Defining industrial policy – not as easy as it seems

When reviewing my collection of literature on the subject of industrial policy in search of a definition, it quickly dawned on me on how complicated this simple question was. More than likely, I will have to revisit this topic in a future post. But here goes nothing…

After reviewing about a dozen or so sources, it seems like they could be grouped into a few categories:

  1. Highly simplified definitions;
  2. Broad definitions that choose to focus on particular activities/actions for the sake of simplicity; and
  3. Nuanced, robust, and complicated definitions (spoiler alert – I prefer these).

While Dani Rodrik is perhaps the academic most associated with industrial policy (?), in a 2008 paper, he uses quite a terse definition:

“Policies that stimulate specific economic activities and promote structural change.”

Well that is a start.

Equally terse is this one from the IMF from 2017.

“This departmental paper sets out a conceptual framework to analyze industrial policy, defined as targeted sectoral interventions.”

Definitely ranking in the middle category that I’ve outlined is from this Carnegie Endowment paper.

“For the purpose of this short note, industrial policy is defined as government intervention in a specific sector which is designed to boost the growth prospects of that sector and to promote development of the wider economy. I exclude (emphasis added) from this definition horizontal policies, such as investment in education, reinforcement of the rule of law and property rights, and so on, even though these horizontal policies can affect different sectors differently and so can be part of an industrial policy. I do so for the sake of brevity and because the importance of horizontal policies is widely understood, and there is much less controversy surrounding them than around sectoral interventions. To sharpen the focus further, I also exclude interventions at the sectoral level which aim to achieve other objectives than growth and employment, such as improving environmental and safety standards, as these interventions aim to correct well-recognized market failures and are also relatively uncontroversial.”

So now we’re getting somewhere. As opposed to sectoral interventions identified in the first two quotes, here we see some existential debates about industrial policy. Unfortunately, while the author sees the debate, the answer is to chop off the parts that are contentious, and focus on the easy/non-controversial aspects: sectors, growth, economy. Helpful to some extent, but again missing the point I think.

Honourable mention goes to the OECD and the work of Warwick, who had several interesting papers on industrial policy in the mid 2010s. Here’s a nice quote from this paper:

“A broad definition is ‘any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity towards sectors, technologies or tasks that are expected to offer better prospects for economic growth or social welfare than would occur in the absence of such interventions.”

There’s a lot there, but I think one word is critical – any. This begins to open the door to myriad possibilities. What does any mean? Social policies? Labour policies? Health policies? Education policies? Environmental policies? This goes further than the Carnegie quote by not wishing away the complexities of industrial policy.

But from the papers I’ve assembled over the years, these series of excerpts are the winners for me.

  • In other studies, we ourselves define industrial policies as broadly as ‘any programs of government that relate directly to the economic activity of one or more of a nation’s regions, industries, firms, or plants.’
  • However broadly or narrowly the definitional net is cast, many subclassifications of industrial policy are possible. For example, they can be classified as ‘interventionist’ or ‘noninterventionist.’ Noninterventionist policies can be divided into general macroeconomic policies and general structural policies (such as free trade and competition policy). Interventionist policies, to which most attention has been directed, particularly by those who want to develop an industrial strategy, can be divided into general industrial policies, industry-specific policies, regional policies, and firm-specific policies; they can also be divided into those that promote growth, those that protect against change or decline, and those that assist adjustment (the reallocation of resources away from declining industries). Policies can also be divided in terms of the policy instruments employed: regulations, subsidies, tariff protection, nontariff barriers, procurement policy, government ownership, tax incentives, and so on.
  • Almost every public policy affecting business – particularly, those policies intended to promote, defend, or assist specific industries – falls within the ambit ’industrial policy,’ in the end everyone defines the term to suit his or her own purposes.
  • (Industrial policy is) broadly as a set of policies affecting industrial structure. Such policies may operate at the level of the whole economy, of an industry, or of firms. They may be aimed at choosing and backing winners, at saving losers or helping them to adjust, or at providing an appropriate environment for economic forces to determine the outcome.

“Industrial Policy In Ontario,” Richard M. Bird, Ontario Economic Council, 1985.

Perhaps it’s a bit unfair to cite so much from one paper compared to the others. That being said, Bird was shrewd enough to explore the definition more thoroughly than most. Key ideas he introduces include:

  • The existence of subclassifications, in this case, noninterventionist vs. interventionist industrial policies;
  • The idea that industrial policy can be broad, involving almost any public policy; and
  • The scope of analysis/intervention can be to the firm, the industry, or the entire economy.

With Bird’s highly robust and nuanced definition in mind, I can start to map out a definition for this blog that can be applied to evaluate industrial policies. More to come on that!

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