Vertical Industrial Policy

Vertical industrial policy refers to state interventions that pick winners—directing subsidies, tax credits, tariffs, public procurement, or regulatory advantages toward particular industries, technologies, or even individual companies deemed strategically important. It is typically contrasted with horizontal industrial policy, which improves general framework conditions (skills, infrastructure, R&D base, competition rules) without favoring any sector.

The intellectual case for vertical policy draws on infant-industry arguments associated with Friedrich List and Alexander Hamilton, and later on development economists such as Ha-Joon Chang and Dani Rodrik, who argue that latecomer economies need targeted support to overcome coordination failures, learning externalities, and capital-market gaps. East Asian developmental states—Japan's MITI in the post-war decades, South Korea's heavy and chemical industry drive under Park Chung-hee, and Taiwan's semiconductor push through ITRI and TSMC—are the canonical empirical references.

Critics, often working in a more neoclassical tradition, warn that vertical policy invites rent-seeking, regulatory capture, and fiscal waste, because governments lack the information firms possess and political incentives distort allocation. The mixed record of European "national champions" policy and various failed picks (e.g., Concorde, several solar subsidy programs) is frequently cited.

Vertical industrial policy has returned to mainstream practice since the late 2010s. Notable examples include:

• The US CHIPS and Science Act (2022), directing roughly $52 billion to domestic semiconductor manufacturing and R&D.
• The US Inflation Reduction Act (2022), providing sector-specific clean-energy tax credits.
• The EU Chips Act (2023) and the EU's Important Projects of Common European Interest (IPCEI) framework covering batteries, hydrogen, and microelectronics.
• China's Made in China 2025 plan, listing ten priority sectors.

Contemporary justifications now extend beyond development economics to include economic security, supply-chain resilience, decarbonization, and geopolitical competition, especially with respect to China. Analysts such as Réka Juhász and Nathan Lane have produced new empirical work suggesting vertical interventions are more common, and sometimes more effective, than the 1990s Washington Consensus assumed.