International economic law and the reinvention of industrial policy: Opportunities,limitations and risks

1 Introduction

The concept and practice of industrial policy in the European Union, the United States, and other parts of the world are today taken as a self-evident, non-controversial part of public policymaking. In a very short period, it has become forgotten that recently and for decades the concept of industrial policy was deemed to be obsolete, outdated, and largely discredited.

However, the most recent reinvention of industrial policy after decades of its oblivion should not come as a surprise. The reasons for its reinvention belong to a variety of factors, such as the need to tackle climate change more comprehensively than in the past; the rapid rise of China in the advanced sectors of the economy (5 G network, electric batteries, and electric cars, solar panels, and many other sectors); and geopolitical rivalries, imbalances, and conflicts.

However, the reinvention of industrial policy is taking place without sufficient consideration of the international economic, trade, legal, and social developments of the past four decades. This period of the last four decades was characterized by the primacy of international markets, enhanced international trade, and unrestricted financial flows. The model, which worked well in good economic times, was unable to cope with an increasing number of crises: the financial crisis, climate change and environmental damage, resource depletion, and the deepening of social inequalities within countries and at the global level. The pronounced concepts of “lifting all boats” and “trickle-down economics” proved to be inadequate and often misleading. They led to international and national economic and social divisions, inequalities, and imbalances. This pattern of uneven development in the past four decades could be observed not only in the developing world but also in many developed countries.

The model of neoclassical economic and legal thinking was firmly incorporated into the international economic and legal framework developed in the past four decades. It was incorporated into the rules and practices of the World Trade Organization and the guidelines and policies of the IMF and the World Bank [1]. Consequently, the policy space and room for developing policies at the national and regional levels were substantially narrowed [2]. The international trade rules imposed stricter limitations on national governments than the previous GATT regime [3]. The flexibility of the national and regional governments to intervene in the markets was limited. The availability of policy tools and instruments for governments was reduced. The policy space for developing national and regional policies and for restructuring sectors and regions was left to the markets and forces of globalization.

A backlash against the described model came in the form of social discontent from excluded and marginalized workers, social groups, and local communities in different parts of the world. The discontent was exploited by the populists, when it became clear that the mainstream political parties, policymakers, and international technocrats did not have adequate answers, policy tools, or instruments to tackle the declining industries and localities [1]. The populists channeled the popular discontent against globalization, international technocrats, and/or the rapid rise of China, but they did not provide any constructive, innovative, or coherent proposals themselves. Instead, traditional protectionist trade measures, such as unilateral tariffs, were imposed. Such measures predictably did not help alleviate the global trade imbalances, and they did not address the trade deficits and surpluses, but they further exacerbated the already growing international tensions [4].

Consequently, the more recent attempts to revive the national economies involved the adoption of economic stimulating measures and industrial policy. The most recent shift toward industrial policy is taking place on the grounds of unresolved international normative and conceptual issues. While the circumstances for adopting new forms of industrial policy are compelling— the struggle against climate change, the need to restructure many stagnating or declining industries and regions in developed and developing parts of the world, and the persistent global economic and social imbalances— the normative, institutional, and policy framework at the international and national levels remains inadequate. The risk, therefore, is that the adoption of industrial policy in many parts of the world, developed and developing, will not bring about the desired results of comprehensive economic and social restructuring. If industrial policy is not carefully calibrated, it may even lead to new economic, social, regional, and developmental divides, inequalities, and exclusions [5].

2 Research questions and methodology

This article addresses two research questions. What is a distinctive characteristic of the new, modern industrial policy in comparison with the old, traditional industrial policy? What are the requirements for institutional, normative, and policy changes at the international and national levels to enable the implementation of high-quality modern industrial policy?

The method of analysis will be based on normative and conceptual analyses of industrial policy in different historical contexts. The empirical part of the discussion will be based on comparative institutional studies dealing with the variety of institutions built to support and underpin economic and social development. Institutions at the international level include primarily the international trade and investment rules and the World Trade Organization. Especially the constraints stemming from the Agreement on Subsidies and Countervailing Measures will be addressed. At the national levels, the institutional context of modern corporations, property rights and contracts, as well as the relation between the public sector and the market economic framework will be addressed.

