is also the case that industries fail dismally to add to such a growing body of manufacturing industries.

Industrial policies are sector specific, unlike broader macroeconomic policies. They are often considered to be interventionist as opposed to laissez-faire economics. Examples of horizontal, economywide policies are tightening credit or taxing capital gain, while examples of vertical, sector-specific policies comprise protecting textiles from imports or subsidizing export industries. Free market advocates consider industrial policies as interventionist measures typical of mixed economy countries.

Many types of industrial policies contain common elements with other types of interventionist practices such as trade policy and fiscal policy. An example of a typical industrial policy is import-substitution-industrialization (ISI), where trade barriers are temporarily imposed on some key sectors, such as manufacturing.[5] By selectively protecting certain industries, these industries are given time to learn (learning by doing) and upgrade. Once competitive enough, these restrictions are lifted to expose the selected industries to the international market.[6]


  • History 1
  • Criticism 2
  • Debates on the 'How to' of Industrial Policy 3
  • See also 4
  • Footnotes 5
  • Bibliography 6
  • External links 7


The traditional arguments for industrial policies go back as far as the 18th century. Prominent early arguments in favor of selective protection of industries were contained in the 1791 [10] The arguments of List and others were subsequently picked up by scholars of early development economics such as Albert Hirschman and Alexander Gerschenkron, who called for the selective promotion of key sectors in overcoming economic backwardness.

The relationship between government and industry in the United States has never been a simple one, and the labels used in categorizing these relationships at different times are often misleading if not false. In the early nineteenth century, for example, "it is quite clear that the laissez faire label is an inappropriate one."[11] In the US, an industrial policy was explicitly presented for the first time by the Jimmy Carter administration in August 1980, but it was subsequently dismantled with the election of Ronald Reagan the following year.[12]

Historically, there is a growing consensus that most developed countries, including United Kingdom, United States, Germany and France, have intervened actively in their domestic economy through industrial policies.[13] These early examples are followed by interventionist ISI strategies pursued in Latin American countries such as Brazil, Mexico or Argentina.[6] More recently, the rapid growth of East Asian economies, or the newly industrialized countries (NICs), has also been associated with active industrial policies that selectively promoted manufacturing and facilitated technology transfer and industrial upgrading.[14] The success of these state-directed industrialization strategies are often attributed to developmental states and strong bureaucracies such as the Japanese MITI.[15] According to Princeton's Atul Kohli, the reason Japanese colonies such as South Korea developed so rapidly and successfully was down to Japan exporting to its colonies the same centralised state development that it had used to develop itself.[16] Many of these domestic policy choices, however, are now seen as detrimental to free trade and are hence limited by various international agreements such as WTO, TRIM or TRIPS. Instead, the recent focus for industrial policy has shifted towards the promotion of local business clusters and the integration into global value chains.[17]

During the

  • New Industrial and Innovation Policy, The World Bank Institute
  • Industrial Policy Knowledge Page of the Donor Committee for Enterprise Development
  • McKinsey Global Institute
  • Industrial Policy of Indian States

External links

  • Altenburg, Tilman (2011). Industrial Policy in Developing Countries: Overview and lessons from seven country cases (PDF). Bonn:  
  • Bingham, Richard D. (1998). Industrial Policy American Style: From Hamilton to HDTV. Armonk, NY:  
  • Carey, Matthew (1826). Cursory View of the Liberal and Restrictive Systems of Political Economy. Philadelphia, PA: J. R. A. Skerrett. 
  • Cimoli, Mario;  
  • Gereffi, Gary; Wyman, Donald L. (1990). Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia. Princeton, NJ:  
  • Graham, Otis L. (1994). Losing Time: The Industrial Policy Debate. Cambridge, MA:  
  • Hamilton, Alexander (1827) [1791]. "Report on the Subject of Manufactures". Philadelphia, PA: William Brown. Retrieved 25 August 2012. 
  • Humphrey, John; Schmitz, Hubert (2000). "Governance and upgrading: Linking industrial cluster and global value chain research".  
  • Kaufmann, Friedrich; Krause, Matthias (2009). "Industrial Policy in Mozambique" (PDF).  
  • Kohli, Atul (2004). State-Directed Development: Political Power and Industrialization in the Global Periphery. Cambridge:  
  • McKenzie, Richard B. (2002). "Industrial Policy". In  317650570, 50016270 and 163149563 OCLC  
  • Okuno-Fujiwara, Masahiro (1991). "Industrial Policy in Japan: A Political Economy View" (PDF). In  
  • Pack, Howard; Saggi, Kamal (2006). "The case for industrial policy: a critical survey". (PDF).  
  • Prince, Carl E.; Taylor, Seth (1982). "Daniel Webster, the Boston Associates, and the U.S. Government's Role in the Industrializing Process, 1815–1830". Journal of the Early Republic 2 (3): 283–299.  
  • Rodrik, Dani (2009). "Industrial Policy: Don't Ask Why, Ask How". Middle East Development Journal 1 (1): 1–29.  


