1. Big power politics behind the
“come-back” of industrial policy
Robert H. Wade
LSE
June 1 2023
2. Outline
• The long record of development failure in the global South (in terms of
reducing the average income gap with the North). There is a “middle-
income trap”
• The one successful region is NE Asia; which also adopted vigorous and
sustained industrial policy (IP)
• But states of the global North, and their multilateral organizations (eg WB,
IMF, IDB ), have strongly advised against IP, and even against
comprehensive indicative national planning
• But in past few years states of global North themselves have embraced IP –
for themselves (not for global South)
• Why?
3. Global economy: GDPPC of regions as % of North’s,
1970 – 2017 (China excluded; current USD. Source: Alan Freeman (2019)
4. The two-tier world economy, 1970 - 2022
• (1) Average income gap between all 6 developing regions (exclude
China) remains more or less constant over past half century. No
“catch up” !! (GDP at market exchange rates, not PPP)
• (2) The region with highest average income relative to North is Latin
America. LAC % remains under 20% for almost entire half century !!
• (3) China shows “convergence” – from low-income (“periphery”) to
middle-income (“semi-periphery”). China’s average income is now
SLIGHTLY higher than LAC’s.
5. GDPPC of 3 SE Asian countries + Brazil as % of
that of North (current USD)
1970 2022
MALAYSIA 11 23
THAILAND 6 14
INDONESIA 3 9
BRAZIL 7 17
7. Latin America
Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the
Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).
Per capita real income relative to US
(Measured by the 1990 international Geary-Khamis dollars)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Urguay
Venezuela
8. South Asia
Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the
Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).
Per capita real income relative to US
(Measured by the 1990 international Geary-Khamis dollars)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
India
Sri Lanka
Pakistan
Bangladesh
10. Russia & Eastern Europe
Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the
Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).
Per capita real income relative to US
(Measured by the 1990 international Geary-Khamis dollars)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
USSR
Czeco'kia
Hungary
Poland
Romania
Yugoslavia
12. Important qualification: global convergence in
non-income measures
•Eg life expectancy,
•fertility rates,
•education,
•female labor-force participation,
•urbanisation
But not in average income ! Why?
13. This non-catch-up of Global South =
development FAILURE
• You think the long record of development failure would give
legitimate scope for govts to deploy industrial policy (or
strategy) , IP
• Aim of IP: incentivize private producers to invest more in
“industries of the future” – to diversity and upgrade the
production structure.
• Using vertical / sector-specific measures, as well as macro
(eg exchange rate) and horizontal measures
• The NE Asian success stories all adopted vigorous IP.
14. BUT, until recently “industrial policy” toxic.
“Neoliberalism” ruled
• Reagan, 1980: “Government is not the solution to our problems,
government is the problem”
• “The best industrial policy is none at all” (G. Becker)
• “The govt can’t pick winners”
• “Markets are best for America, and what is best for America is best
for the world”
• World Bank and IMF agreed! Washington Consensus. Structural
Adjustment lending.
15. NOW, industrial strategy is recently back in
“good currency” in the North !
• 2019; two IMF economists published IMF Working Paper
“The return of the policy that shall not be named: principles
of industrial policy” (Cherif & Hasanov 2019, emphasis added)
• 2023: Andy Haldane, former chief economist Bank of
England: “The world is going bananas on industrial
strategy” (quoted in Parker, 2023)
16. OECD economists cautiously endorse IP
• 2022: OECD economists: “So-called horizontal policies, ie
interventions available to all firms and which include business
framework conditions such as taxes, product or labour market
regulations, are increasingly questioned….the case for govts to more
actively direct the structure of the business sector is gaining
traction.” (Criscuolo, C. et al., 2022, emphasis added)
17. US’s “change of mind” away from “free market
economics” began slowly around 2010-12
• By around 2010-12 (Obama government) many officials & politicians
concluded that free trade + horizontal promotion policies not working for
US.
• They saw that:
• (1) China’s entry to WTO 2001 allowed surge of mfd exports to US, which
destroyed jobs of millions & depressed whole regions.
• (2) China’s “state capitalism” was working super-effectively. In 2013 Beijing
(1) published Made in China 2025; (2) initiated Belt Road Initiative
“infrastructure alliances” (not military alliances) across the South
• They saw the rise of hostile emerging superpower
18. Trump’s industrial policy
• Trump was first president to respond. Aim: not to increase
“efficiency” but to strengthen “national economic resilience” &
“national security”, & especially to keep ahead of China in military
and economic competition.