In the first section of this article, the analysis will be focused on the emergence of the knowledge economy as a distinctive economic, social, and normative pattern of development since the beginning of industrialization. The opportunities, risks, and limitations of the knowledge economy will be analyzed. In the second section of this article, the analysis will be devoted to the normative, conceptual, and practical differences between traditional and modern industrial policies. How to embed modern industrial policy into the context of a knowledge economy will be analyzed. In the third section, normative, conceptual, and policy requirements and changes at the international level will be discussed. The concluding section of this article will provide key findings regarding the research questions, especially regarding the envisaged institutional reforms and institutional innovations [6].

The limitation of the article stems from the still-limiting understanding of and empirical research about the substantially different institutional context required to exploit the opportunities of the knowledge economy. Different institutional context refers to the international models of development in the aftermath of the WW II. The three main social and economic models were the Anglo-Saxon institutional model, the European continental model and the Scandinavian model. All three main models have changed substantially in the last decades, but they retained distinctive institutional characteristics despite the rapid development of globalization. More studies and empirical literature regarding the knowledge economy and broad-based social development are necessary.

3 Emergence of the knowledge economy: A distinctive institutional evolution

The compelling reasons to introduce industrial policy were already explained in the introductory part of the article. The rapid shift to reintroduce industrial policy took place, however, without sufficiently considering the characteristics of the knowledge economy. The risk therefore remains that, without the reformed institutional framework, the implementation of industrial policy may lead to the reproduction of existing hierarchies and inequalities. In this case, the potential for comprehensive industrial policy and the potential for structural improvements in close strategic coordination between the public and private sectors will be lost for the foreseeable future.

The emergence of the knowledge economy marks the transition from the traditional Fordist-style of production toward a post-Fordist style of production [7]. It is not a transition from industrialization toward deindustrialization, as the conventional narrative frequently but misleadingly assumes. It is also not a transition from industry toward services, because the knowledge economy requires close cooperation between advanced sectors of industry and advanced services in such a way as to alleviate the differences between them.

The goal of Fordist production is to produce large quantities of standardized goods with the lowest possible costs to pursue economy of scale. The main characteristics of traditional Fordist production are, in a nutshell, the following: routinized repetitive work by the semi-skilled workers; hierarchical top-down organization of the production, with the task-defining managers at the top of the organization and workers executing tasks on the shop floor; and rigid machines designed to produce standardized goods and for mass consumption at the lowest possible prices. A strong division of labor assumes specific tasks for workers designated only for narrowly defined tasks.

The Fordist style of mass production, with large companies pursuing economies of scale and scope to meet mass consumption, was the prevailing mode of production for most of the twentieth century. The mode and the organization of production worked well in the circumstances of stable demand. These were the strengths of Fordism. On the other hand, Fordism had many weak points, one of which was the inability to adapt to demand fluctuations in the markets. Another and perhaps even more important deficiency was the slow process of innovation. Once the production, organization of production, and managerial structure are in place, the changes of technologies and of the processes of production present a disruption to the routinized processes. The introduction of improvements and innovations to the process is slow, tedious, and exogenous. Other managerial practices, such as cutting costs of labor and other inputs of production or outsourcing, are more frequently applied [8–10].

An external institutional, normative, and policy framework has been developed in the context of Fordist production. The structure of ownership, the governance of firms, the primacy of shareholders, principal-agent legal relations, the development of the “business judgment rule,” labor legislation, bankruptcy legislation, competition rules, intellectual property rules, and even the organization of the financial markets are all built around the organization of large corporations based on mass Fordist-style production [11].

The arrival of the knowledge economy at the fringes of traditional organizations of production and corporations did not meet its institutional counterpart that would be hospitable to the new forms of production, the new organizations of production, and the new forms of organizational structure. Namely, Fordist mass production is not always the most efficient type of production. It can work efficiently in the context of stable demand; however, in the context of unstable, constantly changing demand, other modes of production, such as flexible specialization, can be a more efficient means and organization of production [12, 13].

