Using Industrial Policy for Productive Transformation: Three Lessons from Development Economics for US Industrial Strategy
May 25, 2023
By Isabel Estevez
"With the emergent US industrial strategy still in flux and growing awareness of the need for deep productive transformation, policymakers face a unique opportunity to build a broad and powerful coalition for a transformative industrial strategy on the scale of today's critical societal challenges."
The latest US experiment with industrial policy, embodied in the Inflation Reduction Act (IRA), the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act (IIJA), comprises historic public investments in domestic manufacturing, infrastructure, and energy. These emerging policies have sparked a range of reactions—from outright opposition to any use of industrial policy, to pleas for restraint, to calls for far more ambitious action.
Underlying much of this disagreement is a lack of consensus about the nature of the challenges that US industrial policy could or should address: Those who oppose any use of industrial policy seem to deny that the US faces problems that might benefit from industrial policy solutions, while those who argue for greater ambition recognize that the US faces myriad challenges—not least the existential challenge of climate change—that are unlikely to be met without profound transformation of the production systems that make up the US economy.
In the sections that follow, I argue for a broad understanding of the intersecting challenges that US industrial strategy could and should address, and offer some timely lessons from an academic field devoted to the problem of productive transformation: development economics.
Efforts at economic transformation have historically been curtailed by grave underestimation of the necessary scale and scope of the policy interventions, and US policymakers risk falling prey to this pitfall if they give in to pressures to deploy industrial policy narrowly, relying on a limited set of policy tools.
Great economic transformations have often sidelined or deferred (sometimes indefinitely) human well-being objectives in favor of other strategic priorities. Policymakers should design industrial policy with a more humanist sensibility.
Failure to effectively manage class politics and secure buy-in from a broad range of stakeholders can both undermine the viability of industrial policy and hamper its ability to properly assess public interest challenges to deliver on public interest objectives. Conversely, effective democratic engagement can help policymakers better diagnose problems and build buy-in and momentum for transformative change.