The New Economics of Industrial Policy: Understanding the Rise of ‘Bidenomics’

The New Economics of Industrial Policy: Understanding the Rise of 'Bidenomics'

Exploring the Definition, Rationale, and Evaluation of Industrial Policy

The recent surge of economic legislations under the umbrella of ‘Bidenomics’ has brought industrial policy to the forefront of economic policy discussions. With the of key bills like the Infrastructure Investment and Jobs Act, Creating Helpful Incentives to Produce Semiconductors Act, and Inflation Reduction Act, there is a renewed interest in understanding the workings of industrial policy. This has led to the emergence of a new field of research known as the New Economics of Industrial Policy, which aims to provide insights into the definition, measurement, and evaluation of these policies.

Defining Industrial Policy:

Industrial policy refers to government policies that specifically target the transformation of the economic activity structure in pursuit of public goals. These policies are selective, focusing on certain activities while excluding others. They are intentional in nature, aiming to bring about changes in the economy. Industrial policy encompasses various forms of intervention, including sectoral support, research and development (R&D) funding, and export promotion. The goals of industrial policy have expanded beyond structural transformation and industrialization to include climate goals, job creation, supply chain resilience, and national security.

The Rationale for Intervention:

The economic rationale for industrial policy can be categorized into three main areas. Firstly, market failures such as positive externalities create a situation where the market alone cannot generate enough positive activity, such as modern manufacturing or green energy. Secondly, coordination failures occur when a desirable activity becomes individually profitable only if others are also engaged in it. Lastly, the provision of activity-specific public inputs, which are public goods, is necessary for certain sectors to thrive, such as the charging infrastructure for electric vehicles.

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Challenges and Controversies:

Industrial policy is not without its challenges and controversies. Skeptics argue that information problems and political capture can hinder the effectiveness of these policies. Information problems make it difficult for governments to accurately select the activities to target, while political capture may divert resources away from activities that benefit society at large. However, the effectiveness of industrial policy should be measured by its ability to “let losers go” rather than expecting governments to always “pick winners.” While challenges exist, similar debates surrounding other areas of public policy focus on how to do policy well, rather than questioning the need for policy itself.

Evaluating Industrial Policies:

Evaluating the efficacy of industrial policies presents empirical challenges. Distinguishing between rent-seeking governments and technocratic interventions is difficult with observational data alone. The random allocation of industrial policy may not fully capture the practical challenges faced in implementation. However, recent research has made progress in evaluating different layers of treatment. The economic mechanism layer examines the validity of the market failure justification for industrial policy. Another layer evaluates whether the intended firms, industries, or sectors respond as intended. Reduced-form research designs have provided insights into the effectiveness of infant industry, public R&D, and place-based industrial policies.

The Credibility Revolution:

The New Economics of Industrial Policy has brought about a credibility revolution in the field. Recent studies have evaluated the impact of industrial policies on targeted sectors and industries. Evaluations of infant industry policies in technological follower countries have shown increased activity in the targeted sectors. Research on public R&D efforts during times of national crisis has demonstrated positive effects, both locally and potentially at the aggregate level. Place-based industrial policies have also shown positive outcomes in lagging and declining regions, leading to local structural transformation and income gains.

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Learning from the East Asian Miracle:

The East Asian economic miracle, particularly South Korea’s Heavy-Chemical Industry Drive, has been a focal point of debates on industrial policy. Recent studies have shown that industrial policy in South Korea successfully promoted the growth and export development of targeted industries. Quantitative work has provided guidance for policymakers in selecting industries to target, highlighting the potential for overcoming informational challenges.

Conclusion:

The New Economics of Industrial Policy has emerged as a field of research to better understand and evaluate industrial policies. While challenges and controversies exist, recent studies have provided insights into the effectiveness of different types of industrial policies. The field is moving towards a more comprehensive evaluation of industrial policy, combining reduced-form methods with model-based approaches. As industrial policies continue to play a prominent role in economic policy, further research and analysis will be crucial in informing policymakers on how to implement these policies effectively.