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Archives of Business Research – Vol. 10, No. 3

Publication Date: March 25, 2022

DOI:10.14738/abr.103.11682. Aiginger, K. (2022). Society Shapes Industrial Policy, Industrial Policy Shapes Society. Archives of Business Research, 10(03). 33-51.

Services for Science and Education – United Kingdom

Society Shapes Industrial Policy, Industrial Policy Shapes Society

Karl Aiginger

University of Economics and Business, Vienna, Austria

Policy Crossover Center: Vienna-Europe, Vienna, Austria

ABSTRACT

Industrial Policy has been defined and performed in very different ways over time

and across countries and continents, along with its aims and scope. Instead of

repeating these controversies, the article starts with the emerging consensus that

systemic industrial policy should support societal priorities and that instruments

should be used which maximize synergies with other policy strands. A future- oriented industrial policy should also no longer maximize national priorities, but

goals should at least be shared with neighboring countries. Realistically, we have to

acknowledge that it will remain a weapon in the competition between superpowers

and those who want to defend or gain this status. Industrial Policy will also be

different in emerging countries with low income and education, a high agricultural

share, and persistent gender differences, compared to that in highly industrialized

countries. Industrial policy leads to and requires structural change, with causality

running in both directions. Its shape will influence the "future of capitalism", and

the socio-ecological system will define the content of a systemic and integrated

industrial policy.

Keywords: Systemic Industrial Policy, Future of Capitalism, Competition between

Superpowers, Lead in Environmental Policy

OBJECTIVE AND OUTLINE OF THE ARTICLE

This article documents the ongoing transition of industrial policy from a separate and heavily

contested narrow policy line towards a central pillar of any socioeconomic sustainability

strategy. The role of industrial policy, as well as its instruments, must be adapted to the new

challenges of globalization, digitalization, and climate change, but equally to the ever-changing

forms of inequalities and the upcoming new world order with China in the lead. The article

builds on past articles by the author and the European WWWforEurope project (Aiginger and

Rodrik 2020; Aiginger 2007, Aiginger 2016), but also includes recent evidence and new policy

communications of the EU and international organizations. It remains a work in progress,

however, due to constant changes in the world economy, ecological challenges, new

technologies, and the impact of populism, nationalism, and pandemics.

The next section provides an overview of the content, definition and importance of industrial

policy across countries and over time, including a pledge for a systemic policy instead of a

narrow-focused approach. Section 3 reports ten principles of industrial policy for the 21st

century, as summarized recently. That this cannot be the end of the discussion is shown in

section 4 by addressing the challenges of well-known goals, which however require more

urgent responses. Since industrial policy should be driven by societal goals, section 5 speculates

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Archives of Business Research (ABR) Vol. 10, Issue 3, March-2022

Services for Science and Education – United Kingdom

about the unknown future of a new world order – how it is both shaped by and affects industrial

policy. The last section summarizes.

INDUSTRIAL POLICY IN THE PAST AND PRESENT: CONTROVERSIES AND DEFINITIONS

Industrial policy has always been controversial

The dichotomization between the French approach – selecting and favoring special sectors –

and the German approach – providing framework conditions only – has been highly debated

between left and right leaning experts in Europe. In the US, many economists claimed that no

industrial policy was the best policy.

The EU Treaties favor the horizontal approach, but in later communications a sectoral

differentiation was added. Europe intervened heavily in the aircraft industry, enabling the

success of Airbus. From Europe’s perspective, this was the breaking up of a US monopoly, which

itself was a spinoff of the military sector. In economists’ language, the support for Airbus was

the fight against a monopoly profiting from spillovers of the military sector. Smaller national

aircraft companies could not generate the needed economies of scale and scope to compete

with Boeing, given that past investments constituted sunk costs.

