As the IEDI has been emphasizing for some years, strengthening the industrial system is a contemporary global trend, although the priorities and the actions taken are not always the same everywhere. Lately, OECD researchers have sought to systematize and rationalize the characteristics of industrial policy experiences that, in recent years, are being embraced around the world, notably in developed countries.

In the study “An industrial policy framework for OECD countries: old debates, new perspectives,” the focus of today's Letter IEDI, the OECD seeks to establish a conceptual framework for new industrial strategies that, together with contributions from other institutions, can help Brazil discuss, design and implement actions to revitalize its industrial fabric, with the ultimate goal of improving its socioeconomic performance.

The OECD recalls that the meaning and instruments of industrial policy vary between countries, policymakers and researchers on the subject. There is no consensus on the scope of the policy, but the governments of developed countries have not failed to adopt explicit industrial strategies. 

In other words, although influent, controversies and divergences between economists and other technicians in the area do not seem to be enough to paralyze governments and their policy makers in the elaboration and implementation of industrial strategies today.

For example, according to the study, horizontal policies—that is, interventions available to all companies—are increasingly questioned as to their effectiveness and sufficiency to face global social challenges. On the other hand, targeted policies continue to raise concerns related to possible anti-competitive effects, capture by private interests and the opportunity cost of public resources. Despite this, policies of both types are on the agenda.

The OECD adopts a broad concept of industrial policy as “interventions aimed at structurally improving the performance of the national business sector” by employing a diverse set of instruments. Thus, the authors of the study defend a definition that encompasses the entire productive sector and not only the manufacturing industry, whose borders with other activities, as we know, are becoming increasingly fluid.

Productivity and economic growth, according to the study, are the main metrics for the evaluation of industrial policy, which gives technology and innovation policies a fundamental role in the proposed analytical-conceptual framework.

In addition, addressing global social challenges such as climate change, demography, increasing inequality, cybersecurity, etc.— which require both public intervention/guidance and large-scale private investment—has become a fundamental rationale for industrial policy, placing mission-oriented strategies at the heart of policymaking in developed countries.

In this conceptual framework, the formulation of industrial policy combines the conception of strategy and the choice of instruments. The strategy is designed to achieve a predefined goal and instruments with specific objectives are chosen and grouped according to the scope of the intervention (horizontal or targeted) and the channel through which they operate (supply, demand and governance). 

It should be noted that the OECD no longer talks about “vertical policies,” a term that has often been confused with sectoral actions, as opposed to “horizontal policies”. The modern terminology used in the study mentions "targeted policies," which go far beyond measures to support specific sectors or groups of sectors and also includes three other types of actions: 

•  Mission-oriented policies, which have well-defined objectives related to facing social challenges, within a defined timeframe; 

• Technology-focused policies aimed at promoting innovation and technology diffusion;

•  Place-based policies, which seek mainly to affect the regional distribution of economic activity, with objectives of inclusion and equality.

The authors recognize, however, that, in practice, the different types of policies often overlap. Horizontal policies are combined with targeted policies in current industrial strategies. Mission-oriented policies may include technology-focused or sector-focused policies, as well as technology-focused strategies may also include placed-based or mission-oriented and/or sectoral policies.

As for the instruments, the role of those focused on governance is to coordinate and articulate the business sector, the public sector and research institutions, at the sub-national, national and international levels. Demand side instruments, such as public orders, technical norms and standards, taxes and subsidies, affect domestic consumption decisions, regardless of where production occurs.

Supply side instruments, on the other hand, affect domestic production decisions, regardless of where consumption occurs, and can be of two types, according to the OECD: 

•  those that affect efficiency "within" companies, such as subsidies, public venture capital, loans, guarantees, public R&D, infrastructure, etc.;

•  those that affect the allocation of production factors "between" companies, such as the tax system, labor mobility, incentive to entrepreneurship, intellectual property defense, competition policy, etc.

The OECD researchers note that such a distinction is a fundamental novelty in the reflection on industrial policy, since it highlights the Schumpeterian dynamics and the fact that productivity growth comes, in part, from creative destruction, in particular from the relocation of production factors from less productive companies to more productive ones, with superior technology or better innovation capacity. The IEDI has previously addressed this issue, as in Letter n. 1112 “Creative Destruction and Innovation-Driven Growth”, of Oct'21.

Finally, the OECD study points out four main messages that can act as recommendations on aspects to be observed in the adoption of industrial strategies:

1. Complementarities between policy instruments justify the use of industrial strategies. For the OECD, the available evidence supports the effectiveness and complementarities of various policy instruments, such as investment incentives, support for access to inputs and appropriate structural conditions. However, good policy design is crucial if the instruments are to be effective.

2. Targeted industrial strategies can drive technological change and growth. Targeted actions can usefully complement horizontal policies in an industrial strategy. The OECD warns, however, that it is important to be aware of the pitfalls (risk of capture, information asymmetry, etc.) and to build an appropriate governance model, specifying objectives and not means, carrying out evaluations, building exit options and not excluding the entry of new competitors.

3. Demand instruments can contribute to the transformation of the industry. For the OECD, in the current context of new targeted industrial strategies—and, in particular, of technology-focused, mission-oriented strategies—demand-side policies are particularly interesting because of the lower risk of distortion vis-à-vis targeted supply policies. 

4. Governments need to emphasize the evaluation and adjustment of targeted policies. Digital technologies can make the evaluation of targeted policies cheaper and more effective and should be used to obtain more robust evidence on the measures adopted, without which the OECD suggests caution. The study also considers that policymakers should take into account the need for policy stability and therefore should avoid very frequent adjustments.

The full text is available in Portuguese.