"The Return of Industrial Policy"

Dani Rodrik welcomes the "shift toward embracing industrial policy":

The Return of Industrial Policy, by Dani Rodrik, Commentary, Project Syndicate: British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right.

Industrial policy is back.

In fact, industrial policy never went out of fashion. Economists enamored of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation.

China is a case in point. Its phenomenal manufacturing prowess rests in large part on public assistance to new industries. ... Chile, which is often portrayed as a free-market paradise, is another example. The government has played a crucial role in developing every significant new export that the country produces. ...

But when it comes to industrial policy, it is the United States that takes the cake. This is ironic, because the term “industrial policy” is anathema in American political discourse.  It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs. Yet ... the US federal government is the world’s biggest venture capitalist by far. ...

The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known:... scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath.

The real question about industrial policy is not whether it should be practiced, but how. Here are three important principles to keep in mind.

First, industrial policy is a state of mind rather than a list of specific policies. ... Second, industrial policy needs to rely on both carrots and sticks. ... Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives. ...

The standard rap against industrial policy is that governments cannot pick winners. Of course they can’t, but that is largely irrelevant. What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go – a much less demanding requirement. ...

Thomas Watson, the founder of IBM, once said, “If you want to succeed, raise your error rate.” A government that makes no mistakes when promoting industry is one that makes the bigger mistake of not trying hard enough.