Stimulating growth: the role for industrial policy
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A large number of transition countries have started pursuing various forms of industrial policy. They are doing this in the belief that market failures and other factors justify government intervention to improve the efficiency of firms and sectors, while achieving the structural change that more dynamic and productive activities require. This is despite the fact that industrial policy has had a very chequered history. The challenge for countries is not only to identify the particular market failures or constraints (typically relating to finance, infrastructure, innovation, information and human capital) that a given industrial policy aims to address, but also the appropriate instruments that need to be deployed.
Industrial policy can be either horizontal– affecting the business environment in which firms and industries operate– or vertical and hence targeted at specific firms, industries or sectors. There is relatively little disagreement about the role of horizontal policy but experience with vertical interventions has been very mixed. These interventions need to be designed carefully to avoid the pitfalls that weak institutional environments and poor governance pose.
There are, however, several areas where selective government intervention may be warranted– particularly in financefor innovative activities, assistance with forming agglomerations or clusters of economic activity, and building the key capabilities that countries need in order to diversify and improve the quality of their products. In designing interventions in these areas, priority should be given to activities that are, as far as possible, subject to some discipline from market competition and where private sector participation– for instance through co-financing– can be established. Experience suggests that the targeting of specific products or sectors should be avoided.
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