Industrial Policy and Comparative Advantage: When and Where Government Involvement Can Increase Social Welfare

Published on: 2016-09-13

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Yong Wang, Assistant Professor of Economics and Faculty Associates of HKUST IEMS, discussed how government involvement can make or break industrial development as well as social welfare. He pointed out that successful industrial policy should involve dynamic strategic adjustments and the promotion of a given industry in phases, rather than all-at-once. In particular, he cautioned that industrial upgrading may present a challenge to social stability in countries like China, where accelerated industrial upgrading may displace lower-skilled workers and reduces jobs.

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Key Points

  • Government-led industrial policies can ameliorate the phenomenon of sub-optimal private investment under certain scenarios.
  • When setting industrial policies, governments should target industries based on the structure of factor endowments (the comparative advantage of labor or capital) by making use of price signals.
  • Concrete policy tools to spur government-led industrialization include subsidies such as tax rebates, tax holidays, investment credits, and export subsidies;
    or punishments such as tax increases.

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