The arrival of the knowledge economy is not a mere continuation or evolution of the modes of production. The knowledge economy, in its organizational principles, presents a radical break with Fordism [9]. To begin with, the knowledge economy, in contrast to the hierarchical and rigid division of labor in Fordism, is much more collaborative. It assumes teams of workers, experts, and managers constantly trying to innovate and improve production processes and products. The same applies to the provision of services. Multipurpose machines require a skilled, educated, and constantly trained workforce capable of performing multiple tasks and operations. Between different layers and teams of workers, a constant flow of information is established, and the traditional distinction between task-defining and task-executing jobs is blurred [9]. The aim of production is not primarily to minimize costs per unit of work hour but to improve the quality of a tailor-made product for a known customer. Instead of high volumes of standardized products, small volumes of high-quality tailor-made products are produced. Rapid changes in the process of production require the cooperation of teams of workers and constant adjustments and improvements that are best described as a constant learning and innovation process [9].

If the arrival of the knowledge economy in all sectors of the economy, including services and agriculture, presents a discontinuity with the traditional modes of production, the discontinuity has not been matched with the broader institutional changes. There is a growing literature on the emergence and characteristics of the modern knowledge economy. However, literature that analyzes the effects of unchanged institutional frameworks and the evolution of the knowledge economy is scarce. Some of the most perceptive scholars have pointed out that the knowledge economy presents immense opportunities to broaden economic activities and include many more workers, social groups, and local communities. On the other hand, if the knowledge economy is not adequately supported by the reformed set of institutions, the knowledge economy can become isolated and confined [9]. This can lead to the concentration of knowledge, advanced technologies and practices, and managerial and labor skills only in a handful of leading corporations, usually concentrated in the most advanced regions in the world.

More concretely, according to the WIPO Global Innovation Index 2022, the top 100 hundred clusters in science and technology (S&T) are concentrated in three regions –North America, Europe, and Asia –and in two countries, especially: China and the United States. China is on par with the United States of the number of top 100 S&T clusters, followed by Germany, with 10 in the top 100 [14]. In addition to the strong regional concentration of science and research, there is also a concentration of science and technology in a handful of leading international super-firms [14]. Furthermore, evidence shows “that a very large proportion of the R&D investments financed and executed by the business sector worldwide is concentrated in a relatively small number of world-leading corporate innovators, in many cases large multinational groups [14].

Because of concentrated and insulated knowledge economy worldwide, “the rising inequality between leading and lagging firms, leading, and lagging regions, across high-paid and low-paid workers, and across countries is recognized as a major drag on technology diffusion, adoption, and productivity [14].

The lack of adequate institutional and policy support does not provide sufficient dissemination of advanced practices to the rest of the economy and society. There are only a few occasional examples of successful start-ups or small and medium-sized firms capable of joining the advanced parts of the economy. However, many other firms, workers, social groups, local communities, and regions remain stuck in the traditional sectors of the economy and run in traditional ways with the already identified weaknesses. Due to the pressures of globalization, these large segments of the economy and society are under increasing competitive pressure to reduce wages, lay off workers, move production, or close production. Backlash against globalization in its current form, even in the most developed, but increasingly unequal countries in the world, becomes inevitable [15].

The divide between isolated, confined parts of the advanced knowledge economy and the rest of the economy remains unresolved, and any kind of modern or traditional industrial policy currently applied should aim primarily to overcome the confined character of the knowledge economy. The existing institutional framework, the limited policy space at all levels of government, the lack of sophisticated instruments and tools, and the lack of broad popular participation in articulating new development strategies that are more inclusive and sustainable narrow the opportunities and benefits of the recently launched industrial policies in different parts of the world.

It appears that international economic, legal, financial, and trade arrangements reinforce global imbalances that even the most sophisticated industrial policy anywhere in the world cannot effectively address. In an unreformed international framework, any attempts to revive domestic industrial policy resemble more a leap of faith than a deliberate action to achieve structural transformation. The risk is that the revived industrial policy will not be sufficiently capable of economic turnaround, or, in the worst-case scenario, it may even reinforce the existing divides between the advanced and stagnating sectors of the economy, local communities, and social groups [10]. As such, the revived industrial policy can become discredited again for the foreseeable future without even proper design, implementation, and outcome.

