Industrial policy, interpreted as discretionary government intervention in industry, has a bad reputation in the West, and has also for the most part now been eschewed by the governments of economies in transition. But, according to Saul Estrin (LBS and CEPR), most of their microeconomic policies – including their policies on privatization, competition, science and SMEs – are in fact industrial policies in all but name. At a meeting in Bucharest, held on 4 December 1996, and organized jointly by CEPR, IEWS and the Romanian Institute for Free Enterprise (RIFE) under the auspices of the Economic Policy Initiative, Estrin raised three questions about industrial policy. First, what are the appropriate parameters for the exercise of such policy? Second, should governments take a more strategic and systematic view of each element of industrial policy? And third, is there a case for coordinated industrial intervention in transitional economies?

Estrin argued that industrial policies are directed at raising economic efficiency in the industrial sector. This entails raising productivity, international competitiveness and non-price competitiveness, e.g. quality. In general, policies are needed in this area because markets frequently fail to do the job unassisted. But governments may be even more liable to fail, because they distort incentives for firms, creating rents from which business people and public officials alike can choose. There is thus no general solution here: the case must be argued on a policy-by-policy basis. There are five areas of industrial restructuring in transition economies in which industrial policy may be relevant. First, sectoral reallocations from industry to services, from heavy to light industry, and from import substitution to export promotion. There is little evidence that government policy is needed here, or is likely to be effective. Second, encouraging long-run growth, through coordinated policies to improve education, health and infrastructure. This is an important area for policy in transition. Third, increasing the size of the private sector, through privatization. Policies can be useful here, though encouraging the emergence of markets and ‘real owners’ should be the guiding principle. Fourth, encouragment of a balanced firm-size distribution, via policies to support small and medium-sized enterprises, may be relevant. Finally, managing the state-owned sector – clear governance is needed, as are transparent arrangements for subsidy where relevant, and a legislative framework is very important.