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The New Empirics of Industrial Policy

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Abstract

Nations have and will continue to shape their economies through industrial policy. Nevertheless, the empirical literature on these interventions is thin, dwarfed by the attention industrial policies receive from policymakers across the world. In this paper, I discuss the difficulties of empirically studying industrial policy and review how new econometric work is confronting these issues. Through careful research design and attention to institutional detail, I argue that emergent studies are rapidly expanding what we know—and updating what we thought we knew—about these policies. As well, I argue tools from policy evaluation allow us to study the impact of endogenous industrial interventions. This review is a proposal to take industrial policy, along with their complexities, more seriously as objects of inquiry. Doing so requires not only more serious evaluations of past policy but also a reevaluation of past empirical work and consensus.

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Notes

  1. Harrison and Rodriguez-Clare (2010) best summarize the situation: “One challenge that we face in evaluating the empirical literature is the large gap between the theoretical justification for IP and the quantitative work that has been done to evaluate its ‘success’” (p. 4041–4042).

  2. Frank Taussig’s (1914) important discussion of the role of tariffs and development of US industry spawned a century of scholarship on the development of the American economy (Irwin 2017). Historians Bairoch (1972) and Pollard (1981) argued that protections played an essential role in early European growth, inciting a long literature on the “tariff-growth paradox” (see O’Rourke 2000; Jacks 2006). Amsden’s (1992) and Wade’s (1990) comparative studies of East Asian industrial policy, and the sizeable critical literature exploring their arguments, were extensively synthesized by Noland and Pack (2003).

  3. Some goals of industrial interventions—such as strategic aims or national prestige—do not factor into our cost-benefit analysis. Static welfare costs may not have dissuaded General Park Chung Hee from building a national domestic military-industrial complex in the midst of a geopolitical crisis (Lane 2019). Similarly, strategic defense concerns may be a core motive behind China’s shipbuilding industrial policy (Kalouptsidi 2018).

  4. Rotemberg (2017), discussed below, presents interesting ways of considering the general equilibrium effects of industrial policy using within-country variation.

  5. For example, Balassa (1978), after reviewing cross-country evidence on industry interventions, provides exemplary critiques against sector specific targeting, in favor of more “soft” infant industry measures.

  6. Larry Westphal, World Bank economist during South Korea’s industrialization, argues that “lack of agreement about the required counterfactual” has fueled the debate about East Asian industrial policy (Westphal 1990, p.48). In their critical review of industrial policy evidence, Pack and Saggi (2006) reiterate that “it is impossible to offer a single agreed counterfactual to evaluate the success of industrial policy targeted to individual industries” (p.283).

  7. With respect to Japanese industrial policy, Gilpin (2011) writes: “There is considerable evidence on both sides of this debate, but the outcome remains inconclusive because there is no counterfactual…” (p.162).

  8. This point applies to structural and reduced-form approaches alike.

  9. Early aggregate regression studies of interventions include Krueger and Tuncer (1982), Harrison (1994), Beason and Weinstein (1996), Lee (1996), El-Agraa (1997), Pack (2000), and Lawrence and Weinstein (2001).

  10. Westphal (1981) and Grossman (1990) provide excellent early reviews of case studies and simulation-based studies.

  11. An exhaustive treatment of related issues, model uncertainty, mismeasurement, heterogeneity, and more is provided by Durlauf et al. (2005).

  12. Rodriguez and Rodrik (2000) consider the panoply of issues confounding studies of trade policy (specifically, openness); using the contemporary language of causal inference, Billmeier and Nannicini (2009) show how these issues undermine the causal estimation.

  13. Furthermore, under certain conditions, these negative relationships are more common in cross-country settings.

  14. As I discuss below, it is unclear what the specific treatment is.

  15. Many earlier studies of this flavor are reviewed by Grossman (1990). Other empirical examples include Baldwin and Krugman’s (1988a) analysis of industrial policies surrounding Airbus and Baldwin and Flam’s (1989) study of the Canadian airplane protection and its effects on Swedish and Brazilian markets. Irwin (2000a) studies the potential impact of nineteenth century steel industry protection.

