Governments are deploying various industrial strategies for technological upgrading, climate mitigation, infrastructure expansion, and mission-oriented innovation policy.
These state-led economic development initiatives aim to build up productive capabilities—the economic infrastructure that enables the production of goods and services. For example, the Inflation Reduction Act invested in encouraging the private sector to build new manufacturing facilities, specialized supply chains, workforce skills, and networks of industry relationships that the clean-energy industry relies upon.
The resurgence of industrial policy raises a basic measurement problem: how to measure whether such policies are working. These policies aim to foster structural economic change that may take years to materialize. Current evaluation methods are inadequate at observing these changes in real time. Quantitative and qualitative studies fail to assess whether the policy objectives are justified, and broad measures of economic success are slow-moving and shaped by many extraneous forces.
Our solution is to focus on what happens in the local economies where industrial policy lands.
Why Look Local?
Changes in local economies offer a window into whether industrial policy is making progress toward the formation of productive capabilities and achieving its development aims.
Productive capabilities are observable in places. While the concept of “productive capabilities” can be hard to pin down, the changes brought about by industrial policy are often measurable at the local, place-bound level. Productive and technological advantages often remain concentrated in specific regions, and this concentration measurably increases firms’ productivity. For example, counties that attracted new large manufacturing plants saw productivity gains of 12% over the course of five years across all existing plants compared to counties that were considered but did not ultimately host the new manufacturing plant.
Productive capabilities are built over time. Development is not just a reflection of resource accumulation; instead, it is path-dependent and cumulative. How an economy responds to new investments depends on what capabilities already exist there, from production networks to infrastructure to previous access to government development programs. Tracking intermediate changes to local economies can indicate early on whether the desired economic foundations are being constructed.
Local development is an outcome of industrial policy. Industrial policies shaped around national or industry objectives rarely end up being spatially neutral. Even when industrial policies aren’t place-based in design, they’re always place-based in practice. Monitoring economic activity in places is both a method of revealing whether industrial policy is working and an important way to ensure that it is not exacerbating regional inequalities.
A Framework for Tracking Local Change
We propose tracking seven different mechanisms through which industrial policies can affect local economies:
- the expansion of a local economy’s export base
- consumption multipliers across the broader local economy
- how growth in one sector induces growth in complementary sectors
- how investment in a specific sector can lead to clustering similar firms, related industries, and productivity in incumbent firms
- increased productivity and capability across a local economy
- increased local-level government capacity
- local labor-market upgrading that allows local populations to seek well-paying jobs that offer mobility
Not every industrial policy will lead to all seven of these mechanisms, but together, they give policymakers a set of measurable changes to use to evaluate industrial policy. Some indicators of these changes are already accessible, such as industry employment records, housing costs, and gross domestic product. Other factors, such as local government capacities and local business relationships, would require new data to be accurately measured.
All in all, operationalizing this framework to assess industrial policy will require improvements to and investments in America’s economic data infrastructure. As governments use industrial policies to reshape their economies, it is essential that we build a system to capture what this spending is building.
The full “All Economics is Local: Evaluating Industrial Policy Where It Lands” paper is available through the Harvard Kennedy School’s Reimagining the Economy website here.