Industrial Policy General

1. What is meant of industrial policy

2. Objective of industrial policy
3. Main Goals of industrial policy
4. Characteristics of industrial policy
 Industrial Policy is concerned with the
 “any rules and regulation that is framed

aiming the development of industrial sector

in the country that leads to fruitful outcomes
of manufacturing sector as well as to help in
improving the employment opportunities,
reducing poverty, increase welfare and meet
the requirement of the nationals”
 In concluding the industrial policy Industrial
policies primarily address welfare
improvement.
Objectives of Industrial Policy

 The most important objective of industrial

policies is achieving economic growth by way
of industrialization. This interprets into the
desire to alter the industrial structure towards
industries with high-growth potential, most
notably heavy and chemical industries.
 Moreover, employment creation, national
economic independence, export
development, and technological development
as objectives of industrial policy. Creation of
employment opportunities results, in general,
from the increasing demand for labor due to
rapid growth of certain manufacturing
industries.
Main Goals of industrial policy

 The main goals of industrial policy may be

but not limited to these five goals only

 1. sometimes industrial policies are designed

for some selected industries

 (ii) Industrial policy is not a single policy but a

combination of various policies
 (iii) Industrial policy is concerned with
government intervention,

 (iv) Industrial policy targets resource

allocation (most possibly due to market
failures)

 (v) Industrial policy aims to create dynamic

comparative advantages for targeted
industries.
 During the initial stages of industrial
development, there is a necessity to
undertake large-scale investment projects
which are by their nature complementary.
During these early stages, the governments
generally protect the “infant” industries by
establishing strong trade barriers and
providing massive subsidies.
 Considering that the investments made are
large scale, this helps the established
industries attain economies of scale.
 There are two ways to establish and develop
infant industries through suitable and
effective industrial policy.

 One way is the direct provision of production

subsidies that enables the newly established
industry enjoy product prices that exceed
average cost and hence enable the expansion
of production.
 Another way is to impose strong temporary
restrictions on the imports of products
produced by the established industries that
helps expand the production.
Characteristics of industrial policy
 Industrial policies are designed to nurture
selected industries. The governments select
these industries on the basis of their
importance for future growth. The
involvement of government in
industrialization process is often credited to
“market failure” arguments, which state that
the governments in backward economies can
allocate investments and resources better
than the market.
 Note that infant industries exhibit the
characteristics of externalities and dynamic
economies of scale (i.e., improvement in cost
conditions over time through learning by
doing and investment in technology
development). It was argued earlier that the
establishment and development of these
industries require government intervention
and protection by the government.
 Thus, the government undertakes, fully or
largely, the establishment costs of the infant
industry development. In the case of East
Asian latecomers, initially, the capital-
intensive heavy and chemical industries were
the industries that demonstrated the
characteristics of dynamic economies of
scale.
 Later on, when the industrial structure
matured towards these industries, the
industries that require technological
sophistication emerged as infant industries.
Governments protected infant industries until
they gained international competitiveness
and later turned to overseas markets for
further expansion of these industries.
 One reason is almost full exploitation of the
expansion opportunities of domestic
production under protection that is met by
domestic demand. When economies of scale
are achieved, and domestic demand is fully
exploited, the governments in the East Asian
latecomers adopted an export-oriented
strategy and international trade became an
integral part of industrial policies.
 Attainment of economies of scale and
expansion of production led to productivity
gains and allowed domestic industries to
compete with foreign counterparts.
 Industries to be promoted are determined by
high income elasticities on the demand side
and high productivity potential or prospects
for technological advances on the supply
side. For example auto-mobile and Heavy
industries seem to be the most appropriate
candidates from this perspective.
 The Big Push argument contends that it is
possible with a large scale industrialization
drive for the linkages among industries to
create new markets and the risk of
insufficient demand is lessened. This is
aworkable option only if domestic demand is
sufficiently high since large domestic demand
leads to economies of scale.
 If the production reaches a sufficient level
that allows the established industry to stand
on its own feet, import protection can be
removed. From the supply side, these
arguments justify the use of government
intervention and infant industry protection.
On the other hand, higher prices lead to set-
up costs, i.e., a social cost on the domestic
consumers in the form of higher prices.
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