Industrial Policy - History

History

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 Report on the Subject of Manufactures of US economist and politician Alexander Hamilton, as well as the work of German economist Friedrich List. List's views on free trade were in explicit contradiction to those of Adam Smith, who, in The Wealth of Nations, said that "the most advantageous method in which a landed nation can raise up artificers, manufacturers, and merchants of its own is to grant the most perfect freedom of trade to the artificers, manufacturers, and merchants of all other nations." 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." 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.

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. These early examples are followed by interventionist ISI strategies pursued in Latin American countries such as Brazil, Mexico or Argentina. 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. The success of these state-directed industrialization strategies are often attributed to developmental states and strong bureaucracies such as the Japanese MITI. 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. 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.

During the Reagan Administration, an economic development initiative called Project Socrates was initiated to address US decline in ability to compete in world markets. Project Socrates, directed by Michael Sekora, resulted in a computer-based competitive strategy system that was made available to private industry and all other public and private institutions that impact economic growth, competitiveness and trade policy. A key objective of Socrates was to utilize advanced technology to enable US private institutions and public agencies to cooperate in the development and execution of competitive strategies without violating existing laws or compromising the spirit of "free market". President Reagan was satisfied that this objective was fulfilled in the Socrates system. Through the advances of innovation age technology, Socrates would provide "voluntary" but "systematic" coordination of resources across multiple "economic system" institutions including industry clusters, financial service organizations, university research facilities and government economic planning agencies. While the view of one president and the Socrates team was that technology made it virtually possible for both to exist simultaneously, the industrial policy vs. free market debate continued as later under the George H. W. Bush administration, Socrates was labeled as industrial policy and de-funded.

In August 2010, The Economist highlighted a renewed trend of industrial policy in rich countries, with examples of active government intervention in the United States, Britain, France, Germany, Japan and South Korea. The revival has been driven by four main forces: pressure to reduce unemployment and stimulate growth; a desire to 'rebalance' certain economies away from financial services; popular demands for increased government action; and the perceived need to respond to apparently successful policies being pursued in China.