Progressive industrial policy
“Industrial policy is back on the agenda, and it requires bold rethinking. It is not enough to guide investments in desired directions; it is also necessary to ensure the benefits are as widely shared as possible”. (Mariana Mazzucato and Dani Rodrik)
As defined by Deloitte, “Industrial policy is generally [understood as] any government intervention that provides support for a particular sector or industry. Interventions such as tariffs, trade restrictions, and subsidies can help shield a domestic industry from import competition. Governments can provide tax credits or direct funding to encourage investment, while government procurement can be used to boost demand in the sector. Although industrial policy can be used for any sector, historically such policies have mostly focused on heavy industry, technology, energy, agriculture, and anything that could have military applications.”
In the U.S. and Western Europe, one of the most influential figures shaping industrial policy is Dani Rodrik, the Ford Foundation Professor of International Political Economy at the John F. Kennedy School of Government at Harvard University, whose critical ideas about globalization and his support of green and inclusive domestic policies garnered attention within the Biden Administration.
According to Rohan Sandhu, co-founder and associate director of the Reimagining the Economy Project at the Harvard Kennedy School, “[The ‘bottom up’ approach or administrative apparatus undergirding the implementation of Bidenomics] is in line with my colleague Dani Rodrik’s recent paper, with Nathan Lane and Reka Juhasz, reviewing evidence around the structures that make industrial policies successful. From a governance perspective, they highlight two attributes that are necessary: the first is an ‘embedded autonomy’ or regulation based on dynamic public-private dialogue and information exchange. The second is to reinforce that industrial policy is not merely about tax breaks and subsidies, but about the coordination of a range of public inputs.
In their own words, Rodrik and colleague Mariana Mazzucato describe their approach as follows:
Industrial policy is experiencing a global resurgence. The governments of Brazil, the European Union, South Africa, and the United States are just a few of those advancing significant investments and policy measures aimed at fostering more competitive domestic industries and catalyzing economic growth. Many of these governments recognize the need for a different type of industrial strategy to those pursued in previous decades – one that not only catalyzes but also directs growth to shape economies that are greener, more inclusive, and more resilient. Thus, key to a new approach to industrial policy is making sure that directionality of growth (less inequality, more sustainability) is embedded in the tools that lie at the interface of public-private partnerships – subsidies, loans, grants, public inputs, intellectual property rights. Industrial policies can be designed ex ante to enhance public value, including through conditions that maximize public benefits. Conditionalities that grant equitable access and sharing rewards are a central component of shaping the economy for the common good.
Some measure of conditionality is inherent in the idea of industrial policy. In principle, public support is provided in return for the recipients undertaking specific actions. But the extent to which conditionality has been explicit and part of a coherent, self-conscious strategy for generating public value has varied. The creation of public value requires the public sector to establish a clear vision and a public purpose that guides the collaboration and innovation of both private and public actors in addressing societal challenges.
It is generally acknowledged that conditionalities are important to the design of industrial policies and that their absence could hamper success (...) or lead to parasitic relationships, or capture, whereby businesses simply get handouts and subsidies from lobbying.
Economists might worry that close relationships with private firms would make governments prone to capture. On the other hand, one could argue that when a state is not entrepreneurial and market shaping, it is more likely to be captured as its relationship with the private sector will tend to be more subservient to the needs of business rather than public objectives. Indeed, conditions create a healthy tension between public and private so that subsidies are part of a ‘deal’ rather than a blanket handout.
Industrial policy is back on the agenda, and it requires bold rethinking. It is not enough to guide investments in desired directions; it is also necessary to ensure the benefits are as widely shared as possible. Conditionalities are one powerful tool that governments can use to co-shape investment and co-create markets with the private sector. Indeed, with conditions, industrial policy can lead to transformation. Without conditions, it might just lead to subsidies, guarantees, and handouts for firms to stay in place. Such transformation can be at the heart of a development strategy, especially for countries that experience inertia in business investment. When companies receive public investments in the form of subsidies, guarantees, loans, bailouts or procurement contracts, conditions can be imposed to help guide innovation and steer growth towards achieving the highest public benefit. For example, procurement can be made conditional on greener supply chains, reinvestment of profits and better working conditions. Of course, too many conditions can also stifle innovation. Thus, the design challenge is to have conditions that set a direction, while leaving open the how-to experimentation and discovery.
In the context of a shift towards longer-term, public-value-oriented economic thinking, there is a real opportunity to reimagine the contracts that structure public-private relationships. Similar reasoning could also be relevant to the relationship between different public entities, such as the relationship between a country’s state-owned enterprise and the Treasury: benefits to the SOE can be structured with conditions to make sure the SOE directs its investments in particular ways, shares knowledge, makes products/services accessible, etc. Redesigning these contracts means redesigning the direction of the economy from the ground up.