  1. ^ Graham 1994, p. 3.
  2. ^ Bingham 1998, p. 21.
  3. ^ Rodrik 2004, p. 2. Rodrik uses the term in a more extended fashion, such as to encompass "non-traditional activities in agriculture or services. There is no evidence that the types of market failures that call for industrial policy are located predominantly in industry".
  4. ^ UNCTAD & UNIDO 2011, p. 34.
  5. ^ Krugman 1987.
  6. ^ a b Gereffi & Wyman 1990.
  7. ^ Hamilton 1827.
  8. ^ List 1909.
  9. ^ List 1909, Book III, Chapter 31: The System of Values of Exchange (Falsely Termed by the School, the 'Industrial' System)—Adam Smith.
  10. ^ Smith 1904, Book IV, Chapter 9, para. 24.
  11. ^ Prince & Taylor 1982, p. 283.
  12. ^ Graham 1994, p. 27.
  13. ^ Chang 2002.
  14. ^ Wade 2003.
  15. ^ Johnson 1982.
  16. ^ Kohli 2004.
  17. ^ Humphrey & Schmitz 2000.
  18. ^ Smith, Esther (5 May 1988). "DoD Unveils Competitive Tool: Project Socrates Offers Valuable Analysis". Washington Technology. 
  19. ^ Markoff, John (10 May 1990). "Technology Official Quits At Pentagon".  
  20. ^ See for instance, regarding the medias industries : Violaine Hacker, « Citoyenneté culturelle et politique européenne des médias : entre compétitivité et promotion des valeurs », NATIONS, CULTURES ET ENTREPRISES EN EUROPE, sous la direction de Gilles Rouet, Collection Local et Global, L’Harmattan, Paris, pp. 163–84
  21. ^ Amsden 1992.
  22. ^ Pack & Saggi 2006.
  23. ^ Rodrik 2009.
  24. ^ Rodrik 2004, p. 1. "Perhaps not surprisingly, this recognition is now particularly evident in those parts of the world where market-oriented reforms were taken the farthest and the disappointment about the outcomes is correspondingly the greatest—notably in Latin America".
  25. ^ "Five Major Debates on Industrial Policy". The Donor Committee for Enterprise Development. Retrieved 25 August 2012. 
  26. ^ Lin & Chang 2009.
  27. ^ Khan 2003.
  28. ^ Kaufmann & Krause 2009.
  29. ^ Altenburg 2011.


See also

Of particular relevance for developing countries are the conditions under which industrial policies may also contribute to poverty reduction, such as a focus on specific industries or the promotion of linkages between larger companies and smaller local enterprises.[29]

Much debate also still surrounds the issue whether government failures are more pervasive and severe than market failures.[27] Some argue that the lower government accountability and capabilities, the higher the risk of political capture of industrial policies, which may be economically more harmful than existing market failures.[28]

One key question is which kinds of industrial policy are most effective in promoting economic development. For example, economists debate whether developing countries should focus on their comparative advantage by promoting mostly resource- and labour-intensive products and services, or invest in higher-productivity industries, which may only become competitive in the longer term.[26]

Despite existing criticism, there is a growing consensus in recent development theory that state interventions are often necessary when market failures prevail.[23] Market failures often exist in presence of externalities and natural monopolies. These market failures hinder the emergence of a well-functioning market and corrective industrial policies are required to ensure the allocative efficiency of a free market. Even relatively sceptical economists now recognise that public action can boost certain development factors "beyond what market forces on their own would generate."[24] In practice, these interventions are often aimed at regulating networks, public infrastructure, R&D or correcting information asymmetries. While the current debate has shifted away from dismissing industrial policies overall, the best ways of promoting industrial policy are still widely debated.[25]

Debates on the 'How to' of Industrial Policy

The main criticism against industrial policy arises from the concept of government failure. Industrial policy is seen as harmful as governments lack the required information, capabilities and incentives to successfully determine whether the benefits of promoting certain sectors above others exceeds the costs and in turn implement the policies.[20] While the East Asian Tigers provided successful examples of heterodox interventions and protectionist industrial policies,[21] industrial policies such as import-substitution-industrialization (ISI) has failed in many other regions such as Latin America and Sub-Saharan Africa. Governments, in making decisions with regard to electoral or personal incentives, can be captured by vested interests, leading to industrial policy only supporting the rent-seeking political elite while distorting the efficient allocation of resources by market forces at the same time.[22]



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