History of Industrial Policy in the EU

Laura Porak
Exploring Economics, 2023
Poziom: początkujący
Perspektywy: Ekonomia instytucjonalna, Marksistowska ekonomia polityczna
Temat: Kryzys, historia ekonomiczny, Innovation, institutions, mikroekonomia, resources, environment & climate
Formularz: Learning Text

Industrial policy is on the rise – and given the immense challenges created by the green and digital transition, but also crises such as the Covid-19 pandemic or the War in Ukraine, it will most likely increase in importance in the future. This diagnosis has been made repeatedly in the past two decades (e.g., Aiginger et al., 2013; Aiginger and Rodrik, 2020; Bulfone, 2022; Wigger, 2022, 2019). Industrial policy commonly is defined as

“any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity toward sectors, technologies, or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of such intervention” (Warwick, 2013, p. 6, cf. Bulfone 2022).

So, industrial policy focuses on supporting specific industries, technologies or sectors and per-definition alters the economic environment – but this might be done in different ways. This is because industrial policies and the preferred instruments, like all forms of policy, are affected by ideas about how the economy works and formed in a specific socio-economic context. The aim of this article is to illustrate how first, specific perceptions of the economy (most importantly, the world market) and second, the specific socio-economic and political context shape industrial policy. To this end, this text reviews how industrial policy in the European Union evolved over time from the 1950s until today. More precisely, I (1) introduce Cultural Political Economy as theoretical framework to analyze industrial policies. On this base, (2) I move on to depicting the different forms industrial policymaking took in the Fordist period and (3) the neoliberal period, before (4) moving towards more recent developments such as the rise of mission-oriented industrial policy and (5) its recent geopoliticization. (6) The text ends with some political reflections.

Cultural Political Economy

As stated above, the state- and regulation-theoretical approach, Cultural Political Economy (CPE) (Sum and Jessop 2013; Jessop 2002; 2004; 2010; 2015;), is employed as an analytical framework for approaching industrial policy. For CPE scholars, institutions (e.g., industrial policy) are closely related to the interaction of ideas and social relations of production: Different sets of ideas could be used to understand or describe socio-economic realities and/or problems. By implying distinct practices and/or solutions at any time, ideas contribute to shape political strategies, institutions and economic reality. To account for this, CPE introduces the concept of economic imaginary (Jessop, 2004, 2010). Economic imaginaries provide specific narratives that highlight certain economic elements while side-lining others and this way, selectively frame actions and experiences of individual and collective actors. Despite the necessary selectivity that allows actors to reduce complexity and make sense of their lived, day-to-day economic reality, they must have significant correspondence to the real economy. Besides, economics provides a scientific base for the imaginaries: economic theory is used to make sense of different elements and their relation to each other and thus, marks the field of what can be said and done. However, as economic imaginaries are always simplifications, they do not correspond to economic theory. Against this background, I argue that in analyzing the selection and retention of economic imaginaries throughout policymaking it is useful to consider (1) capitalist dynamics, (2) ideas, (3) power relations, and (4) institutions.

(1) Arguing from a regulation-theoretical perspective (e.g., Bieler and Morton 2008; Jessop 1999, 2002), capitalist economies and societies are geared towards the creation of profits. This is a necessary condition to reproduce their economic, political and social order. However, since capitalist dynamics in social relations of production are crisis-prone, the state has the crucial function to ensure ongoing accumulation and regulate conflicts between different interest groups seeking to maximize their profit shares. The way that states do this, depends on the specific socio-economic and political context – it thus, varies in time and space. Therefore, a historical analysis of the development of the capitalist economy analysis is necessary to understand specific sets of policies ( e.g., Brand et al., 2022; Buch-Hansen and Wigger, 2010), e.g., globalization and the development of specific economic sectors (e.g., a European chip industry) were important factors shaping the trajectory of European industrial policy. (2) But economic structures do not determine a particular form of politics (Bieler and Morton, 2008) - policies are also significantly shaped by ideas. To make sense of economic phenomena, different sets of ideas (i.e., economic imaginaries) can be used - albeit they must bear some resemblance to economic relations (Jessop 2004, 2010). For instance, the world market might be described as place of exchange of equal partners or struggle for market shares and profits (see also Porak 2023b). (3) Power struggles between actors closely related to social relations of production, regulate the circulation of ideas (Bieler and Morton, 2008; Jessop, 2010, 2004, 2002): Actors use economic imaginaries to support, advance and legitimize their preferred ideas and thereby, normalize/privilege certain economic activities from a broad set of possibilities. Thus, theoretical knowledge might be used strategically to realize one’s own interest in policymaking. To explain the dominance of ideas in specific moments, the concept of hegemony (cf. Gramsci, 2012) is important as it accounts for the complicated process through which ideas are accepted by broad class (fraction) coalitions: Particular interests of diverse class fractions are, by also making material concessions to other fractions, reconciled around the interests of dominant class fractions, and reframed to create the illusion of a universal interest. For instance, industrial policy is framed as necessity to create and sustain jobs in the liberalized world market. (4) (Political) institutions with their inscribed strategic selectivity (i.e., bias towards specific actors, elements of intervention or policies) regulate the circulation of ideas and access of economic, political or social forces in society (Jessop, 2002). The strategic selectivity results from past social conflicts so that path-dependencies make some policies more likely than others. Put differently: As institutional-fix, institutions ensure accumulation for specific capitalist formations and create a temporarily stable social order. This is often backed by a spatio-temporal fix displacing and deferring crisis tendencies to another space or time (e.g., the global South or future) (Jessop 2014).