The development dilemma in developed and developing parts of the world is similar despite differences in levels of development. How can a new institutional framework be developed that will ensure that the opportunities and benefits of the knowledge economy can be disseminated among all stakeholders, participants, local communities, and social groups beyond the confined segment of the currently insulated knowledge economy for the handful of leading corporations and technological centers?

4 Old and new industrial policies in the context of a confined knowledge economy

The concept of industrial policy, old and new, was never fully embraced by the mainstream policymakers and technocrats nor by the neoclassical economists and other social scholars. Even though it was practiced in all parts of the world, including many of the US states, the implementation of industrial policy was not particularly well accepted. It was not part of the standard policy prescription for the countries receiving the IMF lending programs. It was not part of the standard policy prescriptions advocated by most of the international economic and policy advisors. The industrial policy was deemed to be only a residual policy intended to alleviate some market failures.

Nevertheless, many of the developing countries that were climbing the ladder of industrial development in the 1960 s adopted various forms of industrial policy. South Korea, for example, was particularly known for comprehensive top-down centralized support for selected state-owned enterprises and selected and prioritized industries with the aim of building internationally competitive national groups of companies that the government perceived as potential niches on the international markets. The literature on the successes and failures of the South Korean industrial policy is well documented [18]. On the other hand, the example of Taiwan exemplifies a different route of economic rise and a different implementation of the industrial policy. In contrast to the South Korean centralized top-down approach supporting selected large conglomerates in key strategic sectors of industry, the Taiwanese approach was more decentralized and oriented primarily toward the support of small and medium-sized companies, and it was less prioritized in terms of sectors and more flexible according to the actual development of the domestic and international markets [19].

Both countries developed a nexus of support institutions, including a system of long-term finance for new projects and entrepreneurial initiatives. Both countries— and many other so-called East Asian tigers— paid special attention to a high-quality public administration with the expertise in technologies, international markets, finance, and policymaking. Both countries established a sufficient level of public accountability to create a sufficient level of trust, coordination, and flow of information among all the stakeholders. The institutional framework, as well as the macroeconomic policies, were embedded in the developmental strategies of the countries. At the time of the rise of the respective countries, the international economic and legal framework was more open and flexible and less strict toward the domestic industrial, financial, and trade policies in comparison with the subsequent development of the international trade rules in the context of the World Trade Organization. Industrial and development policies, however, were never and can never be a linear process of overall economic and social progress. As this is a trial-and-error process, both countries, in their paths of development, also made costly mistakes along the way.

The two mentioned countries were not alone in pursuing industrial policy. In many instances, even the United States –as one of the most market-oriented countries among the advanced countries –pursued many forms of the industrial policy. Apart from the introduction of the Internet to the country and the world, the federal program of the Defense Advanced Research Program Agency (DARPA) is one such example [19]. In addition, during periods of macroeconomic crisis, individual federal interventions on the markets also took place. Under the Obama administration, the federal government directly intervened with large sums of funding to prevent the bankruptcy of General Motors, one of the traditional icons of the American automotive industry. These are just some examples of pragmatic American industrial and economic policy that, in practice, deviated from its declared neutrality and non-intervention in the free market.

The term “industrial policy” in its broadest sense can be described as any form of deliberate public activity— at the local, regional, national, or supra-national levels— that contributes to productive capabilities and improved competitiveness [20]. Similarly, in the broadest sense, the distinction between the old traditional type of industrial policy –predominantly in the form of state intervention in the markets –and the new type of industrial policy –in the form of promoting and disseminating innovations and competitiveness.

The focus of industrial policy as a general concept “is not just consumer welfare, but overall productivity, value, and wealth creation” [21]. Of course, in the context of different nations at different levels of development, countries and their governments adopt a variety of approaches toward the industrial policy with specific national economic and social goals. In addition to national value and wealth creation, thanks to deliberate public activities, the goals of the modern industrial policy are the ability of the nations to provide strategic goods (such as health protection equipment during the pandemic) and to maintain public goods.