  16. In a well-known comment on Krueger and Tuncer (1982), Harrison (1994) highlights some conceptual and statistical issues with their approach. In fact, her reanalysis overturns the results of the original 1982 analysis.

  17. Studies of both South Korean and Japanese protection may treat “protectionist periods” as one homogenous period. However, liberalization of Japanese trade policy began in the 1960s and in South Korea in the 1980s (though there had been a steady decline in restrictions prior).

  18. In an excellent early review of infant industry policy, Grubel (1966) describes the complications faced by Frank Taussig’s early studies of US interventions; Taussig found “tariffs once imposed never seem to get removed, thus making it impossible to observe whether protection has been successful or not” (p. 339).

  19. Anderson and Van Wincoop (2004): “The grossly incomplete and incomplete and inaccurate information on policy barriers available to researchers is a scandal and a puzzle” (p.693).

  20. Also see Irwin and Pavcnik (2004), who used a structural framework to explore the impact of subsidy reforms on the international airplane market when subsidies themselves are hard to observe.

  21. Also see Spencer (1986), who considers the question “What Should Trade Policy Target?” through the lens of new trade models.

  22. And similarly, sectors with higher output growth or total factor productivity.

  23. Notably in evaluating labor market programs in observational settings (Heckman et al. 1996, 1999)

  24. Or, more specifically, something similar. For expositional purposes, I will treat this as an ATET.

  25. Greenstone et al. (2010) notably used this strategy to identify the agglomeration effects of large plant openings. The generalization of “near-miss” identifications is from Neumark and Simpson’s (2015) discussion.

  26. Longer-run analysis (Bernini et al. 2017) argues TFP eventually increased, and that these effects may take time.

  27. In the case of the RDD design, the authors estimate the local average treatment effect (LATE) of the program.

  28. Also see Azoulay et al.’s (2019) RDD study of the impact of US NIH funding. The findings of recent quasi-experimental studies dovetails with contemporaneous (control-based regression) research by Le and Jaffe (2017) on the efficacy of New Zealand’s R&D grant policies.

  29. See Van Beveren (2012) for an extensive review of work on structural estimation of TFP.

  30. In particular, Ackerberg et al. (2015) propose means of dealing with deficiencies of the early control-function approaches to production function estimation.

  31. Also see Doraszelski and Jaumandreu (2013), who consider similar issues in light of R&D expenditures. Eslava et al. (2017) propose promising new methods that utilize input prices for production function estimation.

  32. De Loecker and Goldberg (2014) provide a comprehensive review of these issues in the estimation of production functions, with an emphasis on evaluating the performance of firms in response to trade policy; see Garcia-Marin and Voigtländer (2019) for an application of these methods, evaluating the impact of exporting on firm productivity.

  33. See Goldberg and Pavcnik’s (2016) extensive review of current trade policy studies.

  34. Also see Costinot and Rodríguez-Clare (2014) review of this literature.

  35. Lehmann and O’Rourke (2011) perform a similar correlational exercise, exploring the relationship between the structure of sectoral protection and growth across several nineteenth-century European economies. Distinguishing between agricultural, manufacturing, and revenue-oriented tariffs, they find that only manufacturing tariffs are significantly correlated with aggregate growth during the period.

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Acknowledgments

I would like to thank Alice Evans, Samantha Eyler-Driscoll, Weijia Li, Ernest Liu, Rachel Marshall, Dani Rodrik, Lucy Valentine, and the editor for their invaluable input and comments.

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  1. Monash University, Wellington Rd, Clayton, VIC, 3800, Australia

    Nathaniel Lane

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Lane, N. The New Empirics of Industrial Policy. J Ind Compet Trade 20, 209–234 (2020). https://doi.org/10.1007/s10842-019-00323-2

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