Mission-led industrial strategy: Mazzucato’s new paper provides insights into how directed economic growth can drive productivity that meets societal goals.
Productivity cannot be achieved without investment: but for today’s productive economies, it is insufficient to invest for investment’s sake. Without a sense of direction, investments can result in pollution- and consumption-led growth. Considering existing challenges such as the climate crisis, this is the exact opposite of what we need: rather, investments need to direct growth and productivity to be more inclusive and sustainable. Boosting productivity and growth are entwined with social and environmental priorities. Mazzucato thus argues that the relationship between the public and private sectors must be rethought, particularly in terms of shifting beyond the ‘fixing markets’ and filling financing gaps’ mindset. New economic thinking is necessary, as well as strategic public financing and adopting a modern approach to industrial policy. In her recently published working paper Directing Growth: How a mission-oriented industrial strategy can help drive productivity, Mazzucato suggests that a mission-oriented industrial strategy can help drive productivity. The paper considers three key aspects of a modern industrial strategy: (1) adopting a mission-led approach; (2) harnessing the power of strategic public finance and establishing thoughtfully designed contracts that ensure reciprocity; and (3) investing in public sector dynamism.
The EU updated its industrial strategy in May 2021, with the aim of ensuring that its industrial ambition considers the change of circumstances post-Covid 19, while simultaneously ensuring that the EU industry can be leaders in transforming the economy into one that is green, digital, and resilient. But evolving global (geo)political tensions and the changing landscape have emphasised the importance of sovereignty and competitiveness for the EU – priorities reinforced, among other things, by the Draghi report – resulting in productivity featuring highly on discussions at the EU level. The subsequent Competitiveness Compass places closing the productivity gap with other global players, such as the US and China, at the forefront of the Commission’s direction of work, and Mazzucato’s insights into achieving productivity through a missions-oriented industrial strategy could be a valuable source of guidance in designing the future path of the EU. With ongoing discussions of Framework Programme 10 and the Multiannual Financial Framework, it is more important than ever to emphasise Mazzucato’s message that economic growth and meeting sustainability goals are not mutually exclusive.
With industrial strategy becoming an increasingly popular policy tool to drive economic activity, both nationally and regionally, governments should (re)consider the design of such strategy. A mission-led approach entails setting clear missions (e.g. tackling economic inequality), incentivising all sectors to transform and innovate. The benefit of such an approach is that, although the government determines top-down a clear direction, thereby fostering alignment across all actors, there is freedom and flexibility for bottom-up solutions to achieve these collective goals. A mission-led industrial strategy, then, is a strategy that aims at achieving collective societal goals, by incorporating a range of supply- and demand-side, vertical and horizontal industrial policies specifically designed to align with those goals.
Moreover, the government can make strategic public investments – particularly in physical, human, and technical capital – to lay the foundations for long-term productivity. Public financial institutions are uniquely positioned to provide the currently scarce patient and risk-tolerant capital, which is essential for modern industrial strategy. However, to rise to this challenge, public financial institutions must stop fixating on filling financial gaps. Rather, such institutions must be reimagined as strategic catalysts for transformative change, capable of supporting high-risk/high-reward projects usually avoided by private capital. This is where the state comes in: through providing direction – using a mission-led approach – the state can support the reimagination of these institutions, as well as ensure that subsequent economic and innovation activities resulting from public investments contribute meaningfully to long-term development goals. Mazzucato provides insights into the necessary conditions for innovation-led growth: (1) targeted fiscal policies prioritising public investments with strong multiplier effects; (2) financial policies directing private savings into productive investments that generate shared value; and (3) mission-oriented industrial strategies providing clear direction to align both public and private investments with societal goals. By using policy tools, institutions, procurement, and contract conditionalities, a successful mission-oriented industrial strategy can be pursued.
Finally, to support a mission-led industrial strategy, it is vital to develop public sector dynamism. It is not simply the role of the state to administer services and fix markets, but the state is crucial in designing and deploying policies that shape markets to deliver public benefits. As Mazzucato emphasises: a “dynamic and capable public sector can expand the productive capacity of the economy.” To explain this, she breaks down public sector capabilities into three layers: (1) state capacities; (2) organisational routes; and (3) dynamic capabilities of organisations. But to achieve this dynamism, we must accurately capture the value generated by the public sector, which necessitates a reconsideration of how public sector activities are monitored and evaluated. Failure to do so will result in the continued outsourcing of public sector capacities, undermining the government’s ability to learn and develop itself, thereby maintaining and strengthening its dependency on private entities to facilitate government actions.
Overall, employing an industrial strategy is a valuable tool to drive economic growth and productivity. But it is high time for the public sector to take charge, to ensure that these ambitions do not come at the cost of public value and societal goods. Sustainable economic growth is possible, if not crucial, and adopting a mission-led industrial strategy enables this. Aligning all sectors around defined societal objectives directs transformation and innovation, driving growth and productivity that simultaneously addresses social and environmental priorities. While Mazzucato’s work does not explicitly address the EU’s ongoing work, it provides valuable insights and guidance into how the Union can pursue its ambitions in a sustainable, competitive, and productive manner.