The goals of industrial policy may vary, as may the instruments and policy methods. The constant monitoring and assessment of industrial policy should be viewed primarily as a source of information and insight into what can be done in new, better ways. Among the traditional instruments of industrial policy are subsidies, subsidized interest rates, and public guarantees on loans, favorable loans; public procurement policy, state-private cooperation on R&D, various forms of public ownership and direct public control of the firms; and the prevention or encouraging mergers and acquisitions to defend or protect public entities.

The classical repertoire of instruments of industrial policy is risky. It requires expertise, information, independent assessment, a long-term economic strategy, highly capable public administration, coordination among various government departments, and cooperation with the firms on the market. The administration is oscillating between perils at two opposite poles: on the one hand, it can succumb to economic dogmatism and administrative inertia; on the other hand, it can succumb to clienteles and various forms of corruption. Only the most competent governments with high levels of accountability and integrity can meet such high requirements. Establishing a developmental state in developing countries is a task of the highest order. But, without the ability to establish relationships between the public and the private sectors as complements, it is almost impossible to climb the ladder of industrial development successfully.

Without the carefully established industrial policy of the newly industrialized countries in Asia— South Korea, Taiwan, Singapore, Hong Kong, and Japan–their successful integration into the world economy would not have been possible. At the same time, a favorable international economic and legal framework was supportive of such integration. The success of these strategic industrial policies lay in the capabilities of the newly industrialized countries to forge “a strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what types of intervention are most likely to remove them” [22].

Even the most successful newly industrialized countries committed costly mistakes and made many wrong decisions along the path of strategic industry policy. The attempt by Taiwan to launch its domestic car industry on the model of Japan or South Korea is one such example. The example of South Korea launching its chemical industry based on the German model is another example [23]. There are many more. These costly mistakes and other limitations of the traditional, old industrial policy led gradually to its marginalization.

More pragmatic, flexible forms of industrial policy, as a mixture of regulatory measures, even privatizations of the former state-owned enterprises, various mergers, public-private partnerships, sometimes support for regional development, and/or support for small and medium-sized companies, often in the form of more rigorous antitrust and other competitive measures, are all part of the new industrial policy. Such an industrial policy has been implemented, for example, in the regulatory context of the European Union in the consolidation of its Single Market in the past thirty years. The characteristics of the new type of industrial policy were summarized by Best [12]. in his analysis of the emergence of post-Fordist regions engaging in what he described as the new competition: “The new competition can be distinguished from the old in four dimensions: organization of the firm, types of coordination across phases in the production chain, organization of the sector, and patterns of industrial policy. The new competition is about strategic actions within each dimension. The term ‘strategic’ refers to market-shaping activities in contrast with market-reacting responses.” [13].

Yet, in the context of the European Union, new forms of industrial policy are aimed primarily at the completion of the Single Market and the removal of barriers to cross-border business activities [24]. Structural and cohesion funds were not well synchronized with other policy measures at the supranational and the national levels. The measures of the new, loose, and flexible industrial policy— horizontal, regulatory, and sectoral measures— did not comprehensively address the structural challenges of the European economies. The primacy of the Single Market, including regulatory, competitive, state aid, and other rules, took precedence over developmental and industrial policy at the supranational and the national levels. Simultaneously, the international legal and economic framework became less inclined to various types of interventionist policies. Integration of international markets took precedence over national interventionist and developmental policies in developed and developing parts of the world.

The new industrial policy became a weak surrogate for the unresolved flaws of the old industrial policy. It has not solved any of the structural problems in developed or developing parts of the world. The hierarchical segmentation of the world economy and the concentration of economic, financial, technological, and managerial powers in a handful of regions and of leading multinational companies remain in place today either in the context of the United States, the supranational context of the European Union, or in the context of rapidly developing countries such as China. None of the main economic and trading blocs currently pursues a developmental and sophisticated industrial policy that will embrace the opportunities and constraints of the knowledge economy. Consequently, the development in all the major trading blocs remains unbalanced and unequal.

