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AFTER DECADES of being relegated to the fringes of the mainstream economic conversation, industrial policy has been having a moment. 

Broadly defined as efforts by governments to shape their economies by targeting specific industries, companies, or economic activities, it has been criticized by market-centric economists as being both inefficient and prone to abuse. For market purists, industrial policy has evoked images of heavy-handed, Soviet-style central planning or the stifling, state-centric protectionism that stunted economic growth in many Latin American countries for much of the 20th century. “The government shouldn’t be picking winners” was a mantra repeated over and over, everywhere from free market think tanks to the halls of Congress to CNBC.

That conversation has turned dramatically in just the past few years. In the United States, recent legislation, including the CHIPS and Science Act and the Inflation Reduction Act, has made industrial policy a centerpiece in stimulus plans for industries ranging from semiconductors to pharmaceuticals to electric cars. Former President Joe Biden touted its success in boosting domestic manufacturing, strengthening supply chains, and creating good-paying jobs. “The Biden administration basically adopted it wholesale as part of their overall economic policy,” says Dani Rodrik, the Ford Foundation Professor of International Political Economy at Harvard Kennedy School and codirector of the School’s Reimagining the Economy Project, housed at the Malcolm Wiener Center in collaboration with the Center for International Development and the Taubman Center for State and Local Government. “And they weren’t embarrassed to shout it from the rooftops.”

Now all eyes turn to President Donald Trump, particularly his pledges to impose significant tariffs against traditionally strong U.S. trading partners including China, the European Union, Canada, and Mexico. Although Trump’s stated economic priorities—particularly in the area of clean energy—are different from Biden’s, ����vlog���� faculty members say they don’t expect a shift back to globalism and unfettered free trade. After all, tariffs are themselves an instrument of industrial policy, albeit possibly a blunt one in Trump’s hands. “Trump is not a neoliberal; he’s not a free trader,” says ����vlog���� Professor Ricardo Hausmann, the founder and director of the at Harvard Kennedy School and the School’s Rafik Hariri Professor of the Practice of International Political Economy. “He wants to use American power to achieve American goals.” 

Yet although industrial policy is back in the mainstream conversation, Rodrik, Hausmann, and others say the research on it never really went away—it was just flying below the mainstream radar. “I think it’s part of the pendulum swing of intellectual fads that come and go in economics,” Rodrik says. “After the 1980s there was a wave of neoliberalism and market fundamentalism, and industrial policy fell out of favor intellectually among economists. And I think that was reflected among the policy technocrats in general.”

In a 2023 paper titled “The New Economics of Industrial Policy,” Rodrik asserted that, in general, recent research offers a more positive take on industrial policy and its effects. “More importantly, it provides a much more nuanced and contextual understanding,” he wrote. “It enables economists to engage in the debates around industrial policy in a more productive manner, shedding light rather than heat.”

����vlog���� Associate Professor of Public Policy Jie Bai says the practice of implementing industrial policies really never disappeared either. That was true even in the United States, but particularly in Asia, with China’s growth into an economic superpower and the development of strong manufacturing economies such as South Korea and Taiwan. Bai, who studies barriers to growing businesses in emerging economies and policies to overcome them, says she’s pleased that resurgent interest in industrial policy is starting to drive conversations away from economic orthodoxies and toward a future that combines the positive aspects of both markets and policy interventions. “Governments around the world are doing industrial policy all the time, whether you like it or not,” she says. “So it’s something that we economists should care about and debate about.” 

Industrial policy, the “Washington Consensus,” and China 

AFTER THE FALL of communism, British economist John Williamson first used “the Washington Consensus” as a name for policies Latin American leaders adopted as they opened their economies in the late 1980s. The term took on a life of its own, and eventually became synonymous with a belief that the keys to global growth and prosperity were liberalizing trade, privatizing state-owned enterprises, easing government control over national economies, and removing barriers to foreign investment. 

