Professional Documents
Culture Documents
2020-Oxford Handbook of Industrial Policy-Ha-Joon Chang Et Al
Uploaded by
Reyes J. MoralesCopyright
Available Formats
Share this document
Did you find this document useful?
Is this content inappropriate?
Report this DocumentCopyright:
Available Formats
2020-Oxford Handbook of Industrial Policy-Ha-Joon Chang Et Al
Uploaded by
Reyes J. MoralesCopyright:
Available Formats
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
INDUSTRIAL
POLICY
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
................................................................................................................................................................................................
INDUSTRIAL
POLICY
................................................................................................................................................................................................
Edited by
ARKEBE OQUBAY , CHRISTOPHER CRAMER,
HA-JOON CHANG,
and
RICHARD KOZUL-WRIGHT
1
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
3
Great Clarendon Street, Oxford, OX DP,
United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
© Oxford University Press
The moral rights of the authors have been asserted
First Edition published in
Impression:
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
by law, by licence or under terms agreed with the appropriate reprographics
rights organization. Enquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the
address above
You must not circulate this work in any other form
and you must impose this same condition on any acquirer
Published in the United States of America by Oxford University Press
Madison Avenue, New York, NY , United States of America
British Library Cataloguing in Publication Data
Data available
Library of Congress Control Number:
ISBN ––––
Printed and bound by
CPI Group (UK) Ltd, Croydon, CR YY
Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
A
..............................................................................................
Working on this exciting yet challenging scholarly project has involved close to fifty
authors. We have enjoyed the full support of contributors who put significant time and
effort into this volume. The Handbook has benefited from constructive comments
provided by internal and anonymous external reviewers. In particular, the editors are
very grateful to all the contributors of this Handbook and thank them sincerely for their
exceptional efforts and their personal commitment to ensuring the success of this
volume.
Special thanks are due to our commissioning editor, Adam Swallow, and his team at
Oxford University Press, as well as to the entire production team for their advice,
support, and encouragement. We also wish to thank the anonymous reviewers and
delegates of OUP who approved our book proposal. We are grateful to Eva Paus,
Mount Holyoke College; Edlam Yemeru, United Nations Economic Commission for
Africa (UNECA), Addis Ababa; Fantu Cheru, Leiden University; and Dirk Willem te
Velde, ODI; as well as all peer reviewers, who provided invaluable guidance on the
structure and content of the book. This gratitude is also extended to all the participants
at both the inception and chapter review workshops held in Addis Ababa in April
and September for their insightful presentations, discussions, feedback, and
collaboration.
Our sincere appreciation goes to Mr Tewolde Gebremariam, Group CEO Ethiopian
Airlines, and his team, and the Ethiopian Airlines Skylight Hotel, for their support of
this project. Special thanks are also due to Keith Povey Editorial Services Ltd for the
pre-publication copy-editing of the volume. We also thank Nigisty Gebrechristos and
Ayalew Mamo for their continued support of this project. And finally, our appreciation
and gratitude goes to our project and research coordinator, Deborah M. Kefale, and the
team of Helena Alemu, Tsion Kifle, Meron Tilahun, for their dedicated support in the
preparation of the manuscript and assistance throughout the project.
Every effort has been made to trace and contact copyright holders to reproduce
quotations in this volume prior to going to press however if notified the publisher will
undertake to rectify any errors or omissions at the earliest opportunity.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
C
.............................................
List of Figures xi
List of Tables xv
List of Contributors xvii
PART I: INTRODUCTION
. Introduction to Industrial Policy and Development
A O, C C, H-J C,
R K-W
. The Theory and Practice of Industrial Policy
A O
P A R T II : TH E O R E TI C A L PE R SPE C T I V E S
. Industrial Policy, Macroeconomics, and Structural Change
J́ A O
. Industrial Policies, Patterns of Learning, and Development: An
Evolutionary Perspective
M C, G D, X Y
. Neoclassical Economic Perspectives on Industrial Policy
J W
. Enterprises and Industrial Policy: Firm-based Perspectives
S R
. Radical Perspectives on Industrial Policy
S A, S N, F T
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
viii
P A R T I I I : C O N T E X T AN D C O N N E C T I O N S
. Global Value Chains and Regionally Coordinated Industrial
Policy: The Case of ASEAN
B A. D W M
. Managing Trade through Productive Integration: Industrial
Policy in an Interdependent World
R K-W P F
. Greening Industrial Policy
J A. M
. Globalization Narratives and Industrial Policy
D E. E J H. M
. Grand Challenges, Industrial Policy, and Public Value
M M R K
. The Political Economy of Development Banking
J D J
. Technical Change, the Shifting ‘Terrain of the Industrial’,
and Digital Industrial Policy
A A
. An Industrial Policy Framework to Advance a Global Green
New Deal
R P
. Industrial Policy and Gender Inclusivity
S S
. Macro-Policy, Labour Markets, and Industrial Policy
S S
. Technological Disruptions, GVCs, and Industrial Policy
D B L D P
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ix
P A R T I V : E X P E R IE N C E S I N A DV A N C E D
ECONOMIES
. Industrial Policy: A Long-term Perspective and Overview
of Theoretical Arguments
E S. R
. Post-war American Industrial Policy: Market Myths and
Production Realities
M H. B
. European Industrial Policy: A Comparative Perspective
P B S L
. The European Union’s Industrial Policy
M A. L R Sö
. Diverse Tools of Industrial Policy in Korea: A Schumpeterian
and Capability-based View
K L
P A R T V : E X P E R I E N C E S I N E M E R G I N G AN D
DEVELOPING COUNTRIES
. Industrial Policy and Industrialization in South East Asia
R R
. National Champions, Reforms, and Industrial Policy in China
C L M C
. Industrial Policies in the BRICS
F S
. Successes and Failures of Industrial Policy in Transition
Economies of Europe and Asia
V P
. Latin American Industrial Policies: A Comparative Perspective
J́ A O G P
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
x
. Phases and Uneven Experiences in African Industrial Policy
L W N Z
. The Political Economy of Industrialization and Industrial Policy
in Africa, –
H C P L
Index of Names
General Index
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
L F
.......................................................................
. Productivity and GDP dynamics
. Empirical density (Pr, vertical axis) of labour productivities, whole
manufacturing of China, France, and Italy, , , and
. Scatterplot of log (VA/L) versus log (K/L) for corn milling sector
(CIC ),
. Empirical density of (log) labour productivity of exporters and
non-exporters of transport equipment (CIC ) and electrical machinery
and equipment (CIC ) sectors in selected years (, , and )
. Stylized manufacturing value chain smile curve
. Evolution of GVC positioning in selected developing economies
(participation and upstreamness), –
. Evolution of GVC positioning in selected developing economies
(downstreamness and upstreamness), –
. Sectoral positioning of BRIC economies, –
. Learning curve associated with solar PV power
. India’s solar PV installed capacity, –
. China: Rising proportion of electric power sourced from water, wind,
and sun, –
. A mission-oriented approach to cleaning the oceans
. Industrial ecosystem framework
. Change in women’s relative concentration in industrial-sector
employment, –
. An export-led growth model with cumulative causation
. Successful industrial policy raises equilibrium output growth and
productivity growth but reduces employment growth
. Trade-off between labour productivity growth and employment
growth in twenty-four late industrializing countries, –
. An export-led growth model with cumulative causation and a
balance-of-payments constraint
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xii
. Successful industrial policy raises equilibrium output growth above the
BoP-constrained growth rate
. The macroeconomic impacts of a commodity-price boom
. Escaping the primary-commodity specialization trap
. The (+/–) impacts of a higher real wage on the profit rate (ρ)
. Industry .+
. The sad curve
. The frequency of ‘David Ricardo’ (in English) during the first years
after the publication of his main work, Principles of Economics,
compared to that of two other, then much more famous, English
economists
. Frequency of the term ‘comparative advantage’ (in English) from
until today
. The cover of the first edition of the book that laid the earliest
foundations for a theory of industrial policy: Botero’s volume
. An example of the practical consequences of ‘the cult of value added’
. von Thünen’s map of a modern state, with the industrial city at its core
. How industries differ
. Productivity explosion: cotton spinning
. US learning curve in men’s shoes, ‒
. The quality index of economic activities
. Increasing diversity and specialization over time (= ‘tid’)
. Economic growth since (fall of the Berlin Wall), selected
countries: percentiles of population with income growth above/below
the level / the G average level
. Manufacturing value added as a percentage of GDP, selected
countries, –
. The industrial policy structure of the EU
. Spending on industrial policy in the European Union, average –
. Funding of industrial policy in the European Union by themes, average
–
. Spending on industrial policy from the EU and from member states,
by country groups, average –
. Spending on industrial policy from the EU budget, by country groups
and themes, average –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xiii
. Share of Horizon applications per EU member state, average
–
. Innovation-driven industrial policy
. Manufacturing value added share in GDP, selected economies,
–
. Manufactured exports share in total merchandise exports, selected
economies, –
. Electric and electronics exports, selected economies, –
. Motor vehicle exports, selected economies, –
. Trade balance, electric and electronics, selected economies, –
. Trade balance, motor vehicles, selected economies, –
. GERD in GDP, South East Asian market economies, – (%)
. Intellectual property trade balance, selected economies, –
. BRICS’ growing but heterogeneous contribution to global economic
dynamics
. BRICS: structural change and catching up, ‒
. GDP change in economies of the former Soviet Union, = %
. Share of manufacturing value added in GDP in post-communist
transition countries between and , %
. Share of industry value added in GDP of post-communist countries,
–, %
. Share of service value added in GDP in selected post-communist
countries, –, %
. Manufacturing exports, % of merchandise export, in some
post-communist countries
. R&D (research and development) Expenditure in selected
countries, % of GDP
. The share of private sector in GDP in some former Soviet republics,
–, %
. Public, private, and gross investment in developing countries as a % of
GDP,
. Investment ratio and capital account openness in Latin America
. Real exchange rate ( = )
. Relative productivity vs. United States
. Latin America: Share of manufacturing in GDP, –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xiv
. Share of manufacturing in GDP: Largest Latin American countries vs.
Korea
. Index of the share of engineering industries in manufacturing value
added vs. United States
. Research and development as % of GDP
. Strength of the National Systems of Innovation (NIS)
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
L T
...................................................................
. Annual growth rate of labour productivity amongst firms over –,
and subperiods – and – amongst ‘continuing’
firms (i.e firms remaining in the same two-digit sector over the
relevant period)
. Median capital intensity (capital/output ratios) by sector, China, Italy,
and France, , , and
. Ratio of the average labour productivity of the second highest decile
over the second lowest decile, China, , , and
. Contribution of each two-digit sector to total manufacturing value
added, China, , , and (percentages)
. Within-sector learning vs. structural change in productivity growth
. Policy hierarchy: industry support by alternative measures
. Uneven returns in the iPod value chain
. Thirty-year global GDP growth trajectory, –
. Global energy demand and energy-efficiency cost projections for
. Global clean renewable energy expansion and cost projection for
. Costs of thirty-year clean energy investment project as share of average
GDP, –
A. Energy intensity ratios, global average and selected countries
A. Estimates of cost savings from energy-efficiency investments
A. Average global levellized costs of electricity from utility-scale
renewable energy sources vs. fossil-fuel sources, –
A. Capital expenditure costs for building renewable electricity productive
equipment, present values of total lump-sum capital costs per Q-BTU
of electricity
A. Major funding sources for global clean energy investments
A. Change in overall domestic content of clean energy investment
activities after per cent import increase with tradable activities
A. Reliance on fossil fuels and imports as energy sources in selected
countries,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xvi
. Gender regimes in BRICS and selected developing and developed
countries
. Late industrializing economies: stylized facts and parameter values
. Income elasticity of exports (ε) and imports (μ): selected late
industrializing countries, –/
. Impact on economic growth of a one percentage point increase in
real wage growth, selected late industrializing countries
. Share of wages in the gross output price, selected regions and countries
. How the game changed
. Characteristics of the collusive and classical modes of diffusion of
productivity improvements
. ‘Good’ and ‘bad’ economic activities
. Average wage per cluster category in Europe, based on European
regions
. The three phases of industrial policy in the European Union
. EU and member states’ spending on industrial policy by policy field,
– (annual averages)
A. List of member states, country codes, and country groups
A. Industrial policy item within the MFF –
A. Categorization of the thematic objectives in the ESIF into
industrial policies themes
. China’s National Champions in Fortune Global ,
. National Champions in the top companies ranked by R&D in
mainland China
. Composition of gross manufacturing exports by country of origin of
value added, –
. UNCTAD FDI estimates by ultimate investor, share in inward
FDI stock,
. R&D expenditure in post-communist countries as a percentage of
GDP,
. Manufacturing performance during early ISI, –
. Manufacturing performance during SAPs, –
. Manufacturing performance post SAPs, ‒
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
L C
......................................................................................................
Arkebe Oqubay (PhD) is a senior minister and special adviser to the prime minister of
Ethiopia and has been at the centre of policymaking for over twenty-five years. He is
the former mayor of Addis Ababa, winner of the Best African Mayor of and
finalist in the World Mayor Award , for his work transforming the city. He is a
recipient of the Order of the Rising Sun, Gold and Silver Star, presented by the
Emperor of Japan. He currently serves as board chair of several leading public
organizations and international advisory boards. He is an ODI Distinguished Fellow
and a research associate at the Centre of African Studies in the University of London,
and holds a PhD in development studies from SOAS, University of London. His recent
works include the path-breaking Made in Africa: Industrial Policy in Ethiopia (OUP,
); The Oxford Handbook of the Ethiopian Economy (OUP, ); How Nations
Learn: Technological Learning, Industrial Policy, and Catch-up (OUP, ); China‒
Africa and an Economic Transformation (OUP, ); African Economic Development:
Evidence, Theory, and Policy (OUP, ); and The Oxford Handbook of Industrial
Hubs and Economic Development (OUP, ). He was recognized as one of the
Most Influential Africans of , and a ‘leading thinker on Africa’s strategic devel-
opment’ by the New African, for his work, both theoretical and practical, on industrial
policies.
Christopher Cramer is professor of the political economy of development at SOAS,
University of London. He is a vice-chair of the Royal Africa Society and chair of the
Scientific Committee of the African Programme on Rethinking Development Econom-
ics (APORDE). His publications include Civil War Is Not A Stupid Thing: Accounting
for Violence in Developing Countries (Hurst Publishers, ), African Economic
Development: Evidence, Theory, and Policy (OUP, ) and The Oxford Handbook
of the Ethiopian Economy (OUP, , co-edited with Cheru and Oqubay). He led the
research project Fairtrade, Employment, and Poverty Reduction in Ethiopia and
Uganda.
Ha-Joon Chang teaches economics at the University of Cambridge. His main books
include Kicking Away the Ladder (), Bad Samaritans (), Things They Don’t
Tell You about Capitalism () and Economics: The User’s Guide (). His writing
has been translated into forty-one languages in forty-four countries. Worldwide, his
books have sold over million copies. He is the winner of the Gunnar Myrdal
Prize and the Wassily Leontief Prize.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xviii
Richard Kozul-Wright is director of the Globalisation and Development Strategies
Division in UNCTAD. He has worked at the United Nations in both New York and
Geneva. He holds a PhD in economics from the University of Cambridge. He has
published widely on economic issues including, inter alia, in The Economic Journal,
Cambridge Journal of Economics, The Journal of Development Studies, and Oxford
Review of Economic Policy. He is the author of many books, including The Rise and
Fall of Global Microcredit: Development, Debt and Disillusion (, with
S. Blankenburg and M. Bateman), Securing Peace: State-Building and Economic Devel-
opment in Post-Conflict Countries (, with P. Fortunato), Climate Protection and
Development (, with Frank Ackerman) and The Resistible Rise of Market Funda-
mentalism (, with Paul Rayment). His edited volumes include Transnational
Corporations and the Global Economy, Economic Insecurity and Development, Securing
Peace, Climate Protection and Development, and Industrial Policy. He is a frequent
contributor to newspapers worldwide on economic issues, including the Financial
Times, The Guardian, and Project Syndicate.
Antonio Andreoni is associate professor in industrial economics at University College
London (UCL), and research head of UCL Institute for Innovation and Public Purpose.
He is also visiting associate professor SARChI Industrial Development, University of
Johannesburg. He has acted as an adviser for the World Bank, OECD, DFID, UNIDO,
UNCTAD, ILO, UNDP, UNECA, UNU-WIDER, EU Growth and Innovation, and to
governments in South Africa, Tanzania, and the United Kingdom. His work on
structural change, production, technology, innovation, financialization, corruption,
political economy, and industrial policy has appeared in Cambridge Journal of Eco-
nomics, Development and Change, Cambridge Journal of Regions, Economy and Society,
Structural Change and Economic Dynamics, Oxford Review of Economic Policy, Euro-
pean Journal of Development Research, and Energy Policy.
Sam Ashman is associate professor in the School of Economics at the University of
Johannesburg where she is director of the UJ-IDEP MPhil in industrial policy pro-
gramme. Her research focuses on the financialization of the world economy and its
various impacts—on firm behaviour, patterns of development, the shaping of eco-
nomic and social policy, and the worsening of inequality. She also researches industrial
policy and development issues, including the impact of global value chains, the
evolving political economy of South Africa, and the history and philosophy of eco-
nomics and political economy.
David Bailey is professor of business economics at the University of Birmingham and
senior fellow of the ESRC’s ‘UK in the Changing Europe’ programme, exploring the
impacts of Brexit on the UK automotive and manufacturing industries. He has written
extensively on industrial and regional policy, especially in relation to manufacturing
and the auto industry.
Michael H. Best has been actively engaged in industrial restructuring policy in
London, Massachusetts, Slovenia, Cyprus, Jamaica, Honduras, Malaysia, Northern
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xix
Ireland, and the Republic of Ireland, and has written production audits based on extensive
factory visits in many other countries. His three books on industrial policy are The New
Competition: Institution of Industrial Restructuring (HUP, ), The New Competitive
Advantage: The Renewal of American Industry (Oxford University Press, ), and How
Growth Really Happens: The Making of Economic Miracles through Production, Governance,
and Skills (Princeton University Press, ) which won the Schumpeter Prize.
Patrizio Bianchi is professor of economics at the University of Ferrara, Italy, and has
been, since , minister for education and research in the regional government of the
Emilia-Romagna region. Besides his academic activity, he has been an adviser to Italian
institutions such as the Prime Minister’s Office, the Minister of Industry’s Cabinet and
the regional government of Emilia-Romagna, and to international institutions such as
the European Commission, the BID, and UNIDO. Patrizio has more than publi-
cations, including books and articles in scientific journals. Publications on industrial
policy include Industrial Policy after the Crisis: Seizing the Future (Edward Elgar, )
and Industrial Policy for the Manufacturing Revolution: Perspectives on Digital Global-
isation (Edward Elgar, ) with Sandrine Labory.
Muyang Chen is an assistant professor at the School of International Studies, Peking
University. Her research interests include infrastructure finance, development banking,
international development, and state‒market relations. She has been a visiting scholar
at the National Graduate Institute for Policy Studies (Japan) and a pre-doctoral fellow
at the Global Development Policy Center of Boston University. She received her PhD
from the University of Washington, an MA from University of California, Berkeley,
and BAs from Peking University and Waseda University.
Horman Chitonge is a professor at the Centre for African Studies, University of Cape
Town (UCT). His research interests include agrarian political economy, social welfare,
and alternative strategies for economic growth in Africa. His most recent books
include: Industrialising Africa: Unlocking the Economic Potential of the Continent
(Peter Lang, ), Social Welfare Policy in South Africa: From the Poor White Problem
to a Digitised Social Contract (Peter Lang, ), Contemporary Customary Land Issues
in Africa: Navigating the Contours of Change (Cambridge Scholars Publishing, )
and Economic Growth and Development in Africa: Understanding Trends and Prospects
(Routledge, ).
Mario Cimoli is deputy executive secretary of the United Nations Economic Com-
mission for Latin America and the Caribbean (ECLAC). In , he was appointed co-
director (with Giovanni Dosi and Joseph Stiglitz) of two task forces: Industrial Policy
and Intellectual Property Rights Regimes for Development (Initiative for Policy Dia-
logue, Columbia University, New York). Amongst his broad interests are economic
development and its relationship to production structure, productivity growth, inter-
national trade, and structural change. His work analyses the linkages between indus-
trial policy, technology development and innovation, and their role in shaping
development trajectories.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xx
Lisa De Propris is professor of regional economic development, University of Bir-
mingham. She has written extensively on competitiveness in clusters and regions;
technological change and innovation; clusters and globalization; and regional and
industrial policy.
Jonathan Di John is a senior lecturer in the political economy of development at
SOAS, University of London. His main areas of expertise are development economics,
institutional economics, and the political economy of growth and development in Latin
America, especially in Brazil and Venezuela. His research focuses on the political
economy of industrial strategy, taxation, development strategies in oil economies,
and social service delivery in violent contexts. He has undertaken consultancy work
for the World Bank, United Nations Development Programme (UNDP), the UK
Department for International Development (DFID), the Organisation of Economic
Cooperation and Development (OECD) and the International Monetary Fund (IMF).
Budi A. Djafar is a PhD candidate in economics at the New School for Social
Research. His dissertation investigates the implications of international trade and the
rise of global production networks for national income and gender-based employment
in the manufacturing sector in Indonesia from to . Budi previously served in
the Ministry of Foreign Affairs of the Republic of Indonesia and the Presidential
Advisor’s Council of the Republic of Indonesia, ‒.
Giovanni Dosi is professor of economics at Sant’Anna School of Advanced Studies,
Pisa, Italy, and continental Europe editor of the journal Industrial and Corporate
Change. He is included in the ISI Highly Cited Research list of scholars who have
made fundamental contributions to the advancement of science and technology, and is
a corresponding member of the Accademia Nazionale dei Lincei, the first academy of
sciences in Italy. In , he received the Wiley TIM Distinguished Scholar Award
from the Technology and Innovation Management Division of the American
Academy of Management. His major research areas, in which he is author and editor
of several works, include the economics of innovation and technological change,
industrial economics, evolutionary theory, economic growth and development, and
organizational studies.
Daniel E. Esser is an associate professor in the American University’s School of
International Service in Washington, DC. He holds MSc and PhD degrees from the
London School of Economics and Political Science. His current book project focuses on
sociopolitical processes forging perceptions of legitimacy where democratic institutions
are fractured or absent. He also continues to pursue scholarly interests in the politics of
sub-national governance and communities’ responses to violence and terror. His
research frequently takes him to Latin America and South Asia, and its findings have
been published in leading international journals and two Oxford Handbooks.
Piergiuseppe Fortunato is an economist at the United Nations Conference for Trade
and Development. He previously worked in the Department of Economic and Social
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xxi
Affairs of the United Nations in New York and held positions at the University of
Bologna and Université Paris I. His research interests include political economics,
economic development, and industrial policy. In these fields he has published in
journals including Journal of Economic Growth, The Economic Journal, and European
Economic Review. He is also heavily involved in policy-oriented research, has edited a
volume on post-conflict recovery, published in policy journals such as Global Policy
and contributes to several blogs.
Rainer Kattel is an Estonian academic and science administrator. He is deputy
director and professor of innovation and public governance at the Institute for Innov-
ation and Public Purpose, University College London.
Sandrine Labory is associate professor of economics at the University of Ferrara, Italy.
She has a MSc in economics from University College London, and a PhD from the
European University Institute in Florence, Italy. Her research is focused on industrial
economics and policy, including comparative analysis of national and regional indus-
trial policies, innovative and productive processes at firm and territorial levels, struc-
tural changes and industrial development. She has published numerous articles in
Italian and international journals, as well as books such as Industrial Policy after the
Crisis: Seizing the Future (Edward Elgar, ) and Industrial Policy for the Manufac-
turing Revolution: Perspectives on Digital Globalisation (, Edward Elgar) with
Patrizio Bianchi.
Michael A. Landesmann was scientific director of the Vienna Institute for Inter-
national Economic Studies (wiiw) from to and is professor of economics
at Johannes Kepler University, where he is head of the Department of Economic
Theory and Quantitative Research. His research focuses on international economic
relations, European economic integration, globalization and labour markets, and
migration. He has a DPhil from the University of Oxford, was a lecturer and fellow
(Jesus College) at the University of Cambridge, and has held visiting professorships at
Harvard University (Pierre Keller, Schumpeter) and a range of other universities
(Brandeis, Jerusalem, Central European University, Padova, Basel, Osaka, Mumbai).
Peter Lawrence is emeritus professor of economics at Keele University, United King-
dom. He holds a BA and MA from the University of Sussex and a PhD from the
University of Leeds. He has taught and researched in several African countries and
published variously on rural and industrial development, macroeconomic policy, and
development strategy.
Keun Lee is a professor of economics at the Seoul National University, fellow of the
CIFAR programme on Innovation, Equity and Prosperity, and founding director of
the Center for Economic Catch-up. He is an editor of Research Policy and an associate
editor of Industrial and Corporate Change. He served as president of the International
Schumpeter Society (‒), a member of the Committee for Development Policy of
UN (‒), and a council member of the World Economic Forum (‒). He is
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xxii
the winner of the Schumpeter Prize for his monograph Schumpeterian Analysis of
Economic Catch-up (Cambridge University Press, ), as well as the Kapp Prize
from the EAEPE for his article on national innovation systems. He obtained his PhD
in economics from the University of California, Berkeley. One of his most cited
articles is the paper ‘Korea’s Technological Catch-up’ published in Research Policy,
with , citations (Google Scholar). His H-index is , with about papers with
more than ten citations. His latest book is The Art of Economic Catch-up: Barriers,
Detours, and Leapfrogging (Cambridge University Press, ).
Chen Li is an assistant professor at the Centre for China Studies, The Chinese
University of Hong Kong (CUHK). He is also an assistant professor (by courtesy) at
CUHK’s Lau Chor Tak Institute of Global Economics and Finance (IGEF). He has
researched and written extensively on issues related to China’s economic development,
business environment, and public policies, such as China’s state-owned enterprise
reform, financial regulatory reform, government‒business relations, and industrial
and regional development. He received his PhD and MPhil in development studies
from the University of Cambridge and dual bachelor’s degrees in law and economics
from Peking University.
John A. Mathews is professor emeritus in the Faculty of Business and Economics at
Macquarie University, Sydney. He was a professor of strategy at Macquarie Graduate
School of Management for twenty years, retiring from active teaching in . From
– he held concurrently Enr Chair of Competitive Dynamics and Global Strategy
at LUISS Gardo Carli University in Rome. For the past several years he has focused on
the greening of industry with an emphasis on the role of China. The year saw the
publication of his Global Green Shift by Anthem Press, London. In July he was
awarded the bi-annual Schumpeter Prize in recognition of his work and most recent
book.
Mariana Mazzucato is professor of the economics of innovation and public value at
University College London (UCL), where she is founding director of the UCL Institute
for Innovation & Public Purpose (IIPP). She is winner of the Leontief Prize for
Advancing the Frontiers of Economic Thought and the All European Academies
Madame de Staël Prize for Cultural Values. She is author of many publications
including The Entrepreneurial State: Debunking Public vs. Private Sector Myths
() and The Value of Everything: Making and Taking in the Global Economy
(). She advises global policymakers on innovation-led growth.
William Milberg is dean and professor of economics at The New School for Social
Research and director of the Heilbroner Center for Capitalism Studies at The New
School. His research focuses on the relation between globalization, income distribution,
and economic growth, and the history and philosophy of economics. His most recent
book is Outsourcing Economics: Global Value Chains in Capitalist Development, co-
authored with Deborah Winkler. He has served as a consultant to UNCTAD, ILO,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xxiii
WTO, and the World Bank. He is a member of the Advisory Board for the Center for
Business and Human Rights at New York University.
James H. Mittelman is distinguished research professor and university professor
emeritus at the American University. Previously, he was professor and dean at Queens
College, City University of New York; professor and dean, Graduate School of Inter-
national Studies (today the Korbel School), University of Denver; and Pok Rafeah
chair, National University of Malaysia. He received the International Studies Associ-
ation’s Distinguished Scholar award in international political economy, and is an
honorary fellow at the Helsinki Collegium for Advanced Studies. His books include
The Globalization Syndrome: Transformation and Resistance (Princeton University
Press, ) and Implausible Dream: The World-Class University and Repurposing
Higher Education (Princeton University Press, ).
Susan Newman is professor of economics at the Open University, United Kingdom.
She has published in areas including finance and industrial policy, the political
economy of industrial development in South Africa, and financialization and the
restructuring of production. She is particularly interested in the dynamics of wealth
and income distribution along global value chains. She is a member of Reteaching
Economics and the International Initiative for Promoting Political Economy and is
committed to the promotion of political economy in economics education.
José Antonio Ocampo is professor at Columbia University’s School of International
and Public Affairs, and chair of the Committee for Development Policy of the United
Nations Economic and Social Council (ECOSOC). He has occupied numerous posi-
tions at the United Nations and his native Colombia, including UN under-secretary-
general for economic and social affairs, executive secretary of the UN Economic
Commission for Latin America and the Caribbean (ECLAC), and member of the
board of directors of Banco de la República (Colombia’s central bank), minister of
finance, minister of agriculture and director of the National Planning Office of
Colombia.
Robert Pollin is distinguished university professor of economics and co-director of
the Political Economy Research Institute (PERI) at the University of Massachusetts-
Amherst. He is also the founder and president of PEAR (Pollin Energy and Retrofits),
an Amherst, MA-based green energy company operating throughout the United States.
His books include The Living Wage: Building a Fair Economy (co-authored, ),
Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity
(), An Employment-Targeted Economic Program for South Africa (co-authored,
), Back to Full Employment (), Greening the Global Economy (), and The
Political Economy of Climate Change and the Global Green New Deal (co-authored,
forthcoming ).
Vladimir Popov is a principal researcher in the Central Economics and Mathematics
Institute of the Russian Academy of Sciences. He is also professor emeritus at the New
Economic School in Moscow, and an adjunct research professor at the Institute of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xxiv
European and Russian Studies at Carleton University in Ottawa. He has published
extensively on world economy and development issues; he is editor of four books, and
author of hundreds of articles and ten books including Mixed Fortunes: An Economic
History of China, Russia, and the West (Oxford University Press, ; also published
in Chinese).
Gabriel Porcile is an economic affairs officer at ECLAC and professor of economics at
the Federal University of Parana, Brazil. He holds a PhD in economic history from the
London School of Economics. He has been a visiting scholar at the University of Sao
Paulo, Brazil, University of the Republic, Uruguay and Columbia University, United
States. His main research topics are economic growth, distribution, structural change,
and the political economy of development. His latest publications are ‘New Structur-
alism and the Balance-of-Payments Constraint’, Review of Keynesian Economics, ,
(with Giuliano Yajima) and ‘A Technology Gap Interpretation of Growth Paths in
Latin America and Asia’, Research Policy, , (with Mario Cimoli and Joao Basilio
Pereima).
Rajah Rasiah currently holds the position of distinguished professor of economics at
the University of Malaya. His previous positions were professor of industrial organ-
ization at National University of Malaysia, and senior research fellow at UNU-
INTECH, Maastricht. He obtained his doctorate in economics from the University of
Cambridge in . He was awarded the Celso Furtado Prize by the World Academy of
Sciences in for advancing social science thought (economics).
Erik S. Reinert a Norwegian citizen, is a professor at Tallinn University of Technology
and guest researcher at the Centre for Sciences and the Humanities at the University of
Bergen. His research area is the theory of uneven growth, that is, the factors which—
contrary to the predictions of standard economic theory—cause world economic
development to be such an uneven process. He holds a BA from Hochschule St. Gallen,
Switzerland, an MBA from Harvard University and a PhD in economics from Cornell
University. His book How Rich Countries Got Rich and Why Poor Countries Stay Poor
has been published in more than twenty languages.
Simon Roberts is a professor of economics at the University of Johannesburg and an
economics director at the UK Competition and Markets Authority. He founded and
directed the Centre for Competition, Regulation and Economic Development
(CCRED) at the University of Johannesburg. Prior to this he was chief economist at
Competition Commission South Africa. He has worked extensively on issues of
industrial development, trade, regional value chains, competition and economic regu-
lation in Southern and East Africa, advising governments, competition authorities, and
regulators. He has also testified as an expert witness in a number of major competition
cases.
Fernando Santiago is an industrial policy officer at the United Nations Industrial
Development Organization (UNIDO) where he specializes in the design, monitoring,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xxv
and evaluation of industrial policies. He is also a member of the scientific board of the
Latin American Network for the Study of Learning Systems, Innovation and Compe-
tency Building (LALICS). He has published on topics related to innovation and
industrial policy. He is an economist from the National Autonomous University of
Mexico and holds a master’s degree from SPRU-University of Sussex and a PhD in
economics and policy studies of technical change from UNU-MERIT/University of
Maastricht.
Stephanie Seguino is professor of economics, University of Vermont, United States
and fellow, Gund Institute for the Environment. Her research explores the relationship
between intergroup inequality by class, race, and gender on the one hand, and
economic growth and development on the other. She is past president of the Inter-
national Association for Feminist Economics and an associate editor of Feminist
Economics, Journal of Human Development and Capabilities and Review of Keynesian
Economics. Her work has appeared in Cambridge Journal of Economics, Development
and Change, Structural Change and Economic Dynamics, and World Development,
amongst others. She has consulted with numerous international organizations, includ-
ing the UNDP, UNRISD, UNCTAD, and the World Bank.
Roman Stöllinger is a staff economist at the Vienna Institute for International Eco-
nomic Studies (wiiw). In his research he focuses on issues related to international trade
and global value chains, industrial policy and structural change. Recent publications
include a paper on the impact of global value chains on structural change and the need
for appropriate industrial policies in Europe and its neighbourhood. He is a regular
contributor to research reports by international institutions such as the European
Commission and UNIDO. He is strongly involved in the Research Centre International
Economics (FIW), an Austrian think-tank and infrastructure platform in the field of
international economics. Since he has also been a lecturer at the Vienna Univer-
sity of Economics and Business, teaching international macroeconomics and industrial
policy. Before joining wiiw in , he worked at OeKB, the Austrian Export Credit
Agency, where he gained real-world experience in implementing state support policies.
He holds a master’s degree in international economics from the University of Inns-
bruck and a PhD in economics from the University of Vienna.
Servaas Storm is a senior lecturer at Delft University of Technology. He obtained a
PhD in economics from Erasmus University Rotterdam. His work has appeared in
scholarly journals including Cambridge Journal of Economics, Development and Change,
Eastern Economic Review, Industrial Relations, International Journal of Political
Economy, Journal of Post-Keynesian Economics, and Structural Change and Economic
Dynamics. His latest book, co-authored with C.W.M. Naastepad, is Macroeconomics
beyond the NAIRU (Harvard University Press, ), winner of the Myrdal Prize of
the European Association for Evolutionary Political Economy. He is one of the editors of
Development and Change.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
xxvi
Fiona Tregenna holds the DST/NRF South African Research Chair in Industrial
Development and is also a professor of economics at the University of Johannesburg.
She is appointed to policy bodies including the Competition Tribunal and the Presi-
dential Economic Advisory Council, sits on a number of boards, and consults for
various international organizations. She has a PhD in economics from the University of
Cambridge, a master’s degree in economics from the University of Massachusetts, and
earlier degrees from the Universities of the Witwatersrand and Natal (South Africa).
Her primary research interest is in issues of structural change, deindustrialization, and
industrial development.
John Weiss is emeritus professor of development economics at the University of
Bradford, United Kingdom. He has written extensively on issues of cost‒benefit
analysis, industrialization, and industrial policy, publishing several textbooks, includ-
ing Project Analysis in Developing Countries (with Steve Curry, MacMillan, ),
Industry in Developing Countries (Routledge, ) and The Economics of Industrial
Development (Routledge, ). He is the joint editor of the Routledge Handbook on
Industry and Development (Routledge, ). He has been a consultant to, among
others, the United Nations Industrial Development Organization (UNIDO), the World
Bank, and the Asian Development Bank.
Lindsay Whitfield is professor (with special responsibilities) in Global Studies and leader
of the Centre of African Economies in the Department of Social Sciences and Business,
Roskilde University, Denmark. She is author of several books on African politics and
economies, including The Politics of African Industrial Policy: A Comparative Perspective
(Cambridge University Press, ) and Economies after Colonialism: Ghana and the
Struggle for Power (Cambridge University Press, ).
Xiaodan Yu is an assistant professor in the Department of Entrepreneurship and
Innovation at Nottingham University Business School, China. Prior to joining
NUBS, she held research positions at the National Research Council and Scuola
Superiore Sant’Anna in Italy. She received her BEng from Beihang University in
China, MSc from University of Cincinnati, and PhD in economics from Scuola Super-
iore Sant’Anna in . Her research interests include the economics of innovation,
industrial dynamics, firm growth, and entrepreneurship.
Nimrod Zalk is industrial development adviser at the South African Department of
Trade and Industry (DTI). Prior to this he was deputy director-general of the Industrial
Development Division (IDD) of the DTI. He sits on the board of the South African
Industrial Development Corporation (IDC) and chairs the steering committee of the
Industrial Development Think Tank (ITT) at the University of Johannesburg.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.............................................................................................................
.............................................................................................................
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
, ,
- , -
. A O I P
D
..................................................................................................................................
.. History and Debate in Industrial Policy
I policy has a long history both in practice and in theory. Early practices of
what would come to be regarded as industrial policy stretch back at least as far as
Medieval Europe and can be found in Italian city-states or late medieval England.
There is also a rich history of thinking and analysis about such policies, including
sixteenth-century Italian texts, long before the more frequently referenced classic late
eighteenth- and early nineteenth-century texts of Alexander Hamilton (who argued
that Adam Smith’s theories were ‘geometrically true’ but ‘practically false’) and
Friedrich List.¹
Industrial policy discussions resurfaced during the inter-war period, particularly
against the backdrop of the decline of traditional industries in some advanced econ-
omies under threat from a mixture of emerging competitors and new technologies
(Chick, ) and often connected to growing economic problems at the regional level.
With the breakdown of the gold standard and the protectionist turn in the s,
industrial policy was closely linked to a wider set of measures aimed at expanding local
markets, particularly in poorer countries, where discussions around import-substitution
¹ See Chapter .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, , , -
industrialization began to take root. Industrial policy became a staple of development
research and policy analysis from the end of the Second World War.²
Nonetheless, the most extensive theoretical and empirical perspectives on industrial
policy date from the late twentieth century, often linked to a close examination of the
policies adopted by the successful industrializing economies of East Asia (Johnson, ;
Amsden, , ; Wade, ; Chang, , among others). These approaches
highlighted the significance of ‘a country’s structure of production and trade, because
different goods have different production and demand characteristics’ (Thirlwall,
: ), and the role of state institutions in shifting those structures to support
and sustain economic development (Haggard, ).
But industrial policy has also been subject to sustained criticism. Especially from the
late s onwards, in mainstream economic analysis, in the pronouncements of
international development agencies, and in explicit policy statements by some (espe-
cially Anglo-Saxon) governments, industrial policy fell out of favour.³ Neoclassical
growth economists tended to favour one-sector growth models and to argue that there
were no special properties for any sector. They also pointed to the obvious potential for
industrial policy to create ‘rent-seeking’ opportunities.⁴ The debates between propon-
ents and opponents of industrial policy as a strategy of economic development,
sustained growth, and competitiveness became sharply ideological and were not always
supported by comprehensive, evidence-based analyses.
Despite these criticisms, industrial policy never went away. Even in the most
committed ‘neo-liberal’ policy environments—the United Kingdom and the United
States, for example—industrial policies were implemented (often especially in the
military-industrial policy arena), though they were not always advertised loudly as
such (see Chapter ). In the United States, for example, the Department of Energy ‘has
a program to provide low-interest loans to companies to encourage risky corporate
innovation in alternative energy and energy efficiency . . . as a whole, since its inception
in , the program has turned a profit . . . Its loans to early-stage solar energy
companies launched the industry’ (Lewis, : –). Still, lingering hostility to
industrial policy meant that these policies were often presented as ‘energy policy’ or
‘defence policy’, though they promoted some frontier technologies through the public
funding of R&D and procurement preferences.
This volume comes at a moment when industrial policy has returned to centre stage.
Advanced-economy governments have been designing, implementing, and announ-
cing a new generation of industrial policies with more confidence as part of their
efforts to benefit from the Fourth Industrial Revolution—even to the point where
there are concerns about ‘industrial policy wars’ alongside trade wars.⁵ International
² See Prebisch (), Myrdal ().
³ See Chapter .
⁴ See Chapter .
⁵ ‘Industrial Policy War—Capitalism with Chinese Characteristics’, Financial Times, September
.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
organizations have become more open to discussing industrial policy in lower- and
middle-income countries, in Africa for example, in part thanks to China’s remark-
able transformation over the last forty years (UNCTAD, ) but also in the context
of a climate emergency that requires a rapid shift from high- to low-carbon growth
paths in both developed and developing countries (UNIDO, ). Two IMF econo-
mists even attracted considerable attention for hailing the ‘return of the policy that
shall not be named’ (Cherif and Hasanov, ). UNCTAD’s () World Investment
Report identified eighty-four countries (accounting for per cent of global GDP) that
had adopted formal industrial policies in the five years to . Further, in recent years
industrial policy has come to rely on an ‘expanded range of support measures and
instruments that aim to improve infrastructure, education and training, enterprise devel-
opment, the building of clusters and linkages, entrepreneurship, innovation, access to
finance, and social policies’ (UNCTAD, : , citing Salazar-Xirinachs et al., ).
At such a moment, this volume offers a comprehensive reference work that presents
different schools of thought and reflects evolution in contemporary thinking on
industrial policy, alongside theoretical and empirical evidence from both advanced
and developing economies. It also makes the connection between industrial policy and
other policies. When economists (and others) across a broad spectrum seem to agree
on the relevance, desirability, and practicability of industrial policy, it is especially
important to assess suggestions that there is a ‘consensus’ around what this means and
involves. For some, industrial policy should still be seen as subordinate to other goals,
such as competitiveness or structural reform, while others argue that this ‘mainstream-
ing’ of industrial policy amounts to a dilution of the idea. Hence the relevance of this
book, which provides the historical background and conceptual underpinnings, and
presents a range of perspectives on industrial policy, together with regional and
individual country case studies.
.. Evolving Challenges to Industrial Policy
This volume captures a range of perspectives on industrial policy at a very specific
moment in the history of such policies. Another reason why this book is particularly
relevant is that, just as industrial policy has become more popular again among both
academic economists and policymakers, there are also new challenges to the viability of
industrial policy, especially in developing countries. The upshot, for some observers, is
that low-income countries, for example those in Africa, should not even try to
industrialize any more, given the advent of a post-industrial age (IMF, ), or should
simply limit their ambition to providing links in global value chains, given how
impenetrable the global industrial hierarchy has become (Baldwin, ).
The most significant of these threats is the spectre of ‘premature de-industrialization’:
many countries have experienced a decline in the share of manufacturing in GDP—
de-industrialization—at far lower levels of per capita GDP than has historically been
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, , , -
the case. This trend, and some of the factors that may lie behind it, suggests to some
economists that manufacturing (and industrial policy) cannot be the ‘engine of
growth’ that it historically has been (World Bank, ). But this is contested, and
debates around the ineluctability of premature de-industrialization and about the
continued role for manufacturing and industrial policy are taken up across different
chapters in this book.⁶
Premature de-industrialization is just one of a number of features of the contem-
porary global political economy that affect the scope for industrial policy. Related
arguments about automation and the Fourth Industrial Revolution suggest to some
that it will be even more difficult, particularly in lower- and middle-income countries,
successfully to pursue industrial policies geared towards competitiveness, productivity
growth, and employment (Cramer and Tregenna, ). Others argue that there
remains plenty of scope for industrial policies to harness the dynamics of new waves
of technical change and that these may even in some respects make it easier to ‘catch
up’.⁷ Meanwhile, there are arguments that recent developments in global political
economy and governance, for example around the increased market power of large
international firms, restrict policy space still further for developing countries in
particular. And there are counter-arguments pointing to the opportunities for policy
space that are created by a more multi-polar, fragmented global political order (Grabel,
). If the ‘rules of the game’ have become increasingly unstable, that may make the
global economy both more hostile and more ‘permissive’ for developing countries.
Finally, much production nowadays is organized through global value chains com-
manded by ‘systems integrators’ controlling a cascade of ‘tiers’ of suppliers, with very
little scope for lower-income countries to occupy anything higher than the lower levels.
There are complex debates about what scope there is for these lower-income countries
to ‘move up’ within GVCs, about the ways in which GVCs have reshaped much
industrial policy around foreign direct investment policy,⁸ and indeed about the
implications of evidence of some ‘reshoring’ of production (bringing production and
innovation physically closer together again) by firms based in advanced economies.⁹
.. The Shifting Terrain of Industrial Policy
The spatial dimensions of firm decisions within a globalized economy are an important
influence on the evolution of industrial policies. Another influence is the blurring of
boundaries between ‘sectors’ traditionally treated as discrete categories of economic
activity. One feature of modern capitalism is the way in which firms, especially those
based in advanced economies, concentrate and control knowledge expertise in ways
⁶ For instance, see For instance, see Chapters , , , and .
⁷ For example, Naudé (), UNCTAD ().
⁸ See also Mittelman (), Lee (), UNCTAD ().
⁹ See Gereffi (). See also Chapters and .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
that add to the advantages of first movers and economies of scale and scope, etc. This
represents one facet of ‘servicification’, the increasing share of the value of final output
of goods accounted for by service-sector activities—branding, design, R&D, logistics,
etc., whether carried out in-house or contracted out. But economic data—for example,
US production and employment statistics—have not adjusted to reflect accurately the
relative weight of different activities. US statistics, for example, ‘do not include [in
manufacturing statistics] pre-production services to manufacturing such as research
and development or design or post-production services such as repair and mainten-
ance or sales. Yet manufacturing firms invest heavily in these services’ (Whitefoot and
Valdivia, : ). The basis of the North American Industry Classification System
(NAICS) is the assumption that extractive industries, manufacturing, and service
industries ‘rely on essentially different production processes and establishments in
each of these three categories have similar processes’ (Whitefoot and Valdivia, : ).
As a result, much that is fundamentally manufacturing-dependent economic activity is
classified as non-manufacturing in service-sector data. Another way in which activities
traditionally assigned to discrete ‘sectors’ have become increasingly imbricated is the
‘industrialization of freshness’ (Cramer, Di John, and Sender, ). Much production
of ‘fresh’ and apparently unprocessed high-value agricultural commodities (e.g. avo-
cados, blueberries, poinsettia, or pelargonium seedlings) is very different from trad-
itionally conceived ‘primary commodity production’ and in its ‘roundabout’
production processes has many of the attributes of industrial activity.¹⁰
.. Political Economy and Industrial Policy
The recent return of industrial policy to international policy discussions is not the result
of new analytical insights into the process of structural transformation. Arguably, it has
more to do with the weak outcomes of policies pursued by many developing countries
under the guidance of the Washington Consensus,¹¹ the shock to market-friendly
policies in the global financial crisis of and its aftermath, the challenges to the
welfare state and ‘normal’ politics in many advanced, de-industrialized economies,
growing regional disparities, new sources and forms of global competition and market
demand (in China above all),¹² and the questions posed by technological changes and
climate change. Meanwhile, governments in developing countries are once again asking
¹⁰ On the enduring difficulties with the classification of economic activities, see also Marshall ()
and Schumpeter (). See also Chapter , which discusses this issue of the shifting terrain of
industrial policy.
¹¹ Oqubay (), Cramer, Sender, and Oqubay ().
¹² Nolan (), Nayyar ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, , , -
how they can achieve their development goals by creating new sources of growth and
dynamism, rather than simply trying to do the best with what they currently have.¹³
In discussing these and other issues, the present volume takes a political economy
approach. For industrial policy cannot be reduced to a technical or ‘purely’ economic
argument or set of instruments. Both more and less orthodox economists agree on this.
But there are very different ways of taking account of the political economy of
industrial policy. Public-choice theory may be one way of thinking about the political
economy but it is not the same as more historically minded, less methodologically
individualist frameworks, such as the political settlements literature or older (and to
some extent more explicitly class-based) analyses like Hirschman’s discussion of the
political economy of import-substitution industrialization (ISI) in Latin America
(Hirschman, ). Arguably, the richest vein of the political economy of industrial
policy is found in domestic class-based analysis and in analyses of particular countries’
positions in international alliances and hierarchies. From that perspective, domestic
and international security has often been an important theme in accounting for
governments resorting to and pushing industrial policy. For example, Doner, Ritchie,
and Slater () analysed industrial policy and the ‘developmental state’ in North East
Asia as responses to internal and external ‘threats’. In this volume, another kind of
example is given in Mathews’ argument about the role of energy security in provoking
innovative industrial policy in China which has created new, lower-cost technologies
that over time can in turn help lower-income economies avoid reinventing a sustain-
able wheel.¹⁴
.. The Cabinet of Policy Errors
One further feature distinguishing this volume is its commitment to highlighting
learning from policy mistakes. While we are wary of simplistic labels of ‘failure’ and
‘success’, whose evaluative criteria are often not laid out clearly or are subjective,
arbitrary, or unduly narrow, the issue of policy failure is a key theme in debates on
industrial policy. Much of the hostile literature on industrial policy simply points to
failures and uses these to argue against its adoption. Much of the literature more
favourable to industrial policy picks out and explores the conditions behind obvious
‘successes’. Thus, the literature can become bifurcated and static, reduced to an
unhelpful either/or of market failure or state failure. We argue for a more dynamic
focus on ‘failure’. This stance is inspired not only by Hirschman’s () subtle
investigation of the dynamics of the ‘Hiding Hand’ in large projects, but also by the
experience of Enzo Ferrari. Ferrari often held board meetings in a room whose walls
were lined with cabinets displaying the parts of racing cars that had malfunctioned
¹³ See Cimoli, Dosi, and Stiglitz (), Best (), and Lee ().
¹⁴ See Chapter .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
during races, to focus the board members’ minds on the obsessive need to learn from
what had gone wrong and to improve. We advocate a wider institutional adoption of
the policy official’s equivalent of the ‘cabinet of errors’.
. A A
H
..................................................................................................................................
.. Aims and Approaches
No country has made the arduous journey from widespread rural poverty to post-
industrial prosperity without employing targeted and selective government policies to
shift the production structure towards activities and sectors with higher productivity,
better-paid jobs, and greater technological potential.¹⁵ Alfred Marshall’s ‘principle of
continuity’, that is, development through incremental changes (Marshall, ) has
never been sufficient to bring about fundamental structural changes and rising prod-
uctivity and has always been supplemented by the visible hand of policy intervention.
Such policies are conventionally called industrial policies, although they are also
termed ‘production/productive transformation policies’. Much of the discussion on
industrial policy in recent years, however, has revolved around sterile debates on
government failures or whether governments can pick winners. This volume focuses
on theoretical foundations, on institutional conditions, and on emerging challenges.
The Oxford Handbook of Industrial Policy introduces specialist research by a wide
range of scholars and seeks to make a significant contribution to our understanding of
industrial policies and their role in economic growth, development, and structural
change, both historically and in today’s changing policy landscape. The volume reviews
the conceptual underpinnings, theoretical perspectives, and methodologies of the study
of industrial policies. It uses case studies of policies and practices to offer new insights
for policymakers, practitioners, and policy researchers. The Handbook is forward
looking while also drawing on long historical perspectives, and aims to serve as a
single, comprehensive, and authentic reference on industrial policies. The book also
highlights major themes and policy perspectives rather than speculating on recom-
mendations that may not stand the test of time.
The evolving debates on industrial policy and the perspectives of various schools of
thought are presented, from the early Industrial Revolution to the adaptive industrial
policy practices of the present day.¹⁶ Theoretical perspectives are integrated with
empirical evidence from both advanced economies and developing and emerging
economies, bridging the gap between the theory and practice of industrial policy.
¹⁵ See Chapters and .
¹⁶ See Chapters , , and . See also Lin and Chang ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, , , -
The volume’s critical examination of the progress and direction of debates lays the
foundation for future research. It attempts to provide new perspectives for scholars and
graduate students, as well as a collection of authoritative and original research.
.. Process
The first step in ensuring the high standard and timely publication of this volume was
the careful selection of topics and contributing authors. At an inception workshop in
Addis Ababa, editors and contributors met to discuss the themes and chapters chosen,
to review abstracts, and to discuss new ideas and suggestions. Contributors were
encouraged to focus on mistakes and failures as well as successes, to consider connec-
tions and contexts, to be cognizant of unevenness in policy design and outcomes, and
to highlight political economy issues.
External and internal reviewers have carefully reviewed each chapter, providing a
high level of peer review engagement (especially for an edited volume). A chapter
review workshop reviewed all first drafts to improve chapters and ensure complemen-
tarity. A book project coordination team provided the necessary support service and a
pre-publisher copy-editing service improved readability and ensured uniformity of
style.
. O S
..................................................................................................................................
The thirty chapters of the Handbook are organized in five sections: introduction;
theoretical perspectives; context and connections; experiences in advanced economies;
emerging economies and developing countries.
.. Part I: Introduction
The background, purpose, approaches, and organization of the Handbook are intro-
duced in Chapter , together with an outline of the evolving landscape of industrial
policy and emerging research questions. The volume’s wide conceptualization of
industrial policy includes the transformation of production, the development of
technological and innovation capabilities, and the constant struggle to occupy
more advantageous positions in international markets. In addition to industrial
policy within national and sub-national structures, regional application of industrial
policy can be seen, for example, in the European Union. Oqubay’s Chapter , ‘The
Theory and Practice of Industrial Policy’, presents industrial policy as a driver of
structural change and a conduit of technological catch-up, underlining the strategic
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
role of exports and of sectors with higher dynamic efficiency.¹⁷ The dynamic and
adaptive aspects of industrial policies are examined, together with their origins and
the unevenness of policy design and outcomes. The chapter provides the groundwork
for subsequent chapters that present theoretical perspectives, contexts and connec-
tions, and experiences from advanced, emerging, and developing countries.
.. Part II: Theoretical Perspectives
The five chapters in this section present a comprehensive conceptual framework by
reviewing the industrial policy perspectives of various schools and traditions. Ocampo
(Chapter ) examines the macroeconomic dimension of industrial policy, arguing that
structural change and active industrial policy or productive transformation policies
must be at the centre of economic development strategy. The chapter underlines the
centrality of state intervention in promoting the dynamic efficiency of economic
structures and their capacity to generate new waves of structural change. Cimoli,
Dosi, and Yu (Chapter ) discuss the role of industrial policy in the evolutionary
view of innovation and learning as drivers of economic development. Technological
paradigms and trajectories are considered, as well as the link between catch-up
processes and the dynamics of capability accumulation within and across firms, and
their embeddedness in national systems of innovation.¹⁸
Weiss (Chapter ) reviews neoclassical perspectives on industrial policy. The chapter
discusses market imperfections and ‘distortions’, the idea of a ‘policy hierarchy’ that
might lead to a case for industrial policy, and the neoclassical assumptions underlying
recent work on ‘discovery process’, ‘export space’, and ‘facilitative’ interventions to
exploit comparative advantage. Roberts (Chapter ) presents a firm-based perspective
linking large firm strategies to industrial policies, and reviews relevant theories of the
firm and capability development. Ashman, Newman, and Tregenna (Chapter ) look at
various ‘radical’ economic traditions relating to industrial policy and industrialization
and consider how these views differ from structuralist or evolutionary economics or
other heterodox approaches. Their discussion gives greater attention, for example, to
arguments about the ‘inherent contradiction of labour and capital’ and the ‘contra-
dictory’ role of the state.
.. Part III: Context and Connections
This section comprises eleven critical chapters on the context of industrial policy and
its connections with other policies. Djafar and Milberg (Chapter ) discuss global value
¹⁷ See Hirschman (), Kaldor (), Amsden (), and Mazzucato ().
¹⁸ See Cimoli, Dosi, and Stigltiz (), Best (), and Oqubay and Ohno ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, , , -
chains and the regionalization of industrial policy, based on the case of ASEAN. The
changing nature of global production networks and their concentration is examined,
together with regional coordination of industrial policy, which is strengthening
production integration and promoting competitiveness. Kozul-Wright and Fortu-
nato (Chapter ) examine industrial policy in an interdependent world and review
debates around trade, participation in global value chains, and industrial policy. The
chapter discusses the diversification of the export basket, the sophistication of export
products, and the upgrading of productive capacities. Mathews (Chapter ) exam-
ines the greening of industrial policy, the shift to renewables, and the solutions
offered by the circular economy.¹⁹ Case studies from advanced, emerging, and develop-
ing countries are presented, encompassing energy, materials and finance, and other
green options.
Esser and Mittelman (Chapter ) address the blind spot in the evolving and
competing narratives of globalization and industrial policy, showing the importance
of understanding these representations as they are objectified as policy. Mazzucato and
Kattel (Chapter ), examining the ‘mission-oriented’ approach to industrial policy,
which focuses on providing the direction for growth, argue for the importance of a new
analytical framework to understand how policies can shape market forces. Di John
(Chapter ) reviews the evolution and political economy of development banking as a
catalyst of industrial policy in the context of late development and structural change
(with particular attention to the case study of Brazil).
Andreoni (Chapter ) reviews the role of technical change as a driver of the shifting
terrain of industrial sectors and the industrial ecosystem. Pollin (Chapter ) identifies
the prime contributors to climate change and examines viable routes to achieving
agreed global emissions goals. The chapter also looks at the role of clean energy
industrial policies and global investment, and how industrial policy will promote
technical innovation and the expansion of investment. Seguino (Chapter ) explores
the intersection of gender relations and industrialization and industrial policy, and
argues that gender-inclusive industrial policies can ensure equitable and sustainable
development. Storm (Chapter ) shows the importance of macroeconomic policy
management for the effectiveness of industrial policy and argues that demand-side
policies are crucial. He explores the ways in which food policy and wages and labour
protection legislation can underpin industrial policy and shows how overvalued
exchange rates and restrictive monetary policy have often undermined industrial
policy efforts. Bailey and De Propris (Chapter ) review technological change in
global value chains, the origins of internationalization strategies and global produc-
tion networks, and the importance of appreciating the spatial dimensions of indus-
trial policy.
¹⁹ See Mathews ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Part IV: Experiences in Advanced Economies
The five chapters in Part IV focus on empirical evidence of industrial policies in
selected advanced economies. Reinert (Chapter ) reviews historical perspectives on
the origins of industrial policy and industrialization, the role of the state and key
arguments ranging from before the Industrial Revolution up to the early twentieth
century. Best (Chapter ) reviews the success of US industrial policy during the
Second World War, and the country’s post-war de-industrialization, arguing that
industrial policy has been integral to core production processes and innovation
capability. Bianchi and Labory (Chapter ) examine the evolution of post-Second
World War European industrial policy through a comparative review of three phases
(strong and selective intervention, market-led approaches, and more recently, more
interventionist), illustrating how the EU’s multilevel governance adapted to new
technological disruptions. Landesmann and Stöllinger (Chapter ) review EU indus-
trial policy, with a focus on contemporary Europe, and examine the key challenges of
keeping pace with the frontiers of technology, responding to the fast catching-up by
emerging economies, convergence and cohesion within the EU, and the climate
challenge. Lee (Chapter ) reviews East Asian experiences with a focus on South
Korea’s economic catch-up from the s to the s, showing how industrial policy
was used to build innovation capability and upgrade the private sector during the four
phases of transformation.
.. Part V: Experiences in Emerging and Developing
Countries
Part V focuses on industrial policy experiences and outcomes in emerging and devel-
oping countries, including South East Asia, post-communist transition economies,
Latin America, and Africa. First, Rasiah (Chapter ) reviews industrial policy and
industrialization in South East Asia, with a comparative analysis that shows the
persistence of premature de-industrialization and the weakness of industrial policies
in contrast to those of Japan, South Korea, and Taiwan. Li and Chen (Chapter )
examine the development of national champions as a key element of industrial policy,
showing how China transformed and consolidated its big state-owned enterprises into
world-class firms.
Santiago (Chapter ) reviews industrial policy in the BRICS (Brazil, Russia, India,
China, South Africa), exposing the asymmetry of these countries’ economic perform-
ances and divergent industrial policies, despite the cooperation between them. Popov
(Chapter ) considers the lessons from the evolution of industrialization and indus-
trial policy outcomes among (post-communist) transition economies of Europe and
Asia. Ocampo and Porcile (Chapter ) present a comparative review of macroeco-
nomic and industrial policies of Latin American countries and the outcomes in terms
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, , , -
of catch-up and economic transformation. Whitfield and Zalk’s (Chapter ) com-
parative review of industrial policy in four African countries (Ethiopia, Nigeria,
Rwanda, and South Africa) highlights their mixed outcomes and the limited economic
development achieved. Chitonge and Lawrence (Chapter ) examine the different
phases of industrial policy in post-independence Africa, reviewing the history through
the lens of power relations and the state as the focus of political economy.
R
Amsden, Alice H. () Asia’s Next Giant: South Korea and Late Industrialization. Oxford
University Press on Demand.
Amsden, Alice () The Rise of ‘the Rest’: Challenges to the West from Late-industrializing
Economies. New York: Oxford University Press.
Baldwin, Richard () The Great Convergence: Information Technology and the New
Globalization. Cambridge, MA: Harvard University Press.
Best, Michael H. () How Growth Really Happens: The Making of Economic Miracles
through Production, Governance, and Skills. Princeton, NJ: Princeton University Press.
Chang, Ha-Joon () Kicking away the Ladder: Development Strategy in Historical Perspec-
tive. London: Anthem Press.
Cherif, Reda and Fuad Hasanov () ‘The Return of the Policy That Shall Not Be Named:
Principles of Industrial Policy’. International Monetary Fund. Available at https://www.imf.
org/en/Publications/WP/Issues////The-Return-of-the-Policy-That-Shall-Not-Be-
Named-Principles-of-Industrial-Policy-.
Chick, Victoria () ‘Industrial Policy, Then and Now’. Real-world Economics Review
: –. Available at http://www.paecon.net/PAEReview/issue/Chick.pdf.
Cimoli, Mario, Giovanni Dosi, and Joseph E. Stiglitz (eds) () Industrial Policy and
Development: The Political Economy of Capabilities Accumulation. The Initiative for Policy
Dialogue Series. Oxford: Oxford University Press.
Cramer, Christopher and Fiona Tregenna () ‘Heterodox Approaches to Industrial Policy
and Implications for Industrial Parks’, in Justin Yifu Lin and Arkebe Oqubay (eds) The
Oxford Handbook of Industrial Hubs and Economic Development. Oxford: Oxford Univer-
sity Press.
Cramer, Christopher, Jonathan Di John, and John Sender () ‘Poinsettia Assembly and
Selling Emotion: High Value Agricultural Exports in Ethiopia’. AFD Research Papers Series
No. –, September. Paris: Agence Française du Développement.
Cramer, Christopher, John Sender, and Arkebe Oqubay () African Economic Develop-
ment: Evidence, Theory, Policy. Oxford: Oxford University Press.
Doner, Richard, Bryan Ritchie, and Dan Slater () ‘Systemic Vulnerability and the Origins
of Developmental States: Northeast and Southeast Asia in Comparative Perspective’,
International Organization (): –.
Gereffi, Gary () Global Value Chains and Development: Redefining the Contours of st-
century Capitalism. Cambridge: Cambridge University Press.
Grabel, Ilene () ‘The Rebranding of Capital Controls in an Era of Productive Incoher-
ence’, Review of International Political Economy (): –.
Haggard, Stephan () Developmental States. Cambridge: Cambridge University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Hirschman, Albert O. () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Hirschman, Albert O. () Development Projects Observed. Washington, DC: Brookings
Institution.
Hirschman, Albert O. () ‘The Political Economy of Import-substituting Industrialization
in Latin America’, The Quarterly Journal of Economics (): –.
IMF () World Economic Outlook: Cyclical Upswing, Structural Change. Washington, DC:
IMF.
Johnson, Chalmers () MITI and the Japanese Miracle: The Growth of Industrial Policy,
–. Stanford, CA: Stanford University Press.
Kaldor, Nicolas () Causes of the Slow Rate of Economic Growth of the United Kingdom:
An Inaugural Lecture. Cambridge: Cambridge University Press.
Lee, Keun () The Art of Economic Catch-up: Barriers, Detours and Leapfrogging in
Innovation Systems. Cambridge: Cambridge University Press.
Lewis, Michael () The Fifth Risk. New York: W. W. Norton & Company.
Lin, Justin Yifu and Ha-Joon Chang () ‘Should Industrial Policy in Developing Countries
Conform to Comparative Advantage or Defy It? A Debate between Justin Lin and Ha-Joon
Chang’, Development Policy Review, (): –.
Marshall, Alfred () Principles of Economics. London: Palgrave Macmillan.
Mathews, John () Greening of Capitalism: How Asia Is Driving the Next Great Trans-
formation. Stanford, CA: Stanford University Press.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths, Vol. . London: Anthem Press.
Mittelman, James H. () Implausible Dream: The World-class University and Repurposing
Higher Education. Princeton, NJ: Princeton University Press.
Myrdal, Gunnar (). Asian Drama: An Inquiry into the Poverty of Nations. New York:
Pantheon.
Naudé, Wim () ‘African Countries Can’t Industrialise? Yes, They Can’. The Conversation,
November. Available at https://theconversation.com/african-countries-cant-industrialise-
yes-they-can-.
Nayyar, Deepak () Asian Transformations: An Inquiry into the Development of Nations.
Oxford: Oxford University Press.
Nolan, Peter () China and the Global Economy: National Champions, Industrial Policy
and the Big Business Revolution. Basingstoke: Palgrave.
Oqubay, Arkebe () Made in Africa: Industrial Policy in Ethiopia. New York: Oxford
University Press.
Oqubay, Arkebe and Kenichi Ohno () How Nations Learn: Technological Learning,
Industrial Policy, and Catch-up. New York: Oxford University Press.
Prebisch, Raúl () The Economic Development of Latin America and its Principal Prob-
lems. New York: UN Department of Economic Affairs.
Salazar-Xirinachs, José M., Irmgard Nübler, and Richard Kozul-Wright (eds) () Trans-
forming Economies: Making Industrial Policy Work for Growth, Jobs and Development.
ILO/UNCTAD.
Schumpeter, Joseph () Theory of Economic Development. Cambridge, MA: Harvard
University Press.
Thirlwall, Anthony () ‘Thoughts on Balance-of-payments-constrained Growth after
Years’, Review of Keynesian Economics (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, , , -
UNCTAD () Trade and Development Report : Structural Transformation for
Sustained and Inclusive Growth. Geneva: UNCTAD.
UNCTAD () ‘Beyond Austerity: Towards a Global New Deal’, in Trade and Development
Report . Geneva: UNCTAD.
UNCTAD () World Investment Report . New York and Geneva: UNCTAD.
UNIDO () Structural Change for Inclusive and Sustainable Development. Vienna:
UNIDO.
Wade, Robert () Governing the Market: Economic Theory and the Role of Government in
East Asian Industrialization. Princeton, NJ: Princeton University Press.
Whitefoot, Kate and Walter Valdivia () Innovation and Manufacturing Labor: A Value-
chain Perspective. Washington, DC: Centre for Technology Innovation, Brookings.
World Bank () Trouble in the Making? The Future of Manufacturing-led Development.
Washington, DC: World Bank.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
. I T
P I P
..................................................................................................................................
D on industrial policy and scholarly debates echoes global economic shifts,
changes in the international power structure, and the ideological fervour of the period.
Arguably, many governments have continued to use some form of industrial policy,
although it appeared unfashionable in the s‒s with the rise of new liberal waves.
Nonetheless, industrial policy has recently attracted growing attention from policy-
makers and researchers, and is now part of mainstream economic debate. A recent
working paper by IMF researchers (Cherif and Hasanov, ) was entitled ‘The Return
of the Policy That Shall Not Be Named: Principles of Industrial Policy’. Nonetheless,
there is little agreement on the underlying conceptual perspectives and basic essence of
industrial policies and empirical interpretation (Andreoni and Chang, ).¹
Pioneering theoretical work on industrial policy, particularly the theory of infant
industry protection, is mainly associated with the classical political economy of the
early capitalist economy in eighteenth-century England and the economic catch-up
of continental Europe, the United States, and Japan in the nineteenth century
¹ According to Weiss (: ) two competing perspectives emerge, namely the ‘promotional’ that
focuses on interventionist and leading role of government, and the ‘market-based’ approach which sees
government as a facilitator with the role of addressing market failures and the malfunctioning of the
market.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(Hamilton, [] ; List, ).² Industrial policy as a viable path to capitalist
development has been practised by both forerunners and latecomers (Chang, ;
Reinert, ; Reinert, Gosh, and Kattel, ), with sustained growth and economic
transformation associated with industrial policy and the transformation of productive
capability.³ However, the experience of industrial policies has been uneven across
countries, sectors, and historical periods. Debate on industrial policy has tended to
be influenced more by ideological contentions than by empirical evidence and eco-
nomic history. The recent proliferation of literature brings the divergent underlying
perspectives to the fore.
From a long-term, strategic perspective, industrial policy underpins structural trans-
formation and catch-up, sustained economic growth, productivity gains, technological
advances, and broader socio-economic transformation. The approach taken in this
chapter is based on a broader conceptualization of industrial policy incorporating
production, international trade, technology, and innovation, rather than a narrower
definition confined to government interventions or policy instruments. This means
that the purpose and patterns of industrial policy and the perspectives underlying it are
of paramount importance (Oqubay, ; Best, ; Andreoni and Chang, ).
This chapter reviews the theory and practice of industrial policy and advances three
sets of arguments. First, it presents industrial policy as a vehicle of structural trans-
formation and wealth creation, in which manufacturing (and other dynamic, high-
productivity, and knowledge-intensive activities) exhibits increasing returns (both
static and dynamic) and drives structural change.⁴ It underlines the strategic role of
exports, especially as a source of international learning and relaxing balance-of-
payment constraints. Second, it underlines the dynamics of industrial policy as a
conduit for technological learning and the development of innovation capability
(Best, ; Dosi and Nelson, ).⁵ Finally, it shows that unevenness and adaptability
have been key aspects of the practice of industrial policies over the last two centuries,
suggesting their continuing relevance for structural change, structural transformation,
and catch-up, even in the radically transformed global economic landscape of the
twenty-first century, where policy space is more restricted than in the past.
The chapter is divided into six sections. Following the introduction, section .
draws on classical political economy and structuralist development economics to
examine structural transformation as the prime foundation of industrial policy, and
reviews related concepts such as the infant industry protection theory. In section . we
explore evolving thinking on industrial policy in the twentieth century with a focus on
its role in technological learning and economic catch-up. The unprecedented rate of
latecomer economy industrialization, together with rapid changes in technology, the
² See Komiya, Okuno, and Suzumura () and Ohno () on Meiji’s restoration and Japanese
industrial policy in the nineteenth and twentieth centuries.
³ Reinert, Gosh, and Kattel (). See also Chapter .
⁴ See Mazzucato (). See also Chapter .
⁵ See Chapter .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
economic landscape, and firms’ domestic and international competition strategies, has
influenced our understanding of industrial policy. Section . reviews the state‒market
relationship, and the politics of industrial policy. Section . focuses on principles and
practice, including linkage effects and industrial ecosystems. Section . presents a
summary of observations and emerging issues in the changing landscape of industrial
policy.
. T P
I P
..................................................................................................................................
.. The Concept of Industrial Policy
An active industrial policy underpinning structural transformation and catch-up
comprises measures to develop productive and technological capabilities and selective
interventions to build new industries and activities with dynamic efficiency
(UNCTAD-UNIDO, ; Chang, ; Johnson, ; Amsden, ; Wade, ;
Oqubay, ).⁶ An industrial policy is ‘a strategy that includes a range of implicit or
explicit policy actions and instruments selectively focused on specific industrial sectors
and new activities for the purpose of shaping structural change and promoting catch-
up in line with a broader national vision and development strategy . . . Successful
catching up has depended on active industrial policy. What distinguishes industrial
policy is its “soul”, that is, the purpose and underlying pattern of industrial policy’
(Oqubay, : , ). This definition emphasizes economic development strategies
as the prime point of departure for inducing productive investment and changing the
political economy accordingly.
This conception assists a long-term policy approach that emphasizes synergies and
connections with macroeconomic policies (such as exchange rate regimes, saving and
investment rates, financing systems), human capital development policies (including
the orientation and quality of tertiary and vocational schools, the links between
universities and industry, and the focus on engineering and technology), and the
development of physical infrastructure (such as energy and modern transport). It
also follows a tradition of strengthening industrial competitiveness and institutions.
A key feature of industrial policy is that it constantly adapts to shifts in the
international and domestic environment, including constraints posed by international
governing institutions such as the WTO.⁷ However, while multilateral trade rules have
⁶ According to Ocampo, dynamic efficiency is the ‘capacity to generate new waves of structural
change’ (see Chapter ). See also Ocampo ().
⁷ For example, the outlawing of local content requirements, which have been a staple of industrial
policy. LDCs may find smart ways to get around imposed restrictions.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
restricted the policy space of countries, with implications for industrial policymaking, it
has been argued that many industrial policy instruments remain available to latecomer
countries wishing to pursue an industrialization agenda (UNECA, ). For some
countries, including least developed countries (LDCs), multilateral rules either do not
apply at all or do so rather leniently. Environmental sustainability and the greening of
industrial policy has increasingly gained importance in policy debates in the late
twentieth century (Mathews, a, ).⁸
A pragmatic rather than dogmatic, doctrinaire approach to the design and execution
of industrial policy is a key requirement. New ideas can be tested, and old policies
discarded if the measures deviate from facts on the ground. Successful outcomes imply
the substitution of new instruments for failed ones. Policy learning is rooted in learning
by doing and learning by experimentation, augmented by the search for new solutions
and learning from international experiences (Oqubay and Ohno, ). Pragmatism
combined with long-term vision serves as a compass while allowing the trial-and-error
approach and has been typical of industrial policy in East Asian economies.⁹ The post-
Chinese approach to industrial policy and reform has been characterized by
pragmatism, learning by doing, and experimentation.¹⁰
.. Structural Transformation and Industrial Policy
... Perspectives on Structural Transformation
Economic history shows that growth alone is not sufficient to sustain economic
development. Structural change is characterized by sectoral shifts, sustained product-
ivity growth, and technological spillover, accompanied by shifts in demand, occupa-
tions, and income levels, as well as institutional and socio-economic changes (Kuznets,
; Ocampo, Rada, and Taylor, ). Structural transformation involves shifts from
low- to high-productivity activities and sectors, diversification into new activities and
industries, and sector-specific industrial deepening and upgrading. A process of fun-
damental structural change necessitates the development and expansion of a country’s
productive capacity, namely, accumulation of various types of capabilities.¹¹ Nonethe-
less, technical progress does not necessarily occur uniformly across sectors or during
⁸ See Chapters and . For example, sustainability and the development of eco-industrial hubs has
become a critical aspect of industrial policies.
⁹ See Chapters and .
¹⁰ Axioms of Deng Xiaoping capture this thinking: ‘It doesn’t matter if a cat is black or white, so long
as it catches mice’; ‘Seek truth from facts’; and ‘Crossing the river by feeling the stones’. See also
Peerenboom ().
¹¹ According to UNCTAD (), productive capacity is ‘the productive resources, entrepreneurial
capabilities and production linkages’ which together enable a country to develop the technological and
production capabilities necessary to produce a wide range of goods (UNCTAD, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
different stages of industrialization (Ocampo, Rada, and Taylor, ; Andreoni and
Chang, ).¹²
Pasinetti states that structural transformation is not about temporary or short-term
changes but rather about fundamental shifts, ‘those changes in the composition that are
permanent and irreversible’ (Pasinetti, : ). Structural transformation implies the
transformation of production and hence the need for a production-centred framework.
Ocampo et al. (: ) highlight ‘the composition of production activities, the associ-
ated patterns of specialization in international trade, the technological capabilities of the
economy, including the education level of the labour force, the structure of ownership of
factors of production, the nature and development of basic state institutions, and the
degree of development and constraints under which certain markets operate (the
absence of certain segments of the financial market or the presence of a large under-
employed labour force)’ (own emphasis).
Thinkers and development economists have multiple views on how structural
transformation takes shape. The Prebisch‒Singer hypothesis focuses on what prevents
structural change in developing countries and leads to strategic implications for how to
overcome this obstacle (Prebisch, ). The trade imbalances between developed and
developing countries that are inherent in the economic structure and the core‒periphery
relationship are articulated in economic dependency theory.¹³ This hypothesis sug-
gests that in the long term the price of primary commodities declines relative to
the price of manufactured goods, due to the greater income elasticity of demand
observed relative to primary products, and emphasizes the importance of import-
substitution industrialization to kick-start the process of structural change.
... Manufacturing as an Engine of Growth and Structural Change
A proposition widely argued by the structuralist perspective but not universally
accepted is that the special properties of manufacturing, which are critical for the
long-term dynamism of both industrial and broader economic systems, include the
ability to generate linkage effects, increasing return to scale and productivity gains both
in manufacturing itself and in the broader economy through linkages, technological
spillovers, and job creation (both direct and indirect). The relative significance of these
special features varies across manufacturing industries and phases of development.
Kaldor’s pioneering work on growth laws underlines manufacturing’s special contri-
bution to growth and productivity:
The first law is that there exists a strong causal relation between the growth of
manufacturing output and the growth of GDP. The second law states that there
exists a strong positive causal relation between the growth of manufacturing
output and the growth of productivity in manufacturing as a result of static and
dynamic returns to scale. This is also known as Verdoorn’s law. The third law
¹² See Chapters and .
¹³ This view influences economic views promoted by the United Nations Economic Commission for
Latin America and the Caribbean (ECLAC) and in Latin American policymaking.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
states that there exists a strong positive causal relation between the rates at which
the manufacturing sector expands and the growth of productivity outside the
manufacturing sector because of diminishing returns in agriculture and many
petty service activities which supply labour to the industrial sector.
(Thirlwall, : ; own emphasis)
From Kaldor’s perspective, manufacturing is associated with an enormous increase in
the ‘technical dynamism’ of the economic system, with the introduction of new
knowledge inducing productive investment (Andreoni and Chang, ).¹⁴ This inex-
tricable interaction between technical change and investment impels the accumulation
of technology and capital, together with sustained productivity growth and dynamism.
Capital intensity and economic viability are, however, determined by the size and
nature of demand as well as technological advances. Kaldor highlights how ‘both
technology and demand contribute to determining the degree of capital intensity of
the economic system as a whole, and both the evolution of technology and the
evolution of demand govern its movement through time. But no relevant role on
these matters can be attributed to the rate of profit . . . The most important character-
istic of capitalist business enterprises is the continuous change and improvement in the
methods of production’ (: ). Hence, knowledge intensity and technology
remain the key measures of development.¹⁵
As per Young (), manufacturing offers countries the opportunity to capture
increasing returns as a result of manufacturing specialization.¹⁶ Historically, manufac-
turing has been viewed to have stronger elasticity of demand than primary
commodities—though this distinction may be changing—and increasing returns to
scale (Young, ; Prebisch, ). Pasinetti states that ‘The physical quantity of each
commodity to be produced is determined by demand . . . the nature of human needs
and preferences gives rise to entirely different compositions of demand, and, therefore,
different structures of production and employment, at the various level of real per
capita income’ (Pasinetti, : ).
Young () highlights that the notion of increasing returns comprises static
increasing returns, captured in firms, and dynamic increasing returns, generated in
networks or connections of firms and clustering, driving specialization and differen-
tiation. Kaldor () adds an important dimension, namely, the ‘scope for learning-
by-doing’ at the individual, firm-level, sector-level, and industrial workforce, which
is evident in the ‘special properties’ of manufacturing activities. However, it is
noteworthy that sectoral classification has evolved to reflect the changing
¹⁴ See Chapter .
¹⁵ Pasinetti underlines that industrial wealth is associated with technical knowledge and capability. In
capitalism or industrial society, ‘wealth is not a stock of material goods (which only represent the
external expression of it)—it is a stock of technical knowledge . . . today it has become to emulate them
and do better’ (Pasinetti, : ). ‘It is only by absorbing technical knowledge that the poor countries
will be able permanently to increase their wealth’ (: ).
¹⁶ See Kaldor’s laws as elaborated by Thirlwall () and Mathews (b).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
characteristics of production and technology, and the growing heterogeneity in the
nature and characteristics of activities within sectors.
Moreover, the nature of inter-sectoral linkages is evolving as the boundaries between
sectors are changing; examples include the ‘servification’ featured in the linkage
between services and manufacturing, and the ‘industrialization of freshness’ that
shapes the linkage between agriculture and manufacturing (Cramer and Sender,
).¹⁷ While activities with dynamic efficiency and arguably a sectoral approach
are a critical aspect of industrial policy, a systematic survey and analysis is essential to
understand the nature of such activities (Cramer and Tregenna, ).¹⁸ These
changes, including the blurred boundaries between sectors and the increasing breadth
and heterogeneity of production activities, may arguably offer widening scope for
industrial policies while calling for industrial policy to be adapted to the new
environment.
....
It has been argued that manufacturing industries also complement agriculture and
services, and are associated with stronger inter-sectoral forward and backward pro-
duction linkage effects (see Hirschman, , among others). Historically, early indus-
trialization is accompanied by the transformation of agriculture, both as the initial
source of demand and as a provider of food surplus to urban populations.¹⁹ Agricul-
tural productivity is increased through both research and widely applied technological
advances, with high-productivity agriculture exhibiting the stronger dynamism of
manufacturing. Manufacturing has similarly stimulated the growth of services, with
the transfer of activities such as distribution, logistics, and marketing to the service sector
and the outsourcing of other activities such as accounting and human resource manage-
ment (Andreoni and Chang, ). Knowledge intensity in the service sector varies,
ranging from the informal sector to high-productivity industries such as ICT and logistics,
which are critical for the competitiveness of manufacturing. The potential and market of
services is partly shaped by the scale and sophistication level of manufacturing.
... The Strategic Role of Exports
There are conflicting views on the role of exports. A market-friendly or neo-liberal view
regards opening to international markets and liberalization as a route to international
competitiveness.²⁰ The other view argues that what matters is not trade liberalization or
¹⁷ Knowledge and technology intensity are increasing in some high-value activities in primary goods
and services such as health care.
¹⁸ See also Chapters and .
¹⁹ The intersectoral linkages are noticed through technical and mental shifts, as Kaldor highlights that
‘the key to an accelerated growth of the underdeveloped areas of the world lies in bringing about
fundamental changes in both the mental outlook and the technical knowledge and skill of their peasant
population’ (Kaldor, : ).
²⁰ For instance, see Serra and Stiglitz (). This view is represented in various publications of
international financial institutions and proponents of free trade and economic liberalization.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
integration with the global market but how each country inserts itself into international
trade (Ocampo, Rada, and Taylor, ). Hirschman ([] : ) argues that
export is critical for late latecomers because of its implications for economic
transformation:
First, through exports they would overcome whatever obstacles of market size limit
their growth or prevent their establishment. Second, through exports they would
loosen the balance-of-payments constraint which may otherwise prevent capacity
operation of existing industries as well as establishment of new industries. Finally,
by competing in world markets, industries would be forced to attain and maintain
high standards of efficiency and product quality and would thereby acquire defence
against oligopolistic collusion and decay to which they often succumb in highly
protected, small local markets.
Exports and positioning in international trade have been recognized as pivotal for
growth, and exports have been associated with structural transformation, especially
with industrialization and manufactured exports (Thirlwall, ). Policymakers may
pursue a variety of export promotion strategies resulting in different outcomes. How-
ever, from a structuralist perspective, there are at least three fundamental reasons why
exports play a strategic role in economic growth and structural change.
First, exports are sources and propellers of international learning, as positioning in
international trade requires competitiveness in terms of quality, delivery time, and cost.
Exporters also serve as conduits for indirect exporters and domestic suppliers, and
generate spillover effects in local firms through management skills, workforce transfer,
and purposeful emulation. Although international learning is the principal gain from
exports, knowledge transfer is less mobile than traded goods. Pasinetti highlights that:
When firms in one country are challenged by lower priced products from abroad,
they will either learn how to cut down costs or close down . . . a widespread failure
to realise that the primary source of international gains is not mobility of goods but
mobility of knowledge . . . International learning must therefore remain, for any
country, the major and primary aim. This principle of economic policy is one of
general and unconditional validity . . . it generally comes from its coincidence with
the primary aim (learning) of any international policy.
(Pasinetti, : , ‒)²¹
Second, exports represent the most sustainable response to the balance-of-payments
constraints that can slow down economic growth and impede rapid industrialization,
which ultimately slows down the process of fundamental structural change and can
trigger macroeconomic crises. An economy that is unable to use exports to generate
²¹ Pasinetti states: ‘The real difficulty is that technological knowledge is far less mobile, or rather . . .
far less quickly mobile, than goods, so that—when all possible efforts have been made to improve
technical knowledge, and only when all such efforts have been made—a country can obtain further gains
by expansion of international trade’ (Pasinetti, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
foreign exchange is likely to be dependent on less reliable sources such as overseas aid
and external loans.²²
Third, where a country has limited capability to add value, exports can stimulate the
local economy by creating markets for surplus domestic production as well as natural
resources for which there is insufficient demand locally. This underlines the comple-
mentarity of export-led industrialization (ELI) and import-substitution industrializa-
tion (ISI) strategies. The ELI strategy, carefully synchronized with ISI, has offered an
accelerated industrialization path to twentieth-century latecomers such as Japan, the
East Asian newly industrializing economies (South Korea, Taiwan, Singapore), and
China. In many instances, ISI is the precursor to ELI (Amsden, ).²³ Stiffening
international competition and a crowded marketplace have led some observers to
predict that ELI will be a difficult strategy to pursue successfully in the twenty-first
century (UNCTAD, ).²⁴ However, this makes exports a more relevant and press-
ing source of learning than ever.
Foreign direct investment (FDI), which has shown exponential growth since the
s, is arguably associated with export growth and international learning.²⁵ How-
ever, the long-term contribution to the host economy is neither automatic nor
inherent in FDI. Akyüz (: ‒) asserts that ‘the contribution of FDI to
balance of payments and external financial stability, and growth and industrialization
is highly contentious . . . none of these are intrinsic qualities of FDI. Rather policy in
host countries plays a key role in determining the impacts of FDI in these areas.’ It is
worth noting first, that countries like South Korea have placed little reliance on FDI,
and second, that new research shows that a huge share of FDI is really ‘phantom’,
being merely transfers of profits across countries but within firms.
With a deliberate and effective industrial policy in the host economy, FDI can serve
as a source of international learning and may have significant spillover effects (techno-
logical, management skills, and market capability), especially at earlier stages of
industrialization, and these may be more important for economic catch-up than
FDI’s contribution to capital formation and balance of payments (Lee, a;
Amsden, ; Akyüz, ). However, maximizing the benefits from FDI requires
²² Thirlwall (: ) highlights that the constraint on balance of payments is the prime constraint
for sustained growth in an open economy. The balance of payments constrained growth model is ‘the
proposition that no country can grow faster than that rate consistent with balance of payments
equilibrium on current account, unless it can finance ever-growing deficits, which in general it cannot.
There is a limit to the deficit/GDP ratio, and international debt/GDP ratio, beyond which financial
markets get nervous.’
²³ Reinert states that import substitution has preceded exports in England (see Chapters and ).
²⁴ See UNCTAD (: ‒).
²⁵ Hymer (), in his pioneering work on FDI and the importance of national origin, states
that ‘direct investments are the capital movements associated with international operations and
firms’ and ‘their nationality is of the utmost importance, for it affects the way they behave, and it
affects the treatment they receive’ because of legal aspects of nationality, control of firm operations
and taxation, the conversion of profit to the home currency, and a preference for building R&D at
home (: , ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
local absorptive capacity both at the firm level and in the economy as a whole. Some
economies, such as China and Singapore, have been more effective than others in their
management of FDI.
Governments of host economies have used policy innovation and strategies to
promote and manage FDI, which reflects specific local conditions. These include
careful identification of foreign firm capabilities, targeting specific industries, careful
management of know-how transfer channels (such as joint ventures, licensing, man-
agement services), and enforcing performance requirements, incentives, and restric-
tions. Akyüz () states that competition, imitation, demonstration effects, labour
turnover, forward and backward linkages, and R&D activities are all drivers of techno-
logical spillover.
... Structural Transformation and its Implications
for Industrial Policy
Perspectives on structural transformation have fundamental implications for the
design and practice of industrial policy in three key areas. First, structural transform-
ation reinforces the purpose of industrial policy and the strategic importance of export-
led industrialization not only for small economies with a limited domestic market but
also for those that enjoy a large domestic market. With manufacturing-led industrial-
ization and exports, critical drivers of sustained growth and economic transformation,
productive investment, industrial deepening, and upgrading within specific industries
and across industrial sectors become critical.
Second, a sectoral approach is essential for targeting industrial sectors and economic
activities (products, production processes, technology, linkages) as foundations of
industrial policy. Individual economic and industrial activities have different charac-
teristics and growth dynamics. It is important to ensure that industrial sectors and
activities are prioritized based on three characteristics: technological intensity and the
scope for technological learning; the dynamics of linkage effects (such as forward and
backward linkages); and demand elasticity.
Third, supporting and nurturing industrial sectors requires appropriately aligned
instruments that promote the move towards high-productivity activities and highly
productive investments. Matching incentives with performance (Amsden () calls
it a ‘reciprocal monitoring system’) is critical for industrial policy and exports are
perfectly positioned to apply pressure for learning. Hobday (: ) highlights that
‘exports, whether with TNCs or from local firms, acted as a focusing device for
technological learning and investment’. Understanding the structure of the industry
is critical for designing industrial policy instruments that can adapt to the changing
industrial structure. Firms can promote international learning as well as exploit
increasing economies of scale and scope by implementing policies that both support
big businesses and foster start-ups. As Hirschman () argues, industrial policy
expedites structural change by anticipating developments and patterns, by removing
binding constraints, and by championing emerging and new activities.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. The Infant Industry Theory
The three pillars shaping the development and practice of industrial policy are,
arguably, the theory of infant industry, the comparative advantage perspective, and
the concept of dynamic and interdependent linkage effects (List, ; Hamilton, ;
Hirschman, ; Andreoni and Chang, ). The aim of protecting infant industries
is to provide time for the learning and accumulation of the experience that will enable
them to reach international levels of competitiveness (Pasinetti, : ). The theory
of infant industry originates in the classical political economy of the eighteenth century
and the pioneering work of List and Hamilton. Alexander Hamilton (‒), the
first secretary of the US Treasury, was the architect of US industrial policy who wrote a
famous ‘Report on Manufacturers’ in .²⁶ In his comprehensive four-volume
National System, Friedrich List (‒), a political economist and forefather of
the German historical school of economics, set out an industrial policy that focused on
national systems of production capacity, protection of domestic industry, and innov-
ation. The key perspectives in these classical works refute David Ricardo’s notions of free
trade and comparative advantage. List (: ) showed that England rose to a leading
industrial and military power by adhering to three strategies: ‘First, to prefer constantly
the importation of productive power to that of commodities; second, to maintain and
carefully protect the development of productive power; third, to import only raw
materials and agricultural products, and to export only manufactured articles.’²⁷
The central arguments relating to infant industry theory can be summarized as follows:
a) Manufacturing as the key to wealth creation and building economic and military
might. The analysis was based on the importance of economic diversification,
modernization, and economic returns. Hamilton based his argument on full
employment and labour productivity, increased demand and domestic supply
of industrial products, and access to a secure domestic market.
b) The notion that nations should develop national production systems rather than
international or sub-national economies and should focus on production cap-
acity in preference to exchanges and trade.
c) The importance of selecting sectors with higher value addition and knowledge
intensity, attracting talent, and providing incentives to support selected sectors.
d) The necessity of protecting domestic industry until it is able to compete locally
and then with advanced economies, the superiority of domestic manufacturing
over the import of industrial goods, and the export of manufactured goods as a
true indicator of economic power.
²⁶ See also Goodrich () and Cohen and DeLong ().
²⁷ Oqubay (: ) highlights that ‘the theory of infant industry is based on the assumption that the
manufacturing sector should play the key role in the economy, and that its promotion requires jumping
ahead of comparative advantage, thus necessitating protection of infant industries, the use of industrial
policies, and an indispensable role for the state’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Two centuries later, the infant industry hypothesis remains part of the debate
around industrial policy (Chang, ). This notion is related to the issue of compara-
tive advantage and its strategic implications for industrial policy.²⁸ Historical and
empirical evidence shows there are countries that have achieved significant progress
in climbing the development ladder by building competitive advantage to sustain
catch-up and structural transformation without relying on their latent competitive
advantage (Chang, ). This does not imply deviating from the external and internal
environment to follow an irrational and unrealistic path.
A plausible view is that conforming with and defying comparative advantages are not
mutually exclusive, often occurring under the same national strategy but across different
sectors and at different stages. Schwartz () argues that advanced economies and
newly industrializing economies of the late twentieth century had to rely on both the
Ricardian strategy of using latent comparative advantage and the Kaldorian strategy of
creating new comparative advantage.²⁹ Oqubay (: ; emphasis added) highlights:
An active industrial policy, while initially dependent on and overlapping with a
Ricardian strategy (relying on comparative advantage in agricultural exports and
low-value light manufacturing), will eventually shift its focus to a more Kaldorian
strategy. A Ricardian strategy on its own can neither bring structural change to the
economy nor achieve catch-up. Ultimately, it is the Kaldorian strategy (which
partly ignores factor disadvantages and advantages, focuses on manufacturing
exports, and is investment-driven) that can address the challenges of catch up in
terms of investment concentration, learning, and innovation . . . This is what climb-
ing the ladder means.
While it is necessary to fully exploit revealed latent comparative advantage, what matters
most for economic catch-up and deepening of structural transformation is the capacity
to create and shape comparative advantages. In a nutshell, structural transformation
should underpin industrial policy. Nonetheless, this will be incomplete without an
equivalent perspective on technological learning and catch-up which has become more
marked in the twentieth century—the focus of the discussion in section ..
. E T I
P: T L
C-
..................................................................................................................................
Thinking on industrial policy evolved profoundly in the twentieth century, with an
increasing number of latecomers recording accelerated industrialization and developing
²⁸ This is exemplified in Lin and Chang’s debate on the strategy of conformity (comparative advantage
defying following, CAF) or defying comparative advantage defying (CAD) (Lin and Chang, ).
²⁹ As coined by Schwartz ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
technological capabilities at an unprecedented rate (see Nayyar, , , among
others). Key elements in this evolution are the rapidly changing global economic
landscape, the unmatched pace and shift of technological advancements, and how
firms and countries compete. This has encouraged empirical research and theoretical
work on the uneven development of capitalism, the diversity of development paths and
economic catch-up, the process of technological learning, and the centrality of product-
ive and technological capabilities. The proliferation of debate has underpinned an
evolving view of industrial policy as the right strategy to ensure technological learning
and economic catch-up, which is the focus of this section. The rarity of middle-income
countries escaping from the ‘middle-income trap’ has become an additional impetus to
the study of the nexus between industrial policy and technological learning and catch-up.
.. Technical Change and Economic Development
An evolutionary economics or Schumpeterian evolutionary tradition offers an import-
ant view of industrial policy as well as new concepts. Evolutionary theory builds on the
centrality of technical change or technological change as the driver of capitalism and
stresses the importance of learning and capability development as a key driver of
competitiveness of firms (Dosi and Nelson, ; Nelson and Winter, ; Mowery
and Rosenberg, ; Rosenberg, ). Classical political economy (Smith, ;
Babbage, ; List, ) emphasizes the importance of technological and technical
change and domestic technological capability for building an innovation-driven know-
ledge economy.³⁰
Although technological advancement accelerated in the early days of the first
industrial revolution in England, it had already been dependent on science for many
centuries, for example in China. Kuznets (: ) states that ‘the epochal innovation
that distinguished the modern economic epoch is the intended application of science to
problems of economic production’. According to Kaldor, innovation implies the
introduction of new knowledge in which the eagerness to absorb technological change
and the preparedness to invest in firms are central. Kaldor states that ‘the most
important characteristic of capitalist business enterprise is the continuous change
and improvement in the methods of production’ (Kaldor, : ). Pasinetti (:
) underscores the centrality of technical progress: ‘it is only by absorbing technical
knowledge that the poor countries will be able to permanently increase their wealth.’
Technical change is the process by which new technologies are being constantly
introduced into economic activities by incremental improvements and innovation. It
usually comes in various forms and is path dependent. Rosenberg (: ) highlights
that ‘the growth of technological knowledge is fundamental to the improvement of
³⁰ Marx ([] : ) highlights that ‘modern industry never looks upon and treats the existing
form of a process as final’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
economic performance . . . technological changes are often “path dependent” in the
sense that their form or direction tends to be influenced strongly by the particular
sequence of earlier events, out of which a new technology has emerged’. The duality of
diversity and path dependence is a process imbued with uncertainty.³¹ Kaldor (:
) highlights that technological progress and productivity increase, not in isolation,
but alongside the growth of population and accumulation of capital.
In his pioneering work on creative destruction, Schumpeter ([] , ) held
that industrial capitalism constantly rejuvenates itself in a cycle of technical and
economic progress involving heroic entrepreneurs or inventors, imitation by other
firms, an investment boom, an ensuing depression, and new ‘innovating’ investment.³²
Innovation is both incremental and radical, and includes products, processes, markets,
and organizational set-ups that are new to the country or the firm (OECD, ).³³
Thus, innovation is defined as a process by which firms master and implement the
design and production of goods and services that are new to them, irrespective of
whether they are new to their competitors, their countries, or the world (see, for
example, Mytelka and Tesfachew, ; Mytelka, ).
Dosi and Nelson (), among others, highlight that tacit knowledge plays an
important role in know-how transfer, technology diffusion, and innovation, and is
nested in organizations; and also that innovation is not a technical exercise that can be
detached from political economy.³⁴ They further emphasize that the focus on capability
development is more valuable than financial incentives. Latecomer economies may
focus on learning by doing or imitation, incremental innovations, and ultimately new
innovations that require domestic R&D capability and the development of science and
technology infrastructure (Amsden, ; Kim, ; Kim and Nelson, ). Learning
³¹ Veblen (: ) argues that ‘the prime mover among these factors [population growth, military
power, industrial efficiency] of the nation’s unfolding power has been its increased industrial efficiency
rather than either the other two factors’. Kim and Nelson (: ) state that ‘technology advance is the
key driving force of economic growth’ and ‘technological advance accounted for the lion’s share of
growth in worker productivity’.
³² Solow highlights the distinction between incremental and true innovations: ‘Innovation is the
discretion or outcome of researches that bring those development changes to the nature of the product
or the nature of the production process in existing industries, or may even lead to the creation of
recognizably new industries. The less obvious process is usually described as “continuous improvement”
of products and processes. It consists of an ongoing series of minor improvements in the design and
manufacture of standard products. It leads to advances in customers’ satisfaction, in quality, durability,
and reliability, and to continuing reductions in the cost of production.’
³³ Paus (: ) states that ‘innovation is primarily the result of the incorporation of knowledge
developed elsewhere: through the use of licenses, the incorporation of new capital goods, and spillovers
from foreign investment in the developing country, if there is domestic absorptive capacity. The next
step is an increase in the development of domestic innovation, where firms generate new processes and
products that make them internationally competitive.’ The Oslo Manual (OECD, ) states that
innovation ‘goes far beyond the confines of research labs to users, suppliers and consumers
everywhere—in government, business and non-profit organisations, across borders, across sectors,
and across institutions’ and proposes four types of innovation: product innovation, process innovation,
marketing innovation, and organizational innovation.
³⁴ In contrast to articulated or explicit knowledge, tacit knowledge is neither codified nor explained.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and technological catch-up, and building domestic capability, which also includes
growing investment in R&D, were all essential components of successful cases of
economic catch-up (Cimoli, Dosi, and Stiglitz, ; Lee, a).
Absorptive capacity is an important component of innovation and technological
capability. Cohen and Levinthal () define absorptive capacity as the ability to
identify, assimilate, and apply knowledge; they make a distinction between learning
capability and problem-solving capability. They also emphasize the importance of
multi-functional teams, diversity of knowledge and experience within firms, and
openness to the external environment of buyers, suppliers, and research centres.
Contributions on innovation systems by Nelson and Winter () and Kim and
Nelson () focus on national innovation systems as a proxy for building absorptive
capacity, including the education system, the R&D system, government funding of
research, universities, research centres, government agencies, and interactions between
these, also captured by Best’s () production-centric ‘capability triad’, namely
production systems, business governance, skill formation, and their interconnected-
ness. Chung and Lee () show the origins of absorptive capacity in latecomer
economies such as South Korea. Breschi and Malerba () have emphasized the
importance of addressing innovation systems at both national and sectoral levels.
The market failure paradigm (derived from the neoclassical view of innovation and
capability development) is based on information asymmetry and an assumption that
knowledge is freely available to all firms, and ignores the dimension of ‘issues of
utilization’ (Rosenberg, ; Mowery and Rosenberg, ).³⁵ The role of the state
is confined to facilitation and financial rewards and incentives for innovation. This
viewpoint ignores the inescapable truth that firms cannot capture all the benefits and
risks of financing innovations, or the lags intrinsic in adopting technology. It views
innovation as an exogenous factor, ignoring its multiple sources, complexity, path
dependency, and unclear boundaries. It views innovation as dissociated from issues of
practical application. Finally, it focuses on incentives rather than firms’ capabilities or
innovation systems at both sectoral and national levels.³⁶
.. Theoretical Underpinning of Catch-up
and Late Development
Unevenness among economies and regions is an essential characteristic of capitalism
and industrialization (Gerschenkron, ; Chang, ; Schwartz, ).³⁷ Economic
³⁵ Market fundamentalism advocates a laissez-faire approach and intellectual property protection
(reflecting property rights and rewarding innovators), rejecting the role of the state.
³⁶ See Mowery and Rosenberg (), Lee (a), Dosi and Nelson ().
³⁷ It is useful to note that the notion of catch-up and late development is a notion which is old and
neoclassical economists may well agree with some of this because of the assumption of diminishing
returns and market-facilitated convergence.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
history shows that countries do not have uniform or linear development paths and
there is no standard prescription. Late latecomers are compelled to rely on their
abundant ‘backward’ resources and pursue a strategy that induces disequilibrium and
imbalances (Hirschman, ). Gerschenkron’s (: ) pioneering work on catch-
up and late development shows that latecomers, despite the disadvantage of being
followers, can exploit the advantages of backwardness or late development: ‘the more
backward countries are, the great spurt of industrial development occurred despite the
lack of these prerequisites . . . [and] the higher the degree of backwardness, the more
discontinuous the development is likely to be.’ This hypothesis confirms that catch-up
requires a deliberate strategy and policy, and active state intervention. Forerunners
provide compelling learning for latecomers, and contact with forerunners is an essen-
tial condition for late development.
Lee and Malerba () define economic catch-up as narrowing the distance between
latecomers and frontrunners or leaders. Abramovitz, writing on catch-up and the
advantages of backwardness, reviews three key aspects of the catch-up hypothesis:
) Its prime concern is a single aspect of economic relations among countries:
technological borrowing by followers, meaning the level of technology embodied
in a country’s capital stock (Abramovitz, : ).
) Being a latecomer carries with it the potential for faster productivity gains: ‘The
catch-up hypothesis asserts that being backward in level of productivity carries a
potential for rapid advance . . . Followers tend to catch up faster if they are
initially more backward . . . Backwardness carries an opportunity for moderniza-
tion in disembodied as well as embodied technology.’ Abramovitz further states:
‘those who are behind, however, have the potential to make a larger leap. New
capital can embody the frontier of knowledge, but the capital it replaced was
technologically superannuated’ (Abramovitz, : ).
) However, as the distance between latecomer and frontrunner narrows, product-
ivity gains slow down. Abramovitz (: , ‒) highlights: ‘a follower’s
potential for growth weakens as its productivity level converges toward that of
the leader’; and ‘countries in the course of catching up, however, exploit the
possibility of advance scale dependent technologies by import substitution and
expansion of exports’.
Learning has become the hallmark of economic catch-up and late development.
Amsden () states that ‘diversity notwithstanding, all late industrializers have in
common industrialization on the basis of learning, which has conditioned how they
have behaved’ (Amsden, ). One stream of research has concentrated on both
catch-up strategies and the development of productive and technological capabilities,
based on empirical evidence from the late industrializers of the late twentieth century
(Amsden, ; Best, ; Lee, , a). Lee’s work on East Asian, especially
Korean, economic catch-up shows that it is not automatic and cannot be accomplished
merely by imitating forerunners, because forerunners are also constantly advancing
and developing higher capabilities. Hence, a different catch-up path is required.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Different strategies are used for different stages of catch-up. Focus on imitation,
learning from forerunners and insertion into the global value chain are essential in
early-stage industrialization, but this alone will not enable sustained catch-up. Accord-
ing to Lee (b), latecomers face catch-up paradoxes: each latecomer has to be
different, the pace of catch-up has to be faster and requires detour strategies, while
leapfrogging requires exceptional innovation and development of R&D capabilities. In
the early phases, relying on foreign firms, insertion into global value chains, and
excelling in learning by doing and imitation is essential, together with growing
investment in human capital, innovation capabilities, and the development of big
businesses. In the second stage, where the focus is on adaptive imitation, the latecomer
needs to work closely with frontrunner technology, even though this poses a significant
threat. Strictly enforced intellectual property and other protections create new difficul-
ties for latecomers seeking to move into innovation leadership. According to Lee
(b), latecomers need to focus on leapfrogging in short-cycle industries, gradually
moving to long-cycle technologies, and building local value chains into global ones.
Recent research has shown that catch-up from middle-income to high-income levels
rarely occurs, and a new term, ‘middle-income trap’ (MIT) has been coined. However,
while it is true that more and more countries are remaining trapped at middle-income
level, the evidence used to explain the notion of the middle-income trap is based on a
partial premise.³⁸ The explanation focuses on conditions, rather than dynamic factors
such as productive and technological capabilities, which are key drivers of productivity
growth.³⁹ A more plausible explanation would be low investment in technological and
innovation capability, which becomes more difficult as productivity converges to that
of the frontrunners (see Abramovitz, , ; Paus, ; Lee, b). Paus (:
) highlights that ‘Productive transformation from commodity production to higher
value added, more knowledge-intensive activities is at the heart of the transition from a
middle-income to a high-income economy . . . Productivity growth is the distinguishing
characteristic between upper middle-income countries which transitioned to high-
income countries and those that did not.’ Similarly, according to Lin, ‘the middle-
income trap is a result of a middle-income country’s failure to grow labour productivity
through technological innovation and industrial upgrading’ (Lin, ). For UNCTAD,
catch-up is dependent on the nature of the industrialization path or trajectory followed,
³⁸ According to the World Bank (), only thirteen of the middle-income economies in
have escaped the middle-income trap. The methodology and data are flawed as the classification is based
on GNI per capita; a static indicator based on a World Bank classification that was introduced in the late
s for purposes other than analysing economic catch-up. It can be argued that this threshold for
high-income economy is lower than present times warrant (i.e. about US$,). See also Lin and
Treichel () and Lin ().
³⁹ The thirteen economies are Equatorial Guinea, Greece, Hong Kong SAR (China), Ireland, Israel,
Japan, Mauritius, Portugal, Puerto Rico, the Republic of Korea, Singapore, Spain, and Taiwan, China.
