Can Industrial Policy Be Good Policy

Can industrial policy be market-ensuring (e.g. via antitrust or enforcement of property rights) and market-conforming (non-distorting)? Can it provide a political second-best solution by creating a smaller market distortion to prevent a larger one that results from political ferment? This paper explores issues of the definition of industrial policy, discusses market failure vs. government failure in specific industries, contrasts the options for industrial policy in the regulatory state with those available in developmental states, and provides examples from previous research on HDTV, flat panel displays, semiconductors, software, and cellular phones to illustrate arguments about what makes good policy. Introduction Industrial policy has always been controversial because the reallocation of resources across industries by government in ways that do not conform to market signals is market distorting and therefore generally considered to have bad (allocatively inefficient) results. But this may be too narrow a way to conceptualize industrial policy. In this paper I will examine the broad array of policies that are considered to be “industrial” and review the arguments for and against them. Similarly, I will review the debates about industrial policy in developmental states. The term “developmental state” refers to a type of government that is comfortable with the use of industrial policies as a way of catching up with more advanced industrial nations, particularly in high technology industries. I will contrast the developmental state with the regulatory state that we have come to be familiar with in North America and Western Europe. I have argued elsewhere, with my colleague Aseem Prakash, that theories of strategic trade have been used to justify a wide variety of industrial policies that we called