The Textbook Case for Industrial Policy: Theory Meets Data
The textbook case for industrial policy is well understood. If some sectors are subject to external economies of scale, whereas others are not, a government should subsidize the first group of sectors at the expense of the second. The empirical relevance of this argument, however, remains unclear. In this paper we develop a strategy to estimate sector-level economies of scale and evaluate the gains from such policy interventions in an open economy. Our benchmark results point towards significant and heterogeneous economies of scale across manufacturing sectors, but only modest gains from industrial policy, below 1% of GDP on average. Though these gains can be larger in some of the alternative environments that we consider, they are always smaller than the gains from optimal trade policy.
We are grateful to Susanto Basu, Jonathan Eaton, Giammario Impullitti, Yoichi Sugita, and David Weinstein for discussions, to Daniel Haanwinckel and Walker Ray for outstanding research assistance, and to many seminar and conference participants for comments. Costinot and Donaldson thank the NSF (grant 1559015) for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.