Some of these countries have low technological capability and their economy and exports are not based
on diversification and technological intensity (for example, exports of crude oil account for per cent
of Equatorial Guinea’s economy).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
which may lead to successful catch-up or getting caught in the low- or middle-level
development trap. UNCTAD classifies these stages as catch-up industrialization, stalled
industrialization, and premature de-industrialization (UNCTAD, ).⁴⁰
.. Technological Learning and Industrial Policy
... Technological Learning
From a catch-up perspective, learning is central in late development. It has two
dimensions: technological learning in firms and policy learning by governments.⁴¹
Learning is the prime source of learning and learning is embedded in learning by
doing (Oqubay and Ohno, ). Governments and firms learn from other firms or
other governments, but also and perhaps more importantly, from themselves. Emula-
tion involves learning from others in the form of copying or imitation, adaptive
innovation, or radical or new innovations. Learning requires an open system, inter-
firm interactions, contact with foreign knowledge, the compulsion and readiness to
learn, while depth of learning depends on absorptive capacity. The experience of the
East Asian countries shows that they were not only pragmatic, but also strategic in their
choices of policies and sectors, and in designing their industrial and international trade
policies. Hence, pragmatism is at the heart of industrial policy as policy decisions have
to be based on what works or does not, and no policy action is immune from the test of
practice. Pragmatism rejects dogmatism or romanticism: it adopts what works and
serves the long-term vision and strategy, while constantly adapting to international and
domestic reality.
The sources and dynamics of learning are diverse and constantly changing. Success-
ful economies such as the East Asian newly industrialized economies have perfected
⁴⁰ See Tregenna (, ) on manufacturing properties and premature de-industrialization. See
also UNCTAD (). According to UNCTAD (: ):
Catch-up industrialization, with robust growth of production, investment, income, and
technological and trade linkages built around a large and increasingly diversified manufac-
turing sector gives rise to a strong catch-up growth dynamic resulting in narrowing the
productivity gap with lead economies. Stalled industrialization is characterized by stagnant
shares of industrial output and employment, and sporadic growth episodes that generate
linkages that are not large or strong enough for industrial growth to withstand shock and
setbacks resulting in continued vulnerability. In general, such a trajectory results in a
widening productivity gap with lead economies. Finally, there is premature deindustrializa-
tion in which the shares of industrial output and employment fall prematurely, at levels of per
capita income much lower than those at which developed economies started to deindustrial-
ize. This is accompanied by delinking along several dimensions and a sharp drop in relative
productivity levels.
⁴¹ Arrow (: ) states that learning is ‘the acquisition of knowledge . . . learning is the product of
experience. Learning can only take place through the attempt to solve a problem and therefore only takes
place during activity.’ Moreover, Arrow emphasizes that a steadily evolving situation acts as stimulus to
generate growing productivity.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
their trials and errors, and have strictly adhered to a pragmatic national vision and
development strategy.⁴² The driver of technological learning and industrial policy is the
synergy between industrialization or productive capacity, exports or market focus, and
innovation. Exports provide the broader market opportunity to expand economies of
scale and scope, and exploit productivity gains. In addition to their strategic role as a
key driver of growth, exports remain a prime disciplining device for firms, promoting
international learning, energizing technological learning and innovation, and attesting
to their international competitiveness (Amsden, , ; Wade, ).⁴³
Advances in the technological and knowledge frontier are intimately tied to accu-
mulation of capital. Hirschman highlights that ‘the complementary effect of invest-
ment is the essential mechanism by which new energies are channelled toward the
development process . . . where one disequilibrium calls forth the development mover
[which] in turn leads to a similar equilibrium and so on ad infinitum’ (: ).
This is in line with the proposition of technological learning as the conduit of
structural change and driver of economic catch-up, the foundations of the
production-centric paradigm explored by leading thinkers on capability development
(Best, , ; Lee, a). Michael Best’s How Growth Really Happens ()
describes the ‘capability triad’ of production capability, skills, and governance in firms.
This perspective integrates the catch-up drive, the active role of the state as organizer of
production, the dynamism of firms, and shifting production systems.
The development of technological and innovation capabilities underpins the sym-
biotic and dynamic relationship between technological learning, industrial policy, and
catch-up. A coherent and strategic approach to R&D, technology commercialization,
support mechanisms, education, and skills targets key dynamic industries (and firms)
and new technologies, rewarding learning and providing consistent and comprehen-
sive support.
... Innovation Systems and Infrastructure
The structure of innovation systems, and the science and technology infrastructure, are
foundations for developing innovation and technological capability. The notion of
innovation systems was popularized in the s by Nelson and Winter (),
Mowery and Rosenburg (), and Kim and Nelson (), among others. The
innovation system framework provides a holistic view of the conditions necessary to
create an environment that supports innovative activities by enterprises. In this respect,
it describes a nation’s capabilities, encompassing firms, industries, institutional net-
works, and the interaction among the key players.⁴⁴ National innovation systems
(NISs) have become increasingly open with regard to knowledge flows, including
⁴² See also Mathews (b).
⁴³ Hobday (: ) confirms that in East Asia, ‘exports, whether within TNCs or from local firms,
acted as a focusing device for technological learning and investment’.
⁴⁴ See also Hall and Soskice () on various national innovation systems that reflect the varieties of
capitalism.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
technologies and know-how acquired from abroad through capital and intermediate
goods, purchases of patents and licences, technical alliances between firms in different
countries, trade in services such as technical consultancies, FDI, and so on. This has
enhanced the abilities of local firms to innovate through, for example, learning,
linkages, and demonstration effects. With the influence of external actors, the NIS
framework is not as closed or ‘rigid’ as it was once perceived. Cohen and Levinthal
(: ) highlight that ‘the ability to exploit external knowledge is a critical
component of innovative capabilities’.⁴⁵
... Implications for Technological Learning and Industrial Policy
This premise has important implications for technological learning and industrial
policy.
First, while national innovation systems focus on country or economy level, the NIS
may be augmented by sectoral innovation systems as key shifts occur in industries.
Malerba states that a wider view of industrial sectors that includes related support
industries is critical for innovation and technological capabilities, and for ecosystems
and cluster dynamics. Breschi and Malerba (: ) suggest ‘some key drivers of
agglomeration are sector-specific, leading to distinct patterns of concentration’. This
view has implications for the life cycle of industrial hubs, with distinct drivers of
processes during the initiation of industrial hubs and their maintenance.
Second, technological learning is associated with the evolving institutional structures
of research systems. With the increasing role of big businesses in the twentieth and
twenty-first centuries in the United States, Western Europe, Japan, the East Asian
economies and China, national economies have single-mindedly pursued the develop-
ment of national champions, for example, in South Korea and China (Lee, a;
Nolan, ).⁴⁶ While the role of big business is critical for the exploitation of the
global market, its increasing investment in R&D is also important and should be
matched with support of new technology start-ups and spin-outs to continuously
reinvigorate innovation.⁴⁷ It is through new start-ups, especially in the technology
sphere, that the economy continuously renews and upgrades.
⁴⁵ Cohen and Levinthal associate absorptive capacity as like ‘creative capacity’ in the field of
psychology. They emphasize the critical role of learning intensity, diverse background, knowledge
diversity, and openness to external environment are critical for facilitating innovation capability. ‘Learning
is cumulative, and learning performance is greatest when the object of learning is related to what is already
known . . . Learning capabilities involve the development of the capacity to assimilate existing knowledge,
while problem-solving skills represent a capacity to create new knowledge’ (: ).
⁴⁶ See Chandler (). See also Chapters and .
⁴⁷ A policy choice of industrial policy is related to the focus on large firms in contrast to small and
medium firms. Large firms are important for developing technological capability and engaging in
international markets, while small and medium firms play an indispensable role in employment creation
and in production networks with large firms. Germany and Japan are examples where such production
networks are widely used and have contributed to international competitiveness.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Third, collaboration among the key economic players (or actors) is critical for
building and developing a dynamic innovation system. The roles of industrial firms,
the academic community, and government-funded independent research centres (as
well as some private ones), as well as the orientation and focus of higher education and
industry‒university linkages, are critical elements of the science and technology infra-
structure. The development of innovation and technological capabilities should not be
separated from the development of production capacity and market promotion.
Although policy innovations vary across countries and times, they enhance coordin-
ation among lead agencies and strengthen strategic development.
Fourth, the ‘middle-income trap’ can be associated with inadequate investment in
new innovations and technologies. Resource allocation is a proxy to measure the focus
on innovation and should be reviewed with related issues, such as the contribution of
firms, universities, and research centres.
Finally, the distinction between innovative activities and the nature of innovation
has significant implications for policy approaches.⁴⁸ At early stages of industrialization,
copying, imitation, FDI, and global value chains may be used as prime sources of
learning. However, economies increasingly need to develop their own capabilities, and
add incremental innovation by moving to ‘adaptive imitation’ (a term coined by Linsu
Kim, meaning internalization of knowledge and technology). Ultimately economies
have to focus on new industries and technologies (‘leapfrogging’, as Keun Lee terms it)
primarily by building on growing investment in innovation and production capability.
The mechanisms and instruments vary depending on the context (industry, tech-
nology, external environment) and require thoroughly thought-out policy design. For
instance, reverse engineering, licensing, insertion into GVCs, attraction of FDI, and
sub-contracting are common during the early and middle stages of industrialization.
Technological institutes, the targeted circulation of talent, and overseas training and
education apply in the middle stages of industrialization. Ultimately, a focus on
domestic capability and the promotion of big business, leapfrogging to new industries
and technologies with a focus on short-cycle industries, massive investment in R&D,
and the acquisition of foreign firms are critical for building an innovation-driven
economy.⁴⁹ In the electronics and semiconductor industries, local firms have been
used as original equipment manufacturer (OEM) during initial industrialization,
upgrading to own design and manufacturer (ODM), and subsequently own brand
manufacturer (OBM). This approach will, however, differ across sectors.⁵⁰
A commitment to structural transformation and developing technological capability
requires the support and intervention of the state, a creative state–market interaction,
and has to be embedded in political economy. This is discussed in section ..
⁴⁸ See Atkinson and Ezel ().
⁴⁹ For a thorough review on economic catch-up and leapfrogging strategies, see The Art of Economic
Catch-up (Lee, b).
⁵⁰ See Amsden and Chu () on Taiwan’s industrial upgrading.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. T S P
I P
..................................................................................................................................
.. The Dynamics of the State‒Market Mechanism
The existence of self-regulating markets is a common myth; in reality the internal
workings and consequences of capitalism cannot function without state intervention.
Polanyi (: xxvi) highlights that ‘the idea of a self-adjusting market implied a stark
utopia. Such an institution could not exist for any length of time without annihilating
the human and natural substance of society . . . Real market societies need the state to
play an active role in managing markets, and that role requires political decision
making; it cannot be reduced to some kind of technical or administrative function.’
This perspective has significant implication for the nature of industrial policy
(Mazzucato, ; Wade, ; Amsden, ).
State‒market forces are in constant tension in various sectors, economic activities,
and at different times, and a perfect match is always difficult to achieve. There are three
variants on the state‒market mechanism relationship. The first is market fundamen-
talism which rejects government intervention as harmful. It advocates that govern-
ments should restrain themselves from intervening in the functioning of the market
with the rational reallocation of resources. The neo-liberal Washington Consensus,
orchestrated by IFIs and mainstream scholars, typified this laissez-faire (‘leave it to
the market’) view, advocating the dismantling of state apparatus, privatization, and the
opening up of markets. This view idolizes the free-market economy and rejects the
need for industrial policy.
A second variant is the market failure view, which argues that market mechan-
isms and the market economy do not function optimally in all times and conditions.
This view accepts that the government should intervene selectively to stabilize the
macro economy, for example, where there is market failure, such as infrastructure
development, or development of human capital. The point of market failure policy
recommendations is that they are designed to replicate how a perfectly competitive
market would look. The state is confined to a ‘facilitative’ role, its interventions
‘qualified’, and is constrained to follow latent comparative advantage as this does
not imply strategic intervention. This view has gained widespread influence in
mainstream economics and has become dominant within neoclassical economics.
A third variant is the state activism perspective that believes market mechanisms are
institutions that need to be nurtured, and advocates that the state should intervene to
enhance structural transformation and technological catch-up, playing a leading role as
organizer of production, with the aim of promoting a dynamic private sector (Best,
; Lee and Malerba, ; Wade, ; Amsden, ). This view recognizes that
capitalism involves economic players, primarily the state, firms, labour, families, and
non-government players, and sees capitalism as a mixed economy where markets and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
non-market forces function. The activist state intervenes beyond market failure to
shape and create market forces, with strategic interventions to develop competitive
advantage, and works hand in hand with the private sector. Mazzucato (: )
highlights that ‘When not taking a leading role, the State becomes a poor imitator of
private-sector behaviours, rather than a real alternative. It is a key partner of the private
sector—and often a more daring one, willing to take risks that business won’t.’ The
purpose and modality of interventions are crucial, as Johnson (: ) highlights:
‘the issue is not one of state intervention in the economy . . . all states intervene in their
economies for various reasons . . . the question is how the government intervenes and
for what purpose’.
The state activism view is supported by both economic history and deductive
observations. Such governments are known variously as ‘activist’, ‘entrepreneurial’,
and ‘developmental’ states. The term ‘developmental’ tends to be used as a neat and
rigid characterization of a government. The purpose of a developmental state, however,
changes during different stages of industrialization and economic catch-up, and across
sectors. Existing literature on the developmental state takes two views: the static and
the dynamic. Some scholarly works have seen the role of industrial policies as
dependent on the quality of bureaucracy to the extent of being dissociated from
politics. Another variant views developmental states as ‘pure prototypes’ detached
from the international and national context where they function. A more dynamic
perspective is to link developmental states with the deliberate pursuit of developmental
goals, a grand vision interacting with society, in which the nature of the state constantly
evolves on the predatory‒developmental state continuum (Chang, ; Oqubay, ;
Thurbon and Weiss, ).⁵¹ It should be noted that there is a broader issue here. Not
just that the very idea of a developmental state is usually ahistorical, but that industrial
policy does not exist within an institutional and political vacuum. The policies that
have ‘worked’ in one place may fail in other places, and this may be because of the
political and institutional context (Haggard, ; Thurbon and Weiss, ).
Schwartz () argues for the essential role of the state in latecomers or late-
latecomers.
.. Politics and Political Economy
While it is widely recognized that politics and political economy matters for economic
policies, the various schools have divergent views. The Marxist view revolves around
class struggle and exploitation, while market-friendly views (based on methodological
individualism and rational choice theory) focus on profit maximization, ensuring
market property rights and reducing transaction costs, and on abstract notions of
good governance and institutions. A plausible analytical framework is offered in the
⁵¹ See also Evans (), Woo-Cummings (), and Wade ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
developmental state literature (which focuses on ideological commitment and the
nature of the ruling elite) and the political settlement framework, sharing common
features such as the balance of power among elites, the features of institutions, and
prevailing ideas.⁵²
In the important, broader political and political economy dimension of industrial
policy, power relations, and political variables shape the nature and outcomes of
policies (Hall, ). Industrial policy shapes market structure and the nature and
direction of private-sector growth. If industrial policy is focused on the transformation
of production and positioning in international trade, it is more likely that private-
sector manufacturing, exports, and technological advancement will grow and have
greater political influence, which inversely affects economic policies. The development
of production capabilities may slow down in situations where industrial policy is
oriented towards extractive industries or the finance sector. The politics and political
economy of industrial policy is a key variable shaping its design, execution, and
outcomes at both sectoral and national level. Hence, understanding the internal and
external political constraints is essential for the success of industrial policies.
All economic policies affect the existing political economy, and industrial policy-
making is in its turn shaped by politics. Hall (: i, ) highlights that ‘economic
policymaking must be understood as an essentially political process . . . a process
deeply conditioned by broader struggles between competing parties, ideologies, and
social classes’. He adds that ‘economic policy is made by governments, and govern-
ments are political creatures’. Even when a consensus is less likely among key interest
groups and political forces, they at least need to accept decisions even if they can’t
shape them directly. The cohesion and historical intellectual formation and shared
experiences of the political elite have a significant bearing on the functioning of
government and the policymaking process, which has to be managed by the govern-
ment through structures coordinated along horizontal and vertical divisions of
power. An agreement among the ruling elites and key influencers is necessary to
hold and impose power to pursue industrial policy as consensus on values and grand
projects may not necessarily be achieved but it acts as a glue enabling the pursuit of
industrial policies.
.. Disciplining the Private Sector and Reciprocity
All economic policies, including industrial policy, are the outcome of power relations,
and each policy generates losers and winners (Hirschman, , ). The stark
contrast between the success of industrial policy in East Asia and weak performance
in Latin America and Africa has been associated with the political economy variable
⁵² See Khan (), Amsden (), and Gray ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and state capacity (see, e.g. Kohli, ; Chang, ; Khan and Blankenburg, ).
This is also true at the international level, where positions on environmental sustain-
ability and climate change exemplify the political constraint, power relations, and
interest groups. The constraints on policy space and the international governance
system reflect political and power relations globally.
A key aspect of the interaction of politics and political economy with industrial
policy is disciplining the private sector; the provision of productive rent or incen-
tives to shape its behaviour and promote learning is critical for the success of
industrial policies. This is a critical political economy dimension. Incentives, to be
productive, have to be carefully designed and adjusted to have a positive impact.
However, the ability of the government to apply specific types of incentives depends
on the political constraint of the state. Khan and Blankenburg (: ) highlight
that ‘managing rents for technology acquisition is not just constrained by state
capacities, but also and often primarily by political constraints that prevent specific
strategies of rent management from being implemented . . . From a policy perspec-
tive, potentially growth-enhancing rents can become growth reducing if the rent-
management capacities of the state are missing.’ Political ability has a direct and
indirect bearing on the allocation of ‘development rents’ and this differs across
sectors, different stages of development, and countries. Institutional strength, i.e.
the capacity to design and administer rents, is also another dimension that is
political. Hence, political considerations and understanding the political context of
each sector is essential.
The dynamism of economic players is a major variable that has an important impact
on policymaking. The design of incentive structures and support schemes requires an
understanding of reciprocity and the dynamics of sectors. Moreover, linking incentives
with performance helps strengthen developmentalism and productive contribution.
Inducements such as linkages and latitude for performance will also help to leverage
activities in line with the desired political-economy and development outcomes.
History and path dependency play an important role in shaping political economy
and industrial policy. Land reform in East Asia significantly changed the political
economy, making it conducive to export-led industrialization, while in Latin America
it constrained the political economy (Kay, ; Ocampo, ; see Chapter ).
Internal and external threats, diverse legacies of colonial rule, and cultural traditions
also shape the political economy (Doner, Ritchie, and Slater, ).
.. Conflict and Political Stability
Politics and political economy are significant because policies (like all economic policies)
have conflicting distributional effects across sectors and regions (Hirschman, ). The
rules of capitalism include conflict, and the outcomes of industrial policies produce
winners and losers. Conflicts occur with considerable frequency, in a variety of forms,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and navigating through them calls for constant compromise and bargaining, a process
which society learns to manage. Hirschman (: ‒) states:
Conflict is indeed a characteristic of pluralist market society that has come to the
fore with remarkable persistence . . . many conflicts of market economy are over the
distribution of the social product among different classes, sectors, or regions . . . all it
can aspire to accomplish is to ‘muddle through’ from one conflict to the next.
Polanyi () and Hirschman argue that economic transformation and technical
changes constantly generate new conflicts and social configurations across sectors or
regions because of newly emerging inequalities. Such conflicts may involve sectors and
regions as some decline and some rise.
From this perspective, political stability is a much more complex issue than usually
presented in ‘business climate’ literature. It could be argued that while efforts may be
made to improve business climate and with it political stability and security, it is
important to recognize the complexity and limitations of this approach. Even if
political stability is secured, a focus on productive transformation and developing
technological capability is what ultimately matters. Political stability and security, a
critical and related issue, is the minimum but insufficient condition for economic
growth and industrial policies. This is particularly important for long-term invest-
ments, productive FDI, and the attraction of talent. However, while this may be the
case in most instances, many industrial policies and periods of economic growth and
technical change have thrived amidst horrible instability and warfare.
.. Myths Surrounding Industrial Policy
Myths around industrial policy arguably reflect the underlying political and ideological
views of the role of the state in industrial policy. The most common misconception
around industrial policy equates it with merely ‘picking winners’ rather than consid-
ering its wider perspectives. Another myth is the ideologically driven dichotomy
between the role of the state and market forces. There has never been a market reality
that has not been shaped by state intervention, although the type and nature of
interventions differ. Economic history and empirical evidence point to the state’s role
in promoting industrialization and structural transformation. Industrial policy is
wrongly equated with state intervention, while the dominance of the state in a
command economy does not necessarily guarantee an activist industrial policy aiming
to build a dynamic private sector.
There is often a dichotomy between export-led and import-substitution industrial-
ization. In reality, however, they are complementary and industrial policy is not about
ISI per se, as some scholars suggest. Similarly, FDI firms are seen as an enclave focused
only on their own outcomes, while experience shows that FDI could be directed to
support the development of domestic firms. Another myth confuses instruments with
the nature of industrial policy. As this chapter has shown, a vigorous industrial policy is
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
based on structural transformation and economic catch-up perspectives, the recogni-
tion of a dynamic view that emphasizes long-termism, synergy and connectivity, and
constant adaptation to the changing external and domestic environment and the
shifting dynamics of industrial policy.
Wade () articulates clearly the reasons for the failure of neoclassical and neo-
liberal economists to design and apply industrial policies promoting structural trans-
formation and catch-up. He writes:
Neoclassical economics is a misleading guide to development policy. It thinks in
terms of curves, not step changes. And it makes no distinction between activities (or
sectors) according to their growth potential—it treats each unit of GDP as having
equal potential for future growth. Yet the governments of virtually all the successful
catch-up countries recognized that they had to nurture ‘superior’ or ‘star’ economic
activities by means of trade protection, subsidies, and regulations, buffering them
from—but not insulating them from—competitive pressures. (Wade, : )
Industrial policy is as essential for the pursuit of structural transformation and
economic catch-up in the twenty-first century as it was in earlier centuries. Economic
history and empirical evidence from advanced, emerging, and developing economies
alike illustrate this reality. Industrial policies, like all economic policies, are influenced
by experience; learning and building experiences is critical to their success. Further-
more, industrial policy is inseparable from politics and the political economy and
forms an integral part of broader economic and social transformation. Learning from
international and local experience needs to be supported by research that vigorously
seeks to build knowledge on the subject, helping to constantly adapt industrial policy
based on both lessons and the changing external environment and domestic reality. It
is hoped that this Handbook will motivate researchers to undertake new studies to help
policymakers and practitioners produce creative policies.
. T P I P:
D, A, P
..................................................................................................................................
A broad and comprehensive understanding of industrial policy has to be tied to
structural transformation and to notions such as protection of infant industry and
the state‒market mechanism. Industrial policies, far from being empty declarations and
plans, underlying purposes and patterns, consist variously of structural change,
employment, nationalism, or defence. Most industrial policies are designed and exe-
cuted at a national level, though there are also regional levels (such as the European
Union), and sub-national or provincial levels.⁵³ Instruments of industrial policy may
⁵³ See Chapters and .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
vary and can involve mid- to long-term plans (five years and beyond), target setting
and performance reviews, associated legislation (proclamations, bills, regulations),
specific policies, executive decisions and directives, support institutions, and the
organization of government‒private sector dialogue.
This section reviews the principles and features of successful industrial policies, with
structural transformation and technological catch-up as key frameworks. It also high-
lights the linkage dynamics, ecosystems, and the politics and principles of industrial
policy that are needed to produce stronger dynamism, coherence, synergy, and
complementarity.
.. Linkage Dynamics and Interdependence
The pioneering work on linkage effects as a prime tool of industrialization was by
Hirschman. Hirschman ([: ] ) states that linkage is a conceptual tool that
assists in ‘detecting how one thing [activity] leads or fails to lead to another’, and is ‘a
more or less compelling sequence of investment decisions occurring in the course of
industrialization and, more generally, of economic development’ (Hirschman, [:
] ). The linkage effect is relevant for the selection and support of priority sectors
likely to have the strongest or most lasting effect in accelerating structural change.
According to Oqubay, ‘understanding the industrial structure of different sectors, and
leveraging latitudes for performance are valuable in industrial policymaking. Hirschman’s
linkage concept (the favouring of industries with strong linkages . . . ) is essential in
bringing dynamics and impetus to new activities and increasing returns and in creating
economic space in developing economies’ (Oqubay, : ; own emphasis).
Hirschman () argued—though this was not widely accepted—that the key
constraint in developing countries is not scarcity of resources as such but the inability
to make decisions that promote investment and induce productive activities. Thus, for
latecomer countries, the correct identification of linkage effects, the direction of the
linkages and the various forms of linkages, and changing dynamics are important for
industrial policy. Latitude for performance is an associated concept that helps to
identify and exploit the internal dynamics (especially the technological and economic
characteristics) present in the industrial structures of sectors, projects, and productive
activities.⁵⁴ While linkage effect is central to the selection of sectors, it is essential that
technical change or the potential for technological advancement and demand forma-
tion and elasticity are also considered. Ocampo, Rada, and Taylor () underline the
importance of focusing on ‘innovative activities that generate domestic spill over’ in
new industries, new products, new markets, new linkages, and new institutions.⁵⁵
⁵⁴ See Hirschman () on latitude for performance.
⁵⁵ Oqubay underlines how ‘understanding the industrial structure of different sectors and leveraging
latitudes for performance are valuable in industrial policymaking. Hirschman’s linkage concept (the
favouring of industries with strong linkages . . . ) is essential in bringing dynamics and impetus to new
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
From a linkage effects perspective, the prime focus is inducing investment for
development, and promoting interdependencies and complementarities. There are
three principal issues. First, the relationship between export-led and import-
substitution industrialization leads strategic choices and patterns of industrial policies.
The increased density of players in the international market should not lead countries
to discount the primary role of exports and abandon export-led industrialization. From
a production-centric perspective, relying on exports to spearhead the industrialization
drive generates more dynamism, with growth in productivity gains, larger market size
and demand, and a source of international learning; by generating foreign exchange it
also resolves the constraints hampering the growth of the economy.⁵⁶ While compe-
tition is naturally strongest in international markets, this choice is a prime guarantee of
sustained growth and international competitiveness.⁵⁷ Complementarity is heightened
by ensuring that the export sector leads all other sectors, including those in the
domestic markets, and that domestic rivalries are fostered.
A second interdependent and complementary relationship is that between manu-
facturing and agriculture, especially for late latecomers in the early stages of develop-
ment. The alternatives of manufacturing and agriculture are usually regarded as
mutually exclusive, but a plausible option is to search for an approach that maximizes
their synergy and complementarity. All developing countries need to focus on boosting
agriculture for their initial economic take-off, laying the foundations for accelerated
industrialization. Kaldor highlights that ‘any relative growth of industry in an economy
presupposes a corresponding growth in the excess of agricultural production . . . it is
not an accident that all countries which succeeded in developing manufacturing
industry on a large scale possess a highly efficient or largely “commercialized” agricul-
ture, with high yields per acre and high productivity per man’ (Kaldor, : ).
Kaldor thus argued that agriculture generates the initial demand for the manufac-
turing sector in the early stages of industrialization, before penetration of the inter-
national market. However, this may not be the case in all countries; the focus may be on
meeting the demands of other priorities and on manufactured imports. It is important
that the technologically intensive, high-productivity agricultural sub-sectors with
stronger linkage dynamics should qualify as targeted sub-sectors. Research and
study, supported by experiments and learning from experience and innovation else-
where, should determine complementarities. Technological advances (in bio-
technology, digitization, economics of freshness, and automation) are shaping and
reshaping agricultural practices as we know them.⁵⁸
activities and increasing returns and in creating economic space in developing economies’ (Oqubay,
: , own emphasis).
⁵⁶ See Drucker () on Germany’s industrial competitiveness in machinery and industrial goods
exports.
⁵⁷ In a highly open economy, it is possible that the open domestic market can be as competitive as
international markets. Thus, competition is naturally strangest in international markets if the domestic
market is totally or partially protected.
⁵⁸ See Cramer and Sender ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
A third important aspect of industrial policy is the relationship between FDI and
domestic firms, a challenging balance that is often affected by political tension. Policy
choices depend on the international environment, a dynamic domestic private sector,
the nature of the specific industry, and the stage of industrialization. For instance, in
the highly globalized production network, the role of FDI as a source of productive
investment has increased immensely. However, building an innovation-driven econ-
omy requires a shift from imitation to innovation, which is driven by domestic
capability. Different countries, for instance Japan, South Korea, Singapore, and Taiwan,
China, have followed different paths, according to their technological capabilities and
industrial structure.
.. Industrial Ecosystem and Cluster Dynamics
Agglomeration economies and cluster dynamics foster specialization and division of
labour, increasing returns and productivity gains, innovation and learning, and link-
ages, acting as critical drivers of positive externalities. Internal economy of scale applies
to firms, while external economy of scale applies to agglomeration within the same
industry and across industries (these are termed respectively localized and urbaniza-
tion agglomeration).⁵⁹ Positive externalities are also associated with productive cities
that are centres of new ideas and learning (Jacobs, , ). While the organic
formation and evolution of industrial hubs is universal, the deliberate development of
industrial hubs that offer a learning ecosystem and facilitate linkages is a post-Second
World War phenomenon.⁶⁰
Developing dynamic industrial hubs that move beyond static benefits to become
dynamic and organic evolving entities needs to be an integral part of the industrial
policy framework (Best, ). Breschi and Malerba suggest that ‘clusters should not be
examined only as a static framework and at a given point in time. Rather, clusters have
specific stages of development and transformation’ (Breschi and Malerba, : ).⁶¹
The dynamics of these industrial hubs are shaped by a culture of learning and
openness, and open systems involving a network of institutions such as universities,
research centres, government bodies, standards authorities, and intermediary
institutions.
Empirical evidence shows that the cluster dynamics of industrial hubs promote
learning and innovation, linkages, productivity gains, increasing returns to scale, and
⁵⁹ See Smith (), Babbage (), Marshall (), and Ohlin (), among others. For a
comprehensive understanding of theories, context, and empirical perspectives, see The Oxford Hand-
book of Industrial Hubs and Economic Development (Oqubay and Lin, ).
⁶⁰ See UNCTAD (), which states there are more than , industrial hubs (special economic
zones, export-processing zones, industrial parks, and technology parks) globally, the lion’s share of these
are in Asia.
⁶¹ See Breschi and Malerba () and Best ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
especially, technological and innovation capabilities. If built on an open culture, they
will promote knowledge exchanges and combine collective efficiency, cooperation, and
competition.⁶²
Effective policies for cluster development include talent attraction and brain gain, a
network of organizations, the attraction of new start-ups and enhanced spin-outs.⁶³
Different strategies are required during the initial stage and the growth and maturity
stages.⁶⁴ Best (: ) highlights that:
A static industrial district lacks the internal/external growth dynamic. Such districts
can enjoy Marshall’s locational economies, but they do so within an unchanging
‘production chain’. Dynamic districts, in contrast, are continuously upgrading,
redefining, and reconstituting the production chain. Most of the world’s industry
is conducted within static industrial districts that lack entrepreneurial firms. Cap-
abilities are not advancing and innovation is limited. They do not drive growth.⁶⁵
.. Tensions in Industrial Policy
Different contexts (national or sectoral, or different stages) call for various industrial
policy instruments to serve different goals and strategies. Despite their varied content,
inherent tensions are evident during the design and execution stage which impact on
the outcome of industrial policy. These tensions are exhibited in multiple ways.
... Strategic Compatibility and Coherence
The overarching principle in the design and application of industrial policy is to choose
instruments that serve the country’s grand vision, purpose, goals, and development
strategy. Key to this decision is the targeting of priority sectors and new productive
⁶² See Oqubay and Lin, The Oxford Handbook of Industrial Hubs and Economic Development ().
See also Marshall (); Jacobs (, ); Porter () among others.
⁶³ Babbage (: ): ‘It is found in every country, that the situation of large manufacturing
establishments is confined to particular districts.’ Marshall (: ) states: ‘The mysteries of the
trade become no mystery . . . good work is rightly appreciated, inventions and improvements in machin-
ery, in processes and the general organization of business have their merits promptly discussed: If one
man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it
becomes a source of further new ideas.’
⁶⁴ Breschi and Malerba (: –) highlight that ‘starting a cluster and sustaining clusters are
different in processes and economies: a) availability of technical and managerial skills, exploiting
technological and market opportunities, availability of government agencies and research institutions,
importing intellectual, organizational, technical inputs from outside the local area’. They emphasize the
importance of external linkages: ‘In particular, external linkages are vital in order to establish and
maintain a dense local network of relationships, for both emerging and established clusters’ (Breschi and
Malerba, : ).
⁶⁵ See also UNCTAD (: ): ‘Agglomeration and clustering facilitates economic benefit from
GVC participation’, generating collective efficiency from geographical proximity, facilitating learning
and business interaction.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
activities. Another aspect is engaging firms and dynamic social groups that have a high
stake in the desired outcomes. Focus on the development of productive capacity,
technological and domestic capability, and learning is critical to ensure that industrial
policy serves as a conduit of transformation and catch-up. However, ensuring com-
patibility between the industrial goals, and picking and nurturing winners, or even
establishing state-owned enterprises and transfers to the private sector, are in constant
tension.
Dynamic shifts in productivity require both learning by doing and ‘true’ innov-
ations, which as key drivers of technological learning are highly complementary. Solow
underlines that:
Learning by doing would soon exhaust itself were it not for the intermittent
occurrence of major innovations . . . The overall productivity trend will represent
both true innovation and learning by doing. Innovations will bulk larger the faster
they come and the larger they are. Learning by doing will bulk larger the more rapid
the pace of investment and the greater the intensity of learning.
(Solow, : , )
In the long term, what matters is not the design and content of a single instrument. In
almost all situations, multiple instruments are needed for full and sustained impact, so
coherence between them as well as between short-term and long-term directions is
critical to achieving maximum benefits. However, coherence is not automatic and must
be achieved through appropriate planning and design. Aligning plans to policy deci-
sions, proclamations, regulations, and other executive directives and implementing
institutions is a difficult exercise and is full of tensions. A major constraint on policy
outcomes is inconsistency of policy execution, which can limit both effectiveness and
learning opportunities. Inconsistencies across firms, time, regions, and sectors creates
frustration and undermines effectiveness. Gaps should therefore be consistently iden-
tified to improve policy implementation. Enhancing coherence and consistency can be
targeted during the design, execution, and review stages of the policy. Independent
studies, continuous research, and curiosity are important for continuous improvement.
However, one of the pitfalls is that many policymakers and practitioners perceive
instruments as static.
... Synergy and Connections to Other Policies
As we have seen, industrial policy clearly does not exist in a vacuum; it is related to
other economic policies and the general political economy. Industrial policies will only
have a partial effect and indeed are likely to fail in the long term if complementarity is
not maximized. Of particular importance are policies that impact the transformation of
productive capacity, export and domestic capacity, and the development of techno-
logical capability, and those associated with building human capital and the education
system, the development of physical infrastructure, and ensuring macroeconomic
stability.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Human capital and education have a direct bearing on the vigour and outcome of
industrial policy. Empirical evidence and research show that education is a necessary
condition for structural transformation and industrial catch-up. Its importance
increases as the economy progresses towards the advanced stage when technological
capability and innovation become more critical. However, experience elsewhere shows
that education alone does not necessarily guarantee a breakthrough in the economic
catch-up of late industrializers. At an early stage of development, access to general
education is important to promote agriculture and shared growth. However, as indus-
trialization advances, technical schools, technical and vocational education centres, and
universities become more important. Skills formation, and engineering- and
technology-driven courses become higher priorities. In an innovation-driven economy,
links between research centres, universities, and industry become important. Education
should focus not only on producing high-quality technicians and technologists, but
also on nurturing the talent that will be needed for innovation. The tension inherent in
this connection is exacerbated by the number of players—multiple organizations,
political interests, and interest groups.
Another critical policy dimension that has a direct bearing on the outcomes of
industrial policies is the development of physical infrastructure. Infrastructure, includ-
ing reliable and competitive energy and electricity supplies, transport and logistics, is
the most important factor in the production process and in downstream and upstream
activities, and it is relevant to both quality and cost competitiveness. Infrastructure
requirements change during the different stages of development. At an early stage, road
connectivity (especially rural and regional) and universal access to electricity, water,
and telecommunications will be mandatory. At a later stage, high-speed road networks
and high-productivity infrastructure such as large power supply, railways, and airports
become necessary. Infrastructure development is capital intensive and requires not
only long-term planning but also economic viability and full utilization, building
international competitiveness and capacity in managing and maintaining infrastruc-
ture facilities.
Equally important for the attraction of investment, performance, and viability of
exports, labour costs, and productivity, is the presence of a stable and conducive
macro economy, including favourable interest rates and sound monetary and fiscal
policies. The connection of industrial policy and macro-policies is essential as macro-
policies should be conducive to industrial policy and support the production-centric
pathway and the production transformation. This implies arguably not only creating
macroeconomic stability but also developing support for the production transform-
ation in terms of exchange rates, taxation, fiscal policy, public investment, labour
market institutions, and income distribution (Cimoli, Dosi, and Stiglitz, ).
Imbalances and tensions are the basic feature of this relationship and the aim should
not be to create harmony but to use the imbalances and tension to promote enduring
economic transformation. Macroeconomic policy decisions should also aim to maxi-
mize synergy with industrial policy, ensuring that exchange rates do not undermine
exports, that domestic savings and investment are conducive to the expansion of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
production capability, inflation is controlled so that wages are not undermined, and
that the tax regime is directly linked to supporting production capability and
innovation.⁶⁶
... Competitiveness and Discipline
A vital principle of industrial policy is the support offered to industries and firms, and
an incentive structure linked to performance standards and enhancing productivity,
exports, learning, and innovation. One of the most important lessons from the East
Asian experiences was the linking of incentives and support to performance and the
control of hand-outs and unproductive rent. Amsden highlights that ‘the guiding
principle of the best bureaucracies—politics permitting—was to give nothing away
for free. Reciprocity was ideal . . . The reciprocity principle in Korea operated in almost
every industry’ Amsden (: , ).⁶⁷ Outcomes are far from automatic if the
principle of reciprocity is not strictly adhered to; its successful implementation depends
above all on the state’s political support, a social base that ensures enforcement, and
whether the government has the political clout and capability to insulate itself from
interest groups. In addition, designing and managing incentives and support schemes
is a complex process that requires careful selection, together with an effective bureau-
cracy, and continuous evaluation of its purpose and shortcomings during the imple-
mentation process.
Instruments such as export discipline (linking incentives to exports to discipline
firms and enhance international learning) and domestic rivalry (to ensure that incen-
tives are tied to intense competitiveness) may also be beneficial. Devices such as
latitude to performance are important; the system has to be measurable and execution
as simple as possible. The nature of these incentives should be measured against
international practices and policy space, and constantly renewed based on learning
from others. These are critical decision areas that have strategic implications. The
incentive structure should differentiate between big businesses, small businesses, and
technology start-ups, and should focus on sectors with the strongest linkage effects. It
should also be based on the principle of ‘creative destruction’ to ensure that the death of
decaying firms is accelerated and new start-ups and spin-outs that generate new energy
are supported.
The point is that ensuring complementarity, coherence, and compatibility across
policies and within industrial policy is a difficult exercise which is constrained by
institutional capability and political constraints. Ensuring greater coherence at plan-
ning and during implementation stages may not be sufficient as these tensions and
imbalances are constant. Arguably, thriving by creating tensions and imbalances is an
alternative but complementary approach to produce better outcomes: ‘the view that
⁶⁶ See Chapters and .
⁶⁷ See also Oqubay (: ) who highlights that ‘The principle of reciprocity is important in
almost all conditions, despite the challenges of implementation and its dependence on the state’s
political clout’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
economies should develop by prioritizing key sectors rather than relying on compre-
hensive, overarching plans’ (Hirschman, : ; see also Oqubay, ; Cramer,
Sender, and Oqubay, ).⁶⁸
.. Summary
The practice of industrial policy requires:
a) Effective policy instruments which are relatively easy to design, measure, and
adapt at sectoral level. This helps to link instruments with the sector’s life cycle
and with upgrading and deepening of the industrial structure, and to create an
ecosystem that offers growth opportunities and continuous learning.
b) Not all instruments require the same level of execution capacity. For instance,
devaluation is important for promoting exports, but it does not require sophis-
ticated executive capacity at sectoral level. Nonetheless, some export incentives
(such as the ‘voucher system’) may require higher professional bureaucracy.
Understanding this variation is important for choosing and designing policy
instruments.
c) The purpose of these instruments is to promote productive investment, produc-
tion capability, domestic capability, export performance, and linkage effects and
innovation capability. It needs a balancing act so that not only productive
investment, but more importantly international and local talents are targeted,
accelerating creative destruction in terms of firm dynamism, and balancing the
attraction of FDI against domestic firms, and big business against small firms.
. C R: O
E I
..................................................................................................................................
Industrial policy has not been static, and successful industrial policies have constantly
adapted to the changing external environment and local conditions. Empirical evi-
dence shows that industrial policy and outcomes are uneven across sectors and are
primarily shaped by variations in the industrial structure, politics, and linkage effects of
sectors (Oqubay, : , ).⁶⁹ However, three key factors carrying significant
implications for policymakers emerge as drivers of unevenness and variation in
⁶⁸ See Hirschman (: ), who ‘emphasized the positive role of imbalance in economic devel-
opment and of crisis in the achievement of social and economic reform in Latin America’. See also
Hirschman (, ).
⁶⁹ See also Oqubay (a, b).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industrial policies: the industrial structure of each sector; politics and the political
economy; and linkage effects.
.. The Middle-income Trap
More recently, new debates have emerged focusing on economic catch-up, and par-
ticularly on the difficulty and rare instances of climbing the development ladder from
middle to high income. While there is less agreement on the ‘middle-income trap’
concept, increasing evidence shows that the vitality of technological capability and
innovation are critical for avoiding it. This may be partly explained by Abramovitz’s
hypothesis that catch-up slows as latecomers converge with the productivity levels of
the leaders or forerunners (Abramovitz, ). Accelerated catch-up, dynamic trans-
formation to an innovation-driven economic path, stalled industrialization, where
technological catch-up has become impossible, and premature de-industrialization,
where manufacturing has run out of steam for creating jobs, output, and export
earnings (UNCTAD, ), can all be imagined. As China emerges as the world’s
manufacturing and exports powerhouse, its shift to an innovation-driven economy,
combined with its sheer size, continues to impact the intensity of global competition,
and the struggle to escape the ‘middle-income trap’ (Paus, ).
.. Changing Patterns of Global Production
and World Economy
A major shift in the last five decades has been the internationalization of production,
the rise of global value chains and global production networks, and the dominance of
the global business revolution (Gereffi, ; Dicken, ; Coe and Yeung, ;
Nolan, ). Major shifts in international governance systems that have had an
uneven impact on developing, emerging, and advanced economies and on the policy
space for designing industrial policy include the introduction of binding multilateral
trade rules under the WTO, tighter protection of intellectual property through the
TRIPS agreement, a Sino-centric global economy, and the post- global economic
slowdown. Least developed economies face intensified competition to exploit limited
opportunities. Wade characterizes this process as follows: ‘the combination of global value
chains, knowledge monopoly, and financialization makes for slow or no long-run con-
vergence upwards of the majority of emerging and developing economies’ (: ).⁷⁰
⁷⁰ Wade further states that: ‘The key point is that the new phase of globalization characterized by
GVCs (since the late s) tips the balance of power in the world economy firmly in favour of MNCs,
because if one host government does not agree to their conditions, or if labour costs in one country rise
too high, the firm can readily shift production elsewhere’ (: ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Since the economic crisis three tendencies have surfaced which reflect the
contemporary global political economy. First, emerging economic powers and signifi-
cant players in international markets have pursued a pro-WTO trading system advo-
cating free trade and shrinking protection. This view is in line with multilateralism and
the multi-polar global power structure. Second, however, there has also been a backlash
against this trend with a preference for bilateral trade negotiations and a withdrawal
from regional economic blocks. Third is increased integration of regional markets, such
as ASEAN in the Asia Pacific, an inclusive initiative related to the Trans Pacific
Partnership.⁷¹
.. Accelerated Technological Advancement
The pace of technological change has accelerated the emergence and fusion of new
technologies (such as ICT, artificial intelligence, G technology, automation, robotiza-
tion, and digitization) that are shaping and shaking each industry in unexpected ways.
While what is called the Fourth Industrial Revolution, or the digital economy, offers
many opportunities, the unrestrained power these technologies offer to leading tech-
nology MNCs undermines the roles of government and the rights of citizens.⁷²
‘Technological romanticizing’ or ‘technology hype’ advocates technological determin-
ism, ignoring the fact that technologies should serve the well-being of society and the
indispensable role of social transformation.
Technological advances do not shape all sectors uniformly, and understanding their
scope at economy and sectoral level is critical. The implications for the development of
human capital and the expansion of smart infrastructure, financial services, and R&D
are particularly significant. Industrial policies should take this fundamental shift into
account and provide effective mitigation and adjustment in response to these
challenges.
.. Sustainability and Green Industrial Policy
The early industrial revolution and twentieth-century industrialization were charac-
terized by neglect of climate change and the critical role of environmental sustainability
(Mathews, a, ).⁷³ The position taken by the corporate world has varied
according to economic interests and economic power. Increased awareness on the
part of consumers has still not been sufficient to pressure corporations and industries
to refrain from damaging the environment. One perspective to emerge is that economic
⁷¹ The United States and the United Kingdom are typical examples. See also Chapters and .
⁷² See Paus ().
⁷³ See Chapters and .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
growth and environmental sustainability are not mutually exclusive. Sustainable devel-
opment requires environmental protection to be at the centre of economic policies. It
involves education, a regulatory regime that does not reward polluters, industrial policy
that rewards sustainability and resource savings, and increased innovation in environ-
mental science for job creation and economic growth. From a long-term perspective,
integrating environmental sustainability and putting it at the centre of industrial policy
is a necessity.⁷⁴
A
The author is grateful to Christopher Cramer, John Mathews, José A. Ocampo, and Taferre
Tesfachew for their constructive comments and discussion, and inputs from the reviews
workshop. The author thanks Deborah Kefale, Samuel Arkebe, and Binyam Arkebe for inputs
to improve the draft and for their continued support.
R
Abramovitz, Moses () ‘Catching up, Forging ahead, and Falling behind’, in Moses
Abramovitz, Thinking About Growth: And Other Essays on Economic Growth and Welfare.
Cambridge: Cambridge University Press, pp. –.
Abramovitz, Moses () ‘Catch-up and Convergence in the Growth Boom and After’, in
William Baumol, Richard Nelson, and Edward Wolf (eds), Convergence of Productivity:
Cross-national Studies and Historical Evidence. Oxford: Oxford University Press,
pp. –.
Akyűz, Yilmaz () Playing with Fire: Deepened Financial Integration and Changing
Vulnerabilities of the Global South. Oxford: Oxford University Press.
Amsden, Alice () Asia’s Next Giant: South Korea and Late Industrialization. Oxford:
Oxford University Press.
Amsden, Alice () The ‘Rise of the Rest’: Challenges to the West from Late-Industrializing
Economies. Oxford: Oxford University Press.
Amsden, Alice () Escape from Empire: The Developing World’s Journey through Heaven
and Hell. Cambridge, MA: MIT Press.
Amsden, Alice () ‘Elites and Property Rights’, in Alice Amsden, Alisa DiCaprio, and
James A. Robinson (eds) The Role of Elites in Economic Development. Oxford: Oxford
University Press, pp. –.
Amsden, Alice and Wan-wen Chu () Beyond Late Development: Taiwan’s Upgrading
Policies. Cambridge, MA: MIT Press.
Andreoni, Antonio and Ha-Joon Chang () ‘Bringing Production and Employment back
into Development: Alice Amsden’s Legacy for a New Developmentalist Agenda’, Cam-
bridge Journal of Regions, Economy and Society (): –.
⁷⁴ See also Mathews (a) Green Capitalism.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Andreoni, Antonio and Ha-Joon Chang () ‘The Political Economy of Industrial Policy:
Structural Interdependencies, Policy Alignment and Conflict Management’, Structural
Change and Economic Dynamics : –.
Arrow, Kenneth () ‘The Economic Implications of Learning by Doing’, The Review of
Economic Studies (): –.
Atkinson, Robert, and Stephen Ezel () Innovation Economics: The Role for Global
Advantage. New Haven, CT: Yale University Press.
Babbage, C. ( []) On the Economy of Machinery and Manufactures. Cirencester:
Echo Library.
Best, Michael () The New Comparative Advantage. Oxford: Oxford University
Press.
Best, Michael () How Growth Really Happens: The Making of Economic Miracles through
Production, Governance, and Skills. Princeton, NJ: Princeton University Press.
Breschi, Stefano and Franco Malerba (eds) () Clusters, Networks, and Innovation.
Oxford: Oxford University Press.
Chandler, Alfred () Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge
MA: Harvard University Press.
Chang, Ha-Joon () The Political Economy of Industrial Policy. London: Macmillan.
Chang, Ha-Joon () ‘The Economic Theory of the Developmental State’, in Meredith
Woo-Cummings (ed.) The Developmental State. Ithaca, NY: Cornell University Press,
pp. –.
Chang, Ha-Joon () Kicking away the Ladder: Development Strategy in Historical Perspec-
tive. London: Anthem Press.
Cherif, Reda, and Fuad Hasanov () ‘The Return of the Policy That Shall Not Be Named:
Principles of Industrial Policy’. IMF Working Paper No. WP//. March.
Chung, Moon Y. and Keun Lee () ‘How Absorptive Capacity is Formed in a Latecomer
Economy: Different Roles of Foreign Patent and Know-how Licensing in Korea’, World
Development : –.
Cimoli, Mario, Giovanni Dosi, and Joseph Stiglitz () The Political Economy of Industrial
Policy and Development. Oxford: Oxford University Press.
Coe, Neil and Henry Yeung () Global Production Networks: Theorizing Economic Devel-
opment in an International World. st edition. Oxford: Oxford University Press.
Cohen, Stephen, and Bradford DeLong () Concrete Economics: The Hamilton Approach
to Economic Growth and Policy. Boston, MA: Harvard Business Review Press.
Cohen, Wesley and Daniel Levinthal () ‘Absorptive Capacity: A New Perspective on
Learning and Innovation’, Administrative Science Quarterly (). Special Issue: Technol-
ogy, Organizations, and Innovations, pp. –.
Cramer, Christopher and John Sender () ‘Oranges Are Not Only Fruit: The Industrial-
ization of Freshness and the Quality of Growth’, in Ravi Kanbur, Akbar Noman, and Joseph
Stiglitz (eds) The Quality of Growth in Africa. New York: Columbia University Press,
pp. –.
Cramer, Christopher and Fiona Tregenna () ‘Heterodox Approaches to Industrial Policy
and the Implications for Industrial Hubs’, in Arkebe Oqubay and Justin Yifu Lin ()
The Oxford Handbook of Industrial Hubs and Economic Development. Oxford: Oxford
University Press.
Cramer, Christopher, John Sender, and Arkebe Oqubay () African Economic Develop-
ment: Evidence, Theory, Policy. Oxford: Oxford University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Dicken, Peter () Global Shift: Reshaping the Global Economic Map in the st Century.
London: Sage.
Doner, Richard, Bryan Ritchie, and Dan Slater () ‘Systematic Vulnerability and Origins
of Developmental States: Northeast and Southeast Asia in Comparative Perspective, Inter-
national Organization (): –.
Dosi, Giovanni and Richard Nelson () ‘Technical Change and Industrial Dynamics as
Evolutionary Processes’, in Bronwyn Halland and Nathan Rosenberg (eds) Economics of
Innovation, Vol. I. Burlington, VI: Academic Press, pp. –.
Drucker, Peter F. () ‘What We Learn from Germany’, in Peter Drucker, The Frontiers of
Management. Oxford: Butterworth Heinemann, pp. –.
Evans, Peter () Embedded Autonomy: States and Industrial Transformation. Princeton,
NJ: Princeton University Press.
Gereffi, Gary () Global Value Chains and Development. Cambridge: Cambridge Univer-
sity Press.
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cam-
bridge, MA: Harvard University Press.
Goodrich, Carter () The Government and the Economy, –. New York: Bobbs-
Merrill.
Gray, Hazel () Turbulence and Order in Economic Development: Institutions and Economic
Transformation in Tanzania and Vietnam. Oxford: Oxford University Press.
Haggard, Stephan () Developmental States. Cambridge: Cambridge University Press.
Hall, Peter () Governing the Economy: The Politics of State Intervention in Britain and
France. Cambridge: Polity Press.
Hall, Peter, and David Soskice () Varieties of Capitalism: The Institutional Foundations of
Comparative Advantage. Oxford: Oxford University Press.
Hamilton, Alexander () Papers on Public Credit, Commerce and Finance, ed. Samuel
McKee. New York: Columbia University Press.
Hirschman, Albert () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Hirschman, Albert O. () Journeys toward Progress: Studies of Economic Policy-making in
Latin America. New York: Twentieth Century Fund.
Hirschman, Albert O. () Development Projects Observed. Washington, DC: The Brook-
ings Institute.
Hirschman, Albert O. () ‘The Political Economy of Import-substitution Industrialization
in Latin America’, Quarterly Journal of Economics (): –.
Hirschman, Albert ([] ) ‘Social Conflicts as Pillars of Democratic Market Society’, in
Jeremy Adelman (ed.) Essential Hirschman. Princeton, NJ: Princeton University Press,
pp. –.
Hirschman, Albert () ‘The Gaucher-Dubeil Thesis: Conflict as the Builder of Commu-
nity’, in Jeremy Adelman, The Essential Hirschman, Princeton, NJ: Princeton University
Press.
Hobday, Michael () ‘East versus South East Asian Innovation Systems’, in Linsu Kim and
Richard Nelson (eds) Technology, Learning, and Innovation: Experiences of Newly Indus-
trializing Economies. Cambridge: Cambridge University Press, pp. –.
Hymer, Stephen H. () The International Operations of National Firms: A Study of Direct
Foreign Investment. Cambridge, MA: The MIT Press.
Jacobs, Jane () The Economy of Cities. New York: Vintage Books.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Jacobs, Jane () Cities and the Wealth of Nations: Principles of Economic Life. New York:
Vintage Books.
Johnson, Chalmers () MITI and the Japanese Miracle: The Growth of Industrial Policy,
–. Stanford, CA: Stanford University Press.
Kaldor, Nicholas () Strategic Factors in Economic Development. Ithaca, NY: New York
State School of Industrial and Labour Relations, Cornell University.
Kaldor, Nicholas () Essays on Economic Stability and Growth. nd edition. New York:
Holmes & Meier Publishers.
Kay, Cristobal () ‘Why East Asia Overtook Latin America: Agrarian Reform, Industri-
alisation and Development’, Third World Quarterly (): –.
Khan, Mushtaq H. () ‘Political Settlements and the Governance of Growth-Enhancing
Institutions’. Available at https://eprints.soas.ac.uk///Political_Settlements_internet.
pdf.
Khan, Mushtaq H. and Stephanie Blankenburg () ‘The Political Economy of Industrial
Policy in Asia and Latin America’, in Mario Cimoli, Giovanni Dosi, and Joseph E. Stiglitz
(eds) Industrial Policy and Development: The Political Economy of Capabilities Accumula-
tion. Oxford: Oxford University Press, pp. –.
Kim, Linsu () ‘Korea’s National Innovation System in Transition’, in Linsu Kim and
Richard Nelson (eds) Technology, Learning, and Innovation: Experiences of Newly Indus-
trializing Economies. Cambridge: Cambridge University Press, pp. –.
Kim, Linsu and Richard R. Nelson (eds) () Technology, Learning and Innovation:
Experiences of Newly Industrializing Economies. Cambridge: Cambridge University Press.
Kohli, Atul () State-Directed Development: Political Power and Industrialization in the
Global Periphery. Cambridge: Cambridge University Press.
Komiya, Ryutaro, Masahiro Okuno, and Kotaro Suzumura (eds) () Industrial Policy of
Japan. London: Academic Press.
Kuznets, Simon () Modern Economic Growth: Rate, Structure and Spread. New Haven,
CT: Yale University Press.
Kuznets, Simon () ‘Modern Economic Growth: Findings and Reflections’, American
Economic Review : –.
Lee, Keun () Schumpeterian Analysis of Economic Catch-up: Knowledge, Path-Creation,
and the Middle-income Trap. Cambridge: Cambridge University Press.
Lee, Keun (a) ‘The Origin of Absorptive Capacity in Korea: How Korean Industry
Learnt’, in Arkebe Oqubay and Kenichi Ohno (ed.) How Nations Learn: Technological
Learning, Industrial Policy, and Catch-up. Oxford: Oxford University Press, pp. –.
Lee, Keun (b) The Art of Economic Catch-up: Barriers, Detours and Leapfrogging in
Innovation Systems. Cambridge: Cambridge University Press.
Lee, Keun and Franco Malerba () ‘Economic Catch-up by Latecomers as an Evolutionary
Process’, in Richard Nelson (ed.) Modern Evolutionary Economics: An Overview. Cam-
bridge: Cambridge University Press.
Lin, Justin Yifu () ‘The Latecomer Advantages and Disadvantages: A New Structural
Economics Perspective’, in Martin Andersson and Tobias Axelsson (eds) Diverse Develop-
ment Paths and Structural Transformation in Escape from Poverty. Oxford: Oxford Uni-
versity Press, pp. –.
Lin, Justin Yifu and Ha-Joon Chang () ‘Should Industrial Policy in Developing Countries
Conform to Comparative Advantage or Defy It? A Debate between Justin Lin and Ha-Joon
Chang’, Development Policy Review (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Lin, Justin Yifu and Volker Treichel () ‘Learning from China’s Rise to Escape the Middle-
income Trap: A New Structural Economics Approach to Latin America’. Policy Research
Working Paper No. . Washington, DC: World Bank.
List, Friedrich () National System of Political Economy, Vols I–IV. Memphis, TN:
Lippincott.
Marshall, Alfred () Principles of Economics. London: Palgrave Macmillan.
Marx, Karl ([] ) Capital: A Critique of Political Economy, Volume I. London:
Penguin Classics.
Mathews, John (a) Greening of Capitalism: How Asia is Driving the Next Great Trans-
formation. Stanford, CA: Stanford University Press.
Mathews, John (b) ‘Latecomer Industrialization’, in Erik S. Reinert, Jayati Gosh, and
Rainer Kattel (eds) Handbook of Alternative Theories of Economic Development. Cheltenham:
Edward Elgar, pp. –.
Mathews, John () Global Green Shift: When CERES Meet GAIA. London: Anthem Press.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths. London: Anthem Press.
Mazzucato, Mariana () The Value of Everything: Making and Taking in the Global
Economy. London: Allen Lane.
Mowery, David C. and Nathan Rosenberg () Technology and the Pursuit of Economic
Growth. Cambridge: Cambridge University Press.
Mytelka, Lynn () ‘Local Systems of Innovation in a Globalized World Economy’,
Industry and Innovation (): –.
Mytelka, Lynn and Taffere Tesfachew () ‘The Role of Policy in Promoting Enterprise
Learning during Early Industrialization: Lessons for African Countries’. UNCTAD/GDS/
MDPB/Misc.. Geneva: UNCTAD.
Nayyar, Deepak () Catch Up: Developing Countries in the World Economy. Oxford:
Oxford University Press.
Nayyar, Deepak () ‘Foreword’, in Arkebe Oqubay and Kenichi Ohno (eds) How Nations
Learn: Technological Learning, Industrial Policy, and Catch-up. Oxford: Oxford University
Press, pp. vi–xi.
Nelson, Richard and Sidney Winter () An Evolutionary Theory of Economic Change.
Cambridge: Cambridge University Press.
Nolan, Peter () Chinese Firms, Global Firms: Industrial Policy in the Age of Globalization.
New York: Routledge.
Ocampo, José Antonio () ‘Dynamic Efficiency: Structural Dynamics and Structural
Change in Developing Countries’, in Akbar Noman and Joseph E. Stiglitz (eds) Efficiency,
Finance, and Varieties of Industrial Policy. New York: Columbia University Press,
pp. –.
Ocampo, José Antonio () ‘The Transformation of Latin American Economies’, in
Célestin Monga and Justin Yifu Lin (eds) The Oxford Handbook of Structural Transform-
ation. Oxford: Oxford University Press, pp. –.
Ocampo, José Antonio, Cordina Rada, and Lance Taylor () Growth and Policy in
Developing Countries: A Structuralist Approach. New York: Columbia University Press.
OECD () Guidelines for Collecting and Interpreting Innovation Data: Oslo Manual.
OECD and Eurostat.
Ohlin, Bertil () Interregional and International Trade. Cambridge: Cambridge University
Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Ohno, Kenichi () ‘Meiji Japan: Progressive Learning of Western Technology’, in Arkebe
Oqubay and Kenichi Ohno (eds) How Nations Learn: Technological Learning, Industrial
Policy, and Catch-up. Oxford: Oxford University Press, pp. –.
Oqubay, Arkebe () Made in Africa: Industrial Policy in Ethiopia. Oxford: Oxford
University Press.
Oqubay, Arkebe (a) ‘Ethiopia: Lessons from an Experiment’, in Célestin Monga and
Justin Yifu Lin (eds) The Oxford Handbook of Structural Transformation. Oxford: Oxford
University Press, pp. –.
Oqubay, Arkebe (b) ‘Industrial Policy and Late Industrialization’, in Fantu Cheru,
Christopher Cramer, and Arkebe Oqubay (eds) The Oxford Handbook of the Ethiopian
Economy. Oxford: Oxford University Press, pp. –.
Oqubay, Arkebe and Justin Yifu Lin (eds) () The Oxford Handbook of Industrial Hubs
and Economic Development. Oxford: Oxford University Press.
Oqubay, Arkebe and Kenichi Ohno (eds) () How Nations Learn: Technological Learning,
Industrial Policy, and Catch-up. Oxford: Oxford University Press.
Pasinetti, Luigi () Structural Change and Economic Growth: A Theoretical Essay on the
Dynamics of the Wealth of Nations. Cambridge: Cambridge University Press.
Pasinetti, Luigi () Structural Economic Dynamics: A Theory of the Economic Conse-
quences of Human Learning. Cambridge: Cambridge University Press.
Paus, Eva (ed.) () Confrontation Dystopia: The New Technological Revolution and the
Future of Work. Ithaca, NY: Cornell University Press.
Paus, Eva () ‘Innovation Strategies Matter: Latin America’s Middle-income Trap Meets
China and Globalisation’, The Journal of Development Studies (): –.
Peerenboom, Randall () ‘Seek Truth from Facts: An Empirical Study of Enforcement of
Arbitral Awards in the PRC’, The American Journal of Comparative Law (): –.
Polanyi, Karl ([] ) The Great Transformation: The Political and Economic Origins of
our Time. Boston, MA: Beacon Press.
Porter, Michael () The Competitive Advantage of Nations. New York: Palgrave Macmillan.
Prebisch, Raúl () The Economic Development of Latin America and its Principal Prob-
lems. New York: UN Department of Economic Affairs.
Reinert, Erik () How Rich Countries Get Rich and Why Poor Countries Stay Poor.
London: Constable.
Reinert, Erik, Jayati Gosh, and Rainer Kattel (eds) () Handbook of Alternative Theories of
Economic Development. Cheltenham: Edward Elgar
Rosenberg, Nathan () Exploring the Black Box: Technology, Economics and History.
Cambridge: Cambridge University Press.
Schumpeter, Joseph ([] ) The Theory of Economic Development. New York:
Routledge.
Schumpeter, Joseph () Capitalism, Socialism, and Democracy. rd edition. New York:
Harper and Brothers.
Schwartz, Herman () States versus Markets: The Emergence of a Global Economy.
rd edition. New York: Palgrave.
Serra, Narcis and Joseph E. Stiglitz () The Washington Consensus: Towards a New Global
Governance. Oxford: Oxford University Press.
Smith, Adam ([] ) An Inquiry into the Nature and Causes of the Wealth of Nations,
Vols I and II. London: W. Strahan and T. Cadell.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Solow, Robert () Learning from “Learning by Doing”: Lessons for Economic Growth.
Stanford, CA: Stanford University Press.
Thirlwall, Anthony () The Nature of Economic Growth: An Alternative Framework for
Understanding the Performance of Nations. Cheltenham: Edward Elgar.
Thirlwall, Anthony () ‘Balance of Payments Constrained Growth Models: History and
Overview’, PSL Quarterly Review (): –.
Thirlwall, Anthony () Economic Growth in an Open Developing Economy: The Role of
Structure and Demand. Cheltenham: Edward Elgar.
Thurbon, Elizabeth and Linda Weiss () ‘The Developmental State in the Late Twentieth
Century’, in Erik Reinert, Jayati Gosh, and Rainer Kattel (eds) Handbook of Alternative
Theories of Economic Development. Cheltenham: Edward Elgar, pp. –.
Tregenna, F. () ‘Characterising Deindustrialisation: An Analysis of Changes in Manu-
facturing Employment and Output Internationally’, Cambridge Journal of Economics ():
–.
Tregenna, Fiona () ‘Deindustrialization and Reindustrialization’, in Adam Szirmai, Wim
Naudé, and Ludvico Alcorta (eds) Pathways to Industrialization in the Twenty-First Century:
New Challenges and Emerging Paradigms. Oxford: Oxford University Press, pp. –.
UNCTAD () Developing Productive Capacities. The Least Developed Countries Report
. Geneva: United Nations.
UNCTAD () Global Value Chains: Investment and Trade for Development. World
Investment Report. Geneva: United Nations.
UNCTAD () Structural Transformation for Inclusive and Sustained Growth. Trade and
Development Report. Geneva: United Nations.
UNCTAD () World Investment Report. Geneva: UNCTAD.
UNCTAD-UNIDO () Fostering Industrial Development in Africa in the New Global Envir-
onment. Economic Development in Africa Report . Geneva: UNIDO and UNCTAD.
UNECA () Greening Africa’s Industrialization. Economic Report on Africa. Addis
Ababa: United Nations Economic Commission for Africa.
Veblen, Thornstein ([] ) Imperial Germany and the Industrial Revolution. Hard
Press, Classic Series. New York: The Macmillan Company.
Wade, Robert () Governing the Market: Economic Theory and the Role of the Government
in East Asian Industrialization. Princeton, NJ: Princeton University Press.
Wade, Robert () ‘The Developmental State: Dead or Alive’, Development and Change
(): –.
Wade, Robert () ‘Catch-up and Constraints in the Twentieth and Twenty-first Centur-
ies’, in Arkebe Oqubay and Kenichi Ohno (eds) How Nations Learn: Technological Learn-
ing, Industrial Policy, and Catch-up. Oxford: Oxford University Press, pp. –.
Weiss, John () ‘Industrial Policy in the Twenty-first Century: Challenges for the Future’,
in Adam Szirmai, Wim Naudé, and Ludovico Alcorta (eds) Pathways to Industrialization
in the Twenty-first Century: New Challenges and Emerging Paradigms. Oxford: Oxford
University Press, pp. –.
Woo-Cummings, Meredith (ed.) () The Developmental State. Ithaca, NY: Cornell Uni-
versity Press.
World Bank () China : Building a Modern, Harmonious, and Creative High-income
Society. Washington, DC: World Bank.
Young, Allyn () ‘Increasing Returns and Economic Progress’, Economic Journal ():
–.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.............................................................................................................
.............................................................................................................
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
,
,
.............................................................................................................
́
. I
..................................................................................................................................
T chapter argues that structural change is at the heart of a dynamic process of
economic development, and that active industrial (production-sector development)
policies must be at the heart of an appropriate development strategy. The major policy
focus of that strategy should, therefore, be on the dynamic efficiency of economic
structures, defined as their capacity to generate new waves of structural change.¹ This
concept is in sharp contrast with static efficiency, the central focus of traditional
microeconomic and international trade theories. Dynamic efficiency requires degrees
of state intervention that traditional defendants of static efficiency would also consider
unacceptable.
What this means is that economic growth in emerging and developing countries—
the focus of this chapter—is intrinsically tied to the dynamics of production structures,
the learning processes associated with technological catch-up and the capacity to
gradually join the world of innovators, and the specific policies and institutions created
to support these processes. The promotion of dynamic efficiency in these countries also
includes the creation of linkages among domestic firms and sectors, and the adequate
management of natural resources in countries that have a strong static comparative
advantage in commodity production. It equally involves the reduction of the hetero-
geneity of their production structures, due to the coexistence of low-productivity
(informal) activities alongside high-productivity (modern) firms—a phenomenon
¹ This concept is borrowed from Ocampo (b). Note that it is entirely different from that of
‘dynamic efficiency’ used in neoclassical optimal growth models.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
that has been alternatively called both ‘dualism’ and ‘structural heterogeneity’. Avoid-
ing macroeconomic instability is also essential, particularly guaranteeing competitive
and stable real exchange rates, which are critical for adequate structural change, in the
face of terms-of-trade fluctuations and capital account volatility.
These are basic ideas that have been advanced by all brands of—broadly defined—
‘structuralism’ in economic thinking.² The work of Schumpeter, the neo-Schumpeterian,
and evolutionary schools are included within this concept. This encompasses the
view, which originates in Schumpeter’s () analysis of business cycles, that
technological revolutions come in waves of innovation that gradually spread through
the economic system (Freeman and Soete, ; Pérez, : part I), replacing
previous technologies and the firms and sectors that used them, and generating a
process of ‘creative destruction’ (Schumpeter, : ch. VIII). In relation to develop-
ing economies, some of the ideas come from different brands of Latin American
structuralism that followed the work of Raúl Prebisch and the United Nations
Economic Commission for Latin America and the Caribbean (ECLAC), including
its most recent brand, ‘neo-structuralism’. We should also embrace within this broad
concept of structuralism the emphasis of classical development economics on indus-
trialization and external economies as core elements of economic development,
including the notions of backward and forward linkages associated with the work of
Hirschman (). We can add the growth-productivity connections associated with
Kaldor’s (: chs and ) analysis of economic growth, as well as the role of
increasing returns in contemporary neoclassical models of economic growth.³
Contextual conditions for a dynamic development process have also been empha-
sized in the literature. However, they generally play the role of background conditions
rather than that of direct determinants of changes in the growth momentum.⁴ They
include an adequate education system and a proper physical infrastructure. They also
include an institutional context that guarantees a measure of stability in the basic social
contract, a non-discretionary legal system, an impartial (and, ideally, efficient) state
bureaucracy, and smooth business‒labour‒government relations. There are, however,
significant differences in concepts about what constitutes a proper institutional con-
text, and certain institutional features are fairly constant over decades in specific
countries, whereas growth is not.⁵ This chapter therefore leaves aside the analysis of
these contextual conditions, referring only to institutions that directly relate to struc-
tural change.
² See, among an extensive literature, Prebisch (, ), Furtado (), Nelson and Winter
(), Dosi et al. (), Wade (), Taylor (), Chang (), Nelson (, ), Aghion and
Howitt (), Rodrik (, ), Ros (, ), Amsden (), Ocampo et al. (), Lin (),
Stiglitz and Greenwald (), and Cherif and Hasanov ().
³ See the classical contributions by Romer (), Lucas (), and Barro and Sala-i-Martin ().
⁴ See in this regard the differentiation between ‘proximate’ and ‘ultimate’ causality of growth
processes by the economic historian Maddison (: ch. ).
⁵ See, for example, Easterly et al. () and Pritchett ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
It should be added that the distributive effects of structural transformation strategies
depend on how far such strategies help reduce the heterogeneity of production
structures through training, technological diffusion, appropriate financing channels,
the promotion of different forms of associations among small entrepreneurs, and
commercial links between large and small firms. However, this is a subject that is
only marginally covered here.
The chapter is divided into six sections, the first of which is this introduction. The
second takes a look at growth patterns identified in the old and more recent literature.
The third focuses on the dynamics of production structures, and particularly on its two
fundamental elements: innovations and complementarities. The fourth considers the
specific issues raised by natural resource dependence. The fifth looks at the interrelated
issues of financing structural change and managing financial fluctuations. The last
section draws major policy implications.
. G P
..................................................................................................................................
The large empirical literature has identified that economic growth involves the simul-
taneous movement of a series of economic variables: improved technology, human
capital accumulation, investment, savings, and systematic changes in production
structures.⁶ Disentangling cause and effect is not always an easy task. Thus, higher
investment and savings ratios are generally seen as essential for growth accelerations,
but they may be the result rather than the cause of faster growth: the effects of the
accelerator mechanism on investment, and higher savings associated with income
growth and redistribution effects that go along with it, such as raising firms’ retained
profits. In turn, the accumulation of skills, an essential element of human capital, is
mainly the result of learning associated with production experience, and the expansion
of education systems is facilitated by the increased social spending enabled by eco-
nomic growth. Productivity improvements may also be the result of growth: learning
processes, as well as technical improvements embedded in new equipment—the causal
link emphasized by Kaldor (), which is the opposite of that assumed by neoclas-
sical growth theory since Solow (, ). Thus, many of the regularities mentioned
in the growth literature may be subject to sharply differing interpretations, depending
on views on the causal links involved.
A few ‘stylized facts’ may serve, however, as a point of departure for this chapter. The
first is the persistence and even enhancement of the vast inequalities in the world
economy that arose quite early in the history of modern economic growth. As Rodrik
() has emphasized, convergence in per capita incomes has been the exception
⁶ Nonetheless, it has also been argued that there is much less association between some of these
variables and economic growth than was traditionally assumed. This has been claimed particularly in
relation to physical and human capital. See Easterly (: part II).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
rather than the rule. Indeed, using Maddison’s () data, we can estimate that
slightly over per cent of the variance of per capita income levels in the world at
the end of the twentieth century can be explained by income differences that already
existed in . This indicates that, although there have been changes in the world
income hierarchy, these have been exceptions. Even in the case of developed countries,
strong convergence took place during the post-Second World War ‘golden age’ of
‒, but not before the Second World War (Maddison, ).⁷
The most important feature, however, is the divergence of incomes between devel-
oped and developing countries in the nineteenth and twentieth centuries, which
Pritchett () aptly characterized as ‘divergence, big time’. Among the exceptions
to this rule, we can also include the rise of Latin America to middle-income levels since
the late nineteenth and early twentieth centuries and through the inter-war period⁸
and, of course, the success of Asian newly industrializing economies since the s
and that of China since the s. The first decade of the twenty-first century, and at a
slower rate until the end of the ‘super-cycle’ of commodity prices in , is perhaps
the only case of fairly broad convergence of per capita income between developed and
developing countries in history.
The reasons for divergence are well known. They include the ‘poverty trap’ analysed
by classical development economists, as well as the ‘middle-income trap’ identified in
the recent literature (see, for example, Gill and Kharas, , ; Eichengreen et al.,
, ). They also reflect basic international asymmetries: (i) prohibitive entry
costs into mature sectors and technologically dynamic activities; (ii) differences in
domestic financial development and in the stability or volatility of external financing;
and (iii) macroeconomic asymmetries that generate quite different degrees of freedom
to adopt countercyclical macroeconomic policies and even a tendency for developing
countries to adopt procyclical policies, due to their dependence on unstable external
financing (Ocampo, , ).
The main implication of this fact is that economic opportunities are largely deter-
mined by the position that a particular country occupies within the world hierarchy.
For this reason, economic development is not about following ‘stages’ of growth, but
carrying out the associated structural transformations, and employing the appropriate
macroeconomic and financial strategies within the restrictions that each country’s
position within the world hierarchy creates. This was the essential insight of the
Latin American structuralist school and the literature on late industrialization since
Gerschenkron (see Gerschenkron, ; Amsden, ).
As underscored in the classic work by Chenery and collaborators, growth is accom-
panied by regular changes in the sectoral composition of output and the patterns of
international specialization (see Chenery et al., ). Episodes of convergence have
⁷ The development that took place in Japan after the Meiji Restoration, and the escalation of this
country to the top group of developed countries in the post-Second World War years should be included
as successful convergence processes.
⁸ In relation to Latin America, see Bértola and Ocampo (: ch. ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
been generally associated with processes of industrialization and the reallocation of
labour from low- to high-productivity sectors subject to economies of scale and scope
(specialization), but many have also ended in truncated convergences or growth
collapses (Ros, , ; Easterly, ).⁹ Furthermore, a significant feature of
developing countries in recent decades has been the premature de-industrialization
of Latin America and Africa, that is, the reduction in the share of manufacturing in
employment and GDP at much lower levels of income per capita than has been typical
in similar processes in developed countries—a concept and a trend that was first
highlighted by Palma () and Dasgupta and Singh (), and more recently by
Rodrik (). De-industrialization may have been generated by the way economic
liberalization was undertaken, and by the ‘Dutch Disease’ effects of the super-cycle of
commodity prices of the early twenty-first century. Such a trend is in sharp contrast
with the persistent industrialization of East Asia and its spread to a group of middle-
and lower-income countries in South East and South Asia. Asian countries are also the
only ones where recent growth accelerations have mixed structural change with
improvements in labour productivity at the sectoral level, whereas Latin America has
lacked the first element and Africa the second (Diao et al., ).
Several authors have also pointed out that episodes of structural change come in
spurts rather than as steady flows, an idea that may be seen as related to the concept of
waves of innovation. The capacity to generate a wave of innovations or absorb one that
has already been developed in advanced economies depends, in any case, on produc-
tion experience, and follows, therefore, a process of path dependence (Arthur, ).
The complementarities (externalities) among sectors are crucial for a strong growth
process to take place (Rosenstein-Rodan, ; Taylor, ; Ros, , ) and,
if they cannot be developed simultaneously, they may generate successive phases of
disequilibrium (Hirschman, ). These views imply, in short, that the dynamics
of production structures are an active determinant of economic growth and, therefore,
that this process cannot be reduced to its aggregate dimensions.
Elastic factor supplies play an essential role in facilitating a smooth expansion of
dynamic activities. Financing facilities for innovative sectors are essential in this regard,
as emphasized in the literature on late industrialization in the now developed countries;
as we will see, public-sector development banks can play a crucial role in this regard. In
turn, the reallocation of labour from traditional to modern sectors also plays an
essential role, as underscored by Lewis (, ) and many later authors.¹⁰ At the
same time, however, low economic growth may generate the opposite pattern, in which
traditional or informal activities—or the public sector—absorb the labour that modern
⁹ The lasting effects of the debt crises of the s in Africa and Latin America are the most telling
example in this regard, but that of several peripheral European countries (notably Greece) after the
‒ North Atlantic financial crisis has similar features (I use this term rather than the more
commonly used ‘global financial crisis’, because although the crisis had global effects, it centred in the
United States and Western Europe).
¹⁰ Interestingly, Kaldor (: ch. ) and Cripps and Tarling () show the importance that this
process also had during the post-Second World War golden years in industrial countries.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
sectors do not demand (Ocampo et al., ). The interplay between labour mobility
and economies of scale has also been the essential insight of regional economics since
its origins, generating urban and regional growth poles (for a modern version, see
Fujita et al., ). The ‘vent for surplus’ models of international trade, which go back
to Adam Smith, also provide an alternative source of elastic factor supplies: un- or
underexploited natural resources (Myint, : ch. ).
The role of economic policy in these processes has been the subject of heated
controversies. In recent decades, the orthodox emphasis has been on the positive role
that trade openness plays in facilitating economic growth, but the simplistic relation
between trade liberalization and growth has been shown to be incorrect, as under-
scored by several authors after the seminal paper by Rodríguez and Rodrik ().
Indeed, to the extent that scale economies and learning play an important role in
international specialization,¹¹ comparative advantages can be or even are generally
created. More broadly, successful development experiences have been associated with
variable policy packages involving different mixes of orthodox incentives with
unorthodox institutional features (‘local heresies’) (see the comparative analyses of
development experiences in Helleiner, , and Rodrik, , ). Thus, protection
has been a source of growth in some periods in specific countries, but has blocked it in
others; the same thing can be said of freer trade—the degree of openness in the world
economy being critical in this regard. Export growth has been, of course, a crucial
element of East Asian success in recent decades, but has involved significant elements
of state intervention. Mixed strategies have worked well under many circumstances.
Indeed, an interesting historical observation is the evidence that successful experiences
of manufacturing export growth in the developing world were generally preceded by
periods of import-substitution industrialization (Chenery et al., ). Bairoch (:
part I) came to a similar view regarding the role of protection in the growth of the ‘late
industrializers’ during the pre-First World War period, concluding that the fastest
periods of growth in world trade before the First World War were not those charac-
terized by the most liberal trade regimes.
In macroeconomic terms, there is evidence that long-term growth in developing
countries is positively associated with the capacity to guarantee a competitive real
exchange rate, and thus with the idea that an active exchange rate policy can help foster
structural change.¹² In this sense, a competitive exchange rate can be viewed as a type of
industrial policy that can partially substitute for traditional industrial policies, particu-
larly in the face of restrictions on subsidies to production and exports under World
Trade Organization (WTO) rules. However, it should also be complemented by other
industrial policies (e.g. on access to technology and credit) that increase the elasticity of
the aggregate supply to the real exchange rate.
¹¹ See the seminal analysis of this issue in Krugman (), Grossman and Helpman (), and, in
relation to developing countries, Ocampo ().
¹² See Rodrik (), Rapetti et al. (), Razmi et al. (), Rapetti (), and for a review of the
literature, Frenkel and Rapetti () and Missio et al. ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
. T D P
S
..................................................................................................................................
As stated in the introduction, the capacity to permanently generate new dynamic
activities is the essence of successful economic development. In this sense, structural
change is essentially a meso-economic process that includes the variations in the
composition of production, intra- and inter-sectoral linkages, market structures, the
functioning of factor markets, and the institutions that support all of them. Dynamic
microeconomic changes are the building blocks, but it is system-wide structural change
that matters. Furthermore, this process has a strong impact on macroeconomic
dynamics through its effects on investment, employment, and trade, and macroeco-
nomic policy can also affect this process.
The dynamics of production structures may be visualized as the interaction between
two basic forces: () innovations, broadly defined as new technologies, new activities
and new ways of doing previous activities, and the learning processes that characterize
their full realization and their diffusion through the economic system; and () the
complementarities, linkages, or networks among firms and production activities. The
institutions required to enhance these structural processes are crucial and also subject
to learning. Elastic factor supplies are essential to guarantee that these dynamic
processes can deploy their full potentialities. It is the combination of these factors
that determines the dynamic efficiency of a given production system (Ocampo, b).
.. Innovations
The definition of innovations used here follows the broad concept of ‘new combin-
ations’ suggested by Schumpeter (: ch. II): new qualities of goods and services; new
production methods or marketing strategies; opening up of new markets; new sources
of raw materials; and new industrial structures. Today we would also add new ways of
managing the environment, including mitigating the effects of climate change. The
definition includes technological innovations—the more common use of the concept of
innovations in the economic literature—but also a broader set of micro- and meso-
economic processes.
As we saw in the Introduction to this chapter, innovations include not only the
creation of firms, production activities, and sectors, but also the destruction of others—
or, using Easterly’s (: ch. ) terminology, complementary and substitution effects.
Schumpeter’s ‘creative destruction’ is, of course, essential if innovations are to lead to
growth. However, there may be other outcomes: limited destruction but also large-scale
destruction or a mixed negative case, ‘destructive creation’, when the destruction
prevails over the creative parts of the transformation. Also, some locations may
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
concentrate the creative and others the destructive effects, for example, when a
synthetic substitute is discovered in an industrial centre that puts producers of the
natural raw material located elsewhere out of business.
In industrial countries, the incentive to innovate is provided by the extraordinary
profits that can be earned by the pioneering firms that introduce technical, commercial,
or organizational changes, or which open new markets or find new sources of raw
materials. This incentive is necessary to offset the uncertainties and risks involved in
the innovators’ decisions, the incomplete nature of the knowledge they initially have,
and the fact that, due to the externalities that the innovation generates, they may not be
able to fully appropriate its benefits.
In contrast, in developing countries, innovations are largely associated with the
transfer of sectors, new products, technologies, and organizational or commercial
strategies previously developed in the industrial centres. The industrial countries’
innovations thus represent the ‘moving targets’ which generate the windows of oppor-
tunity for developing countries (Pérez, ). The extraordinary profits that innovators
enjoy in developed countries may be absent, as they may involve entry into mature
activities with thinner profit margins. Thus, in the absence of policy incentives, there
may be a suboptimal search for new economic activities (Hausmann and Rodrik, ).
No innovative process is passive, as it requires investment and learning. It requires
investments in physical capital as well as in intangibles, including technological
learning. Technical know-how must indeed go through a maturing process that is
closely linked to the production experience. Climbing up the ladder in the world
hierarchy entails shortening transfer periods, taking ‘detours’ to manage existing
intellectual property rights in place and, most importantly, gradually becoming a
more active participant in technology generation (Lee, ). It requires national
innovation systems to be built up, which should include an institutional framework
to coordinate the various actors engaged in innovation and learning—research and
development centres, universities and technology schools, extension services, and the
innovating firms themselves—and to redirect investments over the long term towards
new capabilities and, of course, an ambitious educational strategy that supports these
processes.
Essential insights into learning dynamics have been provided by ‘evolutionary’
theories of technical change.¹³ These theories emphasize the fact that technology is,
to a great extent, tacit in nature, that is, that detailed ‘blueprints’ cannot be plotted. This
has three major implications. The first is that technology is incompletely available and
imperfectly tradable. This is associated with the fact that technology is, to a large extent,
composed of intangible human and organizational capital, which implies that even
¹³ See Nelson and Winter (), Nelson (), and Dosi et al. () and, with respect to
developing countries, Katz (), Lall (, ), and Lee (). Similar concepts have been
developed in some versions of the new neoclassical growth theory, in which ‘knowledge capital’ is a
form of ‘human capital’ with three specific attributes: it is ‘embodied’ in particular persons, it is capable
of generating significant externalities, and it is costly to acquire (Lucas, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
firms that purchase or imitate it must invest in mastering the acquired or imitated
technology, a process that involves adaptation and even redesigns and other secondary
innovations. Since this process will be specific to each firm, heterogeneous producers
will coexist in any sector of production. The second implication is that technology
proficiency cannot be detached from production experience: it has a strong learning-
by-doing component. This will also apply, at least in part, to technology creation,
which implies that the probability of major innovations would depend on the accu-
mulated technological knowledge and production experience of firms, which in new
technological fields would include new firms. The third feature of technical change,
unrelated to tacitness, is that diffusion of innovations implies that innovative firms only
imperfectly appropriate their benefits. Intellectual property rights provide a mechan-
ism for appropriating those benefits more fully in the case of technological innovations,
but they are not present in other forms of innovation (such as the development of new
activities or a new marketing strategy). Innovations, therefore, have a mixture of
private and public good attributes.
It must be emphasized that these three features of technical change—imperfect trad-
ability, close association with production experience, and private/public attributes—are
equally characteristic of other forms of knowledge, particularly organizational and
commercial know-how, and institutional development. Imperfect tradability, due to its
social-capital attributes, is paramount in the case of organizational knowledge. In
turn, commercial know-how and the development of commercial reputation (good-
will) plays a pivotal role in international trade (Keesing and Lall, ). Moreover,
familiarity with the market enables producers to modify their products and their
marketing channels and helps buyers learn about suppliers, generating client rela-
tions that are important to guarantee the stable growth of firms.
.. Complementarities
Complementarities are associated with the development of networks of suppliers of
goods and specialized services, marketing channels, and organizations and institutions
that disseminate information and coordinate the relevant agents. This concept sum-
marizes the role that backward and forward linkages play in economic growth
(Hirschman, ) but also that of (private, public, or mixed) institutions that are
created to reduce information costs (e.g. on technology and markets) and to mitigate
the coordination failures that characterize interdependent investment decisions
(Chang, ). Complementarities generate positive externalities among agents,
which help reduce their costs. They are the basis of the dynamic meso-economic
economies of scale that determine the competitiveness of production sectors in a
given region or country—or the lack of it. Under these conditions, competitiveness
involves more than microeconomic efficiency: it is essentially a meso-economic or even
a system-wide feature (Fajnzylber, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
The cost and quality of the non-tradable inputs are particularly important in this
regard. They contain specialized services, including knowledge, and logistic and mar-
keting services, for which closeness to producers who use the inputs or services may be
a critical factor. They may also include specialized financial services, where closeness
can also be important due to asymmetric information. Also, and although importing
tradable inputs from the best supplier worldwide can encourage export competitive-
ness, the capacity to generate value chains in which exports have a large domestic
value-added content based on national clusters determines how much a given country
benefits from trade. Such contents differ considerably among countries. According to
OECD-WTO data, and focusing only on developing countries that are important
manufacturing exporters, the share of value added in gross exports in was .
per cent for China, where it has been rising over the past decade, . per cent for the
Republic of Korea, also rising, but . per cent and falling for Mexico, and only .
per cent, also falling, for Vietnam.¹⁴
As we have seen, the ability of innovative activities to attract capital and labour, and
to gain access to the natural resources they need, will be a critical factor in facilitating
the growth of these activities. One factor is the role of national development banks in
facilitating long-term finance for innovative activities. International capital mobility—
particularly foreign direct investment—can also play an important role. International
labour migration may be critical for skilled labour. Unemployed or, more typically,
underemployed natural resources can facilitate the expansion of innovative sectors that
require them—for example, innovative agricultural activities. And, of course, in the
developing world, low-productivity activities, characterized by a considerable element
of underemployment (or informality), act as a residual supplier of the labour required
by a surge of economic growth. The distinction that dualistic models make between
‘traditional’ and ‘modern’ sectors is inappropriate for describing this feature of the
developing world, as high- and low-productivity sectors are heterogeneous in their
structure. The term ‘structural heterogeneity’, coined by Latin American structuralists
(Pinto, ) to describe this phenomenon, is more appropriate and will thus be used
in this chapter.
Structural heterogeneity implies that the dynamism generated by innovative activ-
ities and the strength of the linkages they generate determine the efficiency with which
the aggregate labour force is used (i.e. the extent of labour underemployment), as well
as the underemployment of other factors of production, particularly land. A similar
process can be generated by the better use of existing infrastructure. At the aggregate
level, these processes give rise to Kaldorian growth–productivity links of similar
characteristics, but in addition to the micro- and meso-economic dynamic economies
of scales associated with learning and the development of complementarities. This
means, of course, that aggregate productivity growth is both a cause and an effect of
dynamic economic growth (see section .. below).
¹⁴ See OECD, Trade in value added database, https://www.oecd.org/sti/ind/measuring-trade-in-value-
added.htm#access.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
.. The Interplay of Innovations and Complementarities
The interplay between these factors will determine the dynamic efficiency of a given
process of structural transformation. Innovations accompanied by strong complemen-
tarities will be reflected in the absorption of an increasing number of workers into
dynamic activities. The result will be a virtuous circle of high investment, accelerated
technological learning, and institutional development. On the other hand, destructive
forces may prevail, giving rise to a vicious circle of a slowdown in productivity and
economic growth, decline in investment, increased structural heterogeneity as surplus
manpower is absorbed into low-productivity activities, and loss of production experi-
ence that widens the technology gap vis-à-vis industrialized countries.
A simple typology of different processes of structural transformation can be sug-
gested (Ocampo, b). ‘Deep transformation’ is characterized by strong learning
(including induced technological innovations) and complementarities (economies of
agglomeration and specialization, and knowledge spillovers) and hence also by strong
micro- and meso-economic dynamic economies of scale, and by the additional prod-
uctivity effects generated by the reduction in underemployment. This tends to be the
pattern in periods of rapid growth in the developing world and has characterized the
East Asian success stories of recent decades. The opposite, which can be called ‘shallow
structural transformation’, is characterized by the weakness of both learning and
complementarities. A classic case is natural resource enclaves, but as we shall see,
this may also be true today of certain forms of assembly manufacturing.
A first mixed case combines strong learning with weak linkages, due to high import
requirements. Some import-substitution activities of the past were of this type; in this
case, the initial innovative effect may soon be exhausted due to its limited sectoral or
systemic effects. A second mixed case is the combination of strong linkages with weak
learning processes. In this case, productivity growth at the firm level may be low, but
there may be significant aggregate productivity effects associated with reductions in
underemployment and the development of complementarities. The expansion of
labour-intensive export crops (e.g. coffee) is a case in point.
The association with large-scale international networks of suppliers—global value
chains¹⁵—that comes from very active foreign direct investment by multinational
firms, and more codified technology that can be borrowed by paying the associated
intellectual property rights, reduces the costs for developing countries to enter new
activities. However, the centralization of research and development efforts and the
marketing of the associated products—which can be seen as the two poles of the value
chain—also risk ‘shallow’ structural transformation for the developing countries where
assembly manufacturing takes place; the lack of domestic complementarities also
makes these export activities footloose. Governments would have to challenge this
outcome by promoting domestic complementarities and transition to new sectors that
can benefit from existing specialization patterns.
¹⁵ Now, of course, being challenged by US protectionist policies and the coronavirus pandemic.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
Finally, the typology is useful for understanding some of the social effects of
structural transformations. In this regard, deep transformations have better effects on
formal employment and standards of living than shallow processes. However, if there is
technical bias in the demand for labour in the first case, wage differentials may increase
if the education policy does not rapidly increase the supply of skilled labour. Strong
learning with weak linkages may lead to increased structural heterogeneity, whereas the
opposite combination may generate strong demand for low-skilled labour.
.. The Links between Productivity and Growth
The relationships between structural dynamics and long-term growth can be formalized
as a dual link between economic growth and productivity (Ocampo and Taylor, ;
Ocampo et al., : ch. ). On the one hand, economic growth has positive effects on
productivity through four channels: (i) dynamic economies of scale of a microeconomic
character, associated with learning and induced innovations; (ii) if technology is
embodied in new equipment, a higher rate of investment induced by faster growth
will also increase productivity; (iii) the productivity effects of the development of
complementarities, associated with the exploitation of intra- and inter-sectoral external
economies (economies of agglomeration and specialization, and knowledge spillovers);
and (iv) the transfer of underemployed workers to higher-productivity activities. Kaldor
(: chs and ) called this link between productivity and production growth (shown
as TT in Figure .) the ‘technical progress function’. Following the literature on the
topic, it could also be referred to as the Kaldor-Verdoorn function.
G
G’
T’
D
T
B
C
Productivity
growth
T’ A
G G’
GDP growth
. Productivity and GDP dynamics
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
It must be emphasized that the technical progress function is not an aggregate
production function. Rather, its positive slope implies that there is some underutiliza-
tion of resources at any point in time and, therefore, that growth induces a better
allocation of resources—and the lack of growth reduces aggregate productivity, mainly
through the underemployment of labour.
The second relationship, shown as GG in Figure ., focuses on the reverse causality
link: productivity growth increases economic growth. It can have diverse determinants,
which alternately capture either aggregate supply or aggregate demand effects. First,
technical change directly increases aggregate supply; this is the channel most empha-
sized in the growth literature. It also generates new investment that increases aggregate
demand, generating a GG curve of a Keynesian nature. If the economy is foreign
exchange constrained—a situation not uncommon in developing countries—the GG
function would be effectively an aggregate supply function determined by the balance-
of-payments restrictions (Thirlwall, a, b).¹⁶ Technical change also improves
international competitiveness and thus the trade balance and aggregate demand; if the
economy has a scarcity of foreign exchange, it weakens this constraint and has
aggregate supply effects.
As both curves have positive slopes, the effects that they capture reinforce each other,
generating alternating positive feedbacks but also possible negative feedbacks. A stable
equilibrium A exists when TT is flatter than GG, as shown in Figure ..¹⁷ Given the
determinants of the technical progress function, TT will be flatter if micro- and meso-
economic dynamic economies of scale are not too strong, or labour underemployment
is moderate. In a Keynesian model, the slope of GG will depend on the elasticity of
investment to productivity growth, whereas in foreign-exchange-constrained models, it
will depend on the elasticities of exports and imports to productivity. In both cases, the
higher the elasticities the flatter GG will be.
It is important to emphasize that the relationships shown here are assumed to be
medium or long term in character (some short-term macroeconomic effects associated
with the balance of payments will be analysed below). If there is a new wave of
innovations, the TT function will shift upward, to T’T´, accelerating both productivity
and income growth at a new equilibrium point B. As this particular wave of innov-
ations becomes fully exploited, the function may shift down. In turn, a favourable
macroeconomic shock—improved investment financing in a Keynesian model, or
improved export prospects or access to external financing in a foreign exchange-
constrained economy—will shift the GG function rightwards to G’G´, generating a
new equilibrium at C; a negative macroeconomic shock will, of course, have the
¹⁶ See also the October issue of the Review of Keynesian Economics in honour of Thirlwall. There
may also be savings constraints. For a full analysis of the gaps in macroeconomic adjustment that may be
reflected in the GG curve, see Taylor ().
¹⁷ Under significant initial labour underemployment or underutilization of other resources, the slope
of TT could be steeper than that of GG, generating an unstable equilibrium at A. In this case, any
displacement from saddle point A will lead the economy into explosive virtuous or vicious growth
processes.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
opposite effect. With positive productivity and macro effects, the two curves could
shift, generating a new equilibrium at D.
In Ocampo (b), this simple framework is used to analyse the effects of trade
liberalization on growth. The net effects are uncertain since they depend on many
factors that affect both functions. In the orthodox view, that opening the economy to
competition (including external competition) unleashes more innovations, then the
TT function will shift up. However, if the response of firms to liberalization is a
rationalization of their production (i.e. a defensive attitude) rather than a new wave of
innovation and investment, the TT curve may not be affected; it may even be
adversely affected if the static comparative advantages are in sectors with limited
innovations and complementarities (see section .). On the other hand, through
either Keynesian mechanisms or the supply effects characteristic of a foreign-
exchange-constrained economy, the increase in the propensity to import generated
by a trade reform will lead to a leftward shift in the GG function, with adverse effects
on equilibrium growth. Overall there is, therefore, no general presumption that trade
liberalization will accelerate growth, as the positive microeconomic links emphasized
by defenders of liberalization may be swamped by adverse structural and macroeco-
nomic effects.
. C D
..................................................................................................................................
Commodities have been and will continue to be at the heart of development in several
parts of the developing world, notably Africa, several parts of Latin America (particu-
larly South America), the Middle East, and some other Asian countries. Furthermore,
the recent commodity boom, which started in and lasted for a decade, generated a
‘re-primarization’ (or ‘re-commoditization’) in several Latin American countries,
understood as a growing share of natural resource goods in the export basket.¹⁸
The links between commodity dependence and development have been the subject
of heated debate in the development literature as to whether commodity dependence
promotes or obstructs structural change, and particularly whether it benefits or harms
the development of manufacturing and modern services. There is also discussion on
how the macroeconomic challenges associated with commodity price trends and
fluctuations should be managed.
The historical debate on these issues started with the Prebisch–Singer hypothesis,
which claimed that commodity prices tended to deteriorate in the long term relative to
those of manufactures (Prebisch, ; Singer, ). The original hypothesis involved
two complementary ideas (Ocampo, ). The first was that commodities are char-
acterized by low income and price elasticities of demand. The second and more
interesting suggestion was that there is an asymmetry between the labour markets of
¹⁸ See Chapter in this volume.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
advanced and developing countries, which implies that technological progress in
manufactures tends to increase real wages in developed countries whereas, given the
pool of unskilled labour, it tends to depress the prices of commodities in the developing
world. This coincides with Lewis’s () analysis of the terms of trade of developing
countries. It implies that manufactures exported from developing countries may face
similar pressures.
Focusing first on long-term commodity price trends, the Prebisch–Singer hypothesis
was largely discarded on empirical and analytical grounds in the three decades after its
formulation. Interestingly, it was revived by the work of Grilli and Yang () at the
World Bank, who showed that real commodity prices had declined through the
twentieth century. These findings triggered a significant flow of empirical contribu-
tions.¹⁹ A major conclusion of this literature is that the factors underlying such long-
term trends and cycles vary through time, including, in recent decades, for example, the
rising Chinese demand for commodities, notably for metals, and that this gives rise to
specific features in different periods.
Overall, Grilli and Yang’s view that the terms of trade have deteriorated through the
twentieth century has been confirmed in the empirical literature. According to Erten
and Ocampo (), the adverse trend was stronger in terms of length and intensity for
tropical agricultural goods than for temperate-zone agriculture and metals, and short
and weak for oil prices. However, there was no adverse long-term trend in the
nineteenth century, and there has not been one in the early twenty-first century,
where there has been rather an upward trend for metal and oil prices, which will
probably come to an end due to the COVID- crisis. In turn, non-oil commodities
have experienced four long-term thirty-to-forty-year cycles since the late nineteenth
century (the last still ongoing), with substantial overlap among different commodity
groups, as they are largely determined by trends in world GDP.
The broader macroeconomic effects of commodity dependence should be analysed
from both a short- and a long-term perspective. The short-term dimensions are closely
associated with the cyclical patterns of commodity prices, which generate fluctuations
in income levels, aggregate domestic demand, and the balance of payments. The
procyclical patterns of investment tend to be particularly strong, and are enhanced
by those of both external and domestic finance (see section .). In commodity-
exporting countries, financing cycles tend to follow those of commodity prices, and
the recent ‘financialization’ of commodity markets has reinforced this pattern.
Among the main implications of these cyclical fluctuations are their effects on the
real exchange rate. The cyclical fluctuations of this variable tend to reinforce the
variations of aggregate demand in economies with net liabilities in foreign currency:
real exchange-rate appreciation during booms generates windfall wealth gains that
enhance spending, whereas depreciation during crises generates wealth losses, which
accentuates the contraction of spending. The distributive effects go in the same
direction: if the appreciation benefits workers and the depreciation hurts them, there
¹⁹ See a review of the literature in Erten and Ocampo (), the conclusions of which are summarized
in the next paragraph.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
will also be procyclical effects, given the higher propensity to spend out of wages. As the
more traditional macroeconomic literature has argued, the effects of real exchange-rate
fluctuations on the current account of the balance of payments will tend to be counter-
cyclical (non-primary exports decreasing and imports rising during commodity
booms, and the opposite evolution occurring during crises). However, if there is an
initial surplus during the boom (e.g. due to macroeconomic adjustments adopted to
manage the previous commodity crisis), or an initial deficit during the crisis (as a result
of the strong expansion of aggregate demand during the boom), the initial effect would
also be procyclical and the countercyclical effects will come with a lag.
In terms of cyclical behaviour, the critical choice for governments is whether to
adopt a countercyclical stance, as macroeconomic theory recommends, particularly in
its Keynesian variants, or follow a procyclical pattern, associated with either economic
or political-economy pressures, or both. In commodity-dependent economies, an
important countercyclical instrument is a commodity stabilization fund through
which the government saves, during the boom, some of the increased revenues from
taxes on commodity sectors and the profits from state-owned enterprises active in
those sectors (particularly important in oil and minerals sectors).²⁰ This also helps to
mitigate the procyclical effects of commodity prices on real exchange rates if those
revenues are kept abroad or saved as foreign exchange reserves by the central bank.
There may, however, be strong political pressures to spend those revenues, in which
case the procyclical effects of commodity prices will be transmitted in a stronger way to
the domestic economy. As we will see in sections . and ., the government’s ability
to counteract the procyclical effects of a mix of a commodity boom and procyclical
financial flows with countercyclical monetary policy would be limited if there is free
movement of capital; the use of some other instruments would, therefore, be necessary.
The long-term structural effects of commodity dependence are associated, in turn,
with whether the commodity sectors generate strong or weak linkages with other
economic activities, and whether commodity dependence is associated with strong or
weak productivity growth and learning. In classical analyses of commodity depend-
ence, including those associated with Prebisch and Singer, the basic arguments were
that manufacturing generates stronger linkages and is a better mechanism to transmit
technical progress. As we have seen, the more recent literature has tended to confirm
that rapid economic growth in emerging and developing countries continues to be
associated with industrialization drives and, in contrast, that the de-industrialization
that Latin America and Africa have experienced in recent decades is an adverse trend.
It can be argued in favour of commodity dependence that the opportunities for
technical progress and linkages with both the manufacturing and service sectors have
been behind the capacity of commodity-dependent developed countries to prosper.²¹
²⁰ This choice is part of a broader dilemma of how much to save or invest out of commodity booms.
For an analysis of this choice in oil economies, see Cherif and Hasanov ().
²¹ One interesting analysis is the comparative history of Scandinavian vs. Latin American historical
development, in the essays collected in Blomström and Meller ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Pérez () mounts a strong defence of the development opportunities provided to
Latin America by its natural resources, arguing that there are ample technological
opportunities—biotechnology, nanotechnology, environmentally friendly products—
associated with natural resources and the opportunities to exploit the whole value
chains of natural resource-intensive sectors. In contrast, states Pérez, Latin America is
too far behind in other technology sectors and is no longer a low-wage region. There are
also strong complementarities with Asia, an argument that applies even more strongly
to Africa, where China is both a major market and investor. The major challenge in both
cases is how to diversify into non-commodity sectors, using rising commodity revenues
(including those from commodity-producing state-owned enterprises).
The long-term effects are not independent of the cyclical effects of commodity
dependence. This implies that the structural vulnerabilities associated with commodity
dependence are combined with short-term macroeconomic vulnerabilities. Those
associated with real exchange-rate fluctuations are particularly important. Real
exchange-rate appreciation during commodity booms has a negative effect on non-
commodity tradable sectors (both exporting and import competing) during booms—
an effect that has been strongly emphasized by the ‘Dutch disease’ literature.²² Firms in
non-resource tradable sectors may go bankrupt during commodity booms, generating
permanent effects on economic structures and productivity if the latter is associated
with production experience (Krugman, : ch. ). The unstable incentives associated
with real exchange-rate fluctuations through the business cycle also make the profit-
ability of those sectors highly volatile, reducing investment in structural diversification.
Beyond the structural and macroeconomic vulnerabilities mentioned lie other vul-
nerabilities of a more political-economy or institutional character. In this regard, the
literature on the ‘Dutch disease’ has emphasized the institutional effects of the rentier-
ism associated with natural resources. There may also be significant distributive effects
associated with land concentration in agriculture and, in the cases of hydrocarbons and
mining, high industrial concentration.
. M, F,
S C
..................................................................................................................................
There are two crucial links between macroeconomics, finance, and structural change.
The first is the positive contribution made by financial institutions that support innova-
tive sectors with long-term risk capital and lend ‘patient capital’ (Mazzucato, ).
Funding can, of course, be external or domestic, with national development banks
(NDBs) having an important role to play in domestic financing. The second link, in
²² On the ‘Dutch disease’, see, among many others, Corden and Neary (), van Wijnbergen
(), and Krugman (: ch. ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
contrast, concerns whether finance risks undermining growth, because it generates
boom‒bust macroeconomic cycles—again of external or domestic origin—that may
end up in costly crises. Important links between capital flows and structural change
are (i) the possible misalignment of exchange rates during booms and (ii) exchange-rate
volatility through the business cycle, with a negative effect on innovative tradable sectors.
Focusing first on international capital flows, the key question is which of two effects
on the domestic economy will prevail. The first is the direct contribution to growth if it
leads to higher domestic investment, and particularly to key areas of innovations or
domestic competitiveness. The contrasting effect is the risk that growth is undermined
because external financing can be consumed, and in that case substitutes domestic
savings, but particularly because it is potentially reversible and can lead to ‘sudden
stops’ that generate costly crises (Calvo, ).
