Institutions at the helm of industrial policy

Andrés Rodríguez-Pose

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Industrial policy is back in vogue, with governments rediscovering their appetite for state-led development. Yet its fortunes often hinge on a neglected variable: institutional quality. This paper reviews the rise, fall, and resurgence of industrial policy, arguing that institutional capacity has been the decisive, if underappreciated, factor separating success from failure throughout this cycle. It then illustrates this argument empirically using EU Cohesion Policy as Europe’s de facto industrial policy, examining regional growth across NUTS-3 regions over 2006–2024 against fund intensity and both the level and the trajectory of regional government quality. The results reveal a systematic empirical pattern: cohesion spending is connected with faster growth only where institutional quality improved; in places with backsliding institutions the association is negligible. Sectorally, “hard” lines—energy, IT, transport, skills, environment—are linked to growth almost everywhere, while “soft” lines—R&D, social infrastructure, technical assistance—show a positive association chiefly in regions that managed to improve their governance. Spain offers a cautionary tale: substantial inflows amid deteriorating governance have coincided with thin convergence. These patterns point to a policy-relevant regularity: any industrial strategy that neglects institutional reform risks squandering resources. The analysis suggests that competitive allocation, rigorous monitoring, credible sunset clauses, and, above all, the checks and balances that sustain investments in state capacity should accompany EU transfers. Europe’s strategic ambitions will ultimately rest not just on how much it invests, but on whether it can strengthen the institutional scaffolding that shapes investment returns.

Keywords: industrial policy; institutional quality; EU Cohesion funds; development; policy effectiveness; EU Spain; Policy effectiveness; Development; Institutional quality; EU; Spain; Industrial policy (search for similar items in EconPapers)
JEL-codes: H11 R58 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2026-06-23
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Published in SERIEs, 23, June, 2026. ISSN: 1869-4187

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