Waylaid Dialectic

April 19, 2010

Industrial Policy

Filed under: Governance,Trade — terence @ 10:48 am
Tags: ,

I missed this when it came out, but well worth a read – Dani Rodrik at Project Syndicate on Industrial Policy.

I’m persuaded: good industrial policy aids economic development; it may even be essential (can you name any country which has developed without something resembling IP?*)

As for what ‘good’ means when it comes to industrial policy, Rodrik provides a handy how to:

First, industrial policy is a state of mind rather than a list of specific policies. Its successful practitioners understand that it is more important to create a climate of collaboration between government and the private sector than to provide financial incentives. Through deliberation councils, supplier development forums, investment advisory councils, sectoral round-tables, or private-public venture funds, collaboration aims to elicit information about investment opportunities and bottlenecks. This requires a government that is “embedded” in the private sector, but not in bed with it.

Second, industrial policy needs to rely on both carrots and sticks. Given its risks and the gap between its social and private benefits, innovation requires rents – returns above what competitive markets provide. That is why all countries have a patent system. But open-ended incentives have their own costs: they can raise consumer prices and bottle up resources in unproductive activities. That is why patents expire. The same principle needs to apply to all government efforts to spawn new industries. Government incentives need to be temporary and based on performance.

Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives. To guard against abuse and capture, industrial policy needs be carried out in a transparent and accountable manner, and its processes must be open to new entrants as well as incumbents.

Excellent advice. Or, at least, excellent advise for Sweden or any other part of the reasonably well governed world. The trouble is the developing countries of our planet don’t have governments like Sweden – think low capacity bureaucracies, corruption, clientelism, unstable polities. And the real question – the real curly question – is how do you get good industrial policy from a bad government? And, in the absence of this, is bad industrial policy better than nothing?

* Hong Kong maybe. But they hardly count given their circumstances and given their ‘policy’ of permitting flagrant violations of intellectual property rights.

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