to “horizontal” policies that target broad sectors by improving their business environment (Rodrik, 2008, and Warwick, 2013). The more horizontal these policies are, the more they approach public goods. Countries around the world have implemented industrial policies with varying degrees of success. An analysis of Chilean industrial policy, for instance, describes the use of several horizontal and vertical policy instruments, though with a growing emphasis on the latter in recent years (Inter-American Development Bank, 2014). Horizontal industrial policies used in Chile include guarantees for loans to small enterprises, subsidies to new exports, and a program to foster innovation; while vertical industrial policies feature the creation of a semi-public entrepreneurial institution (Fundacion Chile) and a program to attract FDI in technology. As is often the case with vertical industrial policies, Fundacion Chile has had many failed projects, for instance the cultivation of the southern hake, but also a few huge successes, including the development of the salmon and blueberry industries (Inter-American Development Bank, 2014).

Choosing between industrial policy instruments is often complicated due to uncertainty and the existence of information asymmetries between the public and private sectors. In order to manage these challenges, Rodrik (2004) proposes that industrial policy be viewed as a discovery process, whereby public and private sector collaborate to identify underlying costs and opportunities. In this vein, Fernández-Arias et al. (2016) describe several instances of successful collaborations across Latin America, including in the sugarcane industry in Argentina, the tourism industry in Costa Rica, and shipbuilding programs in Uruguay. This type of public-private collaborative approach, however, is hampered by the risk that the private sector might exploit its informational advantage to derive unproductive rents from industrial policies through capture. IADB (2014) illustrates this risk using the case of the rice industry in Costa Rica. It describes how private involvement in the institution in charge of managing policies for the rice sector have resulted in excessive support to rice producers and a decrease in agricultural productivity. An analysis of industrial policies in the Middle East and North Africa region also highlights the risk of state capture in the use of both vertical and horizontal instruments (Jaud and Freund, 2015). The report notes that, in Tunisia, for example, ...rms highly connected to former president Ben Ali were found to be most present in protected sectors including telecoms, automobiles, and tourism.

Given the risks and costs associated with the implementation of industrial policies, policymakers, particularly in developing countries, should consider the best match between their capacity and the type of policy to be implemented (Chang, 2011; IADB, 2014). Vertical policies require a greater capability to control capture by the private sector, and thus higher administrative costs, than do horizontal policies. For example, while tax incentives have been widely used to attract new investment and spur economic growth, including in Singapore and Korea, the cost of implementing and enforcing these policies can be particularly high (Tanzi and Shome, 1992). Further, these implementation costs generally increase with the complexity of subsidies and taxes involved in industrial policies, especially under low government capacity (Chang, 2011). A committee reviewing the use of tax incentive policies in Papua New Guinea, for instance, highlighted concern about the challenges of implementing or e¤ectively monitoring R&D and infrastructure incentives in the face of scarce administrative or technical capacity (PNG Tax Committee, 2014; Chang, 2011).

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