On March 4, 2026, the European Commission published the Industrial Accelerator Act (IAA), a legislative proposal aimed at raising the EU’s manufacturing share from 14.3% to 20% of GDP by 2035. Subsidized credit, accelerated permits, “Made in EU” requirements in public procurement: the tools are those of an active and selective industrial policy (IP), a category of interventions long viewed with suspicion on the old continent.

The long-awaited Accelerator deserves a dedicated column to discuss its characteristics and the divergences among Member States with respect to it. In order to assess it as thoroughly as possible, however, we have decided to address it only at the culmination of a journey through Industrial Policy, and through the elements that the IAA appears to draw from global competitors, albeit under different circumstances. For this reason, this first article will provide a theoretical and empirical background on industrial policy, examining one of the most documented, debated and, with due caution, positively evaluated cases in academic literature: South Korea’s Heavy and Chemical Industries (HCI) drive.

Launched in 1973 by the government of Park Chung-hee, the HCI drive is one of the most studied industrial policy programs of the twentieth century. In the following sections we examine the available empirical evidence: results, limitations and lessons. The analysis of the HCI is a first opportunity to observe IP in action, to grasp its cornerstones now and, further down the line, its complications, especially in the European case.

The current introductory chapters and the subsequent ones of this analysis will therefore focus on the Asian Tigers. This is the term used to define the national economies of Taiwan, Singapore, Hong Kong and South Korea, following the economic miracle that brought them, within the span of a generation, from being predominantly agricultural countries to industrial powers. They are undoubtedly the most striking case of economic transformation, but the reasons behind this success are debated. Is the growth to be attributed to the effective use of industrial policy or, on the contrary, was the latter actually counterproductive?

Industrial Policy and market failures: the what and the why

Before delving into the Korean case, it is worth to pin down a few concepts.

Among the intervention measures available to governments, industrial policy measures are among the most debated by economists. Academic debates on the effectiveness of IP do not seem, however, to deter states from making extensive use of it. Despite the wide-ranging discussions on the subject, industrial policy is rarely defined, and for this reason we will draw on the definition of one of the fathers of the new industrial policy, Dani Rodrik, who defines IP as the set of government policies aimed at transforming the structure of economic activity in pursuit of a social objective (Juhasz, Lane and Rodrik 2023). It certainly encompasses tariffs (the motto of recent times’ trade policy) and subsidies, but also simplified access to credit, public investment in research, agglomeration, and differentiated tax regimes. What these instruments have in common is selectivity: the state chooses which sectors to favour, and the choice is justified only in the presence of a market failure that the private sector alone cannot correct.

The first relevant type of failure is that of positive externalities. When a firm invests in new production processes, part of the benefits, as knowledge, skills, technical standards, inevitably spills over to other firms. The market therefore produces less innovation than would be socially optimal. This knowledge leak, however, discourages the first entrant, which would find itself transferring knowledge to those who act “as a second movers”. But without a first entrant, no market exists. This logic therefore justifies subsidies to research, but also subsidised credit to sectors with high external learning-by-doing potential: industries where learning to produce better has effects that spill over beyond the boundaries of the firm.

The second failure concerns coordination. Some industries are profitable only if an ecosystem exists around them: suppliers, adequate infrastructure, downstream industries that absorb and feed production. No private actor has an incentive to move first if the others do not move simultaneously. The state can unlock these equilibria by intervening in a targeted manner, taking on the risk of the first move.

Both logics have, however, an uncomfortable corollary: the intervention works only if it is temporary, calibrated and oriented toward creating market conditions; not toward maintaining inefficient industries alive. It is precisely on this dividing line that the successes and failures of industrial policy are measured. This is also the strong assumption with which Rodrik and the proponents of IP assess the rationale behind the government’s hand: the effectiveness of a government lies in its ability to “abandon the losers” rather than to “pick the winners”. And it is the same criterion with which the Korean HCI is worth reading.

The tools of industrial policy

Demilitarisation and (old) new fears: how the military threat drove Seoul to transform itself

July 25, 1969, Richard Nixon, on a stopover on the island of Guam (unincorporated U.S. territory, Mariana Islands) for refuelling, enunciated his face-saving doctrine to exit Vietnam with. The prospect of American demilitarisation on the Korean peninsula following the announcement of Vietnamization, created in Seoul an urgent need to arm itself in order to face the growing threat of the DPRK, which was better organised militarily. The industrial transformation that followed was therefore not merely a development choice. It was, first and foremost, a strategic necessity.