“For emerging countries, this has been for many decades an issue of how do you encourage industrialization or export diversification when it’s not naturally occurring,” says Hausmann. “And for a long time, the world was under the Washington Consensus paradigm, where the idea is that you just liberalize the economy, and if it was meant to be, it will be. And if it wasn’t meant to be, it wasn’t meant to be. End of story.”

The Washington Consensus did help some countries get their debt and budgets under control, but for most, the promised prosperity never materialized. Meanwhile, China was using activist industrial policy to become a manufacturing powerhouse and an economic rival to the United States and the European Union. “There is a sense that China changed the rules of the game,” says Professor Gordon Hanson, codirector of the Reimagining the Economy Project and ����vlog���� academic dean for strategy and engagement. “It is much more aggressive about supporting its industries through a whole bunch of different means. That has undermined the more laissez-faire approach to industrial policy which had dominated much of the world from the 1980s forward.”

The loss of manufacturing jobs to China and other countries in the Asia-Pacific region also drives the rethinking of industrial policy, as policymakers in the United States and elsewhere try to revitalize economic growth in communities that have been devastated by high unemployment. “Today, industrial policy isn’t just about industrialization,” says Hanson, the Peter Wertheim Professor of Urban Policy. “It’s about combating the consequences of deindustrialization.” Polls show that widespread economic discontent among voters contributed to Trump’s narrow victory in the 2024 election.

National security is another factor, with U.S. lawmakers from both major parties eager to counter China’s potential dominance of strategic industries such as semiconductor chips and the rare earth metals crucial for green technologies. The CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act passed both the House and the Senate with bipartisan support in 2022. Rodrik says that in certain areas, such as defense, the United States has for decades been willing to embrace industrial policy to achieve desirable outcomes. Perhaps the best example is DARPA, the Defense Advanced Research Projects Agency, which is the central research and development organization of the U.S. Department of Defense. “DARPA is a long-standing model in the United States, where essentially you have these program directors that work with innovators, universities, firms in very high-tech areas, in a kind of an open-ended way to promote new technologies,” Rodrik says. The agency has been responsible for helping create numerous breakthrough technologies that are now in widespread commercial use, including the internet and GPS.

Another factor is COVID, which Rodrik says showed how brittle and vulnerable global supply chains had become. At their highest point during the pandemic, shipping prices for containers coming from China to U.S. ports jumped to more than 1,000% of 2019 levels, resulting in shortages and rising inflation. “We put too much emphasis on cost reduction, and not enough on resilience,” Rodrik says. “That resulted in a desire for bringing some of those supply chains back home in the hope that they might be more dependable.”

COVID also launched another U.S. industrial policy effort: Operation Warp Speed, the $10 billion federal effort to accelerate development of RNA-based vaccines by supporting multiple pharmaceutical companies at the same time through financial incentives and streamlined testing and regulatory processes. The effort brought two effective vaccines into wide public distribution in a record-breaking 11 months, according to the National Institutes of Health.

Climate change, politics, and the problem of public goods 

EVEN MOST INDUSTRIAL POLICY enthusiasts will allow that markets are useful, even essential, for many things. But creating “public goods”—such as rules, regulations, infrastructure, and public safety services that are essential but are difficult to monetize—is not one of them, Hausmann says. “The problem with public goods is that they don’t benefit from the invisible hand of the market,” he says. “You need a visible, engaged government trying to figure out: What are the public goods that are needed? What are the public goods that are missing? And so on.”

Human-made climate change, and the need to respond to it by promoting a world-wide transition to clean energy sources and away from fossil fuels, has brought the issue of markets and public goods into the conversation on a planetary scale. Most economists say that transition will not occur unless governments around the world intervene to grow the green energy industrial sector and phase out the massive global fossil fuel industry. That challenge will be made more difficult because energy companies—which are seen by governments as strategically important for national security—have long benefitted themselves from industrial policy in the form of significant subsidies. That financial support skyrocketed during the pandemic, as governments poured some $7 trillion into subsidies to keep energy prices low and prevent a massive economic shock, according to the International Monetary Fund. 

