Does industrial policy actually work?

The crux of the debate about the costs and benefits of economic globalization centers around how to interpret the East Asian miracle. To advocates of economic liberalization (Xavier Sala-i-Martin, Martin Wolf, Surjit Bhalla, Brink Lindsey), the success of the Pacific Rim is due to the focus on export promotion, and the 1997-99 crisis the fault ...

By , a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast.

The crux of the debate about the costs and benefits of economic globalization centers around how to interpret the East Asian miracle. To advocates of economic liberalization (Xavier Sala-i-Martin, Martin Wolf, Surjit Bhalla, Brink Lindsey), the success of the Pacific Rim is due to the focus on export promotion, and the 1997-99 crisis the fault of crony capitalism coming home to roost. To skeptics of economic liberalization (Dani Rodrik, Joseph Stiglitz, Robert Wade), the success of the Pacific Rim is due to the selective protectionism and smart industrial policies pursued by the relevant states, and the 1997-99 crisis the fault of financial liberalization coming home to roost. With this set-up, Marcus Noland has an Institute for International Economics working paper on whether South Korea's industrial policy was actually "effective." Here's the abstract:

The crux of the debate about the costs and benefits of economic globalization centers around how to interpret the East Asian miracle. To advocates of economic liberalization (Xavier Sala-i-Martin, Martin Wolf, Surjit Bhalla, Brink Lindsey), the success of the Pacific Rim is due to the focus on export promotion, and the 1997-99 crisis the fault of crony capitalism coming home to roost. To skeptics of economic liberalization (Dani Rodrik, Joseph Stiglitz, Robert Wade), the success of the Pacific Rim is due to the selective protectionism and smart industrial policies pursued by the relevant states, and the 1997-99 crisis the fault of financial liberalization coming home to roost. With this set-up, Marcus Noland has an Institute for International Economics working paper on whether South Korea’s industrial policy was actually “effective.” Here’s the abstract:

This paper attempts to determine whether conditions amenable to successful selective interventions to capture cross-industry externalities are likely to be fulfilled in practice. Three criteria are proposed for good candidates for industrial promotion: that they have strong interindustry links to the rest of the economy, that they lead the rest of the economy in a causal sense, and that they be characterized by a high share of industry-specific innovations in output growth. According to these criteria, likely candidates for successful intervention are identified in the Korean data. It is found that, with one exception, none of the sectors promoted by the heavy and chemical industry (HCI) policy fulfills all three criteria.

Before everyone jumps up and down, bear the paper’s closing paragraph in mind:

The calculations made in this paper are admittedly quite crude, and they should not be considered a test of the theoretical arguments in favor of selective intervention. Indeed, even accepting the argument put forward in this paper, one could quarrel with the specific statistical results for the reasons cited above. But beyond these questions of econometric technique, it is certainly correct to argue that the level of industry aggregation (imposed by data availability constraints) is far too high and that both the underlying externalities and the forms of intervention may be far more subtle than the relations modeled in this exercise. Nonetheless, this approach may provide a useful starting point for identifying potential candidates for industrial promotion.

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner

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