As we can see, Rodrik and Mazzucato consider both capture and monopolies as inherent problems of industrial policies that do not incorporate conditionalities — for example, in public contracts — to ensure that public-private relationships act in the public interest for the common good. This is the heart of their argument.
There is still little information about how progressive industrial policies are being used — or could be used — to further the goals of anti-corporate capture work at national or international levels. Thefollowing topics are the exception:
- Collective bargaining and codetermination:The concept of organized labor participating in corporate governance and management of the companies where their members work — standard practice in Germany but a rarity elsewhere — provides an opportunity, on one hand, for firm-level and perhaps sectoral-level oversight of specific corporate capture practices and, on the other hand, to provide political education to firms and workers about the phenomenon of corporate capture. While the German model is intriguing, other countries, for example Chile under President Gabriel Boric, seek to replicate it albeit with little political support for change.
- Human and labor rights linkage to free trade agreements (FTAs):The U.S.-Mexico-Canada Agreement (USMCA, or NAFTA 2.0) — specifically the Chapter 31, Annex A, Facility-Specific Rapid-Response Labor Mechanism, Frequently Asked Questions on Labor Chapter Petitions, Chapter 15 Cross-Border Trade in Services, and the USMCA Implementation Act — is offered as a model of how FTAs can be used both to establish specific obligations regarding rights-based compliance as well as the need for signatory States to adapt their regulatory frameworks in order to comply.
- Due diligence laws:According to Conectas,“The due diligence laws being discussed in different countries, particularly in the European Union, could, if minimum conditions are guaranteed, represent the possibility of building pro-worker policies. This is because, especially in exporting countries such as Brazil, such legislation raises concerns about the loss of market share due to possible accusations against or convictions of large companies for the unworthy working conditions of their suppliers. Due to the strength of commodity producers in their countries and even the state’s interest — which is dependent on this export economy — there have already been some moves, including by the state machine itself, to improve working conditions in some sectors. For this to be a continuous, progressive and efficient movement, however, it is necessary to ensure that these laws are no more than mere intentions or market protections and can have a practical effect on corporate accountability and social dumping, serving as an example to the corporate world.”
- Worker ownership through anti-monopoly regulation:In South Africa, for example, there is an option — not a requirement, however — through competition law and policy during large mergers to increase worker ownership through shareholding.
According to Sha’ista Goga and Imraan Valodia, “In South Africa, competition policy was actively developed to address concentration with a view to redressing the past. The preamble to the Competition Act notes, firstly, that apartheid and discrimination in the past have led to excessive concentration of ownership and control, and secondly, that the economy must be open to greater ownership by a greater number of South Africans. It also explicitly notes a balance of the interests of workers, owners and consumers, and is focused on development. As such, competition policy in South Africa has broader objectives than many other jurisdictions. This is clear throughout the Competition Act. For example, in South African competition law, regulation over ownership is engaged in through approval of mergers and acquisitions. This enables oversight to prevent unnecessary concentration of the economy. (…) Worker ownership is one method to increase asset distribution that is typically broad-based. It has benefits for workers as well as companies and is widely being considered in policy discussions locally and internationally. When large companies incentivise worker ownership there are two approaches: ‘the carrot’ of favourable incentives, such as [Black Economic Empowerment] points or tax incentives, and ‘the stick’ which is mandated by legislation where non-compliance can be penalised. Mandatory requirements for worker ownership can be crafted through various means, including amending company laws, or situating it within the larger BEE framework.”
- SOEs as a model of public interest governance and regulation of strategic assets and sectors:According to Codelco,the Chilean State-owned copper mining company, which includes copper and lithium, “We have a very clear mandate to maximize the value of the market that has been entrusted to us. We are subject to transparency and other legislation. It is a kind of barrier with respect to the political will of different governments in power. The corporate governance law that governs us establishes a separation from the Codelco government, which is more specialists-based. The participation of the State is to have an influence on where a business is run, but not to develop certain programs. The resources generated can end up in social programs through tax mechanisms and budget programming, but that does not depend on us. (…) The composition of our corporate governance is: Three of the nine belong to the government; two are appointed by and come from the workers; and four are professionals who come from both center-right and left-wing sectors. (…) The question we have is how to maximize the growth of the sector in a healthy way, to maximize income to the nation so that it can invest in other types of programs. A corporate government must ensure that it is insulated from political cycles that can be ups and downs in governance, and that can be risky.”