Industrial Policy - Debates On The 'How To' of Industrial Policy

Debates On The 'How To' of Industrial Policy

Despite existing criticism, there is a growing consensus in recent development theory that state interventions are often necessary when market failures prevail. 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." 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.

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.

Much debate also still surrounds the issue whether government failures are more pervasive and severe than market failures. 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.

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.