If investment is increased, whether it is channelled to sectors with higher prod-
uctivity or faster productivity growth will generally depend on domestic economic
structures rather than on capital flows as such. From a policy perspective, it may be
possible, however, to encourage foreign direct investment which brings technological
innovations, increases exports, and/or produces for the domestic and foreign markets
with higher domestic value-added contents.
Multilateral development banks (MDBs) can also play a role in supporting innov-
ations, including the development of relevant domestic institutions. They can also
support activities with significant externalities, notably infrastructure and investments
that contribute to combatting climate change. Recent analyses have underscored the
role of MDBs and sovereign wealth funds in providing financing to reduce the large
infrastructure gaps that characterize the developing world, as well as the full develop-
ment of infrastructure as an asset class (see, for example, Bhattarcharya et al., ).
A major countercyclical role, recognized by all MDBs since the ‒ North
Atlantic financial crisis, is that of increasing their lending or investments by their
financial corporations in developing countries when international private capital flows
experience a major downward swing or a sudden stop. MDBs significantly increased
their financing during that crisis and its aftermath (Ocampo, a: table .). All
MDBs were also capitalized during those years; two more recent institutions of this
type are the Asia Infrastructure Investment Bank (AIIB) and the BRICS’ New Devel-
opment Bank, in both of which China is playing a leading role.
An extensive literature discusses the macroeconomic risks associated with cross-
border capital flows and the policies required to manage them. The major risks are the
volatility of international private capital flows, the procyclical pattern of country risk
premiums, and the contagion that characterize both booms and sudden stops of
external financing. The literature has identified a sort of hierarchy of volatility, with
FDI being the more stable, and short-term bank lending and portfolio flows more
unstable (Rodrik and Velasco, ).²³ These problems are particularly important in
²³ As the IMF (: ch. ) has shown, there is evidence that FDI has also become more volatile,
largely because it has become partly financialized. This relates to greater use by multinationals of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
relation to emerging economies, but also affected peripheral Europe during the North
Atlantic crisis, and are also increasingly important to low-income countries—the
‘frontier markets’ in current terminology.
From a theoretical perspective, the major problem of volatile flows is that they have
negative externalities, as individual investors and borrowers do not take into account the
effects of their financial decisions on other investors and, overall, on the level of financial
stability in a particular country (Jeanne and Korinek, ; Korinek, ). From an
empirical perspective, the intellectual battle over the effects of capital market liberaliza-
tion was settled by a major International Monetary Fund (IMF) study (Prasad et al.,
), which showed that it generates stronger business cycles in developing countries,
and to a lesser extent in developed countries. This was also a major conclusion of the
Commission on Financial Stability convened by the Bank of International Settlements
after the outbreak of the North Atlantic financial crisis (BIS, ).
Strong evidence also comes from later studies. Gourinchas and Jeanne (),
among others, have shown that countries that have grown more are the ones that
have relied less, not more, on capital flows for growth, and have therefore run stronger
current account balances; this result is, of course, related to the links between com-
petitive exchange rates and growth. The ‘meta-regression’ analysis by Jeanne et al.
(: ch. ) also found very limited evidence of a link between financial globalization
and growth in the period ‒.
In terms of macroeconomic and financial policy, the major implications of these
effects are that capital account liberalization generates major risks in emerging and
developing countries, and that a proper macroeconomic policy in these countries
should include the use of capital account regulations (CARs) to manage the risks of
cross-border flows, as part of the broader family of ‘macroprudential’ regulations
(Ocampo, a: ch. ).²⁴ Section ., the final section of this chapter, provides an
additional discussion of this issue.
At the domestic level, the central problem in many (or even most) emerging and
developing countries is that their financial markets are thin, that is, they are charac-
terized by the strong prevalence of short-term financial assets and liabilities. This
means that long-term financing is limited, forcing firms to rely on short-term loans
for their investments, or limiting them to what they can finance with retained profits.
From a stability perspective, the major issue is the variable mixes of maturity and
currency mismatches in portfolios. This means that, during crises, creditors may not
roll over short-term loans, thus generating a liquidity crunch, or may subject domestic
borrowers to interest rate increases at a time when their revenues are falling. Domestic
bond markets—if they have developed—will also shrink and be subject to shorter
maturities and/or higher interest rates. For larger firms that have borrowed abroad,
intra-corporate and other international loans to fund subsidiaries, as well as derivatives, both to hedge
their exposure, but also to speculate on currencies.
²⁴ I prefer the term ‘capital account regulations’ to ‘controls’, because most are not direct regulation
and are rather similar to other prudential regulations.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
debt ratios will rise if exchange rates depreciate. The limited development of future
markets implies that the capacity of agents to cover these mismatches would be very
limited.
Given the limitations and stability issues that domestic financial sectors face, NDBs
play an essential role from both growth and stability perspectives. As argued in
Griffith-Jones and Ocampo (), NDBs should have five main functions, which
help cover associated market failures: (i) providing countercyclical financing;
(ii) promoting innovation and structural change; (iii) financing infrastructure invest-
ment; (iv) enhancing financial inclusion; and (v) supporting the provision of public
goods, particularly combatting climate change.
Function (ii) is particularly important for the topics analysed in this chapter, but
other dimensions also potentially are. Function (i) makes development banks an
additional instrument of countercyclical macroeconomic policy, and (iii) makes them
an instrument of infrastructure financing, two functions we have discussed in relation
to MDBs. Promoting small start-ups or SMEs that link to them, as part of the broader
objective of financial inclusion (iv), may also be essential for structural change. And
many of the activities associated with mitigating and adapting to climate change,
included under (v), are innovative activities in themselves. But I will underscore the
function of development banks as providers of ‘patient capital’ to support innovative
sectors and firms.
The failure of private financial markets to deliver adequate long-term funding is
behind the history of NDBs in many developing but also developed countries. They are
a crucial feature of financial sectors in successful emerging economies like China, India,
and the Republic of Korea, but also in prosperous developed countries, notably
Germany. After a long period of neglect in the academic and policy literature, they
have been the subject of renewed interest by MDBs²⁵ and by policymakers in several
developed and developing countries, some of which have created NDBs over the past
decade.
The evidence from World Bank data indicates that NDBs played a countercyclical role
in the wake of the North Atlantic financial crisis (Luna-Martinez and Vicente, ). In
turn, Mazzucato and Penna () have argued that there is mounting evidence that
NDBs have fostered patient, long-term committed finance for mission-oriented invest-
ment in innovative activities. The case studies analysed in Griffith-Jones and Ocampo
() corroborate this: the role of KfW, the German development bank, in the devel-
opment of renewable energy; of the CDB, the Chinese NDB, in nurturing high-tech
ventures since the s; of Brazil’s BNDES in financing programmes targeted at high-
tech firms and promoting a successful venture capital fund; and of the successful start-up
programme of CORFO, the Chilean development agency, among others.
One of the key features of successful NDBs is, of course, providing leverage to attract
private investors and deepen domestic financial markets. The development of new
²⁵ See, for example, the work of the World Bank economists Luna-Martinez and Vicente ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
instruments, such as guarantees, equity—including venture capital—and debt funds
have been major innovations in this regard. Loan instruments continue to be import-
ant, though greater emphasis than in the past is placed on second-tier loans. A key is, of
course, the long-term character of NDBs’ loans (over per cent of their lending is for
ten years’ maturity or more). In the area of financial inclusion, correspondent stores
have also been an important new instrument that can be widely used by commercial
banks (Colombia being a success story in this regard). In Mexico, NAFINSA also
operates an online reverse factoring system called Productive Chains, which allows
SMEs to sell their accounts receivables from large companies to private banks, provid-
ing themselves with working capital. Several NDBs have helped deepen financial
markets by introducing local currency and green bonds into their local capital market.
Expanding the role of NDBs in countries that have them, or creating them in those
that do not, would therefore help create a financial system that better serves develop-
ment needs. These activities should be linked to strong development policies with
structural change at their heart, they should have adequate support from macroeco-
nomic policies, and be buttressed by good governance structures that guarantee, in
particular, that they are not used for rent-seeking. This does not necessarily imply large
government resources, as the only public contributions would be an increase in their
paid-in capital and special programmes that governments want to promote. NDBs
would then fund their operations on the private domestic market, as well as inter-
national capital markets—including through the support of MDBs and their financial
corporations.
. P I
..................................................................................................................................
The main conclusion of this chapter is that the key to rapid growth in the developing
world is the dynamic efficiency of economic structures, defined as their capacity to
generate new waves of innovative activities. The strategies aimed at promoting struc-
tural change should be mixed with appropriate macroeconomic and financial policies.
They also require appropriate institutional frameworks, the formation of human
capital, and the development of infrastructure, but these additional conditions (not
analysed here) only serve as the context for the structural transformation and are not in
themselves sufficient to guarantee dynamic economic growth.
The focus on structural dynamics helps to identify the policy areas and specific
institutions that authorities should target to accelerate economic development. The
first is encouraging innovations—in the broad sense of the term—and the associated
learning processes in the areas of technological development, productive organization,
and marketing strategies. In emerging and developing countries, the diversification of
production structures that this policy requires may be largely associated with the
transfer of sectors of production from the industrialized world. The second policy
area is the development of complementarities—backward and forward linkages in
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
Hirschman’s terminology—aimed at guaranteeing that innovations spread through the
economy, at the same time ensuring system-wide competitiveness. Non-tradable
inputs and specialized services (knowledge, logistics, and marketing services) are
particularly important, but tradable inputs also are, as part of a policy aimed at
increasing the domestic value added of a given economic activity.
An adequate structural transformation strategy should therefore develop a fair
balance between individual entrepreneurial initiatives—microeconomic dynamics—
and equally appropriate meso-economic processes that diffuse innovations through
the economy and help create appropriate complementarities. This includes the estab-
lishment of institutions aimed at increasing information and coordination among
agents; different mixes of public and private institutions can play that role, according
to the tradition of each country. Moreover, different mixes of international, national,
and local institutions can play a positive role in this regard.
The appropriate strategies should mix horizontal and selective policies. Although a
fundamental advantage of the former is their neutrality vis-à-vis individual agents,
selective policies must be part of an effective structural diversification strategy that
reinforces successful specialization patterns, helps nurture ‘infant sectors’, and creates
comparative advantages. These policies must include support for research and devel-
opment in the relevant sectors, the institutions that link firms in those sectors, their
export strategies, and special long-term credit lines from NDBs. Furthermore, when
there are limited resources, any ‘horizontal’ policy must be detailed and, hence,
necessarily becomes selective. Clear examples are the allocation of resources from
funds for technological development and export promotion. Recognizing that there
is an implicit selectivity in horizontal policies will lead to a better allocation of resources
than a supposedly neutral stance.
Under current global conditions, emphasis should be placed on integrating into
dynamic global markets and thus on developing competitive export sectors, as well as
mixing industrial and competition policies. Incentives should be granted based on
performance, generating ‘reciprocal control mechanisms’, to borrow Amsden’s ()
term. In this regard, the capacity to export is indeed the best control mechanism, as
underlined by Oqubay in his contribution to this volume (see Chapter ) and by Cherif
and Hasanov ()—and, of course, as the East Asian success stories indicate. The
institutional structure that guarantees this should be subject to periodic evaluations,
within its learning path.²⁶
A complex issue is the framework of international rules, especially those of the
WTO and the wave of bilateral and plurilateral free-trade agreements. In this regard,
although priority should be given to taking advantage of the manoeuvring room
provided under existing agreements, there is a strong sense that a larger policy space
(to borrow the term extensively used in UN debates) should be made available to the
governments of developing countries, as policy autonomy has been severely restricted in
²⁶ See also on these issues Hausmann and Rodrik ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
trade negotiations. In particular, according to the analysis presented in this chapter, they
should be allowed to apply selective policies and performance criteria to encourage
innovation and create the complementarities that are essential for development. To the
extent that the current ongoing trade wars undermine the world trading system, regional
integration processes among emerging and developing countries may be particularly
attractive.
According to our analysis, structural transformation is not a ‘once and for all’
process, but rather a persistent task, as the structural transformation process is
continuous and may face obstacles at any stage. To the extent that in developing
countries innovative activities are largely the result of the spread of new sectors and
technologies previously created in the industrial centres, these activities may be
regarded as the new set of ‘infant sectors’ to be promoted—particularly infant export
activities. Furthermore, according to the analysis presented here, the process of trans-
formation is by no means smooth: destruction is a constant companion of creation, and
structural heterogeneity is a persistent feature that may increase at different stages.
Distributive tensions are presumably associated with both factors. In this context,
supporting the restructuring of firms in old sectors and regions that concentrate
them, avoiding transformation processes that increase structural heterogeneity, and
working to upgrade low-productivity activities and generate positive links with high-
productivity sectors are critical for achieving a more equitable development process.
As part of their broader set of functions, NDBs can play a crucial role in guarantee-
ing the availability of long-term financing for innovative sectors, and should interact
closely with private financial agents. Private investment banking and venture capital
can also play a role, but past and recent experience indicates that they do not
automatically expand optimally in developing countries. Hence the importance of
private financial agents working together with NDBs, which in their turn should help
build deeper domestic financial sectors. Access to international financial services of this
sort may also be important to guarantee funding of innovative activities, but this may
generate a strong bias in favour of multinational and large domestic firms and against
small and medium-sized enterprises.
Macroeconomic policies should aim, in turn, at smoothing business and investment
cycles, and guaranteeing a competitive and relatively stable real exchange rate. Smooth-
ing cyclical commodity price fluctuations and external financing boom‒bust cycles is
essential for the relative stability of the exchange rate. Absorbing part of the commodity
booms with stabilization funds or taxes is critical for managing the first of these
problems, while CARs are essential to regulate the second. The latter should be
complemented at the domestic level with regulatory policies aimed at avoiding unsus-
tainable credit booms, and managing the maturity and currency mismatches in
portfolios, and the incompleteness of futures markets. NDBs should also be active in
the provision of countercyclical financing at the national level, complementing the role
played by MDBs at the international level.
A competitive exchange rate can be seen as a type of industrial policy, indeed
perhaps as the best ‘neutral’ industrial policy, particularly in the face of restrictions
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
on subsidies to production and exports under WTO rules. However, exchange-rate
policy alone may fail to encourage diversification: it should be complemented by other
industrial policies that increase the elasticity of the aggregate supply of tradables to the
real exchange rate. A competitive exchange rate may also benefit sectors, particularly
natural resource sectors that should not be subject to specific incentives. This implies
that an active exchange-rate policy must be combined with taxes on sectors with no
externalities, smaller learning spillovers, and weak domestic complementarities
(Guzman et al., ). The stability of the real exchange rate is also essential to provide
stable profit incentives, which would help reduce the uncertainties that characterize
investment in innovative sectors.
The policy interventions necessary to guarantee a competitive and stable real
exchange rate should include CARs and exchange-rate management; both aim at
facilitating a more positive relationship between international capital flows and
macroeconomic management (Ghosh et al., ; Ocampo, , a: ch. ).
CARs play the dual roles of both macroeconomic and financial stability tools. As a
macroeconomic instrument, they provide greater room for countercyclical monetary
policies. During booms, they increase the space needed for contractionary monetary
policies while mitigating the exchange-rate appreciation pressures that such mon-
etary policies may generate. During crises, they can create space for expansionary
monetary policies while constraining capital flight as well as excessive exchange-
rate depreciation that would otherwise partly translate into domestic inflation and
rising debt/GDP ratios. In turn, when viewed as a financial stability tool, CARs
recognize the fact that there is a ‘hierarchy’ of volatility, as reversibility is particu-
larly important for portfolio flows and short-term bank lending.
There is a broad consensus in the literature that CARs help improve the composition
of capital flows towards less reversible flows, and provide room for countercyclical
monetary policies. As Erten and Ocampo () have shown, they also reduce the
‘foreign exchange pressure’ generated by capital flows in emerging and developing
countries. All these advantages mean that there is now a broad consensus in the
international policy debate that the full liberalization of the capital account is not
desirable and that CARs can play a positive macroeconomic role—views that can
particularly be seen in the IMF’s ‘institutional view’ on capital account management
(IMF, ).
CARs can and should be combined with active intervention in foreign exchange
markets and effective management of foreign exchange reserves in a countercyclical
way: accumulation during booms and use of reserves as a stabilization tool during
crises. Countercyclical foreign exchange reserve management has indeed been a wide-
spread practice in emerging and developing countries since the East Asian crisis
(Ocampo, a: ch. ). However, the ‘self-insurance’ that they provide is costly, as it
involves accumulating an asset that has low yields (foreign exchange reserves) to
compensate for the entry of private capital inflows, which have higher costs; if reserve
accumulation is sterilized, central banks will also incur losses. CARs are, therefore, a
less costly policy instrument, but countries may be reluctant to use them because they
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
are seen as a distortion in financial markets, and there may be restrictions on their use
associated with investment treaties.
In summary, the combination of CARs with exchange-rate and foreign exchange
management, the countercyclical monetary policy that they facilitate, and counter-
cyclical fiscal policies, forms the appropriate macroeconomic policy package. Aside
from its contributions to countercyclical management, this policy package has long-term
development implications, in that it contributes to maintaining a competitive and
relatively stable real exchange rate. It creates a positive relation between international
capital flows, macroeconomic stability, structural transformation, and economic growth.
A
This chapter borrows from the author’s previous work on the subject, and from joint work
with Bilge Erten, Stephany Griffith-Jones, Martin Guzman, Codrina Rada, Joseph E. Stiglitz,
and Lance Taylor, whose contributions are gratefully acknowledged. In particular, the section
on the dynamics of production structures borrows from Ocampo (b) and my analysis of
financing issues from my work with Stephany Griffith-Jones (Griffith-Jones and Ocampo
). The author thanks Reda Cherif, Fuad Hasanov, Arkebe Oqubay, Gabriel Porcile, and
Rajah Rasiah for comments on a previous draft of this chapter, also Verónica Pérez for her
support in its drafting.
R
Aghion, Philippe and Peter Howitt () Endogenous Growth Theory. Cambridge, MA: The
MIT Press.
Amsden, Alice () The Rise of the Rest: Non-Western Economies’ Ascent in World Markets.
Oxford: Oxford University Press.
Arthur, W. Brian () Increasing Returns and Path Dependence in the Economy. Ann
Arbor, MI: University of Michigan Press.
Bairoch, Paul () Economics and World History: Myths and Paradoxes. Chicago, IL:
University of Chicago Press.
Barro, Robert J. and Xavier Sala-i-Martin () Economic Growth. New York: McGraw-Hill.
Bértola, Luis and José Antonio Ocampo () The Economic Development of Latin America
since Independence. New York: Oxford University Press.
Bhattarcharya, Amar, Jeremy Oppenheim, and Nicholas Stern () Building Sustainable
Development through Better Infrastructure: Key Elements of a Transformation Program,
Brookings Institution, The New Climate Economy and Grantham Research Institute on
Climate Change and the Environment, July.
BIS (Bank for International Settlements) () ‘Capital Flows and Emerging Markets’.
Report of the Committee on the Global Financial System, CGFS Papers No. , January.
Blomström, Maguns and Patricio Meller (eds) () Diverging Paths: Comparing a Century
of Scandinavian and Latin American Economic Development. Washington, DC: Inter-
American Development Bank, and Johns Hopkins University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
Calvo, Guillermo A. () ‘Capital Flows and Capital Markets Crises: The Simple Economics
of Sudden Stops’, Journal of Applied Economics (): –.
Chang, Ha-Joon () The Political Economy of Industrial Policy. London: Macmillan and
St. Martin’s Press.
Chenery, Hollis, Sherman Robinson, and Moshe Syrquin () Industrialization and
Growth: A Comparative Study. New York: The World Bank, Oxford University Press.
Cherif, Reda and Fuad Hasanov () ‘Oil Exporters’s Dilemma: How Much to Save and
How Much to Invest’, World Development (December): –.
Cherif, Reda and Fuad Hasanov () ‘The Return of the Policy That Shall Not Be Named:
Principles of Industrial Policy’. IMF Working Paper WP//, March. Washington, DC:
IMF.
Corden, W. Max and J. Peter Neary () ‘Booming Sector and De-industrialization in a
Small Open Economy’, Economic Journal (December): –.
Cripps, T. Francis and Roger J. Tarling () ‘Growth in Advanced Capitalist Economies
–’. Occasional Paper No. , University of Cambridge, Department of Applied
Economics.
Dasgupta, Sukti and Ajit Singh () ‘Manufacturing, Services and Premature Deindustrial-
ization in Developing Countries: A Kaldorian Analysis’. Research Paper No. /,
World Institute for Development Economic Research (UNU-WIDER).
Diao, Xinshen, Margaret McMillan, and Dani Rodrik () ‘The Recent Growth Boom in
Developing Economies: A Structural Change Perspective’. NBER Working Paper No.
. Cambridge, MA: NBER.
Dosi, Giovanni, Christopher Freeman, Richard Nelson, Gerald Silverberg, and Luc Soete (eds)
() Technical Change and Economic Theory, Maastricht Economic Research Institute
on Innovation and Technology (MERIT)/The International Federation of Institutes for
Advanced Studies (IFIAS). London and New York: Pinter Publishers.
Easterly, William () The Elusive Quest for Growth: Economists’ Adventures and Misad-
ventures in the Tropics. Cambridge, MA: MIT Press.
Easterly, William, Michael Kremer, Lant Pritchett, and Lawrence Summers () ‘Good
Policy or Good Luck? Country Growth Performance and Temporary Shocks’, Journal of
Monetary Economics (December).
Eichengreen, Barry, Donghyun Park, and Kwanho Shin () ‘When Fast Growing Econ-
omies Slow Down: International Evidence and Implications for China’, Asian Economic
Papers : –.
Eichengreen, Barry, Donghyun Park, and Kwanho Shin () ‘Growth Slowdowns Redux:
New Evidence on the Middle-income Trap’. NBER Working Paper No. . Cambridge,
MA: NBER.
Erten, Bilge and José Antonio Ocampo () ‘Super Cycles of Commodity Prices since the
Mid-nineteenth Century’, World Development : –.
Erten, Bilge and José Antonio Ocampo () ‘Macroeconomic Effects of Capital Account
Regulations’, IMF Economic Review (): –.
Fajnzylber, Fernando () ‘Industrialization in Latin America: From the “Black Box” to the
“Empty Box” ’, Cuadernos de la CEPAL, No. , Santiago.
Freeman, Chris and Luc Soete () The Economics of Industrial Innovation. rd edition.
Cambridge, MA: MIT Press.
Frenkel, Roberto and Martin Rapetti () ‘The Real Exchange Rate as a Target of Macro-
economic Policy’. Paper No. . Buenos Aires: Iniciativa para la transparencia financiera.
Available at www.itf.org.ar.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Fujita, Masahisa, Paul Krugman, and Anthony J. Venables () The Spatial Economy:
Cities, Regions, and International Trade. Cambridge, MA: MIT Press.
Furtado, Celso () Desarrollo y subdesarrollo, Colección Cuadernos . Buenos Aires:
Editorial Universitaria.
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cambridge,
MA: Harvard University Press.
Ghosh, Atish R., Jonathan D. Ostry, and Mahvash Saeed Qureshi () Taming the Tide of
Capital Flows: A Policy Guide. Cambridge, MA: MIT Press.
Gill, Indermit and Homi Kharas () An East Asian Renaissance: Ideas for Economic
Growth. Washington, DC: World Bank.
Gill, Indermit and Homi Kharas () ‘The Middle-income Trap Turns Ten’. World Bank
Policy Research Working Paper No. . Washington, DC: World Bank.
Gourinchas, Pierre-Olivier and Olivier Jeanne () ‘Capital Flows to Developing Countries:
The Allocation Puzzle’. NBER Working Paper No. . Cambridge, MA: NBER.
Griffith-Jones, Stephany and José Antonio Ocampo () The Future of National Develop-
ment Banks. Oxford: Oxford University Press.
Grilli, Enzo R. and Maw Cheng Yang () ‘Primary Commodity Prices, Manufactured
Goods Prices, and the Terms of Trade of Developing Countries: What Long Run Shows’,
The World Bank Economic Review (): –.
Grossman, Gene M. and Elhanan Helpman () Innovation and Growth in the Global
Economy. Cambridge, MA: The MIT Press.
Guzman, Martin, José Antonio Ocampo, and Joseph E. Stiglitz () ‘Real Exchange Rates
for Economic Development’, World Development : –.
Hausmann, Ricardo and Dani Rodrik () ‘Economic Development as Self-discovery’,
Journal of Development Economics : –.
Helleiner, Gerald K. (ed.) () Trade Policy and Industrialization in Turbulent Times.
New York: Routledge and UNU/WIDER.
Hirschman, Albert O. () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
IMF () World Economic Outlook (WEO). Tensions from the Two-Speed Recovery:
Unemployment, Commodities, and Capital Flows. Washington, DC: International Mon-
etary Fund.
IMF () The Liberalization and Management of Capital Flows: An Institutional View.
Washington, DC: International Monetary Fund.
Jeanne, Olivier and Anton Korinek () ‘Managing Credit Booms and Busts: A Pigouvian
Taxation Approach’. NBER Working Paper No. . Cambridge, MA: NBER.
Jeanne, Olivier, Arvind Subramanian, and John Williamson () Who Needs to Open the
Capital Account? Washington, DC: Peterson Institute for International Economics.
Kaldor, Nicholas () Further Essays on Economic Theory. London: Duckworth.
Katz, Jorge () ‘Domestic Technology Generation in LDCs: A Review of Research Find-
ings’, in Jorge Katz (ed.) Technology Generation in Latin American Manufacturing Indus-
tries. London: Macmillan.
Keesing, Donald B. and Sanjaya Lall () ‘Marketing Manufactured Exports from Devel-
oping Countries: Learning Sequences and Public Support’, in Gerald K. Helleiner (ed.)
Trade Policy, Industrialization, and Development: New Perspectives. New York: Oxford
University Press and WIDER.
Korinek, Anton () ‘The New Economics of Prudential Capital Controls: A Research
Agenda’, IMF Economic Review : –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
Krugman, Paul () Rethinking International Trade. Cambridge, MA: MIT Press.
Lall, Sanjaya () Building Industrial Competitiveness in Developing Countries. Paris:
OECD Development Center.
Lall, Sanjaya () ‘Technology and Industrial Development in an Era of Globalization’, in
Ha-Joon Chang (ed.) Rethinking Development Economics. London: Anthem Press, pp. –.
Lee, Keun () The Art of Economic Catch-Up: Barriers, Detours and Leapfrogging in
Innovation Systems. Cambridge: Cambridge University Press.
Lewis, W. Arthur () ‘Economic Development with Unlimited Supplies of Labor’,
Manchester School of Economic and Social Studies : –.
Lewis, W. Arthur () Aspects of Tropical Trade, –. Stockholm: Almqvist &
Wicksell, Wicksell Lectures.
Lin, Justin Yifu () The Quest for Prosperity: How Developing Countries Can Take Off.
Princeton, NJ: Princeton University Press.
Lucas, Robert E., Jr. () ‘On the Mechanics of Economic Development’, Journal of
Monetary Economics (): –.
Luna-Martinez, José de and Carlos Leonardo Vicente () ‘Global Survey of Development
Banks’. World Bank Policy Research Working Paper No. WPS . Washington, DC:
World Bank.
Maddison, Angus () Dynamic Forces in Capitalist Development: A Long-Run Compara-
tive View. Oxford: Oxford University Press.
Maddison, Angus () The World Economy—A Millennial Perspective. Paris: Development
Centre Studies, OECD.
Mazzucato, Mariana () The Entrepreneurial State: Debunking the Public vs. Private Myth
in Risk and Innovation. London: Anthem Press.
Mazzucato, Mariana and Caetano C. R. Penna () ‘National Development Banks and
Mission-Oriented Finance for Innovation’, in Stephany Griffith-Jones and José Antonio
Ocampo (eds) The Future of National Development Banks. Oxford: Oxford University
Press.
Missio, Fabricio José, Frederico G. Jayme Jr, Gustavo Britto, and José Luis Oreiro () ‘Real
Exchange Rate and Economic Growth: New Empirical Evidence’, Metroeconomica ():
–.
Myint, Hla () Economic Theory and the Underdeveloped Countries. New York: Oxford
University Press.
Nelson, Richard R. () The Sources of Economic Growth. Cambridge, MA: Harvard
University Press.
Nelson, Richard R. (). ‘Development as an Evolutionary Economic Process’, in Machiko
Nissanke and José Antonio Ocampo (eds) The Palgrave Handbook of Development Eco-
nomics: Critical Reflections on Globalisation and Development. London: Palgrave Macmillan,
pp. –.
Nelson, Richard R. and Sidney G. Winter () An Evolutionary Theory of Economic
Change. Cambridge, MA: The Belknap Press of Harvard University Press.
Ocampo, José Antonio () ‘New Developments in Trade Theory and LDCs’, Journal of
Development Economics (): –.
Ocampo, José Antonio () ‘Raul Prebisch and the Development Agenda at the Dawn of
the Twenty-first Century’, CEPAL Review : –.
Ocampo, José Antonio (), ‘Balance-of-payments Dominance: Implications for Macro-
economic Policy’, in Mario Damill, Martin Rapetti, and Guillermo Rozenwurcel (eds)
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Macroeconomics and Development: Roberto Frenkel and the Economies of Latin America.
New York: Columbia University Press, pp. –.
Ocampo, José Antonio (a) Resetting the International Monetary (Non) System. Oxford
and Helsinki: Oxford University Press and UNU-WIDER.
Ocampo, José Antonio (b) ‘Dynamic Efficiency: Structural Dynamics and Structural
Change in Developing Countries’, in Akbar Noman and Joseph E. Stiglitz (eds) Efficiency,
Finance, and Varieties of Industrial Policy. New York: Columbia University Press,
pp. –.
Ocampo, José Antonio, Codrina Rada, and Lance Taylor () Growth and Policy in
Developing Countries: A Structuralist Approach. New York: Columbia University Press.
Ocampo, José Antonio and Lance Taylor () ‘Trade Liberalisation in Developing Econ-
omies: Modest Benefits but Problems with Productivity Growth, Macro Prices, and Income
Distribution’, Economic Journal (): –.
Palma, José Gabriel () ‘Four Sources of “De-Industrialization” and a New Concept of the
“Dutch Disease” ’, in José Antonio Ocampo (ed.) Beyond Reforms: Structural Dynamics and
Macroeconomic Vulnerability. Palo Alto, CA: Stanford University Press, ECLAC, and
World Bank, pp. –.
Pérez, Carlota () ‘Technological Change and Opportunities for Development as a
Moving Target’, CEPAL Review , Santiago.
Pérez, Carlota () Technological Revolutions and Financial Capital: The Dynamics of
Bubbles and Golden Ages. Cheltenham: Edward Elgar.
Pérez, Carlota () ‘Dinamismo tecnológico e inclusión social en América Latina: Una
estrategia de desarrollo productivo basada en los recursos naturales’, Revista de la CEPAL
: –.
Pinto, Aníbal () ‘Naturaleza e implicaciones de la “heterogeneidad estructural” de la
América Latina’, El Trimestre Económico (), México, DF: Fondo de Cultura Económica,
January–March; reprinted in Cincuenta años del pensamiento en la CEPAL, vol. II, San-
tiago: CEPAL/Fondo de Cultura Económica, .
Prasad, Eswar S., Kenneth Rogoff, S. J. Wei, and Ayhan Kose, M. () ‘Effects of Financial
Globalization on Developing Countries: Some Empirical Evidence’. Occasional Paper No.
. Washington, DC: International Monetary Fund.
Prebisch, Raúl () ‘Theoretical and Practical Problems of Economic Growth’ (E/CN./
). Mexico City: Economic Commission for Latin America (ECLA).
Prebisch, Raúl () Interpretación del proceso de desarrollo latinoamericano en . nd
edition. Santiago: ECLAC, Serie conmemorativa del XXV aniversario de la CEPAL.
Pritchett, Lant () ‘Divergence, Big Time’, Journal of Economic Perspectives (): –.
Pritchett, Lant () ‘Understanding Patterns of Economic Growth: Searching for
Hills among Plateaus, Mountains and Plains’, World Bank Economic Review ():
–.
Rapetti, Martin () ‘Macroeconomic Policy Coordination in a Competitive Real
Exchange Rate Strategy for Development’, Journal of Globalization and Development
(): –.
Rapetti, Martin, Peter Skott, and Arslan Razmi () ‘The Real Exchange Rate and Economic
Growth: Are Developing Countries Different?’, International Review of Applied Economics
(): –.
Razmi, Arslan, Martin Rapetti, and Peter Skott () ‘The Real Exchange Rate and Economic
Development’, Structural Change and Economic Dynamics (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
́
Rodríguez, Francisco and Dani Rodrik () ‘Trade Policy and Economic Growth:
A Skeptic’s Guide to the Cross-national Evidence’, in Ben S. Bernanke and Kenneth Rogoff
(eds) NBER Macroeconomics Annual , Vol. . Cambridge: MIT Press, pp. –.
Rodrik, Dani () The New Global Economy and Developing Countries: Making Openness
Work. Washington, DC: Overseas Development Council.
Rodrik, Dani () One Economics, Many Recipes: Globalization, Institutions and Economic
Growth. Princeton, NJ: Princeton University Press.
Rodrik, Dani () ‘The Real Exchange Rate and Economic Growth’, Brookings Papers on
Economic Activity Fall: –.
Rodrik, Dani () ‘The Past, Present and Future of Economic Growth’, in Franklin Allen
et al. (eds) Toward a Better Global Economy. Oxford: Oxford University Press, pp. –.
Rodrik, Dani () ‘Premature Deindustrialization’, Journal of Economic Growth : –.
Rodrik, Dani and Andrés Velasco () ‘Short-Term Capital Flows’, in Boris Pleskovic and
Joseph E. Stiglitz (eds) Annual World Bank Conference on Development Economics .
Washington, DC: World Bank.
Romer, Paul Michael () ‘Increasing Returns and Long-run Growth’, Journal of Political
Economy (): –.
Ros, Jaime () Development Theory and the Economics of Growth. Ann Arbor, MI:
University of Michigan Press.
Ros, Jaime () Rethinking Economic Development, Growth, and Institutions. Oxford:
Oxford University Press.
Rosenstein-Rodan, Paul N. () ‘Problems of Industrialization of Eastern and South-
Eastern Europe’, The Economic Journal (/): –.
Schumpeter, Joseph () Business Cycles. New York: McGraw-Hill.
Schumpeter, Joseph () The Theory of Economic Development. Oxford: Oxford University
Press.
Schumpeter, Joseph () Capitalism, Socialism and Democracy. rd edition. New York:
Harper Torchbooks.
Singer, Hans W. () ‘The Distribution of Gains between Investing and Borrowing
Countries’, American Economic Review, Papers and Proceedings (): –.
Solow, Robert M. () ‘A Contribution to the Theory of Economic Growth’, Quarterly
Journal of Economics (): –.
Solow, Robert M. () Growth Theory: An Exposition. nd edition. New York: Oxford
University Press.
Stiglitz, Joseph E. and Bruce Greenwald () Creating a Learning Society: A New Approach
to Growth, Development, and Social Progress. New York: Columbia University Press.
Taylor, Lance () Income Distribution, Inflation, and Growth. Lectures on Structuralist
Macroeconomic Theory. Cambridge, MA: MIT Press.
Taylor, Lance () ‘Gap Models’, Journal of Development Economics : –.
Thirlwall, Anthony Philip (a) The Economics of Development: Theory and Evidence. th
edition. London: Macmillan.
Thirlwall, Anthony Philip (b) ‘Balance of Payments Constrained Growth Models: His-
tory and Overview’, PSL Quarterly Review (): –.
van Wijnbergen, Sweder () ‘The Dutch Disease: A Disease after All?’, Economic Journal
(): –.
Wade, Robert () Governing the Market: Economic Theory and the Role of Government in
East Asian Industrialization. Princeton, NJ: Princeton University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
,
,
An Evolutionary Perspective
.............................................................................................................
, ,
. I
..................................................................................................................................
I is now generally acknowledged by both economists and economic historians that
there is a strong relationship between technical change and economic development.
However, the precise causal links are still a matter of debate. Although it is quite
intuitive that improvements in the efficiency of production techniques and in product
performances may be a determinant or at least a binding precondition of growth in per
capita incomes and consumption, ‘what ultimately determines what’ remains debat-
able. Is it resource accumulation that primarily fosters the exploration of novel
innovative opportunities, or, conversely, does innovation drive capital accumulation?
Do new technological opportunities emerge mainly from an extra-economic domain
(‘pure science’) or are they primarily driven by economic incentives? Should one
assume that the institutions supporting technical change are sufficiently adaptive to
adjust to the dynamics of market interactions, or, conversely, are they inertial enough
to shape the rates and directions of innovation and diffusion?
These are obviously quite complex questions. However, the last four decades have
seen a profusion of studies on the sources, mechanisms, and patterns of technological
innovation, diffusion, and imitation. And the opening of the technological ‘black box’
has often gone hand in hand with important insights into innovation-driven market
competition. Business historians have finally achieved some cross-fertilization with
(some breeds of) economic theorizing. And institutional understanding of the socio-
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
economic fabric of contemporary societies is starting to show fruitful complementar-
ities with economic analyses. A number of these contributions have been made by
evolutionist or institutionalist scholars. Indeed, the common threads linking these
diverse streams of research highlight the co-evolution of technologies, corporate
organizations, and institutions (more in Freeman and Louca, ; Freeman, ;
and Reinert, ; but a few of the intuitions are already in the classics of development
theory: cf. for example, Gerschenkron, ; Hirschman, ). These threads—
linking evolutionary analyses of the microeconomics of innovation and learning all
the way to generalizations on some invariant features of the process of development—
are the subject of this contribution. It does not claim to be a comprehensive survey, but
rather a sort of ‘roadmap’.
We start by discussing the theoretical implications of what we know about the
dynamics of innovative activities at micro and sectoral levels. Technical change is
structured by technological paradigms and follows relatively ordered trajectories. In
such a view, knowledge accumulation plays a central role. This view has major
implications also for the theory of production. There are firms and countries that are
simply ‘better’, that is, more efficient and more innovative, than others, irrespective of
relative prices. This implies that technological asymmetries or gaps are permanent
features across firms and, even more so, countries.
Technical change can be viewed as an evolutionary process with invariances and
specificities in patterns of change at sectoral and national level, which in turn can be
interpreted in terms of some underlying features of the processes of collective learning,
market selection, and institutional governance.
. T F P
T
..................................................................................................................................
.. Technological Paradigms and Trajectories
A variety of concepts have been put forward in recent decades to define the nature of
innovative activities: technological regimes, paradigms, trajectories, salients, guide-
posts, dominant designs, and so on. The names are not so important (although some
standardization could make the diffusion of ideas easier). More crucially, these are
overlapping concepts seeking to capture a few common features of the procedures and
direction of technical change (for discussions and references, see Dosi, ; Dosi and
Nelson, ). Let us consider some of them.
The notion of technological paradigm is based on a view of technology grounded on
three fundamental ideas. First, any satisfactory description of what technology is and
how it changes must also embody the representation of the specific forms of knowledge
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
on which a particular activity is based. In other words, technology cannot be reduced to
the standard view of a set of well-defined blueprints; rather, it concerns problem-
solving activities and also involves tacit forms of knowledge embodied in individuals
and organizational procedures.
Second, paradigms entail specific heuristics and visions of ‘how to do things’ and
how to improve them, often shared by the community of practitioners in each
particular activity (engineers, firms, technical societies, etc.) that share common cog-
nitive frames (Constant, ).
Third, paradigms generally also define basic models of artefacts and systems, which
over time are progressively modified and improved. These basic artefacts can also be
described in terms of some fundamental technological and economic characteristics
For example, the basic attributes of an airplane are described in terms not only of
inputs and production costs, but also on the basis of some salient technological features
such as wing-load, take-off weight, speed, distance it can cover, etc. What is interesting
is that technical progress seems to display patterns and invariances in terms of these
product characteristics. Similar examples of technological invariances can be found, for
example, in semiconductors, agricultural equipment, automobiles, and a few other
micro-technological studies.
Technological trajectories relate to the progressive realization of the innovative
opportunities associated with each paradigm which can in principle be measured in
terms of the changes in the fundamental techno-economic characteristics of artefacts
and the production process. The core ideas involved in this notion of trajectories are
the following.
First, each particular body of knowledge (i.e. each paradigm) shapes and constrains
the rates and direction of technological change irrespective of market inducements.
Second, as a consequence, regularities and invariances can be seen in the patterns of
technical change that hold under different market conditions and whose disruption is
correlated with radical changes in knowledge bases (in paradigms). Third, technical
change is partly driven by repeated attempts to cope with the technological imbalances
which it itself creates.
It is now widely acknowledged in the innovation literature that learning is
local and cumulative. Local means that the exploration and development of new
techniques is likely to occur in the neighbourhood of the techniques already in use.
Cumulative means that current technological development—at least at the level of
individual business units—often builds upon past experiences of production and
innovation, and it proceeds via specific problem-solving sequences (Vincenti, ).
Clearly, this is consistent with the ideas of paradigmatic knowledge and the ensuing
trajectories. A crucial implication, however, is that at any point in time the agents
involved in a particular production activity will have little scope for substitution among
techniques, if by that we mean the easy availability of blueprints different from
those actually in use, which could be put efficiently into operation according to relative
input prices.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
.. Paradigms, Routines, Organizations
A locus classicus in the analysis of the profound intertwining between technological
learning and organizational change is certainly Alfred Chandler’s reconstruction of the
origins of the modern multi-divisional (the M-form) corporation and its ensuing effects
on the American competitive leadership over several decades (Chandler, , a,
). And, as Chandler himself has argued, there are strict links between story and
evolutionary theories (Chandler, b). While it is not possible to enter into the
richness of the Chandlerian analysis here, let us just recall one of the main messages:
It was the institutionalizing of the learning involved in product and process
development that gave established managerial firms advantages over start-ups in
the commercialization of technological innovations. Development remained a
simple process involving a wide variety of usually highly product-specific skills,
experience and information. It required a close interaction between functional
specialists, such as designers, engineers, production managers, marketers and
managers . . . Such individuals had to coordinate their activities, particularly during
the scale-up processes and the initial introduction of the new products on the
market . . . Existing firms with established core lines had retained earnings as a
source of inexpensive capital and often had specialized organizational and technical
competence not available to new entrepreneurial firms. (Chandler, : )
These organizational dynamics can be interpreted as an evolutionary story of compe-
tence accumulation and development of specific organizational routines (Chandler,
b). Did seemingly superior organizational forms spread evenly throughout the
world? The Chandlerian enterprise diffused, albeit slowly, through other OECD countries
(Chandler, ; Kogut, ). However, organizational forms, strategies, and control
methods have developed differently from nation to nation, because of the difference
in national environments (Chandler, a: ). Moreover, the diffusion of the
archetypical M-form corporation has been limited to around half a dozen already
developed countries (and even in countries like Italy, it involved very few companies).
Similar differences can be found in the processes of international diffusion of American
principles of work organization—for example, Taylorism and Fordism—(for an analysis
of the Japanese case, see Coriat, ). A growing literature looks at the early corporate
histories of the German, Japanese, or Italian systems of production which continue to
influence contemporary forms of organization and learning (see Chandler, ; Coriat,
; Kogut, ; Dornseifer and Kocka, ; Dosi, Giannetti, and Toninelli, ).
Different initial organizational conditions, as well as different patterns of learning, can
be seen across developing countries. The last three decades have witnessed increased
technological dynamics in some of them (in primis China), with a subsequent develop-
ment of the ‘modern’ industrial structures and an impressive technological catching up.
The evolutionary path of technological learning involves both the capacity to acquire
technologies (capital goods, know-how, etc.) and the capability to absorb these tech-
nologies and adopt them to the local conditions. Microeconomic/micro-technological
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
evidence highlighting the mechanisms which stimulate and limit endogenous learning
in the NIEs suggest the existence of some characteristics in the paths of technological
learning at the firm level (see also Cimoli, ; Cimoli and Dosi, ). In particular,
one might be able to identify some relatively invariant sequences in the learning
processes, conditional on the initial organizational characteristics of the firms and
the sectors of principal activity.
A first set of regularities regards the varying combinations between acquisition of
outside technologies and endogenous learning. As is well known, the transfer of
technology to developing economies is a common source for the subsequent develop-
ment of learning capabilities at the firm and sectoral levels. So, Amsden and Hikino
identify the ability to acquire foreign technology as a central characteristic ‘of late
industrialization at the core of which is borrowing technology that has already been
developed by firms in more advanced countries. Whereas a driving force behind the
First and Second Industrial Revolutions was the innovation of radically new products
and processes, no major technological breakthrough has been associated with late-
industrializing economies. The imperative to learn from others, and then realize lower
costs, higher productivity and better quality in mid-tech industries by means of
incremental improvements, has given otherwise diverse twentieth-century industriali-
zers a common set of properties’ (Amsden and Hikino : ).
. T D,
M-H, N-
..................................................................................................................................
The notion of paradigm contains elements of both a theory of production and a theory
of innovation. Loosely speaking, we should consider such a theory at the same level of
abstraction as, say, a Cobb-Douglas production function or a production possibility set.
That is, all of them are theories of what are deemed to be some stylized but funda-
mental features of technology and, relatedly, of production processes.
In fact, one finds a few remarkable assumptions underlying conventional production
theories. As already mentioned, technologies—at least in a first approximation—are
conventionally seen as a set of blueprints describing alternative input combinations.
Moreover, at any one time there must be many of them, in order to be able to interpret
empirical observations as the outcome of a microeconomic process of optimal adjust-
ment to relative prices. Information about these blueprints is generally assumed to be
freely available (unless appropriated through the patent system). Finally, it is assumed
that activities leading to the efficient exploitation of existing blueprints can be separ-
ated from those leading to the development of new ones (exogeneity of technical
progress is its extreme version). Of course, this is only a trivialized account of a family
of models that can be made much more sophisticated, by, for example, adding details
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
on how blueprints are ordered with respect to each other (more technically, issues like
continuity and convexity come under this heading). However, it still seems fair to say
that the basic vision of production—also carried over in aggregate growth and devel-
opment models—focuses on questions of choice among well-defined techniques,
generally available to all producers, who also know perfectly well what to do with all
the recipes when they see them.
The theory of production based on paradigms, however, is based on an opposing set of
theoretical building blocks, many of which yield empirically testable hypotheses. Although
it undertakes the same interpretations at the same level of generality, it is more in tune
with the microeconomic evidence and is directly linked to theories of innovation.
The evolutionary theory makes the following predictions:
a) At any point in time there is one or very few best-practice techniques which
dominate the others irrespective of relative prices.
b) Different agents are characterized by persistently diverse (better and worse)
techniques.
c) Over time the observed aggregate dynamics of technical coefficients in each
particular activity is the joint outcome of the process of imitation/diffusion of
existing best-practice techniques, the search for new ones and of market selection
among heterogeneous agents.
d) Changes over time of the best-practice techniques themselves highlight regular
paths (i.e. trajectories) both in the space of input coefficients and also in the space
of the core technical characteristics of outputs.
Catching-up in the productivity distribution is the first fundamental mark of successful
catching-up processes more generally (more in Malerba and Nelson, ; Lee and
Malerba, ; Landini and Malerba, ). The striking success of China is a case in point.
Table . shows the dramatic labour productivity growth in incumbent manufac-
turing firms in China. The overall productivity of incumbents grew at . per cent per
annum between and . All sectors display positive productivity growth rates,
(except petroleum refining, which had negative growth during the – period).
Further, note the remarkable differences in productivity growth across sectors, as
such circumstantial evidence of significant inter-sectoral differences in absorptive
capacities (Cohen and Levinthal, ) of ‘frontier’, generally foreign, technologies,
and of corresponding differences in the average catching-up rates. Figure . offers
three snapshots of the non-parametric kernel density distribution of labour product-
ivity in China, compared with Italy and France, illustrating the overall technology gap
with two higher-income countries.¹ At a first glance readers might find such a
comparison as somewhat far-fetched if one has in mind a ‘world production function’,
¹ We chose Italy and France as we have access to comparable micro data. Our informed guess, based
on smaller samples like COMPUSTAT and Orbis firm-level evidence, supports the argument that the
property applies to all advanced countries, including the United States and Germany.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Table 4.1 Annual growth rate of labour productivity amongst firms over
1998–2007, and subperiods 1998–2002 and 2002–2007 amongst
‘continuing’ firms (i.e. firms remaining in the same two-digit sector over the
relevant period)
CIC Sector 1998–2007 1998–2002 2002–07
13 Food processing of agricultural products 11.25 8.55 13.46
14 Other foodstuffs 8.87 5.73 11.22
15 Beverages 10.63 6.20 12.80
16 Tobacco 15.29 11.08 10.65
17 Textiles 9.79 10.14 10.54
18 Garments, footwear, etc. 7.84 4.84 10.57
19 Leather, fur, feather, etc. 7.55 6.52 10.29
20 Processing of timber, manuf. of wood, 11.87 7.61 14.43
bamboo, etc.
21 Furniture 6.19 4.82 10.40
22 Paper and paper products 10.33 9.48 11.75
23 Printing, reproduction of recording media 8.92 7.54 8.17
24 Articles for culture, education, and sports 8.39 7.06 10.03
25 Processing of petroleum, cokeries, nuclear fuel 3.77 -1.61 6.36
26 Raw chemical materials and chemical 11.40 10.44 11.85
products
27 Pharmaceuticals 8.94 10.64 7.53
28 Chemical fibres 10.31 12.05 8.85
29 Rubber 8.80 7.01 9.39
30 Plastics 5.83 6.43 6.24
31 Non-metallic mineral products 12.76 9.86 14.71
32 Smelting and processing of ferrous metals 13.86 12.68 14.14
33 Smelting and processing of non-ferrous 12.45 13.73 12.64
metals
34 Metal products 5.44 7.84 4.32
35 General purpose machinery 15.40 13.76 15.72
36 Special purpose machinery 16.23 13.09 15.13
37 Transport equipment 12.67 11.64 13.05
39 Electrical machinery and equipment 9.51 8.84 9.32
40 Communication equipment, computers, etc. 5.64 8.37 3.30
41 Measuring instruments and machinery 9.62 9.46 9.57
42 Artwork and other 10.01 9.32 12.70
Average 9.98 8.73 10.66
Source: Yu et al. (2015).
possibly multiplied by some country-specific scalar. After all, Chinese wages have been/
are at least an order of magnitude lower than Italian and French ones. As a conse-
quence, one would expect to see the three countries on very different positions on such
production functions. But is it really the case? If it were so, one would also expect, first,
major differences between China, on the one hand, and Italy and France, on the other,
in capital/output ratios—the appropriate proxy for ‘capital intensities’ when
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
1 Year 1998 China 1 Year 2002 China 1 Year 2006
France France China
Pr Italy Pr Italy Pr France
Italy
0.1 0.1 0.1
0.01 0.01
0.01
0.001 0.001
0.001 (log) labour (log) labour (log) labour
Productivity Productivity Productivity
0.0001 0.0001
–6 –4 –2 0 2 4 6 8 10 –6 –4 –2 0 2 4 6 8 10 –6 –4 –2 0 2 4 6 8 10
1 Year 1998 China
1 Year 2002
China 1 Year 2006
China
France France France
Pr Italy Pr Italy Pr Italy
0.1 0.1 0.1
0.01 0.01
0.01
0.001 0.001
(log) labour (log) labour (log) labour
0.001 Productivity Productivity Productivity
0.0001 0.0001
–6 –4 –2 0 2 4 6 8 10 –6 –4 –2 0 2 4 6 8 10 –6 –4 –2 0 2 4 6 8 10
. Empirical density (Pr, vertical axis) of labour productivities, whole manufacturing of China, France, and Italy, , , and
Note: The first row: constant prices and exchange rates (IMF source); the second row: PPP adjusted price (World Bank source).
Source: Yu et al. ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
‘production functions’ differ. And of course one should expect strong correlations
between labour productivities and capital/labour ratios within each country and within
each sector.
Premise to the following discussion: the proxies for capital are very noisy on Italian
and French data and just more so on the Chinese data.²
Remarkably, what the evidence suggests is rather at odds with the conventional
wisdom. First, capital/output ratios also at sectoral levels do not differ very much
between China and the two European countries considered (Table .). Indeed they
tend to be higher in China. Second, the within-country, within-sector micro correl-
ations between labour productivities (VA/L) and capital/output ratios (K/VA), for
whatever proxy for K is used, is robustly negative in China and is mildly negative in
Italy and France (statistics available upon request). In other words, labour and capital
productivity are strongly positively correlated. Indeed, conventional theories suggest
that, given uniform relative prices, one should not expect distribution of productivities
at all. However, they are persistently there even in developed countries (more in
Syverson, ; Dosi and Grazzi, ) and much more so in developing ones.
Third, even within China, labour productivities and capital/labour ratios—as a proxy
of degrees of production mechanization/automation—are basically orthogonal (see
Figure . for a sector illustration).
Overall, the evidence suggests that very little action comes from ‘moving along
isoquants’ in response to relative prices. Rather, ‘best practice’ techniques involve a
more efficient use of both labour and capital, and relatedly, catching-up fundamentally
involves improvements on both dimensions. It is a world of complementarities rather
than substitution, in which technology-gaps and learning efforts are both reflected by
labour productivity differences, quite independently from relative prices, while TFP
proxies might well yield a quite distorted picture of the development process. Indeed,
given the ubiquitous complementarities between labour and capital, labour productiv-
ities alone turn out to be a robust proxy for the lower bound of ‘true’ efficiency
distributions within countries, but also across countries, with the added advantage of
avoiding any explicit or implicit hypotheses on interfactor substitutability and capital
measurements.
In fact, the empirical elasticities of substitutions implied by the negative micro
relation between labour productivities and capital/output ratios (i.e. positive correl-
ations between labour and capital productivities) are positive in sign: the isoquants do
not look like standard isoquants but are more similar to rays out of the origin.
Granted all that, let us now focus on the micro picture offered by the data and its
dynamics. First, note the different upper bounds of the three country distributions, as
² Measures of ‘capital’ are at best biased by construction: witness the old ‘capital controversy’ between
Cambridge, United Kingdom and Cambridge, MA (more in Cohen and Harcourt, and Shaikh,
). And more so are measures simply obtained from balance-sheets. In particular, ‘capital’ measures
in the case of China (in firm’s balance-sheet) are calculated as the value of fixed capital stock at original
purchase prices (these book values are the sum of nominal values for different years).
Table 4.2 Median capital intensity (capital/output ratios) by sector, China, Italy, and France, 1998, 2002, and 2006
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
NACE Sector China Italy France China Italy France China Italy Francea
1998 2002 2006
173 Finishing of textiles 2.772 1.971 1.863 0.732 0.755 0.694 1.228 1.512 1.546
175 Carpets, rugs, and other textiles 1.672 1.327 0.789 0.752 0.775 0.688 0.891 0.987 1.055
182 Apparel 1.052 0.785 0.620 0.268 0.276 0.226 0.318 0.318 0.336
193 Footwear 1.062 0.885 0.529 0.29 0.331 0.288 0.488 0.631 0.645
203 Wood products for construction 1.477 0.954 0.629 0.728 0.734 0.763 0.773 0.744 0.736
212 Paper and paperboard 1.475 1.367 1.123 0.824 0.901 0.988 1.025 1.206 1.217
221 Publishing 3.873 5.250 5.716 0.259 0.19 0.117 0.229 0.204 0.192
222 Printing 2.559 2.456 2.084 0.508 0.566 0.562 0.700 0.797 0.792
241 Production of basic chemicals 2.547 1.784 1.049 0.977 1.045 1.153 2.081 2.443 2.811
243 Paints, varnishes, inks, mastics 1.312 1.086 0.852 0.584 0.544 0.57 0.946 0.936 1.052
244 Pharma., med. chemicals, botanical products 1.707 1.514 1.508 0.57 0.623 0.656 0.666 0.83 0.837
246 Other chemical products 1.436 1.167 0.707 0.588 0.628 0.636 0.973 1.004 1.072
251 Rubber products 1.587 1.479 0.974 0.514 0.588 0.495 0.951 1.088 1.03
252 Plastic products 1.614 1.394 1.055 0.714 0.795 0.818 0.969 0.991 1.035
261 Glass and glass products 1.696 1.442 1.079 0.579 0.594 0.742 0.996 1.169 1.198
266 Concrete, plaster, and cement 2.084 1.643 1.676 0.93 0.847 0.965 1.365 1.399 1.253
275 Casting of metals 1.113 0.937 0.698 0.669 0.815 0.734 0.886 1.127 1.128
281 Structural metal products 1.290 1.176 0.870 0.433 0.481 0.455 0.547 0.505 0.569
284 Forging, pressing, stamping of metal 1.981 1.289 0.820 0.574 0.695 0.618 0.77 0.913 0.967
285 Treatment and coating of metals 1.113 0.980 0.923 0.452 0.515 0.467 0.673 0.762 0.803
286 Cutlery, tools, and general hardware 1.554 1.068 0.940 0.471 0.584 0.559 0.734 0.861 0.892
287 Other fabricated metal products 1.337 1.018 0.788 0.586 0.626 0.566 0.818 0.921 0.871
291 Machinery for prod. use of mech. power 2.041 1.524 1.012 0.48 0.491 0.408 0.674 0.76 0.714
292 Other general purpose machinery 1.756 1.321 0.905 0.323 0.315 0.272 0.372 0.364 0.361
294 Machine tools 2.530 1.669 0.961 0.343 0.391 0.289 0.425 0.465 0.466
295 Other special purpose machinery 2.177 1.486 0.977 0.358 0.337 0.332 0.520 0.585 0.614
311 Electric motors, generators, and transformers 1.570 1.200 0.767 0.369 0.452 0.397 0.510 0.526 0.501
(Continued)
Table 4.2 Continued
NACE Sector China Italy France China Italy France China Italy Francea
1998 2002 2006
312 Manuf. of electricity distribution and control 1.409 1.127 0.781 0.335 0.453 0.352 0.640 0.648 0.553
equip
316 Electrical equipment not e/where classified 1.163 0.863 0.671 0.299 0.288 0.275 0.498 0.516 0.497
343 Parts for motor vehicles and their engines 1.781 1.336 1.094 0.526 0.63 0.534 1.088 1.311 1.185
361 Furniture 1.293 1.092 0.798 0.593 0.61 0.564 0.633 0.674 0.722
366 Manufacturing n.e.c. 0.793 0.830 0.808 0.467 0.485 0.405 0.576 0.669 0.781
Mean 1.713 1.419 1.127 0.534 0.574 0.550 0.780 0.871 0.888
Median 1.578 1.305 0.914 0.520 0.586 0.561 0.717 0.814 0.820
Note: aData for France in the last column are for 2004.
Sources: Yu et al. (2015), CMM, INSEE (on France), and ISTAT-Micro 3 (on Italy).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
10 CIC 131 (1998)
5
In(VA/L)
–5 In(K/L)
–2 0 2 4 6 8
. Scatterplot of log (VA/L) versus log (K/L) for corn milling sector (CIC ),
Note: OLS regression: coefficient = . (standard error .), R = ., number of observations = ,.
Source: Yu et al. ().
such an impressionistic proxy of different inter-country lags and leads (together of
course with different sectoral compositions of output).
Second, the width of the support of the distribution of China is much larger,
revealing much greater technological asymmetries across Chinese firms. The dynamics
of catching-up in China’s manufacturing productivity are associated with (i) a right-
ward movement of the mean of the distributions; (ii) a corresponding rightward
movement of the support; and (iii) as we shall analyse in more detail below, a shrinking
of the support itself. Labour productivity distribution is asymmetric and left-skewed.
The evolving pattern of the left-tail and that of the right-tail are also different, with a
significant left-tail shift towards higher levels of productivity, compared with a rela-
tively mild movement of the right tail. These dynamics match what, in the old
development literature, was called a ‘reduction of the dualistic structure economy’
consisting of a shrinking traditional/relatively backward part of manufacturing and an
expanding ‘modern’ one which, however, is only just beginning to push ‘frontier
technologies’ further.
An important piece of evidence on intra-sectoral asymmetries in efficiency and their
changes over time is the top-to-bottom ratio of labour productivities. Table . displays
the ratio of the th decile over the nd decile for each sector from to . The
ratios decrease in most sectors, indicating a reduction of productivity dispersion,
plausibly due both to learning by laggard firms and selection (exit) of the worst
performers. The ratios are generally lower in ‘traditional’ ones (CIC – including
textile, garments, leather, furniture, paper manufacturing, etc.) and higher in relatively
technology-intensive sectors (e.g. transport equipment, electrical machinery, and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Table 4.3 Ratio of the average labour productivity of the second highest decile
over the second lowest decile, China, 1998, 2002, and 2007
CIC Sector 1998 2002 2007
13 Food processing of agricultural products 15.62 11.35 10.02
14 Other foodstuffs 19.12 12.20 9.04
15 Beverages 14.89 11.82 9.06
16 Tobacco 17.05 22.95 26.44
17 Textiles 8.61 7.01 6.07
18 Garments, footwear etc. 6.51 5.45 5.42
19 Leather, fur, feather etc. 7.80 7.17 6.80
20 Processing of timber, manuf. of wood, bamboo etc. 11.25 6.91 6.51
21 Furniture 9.29 7.15 6.93
22 Paper and paper products 7.44 6.16 6.27
23 Printing, reproduction of recording media 12.47 9.49 6.12
24 Articles for culture, education, and sports 6.91 6.10 5.52
25 Processing of petroleum, cokeries, nuclear fuel 8.82 12.26 11.23
26 Raw chemical materials and chemical products 10.30 9.19 8.42
27 Pharmaceuticals 10.65 9.71 8.96
28 Chemical fibres 10.05 6.87 7.98
29 Rubber 6.56 7.49 7.42
30 Plastics 8.65 7.18 7.02
31 Non-metallic mineral products 8.32 7.91 8.23
32 Smelting and pressing of ferrous metals 9.57 8.58 8.40
33 Smelting and pressing of non-ferrous metals 9.70 8.43 12.72
34 Metal products 8.36 7.21 7.12
35 General purpose machinery 8.77 6.68 6.56
36 Special purpose machinery 12.24 9.59 7.25
37 Transport equipment 11.69 8.19 7.09
39 Electrical machinery and equipment 9.39 7.71 8.24
40 Communication equipment, computers etc. 13.52 11.08 8.36
41 Measuring instruments and machinery 12.38 9.00 8.70
42 Artwork and other 8.88 7.38 6.59
Source: Yu et al. (2015).
communication equipment). The ratios drop more rapidly in the first part of the period
under consideration, which is also a period of retreat by SOEs from the so-called
‘competitive sectors’. At the same time, the ratios in several ‘heavy industries’ such as
petroleum refining and non-ferrous metals sectors grows, hinting at some sort of
persistent ‘dualism’ within these industries (note that growing intra-sectoral asymmet-
ries can and often do go hand in hand with high average growth rates). How much of
the dynamics in overall productivity distribution is due to inter-sectoral relocation of
production?
Table . displays the time series of value-added shares of each two-digit sector in
overall manufacturing. It is remarkable that relatively little structural change has
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Table 4.4 Contribution of each two-digit sector to total manufacturing value
added, China, 1998, 2002, and 2007 (percentages)
CIC Sector 1998 2002 2007
13 Food processing of agricultural products 4.74 4.50 4.96
14 Other foodstuffs 2.07 1.99 1.99
15 Beverages 3.51 2.69 2.01
16 Tobacco 5.70 5.13 3.11
17 Textiles 6.39 5.81 5.23
18 Garments, footwear etc. 3.02 2.76 2.41
19 Leather, fur, feather etc. 1.78 1.76 1.58
20 Processing of timber, manuf. of wood, bamboo etc. 0.82 0.86 1.16
21 Furniture 0.50 0.53 0.69
22 Paper and paper products 2.11 2.17 1.86
23 Printing, reproduction of recording media 1.21 1.11 0.74
24 Articles for culture, education, and sports 0.92 0.77 0.60
25 Processing of petroleum, cokeries, nuclear fuel 3.56 3.79 3.52
26 Raw chemical materials and chemical products 7.18 6.96 7.78
27 Pharmaceuticals 2.95 3.29 2.45
28 Chemical fibres 1.19 0.91 0.86
29 Rubber 1.33 1.12 1.02
30 Plastics 2.35 2.47 2.28
31 Non-metallic mineral products 6.03 5.20 5.18
32 Smelting and pressing of ferrous metals 6.47 6.92 9.52
33 Smelting and pressing of non-ferrous metals 2.08 2.24 4.58
34 Metal products 2.98 2.86 3.21
35 General purpose machinery 4.75 4.51 5.46
36 Special purpose machinery 3.33 3.09 3.25
37 Transport equipment 7.41 8.54 7.54
39 Electrical machinery and equipment 5.94 6.12 6.47
40 Communication equipment, computers etc. 7.39 9.64 8.44
41 Measuring instruments and machinery 1.25 1.23 1.24
42 Artwork and other 1.05 0.99 0.86
Total 100 100 100
Source: Yu et al. (2015).
occurred over the period under investigation, even if indeed in the ‘right direction’. So,
for example, the shares of transport equipment, electrical machinery and equipment,
and communication equipment, computers etc. are among the highest from the start of
the period under consideration, and their total share just increases from . per cent
in to . per cent in . A synthetic view of the relative importance of the
within- vs. between-sectors contributions to productivity growth is presented in
Table . (for details on the shift-and-share decomposition method of productivity
growth, see Appendix).
Of course, the precise relative measures of sector-specific learning vs. structural
change (what nowadays is often referred to as ‘re-allocation’) depend a great deal on
Table 4.5 Within-sector learning vs. structural change in productivity growth
CIC Sector P0 PT Annual Intra Shift Total P0 PT Annual Intra Shift Total
growth (%) (%) (%) (%) growth (%) (%) (%)
1998–2002 2002–7
13 Food processing of agricultural 40.68 74.30 16.25 4.20 0.02 4.22 74.30 165.12 17.32 5.49 0.00 5.49
products
14 Other foodstuffs 35.26 62.07 15.18 1.70 0.01 1.71 62.07 128.80 15.72 2.16 0.00 2.16
15 Beverages 50.30 86.33 14.46 2.57 0.00 2.57 86.33 174.04 15.05 2.32 0.00 2.32
16 Tobacco 311.94 634.26 19.41 6.05 0.00 6.05 634.26 1448.41 17.96 4.79 0.00 4.79
17 Textiles 18.91 35.63 17.16 5.78 0.00 5.78 35.63 76.19 16.42 6.41 0.00 6.41
18 Garments, footwear, etc. 23.66 30.34 6.41 1.05 –0.91 0.14 30.34 55.73 12.94 2.40 –0.56 1.85
19 Leather, fur, feather, etc. 25.97 34.54 7.39 0.73 –0.46 0.27 34.54 55.62 10.00 1.22 –0.87 0.36
20 Processing of timber, manuf. of 25.94 44.51 14.45 0.68 –0.06 0.63 44.51 94.47 16.24 1.14 –0.42 0.72
wood, bamboo, etc.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
21 Furniture 32.34 43.45 7.65 0.22 –0.07 0.15 43.45 67.52 9.22 0.42 –0.67 –0.25
22 Paper and paper products 27.27 55.11 19.23 2.29 0.00 2.29 55.11 132.98 19.26 2.77 0.00 2.77
23 Printing, reproduction of recording 30.45 59.63 18.29 1.22 0.00 1.22 59.63 111.41 13.32 0.95 0.00 0.95
media
24 Articles for culture, education, and 24.85 31.23 5.87 0.30 –0.27 0.03 31.23 53.91 11.54 0.65 -0.16 0.49
sport activity
25 Oil refining, coking, nuclear fuel 67.07 109.05 12.92 2.16 0.00 2.16 109.05 126.24 2.97 0.37 0.00 0.37
26 Raw chemical materials and 30.88 67.52 21.60 8.75 0.00 8.75 67.52 175.35 21.03 10.18 0.00 10.18
chemical products
27 Pharmaceuticals 44.94 87.29 18.05 3.21 0.17 3.38 87.29 150.83 11.56 2.21 0.00 2.21
28 Chemical fibres 45.25 76.35 13.97 0.87 0.00 0.87 76.35 158.49 15.73 0.92 0.00 0.92
29 Rubber 27.85 53.94 17.96 1.24 0.00 1.24 53.94 98.40 12.78 0.92 0.00 0.92
30 Plastics 34.86 56.05 12.61 1.73 –0.03 1.70 56.05 85.31 8.76 1.43 –0.41 1.02
31 Non-metallic mineral products 21.61 38.50 15.53 4.96 0.00 4.96 38.50 108.60 23.05 8.28 0.00 8.28
32 Smelting and processing of ferrous 34.62 80.27 23.40 8.70 0.00 8.70 80.27 208.33 21.01 10.10 0.00 10.10
metals
(Continued)
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table 4.5 Continued
CIC Sector P0 PT Annual Intra Shift Total P0 PT Annual Intra Shift Total
growth (%) (%) (%) (%) growth (%) (%) (%)
1998–2002 2002–7
33 Smelting and processing of non- 31.86 66.44 20.17 2.47 0.00 2.47 66.44 208.07 25.65 4.70 0.01 4.70
ferrous metals
34 Metal products 31.22 52.69 13.98 2.27 –0.04 2.22 52.69 78.37 8.26 1.52 –0.60 0.92
35 General purpose machinery 22.60 51.26 22.72 6.01 0.00 6.01 51.26 145.54 23.21 9.00 –0.10 8.90
36 Special purpose machinery 18.94 47.35 25.74 4.73 0.00 4.73 47.35 144.79 25.05 6.01 0.00 6.01
37 Transport equipment 35.19 85.62 24.89 11.35 0.00 11.35 85.62 202.69 18.81 11.73 0.00 11.73
39 Electrical machinery and 40.51 71.58 15.29 5.13 0.14 5.26 71.58 116.70 10.27 4.30 –0.69 3.61
equipment
40 Communication equipment, 68.28 123.44 15.96 7.53 1.98 9.51 123.44 116.55 –1.14 –0.75 –0.05 –0.81
computers, etc.
41 Measuring instruments and 31.29 58.45 16.91 1.21 –0.01 1.20 58.45 129.34 17.22 1.70 –0.06 1.63
machinery
42 Artwork and other 22.46 34.29 11.15 0.68 –0.25 0.43 34.29 74.24 16.71 1.25 0.00 1.25
Whole manufacturing 32.73 62.90 17.74 99.89 0.21 100.00 62.90 126.15 14.93 104.58 –4.58 100.00
Note: P 0 is the aggregate productivity in the first year of the period. PT is the aggregate productivity in the last year of the period. Unit: 1000 yuan at 1998 constant
prices. ‘Annual growth’ is the compound annual growth rate of aggregate labour productivity. ‘Intra’ is the percentage contribution of within-sector productivity
growth to overall aggregate productivity growth. ‘Shift’ is the percentage contribution of between-sector employment reallocation to overall aggregate productivity
growth. Total is the overall contribution (i.e. the sum of ‘Intra’ and ‘Shift’ effects) of each two-digit sector to aggregate productivity growth. The row ‘Whole
manufacturing’ shows the contribution of ‘Intra’ and ‘Shift’ effects for the aggregated manufacturing sector. Sectors with zero shift effects are the shrinking ones.
(For details on the shift-and-share decomposition method of productivity growth, see Appendix).
Source: Authors’ elaboration on CMM data.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
the techniques of measurement (e.g. whether the sectoral weights are in terms of
employment or value added). So, for example, Paus () finds a contribution of
the latter of around per cent. However, no matter the measure, the ‘within
component’ dominates—a sign indeed that China achieves quite early a ‘modern’
industrial structure. However, as we shall discuss later, this is an exception in the
overall picture of catching-up experiences.
Interestingly, this evidence seems to contradict Kuznets’ view of increasing prod-
uctivity due to a large extent to structural change, that is, movements from low-
productivity sectors to high-productivity ones also within manufacturing. On the
contrary, our evidence suggests that, unlike what happened in the s (cf. Wang
and Szirmai, ; see also Akkemik, ), the movement of the overall manufactur-
ing means is mainly due to sector-specific dynamics. Incidentally, note that ‘virtuous’
structural change is by no means automatic or inevitable. Indeed, the apparent failure
to undertake that path appears to be at the heart of the middle-income trap which, for
example, Latin American countries have experienced: more in Paus ().
Of course, the relative stability of sectoral shares at the two-digit sectoral level does
not rule out much more turbulence at finer levels of disaggregation within each two-
digit sector: indeed, there is very intensive ‘micro structural change’. However, the
evidence marks a difference from other episodes of industrialization and catching-up,
in that in the period of our observations, China appears to be already quite mature in
terms of its broad manufacturing structure. For example, when South Korea had the
same real per capita income that China had in , which was in (Maddison’s
historical statistics, www.ggdc.net/maddison/oriindex.htm), the share of around per
cent of textile and clothing in total manufacturing was around per cent (World
Development Indicators database), compared to a Chinese share of per cent. In
the literature a quite common claim is that export and productivity growth go together
(possibly with causality running in both directions).
China displays a dramatic rise in the share of exports in total manufacturing output,
coupled with a dramatic growth in productivity. However, the case of China lends little
support to the notion of ‘learning by exporting’.
Figure . shows the labour productivity distribution of exporters and non-exporters
for the years and in selected sectors (chemical, electrical machinery, and
communication equipment), which illustrates a more general pattern. Note that in
exporters have a higher level of productivity and their support of distribution is
narrower than that of non-exporters. However, a significant catch-up by non-exporters
takes place, so that in , exporters and non-exporters have similar productivity
distributions and similar widths of support.³
³ We are currently exploring the conjecture that within the overall pattern of fast learning by Chinese
manufacturing, many ‘non-frontier’ firms found it easier to enter export markets following the accession
of China to the WTO.
1 1 1
exporter CIC 37 (1998) exporter CIC 37 (2003) exporter CIC 37 (2007)
non-exporter non-exporter non-exporter
0.1 0.1 0.1
0.01 0.01 0.01
0.001 0.001 0.001
–8 –6 –4 –2 0 2 4 6 8 –8 –6 –4 –2 0 2 4 6 8 –8 –6 –4 –2 0 2 4 6 8
1 1 1
exporter CIC 39 (1998) exporter CIC 39 (2003) exporter CIC 39 (2007)
non-exporter non-exporter non-exporter
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
0.1 0.1 0.1
0.01 0.01 0.01
0.001 0.001 0.001
–8 –6 –4 –2 0 2 4 6 8 –8 –6 –4 –2 0 2 4 6 8 –8 –6 –4 –2 0 2 4 6 8
. Empirical density of (log) labour productivity of exporters and non-exporters of transport equipment (CIC ) and electrical machinery
and equipment (CIC ) sectors in selected years (, , and )
Source: Yu et al. ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
. S G I
I
..................................................................................................................................
From a theoretical point of view, the above argument implies a radical de-linking of
income distribution, production theory, and development. Conventionally, there is an
obvious link between technological conditions, input availabilities, and remuneration.
It is well known that if production functions are well behaved (homogeneous,
degree-one, hence no increasing returns, etc.), relative scarcities determine relative
input intensities. And if the estimates fall short of fully ‘explaining’ output, then that
goes under the heading of the famous ‘Solow residual’, also renamed as Total Factor
Productivity.
The consequences also for trade theories are straightforward: The Heckscher-
Ohlin-Samuelson theorems easily follow.
And what about the interpretation of why per capita incomes differ so much across
countries? Over the last few decades a disproportionate amount of effort has gone into
the search for arguments to add to the Kamasutra of variables entering the ‘production
function’ (nowadays not only questionable proxies for ‘culture’ and ‘institutions’ but
also sinister notions like ‘genetic endowments’). Here we have taken the opposite route
and explored the implications for development of ‘opening up the black box of
technology’, to use the felicitous definition of Nate Rosenberg.
Within the black box, there are no production functions, and even less so, Cobb-
Douglas ones, but rather painstaking efforts aimed at knowledge accumulation, nested
in more or less supportive organizations and institutions.
. S C
F F C U
..................................................................................................................................
.. The Evolution of Technological Capabilities
and Production Specializations
With the mentioned partial exception of China—which in a sense entered the catching-
up phase already ‘mature’ in terms of sectoral composition of output—most countries
undergo major transformation in the sectors in which they operate and in the products
they manufacture (and China is no exception). However, not every country is success-
ful, with many remaining in the ‘middle-income trap’.
In many respects, catching-up entails ‘climbing up the ladder’ not only of production
efficiency—well captured by the dynamics in the productivity distributions discussed
in section .—but also of product complexities and product demand elasticities.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
To recall a discussion of the s, the impact on competitiveness and growth of
producing potato chips is not identical to that of producing computer chips! In turn,
the climbing up is associated with the accumulation of technological and organizational
capabilities, often against the country’s comparative advantages. That is, absolute
technological levels (and not comparative ones) are a fundamental driver of trade
performance, growth, and, ultimately, welfare. To clarify the point, Cimoli et al.
(a) describe a thought experiment of opening up trade between a ‘Stone Age
economy’ and an ICT-based one. As Ricardo would argue, the country coming from
the Stone Age will be more likely to export ‘stone-intensive’ products in which it has a
comparative advantage (and vice versa for the ICT-based economy with, say, com-
puters). However, there could be no bilateral trade at all if the more advanced ICT
economy will end up producing almost anything worth trading irrespective of the
stone- or ICT-intensities of the products. What really matters for economic growth
might ultimately be absolute levels of technological capabilities and how they interact
with world demand for products. An interesting measure in this respect of the ‘fitness’
of a country in terms of the ‘complexity’ of the products in which it specializes as a
predictor of its growth potential is presented in Tacchella et al. () and Cristelli et al.
().⁴
Comprehensive historical overviews of successful cases of structural transformation
and industrialization is provided by Moses Abramovitz () and Ha-Joon Chang
(). The most telling cases of successful latecomer industrialization are probably the
United States, Germany, and more recently Japan, South Korea, and China.
It was the First Secretary of the US Treasury, Alexander Hamilton, who systemat-
ically elaborated the infant industry argument in . In a nutshell, Hamilton argued
that foreign competition would have prevented domestic industries from becoming
internationally competitive, unless the state had intervened to compensate initial losses
or to enforce import duties (Hamilton, ). American industries ended up being
literally the most protected in the world until after the Second World War (Chang,
); needless to say, this goes a long way in explaining the US pattern of structural
change. Furthermore, the role of the Federal Government in industrial development
has been substantial even in the post-war era, thanks to extensive defence-related
procurement and mission-oriented research (Mazzucato, ; Mowery, ). Simi-
larly, List () lucidly discusses the shortcomings of simply adhering to comparative
advantages: in his view, the true objective of Britain trying to impose free trade on
Europe was simply ‘kicking away the ladder’ that they themselves had climbed (Chang,
). The German experience also points to the importance of ad hoc institutional
innovations which facilitated catching-up and were the basis of the successive forging
ahead with respect to Britain. Of particular importance was the introduction of the
Humboldtian university model for the education of graduate engineers, which supplied
human capital that proved essential for the diffusion of in-house industrial R&D
⁴ A germane attempt, characterized however by a few technical drawbacks, is in Hidalgo and
Hausmann ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
departments (Dosi et al., ). Another pillar of German industrialization was the
emulation of imported British machine tools (often thanks to British craftsmen
attracted to Prussia; Freeman, ). More recently, Japan (Freeman, ) and the
Asian Tigers (Nelson and Pack, ) were able to reap the benefits of rapidly growing
markets for industrial machinery embodying ‘frontier’ knowledge. At the heart of the
Japanese success lay the explicit decision by Japanese political authorities to neglect the
‘natural’ development path implied by comparative advantages (Freeman, ). In
just a few years, Japan ceased being an importer of foreign technology and developed
important indigenous innovation capabilities, even surpassing the United States in
terms of R&D efforts. The secret of its success was building up one of the most
successful innovation systems (which inspired the formulation of the concept itself,
see Freeman, ), in which long-term planning by the Ministry of International
Trade and Industry (MITI) fostered learning and spurred innovation in the export-led
industrial complexes.
The classic works mentioned above are detailed case studies of single countries
and their historical experience. More recently, research leveraging natural quasi-
experiments and new estimation techniques has allowed the precise causal identifica-
tion of the effects of sectoral policies. For instance, China’s th Five-Year Plan
(–) promoted shipbuilding as a strategic industry for defence-related purposes.
Kalouptsidi () finds that the reduction in production costs associated with the
policy explains China’s massive gains of global market share in ships: without the
targeted subsidies, China’s production would be cut to less than half. Lane ()
studies the Heavy Chemical and Industry (HCI) policy that South Korea enacted in
as a response to the US troop withdrawal. Again, targeted industries were chosen
for their military importance, and the comparison with otherwise similar industries
shows that the policy promoted rapid development that lasted long after the measures
were removed. Interestingly enough, downstream sectors also benefited from the lower
prices induced by the policy, an instance of the policy-induced industrial externalities
that Hirschman () termed ‘forward linkages’. The HCI entailed both industrial
subsidies and targeted trade protection. Nonetheless, it must be noted that in certain
situations trade protection alone can be sufficient to change the patterns of trade and
allow industrialization. Juhasz () documents that the temporary protection from
British imports caused by the Napoleonic Blockade was fundamental for the accumu-
lation of technological capabilities in nineteenth-century France. The mechanized
cotton-spinning industry rapidly developed in French départements that received
more sheltering, in accordance with the predictions of the infant industry argument.
Hanlon () complements this evidence by looking at production input advantages,
instead of output market protection. Using twentieth-century metal shipbuilding data,
he shows that even a temporary cost advantage can become the source of long-lasting
competitive advantage due to dynamic localized learning effects and learning-by-
doing. Head () studies the effects of infant-industry protection in the rail steel
industry. And the list could be very long.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Let us turn to the role of policies. Here we end by simply noting that technological
catching-up (and of course straightforward innovation) goes hand in hand with
organizational innovation.
. T C R
I P
..................................................................................................................................
Some general patterns can be distilled from these historical cases. (More in Cimoli
et al., a, and especially c and d. For quite germane policy considerations
cf. Paus, ; Reinert, .)
.. Emulation and, sometimes, Leapfrogging
as a General Principle Inspiring Policies
Emulation—to borrow Reinert’s () term—is the purposeful effort of imitation of
‘frontier’ technologies and production activities, irrespective of the incumbent’s com-
parative advantage profile. It often involves explicit public policies aimed at doing what
rich countries are doing in terms of production, and it always involves microeconomic
efforts—on the part of individuals and, more so, firms—to learn how to do things
others in frontier countries are already able to do. It is a familiar story over the last
three centuries. It dates back at least to the case of England vis-à-vis the Low Countries
in the period preceding the Industrial Revolution, and it applies all the way to
contemporary Chinese industrialization. Emulation primarily concerns products and
processes based on new technological paradigms. At one time it meant mechanized
textile production and the construction of related machines. Later it was steel produc-
tion, electricity-based products and machinery, and the internal combustion engine.
Nowadays it has to do first and foremost with information and telecommunication
technologies, biotech, and nanotechnologies.
It has sometimes happened that catching-up countries not only emulated the leading
ones, but ‘leapfrogged’ them in some of the newest, most promising technologies. This
occurred in the nineteenth-century United States and Germany, which forged ahead
of England in electromechanical engineering, consumer durables, and synthetic
chemistry.
But why should everyone emulate frontier technologies in the first place, rather than
being guided by one’s own ‘comparative advantages’? Or, as the sceptics often put it,
isn’t it absurd to suggest that everybody should specialize in ICT production? We have
answered this question above. Typically, relatively backward economies display an
absolute disadvantage in everything, that is, they are less efficient in the production of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
every commodity, and in fact the disadvantage in many commodities is likely to be
infinite in the sense that they are not able to produce them at all. Catching up entails
closing the gap in production knowledge and learning how to produce novel goods
(which in the beginning are generally novel only for the catching-up country, even if
‘old’ for the world). This is particularly important with respect to new technological
paradigms because such technologies are most often general purpose: they influence
most production activities directly or indirectly. In the past this was the case for
mechanical engineering and electricity as it is today for ICT technologies. Moreover,
goods and equipment based on the new technological paradigms generally entail
higher elasticity of demand and richer opportunities for further technological advance
(cf. Dosi, Pavitt, and Soete, ; Castaldi et al., ; Cimoli et al., b). Hence
emulation of frontier countries in these activities implies, other things being equal,
higher growth possibilities and greater potential for productivity growth and, eventu-
ally, domestic product innovation.
.. The Complementarity between Technological Learning
and the Development of Production Capacity
We have emphasized above the difference between technological knowledge and pure
information, with important implications in terms of ‘stickiness’ and difficulty in the
transmission of the former—embodied as it generally is in specific people, organiza-
tions, and local networks. One consequence of this is that learning rarely occurs
‘offline’, especially in the initial phases of industrialization. Rather, it goes together
with the acquisition of production equipment, and with the efforts of learning how to
use it and how to adapt it to local conditions (more in Bell and Pavitt, ). In turn,
this goes hand in hand with the training of workers and engineers and the professional
development of managers capable of efficiently running complex organizations. These
are also reasons why it is dangerous to see industrialization, even in its early stages,
simply as a matter of ‘diffusion’, or the turnkey adoption and use of equipment
acquired from abroad, all the more so when the technologies are in the form of
blueprints or licences requiring much painstaking local learning. Of course, no policy-
maker is in a position to fine-tune the details of the production activities and patterns
of learning which the economy has to exploit. The details of the actual dynamics
depend a good deal on the details of corporate strategies—and chance. There was no
way, for example, that the Korean policymakers could know or even less ‘plan’, say, a
learning push in semiconductor memories rather than microprocessors. However,
policymakers should be acutely aware of the fact that future capabilities build upon,
refine, and modify incumbent ones: hence the policy goal of building good path-
dependencies (the point resonates with similar advice by Hausmann and Rodrick
() regarding patterns of product diversification along the development process).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Two fundamental caveats must be kept in mind. First, a useful distinction can be
made between production capacity—the knowledge and organizational routines needed
to run, repair, and incrementally improve existing equipment and products—and
technological capabilities—the skills, knowledge, and organizational routines needed
to manage and generate technical change (Bell and Pavitt, : ). The kinds of
activity that foster the accumulation of the latter increasingly involve also specialized
R&D laboratories, design offices, production engineering departments, etc.
Second, and relatedly, ‘while various forms of “doing” are central to technological
accumulation, learning should not be seen simply as a doing-based process that yields
additional knowledge simply as the by-product of activities undertaken with other
objectives. It may need to be undertaken as a costly, explicit activity in its own right:
various forms of technological training and deliberately managed experience accumu-
lation’ (Bell and Pavitt, : ). Interestingly, the transition from the production
capacity phase to the technological capabilities phase has been managed superbly by
countries like Korea and Taiwan and it is where, on the contrary, most Latin American
countries got stuck.
.. The Necessity of Nurturing Infant Industries
Consider again the caricature of a Stone-Age economy and an ICT economy and allow
them to interact. Two properties are quite straightforward. First, the patterns of
economic signals will be biased in favour of stone-intensive product in one country,
and ICT-intensive in the other (their current ‘comparative advantages’). Hence, if the
former wants to enter the ICT age, it has to purposefully distort market signals as they
come from international exchanges (on the assumption that there are some: it could
well be that the ICT economy is unwilling to absorb any stone product!). Second, it is
quite unlikely that the stone producers, even under the ‘right kind of signal’, will be able
to instantly acquire the knowledge to competitively produce ICT products.
Certainly, all individuals take a long time to learn new skills. Turning violinists into
football players and vice versa is rather hard, if possible at all. And this applies even
more so to organizations and organization-building. Even when transformations are
possible, they require time, nurturing, and care. If a newly born violinist, ex-footballer,
is made to compete with professional violinists, he will make a fool of himself. If a
catching-up company is suddenly made to compete with world leaders it will most
likely disappear. Often, it is a daunting enough task to learn how to make—no matter
how inefficiently—a product which might indeed be rather standard in technologically
more sophisticated economies: demanding competitive efficiency as well is like asking
the violinist to run metres in around ten seconds after some quick training rounds.
Safeguarding the possibility of learning is the basic pillar of the infant industry logic.
On the incentive side, market signals alone are often not enough, and indeed they
frequently discourage the accumulation of technological capabilities in so far as they
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
ought to occur in activities currently displaying significant comparative disadvantages
and thus also unfavourable current profitabilities. Incidentally note, also, that the
existence of financial markets is a meagre instrument, if of any use at all, for translating
a future and uncertain potential for learning into current investment decisions (more
in Stiglitz, ). Thus, there are also sound learning-related reasons why, as the
historical evidence shows, just prior to industrial catching-up, average industrial
import tariffs are relatively low; they rise rapidly in the catching-up phase, and they
fall after mature industrialization. Indeed, it is during the catching-up phase that the
requirement to distort (international) market signals is more acute, precisely because
there are young and still relatively fragile learning infants. Beforehand, there are no
infants to speak of. Afterwards, there are adults able to swim into the wild international
ocean by themselves.
Doing so, however, involves more than just ‘signal distortion’. As many of the Latin
American experiences have shown, this is far from enough. Partly it has to do with the
fact that many forms of protection entail the possibility of learning but not, in the
language of Khan and Blankenburg (), the compulsion to innovate as distinct from
the sheer incentive to just exploit a monopoly rent, no matter how inefficient and lazy
the potential ‘learner’. Partly, it has to do with the capabilities accumulation and the
characteristics of the actors involved. (An archetypical example of purposefully ‘getting
signals wrong’ and fostering capability accumulation is Korea: see Amsden, .)
After all, even with the best of intentions and incentives, our violinist will not only take
time to learn but will actually be able to develop his/her football skills only as part of a
team. The team, in turn, will most often not be the making of sheer self-organization,
especially when production entails relatively complex products, as it usually does. At
the same time, violinists might not be the best candidates for playing football, irre-
spective of the incentive structure. Moving away from the metaphor, industrialization
might have little to do with simply the award of property rights and with the
establishment of firms as legal entities. It is quite misleading to think that the world
is full of evenly distributed sources of technological knowledge just waiting to be
exploited—the lag being due mainly to institutional and incentive-related forces. On
the contrary, irrespective of the opportunities for the entrepreneurial exploitation of
technological knowledge, which the ‘international knowledge frontier’ notionally
offers, the fundamental gap is about the lack of capabilities to explore and exploit
them. This is a crucial bottleneck for development. Even casual visitors to developing
countries (whenever they walk out of hotels paid for by the IMF!) notice these gaps—
which in the early stages of development concern even rather basic activities such as
accessing the Internet or processing a credit card payment. They apply much more to
firm-level capabilities such as drilling an oil well (or, in the early stages, even keeping
an existing well working). As discussed in several contributions to Cimoli, Dosi, and
Stiglitz (a), ‘horizontal’ education and training policies, together with technical
support given to firms by public institutions, can go a long way to enhance capabil-
ities. But even that is not likely to be enough. Policies are often bound to get their
hands dirty with respect to the nature, internal structure, and strategies of a few
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
corporate agents themselves. Fostering the emergence of, and occasionally explicitly
building, technologically and organizationally competent firms are fundamental
infant nurturing tasks. In fact, even the most developed countries only boast a
fraction of technologically dynamic organizations within a much greater population
of firms. (Note that all this applies to both ‘high tech’ and ‘low tech’ sectors as
conventionally defined.) In a sense, industrialization involves changing the distribu-
tion between ‘progressive’ and ‘backward’ firms.
Indeed, all this might not be enough: the state in the past often had to do more than
just ‘pushing and pulling’ entrepreneurs into certain strategic sectors, and ended up
acting as ‘entrepreneur of last resort’. We believe that this continues to be the case
today.
Indeed industrial policies for development and catching up are likely to involve the
following ‘capital sins’ which the market faithful are supposed to avoid: (i) state
ownership; (ii) selective credit allocation; (iii) favourable tax treatment for selected
industries; (iv) restrictions (or some conditionalities) on foreign investment; (v) local
context requirements; (vi) special IPR regimes; (vii) government procurement; and
(viii) promotion of large domestic firms. (Dahlman, , discusses them for China
and India, but the lessons are more general.)
In a nutshell, this is the full list of the capital sins which the market faithful are
supposed to avoid!
.. Industrial Policies in a Sino-centric World:
Some Conclusions
A combination of ‘infant nurturing’ measures has been a major ingredient of devel-
opment policies throughout the history of industrialization, and it continues to be so
today. Historically, the ‘infant learners’ had to be shielded in the domestic markets and
helped in the international ones in their interactions with the more efficient and more
innovative firms from ‘frontier’ countries. This happens to a large extent to also hold
today. However, the unique feature of the current ‘Sino-centric’ world—as Castro
() puts it—is that many catching-up countries are caught between a rock and a
hard place: the developed world is still ahead of them, but at the same time China is
rapidly eliminating its absolute disadvantages across the board, both in more trad-
itional productions and in activities based on the newest technological paradigms. And
it is doing so at a higher rate than it is catching up in wages (notwithstanding the fast
growth of the latter). The outcome is an absolute cost advantage in an expanding set of
goods, including those which were/are central to the industrial production of many
low- and middle-income countries. In that respect the magnitude and speed of Chinese
industrialization risks crowding out the industrializing potential of many other coun-
tries. So, for example, Brazil—a country on the upper tail of the distribution of
industrializers in terms of its technological capabilities—is a very ‘high wage’ country
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
compared to China, but so also are other less developed Latin America countries, and
even African countries are losing cost-based international (and domestic) competitive-
ness vis-à-vis China. Is this a reason to give up the ‘infant nurturing’/capability
accumulation philosophy? In our view it is not: on the contrary, it adds to the reasons
for practising various combinations of the ‘capital policy sins’ mentioned above. And it
ought to encourage a more explicit use of domestic or regional markets for cultivating
emerging national industries, even when the latter are being squeezed in the inter-
national arena between ‘advanced producers’ and Chinese exports.
. A: S--S
D M
..................................................................................................................................
To measure the contributions of structural change to aggregate productivity growth, it
is crucial to distinguish between the contributions of shifts between sectors and the
contributions of productivity growth within sectors. Notice that we use an aggregated
dataset based on our firm-level dataset for the decomposition method described below.
Recent studies using the shift-share technique include Ali Akkemik (), Timmer
and Szirmai (), and Kumar and Russell (). We adopt van Ark and Timmer’s
() shift-share model, in order to be comparable with the results of Wang and
Szirmai ().
The difference in aggregate labour productivity levels at time 0 and T can be written
as
X
n X
n
PT P 0 ¼ ðPiT Pi0 ÞSi þ ðSTi S0i ÞPi ð1Þ
i¼1 i¼1
with Pi0 and PiT the labour productivity of sector i at year 0 and T; S0i and STi the
employment share of sector i at year and T; Si sector’s period average share of total
employment; and Pi sector’s period average labour productivity. The growth of aggre-
gate productivity can be decomposed into intra-sectoral productivity growth (the first
term on the right-hand side of equation (), called ‘intra-effect’) and the effects of
changes in the sectoral allocation of labour (the second term, called ‘shift-effect’). Let Ci
denote the contribution of sector i to the aggregate labour productivity growth. We
have
X
n X
n
shift
PT P0 ¼ Ci ¼ ðCiintra þ Ci Þ ð2Þ
i¼1 i¼1
Van Ark and Timmer () reallocate all shift effects (C shift Þ from sectors that
experienced shrinking labour shares to sectors that expanded their share in total
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
labour. Suppose K is the set of sectors which expand their labour shares; J is the set of
sectors with declining labour share. For expanding sectors k and shrinking sectors j,
Ck ¼ Ckintra þ Ck
shift
¼ ðPkT Pk0 ÞSk þ ðSTk S0k ÞðPk PJ Þ 8k ∈ K ð3Þ
Cj ¼ Cjintra ¼ ðPjT Pj0 ÞSj 8j ∈ J ð4Þ
with average labour productivity overall shrinking sectors and averaging over years
X
ðST S0j ÞPj
j∈J j
PJ ¼ X : ð5Þ
ðST S0j Þ
j∈J j
A
This work draws significantly on Cimoli and Dosi (), Cimoli, Dosi, and Stiglitz (a),
Yu et al. () and Dosi and Tranchero (). We thank Eva Paus for her insightful
comments. Support from the European Union Horizon Research and Innovation
programme under grant agreement No. -GROWINPRO is gratefully acknowledged.
R
Abramovitz, M. () ‘Catching up, Forging ahead, and Falling behind’, The Journal of
Economic History : –.
Akkemik, K. Ali () ‘Labor Productivity and Inter-sectoral Reallocation of Labor in
Singapore (–)’, Forum of International Development Studies : –.
Amsden, Alice H. () Asia’s Next Giant: South Korea and the Last Industrialization.
Oxford: Oxford University Press.
Amsden, Alice H. and Takashi Hikino () ‘Staying behind, Stumbling back, Sneaking up,
Soaring ahead: Late Industrialization in Historical Perspective’, in William Baumol,
Richard Nelson, and Edward Wolff (eds) International Convergence of Productivity
with Some Evidence from History. Oxford: Oxford University Press.
Bell, Martin and Keith Pavitt () ‘Technological Accumulation and Industrial Growth:
Contrasts between Developed and Developing Countries’, Industrial and Corporate Change
(): –.
Castaldi, Carolina, Mario Cimoli, Nelson Correa, and Giovanni Dosi () ‘Technological
Learning, Policy Regimes and Growth: The Long Term Patterns and Some Specificities of a
Globalized Economy’, in Mario Cimoli et al. (eds) Industrial Policy and Development: The
Political Economy of Capabilities Accumulation. Oxford: Oxford University Press,
pp. –.
Castro, Antonio Barros de () ‘The Impact of Public Policies in Brazil along the Path from
Semi-stagnation to Growth in a Sino-centric Market’, in Mario Cimoli et al. (eds) Industrial
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Policy and Development: The Political Economy of Capabilities Accumulation. Oxford:
Oxford University Press, pp. –.
Chandler, Alfred D. () Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge,
MA: Harvard University Press.
Chandler, Alfred D. (a) ‘Corporate Strategy, Structure and Control Methods in the
United States during the th Century’, Industrial and Corporate Change : –.
Chandler, Alfred D. (b) ‘Organizational Capabilities and the Economic History of the
Industrial Enterprise’, Journal of Economic Perspectives , –.
Chandler, Alfred D. () ‘Learning and Technological Change: The Perspective from
Business History’, in Richard W. Thomson (ed.) Learning and Technological Change.
Basingstoke: Palgrave Macmillan, pp. –.
Chang, Ha-Joon () Kicking away the Ladder: Development Strategy in Historical Perspec-
tive. London: Anthem Press.
Cimoli, Mario () ‘Technology, International Trade and Development: A North South
Perspective’. PhD thesis, University of Sussex.
Cimoli, Mario and Giovanni Dosi () ‘Technology and Development: Some Implications
of Recent Advances in the Economics of Innovation for the Process of Development’, in
Atul Wad (ed.) Science, Technology and Development: A Critical Perspective. Boulder, CO:
Westview Press.
Cimoli, Mario and Giovanni Dosi () ‘Technological Paradigms, Patterns of Learning and
Development: An Introductory Roadmap’, Journal of Evolutionary Economics (): –.
Cimoli, Mario, Giovanni Dosi, and Joseph E. Stiglitz (a) Industrial Policy and Develop-
ment: The Political Economy of Capabilities Accumulation. Oxford: Oxford University
Press.
Cimoli, Mario, Giovanni Dosi, and Joseph E. Stiglitz (b) ‘The Political Economy of
Capabilities Accumulation: The Past and Future of Policies for Industrial Development’,
in Mario Cimoli et al. (eds) Industrial Policy and Development: The Political Economy of
Capabilities Accumulation. Oxford: Oxford University Press, pp. –.
Cimoli, Mario, Giovanni Dosi, Richard Nelson, and Joseph E. Stiglitz (c) ‘Institutions
and Policies Shaping Industrial Development: An Introductory Note’, in Mario Cimoli
et al. (eds) Industrial Policy and Development: The Political Economy of Capabilities
Accumulation. Oxford: Oxford University Press, pp. –.
Cimoli, Mario, Giovanni Dosi, and Joseph E. Stiglitz (d) ‘The Future of Industrial Policies
in the New Millennium: Toward a Knowledge-centered Development Agenda’, in Mario
Cimoli et al. (eds) Industrial Policy and Development: The Political Economy of Capabilities
Accumulation. Oxford: Oxford University Press, pp. –.
Cohen, Avi J. and Geoffrey C. Harcourt () ‘Whatever Happened to the Cambridge
Capital Theory Controversies?’, Journal of Economic Perspectives, : –.
Cohen, Wesley M. and Daniel A. Levinthal () ‘Innovation and Learning: The Two Faces
of R&D’, The Economic Journal : –.
Constant, Edward () The Turbojet Revolution. Baltimore, MD: Johns Hopkins University
Press.
Coriat, Benjamin () Penser a l’envers. Paris: Bourgeois.
Cristelli, Matthieu, Andrea Tacchella, and Luciano Pietronero () ‘The Heterogeneous
Dynamics of Economic Complexity’, PloS One (): e.
Dahlman, Carl J. () ‘Growth and Development in China and India: The Role of Industrial
and Innovation Policy in Rapid Catch-up’, in Mario Cimoli et al. (eds) Industrial Policy and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Development: The Political Economy of Capabilities Accumulation. Oxford: Oxford Uni-
versity Press, pp. –.
Dornseifer, Bernd and Jürgen Kocka () ‘The Impact of the Pre-industrial Heritage:
Reconsiderations on the German Pattern of Corporate Development in the Late th and
Early th Century’, Industrial and Corporate Change (): –.
Dosi, Giovanni () ‘Sources, Procedures, and Microeconomic Effects of Innovation’,
Journal of Economic Literature (): –.
Dosi, Giovanni and Marco Grazzi () ‘Technologies as Problem-solving Procedures and
Technologies as Input–Output Relations: Some Perspectives on the Theory of Production’,
Industrial and Corporate Change (): –.
Dosi, Giovanni and Richard Nelson () ‘Technical Change and Industrial Dynamics as
Evolutionary Processes’, in Bronwyn H. Hall and Nathan Rosenberg (eds) Handbook of the
Economics of Innovation. Amsterdam: Elsevier, pp. –.
Dosi, Giovanni and Matteo Tranchero () ‘The Role of Comparative Advantage, Endow-
ments and Technology in Structural Transformation’, in Ludovico Alcorta, Adam Szirmai,
Bart Verspagen, and Neil Foster-McGregor (eds) New Perspectives on Structural Change:
Causes and Consequences of Structural Change in the Global Economy. Oxford: Oxford
University Press.
Dosi, Giovanni, Christopher Freeman, and Sylvia Fabiani () ‘The Process of Economic
Development: Introducing Some Stylized Facts and Theories on Technologies, Firms and
Institutions’, Industrial and Corporate Change (): –.
Dosi, Giovanni, Renato Giannetti, and Pier Angelo Toninelli (eds) () Technology and
Enterprise in a Historical Perspective. Oxford: Clarendon Press.
Dosi, Giovanni, Keith Pavitt, and Luc Soete () The Economics of Technical Change and
International Trade. London: Harvester Wheatsheaf.
Freeman, Chris () Technology Policy and Economic Performance: Lessons from Japan.
Pinter.
Freeman, Chris () ‘ “The National System of Innovation” in Historical Perspective’,
Cambridge Journal of Economics (): –.
Freeman, Chris () ‘Technological Infrastructure and International Competitiveness’,
Industrial and Corporate Change : –.
Freeman, Chris () ‘History, Co-evolution and Economic Growth’, Industrial and Cor-
porate Change (): –.
Freeman, Chris and Francisco Louca () As Time Goes by: From the Industrial Revolutions
to the Information Revolution. Oxford: Oxford University Press.
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cam-
bridge, MA: Harvard University Press.
Hamilton, Alexander () Reports of the Secretary of the Treasury on the Subject of
Manufactures, in The Papers of Alexander Hamilton, edited by Harold C. Syrett et al.,
vols. New York: Columbia University Press (–).
Hanlon, W. Walker () ‘The Persistent Effect of Temporary Input Cost Advantages in
Shipbuilding, –’. NYU Stern Working Paper.
Hausmann, Ricardo and Dani Rodrik () ‘Doomed to Choose: Industrial Policy as
Predicament’. CID Working Paper. Cambridge, MA: Center for International Develop-
ment at Harvard University.
Head, Keith () ‘Infant Industry Protection in the Steel Rail Industry’, Journal of Inter-
national Economics (–): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Hidalgo, Cesar A. and Ricardo Hausmann () ‘The Building Blocks of Economic
Complexity’, Proceedings of the National Academy of Sciences : –.
Hirschman, Albert O. () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Juhasz, Reka () ‘Temporary Protection and Technology Adoption: Evidence from the
Napoleonic Blockade’, American Economic Review : –.
Kalouptsidi, Myrto () ‘Detection and Impact of Industrial Subsidies: The Case of Chinese
Shipbuilding’, The Review of Economic Studies : –.
Khan, Mushtaq H. and Stephanie Blankenburg () ‘The Political Economy of Industrial
Policy in Asia and Latin America’, in Mario Cimoli et al. (eds) Industrial Policy and
Development: The Political Economy of Capabilities Accumulation. Oxford: Oxford Uni-
versity Press, pp. –.
Kogut, Bruce () ‘National Organizing Principles of Work and the Dominance of
the American Multinational Corporation’, Industrial and Corporate Change :
–.
Kogut, Bruce () Country Competitiveness. Oxford: Oxford University Press.
Kumar, Subodh and R. Robert Russell () ‘Technological Change, Technological Catch-
up, and Capital Deepening: Relative Contributions to Growth and Convergence’, The
American Economic Review (): –.
Landini, Fabio and Franco Malerba () ‘Public Policy and Catching up by Developing
Countries in Global Industries: A Simulation Model’, Cambridge Journal of Economics
(): –.
Lane, Nathan () ‘Manufacturing Revolutions: Industrial Policy and Networks in South
Korea’. IIES Working Paper. Stockholm.
Lee, Keun and Franco Malerba () ‘Catch-up Cycles and Changes in Industrial Leader-
ship: Windows of Opportunity and Responses of Firms and Countries in the Evolution of
Sectoral Systems’, Research Policy (): –.
List, Friedrich () The National System of Political Economy. London: Longmans.
Malerba, Franco and Richard Nelson () ‘Learning and Catching up in Different Sectoral
Systems: Evidence from Six Industries’, Industrial and Corporate Change (): –.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths. London: Anthem Press.
Mowery, David C. () ‘Defense-related R&D as a Model for “Grand Challenges” Tech-
nology Policies’, Research Policy (): –.
Nelson, Richard and Howard Pack () ‘The Asian Miracle and Modern Growth Theory’,
The Economic Journal : –.
Paus, Eva () ‘Innovation Strategies Matter: Latin America’s Middle-income Trap Meets
China and Globalization’, The Journal of Development Studies (): –.
Reinert, Erik S. () ‘The Role of the State in Economic Growth’, Journal of Economic
Studies : –.
Reinert, Erik S. () How Rich Countries Got Rich and Why Poor Countries Stay Poor.
London: Constable.
Reinert, Erik S. () ‘Emulation versus Comparative Advantage: Competing and Comple-
mentary Principles in the History of Economic Policy’, in Mario Cimoli et al. (eds)
Industrial Policy and Development: The Political Economy of Capabilities Accumulation.
Oxford: Oxford University Press, pp. –.
