Getting Industrial Policy Right
For two decades, the free movement of goods, services, and capital was the world’s guiding principle, crystallized in the so-called Washington consensus. Although countries didn’t always live up to these ideals or implement laissez-faire policies, most aspired to do so. They had to explain, justify, and limit their deviations from this consensus, at least in theory. The vast majority of the world’s countries signed on to multilateral institutions that promoted and enforced this view—such as the International Monetary Fund (IMF) and the World Trade Organization (WTO).
Yet the era of the Washington consensus is now over—and despite what some commentators have argued, the COVID-19 pandemic is not the cause of its demise. Developing countries started pushing back against the consensus in the early years of this century. Mature economies began to sour on its tenets after the 2008 global financial crisis. Today, advanced countries and developing ones alike are embracing “industrial policy,” a catchall term for government interventions in certain industries and in the broader economy. This shift is apparent even in the United States. The Trump administration ignored and attacked the liberal world order that the United States has led for decades. But its approach partly reflected a new conventional wisdom in Washington in favor of an economic path that relies much more on active government involvement.