Introduction
Industrial policy has faced criticism for decades due to its misapplication, leading to resource misallocation, protection of inefficient firms, regulatory capture, and barriers to entry. However, as opening-up market policies have failed to address issues such as coordination failures in innovation, unexploited positive externalities, insufficient market scale, strategic economic or geopolitical objectives, and fragmented markets with monopolistic structures, there is a growing consensus that industrial policy should be revisited.
The Case for Harmonizing Industrial Policy and Competition
Eminent economists Aghion, Dewatripont, and Legros propose a solution in their recent article, “Competition-Friendly Industrial Policy.” They argue that the dichotomy between industrial policy and competition policy is artificial. According to their theory and empirical evidence, a well-designed industrial policy can stimulate innovation by fostering competition instead of protecting established firms. Moreover, competition enhances the positive impact of industrial policies on productivity, and subsidies or incentives should be targeted at specific sectors, focusing on avoiding collusion.
Successful Industrial Policy in Advanced Research Agencies (ARPA)
A crucial aspect to highlight is the success of industrial policy in environments with advanced research agencies (ARPA), such as those in the US focused on defense or biotechnology and health. These institutional settings combine strategic mission definition by the state with competitive implementation among private projects. Such models have been instrumental in rapidly developing COVID-19 vaccines, demonstrating the potential of a competitive environment fostered by industrial policy.
Lessons from China’s Industrial Policy
The authors suggest that China’s industrial policy offers valuable lessons. First, not all policy instruments are equally effective; direct subsidies and tax exemptions appear to have the most significant impact on productivity. Second, industrial policy is more effective when targeted at small businesses and has widespread support dispersion. Lastly, policies that encourage new entrants are most effective, as they help reduce concentration and improve efficiency.
Recommendations for Mexico
The authors propose the following recommendations for Mexico, as it redefines the economic role of the state:
- Avoid supporting concentrated sectors or dominant firms. Focus on high-innovation, high-externality sectors instead.
- Do not support activities of imitation or replication of existing products. Encourage original innovation and development instead.
- Redesign industrial policy to stimulate new businesses in non-concentrated industries. Ensure a governance environment that prevents conflicting incentives for productivity development, discourages collusion, and avoids capture and corruption.
Key Questions and Answers
- Q: What is the main issue with current industrial policy? A: It has been misapplied, leading to resource misallocation, protection of inefficient firms, regulatory capture, and barriers to entry.
- Q: Why should industrial policy and competition policy be harmonized? A: A well-designed industrial policy can stimulate innovation by fostering competition, and competition enhances the positive impact of industrial policies on productivity.
- Q: What are successful elements of industrial policy? A: Advanced research agencies (ARPA) that combine strategic mission definition by the state with competitive implementation among private projects.
- Q: What lessons can be learned from China’s industrial policy? A: Direct subsidies and tax exemptions are effective, targeting small businesses and wide support dispersion; policies encouraging new entrants are most effective.
- Q: What recommendations do the authors propose for Mexico? A: Avoid supporting concentrated sectors, focus on high-innovation and high-externality sectors, discourage imitation activities, and redesign industrial policy to stimulate new businesses in non-concentrated industries.
