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International Handbook on Industrial Policy

Edited by Patrizio Bianchi and Sandrine Labory

This timely and much-needed Handbook reconsiders an old topic from a fresh perspective, raising a number of new, interesting and worthwhile issues in the wake of ten years of globalization. This comprehensive analysis illustrates that old-style industrial policies whereby the government directly intervened in markets, and was often the producer itself, are no longer relevant. Structural changes occurring in economies – summarized in the term ‘globalization’ – are triggering the definition and implementation of new industrial policies. The contributors, leading experts in their field, unite to evaluate this shift of over a decade ago.
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Chapter 7: State Aid to Business

Stephen Martin and Paola Valbonesi


Stephen Martin and Paola Valbonesi A group of blind men encountered an elephant, an animal hitherto unknown to them, and sought to understand what manner of creature it was. One touched its tusk, and found it like a spear. One touched its side, and found it like a wall. One touched its trunk, and found it like a snake. One touched a leg, and found it like a tree. One touched its ear, and found it like a fan. The last touched its tail, and found it like a rope. They went on their way, but fell into dispute about the nature of the elephant, each insisting upon the aspect with which he had come in contact, none comprehending the whole. (Indian parable) 1 Introduction The views of economists and policy makers on state aid to business have much in common with the way the blind men of the fable viewed the elephant. State aid is a subject of at least three primarily academic literatures and at least two primarily policy-oriented literatures. The three academic literatures are those on strategic trade policy (section 2), on tax competition (section 3), and on rent seeking (section 4). The two policy literatures are a predominantly legal literature on the treatment of state action under US anti-trust policy (section 5) and a corresponding literature on EU state aid (section 6), which involves both the treatment of state aid under EU competition policy and the impact of state aid on regional convergence.1 Each of these...

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