The Political Economy of Industrial Policy
Réka Juhász and Nathan Lane
We examine the ways in which political realities shape industrial policy through the lens of modern political economy. We argue that government failure is not a necessary feature of industrial policy but is more likely when countries pursue policies beyond their governance capacity constraints.
Abstract
We examine the ways in which political realities shape industrial policy through the lens of modern political economy. We consider two broad “governance constraints”: i) the political forces that shape how industrial policy is chosen and ii) the ways in which state capacity affects implementation. The framework of modern political economy suggests that government failure is not a necessary feature of industrial policy; rather, it is more likely to emerge when countries pursue industrial policies beyond their governance capacity constraints. As such, our political economy of industrial policy is not fatalist. Instead, it enables policymakers to constructively confront the challenges of policy design.