At the end of his new paper, "Industrial Development: Stylized Facts and Policies," Harvard economist Dani Rodrik specifies his own personal definition of "industrial policy."
It is not, he says, "an effort by the government to select particular sectors and subsidize them through a range of instruments (directed credit, subsidies, tax incentives, and so on). The critics of industrial policy are correct when they argue that governments do not have adequate knowledge to pick 'winners.' ...industrial policy is more appropriately conceived as a process whereby the state and the private sector jointly arrive at diagnoses about the sources of blockage in new economic activities and propose solutions to them."
This limp-wristed definition of industrial policy strikes an odd tone at the end of a paper in which Rodrik, as usual, persuasively argues that the neoclassical faith in free trade and comparative advantage leading automatically to economic growth is misplaced. Rodrik argues that the developing nations who have succeeded in achieving high levels of economic growth are those who consciously developed their manufacturing sectors, pushing ever more aggressively into more diverse and sophisticated products. And if one were to focus on How the World Work's favorite example, Taiwan, one can most definitely make the case that the government selected and subsidized a particular sector -- semiconductors -- and achieved huge success.
But the more troubling aspect of Rodrik's definition is that it defines industrial policy so broadly as to be almost meaningless. Forgive me for obsessing, in these politically red hot days in the United States, but looking back at the last 12 years of a Republican-controlled Congress, it seems that the process by which the government and the private sector -- specifically, the energy lobby -- has succeeded in thwarting any action on climate change, fits Rodrik's selected terms too neatly. The diagnosis: caps on greenhouse gas emissions or a carbon tax will adversely create blockages in the ability to generate new profits. The solution: do nothing.
OK, that's a little unfair. But I'm tired of economists falling over themselves in fulsome agreement that "picking winners" is impossible. Sure, you probably don't want Energy Secretary Samuel Bodman deciding which synthetic enzyme is the best bet for achieving cost-effective cellulosic ethanol, but you probably do want a government that decides that the public welfare requires government incentives for the entire alternative energy sector.
A "stylized fact" by the way, in the parlance of economics, is a broad generalization designed to sum up the results of empirical research. Right here in California, we are about to observe what economists like to call a "natural experiment" in industrial policy: The Million Solar Roofs Initiative that kicks off in January 2007. It will be a while before we can say anything definitive about the results of this experiment; before we can start marshalling some new stylized facts about what role government intervention can play in simultaneously boosting economic development and mitigating the deleterious impact of humans on the planet. But meanwhile, I'm just glad to be living in a state that's trying.
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