Markets and Business
Picking Winners? How Governments Shape the Economy Through Industrial Policy
What It Is and How It Works
Is it the same if a nation exports oil or to produce electric vehicles? Does cultivating wheat have the same long-term return as producing microchips? Does it matter to extract lithium instead of to network lithium batteries, or export peanuts instead of peanut butter?
Industrial policy means government intervention to alter the productive structure of a nation (so pretty much what it will produce). The concept is to actively promote specific strategic industries that hold significance for economic development, technological advancement, or national autonomy. They may be clean energy, high-tech manufacturing, or integration into global supply chains.
Industrial policy is back globally after decades of unfashionability in mainstream economics. It is now at the heart of debates on how to respond to climate change, geopolitical rivalry, and economic inequality.
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The Policy’s Impact
The main goal of industrial policy is to shape the economy’s structure, not just let the market decide. This means promoting sectors that are considered important due to their ability to spread technology, create jobs, or secure control over key resources. Tools for doing this include:
Tax exemptions or subsidies for exports and investment.
Public funding for research, training, or infrastructure.
Credit support for strategic industries.
Local content requirements for public contracts.
Government production in essential sectors.
These policies can boost a country’s competitiveness, both internally (by drawing resources to targeted sectors) and globally (by supporting exports). A successful industrial policy can build a more resilient, diversified economy and reduce dependence on imported goods or foreign capital.
But there are also real risks. Supporting some sectors over others means picking winners, which can lead to favouritism or lobbying. Powerful industries may influence decisions in their favour, regardless of what is best for the broader economy. International rules, such as those of the World Trade Organisation (WTO), often discourage these kinds of policies to preserve free-market competition.
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Stakeholders and Political Implications
Many actors usually shape industrial policy decisions: governments, companies, unions, and sometimes foreign interests. Since any sector would prefer to receive subsidies or protections, these policies often involve strong lobbying and political negotiation.
This kind of government intervention is controversial. Some see it as smart economic planning, while others see it as interference in market dynamics. For developing countries, it can be a tool for catching up. For developed countries, it may be a way to lead global transitions, like the shift to green energy.
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Some Debates Among Economists
At the heart of the debate is the question of efficiency versus development. Some economists argue that letting each country focus on what it naturally does best leads to the most efficient outcomes. Others point out that the world’s most developed countries built their industries with strong state support. They argue that it is unfair for these same countries to now oppose industrial policy in poorer nations.
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Real World Examples
Saving the Steel Industry by Decarbonizing It (2023): In the United States, industrial policy modernizes and decarbonizes the steel sector. Public investment and regulation aim to make the industry cleaner while maintaining production and jobs.