Fundamentals of Industrial Strategy

TL:DR - a lot of awesome research has been done on Industrial Strategy which will be central to getting it right in the UK - regardless of what happens in the election.

Also - I am currently going through my fourth bout of Covid and was bored - this may not be the best article you will read on #industrialstrategy but hopefully it has some insights

So, i have thought hard about writing this. First thing to get across this post has nothing to do with my employer. It should not viewed as anything other than my own interest in the subject. Second, i am not suggesting one or more of the political parties has got this right.

My personal view is that we have de facto an array of industrial policy in the UK right now. A change in government would create a de jure industrial strategy.

Industrial policy & strategy is back on the agenda. A particularly interesting paper by Juhász Réka et al. (2023) highlights that industrial policy is not only prevalent. It is varied in focus and different from what came before in concept and application. They had four key findings:

1. They show that new industrial policy activity is important (25% of commercial policies) and on the rise (doubling through the 2010s). New industrial policy activity is a growing part of the post-Global Financial Crisis world.
2. The second key result is that new industrial policy practice is technocratic and export- oriented. The majority of industrial policies identified are subsidies and export-related measures. They also target measures at individual firms.
3. The third key result considers who uses industrial policies. We find that high income countries are those implementing many new industrial policies. Industrial policy is practiced among OECD members
4. The fourth key result is that countries are selective in the sectors they target. Industrial policy activity is directed at a specific subset of sectors. Industrial policy is targeted at sectors that have higher comparative advantage in trade.

This research has providing key insights to the fundamentals of Industrial Strategy. What i mean about fundamentals is that industrial policy has a wide set of assumed meanings - both from its supporters and detractors.

The New Industrial Policy

For anyone looking to catch up quick on Industrial Policy i would recommend 'The New Economics of Industrial Policy' by Juhász, Lane, and Rodrik (2023) . The focus is less on the rights and wrongs of industrial policy but rather the 'how' of industrial policy in action.

Usefully it creates a definition of industrial policy:

"those government activities that explicitly target the transformation of the structure of economic activity in pursuit of some public goal".

This may seem broad. Yet it is useful to recognise that industrial policy can exist even with out an industrial strategy or an explicit government commitment to it. This also means that the pursuit of industrial policy has to be seen in a wider sense of various policies and how these align to deliver goals.

The key challenge then is being clear what those goals are, the tradeoffs they imply and whats needed to secure success. This to me is the crux of a new industrial policy. Industrial policy is about exports and global value chains. This is different from industrial policy/strategy which is used as a replacement for a consistent set of public policy reforms.

New Goals?

Industrial Policy original goals focused around stimulate innovation, productivity, and economic growth. These are now being added to through wider policy goals. These include net zero/climate transition, good jobs, inclusion, lagging regions/economic inequality. The extent to which these extra goals impact on the application of Industrial Policy remains to be seen. One challenge is whether they erode the export focus in trying to address these wider aims.

Linked to this is how new Industrial Policy is broadening out the areas which its focused on. Deindustrialisation means that domestic economies are different than in earlier periods. Changes in trade patterns and the rise of other countries also impact on the export opportunities. Instead a wider set of issues have emerged which includes:

• services economy,
• sub-national/regional policies,
• place-based policies innovation policy

Each of these areas are intimately linked with industrial policy delivery. A key question is whether the tools of industrial policy be used to:

• Support inclusive growth through career progression into middle
• work in retail, hospitality, education, health & social care
• Still be linked to exports through service exports?

A key part of this are the different Incentives for firms, innovators, investors. Subsidies are the main tool of industrial policy. Yet import protection, exemptions from regulations, land, training remain as key mechanisms. Yet, how they work around services is unknown. Services tend to be more agnostic about place, focused on labour and rely more on data centres, energy connectivity and housing as being central to their growth.

Crucially industrial policy has conditionality. This is where there are limits on the scope of the policy in practice. Either the policy targets:

• specific types of sectors,
• specific types of firms,
• specific number of employees or target levels of employment.
• reward specific investment

The need to be conditional is a key issue. If the tools are too broad, or complicated in application across different tiers of government. Then the risk of failure is high.

Practical challenges for Industrial Policy

A key challenge is measurement. This a mixture of how easy different tools are to observe. How these intersect with wider policy objectives e.g. tariffs can also be used for revenue raising. Linked to the issues of measurement is simply knowing how much states are spending. States vary in how they classify expenditure and define industrial policy.

Industrial Policy within states is also a challenge. This is being able to disentangle the various levels of activity which is taking place and isolating it from wider public policy levers. From single-purpose partnerships through to the complexities of current arrangements. For example, Criscuolo et al. (2019) undertook a study of the Regional Selective Assistance programme. It shows it was able to increase employment but had limited wider impacts on productivity.

The issue around accurately defining, measuring and assessing impact will continue to shape the debate around Industrial Policy. Whilst we should aim to get better at assessing the measuring the impact - the bigger practical challenge is prevent wider policy aims eroding the focus of industrial policy on exports.

Papers

Criscuolo, Chiara, Ralf Martin, Henry G. Overman, and John Van Reenen. 2019. ‘Some Causal Effects of an Industrial Policy’. American Economic Review 109 (1): 48–85. https://doi.org/10.1257/aer.20160034.

Juhász, Réka, Nathan Lane, and Dani Rodrik. 2023. ‘The New Economics of Industrial Policy’. Annual Review of Economics 16. https://doi.org/10.1146/annurev-economics-081023-024638.

Juhász Réka, Nathan Lane, Emil Oehlsen, and Veronica C. Perez. 2023. ‘The Who, What, When, and How of Industrial Policy: A Text-Based Approach’, December. https://doi.org/10.31235/osf.io/uyxh9.