The Possibility of Industrial Policy

Abstract

In this paper I shall outline and analyse the case for employing industrial policy in the pursuit of economic development, in the particular context of Sanjaya Lall's contributions in this area. The case for industrial policy rests on both a positive vision (the nature of technological knowledge and technological capabilities) and a normative vision (government capacity and the promotion of competitiveness). The case for industrial policy depends on establishing both its necessity and its possibility. Necessity is defined in terms of the nature of knowledge and technology, and its implications in terms of market failure; possibility is defined in the context of political economy, and in terms of the costs of discretionary policy interventions. The broader debate on industrial policy is framed in terms of these two dimensions. In particular, the possibility of a welfare-enhancing industrial policy is circumscribed by the ability to control the potential costs of discretionary government intervention. This ability is in turn a function of the political process and of “social capital”, a late concern of Lall's.