Former Reserve Bank of India Governor Raghuram G. Rajan has expressed concerns over the resurgence of industrial policy under the guise of "industrial strategy." In a recent column, Rajan highlighted the risks associated with governments worldwide once again turning to subsidies, protectionism, and regulations to promote domestic firms and job creation. Despite the well-intentioned rebranding of industrial strategy, Rajan warns that it may lead to repeating past failures characterized by misguided policies often referred to as "white elephants."
Rajan draws parallels to the 1960s U.S. moon mission when discussing the proponents of industrial strategy and their belief that it can address pressing challenges like climate change. While the approach may seem sensible in theory by breaking down large objectives into smaller missions with measurable goals involving multiple sectors and stakeholders, Rajan argues that such efforts often result in bureaucratic inefficiencies and overly ambitious coordination between various entities. He emphasizes the dangers of extending industrial strategy beyond governance into the private sector, where government interventions like subsidies, loans, tariffs, and tax breaks can distort competition and market signals, ultimately stifling private enterprise.
A specific critique from Rajan is directed towards the global trend of countries rushing to establish domestic chip manufacturing facilities under the pretext of mitigating risks such as global shortages and military needs. Despite the perceived benefits, Rajan points out that no country can produce all the chips it needs, and government intervention could lead to higher costs, reduced efficiency, and disruptions in supply chains. The argument for national security through domestic chip production is debunked by Rajan, who highlights examples like Russia's ability to wage large-scale wars despite facing sanctions from chip-producing nations, illustrating the limitations of a solely domestic-focused strategy.
Rajan further warns about the high costs associated with industrial strategy, noting how subsidies can perpetuate dependence on state support, undermining innovation and industry-wide profits. He suggests that instead of chasing unsustainable industrial dreams, mid-sized economies like India would benefit more from investing in education and infrastructure. With the current emphasis on industrial strategies related to electric vehicles, solar cells, and batteries, Rajan cautions that governments risk impeding global efforts to combat climate change by creating inefficiency and fragmentation. He advocates for a global dialogue to strike the right balance between industrial strategy and market-driven solutions to ensure long-term global well-being.