In the United States, the Biden administration utilized industrial policy to stimulate the production of green hydrogen through provisions in the Inflation Reduction Act (IRA) of 2022, which earmarked $369 billion in public funding for energy security and climate change mitigation. Hydrogen is considered an important piece of the post-fossil fuels energy landscape, because it can be used in fuel cells for vehicles and energy storage and it is more efficient than electricity for many high-temperature industrial applications, such as steelmaking. Some of the IRA funding goes to tax subsidies and incentives to create a competitive U.S. market for green hydrogen, which some market analysts say could make it cost-competitive with gray hydrogen—which is produced using fossil fuels—by 2030. 

Hausmann says that creating competitive markets by stimulating demand has proved to be a more effective form of industrial policy than subsidizing individual companies. One example: firms that build electrolyzers, which use electricity to split water into hydrogen and oxygen atoms. “The idea is that, by stimulating the production of green hydrogen, you are stimulating the production of electrolyzers,” he says. “Then the electrolyzer companies are going to be learning how to make them. So eventually you’ll end up with an industry of electrolyzers that are much better, cheaper, more efficient than the ones we have now.

But you do that not by funding electrolyzer firms, but by subsidizing demand.”

The IRA and its clean energy stimulus provisions face an uncertain future under Trump, who has promised to return to the fossil-fueled days of “Drill, baby, drill.” He also vowed during the campaign to “rescind all unspent funds” under the IRA—although much of the money has already been allocated and some Republican lawmakers have voiced support for tax credits help American manufacturing. On the flip side, the industrial policies Trump chooses not to pursue—such as expanding and nationally integrating the fragmented U.S. power grid—could also be problematic for the clean energy transition. “The problem is in how regional grids are managed, and it involves the kind of careful negotiation and trade-offs that he has never shown a tolerance for,” Hanson says. “It seems like the perfect policy to create strong disinterest on Trump’s part.”

Industrial policy reimagined  

“THE GOOD NEWS,” Dani Rodrik wrote in a recent paper, “is that there is much to be learned from the variety of industrial policies around the world.” Jie Bai believes some of those policies are being pursued in Meitan County in China’s Guizhou Province, the country’s largest tea-producing county. Bai recently returned from a trip to Meitan, where she saw examples of the kind of carefully calibrated industrial policies that, she says, balance the best of markets with the capabilities that governments bring to the table. 

Maintaining food safety and quality is a major issue and top priority for Meitan, as it is across all of China. Starting in the 1980s, the local government supported the development of a decentralized market of independent tea farmers and processors that flourished, transforming Meitan into the de facto tea capital of China. Decentralized markets are efficient and flexible, able to ride out market shocks and fluctuations better than centralized ones, but Bai says officials in Meitan have recognized that the market alone cannot fully regulate the proper use of pesticides and fertilizers, which could lead to residue buildup in fresh tea leaves, posing a significant health risk to consumers “They asked the question: ‘Why do you need to intervene?’” she says. “What is the market failure that the firms from this decentralized market cannot resolve? And what is the government’s role?” 

The government identified two key problems, Bai says. First, when farmers sold their tea leaves to processors, the small scale of the transacting parties made it difficult for them to afford the costly lab testing needed to determine whether residual pesticide levels met national standards. Bai calls this a textbook example of an information problem leading to a lack of incentives for quality production. The second was the pesticide application technology itself, with farmers relying on low-tech hand-sprayers that often led to over-application, particularly among risk-averse small farmers. Some pesticides designed for use on other crops pose hazards when they are applied to tea, and smallholder farmers often lack awareness of the differences, leading to potential misuse. 