Shaikh, Anwar () Capitalism. Oxford: Oxford University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Stiglitz, Joseph E. () ‘Economic Growth Revisited’, Industrial and Corporate Change ():
–.
Syverson, Chad () ‘What Determines Productivity?’, Journal of Economic Literature
(): –.
Tacchella, Andrea, Matthieu Cristelli, Guido Caldarelli, Andrea Gabrielli, and Luciano
Pietronero () ‘A New Metrics for Countries’ Fitness and Products’ Complexity’,
Scientific Reports on Nature : .
Timmer, Marcel P. and Adam Szirmai () ‘Productivity Growth in Asian Manufacturing:
The Structural Bonus Hypothesis Examined’, Structural Change and Economic Dynamics
: –.
van Ark, Bart and Marcel Timmer () ‘Asia’s Productivity Performance and Potential: The
Contribution of Sectors and Structural Change’. The Conference Board, Washington.
Vincenti, Walter G. () ‘Engineering Knowledge, Type of Design, and Level of Hierarchy:
Further Thoughts about What Engineers Know’, in Peter Kroes and Martijn Bakker (eds)
Technological Development and Science in the Industrial Age. Dordrecht: Kluwer Academic
Publishers, pp. –.
Wang, Lili and Adam Szirmai () ‘Productivity Growth and Structural Change in Chinese
Manufacturing, –’, Industrial and Corporate Change (): –.
Yu, Xiaodan, Giovanni Dosi, Jiasu Lei, and Alessandro Nuvolari () ‘Institutional Change
and Productivity Growth in China’s Manufacturing: The Microeconomics of Knowledge
Accumulation and “Creative Restructuring” ’, Industrial and Corporate Change ():
–.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
. I
..................................................................................................................................
I his book on economic development, Ian Little, perhaps the most prominent
neoclassical author on development of the last century, characterized the neoclassical
approach to economic development as a belief in the power of the price system to
allocate resources efficiently and by implication to stimulate growth. Little labelled
those who questioned the ability of markets to function in this way ‘structuralists’
(Little, ). Theoretically, neoclassical economics is associated with the concept of
equilibrium and the achievement of allocative optimality through the market mech-
anism, which in policy terms implies a preference for laissez-faire and free trade. While
much of modern economics is based on these ideas, once one allows for exceptions to
these simple policy prescriptions based on the existence of market imperfections or
‘market failures’, the meaning of the term ‘neoclassical’ becomes less clear, and the most
common use of the term is now as an alternative to heterodox positions (Colander,
).¹ This chapter focuses on what can be seen as ‘mainstream’ interpretations of
industrial policy, which acknowledge that the existence of market imperfections or
¹ Little himself, in his earlier authoritative work on welfare economics, when writing of the marginal
cost-pricing rule, brings out the policy ambiguity inherent in welfare theory: ‘We may sum up the
present discussion by asking (as we have asked for the other “optimum” conditions) what is required for
it to be sufficient for an improvement in welfare always to adjust output wherever and whenever possible
until price is equal to marginal cost. Formally the answer is that it can be proved to be sufficient only if all
the ‘optimum’ conditions are put into operation at once, and if the resultant redistribution of income is
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
‘failures’ undermines simple policy prescriptions based on the assumptions of the pure
competitive model.
The limitation of markets as a means of fostering development was an assumption
common to most early writers on problems of economic development. In the devel-
opment context, key aspects of market failures included the inability of labour markets
to clear at a socially acceptable wage rate associated with open unemployment and
underemployment; lack of information and collateral in credit markets leading to
unsatisfied demand for credit, particularly from small and medium-size firms; short-
ages of skills with under investment in training by individual producers because of the
externality created for competitors; under investment in new technology because of
lack of capital, financial and human, and the externality for non-innovating competi-
tors. In principle all of these justify intervention to address the gap between market
prices and economic or social values (sometimes termed ‘shadow prices’).
Neoclassical industrial policy is usually interpreted as a minimalist approach to
corrections to the functioning of markets through measures such as the provision of
better information, regulation of monopolies, investment in infrastructure, and the
loosening of government regulation. This is exemplified by the ‘business environment
reform’ agenda introduced as part of structural adjustment programmes in the s and
s, when the term ‘industrial policy’ did not figure in discussions around the
Washington Consensus (Williamson, , ). This chapter discusses the tradition
in welfare economics that can be used to justify a more interventionist version of
industrial policy, and considers more recent restatements of the case for industrial policy
based on a framework initially developed in the s.² The chapter begins with an
overview of the neoclassical approach before discussing its neglect during the structural
adjustment era. It then considers two recent contributions that revive the case for a
neoclassical version of industrial policy. The application of such policies, in particular
priority-setting techniques, is also discussed. A final section draws some conclusions.
. T D D
P H
..................................................................................................................................
Neoclassical versions of economics have been dismissed as dogmatic assertions of the
benefits of laissez-faire and free trade, but within the theoretical framework there is the
possibility of an interventionist, if still limited, role for public policy. Building on
considered to be not unfavourable, and if all external effects are absent. But we have seen that it is
manifestly impossible to put all the conditions into operation’ (Little, : ; emphasis added).
² An interesting link between current suggestions and thinking in the s is found by comparing
some of the arguments reviewed in this chapter and the work of Arthur Lewis in advising on the
prospects for industrialization in the Gold Coast (now Ghana); see Weiss (a).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Marshall’s idea of external effects, for which the initiating producers neither received
recompense nor paid costs, Pigou () created the case for tax-subsidy interventions
as a means of addressing the failures of markets. With reference to the taxing of ‘smoke
nuisance’, he anticipated the case for environmental taxes by several decades.³ The
application of these ideas to a broader policy context had to wait until the s, when
a theoretical literature on policy in inefficient (or ‘distorted’) markets emerged from
analysis of the conditions under which free trade remained the best policy, where
competitive conditions did not hold domestically. Although generally argued in
abstract terms, the issue was highly relevant in the development context as trade
protection was a relatively easy way, at least in fiscal terms, for governments to
compensate producers for factors like wage rates above the opportunity cost of labour
or for externalities created by learning effects. This literature was termed the ‘theory of
domestic distortions’, and seminal contributions were made by Meade (),
Bhagwati and Ramaswami (), and Johnson (). However, it was Max Corden
who generalized the approach beyond trade-related interventions to cover a range of
possible measures to address different market failures in what he termed the ‘policy
hierarchy’ (Corden, : ch. ). This offered the first general statement of the
principles behind what can be seen as a neoclassical version of industrial policy,
which in principle could be used to justify a relatively interventionist policy stance.
Corden recognized that policy needs to address barriers to growth created by real-
world features of imperfect markets, but argued that there are different ways to do this
associated with different by-product costs in terms of their effects on incentives and
prices in related markets. Policy will involve a trade-off between addressing a specific
market failure and the costs arising from the intervention.⁴ The best solution for a
given problem was judged to be the most direct—in the sense of addressing the specific
market failure at source—as this would minimize distortionary by-product costs.
Policy interventions could thus be ranked by the number (or more accurately) the
scale of the by-product distortions they created. One of Corden’s original examples
related to a labour-market distortion (such as a minimum wage or union pressure)
which kept wages above labour’s opportunity cost. If labour-market reforms were ruled
out as impractical, the most direct policy would be a subsidy for employment (for
example through tax credits). Other alternatives, such as a subsidy to production, not
employment, or import protection via tariffs or export subsidies, created increasing
levels of by-product costs. A production subsidy would leave labour-intensity of
production too low; an import tariff combined with an export subsidy would have
the same effect and distort consumer choice; and an import tariff alone would leave
labour-intensity of production too low, distort consumer choice, and bias sales against
exports (Corden, : ). Corden was clear that similar analyses could be applied to
different policy problems and combinations of policy instruments. For example,
³ Robinson and Eatwell (: ).
⁴ Implicitly (and sometimes explicitly) this involves a comparison of the likely benefits and costs of a
policy intervention to address market failures (Tinbergen, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table 5.1 Policy hierarchy: industry support by alternative measures
Rank Policy measures By-product distortions
1 Production subsidy None
2a Import tariff plus export subsidy Consumption distortion
2b Subsidy to inputs Factor intensity distortion
3 Import tariff Consumption distortion
Anti-export bias
4 Import quotas Consumption distortion
Anti-export bias
Public revenue effect
Note: Items at 2a and 2b are equivalent in ranking since they have the same number of by-product
distortions.
Source: Adapted from Cody et al. (1990: table 4.1).
Corden () anticipated more recent discussions on the role of the real exchange rate
as an instrument of industrial policy, contrasting ‘exchange rate protection’ with the
use of import tariffs as means of encouraging tradable activities.⁵
Neoclassical economics as applied to development policy generally recognized infant
industry policy as a possible exception to free trade; such a policy was viewed as a form
of investment, with short-run costs to consumers as costs of imported goods are raised
by import tariffs and non-tariff barriers being compared with long-run gains in
productivity through successful learning (Baldwin, ).⁶ However, support for an
infant can be provided in different ways. In terms of supporting new activities,
following the logic of the policy hierarchy import tariffs were perceived as an inferior
means of promoting a new activity because they distorted consumer choice and created
a bias against exports by raising the relative profitability of home-market sales. The
most direct intervention would be a production subsidy financed by raising taxes in as
non-distortionary a way as possible.⁷ Table . ranks five alternative policy measures
for supporting an infant activity, with the hierarchy determined by the number of by-
product distortions each creates. A combination of an import tariff and export subsidy
⁵ The original version of Corden () was delivered at a seminar in . Using the hierarchy
approach, he suggested both created distortions, which for selective import tariffs was a consumer
distortion and for an undervalued real exchange rate was the shift in producer prices for all tradables
regardless of whether all needed support. In addition, with exchange rate undervaluation there would be
the need to sterilize any resulting current account surplus. On balance he appeared to favour conven-
tional tariff protection.
⁶ For example, one of the key neoclassical authors on trade policy, Bela Balassa, suggested a basic rate
of per cent protection for manufacturing in general with the possibility of a rate of per cent for
infant industries (Balassa, : ). Here rates refer to effective, not nominal, protection. It was usually
understood that gains were based on ‘learning by doing’ rather than on conscious efforts at accumulation
of production capabilities, as identified in empirical work and stressed in structuralist literature (Bell
et al., ; Teitel, ).
⁷ This explains the recommendation in Little et al. () for support for new activities through
‘promotion’ by production subsidy rather than ‘protection’ by import tariff.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
at the same rate would avoid an anti-export bias but would create a consumption
distortion by raising prices paid by consumers. A subsidy to a factor input, such as
labour, power, or credit, would not affect consumer prices but would distort input
selection. An import tariff would have an anti-export bias and would distort consumer
choice. Finally, physical non-tariff barriers like quotas, prevalent in many countries in
the s, were perceived as the most distorting of all forms of protection, creating not
only biases in consumer choice, but also an anti-export bias and a loss of government
revenue.⁸
The policy hierarchy approach has been and remains influential, although it has
clear limitations. It is in the tradition of the theory of the second best, but establishing
exactly what optimal measures will be in a realistic world full of market imperfections is
theoretically highly complex, and the policy hierarchy rule is a way of simplifying the
problem (Lipsey and Lancaster, ). Ranking inversely by number of by-product
distortions a measure creates assumes both that each measure is equally effective in
terms of its impact on the chosen policy objective and that the costs of each distortion
are equal. Logically, where these conditions do not hold it is possible to prefer a more
distortionary, but more effective policy over a less distortionary, but less effective one
(Cody et al., ). In addition, the approach assumes away the fiscal costs and their
associated distortionary effects where taxes are raised to fund subsidies, by assuming
subsidies are financed by a tax package that minimizes tax distortions.⁹
The general point that the unexpected by-product effects of policies can be signifi-
cant is important, but the policy hierarchy approach alone cannot provide a definitive
choice between alternatives. Their relative effectiveness and their costs of implemen-
tation and funding need also to be considered in a simple overall cost‒benefit com-
parison. One of the key central arguments over trade protection, for example, has been
that it can have a direct effect in blocking imports into the home market and that it
does not require funding in the way that promotion by subsidies does. Despite these
limitations, as discussed further below, the influence of the hierarchy approach is still
found in policy discussions, which stress the importance of addressing a market
distortion or failure as directly as possible.¹⁰
. S A E
..................................................................................................................................
The significance of market failures was largely ignored during the structural adjust-
ment era of the s and s, with the counter-argument that, while markets can
⁸ Little et al. () is a classic analysis of the costs of protection from a neoclassical perspective.
⁹ Balassa (: ) argues that ignoring budgetary considerations is unrealistic and for that reason
questions the feasibility of subsidy schemes.
¹⁰ For example, in its discussion of possible interventions World Bank (: ‒) suggests to
‘match the instrument to the rationale’, which is a restatement of the policy hierarchy approach.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
fail, so can governments, in the sense that they can be captured by vested interests so
that interventions become a means of delivering rents to favoured activities. The
avoidance of cronyism, it was argued, required the avoidance of any major interven-
tions to address market failures (Krueger, ). Only minor interventions, for
example, to improve information flows, restrict administrative barriers, and improve
infrastructure, were acceptable.
In relation to foreign trade, there was unanimous support for removing non-tariff
barriers and lowering the mean and dispersion of tariff rates, with the possibility of
retaining above-average tariffs for activities with potential (the so-called infants). Low
relatively uniform import tariffs were advocated, largely for revenue purposes; for
example, in his summary of the Washington Consensus, Williamson () refers to
rates in the range of ‒ per cent, with the lower end more likely to be applied.
In terms of wider industrial policy issues, along with opening economies to foreign
competition through major trade liberalization programmes, the thinking was that
policy reform should aim at making markets work as competitively as possible by
removing distortions directly. This meant that rather than accepting market failures
and designing second-best policies based on taxes, subsidies, or other measures to work
around them, the failures themselves should be removed. Put simply, for example, this
meant that if wages were above the opportunity cost of labour, impediments to the free
functioning of labour markets, such as restrictive legislation on hiring and firing,
should be removed; alternatively, if firms had difficulty accessing credit, the system
of financial intermediation should be improved by removing restrictions on the entry
of new banks or by other regulatory measures to increase competition. The impos-
ition of this type of liberalization reform across the major markets of economies as
part of structural adjustment conditionality was highly controversial. For the present
discussion, what is important is that if implemented effectively it removes the need
for the type of industrial policy implied by the policy hierarchy discussion.
What replaced industrial policy at this time was a focus on barriers to private-sector
expansion as identified in ‘investment climate’ surveys. These were based on interviews
with firms who were asked to rank the importance of different types of constraint on
their growth, whether, for example, poor infrastructure, lack of finance, government
regulation, or lack of skills. Specific measures to address these constraints, within the
confines of an overall policy of liberalization, sometimes described as ‘business envir-
onment reform’ became the new industrial policy of this era (Weiss, ). The
rationale for such measures was based on empirical evidence collected by the World
Bank and others on the impact of various barriers to private-sector expansion (World
Bank, ). The basis for policy at this stage was to overcome these various obstacles by
investing in infrastructure and training, streamlining regulation, where possible lower-
ing taxes, and improving the system of financial intermediation by banking reform.
Improvements were as far as possible to benefit all producers equally through
‘horizontal’ interventions (as opposed to selective or ‘vertical’ measures). However, in
practice a truly level playing field approach was difficult to implement, since differential
impacts were inevitable as improvement in access to a given resource or service would
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
benefit more those who used the resource or service intensively. In addition, firm surveys
revealed that across firms from many countries there was a large gap between de jure and
de facto business environment conditions, which in many instances was explained by
corrupt or informal payments as means of evading controls. This meant that there could
be large differences in the business environment between firms in the same country.¹¹
At this stage, therefore, the policy consensus was dominated by the primacy of
market reform and the need to remove market failures and distortions at source.
Behind this approach was a conception of the state as a facilitator for the private sector
rather than as an active participant in a process to support long-term development,
with its perceived risk of government failure and cronyism. However, a major omission
of this version of policy, highlighted in more recent contributions to the neoclassical
literature, is its failure to address issues of innovation and technical change.
. R I N
I P
..................................................................................................................................
If one believes that market failures in poor countries cannot be adequately addressed
simply by measures to improve the business environment, the market failure/policy
hierarchy framework, while largely neglected in the period from the mid-s to ,
can be used to justify a considerably more active policy than that practised during that
time. From a neoclassical perspective, the revival of interest in industrial policy is
largely due to the work of the Harvard-based economists Ricardo Hausmann and Dani
Rodrik. Although the authors themselves depart from conventional (and therefore
neoclassical) interpretations of causes of growth, their work follows the traditions of
the policy hierarchy literature. Their theoretical approach is set out clearly in
Hausmann and Rodrik (), and its policy implications are explored in a series of
subsequent papers. The authors reject the standard interpretation of the route to
economic growth set out by the Washington Consensus involving openness to foreign
trade and capital flows, market liberalization, and improved governance and institu-
tional development. They argue that while some of these measures individually may
have positive effects, standard reform packages miss the key issue of dynamic entre-
preneurship and its link with innovation and ‘product discovery’. To address this,
additional support measures are required to help firms discover what they can produce
competitively. This opens the door to a version of industrial policy that is based on
dialogue between public agencies and representatives of the private sector and has been
labelled ‘modern industrial policy’ (Felipe, ).
¹¹ Hallward-Driemeier and Pritchett () describe ‘favoured’ and ‘disfavoured’ firms, the former
barely troubled by controls and regulations. In the African context Hallward-Driemeier et al. ()
show that variations in indicators like days to clear customs or time spent dealing with officials vary
more within countries than between them.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The more ambitious side to this policy (what the authors term ‘in the large’) involves
taking strategic bets on new activities, products, or processes and providing the risk
capital—for example through development banks or venture capital funds—or loan
guarantees to allow them to be established.¹² The authors base this on the externality
effect created by innovation, defined as doing things in different ways and creating new
products (or products new to an economy), since followers benefit from the cost
incurred by the first entrant. This gives a rationale for supporting and subsidizing
innovation, and while not referring explicitly to the policy hierarchy approach, their
discussion of the costs and benefits of different policy options largely mirrors the
discussion in Corden from thirty years earlier.¹³ In their analysis, import protection as
a means of supporting innovators is the least attractive option. It does not discriminate
between innovators and followers, raises prices to consumers, and has an anti-export
bias. It will focus innovation on domestic markets which is expected to lower the return
to innovation given their small size relative to the world market. Similarly, export
subsidies may have weaker price effects for domestic consumers than import tariffs, but
also do not discriminate between innovators, leading to over investment in the activity.
As the key concern is to target innovators, while limiting any leakage of benefits to
‘copycats’, public-sector credit or loan guarantees is the preferred instrument for this.
Loans or loan guarantees can transfer the risk of failure to governments as the loan is
only repaid if the investment is successful.
In subsequent papers it is clear that the authors also see the possibility of industrial
policy helping to remove constraints to growth in existing activities (what the authors
term ‘in the small’) and fostering linkages between producers and suppliers
(Hausmann and Rodrik, ; Hausmann et al., , ). Here dialogue between
the government and the relevant private-sector stakeholders is meant to identify both
areas for expansion and the obstacles to this growth that can be removed by the
government. Co-funding by private partners to remove bottlenecks is seen as helpful
to reinforce the public‒private partnership element.¹⁴ Furthermore, Rodrik has made
clear that he sees what Corden () called ‘exchange rate protection’ and others have
¹² In high-income economies it is now common for industrial policy to be rationalized by reference to
externalities from pioneer activities and the need to support these by ‘socializing risk’. Thus, for example,
to quote the most recent industrial strategy from the government of the United Kingdom: ‘Governments
in successful economies have recognized their strategic power and leadership role, allowing them to
coordinate and convene efforts to develop and assimilate new technologies and industries . . . Govern-
ments can make long-term investments that no single commercial or academic player can take alone.
The modern nation state is the most powerful means we have of pooling risk’ (HMG, : ).
¹³ ‘In attempting to promote innovation governments have used a variety of instruments such as
trade protection, public sector credit, tax holidays and investment and export subsidies . . . However,
interventions typically create other distortions’ (Hausmann and Rodrik, : ).
¹⁴ In their policy advice to the government of South Africa, specific suggestions from the authors
included the creation of a special fund to finance public inputs suggested on the basis of proposals from
the private sector, with these public inputs defined broadly to cover infrastructure, training, adminis-
trative reform, R&D or regulatory reform, and the conversion of the existing Industrial Development
Corporation into a risk-taking venture capital fund (Hausmann et al., ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
called a ‘stable and competitive real exchange rate’ (Guzman et al., ) as an
important component of industrial policy. He and other authors have shown a link
between real exchange rates and economic growth (Rodrik, ). This association has
been built on in recent discussions of industrial policy where setting a competitive rate
(that is an undervalued rate for local currency) is seen as an important complement to
supply-side interventions. The criticism that this implies supporting all tradable
activities, not just those with learning externalities, can be addressed by a set of taxes
on the non-externality-creating traded sectors.¹⁵
The focus on innovation and subsidizing innovating firms from Hausmann and
Rodrik links with both the endogenous growth literature (Romer, ) and the
capabilities approach to industrialization as seen, for example, in the discussion of
national systems of innovation in Nelson () and the work of Lall () on
industrial capabilities.¹⁶ It has been argued that if knowledge is firm specific or tacit
then it will not be transferrable and that Hausmann and Rodrik therefore overplay the
importance of knowledge transfer effects and underplay the importance of inter-
sectoral linkages and systemic effects (Andreoni and Chang, : ). The empirical
significance of the spread of a knowledge externality partly depends on what is to be
transferred. The argument of Hausmann and Rodrik about innovation and product
discovery appears to be a broader one, in that firms may follow an innovator in a
particular product line or way of organizing production without having specific
blueprints, as the key information that is transferred concerns what can be produced
competitively in an economy. In relation to inter-sectoral linkages and systemic issues,
such as fostering a culture of entrepreneurship and factory discipline, the charge that
these are neglected overlooks the process or dialogue aspect of the authors’ policy, that
is intended to establish the constraints to growth in a particular area, which can include
lack of domestic input suppliers or a trained workforce. In so far as these are real issues
and governments can relieve these constraints, concerns over linkages and aspects of
the industrial culture should be addressed. The dialogue element of their policy
introduces a potentially more interventionist slant to industrial policy absent from
the ‘business environment reform’ approach.
The most valid criticism of the Hausmann and Rodrik approach is that offering
credit or credit guarantees to firms may not itself provide sufficient incentive for or
¹⁵ The distinguished authors of Guzman et al. () who advocate this approach would probably not
wish to be described as neoclassical, but in so far as their policy recommendation on the real exchange rate
is justified by learning externalities it falls under the definition of neoclassical industrial policy used here.
¹⁶ Andreoni and Chang (: ), reviewing the work of Hausmann and Rodrik, suggest that the
focus on informational externalities is an example of a ‘clumsy translation of old ideas by non-
neoclassical schools into the neoclassical language’. The point that the informational externality is an
old argument is, of course, correct, but the concept of a ‘knowledge externality’ drawn on by Hausman
and Rodrik was clearly cited in the earlier literature (Corden, : ‒; Johnson, ). The fact that
many neoclassical authors tended to underplay its significance as the basis for special support for new
activities is a different argument and illustrates the point that the potential for an active policy inherent
in the market failure analysis was often not developed.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
support to the development of indigenous technology. The national system of
innovation perspective views firms’ technological capability as strongly influenced
by their operating environment, including the education system and research insti-
tutions, and policy on foreign investment, technology transfer, and intellectual
property. Here the role envisaged for industrial policy is much wider than supplying
credit, but requires governments to fund and coordinate basic research, to support its
dissemination and commercial development and support firms in their efforts at
technological upgrading. Case studies from technologically successful economies
reveal the key common denominators as learning within firms, access to foreign
technology and skilled human capital, and an active government policy (Malerba and
Nelson, : ). Similarly, evidence from East Asia on the development of
electronics and information communication technology highlights the role of gov-
ernment support (Lee, ).
. N S E
..................................................................................................................................
A separate body of work influencing the neoclassical revival of industrial policy comes
from the Chinese economist Justin Lin, who gained international prominence and
influence from his time as chief economist of the World Bank. Lin’s case on industrial
policy is part of a wider framework of ‘New Structural Economics’, which aims to
marry a belief that economic structures are critical for development with an emphasis
on the use of the price mechanism as the key to efficient resource allocation. The author
himself terms this ‘a neoclassical approach to structure’, as opposed to traditional
structuralist analysis with its suspicion of the effectiveness of markets (Lin, : ).
The significance of this work for industrial policy is that it acknowledges the existence
of market failures and thus revives the case for government intervention through a
‘facilitating state’. As in the Hausmann/Rodrik work, the importance of informational
externalities created by pioneer firms, whose experience both positive and negative
followers can learn from, is stressed. In addition to ensuring that pioneers are com-
pensated in some way for these effects, the government’s roles cover provision of
information to and coordination of private firms, investment in both hard and soft
infrastructure and the nurturing of new potentially competitive industries, chiefly
through foreign investment.¹⁷ Each of these roles are said to stem from a perceived
market failure, so the argument is consistent with earlier neoclassical work.
¹⁷ ‘Historical evidence and economic theory suggest that while markets are indispensable mechan-
isms to allocate resources to the most productive sectors and industries, government intervention—
through the provision of information, co-ordination of hard and soft infrastructure improvement and
compensation for externalities—are equally indispensable for helping economies move from one stage of
development to another’ (Lin, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
In terms of practical advice on the direction of structural change, Lin draws insights
from the ‘flying geese’ pattern of migration within East Asia, as industries moved
between economies in the region in response principally to wage differentials: with
rising wages in Japan in the s, firms migrated to lower-wage locations like
Thailand and Indonesia, and more recently to China and Vietnam (Lin, ). This
pattern of migration lies behind his suggestion that when poor countries start to think
about new sub-sectors in which to invest, they should start by examining sub-sectors in
which similar countries have had export success in the recent past. A similar dialogue
to that in Hausmann and Rodrik of identifying obstacles to expansion by existing firms
or barriers to entry by new firms is recommended.
In this approach new activities to be supported by governments should be those that
are in line with existing factor endowments of an economy, but which are not yet
profitable for private firms because of short-term market failures. The expectation is
that the removal of these failures will be sufficient to create internationally competitive
production, so that the activities can be described as those where there is a latent, but
not current, comparative advantage.¹⁸ Hence investment in activities such as these is
described as ‘comparative advantage conforming’. Investing in activities which require
skills and capabilities that the economy does not yet possess is termed a ‘comparative
advantage defying’ policy by Lin, who sees this as a characteristic mistake of traditional
structuralism and by implication ‘old-style’ industrial policy.¹⁹ Investment in activities
without latent comparative advantage needs to be postponed until the underlying
endowment structure has changed sufficiently for them to be commercially viable
with the support of the envisaged market-correcting industrial policy.
The type of market-correcting industrial policy interventions envisaged by this
approach is illustrated in a detailed study on the obstacles to light manufacturing in
Africa, which looked at the constraints on development in a range of sub-sectors in
several East African countries, with Ethiopia taken as a case study (Dinh et al., ).
This focus on constraints can be interpreted as ‘industrial policy in the small’ in the
terminology of Hausmann and Rodrik. The analysis is based around a form of sub-sector
growth diagnostics highlighting what are identified as the key constraints and solutions
to them based on cross-country cost comparisons and evidence from interviews.²⁰
¹⁸ Lin and Monga (: ) argue that ‘by facilitating co-ordination and addressing externality
issues, industrial policy helps many domestic and foreign firms to enter sectors that are consistent with
the country’s latent comparative advantage and turn them into overt comparative advantages, and
thereby intensifies competition within the industries and enhances the economy’s competitiveness’.
¹⁹ The debate between Lin and Chang (Development Policy Review, ) provides a helpful insight
into alternative visions of technological upgrading and structural transformation in industrializing
economies. While both agree on the need for government support, they disagree on how far and how
fast it is wise for countries to move into ‘distant’ products in the sense of goods that are far removed from
current comparative advantage.
²⁰ For example, for apparel, specific recommendations include streamlining customs procedures,
eliminating all import tariffs on imported inputs, rehabilitating rail links to the port, and developing an
industrial park near the port; for leather goods, recommendations include removing the import ban on
processed leather and providing technical assistance in factory operations and product design.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. D C: H
I S
..................................................................................................................................
Since it draws its rationale from the existence of significant market failures, neoclassical
industrial policy is usually associated with horizontal as opposed to vertical measures
available only selectively to priority activities. However, both Hausmann and Rodrik
and Lin indicate that some form of selectivity is inevitable to allocate limited resources
ex ante and both agree that perfect neutrality of outcome is impossible even if all policy
is based ex ante on neutral, horizontal interventions.²¹
In principle, horizontal measures supporting innovation, available to all but with an
in-built element of selectivity in that they offer benefits only to dynamic firms offering
new products or processes of production, could be said to offer the greatest scope for
neutrality. Hausmann and Rodrik are a little ambivalent on the balance between
horizontal and vertical measures, although in one paper (Hausmann and Rodrik,
) they argue that due to limited resources and technical capacity governments
are ‘doomed to choose’ the areas or firms to support. In Hausmann and Rodrik (:
) they suggest that ‘in principle, interventions should be as horizontal as possible and
as sectoral as necessary’. Their key point is that measures—like support for
innovation—that enhance growth can span a range of sectors and therefore access to
these should not be restricted selectively. However, they acknowledge that in some
circumstances it may be easier to support specific sectors, both as a way of co-
ordinating firms and because different sectors have different needs.²²
As noted above, a key argument against selectivity is the risk of cronyism and policy
capture, which mean that differential support is not offered on the grounds of potential for
competitiveness. While the neoclassical policy literature is cautious of the concept of
priority areas, its emphasis on quantification and comparison of costs and benefits offers
ways of guiding choice, which can be used in quite different policy settings with varying
degrees of ambition for industrial policy. A starting point could be existing trade special-
ization as shown in revealed comparative advantage indicators. However, this has no
dynamic component and does not in itself help to highlight future areas for growth.
Of similarly limited value is the concept from the neoclassical growth literature of
total factor productivity (TFP). TFP is meant to reflect efficiency gains, interpreted as
technical progress. While used widely in growth-accounting exercises at the macro
level, for some countries estimates are available at the sub-sector level and firm level,
which in principle could be used to set priorities in resource allocation.²³ It has been
²¹ The arguments in this section draw on Weiss (b).
²² Andreoni (Chapter in this volume) suggests a blurring of the division between conventionally
defined sectors as a result of recent technical change, which makes sector-based policies less relevant.
²³ The KLEMS database originally constructed for OECD countries, but now extended to India and
elsewhere, provides TFP estimates at the sub-sector level (O’Mahony and Timmer, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
known for some time that there is a wide variation in productivity levels between firms,
particularly in low- and middle-income economies, so that policies that can reduce the
gap have potentially high returns. However, there are empirical difficulties with
estimation of TFP and controversy over what the unexplained residual actually cap-
tures. In practice, in terms of priority setting, given the high correlation between value-
added growth and TFP, setting priorities on the basis of such estimates would be simply
assuming that past growth will be continued into the future.²⁴
Broad guidance might be found by looking at past patterns of development in the
spirit of initial work by Chenery and his co-authors (Chenery and Syrquin, ;
Chenery et al., ). This has been updated by more recent work at UNIDO, for
example distinguishing ‘early’, ‘middle’, and ‘late’ manufacturing sub-sector branches
by the level of real GDP per capita at which they reach their peak share of GDP
(Haraguchi, : table .). However, as a guide to policy it may be of relatively little
use to know that Food and Beverages peaks at a relatively low-income level or that
Fabricated Metals is usually significant in middle-income economies.
More specific, but still relatively general, guidance is provided in the simple rule of
thumb put forward by Lin and Monga (). Any individual country should target
activities that a country with similar structural characteristics and resource endow-
ments and an income per capita of about double that of the country concerned (in
purchasing power parity) has been able to export successfully in the past fifteen to
twenty years. The argument is that the comparator country will have specialized in
activities likely to require production capabilities that the follower country has or can
develop readily, so that these are activities in which the follower has a latent compara-
tive advantage. This is on the grounds that income per capita provides a proxy for skill
sets and incomes more than double those of a country imply a currently unattainable
skill set. As the comparator economy grows its wages will rise, potentially freeing space
in the global market that the follower economy can fill. Industrial policy is therefore a
two-stage procedure: finding a comparator economy with an income not too far ahead
of the country concerned; and then identifying sectors in the comparator from which
the follower economy can export successfully (Lin and Wang, ).
The rule of thumb from Lin and Monga has the advantage of simplicity, but it is
not clear how far it is possible to generalize this rule. It may make sense in relation
to standardized, labour-intensive products, where wage costs dominate competitive-
ness. For example, in relation to garments, with rising wages in older-established
production centres and the ending of the Multi Fibre Arrangement, new important
exporter firms from countries such as Bangladesh and Cambodia have emerged. In
sectors where technical change is rapid, however, products exported twenty years
ago may have undergone significant redesign. Their technical content and the
²⁴ Felipe and McCombie () argue that TFP estimates in neoclassical growth models are based on
an initial accounting identity and that the unexplained residual is simply a weighted average of the
growth of wages and the rate of profit, with weights given by labour and capital shares.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
required production capabilities may have changed as a result, making it less clear that
the comparator‒follower path is straightforward as a guide to industrial targeting.
Furthermore, based on East Asian experience, the relevance of the guidelines of twice
per capita income and fifteen to twenty years’ export experience in the comparator
country has been questioned. It is argued that effective industrial policy made it
possible for firms in Japan and Korea to move into new industries which, on a simple
reading of the rule, would be viewed as too ‘distant’ from their existing capabilities.²⁵
Such qualifications do not invalidate targeting export industries that are successful
elsewhere, but they do imply that first, the simplicity of the rule needs to be qualified
and second, even where it can be said to exist, latent comparative advantage may need
to be supported through active policies, for example on technology and training, as well
as significant financial support for the nascent activities, whether these policies are
identified by the policy hierarchy approach or by other means.
Other more detailed approaches to the identification of priorities are available from
the neoclassical literature. Here we elaborate further on two approaches that continue
to be used in policy planning: one traditional, based on measures of economic
efficiency, and the other newer, based on ideas relating to the capability required for
the export of different types of good.
. E I
..................................................................................................................................
Different versions of an efficiency indicator have been used as a guide to potential
comparative advantage of either a particular branch of manufacturing, or of individual
project proposals. In the s and s, the neoclassical literature on industrializa-
tion formalized a version of economic cost‒benefit analysis based on the fact that
manufacturing goods are internationally tradable—with the option of importing or
producing domestically for either export or domestic sale. Thus, for any individual
manufacturing investment, benefits from foreign exchange savings by import substi-
tution or generation by exports could be compared with the opportunity costs of the
resources associated with their domestic production (Little and Mirrlees, , ;
UNIDO, ). Adjusting prices used in the analysis to reflect opportunity costs (the
use of shadow prices) meant that in principle the effect of key market failures—such as
an overvalued wage or an undervalued exchange rate for foreign currency—would be
removed from the analysis to allow an assessment of whether an investment was
economically efficient over the operating life of the project. Application of the
²⁵ Chang () argues that Japan targeted its auto sector in the early s when its income was one-
sixth of the market leader economy, the United States, and Korea entered semiconductors in the mid-
s when its income per capita was one-seventh of that of the United States. Lin argues that in the
early s Japan’s income was per cent of the United States’, so that the auto example fits his rule of
thumb. Development Policy Review () sets out the contrasting views.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
methodology was part of a wider drive to shift industrialization strategy away from
import substitution behind protective barriers towards a greater focus on exports.
Projects with rates of return below a cut-off opportunity cost discount rate were to
be rejected with the implication that they were activities where over the project’s life
there was no comparative advantage.
In terms of empirical work on trade policy and industrialization, the most widely
used neoclassical technique of the s and s was the effective rate of protection
(ERP), which was used primarily to show the distorting effect of import-substitution
policies (Little et al., ; Balassa, ). As this showed the effect of trade policy in
inflating value added above what it would have been in the absence of protection, it was
strictly a measure of incentive, not of efficiency.²⁶
An offshoot of cost‒benefit analysis, the domestic resource cost (DRC) ratio is a
more appropriate measure of trade efficiency that provides a relatively simple indicator
to assess comparative advantage (Schydlowsky, ). Developed originally for plan-
ning decisions in Israel, it offers a direct measure of short-term trade efficiency and has
been used to demonstrate the high costs of some import-substitution activities (Bruno,
; Krueger, ). It estimates the domestic resources required per unit of foreign
exchange earned or saved by an activity, in an activity-specific exchange rate.²⁷ Using
the DRC, a test of comparative advantage requires that the domestic resources involved
when valued at their economic opportunity cost are less than the value of net foreign
exchange generated by an activity. In policy discussions, relatively high DRC measures
were also used to justify policies of trade liberalization. Although the inverse ranking of
activities by the size of their DRC is only strictly valid under restrictive assumptions,
such as constant returns to scale, activities with ratios well above unity or a DRC ratio
well above the shadow exchange rate, will not be activities in which an economy has a
current comparative advantage. Unless there is strong evidence that their productivity
P P
²⁶ The ERP for output i was usually calculated from the formula (ti – aji.tj)/( – aji), where ti is
the tariff on i (or tariff equivalent where direct controls were used), tj is the tariff or tariff equivalent on
input j, summation covers all inputs j to n, and aji is the share of input j in the value of output i.
Theoretical problems arise with this formula in relation to the treatment of non-traded inputs into i,
whose price is also raised by protection and by the fact that strictly the coefficient aji should not be the
observed coefficient at domestic prices, but the counterfactual coefficient at world prices under free trade
(Corden, ). P
²⁷ DRCj = VADPj/(WPj – aijWPi), where WPj and WPi are the P world prices for the traded outputs
j and inputs i involved, so for all traded inputs required (WPj – aiWPi) is the net foreign exchange
effect per unit of j’s production after deducting the cost of traded inputs used in j. If the value-added
content of j covering labour and non-traded goods is valued at their opportunity cost, VADPj gives the
economic value of the domestic resources required to generate a given foreign exchange effect. P DRC can
either be expressed as an exchange rate (where VADPj P is in local currency and (WPj – aiWPi) is in
foreign currency) or as a number (where WPj – aiWPi is in local currency converted at an exchange
rate taken to reflect the long-run or equilibrium value of foreign currency). Where the former approach
of an exchange rate is used, an activity is efficient if the DRC ratio is below the economic value of foreign
currency (the shadow exchangeP rate). If the DRC is expressed as a number, the net foreign exchange in
the denominator (WPj – aiWPi) should be converted to local currency at the shadow exchange rate
and efficiency requires a ratio of below unity.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
can be improved markedly over the life of new investments, expansion of these will be
comparative advantage defying in the terminology of Lin ().²⁸ The DRC ratio thus
provides a technique for distinguishing the short-term competitiveness of tradable
activities.
The DRC analysis gives a snapshot picture of efficiency at a point in time, and where
accurate data can be collected it highlights where there is current or short-term
efficiency. Its weakness as a guide to priorities is that ideally what is required is an
indication of longer-term potential that is dynamic, not static, comparative advantage.
In principle an element of dynamism can be introduced by projecting both sides of the
DRC ratio into the future; for example, learning or technical change may reduce the
domestic resources involved (and thus lower the numerator) or improved demand
prospects or design may increase the net foreign exchange effect (and thus raise the
denominator). The exchange rate used should be a projected equilibrium value and
both future costs and benefits should be discounted to give present values. With further
adjustments the analysis can be converted into a full cost‒benefit calculation. Any
benefits from employment creation are picked by the lower valuation of surplus or
underemployed labour either used directly in production or indirectly though the
production of non-traded inputs. If externalities are involved, depending on their
sign, they will add to or reduce the domestic resources in the ratio.²⁹ All of these
adjustments are uncertain, particularly when big structural leaps are taken into com-
pletely new areas. Thus, despite the possibility of projecting into the future, DRC
analysis as applied in practice is essentially static. Hence heterodox or structuralist
authors tend to dismiss this approach as either impractical or having an in-built bias
towards unambitious interventions (Chang, ).
. P S
..................................................................................................................................
Hausmann and Rodrik () highlight the need for countries and firms to discover
what they are good at producing; however, practical policy requires some guidance on
what this is likely to be and where dynamic comparative advantage lies. An addition to
their work, ‘product space’ analysis, is intended to offer this. In the short term it is likely
that a country will move into the production of goods that require similar skills,
technology, and capital assets to those in which it is already competitive, but the
authors argue that the conventional approach of simply looking at areas where there
is already a revealed comparative advantage is insufficient. Within broad product
²⁸ An early example of the use of the DRC ratio is the study on the high cost of automobile engine
assembly in India (Baranson, ). Weiss and Jalilian () give DRC estimates used in a more recent
discussion of planning priorities in Tanzania.
²⁹ Little and Mirrlees (: ch. ) briefly showed the equivalence between their approach and the
DRC analysis.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
categories (like textiles or clothing) there can be significant diversity between individual
products in terms of technology content and branding. This implies that price, profit
margins, and demand prospects can differ between products within the same broad
category, offering scope for a country to upgrade into higher-value products. Patterns
of trade specialization can affect growth and there is evidence that exporting higher-
value or more sophisticated products is associated with faster economic growth, so that
countries whose export basket is more sophisticated than expected for its income level
experience faster growth (Hausmann et al., , ).
If more sophisticated products are to be targeted by policy, a measure of sophisti-
cation is required at the individual product level to assess when changing the compos-
ition of exports adds to growth potential. Initial measures of the sophistication of
products used a weighted average of the income per capita of countries which exported
the goods, so the average income of the exporters became a proxy for the technological
depth, complexity, and thus growth potential of a product.³⁰
Use of an income-based product-level indicator to explain growth of income across
countries risks being tautological, hence a revised measure of product sophistication—
termed ‘product complexity’—was developed (Hidalgo et al., ; Hausmann et al.,
). This index number combines information on diversification—the number of
products a country exports with revealed comparative advantage—and ubiquity—the
number of countries which also specialize in these products. Complex products with a
high score on this index are those where diversified economies with high levels of
capability have a specialization.³¹ Rich countries are expected to export complex goods
that few other countries export, while poor countries are expected to export goods of
less complexity exported by many other countries. The most complex goods by this
measure are machinery, chemicals, and metal products and the least complex are raw
materials and primary commodities. As expected, there is a positive association
between a country’s income per capita and the share of complex goods in exports.
Product space analysis is based on the idea that there is a trade-off between moving
to ‘close’ goods—which may not be highly sophisticated or complex—but which
require capabilities close to an economy’s current set, and ‘distant’ goods with a higher
potential value. This requires a measure of the economic distance between goods,
which Hausmann and Klinger () base on the lower of the two probabilities that a
good is exported with comparative advantage by pairs of countries.³² The argument is
that close products require similar production capabilities for competitive production
and that a country that specializes in goods that are close to other goods will find it
easier to diversify its export basket. Export targets will be goods which add to the
³⁰ The weights were determined either by revealed comparative advantage (Hausmann et al., ) or
share in world exports (Lall et al., ). Weiss () contrasts the two approaches.
³¹ An intuitive explanation, along with product complexity scores for over , products, is in
Abdon et al. ().
³² Thus, for two goods, for example pig meat and copper, it is the minimum probability of all meat
exporters exporting copper with revealed comparative advantage and all copper exporters exporting pig
meat with revealed comparative advantage.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
complexity of a country’s overall export basket but are not so far away in terms of
capabilities required for their production that producing them competitively is not
feasible in a realistic time frame.
Product space analysis is intended to identify potential export products at a disag-
gregate level. The total product complexity of a country’s exports is the product
complexity index for each good weighted by the share of goods in total exports.
Distance is determined by the probability data on joint exports noted above, but
what is not too far away is ambiguous. In practice crude approaches tend to be applied,
for example, to require that target products have a distance from the current export
basket which is below the median distance for all goods exported currently without
revealed comparative advantage.³³ An efficient frontier is defined by goods which add
to the product complexity of the export basket, meet the distance criteria, and add to
the links with other complex products.³⁴
The products identified in this way should require capabilities for competitive
production not too dissimilar from those required in areas where successful special-
ization has already been achieved, so the implication is that these are areas where there
is a potential or latent comparative advantage. However, the authors stress that it is not
designed to ‘pick winners’ as candidates for export subsidies or other forms of support
(Hausmann and Klinger, , ). The idea is that the export priorities implied by
this analysis identify areas for consideration, usually at the four-digit level, in discus-
sion between public agencies and potential investors, including foreign investors.
Product space analysis has been applied in a highly diverse set of countries and a
limitation is that in some cases potential export products which emerge from this
analysis cover a wide range of goods and simply match a priori expectations.³⁵ For
Rwanda, for example, using this approach for exports to global markets, seventy-two
potential export product categories at the four-digit level are identified (Hausmann and
³³ This is used in Hausmann and Chauvin (). Hausmann and Klinger () use different
standard deviations from the mean distance to show the sensitivity of the results to the choice of
distance.
³⁴ This last condition is met by a measure termed ‘opportunity gain’ by Hausmann and Chauvin
(), although different terminology was used in earlier studies. Ideally a country should specialize in
goods with the highest complexity, the shortest distance, and the largest opportunity gain. However,
given the trade-offs between distance (as a measure of how feasible it is to move to new products) and the
other two indicators, for consideration in the list of export targets, product j should have the following
characteristics:
PCIj > PCIav
Djav < Dav
OGj >
where PCI is the product complexity index, j is an individual product, PCIav is the average PCI for the
export basket, Dj is the distance between j and the current export basket, Dav is the median distance
between goods not currently exported with comparative advantage and the current export basket and
OG is opportunity gain (a measure of what j adds to the links with other potential exports).
³⁵ See, for example, for Colombia (Hausmann and Klinger, ), Rwanda (Hausmann and Chauvin,
), and Tajikistan (ADB, ). The Asian Development Bank has used the product space approach
in its country diagnoses for industrial development in several countries.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Chauvin, ). Since they use local materials, are generally labour intensive, and have
below-average transport costs, they are the type of goods that might be suggested by an
a priori analysis of ‘early’ industries based on past international experience. Thus, in this
case it is not clear what the product space analysis has added.³⁶ However, with the
development of a large database of trade statistics and software to derive the relevant
indicators, it has become much easier to apply this approach as a first screening of possible
candidates for new exports, some of which might be of interest to private investors.³⁷
. D C
R?
..................................................................................................................................
Given the uncertainty attached to all future projections and the clear limitations of
these techniques, do they have any useful role in helping to choose areas to support in
the context of an active industrial policy? Emphasis on quantification can be seen as the
strength of a neoclassical approach to policy, since in its absence decisions will
inevitably be taken on weaker grounds.³⁸ As an efficiency indicator, the DRC will inevit-
ably be approximate and at best offers indicative guidelines for policy priorities. The most
useful role of the analysis is as an initial screening device providing a loose form of ranking
by the inverse of the DRC ratio—either between manufacturing branches or individual
potential projects—with activities with a high domestic cost per unit of foreign exchange
treated as unlikely candidates for support unless convincing arguments can be provided to
demonstrate their long-term potential. Short-term costs associated with initially uncom-
petitive activities should not be ignored for priority setting and the indicator is useful as a
means of gauging by how much productivity would need to improve for certain activities
to justify support and to allow a judgement on how best, if at all, policy can help to bring
these down. It has less of a role where genuinely new activities with no comparable
reference price are under consideration.
The product space analysis aims to link the capabilities needed for goods already
exported successfully with those needed for new export target niches. Similarity in
³⁶ The classification of these priority areas into three categories groups them as: () processed
agricultural products, beverages, tobacco, and agro-chemicals; () specialized textiles and garments;
and () construction materials, metal, and wood products. The authors comment that their priority list
does not differ markedly from the priorities in the National Export Strategy for non-traditional exports,
which were derived from expert judgements.
³⁷ The website www.atlas.cid.harvard.edu provides information by country with an explanation of the
methodology.
³⁸ As Little and Mirrlees (: ) wrote in the context of external effects: ‘Even a back of the
envelope calculation may serve to show either that the initial suspicion was unjustified, or that further
work might need to be done. If it is thought that the presence of external effects will be strongly claimed
by opponents or proponents of a project, every effort to achieve a sensible, albeit rough quantification,
should be made. Otherwise wild exaggeration is all too easy.’
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
capabilities in itself does not guarantee that efficient production can be established.
Efficiency will be determined by a range of factors (such as access to technology, skilled
labour, raw material supplies, or marketing links). Hence there is a role for industrial
policy in engaging with producers to establish the constraints that need to be overcome
to create competitive exports in these areas. The data from a product space analysis
should be seen as a first step in a screening and identification process, with detailed
discussions, plans, and appraisals required prior to final decisions.³⁹
. C
..................................................................................................................................
Overall, the ideas from this newer neoclassical policy literature have been taken
seriously by both international agencies and governments in a number of countries,
who see the need for a form of industrial policy.⁴⁰ This literature has served to remind
policymakers that government can have an important role in economic transformation
that goes well beyond that set out in the Washington Consensus of the s and s.
As an example of the influence of this revival of interest, the Inter-American
Development Bank has developed an approach to ‘productive development policies’
based on principles which draw heavily on the ideas behind neoclassical industrial
policy, as defined here. Details of a variety of interventions are given in Crespi et al.
(), while chapter of that volume sets out the conceptual framework involved. The
emphasis is on correcting market failures, addressing these as directly as possible, and
conducting an implicit (or at times explicit) comparison of the costs and benefits
involved. The influence of the policy hierarchy is evident as two tests are set out for
policy analysis: ‘What is the plausible market failure that has been diagnosed to justify
the policy? Is the alleged policy remedy—whether it entails alleviating the failure or
redressing its impact—a good match for the diagnosis?’ (Crespi et al., : ). The
work of Hausmann and Rodrik is also cited, particularly in relation to aiding self-
discovery through support for innovation and encouraging public‒private dialogue to
identify constraints to growth. The examples in the book can be seen as examples of
what Ocampo and Porcile (Chapter in this volume) describe as the ‘timid return’ of
industrial policy post .⁴¹
³⁹ Andreoni and Chang (: ) criticize the methodology for focusing on the characteristics of
products rather than on links through use of similar technology and production processes, which may be
more relevant in determining ease of moving into new areas. This point is valid but the product space
analysis is meant as an operational guide and data unavailability would preclude a similarly detailed
analysis based on technology. They also appear to imply that the product space analysis is not intended
to be used as part of a supportive industrial policy, but of course it could be.
⁴⁰ Ansu () surveys approaches to ‘market-supporting industrial policy’ in five African
economies.
⁴¹ Crespi et al. (: ch. ) highlight the difficulties involved including lack of institutional
capacity, the risk of capture and rent seeking, and the intrinsic difficulty of identifying the best
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
There are different ways of justifying industrial policy and mainstream welfare
economics has always offered one based on market failures. In a development context
the theoretical base for industrial policy was ignored during the era of structural
adjustment, despite earlier work pointing out that real-world features of markets
could be corrected in ways that minimized any negative allocative effects. Recent
thinking has revived the case for industrial policy, as the limitations of market-driven
growth as the basis for innovation and dynamic structural change have become
apparent, with a new emphasis on dialogue between public agencies and the private
sector to determine how the former can best support the latter to become competitive.
However, this neoclassical version of industrial policy has its own limitations. By
focusing on price adjustments through markets it can ignore more effective—but
more distortionary—direct measures like import quotas, investment licences, or direct
credit allocations. By highlighting individual markets, it may miss the bigger picture
that supportive macro policies combined with more effective financial intermediation
and an active policy on technology can be critical. By focusing on short-term costs and
thus on activities with latent comparative advantage relatively close to competitiveness,
where existing capabilities are not very different from those required at the efficiency
frontier, this approach misses the possibility of skipping between generations of
technology into new areas. Because of uncertainty the quantitative planning tools of
the neoclassical approach can have an in-built conservative bias in that they will select
activities with costs that can be estimated or policy interventions with predictable, if
limited, outcomes. In this view, none of the big leaps or breakthroughs associated with
the successful industrialization of the past would have been justified ex ante by
neoclassical criteria.
However, even ambitious ‘vision-based’ or ‘mission-oriented’ versions of industrial
policy which aim at creating winners rather than picking them from existing firms, or
creating markets as opposed to fixing them through tax-subsidy adjustments (Mazzu-
cato and Kattel, Chapter in this volume), still require some approximate comparison
of benefits and costs. Experience suggests that industrial success requires a combin-
ation of a vision, well-designed support, and the application of some form of economic
criteria to aid decision-taking. The neoclassical techniques referred to here, particularly
cost‒benefit analysis and its offshoot the DRC ratio, have limitations. They may not be
very effective in aiding thinking on the most dynamic new areas, but sensible applica-
tion of the DRC indicator, for example, offers a way of weeding out obviously
inefficient investments that have little prospect of competitiveness. Thus, they provide
a check on the short-term costs of different investments associated with different policy
options. In this sense there is scope for a synthesis between competing versions of
industrial policy with the focus of specification and quantification of benefits and costs
from the neoclassical tradition combined with ambitious programmes for industrial
transformation that involve more substantial institutional change.
steps to self-discovery. They also conclude, however, that some public-sector institutions in the region
have had success in working closely with the private sector.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
R
Abdon, Arnelyn, Marife Bacate, Jesus Felipe, and Utsav Kumar () ‘Product Complexity
and Economic Development’. Levy Economics Institute Working Paper No. .
ADB () Tajikistan: Promoting Export Diversification and Growth. Manila: Asian Devel-
opment Bank.
Andreoni, Antonio and Ha-Joon Chang () ‘The Political Economy of Industrial Policy:
Structural Interdependencies, Policy Alignment and Conflict Management’, Structural
Change and Economic Dynamics : –.
Ansu, Yaw () ‘Industrial Policy and Economic Transformation in Africa: Strategies for
Development and a Research Agenda’, in Joseph E. Stiglitz, Justin Yifu Lin, and Ebrahim
Patel (eds) The Industrial Policy Revolution II: Africa in the st Century, International
Economic Association Conference Volume –. Basingstoke: Palgrave Macmillan,
pp. –.
Balassa, Bela () Development Strategies in Semi-Industrialized Economies. Baltimore, MD:
Johns Hopkins for the World Bank.
Baldwin, Robert () ‘The Case against Infant Industry Tariff Protection’, Journal of
Political Economy (): –.
Baranson, Jack () Manufacturing Problems in India. Syracuse, NY: Syracuse University
Press.
Bell, Martin, Bruce Ross-Larson, and Larry Westphal () ‘Assessing the Performance of
Infant Industries’, Journal of Development Economics (–): –.
Bhagwati, Jagdish and V. K. Ramaswami () ‘Domestic Distortions, Tariffs and the
Theory of Optimum Subsidy’, Journal of Political Economy (): –.
Bruno, Michael () ‘Domestic Resource Cost and Effective Protection: Clarification and
Synthesis’, Journal of Political Economy (): –.
Chang, Ha-Joon () ‘Should Industrial Policy in Developing Countries Conform to
Comparative Advantage or Defy It? A Debate between Justin Lin and Ha-Joon Chang’,
Development Policy Review (): –.
Chang, Ha-Joon () ‘Comments on “Comparative Advantage: The Silver Bullet of Indus-
trial Policy” ’, in Joseph E. Stiglitz and Justin Yifu Lin (eds) The Industrial Policy Revolution
, IEA Conference Volume –. New York: Palgrave Macmillan, pp. –.
Chenery, Hollis and Moshe Syrquin () Patterns of Development –. Oxford: Oxford
University Press for the World Bank.
Chenery, Hollis, Sherman Robinson, and Moshe Syrquin (eds) () Industrialization and
Growth: A Comparative Study. Oxford: Oxford University Press.
Cody, John, Richard Kitchen, and John Weiss () Policy Design and Price Reform in
Developing Countries. Hemel Hempstead: Harvester Wheatsheaf.
Colander, David () ‘The Death of Neoclassical Economics’, Journal of History of Eco-
nomic Thought (): –.
Corden, W. Max () ‘The Structure of the Tariff System and the Effective Protection Rate’,
Journal of Political Economy : –.
Corden, W. Max () Trade Policy and Economic Welfare. Oxford: Oxford University
Press.
Corden, W. Max () ‘Protection and the Real Exchange Rate’, in W. Max Corden
Protection, Growth and Trade. Oxford: Blackwell, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Crespi, Gustavo, Eduardo Fernando-Arias, and Ernesto Stein () Rethinking Productive
Development: Sound Policies and Institutions for Economic Transformation. Inter-
American Development Bank. Basingstoke: Palgrave Macmillan.
Development Policy Review () DPR Debate ‘Should Industrial Policy in Developing
Countries Conform to Comparative Advantage or Defy It? A Debate between Justin Lin
and Ha-Joon Chang’, Development Policy Review (): –.
Dinh, Hinh, Vincent Palmade, Vandana, Chandraand, and Frances Cossar () Light
Manufacturing in Africa: Targeted Policies to Enhance Private Investment and Create
Jobs. Washington, DC: World Bank.
Felipe, Jesus (ed.) () Development and Modern Industrial Policy in Practice. Cheltenham:
Edward Elgar.
Felipe, Jesus and John McCombie () ‘The Illusion of Calculating TFP Growth and
Testing Growth Models’. Available at https://ssrn.com/abstract=.
Guzman, Martin, José Antonio Ocampo, and Joseph E. Stiglitz () ‘Real Exchange Rate
Policies for Development’, World Development : –.
Hallward-Driemeier, Mary and Lant Pritchett () ‘How Business is Done and the Doing
Business Indicators’. Policy Research Working Paper No. . Washington, DC: World Bank.
Hallward-Driemeier, Mary, Gita Klun Jush, and Lant Pritchett () ‘Deal versus Rules’.
Policy Research Working Paper No. . Washington, DC: World Bank.
Haraguchi, Nobuya () ‘Patterns of Structural Change and Manufacturing Development’,
in John Weiss and Michael Tribe (eds) Routledge Handbook of Industry and Development.
Abingdon: Routledge, pp. –.
Hausmann, Ricardo and Jasmina Chauvin () ‘Moving to the Adjacent Possible:
Discovering Paths for Export Diversification in Rwanda’. CID Working Paper No. .
Centre for International Development, Harvard University.
Hausmann, Ricardo and Bailey Klinger () ‘Structural Transformation and Patterns of
Comparative Advantage’. CID Working Paper No. . Centre for International Develop-
ment, Harvard University.
Hausmann, Ricardo and Bailey Klinger () ‘The Structure of the Product Space and the
Evolution of Comparative Advantage’. CID Working Paper No. . Centre for Inter-
national Development, Harvard University.
Hausmann, Ricardo and Bailey Klinger () ‘Achieving Export-led Economic Growth in
Colombia’. CID Working Paper No. . Centre for International Development, Harvard
University.
Hausmann, Ricardo and Dani Rodrik () ‘Economic Development as Self-discovery’,
Journal of Development Economics : –.
Hausmann, Ricardo and Dani Rodrik, D () ‘Doomed to Choose: Industrial Policy as
Predicament’, mimeo Harvard. Available at www.ricardohausmann.com.
Hausmann, Ricardo, Cesar Hidalgo, Sebastian Bustos, Michele Coscia, Alexander Simoes, and
Muhammed A. Yildirim () Atlas of Economic Complexity. Cambridge, MA: MIT Press.
Hausmann, Ricardo, Jason Hwang, and Dani Rodrik () ‘What You Export Matters’,
Journal of Economic Growth (): –.
Hausmann, Ricardo, Dani Rodrik, Jose Miguel Benavente, and Francisco Rodriguez ()
‘Self-discovery in Development Strategy for El Salvador’, Economia (): –.
Hausmann, Ricardo, Dani Rodrik, and Charles Sabel () ‘Reconfiguring Industrial Policy:
A Framework with an Application to South Africa’. CID Working Paper No. . Centre
for International Development, Harvard University.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Hidalgo, Cesar A., Ricardo Hausmann, and Partha Sarathi Dasgupta () ‘The Building
Blocks of Economic Complexity’, Proceedings of the National Academy of Sciences ():
–.
HMG () ‘Industrial Strategy: Building a Britain Fit for the Future’. UK Government,
White Paper.
Johnson, Harry () ‘Optimal Trade Intervention in the Presence of Domestic Distortions’,
in Richard Caves, Harry Johnson, and Peter Kenen (eds) Trade, Growth and the Balance of
Payments. Chicago, IL: Rand-McNally, pp. –.
Krueger, Anne () ‘Some Economic Costs of Exchange Control: The Turkish Case’,
Journal of Political Economy October: –.
Krueger, Anne () ‘The Political Economy of the Rent-seeking Society’, American Eco-
nomic Review (): –.
Lall, Sanjaya () ‘Technological Capabilities and Industrialisation’, World Development
(): –.
Lall, Sanjaya, John Weiss, and Jinkang Zhang () ‘The Sophistication of Exports: A New
Trade Measure’, World Development : –.
Lee, Keun () Schumpeterian Analysis of Economic Catch-Up. Cambridge: Cambridge
University Press.
Lin, Justin Yifu () ‘New Structural Economics: A Framework for Rethinking Develop-
ment Policy’. Policy Research Working Paper No. . Washington, DC: World Bank.
Lin, Justin Yifu () ‘New Structural Economics: A Framework for Rethinking Develop-
ment’ World Bank Research Observer (): –.
Lin, Justin Yifu () ‘From Flying Geese to Leading Dragons: New Opportunities and
Strategies for Structural Transformation in Developing Countries’, in Joseph E. Stiglitz,
Justin Yifu Lin, and Ebrahim Patel (eds) The Industrial Policy Revolution II: Africa in the
st Century. Basingstoke: Palgrave Macmillan, pp. –.
Lin, Justin Yifu and Célestin Monga () ‘Growth Identification and Facilitation: The Role
of the State in the Dynamics of Industrial Change’. World Bank Policy Research Working
Paper No. . Washington, DC: World Bank.
Lin, Justin Yifu and Yan Wang () ‘Catching up: Structural Transformation and Diver-
sification’, in Jesus Felipe (ed.) Development and Modern Industrial Policy in Practice.
Cheltenham: Edward Elgar, pp. –.
Lipsey, Richard and Kelvin Lancaster () ‘The General Theory of the Second Best’, Review
of Economic Studies (): –.
Little, Ian () A Critique of Welfare Economics. nd edition. Oxford: Oxford University
Press.
Little, Ian () Economic Development: Theory, Policy and International Relations. New York:
Basic Books.
Little, Ian and James Mirrlees () Manual for Industrial Project Analysis. Paris: OECD.
Little, Ian and James Mirrlees () Project Appraisal and Planning for Developing Countries.
New York: Basic Books.
Little, Ian, Tibor Scitovsky, and Maurice Scott () Industry and Trade in Some Developing
Countries. Oxford: Oxford University Press.
Malerba, Franco and Richard Nelson () ‘Learning and Catching-up in Different Sectoral
Systems: Evidence from Six Industries’, Industrial and Corporate Change (): –.
Meade, James () Trade and Welfare. Oxford: Oxford University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Nelson, Richard () National Innovation Systems: A Comparative Analysis. New York:
Oxford University Press.
O’Mahony, Mary and Marcel Timmer () ‘Output, Input and Productivity Measures at
the Industry Level: The EU India KLEMS Database’, Economic Journal (): –.
Pigou, Arthur () The Economics of Welfare. London: Macmillan.
Robinson, Joan and John Eatwell () An Introduction to Modern Economics. New York:
McGraw Hill.
Rodrik, Dani () ‘The Real Exchange Rate and Economic Growth’, Brookings Papers on
Economic Activity : –.
Romer, Paul () ‘Endogenous Technological Change’, Journal of Political Economy ():
S–.
Schydlowsky, Daniel () ‘A Policy-maker’s Guide to Comparative Advantage’, World
Development (): –.
Teitel, Simon () ‘Technology Creation in Semi-industrialised Economies’, Journal of
Development Economics (–): –.
Tinbergen, Jan () Economic Policy: Principles and Design. Amsterdam: North Holland.
UNIDO () Guidelines for Project Evaluation. New York: United Nations Industrial
Development Organization.
Weiss, John () ‘Changing Trade Structure and its Implications for Growth’, World
Economy November: –.
Weiss John () ‘Strategic Industrial Policy and Business Environment Reform: Are They
Compatible?’. Donor Committee on Enterprise Development Working Paper, June.
Weiss, John (a) ‘Lewis on Industrialisation and Industrial Policy’, Journal of Inter-
national Development (): –.
Weiss, John (b) ‘Implementing Industrial Policy: How to Choose’, Oxford Development
Studies (): –.
Weiss, John and Hossein Jalilian () ‘Competitiveness in African Manufacturing: Some
Evidence from Tanzania’, in David Potts (ed.) Tanzanian Development: A Comparative
Perspective. London: James Currey, pp. –.
Williamson, John () ‘Democracy and the Washington Consensus’, World Development
(): –.
Williamson, John () ‘The Washington Consensus as Policy Prescription for Develop-
ment’. Lecture at World Bank, January.
World Bank () ‘A Better Investment Climate for Everyone’, World Development Report
.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
Firm-based Perspectives
.............................................................................................................
. I
..................................................................................................................................
T chapter considers the central role of firm strategies in industrial policy. It focuses,
in particular, on large firms which can make investments to realize economies of scale
and scope, coordinate clusters of suppliers, and build capabilities. The productive
resources, organizational capabilities and ability of big businesses to shape the policy
environment in their interests are central to a production-centric understanding of
industrial policy.
The enterprise is at the centre of industrialization and the strategies of large
enterprises, in particular, drive the development of productive capabilities. The theory
of the firm is thus an essential part of the conceptual framework for understanding
industrial policy and economic transformation. As emphasized by Ohno (), a
dynamic private sector is critical for catch-up and supporting this is perhaps the key
industrial policy challenge facing developing countries. Four different dimensions to
this may be distinguished (Lall, ): technological upgrading within industries; entry
into more complex activities; increasing local content involving local innovations and
design; and mastering more complex technological tasks within industries.
Neoclassical theories of the firm struggle to address these core concerns as their
market-centric views simply posit the firm as a set of arrangements to minimize
transaction costs. Firms are located in idealized perfectly competitive markets with
many small rivals, and no economies of scale or substantial market power.
Transaction-costs theories influence approaches to understanding the role of busi-
nesses in industrial development which abstract the firms from the political economy
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
context and the reality of market power, and support simplistic ‘investor-friendly’
policy frameworks lowering the costs of doing business.
It is therefore essential to critically evaluate alternative theories of the firm which
explain the development of productive capabilities, and the ways in which businesses
exert control and hold power over economic activity. The market power which firms
hold in setting high prices if they have a monopoly position or collude with their
competitors applies to arms-length market exchanges. However, value creation
involves a range of relationships through which activities are organized in production
networks and value chains. The coordination of the activities involves direct and
diffuse power, which can be exerted in direct and indirect ways (Dallas et al., ).
For example, international business organizations can shape sustainability codes
through diverse lobbying activities which affect the competitiveness of industry in
different countries and benefit some interests over others (Ponte, ).
Business is increasingly transnational in nature as companies coordinate activities
spread around the world. Industrial policies and regulations remain predominantly
national. The ongoing digitalization of design, production, marketing, and logistics
comes on top of the advances in information and communication technologies that
have enabled international coordination by lead firms. It portends a further stepwise
change to a hyper-globalized world where companies transcend national borders. At
the same time, the dramatic growth of the Chinese economy and corporations stands as
a counter-model, where the state is intimately involved in the strategic orientation of
corporations to ensure consistency with the development vision (as addressed in
Oqubay and Lin, ; Oqubay and Ohno, ).
I start by reviewing the main schools of thought in the theory of the firm and the
development of productive capabilities. This takes into account the literature on
transaction costs and the resource-based theory of the firm. Large firms naturally
have considerable political influence; a critical aspect is firms as agents in political
settlements and the implications for industrial development. Substantive sections then
cover the following key areas: market power, competition, and enterprise strategies; the
internationalization of production and global value chains; and recent developments
regarding the digitalization of production, digital platforms, and the implications for
industrial policy.
. T F E
I D
..................................................................................................................................
The theories of the firm in economics can essentially be divided into two main groups.
Firms can be understood either in terms of their organizational capabilities and
productive resources or as a set of coordinating arrangements which replace market
exchange.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The transaction-costs theory of the firm, based on the seminal article by Coase
(), posits that the firm may essentially be viewed as the unified governance
structure that results from the properties of different transactions. It thus takes
exchange as its starting point and defines firms as sets of non-market relationships.
The primary factors producing transactional difficulties include bounded rationality
and imperfect information, opportunism, small-numbers bargaining, and asymmetric
information. The costs associated with transactions increase with uncertainty and asset
specificity (Williamson, ).
Under the transaction-costs approach the firm is the result of fixed, structured,
and open-ended relational contracting which internalizes the transactions, remov-
ing or ameliorating the conflict, and exerting the administrative control required for
planning and coordination. The internationalization of production can be seen as a
particular subset of the reasons for the formation of firms, in response to the costs
of organizing cross-border markets (Dunning, ). The transnational corporation
(TNC) is therefore essentially viewed as an efficient response to intrinsic market
failures.
The firm is, however, treated as a ‘black box’ and ‘[w]hat happens between the
purchase of factors of production and the sale of goods that are produced by these
factors is largely ignored’ (Coase, ). The firm is simply a nexus of contracts (Jensen
and Meckling, ). When transaction costs are defined to subsume a broad range of
issues with market relationships, it becomes unclear what exactly is being internalized.
For example, we need to understand costs associated with transactions in products due
to asset specificity or embodied technology (leading to intra-firm trade), the develop-
ment of products through different stages of the product cycle, as well as factors such as
managerial capabilities and organizational techniques.
In fact, what are identified as market failures are intrinsic features of the organiza-
tion of economic activity—they are not characteristics which, if somehow ‘corrected’,
will mean an arms-length market relationship can exist. At the most basic level, there
are economies of scale and scope, and network effects. Technological improvements at
the firm level also need to be taken into account. These factors have effects on industrial
development which depend on complementary changes, such as in management
approaches, that need to be understood in a systems framework incorporating inter-
industry relationships (Rosenberg, ).
Institutional-based theories of the firm suffer from being primarily concerned with
explaining the types of contractual arrangements which govern exchange rather than
understanding the way in which the production is organized and capabilities are
developed over time. This relates to the factors which explain how firms are able to
reconfigure their productive assets and processes (their dynamic capabilities) to prod-
uce new and better products and services (Teece, ; Teece and Pisano, ; Pisano,
). The institutional approach also ignores the power and political influence of large
firms (Zingales, ). The literature on the resource-based theory of the firm, including
critiques and extensions, has sought to address these issues head on.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Resource-based Theory of the Firm
The resource-based theory of the firm builds on the essential contribution of Edith
Penrose () who focused on firms’ productive resources, organizational routines,
capabilities, and competencies. There is a dynamic learning process through the
interaction of technology capabilities and market opportunities that is at the heart of
the principles of production and business organization.
Penrose argued that experience builds the knowledge of productive opportunities on
the part of firms and that ‘productive services’ (that is, capabilities) open up new
productive opportunities. Firms shape markets through decisions which alter the
parameters (technological, product, and organizational) of the market. The productive
capabilities of the firms are heterogeneous and evolve depending on how they are used.
This means that productive opportunities are unique for each firm and are shaped in
dynamic processes (Penrose, ). Firms are competitive in so far as they are able to
establish technological or market ‘bases’ (a distinctive technological capability). There
can be innovation-driven increasing returns to scale in industry, which were identified
by Babbage in the nineteenth century in his book originally published in
(Babbage, ), and are still highly relevant to considering the implications of the
digitalization of production in the twenty-first.
In a similar vein, Chandler () views the ‘modern business firm’ as a collection of
‘dynamic organizational capabilities’ which are the source of the firm’s competitiveness
(see also Dosi, ). In this framework, the firm is an organization whose develop-
ment depends primarily on its ability to continuously innovate and develop new
products and ways of working. These capabilities are based on a firm’s internal
organization and the extent to which the collective experiences from production are
developed, shared, and learnt from. Cooperation and collaboration are therefore the
basis for competition which is viewed not as aiming to be the lowest-cost producer, but
as the ability to advance and produce better products, more quickly, than other groups
of firms. These factors together describe differences in firms’ competitiveness, as well as
the evolution of ‘business-enterprise systems’ (Fujimoto, ).
The resource-based theory of the firm, however, insufficiently recognizes the extent
to which firms may represent a locus of control and use this control to condition the
environments within which they operate to extract rents. Large profits may be the
reward for investment and innovation to generate or maintain competitiveness; how-
ever, they may also be due to the erection of barriers to entrants and strategies to
entrench a position of market power over potentially more innovative rivals. These
considerations point to the importance of understanding firms as part of the wider
political economy, and to why large business groupings in some countries have built
productive capabilities while in others they have simply extracted rents (as elucidated
in different country/region chapters in this book). ‘Bringing production back-in’
(Amsden, ) requires locating a resource-based theory of the firm in relation to
the wider society.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The resource-based theory of the firm has been extended through a growing
literature on firms understood in terms of their dynamic organizational capabilities
(Chandler, ; Chandler et al., ; Dosi et al., ; Teece et al., ; Pisano,
). This includes learning, innovation, skills, and organizational resources, and the
construction of competitive assets (Amsden, ; Lazonick, ; Khan, , ).
Firms have been located within the evolution of business-enterprise systems and the
institutional context (Dosi, ; Chandler et al., ; Best, ).
Chandler drew on detailed analysis in business history to explain the rise in large
industrial corporations in the United States, contrasted with the United Kingdom and
Germany, setting out the dynamics of industrial capitalism (Chandler, ). This
emphasized the central role of large industrial firms in the creation of wealth, and the
organizational capabilities of the enterprise as a whole. The firms could make invest-
ments large enough to reap economies of scale. Firms are the bases for technological
development and managerial skills. Large firms establish and coordinate a nexus of
related small and medium-sized firms to ensure the flows of materials and information
necessary to maintain production and distribution.
The organizational capabilities were the collective physical facilities and human
skills as they were organized within the enterprise and their careful coordination and
integration to achieve the economies of scale and scope needed to compete locally and
internationally. These organizational capabilities have to be created and maintained
(Chandler, ; Lazonick, ; Teece, ).
Changes in technology, learning and skills development, and capital are constitutive
of the evolution of the firm itself. These are all associated with a reconceptualization of
the business entity around its organizational capabilities which determines a firm’s
scale (defined as ‘throughput’) and scope, being the production of related goods. This
focus on the organizational aspects may be distinguished from the approach in much of
the new institutional economics which views institutions as a collection of relationships
that can be characterized by explicit or implicit contracts replacing market exchange
(Amsden, ; Khan, ).
The orientation of large firms is central to the nature of capitalism in different
countries. Hikino and Chandler () contrast the US model, termed ‘competitive
capitalism’ to reflect the highly developed managerial nature of firms and the vigorous
competition between them, with the experience of Germany which is termed
‘cooperative capitalism’. In Germany it is argued that firms developed a management
hierarchy capable of exploiting the opportunities of economies of scale from investing
in heavy industries such as iron and steel, but cooperated closely together.
The resource-based theory of the firm focuses on the ability to strategically deploy its
resources, on which there is now a vast business-school literature following Porter
(). However, the business-school adoption of the resource-based theory diverted
attention from the importance of taking into account innovation and learning
(Lazonick, ; Pisano, ) and the wider political economy instead of a narrow
and functional focus on organizational structure (Dosi, ). Comparative country
studies (such as in Chandler et al., , ) highlight the importance of understanding
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
different groupings within big business, particularly finance, as well as the complex
relationships of business with the state, as addressed in other chapters in this Handbook.
It is important to emphasize the diversity of outcomes, the inherent uncertainty, and
that effects such as cumulative causation and path dependency need to be understood
at the levels of production systems, institutional frameworks, and wider society,
beyond individual firms.
Teece and Pisano () draw on the definition of the firm in terms of capabilities
and competencies to identify a firm’s ‘strategic dimensions’. These dimensions are
identified as: a firm’s managerial and organizational processes (including patterns of
practice and learning); its present position (including its technological and intellectual
property, customer base, and relations with suppliers); and the paths available to it (the
strategic alternatives and opportunities available to the firm). Strategy and organization
are crucial to the choices firms make in identifying and selecting capabilities for future
competitive advantage, including general-purpose capabilities enabling functional
integration across specialist domains, and market-specific ones (Pisano, ).
The uncertainty inherent in innovation means that finance plays a particularly
important role in how some enterprises mobilize and deploy productive resources
for the development of new products and services, as identified by Lazonick () in
the theory of the innovative enterprise. This uncertainty includes: technological uncer-
tainty relating to whether the firm will be able to develop the products and processes it
envisages; market uncertainty in terms of the returns which will be made from the
improved goods and services due to customer attraction; and competitive uncertainty,
as rivals are engaged in similar strategies and may be more successful. The financial
commitment is the set of relations that ensures allocation of funds to sustain cumula-
tive innovation processes, in what has been termed ‘patient capital’. This is mainly
about the availability of long-term development finance and the ability of the firms to
retain and deploy earnings.
The theory of an innovative enterprise must itself be embedded in a model of
relations among industrial sectors, business enterprises, and economic institutions.
In addition to the conditions for financial commitment (as opposed to financialization,
discussed in other chapters in this volume), Lazonick identifies two other social
conditions which are essential for the innovative enterprise to thrive. First, strategic
control is the set of relations that gives decision makers the power to allocate the firm’s
resources to confront the technological, market, and competitive uncertainties inherent
in the innovation process. Second, organizational integration is the extent to which
there are the incentives for people to apply skills and efforts to the learning required at
the heart of the innovation process (see also Khan, ). There is an important
interdependence of the organizational capabilities with formal knowledge and skills
(Khan, ).
While this conception of the firm grapples with issues of coordination and control,
the performance of firms is based on the extent to which they are effective in terms of
arrangements, given the competitive challenges of the time and industry in question.
Drawing on resource-based theories, Best () identifies the ‘new competition’ as
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
being where performance rests on the ‘resources and experience of the parent concern,
including not only managerial and technical personnel but also the indefinable advan-
tage in its internal operations which an efficient going concern usually has over a new
one’. Firms also choose to collaborate (as well as to make or buy), and networked
groupings will outcompete competing groups of firms (Richardson, ). This is
because competition between firms does not support the emergence of specialized
firms with networked complementarities as part of clusters.
The extensions of the resource-based theory of the firm require enterprises to be
located in production ecosystems if we are to take account of the social context and
linkages which underpin dynamic capabilities (Andreoni, ). A successful industrial
policy requires the articulation of public policy with the detailed mechanics of change
that occur within businesses in a production-centric (rather than market-centric)
framework (Best, ). Such a framework can be captured in a ‘capability triad’:
business models; production capabilities, innovation, and skills; and clusters, networks,
ecosystems, and learning. This triad underpins the creation of dynamic increasing
returns and the innovation dynamics that underlie productivity growth.
Industrial policies to alter a country’s development path need to realize external
economies from stronger linkages, collective learning, and governance (Helmsing,
; Kaplinsky, ). Processes of learning and technical change involve the firm
and the wider institutions of industrial policy (Lall and Teubal, ; Khan, ).
A proactive industrial policy requires private dynamism and improving policy
capability to ensure dynamic capacity development (Ohno, ). State policies reward
value creation and innovation, while disciplining unproductive rent seeking. The focus
in firms and industry clusters on knowledge, skills, and technologies needs to be
mirrored by policy practitioners in government keeping up with industry develop-
ments and building effective engagement with industry.
I identify three key areas for further in-depth assessment. First, the interaction of
enterprises’ market power with the requirements of innovation and dynamic increasing
returns is a key issue for understanding enterprises and industrial policy. Second, the
evolving internationalization of production has fundamental implications for coun-
tries’ industrial development and policies. Third, digitalization is rapidly changing the
organization and coordination of economic activity, including across borders. These
are now addressed in turn. Other key issues, such as patterns of financialization, are
equally important and are addressed by other contributions to this volume.
. M P, C,
E S
..................................................................................................................................
The significance of dynamic increasing returns to scale means that there will normally
be only a few firms in key industries and that concentration is an inevitable feature of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industrial development. For example, large and internationalized firms have had a
crucial role in developing key industries such as consumer electronics, automobiles,
shipbuilding, steel, and basic chemicals around the world. Indeed, cross-industry
regressions find scale economies is a strong explanatory factor for concentration
(Sutton, , ). And smaller domestic markets relative to the minimum efficient
scale of production in an industry means, other things being equal, that concentration
will be higher in many developing countries.
The importance of the large firms means they have considerable power over their
suppliers and customers, as well as being important political actors. This has been
emphasized in seminal work on the lead East Asian industrializers, where state support
was contingent on performance expectations which could be enforced through discip-
lining mechanisms to ensure that the outcomes were in line with performance expect-
ations (Amsden, ; Chang, ; Wade, ; Sakakibara and Porter, ).
Competition in export markets was a key lever for discipline at the firm level and a
way of measuring firms against each other even while offering protection in the
domestic market (Rodrik, ; Singh, ). It also ensured that firms were forced
to adopt and adapt more advanced technologies, production, and marketing methods,
as they were being pitched against the international industry leaders in export markets.
More generally, competitive rivalry between big business groups is a very important
disciplining and motivating factor to ensure that state support does not lead to
collusion and rent extraction. The nature of the rivalry is also an important element
of Chandler’s characterizations of different capitalisms, although quite different from
the neoclassical microeconomic elevation of competitive markets on the grounds of
static allocative efficiency. Instead, it is part of the interaction of public policies and
enterprise strategies to incentivize and support innovative capabilities.
There is no ideal of maximum or perfect competition; rather, we can consider what
is meant by an ‘optimal competition’ in terms of performance (Amsden and Singh,
; Singh, ). Management of the economic power of key companies requires
reciprocal conditionalities (Amsden, , ). Rents are essential for inducing the
effort and investment required on the part of firms to develop innovative capabilities.
Once again, a neoclassical framing of markets which views market power as an
aberration to be corrected is unable to take into account the real world of pervasive
market power to differing degrees and, in particular, of those large firms required to
undertake organization and technological learning.
Competition and competitiveness are therefore a result of a successful industrial policy
which involves the creation of productive rents, and discipline regarding their access.
This can be equated with ‘performance competition’ where effort and innovation are
rewarded rather than ‘handicap competition’ where firms seek to undermine their
rivals (Gerber, ).
There has been an increasing focus since the publication of Piketty’s Capital in
the Twenty-first Century on the implications of concentration of ownership and control
for economic development and for inequality. It is argued that the returns from the
exertion of market power go disproportionately to the wealthy and, on balance, market
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
power discourages innovation and reduces productivity, as observed in the United
States (Baker and Salop, ; Ennis et al., ; De Loecker and Eeckhout, ).
Stronger competition law is sometimes recommended as the answer (see Stiglitz, ;
Atkinson, ).
There is little doubt that there has been a growing global concentration in the hands
of transnational corporations. The largest TNCs have bigger revenues than many
governments around the world. In , sixty-nine of the largest corporate and
government entities ranked by revenue were calculated to be corporations (Zingales,
).¹ This is not necessarily unprecedented. Under colonialism companies such as
the British East India Company controlled the economies of countries with monopoly
rights over trade in some commodities that lasted more than two centuries. Lobbying
to maintain these rights turned firms away from improving productivity in a ‘Medici
vicious circle’ where money is used to get power and power is used to make more
money (Zingales, ). Control over global profits in major industries is in itself one
drive for global concentration (Hymer, ).
Network effects and the rise of digital platforms are one reason given for the
increasing concentration in recent years. I discuss the implications of the digitalization
of industry in section ..
There are three main questions. First, under what terms will the concentration be
accompanied by improved productivity rather than simply rent extraction? Second,
how is the economic power of companies understood? Third, what is the nature of the
political settlement with business which underpins learning and the development of
dynamic capabilities?
.. Competition and Productivity
While the promise of high monopolistic profits can spur innovation (in a Schumpeterian
world), entrenched dominant firms have weaker incentives to invest, innovate, and
improve productivity than if they are challenged by rivals (Schumpeter, ; Mathis
and Sand-Zantman, ; Arrow, ; Bloom et al., ). Firms with substantial
market power can earn returns from exertion of this power and protect their position
by excluding rivals. As retained earnings are important for firms’ ability to make
investments, smaller firms are typically more constrained in terms of the liquidity
they can use to invest (Audretsch and Elston, ; Goergen and Renneboog, ).
High entry barriers to rivals can weaken economy-wide investment, and can prevent
new business models emerging and products being introduced (Shapiro, ; Cohen
and Levin, ; Federico et al., ).
Measuring and analysing productivity is complex precisely because of the different
mechanisms at the firm and industry level that influence it. Management practices are
¹ These include corporations controlled by the Chinese state.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
one critical determinant. A major US study found substantial variations between
different plants in the same firm, with four key factors explaining plant-level produc-
tivity: product competition; learning spillovers; education; and local business environ-
ment (Bloom et al., ). Policies required to support innovation by industries and
address the weakening productivity performance in industrialized countries include
support for R&D along with skills in science, technology, engineering, and mathematics,
and measures to increase competitive rivalry (Bloom et al., ).
The issue comes back to ensuring the right kind of rivalry (the ‘optimal competition’
of Amsden and Singh, ; Singh, ), which can spur large firms to continue to
innovate and invest, rather than competition for its own sake (Van Reenen, ).
A country does not arrive at such markets by magic. Indeed, it seems obvious that
market power, imperfect competition, and market failures which can reinforce posi-
tions of market power are intrinsic features of economic life, and competition policy is
a necessary complement to industrial policy (Roberts, ). We therefore need to
understand how the process of evolving competitive rivalry is related to the nature of
economic opportunity and outcomes. This has been an explicit but largely ignored
aspect of competition regulation in South Korea, where the Korea Fair Trade Com-
mission (KFTC) has monitored the conduct of chaebols, for example in subcontracting
relationships to protect against exploitation of smaller firms (Hur, ; KFTC, ).
Typically, in the short run such subcontracting arrangements would lower prices and
hence not harm consumers. In the longer term, however, unfair subcontracting arrange-
ments by large firms militate against the development of a dynamic base of small and
medium firms able to invest in their own independent production capabilities.
.. Economic Power of Companies
The power of companies to shape markets and influence policies over time is more
important than the market power to charge high prices in any given period. A simplistic
focus on market power measured in static terms as prices which are marked up over
marginal cost is therefore as naïve and unhelpful as modelling the firm as a black-box
internalization of transaction costs and even risks distracting attention from the more
fundamental issues. The features of an industry, such as information asymmetries, scale
economies and network effects, can provide scope for strategic behaviour on the part of
dominant firms to lock in advantages through a range of different strategies (Rey and
Tirole, ; Whinston, ; Vickers, ).
Persistant dominance can suggest that it is not effort and creativity which are being
rewarded but rather that the legacy position of large firms continues to earn them
rewards. As Geroski and Jacquemin (: ) caution, ‘when, however, small asym-
metries can be solidified into dominant positions that persist, the inequities they create
become institutionalized, creating long-term problems in the performance of the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
economic system which cry out for policy attention’. In the context of small domestic
markets, this is consistent with the significance of economies of scale, dynamic effects
related to technology, and the importance of production linkages in processes of
industrialization (Gal, ; Hur, ).
The likelihood of entrenched dominant firms with extensive economic power
depends on the country’s conditions and history which are reflected in different
approaches to competition and industrial policy. For example, analyses have high-
lighted the importance of competitive discipline in the industrial development of East
Asian countries such as Japan and South Korea (Amsden and Singh, ; Sakakibara
and Porter, ). The objectives of South Korea’s KFTC have included promoting
‘balanced development’ in recognition that the early stages of rapid industrialization
were viewed as ‘unbalanced’, requiring an active competition policy addressing
dominant firms in that country (Fox, ; KFTC, ).
Firms’ power exerted within markets extends to shaping vertical and horizontal
relationships with other firms. This is incorporated in the coercive, dyadic power
between firms, or between the state and firms, defined as ‘bargaining power’ by
Dallas et al. (). Firms with substantial market power as buyers, for example,
large supermarket groups, can undermine the ability and incentives of suppliers to
reinvest and improve productive capabilities (Inderst and Mazzarotto, ; Inderst
and Valletti, ). Through vertical arrangements lead firms are able to govern
activities along value chains (Strange and Humphrey, ).
Influence can also be more subtle at the horizontal level, as illustrated by findings on
common ownership. Even relatively small common ownership stakes by private equity
groups such as BlackRock and Vanguard in firms across economies have apparently
influenced firm strategies to undermine investment and rivalry (Azar et al., , ;
Newham et al., ; Seldeslachts et al., ). In industries such as airlines and
pharmaceuticals there have been findings that common shareholdings reduce head-
to-head competition as it supports the alignment of incentives.
Large firms exert power to shape markets in broader ways through collective groups
such as business associations which lobby in direct ways, such as for a particular policy
platform or regulation that favours some interests over others (Vilakazi and Roberts,
). Power is also exercised in more diffuse ways, such as by influencing accepted
standards and best practices (Dallas et al., ; Ponte and Sturgeon, ). For
example, the provisions adopted in competition legislation on abuse of dominance,
or the nature of support for public research in industry, reflect a conceptual framework
about markets and the role of the state in the economy. This is in turn an outcome of
influence and ideas which are promoted within and through political parties, the
media, and academia.
This can be understood as part of the political settlement where elites exercise power
through ‘informal institutions’, setting the agenda (Khan, ). The nature of the
political settlement determines whether longer-term capabilities formation is
rewarded, or coalitions of interests are made to enforce short-term rent extraction.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Economic Power, Rents, and Political Settlement
The orientation of large enterprises is thus intimately related to the balance of power
between different interests in a country and the regulatory arrangements that are part
of the wider political settlement (Khan, ). A settlement is defined as a combination
of mutually compatible power relations and institutions that is sustainable in terms of
economic and political viability (Khan, ). A given settlement depends on the
coalitions of interests within countries and, for industrial development, whether this
coalition supports the design and implementation of policies with incentives and con-
ditions on firms to ensure high levels of effort in learning and technological upgrading,
while disciplining the earning of rents from protection and subsidies (Khan, ).
The political settlements framework emerged as a criticism of institutional economics
and the position that competition with liberalized markets and independent institu-
tions is the primary requirement for economic development. The grounds for this are
that competition will erode rents which, along with liberalized markets, will move us
to what North et al. () term ‘open access orders’. However, this supposes
competition simply arises in the absence of obstacles and it fails to recognize the
need to address entrenched inequality and economic power (Makhaya and Roberts,
, ). And it does not properly explain what the underlying power arrange-
ments and configuration of interests are that support a given institutional configur-
ation (Khan, ).
In addition, the institutional economics of North et al. () fails to recognize
the important role that industrial policies and tariffs have played in countries’
industrialization—in other words, productive rents are required to induce investments
in capabilities. We need to understand what coalitions of interests are required to
sustain a policy framework for industrial development.
Powerful elites organize through ‘informal institutions’, especially during develop-
ment transitions, to sustain economic benefits for groups who would otherwise have
lost out (Khan, ). They are thus the mechanisms through which social and political
stability is maintained, helping to generate distributions of economic benefits that are
more in line with existing distributions of power. In doing so they also sustain these
distributions of power. The framework identifies four sources of ‘holding power’, which
refers to the capacity to engage and survive conflicts—in other words, the ability to
inflict costs and absorb costs inflicted by opposing groups. In addition to violence
rights to exert control over populations, the sources of holding power include
economic structure, ideology, and rents.
The economic structure reflects a country’s economic history. This includes the
construction of markets and the main participants, including the large incumbent
businesses. The economic power of these companies, and how this influences the evolu-
tion of the political settlement, is central to whether the industrial policy will support the
growth of diversified manufacturing sectors with higher levels of productivity (Khan
and Blankenburg, ; Khan, ; Andreoni and Chang, ; Andreoni, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The political settlement framework therefore allows us to assess how incumbent firms or
groups of firms are able to lobby and enter into arrangements with political actors to shape
regulation and the economic environment to ensure future rents. The evolving coalition
of powerful interests effectively sets the rules of the game. Whether a country adopts a
competition law appropriate for the country’s historical context, for example, with regard
to the provisions on abuse of a dominant position, is part of this picture (Budzinski and
Beigi, ; Roberts, ).
. D
I P
..................................................................................................................................
The increased transnationalization of economic activity over the last fifty years has
been driven by large international corporations. While big businesses were central to
colonialism and earlier waves of globalization (Bairoch and Kozul-Wright, ), the
internationalization of production which now exists is much more multi-dimensional,
encompassing governance of trade, technology, value creation, brands, data, and the
related rents. It is associated with the ability to coordinate productive resources
through a multiplicity of governance arrangements beyond vertical integration of
corporations. These blur the boundary of the firm, although not as a ‘nexus of
contracts’ but as a ‘locus of control’.
The exponential expansion in global trade (notwithstanding recent stalling) has far
outpaced GDP growth. Information and communication technologies have enabled
the global dispersion of economic activity while being centrally governed by ‘lead
firms’, as described in the literature on global value chains (GVCs) and global production
networks (Bair, ; Gereffi et al., ; Ponte and Sturgeon, ; Coe and Yeung,
). This has included rapid growth in trade in services, including under digitalization
of processes within firms and along value chains (Baldwin, ).
Large internationalized firms are pursuing low costs combined with flexibility and
speed (Coe and Yeung, ). The digitalization of economic activity has further been
associated with a shift in the proportions of value added—with a higher share going to
pre- and post-production activities than to production activities (Baldwin, ;
Rehnberg and Ponte, ). There have been major advances in technology in the
fields of bio-tech, design, advanced manufacturing, and artificial intelligence, as well as
the rise of digital platforms in e-commerce, online search, and social networking which
merits a separate discussion in section ...
The term ‘transnational’ is more appropriate for large internationalized corporations
rather than ‘multinational’, as the corporate organization of economy activity tran-
scends nation states. Profits are attributed to subsidiaries and associated companies
according to the favourable tax treatment by different jurisdictions, while research
activities, ownership of intellectual property, manufacture, marketing, branding, and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
head office functions may all be spread around the globe. Meanwhile regulation of
TNCs and industrial policies remains predominantly national in scope, or at best
regional in the case of the EU.
There are notable exceptions to the transnational (as opposed to multinational)
organization of production, in particular in the internationalization of Chinese
corporations where the state plays a pivotal role (see Oqubay and Lin, ).
The growing importance of intermediate goods in international trade, with prices
being administratively determined as transfer prices within firms or agreed between
related parties, reflects the importance of GVCs. Chapter elsewhere in this book
(Chapter , this volume) assess the importance of GVCs, including the implications
for industrial policy to upgrade firms’ capabilities, create employment and support
more inclusive growth. The emerging evidence is, however, that the organization of
production in GVCs has further polarized income and wealth distribution in both
developed and developing countries (UNCTAD, ). The reasons given for this
include the nature of technological change (Rodrik, ; Ford, ) and the concen-
trated market structure and dominance of trade by large transnational corporations
(UNCTAD, ).
The implications of TNCs for industrial development and the design and imple-
mentation of industrial policy has been recognized for some time. For example, over
twenty-five years ago Lall () identified five areas for future research with regard to
TNCs: entrepreneurship and innovation; technological change; the conditions required
to stimulate TNC activity as part of paths of dynamic comparative advantage; the
different characteristics of TNCs from different countries and the evolution of less
developed-country TNCs; and the relationship between FDI in services (such as
communications and marketing) and economic development. These all remain
extremely relevant today, with a particular extension to the implications of the inter-
national digitalization of economic activity, addressed in section ..
The international spread of businesses has been described in terms of ownership,
location and internalization (OLI) factors in Dunning’s eclectic framework (Dunning,
; Cantwell, ). This asks relevant questions related to the intra-firm location
and organization of activities across countries. However, it is rooted in the transaction-
costs theory of the firm (which drives internalization decisions, according to the
framework), albeit combined with other factors such as technological advantages and
agglomeration economies. In particular, it lacks a proper political economy under-
standing of large business and an assessment of the organization of production. The
omission hides an apparent leaning of many writers within the paradigm towards
seeing the firm as essentially an efficient response to conditions rather than a means to
coordinate production and secure profits. This fits with a business-oriented policy
agenda for the de-politicization of economic policy and promotion of a technocratic
approach, which is not consistent with the observed reality, nor with businesses’ own
behaviour (Vilakazi and Roberts, ; Hymer, ).
Understanding the internationalization of production requires a framework which
explains the evolving organization of production, drawing on resource-based theories
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
of the firm in terms of firms’ productive resources, organizational capabilities, and
competencies. The international competitiveness of business is determined to a signifi-
cant extent by the position and power of the firm both with regard to competitors and
within the production chain, which in turn depends on a range of non-/semi-market
relationships, on dimensions of internationalization other than trade and ownership,
and on the position of groupings of business in the domestic economy.
The literature on GVCs analyses inter-firm linkages and vertical relations regarding
design, production, and marketing of products as layers of value addition (Gereffi and
Fernandez-Stark, ). These linked activities span different enterprises often located
in both developed and developing countries. The geographic fragmentation of activities
means that developing countries can attract some activities in a value chain. However,
for this to be part of sustained productive capability building depends on local
industrial clusters of producers of intermediate goods and services (Lee et al., ).
The opening up of opportunities for process and product upgrading in developing
countries depends on the overall governance and control of the value chain, and the
ways in which industrial policies alter the governance of the chain by key firms (Ponte
and Sturgeon, ).
Lead firms coordinate activities to ensure the competitiveness of the end product and
are able to exploit often extremely asymmetrical power relations between firms within
value chains to control how, where, and by whom value is created and captured (Gereffi
and Fernandez-Stark, ). The influence of the lead firm depends on the nature of
the sector and the basis of competitiveness. Value chains such as automobiles have
been identified as producer driven due to the importance of technology and design
(Gereffi and Fernandez-Stark, ). In buyer-driven chains, such as clothing, the
owners of the brands hold the power. The relationships range from arms-length market
exchange, such as to drive down costs through outsourcing, through close relational
governance such as for coordinating product-specific design, to fully internalized
linkages (Gereffi et al., ; Bair, ; Gereffi, ).
The digitalization of production networks and value chains enables greater coord-
ination of activities across borders and shifts power to the firms who collate and analyse
the data. The nature of governance over internationalized production is changing, with
new strategic industries and sectors which are the locus of control over data and
underpin dynamic capabilities (Petricevic and Teece, ).
. D P,
E, I P
..................................................................................................................................
A rapid digitalization of production is taking place associated with key technologies at
different stages of maturity, including advanced robotics and factory automation, data
from mobile and ubiquitous Internet connectivity, cloud computing, big-data analytics,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
machine learning, and artificial intelligence. This is associated with the development of
new ‘platform’ business models and modes of value creation (UNCTAD, ;
Sturgeon, ). The technologies and business models emerging in the digital economy
have already disrupted traditional industries and created entirely new ones.²
.. Digitalization of Production
Advanced manufacturing and automation can be understood as fully integrated,
collaborative manufacturing systems that respond in real time to changing demands
and conditions in the factory and the supply network. Though this typically relates to
‘smart factories’, it is equally applicable in agriculture, commonly referred to as
‘precision farming’, or even mining or construction. Advanced manufacturing is
made possible by a combination of technologies including robotics, sensors, machine
learning, and the Internet of things (IoT). Industrial robots linked to advanced
manufacturing are automatically controlled and operate on their own. They are multi-
purpose (reprogrammable) and capable of doing different kinds of tasks rather than
simply repeating the same tasks.
The technological changes have profound implications for the coordination of
economic activity by firms and the division of returns (UNCTAD, ). Digital
tools can improve design, prototyping and customization processes, reducing scale
economies, and opening opportunities for businesses in developing countries; however,
advanced economies have tended to retain control of higher value-added activities.
While, in principle, digital platforms can lower costs for smaller businesses to market
their products and services, most digital platforms are characterized by high levels of
concentration. Many of the technological changes are also skills biased and may
undermine the ability of developing countries to compete in traditionally labour-
intensive industries that have supported their industrialization (Rodrik, ).
Transnational corporations in the form of digital platforms are shaping global
economic activity and pose new challenges for industrial policy around the world. In
addition, there are substantial emerging regulatory challenges associated with the
ownership and control of the data that provide major platforms with their power
and associated commercial value (UNCTAD, ; Polson and Scott, ; McAfee
and Brynjolfsson, ).
The nature of the changes can be incremental as well as disruptive. Incremental
changes include improving supply chain integration across firms through digital
tracking of product flow and quality at every stage, which can be combined with
² This section draws on discussions with Rashmi Banga, Justin Barnes, Anthony Black, Parminder
Jeet Singh, Stefano Ponte, and Tim Sturgeon, for the Digital Industrial Policy Issues paper produced by
the Industrial Development Think Tank at the University of Johannesburg.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
machine learning to improve processes and respond to changes in the environment.
Disruptive changes mean fundamentally altering the way products and services are
created and delivered, for example, through D printing of products on demand.
Digitalization also enables a dynamic cycle of continuously improved efficiency that
is increasingly being driven by the rapid advance of machine learning (artificial
intelligence). Maintaining competitiveness means adopting the incremental changes
to build the capabilities of clusters of firms and, as such, engaging with the international
technology leaders.
The generation of ‘big data’ is a characteristic feature of digitalization. Data can be
collected through sensors in production, from users of the product or service, and
from the online search and purchasing activities of buyers. It is possible for firms to
track performance across multiple production sites and distribution channels and to
provide new services such as real-time monitoring of product use and/or perform-
ance using big-data analytics, and increasingly, artificial intelligence (Sturgeon,
). This is often referred to as the industrial Internet of things. It heightens the
potential for centralized control across dispersed production sites and along logistics
chains, enabling a further transnationalization of production.
.. Digital Platforms
The more members or users on a platform, the more data is collated and the greater its
value to other users in respect of data aggregation and analysis. There are strong
economies of scale and scope and the positive network externality effects within
and across different user groups of the platforms imply they are likely to tip to the
‘winner-takes-all’ quasi-monopoly (see Furman et al., ; Cremer et al., ; Com-
mittee for Study of Digital Platforms, ). There are major barriers to smaller
competitors attempting to enter the market and the dominant platforms can exert
substantial market power, requiring a rethink of the appropriate regulatory and policy
framework.
Data itself is an asset and the ownership and control of data is an important
determinant of power relations in value chains and over markets. The data are collected
partly in order to provide the service in question and partly as a by-product of the
service. Moreover, the combination of data from different sources enables additional
value to be offered. This underpins the substantial network effects where the aggregator
of data is able to offer better services by virtue of having more users across the different
‘sides’ of their platforms (for example, suppliers of goods and consumers). First movers
are therefore able to lock in their advantages.
The routes to customers are increasingly through one of a very few ‘technology
giants’, whether in online search, social networks, or e-commerce. These online
platforms bring together consumer data and analysis, logistics, and payments. Firms
such as Amazon and Alibaba have immense scale, strong brand identity, supplier
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
networks, and data capabilities. Multi-sided online platforms are able to aggregate and
analyse data from groups of users.
The technology giants have been able to grow so fast partly because they have been
allowed to acquire small and innovative companies without much consideration given
to the possible harmful long-run effects on competition. Between and
Google acquired companies, Facebook acquired seventy-one companies and
Amazon acquired sixty companies (LEAR, ). The reviews carried out in
and for various governments and competition authorities, including those in the
EU, Australia, and the United Kingdom, find that merger evaluation needs to recognize
the competitive value of data, the harm to potential competition, and the possible
conglomerate effects of such mergers.³ In other words, the assessment needs to extend
beyond static analysis of whether there will be a lessening of competition from the
merger due to firms being in horizontal or vertical relationships.
The convergence of platforms which operate in and across payments systems,
retailing, logistics, customer information and marketing, and telecoms requires regu-
lation through a flexible and responsive regime. In addition, an enabling environment
for the digitalization of business, including more reliable and cheaper connectivity and
an urgent upgrading of the skills pool in big-data analytics, is urgently required to open
up markets to local entrepreneurs.
The evolving nature of economic power that arises from the digitalization of
economic activity and the importance of digital platforms has huge implications for
industrial development and industrial policy. The governance of value chains and
production networks, as well as the very determination of what constitutes the value
(including for tax purposes) is controlled by the aggregator of the core data in the form
of the online platforms. The growth and competitiveness of local businesses depends
on the terms on which they can insert themselves into, and/or interface with, the
dominant international platforms.
Europe has led competition enforcement of digital platforms with three decisions
against Google as of September . These cases highlight the mechanisms by which
power is exerted to shape markets. The European Commission’s Google Shopping case
addressed the ability to preference partners in search results, restricting consumer
choices, and raising prices paid by consumers.⁴ Similar concerns relating to consumers’
online searching behaviour have been identified in UK competition and consumer
³ The UK and EU reviews are respectively Furman et al. () and Cremer et al. (). For
Australia see Australia Competition and Consumer Commission Digital Platform Inquiry Final Report,
. For Germany see Report by the Commission ‘Competition Law .’, ‘A New Competition
Framework for the Digital Economy’, report for the Federal Ministry for Economic Affairs and Energy,
available at https://www.bmwi.de/Redaktion/EN/Publikationen/Wirtschaft/a-new-competition-framework-
for-the-digital-economy.html.
⁴ European Commission, Decision of June , case AT.–Google Search (Shopping).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
protection matters related to digital comparison tools and online hotel booking.⁵ India
has taken a decision regarding Google preferencing searches for flights.
The EC’s Google Android case related to Google extending and protecting market
power with regard to restrictive terms applied to the Google Playstore for apps on mobile
phones, as well as to the development of alternative Android operating systems.⁶ The
Google Adsense case relates to Google extending power over advertising space on third-
party websites.⁷ These cases emphasize the evolving ways in which routes to market now
depend increasingly on the online reach to consumers including online advertising.
The competition policy recommendations that have been made in the various
reviews include changing the standards in merger control to consider a ‘balance of
harms’ test, and designating companies as having ‘strategic market status’ with greater
obligations not to distort competition. To ensure that there is consistency of regulation
and competition enforcement some reviews have proposed establishing a regulatory
‘data unit’ with powers to obtain information, and timeously make and enforce orders.
This recognizes the central role that control over, and access to, data has for economic
participation.
.. Industrial Policy Implications
The rise of digital platform businesses as the largest global corporations, and the
importance of data for the competitiveness of firms of all sizes, poses fundamental
challenges for industrial policy. The major technological changes in the ‘new digital
economy’ require business models that can integrate, coordinate, and control value
creation across businesses.
Industrial policy and economic regulation similarly need to be consistent and
support public organizations that set the standards required to support the intercon-
nection and integration of components and subsystems into larger systems. Three
business models have been identified as key to these goals (Sturgeon, ):
• Modularity describes a business model based on interchangeability, where sub-
components can be added or subtracted without redesigning entire systems. On
the factory floor, different sub-assemblies with shared interfaces can be substituted
in the assembly of larger products. In product design, off-the-shelf or lightly
customized modular components can be designed in as elements of larger systems.
In supply chains, standards and protocols allow for complex information about
⁵ UK Competition and Markets Authority: press release of September , available at https://
www.gov.uk/government/news/major-overhaul-of-hotel-booking-sector-after-cma-action; report on
Digital Comparison Tools Market Study, available at https://assets.publishing.service.gov.uk/media/
cead/digital-comparison-tools-market-study-final-report.pdf.
⁶ European Commission, Decision of July , Case AT.–Google Android.
