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Industrial Policy

INDUSTRIAL POLICY


Industrial policy refers to organized government involvement in guiding the economy by encouraging investment in targeted industries. Such policy serves to allocate capital across manufacturing industries by a system of taxes, subsidies, and investment incentives designed to move the economy along a specific pathway. Although an industrial policy was in place since the 1950s in many developed countries including Japan, Germany, France, and Sweden, it continued to be hotly debated in the United States toward the end of the twentieth century.

Japan's successful industrial policy drew a great deal of attention. In Japan the Ministry of International Trade and Industry (MITI) orchestrated directed development of selected industries and products which it deemed necessary for Japan to compete in the international market. MITI only assisted the private sector in targeted industries. It generally financed no more than 50 percent of a project, leaving the rest to the private sector and market influences. The MITI is not autonomous but is overseen by various government agencies. Japan's automobile industry served as a highly successful model where a specific industry was targeted to assume an expanded role in world markets.

Advocates for an industrial policy in the United States pointed to four major issues. First, since the law of supply and demand in world markets is greatly skewed by various measures employed by nations to help particular industries, the U.S. needed to do likewise to compete. Second, an industrial policy could help ease the social costs when industries lost their competitive advantage by assisting in retraining workers for new jobs. Third, industrial policy could ease "boom and bust" cycles by planning tax incentives to stabilize regions. Finally, the United States already protected certain industries and special interest groups but in a haphazard manner with no organized social goals; an organized program was believed to be more effective.

Opponents cited the market as the most efficient allocation of resources, insisting the government could not do a better job. Interfering in the market process was generally less accepted in the United States than in other countries.

See also: De-Industrialization

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industrial policy

industrial policy, government-sponsored economic program in which the public and private sectors coordinate their efforts to develop new technologies and industries. Government provides the financial support and capital to the private sector by direct subsidies, tax credits, or government-run developmental banks. Industrial policy emphasizes cooperation between government, banks, private enterprise, and employees to strengthen the national economy. In the 1980s and 90s, industrial policies enjoyed some success in Germany and Japan. In the United States, such direct government involvement in business planning has traditionally been viewed with suspicion. However, the Advanced Technology Program, begun in 1990, has been instrumental in the research and development of promising, high-risk technologies. U.S. government subsidies can also be found in such areas as defense, energy, transportation, and home construction.

See R. Reich, The Work of Nations (1991).

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