Update from Davos: Can industrial policy really work? With Beata Javorcik
Jan 24, 2025
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Beata Javorcik, Chief Economist at the European Bank for Reconstruction and Development and a professor at Oxford, shares her expert insights on industrial policy's evolution and challenges. She discusses the historical context behind industrial strategies and how they’re gaining traction amid rising economic nationalism. Javorcik explores the delicate balance between supporting green technologies and protecting traditional industries. She also reflects on lessons from East Asian economies and the importance of adaptive policies for fostering innovation.
The resurgence of industrial policy reflects a shift from free market ideologies towards recognizing the state's role in addressing market failures.
While industrial policies can promote economic growth, they pose risks of market distortions and require clear objectives for effective implementation.
Deep dives
The Rise of Industrial Policy
Industrial policy, which involves government intervention aimed at altering the productive structure of an economy, is experiencing a resurgence after being largely discredited by the 1990s. Historically utilized by communist nations and later associated with the economic success of Asian tigers, it has recently regained traction, particularly following the global financial crisis. This shift represents a fundamental change in ideologies, moving away from free market principles towards recognizing the state's role in correcting market failures and externalities. As countries grapple with economic challenges, this trend of increasing industrial policy has been observed worldwide, spanning advanced economies such as the U.S., China, and Germany, as well as emerging markets involved with the European Bank for Reconstruction and Development (EBRD).
Drivers of State Intervention
Multiple factors contribute to the rising demand for industrial policy, particularly the urgency to accelerate the green transition and respond to global competitors. Nations feel compelled to introduce such policies in reaction to each other’s economic strategies, creating a ripple effect driven by major interventions like the United States' Inflation Reduction Act. Additionally, public sentiment has shifted towards favoring state involvement in the economy, particularly among younger generations who have experienced significant economic upheaval, such as the global financial crisis and the COVID-19 pandemic. This transition in public opinion reflects a growing desire for state guidance through periods of uncertainty, fostering a conducive environment for the adoption of industrial policies.
Challenges and Critiques of Industrial Policy
While the rise of industrial policy offers potential benefits, it also presents significant challenges and risks, including economic distortions and prolonged market inefficiencies. Evidence suggests that industrial policies often favor local interests at the expense of foreign competition, leading to fragmentation in global markets and trade relations. Moreover, the absence of clear objectives can create conflicting goals within industrial policy, complicating implementation and outcomes. Effective industrial policy must include mechanisms for withdrawing support, promoting competition, and setting clear goals to ensure adaptability and beneficial impacts on economic growth.
Sam Fleming is the FT’s Economics Editor, and this week he is reporting from the World Economic Forum at Davos, where much of the talk is about protectionism and industrial policy. Today on the show, Sam speaks to Beata Javorcik, the chief economist of the European Bank for Reconstruction and Development. They discuss the history of industrial policy -- and what it takes to get it right.
