In an attempt to clean out my Inbox before my trip to the U.S., I stumbled upon a Dani Rodrik article from April that somehow never managed to crawl its way out of the gravity sink that is my RSS reader. In light of some recent posts, particularly this one on clean energy, and this one on Jim McGregor’s call for a new U.S. policy towards China, it’s still quite relevant.

Check out the post on clean energy for a very brief description of what industrial policy is. Rodrik’s column makes the point that industrial policy is being revitalized in several countries, such as the UK and France, in addition to places like China.¹

Here’s Rodrik’s main point:

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. State-owned enterprises have acted as incubators for technical skills and managerial talent. Local-content requirements have spawned productive supplier industries in automotive and electronics products. Generous export incentives have helped firms break into competitive global markets.

No question about it. I’ve been making two points recently on this subject: first, that China has had an industrial policy since 1949 that is therefore not “new,” despite a more aggressive recent approach; and second, that foreign investors should neither be surprised nor complacent when they compete in the China market as a result.

What I like about Rodrik’s article is his gentle pushback against the Washington Consensus orthodoxy that likens industrial policy to the worst excesses of Communist dogma. While there is a strict economic argument to make about government involvement in the economy, the most vocal critic, the U.S., comes to the table with unclean hands, or at the very least guilty of a good measure of hypocrisy:

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 owes much of its innovative prowess to government support. As Harvard Business School professor Josh Lerner explains in his book Boulevard of Broken Dreams, US Department of Defense contracts played a crucial role in accelerating the early growth of Silicon Valley. The Internet, possibly the most significant innovation of our time, grew out of a Defense Department project initiated in 1969.

Examples are everywhere, but it’s hard to beat defense spending in general, and the Internet specifically. One of the many fun things about American politics, though, is that one is allowed to call the bailout of General Motors “socialism,” but huge subsidies to the aerospace industry is “national security” and therefore sacrosanct.

Rodrik’s point is that since many nations, including the U.S. and China, have robust industrial policies, it makes more sense to discuss how such strategies should be developed and implemented as opposed to whether they should, or should not, exist. A dose of reality — I like it.
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1. This was before the recent UK elections. One expects that the new government there might have something to say about industrial policy.[↩]

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