Industrial and Trade Policies for the Emerging Market Economies

The purpose of this paper is to suggest how institutions can be created and modified to devise and implement industrial policy in the emerging market economies. Two main issues confronting industrial policy institutions are how to avoid regulatory capture, that is, having those policy-makers with a mandate to devise and implement industrial policy avoid being captured by particular interest groups; and how to make industrial policy consistent with international trade policy.The second section of this paper links institutions devising and implementing industrial and trade policies to the framework and timetable recently agreed upon in the Europe Agreements. The third section of the paper provides a framework for prescribing industrial policies, their interaction with trade policies, and institutions charged with policy formulation and implementation. At the heart of this framework is a clear distinction between sectoral policies, which essentially target the economic output of specific industries and even firms, and horizontal policies, which essentially focus on improving the quality of inputs in the production process. There are a number of reasons why industrial policy institutions of this second type are less likely to be subject to regulatory capture than industrial policy institutions of the first type. Regulatory capture is more likely to result when the benefits of industrial policy are concentrated upon a relatively few number of firms, as is the case of industrial targeting. By contrast, regulatory capture is less of a problem when the recipients tend to be more widely dispersed, as in the case of horizontal policies.Designing institutions of industrial policy and international trade to avoid, or at least to minimize regulatory capture is the subject of the fourth section. A number of administrative procedures which will serve to diminish the influence of political rent-seeking activities are introduced.