35 Industrial Policy

Noah Smith

Ultimately what is required for industrial policy to work is far less than a consistent ability to pick “winners.” In the presence of uncertainty, both about the effectiveness of policies and the location/magnitude of externalities, the ultimate test is not whether governments can pick “winners,” but whether they have (or can develop) the ability to let “losers” go. As with any portfolio decision, it would be an indication of sub-optimal policy if the government did not back some ventures that end up as failures ex post. In the U.S., Department of Energy loan guarantees to Solyndra, a solar cell manufacturer, failed miserably; but a similar loan guarantee to Tesla enabled the company to avert failure and become the behemoth it is today. In Chile, successes in four projects supported by Fundacion Chile – including most spectacularly salmon – is said to have paid the costs of all other ventures.

Letting losers go may still be a hard task, in light of political pressures that inevitably develop…But it is far less demanding than governmental omniscience.

There’s a fairly large literature showing a negative correlation between subsidies and productivity at the industry level. But Juhász, Lane, and Rodrik point out that while this could be because of inefficient policies and rent-seeking, it could also be that government is directing subsidies to the industries where market failures are the largest. After all, if you look at the correlation between hospital visits and deadly heart attacks, you’ll find a strong positive correlation…but this doesn’t mean that hospitals give people fatal heart attacks!

The authors also warn about conflating industrial policy with protectionism, noting that recent industrial policies have often been aimed at increasing exports and international capital flows. The ascent of the East Asian Tiger economies belies a clean correspondence between protectionism and industrial policy.

A whole lot of industrial policies are just rich countries trying to help their successful established exporters, and most of that assistance comes in the form of subsidies.

The truth is that all of this still represents only a few tiny slivers of knowledge, and economists as a whole have only begun to scratch the surface of this incredibly important and very timely topic. But at least a few are trying. If and when the global rise of industrial policy eventually forces economists to study it en masse, Réka Juhász, Nathan Lane, and Dani Rodrik will be remembered as the pioneers who broke ground on the topic even before it was cool and sexy.

Noah Smith (2023) A few economists are starting to think seriously about industrial policy

Juhasz Abstract

We discuss the considerable literature that has developed in recent years providing rigorous evidence on how industrial policies work. This literature is a significant improvement over the earlier generatioon of empirical work, which was largely correlational and marred by interpretational problems. On the whole, the recent crop of papers offers a more positive take on industrial policy. We review the standard rationales and critiques of industrial policy and provide a broad overview of new empirical approaches to measurement. We discuss how the recent literature, paying close atention to measurement, causal inference, and economic structure, is offering a nuanced and contextual understanding of the effects of industrial policy. We re-evaluate the East Asian experience with industrial policy in light of recent results. Finally, we conclude by reviewing how industrial policy is being reshaped by a new understanding of governance, a richer set of policy instruments beyond subsidies, and the reality of de- industrialization.

[Juhasz (2023) The New Economics of Industrial Policy (pdf)] (pdf/Juhasz_2023_The_new_economics_of_industrial_policy.pdf)