America's Era of Hidden Industrial Policy
Before the US started doing industrial policy out in the open, it was doing industrial policy behind closed doors
In last week's post, I wrote about the postwar era consensus that state-led industrialization was necessary for development and its subsequent decline. By the 1980s, the new consensus was that industrial policy wouldn’t work. Merely mentioning it in policy circles often provoked disdain and dismissal.
The US played a unique role in maintaining this perception and promoting an anti-interventionist, pro-market agenda for the developing world. Its ability to reinvent itself through new technological breakthroughs (from the automobile to semiconductors to the internet) and its relatively strong economy were attributed to a laissez-faire approach to governance. The takeaway promoted by this market fundamentalist narrative was clear: industrial policy was unnecessary, and attempts to direct economic development through state intervention were ineffective and counterproductive.
However, new scholarship has revealed the hypocrisy of the US's anti-industrial policy narrative. Fred Block characterized the US as a “hidden developmental state,” noting how state agencies played a critical role in financing the commercialization of new technologies.1 Arguing against the small-state doctrine of the US, Mariana Mazzucato highlights how American tech companies have relied on state-funded investments, noting, for instance, that the algorithm behind Google’s search engine was developed with funding from the US National Science Foundation.2 Robert Wade (2017), one of the original contributors to the developmental state scholarship, also pointed out that the US state has actively supported its IT sector through industrial policy—placing bets on private firms, offering credit lines to small businesses, and providing R&D subsidies.3
This scholarship shows that despite promoting a market fundamentalist approach abroad (e.g., the Washington Consensus), the US was, in fact, an active practitioner of industrial policy at home. However, the nature of US industrial policy during this period differed significantly from the industrial policy strategies put in place under the Biden presidency as well as those from the East Asian developmental states. This post will examine this distinctive era of covert industrial policy in the US, how these policies differed from the industrial strategies employed in East Asia, and how these policies boosted development at home while perpetuating the small-state doctrine abroad.
Policy objective
The covert industrial policies used in the US differed significantly from the East Asian model on several dimensions. Industrial policy in the East Asian developmental states was explicit, centralized, and production-focused. Their primary goal was to catch up with early developers by "learning" existing frontier technologies and expanding production capacity.4 These policies emphasized long-term relationships with a select group of national champions, prioritizing production scale and technological upgrading.
In contrast, the industrial policy in the US, as described by Block, Wade, and Mazzucato, is covert, decentralized, and market-oriented. Rather than focusing on production capacity, the US approach aimed to develop entirely new technologies and commercialize innovations without clearly defined markets. With a focus on early-stage technology, US agencies adopted a portfolio approach, distributing resources across multiple sectors and firms, much like venture capitalists. In this model, the state acts as a high-risk investor.
A prominent example of this approach is the Defense Advanced Research Projects Agency (DARPA), which uses federal funding to support research and development in select defense-related industries. Since DARPA’s support is directed toward early-stage technologies, many projects have found broad applications beyond defense, including the internet, mRNA vaccines, voice assistants like Siri, and GPS.
Policy approach
At the heart of the US's covert industrial policy approach is the goal of commercializing new technologies where markets do not yet exist or discovering entirely new technological opportunities. Targeting support for early-stage technologies aims to solve a particular kind of market failure—the mismatch between the social benefits of new technologies and the anticipated private benefits. Without state support, it would be too risky for private actors to invest in nascent technologies because they would have to eat the risk of unproven technologies. In the rare case where a new technology succeeds, first movers would have to share in the profits with risk-averse latecomers who came only after the technology was proven viable. To counteract these risks, the government can finance first movers to address this market failure.
Financing first movers requires a different policy approach to that of the East Asian developmental states. In the developmental state model, state assistance was tied to export promotion. This made it relatively easy for state actors to enforce discipline (e.g., cutting subsidies) when private firms do not fulfill export performance requirements. The US's covert industrial policies differ primarily in that the test for success is the domestic commercialization of the innovative activity. And so, rather than helping firms to compete in product markets, innovation-based industrial policy must generate new markets through new technologies and products. As a result, long-term planning and targeted investments do not work. Instead, the strategy is to pursue a portfolio of experimental investments—in a way, not unlike venture capitalists.
State business relations
The state-business relations for the US approach also radically differed from the East Asian model. Instead of a central authoritative government agency where state-business relations were governed by the principle of "reciprocity"—in which firms received state support only if they contributed to national development goals—U.S. industrial policy operated through a decentralized network of suppliers, including subcontractors, venture capitalists, private laboratories, and even universities.
These networks aimed to accelerate the commercialization of technological breakthroughs and, in return, supply government agencies with cutting-edge products and services. Mazzucato uses the iPhone as an example of the networked approach to industrial policy in advanced economies. While the iPhone is often celebrated as a product of private-sector innovation, she highlights that many of its core technologies—such as the touchscreen, GPS, Siri, and the internet—originated from government agencies, private research labs, and university research labs.
From the iPhone to the Google search engine, these covert and decentralized industrial policy strategies created the perception that these innovations emerged solely from a market-driven system of free market entrepreneurialism rather than a state-guided ecosystem of government agencies, research labs, and universities. As a result, the hypocrisy of US industrial policy could persist for years.
State Institutions
The East Asian developmental model relied on centralized institutions led by career bureaucrats, deeply embedded in long-term planning processes. Institutions like South Korea's Economic Planning Board (EPB) and Japan's Ministry of International Trade and Industry (MITI) exemplify this approach. These centralized agencies had broad authority to direct industrial policy, including allocating resources, setting production targets, and nurturing key industries. These East Asian agencies operated in alignment with national development strategies and were staffed by career bureaucrats, which enabled stable relationships with private firms. This model prioritized selecting and supporting a small number of national champions, with clear expectations of performance and technological advancement.
In contrast, the portfolio approach of the covert US model relied on a decentralized and networked political structure to effectively coordinate public and private initiatives rather than a centralized and authoritarian system focused on long-term relationships. State agencies engaged in industrial policy deliberately kept their programs under the radar, enabling them to operate with reduced political interference and greater capacity for experimentation. This secrecy was also crucial for maintaining the legitimacy of the government’s outwardly anti-industrial policy stance.
Concluding thoughts
Today, the US is embracing industrial policy out in the open. Unlike in the past, where industrial policy was conducted under the radar to preserve a narrative of laissez-faire capitalism, the costs of maintaining such a narrative are now too high. The race for dominance in emerging technologies such as semiconductors, renewable energy, and artificial intelligence has made industrial policy a critical strategy for retaining economic competitiveness. However, adopting explicit, East Asian-styled industrial policies requires more than changing its policy objectives and approach. It will also require a transformation of its state-business relationships and its state institutions—a far more challenging task.
Block, Fred. 2008. “Swimming Against the Current: The Rise of a Hidden Developmental State in the United States.” Politics & Society 36(2): 169–206.
Mazzucato, Mariana. 2014. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Revised edition. London ; New York: Anthem Press.
Wade, Robert H. 2017. “The American Paradox: Ideology of Free Markets and the Hidden Practice of Directional Thrust.” Cambridge Journal of Economics 41(3): 859–80.
Alice Amsden famously noted in her 1989 book that the developmental states developed via “learning”