To address these problems, the government set up a series of testing centers along the tea value chain to monitor pesticide level violations, eliminating the need for thousands of individualized tests. That was a fairly standard example of government oversight, Bai says, much like what the U.S. Food and Drug Administration does. But the government took it a step further, working to centralize the entire pesticide application process using drones, which can cover wider areas and apply pesticides more evenly than hand sprayers. Centralizing the purchasing process also ensures the use of less harmful, and even organic, pesticides. “There’s a lot of return to scale,” Bai says. “It’s very efficient to control this problem from the source.” Initially, farmers were resistant to giving up their hand-sprayers, so the government subsidized the drone program for the first year and set up a demonstration plot to show farmers it would work. The long-term plan, Bai says, is for the government to step back from managing the pesticide drone program and hand it over to a firm, several firms, or possibly a cooperative. “For the government of Meitan, their thinking has always been: ‘How can we work with the market and let the market function better? Our role is to build a market environment and a regulatory environment for the private sector to thrive,’” Bai says.

Many of China’s industrial policies have met with mixed or disappointing results. At a Reimagining the Economy Project conference on global experiences in industrial policy last year, Harvard Professor of Economics presented her research on China’s shipbuilding industry, which went from negligible output to world-leading dominance in less than 20 years. China poured $11 billion in annual subsidies into the sector for a 10-year period, and after a few years had passed South Korea and Japan as the world’s leading ship producer. 

Kalouptsidi said her research also showed that the impact of the subsidies on public welfare—gains in areas such as employment, salary levels, and economic security—was relatively minimal. But she added that Chinese policymakers may have had other objectives in mind for the subsidies, such as reducing global trade costs by increasing the supply of ships or strategic support for the country’s rapid military buildup. China’s military recently surpassed the U.S. Navy and now has the world’s largest fleet. “Against those objectives, the policy could be viewed more favorably,” Kalouptsidi stressed.

Meanwhile, the Reimagining the Economy Project has been working with researchers at Georgetown University on a program to evaluate the career and technical training programs of various community college systems, focusing on those that are effective in helping workers train for jobs in growth industries that pay more than $45,000 a year. Hanson says they are developing a program that will pair top-performing community colleges with underperforming ones, so they can share knowledge and best practices. “We recognize that there is some really powerful experimentation happening at the local level,” Hanson says. “And we’re thinking about mechanisms through which we can diffuse that information about best practices more effectively.”

Measuring a program’s success depends not only on defining its objectives but also on correctly identifying the underlying source of the problem, says Hausmann. The Growth Lab is running a project in Wyoming to help the state grow by identifying how to attract new businesses and diversify its fossil-fuel-dependent economy. To that end, Hausmann says, Wyoming has become a leading education funder among U.S. states. “They have put an enormous amount of money into the University of Wyoming,” he says. “But the graduates of UW prefer to go to Denver or Fort Collins or Salt Lake City, and when you ask them why, they say restaurants, amenities, entertainment, and so forth.” 

It turns out the problem wasn’t just a lack of investment in education, Hausmann says. Unlike other oil-rich states, Wyoming never built a major urban center like Denver or Houston. In 1870, Cheyenne, the state’s largest city, was larger than Denver. Now Denver is a metropolis of 3 million people, and the population of Cheyenne, a 90-minute drive away, is just 63,000. One major issue the researchers identified was that, because city water and sewer connections are hard to come by, new homes often must rely on wells and septic systems, which require large plot sizes, often a minimum of five acres. And with the population spread out that much, it’s hard to support a thriving restaurant or entertainment scene. “It also makes it hard for you to have enough of a labor pool to sustain the kinds of industries that you might be moving into,” Hausmann says.

The future of industrial policy 

WITH A BALANCED APPROACH to markets and economic policies back in the mainstream conversation, proponents are working on what the future of industrial policy will look like. Gordon Hanson says that better measurement tools to help evaluate and adjust industrial policies in real time are a big part of that equation.

The Reimagining the Economy Project is currently conducting research in parts of West Virginia that have been hit hard by the decline of the coal industry. “In the aftermath, you have two problems,” Hanson says. “You have workers who are used to earning high wages, and they’ve got to find something new to do. And you’ve got a landscape that’s been beat up pretty badly by the mining process itself.” One company working on those issues, Coalfield Development, has received significant funding from the Biden administration for worker-retraining programs and mining-land-reuse efforts. It is experimenting with everything from solar power installation on reclaimed land to agricultural projects that are uniquely suited to thriving on formerly strip-mined areas, including outside-the-box projects such as growing lavender and raising wild pigs.

