Industrial policy

Should governments try to shape which industries a country builds, or leave it to the market? Industrial policy is the contested attempt to do the former.

Industrial policy is deliberate government action intended to shape the structure and development of a country's industries, favouring particular sectors, technologies, or firms thought to be strategically important. It ranges from subsidies, tariffs, and public research funding to state direction of credit and the creation of national champions.

The case for it

Advocates argue that markets alone may underinvest in industries with large spillovers, steep learning curves, or strategic value, and that targeted support can help a country build capabilities it would not otherwise develop. They point to the rapid industrialisation of several East Asian economies, where active state direction coincided with extraordinary growth, as evidence that well-designed industrial policy can accelerate development and move a country up the value chain.

The case against it

Critics counter that governments are poor at picking winners, lacking the knowledge and the discipline that competitive markets provide. Industrial policy, they argue, invites capture by politically connected industries, props up inefficient firms, and substitutes the judgement of officials for the signals of the market, often wasting resources on favoured sectors that never become competitive. For every celebrated success there are costly failures where subsidies sustained industries that should have been allowed to fail.

The revival and the conditions

Long out of fashion, industrial policy has returned to prominence, driven by concerns about supply chains, strategic technologies, climate, and rivalry between major powers. The more careful modern view is less about whether to have industrial policy, since governments shape industries whether they intend to or not, than about how to do it well: with clear objectives, sunset clauses, exposure to competition and export discipline, and mechanisms to cut losses rather than entrench failures.

Industrial policy sits at one of the enduring fault lines in economics, between faith in markets and belief in purposeful state action. The evidence is genuinely mixed, which is why the honest debate has shifted from the ideological question of whether to the practical and difficult question of how.