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What is the role of industrial policy in delivering the Sustainable Development Goals?

By Laurie Macfarlane

This blog is a follow up to the event ‘Industrial policy in action: What are the routes to sustainable prosperity?’ The event is part of IIPP’s ‘Walking the talk: Getting serious about the UN Sustainable Development Goals’ series. The recording of the event can be viewed above.

The term “industrial policy” has a turbulent history. After playing a central role in many countries during the post-war economic boom, the term fell out of favour as governments embraced free-market reforms in the 1980s, becoming known as the ‘Policy That Shall Not Be Named’.

However, faced with mounting global crises — from the Covid-19 pandemic to climate change — governments around the world are increasingly recognising that industrial policy is key to delivering inclusive and sustainable prosperity. But how can industrial policy be most effectively designed to address modern challenges such as the UN Sustainable Development Goals (SDGs)? This was the focus of the fourth webinar in IIPP’s ‘Walking the talk: Getting serious about the UN Sustainable Development’ event series.

Nobuya Haraguchi, Chief, Research and Industrial Policy Advice Division at the UNIDO, kicked off the discussion by explaining how modern approaches to industrial policy differ from those pursued in the past.

“In the past, the main focus on industrial policy was to get firms to internalise market externalities”, he explained. Under this approach, it is assumed that goods and services are most efficiently produced by private firms operating in a competitive market. Because the state has neither the knowledge nor the expertise to allocate resources better than the market, it was recommended that governments should avoid pursuing policies that try to ​‘pick winners’ or ​‘distort’ market competition. Instead, the state should only act to ​‘level the playing field’ or to correct certain identifiable ​‘market failures’.

However, it has become increasingly acknowledged that fixing market failures is not sufficient to solve modern challenges. Instead, Haraguchi explained that modern approaches to industrial policy are more focused “achieving outcomes measured against set targets” such as the SDGs. This ‘outcomes orientation’ marks a significant departure from previous approaches. It requires governments to move beyond simply fixing market failures and start actively creating and shaping new markets, technologies and industrial landscapes.

The mission-oriented approach to industrial policy pioneered by IIPP is one example of this approach. Mission-oriented thinking requires understanding the differences between broad challenges, missions, sectors and specific solutions, as shown in Figure 1 below.

Source: Missions: a beginner’s guide

Challenges are a broadly defined area which a government may identify as a priority, such as climate change. Missions, on the other hand, are concrete targets where different sectors can collaboratively address by tackling a challenge through a series of interconnected innovation activities, such as reducing carbon emissions by a given percentage over a specific year period. Finally, solutions are specific projects undertaken by businesses, governments, or the third sector that can help support a mission.

Whereas the market failure approach to policy is about ‘de-risking’ and ‘levelling the playing field’, mission-oriented policy encourages risk-taking, sharing of risks and rewards, and tilting the playing field in the direction of desired public purpose goals. It does not seek to ‘pick winners’, but instead serves to ‘pick the willing’ — identifying those organisations (in different sectors, across both the public and private spheres) that are willing to engage with societally relevant missions.

Javiera Petersen, the Deputy Minister of Economy in Chile and IIPP PhD candidate, explained how a similar approach is being embraced in Chile in order to tackle the challenge of climate change. The country has set clear targets for reducing its greenhouse gas emissions, and has identified green hydrogen as a potentially transformative solution for accelerating this — particularly in relation to its large mining sector. Up until now however, the country has not had a competitive green hydrogen sector. As a result, the government has recently developed a new strategy for creating and shaping this new market.

“Developing a green hydrogen industry requires a coordinated effort between many public institutions, the private sector, civil society, local communities and academia”, Petersen explained. It also requires many different sectors to collaborate in new ways, including investors, technology developers, electricity suppliers, hydrogen producers, and many more. In order to kickstart the development of the industry, Petersen explained how the government has established a new Advisory Board for the development of the National Green Hydrogen Strategy to coordinate different actors and help to catalyse the development of the industry.

However, if industrial policy is to help deliver the SDGs, it must not simply be about developing new technologies or industries. Tackling climate change will inevitably mean that some existing polluting sectors must shrink or even disappear altogether, potentially creating significant disruption in the labour market. Policy must therefore ensure that this process of industrial transformation happens in a way that is fair and just, creating new opportunities for those impacted.

Samantha Smith, Director of the Just Transition Centre at the International Trade Union Confederation (ITUC), discussed why the concept of a ‘just transition’ is vital in the context of the SDGs. The ITUC defines a just transition as “decent work, social inclusion, and poverty eradication while reducing emissions in line with global commitments on tackling climate breakdown.” Achieving a just transition means that those most impacted by the net zero transition are proactively supported to ensure that the benefits of a green economy transition are shared fairly.

Smith explained how the Just Transition Centre is currently examining the net zero pathways being offered by governments and companies around the world, and assessing them against three key questions:

  1. What are the new jobs that will be created?
  2. Are they good jobs?
  3. What else needs to happen to make the transition just?

Setting out ambitions for a just transition is the easy bit, however. Successfully implementing industrial policy in practice is much more difficult. According to Haraguchi, there are three key ingredients to the successful implementation of industrial policy.

The first is “strong leadership and ownership of the plan by the head of government”. Because industrial policy cuts across many different ministerial departments, only the head of government can coordinate this effectively and resolve potential conflicts that arise. In addition, the government must exercise strong ownership over the industrial policy, rather than outsource it to consultancy firms or other third parties, to ensure that knowledge and learning is retained.

The second key ingredient is “multi-stakeholder participation”. This should involve close dialogue with all stakeholders — including policymakers, the private sector, NGOs, workers and academia — to avoid problems of information asymmetry and generate widespread buy-in.

The final key ingredient is performance conditionality. Regular monitoring and evaluation is an essential part of any industrial policy, as it allows policies to be adjusted or recalibrated based on assessed performance.

Overall it is clear that ‘Policy That Shall Not Be Named’ has a key role to play in achieving the SDGs. The question is not whether industrial policy is needed, but how it can most effectively be designed, implemented and governed.

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UCL Institute for Innovation and Public Purpose

UCL Institute for Innovation and Public Purpose

Changing how public value is imagined, practiced and evaluated to tackle societal challenges | Director: Mariana Mazzucato | Deputy Director: Rainer Kattel