Industrial Transformations

The latest US experiment with industrial policy—comprised primarily by the Inflation Reduction Act (IRA), the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act—has sparked outright opposition and pleas for restraint, but also calls for far more ambitious action.

The divergent responses are representative of the lack of consensus about the nature of the challenges that US industrial policy could or should address. In the broadest sense, industrial policy refers to the deployment of policy tools in order to influence how we create value—what goods (and services) we produce and how we produce them. In economist Ha-Joon Chang’s words, it is a set of “policies aimed at particular industries (and firms as their components) to achieve outcomes that are perceived by the state to be efficient for the economy as a whole.”¹ Mario Cimoli, Giovanni Dosi, and Joseph Stiglitz argue that industrial policies “come together with processes of ‘institutional engineering’ shaping the very nature of the economic actors, the market mechanisms and rules under which they operate, and the boundaries between what is governed by market interactions, and what is not.”² These different understandings of industrial policy all recognize the government as a key actor in shaping the world of production in line with a public purpose.

There is a growing awareness that all nations use industrial policy on an ongoing basis, whether or not they acknowledge it as such. Many conventional policy measures—from public investment allocations and trade measures to environmental regulations and public procurement rules—influence which industries and production methods thrive and decline, which economic (and social) actors win and lose power, who creates value, and who captures it. Therefore, whether or not policymakers frame such policy measures as industrial policy, that is precisely what they are.

However, the specific uses of industrial policy vary widely. States have historically deployed industrial policy for a range of purposes, from narrow objectives like temporarily ramping up production of a strategic good (e.g., masks during a pandemic), to broader and more ambitious missions, like winning wars or transforming poor countries into rich, industrialized ones. 

Today, the existential threat of climate change and environmental degradation, rooted in a system of production that has been unambiguously diagnosed as terminally self-destructive from a range of scientific perspectives, necessitates a similarly ambitious transformation of the production systems that make up the American economy. The emerging US industrial strategy recognizes climate change as a central problem, but the full scope of existential threats we face (e.g. biodiversity loss, soil depletion, and water pollution) have yet to be integrated as priorities.

Industrial policy can have even greater implications. Broadening our outlook allows a host of societal challenges to come into view. It has long been evident that the burden of environmental degradation falls more heavily on poor Black, Brown, and Indigenous communities.³ If we aspire to more equitable outcomes, environmental injustice has to be integrated as a priority in the redesign of production systems.

While these deep and intertwined problems cannot be solved exclusively through industrial policy, it can address issues ranging from pollution and access to safe drinking water, to poverty alleviation and housing provision. In pursuing this undertaking, we can gain timely lessons from an academic field devoted to the problem of productive transformation: development economics.

Dependent structures

Among the most profound insights of this scholarship is that productive structures—a country’s collection of technological-productive capabilities—are highly persistent across time. Studies of long-run trade dynamics have shown that countries specialized in exporting low value-added products are very unlikely to shift toward specializing in more sophisticated products.⁴ Moreover, this global pattern of productive specialization has been largely persistent over two eras of globalization, with far-reaching consequences: the economic divergence between rich and poor countries that emerged during the first era of globalization resulted from unequal gains from trade between exporters of raw materials and manufactured goods.⁵

Policymakers have recognized the difficulty in transforming a nation’s productive structure since well before the industrial revolution. The scale of the challenge motivated ambitious industrial policies. France’s Finance Minister Jean-Baptise Colbert (1619-83), for example, banned imports of Venetian glass to protect the state-owned glass manufacturer that today is the construction materials multinational St. Gobain. In the fourteenth century, King Edward III of England sought to develop local wool manufacturing capabilities by hiring Flemish weavers (the industry leaders at the time) and banning the import of woolen cloth; he even wore English cloth to set an example.⁶

