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When crafting an effective industrial policy, a critical distinction must be made: the primary goal should be to reduce the inherent high investment risks, rather than merely supplementing returns on investment. While the latter might seem like a straightforward way to attract capital, it often leads to market distortions and unsustainable dependencies.
High investment risks can stem from a multitude of factors, including regulatory uncertainty, political instability, inadequate infrastructure, a lack of skilled labor, or an unpredictable legal framework. Addressing these foundational issues creates a more stable and attractive environment for long-term capital. Policies focused on risk reduction might involve streamlining bureaucratic processes, ensuring policy predictability, investing in crucial infrastructure (energy, transport, digital), fostering a skilled workforce through education and training, and strengthening property rights and contract enforcement.
In contrast, policies that primarily supplement returns, such as direct subsidies, tax breaks for profits, or guaranteed purchase agreements, while sometimes necessary in niche areas, can inadvertently create ‘rent-seeking’ behavior. They may attract investments that are only viable because of the incentives, rather than genuine market demand or competitive advantage. This can lead to inefficient allocation of resources and create an economy heavily reliant on government largesse, making it vulnerable to changes in policy or budget constraints.
Therefore, a truly robust industrial incentives framework should prioritize creating an ecosystem where the risks of doing business are minimized, allowing genuine entrepreneurial spirit and market forces to drive growth. This strategic shift from ‘handouts’ to ‘hand-up’ fosters resilience, innovation, and sustainable economic development.
Source: Original Article
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