The Return of the Policy That Should Not be Named: Bringing Politics Back in to the Industrial Policy Debate

Date: 

Mon, 21/11/2022 (All day)
EMC

Location: 

Mandel Building

Lecturer: 

Dr. Erez Maggor

Not long ago considered “a policy that should not be named,” industrial policy is back on the political agenda. Indeed, since the great financial crisis of 2008, there is a growing worldwide consensus that society’s most formidable challenges—from adverse climate change to widening economic inequality—cannot be addressed by market forces alone. This trend has only accelerated with the outbreak of the Covid-19 pandemic.

The central objectives of today’s industrial strategies are to foster new technologies and industries, create good jobs, and contribute to a growing tax base that can fund needed public services. Yet a common criticism of industrial policy is that it often fails to deliver on these ambitious aspirations due to various forms of corruption, government capture, or lack of public sector capacity. These concerns are well-founded. It is certainly true that when industrial policies are poorly applied, they run the risk of state assistance being diverted to further entrench the position of leading firms and enrich those already well-off.  How, then, can policymakers ensure that industrial policy is implemented in a manner that enables innovation to flourish while steering benefits to the broader society?

In my talk, I address this pressing question with a close examination of the successful history of industrial and innovation policies in Israel. In contrast to popular narratives, Israel’s emergence as a leading producer of cutting-edge technologies was the result of a political project that intended to restructure Israel’s economy. More than risk-taking entrepreneurs, it was policymakers and politicians who played a crucial role in conceiving, planning, and implementing this strategy. What made these policies effective? I made two main arguments. First, I argue that an effective industrial strategy requires policies that combine public incentives and disciplinary mechanisms– carrots & sticks. These mechanisms ensure that publicly funded innovation generates not only private but also various public rewards. Secondly, I argue that these policies are products of an “upgrading coalition— broad and enduring partnerships that include various public and private actors. Once support from these constituencies started to wane, however, so did the state’s ability to maintain strict conditions and effective enforcement. The weakening of these measures resulted in diminishing social returns, as Israel’s high-tech sector has become more narrowly focused on private gains via the pursuit of mergers and acquisitions, rather than driving more inclusive growth. I concluded my talk by highlighting the broad theoretical implications of my findings and present future research directions.