Normalizing Industrial Policy

Abstract

The theoretical case for industrial
 policy is a strong one. The market failures that industrial
 policies target in markets for credit, labor, products, and
 knowledge have long been at the core of what development
 economists study. The conventional case against industrial
 policy rests on practical difficulties with its
 implementation. Even though the issues could in principle be
 settled by empirical evidence, the evidence to date remains
 uninformative. Moreover, the conceptual difficulties
 involved in statistical inference in this area are so great
 that it is hard to see how statistical evidence could ever
 yield a convincing verdict. A review of industrial policy in
 three non-Asian settings El Salvador, Uruguay, and South
 Africa highlights the extensive amount of industrial policy
 that is already being carried out and frames the need for
 industrial policy in the specific circumstances of
 individual countries. The traditional informational and
 bureaucratic constraints on the exercise of industrial
 policy are not givens; they can be molded and rendered less
 binding through appropriate institutional design. Three key
 design attributes that industrial policy must possess are
 embeddedness, carrots-and-sticks, and accountability.