Japan ́s rise from a wrecked economy after the Second World War to an industrial powerhouse

was based on selecting, financing and supporting key technologies and firm clusters (in

keiretsus) steered by a powerful MITI. It thus approached the top productivity of the US,

enjoying a large trade surplus and developing the just-in-time model, which did not only

revolutionize the car industry. Japan ́s policy was to some degree imitated by other East Asian

countries. The Japanese model became unattractive after certain "lost decades" at the end of

the last century: "corporate Japan" disfavored startups, foreign intellectual and physical inward

investment and inward migration. Equality of genders, including diverse management, was

disregarded; the negative impact of male, old-age networks could not be compensated by

strong industry clusters or the change from MITI to METI. Competition policy preventing the

negative consequences of monopoly power was not applied in Japan, or at least much less so

than in Europe.

China continued to steer its economy and society according to five-year plans, which adapted

the sectors to be preferred and problems to which the communist party paid the highest

attention. It succeeded in shifting from an agrarian to an industrial economy in a very short

time. China imported technology but steered foreign investment into special zones and forced

investors to share their technology in joint ventures. It chose industries in which China could

take the lead, such as electric cars or photovoltaics. "China 2025" set the goal of switching from

the supply of cheap goods to sophisticated ones like machinery, environmental technology, and

biotech, and then the strategy of "China 2049" – named according to the anniversary of the year

in which the Communist party assumed power - proclaimed the long-run mission to become

the leading Socialist superpower by the middle of the century.

The US proves that no industrial policy can be a trap. The US has accrued a significant trade

deficit, not only with respect to China but also with respect to Europe, and there is evidence

that the Protectionism tried under the Trump administration proved to be no solution. An

implicit industrial policy – not steered by societal goals – favored the exploitation of oil and gas

resources, including problematic horizontal drilling techniques or dangerous platforms in the

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Aiginger, K. (2022). Society Shapes Industrial Policy, Industrial Policy Shapes Society. Archives of Business Research, 10(03). 33-51.

URL: http://dx.doi.org/10.14738/abr.103.11682

sea. Now, the technology leader US has a trade surplus in raw materials and low processed

goods and deficits for high tech products. Interventions that disregard emissions and the

preferences of citizens for clean air are ignored due to lobbies financing politicians and

candidates for the presidency. This has demonstrated that an industrial policy not steered by

long-run societal goals can be negative for structural change in the right direction. Nevertheless,

the US is still leading in labor productivity and its firms dominate the Top-100 list in Wall Street,

while many new internet platforms have been launched in the US (Andreoni and Chang 2019,

Atkinson 2021).

DEFINITIONS

For an overview of the scope of industrial policy see Aiginger (2007) and table 1 below.

Definitions on which most economists seem to agree contain the following elements:

• activities to promote or prevent structural change (Curzon Price 1981),

• encouraging resources to move into particular sectors important to future economic

growth (Krugman and Obstfeld 1991),

• broad restructuring policies in favor of more dynamic activities, regardless of whether

these are located within the industry or manufacturing per se, institutionalized

collaboration and dialog between private sector, government, and civil society (Rodrik

2004),

• interventions improving the business environment or changing the structure for better

prospects for economic growth or welfare (Saggi and Pack 2006),

• Fostering industrial development, in accordance with a society ́s long run rise of living

standards (Peneder 2017).

The ambitions of industrial policy thus differ with respect to the assumed extent of the

knowledge of the government (and its experts) and with respect to technology and demand

trends. Superior knowledge is needed to select "future industries" and "best technologies", or

to predict demand shifts. Horizontal policies require less knowledge and only the prediction of

growth theory that broad activities like research and education generate dynamic external

effects, in the sense that the expenses of one firm are also beneficial to non-investors.

If industrial policy is to be shaped by societal needs, it is important to switch from the

traditional economic performance measure of GDP (or GNI) to the broader SDGs. Ecological

goals, maximizing cooperation with neighbors, work-life balance, health, and working

conditions have a higher priority than does redirecting technological progress from labor

productivity to resource and energy productivity. This is called "New perspectives outcome" by

Aiginger et al (2013) or, later on, "green industrial policy" (Aiginger 2013, Rodrik 2014,

Tagliapietra and Veugelers 2021).