In Discussion Paper No. 1046, Research Fellow David Audretsch considers how institutions can be created to devise and implement industrial policy in the CEECs. Two main issues confront industrial policy institutions: one is how to avoid regulatory capture, preventing policy-makers from being captured by particular interest groups; the other is how to make industrial policy consistent with international trade policy.

The author provides a framework for prescribing industrial policies, their interaction with trade policies, and institutions charged with policy formulation and implementation. At its heart is a clear distinction between sectoral policies, which target the economic output of specific industries, and horizontal policies, which focus on improving the quality of inputs in the production process. There are a number of reasons why institutions of the second type are less likely to be subject to regulatory capture: capture is more likely when the benefits of industrial policy are concentrated on relatively few firms, as with industrial targeting. By contrast, capture is less likely when the recipients tend to be more widely dispersed, as with horizontal policies.

Audretsch then turns to designing institutions of industrial policy and international trade that avoid regulatory capture. A problem particular to the CEECs is that the centralized power and interest groups that have been established through inherited coalition structures can influence the political process and restrict the entry of new domestic firms and foreign competitors which would undermine their power. The privatization process also poses a special problem: should restructuring occur prior to or subsequent to privatization, and whose interests should prevail in the privatization process? The German approach to privatizing the former East German Kombinate provides a useful model for the CEECs.

Industrial and Trade Policies for the Emerging Market Economies
David B Audretsch

Discussion Paper No. 1046, June 1995 (IT)