• Introduced tariffs on imports from China, export controls, restrictions
on US firms investing in China and Chinese firms investing in US.
• Talked about need for US firms invested in China to “reshore” to US –
but gave no incentives to do so
19. Biden’s industrial policy (IP): 2 Acts, summer
2022
• (1) CHIPS and Science Act; &
• (2) Inflation Reduction Act (IRA) – a “green investment” act
to accelerate “green” investments (eg renewable energy,
electric vehicle production)
20. Biden says these Acts have 3 main objectives:
•(1) strengthen US hand against China;
•(2) expand “middle-skill”, “middle-class” jobs, so as
to reduce income and wealth inequality
•top 1% in US wealth distribution owns 35% of national
wealth;
•(3) climate – cut GHG emissions & strengthen
adaption to climate change
21. The politics of radical change in policy
“consensus”
• Strengthening the “middle class” and combatting climate change are
LONG-STANDING policy objectives -- which have not produced much of a
“govt intervention” response.
• What changed policy consensus now is “national security threat posed by
China”.
• Almost the only thing Republicans in Congress cooperate with Democrats
on is: “keep ahead of China” (by fair mans or foul)
• Making large subsidies available crucial for winning bipartisan support.
• “Buy American” also crucial for political support, because it creates jobs.
• Much of the subsidies targeted at REPUBLICAN areas !
22. How the US is trying to contain China and
advance US
• (1) Slow China’s progress especially in chips & AI & QC, by blocking China’s
imports of advanced tech with military uses -- blocking imports from all
the G7 countries ! Till recently Biden used the phrase “de-couple” from
China. European Commission persuaded Biden govt to switch to “de-risk”
• (2) Free US from dangerous dependence on China – eg rare earths &
critical minerals crucial for battery technology & green transition. Including
entire copper value chain !
• Accelerate US progress. Huge subsidies (almost $400 bn) available to
businesses and consumers to adopt green technologies in products mainly
produced in the US. Eg electric vehicle tax credit contingent on large % of
the parts being made in US.
• Subsidies ($52bn) also available for chip production in US – to shift chip
production away from Taiwan & China.
23. US—China tension geopolitics now shapes
economic policy: US airforce shoots down alleged Chinese spy balloon over S Carolina February 2023
24. US-China tension must be placed in context of
US’s long term global dominance strategy
•long-term goal is to prevent emergence of
regional hegemon(s) in Eurasia
• Congressional Research Service, 2022, “Defense primer: geography, strategy, and US force design”, November 15
• “Most of the world’s people, resources and economic activity are located not in the Western
Hemisphere, but in the other hemisphere, particularly Eurasia [not defined].… US policymakers
for the last several decades have chosen to pursue, as a key element of US national strategy, a
gloal of preventing the emergence of regional hegemons in Eurasia….This objective reflects … two
key judgements: …
• a regional hegemon in Eurasia wld represent a concentration of power large enough to be able to
threaten vital US interests; and
• Eurasia is not dependably self-regulating in terms of preventing the emergence of regional
hegemons, [so Eurasian states] may need assistance from one or more countries outside Eurasia
to be to do this dependably.”
25. AI is beginning to super-charge US-China rivalry,
making it still more dangerous.
• There is an international arms race in militarized AI. It is becoming
possible, for first time in history, for an adversary to destroy (almost)
100% of its opponents. (Henry Kissinger, 2023 )
• AI + Quantum Computing will be still more dangerous for future of
humanity
• Geoffrey Hinton, “godfather of AI”: “The alarm bell I’m ringing has to
do with the existential threat of them [AI algorithms ] taking control. I
used to think it was a long way off, but not I think it’s serious and
fairly close.” He thinks the AI technology has the potential to surpass
human intelligence.” (Smith 2023; Harari 2023)
26. Biden’s IP is working , so far
•US overall factory construction is flat. But new
construction in electronics sector is booming !
