Industrial Policy: No Longer a Dirty Word but Still Misunderstood

Danny Leipziger

World Economics, 2025, vol. 26, issue 3, 38-53

Abstract: The paper traces industrial policy (IP) from Alexander Hamilton's 1791 advocacy for US manufacturing to modern examples like Japan's MITI and South Korea's export-driven growth, highlighting China's rise as a global manufacturing powerhouse through extensive IP use, and noting the recent resurgence of IP in the US and Europe, as seen in Biden's and Trump's policies and the Draghi Report's call for European competitiveness. South Korea's economic ascent, driven by the 1970s Heavy and Chemical Industry initiative, relied on export-oriented policies, directed credit to chaebol, competitive exchange rates, and robust planning via the Economic Planning Board, offering a model for EMDEs, unlike Brazil's failed attempts to protect inefficient industries, while Vietnam's FDI-led approach shows a successful alternative. China's “Made in China 2025†plan, targeting dominance in 10 key industries, has significantly influenced global markets, particularly affecting South Korea, with subsidies to state-owned enterprises raising US concerns about unfair trade practices, though global consumers benefit from cheaper imports, the concentrated job losses in places like the US Rust Belt fuel political backlash. The paper advises EMDEs to focus on attracting FDI to gain skills and technology rather than picking winners, as most lack the capacity for aggressive IPs, while advanced economies' increasing use of IPs (e.g., US Chips Act, Europe's Draghi Report) requires careful targeting to avoid wasteful subsidies, with a call for global cooperation to mitigate negative externalities and revitalise frameworks like the G20.

Date: 2025
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