Explicit industrial policy as a part of overall economic policy was not in the centre of research interest in the industrialized countries until the mid-1970s. This is due to underlying economic developments. During the 1960s and early 1970s these countries experienced relatively fast economic growth with low rates of inflation and unemployment. Prices of raw materials were stable and relatively low, while labour was flowing without major disturbances from agriculture to the manufacturing and services sectors. Excess demand for labour was met by a steady inflow of labour from abroad. This period was also characterized by sporadic government intervention to influence the pattern of national manufacturing and services production. Relatively free markets were operating smoothly without significant disruption. During this period, the GATT was active in the lowering of tariffs.
The golden era of the 1960s was followed by a period whose first characteristic was a sharp increase in the price of oil in 1973. This triggered rises in inflation, unemployment and a deceleration in the rate of growth throughout the world. International competition increased sharply because suppliers were fighting in shrinking markets. It seemed that the free market system was not capable of coping satisfactorily with this situation. There appeared an awareness about a need for alternative strategies (i.e. ones based on intervention in manufacturing, services and trade) to cope with the new situation. Industrial policy could be seen as a supply-side response to market imperfections. Discussion was less about the formation of capital and more to do with its allocation. It was also more about the adjustment policy than about an industrial policy (a term not liked by either politicians or neo-classical economists). None the less, the gloves were now off for the debate about industrial policy in the developed market economy.
This chapter is structured as follows. An explanation of the rationale (market failure) for an industrial policy is followed by a consideration of the meaning of this policy. Various issues related to industrial policy are considered in a separate section, and so too is the problem of picking winners or losers in industry. Industrial policy in the manufacturing sector, including the technology policy of the EU, is presented, before the analysis of industrial policy in the services sector. At the end of the chapter, certain doubts are raised about the possibility of implementing a sound industrial policy both in a single democratic country or in economic unions because of various interests and coordination problems.