Industrial Policy: Proactive and Effective

Despite a lack of consensus on its effects, industrial policy has existed for a considerable period of time and is now back in the spotlight amid the changing global landscape. In the 19th century, Germany used industrial policies to cope with international competition. After the Second World War, Japan also actively employed industrial policies. Vertically, the US and Japan both used industrial policies to promote industrialization when they were at the stage of catching up with other economies. After becoming leading economies, they shifted the focus of their industrial policies to promoting innovation. Horizontally, the US as a leading economy often used industrial policies to compete with latecomer economies if the competitiveness of the latter improved substantially. The world today is undergoing profound changes (e.g., green transition, the COVID-19 pandemic, competition between large countries, and the growing gap between the rich and poor) which not only affect market efficiency, but also affect security in a broad sense. Therefore, US and European governments have stepped up efforts to intervene, and industrial policy is back in the spotlight. Profound changes call for a new mindset. The theoretical basis for industrial policies is shifting from neoclassical economics, which took center stage in recent decades, to political economy, and governments need to take proactive measures rather than occasionally intervene in the market when necessary. According to traditional views, the goal of industrial policy is mainly to solve problems related to market failures, including monopolies and externalities. However, in an era of profound changes, industrial policies should not only focus on efficiency, but also pay more attention to security. After analyzing policy targets, policy tools, income distribution modes, competition, and innovation from the perspective of the government’s role, we believe the principles that industrial policies follow will change considerably. Industrial policies should shape and create new markets and be more comprehensive, focusing not only on manufacturing but also on service industries. Income distribution modes should also be improved as government investment increases. Industrial policies should not hurt competition while improving and strengthening industries and achieving economies of scale. Otherwise, they could be detrimental to innovation. In an era of profound changes, China’s industrial policy is multifaceted, but promoting innovation remains crucial. Industrial policies have played an important role in China’s economic development, but they have also led to various problems. In the future, industrial policies should not only continue to improve efficiency, but also focus on social governance. For China’s industrial policies, we think promoting innovation remains crucial, whether from the perspective of coping with profound changes or from the perspective of catching up with other countries. To promote innovation, we suggest increasing support for R&D. We believe government-guided funds are a good effort, but the market-oriented operations of such funds need to be improved. In an era of deglobalization, economies of scale are an advantage for China, but efforts should be made to avoid exacerbating monopolies, and to avoid improving security at the cost of lowering efficiency. We think expanding opening-up and attracting foreign investment are of far-reaching significance.