1 - Introduction: industry, economy andindustrial policy

Summary

The question of the government’s role in market societies has loomed large since at least Adam Smith’s day. There is a wide political and academic consensus today that well-designed economic policies delivered by the state or its agents can increase the well-being of societies through higher growth rates and greater efficiency. However, it is not always clear what these policies are, or should be, and how they can be put into effect.

This book explores some of these economic and policy questions through an examination of one particular strand of economic policymaking known as “industrial policy”. Industrial policy is a distinct policy domain which includes a wide range of measures aimed at developing productive and technological capabilities in industry and related sectors, building and supporting new industries, and increasing the productivity and competitiveness of the economy generally.

Industrial policies are separate from macroeconomic policy, which is concerned with the broad balance and direction of whole economies through tools like interest rates. But they are not necessarily synonymous with microeconomic policies either, as they can be directed at altering the structure of the productive sector of the economy by nudging domestic industries towards certain activities and developing broad attributes, such as higher productivity or greater R&D intensity.

Depending on circumstances, the objectives of industrial policy can include export promotion, development of linkages between firms in an industry and support for upstream technology development. Policy tools for achieving these objectives can include infrastructure spending, tax incentives for R&D, creation of intermediary institutions such as institutes for applied technology, vocational training programmes focused on high-technology, and direct intervention to protect or promote specific industries and even individual firms.

Done successfully, industrial policy can have a significant effect on economic well-being. Britain, the industrial pioneer, used industrial policies to nurture and guide its nascent manufacturing industries from the mid-eighteenth century (contrary to persistent myths that its industrial take-off was an entirely free-market affair; see Figure 1.1). South Korea went from being one of the world’s poorest countries in the 1950s to an advanced industrial nation in little more than 30 years through judicious use of industrial policy to develop its economy through planned, export-led growth.