S9 Ep43: Navigating industrial policy

Episode Summary

Executive Summary: The discussion argues that industrial policy has returned broadly across rich and emerging economies, driven by geopolitical fragmentation, market failures, and politics. Using a novel EBRD database, the guest explains that industrial policies are concentrated in large economies but widespread, often pursue multiple objectives, and work best when paired with strong administrative capacity, evaluation, and core fundamentals like infrastructure and human capital.

Main Topics: The resurgence of industrial policy (Priority: 5/5): The transcript argues industrial policy is no longer taboo and is rising again across economies, with a broad upward trend especially since 2019. Defining industrial policy versus horizontal policy (Priority: 4/5): Industrial policy is framed as sector-targeting intervention intended to shift the composition of production, unlike broad business-environment reforms. Who uses industrial policy and where (Priority: 5/5): Large, richer economies use more industrial policy overall, but EBRD regions also show widespread adoption, with differences in instruments and goals by income level. Why governments adopt it (Priority: 5/5): Motives include market failures, environmental and coordination failures, geopolitical rivalry, election incentives, and demand for a larger state role. Capacity, instruments, and implementation risk (Priority: 5/5): Effective industrial policy needs bureaucratic capacity and sectoral knowledge; poorer-capacity states tend to rely on simpler but more distortive tools. Measuring effectiveness and phasing out failures (Priority: 5/5): The report emphasizes iterative evaluation, clear objectives, benchmarks, and sunset clauses to avoid entrenched, hard-to-remove policies. Industrial policy in context of fundamentals (Priority: 4/5): Industrial policy is most likely to succeed when supported by infrastructure, human capital, and administrative quality rather than replacing them.

Key Arguments: Industrial policy is experiencing a broad-based resurgence, not just a temporary COVID-era spike; the trend accelerated after 2019. The EBRD database expands prior work by adding emerging markets and using large language model processing to infer policy objectives. Industrial policy is best understood as sector-specific intervention aimed at changing the sectoral composition of an economy, not general horizontal reform. Most industrial policies have multiple objectives, which makes evaluation difficult and can create conflicting goals. Geopolitical fragmentation can make industrial policy rational even if it is costly, because countries may feel compelled to match rivals’ support measures. Richer economies and those with stronger administrative/fiscal capacity adopt more industrial policy, but the EBRD regions also show significant use. Policy instruments differ by capacity: complex, less distortive measures need stronger administration, while simple tools like bans and quotas are easier but more distortive. Successful industrial policy requires iterative evaluation, benchmarks, competitive elements, and often independent assessment bodies. Sunset clauses matter because many policies persist too long; policymakers are learning, as these clauses are becoming more common. Industrial policy works better when paired with fundamental investments in infrastructure, human capital, and bureaucratic quality.

Data Points: Industrial policies with more than one objective: Three-quarters - Share of industrial policies in the analysis that pursue multiple objectives. Industrial policies with three or more objectives: Over 10% - Portion of policies with especially complex, potentially conflicting goals. COVID-related industrial policies: About 30% - Share of industrial policies adopted over 2020-2022 that appear related to COVID. Time span of policy analysis: 2000 to 2022 - Period over which the report examines industrial policy adoption. Trend acceleration: Since 2019 - The upward trend in industrial policies became more pronounced around this year. Top firm concentration threshold: Top 15 listed firms - Countries/years where these firms account for a larger share of GDP are more likely to adopt industrial policy. Number of broad objective buckets: 5 - LLM-based coding grouped objectives into growth/productivity, employment, secure supply/strategic sectors, environmental objectives, and regional development.

Pivotal Quotes: "The nine most terrifying words in the English language were: I'm here from the government and I'm here to help." — Zoka Koshkan (citing Ronald Reagan): Used to illustrate the historical backlash against state intervention and industrial policy. "The policy that cannot be named." — Tim Phillips referencing an IMF paper: Describes how industrial policy existed even when it was unfashionable or not explicitly labeled. "Industrial policies tend to work better in a context where the pie is growing rather than when they are used to support, for instance, sunset industries." — Zoka Koshkan: Explains why policy is more successful in expanding sectors than in defending declining ones.

Implications: Industrial policy is back, but success depends on capacity, clear goals, and strong fundamentals. Governments should favor narrow, evaluable, time-limited measures and avoid opaque, permanent support that becomes politically sticky.