Industrial Change, Barriers to Mobility, and European Industrial Policy

Abstract

Within the European Community, there is now a widespread feeling of industrial crisis. In contrast to the prosperous 1950s and 1960s, the 1970s and 1980s have seen sluggish growth and a series of major shocks to which European economies have adjusted only slowly. In this paper, we evaluate the design of industrial policy within this context. Our theme is that industrial policy can and should be used to encourage and direct change in industrial markets. Drawing both on recent developments in the economic theory of industrial organization and on a growing body of empirical evidence, we emphasize not only the market failures which prevent free markets attaining static efficiency but also the longer run importance of dynamic incentives in a changing world. In our view, industrial policy should be designed not to specify and enforce particular outcomes but to alter market processes by attacking the rigidities which impede both the force of market selection external to the firm, and the pressures for change from within the firm. Our discussion is in two main parts. In Section 2 we contrast the policy problems of the 1960s with those of the 1970s and 1980s, in part to show why a change in industrial policy was needed, and in part to stress how market rigidities have become the key problem which industrial policy must tackle. Section 3, the main part of the paper, investigates these rigidities, particularly those arising from entry and exit barriers