Industrial Policy Rationales

Rationales for industrial Policy

The evolution in thinking about the rationale for industrial policy has been started after the World War II. A number of researchers have reviewed the development of industrial policy with focusing the rationales of the policy. As many countries started industrialization during 1940 to late 1960s, the market failures, especially in developing countries, were vastly ob-served. Therefore, the industrial policy was essential, particularly to protect the infant indus-tries of these countries. During 1970 to 1990s, the effectiveness of industrial policy was under the questions. The government failures were seen to fix up the market failures. Several econ-omists blamed the industrial policy for market failures as

First one is liberal or laissez-faire. According to this approach, the markets auto-matically select firms and sectors to make sure the distribution of resources. The second ap-proach is the correction of the market failures. According to this approach public action is re-quired to correct market failures and to assure the provision of public goods. There should be a balance between market and government failures. The third approach refers the Schumpet-erian, evolutionist, structuralist synthesis (SES) where public action brings asymmetries and makes it attainable to analyze technological opportunists. The purpose of this approach is to improve the aggregation of capacities and knowledge. Meanwhile, Pryce (2012) has traced a pattern of industrial policy in the evolution of thinking in United Kingdom and divided into three generations. In first generation, government tried to find out the conqueror through state aids, national champions and nationalisation. The second generation focused on privatization and economic free trade. The sector-specific third generation is busy in correcting market failure or find out the barriers to growth. Pryce has also suggested a ‘fourth generation’ indus-trial policy on the basis of an integrated approach to policy and a new partnership between private sector and public

The markets automatically select firms and sectors to make sure the efficient resource allocation. Therefore, it is also known as the “invisible hand”. Since there is a tendency of industrial policy to distort the market mechanism, Friedman (1962) suggested a minimum state intervention only where the market could not does it by itself.

On the traditional, state-aids or ownership-based approach, endeavors were made to encour-age certain segments of the economy through production subsidies or different forms of state aid or some cases through the advancement of national champions through nationalization which is the support of mergers or preferred procurement policies. However, the important role of production industry was promoted because of its linkages with other industries, knowledge spillovers due to R&D investments and dynamic economies of scale (Warwick,