A new World Bank report is being heralded as an endorsement of industrial policy, but mostly the research shines a light on how it doesn’t actually work.
The Washington Consensus was traditionally wary of developing countries picking winners and losers, erecting trade barriers and subsidizing favored industries. Global institutions like the World Bank used Western capital as leverage to push for fiscal discipline, tax reform and liberalization that leads to sustainable growth.
Yet both political parties have pushed industrial policy on the United States in recent years, and now the bank — a member-funded organization — is trying to catch up with pandering politicians in the race to the economic bottom.
The 276-page report says the World Bank’s previous advice against industrial policy “has not aged well” and that it should be “in the national policy toolkit of all countries.” It says three characteristics make industrial policy work: capable and competent government institutions, a large domestic market and high levels of fiscal space. Depending on how many of those a country has, its options change.
To be fair, many of the whiz-kid bureaucrats at the World Bank have long exuded the hubristic ethos that they can outsmart markets. They’ve never been laissez-faire. They have also long supported developing infrastructure and industrial parks, which the new report considers to be industrial policy.
The World Bank wants politicians to commit to retain industrial policies when the opposing political party takes power to give them time to work. Good luck with that.
They also want the bureaucracies charged with implementing industrial policy to be meritocratic and insulated from politics and interest-group pressure. Who wouldn’t?
Most silly is the assertion that these bureaucracies can be more competent now than in the past because rising global education levels mean more talent is available. As if the main blocker to global growth is a lack of bureaucrats with doctorates.
Throughout, the bank’s recommendations are carefully hedged. The authors acknowledge there is no silver bullet, that there have been many failures and that politicians need to admit when programs aren’t working so they can abandon them. They acknowledge that knowing exactly what industry to target is more of an art than a science.
Ultimately, the World Bank is arguing that industrial policy will work if governments spurn favoritism, reject rigidity and reward successful outcomes regardless of the politics. All governments have to do is act contrary to their very nature.
In other words, industrial policy won’t work.
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