Industrial Policy: Picking Winners?

How governments try to promote particular industries through subsidies, tariffs and support, the arguments for and against, and its revival worldwide.

Industrial policy means government actions aimed at developing particular industries or sectors, rather than leaving their growth entirely to markets. After falling out of favour for several decades, it has made a major comeback.

Tools

Subsidies and tax breaks for favoured industries.
Tariffs to protect domestic producers.
Cheap credit from state banks.
Public research and infrastructure.
Requirements to use local components.

The case for

Supporters argue:

Infant industries need temporary protection to become competitive.
Spillovers: some industries, like semiconductors or clean energy, create knowledge and skills that benefit the whole economy but that private firms do not fully capture.
Coordination: new industries need many things at once, such as suppliers, skills and infrastructure, which markets may not coordinate.
Strategic reasons: security and supply chain resilience.

East Asian economies, including South Korea and Taiwan, used industrial policy extensively during their rapid growth.

The case against

Critics argue:

Governments cannot pick winners better than markets.
Capture: industries lobby for support whether or not they deserve it.
Waste: subsidies may flow to firms that would have invested anyway.
Retaliation: other countries may respond with their own subsidies or tariffs.

Latin America’s import substitution policies are often cited as industrial policy that went wrong.

The revival

In the 2020s, industrial policy returned strongly. The United States passed the CHIPS and Science Act and the Inflation Reduction Act in 2022, providing large subsidies for semiconductors and clean energy. The European Union and Japan launched similar efforts. India’s Production Linked Incentive schemes, launched from 2020, offer payments tied to increased production in sectors like electronics, pharmaceuticals and solar modules.

India's mobile phone push

Under the Production Linked Incentive scheme for mobile phones, manufacturers received incentives based on increases in production in India. Phone production and exports rose sharply, with India becoming a major smartphone exporter. Critics noted that much of the value came from imported components, raising questions about how much domestic value was being created.

Doing it well

Economists who support industrial policy emphasise clear goals, time limits, performance requirements such as export targets, competition among supported firms and willingness to end support that fails.

Thinking industrial policy is either always good or always bad

Industrial policy has produced both successes and costly failures. Its results depend on design, discipline and the capacity of governments to implement it well.

Key takeaways

Industrial policy uses subsidies, tariffs, credit and research to promote particular industries.
Supporters cite infant industries, spillovers and strategic needs.
Critics warn of waste, capture and poor picking of winners.
It has revived worldwide, including India's Production Linked Incentive schemes from 2020.