notes for small report

But in practice industrial policy is hard to get right. Helping companies is as likely to promote laziness as competitiveness. Moreover, officials may be no better—and perhaps much worse—than business people in choosing which industries to support.

State Grid Corporation of China 


One tentative conclusion is that China’s industrial policy works better when natural monopolies are involved. There is a clear role for a central authority with strong organising power to develop a power-transmission system or a high-speed rail network. Yet that same authority can stifle competition in sectors that need it. Alternatively, as often occurs in China, if lots of provincial governments try to foster their own champions, nominally in pursuit of national objectives, the outcome is extreme over-capacity, which undermines the targeted sector.


Ernest Liu of Princeton University argues that state support is most effective when it targets those sectors that make the most essential inputs for others. Generally, these are upstream; turning raw materials into products used in a range of industries. Subsidies for them, even via state firms, can raise overall efficiency.