Political processes matter much for industrial policy to succeed
Mint Mumbai|October 16, 2023
The rationale for economic interventionism has grown but uncertainty over how well it is targeted still deters from its use
BARRY EICHENGREEN
Political processes matter much for industrial policy to succeed

Industrial policy is back. It is back with a vengeance in the United States, where for decades the dominant ideology and policy minimized government efforts to influence the structure of the economy. Now, in contrast, we have the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act, all with significant industrial-policy components.

And what happens in the US doesn’t stay in the US. Other countries, similarly seeking to preserve and enhance their industrial bases, have responded with comparable measures. The question is whether the return of such government-led efforts should be welcomed.

Industrial policy has a long history, extending back to Alexander Hamilton, America’s first Treasury secretary, and his Report on Manufactures (1791), if not even further back to Jean-Baptiste Colbert, first minister under King Louis XIV in the 1660s. By the end of the 20th century, however, industrial policy had fallen out of favour. Simple models of the market economy provided no rationale for selective government intervention to promote specific industries in particular places.

Evidence supporting the efficacy of industrial policies was weak. Offering tax breaks and tariffs, it was observed, opened the door to rent seeking, leading to dissipation of resources and the extension of subsidies to inefficient, undeserving producers.

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