Dani Rodrik suggests that China's recent successes should trigger a reevaluation of smart industrial policy:
I would point to role of industrial policy as a key ingredient in China's success. In this particular case--the automotive industry--industrial policy seems to have made three contributions. First, the government required foreign companies to enter into joint ventures with local enterprises, ensuring the transfer of technological capacities. Second, domestic content requirements compelled vehicle manufacturers to source more of their inputs domestically than they would have chosen to do at the outset. Economists normally think this is a terrible policy because it breeds inefficient domestic suppliers. (Such requirements are also now banned by the WTO). But this has evidently not happened in China (and also in India), where first-tier suppliers have reached near-frontier levels of productivity. John Sutton, who has analyzed the auto industry in China and India in detail, credits in part the domestic content requirements for this achievement. Finally, state-owned enterprises have been a breeding ground for private entrepreneurs....A good dose of market discipline combined with a government bent on enhancing industrial capabilities beats either one taken on its own.
Industrial policy has, in recent years, fallen into disrepute. But Rodrik's right: The examples of China, India, and various parts of Europe (not to mention Japan) suggest that it can be deployed effectively. Given the rapidly deteriorating state of our own industrial base, this is an approach we could learn some lessons from.
