I highlighted this two years ago. I am highlighting it again, as I think it has not received the attention it deserves. Ernest Liu: Industrial Policies in Production Networks: "Many developing countries adopt industrial policies favoring selected sectors. Is there an economic logic to this type of interventions?...

...I answer this question by characterizing industrial policy in production networks. Market imperfections compound through backward demand link- ages, causing upstream sectors to be the sink of imperfections and have the largest size distortions. My key finding is that the distortion in sectoral size is a sufficient statistic for the social value of promoting that sector; thus, there is an incentive for a well-meaning government to subsidize up- stream sectors. Furthermore, aggregate effects of sectoral interventions can be simply summarized by the cross-sector covariance between my sufficient statistic and policy spending. My sufficient statistic predicts sectoral policies in South Korea in the 1970s and in modern-day China, suggesting that sectoral interventions might have generated positive aggregate effects in these economies...


#shouldread

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