Rodrik, D. (2004) ‘Industrial Policy for the Twenty-First Century’

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To maintain high levels of growth private sector investment needs to be increased. Precept 10 shows that government ought to have the objective of making ‘general purpose’ investments and diversifying the economy. The paper supports both these objectives, providing guidelines on how this can be achieved through industrial policy.

 

Rodrik begins with the recognition that employment and sectoral production are less concentrated and more diversified in rich countries. In order to diversify the economy Rodrik puts forward an industrial policy framework. A fundamental element of this is the challenge of how government can expedite private sector investment.  According to the paper this challenge ought to be tackled through a collaborative approach between private sector and government, whereby focus is placed as much on the exchange of information regarding significant externalities as it is on implementing the right policies

 

In achieving diversification Rodrik makes the case for an industrial policy in which strategic cooperation between the private and public sector occurs. However, such cooperation ought to be guided by a number of industrial policy design principles. These include, but are not limited to:

      - First, as not all investments will pay off there ought to be clear benchmarks for success and failure – ideally dependent upon productivity.

     - Second, government needs to target activities rather than sectors, thereby supporting the correction of specific market failures.

     - Third, a built-in sunset clause would ensure that resources do not remain stuck with activities that do not pay off.

     - Fourth, subsidized activities ought to have the potential of providing spillovers and demonstration effects

     - Fifth, government agencies promoting industrial policy ought to maintain channels of communication with the private sector, thereby allowing public officials to have good information on business realities.

     - Sixth, in adopting a strategy of picking winners, mistakes will be made. These should be allowed but minimized where possible.

Access the report here.

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