•Since CHIPS Act announced summer 2022, more than
50 new chip production facility projects have been
announced in US. Eg big subsidy to TSMC for new chip
fab in Arizona. (Ngo 2023)
•Pressure growing in Washington to expand subsidy
program to boost US production of pharma and
shipbuilding and …
27. EU too is anxious to reduce dangerous
dependencies on China
•Eg EU imports 97% of its lithium – crucial for batteries
– from China; and very high % of its solar panels
28. BUT, EU & Japan & S Korea are angry at US
industrial policy
• They see Washington’s chips & green energy subsidies as a new form
of competition that hurts their own economies
• Danger of “race to the bottom” on tax incentives & subsidies
• Chips: Jpn, SK, Taiwan, have all raised subsidies for their chips
industry. EU considering new subsidies. But they could end up
drawing business away from not just China but also from each other
and the US – to the benefit of the corporations = “race to the
bottom”
• Clean energy and EVs: Brussels angry at US subsidies. Macron to
Senator Manchin, January 2023: “You’re hurting my country”.
29. Politics of the EU response to US subsidies
• Brussels has so far provided few subsidies to compete with US
subsidies – “EC is a regulatory superpower & budgetary dwarf”.
• But Brussels is waiving its rules limiting member states’ use of “state
aid”, rules which are meant to prevent subsidy races, & allowing
countries to adopt “matching aid” to compete with “countries outside
the EU”.
• Periphery countries like Greece & Portugal resist relaxation of limits
on “state aid”, b/c fear that rich countries like Germany wld be able to
further improve competitive edge further polarization within EU.
30. Reaching consensus b/w EU, Jpn and US
proving very difficult
• US has pursued the most aggressive path to decouple China from US in
advanced technologies.
• US wants EU & Jpn to agree to same restrictions against China as US
imposes. Eg Rahm Emanuel, US ambassador to Tokyo: the response to
Beijing’s economic coercion must “be collective and must be led by the
United States”.
• Washington worries that when it limits US firms in China, this gives
opportunity for German, France, Japan firms unless they are equally
constrained
• EU and Jpn are more cautious, more selective than US, b/c China remains a
crucial and growing market for them – they are much more exposed to
China than US is. They fear a subsidy race with US.
• (Inagaki 2023)
31. EU businesses call for more state support
•President of BusinessEurope, the pan-EU business
lobby group, says the combination of high energy
prices and hefty regulation has made “the risk of
deindustrialization real” unless Europe acts quickly. “If
we, Europeans, fail to create an attractive framework
today, we will lose urgently needed investments for
the green and digital transformation to global
competitors such as the US and China.” (Handcock 2023)
32. Multilateral organizations, G7, G20
• Washington has lost faith in multilateralism (eg WTO, World Bank, UN). It never
had much faith in G20
• Jake Sullivan, Biden’s national security advisor, recently defined G7 as “the
steering committee of the free world”.
• American emphasis on G7 rather than broader G20 and multilateral organizations
marks transition from the period of world affairs dominated by economics &
globalisation to a period in which geopolitics and strategic rivalries shape
economics -- both domestic & international economics.
• Sullivan’s use of phrase “the free world” is redolent of first Cold War.
Washington now rallying allies against enemies from the first Cold War: Russia
and China. (Rachman 2023)
• G7 leaders at Hiroshima summit (May 19-21 2023) spent a lot of time
talking about “supply chains” – for first time ever !
33. “Friend shoring” as the compromise solution?
• The common aim of US / EU / Jpn is to build more redundancy in
those supply chains that have potential to be “weaponized”.
• “Friend shoring” is part of this overall strategy. Friend shoring is
trade with countries that have shared values, rather than trade with
the entire world.
• Balances economic efficiencies of global integration with the security
& resilience benefits of lessening the influence of rival / hostile states.
• It focuses “economic integration” on economies of allies. (Kamin & Kysar 2023)
34. Bottom line: “the return of the policy that
SHALL be named” !
• On both sides of Atlantic, now widely accepted in governments ( if
not in mainstream Economics) that: leaving resource allocation to
“the market” to decide which industries grow (& limiting “govt
intervention” to “horizontal” measures) is a recipe for economic
vulnerability (eg to China, & to climate dangers), & monopoly
(especially high-tech monopoly – less than 10 tech firms make > 2/3
of total spending on AI R&D), & widening income inequality.
• This makes a sharp break from “free market” ideology, from
Washington Consensus, from “Structural Adjustment” ideology.
