By Huw Spencer

MazzucatoAlthough industrial policy has seen a resurgence in recent years, there hasn’t been a specific unifying model which policy makers can rally behind. The goals of industrial policies have been as diverse as the governments using them. Is there a consistent way to use industrial policy and improve it going forward?

Mariana Mazzucato, Director of the Institute for Innovation and Public Purpose at University College London, joined the conference for a conversation on the future of industrial policy entitled “Directing Inclusive and Sustainable Growth”, in conversation with Dani Rodrik, Reimagining the Economy Faculty Co-Director and Ford Foundation Professor of International Political Economy at the Harvard Kennedy School. Here are some of the main takeaways from the discussion.

  • Industrial strategy needs to be challenge-oriented

Industrial strategy should not be oriented around sectors or specific technologies, but rather around challenges. This means setting ambitious goals, such as the Sustainable Development Goals made by the United Nations, beyond just growth in a particular industry. These sorts of goals create a unifying vision and a motivating force for governments and citizens.

A challenge-oriented strategy recognizes that we do not have all the answers at the start of the process. When governments take on difficult problems, they require experimentation to solve. This rethinking of government strategy moves beyond top-down processes, where government sets expectations around specific inputs, and towards a negotiated, contested set of actions between partners in pursuit of a shared goal. How you get to that goal is not prescribed by the public sector; what matters is getting there.

The challenge-oriented approach also encourages policy tools besides the standard subsidies and tax breaks. It uses a suite of instruments including rules about grants, loans and equity schemes. Even procurement - which seems much more mundane - can be goal oriented; the structure of contracts can encourage innovation and growth.

  • Industrial strategy needs to be cross-sector and cross-government

Effective industrial strategy brings together sectors – public and private actors – to tackle a goal. And a challenge-oriented approach to industrial strategy requires the whole government, not just individual ministries.

Here we can look at what governments have gotten right in the past. The canonical example is the space race and the successful manned missions to the moon and back. This goal was not just delivered by the aerospace sector but many different sectors working together — taking advantage of the collective effort of over 400,000 people. NASA led the mission but did not fall into the false binary of top-down or bottom-up and instead unified actors around a shared, concrete challenge.

Another example of effective public-private partnerships came in the form of DARPA and, later, ARPA-E. Through these organizations the US government created a decentralized network of innovators, entrepreneurs, and institutions across the whole supply chain: from upstream basic research to more ambitious investment into downstream demand and growth.

  • We should use conditionalities to embed a better way of doing capitalism

New investments in industry should come with expectations of firms. The private sector can produce positive externalities, like good jobs or decarbonization, through its collaboration with government. These positive externalities should motivate the conditionalities that governments set out for their investments. This means making demands of the private sector, such as rules about wages and working conditions, so we build forward better, not just give out money to businesses.

One example of effective conditionalities in action is in Germany’s development bank. The KfW doesn’t just give out money to sectors that ask for help, but instead asks firms what their role is in reaching the country’s energy goals. It adopted this methodology with steel – offering loans to companies that were researching and producing cleaner forms of steel. This approach has led many German steel producers to invest in green production and innovation.

One criticism leveled at the conditionalities approach is that it creates an “everything bagel” liberalism, where too many social objectives are saddled onto one policy process. This misses the point: the point isn’t that we shouldn’t go for every policy objective, it’s that we should set requirements based on the best evidence and with realistic, iterative expectations. It is not a mistake to turn innovation policy into social policy; the goal is to do so with the right conditions rather than a general shopping list. In doing so, social policy will move to the center of growth policy, rather than at the periphery.

In fact, the use of industrial policy with conditionalities offers a new way to work with capitalism and the social contract. When the public and private sector help each other achieve their goals, it creates a symbiotic relationship instead of the antagonistic (or parasitic) relationship that we typically see today.

  • This all requires new capabilities in the public sector

The new industrial strategy outlined here requires a systematic investment in the capabilities of the public sector. Getting out of the way or just correcting market failures is not good enough. If what we want is to shape and co-create markets that deliver more inclusive and sustainable growth, what are the capabilities we need?

The core challenge is deep uncertainty. Big problems like getting to the moon or fighting climate change are full of unknowns, so governments must be able to work with uncertainty. To that end, the public sector needs to innovate from the bottom-up, be dynamic like its private sector partners, and be willing to fail in the pursuit of its goals. It also requires the effective evaluation of public investments. Cost benefit analysis plays an important role here but so too does the evaluation of the dynamic spillovers that are created across a whole economy along the way to achieving a goal.

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