DP13931 The Textbook Case for Industrial Policy: Theory Meets Data

Author(s): Dominick Bartelme, Arnaud Costinot, Dave Donaldson, Andres Rodriguez-Clare
Publication Date: August 2019
JEL(s): F10, F11, F12, F13, F14, F17
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13931

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.