What is industrial policy?
Industrial policy is a government strategy of actively supporting the development of specific industries or economic sectors judged strategically important, typically through subsidies, tax incentives, trade protection, or direct investment, rather than leaving the composition of the economy entirely to unguided market outcomes.
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Core tenets
- Deliberate sectoral targeting
- The government identifies specific industries or technologies to support, rather than treating all sectors of the economy identically.
- Multiple possible tools
- Industrial policy can be implemented through subsidies, tax incentives, tariffs, direct government investment, or public research funding, individually or in combination.
- Justified by strategic or developmental goals
- Typically justified on grounds such as national security, technological leadership, or accelerating economic development in a specific sector.
How it works in practice
Industrial policy has been used by countries across a wide range of overall economic systems, from state-led developmental economies to otherwise strongly market-based ones.
- Infant industry protection
- Tariffs or subsidies shield a developing domestic industry from established foreign competition until it can compete unsupported.
- Strategic technology investment
- Direct government funding or incentives target specific advanced technologies judged important for future economic or national security reasons.
What it is often confused with
Industrial policy is a strategic approach to supporting specific sectors, not itself a complete economic system; it has been used within capitalist, mixed, and more state-directed economies alike.
Criticisms and debates
Criticism of industrial policy centers on whether governments can reliably identify which industries deserve support, often called the picking winners problem.
Picking-winners critique
Argues that government officials lack the information markets generate through price signals and competition to reliably identify which specific industries or firms will succeed, risking misallocated resources toward politically favored but ultimately uncompetitive sectors.
Response: Defenders point to specific historical cases of successful state-led industrial development, arguing that well-designed institutions, with clear performance benchmarks and willingness to withdraw support from underperforming sectors, can substantially reduce this risk.
Political-capture critique
Contends that industrial policy decisions are vulnerable to being shaped by political lobbying and existing industry influence rather than objective assessment of strategic value.
Response: Proponents respond that transparent, rules-based industrial policy design, rather than case-by-case discretionary decisions, can reduce vulnerability to this kind of capture.
Historical examples
- South Korea's state-led industrialization, 1960s to 1980s
- The government directed substantial investment and protection toward specific export industries, a widely cited example of successful industrial policy.
Sources
- 1.List, Friedrich. The National System of Political Economy. 1841.
- 2.Stanford Encyclopedia of Philosophy. Economic Justice.
- 3.Encyclopaedia Britannica. Industrial policy.