⁷ European Commission, Decision of March , AT.–Google Search (AdSense).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
products, production, and logistics to be exchanged across organizational and
geographic boundaries.⁸
• Open innovation refers to the pre-competitive pooling of R&D activities and
design criteria, either through consortia, or through the voluntary ‘crowdsourcing’
efforts of engineers and technologists interested in creating free resources for their
communities. For example, nearly all the world’s major computer programming
languages, such as Python, are open source and free. Like modularity, open
innovation helps companies ‘vertically specialize’, that is, develop a strategic
focus on a specific bundle of competencies, while still providing customers with
a rich set of fully functional products and solutions.
• Platforms provide services for networks of users, bringing together those using the
platform to sell goods and services with consumers looking to purchase, effectively
shaping and creating the markets themselves. The platform owners benefit from
aggregating user data (including from key components such as geo-location and
mapping) and charging for advertising, and can vertically integrate into the
suppliers of the goods and services. The platforms can then channel consumers
to the platform’s preferred services.
Digitalization means that a coordinated industrial policy which prioritizes key
sectors and cross-cutting activities is even more important. The spillover effects
mean that industry-specific and cross-cutting technology and skills support are both
critical. This includes the key enablers of skills in software engineering, data science,
and related ICT skills, along with intermediate industries such as electronic control
systems, logistics, design, and additive manufacturing. Development finance for invest-
ments in productive capabilities, upgrading of capital equipment, and supply-chain
integration remains essential.
The significance of digital platforms which straddle communication, media, pub-
lishing, search, e-commerce, finance, and payments requires a rethink of competition
and regulation to establish rules for platforms to ensure local businesses are not
discriminated against. Legal provisions asserting ownership of data on behalf of
citizens are a necessary step at the national level, while countries such as Rwanda
and India have taken steps to ensure local businesses are not undermined by trans-
national e-commerce businesses. Effective regulation is an industrial policy imperative
when control over data is a barrier to being able to compete. This needs to be coupled
with vertical policies to support stronger local linkages.
While policy design and the governance framework are critical, the effective imple-
mentation and enforcement of any industrial policy will depend on government
capacity and laws to ensure access to data. The implementation of a digital industrial
policy requires the establishment of high-level coordination capacity, institutionalized
private-sector inputs, and appropriate monitoring and evaluation systems. New
⁸ The standards and protocols supporting value-chain modularity are often embedded in digital ICT
systems such as CAD/CAM and ERP.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
coalitions for change forged around better aligned productive interests are necessary
for the successful implementation of industrial policy, enabling sector-specific and
cross-sectoral interventions.
. C
..................................................................................................................................
Enterprises are at the centre of understanding the processes of industrialization, and
the potential for, and constraints on, industrial policy. A dynamic private sector is
critical for catch-up by developing countries (Ohno, ). The transaction-costs
theories of the firm which have dominated economics are, however, effectively unable
to come to terms with the most important questions of dynamic organizational
capabilities—the strategic orientation of large internationalized businesses and the
nature of power relations and the political settlement.
The resource-based theory of the firm, developed through detailed empirical study
within and across countries, provides a robust framework for analysing the develop-
ment of capabilities. It has been extended in terms of the ways in which power is
understood and the internationalization of businesses. The implications of digitaliza-
tion are subject to intense current research pointing to major changes in the nature of
firm-level governance of economic activity and the appropriate industrial policies.
Substantial economic power on the part of firms is an intrinsic feature of industrial
development given the dynamic economies involved. There is therefore a natural
tension between the short-term objectives of firms in securing and exploiting rents,
and the longer-term investments required to build dynamic productive capabilities
taking into account the uncertainties involved. This tension is at the heart of an
effective industrial policy which has analysis of firms located in a production-centric
framework. A critical objective of industrial policy is therefore to shift the calculus on
the part of large firms, to be able to set and enforce conditionalities for the support
required. The effective engagement with large firms includes locating them in clusters,
with long-term relationships with smaller firms as subcontractors, through policies
supporting shared research and development, skills improvement, ongoing capabilities
upgrading, and product development.
The greater emphasis which is now being placed on concentration of ownership and
control in many countries is welcome. It is part of a rethink of competition policy
which recognizes competition as a dynamic process of rivalry underpinning ongoing
improvements in productivity. An effective framework for competition and economic
regulation, which sets the rules for markets, complements industrial policies. Assessing
the debates about concentration and the appropriate policy responses requires attention
to the influence of coalitions of large business interests over the policy agenda in indirect
and diffuse ways, as well as alternative coalitions which can underpin progressive
industrial policies.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The internationalization of businesses in the context of the digitalization of
economic activity raises important questions about the ability of regulations and
industrial policies at a national level to discipline the conduct of businesses. Large
developing countries have greater scope to take appropriate measures, including
supporting alternative digital platforms, in which China is leading. Countries with
smaller economies, such as those in Africa, are in relatively weak positions and depend
on a broader international development coalition to underpin effective regulation of
the global digital platforms. At the national level, countries need to ensure access to
data for local businesses as part of a digital industrial policy platform to support local
capabilities in targeted sectors and cross-cutting measures for the critical skills and
investment required to adapt to the digitalization of economic activity.
R
Amsden, Alice () Asia’s Next Giant—South Korea and Late Industrialization. New York
and Oxford: Oxford University Press.
Amsden, Alice () ‘Bringing Production back in: Understanding Government’s Economic
Role in Late Industrialization’, World Development (): –.
Amsden, Alice () The Rise of the ‘Rest’: Challenges to the West from Late-industrializing
Economies. New York: Oxford University Press.
Amsden, Alice and Ajit Singh () ‘The Optimal Degree of Competition and Dynamic
Efficiency in Japan and Korea’, European Economic Review : –.
Andreoni, Antonio () ‘Varieties of Industrial Policy: Models, Packages, and Transform-
ation Cycles’, in Akbar Noman and Joseph E. Stiglitz (eds) Efficiency, Finance and Varieties
of Industrial Policy. New York: Columbia University Press, pp. –.
Andreoni, Antonio () ‘The Architecture and Dynamics of Industrial Ecosystems: Diver-
sification and Innovative Industrial Renewal in Emilia Romagna’, Cambridge Journal of
Economics (): –.
Andreoni, Antonio and Ha-Joon Chang () ‘The Political Economy of Industrial Policy:
Structural Interdependencies, Policy Alignment and Conflict Management’, Structural
Change and Economic Dynamics : –.
Arrow, Kenneth () ‘Allocation of Resources for Invention’, in The Rate and Direction of
Inventive Activity: Economic and Social Factors, National Bureau of Economic Research.
Princeton, NJ: Princeton University Press.
Atkinson, Anthony () Inequality: What Can Be Done? Cambridge, MA: Harvard Uni-
versity Press.
Audretsch, David B. and Julie A. Elston () ‘Does Firm Size Matter? Evidence on the
Impact of Liquidity Constraints on Firm Investment Behavior in Germany’, International
Journal of Industrial Organization (): –.
Australian Competition and Consumer Commission (ACCC) () Digital Platform Inquiry
Final Report.
Azar, José, Sahil Raina, and Martin C. Schmalz () ‘Ultimate Ownership and Bank
Competition’, SSRN Electronic Journal. ./ssrn..
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Azar, José, Martin C. Schmalz, and Isabel Tecu () ‘Anticompetitive Effects of Common
Ownership’, The Journal of Finance : –.
Babbage, Charles ( []) On the Economy of Machinery and Manufactures. Cirences-
ter: Echo Library.
Bair, Jennifer () ‘Global Commodity Chains’, in Jennifer Bair (ed.) Frontiers of Com-
modity Research. Palo Alto, CA: Stanford University Press.
Bairoch, Paul and Richard Kozul-Wright () ‘Globalization Myths: Some Historical
Reflections on Integration, Industrialization, and Growth in the World Economy’. Discus-
sion Paper No. . Geneva: UNCTAD.
Baker, Jonathan and Steve Salop () ‘Antitrust, Competition Policy, and Inequality’, The
Georgetown Law Journal Online : .
Baldwin, Richard () The Great Convergence: Information Technology and the New
Convergence. Cambridge, MA: Harvard University Press.
Best, Michael H. () The New Competition. Cambridge: Polity Press.
Best, Michael H. () How Growth Really Happens: The Making of Economic Miracles
through Production, Governance, and Skills. Princeton, NJ: Princeton University Press.
Bloom, Nicholas, Erik Brynjolfsson, Lucia Foster, Ron Jarmin, Megha Patnaik, Itay Saporta-
Eksten, and John Van Reenen () ‘What Drives Differences in Management?’. NBER
Working Paper No. . Cambridge, MA: NBER.
Bloom, Nicholas, John Van Reenen, and Heidi Williams () ‘A Toolkit of Policies to
Promote Innovation’, Journal of Economic Perspectives (): –.
Budzinski, Oliver and Maryam H. A. Beigi () ‘Generating Instead of Protecting Compe-
tition’, in Michal S. Gal, Mor Bakhoum, Josef Drexl, Eleanor M. Fox, and David J. Gerber
(eds) Economic Characteristics of Developing Jurisdictions: Their Implications for Competi-
tion Law. Cheltenham: Edward Elgar, pp. –.
Cantwell, John () ‘The Relationship between International Trade and International
Production’, in David Greenaway and L. Alan Winters (eds) Surveys in International
Trade. Oxford: Blackwell, pp. –.
Chandler, Alfred Jr. () Scale and Scope: The Dynamics of Industrial Capitalism. Cam-
bridge, MA: Harvard University Press.
Chandler, Alfred Jr., Franco Amatori, and Takashi Hikino (eds) () Big Business and the
Wealth of Nations. Cambridge: Cambridge University Press.
Chandler, Alfred Jr., Peter Hagström, and Örjan Sölvell (eds) () The Dynamic Firm.
Oxford: Oxford University Press.
Chang, Ha-Joon () The Political Economy of Industrial Policy. New York: St. Martin’s
Press.
Coase, Ronald () ‘The Nature of the Firm’, Economica : –.
Coase, Ronald () ‘The Institutional Structure of Production’, American Economic Review
(): –.
Coe, Neil M. and Henry W. Yeung () Global Production Networks: Theorizing Economic
Development in an Interconnected World. Oxford: Oxford University Press.
Cohen, Wesley M. and Richard Levin () ‘Empirical Studies of Innovation and Market
Structure’, in Richard Schmalensee and Robert D. Willig (eds) Handbook of Industrial
Organization, Vol. II. Amsterdam: North Holland, pp. –.
Committee for the Study of Digital Platforms () ‘Report of the Market Structure and
Antitrust Subcommittee’, Stigler Centre Committee for the Study of Digital Platforms
Market Structure and Antitrust Subcommittee, chaired by Fiona Scott Morton.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Cremer, Jacques, Yves-Alexandre de Montjoye, and Heike Schweitzer () Competition
Policy for the Digital Era. Brussels: European Commission.
Dallas, Mark, Stefano Ponte, and Timothy Sturgeon () ‘Power in Global Value Chains’,
Review of International Political Economy (): –.
De Loecker, Jan and Jan Eeckhout () ‘The Rise of Market Power and the Macroeconomic
Implications’. NBER Working Paper No. . Cambridge, MA: NBER.
Dosi, Giovanni () ‘Organizational Competencies, Firm Size, and the Wealth of Nations:
Some Comments from a Comparative Perspective’, in Alfred Chandler, Jr., Franco Ama-
tori, and Takashi Hikino (eds) Big Business and the Wealth of Nations. Cambridge:
Cambridge University Press, pp. –.
Dosi, Giovanni, David J. Teece, and Joseph Chytry (eds) () Technology, Organization,
and Competitiveness: Perspectives on Industrial and Corporate Change. Oxford: Oxford
University Press.
Dunning, John () Multinational Enterprises and the Global Economy. Wokingham:
Addison-Wesley.
Dunning, John () The Globalization of Business: The Challenge of the s. London:
Routledge.
Ennis, Sean, Pedro Gonzaga, and Chris Pike () ‘Inequality: A Hidden Cost of Market
Power’, Oxford Review of Economic Policy (): –.
Federico, Giulio, Fiona Scott Morton, and Carl Shapiro () ‘Antitrust and Innovation:
Welcoming and Protecting Disruption’. NBER Working Paper No. . Cambridge,
MA: NBER.
Ford, Martin () Rise of the Robots: Technology and the Threat of a Jobless Future. New
York: Basic Books.
Fox, Eleanor () ‘We Protect Competition, You Protect Competitors’, World Competition
(): –.
Fujimoto, Takahiro () ‘Reinterpreting the Resource-capability View of the Firm: A Case
of the Development-Production Systems of the Japanese Auto-Makers’, in Alfred
D. Chandler, Peter Hagström, and Örjan Sölvell (eds) The Dynamic Firm: The Role of
Technology, Strategy, Organization, and Regions. Oxford: Oxford University Press,
pp. –.
Furman, Jason, Diane Coyle, Amelia Fletcher, Derek McAuley, and Philip Marsden ()
‘Unlocking Digital Competition’. Report of the Digital Competition Expert Panel, March.
London: Crown Publications.
Gal, Michal () ‘Antitrust in a Globalised Economy: The Unique Enforcement Challenges
Faced by Small and Developing Jurisdictions’, Fordham International Law Journal ():
.
Gerber, David () Global Competition: Law, Markets, and Globalisation. Oxford: Oxford
University Press.
Gereffi, Gary () ‘Global Value Chains in a Post-Washington Consensus World’, Review of
International Political Economy (): –.
Gereffi, Gary and Karina Fernandez-Stark () ‘Global Value Chain Analysis: A Primer’.
Center on Globalization, Governance & Competitiveness (CGGC), Duke University, North
Carolina.
Gereffi, Gary, John Humphrey, and Timothy Sturgeon () ‘The Governance of Global
Value Chains’, Review of International Political Economy : –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Geroski, Paul and Alexis Jacquemin () ‘Dominant Firms and their Alleged Decline’,
International Journal of Industrial Organisation (): –.
Goergen, Marc and Luc Renneboog () ‘Investment Policy, Internal Financing and
Ownership Concentration in the UK’, Journal of Corporate Finance (): –.
Helmsing, Albert H. J. () ‘Externalities, Learning and Governance: New Perspectives on
Local Economic Development’, Development and Change : –.
Hikino, Takashi and Alfred Chandler, Jr. () ‘Historical and Comparative Contours of Big
Business’, in Alfred Chandler, Jr., Franco Amatori, and Takashi Hikino (eds) Big Business
and the Wealth of Nations. Cambridge: Cambridge University Press, pp. –.
Hur, Joseph Seon () ‘The Evolution of Competition Policy and its Impact on Economic
Development in Korea’, in Philippe Brusick, Ana Maria Alvarez, Lucian Cernat, and Philip
Holmes (eds) Competition, Competitiveness and Development: Lessons from Developing
Countries. Geneva: United Nations Conference on Trade and Development, pp. –.
Hymer, Stephen () The International Operations of National Firms: A Study of Direct
Foreign Investment. Cambridge, MA: MIT Press.
Inderst, Roman and Nicola Mazzarotto () ‘Buyer Power in Distribution’, in W. D. Collins
(ed.) ABA Antitrust Section Handbook: Issues in Competition Law and Policy, American
Bar Association.
Inderst, Roman and Tommaso M. Valletti () ‘Buyer Power and the “Waterbed Effect” ’,
Journal of Industrial Economics (): –.
Jensen, Michael C. and William H. Meckling () ‘Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economics ():
–.
Kaplinsky, Raphael () ‘Globalisation and Unequalisation: What Can Be Learned from
Value Chain Analysis?’, Journal of Development Studies (): –.
Khan, Mushtaq () ‘Learning, Technology Acquisition and Governance Challenges in
Developing Countries’. Research Paper Series on Governance for Growth. School of
Oriental and African Studies, University of London. Available at http://eprints.soas.ac
.uk///Learning_and_Technology_Acquisition_internet.pdf.
Khan, Mushtaq () Political Settlements and the Governance of Growth-enhancing Insti-
tutions. London: SOAS.
Khan, Mushtaq () ‘Industrial Policy Design and Implementation Challenges’, in Jesus
Felipe (ed.) Development and Modern Industrial Policy in Practice: Issues and Country
Experiences. Cheltenham: Edward Elgar, pp. –.
Khan, Mushtaq () ‘Introduction: Political Settlements and the Analysis of Institutions’,
African Affairs Special Issue: –.
Khan, Mushtaq () ‘Knowledge, Skills and Organizational Capabilities for Structural
Transformation’, Structural Change and Economic Dynamics : –.
Khan, Mushtaq and Stephanie Blankenburg () ‘The Political Economy of Industrial
Policy in Latin America’, in Giovanni Dosi, Mario Cimoli, and Joseph E. Stiglitz, Industrial
Policy and Development: The Political Economy of Capabilities Accumulation. Oxford:
Oxford University Press, pp. –.
Korea Fair Trade Commission (KFTC) () ‘ Years of KFTC, Looking back, Moving
forwards’, Annual Report , Special Edition. Seoul: KFTC.
Lall, Sanjaya () ‘Introduction: Transnational Corporations and Economic Development’,
in Sanjaya Lall (ed.) Transnational Corporations and Economic Development. London:
Routledge.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Lall, Sanjaya () ‘The East Asian Miracle: Does the Bell Toll for Industrial Strategy?’,
World Development (): –.
Lall, Sanjaya and Morris Teubal () ‘ “Market-Stimulating” Technology Policies in Devel-
oping Countries: A Framework with Examples from East Asia’, World Development ():
–.
Lazonick, William () ‘The Chandlerian Corporation and the Theory of Innovative
Enterprise’, Industrial and Corporate Change : –.
LEAR () ‘Ex post Assessment of Merger Control Decisions in Digital Markets’, Report for
the UK Competition and Markets Authority.
Lee, Keun, Marina Szapiro, and Zhuqing Mao () ‘From Global Value Chains (GVC) to
Innovation Systems for Local Value Chains and Knowledge Creation’, European Journal of
Development Research (): –.
Makhaya, Gertrude and Simon Roberts () ‘Expectations and Outcomes—Considering
Competition and Corporate Power in South Africa under Democracy’, Review of African
Political Economy : –.
Makhaya, Gertrude and Simon Roberts () ‘The Changing Strategies of Large Corpor-
ations in South Africa under Democracy and the Role of Competition Law’. CCRED
Working Paper No. /.
Mathis, Jérôme and Wilfried Sand-Zantman () ‘Competition and Investment: What Do
We Know from the Literature?’. Institut d’Economie Industrielle Working Paper. Tou-
louse: Institut d’Economie Industrielle.
McAfee, Andrew and Erik Brynjolfsson () Machine, Platform, Crowd. New York:
W. W. Norton.
Newham, Melissa, Jo Seldeslachts, and Albert Banal Estañol () ‘Common Ownership and
Market Entry: Evidence from Pharmaceutical Industry’. DIW Berlin Discussion Paper No.
.
North, Douglass C., John Wallis, and Barry Weingast () Violence and Social Orders.
Cambridge: Cambridge University Press.
Ohno, Kenichi () Learning to Industrialize: From Given Growth to Policy-aided Value
Creation. Oxford: Routledge.
Oqubay, Arkebe and Justin Yifu Lin (eds) () China–Africa and an Economic Transform-
ation. Oxford: Oxford University Press.
Oqubay, Arkebe and Kenichi Ohno (eds) () How Nations Learn: Technological Learning,
Industrial Policy, and Catch-up. Oxford: Oxford University Press.
Penrose, Edith () The Growth of the Firm. Oxford: Blackwell.
Petricevic, Olga and David Teece () ‘The Structural Reshaping of Globalization: Impli-
cations for Strategic Sectors, Profiting from Innovation, and the Multinational Enterprise’,
Journal of International Business Studies (): –.
Piketty, Thomas () Capital in the Twenty-First Century. Cambridge: The Belknap Press
of Harvard University Press.
Pisano, Gary () ‘Towards a Prescriptive Theory of Dynamic Capabilities: Connecting
Strategic Choice, Learning and Competition’, Industrial and Corporate Change (): –
.
Polson, Nick and James Scott () AIQ: How Artificial Intelligence Works and How We Can
Harness its Power for a Better World. London: Bantam Press.
Ponte, Stefano () Business, Power, and Sustainability in a World of Global Value Chains.
London: Zed Books.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Ponte, Stefano and Timothy Sturgeon () ‘Explaining Governance in Global Value
Chains: A Modular Theory-building Effort’, Review of International Political Economy
(): –.
Porter, Michael () The Competitive Advantage of Nations. London: Macmillan.
Rehnberg, Martha and Stefano Ponte () ‘From Smiling to Smirking? D Printing,
Upgrading and the Restructuring of Global Value Chains’, Global Networks ()
doi.org/./glob..
Rey, Patrick and Jean Tirole () ‘A Primer on Foreclosure’, in Mark Armstrong and Robert
H. Porter (eds) Handbook of Industrial Organization III. Amsterdam: North Holland,
pp. –.
Richardson, George B. () ‘The Organization of Industry’, The Economic Journal ():
–.
Roberts, Simon () ‘Administrability and Business Certainty in Abuse of Dominance
Enforcement: An Economist’s Review of the South African Record’, World Competition
(): –.
Roberts, Simon () ‘Competition Policy, Industrial Policy, and Corporate Conduct’, in
Joseph E. Stiglitz, Justin Yifu Lin, and Ebrahim Patel (eds) The Industrial Policy Revolution
II: Africa in the st Century. New York: Palgrave MacMillan, pp. –.
Rodrik, Dani () ‘Getting Interventions Right: How South Korea and Taiwan Grew Rich’,
Economic Policy : –.
Rodrik, Dani () ‘New Technologies, Global Value Chains, and the Developing Econ-
omies’. CESifo Working Paper No. .
Rosenberg, Nathan () ‘Technological Interdependence in the American Economy’,
Technology and Culture (): –.
Sakakibara, Mariko and Michael E. Porter () ‘Competing at Home to Win Abroad:
Evidence from Japanese Industry’, Review of Economics and Statistics (): –.
Schumpeter, Joseph A. () Capitalism, Socialism, and Democracy. New York: Harper and
Brothers.
Seldeslachts, Jo, Melissa Newham, and Albert Banal-Estanol () ‘Changes in Common
Ownership of German Companies’, DIW Research Bulletin (): –.
Shapiro, Carl () ‘Competition and Innovation: Did Arrow Hit the Bull’s Eye?’, in Josh
Lerner and Scott Stern (eds) The Rate and Direction of Inventive Activity Revisited. Chicago,
IL: University of Chicago Press.
Singh, Ajit () ‘Competition and Competition Policy in Emerging Markets: International
and Developmental Dimensions’. ESRC Centre for Business Research, Working Paper No.
. University of Cambridge.
Singh, Ajit () ‘Multi-lateral Competition Policy and Economic Development’. UNCTAD
Series on Issues in Competition Law and Policy. Geneva: United Nations.
Stiglitz, Joseph E. () ‘Towards a Broader View of Competition Policy’, in Tembinkosi
Bonakele, Eleanor Fox, and Liberty Mncube (eds) Competition Policy for the New Era:
Insights from the BRICS Countries. Oxford: Oxford University Press, pp. –.
Strange, Roger and John Humphrey () ‘What Lies between Market and Hierarchy?
Insights from Internalization Theory and Global Value Chain Theory’, Journal of Inter-
national Business Studies (): –.
Sturgeon, Timothy () ‘The “New” Digital Economy and Development’. UNCTAD
Technical Notes on ICT for Development No. . Geneva: UNCTAD.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Sutton, John () ‘Market Structure: Theory and Evidence’, in Robert H. Porter and Mark
Armstrong (eds) Handbook of Industrial Organization, Volume III. Amsterdam: Elsevier,
pp. –.
Sutton, John () Competing in Capabilities: the Globalisation Process. Oxford: Oxford
University Press.
Teece, David J. () Dynamic Capabilities and Strategic Management: Organizing for
Innovation and Growth. Oxford: Oxford University Press.
Teece, David J. () ‘Alfred Chandler and “Capabilities” Theories of Strategy and Manage-
ment’, Industrial and Corporate Change (): –.
Teece, David J. and Gary Pisano () ‘The Dynamic Capabilities of Firms: An Introduction’,
in Giovanni Dosi, David J. Teece, and Josef Chytry (eds) Technology, Organization, and
Competitiveness: Perspectives on Industrial and Corporate Change. Oxford: Oxford Univer-
sity Press, pp. –.
Teece, David J., Gary Pisano, and Amy Shuen () ‘Dynamic Capabilities and Strategic
Management’, Strategic Management Journal (): –.
UNCTAD () Trade and Development Report. Geneva: UNCTAD.
Van Reenen, John () ‘Increasing Difference between Firms: Market Power and the
Macro-economy’, Proceedings of the The Federal Reserve Bank of Kansas City
Economic Policy Symposium: Changing Market Structures and Implications for Monetary
Policy, Jackson Hole, WY, August.
Vickers, John () ‘Abuse of Market Power’, The Economic Journal : –.
Vilakazi, Thando and Simon Roberts () ‘Cartels as “Fraud”? Insights from Collusion in
Southern and East Africa in the Fertilizer and Cement Industries’, Review of African
Political Economy (): –.
Wade, Robert () Governing the Market: Economic Theory and the Role of Government in
East Asian Industrialization. Princeton, NJ: Princeton University Press.
Whinston, Michael () Lectures on Antitrust Economics. Cambridge, MA: MIT Press.
Williamson, Oliver () Economic Organisation: Firms, Markets, and Policy Control. New
York: Harvester Wheatsheaf.
Zingales, Luigi () ‘Towards a Political Theory of the Firm’, Journal of Economic Perspec-
tives (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
, ,
. I
..................................................................................................................................
I restructuring has been taking place in the Global North since the s.
Ongoing de-industrialization, downsizing, outsourcing, off-shoring, and just-in-time
production have had a profound impact on the conditions of work and on workers,
marked by worsening precarity and lower wages (Lazonick and O’Sullivan, ;
Milberg and Winkler, ; Tregenna, , ). The last forty years has seen a
dramatic rebalancing of power in favour of capital, exemplified by the increasing share
of income distributed to capital and stagnant real wages for labour (Giovannoni, ;
Stockhammer et al., ). This has been most pronounced in state responses to the
financial crisis, which have amounted to bailouts for capital, austerity for workers, and
anti-union legislation.
This economic malaise, together with impending climate catastrophe, has generated
greater calls for inclusive and sustainable economic growth and development. Can
growth be made to be more equitable and socially and environmentally sustainable
through industrial restructuring and industrial development? Are there viable alterna-
tive ways of organizing production so that it is more democratic? Can industrial policy
contribute to shifting power relations—internationally in favour of peripheral coun-
tries, and domestically in favour of the working class as well as in favour of women and
other oppressed groups. These are among the key concerns of radical industrial policy
that go beyond just capturing a greater share of global manufacturing production, and/
or changing the identity of the owners of industrial capital (for example, from former
colonialist to indigenous).
Radical industrial policy, we argue, emphasizes class structures and relations,
including the importance of exploitation, and the subjugation of labour to capital as
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
central to capitalist accumulation. It should be noted that class structures and relations
are also racialized and gendered, as expressed in the division of labour. Industrial
development is thus not gender neutral and occurs historically in interaction with
prevailing structures of oppression in a co-constitutive manner. For example, the
gendered division of labour and low wages for ‘feminized’ work is premised upon,
and reproduces, social structures that place the burden of unpaid social reproduction
on women in the home. Industrial policy choices can contribute to deepening or
displacing patriarchal social structures. Chapter in this volume, by Seguino, focuses
on a gendered approach to industrialization and industrial policy.¹ Analytically, radical
industrial policy must necessarily take into account gendered social and economic
relationships. Prescriptively, radical industrial policy would also actively seek to promote
a trajectory of industrial development in which women are empowered and gender
inequality is reduced.
This chapter aims to survey, evaluate, and develop radical perspectives on industrial
policy. Radical industrial policy is both analytic—understanding how capitalism
works—and prescriptive—suggesting what should guide industrial policy. We consider
radical industrial policy as also aiming at fundamentally changing productive struc-
tures and dynamics of accumulation in the direction of labour-centred economic and
political restructuring. ‘Labour-centred’ refers not only to the distribution of gains
from development in the interest of labour, but also to the central participatory and
determining role of labour in the process.
We begin the chapter by discussing radical approaches to the role of the manu-
facturing sector and to industrialization, reflecting on how these approaches differ
from both other heterodox and mainstream approaches. We go on to analyse radical
approaches to industrial policy, focusing on the conceptual and theoretical levels,
with particular attention to the inherent contradictions of capital‒labour relations
under capitalism, the contradictory role of the state, and radical industrial policy
with respect to the case of the climate crisis. We next discuss historical experiences
of radical industrial policies with specific reference to statist, local co-operative, and
participatory planning models of industrial policy and industrial development. By
way of conclusion, we consider what is distinctive about radical industrial policy
and what value such an approach adds. We also reflect on the limitations of
industrial policy, especially under globalized and financialized capitalism. The
effects of industrial policy on the balance of power are likely to be contingent and
conjuncturally specific, and we discuss the factors affecting these outcomes. Finally,
we consider the possibilities for radical industrial policies in current global and
national conditions.
¹ See also, for instance, Berik, Rodgers, and Seguino (), Braunstein (), Çağatay and Özler
(), Elson and Pearson (), İzdeş and Tregenna (), Kucera and Tejani (), and Seguino
and Braunstein ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
. R A R
M I
..................................................................................................................................
Here we discuss radical approaches to the role of manufacturing in growth and
development at a theoretical level. Rather than attempting to survey all ‘radical’
approaches to these issues, we focus on the structuralist and Kaldorian traditions,
and on a Marxist approach.
The approach to sectors is one of the important dimensions along which main-
stream and heterodox economics can be distinguished. Mainstream economic
approaches are generally sector neutral in the sense that the marginal effects of an
additional unit of value added or of labour on growth do not vary by sector. Sectors are
seen primarily as a way of classifying economic activities. While there is recognition of
common characteristics within sectors, the growth process itself is not seen as sector
specific.
In contrast, heterodox approaches tend to view growth as sector specific. This is in
the sense of the composition of output and employment affecting the potentiality of
growth, and marginal increases in value added or labour affecting growth differently
depending on the sector in which these increases occur. More specifically, the manu-
facturing sector is deemed to have a special role to play as an engine of economic
growth, as discussed in section .. below.
.. Kaldorian and Structuralist Approaches:
Manufacturing as a Special Engine of Growth
Among the various heterodox schools of thought, it is in Kaldorian and structuralist
approaches that the sector specificity of growth and the special role of manufacturing
come out most clearly.² The structuralist approach to development was first developed
by economists associated with the Economic Commission for Latin America and
the Caribbean (ECLAC). ECLAC identified the dual problems of foreign exchange
constraints and the tendency towards deterioration in the terms of trade for commod-
ity exports as holding back sustainable growth in developing countries. These problems
derive both from the structure of production in developing countries, and from the
nature of articulation between ‘periphery’ countries on the one hand, and ‘core’ or
‘centre’ economies on the other hand. In structuralist thought, manufacturing mat-
ters and growth is product specific both on the supply side and on the demand side.
From this perspective, industrialization is the key—or in fact the only viable—path
² See Ocampo, Chapter , this volume for a discussion of the structuralist approach to industrial
policy.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
through which developing countries can catch up with advanced economies
(Blankenburg et al., ).
The importance of manufacturing as an engine of growth was theorized and
formalized through Kaldor’s three laws (Kaldor, , , ). In brief, the first
of these laws states that faster output growth in manufacturing is associated with faster
aggregate economic growth. The second law, also known as Verdoorn’s Law (see
Verdoorn, []), states that productivity growth in manufacturing is endogen-
ous to the growth of manufacturing output. According to the third law, aggregate
productivity growth is positively related to the growth of manufacturing output and
employment. The Kaldorian school of thought thus emphasizes the special role of
manufacturing in driving economic growth. Kaldor’s views of increasing returns build
on the ideas of Young (), who emphasized the importance of dynamic increasing
returns as distinct from firm-level static increasing returns. Cramer and Tregenna
() argue that one of the ways in which mainstream and heterodox approaches
differ is in the recognition and treatment of increasing returns. In neoclassical thought,
increasing returns are typically either ignored or are dealt with in an extremely limited
fashion (see Best, ).³ Superior scope for dynamic increasing returns in manufac-
turing, relative to other sectors, is one of the key premises for a special role for
manufacturing and for the emphasis on industrialization.
Schumpeter’s wide-ranging contributions to economics also have implications for
understanding the dynamics of accumulation, including around business cycles and
long waves, innovation, and entrepreneurship. While Schumpeter’s approach is fun-
damentally different from Marx’s, he does draw on insights from Marx, including
around the instability of capitalism and the inevitability of crises (see Rosenberg, ).
Schumpeter places less emphasis on class and exploitation, and more on the role of the
entrepreneur. (See Cimoli, Dosi, and Yu, Chapter in this volume, on evolutionary and
neo-Schumpeterian perspectives on technological change and industrial policy.)
Associated more or less directly with these traditions within heterodox economics
have been various applied studies, especially over the past three decades or so, of
country and regional industrialization experiences. Seminal contributions on East
Asian industrialization include Amsden (, ), Chang (), and Wade
(). Oqubay () is a recent study of the case of Ethiopia, from a similar
theoretical standpoint. These studies bear out the ongoing relevance of industrializa-
tion.⁴ We return below to the implications of different theoretical perspectives for
industrial policy and to an appraisal of experiences of radical industrial policy.
³ Also of interest here is Babbage’s view of the ‘law of multiples’ in industrial production, which
relates to increasing returns and the division of labour and to the problem of indivisibility, and to the
sector specificity of this. This has implications for the scaling up of industrial production, and hence for
industrial policy (see Andreoni and Scazzieri, ).
⁴ See also the country and regional experiences of industrial policy discussed in Parts IV and V of this
volume, which draw attention to the diverse experiences of industrial policy and industrialization
internationally and over time.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
.. A Marxist Approach to Manufacturing and
Industrialization
Marxist economics takes a fundamentally different starting point from these other
heterodox approaches and uses different categories of analysis. While Kaldorian/
structuralist traditions differ from mainstream economics in their approach to the
sector specificity or sector neutrality of growth, they share a view of economic activity
as categorized in the first instance in sectors. In Marx, by contrast, the basic issue is
whether or not an activity is productive of surplus value (Tregenna, , ).
Surplus value is generated in the (capitalistic) production of commodities. The primary
basis for classifying economic activities in a Marxist schema is thus according to their
position in the circuit of capital, and this does not fully coincide with sectoral
distinctions.
While sectors are not the starting point in a Marxist approach, such an approach is
also not sector neutral. Marx does discuss sectors at length in various works, and
identifies a special role for manufacturing in the processes of accumulation and growth.
In fact, Tregenna () argues that the special characteristics of manufacturing that
are associated with the structuralist and Kaldorian traditions (see earlier discussion)
can be traced to Marx’s own writings.
What Marx terms ‘modern machine industry’ is central to what he sees as the
progressivity and dynamism of the capitalist accumulation process. He regards mech-
anization and industrialization as closely linked with the overcoming of human
limitations in the production process, with competition between firms, with the
concentration of ownership and control and the associated emergence of large-scale
enterprises, and with the internationalization of production (Marx, [],
[]; Marx and Engels, [/]). Marx’s analysis was animated by the
dramatic transformations rendered by the First Industrial Revolution; he observed
both the exploitation and social misery occasioned by this, as well as the unprecedented
pace of accumulation and of technological and economic progress.
More specifically, Marx identifies the features of manufacturing that lend it dyna-
mism and provide the basis for sustained growth in the rate of relative surplus value as
including: scope for both the division of labour and the socialization of labour;
technological advancement; mechanization; learning by doing; increasing returns to
scale; and overall, stronger potential for cumulative productivity increases (Tregenna,
, ; see also Ricoy, ). We can perceive here the commonalities between
Marx’s view of manufacturing and the Kaldorian and structuralist traditions that
emerged in the second half of the twentieth century.
For Marx, cumulative causation in manufacturing provides the basis for sustained
growth in the productivity of labour, and thence in the rate of relative surplus value.
With the rate of relative surplus-value production being central to the rate of accumu-
lation, we can then see the sector specificity of growth in a Marxist approach (see
Tregenna, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
As with non-Marxist radical approaches, Marx sees industrialization not only as
central to accumulation and growth, but as transformative of wider social relations
(see, for example, Marx and Engels, [/]). Of course, an important difference
between Marxist and other radical approaches is that, in Marxism, the analytical
framework is part of a broader political project for revolutionizing the way that
production is organized and the very nature of society, as discussed elsewhere in this
chapter. Furthermore, while Marx is concerned with accumulation and growth and
with the dynamism of capitalism, it is exploitation and class relations that take centre
stage rather than economic growth and catching up between countries.
Both Marxist and structuralist/Kaldorian perspectives recognize the sector speci-
ficity of growth, but a Marxist analysis is arguably less ‘sector fundamentalist’ than in
the structuralist and Kaldorian traditions. From a Marxist stance, there is a great deal
of heterogeneity within sectors, as sectors comprise activities with totally different
relationships to the production and distribution of surplus value (see Tregenna, ,
). Manufacturing is seen as having a special role to play in accumulation and
growth, yet not all manufacturing activities necessarily have greater scope for pro-
ducing relative surplus value than all (capitalist commodity-producing) activities in
other sectors.
In this section, we have discussed different approaches to sector specificity and to the
role of manufacturing and to industrialization. We have drawn out the commonalities
between different radical approaches (in contradistinction to mainstream economics),
as well as some pertinent differences between them. Different conceptualizations of
manufacturing and industrialization discussed here are part of fundamentally different
political projects, with different concerns and aspirations. Moreover, these conceptu-
alizations lead to different policy perspectives, in particular around the role and nature
of industrial policy. This is the focus of section ..
. M I P:
B S D
..................................................................................................................................
Marx’s analysis of capital accumulation and of capitalism goes beyond what might be
called a technical analysis of the role of manufacturing in industrialization or a sector-
specific conception of growth. Marx’s concern is with the overall dynamics of accu-
mulation and how they are founded upon, and reproduce, class differences and entail
processes of class exploitation. As such, Marx is concerned with issues of the creation,
circulation, and distribution of value, the power relations involved in this and the
struggles that ensue, as well as with crises, as central dynamics of accumulation. In this
section we look, first, at how Marx goes beyond the technical in ways that are both
similar to, and different from, structuralist analyses. Second, we argue that radical
approaches to industrial policy can be understood at both analytical and prescriptive
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
levels. Third, we use the example of the climate crisis to argue the case for radical
industrial policy today.
.. Value, Exploitation, and Power in Capitalism
Through his critique of classical political economy, Marx developed an analysis of
capital accumulation that demonstrates its dynamic and radical nature, particularly
when compared to earlier modes of production, but also its exploitative and destructive
character. Competition between rival units of capital drives capitalists to innovate and
to restructure production ‘on pain of death’, producing a tendency to drive up
productivity and for capital to expand across the globe. This makes technical change
far more rapid and systematic than in previous modes of production. At the same time,
capitalist accumulation is based upon the subjugation of labour to capital, as property-
less labour is forced to sell its labour power to capital in order to survive, and
competition compels capitals to seek new ways to increase surplus-value extraction.
Capitalist accumulation is therefore inherently unequal and contradictory, and it is
not only the market and the sphere of exchange, but also the relations of production,
that are critical for Marx (Brenner, ; Weeks, ). It follows that an equitable
society requires a profound reorganization of society and the reorientation of work and
production to meet human needs and not simply the goal of profit (Spencer, ).⁵
The problematic for Marx, then, is that of capitalist industrial development, not
industrial development per se. The state, the subject of some debate within Marxism
(see, for example, Clarke, ), is also viewed as part of capitalist social relations.
Marx’s analysis is inherently concerned with power relations and dynamics in
understanding any economy, and in understanding world economy. A concern with
power relations is also true of structuralist approaches. Prebisch, for example, high-
lights several reasons for the declining terms of trade for developing-country exports
that are political in nature and/or relate to industrial organization and industrial
relations; he underscores the power of the centre to maintain control over the benefits
of technology; he points to the need for ‘social legislation’ to ensure real wage increases
(in tandem with industrial development); and posits the overall goal of industrializa-
tion to be to ‘increase the measurable well-being of the masses’ (Prebisch, : ).
Hirschman, too, grasped such dynamics, was a committed Marxist in his youth
(Adelman, ), and remained in critical dialogue with Marxism. Hirschman devel-
oped the idea that development would be accelerated through investment (either
private or public) in projects and industries with strong forward or backward linkages
because of the induced investment effect or the ‘push factors’ which come from the
⁵ For reasons of space we are unable to discuss current debates around post-work and connected
policy measures, such as a universal basic income. For relevant suggestions, see Spencer ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
product side, arguing that it is not simply incomes and demand that govern investment
(Hirschman, , ). We noted in section .. the importance of growth pulling
backward linkages: ‘backward linkages lead to new investment in input-supplying
facilities and forward linkages to investment in output-using facilities’ (Hirschman,
: ). To these production linkages he added consumption and fiscal linkages and
what he called inside and outside linkages.
Hirschman’s conception of linkages is worth discussing further as it demonstrates
both strengths and weaknesses in structuralist analysis. Hirschman points to how
different ‘constellations’ of linkages can profoundly shape a specific pattern of eco-
nomic development, be it in terms of the balance between the different types of
linkages, the speed and strength of linkage development, the sequencing of the devel-
opment of linkages, or how ‘technological gaps’ can hinder the development of
production linkages. For example, he argues that strong fiscal linkages in the context
of a lack of productive investment (or weak production linkages) can lead to a growth
in bureaucracy, wasteful spending, such as on armaments, and/or a surge in imported
consumer goods with concomitant impact on the balance of payments. In another
context, customs duties on imported manufactures used in staple exports may seem
desirable, but this is self-defeating if funds are simply used for infrastructure that only
further aids staple exports.
Hirschman’s insights continue to be of contemporary relevance for industrial policy
and development more broadly. Indeed, he argues that his approach could be seen as
an instance of ‘micro-Marxism’ (: ), an attempt to show how ‘the shape of
economic development, including its social and political components, can be traced to
the specific economic activities a country undertakes’ (: ). Countries will have
different experiences according to ‘different linkage constellations’ (: ). Indus-
trialization can be viewed as a ‘changing structure of linkages’ (Fine and Rustomjee,
: ) with attendant implications for industrial policy.
Yet, from a radical perspective, there are important limits to Hirschman’s concep-
tualization, specifically a lack of emphasis on class relations and dynamics in under-
standing industrialization processes. Fine and Rustomjee (), in their account of the
industrialization of South Africa, provide both an account of industrialization in a
particular place, and a methodology grounded in Marxism for examining particular
processes of industrialization. They argue that Hirschman tends, not without contra-
dictions, largely to suggest that a potential linkage will call forth the corresponding
agency necessary to bring it about, be it public or private. They argue instead that
which classes forge linkages, and how particular class interests are brought to bear in
these processes, is critical to understanding how industrialization develops (see also
Sender and Smith, ). And so, in accounting for development in South Africa, Fine
and Rustomjee emphasize linking class and economic structure together with the role
played by the state and industrial policy. The result of this analysis is Fine and
Rustomjee’s idea of South Africa being dominated by a (changing) ‘minerals‒energy
complex’, which is an analysis of industrial development that empirically identifies
input‒output linkages between sectors. This analysis ties these patterns of linkage to the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
different dimensions of interdependencies between fractions of capital, industrial
sectors, and the state. Their analysis involves economic and political scrutiny (includ-
ing of the state) through an emphasis on evolving class relations and conflicts and how
these are reflected in patterns of accumulation and economic and social reproduction
over time.
.. Industrial Policy: The Analytic and the Prescriptive
Marxist industrial policy can be seen to operate at two levels: the analytic and the
prescriptive. We discuss each in turn.
The analytic can be said to be the analysis of ‘actually existing’ capitalism, both the
historic centres of accumulation and empire, and the late developers. This entails a
critique of mainstream accounts of capitalism, with its emphasis on self-regulating,
dynamic, market-based processes. There is, therefore, considerable overlap with the
perspectives advanced by the ‘developmental state’ (DS) approach, which has focused
on the reality of state intervention to bring about rapid rates of capital accumulation
and structural change in East Asia (see, for instance, Amsden, ; Chang, ;
Wade, ), with South Korean macroeconomic policy, for example, understood as
‘investment management’ (Chang, : ). This approach emerged out of a critique
of neo-liberalism and, in contrast to the sector neutrality of neo-liberal theories of
economic growth, the DS approach recognizes the specific role of manufacturing in
economic dynamism and growth. This work, with its emphasis on state intervention
in, and state guidance of, late industrial development, has provided rich insights from
history (see, for example, Chang, ). Following Gerschenkron (), ‘late’ devel-
opment (late in the context of an already developed world market), is seen as requiring
more effort by the state, not less. This brings forth a variety of institutional innovations,
not least in the financing of industrialization. This literature both critiques the main-
stream and discusses important aspects of industrial development, such as strategic
mixing of incentivizing and disciplining capital (Amsden, , ; Di Maio, );
‘embedded autonomy’ (Evans, ); and the role played by political settlements and
political economy more broadly in patterns of economic development, including, for
example, corruption (Khan, ; Behuria, Buur, and Gray, ).
There are also important Marxist criticisms of the DS approach (Ashman, Fine, and
Newman, ; and see the essays collected in Fine, Saraswati, and Tavasci, ).
Utilizing a Marxist approach to the state and accumulation, to the theorization of
both state and market, and the relationship between the two, these perspectives place
greater and more systematic emphasis on issues around labour exploitation and
struggle and the frequent instances of labour repression within the processes of late
industrialization.
The major issues can be summarized as follows. First: the tendency towards a
technical-industrial conception of broader capitalist development which downplays
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the social antagonisms inherent in capitalist development, and which tends to see the
state in neutral terms (Chang, ; Selwyn, ). Second: a certain teleology, if at
times only vestigial, about development and industrialization and what is necessary to
bring it about, rather than a recognition of the possibilities for regression, marginal-
ization, or of its skewed, partial, or ‘combined and uneven’ nature (Ashman, ).
Third: lack of recognition of capitalism as a world system with distinctive phases of
development that shape and condition the development of its constitutive parts.
Specificities of conditions in a particular period may not apply at another time
(Chibber, ) and today the financialization of the world economy and the
internationalization of production networks pose new challenges. The interconnec-
tions of the world capitalist system mean that the development of one affects the
prospects for the development of others, with acute competition limiting the pros-
pects for all to succeed, and endemic crises pointing to the impermanence of gains.
Manufacturing is not specially protected (despite knowledge gains) from crises,
radical restructuring, or ‘spatial fixes’, pointing to the limitations of nation-centric
views and of national(ist) strategies for development (Song, ). Fourth, as already
noted: the labour repression of late development and the tendency to neglect or
downplay labour exploitation.
Fifth, and finally: the question of whose standpoint is adopted. Selwyn () argues
that the DS approach generally takes the view of an elite strategy for catch-up, and
advocates policies that may give rise to faster rates of accumulation, but may not
necessarily benefit society as a whole. Burkett and Hart-Landsberg () argue that
catch-up views tend to see labour as passive, merely an instrument of accumulation and
growth, that mass movements are merely disruptive of accumulation, and that ‘popular
forces’ cannot be conceivers of, and contributors to, development.
We should note at this point that state intervention is not without contradictions.
Analysts of welfare have argued rightly that the universal provision of welfare has the
potential to reduce the inequality involved in market-based provision, and in socializ-
ing the costs of caring (for children, for the aged, for the sick and disabled), effectively
decommodifies provision and promotes collective over individualized values, and
collective over individual or market-based solutions to both social needs and social
problems (Esping-Andersen, ). The nationalization of industries, similarly, while
often forced by economic crisis and war, has also provided gains in terms of labour
conditions and trade union representation and protection from the market.
In a sense, radical industrial policy can be seen as exploiting the contradictions of the
state, by, on behalf of, and (potentially) with the active involvement of, labour, women,
and the poor. This is important, as the same policies can be very different in different
contexts according to the social forces pursuing them, for example, capital controls in
Chile (Soederberg, ) compared with South Africa (Alami, ).
This leads us to the prescriptive dimensions of radical industrial policy. At the level
of the prescriptive, or of advocacy, we suggest that industrial policy needs yardsticks to
assess its efficacy. We suggest a broad conception of industrial policy designed to meet
basic social needs (not to be confused with a basic-needs approach) and to generate
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
employment. A broad-based conception of industrial policy seeks out the connections
between industrial and social policy with health provision, mass public transport, and
housing, for example, simultaneously meeting basic social needs, generating employ-
ment, and stimulating backward and forward linkages (MERG, ). Public health
provision requires skilled and unskilled labour as well as infrastructure and there are
potential connections with pharmaceutical policies. Radical industrial policy would
also contribute broadly to a more egalitarian distribution of income and wealth, and to
transforming social relations along gender, class, racial, and other dimensions.
Diversification to a more broad-based and therefore equitable economic structure
can be connected with defending labour and socializing production to meet these basic
social needs. In addition, strengthening the redistributive capacities of the state, not
least through taxation, restriction on tax avoidance, and base erosion profit shifting in
order to fund collective rather than private provision of essential services, can offer
protections against the market and commodification, and potentially go beyond the
market. But radical industrial policy can only assist progressive change to the extent that
it strengthens labour, civil society, and social movements, and promotes democracy and
has a view to moving towards socializing the economy under democratic control.
.. Climate Change: The Potential and Necessity
of Radical Industrial Policy Today
The United Nations warned in that the world has twelve years to take the action
necessary to keep global warming to a maximum of . C, beyond which intense heat,
flooding, drought, and poverty will follow for many (Watts, ). Others suggest there
is even less time to radically decarbonize the world economy in order to avoid a
disastrous level of global warming. What has become clear is that climate change is
moving faster than previously thought, and its effects will be more rapid and severe.
We use a brief discussion of the climate emergency to illustrate some of the broader
arguments of the chapter.
The roots of the climate crisis lie precisely in the industrial development being
discussed in this volume, and in capital’s dependence upon particular commodities.
The CO₂ emissions that arise from coal, oil, and gas—what Malm () calls
‘fossil capital’—are not the only drivers of climate change, but they are by far the
largest. Fossil fuels are critical for the production of surplus value across an
enormous spectrum of commodities. Coal, in particular, has been the ‘the fuel
transmitting motion to the labour process’ (Malm, : ). The climate crisis is
an unintended consequence of industrial development and industrial policy in
many parts of the world. Now, industrial policy, and more besides, is necessary
to address it. But as a consequence of the very power relations we have discussed,
fossil capital continues to grow (alongside the growing green economy), and
continues to be funded by the big banks (Rainforest Action Network, ). Energy
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
is increasingly financialized, with private equity, hedge funds, and the whole
shadow banking sector involved in the speculative trading of fossil capital. This
financialization exists now across every aspect of everyday life, but power and
nature have become increasingly intertwined.
While there is a certain irony in radical industrial policy to address climate change,
the consequences of failure to do so will be severe. Non-linear processes set in train by
the warming of the planet mean that once we reach a certain point, the impact will be
beyond human control and we will face ‘runaway climate change’ (Bendell, : ).
This means we must accept ‘collapse as inevitable, catastrophe as probable, and
extinction as possible’ (Bendell, : ). Social collapse—by which Bendell means
‘starvation, destruction, migration, disease, and war’—is already with us.⁶
The scale of the problem can lead to despair, as encapsulated in the remark,
attributed both to Jameson and to Žižek, that ‘it’s easier to imagine an end to the
world than an end to capitalism’ (Fisher, ). But Bendell argues that recognizing the
possibilities of collapse, catastrophe, and extinction can also produce something
positive: ‘a shedding of concern for conforming to the status quo, and a new creativity
about what to focus on going forward’ (Bendell, : ). The climate strikes by
schoolchildren and the discussion of the need for a Green New Deal may support such
a view.
There is growing awareness of this within industrial policy circles (see Pollin,
Chapter in this volume, as well as Altenburg and Assmann, ; Altenburg
and Rodrik, ; Rodrik, ). Yet it is tempting for developing-country govern-
ments to implement industrial policy that, in trying to break out of commodity
export dependence, disregards the impact of policy on climate change. UNCTAD
(: ) shows that some energy export-dependent countries have increased their
non-commodity exports by adding value to downstream energy sectors—a ‘good
news’ story. Yet this has been achieved by increasing the share of chemicals in these
countries’ exports. Between and , Trinidad and Tobago increased the
share of (petrol-based) chemicals in its exports by nearly per cent, from . per
cent to . per cent. Oman increased the share of chemicals in its exports from
per cent to . per cent during the same period, mainly through fertilizer manufacture.
The UAE, Qatar, and Saudi Arabia have increased production of petroleum and gas-
based products, and Bahrain utilized their rich energy resources and began aluminium
production which is highly energy intensive (UNCTAD, : ). Instead of
⁶ Neale () argues that the imagery of social collapse brought about by climate change tends to be
that of wandering nomads in a post-apocalyptic world where society has fallen totally apart. Instead, he
argues, it will be nothing of the sort: the elites presently with power will intensify their rule, and climate
collapse is more likely to come ‘with tanks on the streets and the military or the fascists taking power.
Those generals will talk in deep green language. They will speak of degrowth, and the boundaries of
planetary ecology . . . and they will build a new kind of gross green inequality. And in a world of
ecological freefall, it will take cruelty on an unprecedented scale to keep their inequality in place.’
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
diversifying out of fossil fuels, these policies reinforce both their centrality and their
climate impact.
There is insufficient space in the present chapter for a thorough discussion of the
policy measures needed to address climate change beyond pointing to areas of
potential. Tackling climate change requires nearly all the burning of coal, oil, and
gas to be ended. This cannot be achieved through market-based solutions, innovative
entrepreneurial efforts to drive ‘green growth’, or the kind of mainstream approaches
that tend to emphasize incentivizing firm and individual consumer behaviour (Klein,
). It requires radical state intervention, the creation of millions of public-sector
climate jobs, and the extension and deepening of economic democracy and planning.
The Green New Deal under discussion in the United States and elsewhere, though
not without its limitations, proposes to simultaneously tackle climate change and
inequality. This is intended to be achieved through economic planning and industrial
policy measures to bring about mobilization for the environment, in a way that
resources were previously mobilized for war. For many advocates of a Green New
Deal, planning and democracy need to go together, to encompass labour and trade
union involvement, while others advocate increased ‘energy democracy’ to bring
about the necessary democratization of energy policy.
Meeting basic needs in a green way, reorienting priorities towards local production
to meet local needs—including more local food production and so less packaging and
transport—would result in a degree of ‘de-globalization’ of the world economy.
‘Climate jobs’, which seek to minimize greenhouse gas emissions and maximize
employment, have been advocated to address simultaneously the crises of unemploy-
ment and climate change. Such climate jobs could contribute to meeting the basic
needs of communities in an equitable and sustainable way, with linkages focusing on
jobs created in renewable energy (especially wind and solar power), retrofitting of
buildings, new construction methods, expanded public transport (run increasingly on
renewable energy), and re-employment or support for those in coal and other sectors
who would lose their jobs. Relating back to the earlier discussion, it could be argued
(adding a Kaldorian twist) that we can contrast the extraction of energy under
diminishing returns (coal, oil, gas) with the harvesting of energy under increasing
returns (solar, wind power).
In this section, we have emphasized the distinctiveness of a radical approach to
industrial development. Marx’s holistic account of capitalist industrial development
moves beyond issues revolving around the role of sectors and development, though
overlaps exist. We have argued that radical industrial policy operates at both the
analytic and prescriptive levels. Capitalism creates interconnected crises: economic
crises such as the recent global financial crisis, crises of war and global competition, crises
of food, of health, of resources, and sustainability (Tabb, ). The climate crisis, we
argue, reveals the possibility and the necessity for radical industrial policy today (and
radical action more generally), though there are limits to what can be achieved within
the constraints of the current social relations of production, which we explore in
section ..
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. E ‘R’ I
P
..................................................................................................................................
This section discusses the ‘radical’ content of industrial policies that, to different
extents, have been informed by a desire to transform the organization of production
and capital‒labour relations. While by no means comprehensive, examples have been
selected to illustrate key features of, and challenges to, ‘radical’ industrial policy. In
particular, we highlight the ways in which tensions between economic imperatives for
rapid industrial development on the one hand, and the balance of social forces and the
development of participatory democracy as they relate to the state on the other, have
been dealt with. These historical experiences have been loosely categorized here as
statist approaches that are centred on state planning and national development, labour-
centred co-operative approaches that focus on workers’ democracy in the local organ-
ization of production, and examples of industrial policy under participatory planning
systems. There are very broad categorizations to organize our discussion, with consid-
erable diversity within each as well as some commonality among these loose categories.
For example, we discuss the Soviet Union and East Asia together, despite not only the
fundamental differences between their industrial policies but also the broader political
and economic characteristics of these models, and we discuss Cuba and Yugoslavia as
examples of industrial policy under participatory planning systems. There are some
relevant commonalities between these approaches (Cuba’s in particular) and that of the
Soviet Union that we discuss in a different category.
.. Statist Models of Industrialization
Statist models of industrialization include the—very different—models of ‘top-down’
industrial development in the Soviet Union and the earlier developmental states of East
Asia, as well as more recent examples from China and Vietnam. Many technical aspects
of radical industrial policy discussed above were present in statist industrialization
experiences. Economists such as Kritsman, who worked in the Soviet State Planning
Commission during the s, were early pioneers of the ideas of iteration and linkage
as a way of understanding sectoral interrelationships and the growth-pulling potential
of building industries with significant backward linkages. Leontief, who later developed
the input‒output production model, worked in the Soviet planning establishment in
the early s. Stalin’s priority sectors, according to later assessment by Chenery and
Watanabe (), appeared to be those with maximum linkage effects, and there was
considerable success in developing domestic linkages (backward linkages in particular)
and the minimization of bottlenecks through highly effective mobilization of resources
and high rates of fixed capital investment.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Statist models prioritized the development of productive forces over the develop-
ment of democratic participation by labour. In different ways in the Soviet Union and
the East Asian developmental states, the focus was on state‒capital relations and the
need for the state to dominate and/or command capital. In the Soviet Union, this took
the form of direct state ownership over the means of production and the state’s ability
to command and deploy surpluses in the economy. In East Asia, the state‒capital
relation took the form of the role of the state in regulating, directing, and disciplining
private business.
In line with the radical ideas on the role of manufacturing in economic development
we have already discussed, development under Stalin was, ‘identified with industrial-
ization, industrialization would be impossible without capital-intensive techniques,
which meant high savings/investment ratios’ (Dyker, : ). In the absence of foreign
credit, Stalin saw it as necessary to ‘pump over’ surpluses from the peasantry to fuel
accumulation in the modern sector. This reflected a crude version of Preobrazhensky’s
theory of ‘primitive socialist accumulation’ and entailed a campaign of collectivization
(Dyker, : ). Industrialization was directed, top down, according to heavy central-
ization and the command principle, via a series of five-year plans that prioritized the
development of heavy industry and the de-prioritization of light labour-intensive
industry that had been the focus of earlier Soviet industrialization strategy.
While the East Asian model can also be characterized as statist, this was under
capitalism with strong developmental states that pushed a strong industrialization
agenda. The strength of these states, combined with a high degree of bureaucratic
autonomy, were seen as key to the success of state-directed investment to promote the
concentration of capital and rising productivity and competitiveness via incentive
structures and disciplinary mechanisms. The state protected and supported domestic
business, including through subsidies and through captive domestic markets, yet by
disciplining capital ensured that the rents from this were reinvested in investment,
upgrading, and expansion. The role of the state in pushing firms to compete in export
markets was one of the disciplining mechanisms used to ensure that this reinvestment
materialized, facilitating rapid growth in productivity and an extraordinary record of
economic growth sustained over a long period of time. This transformed not only
living standards but also social relations in East Asian countries.
One condition for state domination that has been identified by DS theorists has been
that of ‘weak labour’ (Amsden, : ). Authoritarianism and the repression of
labour has been an enduring feature of statist approaches to industrial development. It
has been argued that the success of catch-up industrialization in East Asia is associated
in part with the isolation and suppression of workers and social movements and the
political geography established by the Cold War and the US foreign aid inflows that
this engendered (Chang, ).
In the Soviet Union, workers had limited scope for democratic participation either
politically or economically. Furthermore, mass collectivization and the shift in
priority from light to heavy industry under Stalin destroyed the (unofficial and
voluntary) co-operative organization of production, based upon principles of democratic
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
participation that had been emerging under Lenin’s leadership. Lenin had a cautious
attitude towards the establishment of communes and equalization and collective
consumption in advance of developments in production and the creation of abun-
dance. Rather than supporting development of the communes towards wider social
provisioning and consumption, the prioritizing of rapid industrial development
entailed the expansion of agricultural surplus by intensification of production and
downward pressure on consumption.
Successful industrial development did raise average living standards in the Soviet
Union and East Asia, but this success was in the context of very limited scope for
workers’ democratic participation. This raises difficult questions around the compati-
bility of statist models of industrialization with vibrant participatory democracies,
especially in the twenty-first century.
.. Labour-centred Industrial Development:
Worker Co-operatives
The neo-liberal assault on labour organization and the subsequent decline in the
structural power of labour vis-à-vis capital manifest in capital’s rising share in
the functional distribution of income across both the Global North and South, has
inspired greater attention to alternative economic organization conducive to more
equitable and sustainable distribution in the context of austerity. Industrial policy at
the local level, based upon citizen cooperation and shared wealth, has sprung up in the
wake of austerity in, for example, Cleveland, United States and Preston, United
Kingdom, where new models of municipal socialism have been developed that draw
from the experiences of successful co-operatives—in particular the Mondragon co-
operatives of Spain’s Basque region. These local approaches stress the role of develop-
ment in meeting human needs as well as the scope this offers for green transitioning.
Participatory models of industrial organization have a long history and have
co-existed within a wider context of capitalist relations of production. Studies of
participatory forms of economic organization have variously identified the economic
and social benefits of workplace democracy, which include: improved productivity;
greater contribution to social development than purely private enterprise; improved
conditions of work; improved health outcomes associated with better work‒life balance
and greater autonomy; a more equitable distribution between profit and wages/man-
agers and workers; and greater resilience (Foley and Polanyi, ; Pencavel, ;
NEF, ). Yet, co-operative ownership of businesses is marginal compared with
capital ownership. Where co-operatives have endured, such as the Mondragon Group,
they have undergone significant restructuring that has included a gradual degeneration
from democratic forms to capitalist forms of organization in the face of globalization
and capitalist competition. This suggests that, in the absence of supportive policies, in
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
particular those that redress the power imbalance between capital and labour in society,
the expansion of workers’ participation in production will be limited.
The Mondragon complex, which consists of a network of linked productive oper-
ations, was founded in on three institutional bases. First, a system for technical
education. Second, the League of Education and Culture, which played a central role in
linking the education system to co-operative firms and in the management of any legal
and political issues with local and national government. And third, the credit union
the Caja Laboral Popular, which was founded to support the expansion of industrial
co-operatives and thus operated on the principle of long-term productive investment
and the reinvestment of profits (Errasti et al., ). Strong input‒output linkages,
together with a multi-layered institutional structure that amassed workers’ pension
savings and surpluses for long-term productive investment, and facilitated education,
research, and design, ensured that the dynamics of cumulative causation were not
hampered by limited access to capital or technical expertise.
Since the s, rising pressures associated with globalization and the increasingly
competitive environment that it engendered, have led to major changes in firms’
management structures. The complex was transformed into a uniform corporate
identity, the Mondragon Co-operative Corporation, with a centralized management
structure and more ‘rationalized’ organization of constitutive elements that involved
several mergers as well as the opting out of several co-operatives (Clamp, ).
Rationalization and corporatization of the co-operative complex had ensured its
survival and growth in an increasingly intensive and internationally competitive
environment, but at the expense of the degree of worker participation in management
and decision-making. The growth of Fagor Electrodomésticos, a leading co-operative in
Mondragon, for example, entailed a process of acquisition of capital-owned local and
foreign firms, and the group ultimately collapsed in . These challenges raise
questions around the viability of sustaining and expanding co-operative forms of
production, and maintaining democratic forms of decision-making within them,
within wider national and international economies that are market based.
Examples of enduring workers’ co-operatives in industrial production can also be
found in Kolkata, India, where such groups were formed in the s and s in
shipbuilding, aluminium cables and conductors, hosiery, printing works, and textiles
through workers’ takeover of industries in apparent decline (Bhowmik and Sarker,
). The enduring democratic participation of workers in these co-operatives can
be attributed to the lead taken by a strong trade union movement in their formation.
The union movement could both draw upon the support of wider membership for
workers’ co-operatives and, to an extent, negotiate with government. The high level
of internal democracy and collectivity has also been credited for their survival in light
of constrained access to finance and markets (Bhowmik and Sarker, ). These
co-operatives survived and maintained employment but did not flourish in the
competitive sense.
The existential tensions between market competition and the preservation of the
egalitarian and participatory ethos of co-operative models of production under
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
prevailing capitalist social relations are widely acknowledged (Gunn, ). At the local
level, governments have begun to experiment with forms of ‘municipal socialism’ in a
few localities in the United States and the United Kingdom, with policies that support
local enterprise and workers’ co-operatives.
The extent to which such programmes can contribute to the wider sustainable
structural transformation of production will depend upon the technical and political
content of policies, among other factors. Radical industrial policies require a polit-
ical economy of labour that is generated by collective action. The promotion of
co-operatives therefore needs to go hand in hand with policies that maximize
workers’ ability to generate and deploy their agential power. Challenges are also
posed by competitive and other pressures exerted by the wider market environ-
ments, beyond the local levels, within which these projects operate. Rather than the
imperative to generate additional capital through the exploitation of workers, a
labour-centred development approach sees the reproduction of labour as the main
objective, rather than the subsumption of labour to the objectives of capital.
.. Models of Industrial Policy with Participatory Planning
In this discussion, we present examples of industrial policy that have engaged with the
contradictions and tensions between economic development of productive forces and
social development in terms of the extension and deepening of democratic participa-
tion in economy and society. Some socialist states outside the Soviet Union, including
Cuba from and Yugoslavia after , pursued radical industrial policies that can
be deemed ‘developmental’. While recognizing the imperative for industrial develop-
ment, these states did not narrowly prioritize development of the forces of production.
In , Yugoslavia split from Stalin and abandoned the Soviet centralized model of
industrial development in favour of a form of central planning that aimed at greater
reliance on the domestic and world market and workers’ control over enterprise
(Estrin, ). Between and , a series of reforms replaced vertical command
planning with ‘direct horizontal relations between more autonomous enterprise
through a regulated market’—a model that became known as market socialism
(Estrin, : ). In contrast to industrial development in the Soviet Union, institu-
tional structures were set up to promote the self-management of enterprise by workers
with high levels of participation by workers in decision-making, particularly over
questions of welfare, employment, and pay, while managers retained much of the
decision-making power over investment (Estrin, ).
Further reforms between and sought to extend democratic participation
by workers beyond decision-making at the level of the enterprise. This involved the
breaking up of enterprises into their constituent establishments or workshops, called
Basic Organizations of Associate Labor (BOALs), each with its own apparatus of self-
management that replaced the enterprise in law. Individual BOALs then worked
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
collaboratively based upon mutual agreements with the effect of replacing competition
(between enterprises) with wider cooperation in the system. Further, the devolution of
state power to the level of the republics represented a shift to a federal political
structure that promoted the involvement of all interested parties in the process of
policymaking and implementation (Estrin, ).
In the case of Cuba, the development process has been characterized by ‘the need to
industrialize and the imperative of social participation in the development process’
(Cole, : ). Even though these objectives were at times in conflict, their resolution
marked the evolution of socialist development in Cuba, which has entailed the deep-
ening of participation in the organization of society. The ‘dialectic between the political
and the economic has been the central dynamic of policy and change’ in Cuba (García
Brigos quoted by Cole, : ).
In this way, Cuban development strategies developed through various iterations
reflecting these tensions. A period of ‘idealistic spontaneity’ (‒) was followed by
‘centralized pragmatism’ (‒) and Soviet-style central planning (‒),
reflecting economic imperatives that were not met in the earlier phases. Central
planning saw subsequent adaptations to promote popular participation that had been
marginalized by Soviet-type planning focused on accelerated accumulation. The Rec-
tification Campaign (‒) saw the culmination of political sentiments in the
building of institutional structures for greater citizen participation. While industrial
development has been linked to social provisioning by leveraging public procurement,
notably in healthcare (Tancer, ), capital accumulation remained centred on the
agro-industrial complex and commodity exports.
With the collapse of the Soviet Union, Cuba opened a window to the world
economy, allowing foreign investment as a source of capital, resources, expertise, and
markets. Industrial strategy focused on biotechnology, pharmaceutical, and medical
equipment industries that had developed to a level that could compete with developed
countries. Development of the Cuban biotechnology industry, for example, reflects
elements of radical industrial policy outlined above, in the linking of industrial
development with public provisioning and also in the organization of production
units strategically linked to a multi-institutional system that included universities
and research institutions fostering collaboration in innovation (Cárdenas, ). In
addition, there was a shift from large-scale monocrop industrial agriculture that had
been heavily dependent on imported inputs to small-scale, organic, or semi-organic
agriculture organized via co-operatives that boosted yields and food independence
(Cole, ). The period after also saw the deepening of forms of democratic
participation and involvement in decision-making (Cole, ). In this way, eco-
nomic liberalization of the early post-Soviet era and the institution of greater
economic specialization provided the opportunity for further socialist development
via deeper participation (Cole, ).
The aim of this cursory discussion of radical industrial policies in Yugoslavia and
Cuba is not to paint an unduly rosy or linear picture of economic and political
development, or to downplay the external and internal challenges these nations have
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
faced. Mistakes were made, and these development models have their own serious
limitations and constraints. Successive policy stages reflect an iterative approach that
sought to calibrate the dynamic relationship between economic and social imperatives
and attempts at deepening democracy.
Overall, the experiences of industrialization processes and the range of models
discussed in this section help to illuminate the radical content of industrial policies.
There are both economic and political dimensions to radical industrial policies. Radical
policies are class-conscious and do not focus on the narrow interests of elites. Rather,
they both stem from and are directed at a class project that places labour at its centre,
not only in the distribution of gains from development, but through direct economic
and political participation of workers. Radical industrial policy, then, entails both the
development of democracy and technical innovations in the organization of produc-
tion, the precise form of which itself evolves and is subject to ongoing contestation.
. C
..................................................................................................................................
In our survey, evaluation, and discussion of radical industrial policy, we have examined
the differences between mainstream and heterodox approaches to economic and
industrial development. The focus of the debate between the mainstream and the
heterodox has been around the question of whether or not growth is sector neutral
and, to a lesser extent, activity neutral. Heterodox approaches have argued that the
sectoral basis of output and employment will affect the pattern of growth and devel-
opment. We looked in particular at the similarities and the differences between
Kaldorian/structuralist approaches and Marxist ones. It is possible to identify points
of common ground, and indeed Marx can be seen to have provided analytical ante-
cedents for later approaches in his analysis of nineteenth-century industrial capitalism.
Structuralists have been primarily concerned with the balance-of-payments constraint
on growth (reflecting the structure of production) and the deteriorating terms of trade
for developing economies (the nature of the international system). Combined, these
hold back development. A radical perspective recognizes both the value and limits of
such arguments.
We see important differences between Kaldorian/structuralist approaches and
Marxist approaches. Marx’s concern is not with sectors but with value and the overall
circuit of capital. This view of a circuit of capital, integrating the different forms which
capital takes, is rooted at a more abstract level in a broader framework for understand-
ing capitalism as a mode of production that sees accumulation as founded upon
exploitative class relations between labour and capital, and where competition between
rival units of capital forces capital both to innovate and to increase the production of
surplus value. Marx’s problematic, for all his insights into modern machine produc-
tion, is concerned with the capitalist basis of production, not primarily with industrial
production. We have argued, therefore, that radical industrial policy foregrounds class
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
and capitalism, not sectors, and integrates a distinctive conception of the state: the
state as central to accumulation but which can also, in particular circumstances, be
leveraged to aid radical transformation if connected to broader social forces and
movements.
Connected to this, we have argued that radical industrial policy operates at two
levels, the analytical and the prescriptive. The analytical level refers to the understand-
ing of capitalist industrial development in particular contexts, integrating the role of
the state and diverging class interests, including patterns of linkages and the nature of
industrial policy interventions. Prescriptively, in radical industrial policy, the contra-
dictions of the state are exploited and there is a concern with meeting basic social
needs, maximizing employment-generating linkages, strengthening labour and dem-
ocracy, and, urgently, mitigating climate change. These are among the yardsticks by
which to assess industrial policy from a radical perspective.
Finally, we surveyed briefly some experiences of industrial policy, loosely dividing
them between statist and labour-centred. The economic imperatives for national
strategies of development have frequently entailed labour subordination to capital, as
the experience of the former Soviet Union attests: the construction of a centralized
command economy prioritizing ‘modernization’ and rapid accumulation, an approach
that was replicated in the five-year plans inspired by the Soviet Union in a number of
developmental states.
Discussing labour-centred industrial policy based on co-operative models of organ-
ization raises issues seemingly out of fashion in industrial policy circles and literature:
the economic and social benefit of workplace democracy in terms of improved condi-
tions of work; better work‒life balance; greater autonomy; a more equitable distribution
between profit and wages; and hence a reduction in inequality. It is difficult for
workers’ co-operatives to survive without supportive policies from the state. Yet if we
are to avoid/reverse the ‘race to the bottom’ and competition between workers, there
are models from which we could learn.
What, then, is the ‘value added’ of radical industrial policy? First, we argued that it
breaks out of the technical. It is not simply about economic growth and catch-up by
developing economies, nor is it simply about ‘sector fundamentalism’; indeed there are
profoundly different political projects embodied in Marxist vis-à-vis Kaldorian and
structuralist approaches to economic development and industrial policy, which stem
from their diverging assumptions.
Second, radical industrial policy has a distinctive analysis rooted in understanding
the dynamics of capitalism: accumulation, exploitation, and the state. Class-based
processes determine the nature and form of industrial development. Class is made
central, rather than sectors and activities, and both class and the state are critical to
understanding specific ‘constellations’ of linkages. These factors are brought to bear in
critiques of the developmental state approaches.
Third, radical industrial puts emphasis upon both economic and political dimensions,
and the avoidance of economic reductionism (a partner of technical conceptions). We
stressed this particularly in the necessity of labour’s active participation, and the radical
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
extension of democracy necessary for greater labour participation in defining the
priorities and methods of production, and in meeting the basic needs of the majority.
Finally, standpoint. Radical industrial policy does not take the standpoint of elites,
but is a class-based project with labour at its centre. In our discussion of radical
industrial policy and the climate crisis, we argued that only a radical extension of
state involvement and democracy can bring about the scale and speed of intervention
necessary to address this impending catastrophe.
Given this analysis, there are necessarily limits to what can be achieved by industrial
policy. Gains for labour are frequently temporary, ‘islands of socialism’ do not survive
long in seas of capitalism and genuine participatory projects remain utterly marginal to
global accumulation. The scale of the climate crisis can induce paralysis, yet it demands
imagining and striving for a more habitable and just economy, including through
public transport, democratic control over energy and water supplies, local production
to meet local needs, and the opening of borders to migrants displaced by climate
impacts (Klein, ).
Finally, what are the prospects for radical industrial policy today? While there is
growing mainstream acceptance of the need for industrial policy, there are widely
differing conceptions of what the appropriate goals and tools of industrial policy
should be. The financialization of the global economy has not been the major focus
of this chapter, yet this conditions the prospects for industrial policy today, be it radical
or otherwise. The present phase of capitalism has witnessed the unprecedented (albeit
uneven) internationalization of productive capital, and its restructuring as driven by
finance. ‘Downsize and distribute’ (Lazonick and O’Sullivan, ) has radically altered
the structure of many economies (along with the rise of China) and radically shifted the
balance of power towards capital. The neo-liberal state has been central to this
restructuring, and ‘finance-induced’ policy orthodoxy has meant price stability, and
high real interest rates continue to be given priority (Fine et al., ). Policies which
‘risk’ higher inflation or higher taxes are fiercely resisted, as are interventionist indus-
trial policies to restructure capital, not least to ward off the possibility that similar state
intervention may be extended to the financial sector. Radical industrial policy, as we
have argued, places power at its centre, and addressing the power of the financial sector
is an absolute necessity.
R
Adelman, Jeremy () Worldly Philosopher: The Odyssey of Albert O. Hirschman. Prince-
ton, NJ: Princeton University Press.
Alami, Ilias () ‘Capital Accumulation and Capital Controls in South Africa: A Class
Perspective’, Review of African Political Economy (): –.
Altenburg, Tilman and Claudia Assmann (eds) () Green Industrial Policy: Concepts,
Policies, Country Experiences. Geneva, Bonn: UN Environment, German Development
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Institute. Available at https://www.un-page.org/files/public/green_industrial_policy_book_
aw_web.pdf.
Altenburg, Tilman and Dani Rodrik () ‘Green Industrial Policy: Accelerating Structural
Change towards Wealthy Green Economies’, in Tilman Altenburg and Claudia Assmann
(eds) Green Industrial Policy: Concepts, Policies, Country Experiences. Geneva, Bonn: UN
Environment, German Development Institute, pp. –.
Amsden, Alice () Asia’s Next Giant: South Korea and Late Industrialization. New York:
Oxford University Press.
Amsden, Alice () The Rise of the Rest: Challenges to the West from Late-Industrializing
Economies. Oxford: Oxford University Press.
Andreoni, Antonio and Roberto Scazzieri () ‘Triggers of Change: Structural Trajectories
and Production Dynamics’, Cambridge Journal of Economics (): –.
Ashman, Sam () ‘Combined and Uneven Development’, in Ben Fine and Alfredo Saad-
Filho (eds) The Elgar Companion to Marxist Economics. Aldershot: Edward Elgar, pp. –.
Ashman, Sam, Ben Fine, and Susan Newman () ‘The Developmental State and
Post-Liberation South Africa’, in Neeta Misra-Dexter and Judith February (eds) Testing
Democracy: Which Way Is South Africa Going? Cape Town: ABC Press for Institute for a
Democratic South Africa, pp. –.
Behuria, Pritish, Lars Buur, and Hazel Gray () ‘Studying Political Settlements in Africa’,
African Affairs (): –.
Bendell, Jem () ‘Deep Adaptation: A Map for Navigating Climate Tragedy’, IFLAS
Occasional Paper No. . Available at http://www.lifeworth.com/deepadaptation.pdf.
Berik, Günseli, Yana Rodgers, and Stephanie Seguino () ‘Feminist Economics of Inequality,
Development, and Growth’, Feminist Economics (): –.
Best, Michael () How Growth Really Happens: The Making of Economic Miracles through
Production, Governance, and Skills. Princeton, NJ: Princeton University Press.
Bhowmik, Sharit K. and Kanchan Sarker () ‘Worker Cooperatives as Alternative Pro-
duction Systems: A Study of Kolkata, India’, Work and Occupations (): –.
Blankenburg, Stephanie, Gabriel Palma, and Fiona Tregenna () ‘Structuralism’, in Lawr-
ence Blume and Steven Durlauf (eds) The New Palgrave: A Dictionary of Economics. nd
edition. Basingstoke: Palgrave Macmillan, pp. –.
Braunstein, Elissa () ‘Engendering Foreign Direct Investment: Family Structure, Labor
Markets, and International Capital Mobility’, World Development (): –.
Brenner, Robert () ‘The Social Basis of Economic Growth’, in John Roemer (ed.)
Analytical Marxism. Cambridge: Cambridge University Press, pp. –.
Burkett, Paul and Martin Hart-Landsberg () ‘A Critique of “Catch-up” Theories of
Development’, Journal of Contemporary Asia (): –.
Çağatay, Nilüfer and Şule Özler () ‘Feminization of the Labor Force: The Effects of Long-
term Development and Structural Adjustment’, World Development (): –.
Cárdenas, Andrés () ‘The Cuban Biotechnology Industry: Innovation and Universal
Health Care’. Cambridge, MA: The Academic-Industry Research Network (theAIRnet).
Chang, Dae-oup () Capitalist Development in Korea: Labour, Capital and the Myth of the
Developmental State. Abingdon: Routledge.
Chang, Dae-oup () ‘Labour and the “Developmental State”: A Critique of the Develop-
mental State Theory of Labour’, in Ben Fine, Daniela Tavasci, and Jyoti Saraswati (eds)
Beyond the Developmental State: Industrial Policy into the Twenty-first Century. London:
Pluto, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Chang, Ha-Joon () ‘The Political Economy of Industrial Policy in Korea’, Cambridge
Journal of Economics : –.
Chang, Ha-Joon () Kicking away the Ladder: Development Strategy in Historical Perspec-
tive. London: Anthem.
Chang, Ha-Joon () Things They Don’t Tell You about Capitalism. London: Allen Lane/
Penguin.
Chenery, Hollis and Tsunehiko Watanabe () ‘International Comparisons of the Structure
of Production’, Econometrica (): –.
Chibber, Vivek () ‘The Developmental State in Retrospect and Prospect: Lessons from
India and South Korea’, in Michelle Williams (ed.) The End of the Developmental State?
Pietermaritzburg: UKZN Press, pp. –.
Clamp, Christina () ‘The Evolution of Management in the Mondragon Cooperatives’,
Mapping Cooperative Studies in the New Millennium, University of Victoria.
Clarke, Simon (ed.) () The State Debate. Conference of Socialist Economists. Basingstoke:
Palgrave Macmillan.
Cole, Ken () ‘Cuba: The Process of Socialist Development’, Latin American Perspec-
tives (): –.
Cramer, Christopher and Fiona Tregenna () ‘Heterodox Approaches to Industrial Policy,
the Shifting Boundaries of the Industrial, and the Implications for Industrial Hubs’, in
Justin Yifu Lin and Arkebe Oqubay (eds) The Oxford Handbook of Industrial Hubs and
Economic Development. Oxford: Oxford University Press.
Di Maio, Michele () ‘Industrial Policies in Developing Countries: History and Perspec-
tives’, in Giovanni Dosi, Mario Cimoli, and Joseph E. Stiglitz (eds) The Political Economy of
Capabilities Accumulation. Oxford: Oxford University Press, pp. –.
Dyker, David () The Future of the Soviet Economic Planning System. London: Routledge.
Elson, Diane and Ruth Pearson () ‘ “Nimble Fingers Make Cheap Workers”: An Analysis
of Women’s Employment in Third World Export Manufacturing’, Feminist Review : –
.
Errasti, Anjel, Ignacio Bretos, and Aitziber Nunez () ‘The Viability of Cooperatives: The
Fall of the Mondragon Cooperative Fagor’, Review of Radical Political Economics ():
–.
Esping-Andersen, Gøsta () The Three Worlds of Welfare Capitalism. Princeton, NJ:
Princeton University Press.
Estrin, Saul () ‘Yugoslavia: The Case of Self-Managing Market Socialism’, Journal of
Economic Perspectives (): –.
Evans, Peter () Embedded Autonomy: States and Industrial Transformation. Princeton,
NJ: Princeton University Press.
Fine, Ben and Zavareh Rustomjee () The Political Economy of South Africa: From
Minerals–Energy Complex to Industrialization. London: Hurst.
Fine, Ben, Costas Lapavitsas, and Dimitris Milonakis () ‘Addressing the World Economy:
Two Steps Back’, Capital and Class (): –.
Fine, Ben, Jyoti Saraswati, and Daniela Tavasci (eds) () Beyond the Developmental State:
Industrial Policy into the st Century. London: Pluto.
Fisher, Mark () Capitalist Realism: Is There No Alternative? Ropley: Zero Books.
Foley, Janice and Michael Polanyi () ‘Workplace Democracy: Why Bother?’, Economic
and Industrial Democracy (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cam-
bridge, MA: Harvard University Press.
Giovannoni, Olivier () ‘Functional Distribution of Income, Inequality, and the Incidence
of Poverty: Stylized Facts and the Role of Macroeconomic Policy’. University of Texas
Inequality Project Working Paper No. .
Gunn, Christopher () ‘Cooperatives and Market Failure: Workers’ Cooperatives and
System Mismatch’, Review of Radical Political Economics (): –.
Hirschman, Albert () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Hirschman, Albert () ‘A Generalized Linkage Approach to Development, with Special
Reference to Staples’, Economic Development and Cultural Change : –.
İzdeş, Özge and Fiona Tregenna () ‘Gender, Industrialization, and Industrial Hubs’, in
Justin Yifu Lin and Arkebe Oqubay (eds) The Oxford Handbook of Industrial Hubs and
Economic Development. Oxford: Oxford University Press.
Kaldor, Nicholas () Causes of the Slow Rate of Economic Growth of the United Kingdom:
An Inaugural Lecture. Cambridge: Cambridge University Press.
Kaldor, Nicholas () Further Essays on Economic Theory. London: Duckworth.
Kaldor, Nicolas () Essays on Economic Stability and Growth. nd edition. London:
Duckworth.
Khan, Mushtaq () ‘Political Settlements and the Analysis of Institutions’, African Affairs
(): –.
Klein, Naomi () This Changes Everything: Capitalism vs. the Climate. London: Allen
Lane.
Kucera, David and Tejani, Sheba () ‘Feminization, Defeminization, and Structural
Change in Manufacturing’, World Development (C): –.
Lazonick, William and Mary O’Sullivan () ‘Maximizing Shareholder Value: A New
Ideology for Corporate Governance’, Economy and Society (): –.
Malm, Andreas () Fossil Capitalism: The Rise of Steam Power and the Roots of Global
Warming. London: Verso.
Marx, Karl ( []) Capital: A Critique of Political Economy, Vol. . London: Penguin.
Marx, Karl ( []) Capital: A Critique of Political Economy, Vol. . London: Lawrence
& Wishart.
Marx, Karl and Friedrich Engels ( [/]) The German Ideology. London: Lawrence &
Wishart.
MERG () ‘Making Democracy Work: A Framework for Macroeconomic Policy in South
Africa’, Centre for Development Studies, University of the Western Cape, South Africa.
Milberg, William and Deborah Winkler () ‘Financialisation and the Dynamics of Off-
shoring in the USA’, Cambridge Journal of Economics (): –.
Neale, Jonathan () ‘Social Collapse and Climate Breakdown’, Ecologist: The Journal for
the Post-industrial Age, May. Available at https://theecologist.org//may//social-
collapse-and-climate-breakdown.
NEF () Co-operatives Unleashed: Doubling the Size of the UK’s Co-operative Sector.
London: New Economics Foundation.
Oqubay, Arkebe () Made in Africa: Industrial Policy in Ethiopia. Oxford: Oxford
University Press.
Pencavel, John () The Economics of Worker Cooperatives. Northampton, MA: Edward
Elgar.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Prebisch, Raúl () ‘The Economic Development of Latin America and its Principal
Problems’, Economic Bulletin for Latin America, No. , United Nations Department of
Economic Affairs, New York.
Rainforest Action Network () ‘Banking on Climate Change: Fossil Fuel Finance Report
Card ’. Available at https://www.ran.org/wp-content/uploads///Banking_on_
Climate_Change__vFINAL.pdf.
Ricoy, Carlos () ‘Marx on Division of Labour, Mechanization and Technical Progress’,
European Journal of the History of Economic Thought (): –.
Rodrik, Dani () ‘Green Industrial Policy’, Oxford Review of Economic Policy (): –
.
Rosenberg, Nathan () ‘Was Schumpeter a Marxist?’, Industrial and Corporate Change
(): –.
Seguino, Stephanie and Elissa Braunstein () ‘The Costs of Exclusion: Gender Job
Segregation, Structural Change and the Labour Share of Income’, Development and Change
: –.
Selwyn, Benjamin () ‘An Historical Materialist Appraisal of Friedrich List and his
Modern Day Followers’, New Political Economy (): –.
Selwyn, Benjamin () ‘Trotsky, Gerschenkron and the Political Economy of Late Capitalist
Development’, Economy and Society (): –.
Sender, John and Sheila Smith () The Development of Capitalism in Africa. London:
Methuen.
Soederberg, Susanne () ‘An Historical Materialist Account of the Chilean Capital
Control: Prototype Policy for Whom?’, Review of International Political Economy ():
–.
Song, Hae-Yung () ‘Marxist Critiques of the Developmental State and the Fetishism of
National Development’, Antipode (): –.
Spencer, David () The Political Economy of Work. Abingdon: Routledge.
Spencer, David () ‘Fear and Hope in an Age of Mass Automation: Debating the Future of
Work’, New Technology, Work and Employment (): –.
Stockhammer, Engelbert, Özlem Onaran, and Stefan Ederer () ‘Functional Income
Distribution and Aggregate Demand in the Euro Area’, Cambridge Journal of Economics ():
–.
Tabb, William () ‘Four Crises of the Contemporary World Capitalist System’, Monthly
Review, October. Available at https://monthlyreview.org////four-crises-of-the-
contemporary-world-capitalist-system/.
Tancer, Robert () ‘The Pharmaceutical Industry in Cuba’, Clinical Therapeutics ():
–.
Tregenna, Fiona () ‘Characterising Deindustrialisation: An Analysis of Changes in
Manufacturing Employment and Output Internationally’, Cambridge Journal of Economics
(): –.
Tregenna, Fiona () ‘What Does the Services Sector Mean in Marxian Terms?’, Review of
Political Economy (): –.
Tregenna, Fiona () ‘The Specificity of Manufacturing in Marx’s Economic Thought’,
European Journal for the History of Economic Thought (): –.
Tregenna, Fiona () ‘A New Theoretical Analysis of Deindustrialisation’, Cambridge
Journal of Economics (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Tregenna, Fiona () ‘Deindustrialization and Premature Deindustrialization’, in Jayati
Ghosh, Erik S. Reinert, and Rainer Kattel (eds) Handbook of Alternative Theories of
Economic Development. Cheltenham: Edward Elgar, pp. –.
Tregenna, Fiona () ‘Sectoral Structure and Change: Insights from Marx’, Review of
Political Economy (): –.
UNCTAD () State of Commodity Dependence . Geneva: United Nations. Available at
https://unctad.org/en/PublicationsLibrary/ditccomd_en.pdf.
Verdoorn, Petrus Johannes ( []) ‘On the Factors Determining the Growth of Labour
Productivity’, in Luigi Pasinetti (ed.) Italian Economic Papers, Vol. II. Oxford: Oxford
University Press, pp. –.
Wade, Robert () Governing the Market: Economic Theory and the Role of Government in
East Asian Industrialization. Princeton, NJ: Princeton University Press.
Watts, Jonathan () ‘We Have Years to Limit Climate Change Catastrophe, Warns
UN’. Available at https://www.theguardian.com/environment//oct//global-warming-
must-not-exceed-c-warns-landmark-un-report.
Weeks, John () Capital, Exploitation and Economic Crisis. London: Routledge.
Young, Allyn () ‘Increasing Returns and Economic Progress’, Economic Journal ():
–.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.............................................................................................................
.............................................................................................................
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
The Case of ASEAN
.............................................................................................................
.
. R E
I, T C ASEAN
I P
..................................................................................................................................
A decades of efforts to transform Southeast Asia into a resilient regional econ-
omy, the Association of Southeast Asian Nations (ASEAN)—a regional intergovern-
mental organization comprising ten countries in Southeast Asia—has shifted its
priorities towards deepening its regional participation into global value chains
(GVCs).¹ For ASEAN, greater participation into the GVC network should help the
region improve its trade and investment nexus critical for firm and industry competi-
tiveness amidst twenty-first-century globalization. Moreover, greater integration into
GVCs might expand production linkages and export destinations of local firms that
may not have been accessible prior to regional and global integration. Above all, at least
¹ The ten countries of ASEAN are Singapore, Brunei Darussalam, Indonesia, Philippines, Malay-
sia, Thailand, Vietnam, Laos, Myanmar, and Cambodia. ASEAN member states have been in an
ongoing dialogue regarding the accession of Timor-Leste, or East Timor, as the eleventh member. It
has been more than a decade (March ) since Timor-Leste applied for formal membership to
ASEAN.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
among ASEAN policymakers, greater participation into GVCs may play a key role in
realizing ASEAN’s grand vision for creating a single market and production base
known as the ASEAN Economic Community (AEC) by .
In this chapter, we argue that the recent policy shift towards deepening regional and
global production networks may pose both an opportunity and a challenge for the
region’s future economic and development trajectories. We highlight several key points
regarding ASEAN’s industrial policy in the era of GVCs. First, increasing GVC
participation may benefit some sectors more than others. We show that the automotive
GVCs in ASEAN have been a success, especially with the expansion of domestic
production and export growth performance in recent times. We note that the success
of automotive GVCs depends on continued institutional support to implement a more
integrative production process. ASEAN’s regionally coordinated policies, such as the
ASEAN Brand-to-Brand Complementation (BBC) scheme, or when parts and com-
ponents are traded without paying full import duties, have made South East Asia an
attractive region for automotive manufacturing. ASEAN’s BBC scheme, first intro-
duced in , was a breakthrough in advancing the integrative process of the
automotive industry in the Southeast Asian region. Second, the success story of
automotive GVCs in ASEAN hinges on regionally coordinated industrial policy
and the active role of large multinational firms in creating regional and local
production linkages. Toyota, a Japanese auto manufacturer, has been directly
involved in making Southeast Asia its own backyard for production and assembling
since the s. Toyota’s influence in the region’s automotive production and
assembly continues as it maintains a positive relationship with ASEAN’s political
and economic establishments. Third, we underline the importance of institutions in
improving local firm capacities and their competitiveness, human capital, techno-
logical capabilities, and ‘industrial upgrading’, or moving up the value chain from
lower value-added to higher value-added economic activities in the era of rising
participation in GVCs. Thailand’s initiative to establish universities and research
institutions related to the auto industry greatly contributed to its advancement in
auto manufacturing. Thailand has been dubbed as the ‘Detroit of South Asia’ for
rapidly transforming its automotive industry since recovering from the Asian
financial crisis.
This chapter starts with an overview of ASEAN as a regional institution that
collectively promotes economic growth policies among its member states. The chapter
will then trace the historical evolution of ASEAN’s economic policies since the
s. We discuss the region’s strategic shift from the conventional approach of
reducing or eliminating trade barriers and creating a conducive environment
for foreign investors to the deepening of regional and global production network
participation.² For ASEAN policymakers, regional integration through GVCs
² For example, the ASEAN Free Trade Agreement (AFTA) and its primary mechanism ASEAN
Trade in Goods Agreement (ATIGA) have ensured the realization of the free flow of goods within
ASEAN, including tariff liberalization, removal of non-tariff barriers, trade facilitation, customs,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
expedites a country’s participation in global markets and production and eases
the process of economic development. Regional geopolitics is also worth noting here;
ASEAN industrial policy in recent years serves to ensure recognition that the region
continues to be dynamic and competitive. With a growing number of free trade
agreements (FTAs), including from those regional trade agreements to which
some ASEAN member states are a party, like the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership (CPTPP), ASEAN has to sustain its com-
petitiveness. Second, the spectacular rise of China, and to some extent India, has
changed the political and economic relationships of ASEAN member states and their
counterparts.³
Deepening ASEAN’s GVC participation also means that there is more space for
local participation, particularly by small and medium-sized enterprises (SMEs).
Improving local participation and the redistribution of economic gains from regional
and global value chains emerged as a focal point in establishing the ASEAN Eco-
nomic Community , as outlined in the ASEAN Blueprint . While this policy
may be good for redistributing gains to local actors, it falls short in guaranteeing the
industrial upgrading that often occurs in firms with large capital investments. To this
extent, ASEAN has yet to produce lead firms with international presence.
Technological advancements in production and logistics have made it easier to
establish inter- and intra-industry cooperation. While participation in GVCs opens
up greater access to markets and technology, there remains a doubt whether techno-
logical spillovers are immediate or if they occur at all. The gains, such as a transfer of
knowledge, from participation in GVCs have been mixed.
Moreover, the chapter argues that while ASEAN industrial policy in the era of GVCs
centred on improving local participation in recent years, more needs to be done to
address the competitiveness of large firms to capture higher economic returns (i.e.
profits) and technological advancements. What we observed from ASEAN’s current
policy initiative in the era of GVCs is the lack of a systematic programme and
streamlining policy for industrial upgrading. ASEAN’s industrial policy in the era of
GVC is skewed towards increasing participation of the bottom and middle tiers of the
value chain. Thus, leaving large local firms to compete directly with multinational
firms.
We conclude that ASEAN industrial policy in the era of GVCs should go
beyond the objectives of deepening regional and global integration. ASEAN must
find new ways to create value-added, whether that involves a large number of
standards and conformance, and other measures such as sanitary and phytosanitary. The inception of
AFTA provides a clear timeline for the tariff reduction schedule for each product by and has since
promoted the export performances of ASEAN member states.
³ ASEAN member states are divided in their support for China, especially with the ongoing dispute
over the South China Seas between China and ASEAN claimant states (including Brunei Darussalam,
Malaysia, the Philippines, Vietnam, and more recently Indonesia).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
vertically linked activities or only just a few in the value chain, and establish
centres for innovation. Learning from past experience, ASEAN should reconsider
introducing a new form of regionally coordinated policies, such as the ASEAN
Industrial Joint Venture (AIJV) in and later the ASEAN Industrial Cooper-
ation (AICO) in , which was successful in expanding the regional division of
labour and scale economies of the auto industry. Finally, the chapter concludes by
suggesting that the future success of ASEAN industrial policy hinges on the
continued growth of Chinese demand (particularly in light of the US–China trade
war) and the ability for ASEAN to build some globally competitive, lead firms in
key industries.
. T D GVC
I: ASEAN,
N
..................................................................................................................................
Southeast Asia has arguably emerged as one of the most dynamic regions in the
world in the last decades. Over the years, ASEAN economies recorded positive real
GDP growth rates of . per cent in to . per cent in (IMF, ).⁴ The
region’s share of world GDP almost doubled from . per cent in to . per cent
in . ASEAN’s value-added exports also show signs of improvement. ASEAN’s
domestic value added improved from per cent in to per cent in .
Domestic value added can be interpreted as positive improvement in a country’s
domestic capacity to produce goods and services. Therefore, the more a country
creates domestic value added, the more income is generated. Meanwhile, ASEAN’s
foreign value-added exports slowed from per cent in to per cent in .
Contrary to domestic value added, foreign value added is often used to show a
country’s exposure to foreign inputs, including raw material resources, parts and
components, and services. Foreign value added differs by industry and country.
Lower foreign value added may be a positive indication of improvement in domestic
production.
While ASEAN has had an impressive economic record over the years, the pace of
economic growth and export performance varies from country to country. In ,
for instance, the domestic value added of exports as a share of GDP for Malaysia
and Singapore is roughly per cent and per cent, respectively; Brunei
Darussalam and Thailand are both per cent; and the rest of the ASEAN economies’
domestic value added of exports as a share of GDP are below the regional average of
⁴ Real GDP growth rates have slowed to . per cent in .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
per cent.⁵ Within ASEAN, the share of the total foreign value-added exports is
highest in manufacturing ( per cent) compared to primary ( per cent) and services
sectors ( per cent) in .⁶ Foreign value-added in manufacturing is driven by
motor vehicles and other transport equipment and electronics sectors with roughly
per cent and per cent, respectively, of the share of the foreign value added in
manufacturing.
ASEAN’s GVC integration is deeper and potentially more rapid than other
regions. Over per cent of ASEAN member states’ gross exports are linked
to GVCs, measured in terms of the sum of the foreign value added and the
indirect domestic value added, or the domestic value added incorporated in other
countries’ exports (Yamaguchi, ; ASEAN-Japan Center, ).⁷ In , about
per cent of ASEAN’s gross exports were tied to GVCs, compared to the North
American Free Trade Agreement (NAFTA, per cent), Trans-Pacific Partnership
(TPP, per cent), the South American trade bloc (MERCOSUR, per cent).
About per cent of European Union’s gross exports were linked to GVCs in the
same period.
. T E ASEAN
I P:
F I-
I
E- I
D GVC I
..................................................................................................................................
Despite impressive regional growth over the years, it is difficult to pin down what is the
ASEAN’s process of industrialization.⁸ As mentioned, the pace of economic reforms
and the institutional capabilities of each ASEAN member state vary in the early phases
of the industrialization process. At the outset, ASEAN was born from the collective
aspirations of its leaders to fast-track their economic independence and production
⁵ On average, ASEAN’s domestic value added as share of export was per cent in .
⁶ The share of foreign value added of exports showed little to no change from previous years.
⁷ The domestic value-added is composed of three parts: the domestic value-added embodied in the
final demand or intermediate goods consumed directly by the importing economy; domestic value-
added sent to third parties (forward GVC participation); and domestic value-added that are sent back to
country of origin used to produce exports.
⁸ ASEAN inter governmental interventions exist to promote trade and changes to regional and global
production structures (Arfani, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
diversification away from primary and commodity-based production to value-added
manufacturing production as the basis for economic modernization (Bautista, ).⁹
However, variations in each country’s endowments, experiences, and priorities com-
pounded the region’s ability to implement a broad-based industrial policy (Ariff and
Hill, ).
From a political economy point of view, the creation of ASEAN’s was driven by the
urgency of regional governments to be economically self-sufficient or ‘independent’,
with the gradual withdrawal of global powers in the Asian region. The end of the Cold
War is a case in point; ASEAN member states that had previously leaned on US aid
scrambled to establish a new regional order that would favour their national develop-
ments. Industrial policy is therefore motivated by the need to industrialize and to form
a new regional dynamics that would enable growth and sustainable development for all
member states (Chang, ). ASEAN economies are small, which makes it even more
challenging for countries to achieve the minimum efficiency required for scale
economies.
It is therefore not surprising that the idea to form ASEAN was first conceived by the
foreign ministers of Indonesia, Thailand, Malaysia, the Philippines, and Singapore, or
also known as the ASEAN-. The ASEAN- countries signed the ASEAN Declaration
in , which outlined the aims and purposes as a regional order that promotes
economic growth, social progress, and cultural development. The ASEAN Declaration
also mandates its member states to promote regional peace, engage in regional collab-
oration (i.e. training, research, etc.) and mutual assistance on matters of common
interest, including agricultural and industrial cooperation. For ASEAN member states,
these collaborations are necessary to raise the living standards of the people in the
region.
The establishment of such regional institutions had a greater purpose than economic
and social goals. Some scholars argued that the common fear of communism from
mainland China was the underlying factor in the creation of ASEAN (Jones, ;
Narine, ; Broinowski, ; Anwar, ). The political motivation led to some
speculation that the association should serve as the informal body to curb even if only
indirectly, communism in the region. During this period, we can interpret several
events to provide an anti-communist rationale for ASEAN: the US involvement in
Vietnam escalated in the region; a joint remark or communique by the Asia and Pacific
Council (ASPAC), of which Thailand, Malaysia, and Philippines are members,
explicitly endorsed regional efforts ‘to safeguard their national independence and
integrity against Communist aggression’; and the declaration by foreign ministers
and prime ministers of member states to defend national interests against communism
(Broinowski, : ).¹⁰ However, it is far from certain that the existence of ASEAN
⁹ The leaders of ASEAN are referred to as the original founding members or the ASEAN-.
¹⁰ A number of leaders made direct remarks to defend their national interests against the growing
threat of communism. This includes statements made by Thanat Khoman of Thailand in about the
need to counter ‘revived germs of an old disease—imperialism—which are still being cultured in [a] large
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
was motivated by the political aim of weakening the potential spread of ideology even
though contemporary developments may suggest otherwise. There is no official state-
ment of ASEAN explicitly condemning the potential spread of communism into the
region. Member states were strictly espoused to the principles of consensus building,
non-alignment, and self-reliance.¹¹
The goal of economic independence led to the adoption of import-substitution
industrialization (ISI) policy in the late –s, albeit differing in extent and
duration between countries, before shifting to an export-oriented industrialization
(EOI) strategy in the –s. Although ISI strategy was short-lived, it marked
the region’s first direct effort to transform its regional production to meet global
standards. But it was during the EOI period that Southeast Asian economies began to
make their mark as major global exporters on the world production stage. Export-
oriented growth had a significant impact in transforming the region into an industrial
player. ASEAN’s annual industrial growth rates of to per cent were recorded for
over three decades after introducing EOI policies. For instance, the structural trans-
formation from ISI to EOI more than doubled the share of manufacturing for
Indonesia and Malaysia (Hill, , a). In the s, the manufacturing sector
constituted less than per cent of all merchandising exports for ASEAN econ-
omies.¹² By the mid-s, manufacturing had become the primary source of eco-
nomic growth.
Scholars have also argued that ASEAN’s rapid economic growth during the EOI
phase was linked to FDI or Transnational Corporations (TNCs) (Hobday, ;
Pradhan, ; Moudatsou and Kyrkilis ). Singapore was the first to adopt such
a TNC-led industrialization strategy, prompting others to follow suit, however, with
varying degrees of success.¹³ ASEAN’s outward-looking industrialization strategy of
export growth and attracting more investment often overlooks the unevenness of
economic development and value-added allocation among individual economies in
the region (Oikawa, ). While EOI policy allowed for greater access to international
area of mainland Asia and are threatening the spread to neighbouring lands’ and the statement by
Narciso Ramos of the Philippines, which declared that ‘the time has come for a truly concerted struggle
against the forces which arrayed against our very survival in these uncertain and critical times’
(Broinowski, ).
¹¹ Indonesia, and to some extent Malaysia, was particularly vital in voicing the principle of non-
alignment within ASEAN. Indonesia’s colonial past played a crucial role in shaping its views and
approach to international affairs, which is an ‘independent and active’ foreign policy or posture that is
not subservient to the interest of major powers (including the west and China).
¹² With the exception of Singapore, which had relatively higher manufacturing exports (less than
per cent) than its ASEAN neighbours. Indonesia did not record significant manufacturing exports prior
to the s.
¹³ China and Taiwan are relatively successful in implementing this model of industrialization,
particularly in creating special economic zones for electronic exports. Later, Southeast Asian economies
followed this model of industrialization with Singapore taking the lead.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
markets and capital inflows, the region became increasingly vulnerable to global
economic fluctuations, like with the Asian financial crisis.
The Asian financial crisis upended the region’s decades of EOI strategy and its
overall development trajectories.¹⁴ The crisis led to another round of regional industrial
policy ‘rethinking’. ASEAN countries that cemented their industrialization strategy
based on export performance find it difficult to contain external shocks. As a result, the
financial crisis led to deregulation and privatization of several key industries, such as
the auto industry in Indonesia and Thailand. However, countries that continued with
strong domestic protection of ‘infant industry’ were in a better position to contain the
financial crisis. For instance, Malaysia’s unorthodox response to the financial crisis was
to impose strict financial measures or capital controls—thus, restricting the flow of
foreign capital in and out of the domestic economy.¹⁵ This partly explains why the
Malaysian government, unlike its neighbouring counterparts, was more successful in
containing the domestic economy from widespread financial panic.¹⁶ Capital controls
produced faster economic recovery, including declines in unemployment and improve-
ment in real wages (Kaplan and Rodrik, ).¹⁷
The severity of the financial crisis left some countries with limited policy tools to take
the domestic economy back into pre-crisis levels. As a response to the financial crisis,
ASEAN economies began implementing a more integrative process of regional pro-
duction as a potential solution to reintegrate into global markets. Deepening regional
economic integration was sought to bring back foreign investments and reinstate
market confidence. ASEAN leaders later adopted a more formal language of cooper-
ation in the subsequent ASEAN Summits.¹⁸
In , ASEAN adopted several key policy measures to expedite the process of
economic regionalization and integration into GVCs. The free flow of goods and
services was the cornerstone of ASEAN cooperation as outlined in the ASEAN Free
Trade Agreement (AFTA) in , which was enacted to create a single market and
¹⁴ For some countries in the region, the financial crisis turned into a political crisis. President Suharto
of Indonesia was forced to step down after thirty-two years of authoritarian rule due to domestic and
political turmoil in many parts of the country.
