Academic journal article Journal of Australian Political Economy

Industrial Policy: A Survey of Institutional Challenges

Academic journal article Journal of Australian Political Economy

Industrial Policy: A Survey of Institutional Challenges

Article excerpt

Industrial policy can be defined as the government's use of its authority and resources to foster industry development, to intervene with private sector weaknesses or to create growth in selected areas (Okimoto, 1989:8; Pack & Saggy 2006: 2). Policy instruments range from subsidies, cheap financing, export incentives and tax breaks, to trade protection, and state-sponsored innovation R&D, among others. The use of these industrial policies defies the neoliberal orthodoxy which prescribes free markets, relegates the state to a regulatory role, and claims that state intervention would be derailed by selfish interests (Stein, 2012:421-440; Cudworth, 2007:243-245).

The rapid industrialisation and economic growth of countries such as Japan, South Korea, and Taiwan after World War II have been associated to a certain degree with industrial policies (Johnson, 1982; Okimoto, 1989; Rodrik, 2007; Wade, 2004). Admittedly, industrial policies have yielded disappointing or uneven outcomes in other places, such as countries in Latin America, and Asian-Pacific countries such as India and the Philippines (Bell 2002; Wade, 2010:156; Rodrik, 2007:106). In Australia, as elsewhere, the experience of industrial policy has been controversial: over much of the twentieth century industrial policies eased balance of payment problems and generated significant employment, yet ultimately low productivity and weak competitiveness endangered the sustainability of state-supported industries (Conley and van Acker 2011). This variety of experiences has generated scrutiny into the challenges facing the effective implementation of industrial policy.

A compelling argument in the literature comes from the synthesis of Evans and Rodrik's work, which holds that the main challenge facing industrial policy is the need to create institutions which balance (a) the bureaucracy's authority to implement merit-based policies underpinned by accountability with (b) the embeddedness of the bureaucracy in public-private linkages which provide useful information to bureaucratic decision-making (Evans, 1995; Rodrik, 2004, 2007). Complementing this high-level argument, the literature has also yielded numerous specific findings with relevance to institutional challenges facing industrial policy.

This article is written in the belief that the accumulated knowledge arising from political economic research on these issues must be made more accessible to policymakers and non-academic audiences. This survey collates numerous insights in the literature and weaves them into five major themes. These include: difficulties in establishing bureaucratic authority; the threat of external interference; problems of accountability and institutional design; unfavourable socio-cultural or historical preconditions; and incompatible political economic structures. Many of the examples are drawn from Asia-Pacific but examples from other countries are cited where relevant. The intention is to provide a concise overview of the institutional hurdles facing effective industrial policy. Policy makers need to be aware of these pitfalls so that they can seek to overcome them. The next section of the article presents the rationale for industrial policy and describes key institutional characteristics.

Industrial Policy: Rationale and Key Characteristics

The myriad arguments supporting industrial policy can be summarised as follows. First, mounting empirical evidence indicates that industry diversification is associated with economic growth for most developing countries (Imbs and Wacziarg, 2003; Rodrik, 2007:103), rather than static specialisation based on the free-market view of comparative advantage. Successful industrialisers, such as Japan and South Korea, actively used industrial policy to discover potential growth sectors (Hausmann and Rodrik 2003:607-627), and to stimulate new areas of comparative advantage (Johnson, 1982; Rodrik, 2007:103). Second, firms underinvest in training due to the risk of employee turnover--a market failure which warrants state intervention (Grossman, 1990:109). …

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