By Julia Pamilih
Industrial policy is back on the policy agenda. In the U.S., the Bipartisan Infrastructure Law (BIL), the CHIPS & Science Act, and the Inflation Reduction Act are set to . The EU of its Covid-19 recovery fund to the energy transition, while Japan’s government is making into its semiconductor industry. The huge sums being committed by governments across the globe raises an important question about policy design: how can policymakers develop industrial policy that shapes the economy for the common good?
A , published in September 2023, asks how we can capitalize on industrial policy to enhance public value. Mazzucato and Rodrik focus on conditionalities in industrial policy to unlock more sustainable and equitable growth. Until now, conditionality in industrial policy has been little studied and conceptualized.
The principle of conditionality is inherent in industrial policy because governments expect a return from industry in return for their support. But there is significant variation in how explicit those conditions are, and how much the government seeks to maximize public value in its contracts with firms. Mazzucato and Rodrik focus on conditions set by the government on firms, “where the government provides a benefit to the firm, such as a grant, training or infrastructure in return for the firm undertaking behavioral changes towards meeting public objectives”.
Conditionalities refers to the framework used to describe the conditions - or limits - set on a policy in order to further a wider aim. For example, the IMF , with the aim of encouraging countries to pursue economic or fiscal reforms.
Industrial policy is often associated with the rise of East Asian economies, and the region is replete with successful examples of the use of conditionalities. In the 1960s and 1970s, and Taiwan provided significant fiscal support to heavy industrial and semiconductor firms, on the condition that recipient firms must promote exports – with significant success. In other regions such as Latin America and South East Asia, the absence of conditionalities arguably and worsened corruption.
Industrial Policy with Conditionalities is grounded in Mazzucato’s wider principle of empowering an . The state is not just a market fixer, but an active creator and shaper of markets. Conditions should not be seen as just a constraint, but rather a way to encourage desirable economic behavior. In this vein, Mazzucato and Rodrik’s taxonomy sets out a new framework to aid researchers and policymakers in thinking about conditions that can be used to maximize public value when designing industrial policy.
Taxonomy of conditionalities
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Conditionality |
Example |
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Type of firm behavior targeted Types of behavior:
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Directionality: The Advanced Research Projects Agency–Energy (ARPA-E) is a US government agency which funds applied R&D for advanced energy technologies. Its funding is conditional on firms’ alignment with the mission of the organization. Profit-sharing and reinvestment: Israel’s High-Tech R&D Investment Incentives offered support for high-risk R&D projects. Funding was conditional on profitable firms repaying the grant, and . |
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Fixed versus negotiable / iterative conditions Some program requirements may be fixed or linked to firm characteristics, while others may be negotiable. |
The German national investment bank Kreditanstalt für Wiederaufbau (KfW) with low-interest loans contingent on meeting energy efficiency standards. Under this program, the building standards and interest rates are fixed, but there is flexibility over the repayment terms. |
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Risk/rewards sharing mechanism The degree to which risks and rewards are divided between the public and private sectors. |
During the Covid-19 pandemic, AstraZeneca and the University of Oxford signed a with the UK Government for the non-profit production of vaccines. The contract reduced risk by guaranteeing manufacturing demand, while the UK government secured public health benefits. |
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Measurable performance criteria & monitoring and evaluation Industrial policy may contain criteria for monitoring and evaluation, but there is variation in who makes the assessment and how. |
The US CHIPS and Science Act sets clear criteria for funding applications based on economic and national security objectives, and other criteria including commercial viability. One high-profile criteria is that CHIPS funds limit recipients from any . |
This is the first post in a series on the working paper Industrial Policy with Conditionalities: A Taxonomy and Sample Cases by Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London, and Dani Rodrik, Faculty Co-Director of Reimagining the Economy.