In the view of this article, trying to revive industrial policy is positive. Misunderstanding or ignoring the characteristics of the modern knowledge economy while pursuing a revived industrial policy can become perilous. The discontent of the excluded parts of the population and stagnating firms can be directed at globalization, at the rise of China or any other target, but the qualified debate should be focused on how to launch sophisticated, long-term strategic industrial and developmental policies at the domestic levels.

Neither traditional or modern, old or new industrial policies, adequately answer how to pursue sophisticated industrial policy in the context of the knowledge economy. The risk thus remains that any well-intended revival of industrial policy without international and domestic institutional adjustment may only deepen the existing social and economic divides and the divide between advanced sectors of the economy, firms, and social groups and the rest of the economy and society.

5 Expanded knowledge economy and institutional reforms: International and domestic dimensions

To exploit the potential and opportunities of the knowledge economy for society and the economy at large, institutional reforms at the international and domestic levels are necessary that will be supportive of an inclusive and sustainable knowledge economy for many firms, local communities, and social groups. Such institutional reforms require the redirection of the main patterns of development in the last several decades in developed and developing countries.

Strategic industrial policy rarely succeeds. The risks, uncertainties, and unknowns are immense. In addition to the conceptual shift from primacy of the markets over deliberate public action, the alleged “trickle-down economy” and similar narratives [25], this empirical insight was the main reason for all but the abandonment of industrial policy in most parts of the world. Even in places where industrial policy was pursued, the weaknesses and limitations of the old and new types of industrial policy were not sufficiently addressed.

In addition to the conceptual and practical reasons for abandoning the industrial policy, the normative reasons also played a role. The limitations imposed by the international trade rules— the highly restrictive definition and constraints on subsidies imposed by the Agreement on Subsidies and Countervailing Measures— further narrowed the policy space for public deliberate action at the national and regional levels [26]. Among other international normative constraints, the rules of intellectual property, the missing rules of international competition and international antitrust, and the in-operationalized rules on special and differential treatment [26] should be added. The international investment rules disproportionally protect the interests of multinational companies and narrow the regulatory autonomy of governments in the areas of labor protection, environmental protection, health, and tax. No reform to date, procedural or substantive, has significantly changed the embedded asymmetry between the power of multinational companies and the legitimate regulatory autonomy of the governments.

A gradual, piecemeal set of new, more inclusive, and innovative institutions at the local, regional, national, and international levels can be envisaged to overcome the confined knowledge economy. Every prudent, sophisticated, participatory, and experimental industrial and development policy [29]. should consider the constraints and opportunities of the knowledge economy. Unreformed international economic and legal contexts and limited national and regional policy space may not only deepen the existing imbalances and inequalities, but they may also deepen the global strategic rivalries [30]. If trade wars are indeed class wars [4], similar is the dilemma with reinvented industrial policy in an unreformed international and domestic institutional context: it may benefit the already advanced and protected at the expense of the majority of firms, workers, and local communities. The popular discontent may only deepen. It will not be oriented so much against the domestic (probably populist) government, but it will be primarily oriented against “others”: the forces of (unreformed) globalization, migrants, and other international powers. The destabilizing effect of the current international economic and legal order will go one step further without resolving key structural issues that the entire international community is facing: climate, biodiversity, the green transition, social inequalities, public health, and the preservation of all other key global public goods.

To conclude, the key requirements of the institutional reforms for more inclusive, sustainable, and equitable industrial and policy policies are reinvented policy space at the international level, effective safeguards for the protection of global public goods in a more cooperative form of international relations, and ground-up institutional innovations at the local, regional [30] and national levels to reinvent domestic and international markets.

The reinvention of industrial policy is a positive development in a period of multiple challenges and crises. Contrary to traditional and modern industrial policy, the context of the knowledge economy requires a new set of institutions at all levels of polity to exploit the opportunities of the knowledge economy.

