Government (Industrial) Policies for Competitiveness in a Global Economy
The general principle is that it is crucial for the government to provide a stable macroeconomic environment conducive to business development with a clear, transparent and neutral regulatory environment and neutral incentives to all firms and indu...
| Main Author: | |
|---|---|
| Format: | Working Paper |
| Language: | English en_US |
| Published: |
International Finance Corporation, Washington, DC
2017
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/160861484054779188/Government-industrial-policies-for-competitiveness-in-a-global-economy http://hdl.handle.net/10986/25929 |
| Summary: | The general principle is that it is
crucial for the government to provide a stable macroeconomic
environment conducive to business development with a clear,
transparent and neutral regulatory environment and neutral
incentives to all firms and industries. Clear, transparent
and neutral incentives (those which do not distinguish by
sector or firm) are crucial so that entrepreneurial
innovation is rewarded more highly than rent-seeking
activities. The economy must provide its most talented
members with the incentive to engage in entrepreneurial
activities such as starting or expanding firms, developing
new products and lowering costs. If the economy provides
extensive subsidies or tax exemptions to industries or
firms, or presents a difficult regulatory framework within
which to do business, corruption will be encouraged and,
crucially, talented people will find it more profitable to
engage in the socially wasteful activity of lobbying the
government for subsidies, protection, tax or regulatory
relief. This socially wasteful lobbying is especially
harmful because it attracts scarce entrepreneurial talent
that would otherwise be devoted to helping the economy grow.
First, there is the risk that the wrong industries will be
identified. The market is a more reliable indicator of the
industries that have comparative advantage than any economic
model or theory. Over time this is particularly true, as
comparative advantage changes with technological
development. Moreover, targeting industries as
"winners" will generate rent-seeking where
industries will spend resources to obtain government
subsidies rather than attempting to compete more effectively
on the market. Governments often find it difficult to resist
these pressures. And assistance that is designed to be
temporary may become permanent. Thus, experience in most
countries has shown that a government policy of attempting
to "pick winners" is highly counter productive. |
|---|