The origin stories of today’s industrialized economies are variations on this theme of path-defying policies,⁷ including in the US, which began by promoting “infant industries” in textile and steel manufacturing when Alexander Hamilton ⁸ defied British pressure—and advice straight from Adam Smith—to continue specializing in raw materials and leave manufacturing to Britain. US industrial policy has since been marked by several ambitious transformations of national infrastructure, periods of war-time economic planning, and the development of state-led innovation hubs in several key industries, most notably the military industry, which grew out of war-time mobilizations.⁹ Much like these early industrializers, the few countries that have managed to achieve path-defying change in the twentieth century—including South Korea, Taiwan, Japan, and China—have done so not by allowing pre-existing market dynamics to determine their productive structures but by reshaping those structures using a range of tools, from price management and public enterprises to trade management and workforce planning.¹⁰

At this historical juncture, there are compelling reasons to think that the intertwined societal challenges the US faces call for similarly ambitious, transformative approach. Efforts at economic transformation have historically been curtailed by grave underestimation of the necessary scale and scope of the policy interventions. US policymakers risk this pitfall if they give in to pressure to deploy industrial policy narrowly, relying on a limited set of policy tools. US industrial strategy already features vigorous deployment of public investment and complementary “carrots,” but pathbreaking change will require more.¹¹ “Sticks” like industry-wide rules to bring pollution levels in line with climate and human health targets may be less politically tractable, but they will likely be necessary for meaningful change. To manage future crises, we will need more potent tools and institutions from the industrial policy toolbox, like price management, public banks, public enterprises, and public equity stakes.

Measuring development

The field of development economics emerged as a response to what it deemed “the economic problems of poor countries.” Motivated by a concern of expanding consumption capacity, classical development economists focused on questions related to how states could achieve capital accumulation for technological change, economic diversification, industrialization and, as a result, per capita growth.¹² However, the relationship between growth and living standards remained largely unexamined. Rising living standards, it was assumed, would be the natural byproduct of increasing per capita income through industrialization.

Mounting evidence that growth often did not improve human well-being gradually forced development economists to broaden their framework. Pakistan’s former financial minister, Mahbub ul-Haq, who would later champion the “human development” approach in the United Nations, noted: “When rapid economic growth during the 1960s failed to translate into improvements in the lives of Pakistan’s masses, I was forced to challenge many of the premises of my initial work.’’ Similarly reflecting on the early stages of his economic thinking, development economist Raul Prebisch wrote:

Up to this stage, I had not paid sufficient attention to the problem of income disparities [nor] to the fact that growth had not benefited large masses of the low-income population, while at the other extreme of the social structure high incomes flourished. Perhaps this attitude of mine was a remnant of my former neoclassicism, which assumed that growth in itself would eventually correct great income disparities through the play of market forces.

Prebisch and Haq’s accounts reflect the gradual expansion of development economics into issues like inequality, unemployment, and the fulfillment of basic human needs. Amartya Sen’s Development as Freedom (1999) cemented this humanist turn in development theory. The “human development and capabilities” scholarship examines how policies can expand human capabilities (or freedoms), and more recently has begun to explore how that expansion can be achieved within ecological boundaries.¹³ The shift away from growth-centric models is also reflected in the proliferation of metrics that add to or altogether displace growth as a proxy for societal prosperity.¹⁴

This evolution can be read as a record of a gradual realization that (i) an economic transformation that expands growth does not necessarily expand well-being; (ii) the expansion of well-being also involves policies that have little or nothing to do with growth; (iii) policies for economic transformation need to center the objective of improving human well-being; (iv) those policies need to be consistent with ecosystem boundaries to ensure species survival. Though these lessons are still often forgotten or marginalized in policy design, they can have profound implications when taken seriously.

First, they call on policymakers to articulate a vision for industrial policy that centers well-being as its ultimate objective. As Todd Tucker and Steph Sterling suggest, “Perhaps the most important question for policymakers when developing industrial policy is whether it is promoting the industries we need most to allow all members of our society and country to flourish.”¹⁵

In the absence of a holistic vision and missions for a “well-being-oriented” industrial policy (i.e., a national development strategy), basic principles can serve as heuristics to help clarify how policymakers can make “the perspective of freedom coherent and cogent”¹⁶ in policy design and execution. Foundational principles like equity, human rights, ecological sustainability, and democratic accountability can improve the quality of policy design if seriously considered and consistently applied.¹⁷

And much like development scholars use the principle of “exhaustiveness” to ensure that their analyses holistically examine the impacts of each policy intervention on the full range of critical human capabilities,¹⁸ each stage of industrial policy design should be guided by a concern for well-being in all its dimensions.

