Adam Smith’s invisible hand has lost its grip. The idea that markets take care of themselves has always been a sort of collective fantasy. The global financial crisis opened Pandora’s box, unleashing doubts around the real capacity of free markets to efficiently allocate capital and resources. Industrial policies are back in fashion, but their final outcome will ultimately hinge on the quality of their governance.

“Capitalism has changed,” wrote Lord Harrington in his review of foreign investment in the UK published last November. “Gone is any residual view that the government shouldn’t use taxpayers’ money and other resources to assist private companies in investment decisions.”

Capitalism may well have changed, but has also returned to its roots. 

Alexander Hamilton, who served as the first US Treasury secretary between 1789 and 1795, is considered the grandfather of modern industrial policies. He advocated for ‘protective duties’ for sensitive, nascent industries. Add to the mix a generous dose of ‘pecuniary bounties’ — or incentives in modern parlance — and we have a mix that’s pretty close to contemporary industrial policies. 

This déjà vu resonates with many, particularly with those with direct experience of how harsh the invisible hand can be. Take industrial communities in Europe or North America, whose fortunes dried up as manufacturers offshored their production to Asia the global market ran its course. 

Will a bigger state be able to deliver on its desires for economic change? A few recent episodes signal that the answer is not a foregone conclusion.

Take the Teesside Freeport in north-east England. Freeports, or broadly special economic zones (SEZs), are a sort of reverse industrial policy where the government effectively spends money (mostly in the form of foregone fiscal and customs revenues) to give up some control in the designated areas and create a ‘freer’ environment for firms to invest and operate. 

The freeport in Teesside quickly accelerated the redevelopment of a local brownfield industrial area known under the name of Teesworks. Just a couple of years into the scheme, a parliamentary review published on January 29 found that the project’s systems of governance and finance “do not include the expected sufficiency of transparency and oversight across the system to evidence value for money”.

The development of SEZs in Italy also raises major governance concerns. After launching eight regional SEZs in southern Italy in 2022, the government in Rome unexpectedly decided to merge them into a single SEZ extending across the whole of southern Italy and centralised their governance within a department of the ministry of national cohesion from January 1. The change effectively erased most of the progress achieved by the eight free zones and even cost the country the world’s largest free zones event that was scheduled for June in Bari.

SEZs per se have proven capable of triggering investment and development. Although the SEZs in the UK or Italy don’t enjoy the same level of incentives as zones elsewhere, local communities, as well as investors welcomed them. Poor governance now risks turning the clock back on that progress. 

Industrial policies have merits; they effectively sowed the seeds of the US’s industrial boom of the 19th century. Yet they are no panacea: the quality of their governance will inevitably determine their outcome. The invisible hand may be gone, but the more visible one that has replaced it has yet to prove its value.

Jacopo Dettoni is the editor of fDi.

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This article first appeared in the February/March 2024 print edition of fDi Intelligence.