This brief overview on Cultural Political Economy (CPE) illustrates that to analyze a specific set of policies, social relations of production (the socio-economic and political context), ideas (or ideology), power relations (class fractions) and path-dependencies must be considered. Against this background, in the following I briefly sketch industrial policy in the European Union, consider its relation to different schools of thought informing the economic imaginaries (particularly, the rise of neoliberalism) and introduce recent developments in the field.

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Fordism: Industrial policy in and for national economies

The golden era of industrial policy has been Fordism that started in the 1950s and lasted until the 1970s. The Fordist economy was organized around (mainly domestic) economic growth enabled through mass production and mass consumption facilitated by a certain extent of domestic redistribution (Jessop, 2002): In order to legitimize the global market economy newly established after the second world war, all social groups had to participate in welfare gains and policy-making. Social struggles around the distribution of profits and wages were therefore, institutionalized in corporatist bodies (organized interest groups of capital and labor). These then became crucial in ensuring that the shares of profits (for investments) and wages (for consumption) evolved at equal pace (cf. Bulfone 2022; Berger and Compston, 2002; Jessop, 1999, 2002). This was complemented by active, interventionist economic and strong social policies (e.g., unemployment insurances, redistribution). The ideational background of these policies was Keynesianism. Keynesianism’s most relevant insights in relation to this article (particularly in contrast to the economic mainstream) are first, that demand (= consumption) is a condition for steady economic growth and well-being, and second, that markets are crisis-prone and in need of political regulation for their stable functioning. This legitimizes the state to actively shape the economy, e.g., through macro-economic steering or industrial policy, in order to create economic growth and employment. In this regard, industrial policy was actively aiming at a solid manufacturing base (Buch-Hansen and Wigger, 2010) and, inward-looking as it was, used to protect the domestic industry from external interference and competition (Bulfone, 2022). To this end, a range of political instruments were used: state-owned enterprises, credit rationing, long-term planning, legal monopolies, merger control, and subsidies, privileging regulation for specific industries, but also supporting infant industries or `national champions`. The latter aimed at advancing the competitive strength of a specific domestic company or economic sector also at the cost of fairness and/or competition on the market. In the 1950s, industrial policy focused on sectors like steel, car-making, and chemicals, with attention shifting slowly towards electronics, aircraft and biotechnology in the 1970s (Bulfone 2022). In this period, industrial policies were predominantly pursued at the national level, while the EU focused on struggles related to internal market integration (particularly, competition policy) (Buch-Hansen and Wigger 2010).

World market integration just started with the GATT (General Agreement on Tariffs of Trade) (1947) and domestic economies became more integrated over time through the Fordist era (Jessop, 2002). Accordingly, the international trade volume exploded by 1970 to 476% of the volume of 1950 and today (2023) even to 4473% of 1970 (WTO, 2003). As world market integration increased, domestic economies tended to get more specialized and global value chains were becoming increasingly important. However, the largest increase took off after the Fordist era.

