Good and Bad Industrial Policy Lessons for the Asia-Pacific in a Changing Global Order

Thu 05 Jun 2025 1730h
Revisiting Industrial Policy in a Changing Global Order: PAFTAD 42
Panel — Industrial Policy Lessons for Policy in Asia and the Pacific
Panelists — Ross Garnaut, Ann E. Harrison, Mari Pangestu, Danny Quah
Moderator — Chad Bown
Venue — C. Fred Bergsten Conference Center
Location — Peterson Institute for International Economics, Washington DC

Good and Bad Industrial Policy Lessons for the Asia-Pacific in a Changing Global Order

(The below isn’t exactly what I said, but much more what I intended. As usual, in the moment, I ended up too long-winded and roundabout.)

One of the more powerful wake-up calls from policymakers for economists recently is this: “Advocating industrial policy was once considered embarrassing—now it should be considered something close to obvious.”

Along with the best thinkers on the subject, I agree that, simply as a matter of doing science, industrial policy has, despite some powerful exceptions, peculiarly remained for too long at a level of just debating whether it should be done at all. Asymmetrically, on all other kinds of economic policies, we have long gotten past that basic stage to, instead, analyzing how to run well different policies.

This does not justify, however, swinging to the opposite extreme: that anything goes, once tagged industrial policy. I cannot be the first to notice how, suddenly, all kinds of real-world policy interventions seek legitimacy simply by calling themselves industrial policy. Trigger words (in some parts of the world, “national security” or “China”) look to assume a mantle of resonance by marrying these ideas: “We are designing the 21st-century industrial policy needed to counter the market failure that is China.”

In macroeconomics, we spent decades designing instruments to detect market failures. I don’t remember when the profession took a vote and decided that an entire sovereign nation was one.

Policymakers in the Asia Pacific region have long worked with multiple, nuanced understanding of industrial policy. In developing Asia such policies are deliberate attempts by policymakers to reshape the distributional profile of industrial activity—encouraging growth in some parts of the cross section of industrial activities, allowing yet other parts to languish. Industrial policy was sometimes designed as a deliberate bet on what would become technologies of the future; growth industries; high-value, job-creating activities, conditional on the skills profile of the domestic workforce; and so on. The calculations that went into these bets were sometimes predicated on repairing visible market failures. Other times, market failures were less obvious: missing markets, industries that didn’t yet exist, environmental spillovers, yet unborn market participants.

Right after the 1997 Asian Financial Crisis, when the Korea Creative Content Agency was just being put together and South Korea’s government started to actively encourage cultural exports, only one member of Blackpink was older than two. Most South Korean music before the mid-1990s was military-derived, changing only with the group Seo Taiji and Boys.

Ignominiously and disgracefully, in the Asia Pacific but also elsewhere, other calculations presented as industrial policy were instead about lining the pockets of local elites.

For decades, Asia-Pacific’s industrial policy, in its optimal form, was focused on economic growth and development. But when a Great Power like the US decided to turn to it, industrial policy transmogrified to become, instead, an object of economic statecraft. By this, I mean the use of economic instruments to advance objectives in national security and foreign policy, where it becomes legitimate to inflict economic pain for political gain. As a tool of economic statecraft too is how the US views industrial policy in China, rightly or wrongly.

Three points I made in my intervention at the Conference:

ONE // Not all interventions are industrial policy interventions. Some interventions are just bad policy interventions.

Monetary policy—the setting of interest rates—is not industrial policy. Tax policy that takes the form of a general consumption tax or income tax is not industrial policy: it doesn’t tilt the landscape of industrial activity, but affects them all the same way. By the same token, distortionary tax benefits that reward one industry or another do represent industrial policy.

While the US might today view industrial policy as an instance of economic statecraft, not everything that is economic statecraft counts as industrial policy. Foreign lending and foreign aid have been important instruments used to advance America’s foreign policy. But they are not instances of industrial policy. On the other hand, tariffs on selective industries are an instance of industrial policy—they discriminate across different parts of the cross-section distribution. But depending on what those industries are those tariffs don’t necessarily represent economic statecraft in that they advance a nation’s foreign policy or national security.

Here’s the problem. In corrupt Asian societies, selective industrial policy can be given a narrative of advancing growth and reducing poverty, while in reality they simply allow entrenched elites to plunder a nation’s wealth. In corrupt advanced societies and Great Powers, selective industrial policy can be given a narrative of national security and foreign policy, while in reality they simply open the door to operations that violate international law and accepted practice in the marketplace.

By conflating the boundaries of what industrial policy is, we allow such policies to escape the scrutiny of economic science.

TWO // For industrial policy, small countries and Great Powers differ. Importing the reasoning being used in Great Powers into use in small states will potentially impoverish us all.

There is an obvious distinction in that when industrial policy is costly, Great Powers that are rich can afford to do things that smaller, poorer nations cannot. But beyond that because along the relevant dimensions small states are price-takers, their optimal behaviour is to perform as best they can subject to constraints. Because Great Powers don’t view themselves as price-takers, their optimal behaviour—whether for reasons of economic statecraft or strengthening their economy—is to crush the competition. They can do this either by raising themselves or keeping others down. Because they are Great Powers, we don’t call them out even when they do the latter. As Thucydides said, “Great Powers do what they will, the rest of us suffer what we must.”

There might be important lessons for small Asia Pacific states in our seeing how the Gret Powers are doing it. But our taking on board those lessons will make us all collectively poorer.

THREE // Empirical evidence shows heightened industrial policy activity everywhere. Some of that activity is very good and worthwhile. Others are very bad.

Heroic scientific work by economists Juhasz, Lane, and Rodrik, and Cherif and Hasanov, have been eye-opening on the increase in industrial policy worldwide. More than ever is there urgency for science to keep track of the misuse of industrial policy. As with all policy, there are good reasons for undertaking policy action, and there are bad reasons. In the Asia-Pacific region we watch for when corruption in industrial policy destroys value, exacerbates inequality, and entrenches elites. In advanced economies and Great Powers, their scientists need to understand better when economic statecraft is appropriate and when it is not, and not take as given that simply uttering the words “national security” or “contain China” alongside a mention of “industrial policy” immediately implies an appropriate call to action.