Industrial Policy for Growth

There is a large literature on the case for industrial policy and it is argued that, theoretically, industrial policy can help overcome market failures and hence can provide incentives for further industrial development. However, what type of industrial policy should actually be implemented and who should be the direct beneficiaries of industrial policy is contested. This paper presents an empirical investigation of the extent to which countries’ perceived industrial policy package is successful in stimulating economic growth. The analysis builds on a perception based database that includes 22 variables that describe industrial policy-related aspects. Using principal component analysis we distinguish between policy that stimulates industry development, ‘pro-business’ policy, and industrial policy that promotes the development of free markets, ‘pro-market’ policy. We construct indicators to represent these policy types and find that the indicators are positively correlated. The data suggests that high income countries are perceived to implement relatively more pro-business and pro-market policies than middle income countries. On the basis of fixed effects analysis we conclude that our pro-business policy indicator is positively associated with economic growth in middle income countries but not in high income countries. We find no clear evidence of a relation between pro-market policy and economic development.