Juhasz, Lane, Rodrik (2023-2024)
The new economics of industrial policy emphasizes three interconnected dimensions: market failures (rationale), state capacity and political incentives (feasibility), and policy design with governance (implementation).
Market failures provide justification for intervention: externalities, coordination failures, information asymmetries, credit constraints
State capacity + political incentives determine if policies can be implemented: bureaucratic quality, interest group dynamics, institutional constraints
Policy design + governance structures shape outcomes: targeting, conditionality, sunset clauses, monitoring mechanisms
"The New Economics of Industrial Policy"
NBER Working Paper No. 31538 (2023)
Annual Review of Economics 16: 213-242 (2024)
This framework shifts focus from debating whether industrial policy works to understanding when, how, and under what conditions it can be effective.
From traditional market-failure based arguments to a comprehensive framework incorporating empirical evidence, political economy constraints, and governance capacity.
| Dimension | Traditional Theory | New Economics |
|---|---|---|
| Core Explanation | Market failures | Empirical evidence + Political economy + Governance |
| Purpose | Explain why intervene | Explain when, how, under what conditions |
| Methods | Theoretical models + Case studies | Modern econometrics + Political analysis + Text/LLM tools |
| Policy Tools | Subsidies, tariffs | Institutional design, Conditional support, Exit mechanisms |
| Focus | Economic efficiency | Political feasibility + Implementation capacity |
| Evidence Base | Descriptive cases | Causal identification + Cross-country panels |
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Historical and contemporary examples of industrial policy implementation across different contexts and development levels.
Heavy and Chemical Industry Drive - Targeted subsidies, chaebol support, export discipline
Southern Italy industrial policy - State holdings, infrastructure investment, mixed results
CHIPS Act - Semiconductor reshoring, large-scale subsidies, technology nationalism
Green Deal Industrial Plan - Climate-focused industrial policy, carbon border adjustment
Comprehensive industrial policy - SEZs, state coordination, Made in China 2025
Targeted export support - Sector-specific interventions, productivity programs
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A systematic approach to designing, implementing, and evaluating industrial policy.
Diagnose the specific market failure: externalities, coordination failures, information gaps, or credit constraints
Evaluate stakeholder interests, institutional constraints, and implementation capacity
Select appropriate instruments: subsidies, tax incentives, regulations, or direct provision
Create monitoring mechanisms, accountability structures, and sunset clauses
Deploy policy with continuous data collection and performance tracking
Evaluate outcomes, modify approach, or terminate unsuccessful programs
Explore how different conditions affect policy recommendations
Adjust parameters to generate recommendation
Key challenges that industrial policy must navigate to be effective.
Electoral cycles, interest group dynamics, and institutional fragmentation can derail well-designed policies
Policy capture, rent-seeking, resource misallocation, and bureaucratic incompetence
Limited state capacity, weak institutions, data scarcity, and external pressures
International spillovers, environmental impacts, and long-term fiscal sustainability
Subsidy races, WTO disputes, and geopolitical tensions from industrial policy
Attribution problems, counterfactual construction, and long evaluation horizons
Modern empirical methods for studying industrial policy effectiveness.