Industrial Policy

Industrial policy is a form of government influence on business sectors and firms within an economy. Industrial policy has been both distinguished from and closely associated with other forms of government planning and intervention in the marketplace, such as a nation's competition policy, its trade policy, or its macroeconomic policy. Definitions of industrial policy vary. Many traditional definitions have been fairly narrow ones, such as the selective and strategic targeting of certain business sectors and/or firms over others to receive greater government support to improve or take advantage of their productivity and competitiveness. Definitions of industrial policy have also shifted somewhat in recent decades, and industrial policy often has been more broadly described as government interventions to support multiple or particular economic goals, such as increasing exports or R&D spending, that assist a nation's industries and firms. The paragraphs that follow the next one assume a fairly narrow definition of industrial policy, and then later paragraphs introduce additional or broader viewpoints that have been suggested.

Debate concerning an appropriate role and strategies for government intervention to promote more national economic growth can be traced back centuries. Certain government interventions to assist business activities have generally been supported. Examples include spending on education and the physical and social infrastructure in a country, as well as programs offering low-cost loans and incentives for small businesses. Nonetheless, arguments for forms of industry policy, even subsidies or protection for promising, infant industries from threatening competitive markets, have often been raised. Strong critics of industrial policy, particularly some neoclassical economists, question the effectiveness of government interventions, versus the role of free markets and more laissez-faire attitudes, to determine business sector “winners and losers.” Other critics of industrial policy stress that such research, planning, and interventions can have positive impacts on targeted business sectors, but they question its effectiveness in terms of the overall costs versus benefits for the nation's economy.

Countries differ significantly in the extent to which industrial policy is accepted as a legitimate government role and applied. France and Japan, for example, have had mixed results with more formal and elaborate types of industrial policy, while the United States has applied industry policy in more of an inconsistent and ad hoc manner. For example, political pressures following unusual or unexpected events in the United States led to loan guarantees for Lockheed and Chrysler in the 1970s, the closing of savings and loan companies after the crisis in that business sector in 1989, and cash assistance and loan guarantees for the [Page 1124]airline industry after attacks on the World Trade Center and Washington, D.C., in 2001.

Issues involving industrial policy have been investigated using tools from econometrics as well as from academic specialties such as sustainable development, technological change, political science, international relations, and others. Early studies of government interventions targeting selected industries or sectors, particularly within command economies employing central planning, did not generally support the effectiveness of these forms of industry policy. The rapid economic development and success of certain East Asian countries in the 1970s and 1980s fueled studies of their individual patterns of investment in selective industries, along with their macroeconomic policies and various government/business/society relationships. It was thought that much more sophisticated planning and careful execution of industrial policy might prove beneficial for both more advanced and emerging national economies.

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