DP4767 Industrial Policy for the Twenty-First Century

Author(s): Dani Rodrik

Publication Date: November 2004

Keyword(s): economic growth

JEL(s): O10 , O20

Programme Areas: International Trade and Regional Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP4767.asp

Unlike what is commonly believed, the last two decades have not witnessed the twilight of industrial policy. Instead, incentives and subsidies have been refocused on exports and direct foreign investment, in the belief that these activities are the source of significant positive spillovers. The challenge in most developing countries is not to rediscover industrial policy, but to redeploy it in a more effective manner. This paper lays out an institutional framework for accomplishing this objective. A central argument is that the task of industrial policy is as much about eliciting information from the private sector on significant externalities and their remedies as it is about implementing appropriate policies. The right model for industrial policy is not that of an autonomous government applying Pigovian taxes or subsidies, but of strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what type of interventions are most likely to remove them.