Despite past experiences with costly, underperforming ventures—dubbed “white elephants”—governments around the world are once again resorting to subsidies, regulation, and protectionist policies. The aim is to ensure that their domestic industries and job markets remain competitive, but this approach brings with it the familiar risks of inefficiency and wastefulness. Industrial strategy, while sometimes yielding success, has historically been fraught with challenges. As governments prioritize domestic firms and employment over market-driven efficiencies, they risk repeating the failures of the past.
A new wave of industrial policy is being deployed to tackle modern economic concerns, but the question remains: Can the world afford to make the same mistakes again, or should alternative, more sustainable strategies be considered?
A Resurgence of Industrial Policy
Industrial policy—government intervention to promote specific sectors or industries—has been a common tool in economic governance. While some countries have used it to great effect, others have seen it fail disastrously. Nations like Japan and South Korea used strategic interventions to transform their economies into global powerhouses. However, other nations have poured resources into industries that never delivered the promised returns, leaving a trail of failed projects and squandered public funds.
Today, industrial policy is making a comeback in response to several global issues. Developed nations, particularly in Europe, the United States, and China, are facing concerns over job losses, geopolitical competition, and dependence on global supply chains. In a bid to counter these pressures, governments are turning to industrial policies that aim to support key sectors, create jobs, and ensure economic sovereignty.
Several factors are driving this renewed interest in industrial strategy. The COVID-19 pandemic exposed vulnerabilities in global supply chains, highlighting the risks of economic overdependence on foreign suppliers. In addition, emerging technologies—such as artificial intelligence (AI), green energy, and advanced manufacturing—have created a new arena for global competition. Governments are racing to ensure that their economies are at the forefront of these developments, using industrial policies to foster domestic leadership in critical sectors.
The Lessons from Past Failures
The concept of “white elephants” in the context of industrial strategy refers to large-scale, expensive ventures that fail to generate the returns expected of them. These projects drain resources and become burdens rather than engines of growth. Despite their inefficiency, they are often kept afloat by government support.
One of the most notorious examples of industrial policy gone wrong is the Concorde supersonic jet, a joint venture between the United Kingdom and France. While the Concorde was a technological achievement, it ultimately failed to become commercially viable, due to high operating costs and limited demand. The project, sustained by taxpayer money, became a symbol of industrial strategy that failed to deliver on its economic promises.
Brazil’s attempt to create a domestic computer industry in the 1980s provides another cautionary tale. The country imposed strict import restrictions and trade barriers to protect its nascent computer sector. However, these measures stifled competition and innovation, leaving Brazil’s technology sector outdated and uncompetitive. This strategy eventually backfired, causing economic setbacks as local firms struggled to keep pace with global advancements.
These examples underscore the risks of overreliance on government intervention in the economy. When governments attempt to pick winners and control market outcomes, they often end up misallocating resources, creating inefficiencies, and leaving the economy less competitive in the long run.
The Tools of Industrial Strategy: Subsidies and Protectionism
In modern industrial policy, subsidies are a key tool used by governments to support industries they view as strategically important. These subsidies can take various forms, including grants, tax incentives, or low-interest loans. While subsidies are meant to foster innovation, job creation, and economic growth, they can distort market dynamics by encouraging uncompetitive behavior.
For instance, the solar energy sector has received significant subsidies in countries like the United States and China. Although subsidies helped reduce the cost of solar panels, they also led to market oversupply and price competition so fierce that many companies failed to remain profitable. In some cases, subsidies propped up inefficient companies, preventing the market from weeding out underperformers.
Protectionism—another common feature of industrial policy—involves using tariffs, quotas, and trade restrictions to shield domestic industries from foreign competition. While this can protect local jobs in the short term, it often leads to inefficiency by stifling competition. Industries sheltered by protectionist policies may become complacent, failing to innovate or improve productivity.
The global steel industry is a prime example. Countries such as the U.S., the EU, and China have implemented protectionist measures to shield their steel sectors from foreign competition. While these policies may have saved jobs, they have also led to overproduction, declining profits, and trade disputes. Instead of fostering a competitive and dynamic steel industry, protectionism has prolonged the life of inefficient enterprises, to the detriment of long-term economic growth.
Rethinking Industrial Policy for the Future
Given the history of industrial policy failures, it is crucial for governments to rethink their approach. Rather than trying to pick winners and control market outcomes, policymakers should focus on creating the conditions for innovation, competition, and long-term growth.
One alternative is to invest in human capital, research, and infrastructure, which can empower domestic industries to grow organically. This strategy encourages entrepreneurship and innovation without the distortions caused by direct subsidies or protectionist measures. By fostering a competitive environment, governments can ensure that only the most dynamic and efficient industries succeed, without creating white elephants that require ongoing government support.
Another approach is to embrace globalization and encourage open markets, rather than shielding domestic industries from foreign competition. While competition may initially be painful for some sectors, in the long run, it drives efficiency and innovation, ensuring that industries remain competitive on a global scale. Open markets also give consumers access to a wider variety of goods and services at lower prices.
A flexible and adaptable industrial strategy is essential in a fast-changing global economy. Policymakers must be willing to adjust their strategies in response to new developments, rather than locking themselves into rigid plans that may become obsolete. This means regularly evaluating the effectiveness of policies and being open to change when necessary.
The Risk of New White Elephants
As governments around the world return to industrial policy to address modern economic challenges, the risk of creating a new generation of white elephants remains real. If policymakers fail to learn from past mistakes, they may inadvertently divert resources into unproductive ventures that offer little economic benefit. In the race to protect domestic jobs and industries, governments could end up nurturing inefficiencies that weigh down their economies in the long term.
While industrial policy can be a valuable tool in shaping a nation’s economic future, it must be used carefully. Governments should prioritize policies that create a competitive and dynamic business environment, rather than trying to micromanage the economy. By avoiding the pitfalls of past failures, policymakers can prevent a new generation of white elephants from stalling global economic growth.
As governments consider the path forward, it’s essential that they strike a balance between supporting critical industries and maintaining a flexible, competitive market environment. Only then can industrial strategy contribute to sustainable growth, without repeating the mistakes of the past.
Disclaimer: The thoughts and opinions stated in this article are solely those of the author and do not necessarily reflect the views or positions of any entities represented and we recommend referring to more recent and reliable sources for up-to-date information.
