The Textbook Case for Industrial Policy: Theory Meets Data

The textbook case for industrial policy is well understood: sectors with relatively large external economies of scale should be subsidized at the expense of other sectors. Little is known, however, about the magnitude of the welfare gains from such interventions. We develop an empirical strategy that leverages commonly available trade data to estimate sector-level economies of scale and, in turn, to quantify the gains from optimal industrial policy in a general equilibrium environment. Our results point toward significant economies of scale across manufacturing sectors but gains from industrial policy that are hardly transformative, even among the most open economies.