On the political economy of industrial, labor and social reforms as complements

This paper shows that ignoring the political relevance of labor and social policies can lead to the failure of an industrial policy designed to modernize an economy. Our analysis is based on a simple model of a two-sector economy (one old and one new) in which policy decisions are adopted under a majority rule. This model suggests that unless, (i) the labor policy ensures that workers have enough bargaining power to give them an incentive to find a job matching their skills in a restructured economy and (ii) the government adopts a social policy compensating the losers of the industrial policy, the new sector is unlikely to develop. Moreover, we find that the credibility of the commitments made drives the effectiveness of the coordination of the three policy elements.