35. Developing countries ?
• The change in policy consensus in Washington & Brussels gives
scope for developing countries to use industrial strategy with less
censure from both sides of North Atlantic, as in the past
• BUT, mainstream thinking in World Bank, IMF, and in Anglo
economics profession continues to advocate “free markets”, “non-
discriminatory trade”, government “intervention” limited to
horizontal policies (eg subsidized credit for exports)
• Continues to believe: “The market knows best.” “The government
can’t pick winners”. “Govt intervention is justified only to fix ‘market
failures’”. “The best industrial policy is none at all” (G. Becker 1985).
36. “The return of the policy that shall not be named:
principles of industrial policy” (IMF, 2019)
• The two authors worked on writing the paper in their
“spare time”, not in IMF time.
• They had to get clearance from senior IMF management to
publish it – even as low-status IMF Working Paper.
• They have now revised the paper “Industrial policy for
growth and diversification: a conceptual framework”
(DP/2022/017), & published it with AFRICAN Department,
as a higher-status Departmental Paper.
• BUT IMF Communications Dept still tried to stop AFRICA
Dept from publishing it !
37. Conclusion, after 6 decades of deliberate
“development”
•World economy remains strongly “bifurcated” in
terms of income per person into North and South.
Little “catch-up” in average income. There is a
“middle-income trap” !
•Now that govts of the Core have started to champion
“industrial policy” this should give more latitude for
developing country govts to adopt “vertical”, sector-
targeted measures to promote “industries of the
future”
38. Question: how to do IP well rather than badly
?
• (1) Vertical industrial strategy must be complemented with more “horizontal”
measures.
• Eg Tax incentives: govts shd give firms equal tax incentives for investment in improving
skills of work force as they already give for investment in machinery
• Eg Public debt: fiscal rules shd be changed to allow more debt for strategic investments
• (2) How to set objectives of industrial strategy for developing countries?
• R. Hausmann, “ChatGPT’s lessons for economic devt”, Prjt Syndicate, May 8, 2023 argues
policymakers shd focus on exports above all: (a) raising rate of growth of exports, (b)
diversifying exports into more complex goods.
• BUT, export growth and import replacement should be actively integrated ! Import
replacement deepens domestic production structure. See Taiwan & SK
• (3) Now that IP is legitimate, question arises: where should IP stop, where shd govts
NOT “intervene” ? (Kamin and Kysar 2023)
39. References
• Cherif, R. and F. Hasanov, 2019, “The return of the policy that shall not be named: principles of
industrial policy”, IMF Working Paper
• Criscuolo, C. et al., 2022, “Quantifying industrial strategies: measuring industrial policy
expenditures”, OECD Science, Technology and Industry Working Papers, No. 2022/05
• Durand, C. 2023, “Hollow states”, NLR Sidecar, 15 May
• Freeman, A. 2023, PENN World Tables and WEO database, Geopolitical Economy Research
Group, University of Manitoba
• Handcock, A. 2023, “Geopolitics galvanises EU push for net zero”, FT Special Report: Europe’s
climate leaders, 30 May
• Harari, Y. 2023, https://www.youtube.com/watch?v=LWiM-LuRe6w
• Inagaki, K. 2023, “’De-risking’ China links takes precedence over ‘decoupling’”, FT 19 May
• Kamin, D. and R. Kysar, 2023, “The periods of the new industrial policy: how to stop a global race
to the bottom”, Foreign Affairs, May/June
40. References
• Kissinger, H. 2023, “How to prevent a third world war”, The Economist, May 20,
p.19 - 22
• Ngo, M. 2023, “US semiconductor boom faces a worker shortage”, NYT (I) 23 May
• Parker, G. 2023, “Policy veterans question Sunak’s industrial nous”, FT 19 May
• Rachman, G. 2023, “G7’s renewal marks a new era defined by superpower
rivalry”, FT 19 May
• Rosalsky, G. 2023, What if AI could rebuild the middle class? May 9,
https://www.npr.org/sections/money/2023/05/09/1174933574/what-if-ai-could-
rebuild-the-middle-class
• Smith, C. 2023 “’Godfather of AI’ quits Google amid ominous warnings about AI’s
‘existential threat’”, Forbes, May 5
• Wade, R.H. 2017, “The American paradox: ideology of free markets and the
hidden practice of directional thrust”, Cambridge J. Economics 41 (3), May
