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The Role of Industrial Policy in Market-friendly Economies
Given the public good characteristics of new technologies and especially those contributing to improved health, there is a strong case for state support for research and development and indeed for converting those research results to commercialise products and processes. The state support to the market is even more vital in developing vaccines for the COVID-19 pandemic, which has engulfed the whole world and has shattered the economies of countries and lives of ordinary citizens. The paper, in two parts, analyses how the state and the market have responded to the development of vaccines for this pandemic in two countries, India and the United States. India is chosen as it is one of the leading manufacturers of low-cost vaccines, and the US is selected as it is the top country where systematic R&D on vaccines is carried out. In this part, the focus is on the renewed debate on the use of industrial policy and surveys the specific policy instruments used by one of the leading market-friendly economies in the world, namely the US, in successfully developing within a short period of time a number of highly effective vaccines for COVID-19.
The author is grateful to the comments received during an online seminar at CDS on 2 July 2021. The paper is published as Paper No 21 of the Current Issues in India’s
The 1990s saw a systematic paring down of industrial policy instruments, especially in the manufacturing sectors of several developing economies. The Indian economy was one of the major ones to embrace this change to a more market-friendly environment for investments in manufacturing. Despite this newfound euphoria for markets to be at the commanding heights of an economy, knowledge production characterised by well-known market failures was sought to be supported by the state, providing various sorts of financial subsidies. However, the 2008–09 global financial crisis showed that markets were not necessarily efficient. Indeed, there was a broad consensus that without decisive state intervention—which included providing lifelines to specific firms and certain industries—the market economies of the United States (US) and Europe may have collapsed. A similar situation arose in 2020 with the onset of a devastating pandemic, which has affected the whole world so adversely that even the economies and societies of some of the wealthiest economies are affected. Life and economic activity have become very uncertain. The only credible solution to this crisis of unimaginable proportions is the invention and commercial production of vaccines for COVID-19.
According to some estimates, about 290 research and development (R&D) projects are in development across the world (WHO 2021). Among all the countries, including India, where such action was being pursued on a feverish pitch, the US was the first country to develop and commercialise a very highly effective and safe vaccine and that too using a hitherto not tried out new messenger RNA technology. The world had placed relatively high optimism on India as one of the most credible sources of vaccine supply to an international partnership of donors, the COVAX, to distribute vaccines, especially to other developing countries. However, India has not successfully used its large installed capacity and considerable technological capability to manufacture and distribute vaccines in general and leverage this capability to make and diffuse COVID-19 vaccines in particular. Based on an analysis of the relevant data on the support to the market by the state for vaccine development and diffusion, we demonstrate in this paper that the contrasting experiences of two leading vaccine manufacturers could be attributed to how both countries have used industrial policy to drive vaccine development and production. The US, which is characterised as a free market economy, did not hesitate to dust up and employ various industrial policy instruments gainfully. India, on the contrary, an economy long characterised by an extreme form of state control of economic activity, hesitated to intervene until at last fatality rates started mounting, leading even to the Supreme Court of the country to intervene, suo motu, and direct the authorities to put in place an effective vaccination policy. Finally, the Prime Minister
announced an amended vaccine policy on 7 June 2021, outlining a more significant role by the state in vaccine production and distribution (Press Information Bureau 2021). The paper thus makes out a strong case for industrial policy even in market-friendly economies and therefore adds to the renewed debate on industrial policy.
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