Industrial policy

Making industrial policy work for sustainable structural transformation.

Societies are facing unprecedented overlapping crises of climate change, persistent economic unbalances and rising inequalities, at a time of tectonic shifts in the geopolitical landscape. 

The public sector is called to advance inclusive and sustainable solutions to these crises, alongside private sector and civil society stakeholders. These solutions must be integrated, that is, aligned with each other and based on the recognition of the intricate connections linking ecological imperatives, productive development opportunities, and social reproductive needs. Unfortunately, the policy debate tends to get stuck because trade-offs among these ecological, economic and social dimensions of development are overplayed. What we need is a policy approach that leverages complementary policy solutions. 

Industrial policy are back on the centre stage of economic policy, in recognition of its transformative potential that is necessary if we are to address major crises of our time. Climate change requires rapid, major, and inter-linked structural-technological changes in different sectors of the economy, with interdependent changes spanning across value chains at the local, national, regional, and global levels. New industrial policy initiatives have been launched to orchestrate and steer the structural transformation of several sectors, especially those more energy- and material-intensive. Industrial and trade policies are also becoming critical in reshaping the geography of production and trade. This is happening at a time when renewable technologies and sustainability standards are redefining the competitive advantage of places. In this context, central banks and development finance institutions are called to direct financial resources towards sustainable investment opportunities. 

This research stream focuses on how governments can reshape industries and create markets, coordinate activities between relevant economic actors, build productive coalitions, and, through all these, direct the economy towards sustainable prosperity. A key focus of this research is the analysis of how Reciprocal Control and Commitment Mechanisms (RCCMs) – with their conditionalities, performance standards and discipling mechanisms – should be used in order to increase the effectiveness and the transformative impact of industrial policy.

The importance of RCCMs in the success of industrial policy has been well documented, especially through case studies of Korea and other East Asian ‘Tiger’ economies. RCCMs perform several functions. First, they make sure that state supports are ‘reciprocated’ by companies and other organisations receiving them – grants, subsidies, domestic market protection, access to public services and infrastructures, allocation of licences and procurement contracts. Second, this reciprocation is ensured by making the continuation of the supports conditional on meeting specific performance standards in areas including investment, employment, training, export, domestic value addition, etc. Third, RCCMs are used to ‘mimic’ competition when domestic markets and industries are not sufficiently developed. Fourth, RCCMs  facilitate the resolution of coordination problems among different agents, aligning their different interests and capabilities. This ‘alignment’ function is particularly important in the new policy domains related to climate change, because there are several actors and structural interdependencies that need to be coordinated in order to achieve large-scale changes. Finally, RCCMs gives governments more leverage in the implementation of industrial policies.

Picture: Alexander Schimmeck via Unsplash.