It is interesting to observe how history repeats itself. Although the IAA was designed within the Berlaymont to offset the loss of competitiveness of the old continent’s industry, it comes at a moment of extreme fragility of the Atlantic alliance and of a constant threat of “Europeanization” of the Eastern flank.

But let us return to Korea. The Park government identified five priority macro-sectors: steel, shipbuilding, industrial machinery, electronics and petrochemicals. Heavy, capital-intensive sectors with strong ties to military production.

The choice openly contradicted the international recommendations of the time: in 1969 the World Bank had refused to finance a Korean steel project, arguing that the country had no comparative advantage in steel production. Illustrative of the international dissent over the HCI is the 1974 IBRD opinion, in which it advised the Korean government to “focus on light industries”. The HCI drive was therefore built against the consensus of experts, but it was not an idea that came out of nowhere. In its selection of sectors, it drew largely on the Japanese Income Doubling Plan (1950). The development of Japanese heavy industries had in fact demonstrated that a targeted policy could create economies of scale in the sectors most amenable to technological implementation.

New KDB loans by sector, 1972–1981

On the instruments front, 1973 marked a sharp break with the two preceding five-year plans. Until then, Korean economic policy had been based on a virtual free trade regime, with non-discriminatory tax incentives for exporting firms: the state supported export activity in general, without picking winners. From 1973 onwards, with the announcement of the HCI, a genuine policy transition took place, drawing in particular on targeted lending. The Korea Development Bank began extending credit at preferential rates to the target sectors, with effective marginal tax rates more than 30% lower than those of non-HCI industries. Customs exemptions on production inputs reached as high as 100%.

It is common practice to associate IP with protectionism, even when describing the Asian miracle. In reality, HCI industries did not enjoy greater protection on the market: the level of tariffs and quotas for the target sectors was in fact below average.

The impact on targeted sectors

Assessing the success of an economic policy is notoriously difficult. The problem lies in constructing the counterfactual: how would things have gone without intervention?
Lane (2022) addresses the problem by exploiting the HCI as a natural experiment, comparing the evolution of the target industries with that of the industries not involved in the program, across the pre-HCI period (1970–1972), the period during the policy (1973–1979), and after it came to a halt (1979–1986).

Output in HCI vs non-HCI sectors, 1970–1983

In the HCI sectors, a consistent increase in output in real terms is observed, growing at a higher rate than the non-target sectors throughout the duration of the program. The latter also grow, but at a slower pace. By contrast, ineffective policies tend to penalize non-subsidized sectors by diverting resources away from them.

Equally significant is the effect on labor productivity, measured as value added per worker: it increases substantially in HCI industries relative to the control group, while the price of outputs falls relatively. The target industries become more efficient and more competitive.

Even in the post-HCI period, following Park’s assassination in 1979 and the onset of liberalization, the output and productivity differentials between target and non-target sectors stabilize at positive levels. The temporary measures appear to have triggered a permanent structural transformation. This indicator we should keep firmly in mind throughout the chapters: a well-directed subsidiary IP is an IP that limits the rebound once subsidies have ended.

On the trade front as well, a clear reversal of the trend was achieved. Pre-HCI, the comparative advantage of the target sectors was in slight decline relative to the other sectors — which, as we noted, discouraged international financiers. From the launch of the program, the curve reverses. The probability that a target sector achieves a comparative advantage tends progressively toward 1 over the course of the decade¹.

The most significant result is that concerning global integration: the share of Korean exports rose from 13.9% of GDP in 1970 to 35.2% in 1980, while imports followed the same trajectory, from 23.5% to 42.9%.

Exports and Imports as % of GNP, 1960 – 1990

Indirect effects: winners and losers

Clearly, a policy this selective is not a sandbox — it impacts the entire economy one way or another. Value chains are affected throughout the supply chain, with varying intensity and direction.

Downstream industries, which used HCI products as inputs in their own production processes, benefited significantly. A lower relative price for the target industries logically translates into a lower cost for downstream firms, which can therefore produce at lower costs and increase their export share. The comparative advantage of these sectors grows visibly from 1973 onwards and does not diminish after 1979. The HCI therefore generated measurable positive externalities well beyond the directly subsidized sectors.

