Working Paper: NBER ID: w15261
Authors: Ann Harrison; Andrés Rodríguez-Clare
Abstract: In this paper we explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries. Are developing countries justified in imposing tariffs, subsidies, and tax breaks that imply distortions beyond the ones associated with optimal taxes or revenue constraints? We refer to this set of government interventions as "industrial policy". We explore the theoretical foundation for industrial policy and then review the related empirical literature. We follow this with a broader look at the empirical work on the relationship between trade and FDI and growth. In this review, we find little evidence that countries benefit from "hard" interventions that distort prices to deal with Marshallian externalities, learning-by-exporting, and knowledge spillovers from FDI. We discuss an alternative set of "soft" industrial policies that deal directly with the coordination failures that may arise within the sectors or clusters where the country has a comparative advantage.
Keywords: Industrial Policy; Trade; FDI; Developing Countries
JEL Codes: F00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hard interventions (tariffs and subsidies) (F13) | lack of significant benefits for developing countries (F63) |
| soft industrial policies (O25) | positive outcomes (I14) |
| externalities (learning externalities) (D62) | justification for export subsidies (F14) |
| knowledge spillovers from FDI (F23) | rationalization for tax breaks (H20) |
| latent comparative advantage (F11) | successful IP (O34) |
| permanent protection (G52) | raise welfare (I38) |
| production subsidies (H23) | more efficient than protectionist measures (F13) |
| theoretical justifications (D46) | gap between theory and quantitative assessments (C12) |