The Role of Industrial Policy

In recent decades the dominant view has been that governments should limit themselves to removing obstacles to industrial development and correcting market failures. They should not favour specific manufacturing activities or should not obstruct the growth of others. However, structural change in a global economy requires complex strategic choices, and markets can, unaided, neither save the environment nor easily coordinate interrelated investments. Successful industrial development cannot be based on the decisions of individual entrepreneurs alone. Achieving sustainable prosperity for all requires a broad consensus about development objectives. The view has been gaining ground that governments can play a more pro-active role through deliberate industrial policies, understood as a ‘discovery process’ where entrepreneurs, governments and other relevant stakeholders jointly assess costs and opportunities and engage in strategic coordination to select best options for industrial development and diversification. This type of industrial policy is radically different from industrial policies in the past which imposed the industrial priorities of a country top-down; that is, this type of industrial policy is interactive. The best options for industrial development are explored jointly, decisions are made after intensive consultation, selective interventions are made to stimulate specific or new sectors and the process is an open-ended one: as conditions change, policies are adapted. This requires institutionalized, sustained cooperation among the key actors. To be effective, the approach must be a strategic one, focussing on the long-term positioning of a country’s manufacturing sector in the global economy.