Neoliberalism: Horizontal or market-confirming policies

The crisis of Fordism in the 70s and 80s resulted from the declining consumer strength in the Fordist economies, and the need to create new forms of revenue, but also inflation mismanagement during the oil-price crisis (Jessop 2002). It led to far-reaching changes in the political economy resulting in a new politico-economic formation: Post-Fordism (Jessop, 2002). Post-Fordism featured a neoliberal approach to policy grounded in a set of ideas provided by neoclassical economics. Neoliberalism more precisely, can be characterized by two features: ‘(a) promoting the role of the market mechanism and competition as the sole ordering principles of economic exchanges; and (b) recognizing the necessity of state intervention to establish and secure functioning markets’ (Jessop, 2019, p. 669). Accordingly, active, market-intervening policies (of the Fordist era) were increasingly seen as market-distorting and abandoned in the next two decades. Rather, privatization, market liberalization and deregulation were promoted at different scales to increase competitive pressure on market actors. The state’s main goal became to manage the integration of domestic firms, sectors and industries into global chains of production and consumption, closely entangled with domestic and foreign capital fractions (Bulfone 2022). In this context, competitiveness, revolving around the aim to develop and exploit competitive advantages on the world market, gained importance as a policy goal (see e.g., Jessop, 2015, 2002; Linsi, 2020; Miró, 2022, 2021; Nunn and Beeckmans, 2015; Sum, 2009). Competitive advantages might either be created through price or technological competitiveness (i.e., either by reducing production costs by lowering input costs, wages, and the cost of doing business, or through innovation) (Dosi et al., 1990).

To attain this goal, industrial policy is a strategy among others. However, in comparison, in the neoliberal era, industrial policy became more indirect (seemingly passive) or horizontal: European internal market integration (= liberalization), privatization (also of state-owned public service sectors, e.g., electricity, telecommunication, gas, banking, etc.) and the creation of a “regional bloc” were portrayed the best strategy to increase European competitive advantages on the world market (Bürbaumer, 2021; Palan et al., 1996). So, the European Commission aimed to create European champions able to compete against Japanese or American multinationals through internal liberalization that is expected to effectively select the most competitive firm on the domestic market (Bulfone, 2022). Besides, capital markets were de-regulated and on the European level, national fiscal space became reduced and competition policy reinforced so that direct political support for specific economic actors became more difficult. This increased the importance to attract (Foreign) Direct Investments (FDIs) (cf. Bulfone, 2022).

In the late 20th and early 21st century, when the knowledge-based economy became the driver of economic growth, industrial policy again got more important to policy makers (Aiginger and Rodrik, 2020; Bulfone, 2022). Nevertheless, the strategic orientation had changed: Instead of the active industrial policy in the Fordist era, the political focus revolved around re-regulation, and institution-building with the aim to create a well-functioning business environment and so-called “clusters”. Thus, conditions required for successfully doing business are created through so-called market-shaping policies, in order to increase competitive advantages. These policies entail no interference with the market mechanism, while gearing regulation towards the interests of (multinational) businesses, e.g., by ensuring low tax-levels, low wages, minimal social and environmental standards or enabling vertical bilateral interactions between states and foreign companies (Bulfone 2002). This market-shaping approach for instance, has been reflected in the European Union’s economic strategy since the Lisbon Agenda’s (2000) goal to ‘become the most competitive knowledge-based economy in the world`. Particularly, in the early 2000s the horizontal approach was fully embraced, and industrial policy was limited to create ‘better’ (i.e., more efficient) regulation. However, this policy approach did also entail more directional interventions, for instance, ensuring or reinforcing social and environmental goals through appropriate regulation.

Digitalization and the green economy: a case for mission-oriented industrial policy

Since the economic and financial crisis (2008), the related economic downturn and slow acceptance of global warming as systemic political and socio-economic problem, economic policy is increasingly rethought by policymakers and economists. This is reflected in strategic proposals such as the Green New Deal (cf. Aşıcı and Bünül, 2012; Brand, 2016) that aim to reconcile economic growth, employment and a green transition. In this context, Mazzucato (2014, 2018) proposes a new industrial policy approach: Industrial policy should be intentionally oriented towards specific goals and challenges that modern societies must address (e.g., climate crisis or digitalization), and evaluated in respect to the successful realization of goals. In comparison to the horizontal approach that dominated the early 2000s, these so-called mission-oriented policies are less ideologically oriented towards specific (neoliberal) sets of ideas. This opens up space for diverse political decisions and instruments (i.e., interventionist and market-shaping1 policies), but also for closer collaborations between policymakers, businesses and the third sector. Besides, Mazzucato (2018) claims that the policy frameworks steering the direction of future growth must be innovation-led and oriented toward societal values. Thus, the approach entails a technological optimism in that technology appears as strategy to solve social or environmental problems. This orientation towards innovation, sustainability and social cohesion is also reflected at the European level in the economic strategy, Europe 2020 with its foci on smart, green and inclusive growth. Similarly, to Mazzucato, Europe 2020 comprises a strong technological optimism, also to combat climate crisis. Besides, the mission-oriented approach is influenced by Schumpeter’s theory of Creative Destruction as catalyst for economic development and Keynesianism’s more flexible approach towards different political instruments. So, the mission-oriented approach illustrates how different sets of ideas (e.g., Keynesianism, technological optimism, and Schumpeter) might be re-used and reconciled in one consistent economic imaginary which then serves to guide economic policymakers. Particularly since 2014, this was also reflected at the European level: On the one hand, the European Union created loop-holes to circumvent European competition policy (e.g., Important Projects of Common European Interest). On the other hand, the European Union started to impose social- and environmental standards through bilateral trade agreements and acting upon the world market through the WTO to increase European competitive advantages (cf. Porak 2023a, b).

