Industrial policy is accepted as a legitimate tool to pursue transformative priorities. Yet credit policy, industrial policy’s twin, has not received the same attention, despite holding significant transformative power. Without credit policy, industrial policy remains confined to setting incentives via taxation or regulatory changes, which often do not meaningfully constrain credit allocation choices. Credit policy should be understood as the coercive steering of credit flows for transformative purposes, where state industrial and credit planners coordinate to set overall industrial credit priorities. In this set-up, the State exercises control over and through finance. The former allows the State to set quantitative credit allocation targets and to mandatory mobilise institutional funds (like pension funds or insurance capital) for industrial funds, for instance for cleantech, while the later enables close monitoring and alignment of subsidised firms with strategic priorities, either through credit relations or equity ownership.
The outcome is an ecosystem where transformative ambitions are implemented through an ecosystem of central banks and credit institutions, private and public, banks and institutional/industrial funds. The central bank is critical yet not dominant in this institutional set-up. In contemporary Western economies, central banks operate under market neutrality, leaving sector level credit allocation determined by market conditions. In contrast, a developmentalist central bank uses its credit creating powers to support and embed coercive steering, to enforce capital controls and monitor compliance with sectoral targets. Such a setup characterised Korea and Japan during the 1960s and 1970s, as well as contemporary China. The European Central Bank recently experimented with credit policy in its program to tilt its corporate bond portfolio towards greener issuers.
Creating a coercive credit regime requires overcoming three key barriers: reorienting central banks from inflation targeting to developmental credit financing; developing capacity for coercive steering, since private banking system and liberalised capital accounts weaken state control over the direction of credit flows; and new frameworks for mandatory mobilisation of pension/insurance capital into industrial funds that would increase the overall funding capacity of the credit system. This new credit regime would significantly scale up the potential for transformative state interventions, particularly where the rapid transformation of energy, food and production systems becomes a matter of national security. It allows the State, rather than private capital, to control credit flows, thereby disciplining capital and aligning it with public goals. It increases funding capacity by repurposing central banks and institutional investors.
