Inter trade

Gerardo De La Torre

What's Wrong with Industrial Policy

Governments should strive to create an environment that supports rising productivity, because modern competition depends on productivityand it determines the prosperity of any state or nation. Now on days, national and local governments have new roles to play. They must ensure the supply of high-quality inputs that could berepresented as physical infrastructure and skillful and capable employees. They must set the rules of competition, such as protecting intellectual property, in this way you can enhance productivity andinnovation. And Governments should also promote cluster formation and upgrading.

Governments should have a high-profile role in the initial stages, such as guiding the cluster mapping, and in the finalstages, such as leading public-private dialogues on policy and institutional bottlenecks that inhibit industry development and the business environment. The government may assume a lower profile duringintermediate stages, such as the analysis of firm-level competitiveness and market and product segmentation. However, the government should remain involved, because these analyses will help itunderstand industry bottlenecks, which can later inform policy and program formulations.

This roles for government are far away from industrial policy. In industrial policy, governments target attractiveindustries and intervene through subsidies or restrictions on investments by foreign companies, to favor local companies.

The main criticism against industrial policy arises from the concept ofgovernment failure. While industrial policy is seen not as harmful by itself, governments, especially in developing countries, often lack the required information and capabilities to successfully selectand promote sectors. Even though the East Asian Tigers provided successful examples of protectionist industrial policies, industrial policies such as import-substitution-industrialization has failed...