ABSTRACT
If there is a consensus around the proposition that for sustained economic success industries and firms must move up the ladder of competitive advantage, shifting away from a reliance on goods with a simple lower-order advantage based on low wages or natural resources, the critical policy question becomes how this can best be achieved. Once posed in this way, the problem can be linked with the role of government and the future of industrial policy. Here we use the latter term to refer to an explicit attempt by governments to alter the pattern of resource allocation away from that which would result from a marketbased system. Since all governments intervene in some way (even if only to collect small amounts of taxes to pay salaries of civil servants), we can say that by this broad definition there will always be a version of industrial policy in operation, even if only a very weak one. In the literature perhaps three broad strands of argument can be found; one which suggests that industrial policy will inevitably produce inferior outcomes to those generated by markets – the extreme ‘government failure’ case; that which argues that industrial policy will be essential to overcome the obstacles faced by poor countries wishing to industrialise – the extreme ‘market failure’ case; and third, that which acknowledges the success of industrial policy at certain times and in certain contexts, but which recognises that there can be no universal validity in claims for its importance. It is this pragmatic approach that we wish to stress. We take the view that there is no basis in either theory or practice to expect competitiveness to be created on the basis of firms’ initiatives alone. Hence the question becomes what can governments try to do, apart from keeping the basic macro economic fundamentals like inflation, and the exchange rate at sensible levels? The answer will inevitably depend on the circumstances of the case.
