Question

What is meant by the term industrial policy? How do governments attempt to create comparative advantage in sunrise sectors of the economy? What are some problems encountered when attempting to implement industrial policy?

Short answer

Industrial policy is a proactive strategic effort by the government to steer economic development. Governments can create a comparative advantage in emerging industries (sunrise sectors) through measures like investing in technology or education, reducing tariffs, providing subsidies, etc. However, implementation of industrial policy can face issues such as incorrect sector selection, skilled labour shortage, political interference, and inefficiency due to government intervention.

Step-by-step solution

Understanding Industrial Policy

Industrial policy is a strategic effort by the government to influence the development and growth of key sectors of the economy. This is typically done via subsidies, taxes, regulations and other types of government interventions.

Creating Comparative Advantage in Sunrise Sectors

A government may aim to create a comparative advantage in 'sunrise sectors', which are emerging industries set to become important in the future. The government can foster growth in these sectors through investing in technology or education, reducing import tariffs, providing subsidies, or otherwise supporting their development.

The Challenges Encountered

There are numerous issues that can arise when attempting to implement an industrial policy. These might include choosing the wrong sectors to promote, shortages of skilled labour, political interference, and potential inefficiencies created by government intervention.

Key concepts

Comparative Advantage

The concept of comparative advantage is an essential part of understanding how countries can benefit from trade and specialize in producing goods that they produce more efficiently than others. It is the idea that even if one country can produce all goods more efficiently than another, it can still benefit from trading by specializing in the production of goods where it has a relative efficiency advantage. This specialization allows countries to optimize their production and trade for mutual benefits.
Governments can influence comparative advantage through industrial policy by supporting specific sectors where they foresee potential growth or global competitiveness. This might involve investing in technology or education to enhance skills in a particular industry, making it more competitive globally. However, embedding a comparative advantage can be challenging as it requires foresight, strategic planning, and sometimes changing rapidly in response to market trends.

Sunrise Sectors

Sunrise sectors refer to newly emerging industries that have the potential to become significant in the future due to technological advances or shifts in consumer demand. The identification of sunrise sectors is crucial for governments trying to establish a thriving industrial base.
Examples of sunrise sectors might include renewable energy, biotechnology, and information technology. Governments often focus on these areas to create future economic opportunities. They can do so by:

• Investing in research and development to spur innovation.
• Providing infrastructure to support these new sectors.
• Offering incentives like tax breaks and subsidies to attract investment.

This strategic support aims to build a majority share in new industries, leading to robust economic growth.

Government Intervention

Government intervention plays a vital role in shaping a country's economy, especially when it comes to industrial policy. Such interventions can take various forms, including legislation, subsidies, tariffs, and grants. The government's goal is often to stimulate economic growth, protect employment, or promote social welfare.
While these interventions can provide necessary support to emerging industries, they can also lead to certain challenges, like market distortions. Potential issues include:

• Picking "winners and losers," which may involve selecting industries that do not ultimately become economically viable.
• Creating dependency on government support, where industries rely on subsidies and fail to innovate independently.
• Engendering corruption or favoritism due to political influence.

Despite these challenges, strategic government intervention can serve as a catalyst for successful industry development if well-managed.

Economic Development

Economic development refers to the sustained, concerted actions of policymakers and communities to promote the living standards and economic health of a specific area. Industrial policy is a tool often employed to boost economic development by fostering industrialization and competitiveness.
Successful economic development relies on creating a favorable environment for business growth. This includes:

• Investing in infrastructure like roads and telecommunication to enhance business operations.
• Developing human capital through education and skills training.
• Encouraging entrepreneurship and innovation through supportive regulatory frameworks.

Overall, the overarching aim of economic development is to increase the economic well-being of a nation's population, making it crucial to carefully balance industrial policies with long-term development objectives.