Industrial Policy Roars Back

Broadly speaking, industrial policy refers to efforts by a state to promote economic transformation, such as by shifting from lower to higher value activities between or within sectors.

Pack and Saggi (2006) in their work titled “Is There a Case for Industrial Policy? A Critical Survey”, define industrial policy as “any type of selective government intervention or policy that attempts to alter the structure of production in favour of sectors [or activities] that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention…”.

In the 1980s, under the Reagan-Thatcher (United States-United Kingdom) axis and the emergence of the Washington Consensus, the conventional wisdom was that picking economic winners, as industrial policy implied, went against the dominant free market principles at the time. Prior to this period, leading economic thinkers, such as the Caribbean’s very own Sir
Arthur Lewis, championed approaches built on incentivising foreign capital as a means of overcoming limitations to industrial development in developing economies.

At the meeting of the World Economic Forum in Davos, Switzerland, in January this year, industrial policy was a major topic. In practice, a growing number of countries are also putting measures in place to either support certain industries or establish new ones.

Earlier this week, the Government of Barbados presented its 2023 budget which contained several measures aimed at industrial development. For example, 15.3 million Barbados Dollars have been allocated for a new tissue culture laboratory to help boost food production. A further 30 million Barbados Dollars have also been earmarked for the development of a Light Industrial Park.

In the United States, the Biden administration’s CHIPS and Science Act has committed 280 billion United Stated Dollars (USD) for the expansion of the nation’s semiconductor industry in order to reduce America’s dependence on China and ensure its technological supremacy.

Furthermore, the Biden administration’s Inflation Reduction Act (IRA) contains $370 billion USD in energy-transition subsidies to help the United States (US) move to a low carbon economy through massive investments in renewable and alternative sources of energy.

For its part, the European Union (EU) is in the process of rolling out its multi-billion-dollar European Green Deal. This is intended to help its member states invest in clean-energy projects as part of their transition to low carbon economies.

Since the last industrial revolution, there are very few countries which have managed to attain high levels of development without having undergone some form of successful industrialisation. Now that the world is on the cusp of a new industrial revolution, fuelled by digital and green industrialisation, the role of industrial policy takes on even greater significance.

A major challenge is that the vast majority of countries, principally in the developing world, do not have the luxury of adequate fiscal space or the possibility of quantitative easing (printing money) to successfully execute industrial policies. There is also a risk that countries with the resources, such as the US and EU Member States, could have such a significant lead time on other countries that it stifles the scope for those falling behind to ever close the gap.

With the leadership of the World Bank set to change in a few months, perhaps an early concession that developing countries can seek to lock-in is for more focused attention from the Bank on support for industrial policy in the developing world. Most developing countries are at a stage where their own limited resources are unlikely to be sufficient to encourage industrial transformation.

The funds earmarked by Barbados, for instance, pale in comparison to the resources at the disposal of the US and the EU. This is likely to be the case for the majority of other small developing states.

Overall, a robust industrial policy can play an important role in the context of productivity, innovation, quality jobs and the overall welfare of any state. Industrial policy is back in vogue!

Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.
Email: joelkmrichards@gmail.com