I. IntroductionOnce upon a time, economists believed the developing world was full of market failures,and the only way in which poor countries could escape from their poverty traps was throughforceful government interventions. Then there came a time when economists started to believegovernment failure was by far the bigger evil, and that the best thing that government could dowas to give up any pretense of steering the economy. Reality has not been kind to either set of expectations. Import substitution, planning, and state ownership did produce some successes, but where they got entrenched and ossified over time, they led to colossal failures and crises.Economic liberalization and opening up benefited export activities, financial interests, andskilled workers, but more often than not, they resulted in economy-wide growth rates (in labor and total factor productivity) that fell far short of those experienced under the bad old policies of the past.Few people seriously believe any more that state planning and public investment can actas the driving force of economic development. Even economists of the left share a healthyrespect for the power of market forces and private initiative. At the same time, it is increasinglyrecognized that developing societies need to embed private initiative in a framework of publicaction that encourages restructuring, diversification, and technological dynamism beyond whatmarket forces on their own would generate. Perhaps not surprisingly, this recognition is now particularly evident in those parts of the world where market-oriented reforms were taken thefarthest and the disappointment about the outcomes is correspondingly the greatest—notably inLatin America.
See for example de Ferranti et al. (2002). This is a report put out by the Latin America and Caribbean departmentof the World Bank. It is cognizant of the need to adopt some kind of industrial policies in order to generatetechnological dynamism in the region.