Industrial policy has staged a remarkable comeback in Washington. Once a term used with caution, if not embarrassment, it’s now embraced across the political spectrum as a tool to reindustrialize America and outcompete China. Whether it’s semiconductor manufacturing, rare earth mining, or green energy technologies, federal policymakers increasingly believe that strategic government intervention is not only justified but necessary.
Yet for all the rhetoric, the case for industrial policy remains stubbornly weak. Historical and contemporary evidence—from China to South Korea, and even the US itself—indicates that these interventions often fail to deliver lasting benefits. Instead of driving innovation or sustainable growth, they frequently distort markets, politicize economic decisions, and misallocate resources. Even in the best-case scenarios, the returns are modest: estimates from international manufacturing data suggest that, in highly-open economies with significant scale elasticities, the welfare gains from even optimally-designed industrial policy are underwhelming.
However, these statistics do not dampen support for industrial policy. Nowhere has the enthusiasm for industrial policy been greater than in the push for “green growth.” As climate change has climbed the global agenda, governments have turned to industrial planning to decarbonize their economies through massive public investments. In the US, the Inflation Reduction Act has channeled billions into clean technologies, aiming to ignite a new era of innovation and manufacturing revival.
But the notion that green investment equals sustainable economic development is deeply flawed. As shown in Korea’s post-2000 attempts to industrialize via so-called “growth engine industries”—which included future vehicles, bio-drugs, and next-gen batteries—the state invested in cutting-edge sectors with enormous subsidies but saw little in the way of commercial success. As Jwa and Lee (2018) demonstrate, these sectors often attracted capital not due to market demand or firm-level competitiveness, but due to bureaucratic enthusiasm and political symbolism.
Green industrial policies frequently suffer from the same pitfalls. By attempting to artificially “create” markets in politically-chosen sectors, governments bet against the market’s own evolutionary selection process. Without disciplined economic discrimination—that is, rewarding productive firms and phasing out uncompetitive ones—industrial policy merely shifts resources toward projects with the most political appeal, not the highest productivity.
Notwithstanding these failures, South Korea is often cited as an industrial policy success story. For example, the heavy and chemical industry (HCI) drive of the 1970s is typically portrayed as having catalyzed the nation’s transformation into a global manufacturing powerhouse. Yet, new plant-level data tells a more nuanced story.
While targeted sectors and regions did experience growth in output, employment, and capital investment, total factor productivity (TFP)—a more meaningful measure of long-term efficiency—did not outpace that of non-targeted sectors. This discrepancy was driven by increased resource misallocation. Within industries, new entrants absorbed capital and labor without necessarily being more productive, and between industries, capital shifted toward politically-favored sectors rather than those with the highest social returns.
Moreover, once the political support behind the policy disappeared—following President Park’s assassination in 1979—the policy was quickly reversed. As this example illustrates, even if policies are initially aligned with market forces, they are not immune to political reversal. Korea’s HCI policy was abruptly terminated after Park Chung-hee’s assassination, and subsequent regimes reversed direction. The result? Industries that had become reliant on state largesse struggled to adapt, and the misallocations that had accumulated under the policy took years to unwind.
Similarly, China’s “Made in China 2025” strategy was announced with great fanfare, promising dominance in ten high-tech sectors. Initially, stock markets responded positively. But by 2018, the façade had cracked. Chinese firms in targeted industries saw profitability drop by over 50 percent, and their leverage surged. These firms failed to deliver the competitive advantages the policy intended. Ironically, US firms operating in the same sectors performed better over the long run, underscoring the potential superiority of market-driven innovation over state-led engineering. The Chinese case also shows how industrial policy can misalign incentives. Anticipating state support, firms increased their capital investment—but without actual follow-through from the government, this led to financial stress and efficiency loss. State guidance that lacks credible commitment not only misleads markets—it corrodes them.
Indeed, the US system—marked by polarized politics and intense lobbying—is arguably even more vulnerable to such distortions. Firms and industries with deep political connections will have an advantage in accessing subsidies and protections, regardless of their economic merit. The result is what the Korean scholars call “anti-discriminatory policy failure”—a refusal to facilitate and reward high-performing enterprises, instead treating all players as equally deserving of support.
The alternative is not laissez-faire complacency. As Jwa and Lee (2018 ) argue, a pro-market industrial policy—one that supports the environment in which firms operate rather than the firms themselves—may offer a more constructive path. Rather than picking winners, the state can streamline regulation, and enable dynamic markets. This framework acknowledges that economic development is not merely about allocating capital—it’s about shaping incentives. It is the institutional and behavioral conditions under which firms operate that matter most. Misguided industrial policy, especially when cloaked in moral rhetoric like “green growth,” risks substituting political hope for economic logic.
The renewed appetite for industrial policy in the US reflects legitimate concerns: international competition, climate change, and strategic vulnerabilities. But the answer cannot be a nostalgic reversion to postwar-style planning. History—and contemporary experience—show that industrial policy is no panacea. It is costly, politically fragile, and often economically ineffective.
Instead of romanticizing the state as an entrepreneur, we should focus on building a dynamic, competitive, and innovation-friendly environment. That means resisting the urge to centrally plan the future, no matter how urgent the geopolitical stakes. In economic development, as in evolution, survival and success are not achieved through decree—but through disciplined selection, adaptive behavior, and market feedback.