Economists have reason to give industrial policy another chance
economic activity. For example, the disruption to French imports during the Napoleonic blockade stimulated French industrialization in mechanized cotton spinning long after the end of the Napoleonic wars. These results are consistent with what proponents of nurturing infant industries argue.
Studies of recent public programmes to subsidize investment in lagging regions of Britain and Italy have similarly found strong positive effects on employment creation. While these studies cannot provide a definitive answer to whether industrial policy works in general, they are informative about the prevalence of the market failures targeted by the policy and about the policy’s long-term effects. Newer studies also shed light on the controversy over the contribution of industrial policy to East Asia’s economic miracle.
The early economic literature on its rise had argued that industrial policies were at best ineffective. Newer analyses paying closer attention to the structure of upstream and downstream linkages in these economies reach considerably more sanguine conclusions. To cite an example, studies of South Korea’s Heavy-Chemical Industry Drive (HCI), an industrial policy pursued by President Park Chung-hee in the 1970s, found that the policy promoted the growth of targeted industries, both in the short and long run.
HCI’s effects on productivity and export performance were both positive. Critics of East Asian policies thought governments could never pick the right sectors because they lacked information on where market failures were more prominent. Princeton economist Ernest Liu recently provided a useful guide for policymakers confronting an economy where market imperfections occur across multiple, linked sectors.
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