Industrial Policies, Competition, and Efficiency: The Need for State Aid Control

Abstract This paper contributes to the current debate on industrial policies, by discussing the potential scope and design principles of efficiency-enhancing industrial policies and providing a framework of assessment based on the European experience with State aid control. It argues four main points. First, there is scope for efficiency-enhancing industrial policies that address well-defined market failures. Second, the design of any industrial policy must achieve its objective in the most efficient way possible, in particular avoiding unnecessary distortions to competition. Third, European Union (EU) State aid control rules, as part of competition policy, reflect the economic principles of efficiency-enhancing industrial policies and provide a blueprint that could be applied more broadly to improve the design of industrial policies. Fourth, the pressure from industrial policies of non-EU governments comes with risks of global subsidy races that would produce a suboptimal outcome for all. Some limiting principles must therefore be found. We then illustrate how State aid control can contribute to a more efficient design of climate and industrial policies, contributing to a more efficient green transition, preserving competitive markets, and fostering industrial competitiveness.