The coronavirus pandemic has led to a massive increase in state activity in the economy. Correspondingly, we may wonder whether the state retains this role after the end of the crisis or whether it returns to its pre-crisis role. This is particularly relevant in case of industrial policy; that is, government policies for the upgrading of economies. While these policies can also have regulatory character, the focus here is on an active role in complementing private investment by state-led allocation of resources. This can be done in different ways, via as state-owned enterprises (SOEs), public investment banks or state subsidies to private companies. Industrial Policy is a very controversial topic for economic liberals – a recent IMF Working Paper (Cherif and Hasanov, 2019) even was titled ‘The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy’. Some parties consider it indispensable for economic upgrading, while others demand that the state should keep its hand off these allocation decisions and should leave the latter to the market.

The role of industrial policy in different growth models

Country-specific growth models do not only differ with regard to their fiscal and monetary policies, but also with regard to the role of industrial policy. Particularly governments that are not satisfied with the role of their economy with regard to their position in the global hierarchy of manufacturing (see Chapter 17) often are in favour of industrial policy. In the EU, for example, the necessity for industrial policy is felt most pressing in its Southern parts. Since the introduction of the common currency, we have witnessed a growing polarization of production structures within the Eurozone, where the private debt-led economies in the South have deindustrialized to a high degree, in contrast to the export-led economies around Germany. While the latter have accumulated the technological capabilities to compete on global markets for advanced manufacturing, the Southern European economies have increasingly been locked in lower tech and non-tradeable sectors (Gräbner et al, 2020).

Industrial policy is particularly prominent as a policy in economies of the Global South that intend to catch up in terms of industrialization.