Updated thoughts on industrial policy

I’ve long been an industrial policy enthusiast. My favorite popular nonfiction book is Joe Studwell’s How Asia Works, a synthesis of decades of research about the economic miracles in Japan, South Korea, and Taiwan. I wrote a whole series of posts examining the successes and failures of various developing countries through the lens of Studwell’s ideas: There are a bunch of other good books and papers about industrial policy that I’d recommend if you’re interested in the topic. These include Alice Amsden’s Asia’s Next Giant (about South Korea), Robert Wade’s Governing the Market (about Taiwan), “The New Economics of Industrial Policy” by Juhász et al. (2023), and the papers of the Industrial Policy Research Group. Around the same time I discovered the industrial policy literature, the consensus was shifting within the big economic development agencies (the World Bank and the IMF). Whereas in previous decades, these organizations generally recommended against government meddling in the economy’s industrial structure, they’ve recently started to consider the kind of interventionist policies that Studwell recommends. In 2019, the IMF’s Reda Cherif and Fuad Hasanov wrote a paper called “The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy”. They conclude that a Studwellian approach, if executed competently, can help a developing country grow faster than it would from just letting the market take its course: We argue that the success of the Asian Miracles is based on three key principles that constitute “True Industrial Policy,” which we describe as Technology and Innovation Policy (TIP)…(i) state intervention to fix market failures that preclude the emergence of domestic producers in sophisticated industries early on, beyond the initial comparative advantage; (ii) export orientation, in contrast to the typical failed “industrial policy” of the 1960s–1970s, which was mostly import substitution industrialization (ISI); and (iii) the pursuit of fierce competition both abroad and domestically with strict accountability[.] I was happy to see this shift — not because I’m certain that this sort of industrial policy is the secret to growth, but because I think it deserves to be in the discussion. So I’m also happy to see the World Bank now following suit, with a new report (or “book”) by Ana Margarida Fernandes and Tristan Reed entitled “Industrial Policy for Development: Approaches In the 21st Century”. The authors argue that although classic policy recommendations — macroeconomic stability, education, health, infrastructure, etc. — are still good, industrial policy can often help when layered on top of those basics. I think it’s great to see the stigma about industrial policy going away. Not because this will lead to a wave of countries trying out such policies — that’s already happening — but because it’ll lead to more researchers taking the idea seriously. Dismissing the whole idea of industrial policy out of hand — as the World Bank and others did in the 1990s — is simply a policy of self-imposed ignorance. Countries need smart researchers to help them figure out which kind of industrial policies work and which don’t. But as general interest in the topic has grown, my thoughts on industrial policy have also become more nuanced. As I’ve read more and written more about the idea, and as I’ve watched current events unfold, my thinking has evolved beyond “This is an important idea that deserves to be taken seriously”. So I thought I’d write a post briefly summarizing that evolution. One thing I always try to specify when I talk about “industrial policy” is that this term can mean a ton of different things. Most people think of it as government promotion of specific industries — autos, or electronics, or maybe just manufacturing in general. Others see export promotion — which is more about where products are sold than about which products they are — as the key industrial policy. Some people see FDI promotion as industrial policy; others don’t. Even if we just focus on what you might call “classical” industrial policy — government promotion of specific industries — there’s a huge range of types of policies you might use. Protectionism — tariffs, import quotas, etc. — is often regarded as a tool for promoting manufacturing. That’s very different from export promotion. Direct government subsidies for favored industries are a common strategy — and one that’s on the rise throughout the world — but subsidies weren’t really used by many classic “industrial policy” success stories like Japan and Taiwan. It’s kind of crazy that this huge diversity of policies and goals coexists under one single buzzword. It makes conversations about the topic difficult if not outright impossible. When people yell at me that “industrial policy is bad” or “industrial policy always fails”, I have no idea whether they’re talking about protectionism, or industrial subsidies, or government intervention in general. If you read the IMF and World Bank papers on industrial policy, you can see that these distinctions really matter. The IMF paper explicitly contrasts export promotion with import substitution (protectionism), claiming that the former is very promising while the latter is usually bad. The World Bank report supports industrial parks and market-access assistance, while casting doubt on the effectiveness of subsidies and tariffs. In other words, even the people advocating industrial policy think that certain kinds are good and other kinds are bad. In 2012 or even 2018 it made sense to talk about “industrial policy” as a single thing, because it basically just meant that researchers and policymakers should take a look at a bunch of different ideas that had been beyond the pale of orthodoxy in previous decades. But now that researchers and policymakers have actively started to look into those ideas — and to implement them on a large scale — it no longer makes sense to talk about “industrial policy”. We need to be more specific. In my series of posts on developing-country industrialization, I found a subset of countries that had clearly succeeded with a very simple, seemingly replicable formula: promoting FDI in manufacturing. I singled out Poland and Malaysia as countries that got rich in recent years simply by encouraging multinational companies to put their factories and research centers there: Poland, especially, has succeeded amazingly using the FDI strategy. A lot of industrial policy enthusiasts — Ha-Joon Chang, for example — used to argue that developing countries should build their own domestic “national champions” instead of relying on foreign capital and know-how. That’s what Japan and Korea did, it’s true. But you’d probably be hard-pressed to name a Polish brand. And yet Poland’s economic performance since the end of communism has been absolutely stellar — it’s about to surpass Japan’s living standards, and is now even starting to catch up to Korea: Interestingly, FDI was also central to the development strategies of Singapore and Ireland — two of the richest countries on the planet. You’d also be hard-pressed to name a Singaporean or Irish brand. And China’s approach before the early 2010s — during its fastest era of growth — centered much more on FDI than on subsidies or on the promotion of national champions in general. When you look at poor countries that got rich since World War 2 by building national champions, the list is pretty short — there aren’t a lot of South Koreas out there. But the list of countries that got rich, or nearly rich, by promoting FDI is getting longer by the decade. So while I wouldn’t discount the Korea strategy, I’m leaning toward the idea that the Poland approach is a lot easier to get right. Why would it be easier to get rich through FDI than by building your own brands? I can think of a couple of reasons. For one thing, FDI is less risky — instead of having the government pick winners, you let multinationals try bui…