While governments have forged ahead with various industrial policies in areas such as clean energy and semiconductors, we still have much to learn about the historical efficacy of such interventions. Réka Juhász and Claudia Steinwender evaluate the growing literature on nineteenth century industrial policy and possible paths for future research.
The resurgence of industrial policy in the United States and beyond has brought the historical track record of industrial policy under renewed scrutiny. As observers weigh the merits and risks of deploying industrial policy in advanced economies today, it is natural to ask: how successful have governments been at shaping the composition of economic activity in the past? Ironically, in the eyes of both its supporters and detractors, the track record of industrial policy bolsters their respective arguments. Proponents argue that virtually every successful industrialization episode was driven by heavy doses of industrial policy. Skeptics counter that the mere presence of industrial policy does not prove its effect, and point to other reasons these economies thrived. The dearth of research on industrial policy until recently has contributed to our misunderstanding about how industrial policy was practiced historically.
The Nineteenth Century World Engaged in Modern Industrial Policy
In a recent paper, we examine industrial policy in the long nineteenth century—a period where many Western countries successfully industrialized, leaving much of the rest of the world behind. Our review finds that, contrary to popular belief, laissez-faire is the historical exception, not the rule (echoing the findings of other recent work). The sheer breadth and sophistication of industrial policy tools used throughout the nineteenth-century global economy is staggering. Where much of the debate over historical industrial policy focuses on the effects of protective industrial policy tariffs, we find that tariffs were neither the only, and likely not the most important form of industrial policy. In fact, one of the striking aspects of nineteenth- century industrial policy is the extent to which policymakers deployed “softer” tools, which contemporary research also finds to be effective.
Take transport infrastructure development—an area which is heavily promoted in developing countries today. In the nineteenth century, in many countries from Argentina to Sweden and Japan, the state promoted railway development by coordinating investment, providing subsidies, and often building part of the network itself. Sometimes, the goal was explicitly to promote industrial development, as stated by one Swedish minister of finance; “If one wants to extend a helping hand to our industry […] the State cannot support the improvement of the country in a more efficient, appropriate, impartial and magnificent way, than by a firm action to bring about railways.”
New research finds that nineteenth-century railroad development brought a multitude of benefits: it opened up vast agricultural hinterlands to export markets—often for the first time, it allowed for increased specialization within countries and it fostered industrialization. These benefits were evident in already industrializing countries such as Britain, late industrializers such as Sweden and Japan, and even in colonial contexts, such as Ghana and British India, where the main goal of railway development was not to benefit the local population but to serve the colonizers’ interests.
Technology and innovation policy is another area of industrial policy where we find a broad array of “modern” instruments used, often with positive effects. From Bourbon France to Meiji Japan, the state provided wide-ranging support for acquiring and adopting frontier technologies. In some countries, elite universities were established with the goal of producing industrial innovation; in others, lower-level vocational training was offered to equip workers with the skills needed by an industrial workforce. Finally, states grappled with how to protect intellectual property, such as patents or trademarks, to best support innovation, technology adoption, and foreign market access.
Our analysis also points to a more sophisticated use of tariff and trade policy than is commonly understood. Many countries set a low tariff on industrial inputs (machines and materials) and protected their domestic manufacturing industries with high tariffs. This tariff structure anticipates the insight from modern empirical trade that access to high quality foreign inputs is an important channel through which globalization increases firm productivity. In addition, transport and communication infrastructure was used to facilitate the sourcing of inputs from foreign countries. A good example is the transatlantic telegraph, which expedited Britain’s acquisition of raw cotton—a key input for their thriving textile industry—from the U.S..
Countries also tried to facilitate access to export markets: by negotiating trade deals to benefit their export industries as in the case of France; by providing de-facto export subsidies through the subsidization of steam shipping routes as in the case of famously laissez-faire Britain; or by supporting the roll-out of international telegraph networks to reduce frictions in international commerce. In short, protective tariff policy is but one facet of a much more complex, and sometimes more outward-oriented industrial policy pursued by nineteenth-century states.
The Infant Industry Argument Makes a Comeback
More controversially, recent research has found a potentially very important role for protecting nascent manufacturing industries from trade—the classic infant industry argument. Natural experiments in French and Chinese textile manufacturing, the main engine of nineteenth-century industrial development, speak to the importance of protecting infant industries. Strikingly, rigorous cross-country evidence suggests that countries more protected from trade in this period actually grew faster than more open economies. One explanation for these findings is that the standard specialization gains from trade may have been outweighed by infant industry mechanisms that gave large, long-term growth benefits to countries that were able to launch a modern industrial sector.
Importantly, however, the effects of infant industry protection are not uniform across episodes, highlighting that benefits may depend on context. While French industry could independently develop the “first generation” machines of an emerging technology, Chinese catch-up a century later only succeeded once it could secure access to foreign, advanced machinery. This suggests that policy tools do not work in isolation. In some cases, support for infant industries may need to be combined with technology provision policies.
A further consideration is that all recent research papers use episodes of “accidental industrial policy”—instances where wars, blockades, or other shocks drove variation in protection. This leaves open for research the question of whether policymakers themselves were able to deploy effective infant industry protection. Thus, while this research doesn’t fully address the question of whether the industrialization of countries such as the U.S. or Germany were helped by their high tariff regimes, it strongly suggests that some form of support for burgeoning industries was necessary to facilitate industrialization. These findings may hold important lessons for developing countries today.
Don’t Forget Imperialism
Finally, a review of nineteenth-century industrial policy cannot and should not ignore the imperial context of the era. It is important to recognize that colonial powers used colonies to serve their industrial policy goals. Colonized land and peoples were used to source raw material inputs for industry, often under brutally exploitative conditions: West Africa supplied the palm oil which was used as lubricants in machinery, Malaya supplied rubber (which was introduced to the region by the British), and so on. Moreover, colonies often also served as captive markets for the metropole’s manufacturers, thus supporting the colonizer’s industrial development. By forcing colonized regions to specialize in commodities production, colonies were deprived of the opportunity to benefit from infant industry mechanisms in manufacturing. Moreover, without autonomy, colonies didn’t have access to the same industrial policies used in independent countries. Research has only begun to scratch the surface of what the effects of these policies were. In particular, it would be important to understand to what extent the international division of labor, whereby Western countries produced manufactures in exchange for raw materials from the global South, was shaped by these “imperial industrial policies.”
Where Does This Leave Us?
Where does all this leave us in terms of the debate about historical industrial policy? First, it seems high time to recognize that industrial policy has never really only been about protectionism and tariff policy. Much like today, many states in the nineteenth century stepped in to shape the composition of economic activity in a variety of different ways. Many of the tools they deployed were both sophisticated and modern, anticipating contemporary “best practice.” Others, however, were a product of the imperial age, with devastating consequences for colonized peoples.
While it seems likely that industrial policy had a role to play in the industrialization of some countries, it is too soon to declare victory to the optimists. As with most research on industrial policy, much of the work on historical episodes asks whether the policy elicited the desired behavioral response, but doesn’t address whether the policy intervention was efficient—as the latter requires a model. A second, sorely lacking aspect of the current state of research is facilitated by publication bias: we know very little about failed episodes of industrial policy. Our review points to many independent countries using industrial policy, not only the (Western) countries that eventually succeeded. We should learn from the successes and strive to also study the failures—there is much to be learned from both.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