¹⁵ Capital controls are established to regulate financial flows from capital markets into and out of a
country’s capital account. These controls can be economy-wide or specific to a sector or industry.
Government monetary policy can impose capital control. They may restrict the ability of domestic
citizens to acquire foreign assets, referred to as capital outflow controls, or foreigners’ ability to buy
domestic assets, known as capital inflow controls. Tight controls are often found in developing
economies where the capital reserves are lower and more susceptible to volatility.
¹⁶ A great deal of scholarly work has been written about the Asian financial crisis. Refer to Wade
(), Radelet et al. (), and Goldstein () for a more detailed discussion.
¹⁷ Financial restrictions, like capital controls, are becoming a more accepted policy tool among
policymakers and think tanks. For example, the IMF has been flexible in advocating capital controls
as a policy alternative to contain excessive financial speculation.
¹⁸ The ASEAN Summit is held annually by the ten member states to discuss the progress and agreed
commitments on political, security, and economic cooperation.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
international production base, attract foreign direct investments, and expand the intra-
ASEAN trade and investment nexus. The primary mechanism to achieving the goals
envisioned in AFTA is the Common Effective Preferential Tariff (CEPT) scheme that
underscores a gradual reduction and/or elimination of intra-regional tariffs and import
duties up to per cent for per cent of all product categories by .¹⁹ The CEPT
includes a phased schedule of intra-regional tariff reduction that takes into consideration
the level of sensitivity of the products (imports) to the respective ASEAN member states’
domestic industry.
A decade later, at the Bali Summit in , ASEAN leaders announced that the
ASEAN Economic Community (AEC) would be the new aim of regional economic
integration by .²⁰ AEC transforms the region into ‘free movement of goods,
services, investment, skilled labour and freer flow of capital’ (ASEAN Secretariat,
).²¹ The AEC replaced the previously agreed CEPT scheme with the ASEAN
Trade in Goods Agreement (ATIGA), signed in and which came into force in
. The ATIGA renewed the CEPT agreement by including comprehensive
coverage in trade in goods, full tariff reduction schedules and non-tariffs measures,
and implementing the ASEAN Single Window (ASW) for rapid exchange of standard-
ized data among member states’ customs agencies, mutual recognition agreements
(MRAs), and e-ASEAN, among other new initiatives.²² The ATIGA minimizes the
cost of doing business and logistics, deepens economic linkages, creates greater econ-
omies of scale for firms within ASEAN, and further maintains a competitive investment
environment. AEC was a clear signal to reaffirm its intentions to keep abreast with the
rest of the world.
The adoption of AEC and its mechanisms laid down the groundwork for deeper
regional and GVC participation. For ASEAN, increasing regional integration has
several advantages. First, regional integration improves the overall performance of
ASEAN; the more connected are regional firms with one another, the more likely
¹⁹ Tariff reduction of up to per cent by was a commitment made by the original five ASEAN
member states—Indonesia, Thailand, Malaysia, Singapore, and the Philippines. The remaining CMLV
countries, which includes Cambodia, Myanmar, Laos, and Vietnam, were given additional time to
implement the tariff reduction rates.
²⁰ The ASEAN Economic Community (AEC) goal was initially targeted for but was accelerated
to by ASEAN leaders during the th ASEAN Summit in January .
²¹ The ASEAN Economic Community (AEC) blueprint outlines the principles for greater connect-
ivity between member states and ASEAN’s participation in regional and global supply chains (Pettman,
; Padilla, Sari, and Handoyo, ). Moreover, the Initiative on ASEAN Integration (IAI) provides
guidelines to fast-track the building of infrastructure as well as the legal framework in areas such as
broadband connections, e-commerce, technical skills, and many others.
²² The ASEAN Trade in Goods Agreement includes improvements in a number of technical areas
such as disciplines on Technical Barriers to Trade (TBT), Sanitary and Phytosanitary (SPS) Measures,
and the Temporary Modification and Suspension of Concessions, which outlines some technical
guidelines to compensate losses that arise from any modification to changes from existing commitments.
Refer to the ASEAN Guidelines on Standards, Technical Regulations, and Conformity Assessment
Procedures (STRACAP) for a detailed assessment of technical cooperation.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
they are to export to similar global markets. Cooperation among regional firms would
result in more efficient production. Second, regional integration would improve the
resilience of domestic markets to global fluctuations; during the global financial
crisis caused by the subprime mortgage crisis in the Western world, the ASEAN
economies began looking into regional and domestic markets, creating an economic
buffer from external shocks. Regionalization gave ASEAN the bargaining power it
needs to balance geopolitics and anticipate the economic rise of regional powerhouses,
like China and India.
. A C L ASEAN
I P
E GVC
..................................................................................................................................
For years, traditional economics and leading global economic institutions questioned
the effectiveness and the ambiguous contribution of industrial policy on a country’s
economic growth. Economic miracles that a country may have experienced cannot be
directly attributed to industrial policy or some kind of government- or state-led
interventions, such as the promotion or targeting of several strategic industries.
Therefore, the lack of a standardized definition of industrial policy among scholars
and practitioners would often lead to a dubious, and often inconsistent, method of
analysis.
There is no consensus on the definition of industrial policy other than that it is some
form of government intervention that selectively promotes certain industries (Stiglitz,
; Cimoli, Dosi, Nelson, and Stiglitz, ; Chang, ; Milberg et al., ; Naudé,
). Another interpretation of an industrial policy is the deliberate effort to ‘defy’ its
comparative advantage (Chang, , ).²³ Some examples of these interventions
include infant industry protection measures through tariff and non-tariff barriers and
imposing local content requirements as the basis for ‘infant industries’ protection. Note
that contrary to traditional views, countries such as the United States, Great Britain,
²³ Comparative advantage is a theoretical tool for determining a country’s production and trade
specialization. However, a strict interpretation of comparative advantage may understates the
analysis for industrialization and economic development, say from agriculture to manufacturing
and consequently from manufacturing to services. The debate surrounding the importance for
countries to rely on or defy its comparative advantage has shed light on the importance of
industrial policy and the role of institutions in coordinating resource maintenance and production
output (Lin and Chang, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
Japan, and, more recently, South Korea became the world’s industrialists precisely
because of industrial policy that promoted the development of national industries and
nurtured innovation (Cimoli et al., ; Chang, ). Amsden’s () seminal work
on the political economy of South Korea’s industrialization shows the important role of
the state in industrial development. According to Amsden, the South Korean govern-
ment developed its economy not by turning to free-market prescription or by getting
the prices right; South Korea succeeded in developing its industries because it got its
‘prices wrong’.
Some scholars have also argued that industrial policy should have a more broad-
based function that promotes the competitiveness of all productive sectors (Sanjaya,
; Naudé, ). This view suggests a more neutral approach to industrial policy in
that it has a function to elevate the growth of the entire supply side of the economy and
not only be specific to certain sectors (Rodrik, ). In this sense, industrial policy is
an intervention where state and private sectors exchange information, or dialogue, to
reduce or eliminate constraints in order to allow the creation of efficient market
outcomes (Hausmann and Rodrik, ; Rodrik, , ). Thereby, the state can
identify and overcome barriers that may be a hindrance to development. Putting it
differently, industrial policy is a process where the state takes a proactive stance to
change the structural characteristics of the economy to support selective sectors that
yield better prospects of economic growth and development. Others, however, adopt a
more pragmatic or practical point of view in their interpretation of industrial policy,
implying that there is no single recipe for industrial policy (Chang, ). Industrial
policy should reflect the conditions and specific needs of countries seeking economic
growth and development.
Contrary to the popular view that the Southeast Asia region grew rapidly by relying
on market forces and limited, if not acceptable, interventions on human capital and
technological innovations, the role of industrial policy in the development of ASEAN
economies cannot be understated (Jomo, ). Over the past four decades, industrial
policy has had a major role in the successful development of the agricultural and
agro-processing sectors, such as palm oil, in Thailand, Malaysia, and Indonesia.
Without the existence of such direct intervention by the state, Malaysia would not
have emerged as a global exporter in electronics manufacturing. Likewise, Thailand
would not have been known as the ‘Detroit of the East’ had it not used government
investments to nurture the development of the automotive parts and components
industry as early as the s.
However, industrial policy in the era of GVCs is different in a sense that it focuses on
firms rather than the role of the state (Milberg et al., ). Industrial policy in the era
of GVCs would involve the shifting of intervention from the creation of domestic
supply chains to increasing bargaining power and improving value creation within the
value chains, which includes moving into higher value-added production tasks, or what
is commonly called vertical specialization; facilitating access to competitively priced
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
intermediate inputs; negotiating and creating linkages with multinational lead firms;
and moving into higher value-added production tasks (Kaplinsky and Morris, ;
Taglioni and Winkler, ).
ASEAN has had some relative success in promoting industrial competitiveness
and trade facilitation in the region. ASEAN industrial policy began as early as the
s. The ASEAN Industrial Project (AIP), started ASEAN’s agenda to bring
about better industry competitiveness, which encouraged joint projects among
ASEAN firms (Bautista, ; Ravenhill, ; Yoshimatsu, ). The original
plan was to assign one industrial project to each of the five (two out of five were
implemented) founding members of ASEAN (Ravenhill, ). Under the AIP
arrangement, ASEAN firms were encouraged to come into a joint-venture with
regional partners as a way to share fixed costs of production. However, political
squabbles among member states and the institutional limitations at the national
level hindered the full scope of the original project (ASEAN Secretariat, ;
Suriyamongkol, ).
Regional industrial cooperation came to fruition with the subsequent implementa-
tion of the ASEAN Industrial Complementation Arrangement (AICA) in .²⁴
AICA allows for specialization in a narrower range of products by facilitating manu-
facturers to produce at a much lower price and achieve higher optimal output for the
regional market. Toyota played an important role in implementing AICA as a solution
to overcome various local content requirements in automotive production. For
instance, in , under AICA, Toyota could purchase auto parts and components
from other manufacturers in the region at a low and competitive price, which later
became known as the Brand-to-Brand (BB) complementation scheme. Subsequent
industrial cooperation was, however, less of a success. In , the ASEAN Industrial
Joint Venture (AIJV) was implemented to grant regional firms (registered in ASEAN)
with per cent preferential margins.²⁵ But despite ASEAN’s success in improving
auto industrial competitiveness through a centralized policy coordination, like the
BB, other industries, particularly ASEAN’s nineteen priority sectors, have yet to
follow suit.
The future success of ASEAN’s industrial policy hinges on its ability to sustain
foreign direct investments. The ASEAN Investment Guarantee Agreement (ASEAN
IGA) and the Framework Agreement on the ASEAN Investment Area (AIA), first
signed in and later revised in , provide clear guidelines regarding invest-
ment liberalization and protecting foreign investors under a single roof. In ,
²⁴ AICA was formulated with the close cooperation of member state governments and the private
sector. The proposal was put forward by the ASEAN Automotive Federation, which was originally made
by the Ford Motor Company in .
²⁵ The preferential margins are the absolute difference in the preferential rate of duty between the
most-favoured nation and the duty for like products. The preferential margins are extendable up to four
years with a maximum extension of eight years extension.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
ASEAN upgraded its provisions for investors’ protection through implementing
ASEAN Comprehensive Investments Agreements (ACIA). As an economic instru-
ment, the ACIA aims to create a liberal, facilitative, transparent, and competitive
investment environment in ASEAN and further advance regional economic
integration.
Under the current investment framework, foreign investors are rewarded with
greater protection and flexibility, including the prohibition of performance require-
ments (PPRs), which are simply demands by governments for technology transfers or
for some preferential treatment of investment, and the freedom to appoint senior
management positions, which often requires the inclusion of local managers in the
upper hierarchy. The current ACIA framework also sets a clear timeline for member
states to implement investment liberalization. Additionally, ACIA has included a more
comprehensive investor–state dispute settlement (ISDS) procedure to protect investors
from potential damages or losses that arise from changes in state policy. The contro-
versy surrounding the ISDS mechanism in its current form is that it is skewed towards
the foreign investor who can enter an arbitration tribunal when there is a breach of
contract (of rights granted to investors) by the host state, causing a loss of revenue and
profits to private firms. The ISDS is a legal private arbitration that bypasses national
judicial systems, which implies a great disadvantage for governments that typically
have fewer means to defend their national interests (including litigation expenses).
ISDS is considered an integral part of several bilateral and multilateral trade treaties
such as the North American Free Trade Agreement (NAFTA) and the Comprehen-
sive and Progressive Trans-Pacific Partnership (CPTPP), which is the successor of
the Trans-Pacific Partnership (TPP) after the US withdrawal (Sturgeon, Van Bieseb-
roek, and Gereffi, ). The renewed terms on investor protection reflect a bold
intention to better accommodate the interests of investors and the maintaining of
foreign capital.
ASEAN has traditionally been a strong proponent of intellectual property rights
(IPR) protection, although industrializers of the past—including the United States, the
United Kingdom, and Japan—industrialized without the existence and the enforce-
ment of IPR protection (Chang, ).²⁶ The ASEAN Framework Agreement on
Intellectual Property Rights in and the ASEAN Intellectual Property Rights
Action Plan – are the two primary documents that outline the general
principles of intellectual rights protection in the region.²⁷ The framework on intellec-
tual property rights puts in place effective protection measures for IPR, including a new
provision to improve the administrative body for data collection and human resources
²⁶ China has been a member of the World Intellectual Property Organization since and acceded
to the Paris Convention for the Protection of Industrial Property in , however IPR infringements
and copyright violations are commonly reported.
²⁷ The two provisions on intellectual property rights are formulated directly by the ASEAN Working
Group on Intellectual Property Cooperation (AWGIPC) and coordinated by ASEAN Secretariat.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
development. The existing framework on intellectual property rights provides the
groundwork to establish a new ASEAN patent system, such as the ASEAN Patent
Office. Policymakers recognized the urgency of renewing intellectual property
rights protection to promote and encourage more technology start-ups or ‘uni-
corns’ in the region.²⁸ Although ASEAN’s new intellectual property rights regime
was put in place to protect the future of ASEAN’s e-commerce industry, it falls
short in addressing the extent of intellectual property rights protection in its
current production structures. In the world of GVCs, government protections of
intellectual property have the effect of ‘locking in’ the monopoly power to the
intangible asset creation (Pagano, ; Durand and Milberg, ). Intangible
assets are increasingly monopolized by multinational firms (mostly in the West)
who own intellectual property. However, this ‘intellectual monopoly’ in intangible
assets would have great implications on the presence of economies of scale and
network externalities associated with intangible asset creation. The current inter-
pretation of IPR has yet to address the extent or the deepening of intellectual
monopoly within ASEAN GVCs.
The general evolution of ASEAN’s industrial policy suggests a greater facilitation for
foreign investors, that is, access to regional markets and protection, as opposed to
creating mutually beneficial outcomes for domestic producers and lead firms. While
ASEAN accommodates member states’ levels of development and considers deeply the
sensitivity of national products to imported goods, recent policy initiatives lacked the
creative approaches necessary to improve regional production efficiencies and further
encourage innovation in local economies. For instance, the provisions needed to create
economies of scale and a more specialized division of labour in the auto industry (i.e.
the AIP and AICA provisions) remains a unique case that existed during the pre-GVC
era when industrial policy was centrally coordinated by the state at the national level.²⁹
ASEAN has yet to replicate similar region-wide policy initiatives in several of its
targeted strategic industries.
One must also consider the proliferation of regional trade arrangements that have
become the preferred alternative to the slow-paced, and often convoluted, multilateral
negotiations process. This might restrict the effectiveness of ASEAN industrial policy.
For example, competing for regional trade arrangements such as the CPTPP, formerly
known as TPP, might overshadow ASEAN’s very own CEPT arrangement as the
cornerstone to promote regional trade competitiveness. Four out of ten ASEAN
members (Brunei, Malaysia, Singapore, and Vietnam) are parties to the CPTPP.
Indonesia—the largest country in ASEAN in terms of the size of the economy and
²⁸ Regional firms with ‘unicorn’ status include Grab (Singapore), Gojek (Indonesia), Lazada (Singapore),
Traveloka (Indonesia), VNG (Vietnam), and Revolution Precrafted (Philippines).
²⁹ ASEAN’s undemocratic regimes and their close association with Japanese multinational firms, like
Toyota, have been fostered since the s and s. This made it possible for the state to single-
handedly manage the process of industrialization.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
population—has considered joining the CPTPP in the past but retracted its intention
to join. The proliferation of regional trade arrangements pressured ASEAN to
respond to the demands for better protection by global investors. This is clear
when the number of measures, such as ISDS and the recent intellectual property
rights framework, are considered. We cannot ignore the spectacular rise of China and
its increasing demand for intermediate inputs from ASEAN suppliers. China’s
economic influence in the region poses an economic opportunity to expand ASEAN’s
export market, especially given the impasse present in the current state of inter-
national trade negotiations.
.. Reshaping ASEAN Industrial Policy in the Era of GVCs:
Towards a more Inclusive Participation
In the effort to expedite the process of regional economic integration in Southeast Asia,
ASEAN has put forward several updates of its strategic action plans to complement the
ASEAN Economic Community (AEC) Blueprint .³⁰ The aim of the AEC Blue-
print was to strengthen and reinforce the characteristics of the ASEAN Eco-
nomic Community by , that is: (i) a highly integrated and cohesive economy; (ii)
a competitive, innovative, and dynamic ASEAN; (iii) enhanced connectivity and
sectoral cooperation; (iv) a resilient, inclusive, and people-oriented, people-centred
ASEAN; and (v) a global ASEAN. A key feature in its consolidated strategic action
plan (CSAP) is to allow for a more structured monitoring and reporting of the
implantation progress of the AEC . The newly implemented CSAP makes it
more transparent and open for stakeholders to provide feedback towards achieving
ASEAN economic integration priorities. The newly adopted CSAP reinforces exist-
ing integration areas and a new focus, such as cross-sector complementarities and
coordination among ASEAN.
The new CSAP made clear efforts to strengthen the characteristics of regional
economic integration and ‘ASEAN centrality’. While the language of regional cooper-
ation and industrial policy within ASEAN has been consistent in endorsing the free
movement of goods and services, people, and capital, the ASEAN CSAP shifted
towards the promotion of increased participation in regional and global value chains.
For instance, in efforts to create a ‘highly integrated and cohesive economy’, ASEAN
policymakers have focused on five key elements that include trade in goods; trade in
services; investments; financial integration, financial inclusion, and financial stability;
³⁰ The newly updated action plans include Strategic Action Plan – for ASEAN Taxation
Cooperation, the ASEAN Work Programme on Electronic Commerce –, and the AEC
Trade Facilitation Strategic Action Plan. These updated action plans serve as a single reference and key
action lines towards achieving the ASEAN economic integration agenda –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
facilitating movements of skilled labour; and finally enhancing participation in GVCs.
In each of these elements, new provisions have been included to better facilitate the
participation of SMEs—especially, in the least-developed ASEAN member states—
within the GVC structures.³¹
Some distinct key action plans outlined in AEC include increasing the engage-
ment of the private sector with a particular emphasis on the development of SMEs.
This policy area is in response to the need to improve the economic distribution and
participation of local suppliers in regional supply chains. ASEAN has included new
provisions to allow for better opportunities and resources for SMEs to increase their
share of participation and reduce constraints such as high costs for exports (Bernard
et al., ). SMEs face more resource constraints than domestic large firms, including
access to competitive intermediate inputs. Moreover, they capture a low share of the
foreign value added of exports and, in turn, contribute indirectly by supplying to
domestic firms (Lopez-Gonzales, ). The structural contribution of SMEs to
ASEAN economies is significant. SMEs represent a majority (above per cent) of
commercial enterprises in South East Asia and employ to per cent of the
domestic workforce. SMEs contribute over per cent of ASEAN’s GDP (OECD/
ERIA, ).
SMEs’ employment in the production of intermediate goods traded within the
value chains has grown at a much faster rate than overall employment growth
(Lopez-Gonzales, : ). This illustrates the contribution that SMEs make in
supplying intermediate inputs to regional supply chains (Kowalski et al., ).
However, SMEs’ contribution to total exports is relatively insignificant, estimated
at around to per cent. The recent change in policy shows that ASEAN
policymakers have put a great deal of effort into reducing costs and improving
access to physical and non-physical infrastructures for SMEs, including practical
and/or vocational training. Although SME policies have traditionally been associated
with creating social cohesion, it has evolved into stimulating innovation and entre-
preneurship in ASEAN.
Over the last thirty years, ASEAN’s industrial strategy focused on creating
greater market access, through reducing or eliminating barriers to trade and
investments, and maintaining high foreign investments. While such policies
may be necessary to motivate the flow of goods and services between different
production nodes in the value chain, they fall short of guaranteeing firms and
industries from ‘industrial upgrading’, or moving up the value chains from rela-
tively lower to higher value-added economic activities (Pietrobelli and Rabellotti,
). Industrial upgrading captures more of the value-added in the production
process and increases profits for local firms. The recent policy priorities to increase
³¹ The ASEAN Roadmap for Integration codifies ASEAN policies on industrial competitiveness by
way of providing mutual technical assistance, especially for the least-developed economies such as the
CMLV (Cambodia, Myanmar, Laos, and Vietnam).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
intra-ASEAN trade and investment flows consequently created a vacuum for
structural change and the ability to foster innovation.
.. ASEAN Industrial Policy in GVCs:
Success or Failure?
Given the recent adoption of ASEAN’s GVC policies, it is too early to tell whether such
a shift was a success. The AEC Blueprint outlined the agenda to strengthen and
reinforce regional economic integration through trade facilitation and increasing the
participation of SMEs within GVCs. In this section, we assess the shortcomings of
ASEAN industrial policy in the era of GVCs and put forward potential solutions to
ensure that the current policy focus is consistent to the objectives of ASEAN economic
integration.
First, ASEAN’s regional policy coordination has helped to deepen regional inte-
gration, however, it remains incoherent. The pace and quality of policy implemen-
tation at the domestic level vary across member states (Bautista, ; Yoshimatsu,
). For instance, while reducing and/or eliminating tariffs across the region has
been relatively successful (i.e. zero tariffs for most products for ASEAN countries),
other technical aspects, such as improving customs procedures, dispute settlement
mechanisms, the rule of origin, and the removal of non-tariff barriers, have
weak institutional enforcements (Kadarusman, ). The capacity for national
ministries and agencies to coordinate the regionally agreed principles also matters
a great deal (Chang, ; Kadarusman, ). The lack of policy enforcement is
partly because ASEAN policy relies on a consensus-building process, which allows
flexibility, such as additional time and assistance, to implement the agreed regional
commitments.
Second, while increasing SME participation is a positive attempt to redistribute
gains (i.e. employment and income) from taking part in the global economy, more
needs to be done in expanding regional cooperation on SME development. Firms
that are more engaged in export markets tend to be more efficient and pay more
in wages (Bernard and Jensen, ). However, SME limitations are well docu-
mented and policy dimensions to overcome them have been proposed (Lévy, ;
Jinjarak et al., ; OECD, ; Taglioni and Winkler, ; Kowalski et al., ;
Lopez-Gonzales, ). At the current stage, regional cooperation on SME devel-
opment takes the form of information and experience sharing. More direct cooper-
ation would be needed to better streamline the lessons learned from national to
regional level. ASEAN SMEs could benefit from adopting a more standardized
system of exchange, including the financial information of SMEs among ASEAN
member states.
Third, ASEAN’s trade and investment outlook has persistently fostered export
performance but lacked the infrastructure and framework for industrial upgrading,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
primarily for the nineteen priority sectors. This partly explains why the regional
production network in ASEAN continues to be concentrated in ‘buyer-led’ GVCs as
opposed to ‘producer-led’ GVCs (Gereffi, ). The former refers to production
chains whose lead firms outsource the entire production process and final product to
suppliers.³² Conversely, in a producer-led production chain, the lead firm controls the
means of production and technologies in the host country.³³ This field have argued that
GVC participation in a buyer-led GVC is increasingly difficult and costly for local firms
in developing economies.
ASEAN’s industrial policies lack the reward (or penalty) system that East Asian
industrialists received during their process of industrialization (Amsden, ; Chang,
; Naudé, ). A reward system, such as an export subsidy, encouraged South
Korean chaebols, or large industrial conglomerates, to enter export markets. ASEAN
may consider incorporating a reward system (such as an export subsidy) for local firms
that successfully achieved some form of upgrading (i.e. functional) for certain product
categories. Without such incentives, policies to eliminate tariffs and the removal of
non-tariff barriers would, in the long run, only benefit large and foreign multinational
firms.
Finally, there is a great deal of uncertainty regarding ASEAN’s intellectual prop-
erty rights regime. The new initiatives to create a new ASEAN patent system, which
includes the ASEAN Patent Office to promote regional patent protection, respond
directly to the growth of the non-productive and technology sectors. While we cannot
undermine the importance of an ASEAN patent system, a more general approach that
would allow for knowledge transfers would be more appropriate in GVCs.
. ASEAN’ R P
C: T C
A I
I T
..................................................................................................................................
This section reviews the progress of ASEAN industrial policy in the automotive
industry that began as early as the s. There are historical and political economy
³² Buyer-led is when large retailers and global brands contract the entire process of production,
including designs and production, to the supplier on a short-term contractual basis.
³³ Industries that value highly intellectual property, like the automotive industry, are good examples
of producer-led GVCs. ASEAN’s buyer-led GVCs may extend the patterns of production towards a low
value-added manufacturing export rather than shifting towards producer-led GVCs, which would
require significant investments and access to financial resources. There is a big gap in the distribution
of these resources among ASEAN member states (Chang, ; Kadarusman, ). With the current
policy initiatives, ASEAN suppliers will probably face power asymmetries within the GVC governance.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
elements that contributed to the rapid growth of the automotive parts and
components and assembly sectors in Southeast Asia. Japanese automakers, par-
ticularly Toyota, and, to some extent, Kia of South Korea, played a key role in
transforming the region as the hub in auto manufacturing. These conglomerates
developed new business ‘relationships’ with regional authorities. The growth of the
automotive industry in ASEAN is congruent with the internal political interests of
the current regimes. The development of the automotive industry is arguably one
of the recent success stories that emerge directly from ASEAN regionally coord-
inated industrial policy. Today, ASEAN is emerging as the hub of regional
automotive manufacturing with the production of auto parts and components
integrated across member states.
The automotive industry is undoubtedly one of the most complex global industries,
with production centres (or clusters) scattered across several continents. The auto
industry relies on large capital investment and research and development, and insti-
tutional support for capacity building. Auto firms are increasingly becoming more
dependent on each other for inputs and for delivering quality products to the end
market. The auto industry is persistently transforming from geographical, organiza-
tional, and technological standpoints (Sturgeon and Van Biesebroeck, ;
Sturgeon et al., ). Auto production is no longer concentrated in advanced
countries, such as the United States, Germany, and Japan. There has been a gradual
shift away from the global North and into the global South (Traub-Merz, ). In
, for instance, China ( per cent of global production share, million units)
became the largest automotive manufacturer, followed by the United States ( per
cent, million units), Japan ( per cent, million units), Germany ( per cent,
million units), and South Korea ( per cent, . million units). At the regional level,
India, Mexico, Indonesia, and Thailand are also becoming prominent auto manu-
facturers. The trend in automotive production is likely to divide into automotive
manufacturers in the global North producing a ‘core competence’ of skills-based
production, such as engineering and design, while manufacturers in the global South
take up most of the labour-intensive and assembling process (Sturgeon and Van
Biesebroeck, ).
As a whole, global auto production has been on the uptrend and Asia (including
China) has been the major contributor. Global sales in automotive products (excluding
motorcycles) rose from million units in to million units in ; Asia is the
largest automotive consumer market, with growing motor vehicle sales as high as
million units, followed by North America (. million units) and Europe ( million
units). However, demand for motor vehicles in Latin America (. million units) and
Africa (. million units) has not been as dynamic as in other regions in recent years.
The rise of Asia’s middle-income group partly explains the demand surge for vehicles.
From a regional perspective, Asia captures more than half of the global production.
In , Asia produced about million units of vehicles, up from million in
(International Organization of Motor Vehicle Manufacturers. Global auto
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
production absorbs roughly million workers worldwide or about per cent of the
world’s total manufacturing employment (OICA, ).³⁴
At the regional level, there is a clear shift in investment into countries with relatively
lower production costs, that is, Thailand, Indonesia, and Vietnam in Southeast Asia;
China in East Asia; and Mexico and the American South in North America (Sturgeon
et al., ).³⁵ Conversely, auto industry manufacturing in the less-industrialized econ-
omies remains in labour-intensive production, such as in parts and components and
assembling (Milberg and Winkler, ).
The development of the auto industry is consistent with the industry’s global
transformation in production structures, distribution, and innovation. Indonesia and
Thailand are the largest automotive manufacturers in Southeast Asia, with a combined
production of over billion units of vehicles, and export values of roughly US$
billion in alone. Foreign direct investment (FDI) reached US$ billion for
Indonesia in and net FDI investments of US$ billion for Thailand from
to (Phungtua, ).
Indonesia and Thailand have made new commitments to place the auto industry at
the centre of their national economic and development programmes. The government
of Indonesia, for instance, has set a production target of million vehicle units (from
million) and similarly the government of Thailand has increased its production target
to million vehicles (from million) by .³⁶ Indonesia issued a presidential decree
to restructure the country’s automotive industry away from traditional parts and
components production to producing environmentally friendly and technology-
based vehicles. The decree also outlined new initiatives for more R&D and investments
in technology-based universities.
The auto industry represents a small but growing sector. Recent figures show that the
sector’s contribution to employment grew impressively from roughly , to ,
in Indonesia and similarly , to , in Thailand from to (UNIDO,
). The industry’s contribution to value-added per worker also showed a growth
trend from US$, per worker to US$, per worker in Thailand and US$,
per worker to US$, per worker in Indonesia.³⁷
³⁴ This figure includes employment for the production of parts and components and assembling. The
lack of disaggregated employment data makes it difficult to assess employment compositions. This raises
an important question regarding local job improvements from increased participation in global pro-
duction networks or global value chains.
³⁵ In North America, vehicle design, development, and specific parts and production are concen-
trated in the United States and Canada (as well as the southern part of the US border) in the business
of assembling (Sturgeon et al., ). The North American automotive industry is shifting towards
sub-assemblies of parts of components, supplying not only in its region but also to the rest of the
world. Thailand and Indonesia assemble most of the vehicles for East and South East Asia.
³⁶ The automotive industry in Thailand has strategic importance of per cent to the country’s
economic development and accounts for per cent of the GDP in and is part of the country’s
economic developmental agenda.
³⁷ The value-added per worker is computed by taking the total value added from the auto industry
divided by the number of employees.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
.. The GVC in the Automotive Industry
Mainstream economics predict that increased openness to international trade, typically
through various policies such as export promotions, deregulation, and, more recently,
greater participation in the GVC network, leads to faster economic growth. The
argument is that openness to the international market opens up new economic
opportunities for host countries, including foreign investment inflows from capital-
rich countries to emerging countries, providing better access to technology for pro-
duction. The neo-liberal agenda³⁸ (i.e. the Washington Consensus policy) of the s
also contributed significantly to global production fragmentation, which enabled
developing economies to contribute to the global supply chains by producing the
labour-intensive aspects of the production (Feenstra, ).³⁹ The new pattern of
global trade led to production offshoring part of the production processes to factories
in developing economies, which meant that multinational firms could lower their
production unit costs and keep their core competence (i.e. design, engineering, etc.)
and developing countries could specialize in certain production tasks without having to
build an entire industry from the ground up (Gereffi and Kaplinsky, Humphrey
and Memedovic, ; Humphrey, ; Pietrobelli and Rabellotti, ; Cattaneo
et al., ).
Production fragmentation gave way to more sophisticated trade flows known as
GVCs.⁴⁰ The GVC is an intricate web of modes of production; GVC production is not
just a linear stream of a value-added creation that involves a multiple cross-border of
production mode (i.e. export and re-export). Intermediate input goods cross and re-
enter the border more than once via other countries’ exports. What the GVC concept
also proposes is the opportunity for local producers to learn from the global leaders of
the chains, which may be buyers or producers, and capture the dynamics of the trade
from trade in final goods to intermediate inputs trade, also known as ‘trade-in-tasks’.
The GVC analysis includes not only production aspects but also the flow of informa-
tion, clarifying that firm linkages within and between industries involve skills and
knowledge-sharing, critical for increasing value added.
³⁸ Harvey () argues that the spread of neo-liberalism in the s played a central role in modern
economic processes towards the creation of a free market economy. Harvey underscores how the role of
the state was to facilitate that freedom and protect capital and private property.
³⁹ The Heckscher-Ohlin model of international trade stipulates that a country’s exports hinge on
their comparative advantage and abundant factor endowments. For instance, developed countries are
abundant in capital- and/or skilled-intensive production and developing countries are abundant in
labour- and/or low-skilled production. Following the Heckscher-Ohlin model, the direction of trade
would be that developed countries export capital-intensive goods/services and developing countries
export labour-intensive goods/services.
⁴⁰ The GVC is a series of activities needed to turn raw materials into finished products and sell on the
value-added at each node of the production processes (Gereffi and Kaplinsky, ; Kaplinsky and
Readman, ). GVCs can be argued to be the practical application of World System Theory that
predicted a global production dependency among core or advanced countries on the one hand and
periphery countries on the other.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Greater participation in GVCs is also a way for developing economies’ suppliers to
improve their prospects of earning economic profits (Gereffi, ; Humphrey,
). However, governance in GVCs and competitive pressure make it difficult for
developing economies’ suppliers to earn higher profit margins (Humphrey and
Schmitz, ). Suppliers are under pressure to provide quality products at a low
unit price. In most cases, firms may earn profits outside production. It is necessary for
suppliers to have the ability to upgrade and capture more value within the value
chain. We can categorize automotive GVCs into six main stages: vehicle design and
development; parts and components; modules and subsystems; system integration
and final assembly; marketing and sales; and finally, replacement parts and recycling.
Of these categories, the lead firms specialize in vehicle design and development and
marketing and sales. It outsources other product categories to local firms in the
supply chain.
In , per cent (or about US$ billion) of the value of global trade was of
parts and components and per cent (or US$ billion) was of sub-assemblies
(Sturgeon et al., ). The value of parts and components rose from previous
years— per cent in . From this, Sturgeon et al. estimated that final products
for passenger vehicles contributed to about per cent of total exports in the automo-
tive sector in (a fall from per cent in ). Parts and components also
represent a large chunk of Indonesia’s and Thailand’s automotive exports. The source
of auto demand mostly comes from emerging economies with a rising middle-
income class. China, Indonesia, India, and Brazil are among the world’s largest
economies, with strong market growth rates of ., ., ., and . per cent,
respectively, in . However, advanced economies such as the United States,
Japan, and Germany are experiencing a fall in demand with market growth rates of
–., –., and –., respectively, in the same period. This trend in automotive
demand is likely to continue.
.. A Path to Development and Industrial Upgrading
Participation in GVCs presents emerging countries with an alternative channel or
pathway for economic development. For local firms in developing economies, GVC
participation is an opportunity to have greater access to technological advancements
and potentially have a positive spillover effect for the domestic economy (Humphrey
and Memedovic, ).⁴¹ GVC participation is closely associated with growing prod-
uctivity and less concentration in a country’s export basket, including exports of more
⁴¹ This includes improvements in human resources and skills-upgrading, and increased investment
in infrastructure and R&D.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
sophisticated products (Kowalski et al., ). GVCs can also be the driving force in
creating local network clusters, or a ‘collective efficiency’ or ‘clusters’, to the overall
knowledge of the economy. Silicon Valley in California, United States, and Bangalore,
India, are prime examples of clusters in the tech industry. These clusters create positive
network externalities. But the important question is whether GVC participation leads
to a ‘low-road’ (increasing profits via squeezing wages) or ‘high-road’ (sustainable
income growth) process of development. So far, the channels for development in GVCs
have not been direct (Milberg et al., ).
Recent scholarly work has tried to connect (and measure) both the economic and
social gains from increased GVC participation (Rossi, ; Barrientos et al., ;
Bernhardt and Milberg, ; Milberg and Winkler, , ). We have expected to
see economic upgrading from export expansion and social upgrading from improve-
ments in the workers’ working conditions such as employment and real wages
increases. However, evidence suggests that economic upgrading does not lead to social
upgrading, and vice versa, and there are significant variations between countries and
sectors (Taglioni and Winkler, ; Kaplinsky and Morris, ).
From a development standpoint, there are potential shortcomings with GVC ana-
lysis. First, emerging countries face barriers (i.e. technology, access to capital, etc.) and
asymmetrical power structures skewed towards lead firms (Gereffi and Kaplinsky,
). Thus, knowledge transmission for upgrading is not automatic and may
depend on the relationships between local firms and lead firms (Humphrey and
Schmitz, ). The literature on FDI mostly shows weak evidence linking FDI inflow
and its spillover effects, although there is evidence showing a significant association
with improvements in human capital (Slaughter, ). Second, industrial upgrading
functions at the level of the individual firm in a particular value chain. The success
stories of GVC upgrading have been sporadic for selected industries and countries,
which makes it difficult for policymakers to replicate successes in other industries
(Bair, ; Brewer, ). Thus, industrial upgrading in one particular sector does
not result in overall development at the national level (Bair and Gereffi, ). Third,
there is no such thing as a ‘one-size-fits-all’ policy prescription for countries to
capture the gains from international trade and greater participation in a GVC
network (Pietrobelli and Rabellotti, ). This would require countries to identify
specific transmission channels, such as market entry (backward or forward linkages),
market structure, and the labour market conditions within the value chain to capture
the gains.
.. ASEAN’s Regional Policy Coordination in the
Automotive Industry
ASEAN has had a significant role in ensuring the region takes full advantage of global
production in industries such as textiles and garments, electronics, and automotive.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
The ASEAN Complementation schemes ‘allow parts manufacturers to supply final
assemblers in all member states from a single ASEAN location at favourable terms of
trade as long as inter-ASEAN trade among taking part companies remains balanced’
(Sturgeon and Florida, ). ASEAN’s complementation schemes include pro-
grammes such as the ASEAN Industrial Joint Venture (AIJV) in , Brand-to-
Brand Complementation (BBC) in , and ASEAN Industrial Cooperation (AICO)
in . These programmes rely on resource-pooling and market-sharing among
member states to generate economies of scale. One application of the complementation
scheme is to allow countries to trade different aspects of the production process,
including as parts and components, and engine transmissions, from different origins
at lower costs than would have been possible if the scheme were not in place. More than
that, complementation schemes (like the ASEAN AICO) allows for inter-firm cooper-
ation, encouraging increased intra-ASEAN trade, FDI flows, and technological trans-
fers. The ASEAN complementation scheme plays a unique role in ensuring that
member states benefit from the global production network. As Traub-Merz ()
asserts in his study on the rise of automotive in emerging markets, ‘without membership
of large economic zones in which duty-free internal market trade exists, no country has
yet entered export markets for cars on a significant level’.
. T F M ASEAN
I P
..................................................................................................................................
This chapter looked more closely into ASEAN industrial policy in the era of the GVC.
After periods of industrial policy evolution, from import-substitution industrialization
in the s to export-oriented growth in the s and s to focusing on
deepening GVC participation, ASEAN has emerged as one of the most dynamic
economic regions in the world. ASEAN has made significant inroads into deepening
its participation in regional and global value chains by eliminating tariffs, removing
non-tariff barriers across member states, and improving general and conformance
standards and providing greater protection and rights for foreign investors. However,
ASEAN industrial policy in the era of the GVC has yet to bring significant outcomes
in the automotive sector. ASEAN’s industrial policy in the automotive industry, like
AIJV and AICO, provides a great example of how a regionally coordinated industrial
policy creates scale economies and better distributes the gains to member states.
ASEAN should look back to its past policies and rethink how it can introduce
new forms of policy initiatives suited to address the intricacies of the global produc-
tion network.
We noticed that ASEAN’s industrial policy in the last few years shifted to addressing
the participation and inclusivity of SMEs in regional value chains. ASEAN has been
particularly active in SME policy in recent years, which includes facilitating SMEs with
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
greater access to financial resources and vocational training, to name just a few. While
the redistribution of gains from increased GVC participation may be good for SMEs in
the sense that it improves employment and income, it does not necessarily address the
asymmetries of market power within the GVC network. While we cannot understate
the value of their contribution in supplying intermediate input goods for large domes-
tic firms and multinational firms, it leaves a large vacuum in policy for large domestic
firms that are in a better position to compete with multinational lead firms within the
existing GVC structure.
The future success of ASEAN would hinge on its ability to build globally competi-
tive lead firms. Our assessment of ASEAN industrial policy in the era of GVCs, as
outlined in the ASEAN Economic Blueprint , showed that limited policies were
available to ensure industrial upgrading, or moving up from relatively lower value-
added to higher value-added economic activities. ASEAN’s priority to improve local
participation and the inclusivity of SMEs should not outweigh policy initiatives for
innovation for large domestic firms that are directly competing with foreign multi-
national firms.
Stakeholders need to rethink regional industrial policies within the existing intricate
web of global production. Policymakers should reconsider the aim of regional integra-
tion based only on increasing the number actively participating in supply chains and
look beyond and consider how local actors can take full advantage of the GVC network.
ASEAN industrial policy in the era of GVCs could push countries into a ‘low value-
added trap’, or increased specialization in low value-added labour-intensive manufac-
turing. Policies that would increase SME participation fall short in encouraging
innovation and the possibility of capturing profits for local firms. ASEAN policymakers
should also consider new ways to build a regional hub for research and development
that would be useful for identifying the possibility and the scope of functional upgrad-
ing in priority sectors.
R
Amsden, Alice H. () Asia’s Next Giant: South Korea and Late Industrialization. Oxford:
Oxford University Press.
Anwar, Dewi Fortuna () ‘ASEAN and Indonesia: Some Reflections’, Asian Journal of
Political Science (): –.
Arfani, Riza Noer () ‘Political Economy of Regionalism in ASEAN and Its + Partners:
Contemporary Changes in the Automotive and Electronics Production Networks’, Ritsu-
meikan International Affairs : –.
Ariff, Mohammed and Hal Hill () Export-oriented Industrialisation: The ASEAN Experi-
ence. London: Routledge.
ASEAN-Japan Center () ‘Global Value Chains in ASEAN: A Regional Perspective’,
ASEAN Promotion Center on Trade, Investment, and Tourism. January.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
ASEAN Secretariat () ‘ASEAN Economic Cooperation for the s’. A Report Prepared
for the ASEAN Standing Committee. Philippines: Philippine Institute for Development
and ASEAN Secretariat.
ASEAN Secretariat () ‘ASEAN Economic Community Blueprint’. Association of South-
East Asian Nations.
Bair, Jennifer, () ‘Global Capitalism and Commodity Chains: Looking Back, Going
Forward’, Competition & Change (): –.
Bair, Jennifer and Gary Gereffi () ‘Upgrading, Uneven Development, and Jobs in the
North American Apparel Industry’, in William Milberg (ed.) Labor and the Globalization
of Production. London: Palgrave Macmillan, pp. –.
Barrientos, Stephanie, Gary Gereffi, and Arianna Rossi () ‘Economic and Social Upgrad-
ing in Global Production Networks: Developing a Framework for Analysis’, International
Labor Review (–): –.
Bautista, Romeo M. () Industrial Policy and Development in the ASEAN Countries.
Manila: PIDS.
Bernard, Andrew B., J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott () ‘Firms
in International Trade’, Journal of Economic Perspectives (): –.
Bernhardt, Thomas and William Milberg () ‘Economic and Social Upgrading in Global
Value Chains: Analysis of Horticulture, Apparel, Tourism and Mobile Telephones’. Global
Development Institute Working Paper Series, University of Manchester.
Brewer, Benjamin D. () ‘Global Commodity Chains and World Income Inequalities: The
Missing Link of Inequality and the Upgrading Paradox’, Journal of World-Systems Research
(): –.
Broinowski, Alison (ed.) () Understanding ASEAN. Basingstoke: Macmillan Inter-
national Higher Education.
Cattaneo, Oliver, Gary Gereffi,and Cornelia Staritz (eds) () ‘Global Value Chains in a
Post-crisis World: A Development Perspective’. Washington, DC: World Bank.
Chang, Ha-Joon () ‘Trade and Industrial Policy Issues’, in Ha-Joon Chang (ed.) Rethink-
ing Development Economics. London: Anthem Press, pp. –.
Chang, Ha-Joon () The East Asian Development Experience: The Miracle, the Crisis and
the Future. London: Zed Books.
Chang, Ha-Joon () ‘Industrial Policy: Can We Go beyond an Unproductive Confronta-
tion?’, Annual World Bank Conference on Development Economics, pp. –.
Cimoli, Mario, Giovanni Dosi, Richard R. Nelson, and Joseph E. Stiglitz () ‘Institutions
and Policies Shaping Industrial Development: An Introductory Note’, in Mario Cimoli,
Giovanni Dosi, and Joseph E. Stiglitz (eds) Industrial Policy and Development: The Political
Economy of Capabilities Accumulation. Oxford: Oxford University Press, pp. –.
Durand, Cédric and William Milberg () ‘Intellectual Monopoly in Global Value Chains’,
Review of International Political Economy (): –.
Feenstra, Robert C. () ‘Integration of Trade and Disintegration of Production in the
Global Economy’, Journal of Economic Perspectives (): –.
Gereffi, Gary () ‘The Organization of Buyer-driven Global Commodity Chains: How US
Retailers Shape Overseas Production Networks’, in Gary Gereffi and Miguel Korzeniewicz
(eds) Commodity Chains and Global Capitalism. Greenwood, CA: Praeger Publishers,
pp. –.
Gereffi, Gary () ‘A Commodity Chains Framework for Analyzing Global Industries’,
Institute of Development Studies (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
Gereffi, Gary and Raphael Kaplinsky () ‘Introduction: Globalisation, Value Chains and
Development’, IDS Bulletin (): –.
Goldstein, Morris () The Asian Financial Crisis: Causes, Cures, and Systemic Implications.
Washington, DC: Peterson Institute for International Economics.
Harvey, David () A Brief History of Neoliberalism. New York: Oxford University Press.
Hausmann, Ricardo and Dani Rodrik () ‘Economic Development as Self-discovery’,
Journal of Development Economics (): –.
Hill, Hal () ‘Rapid Industrialization in ASEAN: Some Analytical and Policy Lessons’,
Agenda: A Journal of Policy Analysis and Reform (): –.
Hill, Hal (a) ‘Towards a Political Economy Explanation of Rapid Growth in ASEAN:
A Survey and Analysis’, ASEAN Economic Bulletin (): –.
Hobday, Mike () ‘Learning from Asia’s Success Beyond Simplistic “Lesson-Making” ’.
UNU-WIDER Working Paper No. -. Helsinki: UNU-WIDER.
Humphrey, John () ‘Upgrading in Global Value Chains’. Working Paper No. . Geneva:
ILO Policy Integration Department.
Humphrey, John and Olga Memedovic () ‘The Global Automotive Industry Value Chain:
What Prospects for Upgrading by Developing Countries?’. UNIDO Sectorial Studies Series
Working Paper. Vienna: UNIDO.
Humphrey, John and Hubert Schmitz () ‘How Does Insertion in Global Value Chains
Affect Upgrading in Industrial Clusters?’, Regional Studies (): –.
IMF (International Monetary Fund) () World Economic Outlook. Washington, DC: IMF.
Jinjarak, Yothin, Paulo J. Mutuc, and Ganeshan Wignaraja () ‘Does Finance Really
Matter for the Participation of SMEs in International Trade? Evidence from , East
Asian Firms’. ADBI Working Paper No. . Asian Development Bank Institute.
Jomo, Kwame S. () ‘Rethinking the Role of Government Policy in South East Asia’, in
Joseph E. Stiglitz and Shahid Yusuf (eds) Rethinking the East Asian Miracle. Oxford:
Oxford University Press, pp. –.
Jones, Lee () ASEAN, Sovereignty and Intervention in Southeast Asia. Basingstoke:
Palgrave Macmillan.
Kadarusman, Yohanes B. () ‘AEC and Beyond: Realizing ASEAN Value Chain’,
Thailand and the World Economy (): –.
Kaplan, Ethan and Dani Rodrik () ‘Did the Malaysian Capital Controls Work?’, in
Sebastian Edwards and Jeffrey A. Frankel (eds) Preventing Currency Crises in Emerging
Markets. Chicago, IL: University of Chicago Press, pp. –.
Kaplinsky, Raphael and Mike Morris () ‘Thinning and Thickening: Productive Sector
Policies in the Era of Global Value Chains’, European Journal of Development Research,
(): –.
Kaplinsky, Raphael and Jeff Readman () ‘Globalization and Upgrading: What Can (and
Cannot) Be Learnt from International Trade Statistics in the Wood Furniture Sector?’,
Industrial and Corporate Change (): –.
Kowalski, Przemyslaw, Javier Lopez Gonzalez, Alexandros Ragoussis, and Cristian Ugarte
() ‘Participation of Developing Countries in Global Value Chains: Implications for
Trade and Trade-related Policies’. OECD Trade Policy Paper No. . Paris: OECD
Publishing.
Lévy, Benny () ‘Korean and Taiwanese Firms as International Competitors: The Chal-
lenges Ahead’. Center for Development Economics , Department of Economics, Wil-
liams College.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Lin, Justin and Ha-Joon Chang () ‘Should Industrial Policy in Developing Countries
Conform to Comparative Advantage or Defy It? A Debate between Justin Lin and Ha-Joon
Chang’, Development Policy Review (): –.
Lopez-González, Javier () ‘Mapping the Participation of ASEAN Small- and Medium-
sized Enterprises in Global Value Chains’. OECD Trade Policy Papers No. . Paris:
OECD.
Milberg, William and Deborah Winkler () ‘Economic and Social Upgrading in Global
Production Networks: Problems of Theory and Measurement’, International Labour
Review (–): –.
Milberg, William and Deborak Winkler () ‘Trade Crisis and Recovery: Restructuring of
Global Value Chains’. Washington, DC: World Bank.
Milberg, William and Deborah Winkler () Outsourcing Economics: Global Value Chains
in Capitalist Development. Cambridge: Cambridge University Press.
Milberg, William, Xiao Jiang, and Gary Gereffi () ‘Industrial Policy in the Era of
Specialized Industrialization’, in José Manuel Salazar-Xirinachs, Irmgard Nübler, and
Richard Kozul-Wright (eds) Transforming Economies: Making Industrial Policy Work for
Growth, Jobs and Development. Geneva: International Labour Organization, pp. –.
Moudatsou, Argiro and Dimitrios Kyrkilis () ‘FDI and Economic Growth: Causality for
the EU and ASEAN’, Journal of Economic Integration (): –.
Narine, Shaun () Explaining ASEAN: Regionalism in Southeast Asia. Boulder, CO: Lynne
Rienner Publishers.
Naudé, Wim () ‘Industrial Policy: Old and New Issues’. Working Paper No. –,
World Institute for Development Economics Research.
OECD () ‘Small and Medium-sized Enterprises in Global Markets: A Differential
Approach for Services?’. OECD Trade Policy Paper No. . Paris: OECD Publishing.
OECD/ERIA () SME Policy Index: ASEAN : Boosting Competitiveness and Inclusive
Growth. Paris, Jakarta: OECD Publishing, Economic Research Institute for ASEAN and
East Asia.
OICA (The International Organization of Motor Vehicle Manufacturers) () ‘Passenger
Car Production Statistics’, available at http://www.oica.net/category/production-statistics/.
Oikawa, Hiroshi () ‘To Be or Not to Be a Supplier to TNCs? An Entrepreneurial
Approach to Linkage Formation in the Malaysian Electronics Industry’, in Momoko
Kawakami and Timothy J. Sturgeon (eds) The Dynamics of Local Learning in Global
Value Chains. London: Palgrave Macmillan, pp. –.
Padilla, Miguel A. E., Dyah W. Sari, and Rossanto D. Handoyo () ‘Formation of
Production Networks in ASEAN: Measuring the Real Value-added and Identifying the
Role of ASEAN Countries in the World Supply Chains’, Business and Economic Horizons
(): –.
Pagano, Ugo () ‘The Crisis of Intellectual Monopoly Capitalism’, Cambridge Journal of
Economics (): –.
Pettman, Simon () ‘Standards Harmonisation in ASEAN: Progress, Challenges and
Moving beyond ’. ERIA Discussion Paper Series . Jakarta: ERIA.
Phungtua, Wilawan () ‘The Impacts of Japanese MNCs and Foreign Direct Investment
on Thailand’s Automotive Industry’, EAU Heritage Journal Social Science and Humanities
(): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
Pietrobelli, Carlo and Roberta Rabellotti (eds) () Upgrading to Compete: Global
Value Chains, Clusters, and SMEs in Latin America. Washington, DC: Inter-American
Development Bank.
Pradhan, Rudra Prakash () ‘The FDI-led-growth Hypothesis in ASEAN- Countries:
Evidence from Cointegrated Panel Analysis’, International Journal of Business and Man-
agement (): –.
Radelet, Steve, Jeffrey D. Sachs, Richard N. Cooper, and Barry P. Bosworth () ‘The East
Asian Financial Crisis: Diagnosis, Remedies, Prospects’. Brookings Papers on Economic
Activity (): –.
Ravenhill, John () ‘Economic Cooperation in Southeast Asia: Changing Incentives’,
Asian Survey (): –.
Rodrik, Dani () ‘Industrial Policy for the Twenty-first Century’, CEPR Discussion Papers
No. . London: CEPR.
Rodrik, Dani () ‘Normalizing Industrial Policy’. Working Paper No. . Washington, DC:
Commission on Growth and Development.
Rossi, Arianna () ‘Does Economic Upgrading Lead to Social Upgrading in Global
Production Networks? Evidence from Morocco’, World Development : –.
Sanjaya, Lall () ‘Reinventing Industrial Strategy: The Role of Government Policy in
Building Industrial Competitiveness (No. )’. Geneva: United Nations Conference on
Trade and Development.
Slaughter, Matthew J. () ‘Does Inward Foreign Direct Investment Contribute to Skill
Upgrading in Developing Countries?’. Working Paper -. New York: Schwartz
Center for Economic Policy Analysis.
Stiglitz, Joseph E. () ‘Some Lessons from the East Asian Miracle’, World Bank Research
Observer : –.
Sturgeon, Timothy and Richard Florida () ‘Globalization and Jobs in the Automotive
Industry’, Final Report to the Alfred P. Sloan Foundation. International Motor Vehicle
Program, Center for Technology, Policy, and Industrial Development, Massachusetts
Institute of Technology.
Sturgeon, Timothy, and Johannes Van Biesebroeck () ‘Global Value Chains in the
Automotive Industry: An Enhanced Role for Developing Countries’, International Journal
of Technological Learning, Innovation and Development (): –.
Sturgeon, Timothy J., Jack Daly, Stacey Frederick, Penny Bamber, and Gary Gereffi ()
‘The Philippines in the Automotive Global Value Chains’. Durham, NC: Duke University
Center on Globalization, Governance and Competitiveness.
Sturgeon, Timothy J., Johannes Van Biesebroeck, and Gary Gereffi () ‘Prospects for
Canada in the NAFTA Automotive Industry: A Global Value Chain Analysis’. Report for
Industry Canada, Ottawa.
Suriyamongkol, Marjorie L. () Politics of ASEAN Economic Co-operation: The Case of
ASEAN Industrial Projects. New York: Oxford University Press.
Taglioni, Daria and Deborah Winkler () ‘Making Global Value Chains Work for
Development’. Washington, DC: World Bank Group.
Traub-Merz, Rudolf () The Automotive Sector in Emerging Economies: Industrial Policies,
Market Dynamics and Trade Unions: Trends and & Perspectives in Brazil, China, India,
Mexico, and Russia. Berlin: Friedrich-Ebert-Stiftung, Global Policy Development.
UNIDO () INDSTAT Industrial Statistics Database at - and -digit level of ISIC
Revision and . Vienna: UNIDO.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Wade, Robert H. () The Asian Debt-and-development Crisis of –? Causes and
Consequences’, World Development (): –.
Yamaguchi, A. () ‘Global Value Chains in ASEAN’. Institute for International Monetary
Affairs, Newsletter .
Yoshimatsu, Hidetaka () ‘Preferences, Interests, and Regional Integration: The Develop-
ment of the ASEAN Industrial Cooperation Arrangement’, Review of International Political
Economy (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
Industrial Policy in an Interdependent World
.............................................................................................................
-
. I
..................................................................................................................................
T links between trade and development have been a perennial feature of clashes over
economic policy since the Industrial Revolution, if not before. A strict interpretation of
the comparative advantage story tends to contrast a desirable policy of ‘free trade’ and
unbridled competition with distortionary interventions in support of favoured indus-
trial sectors (Becker, ), prone to ‘government failures’ (Krueger, ); looser
interpretations of that story open up possibilities for a more engaged discussion
(Krugman, ; Lin, ), albeit with much hand-wringing over ‘picking winners’
(Harrison and Rodriguez-Clare, ). However, there is more to trade and develop-
ment dynamics than can be extracted from comparing factor endowments.
Taking a macroeconomic focus changes the terms of the debate; exports can provide
a ‘vent’ for domestic production surpluses and a source of external demand while
imports can help correct supply-side shortfalls even as they leak domestic demand; the
resulting examination of economic imbalances necessarily links trade to the balance-
of-payments constraint and related financing issues, as well as focusing attention on
the structure of global markets—through both the negotiation of trade rules and the
power of large firms that dominate international trade—and raising the possibility of
‘unequal’ or at least ‘unequalizing’ exchange (Singer, ; Emmanuel, ). More-
over, the dependence on key imports at different stages of the development process—
particularly technology, capital, and intermediate goods—highlights possible structural
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
obstacles to integrating successfully into the global economy, and in the process linking
the discussion of trade to industrial policy.
Introducing an historical and comparative dimension to the debates on trade and
industry adds institutional and behavioural details missing from much of the con-
ventional trade discussion. Exporting, for example, is seen by some as facilitating
entrepreneurial and other firm-level capabilities through buyer–seller links and
competitive pressures while at the same time giving rise to ‘first-mover advantages’
that can stymie competitive pressures (Gomory and Baumol, ). More generally,
international trade can heighten distributional conflicts, both within and across
countries (Harrison et al., ), and introduce geo political pressures into the
workings of the global economy (Findlay and O’Rourke, ). These matters
necessarily shift the attention on the critical role of the state in managing trade
relations (Caporaso, ; Storm, ) and that role has received particularly close
attention in the success stories of East Asia, reinforcing, according to some, the
advantages of export-oriented industrialization over import-substitution industrial-
ization in devising a national development strategy but, on other counts, broadening
the policy challenges arising from efforts to create ‘dynamic advantage’, including
through the rapid mobilization of resources for accelerated capital formation and the
establishment of a strong nexus between profits, investment, and exports (UNCTAD,
; Krugman, ).
Comparative studies have also revealed how differences at the firm level and in the
organization of production can influence trade relations. With international trade
traditionally dominated by large firms (Bernard et al., ), how these emerge, their
links with smaller enterprises, and the wider impact of their economic power and
influence provide a critical part of the trade and industrialization narrative. Conven-
tional trade models, constructed around a bias for perfect competition, have been
amended by introducing economies of scale and scope. However, other features of a
trading system dominated by large firms, including, for example, the role of financial
markets (themselves prone to scale effects) and the presence of rent-seeking behaviour,
have been less adequately researched (Buckley, ). A more descriptive literature has
examined some of these issues through the lens of global value chains (GVCs) which
have become a more prominent feature of international trade over recent decades.
Establishing links in these chains has, on some accounts, made it easier to begin an
industrialization drive in poorer countries (Baldwin, ). However, on other
accounts, stronger intellectual property rights and weakened labour laws have further
shifted the balance of power towards the multinational firms leading these chains, not
only further strengthening their dominant market positions and ability to generate
high profits but also stalling the industrialization process in developing countries
(Gereffi et al., ; Phillips and Henderson, ; Kozul-Wright and Fortunato, ).
The chapter is organized as follows. Section . critically discusses the role played by
trade integration in the process of economic development, insisting that trade is a
means not an end and that the potential gains from the effective management of trade
involves more than specialization. Section . focuses on productive integration,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
analysing the channels through which the slicing of the value chains across different
economies affects the structure and composition of exports. In this context, the section
discusses the emergence of global value chains (GVCs) and presents a simple mapping
exercise designed to locate different developing economies in the ‘GVCs space’ along
two critical dimensions, the extent and the typology of participation in production
networks. Section . analyses some factors which are of critical importance when it
comes to policy design in an interdependent world economy: the difference between
active and passive policy stance, the challenges of product upgrading along GVCs, and
the relevance of regional value chains (RVCs). Section . offers some concluding
remarks.
. T M C
B T I
D
..................................................................................................................................
.. Gains from Trade?
Most successful economies, starting from a relatively specialized primary structure,
have moved resources into higher productivity manufacturing activities which, along
with access to low-cost inputs, has facilitated access to foreign markets; subsequently
more sectors are added, along with more economic linkages within and across sectors,
including with more sophisticated service activities which are initially located inside
manufacturing firms but subsequently become the basis for more independent sectors.
In the process, successful economies come to rely increasingly on intangible assets,
scale economies, and learning to generate further increases in productivity and further
gains from international trade. At higher levels of income, these economies begin to
specialize once again, but now in service activities. Strong empirical support associates
this pattern with technological progress, the rise of a large middle class, and the
progressive development of financial markets.
These components of successful development have persisted over the last fifty
years even as the world economic landscape has changed considerably. During this
period, growth in world trade has consistently exceeded growth in global output and
today’s global economy is a much more open and interconnected space than it used to
be (UNCTAD, ). Furthermore, the relative importance of developing countries in
world trade has been rising—steadily from the early s, more sharply after the early
s—reaching between and per cent of the total. The composition of world trade
has also changed significantly, shifting away from primary products (particularly metals,
minerals, and fuel) with a corresponding rise in the share of manufacturing and services,
a shift that has also been pronounced in developing countries.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
This evolving landscape is on some accounts the inevitable outcome of a rules-based
liberal world economy in which countries have adhered to their comparative advantage
and where economic gaps are destined to become smaller and smaller (Baldwin, ).
For standard economic theory, specializing according to comparative advantage allows
countries to reap efficiency gains from moving to a production and exporting profile
that concentrates on exploiting their relatively abundant resources and importing
goods that embody relatively scarce resources. Even countries lagging behind in all
sectors would benefit by following this path (Clarida and Findlay, ) and, assuming
markets remain competitive, more mobile capital, particularly in the form of direct
investment, should ensure strong gains for developing countries.
On this basis, the policy conclusion is, invariably, rapid trade liberalization along
with complementary measures to deregulate domestic markets (particularly the labour
market) and remove other government measures that ‘distort’ prices and stymie
international competition. A vast academic industry has sprung up employing sophis-
ticated models and statistical techniques which purport to prove a direct link from
trade liberalization through increased trade flows to rapid economic growth, poverty
reduction, and improved societal welfare. Trade simulation exercises, which seem to
multiply whenever multilateral or regional trade negotiations are getting underway (or
getting stuck), offer headline-grabbing multi-billion dollar gains from trade liberaliza-
tion, often accompanied by finger wagging at those who are reportedly stalling or
opposing the process.
While the argument is much admired for its mathematical elegance, it rests on a set
of severely restrictive assumptions whose distance from reality has troubled gener-
ations of economists beginning with Adam Smith, no less, who insisted that a universal
system of free international trade was more a utopian ideal than a coherent blueprint
for policy, and that the costs of adjusting to it required that it be done ‘only by slow
gradations, and with a good deal of reserve and circumspection’ (cited in Panic,
: ). Smith’s conclusion followed from his observation of a world of underutil-
ized and misused resources in which lagging regions faced a set of unfavourable
circumstances.¹ Smith also recognized, that in this world, and whatever the causes of
the initial gaps among countries, the free movement of goods, technical know-how, and
factors of production could give an advantage to those who opened up an early lead,
allowing them to maintain or extend that lead at the expense of later developers.²
¹ Smith offered a number of reasons why some countries lagged behind, including unfavourable cost
conditions (which led some countries to forsake manufacturing); a hostile policy environment (which
included insecure property rights and misguided trade policy); weak infrastructure (which augmented
geographical obstacles to market expansion); and small or scattered populations (which limited the
division of labour).
² In his Lectures on Jurisprudence published before The Wealth of Nations, Smith noted that ‘it is
easier for a nation, in the same manner as for an individual, to raise itself from a moderate degree of
wealth to the highest opulence, than to acquire this moderate degree of wealth’ (cited in Vaggi and
Groenewegen, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
While Smith’s observations have been obscured by conventional trade models,
development economists and economic historians have long recognized that policy-
makers do not operate in a world populated by small firms, with perfect information
about consumer tastes and available production technologies, where learning or scale
economies are absent, and immobile factors of production fully employed (Toner,
). This has cautioned against rapid trade liberalization, with economic divergence
just as plausible an outcome from such moves as narrowing income and technology
gaps, with even more conventional economists acknowledging that, under some
circumstances, ‘the roulette wheel of evolving comparative advantage’ can lead to
‘genuine harm’ (Samuelson, : ).
In reality, trade takes place among countries at very different levels of development
and is shaped by a variety of forces other than factor endowments, including economic
structure, firm size, technological learning, and power imbalances. This makes for a
much more uncertain trading environment than allowed for in standard trade models
and implies that trade policy will be poorly designed if it is focused on achieving
some single best outcome rather than on making tangible gains from an evolving set
of trading relations among partners of varying degrees of economic power and
sophistication.
In this world, trading possibilities are created rather than given and the adjustments
to opening up can take time and have significant distributional effects, historical
accidents have long-run economic consequences, and ‘market forces do not select a
single, predetermined outcome, instead they tend to preserve the established pattern,
whatever that pattern may be’ (Gomory and Baumol, ). Indeed, as Gomory and
Baumol insist, given that the modern trading system is so different from the implicit
eighteenth-century historical setting of the free-trade model, the analysis of how trade
works needs to start from a very different set of stylized facts. Consequently, a ‘win–
win’ outcome is just one among a range of possibilities in a more open trading system
and highlight that international market forces, in conjunction with varying national
capabilities, can produce results that are beneficial for some but detrimental to others.
Not surprisingly, the idea of a simple positive association between trade and
economic growth is still contested (Kim, ; Rodrik, ). The vague definition of
openness, and the failure to separate episodes of export promotion from those of
import liberalization, can easily lead to the misrepresentation of trade regimes, making
it difficult to draw meaningful cross-country comparisons and correctly interpret the
findings. Cross-sectional averages hide country-specific differences and breaks in the
series. Furthermore, several studies have found that results reporting a strong link
between openness and growth may be sensitive to the specific trade measures employed
(Pritchett, ), the introduction of additional control variables (Levine and Renelt,
), cyclical factors, and periodization (Wacziarg and Welch, ). It also needs to
be stressed that even when a close statistical association between trade and growth is
found, this still leaves open the question of the direction of causation, with plenty of
reasons to suppose that it runs from domestic success in raising productivity to
increased trade, and not the reverse (Clerides et al., ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
From a policy perspective, rather than assuming a positive association between trade
and growth, what is needed is a closer examination of the channels through which the
two variables might be related. From an industrial policy perspective, it is of particular
interest to explore how trade (both exporting and importing) can affect productivity
growth via its impact on aggregate patterns of structural change and diversification.
.. Trade Composition, Structural Transformation,
and Diversification
While there is considerable disagreement over how to weigh up the potential losses
from trade and even more on what to do about it, there is general agreement that what
a country produces and exports matters, that is, whether it exports apples or iPhones is
important for its development process and prospects. This was the lesson drawn by the
first catch-up economy, the United States, under the guidance of Alexander Hamilton
who, as its First Secretary of the Treasury, ruptured its agrarian destiny and actively
pursued a pro-industrialization agenda through high tariff barriers, big infrastructure
projects and support for technological learning (Cohen and de Long, )—a strategy
reproduced, with local variation, in the European late industrializers of the late
nineteenth and early twentieth centuries.
As a new post-war international division of labour took shape, reinforcing the
advantage of industrial as opposed to primary producers, development economists
embraced the idea that trade could generate polarized outcomes between ‘centre and
periphery’ (Prebisch, ) but also, by privileging certain activities, locations, and
firms, could further fracture the international division of labour as large international
firms with tight control over finance and knowledge were able to reinforce their
dominant market positions at the expense of weaker players (Hymer, ; UNCTAD,
). Whether through polarization or fragmentation pressures, the resulting room for
slippages between trade and development implied that even if countries were able to
increase exports, and even achieve higher shares in global trade, they might still fail to
diversify their economies and achieve broader development goals like poverty reduction,
increased employment, improved welfare, etc. As a result, policymakers in many devel-
oping countries looked for new ways to reconnect trade to diversification and wider
development challenges through more active measures to transform the underlying
structure of their economies.
Structural transformation refers to the movement of labour, capital, and other
productive resources from low-productivity to higher-productivity economic activities
within and across sectors. By expanding destination markets and realizing scale
economies, international trade can favour the development of higher productivity
sectors and the shift of labour and other resources in their direction. While the
opportunities are not exclusive to manufacturing, the presence in that sector of various
productivity-enhancing forces has given it a privileged place in the discussion on trade
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and development (Prebisch, ; Toner, ; Cherif and Hasanov, ). Moreover,
exporting manufactures can not only foster a productivity spurt within that sector, it
can also raise an economy’s aggregate productivity by redistributing existing resources
across a broad range of economic sectors, bringing dynamic gains as the access to better
technologies fosters skills-upgrading and other positive externalities.
However, positive outcomes are not predetermined; when there is surplus labour,
strong import competition, or the exit of less productive firms, trade liberalization can
result in declines in aggregate (economy-wide) productivity even as it raises product-
ivity in the industrial sector or among trading firms (McMillan and Rodrik, ). The
net impact ultimately depends on wider employment dynamics and on whether the
productivity growth in industry is outweighed by a larger shift of labour and resources
into low productivity work outside the sector. Evidence of such shifts underlies
concerns about weak industrialization (including premature de-industrialization) in
the developing world in recent decades (UNCTAD, , ; Felipe et al., ;
Rodrik, ; Tregenna, ).
From this perspective, structural transformation is less a one-off adjustment and
more a continuous process and the attendant policy challenges vary, inter alia, with a
country’s level of income, the structure and sophistication of its productive base, the
size of its firms and their technological capacities, and the fiscal space to manage the
employment challenge (UNCTAD, , , , ). Each level of economic
development is a point along the continuum from a low-income agrarian economy,
where most of the output and labour are concentrated in agriculture, to a high-income
economy, where the lion’s share of production and labour accrues to manufacturing
and services. The structure of the economy continuously changes as technological
change leads it to upgrade to more and more sophisticated goods and production
methods. This involves both a progressive diversification of the production base and an
upgrade of the goods produced within each industry. Diversification is therefore the
key economic development challenge to which industrial and trade policy must adapt
accordingly.
The critical importance of diversification, or horizontal evolution of production, has
been underscored by the findings of Imbs and Wacziarg (). Examining sectoral
concentration in a large cross-section of countries, they document an important
empirical regularity: as poor countries get richer, sectoral production and employment
become less concentrated, that is, more diversified. Such a diversification process goes
on until relatively late in the process of development. This highlights another potential
channel of connection between trade liberalization and development; by favouring the
access to international markets, openness can help to overcome domestic demand
constraints and may therefore facilitate the horizontal evolution of production. On the
other hand, an excessive or premature liberalization, taking place when the economy
still lags very far behind the frontier in terms of productive capacities, might instead
foster an overspecialization on natural resources or low-skilled intense manufacturing
products according to the logic of the comparative advantage.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Structural transformation can also proceed through the gradual process of moving
towards higher value-added and more productive activities and the increasing sophis-
tication of the goods produced. Empirical evidence has demonstrated that countries
that have managed to upgrade their productive structures and export more sophisti-
cated goods have grown faster. Hausmann et al. () develop a quantitative index of
countries’ export sophistication generally denoted as EXPY. Unsurprisingly, the
authors show that this measure of export sophistication is highly correlated with per
capita income. But what is important from our perspective is that they also show the
existence of a positive correlation between the initial level of EXPY and the subsequent
rate of economic growth. That is to say, if a country has a sophisticated export basket
relative to its level of income, subsequent growth is much higher (see also Fortunato
and Razo, ). It is telling that China and India, among the most successful
economies in the recent past, had in more sophisticated export profiles than
their income levels might have suggested.
Along with diversification and upgrading, the third component in the transform-
ation narrative is linkages. The immense appeal of manufacturing lies in its potential to
generate productivity and income growth (Kaldor, ), and because such gains can
spread across the economy through production, investment, knowledge, and income
linkages. Several linkages deserve mention here. To begin with, expanding production
can help build ‘backward’ linkages (to source inputs for production), and ‘forward’
linkages in so far as the produced goods are used in other economic activities (Hirsch-
man, ). Intersectoral linkages emerge as knowledge and efficiency gains spread
beyond manufacturing to other sectors of the economy, including primary and service
activities (Cornwall, ; Tregenna, ). Investment linkages are created when
investments in productive capacity, new entrepreneurial ventures, and the related
extensions of manufacturing activities in one enterprise or subsector trigger additional
investments in other firms or sectors, which otherwise would not occur because the
profitability of a specific investment project in a certain area of manufacturing activity
often depends on prior or simultaneous investments in a related activity (Rodrik,
). Income linkages emerge from rising wage incomes generated from industrial
expansion; these add to the virtuous cycle through ‘consumption linkages’. Income
linkages also operate through supplementary government revenues (i.e. ‘fiscal link-
ages’), which may therefore expand public expenditure. The creation of such income
linkages can strengthen the self-reinforcing aspect of industrialization through increas-
ing domestic demand and therefore GDP growth.
While diversification, upgrading, and linkages frame the structural transformation
in general, what determines whether and in which direction a country transforms its
production structure is country specific and often difficult to identify even ex post. But
among the many variables that influence the outcome of this process, industrial and
trade policy have received particular attention in academic and policy debates. Since
countries cannot produce a good for which they have no knowledge or expertise,
deploying policies to foster learning, accumulation of productive capabilities, and
technological change becomes of crucial importance. Trade policy also matters in
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
this context, not only because access to markets abroad can provide new growth
opportunities but also because the commercial partners and the type of integration
strategy pursued may significantly affect the characteristics of the exported products
and the opportunities to further diversify the economy.
. P I: T
E G V C
..................................................................................................................................
For a good deal of the post-war period, policy debates on how best to establish a robust
connection between trade and industry was pursued through the largely misleading
dichotomy between import-substitution industrialization and export-oriented indus-
trialization and a false comparison between free and managed trade. This, by draining
the discussion of a specific structural, institutional, and historical context was an
unfortunate turn, because the case for international trade and its implications for
growth, employment, and distribution is a subtle one that has always depended heavily
on context (Rodrik, ).
Those debates have become, if anything, even less nuanced with the rise of hyper-
globalization marked by large flows of footloose capital and the reorganization of
production around global value chains (GVCs). Advances in information and com-
munication technologies (ICTs) along with extensive market liberalization have
made it easier and cheaper for large international firms to move capital around,
including by illicit means, as well as to manage far-flung production networks, which
nowadays account for a rising share of international trade, global output, and
employment (UNCTAD, and ). Participation in these chains by developing
countries is expected to attract more foreign direct investment (FDI), provide easier
access to export markets, advanced technology and know-how, and generate rapid
efficiency gains from specializing in specific tasks, appropriately guided by the ‘lead
firm’ in the chain. Such participation is seen as particularly important for developing
countries with small domestic markets whose firms confront a range of technological
and organizational constraints stemming from the fact that the minimum effective
scale of production often far exceeds that required to meet their prevailing level of
domestic demand.
This has encouraged policymakers to focus on providing an attractive business
climate (including adequate infrastructure and a sufficiently trained labour force) for
the lead firms that manage these chains, avoiding any restrictions on the free flow of
goods and finance that connect suppliers along the chain. With the spread of these
chains, the foreign content of exports, or backward participation, which measures the
value added generated outside the country that completes and exports a product, has
increased significantly in a number of developing economies but also in Europe and
North America. According to Timmer et al. (), foreign content shares increased
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
for per cent of the product chains between and . As a counterpart, forward
participation of many economies, that is, how much domestic value added is embodied
as intermediate inputs in third countries’ gross exports, has also been on the rise; in
it accounted for over per cent in the United States, China, and the European Union.
Such data indicate the pervasiveness of international fragmentation. No longer are
products simply made in one country and shipped to another for sale. Indeed, products
often go through many stages, traversing several geographic and organizational borders
and adding components and value before they reach their final markets. This is also
reflected in the significant increase in trade in intermediates, whose share of global
trade increased from per cent in to a peak of over per cent in
(explaining two-thirds of the total growth in trade over the period), and in the
continuous rise of the global FDI stock, from just over per cent of global GDP in
to over one-third in .³
In recent years, outsourcing and producer-driven value chains have tended to con-
centrate especially in capital- and technology-intensive industries such as automobiles,
electronics, and machinery. The underlying rationale for this reorientation from the
firms’ perspective is straightforward; first, their control of intangible assets (derived from
investments in R&D, design, marketing, and branding) are less prone to competition, as
they are based on unique resources and capabilities that other firms find difficult to
acquire, and are therefore sources of superior returns or rents (Kaplinsky, ) and
second, their dominant position as lead firm also gives them a monopsonistic position
with respect to suppliers, squeezing their margins and adding to their own super profits.
On the other hand, fragmentation has made integration into these chains attractive for
many developing countries, who, by becoming niche suppliers of parts of the chain,
present an attainable first step towards building industrial capacity, creating employ-
ment, and integrating into global trade. Accordingly, policymakers are increasingly
turning to integration and upgrading in GVCs as a means of driving economic devel-
opment but, more often than not, without the policy tools required to make this happen.
.. Mapping GVCs
Production is nowadays fragmented across national boundaries much more than it
used to be in the past, and it entails the sourcing of inputs and components from
multiple suppliers based in several countries. Understanding how this is affecting trade
patterns and wider development prospects relies on an accurate measurement of the
intensity of participation in the GVCs of each individual economy but also on the
identification of the extent to which countries are specializing in different stages of the
global production processes.
Since many developing countries have faced difficulties in achieving their develop-
ment policy objectives, their place in GVCs has tended to be located on the lower
³ Of course, a significant proportion of the increased stock of FDI is linked to non-tradable tertiary
sectors of the economy.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Digital manufacturing value chain
with corrective policies
Traditional manufacturing
value chain
Digital manufacturing value chain without corrective policies
R&D Design Production Marketing Services
. Stylized manufacturing value chain smile curve
Source: Authors.
portions of what is sometimes referred to as the ‘smile curve’ (Figure .). The smile
curve conceptualizes international production as a series of linked tasks and sees
international trade organized within GVCs as involving trade in those tasks rather
than trade in goods. The resulting fragmentation of production carries significant
consequences for the spatial division of labour and the distribution of economic
power and privilege. Most of the preproduction and post-production segments of the
manufacturing process, with their higher return activities, are usually located in
advanced economies, with developing countries often left with the lower value added
activities of the production segment of the manufacturing process.
To get a more granular measure of the nature of integration of any given country in
international production networks, we employ a participation index calculated as the
sum of forward linkages, that is, domestic value added embodied in foreign exports (as
a share of total exports), and backward linkages that is, foreign value added (as a share
of total exports). Our measure of upstreaming is taken from Fally () and Antràs
et al. () and is meant to gauge the distance of each specific production sector in a
country i from final demand. The index collects information on the extent to which the
industry produces goods that are sold directly to final consumers or to sectors that
themselves sell to final consumers. A country is specializing in upstream activities if it
imports a low share of intermediates and exports a big share of intermediates to third
countries. Upstream activities are, for instance, the production of raw materials, but
also intangibles such as research and development or the design of industrial products.
Formally, we calculate the total share of products sold for final use over the gross
output of each sector and then aggregate across sectors to evaluate the upstreamness of
country i. We take from Fally () also our index of downstreaming. The index is
meant to capture the distance of a given sector in country i from the economy’s
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
2005 GDP 2011 GDP
3.0
2500 3.0
3000
5000 6000
Distance from Final Demand
Distance from Final Demand
7500 9000
2.5 2.5
Country
Bulgaria Bulgaria
2.0 Brazil 2.0 Brazil
China China
Indonesia Indonesia
India India
1.5 1.5
Mexico Mexico
Romania Romania
Russia Russia
1.0 1.0
Turkey Turkey
30 40 50 30 40 50
Participation Participation
2005–2011 Country
3.0 Bulgaria
Distance from Final Demand
Brazil
China
2.5
Indonesia
India
2.0 Mexico
Romania
Russia
1.5 Turkey
Year
1.0 2005
2011
30 40 50
Participation
. Evolution of GVC positioning in selected developing economies (participation and
upstreamness), –
Source: WIOD () and OECD TiVA.
primary factors of production. According to this measure an industry in country i is
more downstream when its production process uses intensively intermediate inputs
(rather than primary production factors) and thus when the value added associated
with its production is relatively low. Typical downstream activities include the assem-
bly of processed products and post-sales customer services. Formally, the measure is
calculated as the complement to unity of the ratio between the value added generated
by each sector and its gross output. Following Marel (), the data are subsequently
aggregated across sectors to obtain the value of the index for a country i.
We focus specifically on low- and middle-income countries within the set of forty
countries covered by the World Input Output dataset (Timmer et al., )⁴ and look
at the years and , and to the changes that occurred during the period. We
study first how changes in participation rates are associated to specialization in
upstreaming activities (Figure .). On the horizontal axis we measure the intensity
of participating in GVCs (participation index) while the vertical axis measures distance
from final demand (upstreamness).
⁴ Bulgaria, Brazil, China, India, Indonesia, Mexico, Romania, Russia, and Turkey.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
GDP
2005 2011 GDP
2500
3000
3.0 5000 3.0
6000
Distance from Final Demand
Distance from Final Demand
7500
9000
2.5 Country 2.5
Country
Bulgaria
Bulgaria
Brazil
2.0 2.0 Brazil
China
China
Indonesia
Indonesia
India
1.5 India
Mexico 1.5
Mexico
Romania
Romania
Russia
1.0 Russia
Turkey 1.0
Turkey
1.0 1.5 2.0 2.5 3.0 1.0 1.5 2.0 2.5 3.0
Distance from primary factors of production Distance from primary factors of production
2005-2011 Country
3.0 Bulgaria
Distance from Final Demand
Brazil
China
2.5
Indonesia
India
2.0 Mexico
Romania
Russia
1.5 Turkey
Year
1.0 2005
2011
1.0 1.5 2.0 2.5 3.0
Distance from primary factors of production
. Evolution of GVC positioning in selected developing economies (downstreamness
and upstreamness), –
Source: WIOD ().
All the economies under scrutiny, with the notable exception of China, experienced an
increasing participation rate coupled with a shift of the production away from the final
demand, that is, upstreaming in is higher than in . This reflects both increased
outsourcing in advanced economies and the relative distance from the market of those
productive activities sourced by developing economies. China, on the contrary, increased
its upstreaming but reduced its overall participation in GVCs. This reflects its increased
specialization in intermediate inputs trade, which in turn increases the distance from
final demand, and the reduction of foreign value addition in domestic production.
Figure . introduces the distance from an economy’s primary factors of production
(downstreamness). We measure downstreamness on the horizontal axis while, once
again, the vertical axis measures distance from final demand (upstreamness).
Figure . shows the existence of a strong and positive correlation between the two
indicators. Countries characterized by more upstream production according to the
production-staging distance from final demand are at the same time closer to primary
factors of production. In other words, economies that sell higher shares of their
output directly to final consumers tend also to display relatively high value added
over gross output ratios, reflecting a limited amount of intermediate inputs embodied
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Brazil—Sectoral Positioning (2005–2011) Russia—Sectoral Positioning (2005–2011)
4.0 Year 4.0 Year
2005 2005
2006 2006
Distance from Final Demand
Distance from Final Demand
3.5 3.5
2007 2007
2008 2008
3.0 3.0
2009 2009
2010 2010
2.5 2011 2.5 2011
Industry Industry
2.0 2.0
Manufacturing Manufacturing
Primary Primary
1.5 Services 1.5 Services
1.5 2.0 2.5 3.0 3.5 1.5 2.0 2.5 3.0 3.5
Downstreamness Downstreamness
India—Sectoral Positioning (2005–2011) China—Sectoral Positioning (2005–2011)
4.0 Year 4.0 Year
2005 2005
Distance from Final Demand
2006 2006
Distance from Final Demand
3.5 3.5
2007 2007
2008 2008
3.0 3.0
2009 2009
2010 2010
2.5 2011 2.5 2011
Industry Industry
2.0 2.0
Manufacturing Manufacturing
Primary Primary
1.5 Services 1.5 Services
1.5 2.0 2.5 3.0 3.5 1.5 2.0 2.5 3.0 3.5
Downstreamness Downstreamness
. Sectoral positioning of BRIC economies, –
Source: WIOD () and OECD TiVA.
in their production.⁵ This is the case since modern economies tend to specialize
alternatively in ‘short’ or ‘long’ value chains. Services are provided through ‘short’ chains
with both a high ratio of sales to final consumers and little use of intermediate inputs in
production. Indeed, payments to labour comprise a larger share of the production costs
in services industries. Conversely, manufacturing processing can be more easily frag-
mented into stages involving separate parts and components. Consequently, manufac-
turing is characterized by relatively ‘longer’ chains with a lower share of output going
directly to final use and a more intense use of intermediate inputs compared to services.
Figure . highlights the significance of these sectoral differences displaying the
relative position of manufacturing, services, and the primary sector in the BRIC’S
economies between and . In all cases, the services sector falls in the lower left
⁵ Among the BRIC economies, Brazil and India have experienced a marginal decline in both
measures while Russia and China experienced a rise, albeit for different reasons.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
quadrant, indicating both proximity to the final demand and to the production factors.
The manufacturing sector displays higher variation across the four countries. In line
with the idea of ‘long’ production chains, China’s manufacturing industries are more
distant from the final demand, reflecting their increasing specialization in intermediate
inputs. Manufacturing in India and Brazil, on the other hand, appears closer to final
demand, thanks to their greater dependence on service activities and primary products
respectively.
.. Assessing the Impact of GVCs
The connection between participation in GVCs and development is not a straightfor-
ward one. When the low unit cost that attracts TNCs is largely dependent on low wages
rather than rising productivity, the danger of a race to the bottom is ever present.
Moreover, while the evidence presented in UNCTAD (), for example, shows that
when increases in the foreign value added of exports occurs in a larger context of
greater production and exports of manufactures (as in much of the Asian region, for
instance), GVC participation can complement industrialization and structural when
increasing participation in GVCs reflects a reduction of domestic sourcing in a context
of weak export performance of manufactures, GVC participation may actually delay
structural transformation, as in the case of many developing economies in Africa and
Latin America.
Kowalski et al. () analyse the impact of GVC participation on economic
upgrading as measured by sophistication of the export structure. They find that
while growing backward participation to GVCs, measured using the share of foreign
value added in exports, is associated with product upgrading in high- and middle-
income countries, wider fragmentation does not have the same effects in low-income
economies. This heterogeneity across income groups suggests that the level of eco-
nomic development must be taken seriously into consideration when evaluating
integration strategies based on GVC participation. Kowalski et al. () also study
the determinants of functional upgrading, defined as the capacity of acquiring new
functions within a given value chain. Key determinants of functional upgrading turn
out to be the import of sophisticated non-primary intermediates and the distance from
economic poles of activity.
Claims for how GVCs can strengthen productivity (and contribute to economic
growth) are largely based on conventional trade models (OECD, ; WTO, ).
But from a development perspective, the structure of most GVCs and the distribution
of power along them require a more nuanced analysis. In particular, the conditions that
ease access to GVCs can also act as barriers to upgrading since more accessible parts of
the chain are associated with few forward and backward linkages, limited institutional
development, and little possibility for knowledge externalities in the wider economy.
A broad body of evidence indicates that only a small number of developing countries—
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
mostly in East Asia—have been able to build the needed linkages between domestic and
foreign firms and achieve upgrading within GVCs (UNCTAD , ) and even
with respect to job creation the impact, in most cases, has been limited (Ingram and
Oosterkamp, ).
Divergence between expectations and outcomes from participation in GVCs is, in part,
a reflection of the fact that the private interests of international firms do not necessarily
coincide with the developmental interests of the host countries. This disconnect is, of
course, familiar to many developing countries from their participation in commodity-
based value chains, reflecting, in part, the asymmetric structure of markets and the pricing
power of firms from the North and South. It also highlights the importance of strategic
policies, as countries look to shift towards a greater reliance on manufacturing (and
service) activities and exports and is an important reminder that reductions in policy
space can hamper industrialization and catching up in late developers (UNCTAD, ).
As Stephen Hymer (: ) recognized over forty years ago, as international
production fragments along task lines, ‘output is produced cooperatively to a greater
degree than ever before, but control remains uneven’; in particular, the lead firm tends
to concentrate its own tasks at the two ends of the smile curve where ‘information and
money’ provide the main sources of control and where profit margins tend to be
higher. These ‘headquarter’ economies are still located predominantly in the North
(now including parts of East Asia) while ‘factory’ economies are, largely, in parts of the
South. Indeed, as these chains have spread across more countries and sectors over the
past three decades they have been accompanied by a more and more uneven distribu-
tion of those benefits. In developed countries, the concern is that low and medium-
skilled production jobs in traditional manufacturing communities have been
‘outsourced’, first to lower-wage regions of the developed world and then ‘offshored’
to developing countries, and wages have stagnated while new jobs created at the ends of
the chain have not only been insufficient in number to replace those being lost, but are
often out of reach to those ‘left behind’, both geographically and in terms of the skills
required. The result is socio-economic polarization and a vanishing middle class in
advanced economies as well as some emerging economies.
Developing economies with limited productive capacities can therefore remain
trapped in, and competing for, the lowest value-adding activities at the bottom of
value chains, which can ultimately result in ‘thin industrialization’, weak linkages and
slow economic growth (Gereffi, ; UNCTAD, , ). Participation in GVCs
also carries the additional risk of leading to specialization in only a very narrow strand
of production with a concomitantly narrow technological base and overdependence on
multinational enterprises (MNEs) for GVC access. Such shallow integration manifests
itself in asymmetric power relations between lead firms and suppliers and in weak
bargaining positions for developing countries. For example, the experiences of Mexico
and Central American countries as assembly manufacturers have been likened to the
creation of an enclave economy, with few domestic linkages (Gallagher and Zarsky,
). The same can be said about the electronics and automotive industries in Eastern
and Central Europe (Plank and Staritz, ; Pavlínek, ; Pavlínek and Zenka,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
). In all these cases, there has been significant ‘internal upgrading’ within MNE
affiliates, but this has involved very few spillovers to the local economies in the form of
productivity improvements and imitation by domestic firms, partly due to limited
linkages of MNEs with local firms and labour markets (Fons-Rosen et al., ; Paus,
). Moving up the chain into more capital-intensive or higher value-added pro-
duction is particularly challenging in such an environment, because it necessitates
relationships with lead firms at the top that are ultimately focused on maintaining their
profitability and flexibility. Indeed, these firms sometimes intentionally use GVCs to
induce and intensify competition among suppliers and countries for their own benefit
(Levy, ; Phillips and Henderson, ).
In a recent paper, Rigo () presents some interesting stylized facts on the extent
to which firms operating in developing countries benefit from GVCs. The author
compares groups of firms along several measures of technology adoption and know-
ledge creation (running training programmes, using foreign-licensed technology, pos-
sessing quality certifications, and communicating with customers and suppliers via the
Internet). He finds that two-way traders, which are firms typically involved in GVCs,
display on average a higher propensity to adopt new technologies than other groups of
firms and that local suppliers to these firms, that is, non-trading domestic firms
involved in upstream operations with them, strongly benefit from technological spill-
overs. However, he also shows that foreign-owned firms involved in GVCs are more
likely to be dependent on the global sourcing policies of their parent companies and
have generally a low propensity to engage in local sourcing. The opportunities for
generating local spillovers in developing countries are therefore to a large extent still
unexploited.
South East Asia represents an interesting exception to this trend. Local enterprises in
fact seem to be much more integrated with the MNEs operating in the region. A recent
OECD-UNIDO () report shows that foreign manufacturers in ASEAN source
considerably from local producers. In Thailand, Lao PDR, Indonesia, Malaysia, and the
Philippines, foreign MNEs source over per cent of intermediate inputs from firms
that produce locally. The average share of local sourcing by foreign MNEs in Vietnam,
though somewhat lower, is still significant.
An emerging literature is trying to assess empirically the impact of the rise of GVCs
on structural transformation by using input–output matrices recently made available
by a number of new databases (e.g. the World Input Output Database and the Trade in
Value Added Database). These studies show that despite the global label, production in
value chains is concentrated in a small number of industries and countries. Lead firms
are generally from advanced economies and production tends to be most fragmented in
clothing and textiles, electronics, and automotive industries (De Backer and Miroudot,
; Timmer et al., ; UNCTAD, ). Another common finding in this litera-
ture is that while participation of developing countries in GVCs has increased tremen-
dously over recent decades, firms headquartered in developed economies have been the
big winners from the spread of GVCs (Milberg et al., ; UNCTAD, , ).
Dedrick et al. () use the examples of the Apple iPod and notebook personal
computers to illustrate how profits are distributed between the participants of these two
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Table 9.1 Uneven returns in the iPod value chain
Function Supplier Gross margin Operating margin Return on assets
Controller chip Portal Player 44.8 20.4 19.1
Les firm Apple 29.0 11.8 16.6
Video chip Broadcom 52.5 10.9 9.8
Primary memory Samsung 31.5 9.4 10.3
Battery TDK 26.3 7.6 4.8
Retailer Best Buy 25.0 5.3 9.6
Display Toshiba-Matsushita 28.2 3.9 1.8
Hard drive Toshiba 26.5 3.8 1.7
Assembly Inventec Appl. 8.5 3.1 6.1
Distribution Ingram Micro 5.5 1.3 3.1
Minor memory Elpida 17.6 0.1 –1.0
Minor memory Spansion 9.6 –14.2 –9.2
Note: Grey areas evidence the gaps in profit margins between different participants in the iPod global
value chain.
Source: Dedrick et al. (2010: 92).
GVCs. The intuition behind this exercise is relatively straightforward: an iPod and a
computer are made up of lots of components produced by different firms in different
countries. Each of these firms charges a price for its component or activity and in turn
pays other firms for the intermediate goods needed to complete its stage of production.
Table . presents different indicators of profit margins of the main participants in the
iPod global value chain. The table clearly depicts the gap between the profits enjoyed by
firms that specialize in product design (or the production of critical components, such
as the controller chip or the video chip) and firms that specialize in assembly or
production of low-tech standardized components like memory chips.
In light of the multifaceted and highly contingent flow from trade to productive
integration to economic development, we need to understand under which particular
conditions integration can actually deliver development in a given country and what
are the critical policy challenges to be faced in this respect. This could serve as a guide
to better target industrial and trade policy. This is the objective of section ..
. M I, F
P C A
..................................................................................................................................
This section discusses several issues which are facing policymakers on linking product-
ive development and trade integration: the long-standing debate on targeting, the
challenges of product upgrading along the value chains, and the potential of regional
value chains (RVCs).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Active versus Passive Policies
The internationalization of production and accompanying changes in the direction and
composition of international trade has not made industrialization easier or lessened the
need for public policy to help build a virtuous circle between productivity growth,
increased investment, and strategic integration into the global economy. Indeed, in
many economies, there is an even greater need for state involvement, precisely because
private actors on their own face greater uncertainty and higher uninsurable risks in
today’s increasingly interconnected but unstable global economy.
For many developing countries these concerns are particularly pronounced because,
in addition to having to reverse widening technology and productivity gaps, efforts to
catch up also have to deal with issues relating to global production chains that are
under the tighter control of large international firms, and as they have been subject to
increasing restrictions on national policy autonomy arising from the proliferation of
free trade agreements and bilateral investment treaties. In such a context, governments
in developing countries must be ambitious without being unrealistic, striving for a high
development road by creating new sources of growth and dynamism, rather than
simply trying to do the best with what they currently have by relying on existing
advantages.
Small and incremental steps can be useful (Lin and Treichel, ); but more radical
‘comparative-advantage-defying’ measures will be needed to shift towards higher
value-added and employment-generating activities with high-income elasticities and
greater scope for boosting productivity through knowledge creation (Wade, ;
UNCTAD, ). The flip side of aiming high is that failure must also be accepted,
but managed, with mechanisms for monitoring performance and underperformance,
leading to a rectification of the latter or to a removal of state assistance. Accordingly,
the focus should be not on whether to design and implement industrial policy at all, but
on how to do it properly (Naudé, ), or, as Cohen and DeLong (: ) have put
it, ‘getting the political economy right’.
In the debates around industrial policy, a good deal of attention has been paid to
distinguishing between vertical policies targeted at particular firms, sectors, or activ-
ities, and horizontal industrial policies aiming at general improvements to the wider
economic environment, such as providing transport infrastructure, reliable supplies of
energy, and a sufficiently educated workforce. However, this distinction is somewhat
artificial, because, in practice, even supposedly neutral horizontal policies may have
vertical effects by benefiting some activities or sectors more than others, depending on
the particular characteristics of those activities. Exports of cut flowers, for instance, are
facilitated more by infrastructure projects related to air travel, whereas trade in cars and
commodities benefits from the upgrading of sea ports. A policy decision to ease credit
restrictions may have an impact on interest rates in general, but affects particular
industries differently, depending on their reliance on such factors as bank credit and
degrees of profitability.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
No matter how much governments may seek to avoid explicit targeting, even
seemingly universal and undifferentiated policies will have varying effects on different
activities. Since policymakers are ‘doomed to target’, it is better to accept this fact and
try to get the targeting right. In the recent case of China, for example, the state has
played a prominent role in establishing a dynamic ‘profit–investment–export’ nexus
through a mixture of more general measures, as well as selective and targeted inter-
ventions at different levels, with the mixture changing over time (Knight, ). As
China shifted towards a more export-oriented growth strategy in the early s,
targeting sectors such as automobiles, semiconductors, and high-speed trains, with
public finance pouring into massive investments in infrastructure development. Mean-
while, both state-owned enterprises and MNEs (often through joint ventures) were
encouraged and cajoled into undertaking industrial upgrading (Lo and Wu, ).
While China has its own unique features, this is a familiar policy approach from
previous success stories in East Asia (Poon and Kozul-Wright, ).
The mixture of more general and selective measures in less developed countries,
such as in sub-Saharan Africa, will need to be substantially different from more
standard industrial policy packages, since these countries are still predominantly
rural, with less developed markets, a smaller industrial base, and weak public institu-
tions. Moreover, the bulk of non-farm employment is generated in small firms or
microenterprises, inter-firm specialization and collaboration are often absent, and
economic transactions are strongly influenced by informal institutions that are not
necessarily well aligned with the prevailing norms of market economies. To overcome
these constraints and nurture larger and more competitive enterprises in both industry
and agriculture, the state will need to assume a particularly active role. This will involve
raising productivity in the rural economy in parallel with developing manufacturing
activities in urban agglomerates, strengthening integration, and creating linkages
among those activities.
The process will likely involve significant investment in boosting the institutional
capacities of both the government and the private sector. In this context, it is useful to
distinguish between ‘passive’ and ‘active’ industrial policies. A ‘passive’ industrial
policy essentially accepts the existing endowments and institutional structures, and
aims to reduce the costs of doing business, including coordination and transaction
costs. By contrast, an ‘active’ industrial policy targets deeper changes in corporate
structure and strategy, such as the links between investment, exporting, and upgrading.
The institutional prerequisites for active and passive policies are likely to be different.
In particular, effective targeting of active measures requires substantial state capacity
and a degree of discipline, which is an area often neglected in discussions of industrial
policy. In practice, while an active policy is almost always accompanied by a passive
policy, the reverse is not the case.
Clearly, it is not enough simply for governments and businesses to develop a vision
and design targets together; governments must also have some means of ensuring that
businesses make the subsequent investments and changes in performance as agreed.
Variously described as ‘reciprocal control’ (Amsden, ) or the ‘support/performance’
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
bargain (Evans, ), this disciplinary function is essential for industrial policy to
succeed, but it has received insufficient attention in much of the renewed discussion
on industrial policy (Schneider, ; Peiffer, ; Kozul-Wright and Poon, ).
In the East Asian examples, governments were able to link the application of their
policy tools (such as the provision of lower-cost capital, dealing with the threat of
foreign competition, or privileged access to scarce foreign exchange) to measurable
improvements in business performance in terms of production efficiency or exports.
All certainly saw one of their principal tasks as that of increasing the supply of
investible resources and assuming part of the long-term investments. State-sponsored
accumulation involved variously the transfer of land and other assets, efforts to
decrease competition in some areas while increasing it in others, strong regulation
and control, and in some cases ownership, of the financial system and a pro-investment
macroeconomic policy, including direct public investment in some lines of activity.
Critically, these developmental states did not simply measure success in terms of
increasing investment to fuel economic growth, but also in terms of guiding the
investment into activities that could sustain a high-wage future for their citizens.
This implied a coordinated effort to shift resources from traditional sectors by raising
agricultural productivity and channelling the resulting surplus to emerging industrial
activities (Grabowski, ; Studwell, ). It also meant deliberately reducing risks
and augmenting profits in industries deemed important for future growth (Wade,
; Amsden, ). Like their late nineteenth- and twentieth-century precursors,
this meant making full use of the creative impulses of global markets, even while
protecting some domestic producers from excessive competition, through strategically
guided integration into the international economy.
Building similar relations has proved more difficult in other contexts. In Latin
America, a form of ‘hierarchical capitalism’ (Schneider, ) has been associated
with undermining government’s abilities to persuade businesses to transform. From
the s onwards, the big national firms were encouraged to invest heavily in import-
substituting industries behind protective tariffs and trade restrictions, but policymakers
did not impose adequate performance standards in return for the higher profits earned
as a result of these measures (Schneider, ; Agosin, ). Similarly, during the
market reforms of the s, explicit performance standards were rarely imposed, even
where governments structured privatization programmes to favour particular business
groups. Utilities were subject to the usual sectoral regulations (i.e. for essential services
or monopolies) but, according to Rodrik (), overall policymakers in Latin America
used too much carrot and too little stick.
.. Upgrading and Sophistication
As discussed in section .., in order to sustain development a country must be able to
progressively upgrade its production structure and raise internal value added by exporting
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
more sophisticated and complex manufactured products. But if ‘what you export matters’
for economic growth, the natural question to address becomes what matters for your
exports? What type of integration (and value chains) favour the export of those sophis-
ticated and complex products which foster economic development?
Upgrading in GVCs is crucially affected by the governance structure of value chains
(Gereffi, ; Gereffi et al., , ). Governance structures depend on firm
characteristics such as size, crucial for achieving economies of scale and establishing
linkages with global lead firms, and the existing level of capabilities, which determines
the potential for productivity growth and upgrading towards higher-value-added
activities and more sophisticated products. Governance structures influence the impact
that GVCs can have on firms in developing countries by determining the power
relations within the chain. When some players gain too much power in the chain,
they might adopt strategies to capture higher shares of value added. For example, by
creating trade-related constraints in the form of tariffs and other taxes, lead firms in
downstream activities can reduce the profit margins of upstream firms. Alternatively,
they might hamper technological upgrading and entry into downstream activities, for
example by limiting knowledge and technology transfers or by imposing standards
through trade and investment agreements (Milberg and Winkler, ; UNCTAD,
). These strategies are likely to cement the asymmetries in power and skills
between developed and developing country firms. Governments in developing coun-
tries can help local firms negotiate contracts with foreign firms, for example, by
encouraging long-term contracts between them, supporting collective bargaining
through producer associations, or providing training in bargaining and model con-
tracts (Milberg et al., ; UNCTAD, ).
Finally, the potential for upgrading also depends on local suppliers and on their
capacity to source intermediate inputs and to acquire, assimilate, and successively
exploit the value of information and knowledge coming through the interaction with
other firms (absorptive capacity). Participation in GVCs exposes domestic suppliers to
multiple interactions with foreign firms, thereby offering them unique opportunities of
absorption. However, MNEs do not always activate linkages with local firms by
preferring international sourcing strategies. Government efforts to strengthen learning
capabilities is likely to help companies, both for start-ups and older firms, better adapt
to the challenges arising from participation in GVCs.
Recent research shows that technology transfers are more effective when firms
possess previously accumulated knowledge and innovative capabilities. OECD and
UNIDO () document how the gap between foreign firms and local SMEs remains
high in some ASEAN member states and how precisely in these countries the spillovers
from local sourcing become less intense. From a policy perspective it is therefore of
paramount importance to couple ‘push’ measures which might incentivize local sour-
cing of parts by MNEs (e.g. local content requirements) with ‘pull’ policies designed to
improve productive capacity and the ability of local suppliers to match the quality of
imported components and intermediate products (e.g. promotion of entrepreneurship
through incubators, training, or support with venture capital and scaling up of domes-
tic capabilities through technical vocational education and training programmes).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Regional Value Chains
Another pillar for the design of integration strategies able to foster productive capacity
building and structural transformation is represented by productive regional integra-
tion. As mentioned above, East Asian countries, particularly South Korea, Taiwan,
Singapore, but also China, have long recognized the importance of regional production
networks with a vast literature spawned around the ‘flying geese’ pattern of develop-
ment based on the work of Akamatsu (; UNCTAD, ).
In response to the collapse in trade after the financial crisis of –, suppliers in
other developing regions shifted their end markets from the North to the South in an
effort to regionalize their supply chains. South African clothing manufacturers, for
example, moved into other countries in sub-Saharan Africa such as Lesotho and
Swaziland, leading to an expansion of the regional value chain led by South African
retailers (Gereffi, ); and the same path is being followed by Mauritian textile
producers who are expanding their operations in Madagascar.
Such regional value chains (RVCs) are characterized by the end-product being
exported by a country within the region, more often to a regional partner, and with
many high value-adding activities also undertaken within the region. They can there-
fore significantly contribute to the creation of value at the local level and offer more
opportunities to participate, gain experience, and build those local capacities needed to
compete globally, thus potentially serving as a stepping stone into GVCs (UNCTAD,
). Regional markets might also exhibit better upgrading potentials, particularly in
terms of functional upgrading, including design, marketing, branding, and distribu-
tion. Furthermore, given the size and the capacity constraints faced by many develop-
ing countries, a local industrial strategy might quickly reach its limits. This can be
overcome through a regional perspective as different complementary advantages in the
region could be leveraged and economies of scale, vertical integration, and horizontal
specialization could be promoted.
RVCs can be instrumental in increasing value added in the developing regions
(Kozul-Wright and Fortunato, ). Recent evidence, however, suggests that despite
their advantages they remain far less developed than GVCs (Los et al., ). Indeed,
over the last couple of decades, outside of Europe and East Asia, the gap between the
two has been widening rather than shrinking and the extra regional component of
foreign value addition remains significantly higher than the intra-regional component.
