This is a thinking out loud piece. I’ve been working on several projects recently around market making.1 It’s been a lot fun and has provided professional cover to indulge a longstanding, rather niche, definitely geeky, interest. And one of the big things making contemporary markets has been the return (?) / resurgence of industrial policy.2 As I’ve been spending a bit of time recently wrestling with the concept and how it manifests, I wanted to jot down some initial thoughts about varieties, mainly in an effort to help bring some clarity for myself.
Let me make it clear from the outset: this is not my area of expertise. I’m a tourist here writing up a travelogue in hopes of making sense of patterns I’m seeing. If you are an expert, set me straight! Despite the fact that that I left academia nearly two decades ago I still get skittish wandering into areas very clearly not my own, so consider this foray personal growth.
Three varieties of industrial policy
From my incomplete, bottom-up review - sorry, “grounded theory approach” - of industrial policy I’ve devised a three-part working topology. For my purposes, I’ve excluded agricultural policies. Hairsplitting I know, but I’m trying to fight my lumping tendencies and agree a split between agriculture and industry despite there being little distance between them these days. My typology splits - unsatisfactorily, if I’m honest - along the lines of means. That is, what are the state’s objective with these policies.
1. State-led industrialization
This is classic industrial policy territory. The state makes bets on key industries and supports them via direct aid, tariffs, co-ownership, etc. This is old, maybe as old as states and markets themselves. Limiting myself to the post-WWII, American-led global economy, there are several examples of these sorts of policy initiatives. On the “not-so-successful-and-therefore-ammunition-for-economists” side we have UK state in 1960s and 70s.3 With its direct support of specific industries, tight ties to unions, and active involvement in production planning, it was highly interventionist.4
On the other side of the coin are the so-called “Asian Tigers”. The governments of South Korea, Taiwan, and Singapore all actively intervened in their markets picking winners and showering them with aid. And it was hugely successful. In line with the “Varieties of Capitalism” approach, these states fall into the “market coordinated” camp. In contrast to the UK (of the 1960s), these economies allowed for greater industrial consolidation across sectors with a bigger role for alternative organizational logics, like family-led conglomerates.
For my purposes here, state-led industrialization is an organizational logic where the state manages industrial activity to gain (or regain) industrial development.
2. Industrial policy as international reputational rehabilitation
To me, this feels new. It’s different on two fronts:
The focus is state-driven market making to achieve international ends above domestic ones.
The objective is to develop soft power via the projection of industrial prowess on the international stage.
Personified by Saudi Arabia, this is form of industrial policy that uses state power across market making activities to reposition the state on the international stage. The logic here is that in countries where the distinction between state and market is blurred, the state may use industrial policy as a tool of international relations. The Saudi’s have been making a full court press out of major, state-led investments across domains. They are major backers of Soft Bank and by extension the tech start-up ecology. They have been pressing into international sports via LIV Golf and English football. And if you’ve been to an airport, opened LinkedIn, or picked up a magazine recently you’ll no doubt be aware of their massive white elephants internal development projects such as NEOM.
All of these activities are clearly using state aid to reposition the country internationally as something more than an oppressive petro-state.
3. Industrial policy as international relations and domestic workaround
The third variety is what’s happening in the US. With big policies such CHIPS and Science Act and the Inflation Reduction Act, the Biden administration has driven the final nail (I hope) in America’s love affair with markets uber alles, internationally at least, while shoring up domestic capacity (and maybe launching greater international competition). But its the weird set of dynamics shaping current industrial policy that leads me to the conclusion that it’s new. Two primary goals appear to be animating current efforts.
Ensure America’s international security - including the flow of goods - in light of geo-political shifts to the global commercial context it spent 40+ years developing. Cooling relations with an increasingly revanchist China has spurred the US to re-evaluate it’s position on global comparative advantage.
Reinforce and rebalance America’s domestic economy. The same global system that drove China’s rise was, at least partially, responsible for the hollowing out of much of America’s industrial capacity while driving eye-watering levels of inequality.
Given the <ahem> constraints of federal policy making in the current environment it’s a pretty bold (some may call it dogs-dinner-like) approach to killing two birds with one stone with one eye covered and one hand tied behind your back. The Roosevelt Institute has published a lot of great stuff on the approach and I’ll admit that, especially given constraints, I’m a fan.
So what…
For decades industrial policy, especially in the US, has been a dirty word. It’s sudden resurgence, domestically and internationally, has spawned a flurry of activity to make sense of what’s happening and what it may mean. For my own purposes, it’s been a powerful catalyst for market making opening and closing opportunities and shifting logics. This initial effort at a classification is part of my wider efforts to make sense of how commerce will work over the next decade. Industrial policy as statecraft will amplify the rewiring of globalization currently underway and most likely increase weaponized interdependence. And, despite my efforts to avoid hyperbole, will be one of the big animating forces shifting commerce over the next decade.
Feels good to get this out of my head. Would love to know what you think. Does this typology work? Is any of it actually new? What have I missed?
Comments on a post card (well, in the comments section), please.
<shameless plug> Just recently put one in the public domain. Check it out!
State aid in the form of subsidies could certainly be argued to represent a form of industrial policy. So in many ways the policy that dare not mention its name has always been around despite the silence.
Ok, not industrialization per se, but definitely rebuilding an industrial society after near wipe out.