Upstream, however, the coin shows its other side. For upstream firms the impact is in fact negative. The customs exemptions enjoyed by the target industries allowed them to purchase production inputs from abroad on competitive terms, exposing domestic suppliers to international competition without offering them any protection. The selectivity of sectors therefore carries a distributive cost. The Korean case is a reminder that in any selective industrial policy, upstream supply chains deserve explicit attention. A lesson that Europe knows well and that, between the CRMA and the IAA, it must necessarily resolve.

Competitiveness over time

Fifty years on from the HCI, we can make assessments over the long run. The Choi and Levchenko (2021) model, based on firm-level data over 40 years, allows us to answer two questions:

What would have happened in the absence of any intervention?
Eliminating the subsidized credit of the HCI period, welfare measured in terms of productivity would be 3.91% lower than what actually occurred. Even assuming that the learning-by-doing effects were temporary rather than permanent, the loss would remain at 2.62%.

Change in productivity in the absence of the HCI drive

Were the right sectors selected?
Choi and Levchenko construct a welfare multiplier map by sector, to identify how much a uniform subsidy of 1% of GNP distributed across each industry would have yielded in terms of aggregate productivity, and compare it with the actual distribution of subsidized credit. The positive correlation demonstrates that Seoul predominantly financed the sectors with the highest multiplier.

Did the government choose well?
Welfare multiplier and credit shares by sector

Lessons from the river Han miracle

In this first chapter we have examined the effects of a well-structured selective industrial policy, but we are far from resolving the debate on the effectiveness of IP. What this case offers us is rather a first empirical evidence of the method and conditions for government intervention to be impactful while at the same time not leading to protectionism.

It must be said that the reasons for success are inseparable from the context, and that context is very different from the European case. First, on the political front: Park’s was to all intents and purposes a legalized dictatorship, a central government with full discretionary power, without opposition and capable of imposing verticality and predictability on economic policy. A key ingredient of sound policy is its ability to resist the phenomenon of rent-seeking. However, by their very nature, the interests of the Chaebol² were largely aligned with those of the government, which helped minimise policy distortions and facilitated the success of the industrialisation strategies. A combination that would be already difficult to replicate in a democratic context, let alone in one with twenty-seven national governments at the table.

There is also the aspect of international constraints and climate objectives: the IAA must necessarily adhere to the European commitment on decarbonisation, favour greenfield investments and, if it wishes to ensure the preservation of a semblance of international order (already profaned by its own proponents), guarantee compatibility with international trade law as enshrined by the WTO (or abandon it decisively in favor of a new order — but that is another story, eds.).

International constraints, climate objectives and lobbying, internal imbalances and a decision-making speed considerably slower than that of Seoul in the 1970s, bring us back down to earth regarding Brussels’ room for manoeuvre in imposing an effective strategy. And yet some similarities with the European proposal can be found. First and foremost, the sectors. The Accelerator will focus primarily on three macro-groups: energy-intensive industries (heavy metals, non-metals and chemicals), automotive and Net Zero Industries³. The Korean plan, for its part, was based on the same sectors (steel, petrochemicals, automobiles, machinery, shipbuilding and non-ferrous metals) by virtue of their relevance and their knowledge transfer capacity. The attention to supply chains also echoes the critical issues faced by Seoul. The IAA will sit within a regulatory framework aimed at a more resilient Europe, particularly with regard to critical materials and raw resources. In this respect, the HCI reminds us of the distributive cost on supply chains.

The HCI therefore cannot and must not serve as a blueprint, but it can provide us with a first benchmark.

Notes

1. The Balassa index, or RCA index (Revealed Comparative Advantage), highlights the presence of a country’s trade specialization in a given product. It is the ratio between the share of a country’s exports of a given product over its total exports, and the share of world exports of that same product over total world exports. An index above 1 therefore denotes a comparative advantage of the country in exporting a given product. ↩︎
2. Chaebols, from the Korean 재벌 (jae-bol), are the large Korean industrial and business conglomerates. Characterized by family ownership and significant political weight, the chaebol were at the center of the HCI drive and of South Korea’s broader change of course. Today, among the country’s leading chaebol we count the Big Four: Samsung Group, SK Group, Hyundai Motor Group and LG Corp. ↩︎
3. For a complete list of net-zero industries, reference is made to Regulation (EU) 2024/1735 of the European Parliament and of the Council of 13 June 2024 on establishing a framework of measures for strengthening Europe’s net-zero technology manufacturing ecosystem (Net Zero Industry Act). Official Journal of the European Union, L 2024/1735. ↩︎

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