Expanding regional productive integration in developing regions beyond the current
limits critically relies on the capacity of developing countries to provide an environ-
ment conducive to GVC participation and that would make domestic firms competi-
tive along these chains. This, in turn, requires the adoption of a vast set of strategic
policy measures such as, for example, enhanced cooperation among governments to
identify and prioritize entry points into value chains and exploit regional complemen-
tarities, facilitating the connections between firms operating in different countries at
different parts of the chain. Setting-up Rapid Development Zones or Free Industrial
Areas in those regions where natural resources are concentrated to foster resource
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
exploitation and upstream participation to value chains could also help, but the record
of these mechanisms should warn against treating them as panacea to a complex set of
interrelated policy challenges.
. C
..................................................................................................................................
This chapter has reviewed the debates around trade and industrial policy and discussed
how the composition of trade and investment flows, as well as the spread and form of
participation in GVCs, affect structural transformation. It focused on three character-
istics that have been identified in the literature as critical to assessing the export
structure of an economy and its potential to accelerate industrialization: the diversifi-
cation of production, the level of sophistication of the exported products, and upgrad-
ing of productive capacities/capabilities required to sustain the production and export
of increasingly sophisticated goods and the establishment of linkages within and across
sectors. The relative importance of each one of these features changes through time,
and with them the structure of trade and the policies needed for linking trade and
production in ways that maintain a virtuous economic circle of rising productivity,
expanding exports, increased investment, rising wages, and deeper domestic markets,
fuelling further productivity rises.
The chapter also discussed the critical components of a national export strategy
which could support the insertion of national firms in international markets, favour the
strategic attraction of FDI, and enable constant upgrading along global (and regional)
value chains. What seems to be the case is that to expand production capabilities and
foster structural change, a focus on exporting manufactures is not enough. Moreover,
success comes not simply from shifting resources from primary activities to labour-
intensive manufactures but also from anticipating future challenges in these industries
(as costs rise and new competitors emerge) and nurturing new linkages and more
sophisticated products. Accordingly, an effective national export strategy must still
involve active industrial policies, targeted support for upgrading, and regional eco-
nomic arrangements.
R
Agosin, Manuel () ‘Productive Development Policies in Latin America: Past and Present’,
Serie de Documentos de Trabajo No. , University of Chile, Santiago.
Akamatsu Kaname () ‘A Historical Pattern of Economic Growth in Developing Coun-
tries’, Journal of Developing Economies (): –.
Amsden Alice H. () The Rise of the ‘Rest’: Challenges to the West from Late-Industrializing
Economies. Oxford: Oxford University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Antràs, Pol, Davin Chor, Thibault Fally, and Russell Hillberry () ‘Measuring the
Upstreamness of Production and Trade Flows’, American Economic Review (): –.
Baldwin, Richard () ‘Trade and Industrialization after Globalization’s Second Unbund-
ling: How Building and Joining a Supply Chain Are Different and Why It Matters’, in
Robert C. Feenstra and Alan M. Taylor (eds) Globalization in an Age of Crisis: Multilateral
Economic Cooperation in the Twenty-first Century. Chicago, IL: Chicago University Press,
pp. –.
Baldwin, Richard () The Great Convergence: Information Technology and the New
Globalization. Cambridge, MA: Harvard University Press.
Becker, Gary () ‘The Best industrial Policy Is None At All’, Business Week, August.
Bernard, Andrew B., J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott () ‘Firms
in International Trade’, Journal of Economic Perspectives (): –.
Buckley, Peter J. () ‘Government Policy Responses to Strategic Rent-seeking Trans-
national Corporations’, Transnational Corporations (): –.
Caporaso, James A. () ‘Industrialization in the Periphery: The Evolving Global Division
of Labor’, International Studies Quarterly (): –.
Cherif, Reda and Fuad Hasanov () ‘The Return of the Policy That Shall Not Be Named:
Principles of Industrial Policy’. IMF Working Paper No. /. Washington, DC: IMF.
Clarida, Richard H. and Ronald Findlay () ‘Government, Trade, and Comparative
Advantage’, The American Economic Review (): –.
Clerides, Sofronis K., Saul Lach, and James R. Tybout () ‘Is Learning by Exporting
Important? Micro-Dynamic Evidence from Colombia, Mexico, and Morocco’, The Quar-
terly Journal of Economics (): –.
Cohen Stephen and Bradford de Long () Concrete Economics: The Hamilton Approach to
Economic Growth and Policy. Cambridge, MA: Harvard Business Review Press.
Cornwall, John () ‘The Relevance of Dual Models for Analyzing Developed Capitalist
Economies’, Kyklos (): –.
De Backer, Koen and Sébastien Miroudot () ‘Mapping Global Value Chains’. OECD
Trade Policy Paper No. . Paris: OECD Publishing.
Dedrick, Jason, Kenneth Kraemer, and Greg Linden () ‘Who Profits from Innovation in
Global Value Chains? A Study of the iPod and Notebook PCs’, Industrial and Corporate
Change (): –.
Emmanuel, Arghiri () Unequal Exchange: A Study of the Imperialism of Trade. New York:
Monthly Review Press.
Evans, Peter () ‘Transferable Lessons? Re-examining the Institutional Prerequisites of
East Asian Economic Policies’, Journal of Development Studies (): –.
Fally, Thibault () ‘Production Staging: Measurement and Facts’, University of Colorado,
unpublished manuscript.
Felipe Jesus, Aashish Mehta, and Changyong Rhee () ‘Manufacturing Matters . . . But
It’s the Jobs That Count’. Asian Development Bank Economics Working Paper No. .
Findlay, Ronald and Kevin H. O’Rourke () Power and Plenty: Trade, War, and the World
Economy in the Second Millennium. Princeton, NJ: Princeton University Press.
Fons-Rosen, Christian, Sebnem Kalemli-Ozcan, Bent Sorensen, Carolina Villegas-Sanchez,
and Vadym Volosovych () ‘Quantifying Productivity Gains from Foreign Investment’.
Working Paper No. . Cambridge, MA: National Bureau of Economic Research.
Fortunato Piergiuseppe and Carlos Razo () ‘Export Sophistication, Growth and the
Middle-income Trap’, in José M. Salazar-Xirinachs, Irmgard Nübler, and Richard
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Kozul-Wright (eds) Transforming Economies: Making Industrial Policy Work for Growth,
Jobs and Development. Geneva: International Labour Organization, pp. –.
Gallagher Kevin and Victor Zarsky () The Enclave Economy: Foreign Investment and
Sustainable Development in Mexico’s Silicon Valley. Cambridge, MA: MIT Press.
Gereffi, Gary () ‘Global Value Chains in a Post-Washington Consensus World’, Review of
International Political Economy (): –.
Gereffi, Gary, John Humphrey, Raphael Kaplinsky, and Timothy Sturgeon () ‘Global-
isation, Value Chains and Development’, IDS Bulletin (): –.
Gereffi, Gary, John Humphrey, and Timothy Sturgeon () ‘The Governance of Global
Value Chains’, Review of International Political Economy (): –.
Gomory, Ralph and William Baumol () Global Trade and Conflicting National Interests.
Cambridge, MA: MIT Press.
Grabowski Richard () ‘Promoting Industrialization: The Role of the Traditional Sector
and the State in East Asia’, Journal of International Development (): –.
Harrison, Ann E. and Andres Rodriguez-Clare () ‘Trade, Foreign Investment, and
Industrial Policy for Developing Countries’. NBER Working Paper No..
Harrison, Ann E., John Mclaren, and Margareth McMillan () ‘Recent Perspectives on
Trade and Inequality’. World Bank Policy Research Working Paper No. . Washington,
DC: World Bank.
Hausmann, Ricardo, Jason Hwang, and Dani Rodrik () ‘What You Export Matters’,
Journal of Economic Growth (): –.
Hirschman, Albert O. () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Hymer, Stephen H. () ‘The Internationalization of Capital’, Journal of Economic Issues
(): –.
Imbs Jean and Romain Wacziarg () ‘Stages of Diversification’, The American Economic
Review (): –.
Ingram, Verina and Elsje Oosterkamp () ‘Literature Review on the Labour Market
Impacts of Value Chain Development Interventions’. LEI Report. LEI Wageningen UR
(University and Research Centre).
Kaldor, Nicholas () ‘Marginal Productivity and the Macro-Economic Theories of Distri-
bution: Comment on Samuelson and Modigliani’, Review of Economic Studies ():
–.
Kaplinsky, Raphael () Globalization, Poverty and Inequality: Between a Rock and a Hard
Place. Cambridge: Polity Press.
Kim, Dong-Hyeon () ‘Trade Growth and Income’, Journal of International Trade and
Economic Development (): –.
Knight John () ‘China as a Developmental State’. CSAE Working Paper No. –,
University of Oxford, Oxford.
Kowalski, Przemyslaw, Javier Lopez-Gonzalez, Alexandos Ragoussis, and Cristian Ugarte
() ‘Participation of Developing Countries in Global Value Chains: Implications for
Trade and Trade-related Policies’. OECD Trade Policy Papers No. . Paris: OECD.
Kozul-Wright, Richard and Piergiuseppe Fortunato () ‘Sustaining Industrial Develop-
ment in the South’, Development (): –.
Kozul-Wright, Richard and Piergiuseppe Fortunato () ‘Development Unchained:
Trade and Industrialization in the Era of International Production’, Global Policy
(): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Kozul-Wright Richard and Daniel Poon () ‘Economic Openness and Development’, in
Deepak Nayyar (ed.) Asian Transformations: An Inquiry into the Development of Nations.
Oxford: Oxford University Press, pp. –.
Krueger, Anne O. () ‘Government Failures in Development’, Journal of Economic
Perspectives (): –.
Krugman, Paul (ed.) () Strategic Trade Policy and International Economics. Cambridge,
MA: MIT Press.
Krugman, Paul () ‘The Myth of Asia’s Miracle’, Foreign Affairs, November/December.
Levine, Ross and David Renelt () ‘A Sensitivity Analysis of Cross-country Growth
Regressions’, American Economic Review (): –.
Levy, Daniel L. () ‘Offshoring in the New Global Political Economy’, Journal of Man-
agement Studies (): –.
Lin, Justin Yifu () ‘New Structural Economics: A Framework for Rethinking Develop-
ment’. Policy Research Working Papers No. . Washington, DC: World Bank.
Lin, Justin Yifu and Volker Treichel () ‘Making Industrial Policy Work for Develop-
ment’, in José M. Salazar-Xirinachs, Irmgard Nübler, and Richard Kozul-Wright (eds)
Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Develop-
ment. Geneva: International Labour Office, pp. –.
Lo Dic and Mei Wu () ‘The State and Industrial Policy in Chinese Economic Develop-
ment’, in José M. Salazar-Xirinachs, Irmgard Nübler, and Richard Kozul-Wright (eds)
Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Develop-
ment. Geneva: International Labour Office, pp. –.
Los, Bart, Marcel Timmer, and Gaaitzen de Vries () ‘How Global are Global Value
Chains? A New Approach to Measure International Fragmentation’, Journal of Regional
Science : –.
Marel, Erik () ‘Positioning on the Global Value Chain Map: Where Do You Want to Be?’,
Journal of World Trade (): –.
McMillan, Margaret S. and Dani Rodrik () ‘Globalization, Structural Change and Prod-
uctivity Growth’, in Marc Bacchetta and Marion Jansen (eds) Making Globalization Socially
Sustainable. Geneva: International Labour Organization, pp. –.
Milberg, William and Deborah Winkler () Outsourcing Economics: Global Value Chains
in Capitalist Development. New York: Cambridge University Press.
Milberg, William, Xiao Jang, and Gary Gereffi () ‘Industrial Policy in the Era of Vertically
Specialized Industrialization’, in José M. Salazar-Xirinachs, Irmgard Nübler, and Richard
Kozul-Wright (eds) Transforming Economies: Making Industrial Policy Work for Growth,
Jobs and Development. Geneva: International Labour Office, pp. –.
Naudé William () ‘New Challenges for Industrial Policy’. Working Paper No. /.
Helsinki: UNU-WIDER.
OECD () ‘Interconnected Economies: Benefiting from Global Value Chains’. Synthesis
Report. Paris: OECD.
OECD-UNIDO () ‘Integrating Southeast Asian SMEs in Global Value Chains: Enabling
Linkages with Foreign Investors’. Paris: OECD.
Panic, Milivoje () National Management of the International Economy. London:
Macmillan.
Paus, Eva () ‘Industrial Development Strategies in Costa Rica: When Structural Change
and Domestic Capability Accumulation Diverge’, in José M. Salazar-Xirinachs, Irmgard
Nübler, and Richard Kozul-Wright (eds) Transforming Economies: Making Industrial
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Policy Work for Growth, Jobs and Development. Geneva: International Labour Office and
UNCTAD, pp. –.
Pavlínek, Petr () ‘Whose Success? The State–Foreign Capital Nexus and the Develop-
ment of the Automotive Industry in Slovakia’, European Urban and Regional Studies ():
–.
Pavlínek, Petr and Jan Zenka () ‘Value Creation and Value Capture in the Automotive
Industry: Empirical Evidence from Czechia’, Environment and Planning (): –.
Peiffer, Caryn () ‘Reform Coalitions, Patterns and Hypotheses from a Survey of the
Literature’. Concept Paper No. , Developmental Leadership Program. Available at http://
publications.dlprog.org/Reform%Coalitions.pdf.
Phillips, Richard and Jeffrey Henderson () ‘Global Production Networks and Industrial
Upgrading: Negative Lessons from Malaysian Electronics’, Austrian Journal of Develop-
ment Studies (): –.
Plank, Leonhard and Cornelia Staritz () ‘Precarious Upgrading in Electronics Global
Production Networks in Central and Eastern Europe: The Cases of Hungary and Romania’.
Working Paper No. . GDI, University of Manchester.
Poon, Daniel and Richard Kozul-Wright () ‘Learning from East Asia: Catch-up and the
Making of China’s Developmental State’, in Arkebe Oqubay and Kenichi Ohno (eds) How
Nations Learn. Oxford: Oxford University Press, pp. –.
Prebisch, Raúl () ‘The Economic Development of Latin America and its Principal
Problems’. Santiago: Economic Commission for Latin America and the Caribbean
(ECLAC).
Pritchett, Lant () ‘Measuring Outward Orientation in LDCs: Can it be Done?’, Journal of
Development Economics (): –.
Rigo, Davide () ‘A Portrait of Firms Participating in Global Value Chains’, Technical
Report. Geneva: IHEID.
Rodrik, Dani () ‘Industrial Policy for the Twenty-First Century’. CEPR Discussion
Papers No. .
Rodrik, Dani () ‘Normalizing Industrial Policy’. Commission on Growth and Devel-
opment Working Paper No. , Washington, DC.
Rodrik, Dani () The Globalization Paradox: Democracy and the Future of the World
Economy. New York: W. W. Norton.
Rodrik, Dani () ‘Premature Deindustrialization’, Journal of Economic Growth : –.
Rodrik, Dani () Straight Talk on Trade: Ideas for a Sane World Economy. Princeton, NJ:
Princeton University Press.
Samuelson, Paul () ‘Where Ricardo and Mill Rebut and Confirm Arguments of Main-
stream Economists Supporting Globalization’, Journal of Economic Perspectives ():
–.
Schneider, Ben Ross () Hierarchical Capitalism in Latin America: Business, Labour and
the Challenges of Equitable Development. Cambridge: Cambridge University Press.
Schneider, Ben Ross () ‘Upgrading in the st Century: New Challenges for Industrial
Policy and Institution Building’. Background paper prepared for UNCTAD’s Trade and
Development Report . Geneva: UNCTAD. Unpublished.
Singer, Hans () ‘The Distribution of Gains between Investing and Borrowing Countries’,
The American Economic Review (): –.
Storm, Servaas () ‘The Political Economy of Industrialization’, Development and Change.
Available at https://doi.org/./dech..
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Studwell, Joe () How Asia Works: Success and Failure in the World’s Most Dynamic
Region. London: Profile Books.
Timmer, Marcel, Erik Dietzenbacher, Bart Los, Robert Stehrer, and Gaaitzen de Vries ()
‘An Illustrated User Guide to the World Input–Output Database: The Case of Global
Automotive Production’, Review of International Economics : –.
Timmer, Marcel, Bart Los, Stephen Rand, and Gaaitzen de Vries () ‘Fragmentation,
Incomes and Jobs: An Analysis of European Competitiveness’, Economic Policy ():
–.
Toner, Phillip () Main Currents in Cumulative Causation: The Dynamics of Growth and
Development. London: Macmillan.
Tregenna, Fiona () ‘Characterising Deindustrialisation: An Analysis of Changes in
Manufacturing Employment and Output Internationally’, Cambridge Journal of Economics
: –.
Tregenna, Fiona () ‘How Significant is Intersectoral Outsourcing in South Africa’,
Industrial and Corporate Change (): –.
UNCTAD () Trade and Development Report . New York: United Nations.
UNCTAD () Trade and Development Report . New York: United Nations.
UNCTAD () Trade and Development Report . New York: United Nations.
UNCTAD () Trade and Development Report . New York: United Nations.
UNCTAD () Trade and Development Report . New York: United Nations.
UNCTAD () World Investment Report —Global Value Chains: Investment and
Trade for Development. New York: United Nations.
UNCTAD () Trade and Development Report . New York: United Nations.
UNCTAD () Global Value Chains and South-South Trade. New York: United Nations.
UNCTAD () Trade and Development Report, : Structural Transformation for Inclu-
sive and Sustained Growth. New York: United Nations.
UNCTAD () Structural Transformation and Export Diversification in Southern Africa.
New York: United Nations.
Vaggi, Gianni and Peter Groenewegen () A Concise History of Economic Thought: From
Mercantilism to Monetarism. Basingstoke: Palgrave.
Wacziarg, Romain and Karen Welch () ‘Trade Liberalization and Growth: New Evi-
dence’. NBER Working Paper No. . Cambridge, MA: National Bureau of Economic
Research.
Wade, Robert H. () ‘Resolving the State–Market Dilemma in East Asia’, in Ha-Joon
Chang and Robert Rowthorn (eds) The Role of the State in Economic Change. Oxford:
Clarendon Press, pp. –.
Wade, Robert H. () ‘The Role of Industrial Policy in Developing Countries’, in Rethink-
ing Development Strategies after the Financial Crisis, Vol. I: Making the Case for Policy
Space. New York: United Nations, pp. –.
World Trade Organization () ‘Measuring and Analyzing the Impact of GVCs on
Economic Development: Global Value Chains Development Report ’. Geneva: WTO.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
.
. W G I P?
..................................................................................................................................
I is widely agreed that the West grew wealthy through its mastery of the novel
processes of industrialization, when fossil fuels were harnessed to provide abundant
energy in new factory settings that liberated production from age-old constraints.
Industrial capitalism underpinned the prosperity of Europe and North America, before
diffusing East to Japan in the twentieth century, and then in the second half of that
century diffusing to the East Asian Tigers (Korea, Taiwan, Singapore, and Hong Kong),
utilizing developmental states as means of catch-up. Now in the twenty-first century
the process encompasses China, followed by India and many other industrializing
giants looking to enjoy their time in the sun. But no sooner do these emergent
industrializing giants begin the same process of burning fossil fuels and wasting
resources as practised by their industrialized predecessors than they are confronted
with an inconvenient truth: their business model for industrialization will not scale.
These industrializing giants have to confront the reality that they cannot rely on the
conventional fossil-fuelled pathway, nor on the traditional linear pathway of resource
usage (extracting resources from nature, and then dumping the residues in nature at
the end of the process), if they wish to see their industrialization through to comple-
tion. Consider these traditional or conventional pathways from the perspective of
energy and resource security. The burning of fossil fuels (whether coal in power
generation and industry or oil in transport) at the scale involved in China or India
(with their total current population of . billion) creates so much urban particulate
pollution that the air becomes unbreathable. China has already paid a terrible price in
terms of this urban pollution, and India will do so as well as the scale of its fossil-fuel
burning rises. Similarly, the linear exploitation of resources, extracting them from
nature at one end of the industrial process and dumping them back in nature at the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
other, creates unmanageable waste issues and shortages of key resources like water.
Even more significantly, the huge appetite for fossil fuels and virgin resources brings
these industrializing giants up against political and economic limits (and ultimately
military limits) of what can be allowed within a densely populated planet. The Western
powers evaded these geopolitical limits through colonization and imperialism—but
such a strategy is not open to China, India, and other industrializing giants. How then
are they to secure the energy and resource inputs needed by their quest for industri-
alization at a scale never before attempted? What are the industrial policies that would
bring them the fruits of modernization?
The answer to this conundrum is provided by green growth, or the greening of the
industrial growth process—balancing growth against sustainability. China stumbled on
this solution in the early years of the twenty-first century, as it was engaging in
tearaway growth. While continuing to burn a lot of coal, oil, and gas, it has found
that its energy security is enhanced by relying more and more on renewables—to the
point that it now has targets for renewables usage that dwarf those of other countries and
have already turned China into a renewables superpower (Mathews and Tan, a,
b, ; Mathews et al., ). And this for the very good reason that renewables are
products of manufacturing, and as such are subject to cost reductions achieved through
the learning curve. While fossil-fuel extraction is subject to arbitrary cost increases or
decreases, the costs of manufacturing renewables devices (wind turbines, solar PV cells,
batteries) are diminishing relentlessly, in accordance with the learning curve.
As costs fall, markets expand—and so the process opens up and expands markets for
renewables devices, in a process that can be expected to lead to fossil fuels being
superseded as energy sources by the middle of the century, if not before. In most
parts of the world electric power generated from renewables is already cheaper than
thermal power generated from burning fossil fuels—and the costs of renewable power
will only continue to fall. Figure . shows that costs of solar PV have been falling by
. per cent for every doubling of production, which has occurred every two to three
years. The chart takes the story up to when solar PV power generation will
approach trillion watts, opening up the terawatt era in solar power. Why would any
country wish to continue burning fossil fuels, given their rising and fluctuating costs,
their heavy burden on the balance of payments, and their geopolitical unreliability?
China has discovered a radical solution to the problem of resource security by
introducing circular flows of materials in place of the linear flows of conventional
industrialization. The recirculation of resources is based on manufacturing (or rather,
‘demanufacturing’ or disassembling) and is subject likewise to diminishing costs, so
that the costs of recirculated materials can be expected to continue to fall, eventually
falling below the cost of virgin materials (indeed they are already lower in cost in some
activities such as ‘urban mining’ of electrical and electronic waste in Chinese cities).
The recirculation of resources solves not only the problem of resource accessibility, but
also the problem of waste accumulation. It provides a sustainable solution to the
problem of dealing with geopolitical limits to resource extraction. As China expands
its adoption of a circular economy to enhance its own resource security, so it creates
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Per- W price in 2018 dollars
100
1976
1985
10
2003 2008
m = 28.5%
1
2015
0.1 2019e
1 10 100 1,000 10,000 100,000 1,000,000
Cumulative capacity (MW)
historic prices (Maycock) Chines c-Si module prices (BNEF) Experience curve at 28.5%
. Learning curve associated with solar PV power
Source: BNEF.
markets and technologies that can be adopted by other industrializing countries, starting
with India, and encompassing late latecomers in Africa, Asia, and Latin America.
This perspective on greening views the process as fundamentally driven by the quest
for energy security and resource security necessitated by the unprecedented scale at
which China and India are industrializing. It is a very different perspective from the
one that informs almost all commentary on green industrial policy, which begins with a
concern over global climate change and deduces from this the need for a low-carbon
economy (and in more extreme versions, for a zero-growth economy as well). Such a
perspective can only result in industrializing giants facing energy and resource choices
that compel them to confront the ethical and moral challenges of decarbonization; little
wonder that this perspective is resisted by late industrializers like India, given that it
would condemn them to abandoning their search for industrialization before it has
started, and with it the search for increased wealth and income to bring them closer to
the levels enjoyed by Western industrialized countries. And they were not responsible
for climate change in the first place.
Consider the impact of switching to renewables to drive power generation, industry,
and transport for reasons of energy security. Security is enhanced by such a move
because renewables are products of manufacturing, and as such come under the control
of the country implementing the policy. A green choice entails a process of
decarbonization—the only known solution to the problem of rising carbon levels. As
the industrializing giants like China and India switch over to renewables, leaving behind
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the fossil fuels of an earlier era, so they are led to achieve the very results anticipated by a
‘climate change’ perspective on greening. Likewise, choosing recirculating resources for
reasons of resource security decouples industrial activity from natural processes, reduces
the materials footprint of industrial activity, and allows the Earth to begin to reclaim its
natural processes and cycles. The aspirational goal of zero-growth advocates is thus
achieved through green growth rather than zero growth.
It is considerations like these that have led international agencies like UNEP to argue
that the greening of economies ‘is not generally a drag on growth but rather a new
engine of growth’.¹ The discourse on developing countries and green industrial policy
is thus moving away from ‘burden sharing’, where the costs of renewables or circular
flows are viewed as higher than in conventional fossil-fuelled or linear flows. Countries
are now discovering profitable opportunities associated with a green shift—notably the
falling costs of solar PV (as shown in Figure .) and the complementary cost
reductions found in wind turbines, batteries, electric vehicles, and other instances of
the global green shift.
Green growth is not so much a response to market failure (as in the standard account
of neoclassical economics) as a response to market opportunities opened up by the
Schumpeterian creative destruction of the incumbent fossil-fuelled energy systems and
linear resource flows by renewables and recirculated resources, with the new industries
driven by green finance. These are the real-world industrial dynamics of the greening of
industrial policy.²
This chapter develops the argument that in a wider technoeconomic setting, as
compared to the narrower economic setting of traditional industrial policy, it is the
energy and resource choices made by industrializing countries that will come to be
central. Indeed, they will determine the success or failure of the industrialization
aspirations of the emergent giants like China and India, and following them, the late
latecomers in Africa, Asia, and Latin America. The material and energy foundations of
these industrialization strategies constitute the core of green growth industrial policies.³
. G F G
I P
..................................................................................................................................
The core of industrial policy concerns the strategies deployed to shift an economy from
lower- to higher-productivity sectors, and within sectors, from lower value-added to
¹ See UNEP () for the Green Economy report.
² For accounts of green industrial policy, which generally start with the challenge of decarbonization
to mitigate climate change, see such works as Shadikhodjaev (), Altenburg and Rodrik (),
Ambec (), Padilla (), Fay et al. (), Schmitz et al. (), Luetkenhorst et al. (), Rodrik
(), Cosbey (), Hallegatte et al. (), or Karp and Stevenson ().
³ For my own contributions to these topics, see Mathews () to Mathews () in reverse order.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
higher value-added activities. These strategies inevitably focus on manufacturing,
where such productivity improvements can be concentrated, while manufacturing itself
can be concentrated in clusters, or industrial hubs, where an export orientation can be
pursued. These strategic choices by successful industrializers (in particular those in East
Asia) now characterize the choices made by smart late latecomers around the world.⁴
The greening of industrial policy broadens the canvas to encompass the energy and
materials/resources aspects of manufacturing activities—widening the scope from
economic to technoeconomic considerations. As soon as this wider perspective is
taken, the material underpinnings of industrialization begin to exert powerful effects.
Let us consider the fundamental aspects of these technoeconomic policy choices,
spanning green energy, green resources, and the green finance that drives the choices
being made in energy and resources.⁵
.. Energy
Energy choices are a principal aspect of the greening of industrial policy. A worldwide
green transition is underway, shaped initially by the choices made by China and India,
and now diffusing to encompass the choices made by countries in Africa, Asia, and
Latin America.⁶
In the energy domain, the move towards renewables like solar and wind has the great
advantage that the resource is free, and marginal costs of generating power from these
free resources are correspondingly low—lower than burning expensive fuel. The
renewable resources are diffuse, meaning that they are available almost everywhere,
and to everyone, countering the trends towards centralization and gigantism in the
traditional fossil-fuelled industry. Renewables-based industries tend to be labour-
intensive (think of installing rooftop solar modules) and generate jobs in rural and
regional areas. And of course renewable energy is clean, in the sense that it carries no
pollution risks (in contrast to the filth associated with coal mining and burning, or the
radiation risks associated with nuclear power), and poses no security dilemma, as in the
ever-present risk that civil nuclear power industries could be converted to military use
virtually overnight. The renewables industries favour small and medium-sized firms as
protagonists, basing their competitive dynamics on innovation as much as on
⁴ For a sophisticated account of East Asian industrialization strategies and the reasons for their
success, see Storm and Naastepad ().
⁵ The alternative approach is to discuss various contingent instances of green industrial policy,
spanning such instruments as carbon taxes, cap and trade schemes and emission allowances, energy
subsidies (and reduction of fossil-fuel subsidies), environmental labelling, and WTO-related instru-
ments such as exemptions under GATT Article XX. For recent discussion of some of these instruments,
see Shadikhodjaev ().
⁶ The rise in renewables is relentless. Total renewables capacity reached . trillion watts in ,
according to REN’s report ‘Renewables ’. We are now well into the ‘terawatt’ era of the
renewables transition.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
imitation. By contrast, how much innovation has there been in the automotive industry
over the past century (until the appearance of electric vehicles)?
.. Materials/Resources
The circular economy emerges as an alternative to the traditional linear economy in the
resources or materials domain. The fundamental attribute of circular resource flows is
that they enhance resource security as more and more resources are extracted from
circular flows rather than as virgin resources (think of water recycling and treatment).
Resource extraction thus becomes a branch of manufacturing (or ‘demanufacturing’)—
as in ‘urban mining’—and its pursuit becomes a goal of industrial policy. Recirculated
resources have declining costs, as demanufacturing generates its own learning curve
and the market for recirculated resources enlarges—to the point where costs of
recovered resources dip below the costs of extracting virgin resources.⁷ Capturing
circular flows by closing industrial loops generates rich linkages between industrial
sectors and multiplies opportunities for capturing increasing returns. For an industri-
alizing economy, the shift to circular flows saves on resources, saves on waste, generates
abundant business opportunities, and creates jobs in rural and regional areas. What is
there not to like?
.. Finance
What drives these shifts in energy and resources/materials flows is finance, which, as
Schumpeter correctly observed, is the ‘engine room’ of capitalism. Here we introduce
another departure from the usual treatment of greening of industrial policy. In the way
that the issues are typically framed by United Nations agencies, finance means creating
funds from the resources of governments, meaning taxpayers’ funds.⁸ But this
approach to finance ignores the central feature of capitalism, namely that it runs on
credit—and credit is created in capital markets. The issue becomes: how to create
instruments of credit that draw from the vast capital markets created by capitalism?
One solution to this issue is to target the bonds markets, which globally are double
the size of equity (stocks) markets. Banks and financial institutions have found that
they can attract the interest of professional investors—managers of wealth funds, hedge
funds, insurance funds, and pension funds—with bonds targeted at green investments,
or green bonds. Ever since the Korean Export-Import Bank first floated a green bond
⁷ See the study of urban mining in Beijing conducted with my Chinese collaborators, Dr Zeng and
Professor Li (Zeng et al., ).
⁸ Consider, for example, the UN-inspired Green Climate Fund, established following the Paris
Climate Agreement, at: https://www.greenclimate.fund/who-we-are/about-the-fund.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
successfully on global bond markets in March , raising US$ million in funds to
be invested in green projects by Korean firms around the world, the idea has caught on
in a big way. China in particular has taken to green bonds, viewing them as a way of
tapping global capital markets to fund its green operations both at home and abroad
(under the Belt and Road Initiative). Green bonds are diffusing to late latecomers around
the world. The Bank Windhoek in Namibia, for example, issued a green bond in
targeted at renewable energy projects as well as at reducing carbon emissions from fossil-
fuel activities (a controversial aspect).⁹ The scale of green bond issuances continues to
grow, reaching US$ billion in , and US$. billion in the first half of .¹⁰
The other way that industrializing countries can channel finance towards green
growth initiatives—both energy and resources/materials aspects—is through develop-
ment banks. China is at the forefront, with its two principal development banks, the
China Development Bank (CDB) and the China Exim Bank, both providing Chinese
green shift companies with long credit lines in the billions of dollars to sustain them in
international competition against less well-endowed competitors. Brazil, too, has been
able to finance green projects throughout the country through the operations of the
Brazilian Development Bank (BNDeS) which has grown to be larger than the World
Bank.
How then are the leading industrializing countries today putting these green initia-
tives to work in driving green growth, or greening industrial policy?
. E I P/G
G I I C
..................................................................................................................................
.. Green Industrial Policy in India and its Impact
on Trade
Let us start with India, which is not only about to become the world’s most populous
country (expected to overtake China by the mid-s) but is actively pursuing green
projects across the board.¹¹ The hallmarks of India’s newfound green growth zeal
⁹ See characterization of the Namibian green bond from the Climate Bonds Initiative, at: https://
www.climatebonds.net/files/files/-%NA%Bank%Windhoek.pdf.
¹⁰ See the reports from the Climate Bonds Initiative, at: https://www.climatebonds.net/resources/
reports/green-bonds-market-summary-h-.
¹¹ The literature on India’s development has recently been throwing off its ‘cultural cringe’ with
respect to Western industrialization, and is now reclaiming India’s strong economic performance right
up to the nineteenth century before colonial depredations dismantled its sources of competitiveness. See,
for example, Bagchi () or Parthasarathi (). On India’s pursuit of green policies, see the
description and analysis by Simran Talwar and myself as at November , ‘India’s green shift to
renewables: How fast is it happening?’, Energy Post, November , at: https://energypost.eu/indias-
green-shift-to-renewables-how-fast-is-it-happening/.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Yearly Addition in GW Total Solar Capacity in GW
30
25
20
15
10
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
. India’s solar PV installed capacity, –
Source: Author.
(emulating China’s strategies with a lag of perhaps a decade) can be found in the
National Solar Mission, designed to achieve solar PV capacity in India of GW by
, and in the corresponding target for wind power of GW, again to be achieved
by . As shown in Figure ., the National Solar Mission was steadily driving the
uptake of solar power—until it met the unexpected obstacle of trade barriers created by
the advanced countries.
The Indian case reveals the hypocrisy of the West in advancing the concept of
decarbonization as a means of mitigating climate change, and yet opposing it as soon as
a country like India starts to take practical steps to build its own green industries.
Emulating China’s great success with building a wind-power industry in the early
s, utilizing the instrument of local content requirements (LCRs) (see section
..), as part of the National Solar Mission India stipulated that there should be
steadily rising proportions of domestic manufactures in the national solar PV output
and in the solar PV installation sector.¹² These requirements, while universally recog-
nized as necessary to build a new industry in an industrializing country, are technically
in breach of WTO rules, and India was duly taken to the WTO for disciplinary action
by the United States in a case that started in .¹³ India defended its policies on the
grounds that they were needed to enable India to meet its clean-tech targets under its
¹² On India’s National Solar Mission, see recent treatments such as Akoijam and Krishna () or
Kumar et al., ().
¹³ See the description of the case (as at February ) by the WTO, at: https://www.wto.org/
english/tratop_e/dispu_e/cases_e/ds_e.htm.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Paris commitments, but these arguments were rejected by the panel put in place to hear
the case and upheld by the highest WTO authority, an Appellate Court, in . By
the expansion of India’s world-beating solar PV industry was moderating. This is
the perverse result of a global system where the WTO and the UNFCCC are danger-
ously out of alignment.
The data on India’s solar PV generation in Figure . tell the story: rapidly growing
PV generation up to the year , when it started to decline under the impact of India
having to dismantle the LCR aspects of the National Solar Mission, on pain of
expulsion from the WTO.
.. Green Industrial Policy in China and its Impact
on Trade
While there is ample documentation on China’s vast consumption of coal and its
growing involvement in oil and gas production and consumption (its black economy),
much less attention is paid to the serious greening that has been under way in China
over the course of the past decade.¹⁴ The green shift in the electric power sector, where
the trends are concentrated, is clearly shown in Figure ..
Figure . reveals in striking detail how China effected a switch to dependence on
renewable sources (water, wind, and sun) around , and has since been pursuing
this green shift as fast as is practicable (given the vast scale of the electric power
system). In terms of capacity (upper line) the proportion of electric power capacity
sourced from water, wind, and sun (WWS) reached per cent by , rising
from per cent in —a per cent green shift in just one decade. If this green
shift is maintained through consistent green industrial policy for the next decade,
China’s WWS capacity could reach more than per cent before , meaning China’s
electric power system (the largest in the world) would have reached the tipping point
where it is more green than black, with a corresponding impact across wider industrial
and transport sectors. The data in terms of actual electricity generated show the same
trend, if not the same absolute values (because of varying capacity factors across
different generating sources).
China has judiciously utilized all the tools of green industrial policy to effect this
green transition in its electric power sector. The new industries of wind power
(encompassing a manufacturing value chain for wind turbines, and the operation of
huge wind farms like the Gansu GW farm) and solar PV power have been carefully
¹⁴ On China’s greening of its energy system, with emphasis on the way that green additions to the
power system now outrank black additions, see the successive articles by myself and Hao Tan in Asia-
Pacific Journal, including the most recent update, ‘The Greening of China’s Energy System Outpaces its
Further Blackening: A Update’, by John Mathews and Carol X. Huang, with comments from Mark
Selden and from Thomas Rawski, May , at: https://apjjf.org///Mathews.html.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
40%
35%
Proportion of the
installed power
capacity from WWS
30% sources
25%
20%
Proportion of
15% electricity
generation from
WWS sources
10%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
. China: Rising proportion of electric power sourced from water, wind, and sun,
–
Source: Author.
nurtured. China utilized LCRs and foreign direct investment (FDI) to build its wind-
turbine industry in the first decade of the twenty-first century, artfully deploying
graded increases in LCRs and (once they had achieved their objective) dismantling
them before a protest could be lodged at the WTO in Geneva. The emerging wind-
turbine giants like Goldwind were equipped with long credit lines by CDB, and
leveraged latecomer technology to good effect to acquire new technologies like per-
manent magnet direct drive (PMDD), which facilitated the expansion of the wind-
power industry offshore. The solar PV industry also expanded, with new entrants like
Suntech Power, founded in Wuxi by young entrepreneur Dr Shi Zhengrong in ,
scaling up production of PV modules to a degree never before attempted, and driving
down costs as they did so.
Of course it was not all plain sailing. Because China opened up the solar PV industry
as an exemplary case of unrestricted growth, there was a rapid build-up of over-
capacity, resulting in many bankruptcies. Rather than being seen as a failure of
industrial policy, this should be viewed instead as a success, in that the PV industry
was exhibiting ‘normal’ industrial dynamics of free entry and free exit via bankruptcy
or corporate acquisition. Suntech Power itself was one of the casualties. China’s power
grid proved incapable of accepting all the renewable power generated from the new
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
wind and solar PV sources, and much of the power was wasted in a process called
‘curtailment’. But this in itself stimulated rapid innovation, with the grid upgraded as a
vehicle of transmission and distribution (T&D) and the State Grid Corporation of
China leapfrogging world electrical engineering leaders with the introduction of new
T&D technologies such as ultra-high voltage (UHV) transmission. The new UHV
transmission lines built over the second decade of the twenty-first century have enabled
China to generate vast amounts of power from renewable sources in inland provinces
and then transport the electrical energy to the eastern seaboard with minimal losses
and enhanced reliability. This was a major achievement, revealing China’s rapid
passage from imitation to innovation in a critical sector.¹⁵
An unheralded aspect of China’s green energy shift over the course of the past
decade is that as the scale of its wind and solar PV markets expanded, so efficiencies
improved and costs were driven down spectacularly, as evidenced in Figure .. These
cost reductions have not been confined to China, but through globalization they have
diffused to the rest of the world. The result has been an unprecedented boom in
building renewable energy industries in newly industrializing countries, particularly
in those pursuing ‘late’ latecomer development strategies.
. O L
L A G I
P D D
..................................................................................................................................
An excellent example of a green economy initiative in a ‘late’ latecomer that makes
abundant economic and business sense may be found in Ethiopia, a country that is
industrializing fast, as the ‘China of Africa’. The country has a clear industrial policy
focused on manufacturing, which is concentrated on a series of industrial parks located
around the country. There are clear strategies in place to have these parks linked to
logistical infrastructure, such as the new (Chinese-financed) railway from the capital
Addis Ababa to the port of Djibouti on the Red Sea, which serves as a conduit to the
outside world for the landlocked country.
These industrial parks offer investors many advantages, including shared capital
infrastructure and common provision of energy and resources inputs. For textile and
clothing firms (the majority of invested enterprises in the industrial parks) water is a
critical resource—and some of the parks are offering an advanced zero liquid discharge
facility, or otherwise advanced water treatment and recycling facilities that come with
park admission. In one park, water is treated both physically and chemically to remove
pollutants and impurities in the form of a sludge that is solar dried and then
¹⁵ See the account of China’s UHV innovation as a leapfrogging strategy in Xu ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
transported off-site to a local cement plant, where it is absorbed as an input. This
creates linkages across manufacturing centres as well as the closure of a loop linking
the textiles and cement industries. And from the perspective of the firms involved in
the industrial parks, it reduces the costs of water as input, since the water utilized in the
park is per cent recycled, providing ‘grey water’ for all enterprises at costs well below
those that would apply to water drawn from underground supplies or from local lakes
and rivers. And the country is saved the environmental damage that would flow from
otherwise ‘free’ discharge of polluted water into local waterways.¹⁶
This is an example of an environmental initiative that enhances the water security of
the country, utilizing a technologically advanced water treatment and recycling system
that is as yet found in few advanced countries. It is thus a case of a government agency
(in this case, the Industrial Parks Development Corporation) acting as a public
entrepreneurial agent and introducing technoeconomic ‘leapfrogging’ as a matter of
industrial policy in Ethiopia. And once installed and operational, the initiative can be
replicated by other late late developers elsewhere in Africa, Asia, or Latin America. The
more it is replicated, the more the costs can be expected to decline, through the
enhanced efficiencies and specialization that flow from market expansion. Far from a
cost that must be imposed on a developing country through an ethic of ‘zero growth’, it
is in fact a business opportunity that offers profits in one country after another through
saving water as a precious resource by recirculating and treating the waste water as it is
generated. As a resource-saving initiative it recovers its public investment through the
exports facilitated by firms locating their operations in the industrial park involved.
This is the circular economy in action.
. W W C W
C F-F
D?
..................................................................................................................................
Compare the gains to be won through the greening approaches discussed above with
maintaining the status quo based on fossil fuels and the linear economy. To pursue a
conventional fossil-fuel pathway, a country would have to jeopardize its energy security
by maintaining dependence on oil, gas, or coal imports, at arbitrary prices and as an
increasing burden on the balance of payments. As the world approaches peak oil or
peak gas in individual oil and gas fields (as it has done repeatedly in successive fields) so
the demands for more extreme, dangerous, and costly extraction and transport
processes multiply. As everyone knows, oil and gas deposits are arbitrarily scattered
around the world, and the discovery of deposits represents a windfall opportunity.
¹⁶ The author visited this industrial park, Bole Lemi Phase II, in Addis Ababa, in October , at the
invitation of the IPDC.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
By contrast, the absence of these fossil-fuel resources (as in the case of Japan) makes the
country excessively dependent on imports from a few sensitive countries, thus reducing
energy security. In the case of Japan in the s, America’s tightening grip on Japan’s
oil supplies eventually led to the Pearl Harbor attacks and the bloodbath of the Pacific
War. Oil wars were the curse of the twentieth century, and they promise to be an even
worse curse in the twenty-first unless industrializing countries succeed in weaning
themselves off fossil fuels and shifting decisively towards renewable energy sources.
And then there is the huge environmental and pollution load associated with the oil
and fossil-fuel industries themselves—the dirtiest industries on the planet. Oil leakages
are the bane of oil production everywhere, quite apart from the shocking oil pollution
episodes involved in tanker collisions and accidents, of which the Exxon Valdez oil spill
may be taken as exemplary.
One common refrain in the anti-renewables discourse is that it would cost too much,
or require too many resources, to build a manufacturing-based energy system to
match the reach and scale of the existing fossil fuel-based system. Given the costs
and suicidal trends associated with continuing with fossil fuels, this is a strange
argument. But let us meet it head on. Would the costs of building manufacturing
industries to produce all the solar PV cells, all the wind turbines, and all the batteries
needed for a per cent transition to a renewables future exceed the costs involved in
continuing to invest in refineries, mines, oil drilling platforms, tankers, pipelines, and
distribution systems as at present? And don’t forget to add in the hospital and health
care costs incurred in treating the victims of fossil fuel-related toxic poisoning and
death—including lung cancer, bronchitis, and other debilitating conditions.
Several research projects have been devoted to proving that the costs—both financial
and resource-based—of building a per cent renewables-based energy system are
containable—and that the transition is therefore feasible and practicable.¹⁷ No further
credibility can be attached to fears that we might run out of silicon, or that we would
have to cover the world’s deserts with black silicon panels. No such estimates are
available as yet of effecting a global transition from the linear economy to the circular
economy—but they should be conducted as a matter of public urgency.¹⁸
Viewed from this perspective, one has to wonder why any country would wish to
persevere with the fossil fuel and linear economy status quo. And then reason dawns:
this is not a rational choice made by well-informed countries, but an outcome of the
incumbents continuing with their ‘business as usual’ and their extraction of rents from
their past investments. It is good to know that our future is in such safe hands.
¹⁷ A prominent project devoted to demonstrating the feasibility of a per cent renewables
transition is that conducted by Mark Jacobson and Mark Delucchi at the University of California,
with a growing band of collaborators; see, for example, Delucchi and Jacobson () and Jacobson,
Delucchi et al. ().
¹⁸ The Ellen Macarthur Foundation in the United Kingdom has come closest to conducting global
cost-examination studies of the circular economy; see Webster ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. G E E
R S: W
D P
..................................................................................................................................
If both a ‘climate perspective’ and a ‘green growth perspective’ end up favouring the
decarbonization of the economy and reducing its ecological footprint, what then is the
difference between them? This is an important and legitimate question—to which there
is an important and legitimate answer. The ‘climate perspective’ sets a standard of zero
carbon emissions as the ultimate goal, so that any single step towards this goal has to be
viewed as minor, until the goal is close. Or it sets a standard of ‘zero growth’ in order to
reduce the economy’s ecological footprint—so that, again, any individual step towards
reducing growth has to be viewed as a minor achievement.
By contrast, the green growth strategy is all about the process of greening, not the
end result. So even a small initiative to shift the energy system towards renewables can
be counted as a positive move that, for example, improves energy security and
generates local employment, which of course are positives in themselves and help to
cement support for the overall green growth strategy. Likewise, a move towards
recirculating resources, such as finding a way to turn an unwanted output into an
input to another industrial process (closing an industrial loop) can be counted as a
positive move that enhances resource security and reduces the waste generation
problem, while also boosting manufacturing linkages, employment, and profitability.
So, while China is continuing to burn a lot of coal—as numerous articles remind
us—the fact is that China is moving its energy system in a profoundly green direction,
one step at a time. It is the moving edge that is greening, with the energy system as a
whole slowly moving to become greener until a tipping point can be expected to be
reached where the entire system would be greener rather than blacker. China’s resource
productivity is also low (meaning that it generates a lot of waste). But China is taking
active steps to improve resource productivity, with moves to close industrial loops
contributing to the construction of a circular economy. And a tipping point will be
reached when the circular flows outnumber the linear flows, and the whole economy
becomes more resource conserving (through circularity) than resource wasting.
In my book, Greening of Capitalism, I discussed this issue under the heading of
the ‘differential principle’.¹⁹ In mathematical terms, complex systems are described by
their differential equations, and the ‘point of change’ is captured by the differential. The
most succinct way of capturing how the system is changing is to find an expression for
the differential. If a change in the system dynamics is required, the simplest way to
¹⁹ See Mathews (: n. ): ‘A more general version of this idea might be called the differential
principle, in that it identifies the point of change of a system as the point at which it is most susceptible to
effective intervention in moving the system to a new trajectory.’
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
effect it is via a change in the expression for the differential. So, translating these ideas
into real-world examples of complex physical or technoeconomic systems involves
focusing change efforts on the point where the system is already undergoing change—
which in technoeconomic systems means focusing on the point where investment is
occurring.
One can try to change a large, complex system by means of an absolute change—one
whole system replaced by another. Or one can try (with more likelihood of success) to
change the system at the point of change, where the forces of change are already in
evidence. Once business and technological systems have been built, they are highly
resistant to change. But at the point where investment is being contemplated, change
can occur by substituting one plan for another, with a stroke of the pen.
So one approach to greening industrial strategy is to focus on a system-wide
absolute, like carbon emissions, and uphold zero carbon emissions (the clean energy
economy) as the goal. This might be a legitimate goal—but as such it is quite
unachievable, because complex technoeconomic systems can change only in small
steps. And this lack of achievability of the absolute goal undermines confidence and
support—which is why we have seen so little overall progress in meeting global climate
targets. Another system-wide absolute might be to aim for the steady state (zero
growth)—which again is a non-achievable goal in any practical sense. But that does
not prevent zero-growth advocates from protesting about a large country’s inability to
conform to their absolutist expectations.
By contrast, the green growth strategy has more modest goals which are in fact
achievable. As the steps towards achieving them accumulate, so the system starts to
change in discernible ways that attract more and more support. Investment in one small
change, when viewed as a step in the right direction, attracts more such investment.
This is indeed the huge advantage of the capitalist business system. It allows change
to occur incrementally, one investment at a time. The big changes needed are the
province of the state—as in the case of the developmental state. There is no harm in
reminding ourselves why the capitalist system has achieved unrivalled supremacy in
the modern world.
. C C
..................................................................................................................................
In this chapter, I have argued that by extending the scope of industrial policy from
narrow economic to broader technoeconomic considerations, encompassing energy
and resource flows, the restructuring of industrializing economies may be accelerated
and at the same time brought closer to a state of balance between economy and ecology.
Using examples from India, China, and late latecomers from around the world, the case
has been made that at the scale of transformation now under way, traditional reliance
on the fallback options of fossil fuels and linear resource flows is no longer feasible.
These traditional options run into problems of severe environmental spoliation: in the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
energy domain, through particulate pollution as well as the pollution associated with
continuing extraction of fossil fuels; and in the materials/resources domain through
resource exhaustion and waste accumulation. Worse still, these traditional options run
up against geopolitical limits when, for example, countries seek to extend their supply
lines utilizing countries that are subject to social conflict or even civil war. These
geopolitical limits to growth now outweigh the physical limits that were so much in
vogue when the world was wrestling with ‘limits to growth’ in the s.²⁰
Green initiatives being taken in India, China, and late latecomers, far from being
viewed as ‘special cases’, should be viewed as the general case that all countries
industrializing in the twenty-first century must engage with. There is a common view
that ‘advanced’ countries constitute the general case in economics, and ‘developing’
countries a special case. But as argued by Dudley Seers in the s, and by Storm in
the s, the general case is in fact the one where structural shifts are under way, and
where dynamics have greater salience than statics.²¹ In advanced countries, incumbents
are concerned to protect rents—but in the developing countries, particularly very large
countries like India and China, latecomer firms are seeking to create profits by
emulating and replicating the patterns of activity observable in the advanced world—
and to do so at lower cost.
In the case of greening, there are countless examples of such imitation and emula-
tion, with latecomers drawing on the huge pool of knowledge and technology available
in the advanced world. Think of Chinese firms scaling up solar PV wafer production to
a mass production industry for the first time, on their way to becoming world leaders in
this sector. Or Chinese wind-turbine manufacturers like Goldwind adopting such
innovations as PMDD and scaling them up for the first time, thus facilitating the
global expansion of wind power from onshore to offshore. There are also cases of
leapfrogging, where the industrializing countries see market opportunities and grasp
them, even when this means going beyond imitation to innovation. The case of China
going it alone to UHV grid operation as a means of transporting vast quantities of
electric power from the interior of the country to the eastern seaboard comes to mind
as an outstanding example.
Indeed, there is a case for abandoning the term ‘greening’ altogether, once it is
understood that the initiatives involved in enhancing energy security and resource
security are in fact well-recognized cases of industrial strategy at work. The perspective
adopted in this chapter is that greening initiatives are going to accumulate, driven by
cost reductions and Schumpeterian creative destruction, until the point where almost
all technoeconomic initiatives are, axiomatically, regarded as green. At that point, there
will indeed be no need to discuss ‘green’ industrial policy as a special case—because by
then it will have become the general case.
²⁰ The reference here is to the influential report to the Club of Rome, ‘The Limits to Growth’
(Meadows et al., ).
²¹ See Seers () for the original argument, and Storm () for a more recent elaboration.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
R
Akoijam, Amitkumar Singh and Venni V. Krishna () ‘Exploring the Jawaharlal Nehru
National Solar Mission: Impact on Innovation Ecosystem in India’, African Journal of
Science, Technology, Innovation and Development (): –.
Altenburg, Tilman and Dani Rodrik () ‘Green Industrial Policy: Accelerating Structural
Change towards Wealthy Green Economies’, in Tilman Altenburg and Claudia Assmann
(eds) Green Industrial Policy: Concept, Policies, Country Experiences. Geneva/Bonn: UN
Environment/German Development Institute (DIE), pp. –.
Ambec, Stefan () ‘Gaining Competitive Advantage with Green Policy’, in Tilman Alten-
burg and Claudia Assmann (eds) Green Industrial Policy: Concept, Policies, Country Experi-
ences. Geneva/Bonn: UN Environment/German Development Institute (DIE), pp. –.
Bagchi, Amiya K. () Colonialism and the Indian Economy. New Delhi: Oxford University
Press.
Cosbey, Aaron () ‘Green Industrial Policy and the World Trading System’, Issue Brief
No. . Stockholm: ENTWINED/Winnipeg, Canada: IISD (International Institute for
Sustainable Development). Available at https://www.iisd.org/library/green-industrial-
policy-and-world-trading-system.
Delucchi, Mark A. and Mark Z. Jacobson () ‘Providing All Global Energy with Wind,
Water, and Solar Power, Part II: Reliability, System and Transmission Costs, and Pol-
icies’, Energy Policy (): –.
Fay, Marianne, Stefane Hallegatte, Adrien Vogt-Schilb, Julie Rozenberg, Ulf Narloch, and
Tom Kerr () Decarbonizing Development. Washington, DC: World Bank.
Hallegatte, Stefane, Marianne Fay, and Adrien Vogt-Schilb () ‘Green Industrial Policies:
When and How?’. Policy Research Working Paper No. . Washington, DC: World Bank.
Jacobson, Mark Z., Mark A. Delucchi et al. () ‘% Clean and Renewable Wind, Water
and Sunlight All-sector Energy Roadmaps for Countries of the World’, Joule : –.
Karp, Larry and Megan Stevenson () ‘Green Industrial Policy: Trade and Theory’. Policy
Research Working Paper No. . Washington, DC: World Bank.
Kumar, Charles R., Vinod Kumar, and M. A. Majid () ‘Wind Energy Programme in
India: Emerging Energy Alternatives for Sustainable Growth’, Energy & Environment ():
–.
Luetkenhorst, Wilfried, Tilman Altenburg, Anna Pegels, and Georgeta Vidican ()
‘Green Industrial Policy: Managing Transformation under Uncertainty’. Discussion
Paper No. /. Bonn: German Development Institute (DIE: Deutsches Institut für
Entwicklungspolitik).
Mathews, John A. () Greening of Capitalism: How Asia is Driving the Next Great
Transformation. Stanford, CA: Stanford University Press.
Mathews, John A. (a) ‘Global Trade and Promotion of Cleantech Industry: A Post-Paris
Agenda’, Climate Policy (): –.
Mathews, John A. (b) ‘Competing Principles Driving Energy Futures: Fossil Fuel Decar-
bonization vs. Manufacturing Learning Curves’, Futures (A): –.
Mathews, John A. (c) ‘Latecomer Industrialization’, in Erik S. Reinert, Jayati Ghosh, and
Rainer Kattel (eds) Handbook of Alternative Theories of Economic Development. Chelten-
ham: Edward Elgar, pp. –.
Mathews, John A. () Global Green Shift: When CERES Meets GAIA. London: Anthem
Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Mathews, John A. () ‘The Green Growth Economy as an Engine of Development: The
Case of China’, in Roger Fouquet (ed.) Handbook on Green Growth. Cheltenham: Edward
Elgar, pp. –.
Mathews, John A. () ‘The Greening of Industrial Hubs’, in Arkebe Oqubay and Justin
Yifu Lin (eds) The Oxford Handbook of Industrial Hubs and Economic Development.
Oxford: Oxford University Press.
Mathews, John A. and Hao Tan (a) ‘Manufacture Renewables to Build Energy Security’,
Nature (): –.
Mathews, John A. and Hao Tan (b) ‘A Trillion Watt “Big Push” to Decarbonize the
World’s Electric Power’, Journal of Sustainable Energy Engineering (): –.
Mathews, John A. and Hao Tan () ‘Circular Economy: Lessons from China’, Nature
(): –.
Mathews, John A., Hao Tan, and Mei-Chi Hu () ‘Moving to a Circular Economy in
China: Transforming Industrial Parks into Eco-industrial Parks’, California Management
Review (): –.
Meadows, Donella H., Dennis L. Meadows, Juergen Randers, and William W. Behrens ()
The Limits to Growth: A Report to the Club of Rome. Washington, DC: Potomac Associates/
Universe Books.
Padilla, Emilio () ‘What can Developing Countries Gain from a Green Transformation?’,
in Tilman Altenburg and Claudia Assmann (eds) Green Industrial Policy: Concept, Policies,
Country Experiences. Geneva/Bonn: UN Environment/German Development Institute
(DIE), pp. –.
Parthasarathi, Prasannan () Why Europe Grew Rich and Asia Did Not: Global Economic
Divergence. Cambridge: Cambridge University Press.
Rodrik, Dani () ‘Green Industrial Policy’, Oxford Review of Economic Policy (): –.
Schmitz, Hubert, Oliver Johnson, and Tilman Altenburg () ‘Rent Management: The
Heart of Green Industrial Policy’, New Political Economy (): –.
Seers, Dudley () ‘The Limitations of the Special Case’, Oxford Bulletin of Economics and
Statistics (): –.
Shadikhodjaev, Sherzod () ‘The Greening of Industrial Policy’, in Sherzod Shadikhodjaev
(ed.) Industrial Policy and the World Trade Organization. Cambridge: Cambridge Univer-
sity Press, pp. –.
Storm, Servaas () ‘Economics for the “General Case” ’, Development and Change ():
–.
Storm, Servaas and Naastepad, C. W. M. () ‘Strategic Factors in Economic Development:
East Asian Industrialization –’, Development and Change (): –.
UNEP () Towards a Green Economy: Pathways to Sustainable Development and Poverty
Eradication. Nairobi, Kenya: United Nations Environment Programme.
Webster, Ken () The Circular Economy: A Wealth of Flows. Cowes: Ellen Macarthur
Foundation.
Xu, Yi-chong () ‘The Search for High Power in China: State Grid Corporation of China’,
in Loren Brandt and Thomas G. Rawski (eds) Policy, Regulation and Innovation in China’s
Electricity and Telecom Industries. Cambridge: Cambridge University Press, pp. –.
Zeng, Xianlai, John A. Mathews, and Jinhui Li () ‘Urban Mining of e-Waste is Becoming
More Cost-effective than Virgin Mining’, Environmental Science and Technology ():
–.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
. .
I the contemporary era, industrial strategies are crafted amid competing narratives of
globalization. These narratives represent the parameters that both constrain industrial
policymaking and provide an opportunity to negotiate alternatives. Such representa-
tions are powerful precisely because they can become objectified as policy. They are
also compelling because the literature on industrial policy, taken as an ensemble,
largely leaves them out, interesting exceptions notwithstanding.¹ The aims of this
chapter are to fill in this blind spot and enlarge the orbit of inquiry.
Mindful of the fluidity of discourses, we will analyse how elite narratives of global-
ization, expressed in verbal and written texts, bear on industrial strategies. Our goal is
to parse out what these stories reveal. We will highlight ways in which the dominant
narrative of hyper-globalization frames analysis and action. Specifically, we will probe
the manner in which narratives of globalization are both shaped by and manifest in
globalization indices as well as in statements and speeches by senior political leaders of
the five BRICS countries: Brazil, Russia, India, China, and South Africa. We will also
show how the unifying discourse of hyper-globalization has been challenged by an
opposing narrative, de-globalization, which, though less apparent in the data analysed
here, is increasingly intertwined with the former. Over the years, these narratives have
gradually been supplanted by three more specific storylines, to be traced in the pages
ahead.
¹ Yet literature in cognate fields such as cultural theory and media studies gives ample attention to
keywords and speech acts. The acclaimed social critic Raymond Williams (), for instance, argues
that the uses and implications of keywords must be explicated historically. He demonstrates that the
language in vogue is constituted as lived experience in diverse contexts, open to challenge, and subject to
appropriation for gainful purposes.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
For the purposes of this study, the context is low- and middle-income countries in
the global South from the s to the present. These years are punctuated by the
transition to a post-Cold War order and adjustments to neo-liberalism, a set of ideas
and a policy framework centred on deregulation, liberalization, and privatization.
. T A A
C
..................................................................................................................................
To investigate the elective affinities between globalization narratives and industrial
strategies, this chapter adopts a critical political-economy perspective supported by
original data. Our critical approach upsets certainties in extant knowledge sets. Two
branches of political economy and social theory are especially pertinent for examining
industrial strategies: our work bridges insights from materialist and poststructuralist
traditions, with their respective emphases on material power and discursive power. The
rationale for linking them has its roots in classical political economy and classical social
theory. Both traditions emerged during the social upheavals accompanying the rise of
industrial capitalism in Western Europe from the late eighteenth to the early twentieth
centuries, as chronicled by Smith, Ricardo, and Marx to Durkheim, Weber, and others.
Our framework also draws on feminist and postcolonial theorists’ writings on stand-
point analysis, that is, seeing global problems from different positions in social and
geographical hierarchies (Tickner, ).
Spoken and written words are central to this endeavour. Words condense and frame
information. They overestimate some aspects of socio-economic phenomena and
underestimate others. While words can plant ideas and generate action, they may
also be a masquerade, disguising meaning and intentions. Whether used as a form of
deception or to induce action, they are instruments of political economy that produce
real consequences.
Moreover, words reflect what the French sociologist and public intellectual Pierre
Bourdieu () famously called habitus: the deep-seated habits, skills, and disposi-
tions that serve as cornerstones of institutionalized social hierarchies. Bourdieu’s
notion of habitus is important to analyses of industrial policy because it can be read
as drawing attention to narrative voices that animate international practices. Expand-
ing Bourdieu’s conceptualization, we argue that how international actors talk about
industrialization, name strategies for bolstering it, and attach labels to its variants, seep
into mindsets. The language chosen is used to kindle or confound practice.² The
² The impact of the preponderant use of the English language on the formation of global narratives is
discussed elsewhere (Mittelman, : especially n. and ) and falls outside the purview of this
chapter.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
vocabularies are terrain for contesting policy. They invite us to derive a sense of what
mistakes to correct and where to go: in short, how to do better policymaking.
In dwelling on the power of verbal and written acts, we will attempt to pick up on the
subtlety of these ambiguities and anomalies. While empirical digging beneath public
statements to investigate hidden transcripts is beyond the scope of this inquiry about
Industrial Globalization Talk,³ this chapter takes but a modest, exploratory step in that
direction. It is our hope that it can serve as a starting point for multipronged projects
combining interviews, ethnographies of organizations, and other types of field research
that would delve deeply into dominant‒subaltern relations and the institutions of civil
society amid the changing global division of labour and power (GDLP).
Conceptually, the narratives of hyper-globalization and de-globalization serve as
nonbinary markers, poles on a spectrum, with many variants in between. Of course,
other discourses are circulating. But we focus on the two widely shared narratives
because of their frequency in both the literature and the empirical data examined for
this research. It must also be stressed that they should not be construed as a dichotomy.
In the coming pages, we acknowledge sub-narratives.
In addition, we presuppose that world regions, multilateral agencies, and individual
countries are saturated with their external environment: in particular, by globalizing
forces, albeit accompanied by counterforces such as resurgent nationalism and authori-
tarian populism.
Methodologically, we offer textual analysis of intersubjective framing on the basis of
documentary research. Evidence is garnered from governmental and intergovernmen-
tal reports issued between and , a period spanning the global financial
crisis and the Eurozone debt crisis, the early years of modest recovery, and the rise of
counter-globalist forms of national populism in different world regions. Our research
integrates qualitative and quantitative data from think tanks and private corporations
with statements and reports by multilateral organizations and BRICS leaders. These are
drawn from online media outlets and the World Economic Forum (WEF, a private,
non-profit body that brings together global elites at annual gatherings usually held in
Davos, Switzerland), keynote speeches and reports by the five members of the BRICS
Business Council, and annual reports of the sole worldwide specialized agency devoted
to industrial development, the United Nations Industrial Development Organization
(UNIDO). All the documents were collected between January and June through
extensive Internet searches and by accessing publicly available online repositories.
Our empirical analysis thus proceeds selectively. As Fernando Santiago (see
Chapter , this volume) demonstrates, the BRICS are a heterogeneous grouping
with regard to their productivity and integration in the global political economy.
This variation notwithstanding, they are a visible expression of ongoing shifts in the
GDLP. Admittedly, some of the data in our study are patchy—they are not as
³ As in James C. Scott’s book () on hidden and public transcripts. For an exemplar of how to
discover and decode imaginaries, see Michael Burawoy et al. (). On ostensible representations of
industrial globalization, Cho, Kim, and Lee’s collection of essays () offers ample evidence.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
prodigious as we would like.⁴ Nevertheless, we deem them representative of national
and international elite narratives of globalization as they relate to industrial policy.
Whereas additional documents generated by governments and multilateral organiza-
tions could broaden our work, we propose avenues for future inquiry in section . of
this chapter.
By grounding this research in empirical findings, we seek to gain conceptual clarity,
throw light on contending narratives, and inform industrial policies in the global South.
The chapter therefore proceeds as follows. After advancing our theoretical framework
and tracking the rival narratives of hyper-globalization and de-globalization, we turn to a
first level of generality. It is the more wide-ranging narrative and maps the ways in
which globalization indices epitomize hyper-globalization. The second level evolved
from the first and describes specific trends, particularly narrative framing of industrial
policy by the leaders of multilateral organizations and the BRICS. Today’s narratives
have their roots in the hyper-globalist and de-globalization paths that continue to be
frequently travelled.⁵
The two levels of narrativity alike embody an epistemology: a theory of how to know
the world. It creates a problematic about what is ‘askable’ and how to go about
responding, thereby influencing what is to be said and done. Supposedly a means, it
becomes the objective of policymaking. To pull together these themes, we conclude by
offering reflections on the emphases and silences in the data, inferring opportunities on
this basis for industrial policymaking, and suggesting a research itinerary.
. T P
..................................................................................................................................
To link ideas, symbols, and language with material forces, Antonio Gramsci ()
formulated the concept of ideological hegemony: a fit between consensus and coercion in
which consensus is the dominant element. It would seem that neo-liberalism and
developmentalism constitute ideological projects in a Gramscian sense (Mkandawire,
). In the postcolonial era, these ideologies formed the prevailing wisdom about the
role of the state in much of Africa and elsewhere (Whitfield et al., ). Their implica-
tions for industrial policy have been unambiguous: a broad consensus, with economic
and diplomatic coercion in the backdrop, is reflected in narratives about industrializing
by forerunners and latecomers, catching up, climbing a ladder, realizing comparative
advantages, and leapfrogging (Chang, ; Nayyar, ; Behuria and Goodfellow,
). Within this consensus, there are of course serious internal differences.
Intervening in these debates, Akira Suehiro (: ) cautions about the pitfalls of
‘thinking in old-fashioned catch-up terms’ and notes that it is difficult to shed this
⁴ See n. this chapter.
⁵ As, for example, in Dani Rodrik’s () use of this construct for examining dilemmas in the
current conjuncture.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
mindset. Suehiro traces the process of ‘technology formation’—that is, upgrading
learning capabilities in industry and bolstering linkages between industrialization
and trade. His conclusion dovetails with our argument in the previous paragraph:
‘The core of the matter is ideological, not technological’ (Suehiro, : ; emphasis
in original).
To be sure, industrialization requires even more than these frames suggest. The
challenge is not to climb a ladder rung by rung to a pre-ordained destination decided
by the organizers of a race, mostly based in affluent countries. The ground beneath the
mythical track and hypothetical ladder can be unstable, even tremulous. The landscape
is produced by historical structures. It cannot be gleaned from analogical reasoning,
which may spread misconceptions and generate faulty narratives. To the extent that
analogies depict structured hierarchies, they facilitate analysis; but history is more
complex than collective metaphors could possibly capture.
For example, the image of climbing a ladder is a linear view of capitalist development.
In fact, the route is circuitous; the process, dysrhythmic. The imaginary of ascendance
omits zigzagging and swerving. It is mistaken to neglect multidirectional tendencies that
can be deeply contradictory. Nonetheless, the conventional wisdom is binary. It intim-
ates verticality: upward or downward movement. This picture deflects attention from the
importance of horizontal and lateral moves—spreading operations, building networks,
and forming alliances. In short, it induces two-dimensional thinking when multidimen-
sional analysis is needed to grasp the messiness of specific contexts.
Falling into these narrative traps can come about through the mimetic repetition of
keywords, a pivotal point to which we will return. In view of this relentless drumbeat, our
attention centres on how stakeholders frame industrialization. The focus on the discursive
moves by which industrial strategies are established, maintained, modified, or abandoned
is crucial because a substantial corpus of literature on industrial policy privileges eco-
nomic factors and understates the salience of intersubjectivity and social forces.
In an attempt to countervail economistic propensities, one of us (Mittelman, :
‒) has sought to advance the Smithian/Ricardian international division of labour
(IDL) theories, which emphasize the importance of the specialization of function and
the comparative advantage of trading products for which costs are relatively low.
Efforts to supplement them in a new international division of labour (NIDL) describe
the devolution of certain manufacturing industries from advanced capitalist countries to
the global South (Fröbel et al., ). This spatial reorganization of production, which
began in the second half of the twentieth century, merits fresh analysis since global
monopolization further concentrates industries geographically (see Chapter , this
volume) argue. Beyond the NIDL, the concept of the GDLP incorporates structural
power, constituted by a mix of objective and intersubjective factors that transcend
economic spheres. It links big powerful institutions such as transnational corporations
(TNCs) to social structure: the intersectionality of class, gender, generations, race and
ethnicity, and sexual orientation.
Building on this conceptualization, we maintain that imaginaries of globalization
embodied in competing narratives render some strategies more promising than others.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The menu of narratives provides options for industrial policy and begets societal impacts,
shaping countries’ positions in the global economy and their sociopolitical development.
To move beyond structuralism and economism in mainstream narratives (with
important correctives, e.g. Hirschman, , , [] ; Amsden, , ),
we want to explore alternative approaches. The pay-off should lie in explanatory power
as well as suggestions for regulatory reform. Towards these ends, let’s now endeavour to
disentangle global narratives.
. H-G
D-G
..................................................................................................................................
Widely deployed by governance agencies as well as by scholars and other policy
intellectuals, the narrative of hyper-globalization embraces propellants in the global
political economy. It is characterized by an acceleration in cross-border flows of capital,
technology, population, and cultural products. Its purveyors call attention to the extent
to which the speed and reach of contemporary economic globalization differ signifi-
cantly from the pace and expanse of earlier phases.
The hyper-globalization narrative emerged in the s and coincided with the
inception of the concept of global governance. Simultaneously pioneered by scholars
such as James Rosenau and Ernst-Otto Czempiel () and policy intellectuals in
international organizations, the umbrella concept of global governance premises
increasing complexity in the GDLP. In various formulations, hyper-globalization and
global governance are kneaded together. Taking into account Asian experiences with
industrialization during the Cold War, heterodox thinkers affirm that the develop-
mental state must play a major role in animating economic development by nurturing
domestic industries to the point that their insertion into global value chains produces
profits outweighing the initial investment and the costs.
In its early renderings, the notion of hyper-globalization depicted a borderless world,
one with heightened denationalization and a proliferation of actors (e.g. Ohmae, ;
cf. Dicken, ). Globalization was said to be an inexorable process that spurs capital
accumulation. For some authors (e.g. Dollar and Kraay, ), deep integration in the
global economy trends towards faster growth and poverty reduction and constitutes a
win‒win scenario. Yet questions about inequality on a world scale and the ethics of the
GDLP abound: whose rules and which discourses are inscribed in it? And who is
responsible for global economic governance?
Other authors have attempted to sharpen the hyper-globalist claim, positing that
with growing deterritorialization, the old Westphalian state system is increasingly
porous. As an organizing concept, the Westphalian principle has limited utility in
accommodating nongovernmental activities and accounting for ways that the state
itself and sovereignty are being reconstituted. New actors have come on the scene with
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
a backlash against globalizing forces, in particular from social movements that have
mounted protests targeting multilateral agencies such as the World Trade Organization
(WTO), the World Bank, and the International Monetary Fund. It has become
apparent that the North‒South divide and centre/periphery distinction lack sufficient
explanatory value for elucidating mobility in parts of the global South and persistent
marginalization in some areas (see Held et al., : ‒; Scholte, ).
In the second decade of the twenty-first century, analysts updated their data, but
many observers cling to the construct of hyper-globalization. Researchers based in
international institutions such as the United Nations Conference on Trade and Devel-
opment (UNCTAD, : iv‒v, ix, xiii, ) and at think tanks, among them Arvind
Subramanian and Martin Kessler () at the Peterson Institute for International
Economics and Yuefen Li (: passim) at the South Centre, still regard rising global
flows as indicators of the staying power of hyper-globalization. This is despite nuanced
readings of features of globalization—for example, the changing meaning of sover-
eignty and citizenship (Sassen, , )—and trenchant critiques by certain trade
economists. Dani Rodrik (), for instance, notes a groundswell against the hyper
form of globalization, efforts to level the playing field, and the rise of populisms, partly
as a reaction to the impact of neo-liberal capitalism.
In the current capitalist era, the tides of globalization tack back and wash forward. It
would be impossible to trace a neat sequential progression. Yet analysts can chart
toggles between retreats and advances, tensions and challenges, that spawn reconsti-
tuted narratives.
From the s, scholar-activists began to forge the counter-narrative of de-
globalization. An avant-garde book titled Delinking () by Samir Amin, an
Egyptian-French intellectual, laid the groundwork for careful research on this theme
carried out in myriad contexts. Amin distinguishes delinking from autarky and with-
drawal from the worldwide industrial, trade, and financial systems. Delinking is a
strategy for capturing control of the national economy—an auto-centric programme
for reconstructing the postcolonial economy. Meanwhile, the aim at the international
level is to work with allies to shape a polycentric system of power.
Amin and like-minded thinkers such as Walden Bello (), a Filipino professor
and former member of the House of Representatives of the Philippines, have put
forward ideas for transforming a political economy with due regard for the specificity
of individual countries in the global South. In Karl Polanyi’s sense (), the goal is
to re-embed the economy and institutions in society rather than to allow the
economy to drive society. Accordingly, in Amin and Bello’s usage, the lodestar of
de-globalization is disengaging from, and then selectively redialling into, the global
political economy.
Seemingly similar to these propositions, populists have formulated nationalist eco-
nomic agendas. They argue in favour of restructuring terms of trade, levying tariffs, and
protecting the domestic economy. In Indian Prime Minister Narendra Modi’s words:
‘As opposed to globalization, the forces of protectionism are emerging. Their intent is
to not only safeguard themselves from globalization, but also to alter the natural flow of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
globalization’ (Government of India, ). This thrust mirrors similar developments
in the global North where diverse economic nationalists, religious fundamentalists, and
radical environmentalists would use the national state as a shield or barrier to constrict
globalization. But major differences between the de-globalization narrative and popu-
list stances on the right are palpable. For instance, while the former propagates the idea
of decoupling to address economic inequalities associated with soft regulation of global
capital flows, the latter considers it mainly to reinvigorate nationalist discourses
and policies. Moreover, whereas the former stresses governments’ regulatory power vis-
à-vis global financial capital as a critical component of a just GDLP, the latter calls for a
reduction in human rather than financial flows even if reducing international mobility is
detrimental to industrialization because it restricts the movement of labour and ideas.
In light of these currents, we will next look at empirical evidence for how contem-
porary elite narratives have evolved and, one might claim, materialize as practices
and policies. We begin with how globalization indices produced by different non-
governmental and corporate actors provide scaffolding for dominant narratives of
globalization.
. N A I:
G I
..................................................................................................................................
Both narratives—hyper-globalization and de-globalization—offer interpretations of
uneven development and subtle shifts in the global political economy. The most recent
aggregate data for the period since the financial crisis show neither a large rise nor
a substantial decline in the overall level of globalization. Nor do the data suggest a
pattern wherein countries are voluntarily delinking from globalizing forces. However,
the indices rest on the taken-for-granted premise that countries can be ranked and
compared by the same measures.
In response, we find that the production of global indices itself incorporates the
preponderance of but one narrative: hyper-globalization. To sustain this proposition,
we juxtapose two global indices, the KOF Globalization Index issued by the KOF Swiss
Economic Institute (a) and the DHL Global Connectedness Index DHL ()
compiled by New York University and the Barcelona-based IESE business schools.⁶
⁶ Secondary data accuracy could be a concern for our analysis since the KOF Globalization Index
notes that ‘not all data are available for all countries and all years [and] missing values within a series are
imputed using linear interpolation’ (KOF Swiss Economic Institute, c). Yet we are more focused on
construct validity than data quality. The KOF Globalization Index, for instance, measures ‘de facto
Cultural Globalization’ through trade in cultural goods and personal services, international trademark
applications, and McDonald’s and IKEA stores relative to the size of countries’ populations. ‘De jure
Cultural Globalization’ is proxied by the ratio of girls to boys enrolled in primary education in public and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
According to the KOF Globalization Index (KOF Swiss Economic Institute,
b), worldwide globalization increased between and but slowed during
the financial crisis and in the recession that ensued. Disaggregating globalization
by dimension, the index suggests that despite a slight upward tick in , aggregate
economic globalization has flat-lined.⁷ Although financial globalization continued to
mount, trade integration reportedly receded. Yet this overall deceleration has left the
hyper-globalist narrative largely intact, as we will indicate in section . of this
chapter. While the social dimensions of globalization increased slightly before evening
out since , global information flows and political globalization vectored upward.
The KOF Globalization Index lists Switzerland as the most globalized country,
followed by other small European countries such as the Netherlands and Belgium,
whereas landlocked and island countries in the global South like the Central African
Republic and the Comoros are ostensibly the least globalized. The BRICS rank con-
siderably below small European countries. Brazil occupies the th spot in the
KOF Overall Globalization Index; Russia, th; India, th; China, th; and South
Africa, th. As stated by the organizations producing the ranking (KOF Swiss
Economic Institute, b; Bertelsmann Stiftung, ), one factor that explains
these ratings is country size. The BRICS are relatively large in terms of population
and land mass, and small countries and their neighbours tend to be more interdepend-
ent than many big ones. Second, not only is the BRICS’ level of intra-regional
integration less than that of the most highly ranked small countries, but greater
economic strictures (trade barriers, capital controls, etc.) in the BRICS are likely to
be another element in this ordering (Weiß et al., ). As the relative ease of flows
within the European Union illustrates, comparative regionalism may help account for
these differences. In this vein, regionalism may be construed both as a component of
globalization and a response and challenge to it, an issue that we will revisit. Third, the
KOF Globalization Index demonstrates that advanced economies in general are more
tied to global capital flows than are emerging economies. For China and the other
BRICS, domestic flows still exceed cross-border transactions.
The DHL Global Connectedness Index measures globalization in terms of the depth
and breadth of cross-border flows of trade, capital, information, and people. The most
recent DHL Index (Altman et al., ) indicates that for the world as a whole, the level
of global connectedness crested at a record high in . Although not entirely sharing
private schools, Feenstra et al.’s () human capital index (based on the average years of schooling per
country and an assumed rate of return to education), and Freedom House () data. The latter
comprise quantifications of aspects of freedom of expression and belief, associational and organizational
rights, rule of law, and personal autonomy and individual rights (KOF Swiss Economic Institute, d).
While creative, these proxies omit crucial dynamics of cultural globalization. For instance, they do not
capture the international spread of ideas (e.g. political traction gained by de-globalization), meanings
(e.g. rules and norms of global trade), and values (e.g. conditions under which national governments
may choose to violate trade agreements in order to protect their citizens).
⁷ For definitions of the dimensions of globalization and explanations of the methodology employed,
see Savina Gygli et al. (). We are also drawing on Kwon ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
KOF’s determination that globalization is declining, the DHL Index attests that on
actual levels of global connectedness, the world is, in fact, not as globalized as many
observers believe. The DHL finds that a larger portion of flows of trade, capital,
information, and people is domestic rather than international. Equally, in contrast to
the KOF Globalization Index, the DHL Index reveals that this is apparent for not only
countries on the low end of tallies of globalization indicators but also for those at the
top. Notwithstanding the ways in which technological globalization compresses time
and space, sovereignty and distance continue to constrain cross-border flows.
The DHL Index ranks the Netherlands as leading all countries in global connectivity.
It is followed in the top ten by mostly European countries in the following order:
Singapore, Switzerland, Belgium, the United Arab Emirates, Ireland, Luxembourg,
Denmark, the United Kingdom, and Germany. They hardly constitute a homogeneous
grouping as the list comprises a city-state (Singapore), a quasi-city-state (Luxembourg),
and relatively large national territories (UAE, Germany). The DHL Index also clusters
knowledge-based industrial economies such as Singapore, Switzerland, and Denmark
with service-based ones like the United Kingdom and Ireland, and the oil revenue-
dependent UAE. Moreover, it evinces substantial variation in flows over time, across
locales, between countries, and within regions. And despite complaints in Washington
about the scale and impact of globalization on the US domestic economy, the DHL
Index reports that the United States lags behind many other advanced countries in this
regard, ranking it th among countries in overall global connectedness. Consid-
ering that, of the major global tech players, fourteen are based in the United States,
three in the European Union, three in China, four elsewhere in Asia, and only one in
Africa (Jomo and Chowdry, , drawing on UNCTAD, ), the index omits
important dimensions of global aggregations of power. Global connectedness varies
considerably by both country and region; it cannot be reduced to one universal pattern.
But the deeper issue about these indices is not just that they offer nominally factual
insights. Their use betrays a philosophical embrace of positivism that resonates with
the tenets of neo-liberalism. The underlying assumption is that data may be objectively
measured, are independent of subjective processes, and that the findings—rankings—
can be replicated and are falsifiable. In objectifying the measures, complex social and
political dynamics are reduced to numbers. The presupposition is that brute data are
‘given’, not, as critical theorists would have it, produced. The question of production
begets questions not ordinarily asked in the field of industrial policy: Who authorizes
the production of measures, who selects the producers, who pays them, and to whom
are they accountable? If these searching questions are sidelined, are the measures—
indicators—an ideological construct adopted by myriad policymakers? In this sense,
dominant narratives may be understood as ideologies of power. And for this reason,
they are theoretically and empirically intriguing.
The empirical evidence adduced above shows that the levels of global connectedness
lie somewhere between what the enthusiasts of hyper-globalization claim and what the
proponents of de-globalization seek. In other words, even if globalization trends were
really measurable, neither narrative would adequately depict the actualities. To pursue
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
these issues, let us now pivot to how these two narratives and their variants are reflected
in other forms of policy texts and explore what this implies for industrialization
strategies in the global South.
. N A II: T
S
..................................................................................................................................
In segueing from globalization trends to industrialization strategies amid competing
narratives of globalization, it is important to be cognizant of narrative entrapment.
Observers can be enthralled with imagery not of their own making. These images often
take the form of language, mental pictures of social phenomena, and paradigms that
filter ideas (Mittelman, : , citing Shotter, : ‒).
Much like speeches and statements by heads of state and ministers at global
conferences, multilateral organizations’ flagship reports are political documents that
need to be read as such (Esser and Williams, ). They are variegated and do not
necessarily present coherent policy positions, but rather exemplify the dynamics of
global policymaking. They also reaffirm dominant global narratives, such as the
Millennium Development Goals and their successors, the Sustainable Develop-
ment Goals, that project authority, purport mandates, and seek legitimacy. This is not
to suggest that all stories are directly action inducing or option excluding (Rasche and
Esser, ). But, to underscore a point made at the outset of this chapter, storylines
have the potential to be converted into strategies and policies.
.. Globalization as Inexorable yet Malleable
The first storyline scrutinized here frames globalization as unavoidable on the one
hand, but susceptible to unilateral interventions by some national governments on the
other. Thus, in a speech, President Xi Jinping presented the Chinese perspective
as recognizing economic globalization as ‘a double-edged sword’ (Xi, ) and alluded
to ‘a time when China also had doubts about economic globalization’ (Xi, ). Xi
nonetheless posited ‘that integration into the global economy is a historical trend’ since
‘the global economy is the big ocean that you cannot escape from’ (Xi, ). Weighing
into ‘a heated debate on economic globalization [amid] a world of contradictions’, he
concluded that for China, the best way forward is to ‘act pro-actively and manage
economic globalization as appropriate so as to release its positive impact and rebalance
the process of economic globalization’ (Xi, ). Xi also stressed that ‘this round of
industrial revolution will produce extensive and far-reaching impacts such as growing
inequality, particularly the possible widening gap between return on capital and return
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
on labour . . . This is the biggest challenge facing the world today. It is also what is
behind the social turmoil in some countries’ (Xi, ).
In a similar vein, speaking at a conference in Washington, DC, Brazilian Vice
President Hamilton Mourão attributed an ‘international environment of greater
instability and competition’ to the ‘triumph of neo-liberal ideas’ (Wilson Center,
). In his view: ‘Today all nations, even the most developed ones, are kept in a
permanent state of alert’ (Wilson Center, ). So, too, Rob Davies, South Africa’s
former minister of trade and industry, warned about ‘the extreme uncertainty of the
current and immediately foreseeable global environment’ (Department of Trade and
Industry [DTI], : ), specifically the ‘volatile mix of geopolitical uncertainties and
risks and the emergence (and apparently growing traction) of populist backlashes in
the United States and much of Europe, partly fuelled by the unchecked exclusion and
inequality which the current model of globalisation has engendered’ (DTI, ).⁸ And
during the WEF meeting, India’s prime minister paraphrased Mahatma Gandhi:
‘I do not want that the walls and windows of my house are closed from all sides . . . But
at the same time it will not be acceptable to me that this wind blows away my feet off
the ground’ (Government of India, ).
It thus appears that even though BRICS leaders embrace a wide range of
political ideologies, they converge on a narrative of economic globalization as a
pervasive force subject to a set of pressures on their societies. They largely agree
that the rise of protectionist stances as outgrowths of chauvinistic populism risks
squandering development opportunities from the flow of goods and human capital
and achieves little in terms of mitigating the pernicious social effects of unfettered
globalization. These impacts and options are recognized across the global South,
from Latin America to East Asia, with important differences in the political
implications.
Meanwhile, a joint communiqué by the BRICS’ trade ministers ‘recognized the
importance of preserving policy space to promote industrialization, industrial upgrad-
ing, and value addition as a core pillar for structural transformation and sustainable
development and BRICS countries’ integration into the global economy’ (BRICS,
a: ). This need to defend and reclaim national policy space was reiterated during
the eighth BRICS Summit, which affirmed ‘measures that support greater participation,
value addition, and upward mobility in Global Value Chains of [BRICS] firms includ-
ing through the preservation of policy space to promote industrial development’
(BRICS, b: ).
This narrative shift towards a more nuanced assessment of globalization’s enabling
and deleterious effects that extend beyond the economic sphere, along with the appeal
of selective protectionism by countries confident in its successful implementation,
⁸ One year later, South African Prime Minister Cyril Ramaphosa also highlighted the ‘rise of trade
protectionism’ as one of the country’s main foreign policy challenges (Council on Foreign Relations
[CFR], ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
becomes equally apparent in UNIDO’s annual reports since .⁹ While recognizing
‘marginalization in today’s globalized world’ (UNIDO, , , ), UNIDO
nonetheless counselled that ‘[i]ncreased globalization and market liberalization pro-
vide great opportunities for developing countries and economies in transition to trade
their way out of poverty’ (UNIDO, : ).
The emphasis changed in the aftermath of the global financial crisis.
According to UNIDO (: ), ‘[a] number of existing and emerging megatrends—
including . . . unequal globalization—converged and together wreaked havoc on the
poorest countries that are home to the bottom billion’. Although the same report noted
a ‘multitude of gains to be achieved from globalization’ (: ), this formulation
soon switched to another frame: ‘rapid changes brought about by globalization’
(UNIDO, : ), which was cast as a ‘new hurdle’ (UNIDO, : ) for the
least developed countries. Four years later, UNIDO (: ) averred, ‘While global-
ization and trade liberalization offer undeniable opportunities . . . they also expose
markets to rapid changes in technologies, consumer preferences, and the pressures of
competition.’ The first storyline shows how narratives of globalization evolve and
expand. Initially schematic frames become more multifaceted. Narratives of globaliza-
tion spread globally but are also localized and modified to fit specific national and
regional conditions and concerns.¹⁰ This evolution across multiple scales of policy-
making is central to comprehending the second storyline emerging from the data.
.. Regionalization as a Process that can Refract
Global Neo-liberalism
The second storyline spotlights the promises of globalization as a crucial element in
regional integration. Let us again illustrate with a statement by Chinese President Xi:
We need to achieve a coordinated development of Asian countries . . . This will
help bring down the logistic costs, create demand and employment, give play to our
comparative and latecomer advantages, secure favourable position [sic] in the
global supply chain, industrial chain, and value chain, raise our comprehensive
competitiveness, and usher in a new situation in Asian development.
(People’s Republic of China [PRC], )
This regional focus on Asia by the region’s largest economic power parallels the South
African minister of trade and industry’s reframing globalization as African
⁹ We have avoided terms such as ‘success’ and ‘failure’ that recur in the literature on industrial
policy, for they are normative and reflect sociopolitical hierarchies.
¹⁰ Almost three years after the global financial meltdown, former Argentinean President Cristina
Kirchner pointed to the economic potential inherent in national industrialization amid contemporary
forces of globalization. In a speech to industrialists, she said: ‘Today I see globalization, which for years
looked like a threat to me, as an immense opportunity for the Argentinean Republic’ (Casa Rosada,
). Despite her government’s persistent nationalistic policies at the time, Kirchner hence felt it
opportune to reverse her previously protectionist rhetoric.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
regionalization. Arguing that South Africa had ‘been supporting the industrialization
of the African continent’ (Chatham House, ) and reflecting his government’s
pursuit of a ‘broader-based industrialization [to] enhance[e] the participation of
historically disadvantaged people and marginalized regions in the mainstream of the
industrial economy’ (Government of India, : ), he underlined that South
Africa’s government ‘want[ed] to see the development of value chains on a regional
basis’ (Chatham House, ; see also Africa Report, ). Brazilian Vice President
Mourão made similar claims concerning the role of Brazil in Latin America when he
stated: ‘Our region wants a better place on the great geopolitical chessboard of
globalization and global value chains’ (Wilson Center, ).
Another facet of this second storyline is BRICS members states’ persistent emphasis
on inter-regional integration. An early example is the Sanya Declaration issued at
the third BRICS Summit, which pledged to ‘support infrastructure development in
Africa and its industrialization within framework [sic] of the New Partnership for
Africa’s Development (NEPAD)’ (BRICS, : ). Two years later, the fifth BRICS
Summit ‘took place under the overarching theme, “BRICS and Africa: Partnership for
Development, Integration and Industrialisation”’(BRICS, : ). In addition, both
summits adopted resolutions ‘to increase . . . engagement and cooperation with non-
BRICS countries’ (BRICS, : ). This commitment has been reiterated consistently
(e.g. BRICS, b).
Extending the storyline to the nongovernmental realm, a statement from the
BRICS Business Forum reinforced the regional focus on Africa ‘in order to contribute
to its development and to expand trade links between Africa and BRICS’ (noted in DTI,
: ). BRICS Business Council chairman Onkar Kanwar complemented the
emphasis on African infrastructure development by demanding joint BRICS economic
zones (Kanwar, ) and greater ‘intra-BRICS trade using local currencies’ (Kanwar,
). And in , a joint statement by the council reaffirmed this commitment by
promoting the ‘development of inter-regional business ties’ (BRICS Business Council,
: ). This practical emphasis on the modalities of regional as well as inter-regional
integration stands in contrast to the final storyline emanating from the data: namely,
the importance of digital technologies for industrial development in the global South
amid a continuing dearth of actionable strategies.
.. Digital Industrialization: Distant Promise
or Catalyst of Inequality?
The articulation of the third storyline hinges on what some have termed the Fourth
Industrial Revolution (IR) and its implications for the global South.¹¹ In this
¹¹ Introduced in as ‘Industrie .’ to enhance competitiveness in manufacturing, the German
federal government incorporated this parlance in its High-Tech Strategy for and empanelled a
working group to advise on specific policies to implement the plan.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
connection, Klaus Schwab, the founder and executive chairman of the WEF, maintains
that the evolution of globalization and the genesis of IR are interrelated. He holds that
the first industrial revolution brought steam trains, steamships, and the industrializa-
tion of weaving and mining; the second, the modern assembly line, the automobile, and
the airplane; and the third, the computer and early digitalization. The fourth is marked
by artificial intelligence (AI), autonomous vehicles, and the Internet of things: the
integration of multiple technologies into one whole system (Schwab, , ).
BRICS leaders have embraced the IR narrative. For instance, the Fortaleza
Declaration capping the BRICS’ sixth Summit stated: ‘We believe that ICTs [informa-
tion and communications technologies] should provide instruments to foster sustain-
able economic progress and social inclusion’ (BRICS, : ). At a regional
WEF meeting, Chinese Premier Li Keqiang argued: ‘The advent of a new round of
technological and industrial revolution has provided a historical opportunity for . . .
the upgrading of traditional industries’ (PRC, ). And one year later, President Xi
() reiterated this narrative in his remarks at the annual meeting in Davos, urging
world leaders to ‘seize opportunities presented by the new round of industrial revolu-
tion and digital economy’. Echoing the Fortaleza Declaration, Indian Prime Minister
Modi expounded at the WEF meeting: ‘Technology and digital revolution
increases [sic] the likelihood of . . . new solutions, which could help us to tackle the
old problems of poverty and unemployment in a new manner.’ So, too, the Russian
Federation’s minister of trade and industry referred to the present era as ‘a time when
manufacturing must adapt to the demands and the opportunities created by the Fourth
Industrial Revolution’ (Roscongress Foundation, ). Along these lines, the WEF’s
Centre for the Fourth Industrial Revolution Network pursues a mission to hone
governance frameworks and protocols and has started to work on projects in various
domains, such as in AI and machine learning (WEF, : ).
However, in the data analysed in this chapter, assertions about the potential of
digitalization for the global South remain largely hypothetical. True, mutual gains seem
likely when, for instance, South Korea and Singapore join forces to facilitate product
development and marketization for start-ups (Korea.net, ). Yet, how national
governments lacking influence on the world stage and in countries with weak links
to global value chains are to engage digitalization is an open question, one acknow-
ledged in the global South.
Addressing this issue at a BRICS Business Council meeting in , South Africa’s
minister of international relations and cooperation recognized ‘the challenges arising
from the Fourth Industrial Revolution’ (Sisulu, ). Remarkably, a UNIDO
report was the only document in our database that presented a discordant view:
namely, that new technologies are no panacea for industrial development, for they
have ‘often failed to translate into concrete growth opportunities’ (UNIDO, : ).
But what can governments of industrializing countries do to level the IR playing
field? A joint initiative by the Indian and South African delegations to the WTO is
emblematic of future opportunities as well as current limitations. Acting on their
shared position that ‘[t]ariffs are instruments of industrial policy and have implications
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
for capital accumulation, technological change, productivity growth, and employment’
(Government of India, : ) and citing a UN study on the implications of growing
global trade in e-commerce (UNCTAD, ), the two delegations advocated an end to
the WTO’s moratorium on imposing customs duties on electronic transmissions
in order to render the latter a source of domestic revenues (WTO, ). Urging the
global regulatory body ‘to understand the ruinous impact of digitization on SMEs
[small and medium-sized enterprises] in developing countries and LDCs [least devel-
oped countries]’ (WTO, : n.p.), the two signatories argued:
The moratorium will negatively impact the efforts of many developing countries,
which are laggards as far as digital industrialization is concerned, to industrialize
digitally. It could also undermine existing industries. Tariffs play an important
role in protecting infant domestic industries from more established overseas
competitors until they have attained competitiveness and economies of scale.
(WTO, : n.p.)
The joint memo concludes that ‘for designing such policies [to protect infant digital
industries], it is extremely important for developing countries to preserve policy and
regulatory space in the WTO’ (WTO, : n.p.). Like statements in favour of selective
protectionism that exemplify the first storyline’s ongoing evolution, such calls for
industry-specific protectionism are at odds with the neo-liberal vision of IR as a
global process unfolding preferably without significant regulatory constraints. On the
one hand, they show that some governments in the global South value the potential of
digitalized trade and of industries for building technological scaffolding. On the other
hand, they clearly recognize that unregulated global digital industrialization is unlikely
to foster economic growth and welfare in countries where entrepreneurial capital has
often been restrained, requisite infrastructure is still nascent, and productivity, whether
digital or analogue, is held back by limited knowledge transfers.
Taken together, the three storylines provide a wide range of examples of how the
narratives of hyper-globalization and de-globalization are adopted and used, but also
supplanted and challenged. In this chapter’s final section, section ., we interpret the
emphases and silences apparent in the data and, on this basis, sketch opportunities for
industrial policymaking in the global South. We also offer suggestions for how to
expand the evidentiary support for these openings and, in a preliminary manner,
provide a multipronged research agenda.
. N S
..................................................................................................................................
One of the otiose stories is about the ‘flying geese’ model, introduced by Kaname
Akamatsu () in the s in Japanese and first appearing in an English-language
publication in . This catchphrase depicts followers in formation, pursuing the
pattern set by lead countries, enabling the others to ascend the hierarchy of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
industrialization. The metaphor is used to describe the IDL in the Pacific region, where
the United States was a lead country; Japan is said to have played catch-up, and other
Asian countries have fallen in line. But one must take cognizance of how structural
constraints operate. The crux of the matter is that neo-liberal globalization typically
reduces national policy space and detaches economic reforms from social policy.¹² In
the changing GDLP, policymakers can ill afford to be swayed by the familiar story of
boosting manufacturing by relying on externally driven growth and creating agglom-
eration economies. This agenda is derived from the Cold War era, with the clustering of
production in East Asia during the first wave of late industrialization. The contempor-
ary context is far different. Strategic thinking must come to grips with vast Chinese
investment in manufacturing (see Oqubay and Lin, ). Rising costs of skilled labour
in China are precipitating continuous restructuring in manufacturing and shifts in
global commodity chains, resulting in the redistribution of industrial employment and
redeployment to new export destinations.
At present, transitions from industrial to digital economies, thus far limited in the
global South, along with more advanced knowledge inputs, appear to be impelling a
parametric transformation in the global economy. While a few middle-income
countries are preparing to benefit from digitalization, many are not. For some of
them—among others, Malaysia—preparation involves studies, even blueprints, with
little actual implementation. But the implications in terms of training and bringing
skills and capital from their diasporas are stark.
Another central question is how low- and middle-income countries can take part in
this global transformation without being relegated to the role of its clients: takers rather
than makers in the GDLP. For these countries, foregoing the potential of recalibrating
their positions in the global political economy, with reduced transaction costs, market
expansion, and technological learning and upgrading, represents an opportunity loss.
Yet, without extolling the virtues of digitalization, as do vogue iterations of the hyper-
globalist narrative, it would be wrong to underestimate the skewed structures of
participation.
By now, policymakers should be crafting new strategies for more fully engaging the
knowledge structure to meet the challenges of digital industrialization. Phenomena
such as industrial robots in manufacturing and the concentration of control of digital
data under the auspices of a handful of big tech firms, the world’s largest ones
headquartered in the United States, are patent. With the exchange of scientific and
technological information, big tech companies based in the global North withhold
know-how, especially with digital industries that are developing algorithms and
AI. Obfuscation employed by these firms to protect their trade secrets takes the
¹² Along these lines, Osvaldo Sunkel and Michael Mortimore () contend that the flying-geese
model does not obtain in the manufacturing sector in Latin America, where no single country has
taken the lead and where TNCs and foreign direct investment have not fulfilled a developmental role.
Rather than flying geese, countries in this region have been, in Sunkel and Mortimore’s words, ‘sitting
ducks’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
form of abstruse language, euphemisms, corporate jargon, and esoteric acronyms. In
the United States and some other countries, trade law, with its many loopholes and
carve-outs (e.g. for intellectual property), buttresses the use of secrecy in many kinds of
disputes and reinforces barriers to entry. And in the name of national security,
governments seek to deny access to information about their technological operations
so that actors with whom they have adversarial relations cannot acquire it. Faced with
this challenge, certain countries are trying to secure a measure of control, Rwanda
among them; they have designed national policies for building digital skills and
exercising sovereign rights over the flow of their national data. A reason why some
actors and not others are making strides lies in the particularity of their domestic
political and transnational economic coalitions.
The knowledge community could make an important contribution to achieving this
objective. However, the narratives and the data scrutinized above say little about this
community’s role in industrialization. The only exception in our dataset was the
Fortaleza Declaration, which affirms the BRICS’ commitment to ‘working together
with the ICT industry, civil society, and academia in order to realize the ICT-related
potential opportunities and benefits for all’ (BRICS, : ). Although university-
based research and training can be vital resources for industrialization strategies, the
linkages between knowledge production in the global South and industry are generally
weak. Rodrigo Arocena, a professor of mathematics and former vice-chancellor of the
University of the Republic of Uruguay, and his co-authors drive this point home,
calling for the relationship to be strengthened (Arocena and Sutz, ; Arocena,
Göransson, and Sutz, ). These ties offer possible gains in advanced knowledge
and, beyond copycat technologies, perhaps breakthrough technologies. As emphasized
above, national variation is evident. In some cases, the quality of higher education,
research institutes in particular, is such that cooperation with domestic industries can
bear fruit only if it is highly selective and actively nurtured by governments’ strategic
investments.
Realizing the potential of industry‒university collaborations (IUCs) in the global
South therefore requires clearing hurdles that add to a list of related challenges arising
from IUCs in the global North (Rybnicek and Königsgruber, ). Moreover, spend-
ing on research and development as a proportion of gross domestic product in the
global South is well below the levels of domestic resource mobilization in most
developed countries. In keeping with the neo-liberal trend in the global North, basic
research, which is the basis of applied work and can catalyse innovations, is typically
assigned low priority (Arocena and Sutz, : , ; Mittelman, ). Practical
results and immediate pay-off have taken precedence. Also, external transfers of
technology from sellers or donors to receivers of imported knowledge often become
more a one-way process than a two-way street.
Surely fundamental and applied research can be rendered complementary rather
than compartmentalized. The knowers and doers can work together or be one and the
same. In this effort, the knowers would strive to better understand the mechanisms of
translating narratives of industrialization into policy, and the doers’ job is to use this
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
understanding to improve practice. Their mutual goal is to enable local actors to be
makers rather than takers of industrial policies so as to achieve societal well-being.
On this route, attempts to align knowledge production and a high level of training to
meet the challenges of industrial globalization are often hobbled by mistrust of the
international experts whose agencies sponsor development projects and the local officials
who try to steer them. This suspicion is not irrational fear. It is based on experience: a
combination of pronounced inefficiencies, endemic corruption, and class antagonism
reflecting changing power relations between capital and labour. In this sense, industrial
policies can run aground on ‘technologies of power’ (Foucault, : ).
In order to arrive at a sober assessment of the prospects for realignment, it is
important to note that knowledge institutions themselves, universities in particular,
are beset with a plethora of problems. Some of them are structural. These include
demographic trends, with a growing population of the young in the global South
seeking higher learning; reductions in state spending per student with few exceptions,
mainly in Asia; and lack of qualified staff equipped with PhDs. Added to this are
matters of political and economic governance: an increase in executive power and the
decline of collegial decision-making within the academy; mounting costs of maintain-
ing and operating higher education institutions; and pressure from the public and
politicians for enhanced performance (Mittelman, ).
From the vantage point of industry, universities are prone to scholasticism.
Universities are seen as being preoccupied with broad philosophical debates, arcane
subjects, abstract theorizing with little relevance to the down-to-earth needs of the
industrial sector, and their own inbred protocols: the habitus of the academic trade.
The application of Bourdieu’s concept of habitus to this dimension of industrial policy
lends perspective to persistent reservations about closing the gap between industrialists
and university-based scholars, and helps explain why many opportunities for realign-
ing knowledge communities and industry are not pursued.
That said, industry and the academy should be reminded to proceed by respecting
one another’s distinctive missions. And if the goal is to serve mutual interests so as to
meet the needs of the local population in an equitable manner, an antidote to the
distance between industry and higher education is to introduce tangible incentives for
collaboration between them. Government authorities could allocate funds to institu-
tions partly on the basis of what in the Nordic countries is known as the ‘third
mission’—knowledge transfer and societal service. True, increasing incentives comes
with a cost and requires money. Yet mobilizing revenue to invest in this kind of
innovation is likely to have a substantial pay-off.
But to what end? It is not that a gap separates competitors in a race for an imagined
finish line. The so-called laggards are not in a race of their own making. The challenge
is to design home-grown industrialization strategies, not to import or download them
from standard global scripts. The goal ought to be increasing autonomy. This calls for
capturing a larger share of control over globalization and thereby repositioning in the
GDLP (Mittelman and Norani Othman, ). Implementation hinges on not only
resources but resourcefulness. It entails not only inventions but inventiveness.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
More specifically, the three evolved storylines outlined above point to narrative traps
as well as opportunities for policymakers in the global South. Putting aside whether the
representations of industrial strategies plotted in prior decades were apt when they
were conceived, the operative consideration now is that customary forms of industri-
alization in the global South, along with the older narratives that portray them, are
historically and theoretically interesting, yet outmoded. The current conjuncture in the
world economy is marked by transformations in capitalism. Among them, the decline
of manufacturing relative to service industries and a shift from industrial capitalism to
digital capitalism are prominent.
. L S P
S
..................................................................................................................................
In our times, the first storyline suggests that national policymakers ought to continue
eschewing protectionist language in the global arena. But this does not mean that
selective industry protection is politically unfeasible. In fact, subtle narrative modifi-
cations in response to regional hegemons’ pivot towards protectionism provide an
opportunity for national actors to derive lessons from historical cases of industrial
policy. The task is to consider locally and regionally workable approaches to industrial
midwifery by which domestic industries are selectively nurtured and shielded inter-
nationally during their initial stages of growth. Economic powers other than the United
States and China have already adapted their industrial policies accordingly, albeit with
a focus on the latter component of economic midwifery. For instance, India’s unfolding
industrial policy enacts Prime Minister Modi’s stance on protecting the domestic
economy from global pressures. And his government’s collaboration with South Africa
to mobilize state revenues from digital commerce signifies that India is not alone in this
protectionist push. Although policymakers in countries at the bottom of the GDLP
may have less room for manoeuvre, the global tide for strategic protection is indeed
rising.
Another promising move is to reclaim policy space by leveraging the second
storyline, that is, globalization-as-regionalization, both on the intra-regional and
inter-regional levels. The idea is to replace the logic of catch-up with more flexible
scenarios of regional and inter-regional integration. Conceivably, the fragmentation of
the global economic system may lessen international pressure on industrializing
countries to comply with global norms. The example of India and South Africa jointly
arguing their case against the extension of the WTO’s e-commerce moratorium is
emblematic of this power shift. In this case, new tactical alliances among industrializing
countries appear more viable than heretofore.