New global struggles: geo-politicizing mission-oriented policy

Towards the end of the second decade of the 21st century the mission-oriented approach gained even more importance for policymakers. This is related to the increasing salience of climate crisis in public and political discourses. In 2015, the Paris Agreement, aiming to limit global warming if possible, to 1,5°, but not above 2°, was agreed. The year 2018 has then been a turning point regarding the political importance of a green transition: Politicians started to talk about climate crisis as a severe threat for humankind (e.g., the ECB referred to climate crisis as a threat to financial stability), and FridaysForFuture was founded. In 2019, the new European Commission around Ursula von der Leyen then adopted the European Green Deal. At the same time, American hegemony at global scale declined with the presidency of Donald Trump, so that geopolitical tensions (particularly, between China, the US, Russia and EU) increased and a new world (economic) order is forming (Lavery and Schmid, 2021; Miró, 2022). While its formation is not yet ended, the green transition and new geopolitical developments gave rise to concerns about strategic dependencies and (digital) sovereignty on the world market at the European level. This indicates a break with the neoliberal belief in the merits of free markets, which had dominated before. Rather, industrial policy is focused on fulfilling ‘geopolitical missions’. On the institutional level, this is reflected for instance, in strategic dependency reports (monitoring global value chains), the Industrial Forum (an institution to involve organized industrial interest groups to work on plans for the green transition) or the Carbon Border Adjustment Mechanism. (CBAM) (Porak, 2023a). The CBAM is said to sustain European economic growth as other regions have not yet introduced carbon-pricing (Ehrenstein and Neyland, 2021). It connects to former European ambitions: Since Europe 2020 (2010), acting on the world market and the rules of international trade became part of the European economic strategy. Such efforts complement industrial policy as they re-assure supply chains (e.g., of raw materials) and sales markets abroad for European products. This reveals a struggle between the primacy of the political or economic: In the past, the EU mainly adapted its policies to world market developments, but lately also attempt to form the world market. However, despite a recent revival of more active industrial policies, in the sense that they are intentionally used to attain specific goals, closer examination of the European industrial policies indicates – in this moment in time - a clear bias towards market-design policies rather than interventionist policies. Hence, the focus is on creating functioning markets or new markets to solve problems (e.g., the EU-ETS). This reveals the lasting influence of neoliberalism in the European Union (cf. Porak 2020, 2023a).

A hopeless mission?

The article illustrates two important points: First, also in capitalist political economies, varieties of policies can be pursued. Which policies are chosen concretely, depends on the social relations of production, institutions and circulating economic imaginaries. Clearly, it was beyond the scope of this text to reconstruct the concrete power relations and social relations of production in much detail. However, it was shown, that in different historical contexts, different sets of ideas about ‘the’ economy and ways to regulate it, dominated discourse and political institutions: An active, market-interventionist approach to industrial policy was characteristic for the Fordist period, while a market-confirming type of industrial policy featured in the neoliberal toolbox. In more recent times, the mission-oriented approach can be seen as a sort of re-activation of industrial policy, even if it is mostly in line with neoliberalism. Secondly, and despite all differences, strong continuities in making sense of ‘the’ economy became visible: Economic growth is not being questioned, even in face of the climate crisis and industrial policy appears as a strategy to create competitive advantages on the (world) market for national (or regional) firms. If the much-needed green transition will be successful in this environment is an open question. Indeed, there are serious reasons for doubt regarding the plans of the European Commission and national governments. Especially Degrowth or Marxist approaches argue that the technological optimism on which current industrial policy initiatives are grounded is not in line with empirical findings about decoupling and thus, should not be considered as strategy for a green transition. Rather, they argue for structural changes of the social relations of production as lever in the socio-ecological transition, while the current approaches towards the green transition are seen at best as green capitalism (Brand, 2016).

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1 Market-shaping means that framework conditions for specific markets are created in order to attain a specific political goal, e.g., the EU-ETS, which creates a market for emission trading with the entitled goal to reduce overall consumption.


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