Keynes and the renaissance of industrial policy in a post-Covid world

Post Covid-19 pandemic, a fascinating transformation has unfolded as several nations unveiled groundbreaking industrial policies between 2021 and 2024, each one a testament to their visionary pursuit of growth and innovation. Amid this flurry of industrial policies, India's 2021 policy stood out, not only for its ambitious goals but also for its historical echoes. Drawing inspiration from the ancient city of Lothal, once a thriving trade hub of the Indus Valley Civilisation, India's new policy aimed to revive its manufacturing sector to its former glory. This move was reminiscent of the tales from Jeremy Rifkin's "The Third Industrial Revolution," where he narrates the story of cities reinventing themselves to become giants of the new economic era.

Similarly, South Korea's 2022 policy took a leap into the future with its focus on green energy and digital infrastructure, aiming to position itself as a leader in sustainable technology. This strategy was as bold and transformative as the tales of economic revival post the Korean War, showcasing the nation's resilience and forward-thinking. Meanwhile, Germany's 2023 policy, with its emphasis on high-tech industries and digital innovation, echoed the stories of its post-war Wirtschaftswunder, the "economic miracle" that propelled it to the forefront of global economies. The list of countries which have introduced new industrial policies is long. But why are countries introducing new industrial policies? What are the factors that have prompted a revaluation of the role of the state in economic development, challenging the laissez-faire orthodoxy that prevailed in the late 20th century?

One reason is that it is a concerted effort by nations to adapt their industrial policies to foster sustainable growth, technological innovation, and competitive advantage. The emphasis on sectors like artificial intelligence, renewable energy, semiconductors, and biotechnology reflects a global consensus on the pivotal role of technology in securing economic dominance and addressing pressing issues such as climate change and national security.

The vulnerabilities exposed by the Covid-19 pandemic in global supply chains have catalysed a movement towards reshoring critical manufacturing and enhancing supply chain resilience. This strategic realignment aims to mitigate risks associated with overreliance on distant supply chains and geopolitical uncertainties. Concurrently, the imperative to combat climate change has led to the adoption of green industrial policies, with significant investments in sustainable technologies and ambitious targets to reduce carbon emissions, illustrating a commitment to ecological sustainability alongside economic development.

National security considerations have increasingly influenced industrial policy, with nations taking measures to protect critical industries and technology sectors from foreign exploitation. This intertwining of economic strategies with security concerns underscores a more holistic approach to national resilience and strategic autonomy.

Countries such as the United States, with its CHIPS and Science Act and Infrastructure Investment and Jobs Act, the European Union with its "Fit for 55" package and the European Green Deal, and China with its "Made in China 2025" initiative, exemplify the diverse approaches being taken to address these challenges. India's approach offers a unique perspective. The country has launched initiatives like "Make in India", Production Linked Incentive Schemes and "Atmanirbhar Bharat" (Self-Reliant India), aimed at boosting domestic manufacturing, attracting foreign investment, and reducing dependency on imports. These policies are designed not only to enhance India's manufacturing capabilities but also to position it as a pivotal player in the global supply chain, particularly in sectors like electronics, pharmaceuticals, and renewable energy.

Dani Rodrik and Ha-Joon Chang have been influential voices in the discourse on evolving industrial policies, advocating for a nuanced approach that recognizes the unique circumstances and needs of individual countries. Rodrik, in particular, emphasizes the importance of context-specific strategies that are adaptable and responsive to local economic conditions, arguing against the one-size-fits-all prescriptions of neoliberalism. He champions the idea that governments should play a proactive role in shaping industrial development, fostering innovation, and facilitating structural transformation. Chang complements this view by critiquing the historical narrative that developed nations have used industrial policy sparingly, highlighting instead their strategic use of tariffs, subsidies, and state intervention to nurture nascent industries. He advocates for developing countries to adopt similar strategies, challenging the conventional wisdom that market forces alone can drive equitable and sustainable economic development.

Mariana Mazzucato's insights into industrial policy have gained significant attention, particularly her argument for the state's role as an 'entrepreneurial actor' that can drive innovation and tackle grand challenges. Mazzucato's work emphasizes the need for public policies that are not only about fixing market failures but also about setting directions and creating markets, especially in areas critical for sustainable development and technological advancement. Her perspective on 'mission-oriented' industrial policies suggests that governments should take a more active role in defining clear goals for societal challenges — like climate change or public health — and then mobilise resources and innovation efforts to achieve these objectives. This approach underscores the potential of industrial policies to drive transformative change, echoing the broader shift in thinking about the role of the state in the economy in this volatile era.