continued protection in the domestic market contingent on export performance (World Bank 1993).<sup>5</sup> Thus a critical take-away from the Asian experience is that industrial policies should include a “termination clause” (or “exit strategy”) in their initial design, to avoid locking into undesirable policies. We will see below that applying this lesson to green industrial policies creates specific challenges.

Importantly, industrial policies should be evaluated taking into account the entire policy mix. For example, industrial policies have been widely used to smooth transitions for declining sectors (Peck et al., 1987). Such policies were likely critical to the political acceptability of other economic policies such as trade openness and increased competition – even if their direct outcome was negative in monetary terms. Support to traditional industries in Japan is probably a good illustration. In such cases, industrial policy is a complementary policy, whose goal is to permit the implementation of progrowth policies. Attributing a negative value to those policies is inappropriate if they made possible the implementation of very positive pro-growth policies.

In sum, industrial policies appear reasonably effective in influencing the composition of the economy—which makes them important instruments of the green growth toolkit. But their relevance must be assessed on a case by case basis, depending on a country’s economic situation, the benefits it can expect from these policies, and its ability to deal with unavoidable failures and to avoid capture by vested interest.<sup>6</sup> Sources of industrial-policy implementation failures are numerous, ranging from simple lack of administrative capacity to the inability to resist rent-seeking by vested interests (Laffont 1999). Industrial policies (green or not) seem particularly risky for countries with weak institutional capacity, weak civil society, low transparence or accountability of governmental organizations. They appear more likely to succeed in high-capacity countries, with educated population, high accountability, and where the main obstacle to economic growth is the low amount of physical capital, as in East Asia in the 1950s and 1960s.

# **3. A case for green industrial policies**

# **3.1. Defining green industrial policies**

We exclude from our definition of green industrial policies pricing policies to correct environmental externalities (e.g., carbon tax or other Pigouvian taxes) and regulation affecting only consumption (and not the supply-side of the economy)–although we argue below that the success of green industrial policies will typically require the deployment of these complementary instruments. We also exclude pure R&D subsidies that do not affect the supply of goods and services.<sup>7</sup> Green industrial policies are usually based on a mix of different policies affecting different stages of technology development and sector growth, and targeting both supply and demand. Examples of include subsidies to green R&D, access to cheaper capital for green projects (notably through government direct participation and subsidized loans<sup>8</sup> ), feed-in tariff policies for renewable energy, consumer mandates and green public procurement rules.

> 5 Note however that subsidies conditional to export are formally prohibited by WTO rules (Agreement on Subsidies and Countervailing Measures 1995; see Charnovitz, 2013). 6 See an analysis on South Africa in World Bank (2011).

> 7 Innovation policies are not discussed in details in this paper, but are investigated in Dutz and Sharma (2011). 8 See (Rozenberg et al., 2013a) for an example of a proposal to provide lower interest rates to green project.

7