I'll consider the theories behind
Industrial Policy but keep in mind
there's also a video on the evidence
about Industrial Policy people use the
term Industrial Policy to mean a lot of
different things but for our purposes
just think of it as deliberate attempts
by governments to subsidize particular
industries and firms and pick winners
and losers in the process of economic
development
the first theoretical argument for
Industrial Policy relates to what are
sometimes called knowledge spill overs
and dynamic scale economies what does
this mean more concretely consider an
automobile industry if a country has a
successful automobile industry this may
require that industry to be a certain
size or scale and in this argument the
government by some mix of tariffs and/or
subsidies can help the automobile
industry grow to that size or scale
there's also the possibility that having
a successful automobile industry brings
knowledge spill overs for the rest of
your economy for instance as an economy
develops a successful manufacturing
capacity this may in the longer run help
the economy get good at making other and
different things a version of this
argument is quite all than it was
discussed extensively at least as early
as the 19th century and then it was
called the infant industry argument the
claim there is that certain industries
are in a sense like infants they need to
be fed they need to be coddled they need
to be helped and eventually they will
grow up and to be strong and healthy a
second argument for Industrial Policy
has to do with what are sometimes called
coordination failures so again let's go
back to our example of the automobile
industry it could be that to have a
successful automobile industry your
country also needs an auto parts
industry your country may also need a an
extensive rail network to ship the parts
from where the parts are made to the
automobile production plants and so on
but it could be possibly that maybe no
single private sector individual will
move first and build his part of the
network because he sees that the other
individuals are not investing so in this
argument there's at least potentially a
role for the government
to have a kind of big push or big move
forward and get everyone on board with
the idea that a particular sector is
going to grow and thus to help overcome
these potential coordination failures a
third theoretical argument has to do
with what are called informational
externalities again consider the
automobile industry and imagine a
developing nation which might have two
or three potential automobile producers
maybe the producer who goes first is the
one who discovers whether or not
automobile production can be successful
in that country but of course the one
who moves first also bears most of the
risk so the one who would move first
discovers information for a number of
different producers but you could
imagine a situation where each potential
producer is afraid to move first and
waits for someone else to take that
plunge or UWE believe some kind of
coordinating policy or subsidy might
help overcome this problem and help get
the nation onto a path where it has a
successful automobile industry
two of the major theoretical arguments
against industrial policy they're fairly
straightforward but they're also fairly
powerful the first we can call the
knowledge problem do individuals in a
government actually now which are the
economic sectors or firms which should
be encouraged after all these are
bureaucrats and they're not necessarily
in the best position to judge what will
be a successful entrepreneurial venture
there are plenty of examples where
governments have tried to encourage
particular sectors those sectors turned
out to be failures and it was a mistake
in the first place that the government
was to think that it was the one to know
which sectors really should be advanced
the second argument asks the simple
question will special interests corrupt
industrial policy so keep in mind
industrial policy is not generally some
kind of objective fact-finding exercise
run by perfectly honest angels in the
public interest industrial policy is run
by real imperfect self interested and
sometimes corrupt human beings and those
human beings respond to political
incentives they may be caught up in a
framework of autocracy they may be
catering to special interests and very
often industrial policy will be run in
the
wrists of particular corporations or
industrial sectors rather than the
nation as a whole if we're talking about
problems with industrial policy there
are also two particular tests to keep in
mind they're called the mill test and
the boss double test the mill test
requires that a protected sector
eventually can survive in a pretty tough
world of global competition once
government protection is taken away the
boss table test requires that well
Industrial Policy it may involve some
costs now in the form of industrial
protection but over time the benefits
for what you're doing have to outweigh
those current costs for industrial
policy to be a good idea
it actually has to pass usually both the
mill test and the boss table test at the
theoretical level two other questions to
keep in mind the first is tariffs versus
subsidies in practice a lot of
industrial policy consists of tariffs
tariffs keep out foreign goods and they
protect domestic firms but the logic of
a lot of industrial policy Theory
arguments actually implies subsidies
would be a better idea but what we get
in practice very often is tariffs rather
than subsidies and tariffs very often
are worse for domestic consumers then
subsidies would be the second question
is that even if you've decided that some
kind of industrial policy should be done
it doesn't have to mean either tariffs
or subsidies it could be that the real
policy which is called for is some kind
of promotion of foreign direct
investment and that could be through the
rule of law it could be through a
favorable regulatory environment it
could be through a low tax regime so the
arguments for industrial policy taken
alone do not themselves decide that you
would prefer tariffs or subsidies over
just having more foreign direct
investment this is a complex topic with
a lot of different angles and I would
stress that this video has only covered
a few for further reading I would
suggest starting with the two pieces
listed on this slide but keep in mind
that really quite a few of our other
videos very directly bear on this
question and if you view the other
videos on economic growth the section on
trade any talk of increasing returns and
also some of the
videos in the history of thought section
you'll get a deeper and more detailed
look at this question of what are the
theoretical arguments for Industrial
Policy