Should-Read: Ernest Liu (2016): INDUSTRIAL POLICIES IN PRODUCTION NETWORKS

Should-Read: Ernest Liu (2016): INDUSTRIAL POLICIES IN PRODUCTION NETWORKS: “Many developing countries adopt industrial policies that push resources towards selected economic sectors…

…How should countries choose which sectors to promote? I answer this question by characterizing optimal industrial policy in production networks embedded with market imperfections. My key finding is that effects of market imperfections accumulate through backward demand linkages, thereby generating aggregate sales distortions that are largest in the most upstream sectors. The distortion in sectoral sales is a sufficient statistic for the ratio between social and private marginal product of sectoral inputs; therefore, there is an incentive for a well-meaning government to subsidize upstream sectors. My sufficient statistic predicts the sectors targeted by government interventions in South Korea in the 1970s and in modern day China…