The textbook case for industrial policy is well understood: sectors with relatively large external economies of scale should be subsidized at the expense of other sectors. Little is known, however, about the magnitude of the welfare gains from such interventions. We develop an empirical strategy that leverages commonly available trade data to estimate sector-level economies of scale and, in turn, to quantify the gains from optimal industrial policy in a general equilibrium environment. Our results point toward significant economies of scale across manufacturing sectors but gains from industrial policy that are hardly transformative, even among the most open economies.
…recall that South Korea — a country often presented as an industrial policy success story — experienced gains in real GDP per capita of 6.82% a year from 1960 to 1989, as documented in Rodrik (1995). A 4.06% long-run welfare increase in nothing to spit at, but a miracle it is not.
That is from a new JPE piece by Dominick Bartelme, Arnaud Costinot, Dave Donaldson, and Andres Rodriguez-Clare. Here are less gated copies of the piece.
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