“[Coalfield Development has] grown really quickly, and they’re working at breakneck speed,” Hanson says. “They don’t necessarily have the time, the bandwidth, or the expertise to think about careful evaluation of programs. What we’re doing is helping them develop program evaluation on the fly. Not something that takes two years to do but using the data at hand to do a good enough evaluation so that they have real-time information on their effectiveness.” Evaluation on the fly means that policymakers can more quickly and more effectively directly public and private investments to the most promising areas, Hanson says. 

Jie Bai, meanwhile, is also working on rigorous program evaluations, which she says have becoming a priority of funders. “Donors in the U.S, the U.K., Europe—they are more and more interested in rigorous evidence,” she says. The gold standard for evaluation, Bai says, is the randomized controlled trial (RCT), where participants are randomly assigned to join a program or receive government support, similar to a clinical trial in medicine. Because the assignment is random, their performance can be compared against an equally deserving control group that does not receive the same support. The resulting comparison, she says, can identify the programs’ true effects. But the challenge is that, in the real world of business and industry, it’s very difficult to find such purely randomized treatment and control groups, since beneficiaries are often preselected. Recently, Bai and her collaborators have been pushing for opportunities to conduct large-scale RCTs, jointly designed and implemented with government stakeholders. Their efforts aim to provide more rigorous evaluations of industrial policy initiatives and test alternative policy designs. “The combination of quasi-experimental methods and RCTs shows a lot of promise,” she says. “We need more rigorous research on industrial policies to objectively assess past successes and failures, and to support evidence-based policymaking in the future.” 

Dani Rodrik says he believes that the future of industrial policy lies in continuing to move away from governments using tax codes and subsidies in favor of a more collaborative approach. “That requires government seeing itself very differently, engaging local actors and local governments in a way that they can interact with investors and producers and innovators on an ongoing basis to understand which one of these inputs serve their needs best,” he says. He also says that the definition of industrial policy will need to expand to cover more than manufacturing and renewable energy. “Manufacturing is becoming a smaller and smaller part of the U.S. economy in terms of employment,” he says. “So if we’re really going to use industrial policy to promote a middle-class society and to provide good jobs for workers who don’t have college degrees or advanced professional skills, it will increasingly have to encompass services like health care, long-term care, retail, and more. That’s where the bulk of the jobs of the future are going to be created, so we need an industrial policy for services.”

The Growth Lab, meanwhile, recently launched Greenplexity, an interactive tool that helps countries craft clean-energy industrial policies by identifying local opportunities for green growth. Showcased at last November’s U.N. Climate Change Conference in Baku, Azerbaijan, the tool provides data for 140 countries about 10 green-energy value chains, including batteries, critical minerals, electric vehicles, green hydrogen, and wind, solar, and nuclear power. “We hope this tool will help us change the conversation around the energy transition where we talk not only about how a country can lower its emissions, but also about what each country can do to supply what the world needs to reduce global emissions,” Hausmann says.

Finally, Hausmann says that schools like ����vlog���� need to embrace industrial policy design as a distinct academic discipline. “I think that policy design is an area that is undertaught, even at the Kennedy School,” he says. While a lot of weight is put on gathering evidence for policy design, more study needs to be devoted to the policy tailoring process itself, he says, because every policy initiative has to fit into a local economic and social ecosystem, and every ecosystem is different. “Design has many degrees of freedom and there’s a lot of possible creativity,” Hausmann says. “And as I like to say, there’s no such thing as a perfect suit. There’s only a perfectly tailored suit.”

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Photographs by Brandon Bell; STR/AFP/China OUT; Costfoto/NurPhoto; Carsten Rehder/DPA/AFP, all via Getty Images. Portraits by Martha Stewart and Winston Tang.

Interested in learning more? Read the transcript of Ricardo Hausmann’s recent appearance on ����vlog���� PolicyCast.