Industrial policies (IPs) are regaining popularity as a tool for economic development, driven by new economic thinking and empirical evidence. This revival is marked by a shift from traditional, sector-specific approaches to functional policies that target economy-wide constraints. The new IP approach focuses on the discovery of areas where the returns to private and social investments are significant but unrecognised.
Policy experimentation plays a crucial role in this process, requiring a close partnership between the government and the private sector. Success hinges on the government’s ability to learn from failures, withdraw support when necessary, and ensure transparency and accountability.
Despite the potential of IPs, they remain controversial due to their misuse in the past. Critics argue that they can lead to rent-seeking, corruption, and inefficiency. To mitigate these risks, new IP advocates recommend embedding them within a rules-based governance framework. This includes clear criteria for the provision and withdrawal of support, a sunset clause, and monitoring and evaluation mechanisms.
The new IP also recognises the importance of global rules and norms. While these can limit policy space, they can also provide discipline and prevent the misuse of IPs. The challenge lies in striking a balance between the two.
While the new IP approach offers a promising path for economic development, it requires careful design and implementation. The potential benefits must be weighed against the risks, and the approach should be tailored to the specific context of each country.
Go to source article: https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/the_new_economics_of_ip_080123.pdf