by Mónika Mercz
A good and effective policy is not only defined by the commonly used top-down approach. Rather, involvement of several stakeholders, a strong bureaucratic capacity, and safeguards against regulatory capture are all essential components of it. While we must avoid the potential pitfalls of enterprises’ influence on governments, we should also take an in-depth look at what characteristics make an industrial policy beneficial for consumers and businesses alike.
Industrial policies are the outcome of political processes, and thus carry political stakes, hence political realities significantly shape industrial policy. The current state of modern political economy suggests that government failure is most likely in cases when countries pursue industrial policies beyond their governance capacity constraints. Two dimensions of this constrains are especially noteworthy: bureaucratic capacity and embeddedness.[1]
Bureaucratic capacity is an important component for industrial policies, as it requires deep knowledge of the relevant markets and firms, coupled with technical expertise,[2] often referred to as “the lifeblood of the administrative process”.[3] Bureaucratic autonomy can be also identified as an essential feature of bureaucratic capacity. It is defined as the result of five mechanisms’ interactions, namely: ex-ante procedural limitations on discretionary authority; ex post review; appointment and promotion power; removal power; and ad hoc interventions by political authorities into bureaucratic decision making, including the use of emergency powers.[4] Bureaucratic autonomy also fosters the development of capacity, by attracting policy-motivated individuals to government service. In addition, autonomy also induces them to remain in public service, while encouraging them to invest in their own expertise to attain their preferred policy outcomes. A high-capacity workforce is characterized as having substantive and procedural expertise, an ability to recruit and retain skilled employees, and an ability to organize itself for efficient team production.[5]
Implementing industrial policy also requires that a high-quality bureaucracy continually interacts, negotiates, and exchanges information with industry and stakeholders. These continual interactions with market participants are necessary for a successful implementation of policies, creating an embeddedness that facilitates the flow of information between bureaucracy and industry. Because it is the political forces that shape how industrial policy is chosen, and the dimensions of state capacity define how industrial policy is implemented, it is vital to give a voice to all relevant parties through in-depth discussions. The key to cultivating embeddedness is strategic collaboration and coordination between the private sector and the government.[6]
What must be avoided, however, is regulatory capture, a process whereby regulators become dominated by the industries or interests they regulate, to the detriment of the public interest. This is a key issue as even though the rules in question often highly affect citizens, consumers are a bit less likely to lobby regulators to the degree that regulated industries do.[7] Examples of regulatory capture can be found across various industries. As we can see, the culture of regulatory capture also serves as a major barrier to climate action and environmental protection.[8] The German car industry is another example of this, where in early 2015, the European Commission proposed more accurate tests for diesel cars, but Germany delayed the adoption due to the government’s relationship with the car industry, ultimately shaping environmental regulations within the European Union.[9]
Despite businesses’ incredible advantages that may lead them to successfully capture agencies, there are several ways through which this regulatory capture can be avoided. The first is for governments to put effort into systematically identifying, preventing, and rooting out regulatory capture. Furthermore, scholars suggest that the regulatory and legislative process should become more interdisciplinary, as it would not only bring greater diversity of perspective to the process but could also help build in better checks and balances. Tasking an executive branch office with investigating and reporting on regulatory capture across the entire regulatory bureaucracy could also be an opportunity to stop such practices.[10] An effective industrial policy should focus heavily on promoting accountability.
The political nature of an industrial policy can be pinpointed through several examples. For instance, Canada and the US withdrew from international climate agreements due to political reasons.[11] These cases underline how “[g]overnment-induced policy risk is one of the major deterrents to [green] investment”,[12] meaning that firms may underinvest in the face of political uncertainty, especially when economic policy impacts the political power of policymakers. In the late 1990s, a financial crisis emerged in Korea, due to the use of credit allocation, during which commercial banks were urged to lend to firms in preferred sectors. Afterwards, banks incurred weak balance sheets, and the policy nearly obviated bank skills for project monitoring and evaluation.[13]
In conclusion, I must state that change in industrial policy practice is as much political as it is economic. Political forces have an enormous influence on how these policies are realized.[14] However, factors such as possible regulatory capture, a working bureaucracy, or embeddedness cannot be understated in the effective nature and future success of a policy.
[1] Juhász, R. and Lane, N. J. (2024) The Political Economy of Industrial Policy, National Bureau of Economic Research Working Paper 32507, DOI 10.3386/w32507
[2] Besley, T., R. Burgess, A. Khan, and G. Xu (2022) Bureaucracy and development, Annual Review Of Economics 14, 397–424.
[3] Burlington Truck Lines, Inc v. United States, 371 U.S. 156, 167 (1962)
[4] Bersch, K. and Fukuyama, F. (2023) Defining Bureaucratic Autonomy, Annual Review of Political Science, https://doi.org/10.1146/annurev-polisci-051921-102914
[5] Bednar, N. R. (2024) Bureaucratic autonomy and the policymaking capacity of United States agencies, 1998-2021, Political Science Research and Methods 12/3, p. 652-665. DOI: https://doi.org/10.1017/psrm.2023.27
[6] Rodrik, D. (2008) Industrial Policy: don’t ask why, ask how, Middle East Development Journal, Demo Issue 1–29, https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/industrial-policy-dont-ask-why-ask-how.pdf
[7] Stigler, G. J. (1971) The Theory of Economic Regulation, The Bell Journal of Economics and Management Science Vol. 2, No. 1, pp. 3-21. https://doi.org/10.2307/3003160
[8] Atayero, A. (2023) Indigenous leaders warn of regulatory capture in the tar sands. So, what is regulatory capture? Greenpeace, https://www.greenpeace.org/canada/en/story/59678/indigenous-leaders-warn-of-regulatory-capture-in-the-tar-sands-so-what-is-regulatory-capture/
[9] Nina Katzemich, “Dieselgate and the German Car Industry, Corporate Capture in Europe: When big business dominates policy-making and threatens our rights”, (Brussels: Alliance for Lobbying Transparency and Ethics Regulation in the EU, 2018), p. 91-92, https://www.alter-eu.org/corporate-capture-in-europe: “whenever German car producers have faced tougher measures from the EU, the German government has done everything it could to protect them by delaying or watering down the new rules”.
[10] Calabria, M. (2016) Preventing Regulatory Capture, The Regulatory Review, https://www.theregreview.org/2016/06/23/calabria-preventing-regulatory-capture/
[11] Vihma, A., G. Reischl, and A. Nonbo Andersen (2021) A climate backlash: Comparing populist parties’ climate policies in denmark, finland, and sweden, The Journal Of Environment & Development 30(3), 219–239.
[12] Stern, N. (2022) A Time for Action on Climate Change and a Time for Change in Economics, The Economic Journal 132(644), 1259–1289.
[13] Borensztein, E. and Jong-Wha, L. (2005) Financial Reform and the Efficiency of Credit Allocation in Korea”. The Journal of Policy Reform, Vol. 8, No. 1, pp. 55–68.
[14] Persson, T. and G. Tabellini (2002) Political economics and public finance. Handbook Of Public Economics 3, 1549–1659.
