Industrial policy

The industrial policy of a country, sometimes denoted IP, is its official strategic effort to encourage the development and growth of part or all of the manufacturing sector as well as other sectors of the economy. The government takes measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation." A country's infrastructure (transportation, telecommunications and energy industry) is a major part of the manufacturing sector that often has a key role in IP.

Industrial policies are sector-specific, unlike broader macroeconomic policies. Examples of the latter, which are horizontal, economy-wide policies, are tightening credit and taxing capital gains. Traditional examples of industrial policy that involves vertical, sector-specific policies, include protecting textiles from imports and subsidizing export industries. More contemporary industrial policies include measures such as support for linkages between firms and support for upstream technologies. Industrial policies are interventionist measures typical of mixed economy countries.

Many types of industrial policies contain common elements with other types of interventionist practices such as trade policy and fiscal policy. An example of a typical industrial policy is import-substitution-industrialization (ISI), where trade barriers are temporarily imposed on some key sectors, such as manufacturing. By selectively protecting certain industries, these industries are given time to learn (learning by doing) and upgrade. Once competitive enough, these restrictions are lifted to expose the selected industries to the international market.

The traditional arguments for industrial policies go back as far as the 18th century. Prominent early arguments in favor of selective protection of industries were contained in the 1791 Report on the Subject of Manufactures of US economist and politician Alexander Hamilton, as well as the work of German economist Friedrich List. List's views on free trade were in explicit contradiction to those of Adam Smith, who, in The Wealth of Nations, said that "the most advantageous method in which a landed nation can raise up artificers, manufacturers, and merchants of its own is to grant the most perfect freedom of trade to the artificers, manufacturers, and merchants of all other nations." The arguments of List and others were subsequently picked up by scholars of early development economics such as Albert Hirschman and Alexander Gerschenkron, who called for the selective promotion of key sectors in overcoming economic backwardness.

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