To reconceptualize the international economic and legal framework and regain the limited policy space, many reforms in all the above-mentioned areas should be pursued. Perhaps the reform of the Agreement on Subsidies and Countervailing Measures could be a symbolic start. There are certainly internationally harmful subsidies that should be discouraged if not outlawed by the international rules. These include subsidies on fossil fuels and on fishing. In this area, we can witness a wide discrepancy between the international declaratory commitments and the actual practice of many key players on the world markets. There are other areas where subsidies could be more tolerated under international law. Support for small and medium-sized companies and for start-ups, especially in the stagnating regions in need of comprehensive restructuring, are examples.

Industrial policy in the knowledge economy should be agnostic toward different sectors, but it should focus primarily on supporting small and medium-sized companies. Accordingly, the international rules regard the support of small and medium-sized companies as the most important segment of socially inclusive growth. Reforms of the financial markets to move from short-term speculative activities toward long-term funding of the real economy should be envisaged by the international and national regulatory reforms.

International economic and legal reforms aimed at reinventing policy space should go hand in hand with domestic institutional and policy reforms aimed at reinventing the market economy to be inclusive, sustainable, and participatory. New institutional innovations, such as decentralized public venture funds, local and regional development banks, training and support centers, and decentralized public-private strategic coordination of new development strategies, should be the characteristics of the knowledge-based inclusive industrial and development policies.

Modern knowledge economy and modern industrial policy in a transformed institutional framework require the trust and collaboration of all participants. The participation of workers, trade unions, and all forms of new labor is a prerequisite for a more inclusive, socially broad-based knowledge economy. The system of education, training, and constant reskilling assumes a life-long process of learning, advancement, and realization of talent. The knowledge economy is based on cooperation, and the exchange of information and ideas, it is based upon mutual trust of all the participants: workers, managers, and teams of experts that constantly improve and innovate, experiment, and learn from each other. New technologies, automatization, and robotization are there to replace the routine repetitive work in other to free other participants to search for novel, improved ways of production and services for the society at large.

The trust and collaboration of participants require changes in the work of the public sector, too. Contrary to traditional Fordism, the knowledge economy –at least in its inclusive form –requires a structural shift in the work and organization of the public sector. The traditional public administration is typically organized in a rigid hierarchical arrangement, with the policies and tasks designed at the top and implemented at the lower levels of administration. Policy-making in the broader context of the knowledge economy requires a more proactive, initiative functioning of the public administration. Analyzing and understanding new technologies, organizational innovations and opportunities of the knowledge economy requires more bottom-up initiatives, sharing of ideas, and dissemination of good practices at all levels of public administration. The capacity for strategic collaboration between the public and the private sector requires also more autonomy, accountability, and initiatives at all levels of public administration. Organizational changes and institutional innovations in the markets and organizational improvements in the public sector are complementary in order to develop a truly inclusive, participatory, and forward-oriented knowledge economy.

Failure to develop a new set of institutions at the international and national levels may not adequately address the inherited social and economic imbalances in developed and developing countries. A counterclaim that we should not expect too much from the reinvented industrial policy may be in place. However, without a comprehensive strategic industrial and development policy in the context of the knowledge economy, it is not possible to expect a structural improvement at the national and global levels at a time of global imbalances and national inequalities in most of the developed and developing countries.

A variety of industrial and developmental policies, adjusted to the national context, but embracing the international framework, can be implemented, compared, and evaluated. At the international level, the guardrails should primarily be aimed at preventing the international “race to the bottom”. The current international race of subsidization of the richest economies of the world will certainly require certain common international rules and transparency, primarily not to hurt the developing countries, their economies, and their interests— or “beggar thy neighbor” harmful policies.

Modern industrial policy in the context of the knowledge economy is not primarily about subsidies, establishing the “national champions”, or competitive sectors. It is about empowerment, dissemination, and support for constant innovations in production, services, and organizations [32]. It is about institutional innovations in the public and private sectors that will establish participatory, decentralized, long-term inclusive, sustainable, and experimental modern industrial and development policies. Ground-up initiatives from local entrepreneurs, workers, and social groups are combined with top-down deliberate actions of the public sector in a variety of ways to tap the real productive and competitive potential of different localities, regions, and countries. A reinvented policy space is combined with the open world economy while being hospitable to local initiatives, allowing maneuvering room for restructuring and public action, especially in the stagnating and declining regions in developed and developing countries.