Integrating Political-Economic Industrial Policy Design in Natural Resource Sectors

The debate on industrial policies has long been polarized between proponents of government intervention and free-market advocates. Proponents argue for market failure correction and industry nurturing, while opponents warn of the inability of the government to “pick winners” and its vulnerability to rent-seeking interests. What the current literature overlooks is that effective industrial policies must simultaneously design pie-expanding “public good” policies with appropriate redistribution policies to facilitate their political acceptance. Using this notion, this review proposes a new approach by extending the political-economic seeking transfer and political-economic resource transaction (PEST-PERT) portfolio framework to examine the efficacy of industrial policies in the agricultural, natural resource, and environmental sectors. Several empirical examples are presented, including payment for ecosystem services, conservation programs, agricultural policy reform, development subsidies to increase maize productivity, infrastructure development, and transportation investments. These industrial policy portfolios are dissected for two policy types: (a) pie-expanding policies that promote public goods, reduce transaction costs, and resolve coordination failures; and (b) redistributive policies often needed to overcome opposition from blocking coalitions. In each empirical study, the policy portfolio is specified, distinguishing these two types of policies.