Industrial Policy

Industrial policy is the set of government measures used to influence what an economy produces and how it produces it. Its central purpose is structural transformation: shifting resources towards more productive activities while building the skills, technology and capabilities needed to sustain higher incomes.

Transforming the productive structure

The objective is not merely to increase industrial output, but to change the economy’s productive capabilities. This involves developing activities that generate greater value, improve productivity and create opportunities for productive employment.

• Diversification reduces dependence on a narrow range of primary commodities or low-productivity activities by expanding the range of goods the economy can produce competitively.
• Technological upgrading enables firms to improve production processes, product quality and their ability to develop or absorb new technologies.
• Stronger production linkages allow growth in one industry to generate demand and opportunities for suppliers, processing industries and related services.
• Manufacturing can support this transformation through economies of scale, technological learning and links with agriculture, mining and services.

Why government intervention may be needed

Private investment alone may not generate all the capabilities required for transformation. Industrial policy seeks to address market failures and coordination failures that can hold back otherwise viable productive activities.

• A firm may underinvest in training or innovation when other firms can benefit without bearing the original cost.
• An industry may require reliable infrastructure, skilled workers and supporting suppliers simultaneously, while no individual investor can provide them all.
• New industries may need time to acquire experience and reduce costs before competing with established producers; this is the infant-industry argument for temporary support.

Instruments and tests of success

Industrial policy can combine economy-wide measures, such as infrastructure and skills development, with targeted measures, such as support for particular industries or technologies. It is not synonymous with state ownership or permanent protection.

• Instruments include research support, access to finance, public procurement, industrial infrastructure and trade-policy measures.
• Success should be assessed through productivity growth, technological capability, competitive production and productive employment, rather than investment or output alone.
• Support needs performance discipline, monitoring and review so that it encourages learning rather than dependence on government assistance.
• Poorly designed intervention can protect inefficient firms, encourage rent-seeking and impose fiscal or consumer costs.