Industrial policy Flashcards
industrial policy
governments help industries which have positive externalities, such as ones that have a large impact on growth
they do this by:
• cutting red tape
• restricting imports from overseas competitors (this can help firms that are just starting up, as it means they won’t have to compete with superior products and will therefore get to develop through learning by doing)
• giving firms privileged access to imports
Risks of industrial policy
it’s difficult to decide which industries are worthy of the government’s help. Industries will lobby the government and this may cause corruption
it’s also politically difficult to take special treatment away from firms and industries that no longer need it
firms and industries protected by industrial policy may grow complacent and become inefficient because they no longer have to compete with others or work as hard in order to retain profits
therefore industrial policies only work in countries where the government is strong enough to fight off corruption and take protections away from firms and industries (so it has only had lasting benefits in countries such as japan and south korea)
