The Industrial Policy Renaissance
Industrial policy, once considered outdated, is staging a powerful comeback worldwide. Governments are increasingly intervening in their economies to promote specific industries and technologies, marking a significant shift from the free-market ideologies that dominated recent decades.
This trend is particularly pronounced in the US where the Biden administration has enthusiastically embraced industrial policy. China, under Xi Jinping's leadership, is also doubling down on state-directed economic strategies. The International Monetary Fund (IMF) reported a notable surge in industrial policy mentions across business publications over the last decade, signalling a resurgence of interest in government-led economic interventions worldwide. Moreover, the National Bureau of Economic Research noted a steep rise in industrial policy interventions globally, from 228 in 2017 to 1,568 in 2022.
Proponents argue that industrial policy can address market failures, promote innovation, and enhance national security. However, critics warn of potential pitfalls, including government failures, resource misallocation, and international retaliation.
The motivations behind this resurgence are multifaceted. The COVID-19 pandemic exposed vulnerabilities in global supply chains, whilst geopolitical tensions and climate change concerns have heightened focus on economic security and technological leadership. In the US, bipartisan support has coalesced around revitalising domestic manufacturing, countering China's economic influence, and prioritising national interests over international trade rules.
Recent industrial policy measures have targeted sectors such as semiconductors, clean energy technologies, and critical minerals. Whilst some initiatives aim to address clear market failures or externalities, others appear driven more by political considerations or special interests.
The international ramifications of this trend are significant. As major economies pursue aggressive industrial policies, the risk of trade disputes and retaliatory measures increases. This could potentially undermine the global trading system and exacerbate economic fragmentation.
Economists and policymakers face the challenge of designing industrial policies that effectively target specific problems whilst minimising negative side effects on international cooperation and economic performance. The IMF emphasises the need for careful cost-benefit analysis and adherence to competition-enhancing principles.
As the world navigates this new era of state intervention, striking a balance between domestic priorities and international cooperation will be crucial. The shift towards more activist industrial policies represents a fundamental change in economic thinking, with far-reaching implications for global trade, innovation, and economic growth.
The success or failure of these new industrial policy initiatives will likely shape the economic landscape for years to come, influencing everything from technological innovation to geopolitical relations. As governments around the world embrace a more hands-on approach to economic development, the global economy enters uncharted territory, fraught with both opportunities and risks.
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