Finally, reconceptualizing notions like efficiency, synergy, and systemic coherence can guide policymaking priorities by optimizing collective wellbeing over financial return, investing in multiple projects that amplify positive outcomes, and preventing indirect or systemic outcomes that may undermine public interest objectives.

The last of these can help craft an industrial strategy that accounts for the effects of policymaking and recognizes that every industrial policy is also an environmental policy, a distributional policy, a natural resources policy, a labor policy, a health policy, and so on. These policies influence power relations and distributional outcomes—who gets or loses access to clean air and water, who keeps or loses their homes, jobs, or livelihoods. This means that an industrial strategy designed around well-being needs to evaluate how different policy pathways—no matter their sectoral specificity or their core mission—affect a broad set of public interest challenges and well-being objectives.

For example, the IRA’s investments in decarbonization of highly polluting industries like steel, aluminum, and cement could target the broader environmental and health impacts of industrial production as well as the disproportionate harm of these effects, which are largely felt by Black, Brown, and Indigenous communities.¹⁹ The distribution of investments could involve equitable hiring standards and community benefit agreements, demonstrating the importance of process in tackling more than a single issue at once.

A democratic process

Since economic transformation is a political process as much as an economic one, the viability of transformative policies is contingent on buy-in from critical stakeholders. Failure to manage class politics to secure a supportive political coalition has historically been a common pitfall of industrial policy. Conversely, successful economic transformations have featured far-reaching political interventions, such as measures to neutralize hostile economic elites vested in the preservation of the status quo. South Korea’s land reform in the 1940s and 1950s, for example, weakened the political power of the landlords, clearing the way for the rise of a pro-industrial policy regime in the 1960s. In the Prussian “marriage of iron and rye,” Bismarck provided protections to the landlord class (the Junkers) in exchange for their acquiescence to industrial policy measures, including tariff protections for the emerging heavy and chemical industries.

In the US, the recent success of major renewable energy investments is partly a product of protracted coalition building between labor, certain sectors of the environmental movement, and sectors of the capitalist class that stand to gain from producing renewable energy technologies—coupled with political negotiation to neutralize hostile interest groups. However, the limited scope of the IRA relative to the Biden administration’s Build Back Better Agenda reflects the enduring power of those opposed to a far-reaching economic transformation. In this context, the implementation phase of the trifecta of US industrial policy legislation presents an opportunity to use democratic engagement as a tool to strengthen a coalition capable of propelling lasting and pathbreaking change.

As Sen reminds us, key actors are all too willing to accept sacrifices like “low welfare, high inequality, [and] intrusive authoritarianism” to achieve “development” in “the future.” In today’s context, some advocate privileging the speed of deployment of renewable energy and the construction of new infrastructure and manufacturing capabilities over other objectives. Critics of the CHIPS and Science Act’s labor, childcare, and community benefit conditionalities argued that higher costs could hamper the rapid buildout of chips manufacturing capabilities. Childcare provisions were entirely excluded from the final version of IRA, which had been proposed in the Biden administration’s original Build Back Better bill.

Notwithstanding the need for speed, Sen notes that the procedural aspects of policy can be just as important when it comes to delivering outcomes that effectively expand people’s freedoms. Procedures define the degrees of agency wielded by different groups in the design, execution, administration, and oversight of the institutional arrangements that structure their societies. Policymakers need to ensure access to decision-making in a way that compensates for existing power asymmetries. Failure to create institutional safeguards—from governance mechanisms to investment standards—that proactively push against those asymmetries risks delivering an industrial policy that exacerbates inequities and further concentrates benefits (and power) in a vicious cycle.

With emergent US policies still in flux and a growing awareness of the scale of the challenges to be met, policymakers have a unique opportunity to build a broad and powerful coalition for a transformative industrial strategy. Reflecting on experiences of industrialization throughout the nineteenth and twentieth centuries, and engaging with the development economics literature which has emerged from these experiences, is vital to this effort.