The Political Economy of Industrial Policy.

• Author: Hemphill, Thomas A.

Industrial policy remains an unresolved topic of international public policy and academic debate. In this adaptation of his doctoral dissertation, Professor Chang contributes important theoretical underpinnings and empirical support to an industrial policy discussion which has long been deficient in a modern conceptual and analytical foundation.

The book, organized into four parts, begins by reviewing the theories of state intervention under the four major theoretical groupings of the market-failure, contractarian, political economy and government-failure literature. Chang offers a comprehensive synopsis of each grouping: he begins with the viewpoint of public goods, non-competitive markets and externalities (market-failure); then proceeds to the morality of paternalism and contractarianism (contractarian); continues on to the approaches of the autonomous state, interest-groups and self-seeking-bureaucrats (political economy); and closes with a discussion of the information problem and rent-seeking (government-failure). He asks two difficult questions: Does the state really serve the public interest? And can it achieve what it sets out to do? In answering the first question, Chang suggests that establishing a reasonable set of hypotheses concerning the objectives of a particular state requires firstly, looking more carefully at the process of interest group formation and collective action, and secondly, evaluating the operation of the bureaucracy in the particular state system of political economy. The government-failure literature attempted to answer the second question. However, says Chang, the information problem and rent-seeking is remedied only through non-intervention, leaving a disingenuous choice of failing markets as a superior alternative to failing governments.

In the second chapter, a new institutionalist theory of state intervention is developed. Traditionally, new institutionalist economics, especially the transaction-costs branch epitomized in the work of Ronald Coase and Oliver Williamson, has emphasized the theory of the firm, contracts and the proposition that the market is not the only viable coordination mechanism. Chang extends this work by interpreting the costs of state intervention as transaction costs. His theory of state intervention views the state, the market, the firm and other economic institutions as equally viable coordination devices. The state may reduce coordination costs lower than the market cost through...