Applied Economy

Applied Economy

Lecture3 : Introduction

• Definition

• Industrial policy= Long-Term Policy/Public Policy.

Central point: Innovation/Endogenous Growth…

It helps to create added value (we have to combine 2nd and 3rd sector in order to do that).

• Comparative Advantage (Bilateral relationship, where you have the lowest opportunity cost) (Ricardo).
• Absolute Advantage (a country is more productive than another one) (A. Smith).

Therefore, you can define this as: taking measures to improve competitiveness and the capabilities of domestic firms to promote structural interventions.

« I will use the term “industrial policy” to denote policies that stimulate specific economic activities and promote structural change.

As such, industrial policy is not about industry per se. Policies targeted at nontraditional agriculture or services qualify as much as incentives on manufactures. Public subsidies for high-yielding varieties of traditional agricultural products, for new crops such as pineapple or avocados, for call centers, or for tourism are some examples. As the next section will make clear, the market failures that justify industrial policy can be found virtually in all kinds of nontraditional activities, and not just in manufacturing.”

Rodrik, 2007, “Normalizing industrial policy”, Commission on growth and development, working paper N°3, pp1-36.

And the theory of endogenous growth says that public funding must be at the beginning of the process of innovation, to help to create ideas… And not at the end.

• Industry in perspective

…

• Theories about industrial policies

The Neo-Classical approach through market failures:

        4 Types of market failures:

1. Externalities: We have the classic example with pollution. It can have bad externalities, it means bad (here it is the case) or good actions which are linked to the pollution of one industry on the other.
2. Monopolies & market power: It should be banned. However, there is a question, because economy needs innovation, and innovation creates monopolies. This is why government allows some monopolies in order to maintain the scale of investment which is possible with innovation.
3. Public Goods: The problem is to know what people want, how many they want to pay… But they will say that the want lot of things but they don’t want to be tax.         
4. Asymmetry of information: for example with cars, we can’t know if it is a bad or a good car, and maybe we will buy a bad car at the price of a good one because we didn’t know that it was a bad one.

If you have one of these failures, the economy cannot reach an equilibrium, it will not be efficient in the allocation of resources. And this is one reason for the intervention of the government in the economy.

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