Costs and Benefits

The August 7 U.S. print edition of The Economist magazine carried a Briefing on “the global revival of industrial policy” (online version here).  The journal’s somewhat alarmist coverage of the resurgence of industrial policy actually begins with the print edition’s first opinion leader, titled “Leviathan Inc” and sub-titled: “Governments seem to have forgotten that picking industrial winners nearly always fails.”  At one point in the briefing, the magazine coolly observes that there are a couple of versions of industrial policy but that “neither tack has met with much success.  Governments rarely evaluate the costs and benefits properly.”

Critiques of industrial policy are a dime a dozen, and The Economist stuffs its briefing with many examples.  But one could just as well ask whether the magazine itself has really evaluated the costs and benefits properly.  The problem with the standard assault on industrial policy is that the truism that governments are inept at industrialization has to be balanced by another truism: development seems to always involve a heavy dose of government intervention in markets.  The need to wrangle with these two truisms is, somewhat surprisingly, even endorsed by the World Bank’s Chief Economist in a recent paper:

Active economic policies by developing countries’

governments to promote growth and industrialization

have generally been viewed with suspicion by economists,

and for good reasons: past experiences show that such

policies have too often failed to achieve their stated

objectives. But the historical record also indicates that

in all successful economies, the state has always played

an important role in facilitating structural change and

helping the private sector sustain it across time.

If government intervention is associated with successful cases of development, as the Bank claims, objective analysis demands some kind of explanation.  Allowing for a few examples of government success airbrushed against a dark sea of government failures, as The Economist briefing does, is fair enough stuff for ideological back-stiffening, but falls short of a satisfying account of the costs and benefits of industrial policy.

The key question is not really whether to intervene, which is, at any rate, a temptation governments seem unable to resist, but how. Caution is certainly warranted here, as the determinants of successful intervention are still too poorly understood to be useful for very specific prescriptions.  The name of the game at this historical moment, however, is to survey the evidence, search for common patterns that can inform prescription, and attempt to assess the costs and benefits of intervention.  That is what the Bank paper is groping toward, as well as a number of other proposals from economists like Dani Rodrik.  We’ll take a look at what they are saying in the next post.

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