New Industrial Policy – How to get it right

As much as industrial policy has been frowned upon in recent decades, there is now great hope that it will make a decisive contribution to overcoming current challenges. It is becoming increasingly clear that market-based solutions alone are not enough to secure prosperity for all and to manage the climate transition.

Recent research suggests that industrial policy, contrary to widespread criticism, can indeed be successful. However, like any policy, its effectiveness depends on its specific design and context to avoid inefficiencies and regulatory capture. As a recent comment by Dani Rodrik on a publication by the International Monetary Fund highlighted, industrial policy is held to particularly stringent standards.

At the Berlin Summit on 28-29 May, which focused on how a new kind of economic policy can help regain public trust, we brought together leading thinkers and practitioners to discuss how to get industrial policy right and what mistakes to avoid. Participants included Dani Rodrik, Mariana Mazzucato, Ufuk Akcigit, Dalia Marin, Emily Sinnott, Franziska Brantner, and Jakob von Weizsäcker.

As Dani Rodrik remarkably noted, there is now a wide-ranging agreement and convergence on industrial policy as a necessary part of the economic policy toolkit. This would have been unthinkable six years ago.

But with its resurgence comes a new understanding of industrial policy. Rather than a strategy focused primarily on growth, it now aims to steer growth towards creating a green, fairer, and more resilient economy. Mariana Mazzucato, in her keynote address, called for a shift from a sector-oriented to a problem-oriented approach.

Rodrik emphasized in a short interview on the fringes of the conference, that in view of the changed economic context the focus of future industrial policy will need to shift more towards services like care, education, and retail, rather than traditional industrial sectors. This requires rethinking how we are doing industrial policy. For Mazzucato, a key question also for Germany therefore is: How do we bring industrial policy to the “normal” economy, such as health?

Even during the peak of market liberalism, industrial policy never entirely disappeared – Reagan, Thatcher, and even Pinochet protected key industries. What’s new today is the more confident discourse around industrial policy, which is a step in the right direction. But what else is essential for success? What are the best practices?

According to Rodrik, effective industrial policy needs above all clear objectives. Pursuing too many and broad objectives simultaneously, as the Biden administration in the USA is currently doing, makes it difficult to achieve concrete results. Furthermore, successful examples of industrial policy combined the following elements:

• Strategic Collaboration and dialogue with businesses and other stakeholders to understand obstacles and coordinate efforts, rather than a top-down approach;
• Ability to revise policies over time and respond to changing circumstances;
• Provision of Tailored Public Goods such as customized work force trainings or infrastructure.

As Mariana noted, one lesson from the past is that it’s about more than just handing out loans, subsidies, and grants. Another conference participant aptly summarized: “We need to think about industrial policy less as a policy and more as a process.”

Traditional criticism of industrial policy, that the state should not interfere by picking winners, is now receding into the background. Rodrik suggests that the recipe for successful industrial policy lies more in “letting losers go” – discontinuing unsuccessful projects when necessary. This is still demanding, as the often quoted case of the US company Solyndra demonstrates, and requires disciplined monitoring and data-driven analysis. And, of course, it also requires governments to learn and adapt their strategy if needed.

In Germany in particular, the low tolerance for errors and risks towards the state poses a significant challenge in this respect. A practitioner confirmed that there is currently little room for experimentation.

Experts at the summit expressed hope that, after 30 years of decline in Eastern Germany, an agglomeration process has been initiated, which could lead to the region’s reindustrialization if continued. However, concerns were raised about the upcoming China shock and the associated risk of deindustrialisation. Unlike in previous decades, Germany today finds itself in a much weaker starting position. Another clear case for industrial policy.

However, if Dani Rodrik’s warnings are taken seriously, industrial policy should not focus excessively on geopolitical objectives alone. This would ultimately be a zero-sum game and neglect essential domestic targets, such as fostering good jobs and labour markets in poor regions.