But one more word of caution: promoting regionalism carries different pay-offs for
the BRICS than for small, landlocked states. An empirical focus on the BRICS member
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
states leaves out the latter. Future research could complement our country cases by
integrating data-enabling analyses of how national governments forging industrial
policy in the proximity of the BRICS have framed globalization and, on this basis,
assess prospects for regionalism.
Next, an extension of this research could home in on multilateral organizations
whose missions are to promote regional development: among them, the Inter-
American, African, and Asian Development Banks and the UN Department of Eco-
nomic and Social Affairs’ regional commissions. More granular tracing of the evolution
of narratives within the compass of international institutions and national govern-
ments could yield deep insights into the incentives and disincentives shaping the
formation of globalization narratives as they bear on industrial policy.
Third, inquiry should extend beyond elite discourses so that it encompasses those of
the most vulnerable subjects of narrative power. A bottom-up perspective would round
out what we have attempted in this chapter. Narratives from below are complementary
to our analysis, especially with changes in industrial relations. Studies at the micro level
would be particularly useful in this regard.
Fourth, while undertaking micro studies, there should be no mistaking the macro
issue concerning the parameters in which industrial policy is being forged. In the
interregnum in which we find ourselves, industrial capitalism is rapidly losing ground
to a new form of capitalism, only hinted at but not elaborated above. Digitalization and
knowledge work are gaining sway at the expense of prior generations of technology and
wage labour. The implications for industrial policy in the context of development
have yet to be drawn in any systematic manner. As intimated, in an attempt to adapt
during this transitional period, discourse brokers in government and at the WEF are
promoting IR and have disseminated a spate of reports, white papers, and articles on
the implications of IR for corporations, technology, governance, and academia
(Kagermann et al., ; Drath and Horch, ; Brettel et al., : ; Cotteleer
and Sniderman, ). The extent to which the IR business model and its asymmet-
ries (see Morgan, ; Andreoni, Chapter , this volume) create a false narrative
about a global win‒win scenario while widening the divide between the world’s data-
rich and data-poor populations gives pause.
The Davos Manifesto clearly calls for a new social narrative in response to the
now widespread recognition of economic globalization’s pernicious effects on inequal-
ity. It would seem that IR affords an opportunity to shape this narrative in order to
influence policy. For policymakers in the global South as much as for nongovernmental
activists globally, this is the time to challenge technological solutionism by subjecting
the narrative to more critical scrutiny. If executed in a constructive, thoroughgoing
way, this effort could help mitigate socio-economic polarization both within and
among countries and world regions.
Finally, the point that warrants emphasis is that for countries at the low end of the
GDLP, achieving fruitful policies requires striving for homemade approaches to indus-
trialization by strategically seizing shifts in globalization narratives and resulting policy
openings. Contextualized combinations of the steps proposed above—industrial
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
midwifery enlisting the knowledge community, prioritizing basic as well as applied
research, mustering resources for incentivizing knowledge transfers and societal ser-
vice, and orienting training programmes to foster capacities for resourcefulness and
inventiveness—can optimize the prospects for industrialization. Each country must
forge its own path. It is our hope that deliberations over country-specific permutations
of this portfolio will spur development through sound industrial policies amid global-
izing forces.
A
For valuable research assistance, we are indebted to Ji Young Kwon and Luciana Storelli-
Castro. Thanks, too, to the reviewers, especially Peter Lawrence, of a preliminary version of
this chapter.
R
Africa Report () ‘Interview: Rob Davies, Minister of Trade and Industry, South Africa’.
Available at https://www.theafricareport.com//interview-rob-davies-minister-of-trade-
and-industry-south-africa/.
Akamatsu, Kaname () ‘A Historical Pattern of Economic Growth in Developing
Countries’, The Developing Economies (): –.
Altman, Steven A., Pankaj Ghemawat, and Phillip Bastian () ‘DHL Global Connected-
ness Index : The State of Globalization in a Fragile World’. Deutsche Post DHL Group.
Available at https://www.logistics.dhl/content/dam/dhl/global/core/documents/pdf/glo-
core-gci--full-study.pdf.
Amin, Samir () Delinking: Towards a Polycentric World. London: Zed Books.
Amsden, Alice H. () Asia’s Next Giant: South Korea and Late Industrialization. Oxford:
Oxford University Press.
Amsden, Alice H. () The Rise of ‘the Rest’: Challenges to the West from Late-
Industrializing Countries. Oxford: Oxford University Press.
Arocena, Rodrigo and Judith Sutz () ‘Changing Knowledge Production and Latin
American Universities’, Research Policy : –.
Arocena, Rodrigo, Bo Göransson, and Judith Sutz () Developmental Universities in
Inclusive Innovation Systems: Alternatives for Knowledge Democratization in the Global
South. Basingstoke: Palgrave Macmillan.
Behuria, Pritish and Tom Goodfellow () ‘Leapfrogging Manufacturing? Rwanda’s
Attempt to Build a Services-led “Developmental State” ’, The European Journal of Devel-
opment Research : –.
Bello, Walden () Deglobalization: Ideas for a New World Economy. London: Zed Books.
Bertelsmann Stiftung () ‘Globalization Report : What about the BRICS Countries?
Why Are They Not the Main Profiteers?’. A Global Economic Dynamics Blogpost.
Available at https://ged-project.de/ged-blog/improving-public-understanding-of-economic-
globalisation/globalization-report--what-about-the-brics-countries/.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
Bourdieu, Pierre () Distinction: A Social Critique of the Judgement of Taste. London:
Routledge.
Brettel, Malte, Niklas Friederichsen, Michael Keller, and Marius Rosenberg () ‘How
Virtualization, Decentralization and Network Building Change the Manufacturing Land-
scape: An Industry . Perspective’, International Journal of Information and Communi-
cation Engineering (): –.
BRICS () ‘Sanya Declaration’. Sanya: Third BRICS Summit, April.
BRICS () ‘eThekwini Declaration’. eThekwini: Fifth BRICS Summit, March.
BRICS () ‘Fortaleza Declaration’. Fortaleza: Sixth BRICS Summit, July.
BRICS (a) ‘Trade Ministers [sic] Communique’. New Delhi: Sixth Meeting of the BRICS
Trade Ministers, October.
BRICS (b) ‘Goa Declaration’. Goa: Eighth BRICS Summit, October.
BRICS Business Council () ‘Joint Statement’. Moscow: BRICS Business Council, April.
Burawoy, Michael et al. () Global Ethnography: Forces, Connections, and Imaginations in
a Postmodern World. Berkeley, CA: University of California Press.
Casa Rosada () ‘Cena por el Día de la industria en Tecnópolis: Palabras de la
Presidenta de la Nación’. Available at https://www.casarosada.gob.ar/informacion/
archivo/-cena-por-el-dia-de-la-industria-en-tecnopolis-palabras-de-la-presidenta-
de-la-nacion.
Chang, Ha-Joon () Kicking away the Ladder: Development Strategy in Historical Perspec-
tive. London: Anthem Press.
Chatham House () ‘Interview with Rob Davies, South African Trade Minister’. London:
Chatham House. Available at https://www.chathamhouse.org/expert/comment/interview-
rob-davies-south-african-trade-minister.
Cho, Lee-Jay, Yoon Hyung Kim, and Chung H. Lee (eds) () Industrial Globalization in
the Twenty-first Century. Seoul: Korea Development Institute.
Cotteleer, Mark and Brenna Sniderman () ‘Forces of Change: Industry .’, Deloitte
Insights. Available at https://www.deloitte.com/insights/us/en/focus/industry-–/over
view.html?nc=#what-is-industry-.
Council on Foreign Relations () ‘A Conversation with Cyril Ramaphosa’. Washington,
DC: Council on Foreign Relations, September. Available at https://www.cfr.org/
event/conversation-cyril-ramaphosa.
Department of Trade and Industry () ‘Joint Statement of the BRICS Business Forum’.
Durban: BRICS Business Forum, March.
Department of Trade and Industry () ‘Industrial Policy Action Plan: Economic Sectors,
Employment and Infrastructure Development Cluster’. Pretoria: Department of Trade and
Industry.
Dicken, Peter () Global Shift: Mapping the Changing Contours of the World Economy. th
edition. New York: Guilford Press.
Dollar, David and Aart Kraay () ‘Trade, Growth, and Poverty’, Economic Journal
(): –.
Drath, Rainer and Alexander Horch () ‘Industrie .: Hit or Hype?’, IEEE Industrial
Electronics Magazine (): –.
Esser, Daniel E. and Benjamin J. Williams () ‘Tracing Poverty and Inequality in Inter-
national Development Discourses: An Algorithmic and Visual Analysis of Agencies’
Annual Reports and Occasional White Papers, –’, Journal of Social Policy ():
–.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Feenstra, Robert C., Robert Inklaar, and Marcel P. Timmer () ‘The Next Generation of
the Penn World Table’, American Economic Review (): –.
Foucault, Michel () The Foucault Reader, edited by Paul Rabinow. New York, NY:
Pantheon.
Freedom House () Freedom in the World . Washington, DC: Freedom House.
Available at https://freedomhouse.org/report/freedom-world/freedom-world-.
Fröbel, Folker, Jürgen Heinrichs, and Otto Kreye () The New International Division of
Labour: Structural Unemployment in Industrialised Countries and Industrialisation in
Developing Countries. Cambridge: Cambridge University Press.
Government of India () The BRICS Report: A Study of Brazil, Russia, India, China, and
South Africa with Special Focus on Synergies and Complementarities. New Delhi: Oxford
University Press.
Government of India () ‘Prime Minister’s Statement on the Subject “Creating a Shared
Future in a Fractured Word [sic]” in the World Economic Forum’. Delhi: Government of
India, January. Available at https://mea.gov.in/Speeches-Statements.htm?dtl%F
%FPrime_Ministers_Statement_on_the_subject_Creating_a_Shared_Future_in_a_
Fractured_Word_in_the_World_Economic_Forum_January__.
Gramsci, Antonio () Selections from the Prison Notebooks, translated and edited by
Quintin Hoare and Geoffrey Nowell Smith. London: Lawrence and Wishart.
Gygli, Savina, Florian Haelg, Niklas Potrafke, and Jan-Egbert Sturm () ‘The KOF
Globalisation Index–Revisited’, Review of International Organizations (published online).
Available at https://doi.org/./s---.
Held, David, Anthony G. McGrew, David Golblatt, and Jonathan Perraton () Global
Transformations: Politics, Economics, and Culture. Stanford, CA: Stanford University Press.
Hirschman, Albert O. () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Hirschman, Albert O. () A Bias for Hope. New Haven, CT: Yale University Press.
Hirschman, Albert O. ([] ) Essays in Trespassing: Economics to Politics and Beyond.
Cambridge: Cambridge University Press.
Jomo, Kwame Sundaram and Anis Chowdry () ‘Developing Countries Losing out to
Digital Giants’. Inter Press Service, October. Available at http://www.ipsnews.net//
/developing-countries-losing-digital-giants/.
Kagermann, Henning, Wolfgang Wahlster, and Johannes Helbig () ‘Recommendations
for Implementing the Strategic Initiative INDUSTRIE .–Securing the Future of German
Manufacturing Industry’. Final Report of the Industrie . Working Group. Forschungsu-
nion. Munich: National Academy of Science and Engineering.
Kanwar, Onkar S. () ‘Bridging Gaps with BRICS’, The Financial Express, Noida, Uttar
Pradesh, September.
Kanwar, Onkar S. () ‘BRICS Must Score a Goal in Fortaleza’, Hindustan Times, New
Delhi, July.
KOF Swiss Economic Institute (a) KOF Globalisation Index. Eidgenössische Technische
Hochschule Zürich. Available at https://www.kof.ethz.ch/en/forecasts-and-indicators/
indicators/kof-globalisation-index.html.
KOF Swiss Economic Institute (b) ‘KOF Globalisation Index: Globalisation Lull Con-
tinues’. Press release, December. Available at https://www.kof.ethz.ch/en/news-and-
events/media/press-releases///kof-globalisation-index-globalisation-lull-continues.
html.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
KOF Swiss Economic Institute (c) ‘KOF Globalisation Index: Method of Calculation’.
Eidgenössische Technische Hochschule Zürich. Available at https://ethz.ch/content/dam/
ethz/special-interest/dual/kof-dam/documents/Globalization//Method__.pdf.
KOF Swiss Economic Institute (d) ‘KOF Globalisation Index: Variables Description’.
Eidgenössische Technische Hochschule Zürich. Available at https://ethz.ch/content/dam/
ethz/special-interest/dual/kof-dam/documents/Globalization//Definitions__.pdf.
Korea.net () ‘Remarks by President Moon Jae-in at the Korea-Singapore Business
Forum’, July. Available at http://www.korea.net/Government/Briefing-Room/Presidential-
Speeches/view?articleId=.
Kwon, Ji Young () ‘Background Paper on Globalization Trends’. Unpublished paper.
Li, Yuefen () ‘Assessment of South-South Cooperation and the Global Narrative on the
Eve of BAPA+’, Research Paper No. . Geneva: South Centre.
Mittelman, James H. () Contesting Global Order: Development, Global Governance, and
Globalization. London: Routledge.
Mittelman, James H. () Implausible Dream: The World-class University and Repurposing
Higher Education. Princeton, NJ: Princeton University Press.
Mittelman, James H. and Norani Othman (eds) () Capturing Globalization. London:
Routledge.
Mkandawire, Thandika () ‘Thinking about Developmental States in Africa’, Cambridge
Journal of Economics (): –.
Morgan, Jamie () ‘Will We Work in Twenty-first Century Capitalism? A Critique of the
Fourth Industrial Revolution Literature’, Economy and Society. doi: ./.
..
Nayyar, Deepak () Catch Up: Developing Countries in the World Economy. Oxford:
Oxford University Press.
Ohmae, Kenichi () The Borderless World: Power and Strategy in the Interlinked Economy.
New York: HarperCollins.
Oqubay, Arkebe and Justin Yifu Lin (eds) () China‒Africa and an Economic Transform-
ation. Oxford: Oxford University Press.
People’s Republic of China () ‘Connectivity Spearheads Development and Partnership
Enables Cooperation, Address by Xi Jinping at Dialogue on Strengthening Connectivity
Partnership’. Beijing, November. Available at http://www.china-embassy.org/eng/zgyw/
t.htm.
People’s Republic of China () ‘Premier’s Speech at the Opening Ceremony of the Tenth
Annual Meeting of the New Champions’. Tianjin: The State Council of the People’s
Republic of China. Available at http://english.gov.cn/premier/speeches////
content_.htm.
Polanyi, Karl () The Great Transformation. Boston, MA: Beacon Press.
Rasche, Andreas and Daniel E. Esser () ‘Managing for Compliance and Integrity in
Practice’, in Chris Carter, Stewart R. Clegg, Martin Kornberger, Stephan Laske, and Martin
Messner (eds) Business Ethics as Practice: Representation, Reflexivity and Performance.
Cheltenham: Edward Elgar, pp. –.
Rodrik, Dani () ‘Populism and the Economics of Globalization’, Journal of International
Business Policy (–): –.
Rodrik, Dani () ‘Globalization’s Wrong Turn and How It Hurt America’, Foreign Affairs
(): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Roscongress Foundation () ‘Russia to Host the Global Manufacturing and Industrialisa-
tion Summit ’. Available at https://roscongress.org/en/news/russia-to-host-the-global-
manufacturing-and-industrialisation-summit-/.
Rosenau, James N. and Ernst-Otto Czempiel (eds) () Governance without Government:
Order and Change in World Politics. Cambridge: Cambridge University Press.
Rybnicek, Robert and Roland Königsgruber () ‘What Makes Industry–University Col-
laboration Succeed? A Systematic Review of the Literature’, Journal of Business Economics
(): –.
Sassen, Saskia () Losing Control? Sovereignty in the Age of Globalization. New York:
Columbia University Press.
Sassen, Saskia () Globalization and its Discontents: Essays on the New Mobility of People
and Money. New York: New Press.
Scholte, Jan Aart () Globalization: A Critical Introduction. nd edition. New York:
Palgrave Macmillan.
Schwab, Klaus () The Fourth Industrial Revolution. New York: Crown Business.
Schwab, Klaus () ‘Globalization .: A New Architecture for the Fourth Industrial
Revolution’, Foreign Affairs, January. Available at https://www.foreignaffairs.com/
articles/world/--/globalization-.
Scott, James C. () Domination and the Arts of Resistance: Hidden Transcripts. New
Haven, CT: Yale University Press.
Shotter, John () Cultural Politics of Everyday Life: Social Constructionism, Rhetoric and
Knowing of the Third Kind. Toronto: University of Toronto Press.
Sisulu, Lindiwe N. () ‘Keynote Address at the Mid-term Meeting of the BRICS Business
Council’, Johannesburg: BRICS Business Council, April.
Subramanian, Arvind and Martin Kessler () The Hyperglobalization of Trade and Its
Future. Washington, DC: Peterson Institute for International Economics.
Suehiro, Akira () Catch-up Industrialization: The Trajectory and Prospects of East Asian
Economies, translated by Tom Gill. Honolulu: University of Hawai’i Press.
Sunkel, Osvaldo and Michael Mortimore () ‘Transnational Integration and National
Disintegration’, in Björn Hettne, András Inotai, and Osvaldo Sunkel (eds) Comparing
Regionalisms: Implications for Global Development. Basingstoke: Palgrave, pp. –.
Tickner, J. Ann () A Feminist Voyage through International Relations. Oxford: Oxford
University Press.
United Nations Conference on Trade and Development () Trade and Development
Report : Power, Platforms and the Free Trade Delusion. New York: UNCTAD.
United Nations Conference on Trade and Development () ‘Growing Trade in Electronic
Transmissions: Implications for the South’. UNCTAD Research Paper No. . New York:
UNCTAD.
United Nations Industrial Development Organization (–, –, ) Annual
Reports. Vienna: UNIDO.
Weiß, Johann, Andreas Sachs, and Heidrun Weinelt () Globalization Report: Who
Benefits Most from Globalization? Gütersloh: Bertelsmann Stiftung. Available at
https://ged-project.de/research/studies/globalization-report--who-benefits-most-from-
globalization/.
Whitfield, Lindsay, Ole Therkildsen, Lars Buur, and Anne Mette Kjær () The Politics of
Africa Industrial Policy: A Comparative Perspective. Cambridge: Cambridge University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. .
Williams, Raymond () Keywords: A Vocabulary of Culture and Society. London: Croom
Helm.
Wilson Center () ‘We are Committed to Restoring Confidence in the Country and its
Institutions: A Conversation with His Excellency Hamilton Mourão, Vice President of the
Federative Republic of Brazil’, Washington, DC: Woodrow Wilson International Center for
Scholars, April. Available at https://www.wilsoncenter.org/sites/default/files/event_
transcript_-_vice_president_mourao_at_wc_.._.pdf.
World Economic Forum () ‘Globalization .: Shaping a New Global Architecture in the
Age of the Fourth Industrial Revolution’. Geneva: WEF. Available at http://www.
weforum.org/docs/WEF_Globalization_._Call_for_Engagement.pdf.
World Trade Organization () ‘Work Programme on Electronic Commerce: The
E-commerce Moratorium and Implications for Developing Countries’, Communication
from the Indian and South African delegation. Geneva: World Trade Organization.
Xi, Jinping () ‘Jointly Shoulder Responsibility of our Times, Promote Global Growth’.
Davos: World Economic Forum, January. Available at http://www.china.org.cn/node_
/content_.htm.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
,
,
.............................................................................................................
. I
..................................................................................................................................
T--century policymaking is increasingly defined by the need to respond to
major social, environmental, and economic challenges. Sometimes referred to as ‘grand
challenges’, these include threats like climate change, demographic, health, and well-
being concerns, as well as the difficulties of generating sustainable and inclusive
growth. Against this background, policymakers are increasingly embracing the idea
of using industrial and innovation policy to tackle these ‘grand challenges’. Examples of
challenge-led policy frameworks include the United Nation’s Sustainable Development
Goals (SDGs; Borrás, ), the European Union’s Horizon Europe research and
development programme (Mazzucato, a), and the UK’s Industrial Strategy
White Paper (HM Government, ).
Challenge-driven policy frameworks are emerging in parallel to well-established
modernization¹ and competitiveness² frameworks. While modernization, and in par-
ticular competitiveness frameworks, rely on the idea that government should first and
foremost fix market failures,³ a challenge-driven agenda does not have such clearly
defined theoretical origins and analytical lenses. As Richard Nelson argued in in
his seminal book The Moon and the Ghetto, getting man to the moon and back is not
¹ See, for instance, the Blair government’s ‘Modernising Government’ White Paper from ,
https://www.civilservant.org.uk/library/_modernising_government.pdf.
² The EU’s Lisbon Strategy from is perhaps the best-known example of this, see https://portal.
cor.europa.eu/europe/Profiles/Pages/TheLisbonStrategyinshort.aspx.
³ On competitiveness, see Reinert ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the same as solving the problem of ghettos in American cities. Put differently, the
nature of our knowledge about socio-economic challenges differs from our perception
of strictly technical challenges. We can discover answers to technical puzzles; socio-
economic issues do not have a single correct discoverable solution. Such issues require
continuous discussion, experimentation, and learning.
We believe challenge-led growth requires a new conceptual and analytical frame-
work that has at its core the idea of confronting the direction of growth with growth
that is, for example, more inclusive and sustainable. Such a framework should focus on
market shaping and market co-creating (Mazzucato, ). This is a question of both
theory and policy practice. In theory, challenge-driven innovation policy questions
both established neoclassical and evolutionary concepts (Schot and Steinmueller,
). In policy practice, directed policies require rethinking what is meant by ‘vertical
policies’.
Industrial policies have always been composed of both a horizontal and a vertical
element. Horizontal policies have historically been focused on skills, infrastructure, and
education, while vertical policies have focused on sectors like transport, health, energy,
or technologies. These two traditional approaches roughly embody differing schools of
economics: neoclassical economics-inspired horizontal policies focusing on supply-
side factors and inputs; and evolutionary economics-inspired policies putting emphasis
on demand-side factors and systemic interactions (Nelson and Winter, ;
Hausmann and Rodrik, for a synthesis). Although certain sectors might be
more suited to sector-specific vertical strategies, the ‘grand challenges’ expressed in
SDGs are cross-sectoral by nature and hence we cannot simply apply a vertical
approach to them. Both neoclassical and evolutionary approaches to industrial policy
have relied on the idea that the best policy outcome is economy-wide development,
without specifying its nature. In policy this has led to managing economies according
to GDP growth rates, competitiveness indices and rankings, or other macro indicators
(e.g. exports, patents) (Drechsler, ). Yet, many SDGs are only indirectly related to
the economy and hence many of the key issues around SDGs have not been theorized
in the context of innovation and industrial policy (see, e.g. Zehavi and Breznitz, ).
In this chapter we argue that through well-defined goals, or more specifically
‘missions’, that are focused on solving important societal challenges, policymakers
have the opportunity to determine the direction of growth by making strategic invest-
ments, coordinating actions across many different sectors, and nurturing new indus-
trial landscapes that the private sector can develop further (Mazzucato, ;
Mazzucato and Penna, ). The result would be an increase in cross-sectoral learning
and macroeconomic stability. This ‘mission-oriented’ approach to industrial policy is
not about top-down planning by an overbearing state; it is about providing a direction
for growth, increasing business expectations about future growth areas, and catalysing
activity—self-discovery by firms (Hausmann and Rodrik, )—that otherwise would
not happen (Mazzucato and Pérez, ). It is not about de-risking and levelling the
playing field, nor about supporting more competitive sectors over less (Aghion et al.,
), since the market does not always know best, but about tilting the playing field in
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
the direction of the desired societal goals, such as the SDGs. However, we argue, to
achieve this requires a new analytical framework based on the idea of public value and a
policymaking framework aimed at shaping markets in addition to fixing various
existing failures. Indeed, we argue that if we want to take grand challenges such as
the SDGs seriously as policy goals, market shaping should become the overarching
approach followed in various policy fields.
. F M F M
S
..................................................................................................................................
The dominant approach to public policy is derived from neoclassical economic theory,
in particular microeconomic theory and welfare economics.⁴ This approach empha-
sizes the idea that, given certain assumptions, individuals pursuing their own self-
interest in competitive markets gives rise to the most efficient outcomes (Samuelson,
; Mas-Colell et al., : ‒). Efficiency is understood in a utilitarian sense,
whereby an activity is efficient if it enhances someone’s welfare without making anyone
else worse off (so-called Pareto efficiency). Under these conditions, the role of govern-
ment intervention is in practice often limited to addressing instances where the market
is unable to deliver Pareto-efficient outcomes.
These ‘market failures’ arise when there are information asymmetries, transaction
costs and frictions to smooth exchange, non-competitive markets (e.g. monopolies) or
externalities whereby an activity harms another agent not directly connected with the
market transaction (e.g. pollution), or coordination and information failures hamper
investment (Rodrik, ).
In the s, public-choice theory considered how the actions of agents (voters,
bureaucrats, politicians) involved in policy could be considered from an economic
efficiency perspective, as those agents, including government agents, were assumed to
be self-interested (Buchanan and Tullock, ). While in markets the existence of
competition and the profit motive tends to enforce efficient decision-making, in
collective decision-making processes (i.e. politics and public administration) the
same disciplining framework does not exist. Policymaking is thus subject to capture
by certain interest groups, in particular those most able to influence policymakers for
reasons of power or money. In public administration, the lack of competitive pressures
leads to ‘bureau-maximizing’ behaviour, whereby departments and agencies look after
their own survival rather than the ‘common good’.
Public-choice theory argues that even where there are clear examples of market
failure, it is not always the case that government intervention would result in a more
efficient outcome. Rather, there could also be ‘government failure’, whereby decisions
⁴ This section builds on Mazzucato and Ryan-Collins ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
aimed at improving welfare make things even worse than they would have been under
conditions of market failure (Le Grand, ). For policymaking processes such an
approach creates a bias towards inaction. If the default assumption is that the market
will find the best outcome, even if it doesn’t the overriding concern is that government
intervention may worsen existing outcomes; the default prescription for government
policy is to maintain the status quo. There is a danger that analytical frameworks
become focused more on justifying and measuring the non-failure of public policies
than on the attainment of wider policy goals.
In development theory and practice, the market-failure-based approaches coalesced
in the s around the so-called Washington Consensus policies focused on deregu-
lation, opening up domestic markets, and relying on foreign direct investments and
exports to drive economic transition and growth (Williamson, ). The Washington
Consensus main assumption was that as all development problems are of the same
nature, the solutions are bound to be the same as well. This removes the question of
directionality of growth away from domestic policymaking and leaves global markets
in charge (Kattel et al., ).
The market failure perspective also creates a particular orientation towards innov-
ation, industrial policy, and structural economic change.⁵ While certain elements of
innovation policy, in particular early-stage R&D, can be considered to be public goods
and thus a case for public policy provision can be justified, in the main it is assumed
that the private sector is the more efficient innovator, possessing greater entrepreneur-
ial capacity and better able to take risks given the pressure created by competition. In
contrast, the state is viewed as risk averse and in danger of creating government failure
if it becomes too involved in industrial policy by ‘picking winners’. Its role is to level the
playing field for commercial actors—mostly through supply-side inputs such as better
skills or the removal of market frictions—and then get out of the way. This has led to
rather diverse debates and the development of policy practices aimed at finding ever
more precise policy targets through better measurement of failures and of the impact of
policies trying to fix those failures. Instead, policy discussions in particular should focus
on ‘heterodox’ policy approaches that recognize both market and government imper-
fections and failures—as well as the fact that it is impossible or even undesirable to
attempt to remove all of them at once—and the need for policies that support scale
economies, dynamic learning effects, and cross-sectoral spillovers (Rodrik, ).
⁵ Some eminent economists have rejected the market failure justification for policy intervention since
the concept that markets by themselves lead to efficient outcomes is dependent on conditions—perfect
information, completeness, no transaction costs or frictions—that have never been empirically demon-
strated (Coase, ; Stiglitz, ). Rather, markets are always incomplete and imperfect, and hence not
‘constrained Pareto-efficient’, that is, they are never in a situation where a government (a central
planner) may not be able to improve upon a decentralized market outcome, even if that outcome is
inefficient (Greenwald and Stiglitz, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
In order to expand such heterodox notions to grand challenges, we need a positive
theory of public value that begins with a notion of the public good not as a correction to
a failure, but as an objective in itself—an objective that can only come about if linked to
a process through which value is created. In this sense a new building block is needed
to guide and legitimize public policy. As indicated by Kenneth Arrow (), while a
market failure approach can be utilized to understand why, for example, private firms
underinvest in R&D, it is not so useful for guiding public investment in R&D, because
of the inherent uncertainty involved in the outcomes of such investment. Indeed,
Arrow called for alternative approaches to analysing public investment and policies
for innovation.
Critically, the market-failure justification implies that pure private markets/private
goods can exist independently of public or collective action. While the role of institu-
tions is admitted (North, ), the role of different voices coming together to form the
notion of the public itself is left mainly to sociology, not economics. Nelson notes that
‘there is no satisfactory normative theory regarding the appropriate roles of govern-
ment in a mixed economy’ (: ) and no theory that captures the complex variety
of institutional arrangements that people have developed to solve collective problems.
Just as pure public goods are rare, so too are pure private goods. Babysitters or sharing
everyday appliances such as lawnmowers involves no government intervention or
regulations, but does involve collective or ‘public’ negotiation. Hence the ‘market
failure’ dichotomy is not particularly useful.
We propose an alternative approach, which begins with the notion of public value as
collectively generated by a range of stakeholders including the market, the state, and
civil society. Key here is the emphasis on value creation at the core: not ‘public’ value
but value itself—with a clear delineation of the role of the different actors that are
central to its formation. While in economics value is, in essence, created inside
businesses and only facilitated by the public sector, in this view value is co-created
and requires a stakeholder understanding of capitalism itself. This view draws on the
work of Elinor Ostrom (), who shows that a radical state/private division is, to use
her word, barren. In developed economies there are many types of organizations. Non-
partisan government regulators, state-funded universities, and state-run research pro-
jects, for example, are quite different. Besides, the crude binary state/private division
fails to capture the many ways in which all institutions create and destroy value. In
addition, Ostrom’s () emphasis on pooled common resources and her interest in
shaping systems so that they take into account collective behaviour, can help shape new
policy tools.
This more collective view also benefits from a different understanding of the market
itself, with the market as an outcome of the interactions of individuals, firms, and the
state, as discussed in the work of Karl Polanyi (), and ‘embedded economies’, as
discussed by Granovetter (). If value is created collectively, a first question
becomes: what capabilities, resources, and capacities are needed for this value to be
created inside all the different organizations, including those in the public sector,
private sector, and civil society? In the same way that a theory of private value creation
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
benefits from a resource-based theory of the firm (Penrose, ), so does a public-
value notion. Indeed, it is by sidelining the notion of value as only created in business
and facilitated or redistributed by the public sector that the question of capabilities is
missed. The work by Teece () on the dynamic capabilities of the firm becomes
equally necessary for the public sector, as we have argued elsewhere (Kattel and
Mazzucato, ).
A collective theory of value creation requires understanding by all actors of invest-
ment and production capacity. Indeed, as discussed by Mazzucato and Sekera (), a
theory of public value needs to also understand the productive capacity and capabilities
of the state. And if the state loses that capacity it will lose its absorptive capacity—and
hence be unable to understand technological and market opportunities (Cohen and
Levinthal, ).
Similarly, instruments like taxation are no longer about correcting externalities,
but about creation itself. Adam Smith’s notion of the free market was free from
rent and this distinction between rent and profits requires tools to incentivize
creation, not extraction, of value (Mazzucato, a). Thinkers such as Ricardo,
Mill, and even Adam Smith recognized that unfettered markets were often ineffi-
cient and prone to capture by special interests, and could have negative distribu-
tional outcomes without ongoing intervention by the state. In particular, there was
a recognition between productive profits and economic rents that represented
unearned income deriving from arbitrary control over resources. These authors
argued that the primary role of taxation, for example, rather than internalizing
externalities caused by identified market failures, should be to tax away rents
accruing from the monopolistic ownership of factors of production, in particular
land (Mazzucato, b: ‒; Ryan-Collins, : ‒). In the classical view,
rents did not accrue from market ‘imperfections’ as in market failure theory, but
from the inherent imbalances in economic and political power that characterized
dynamic capitalist economies.
Thus, the focus is on the economic and political processes, institutions, and
conditions that enable (public) value creation—and equally on how to counter
(public) value extraction—across sectors and economies (Mazzucato, a). The
role of the state is key here, since it is the only institution with the power to shape
markets and direct economic activity in socially desirable directions—or ‘missions’—
to achieve publicly accepted outcomes (Mazzucato, , ). Similarly, many
government interventions enable markets to function, such as legal codes, public
policies, antitrust policies, university scientists, and physical infrastructure (Nelson,
: ).
Public value should thus be as much concerned with the direction of growth (and the
macroeconomic implications) as with the microeconomic structure of government
agencies. The question should be how to shape and co-create markets, not just how to
correct them. Industrial and innovation policy should be focused both on fixing
existing market failures and, equally importantly, on shaping future markets to deliver
public value.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
. L H: T
E M- P
..................................................................................................................................
While economists have had difficulties with the normative theory of the role of
government in the mixed economy, as noted by Nelson above, governments have at
various points in history attempted to implement challenge-driven, mission-oriented
policies. This section gives a brief overview of these policies and draws some key lessons
for public value-based market-shaping theory and policies.⁶
The idea of mission-oriented policies has its root in the idea of modernization, which
of course is not a ‘modern’ idea at all. Even if we are today accustomed to equating
modernization with Westernization, what we call the modern state and bureaucracy
have arguably Asian and specifically Chinese origins (Fukuyama, ). What matters
for our context is the religious-cultural idea of the ‘mandate of heaven’ (particularly
applicable in late Imperial China) under which rulers must govern well and provide for
the people; non-fulfilment of this ‘mandate’ was a legitimate reason to overthrow the
ruler. The counterpart to mandate of heaven in Western culture is the idea of ‘reason of
state’, originating with Giovanni Botero’s eponymously titled book from , Della
Ragion di Stato—number five on the bestseller list of economics books published before
(E. Reinert et al., ; E. Reinert, ; S. Reinert, )—and justifying policies
(Botero explicitly includes economic policies) on the grounds of what today is called
‘national interests’.
These two ideas coalesce around developmental states of the late eighteenth and
early nineteenth centuries with (proto-)missions of catching up, finding their practical
toolbox in Alexander Hamilton’s Report on the Subject of Manufactures in and
their theoretical embodiment in Friedrich List’s Das Nationale System der politischen
Oekonomie (). Mandate of heaven and national interest offer ideational backdrops
to what can be called a ‘duty to catch up’ as an overarching policy challenge that
subsumed under it a variety of policy missions, from building up knowledge base (e.g.
reforming universities) to creating trade relations and social policy (the latter is
particularly crucial for Bismarck’s Germany, including for the evolution of economics
as a science through the debates around the ‘social question’ of the s; see
Drechsler, ). The German catching-up story is especially noteworthy, not only
for the country’s significant investments in development resulting in impressive actual
catching up and, in many instances, forging ahead of England and other industry
leaders of the time, but also for a wealth of institutional innovations such as central
banks as underwriters of private investment in industry and multiple welfare-state
insurance schemes.
The first generation of mission-oriented policies, the ‘developmental state’, relied on
expert meritocracy in public organizations accompanied, however, by constant renewal
⁶ This section builds on Kattel and Mazzucato ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and rejuvenation of organizational configurations (Karo and Kattel, ). As exemplar
institutions we can look at what is called System Althoff in German higher education
and research policy (named after Friedrich Althoff, a top civil servant in the Prussian
Ministry of Culture responsible for hugely successful university reforms; vom Brocke,
), and at MITI (Ministry of International Trade and Industry) in Japan as
quintessential development agencies with ‘embedded autonomy’ (Evans, ).
While both institutions are often seen as representing Weberian bureaucracy at its
finest (with merit-based recruitment and promotion systems and rule-based organiza-
tion of work), both enjoyed high-level political support but also relied on what can be
called wide-ranging charismatic networks, built and nurtured by top civil servants
(Karo, ).
These policies were wide-ranging, demanding endurance and sacrifice in the name
of national catching up and pride, which served as the key sources for normative
framing of public value and as the backdrop for mission/priority selection. A version of
these policies is also to be found in the Soviet Union and other planning-based policies
of the post-Second World War era (Freeman, ; Chandrashekar, ; Chibber,
). Indeed, the latter can be considered an intermediate form between the first and
second generations of mission-oriented policies, particularly in their more successful
forms such as Commissariat du Plan in France, with its origins in mixed enterprises of
the s and its heyday in the s. Schonfield argues that the success of French
planning was also pivotal for Kennedy’s ‘un-American’ fervour for setting targets for
long-term economic growth (: ‒). The French planning culture, with its focus
on achieving a ‘more complete view of man’ (quoted in Schonfield, : ), makes it
clear that the point of ‘planning is thus in part an ethical one: it imposes choices about
the use of resources other than those which the market would produce’ (Schonfield,
: ). The planning exercises were thus driven by an idea of public value and
socio-economic challenges.
The second generation of mission-oriented policies are the well-known policies and
public agencies of the s‒s concerning military and space technologies in the
United States and major Western European economies (Ergas, ; Soete and
Arundel, ). As Alvin Weinberg, for eighteen years the director at Oak Ridge
National Laboratory, which was part of the Manhattan Project, argues, these
mission-oriented policies were about ‘big science’ deployed in the ‘national interests’
(Weinberg, : ). Thus, on the one hand, the national interest of the first
generation of mission-oriented policies became much more clearly defined through
defence and military aims; on the other hand, as we shall see, the translation of these
public-value framings into civilian policy areas failed.
Organizationally, these policies were often implemented by single national/public
laboratories with a concrete mission to solve particular technological problems, not to
engage in basic science, which also meant that their facilities were built up more
hierarchically than universities (Weinberg, ). Weinberg argues that partly due to
accomplishing missions, partly due to pressure from researchers, many of these
organizations lost focus on the original missions and moved towards basic research
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
(Weinberg, : ; see also Nelson et al., : ). Similar problems emerged in
the Western European countries where the basic policy assumption was that ‘research
results constitute an undirected potential’ (Krupp, : ) and that it was up to the
private sector to ‘find’ the direction of innovation. The basic research policies were in
reality supplemented by multiple civilian mission-oriented policies in the form of
large-scale funding for example, nuclear energy and transportation (magnetic
trains, supersonic aviation) (see Gummett, ). This was perhaps the key challenge
for the second generation of mission-oriented policies, and specifically, implementing
agencies: how to redeploy former military resources around new, civilian missions
(Weinberg, : ‒; Nelson et al., : ). While first-generation mission-
oriented policies—catching-up policies—relied on a wide range of constantly renewed
organizations that hired expert civil servants and had strong political support, the
second generation of mission-oriented policies had a much more heroic vision of
dynamic change. Missions were built around single agencies with high-profile man-
agers in charge of them (Weinberg : ; also Lambright et al., ). This
ambition—in terms of both the problems these organizations took on and the scale
of investment—brought both massive successes and spillovers (Block and Keller, ;
Mazzucato, ), but also played a crucial role in the demise of this generation of
mission-oriented policies.
As suspected by Weinberg and later documented by Ergas (), many mission-
driven research laboratories could not create sensitivity and flexibility around their
purpose, particularly when it came to taking up new emerging, less technological and
more social, challenges such as pollution and the decay of inner cities (Nelson, ).
The seeming lack of success in translating the successes of military R&D and its
procurement into the civilian realm also played a significant role in changing policy
attitudes (Pavitt and Walker, ). Similarly, planning exercises, the siblings of
mission-oriented policies, often did not lead to successful outcomes. As documented
by Schonfield (), economic and industrial policy failures in the United Kingdom
and elsewhere in the s, particularly in contrast to their successes in France, were
due both to low political commitment to long-term planning (not just business-cycle
management) and to lack of proper capabilities within planning organizations. The
idea was to pick the willing: ‘deliberately selecting a few promising firms who seem
willing and able to move ahead fast, and then giving them every encouragement in the
form of large contracts, financial help, and other favours’ (Schonfield, : ) and
with handpicked membership in modernization commissions (Schonfield, : ).
Furthermore, one of the key factors in the demise of mission-oriented policies and
industrial planning in Europe was the emergence of the European Economic Commu-
nity, in which each country had rather different planning styles and capabilities
(Schonfield, ). In the late s and s, instead of a common European style
of industrial planning and mission-oriented policies emerging, rather a gridlock of
plans and missions, and policy cultures remained in place (Schonfield, : ; also
). The results of this could be seen in the fate of the European electronics and
semiconductor industries: they could not compete individually with the US companies
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
but neither could a European industry emerge as national policy cultures remained
dominant (Schonfield, : ‒; Dosi, ).
The end of this era saw the emergence of (general-purpose) technology foresight
exercises and a search for visions which, particularly in East Asian economies, was
accompanied by the idea of leapfrogging international competitors rather than just
catching up with them. In essence, mission-oriented policies were slowly replaced by
the search for future technologies and preparing economies for their diffusion
(Rothwell and Zegveld, ). At the same time, however, the end of the era denotes
the emergence of the market-failure-based approach to (innovation) policy that came
to dominate the policy arena, along with New Public Management reforms, in the late
s, resulting in privatization of public laboratories, the emergence of new arms-
length funding agencies (such as research councils), a focus on commercializing and
marketizing research (for example, with competitive grant systems), and cost-efficiency
practices in policy evaluation (Gummett, ; Boden et al., ). This contributed to
the demise of the directionality of innovation as a policy agenda, and to the dominance
of market-failure-based value framings in innovation and industrial policies.
The third generation of mission-oriented policies and organizations, which today is
in the ascendant, has multiple drivers and a somewhat heterogeneous set of actors:
a) Multilateral organizations such as the European Union have been prominent in
urging the development of ‘new’ missions around sustainability and other
decidedly socio-economic (as opposed to solely technological) issues (Soete and
Arundel, ).
b) Large private philanthropies such as the Gates Foundation and others have
sought out specific problems (e.g. diseases) to solve and have focused not only
their funding but also important networks on those problems as missions.
c) Bottom-up social movements have been able to focus the directionality of
research, for example, ACT UP’s impact on HIV research and its increased
funding (Leadbeater, ). Similarly, Germany’s Energiewende would have
never happened without the green movement (Fagerberg, ).
In contrast to previous generations of mission-oriented policies, the current manifest-
ation does not have a ‘dominant design’ regarding its public-value framing or its
governance system. There is, however, a distinct focus on increasing the social respon-
siveness of science and innovation. Rather than focusing on a specific sector (such as
energy) or technology (such as nuclear), as was often the case in the previous generation,
current attempts are characterized by cross-sectoral focus ‘by design’ (Mazzucato, a).
Alongside social responsiveness, citizens and social engagement have moved into the
arena of mission-oriented policies. Finally, experimentalism is seen as a key feature of
mission-driven policies and organizations, which is reflected in randomized controlled
trials being embraced by philanthropists and social enterprises at the one extreme, and by
service design principles of prototyping within various public agencies at the other.
To sum up, we can draw the following lessons from the history of mission-oriented
policies. First, there is a taxonomy of missions, from the socio-economic missions of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
the first generation to the technological missions of the second, and socio-technological
missions of the current (third) generation. Each type of mission-oriented policies
implies different public-value framings and capabilities to design, implement, and
evaluate missions. The directionality of the innovation systems is engendered by
different ideational contexts: first-generation policies were driven by catching up as a
national and often also nationalistic mission; second-generation policies were driven by
national security needs and the technological arms race; and third-generation policies
gain their urgency and purpose from ‘intractable’ socio-economic challenges and social
movements connected to these challenges (e.g. various green movements).
Second, among factors determining the success or failure of previous generations of
mission-oriented innovation policies were investments both in R&D capabilities (e.g.
research laboratories) and in market-shaping capabilities (e.g. procurement practices of
military organizations). This complementarity within and between mission-oriented
policies and other economic policies plays an important role in the success of missions.
Third, missions are about setting concrete directions, which of course must be
picked, that is, chosen strategically. The choice is not whether or not to pick but how
to do so: picking directions is not the same thing as ‘picking winners’, in the sense of
picking individual firms or sectors. It is about deciding that a transformation must
occur in society—and making it happen. The direction will require different missions,
which in itself provides a focus for the different actors and sectors to collaborate. Thus,
missions require ‘picking the willing’: those organizations across the economy (in
different sectors, including both the public and private sphere) that are willing to
engage with a mission relevant to society.
Fourth, with the focus on the market-making, rather than the market-fixing, role of
missions, it also becomes clear why public investment by mission-oriented institutions
has been required along the entire innovation chain, and not just upstream basic
research. Better understanding of the distribution of public agencies, their positioning
across the innovation chain, and the balance between directive and bottom-up inter-
actions is a key area for future study.
. I M
I P
..................................................................................................................................
In order to instrumentalize public-value-based policy frameworks as industrial and
innovation policy tackling grand challenges such as the SDGs, we need, first, to be able
to justify the kind of market creation and mission-oriented directionality that was
required for innovations such as the Internet and nanotechnology and is now required
to address today’s societal challenges (Mazzucato, ). Second, without the state as a
lead investor and market creator, failure-based approaches do not provide insights into
the type and structure of public-sector organizations needed to provide the depth and
breadth of high-risk investments. Third, as long as policy is seen merely as an
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
‘intervention’, rather than a key part of the market creation and shaping process, the
criteria used to assess public investments will inevitably be problematic. Finally, by not
describing the state as a lead risk-taker and investor in this process, failure-based
approaches have avoided the key issue of the distribution of risks and rewards between
the state and the private sector.
Thus, a policy framework for market-shaping activities by the public sector should
offer answers to the following questions, for which we have devised the acronym
ROAR:⁷
() How can public policy be understood in terms of setting the direction and route
of change; that is, shaping and creating markets rather than just fixing them
(Routes of directionality)?
() How should public organizations be structured so they accommodate the risk-
taking, explorative capacity, and capabilities needed to envision and manage
contemporary challenges (Organizations)?
() How can this alternative conceptualization be translated into new dynamic
indicators and evaluation tools for public policies, beyond the static microeco-
nomic cost–benefit analysis and macroeconomic appraisal of crowding in/crowd-
ing out that stem directly from the market failure perspective (Assessment)?
() How can public investments along the innovation chain result in the socializa-
tion not only of risks, but also of rewards, enabling smart growth to also be
inclusive growth (Risks and rewards)?
While the questions may seem broad, it is their potential connections and internal
coherence that can help build a market-creation policy framework—and a practical
toolkit. Policies that aim to actively create and shape markets require indicators that
assess and measure the performance of a policy along that particular transform-
ational objective. The state’s ability and willingness to take risks, embodied in
transformational changes, requires an organizational culture and dynamic capabil-
ities that welcome the possibility of failure and experimentation and are rewarded for
successes so that failures (which are learning opportunities) can be covered and the
next round financed.
. R: R D—A
M- A
..................................................................................................................................
A key success of past market-shaping innovation policies, such as the mission-oriented
policies of the Moonshot era, has been setting a clear direction for problems to be
⁷ This section builds on Mazzucato ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
solved (e.g. going to the moon and back in one generation), which then required
cross-sectoral investments and multiple bottom-up solutions, some of which inevitably
fail. Too much top-down can stifle innovation and too much bottom-up can make it
dispersive with little impact.
A crucial difference between classical mission-oriented policies of the Cold War era
and modern missions is that the latter are focusing on areas such as managing the
impact of technological advance and artificial intelligence on the labour market;
adapting to changing demographics and an ageing population; or making the transi-
tion to a low-carbon economy (European Commission, ; Kattel and Mazzucato,
). Taking up the challenge posed by Richard Nelson in his seminal Moon and the
Ghetto (), modern-day mission-oriented policies focus not on technological chal-
lenges alone but rather on areas traditionally the responsibility of public services, such
as education or the welfare state, and entail changes across various economic and
policy sectors. Germany’s Energiewende policy, for instance, aims to combat climate
change, phase out nuclear power, improve energy security by substituting renewable
sources for imported fossil fuel, and increase energy efficiency. By providing a direction
to technical change and growth across different sectors, Energiewende is tilting the
playing field in the direction of a desired socio-economic goal. Importantly, it is not just
about growing ‘green sectors’—it has required many sectors, including traditional ones
such as steel, to transform themselves, and is leading to changes in patterns of
production, services, and consumption of energy. In other words, its spillovers are as
much technological as social and behavioural (see Fagerberg, , for a discussion).
Policies tackling grand challenges should thus be broad enough to engage the public,
enable concrete missions, and attract cross-sectoral investment, and remain focused
enough to involve industry and achieve measurable success. By setting the direction for
a solution, missions do not specify how to achieve success, but rather stimulate the
development of a range of different solutions to achieve the objective. In other words,
missions guide entrepreneurial self-discovery (Foray, ). As such, a mission can
make a significant and concrete contribution to meeting a Sustainable Development
Goal (SDG) or grand challenge.
The criteria for selecting missions adopted by the European Commission, after
widespread stakeholder consultation based on the ‘Missions Report’ (Mazzucato,
a), are that they should:
• be bold and address societal value;
• have concrete targets: you know when you get there!
• involve research and innovation: technological readiness over limited time frame;
• be cross-sectoral, cross-actor, and cross-disciplinary;
• involve multiple competing solutions and bottom-up experimentation.
To illustrate, take SDG : ‘Conserve and sustainably use the oceans, seas and
marine resources for sustainable development.’ This could be broken down into
various missions, for example, ‘A plastic-free ocean’ (Figure .). This could stimulate
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Political agenda setting
CLEAN OCEANS
and civic engagement
A PLASTIC-FREE OCEAN
Clear targeted
missions Reduction of 90% of plastics entering the
marine environment and collection of more
than half of plastics present in our oceans,
seas, and coastal areas by 2025
Cross-sectoral
Chemical Social
innovation Biotech
industry innovation
Marine Al Design
Waste
life technology sector
Portfolio of projects
and bottom-up Autonomous Re-usable and Plastic and
experimentation ocean stations to biodegradable micro plastic
remove plastic plastic digestion
pollution substitutes mechanism
Re-use of
Image
packing items
recognition waste
through
separation system
personalised
for domestic and
collection
marine waste
services
. A mission-oriented approach to cleaning the oceans
Source: Mazzucato (a: ).
research and innovation in methods of clearing plastic waste from oceans or in
reducing the use of plastics, innovation in new materials, research on health impacts
from micro-plastics, behavioural research and innovation to improve recycling, or
drive public engagement in cleaning up beaches. Each of these areas can be broken
down into particular ‘projects’.
. O: O C
P S
..................................................................................................................................
A key concern should be to establish skills/resources, capabilities, and structures that
can increase the chances that a public organization will be effective, both at learning
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
and at establishing symbiotic partnerships with the private sector, and will ultimately
succeed in implementing mission-oriented and transformative policies. Public and
private organizations must re-rethink their roles when working together. Public‒
private partnerships have often limited the public part to de-risking the private part.
This ignores the capabilities and challenges involved in public-sector risk-taking.
De-risking assumes a conservative strategy that minimizes the risks of picking losing
projects, but does not necessarily maximize the probability of picking winners, which
requires the adoption of a portfolio approach to public investments (Rodrik, ). In
such an approach, the success of a few projects can cover the losses from many projects,
and the public organization in question also learns from its loss-making investments
(Mazzucato, ). Here, matching failures with fixes is less important than having an
institutional structure that ensures that winning policies provide enough rewards to
cover the losses, and that losses are used as lessons to improve and renew future
policies.
One can argue that the community of Schumpeterian scholars never followed up the
call by Nelson and Winter () for public policy to be matched by bold new
organizational structures in the public sector: ‘The design of a good policy is, to a
considerable extent, the design of an organizational structure capable of learning and of
adjusting behaviour in response to what is learned’ (: ). Indeed, there is no
equivalent in the literature to ‘dynamic capabilities of the firm’ for the public sector.
Developmental state research looking at the success of the East Asian Tigers argued
that public-sector capacities and capabilities can be best developed by talent, recruited
and motivated by Weberian meritocratic recruitment and career management that
makes working for government either financially competitive and/or culturally even
more rewarding/prestigious than working in the private sector. Evans and Rauch
() cemented these ideas through a quantitative analysis that tested the importance
of some of the ‘Weberian’ elements (merit-based recruitment and career systems) in a
much broader sample of countries as a whole (see also Rauch and Evans, ; Evans,
). This is best captured by Chalmers Johnson and his concept of the developmental
state: a country with a predominant policy orientation towards development, sup-
ported by a small and inexpensive elite bureaucracy centred around a pilot organiza-
tion, such as the Ministry of International Trade and Industry (MITI) in Japan, and
with sufficient autonomy (limited intervention by the legislature and judiciary)
(Johnson, : ‒).
What is missing, however, in the Weberian framework of capacities are the evolu-
tionary dynamics: why do specific constellations of capacities become more successful
than others?
Teece and Pisano define dynamic capabilities of the firm by their evolutionary
nature.
The term ‘dynamic’ refers to the shifting character of the environment; certain
strategic responses are required when time-to-market and timing is critical, the
pace of innovation accelerating, and the nature of future competition and markets
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
difficult to determine. The term ‘capabilities’ emphasizes the key role of strategic
management in appropriately adapting, integrating, and re-configuring internal
and external organizational skills, resources, and functional competencies towards a
changing environment. (Teece and Pisano, : )
We argue that challenge-driven public policies need to be based on a similarly
evolutionary understanding of capabilities in the public sector.
We propose that twenty-first-century missions require the following set of dynamic
capabilities in the public sector in order to engender mission-oriented policies (Kattel
and Mazzucato, ).
First, key to our premise is that grand challenges can only be solved through dynamic
public‒private partnerships, but these have been constrained by the notion of public
actors as, at best, fixing markets. A market-co-creating role requires the state to have
capabilities for leadership and engagement: missions can all too quickly become either
just fashionable labels on ‘business-as-usual’ practices or too rigid top-down planning
exercises. Thus, capabilities to engage with a wide set of social actors and to show
leadership through bold vision are vital at a time of high ‘democratic deficit’ in many
developed countries (see also ESIR, ). Some of the grand challenges contest ‘the
way of life’ as we know it (e.g. suburbanization accompanied by congested transporta-
tion systems). Capabilities to encourage bottom-up engagement mean a capacity to set
missions but also to leave enough space for contestation and adaptability.
Second, on the level of policy, finding coherent policy mixes (instruments and
funding) and coordination capabilities is fundamental to the success of today’s
mission-oriented policies. As these missions are not just about technological solutions
but also have strong socio-political aspects, experimentation capabilities matter per-
haps more than before. Equally important are evaluation capabilities that do not simply
rely on market-failure-based approaches (e.g. cost‒benefit analysis) but can also inte-
grate user research, social experiments, and system-level reflection (Lindner et al.,
; Rip, ).
Third, administrative capabilities need to rely on a diversity of expertise and skills
from engineering to human-centric design: organizational forms that mix unrelated
knowledge areas (e.g. in urban mobility and planning, lifestyles are just as important as
new energy storage systems; see Grillitsch et al., ) and organizational fluidity (e.g.
cross-departmental teams) seem to be fundamental for managing new missions
(OECD, ).
. A: A E
..................................................................................................................................
One of the key challenges of applying a public value-based framework to policymaking
is the relationship between policy assessment, appraisal, and evaluation. Influenced by
the market failure framework, today’s dominant evaluation practices are usually based
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
on allocative efficiency and some form of ex ante cost‒benefit analysis (CBA).⁸ Costs
(including the costs of potential government failure) are usually defined by their
opportunity cost, that is, the value that reflects the best alternative use a good or service
could be put to (include a do-nothing/business-as-usual option), with all else (includ-
ing all other prices) assumed equal, and with market prices usually the starting point
for the analysis (see, e.g. HM Treasury, : ). Post-intervention policy evaluation
then seeks to verify whether the estimates were correct and whether the market failure
was addressed.
To enable market-type price comparison of interventions whose return will vary in
terms of time, CBAs typically make use of a ‘discount rate’ that reflects the time
preference of users of the service for having money now rather than in the future.
After adjusting for inflation and discounting, costs and benefits can be added together
to calculate the net present value (NPV) of different policy options. In recognition of
the problem of externalities, some attempt has been made in recent years to incorpor-
ate the wider costs to society of particular policy actions, for example through mon-
etizing certain social or ecological externalities in a ‘social cost‒benefit analysis’ (SCBA)
or ‘social cost-effectiveness analysis’ (SCEA). However, the overall framework remains
rooted in the idea that creating a ‘market price’ for interventions will enable the most
accurate decision to maximize welfare and public value. CBA and NPV are mostly
aimed at preventing costly government failures; by their very nature, they cannot tell us
very much at all about proactive market creating and shaping.
This limitation is of crucial importance. Market-shaping policies, such as missions,
aim to accelerate innovation, creating new technologies and radically changing the
prices, availability, and existence of goods and services. Their central purpose is to
transform underlying relationships, a wide range of prices and the broader environ-
ment (OECD, ). The ‘all else (including prices) being equal’ assumption under-
lying cost‒benefit analysis becomes problematic in such circumstances.
By always comparing the policy intervention with the status quo and emphasizing
short-term risks, CBA approaches encourage decision makers to prefer small-scale,
marginal interventions (Allas, : ). Yet there is considerable evidence that
innovation systems exhibit increasing returns or an S-curve-type effect, in which
shifting incentives across multiple sectors may be more likely to achieve such increas-
ing returns (Mazzucato, ). So, arguably, if there is to be any bias around innovation
policy it should be in favour of large-scale interventions. Furthermore, the strong
emphasis on risk assessment/optimism bias is likely to mitigate against the creation
of a mission-oriented approach where failure is viewed as a learning process integral to
the achievement of important technological breakthroughs (Mazzucato, ).
CBA-type analyses derived from market failure theory are concerned with allocative
or distributive efficiency, which involves making the best use of (fixed) resources at a
fixed point in time. Dynamic efficiency involves making the best use of resources to
⁸ This section builds on Kattel et al. ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
achieve changes over time and so is concerned with innovation, investment, improve-
ment, and growth—including, perhaps most importantly, the creation of new resources
(technologies) and shifting technology frontiers (Kattel et al., ). Missions are, by
definition, concerned with dynamic efficiency, since they aim to accelerate innovation
and transformational change.
When allocative efficiency frameworks are applied to dynamic efficiency problems,
the analysis risks are either irrelevant or actively unhelpful.
Aside from considerations of efficiency, given the importance of dynamics over time
for market-shaping policies, it is important to define a concrete target and objectives. In
other words, it must be possible to say definitively whether the policy has been achieved
or not. Technological missions such as putting a man on the moon had obvious end
points which made evaluation easier. However, modern grand challenges are more
long term and their end points less easy to define.
. R: R R
..................................................................................................................................
But this raises a more fundamental question: how to make sure that, like private
venture capital funds, the state can reap some return from the successes (the upside),
in order to cover the inevitable losses (the downside) and finance the next round of
investments.⁹ This is especially important given the path-dependent and cumulative
nature of innovation. Returns arise slowly; they are negative in the beginning and
gradually build up, potentially generating huge rewards after decades of investment.
Indeed, companies in areas like ICT, biotechnology, and nanotechnology had to accept
many years of zero profits before any returns were in sight. If the collective process of
innovation is not properly recognized, the result will be a narrow group of private
corporations and investors reaping the full returns of projects which the state helped to
initiate and finance.
So who gets the reward for innovation? Some economists argue that returns accrue
to the public sector through knowledge spillovers (new knowledge that can benefit
various areas of the economy), and via the taxation system due to new jobs being
generated and taxes being paid by companies benefiting from the investments. But the
evolution of the patenting system has made it easier to take out patents on upstream
research, meaning that knowledge dissemination can effectively be blocked and spill-
overs cannot be assumed. The cumulative nature of innovation and the dynamic
returns to scale (Nelson and Winter, ) mean that countries stand to gain signifi-
cantly from being first in the development of new technologies.
At the same time the global movement of capital means that the particular country
or region funding initial investments in innovation is by no means guaranteed to reap
⁹ This section builds on Mazzucato ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
all the wider economic benefits, such as those relating to employment or taxation.
Indeed, corporate taxation has been falling globally, and corporate tax avoidance and
evasion rising. Some of the technology companies that have benefited the most from
public support, such as Apple and Google, have also been among those accused of
using their international operations to avoid paying tax (Johnston, ). Perhaps most
importantly, while the spillovers that occur from upstream ‘basic’ investment, such as
education and research, should not be thought of as needing to earn a direct return for
the state, downstream investments targeted at specific companies and technologies are
qualitatively different. Precisely because some investments in firms and technologies
will fail, the state should treat these investments as a portfolio, and enable some of the
upside success to cover the downside risk.
In particular, there is a strong argument to be made that, where technological
breakthroughs have occurred as a result of targeted state interventions benefiting
specific companies, the state should reap some of the financial rewards over time by
retaining ownership of a small proportion of the intellectual property it had a hand in
creating. This is not to say that the state should ever have exclusive licence or hold a
large enough proportion of the value of an innovation to deter its diffusion (and this is
almost never the case). The role of government is not to run commercial enterprises; it is
to spark innovation elsewhere. But by owning some of the value it has created, which
over time has the potential for significant growth, government can generate funds for
reinvestment into new potential innovations. With the adoption of a portfolio approach
to public investment in innovation, success from some projects can help cover the losses
from others. In this way, both risks and rewards are socialized (Mazzucato, ).
There are many examples of public organizations that have strategically considered
the distribution of risks and rewards. At times, they have granted licences to private
firms willing to invest in upgrading publicly owned technologies, offering the oppor-
tunity for public and private sectors to share both risks and rewards. For example,
NASA has sometimes captured the returns to its inventions, while private partners
gained on the value added in case of successful commercialization (Kempf, ).
There are other examples of state-owned venture capital activity generating royalties
from public investments (in Israel, see Avnimelech, ) or equity (in Finland via
Sitra), and the more pervasive use of equity by state development banks (e.g. in Brazil,
China, and Germany; see Mazzucato and Penna, ).
Policy instruments for tackling risk/reward issues combine supply- and demand-
side mechanisms geared to enabling public value creation through symbiotic public‒
private partnerships (‘active’) (Lazonick and Mazzucato, ) and mechanisms
blocking value extraction (‘defensive’).
Rewards can be distributed either directly through profit sharing (via equity, royal-
ties) or indirectly through conditions attached that focus more on the market-shaping
role. The latter may involve conditions on the reinvestment of profits, conditions on
pricing, or conditions on the way that knowledge is governed.
This list is not meant to be exhaustive, but rather, to illustrate that there are
multiple experiences in handling policy instruments that, implicit or explicitly,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
enable consideration of issues like value extraction and allowing government to
capture a share of the value it helped to generate. The latter, in particular, have
been adopted by different types of agencies, at different stages of the innovation
chain but mainly downstream, involving different types of partners (e.g. firm size)
and industries. However, they have not always been adjusted to the specificities of
different economic, industrial, and legal settings. Absent a framework that more
clearly informs these policies, decisions on these matters have sometimes been
made unintentionally and haphazardly, inviting both government and systemic
failures.
The prospect of the state owning a stake in a private corporation may be
anathema to many parts of the capitalist world, but given that governments are
already investing in the private sector, they may as well earn a return on those
investments (something even fiscal conservatives might find attractive). The state
need not hold a controlling stake, but it could hold equity in the form of preferred
stocks that get priority in receiving dividends. The returns could be used to fund
future innovation (Rodrik, ). Politicians and the media have been too quick to
criticize public investments when things go wrong, and too slow to reward them
when things go right.
Thus, more thought should be given, not so much to the problem of ‘picking
winners’, as to how to reward the winning investments so they can both cover some of
the eventual losses (inevitable in the innovation game) and raise funds for future
investments. Going hand in hand with this consideration is the need to rethink how
public investments are accounted for in national income accounting. Investments in
innovation are different to current expenditure. The latter does not add to balance-
sheet assets; the former does, and is potentially productive investment in the sense
that it creates new value (Mazzucato and Shipman, ). When setting limits to
fiscal deficits, it is therefore necessary to distinguish public debt contracted for
investment in R&D and infrastructure (value-creating investments) from public
debt contracted for (public or private) consumption. In this sense, financial and
accounting reforms should be regarded as a prerequisite for any successful smart and
inclusive growth plan.
Finally, regarding the government as lead risk-taker helps to debunk fundamental
assumptions behind the theory of shareholder value that underpins the exorbitant
rewards earned by senior executives in recent years. Share options as part of pay
packages have been a key feature of modern capitalism, and especially, a key driver
of the inequality between the top per cent of income earners and the rest (Piketty,
). Share options are boosted when share prices rise, and prices often rise through
‘financialized’ practices such as share repurchase schemes by companies (Lazonick,
). Focusing on boosting share prices is justified on the grounds of the theory of
shareholder value, which holds that shareholders are the biggest risk takers in a
company because they have no guaranteed rate of return (while workers earn set
salaries, banks earn set interest rates, etc.). That is, they are the residual claimants
(Jensen, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
But this assumes that other agents do have a guaranteed rate of return. As we have
argued throughout this chapter, it is precisely because what the state does is not just
facilitate and de-risk the private sector, but also take major risks, that there is no guarantee
of success in its investments, which have historically also played a crucial role in enabling
wealth creation. The fact that a key driver of inequality has been linked with a problematic
understanding of which actors are the greatest risk takers implies that combatting short-
termism and speculative forms of corporate governance requires not only reforming
finance and corporate governance, but also rethinking the models of wealth creation upon
which they are based (Mazzucato, b).
. C
..................................................................................................................................
Market-shaping, mission-oriented approaches to policy allow us to reconsider how to
justify ambitious policies that aim to transform landscapes rather than fix problems in
existing ones. This approach to policy raises challenges in terms of how to nurture
organizational structures that can manage such policies, and how to appraise and
evaluate the market-shaping effect of the policies. This approach would help capture
the potential for policy to create spillover effects across many sectors of the economy
and alter the level of investment and the broader trajectory of economic growth.
What are some of the possible concerns with this type of approach? One concern is
around the setting of missions and the direction of the market shaping in the first place.
Clearly governments can and do become captured by particular interest groups which
limit their ability to both establish missions and follow through on them. The challenges
of climate change and inequality are obvious examples. Government subsidies continue
to favour vested interests (for example fossil-fuel energy firms), while taxation policy
favours labour saving (increasing unemployment or underemployment) over resource
saving (supporting decarbonization), despite governments signing up to treaties com-
mitting themselves to different policy directions. And, of course, democracy is no
guarantee that societal missions such as climate change will be adopted globally, as the
current administrations in the United States and Brazil clearly demonstrate.
However, arguably, these are the outcomes of governments not doing enough to
shape markets to support social and environmental policy goals in the first place.
Hopefully the ideas in this chapter can help meet that challenge.
A
This chapter is based on our previous work: Mazzucato (a and b), Kattel and
Mazzucato (), Mazzucato and Ryan-Collins (), and Mazzucato, Kattel, and Ryan-
Collins (). The research for the article has been partially funded by the Horizon
project GROWINPRO, http://www.growinpro.eu.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
R
Aghion, Philippe, Jing Cai, Mathias Dewatripont, Luosha Du, Ann Harrison, and Patrick
Legros () ‘Industrial Policy and Competition’, American Economic Journal Macroeco-
nomics, (): –.
Allas, Tera () ‘Why a Fundamental Shift in Innovation Policy is Necessary’, in Mariana
Mazzucato and Caetano C. R. Penna (eds) Mission-oriented Finance for Innovation.
London: Policy Network, pp. –.
Arrow, Kenneth J. () ‘The Economic Implications of Learning by Doing’, The Review of
Economic Studies (): –.
Avnimelech, Gil () ‘VC Policy: Yozma Program -Years Perspective’. SSRN Scholarly
Paper No. ID . Rochester, NY: Social Science Research Network. Available at
https://papers.ssrn.com/abstract=.
Block, Fred and Matthew R. Keller (eds) () State of Innovation: The U.S. Government’s
Role in Technology Development. London: Paradigm.
Boden, Rebecca, Philip Gummett, Debora Cox, and Kate Barker () ‘Men in White
Coats . . . Men in Grey Suits’, Accounting, Auditing & Accountability Journal (): –.
Borrás, Susana () ‘Domestic Capacity to Deliver Innovative Solutions for Grand Social
Challenges’, in Stone, D. and Moloney, K. (eds) Oxford Handbook on Global Policy and
Transnational Administration. Oxford: Oxford University Press, pp. –.
Buchanan, James M. and Gordon Tullock () The Calculus of Consent, Vol. . Ann Arbor,
MI: University of Michigan Press.
Chandrashekar, C. P. () ‘Development Planning’, in Erik S. Reinert, Jayati Ghosh, and
Rainer Kattel (eds) Handbook of Alternative Theories of Economic Development. Cheltenham:
Edward Elgar, pp. –.
Chibber, Vivek () Locked in Place: State Building and Late Industrialization in India.
Princeton, NJ: Princeton University Press.
Coase, Ronald H. () ‘The Problem of Social Cost’, Journal of Law and Economics ():
–.
Cohen, Wesley M. and Daniel A. Levinthal () ‘Absorptive Capacity: A New Perspective
on Learning and Innovation’, Administrative Science Quarterly (): –.
Dosi, Giovanni () ‘Technical Change and Survival: Europe’s Semiconductor Industry’.
Sussex European Papers No. , Sussex European Research Centre, University of Sussex.
Drechsler, Wolfgang () ‘The German Historical School and Kathedersozialismus’, in Erik
S. Reinert, Jayati Ghosh, and Rainer Kattel (eds) Handbook of Alternative Theories of
Economic Development. Cheltenham: Edward Elgar, pp. –.
Drechsler, Wolfgang () ‘Kings and Indicators: Options for Governing without Numbers’,
in Markus J. Prutsch (ed.) Science, Numbers and Politics. Cham: Palgrave Macmillan.
Ergas, Henry () ‘Does Technology Policy Matter?’, in Bruce Guile (ed.) Technology and
Global Industry: Companies and Nations in the World Economy. Washington, DC: National
Academies Press, pp. –.
ESIR (Expert Group on the Economic and Societal Impact of Research and Innovation)
() ‘Towards a Mission-oriented Research and Innovation Policy in the European
Union’, an ESIR Memorandum.
European Commission () ‘Green Paper–From Challenges to Opportunities: Towards a
Common Strategic Framework for EU Research and Innovation Funding’. Brussels: Euro-
pean Commission.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Evans, Peter () Embedded Autonomy: States and Industrial Transformation. Princeton,
NJ: Princeton University Press.
Evans, Peter () ‘Transferable Lessons? Re-examining the Institutional Prerequisites of
East Asian Economic Policies’, The Journal of Development Studies (): –.
Evans, Peter and James E. Rauch () ‘Bureaucracy and Growth: A Cross-national Analysis
of the Effects of “Weberian” State Structures on Economic Growth’, American Sociological
Review (): –.
Fagerberg, Jan () ‘Mission (Im)Possible? The Role of Innovation (and Innovation Policy)
in Supporting Structural Change and Sustainability Transitions’. Working Paper on Innov-
ation Studies No. , TIK Centre for Technology, Innovation and Culture, Univer-
sity of Oslo.
Foray, Dominique () ‘Smart Specialisation Strategies as a Case of Mission-oriented
Policy: A Case Study on the Emergence of New Policy Practices’, Industrial and Corporate
Change (): –.
Freeman, Chris () Technology Policy and Economic Performance: Lessons from Japan.
London: Pinter.
Fukuyama, Francis () The Origins of Political Order: From Prehuman Times to the French
Revolution. New York: Farrar, Straus, and Giroux.
Granovetter, Mark () ‘Economic Action and Social Structure: The Problem of Embed-
dedness’, American Journal of Sociology (): –.
Greenwald, Bruce C. and Joseph E. Stiglitz () ‘Externalities in Economies with Imperfect
Information and Incomplete Markets’, The Quarterly Journal of Economics (): –.
Grillitsch, Markus, Björn Asheim, and Michaela Trippl () ‘Unrelated Knowledge Com-
binations: Unexplored Potential for Regional Industrial Path Development’. Papers in
Innovation Studies, Lund University, CIRCLE–Center for Innovation, Research and Com-
petences in the Learning Economy, /.
Gummett, Philip () ‘The Evolution of Science and Technology Policy: A UK Perspective’,
Science and Public Policy (): –.
Hausman, Ricardo and Dani Rodrik () ‘Economic Development as Self-discovery’,
Journal of Development Economics (): –.
HM Government () ‘Industrial Strategy: Building a Britain Fit for the Future’, Depart-
ment of Business, Energy and Industrial Strategy. Available at https://www.gov.uk/govern
ment/publications/industrial-strategy-building-a-britain-fit-for-the-future.
HM Treasury () ‘The Green Book: Central Government Guidance on Appraisal and
Evaluation’. Available at https://www.gov.uk/government/publications/the-green-book-
appraisal-and-evaluation-in-central-governent ISBN ---- PU.
Jensen, Michael () ‘Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers’,
American Economic Review (): –.
Johnson, Chalmers () MITI and the Japanese Miracle: The Growth of Industrial Policy.
Stanford, CA: Stanford University Press.
Johnston, David Cay () ‘How Google and Apple Make their Taxes Disappear’, Newsweek,
December. Available at http://www.newsweek.com////how-google-and-apple-
make-their-taxes-disappear-.html.
Karo, Erkki () ‘Innovation Policy and Mission-oriented Public Organizations in East
Asia’, Industrial and Corporate Change (): –.
Karo, Erkki and Rainer Kattel () ‘Innovation Bureaucracy: Does the Organization of
Government Matter when Promoting Innovation?’. Papers in Innovation Studies, Lund
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
University, CIRCLE–Center for Innovation, Research and Competences in the Learning
Economy, /.
Kattel, Rainer and Mariana Mazzucato () ‘Introduction: Mission-oriented Innovation
Policy and Dynamic Capabilities in the Public Sector’, Special Issue of Industrial and
Corporate Change, (): –.
Kattel, Rainer, Jan Kregel, and Erik S. Reinert () ‘Classical Development Economists of
the Mid-th Century’, in Erik S. Reinert, Jayati Ghosh and, Rainer Kattel (eds) The Elgar
Handbook of Alternative Theories of Economic Development. Cheltenham: Edward Elgar,
pp. –.
Kattel, Rainer, Mariana Mazzucato, Josh Ryan-Collins, and Simon Sharpe () ‘The
Economics of Change: Policy Appraisal for Missions, Market Shaping and Public Purpose’.
UCL Institute for Innovation and Public Purpose Policy Report.
Kempf, Robert () ‘Exploitation of Rights from the US Space Program by NASA’, ESA SP–
, p. . Intellectual Property Rights and Space Activities. Paris: European Space Agency.
Krupp, Hans () ‘Public Promotion of Innovation—Disappointments and Hopes’, in
Gerry Sweeney (ed.) Innovation Policies: An International Perspective. London: Pinter,
pp. –.
Lambright, W. Henry, Michael Crow, and Ralph Shangraw () ‘National Projects in
Civilian Technology’, in J. David Roessner (ed.) Government Innovation Policy: Design,
Implementation, Evaluation. Basingstoke: Macmillan, pp. –.
Lazonick, William () ‘Profits without Prosperity: Stock Buybacks Manipulate the Market
and Leave Most Americans Worse Off ’, Harvard Business Review, September: –.
Lazonick, William and Mariana Mazzucato () ‘The Risk–Reward Nexus in the
Innovation–Inequality Relationship: Who Takes the Risks? Who Gets the Rewards?’,
Industrial and Corporate Change (): –.
Leadbeater, Charles () ‘Postscript: Movements with Missions Make Markets’, Industrial
and Corporate Change (): –.
Le Grand, Julien () ‘The Theory of Government Failure’, British Journal of Political
Science (): –.
Lindner, Ralf, Stephanie Daimer, Bernd Beckert, Nils Heyen, Jonathan Koehler, Benjamin
Teufel, Philine Warnke, and Sven Wydra () ‘Addressing Directionality: Orientation
Failure and the Systems of Innovation Heuristic: Towards Reflexive Governance’. Fraunhofer
ISI Discussion Papers Innovation Systems and Policy Analysis No. .
Mas-Colell, Andreu, Michael Dennis Whinston, and Jerry R. Green () Microeconomic
Theory, Vol. . Oxford: Oxford University Press.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths. London: Anthem Press.
Mazzucato Mariana () ‘From Market Fixing to Market-creating: A New Framework for
Innovation Policy’, Industry and Innovation (): –.
Mazzucato, Mariana () ‘Mission-oriented Innovation Policy: Challenges and Opportun-
ities’. UCL Institute for Innovation and Public Purpose Working Paper, IPP WP -.
Available at https://www.ucl.ac.uk/bartlett/public-purpose/publications//jan/mission-
oriented-innovation-policy-challenges-and-opportunities.
Mazzucato, Mariana (a) ‘Missions: Mission-oriented Research and Innovation in the
European Union’. European Commission. Available at https://ec.europa.eu/info/sites/info/
files/mazzucato_report_.pdf.
Mazzucato, Mariana (b) The Value of Everything. London: Penguin.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Mazzucato, Mariana and Penna, C. C. () ‘Beyond Market Failures: The Market Creating and
Shaping Roles of State Investment Banks’, Journal of Economic Policy Reform (): –.
Mazzucato, Mariana and Carlota Pérez () ‘Innovation as Growth Policy’, in Jan
Fagerberg, Staffan Laestadius, and Ben R. Martin (eds) The Triple Challenge: Europe in a
New Age. Oxford: Oxford University Press, pp. –.
Mazzucato, Mariana and Josh Ryan-Collins () ‘Putting Value Creation back into “Public
Value”: From Market Fixing to Market Shaping’. UCL Institute for Innovation and Public
Purpose, Working Paper Series No. -. Available at https://www.ucl.ac.uk/
bartlett/public-purpose/wp-.
Mazzucato, Mariana and June Sekera () ‘Rethinking Public Production: Producing Public
Value and Achieving Public Purpose’. IIPP Working Paper, forthcoming.
Mazzucato, Mariana and Shipman, A. () ‘Accounting for Productive Investment and
Value Creation’, Industrial and Corporate Change (): –.
Mazzucato, Mariana, Rainer Kattel, and Josh Ryan-Collins () ‘Challenge-driven Innov-
ation Policy: Towards a New Policy Toolkit’, Journal of Industry, Competition and Trade,
forthcoming.
Nelson, Richard R. () The Moon and the Ghetto: An Essay on Public Policy Analysis.
New York: W. W. Norton.
Nelson, Richard R. () ‘Roles of Government in a Mixed Economy’, Journal of Policy
Analysis and Management (): –.
Nelson, Richard R. and Sidney G. Winter () ‘Neoclassical vs. Evolutionary Theories of
Economic Growth: Critique and Prospectus’, The Economic Journal (): –.
Nelson, Richard R. and Sidney G. Winter () An Evolutionary Theory of Economic
Change. Cambridge, MA: Belknap Press of Harvard University.
Nelson, Richard R., Merton J. Peck, and Edward D. Kalachek () Technology, Economic
Growth and Public Policy. Washington, DC: The Brookings Institution.
North, Douglass C. () ‘Institutions’, Journal of Economic Perspectives (): –.
OECD () ‘System Innovation: Synthesis Report’. Paris: OECD. Available at https://
www.innovationpolicyplatform.org/sites/default/files/general/SYSTEMINNOVATION_
FINALREPORT.pdf.
OECD () Systems Approaches to Public Sector Challenges: Working with Change. Paris:
OECD.
Ostrom, Elinor () Governing the Commons: The Evolution of Institutions for Collective
Action. Cambridge: Cambridge University Press.
Ostrom, Elinor () Understanding Institutional Diversity. Princeton, NJ: Princeton Uni-
versity Press.
Pavitt, Keith and William Walker () ‘Government Policies towards Industrial Innov-
ation: A Review’, Research Policy : –.
Penrose, Edith () The Theory of the Growth of the Firm. Oxford: Oxford University Press.
Piketty, Thomas () Capital in the Twenty-first Century. Cambridge, MA: Harvard
University Press.
Polanyi, Karl ( []) The Great Transformation: The Political and Economic Origins of
our Time. Boston, MA: Beacon Press.
Rauch, James E. and Peter B. Evans () ‘Bureaucratic Structure and Bureaucratic Per-
formance in Less Developed Countries’, Journal of Public Economics (): –.
Reinert, Erik S. () ‘Competitiveness and its Predecessors: A -year Cross-national
Perspective’, Structural Change and Economic Dynamics (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Reinert, Erik S. () How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor.
London: Constable.
Reinert, Erik S., Kenneth Carpenter, Fernanda A. Reinert, and Sophus A. Reinert () ‘
Economic Bestsellers before : A Fresh Look at the History of Economic Thought’.
Working Papers in Technology Governance and Economic Dynamics No. . Available at
http://technologygovernance.eu/files/main//.pdf.
Reinert, Sophus A. () Translating Empire: Emulation and the Origins of Political Econ-
omy. Cambridge, MA: Harvard University Press.
Rip, Arje () ‘A Co-evolutionary Approach to Reflexive Governance—and its Ironies’, in
Jan-Peter Voss, Dierk Bauknecht, and René Kemp (eds) Reflexive Governance for Sustain-
able Development. Cheltenham: Edward Elgar, pp. –.
Rodrik, Dani () ‘Coordination Failures and Government Policy: A Model with Applica-
tions to East Asia and Eastern Europe’, Journal of International Economics (–): –.
Rodrik, Dani () One Economics, Many Recipes. Princeton, NJ: Princeton University Press.
Rodrik, Dani () ‘Green Industrial Policy’, Oxford Review of Economic Policy ():
–.
Rodrik, Dani () ‘From the Welfare State to the Innovation State’, Project Syndicate.
January . Available at https://www.project-syndicate.org/commentary/labor-saving-
technology-by-dani-rodrik--?barrier=accesspaylog.
Rothwell, Roy and Walter Zegveld () Industrial Innovation and Public Policy: Preparing
for the s and s. London: Pinter.
Ryan-Collins, Josh () Why Can’t You Afford a Home? London: Polity Press.
Samuelson, Paul () ‘Foundations of Economic Analysis’, Harvard Economic Studies, .
Harvard University Press.
Schonfield, Andrew () Modern Capitalism: The Changing Balance of Public and Private
Power. Oxford: Oxford University Press.
Schot, Johan and W. Edward Steinmueller () ‘New Directions for Innovation Studies:
Missions and Transformations’, Research Policy : –.
Soete, Luc and Anthony Arundel (eds) () An Integrated Approach to European Innov-
ation and Technology Diffusion Policy: A Maastricht Memorandum. Brussels: European
Commission.
Stiglitz, Joseph E. () ‘Government Failure vs. Market Failure: Principles of Regulation’, in
Edward J. Balleisen and David A. Moss (eds) Government and Markets: Toward a New
Theory of Regulation. Cambridge: Cambridge University Press, pp. –.
Teece, David J. () ‘Firm Organization, Industrial Structure, and Technological Innov-
ation’, Journal of Economic Behavior and Organization (): –.
Teece, David and Gary Pisano () ‘Dynamic Capabilities of Firms: An Introduction’.
Working Paper No. WP--. Laxenburg: IIASA.
Vom Brocke, Bernhard (ed.) () Wissenschaftsgeschichte und Wissenschaftspolitik im
Industriezeitalter. Das “System Althoff” in historischer Perspektive. Hildesheim: Lax Verlag.
Weinberg, Alvin M. () Reflections on Big Science. Oxford: Pergamon Press.
Williamson, James () ‘What Washington Means by Policy Reform’. Available at https://
www.piie.com/commentary/speeches-papers/what-washington-means-policy-reform.
Zehavi, Amose and Dan Breznitz () ‘Distribution-sensitive Innovation Policies: Concep-
tualization and Empirical Examples’, Research Policy (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
. I
..................................................................................................................................
N development banks (NDBs) have played a dominant role in the provision of
long-run investment, ‘patient’ financing of catch-up in agriculture, industry, and
infrastructure in the context of late development (Gerschenkron, ; Amsden,
; De Aghion, ; UNCTAD, ), and in the context of innovation in advanced
and emerging economies (Mazzucato, ; Mazzucatto and Penna, , ).¹ For
less developed economies, late industrialization entails substantial risks (because many
projects are large scale and have long learning and maturation periods) that banks are
often unwilling to undertake. Long-term finance requires maturity transformation,
which involves a risk that banks usually prefer to avoid (UNCTAD, ). For these
reasons, NDBs are designed and mandated to fulfil the role of facilitating risk-taking
and learning through the provision of long-run development finance.
As Alexander Hamilton noted, in the context of post-colonial United States: ‘capital
is wayward and timid in lending itself to new undertakings . . . the State ought to
excite the confidence of capitalists who are ever cautious and sagacious, and in doing
so, overcome the obstacles that lie in the way of all experiments’ (Alexander Hamilton,
¹ A World Bank survey defines a development bank as ‘a bank or financial institution with at least
per cent state-owned equity that has been given an explicit legal mandate to reach socio-economic goals
in a region, sector, or particular market segment’ (De Luna-Martinez and Vicente, : ). A definition
that does not require state ownership to be a necessary condition defines ‘development finance
institutions’ (DFIs) as ‘legally independent and government-supported financial institutions with
explicit official missions to promote public policy objectives’ (Xu et al., : ‒). See also Xu et al.
(: , table A) for competing definitions of NDBs.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Report on Manufacturers, ). State-sponsored development banking providing low-
cost, long-run credit is thus central to socializing risk and inducing risk-taking and
learning (Amsden, ). Due to the lack of private-sector capacity and commitment
to financing the inherently risky ventures of late development and innovation, it is thus
not surprising to find that NDBs are often the only source of long-run credit in least-
developing countries (LDCs), and form one of the main instruments of both vertical
and horizontal industrial policy.
Surveys of the share of NDBs clearly indicate that they are not things of the past,
nor relevant only to low-income contexts. A World Bank survey of NDBs found that
per cent were established during the import-substitution years between and
, nearly one-half ( per cent) came into existence between and and
per cent since , periods characterized by increasing globalization and the
growing predominance of neo-liberal policy reforms (De Luna-Martinez et al., ).
Their presence in the financial system thus remains significant, as they account for
per cent of total banking assets around the world (De Luna-Martinez et al., ).²
This suggests that, irrespective of policy orientation or global technological production
patterns, policymakers across a diverse set of economies at varying stages of development
have found that private financial markets do not deliver adequate long-term finance to
support catch-up, innovation, and structural transformation. These patterns contradict
notions of a ‘life cycle’ of development banks: the idea that a more active role for state-
owned banks may be necessary, given the lack of private capital markets and private
entrepreneurship in less advanced stages of development, but may become less important
as economies transform and their financial markets develop (Torres and Zeidan, ).
Moreover, the three largest NDBs in the world (China Development Bank (CDB), KfW
Group in Germany,³ and BNDES in Brazil) have substantially increased their asset and
loan disbursement as a share of GDP since . As of , these three NDBs had assets-
to-GDP ratios in the range of ‒ per cent of GDP (Ferraz and Coutinho, : ).⁴
While there are several roles that NDBs can play in an economy,⁵ this chapter
primarily explores why and how they have played a dominant role in the provision of
long-run investment finance to support industrial policy and production strategies
more generally. The chapter’s main aim is to identify common technical and political
economy factors that have contributed to the effectiveness of national development
banking. Prominent among the factors that matter to such NDB effectiveness and their
² According to Gallagher and Sklar (), the level of total assets of national development reached
approximately US$ trillion in , which is far larger than the level of loans of the multilateral
development banks (around US$ trillion in the same year).
³ KfW is ‘Credit Institute for Reconstruction’.
⁴ By , the five largest development banks in terms of assets (in billions of US dollars) were: (i)
China Development Bank ($,); (ii) European Investment Bank ($); (iii) German Development
Bank (Kfw) ($); (iv) World Bank ($); (v) Brazilian Development Bank (BNDES) ($) (Ferraz
and Coutinho, : , table ).
⁵ Griffith-Jones et al. () identify five crucial roles for NDBs: (i) counteracting the procyclical
behaviour of private financing; (ii) promoting innovation and structural transformation; (iii) enhancing
financial inclusion; (iv) supporting the financing of infrastructure investment; and (v) supporting the
provision of public goods, including promoting ‘green growth’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
role in promoting dynamic structural transformation include: developing sectoral
technical expertise among staff to monitor projects and the capacity to crowd in
financing (that is, to promote co-financing) for projects from other government
agencies, private banks, and business groups. To assist policymakers to identify polit-
ical economy challenges, the chapter also addresses why and when such factors fail to
emerge. These political economy factors provide a different view of less successful NDB
performance from that of neo-liberal critics.
Section . considers the economic reasoning behind the argument that state-
sponsored development banking is central to socializing risk and inducing risk-taking
and learning as well as more innovative ventures across a range of LDCs, and indeed in
advanced capitalist countries. In doing so, it challenges the mainstream view that
advocates financial deregulation. Next, we draw on the historical experience of suc-
cessful national development banking across a range of countries (Germany, Japan,
South Korea, China, and Brazil), to determine what effective development banking is
and how it has contributed to industrial policy across a range of cases in advanced and
less developed countries. An important message that emerges, and something that is
neglected in the literature, is that national development banks, when successful, can
provide a focal point not only for enhancing firm capacities to learn and innovate but
also for enhancing the technical capacity of the state bureaucracy to design and
monitor state support of such activities. We make an original contribution to the
literature with a discussion of the implications of whether economies develop single or
multiple sources of long-run finance. In particular, we discuss why and how economies
that encourage or mobilize diversified sources of long-run finance (rather than relying
on one or a small number of state-owned development banks, which is common
practice) enhance the prospects of their industrial policies meeting the challenges of
large-scale, long-gestating projects which entail risk and uncertainty. We next take a
more extended look at one of the world’s largest national development banks, the
Brazilian Development Bank (BNDES), the source of most of the Brazilian economy’s
long-run financing. This case study is useful for examining issues in the broader
political economy and macroeconomic context in which national development bank-
ing takes place. It also highlights some of the limitations of relying on a single source of
long-run financing, even when that source is one of the largest and most well-run
development banks in the world. Section . summarizes the general policy implica-
tions of the link between development banking and industrial policy.
. T E R
D B
..................................................................................................................................
The general logic of subsidization to promote industrial production in the context of
late development is well known: investments (especially in high-productivity sectors
where scale and gestation period are large) entail significant risks. There are several
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
reasons for this. First, the existence of learning by doing (Arrow, ) implies that the
now more advanced countries have a ‘first-mover advantage’ of accumulated know-
ledge compared with producers in late developers. Second, in advanced economies,
frontier firms have an implicit advantage because of the generally lower transaction
costs of doing business, which is the result of institutions being more predictable, and
the quality of physical infrastructure and education systems being higher (Abramovitz,
; North, ). Third, the risk inherent in undertaking industrial development in a
late developer in the context of relatively underdeveloped capital markets is generally
too high to induce investment in the absence of subsidization and protection.
The supply of state-sponsored, long-run credit in even advanced late developers is all
the more necessary because firms in OECD countries have further significant advan-
tages. First, there are indirect and direct mechanisms that support the technological
advance of their own frontier firms (Mazzucato, ). While R&D spending as a share
of GDP may be only slightly higher in advanced countries compared with late
developers, the absolute amounts of such spending are vastly higher in most OECD
countries because GDP levels are five to ten times higher. Second, the depth of financial
markets makes the advanced economies better able to withstand banking, financial,
and balance-of-payments crises. This reduces the level of business uncertainty over the
long run. Third, the depth of financial markets in OECD countries allows them to
provide a diversity of long-run financing sources, which increases the prospects of
selecting winners in the uncertain and risky world of innovation-driven investments.
Finally, the high level of retained earnings in established Fortune companies
provides a vast supply of investment resources for undertaking R&D.
Gerschenkron (), who examined the late development process in Germany and
Russia, argued that catching up occurs by undertaking more capital-intensive invest-
ment in individual plants, even though overall capital intensity of the backward
economy is less. In his analysis, investment banks and national development banks
served as a functional substitute for stock markets and commercial banking, both of
which financed (along with retained earnings) industrial investment in the forerunner
country, Britain. Germany (as a more advanced, but backward economy) relied on
relation-based private investment banking as the key to successful catch-up. Invest-
ment banks owned substantial shares in industrial ventures. Russia (a much more
backward economy) relied primarily on a state development bank to finance industri-
alization. The key insight is that the stage of development is relevant to the type of
development finance required, challenging the idea that late developers should adopt
‘best practice’ of more advanced countries.
There are sound economic reasons why NDBs have enhanced the prospects of late
development. Standard models of financing suggest that the private banking system is
unlikely to be able to provide long-run financing on its own for such risky ventures
without state coordination and guarantees (Stiglitz and Weiss, ; Dewatripont and
Maskin, ; De Aghion, ). The logic of the basic models is as follows. In a
competitive banking system in a low-income economy, banks tend to underinvest in
long-term projects. This is because long-term projects involve large sunk costs
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
requiring co-financing by several banks. However, each bank will tend to provide a
limited monitoring effort in the knowledge that part of the marginal return from this
effort will accrue to the other banks. Insufficient monitoring jeopardizes project
profitability, discouraging the co-financing of long-term projects. This suggests a role
for a coordinating agency in order to overcome ‘free-rider’ problems and prevent
short-termism. Given the inadequate private provision of long-term finance, coordin-
ating agencies are often sponsored by national governments.
The role of government-led and government-regulated state development banking
goes beyond standard market failure arguments. Late development plans or mission-
oriented governments are not simply ‘fixing market failures’. Rather, development
involves the processes of creating markets and firms that do not exist in the first
place. Such ‘missing markets’ are the result of inherent risks and uncertainty both in
late development and in innovation. In this sense, NDBs and their accompanying
policies and organizations enable and shape the creation of firms and markets, whether
this involves infant industry production or innovation (Burlamaqui, ; Mazzucato
and Wray, ).⁶
However, neo-liberal critics claim that state-controlled subsidized credit leads to
several problems: financial repression (negative interest rates reducing the incentives
to save); the crowding out of private-sector investment; relation-based governance
which can generate ‘insider privileges’; non-competitive markets; cronyism and corrup-
tion; and misallocation of resources towards over-ambitious capital-intensive projects in
labour-surplus economies (McKinnon and Shaw, ; Acemoğlu et al., ;
Musacchio and Lazzarini, a). Their policy advice is to liberalize the banking sector,
attract foreign banking, let private competitive markets determine the interest rate,
avoid capital controls, maintain fiscal and monetary discipline (balance budgets and
target inflation), create independent central banks insulated from political pressures,
and adopt a rules-based system of financing to promote private stock and bond markets.
Neo-liberal policy advice has some important shortcomings. First, there is no
historical evidence that effective catch-up strategies have been based on following
neo-liberal policy advice (Gerschenkron, ; Rodrik, ; Amsden, ). Second,
private financial markets are subject to ‘manias, panics, and crashes’ (Kindleberger and
Aliber, ) such as the Great Depression and the global financial crisis, among
many others in advanced countries. Independent central banks, ‘light touch’ regula-
tion, and monetarist policies reigned supreme leading up to the financial crash.
The private financial sector seems subject to a massive ‘soft budget constraint’⁷—since
⁶ Indeed, from advances such as the Internet and microchips to biotechnology and nanotechnology,
many major technological breakthroughs—in both basic research and downstream commercialization—
were only made possible by direct public investment willing and able to take risks before the private
sector was willing to (Mazzucato, ).
⁷ The soft budget constraint () holds wherever a funding source (such as a bank or government)
is unable to keep an enterprise to a fixed budget, that is, whenever the enterprise can extract ex post a
bigger subsidy or loan than would have been considered efficient ex ante (Maskin, : ). Kornai
() analysed how the centralized, socialist economies of Eastern Europe and the Soviet Union were
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
large banks are deemed ‘too big to fail’; in fact, taxpayers bail them out when they fail to
the tune of trillions of dollars.
Moreover, according to Stiglitz and Uy (), assessing the success or failure of a
directed credit programme is difficult for three reasons. First, there is usually no way of
knowing whether growth would have been higher or lower in the absence of the
programme. Second, a good programme requires risk-taking, which means that fail-
ures are inevitable. A programme with nothing but successes would necessarily have
been too conservative. Third, many of the returns may be long term, so current
profitability may not provide an adequate measure of success. For example, the
measure of Korea’s chemical and heavy industry programme, Japan’s car industry, or
Brazil’s aerospace industry should not be how those industries fared in the first decade
of their existence, but what eventually became of their technological development,
world market share, and so on thirty years after they began. Similarly, low profits may
reflect cyclical conditions rather than long-run prospects.
Despite the shortcomings of the neo-liberal view, it is still important to examine the
factors and conditions that have allowed a select set of NDBs to make positive
contributions to industrial policy and structural transformation, and to identify why
many other countries, even when they have well-run NDBs, fail to achieve similar
outcomes.
. L E
D B
..................................................................................................................................
The aim of this section is not to recount the historical experiences of development
banks. Indeed, there is a substantial literature that covers cases such as Japan, Korea,
Taiwan, China, Germany, and Brazil, among others (see e.g. Griffith-Jones and
Ocampo, ; UNCTAD, ; Naqvi et al., ; Ferraz and Coutinho, ).
Rather, it is to draw out some of the general patterns and mechanisms underlying
why and how development banking supports effective industrial policy.
First, NDBs, unlike most commercial banks, have developed and mobilized the
specialized sectoral and financial skills required to deal with higher-risk, long-term
investments. As noted by Sayers ():
The logically sound basis for the presumption against long-term commitments is
that it is much more difficult to estimate a borrower’s creditworthiness twenty years
ahead than six months ahead. The factors relevant to creditworthiness are substan-
tially different over the longer period and the capacity and experience required in
plagued by soft-budget constraints. The term has been applied to explain problems of SOEs in capitalist
economies and used as a justification for advocating privatization.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the bank manager are of an altogether different order, an order it is not reasonable
generally to expect unless he has specialized expert staff. (Sayers, )
There have been many forms of long-run investment financing that have served the
function of socializing the risks inherent in late development. The French experience in
the nineteenth century, where significant developments in long-term state-sponsored
finance occurred, provides the pioneering example. The creation in – of insti-
tutions such as the Crédit Foncier, the Comptoir d’Escompte, and the Crédit Mobilier
was particularly important.
The involvement of the Crédit Mobilier in Continental European railway investment
was notable. The bank acquired substantial expertise in long-term finance as a result
of railway investments. This expertise was then disseminated to other Continental
European banks in which the Crédit Mobilier held shares. Of even greater importance
than the outcome of the operations of the Crédit Mobilier were intangible benefits such
as the imitated skills of the engineers and technicians which it sent abroad, the
efficiency of its administrators, and its organizational banking techniques, which
were so widely copied (Cameron, ).
Indeed, one of the main reasons why private banking in LDCs cannot easily assume
the risks of long-run financing is precisely their lack of sectoral expertise in assessing
and monitoring risk. There is substantial evidence that the subsequent success of
development banks in Japan, South Korea, Germany, France, and Brazil owes much
to the well-trained staff with engineering and sectoral skills able to monitor loans and
form teams that contribute to and influence planning and coordinate government
policies (Amsden, ; UNCTAD, ; Ferraz and Coutinho, ; Griffith-Jones
and Ocampo, ; Naqvi et al., ).
In explaining why and how the German state development bank staff expertise is
relevant to enhancing the effectiveness of industrial policy, Moslener et al. () note:
Apart from the financial expertise that KfW staff has, it additionally employs experts
with specific—often engineering-type—sector knowledge in agriculture, energy,
transport, water, natural resources, and civil engineering, to name but a few. This
substantively distinguishes KfW from the commercial banking sector. This allows
KfW to base its investment decisions on a broader set of criteria from internal
employees rather than relying on the market generally or external actors, such as
consulting firms. This deeper understanding of sectors and the related markets is also
essential not only to identify market imperfections, but also to anticipate the conse-
quences of the respective interventions and programmes . . . Such knowledge further
increases the likelihood that a particular project will be more successful from a
socio-economic as well as a commercial perspective. Technical expertise further
allows KfW to serve as an important conduit between its investments in the private
sector and government policy, adding to its information advantage. Finally, KfW’s
stamp of approval can effectively signal to other private investors that the project is
viable. (Moslener et al., : ; italics added)
Moreover, the financial expertise of KfW staff allowed them to monitor industrial loans
effectively, especially during downturns in the business cycles or during financial crises.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
In particular, staff were better able than simple government agencies to separate
insolvent companies from healthy ones that were merely suffering from the reduced
lending capacity of the private sector due to fallouts from the financial crisis (Moslener
et al., : ‒).
Second, NDBs have increasingly taken on a macroeconomic role of countercyclical
financing to combat increasingly unstable and volatile financial markets (Griffith-Jones
and Ocampo, ). This is important to help maintain long-term investment, includ-
ing in infrastructure, ensuring the continuity of existing projects and helping new ones
start, valuable both for short-term growth and long-term development. The multilat-
eral development banks (MDBs) collectively increased their lending commitments to
emerging and developing economies by per cent between and , the year
when private capital flows to these countries fell most sharply as a result of the crisis
(Griffith-Jones and Gottschalk, ). This countercyclical lending by multilateral and
regional development banks was complemented by that of NDBs in emerging and
developed countries.⁸
Third, successful state development lending has complemented and ‘crowded in’
private-sector lending rather than displacing it. The high private savings and invest-
ment rates in East Asian countries in the s and s, for example, would not have
been possible if this were not the case. Although directed credit amounts to as much as
per cent of the loans of financial institutions in some countries (such as Brazil), in
the period to , even in Korea (which used directed credit most aggressively),
directed credit amounted to only about per cent of total credit, and in Japan it never
exceeded per cent (Stiglitz and Uy, ).
There are several reasons why development banks have been more influential than
their small share in lending might suggest. Because of their close ties to the govern-
ment, their lending provided information to entrepreneurs and other banks on the
areas that the government was promoting. In addition, other financial institutions
valued information on the development banks’ choice of clients (as distinct from
sectors). This signalling effect only works, of course, if development banks have
sound institutional reputations, which they did in Japan, Singapore, Taiwan (China),
and, by and large, Korea (Stiglitz and Uy, ).
A fourth factor that enhanced effectiveness was substantial amounts of directed
credit to industry, based on broad functional criteria (such as whether the firm
produced exports), typically using objective performance measures (Amsden, ,
; Stiglitz and Uy, ). This was particularly important in the rapid growth cases
of North East Asia (Amdsen, ) but has also been important in the export manu-
facturing drive in Germany (Naqvi et al., ). This dynamic export performance
results from domestic processes of learning, effort, and contestation among competing
firms (Woetzel et al., ). Of course, it is also necessary for state competition policy
to prevent oligopolistic collusion and capture of state subsidies, since internal
⁸ De Luna-Martinez and Vicente () provide evidence that these banks increased their lending
from US$. trillion to US$. trillion between and .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
competition among the selected few subsidy recipients is central to inducing the
maximum efforts of firms learning to become as efficient as possible (Studwell, ).
Fifth, effective export performance has been the result of explicit NDB strategies to
promote large firms and/or industrial conglomerates. The literature on ‘strategic trade’
(see Krugman, ) finds that state subsidization matters to export competitiveness in
the context of increasing returns and imperfect competition. It is well known that
development finance has been central to national firm formation and ‘national cham-
pions’ such as Toyota, POSCO steel, or Hyundai in East Asia (Amsden, ). In
Germany, in the post- period, the KfW aimed much of its very selective export
financing at promoting the export of industrial plant and machinery by a relatively
small group of well-known firms such as Siemens, Krupp, Ferrostaal, Ihde, Fritz
Werner, and AEG to the major newly independent developing economies, while
specific export finance programmes targeted shipping and aircraft exports, including
companies producing for Airbus (Naqvi et al., ). In Brazil, BNDES finance was
central to the export success of national champions in agri-business, aerospace
(Embraer, the world’s third-largest passenger jet company), mining, oil and gas,
among others.
Sixth, macroeconomic policies need to enable the generation of high levels of savings
and investment, and public and private development banking. Indeed, there is consid-
erable debate about what range of inflation and fiscal deficits is compatible with rapid
growth (Rodrik, : ). However, especially in less developed countries that do not
have well developed capital markets for government bonds, the greater the use of the
inflation tax (by printing money), the greater the prospects that hyper-inflationary
pressure will emerge.
Hyper-inflationary pressures result in increasing uncertainty and an increase in
transaction costs, both of which are likely to slow down private-sector investment.
Second, they limit the credibility of government bonds which reduces the borrowing
capacity of the state to fund investments. It also tends to restrict the development of
private banking credit, which limits both the level and diversity of private credit
expansion through the banking system, which, in turn, limits the financing of invest-
ment (Calomiris and Haber, ). Finally, strong inflationary pressure tends to
generate cycles of overvalued exchange rates which reduces the competitiveness of
infant industry exporters, reducing in turn the extent to which export markets can
become an opportunity to either expand market share or provide a realistic focal point
for domestic firms to compete abroad (see Rodrik, , on exchange rate policy and
industrial policy).
Avoiding balance-of-payments crises is a large part of maintaining a viable macro
environment (Thirlwall, , ).⁹ Because ‘big push’ industrialization drives
⁹ Growth reversals or collapses in developing economies have frequently been preceded by foreign
exchange shortage, marked by urgent pressure to seek increased aid flows to finance immediate
imported input requirements and the rising level of external debt (Arizala et al., ; Bagnai et al.,
).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
generate widespread ‘investment hunger’, the macroeconomic challenges of industrial
policy are formidable. The danger of overexpansion in a ‘big push’ strategy is typically
the build-up of unsustainable and destabilizing external debt positions that will occur if
the investment does not lead to productivity improvements, increasing competitive-
ness and net export earnings. The debt overhang that could result also leads to
increases in the share of interest payments on the external debt, which in turn will
reduce the state resource available for investment in infrastructure, which is a central
input into growth in this strategy. As Amsden () notes:
That conditions of ‘lateness’ are inherently conducive to overexpansion is suggested
by the fact that when a debt crisis occurs, it almost always occurs in a latecomer
country. This is because diversification in the presence of already well-established
global industries involves moving from labour-intensive to capital-intensive sectors
characterized by economies of scale. (Amsden, : )
The scale of ‘big push’ investments was, indeed, instrumental in the debt crises in Latin
America in and in East Asia in , as both were preceded by a surge in
investment (Amsden, : ). Thus, mobilizing national savings, both public and
private, becomes central to sustaining a high investment effort without incurring
potentially destabilizing levels of external debt. The higher savings and investment
level in East Asia is probably the main reason why its growth rates recovered after its
macro crises, unlike Latin America, where savings and investment rates are consider-
ably lower. It is well known that high levels of national public savings have supported
robust investment rates (Stiglitz and Uy, ; Krieckhaus, ).¹⁰
Thus, it is not surprising that NDB disbursements tend to grow and crowd in private
investment the most in East Asia and the OECD, economies where macroeconomic
conditions generally allowed governments to develop deep capital markets, especially
in the issuance of long-run bonds. An often neglected and paradoxical trend is that the
asset size of the two largest NDBs in the world, CDB in China and KfW in Germany,
have grown fastest since the late s, an era characterized by financial deregulation
processes of ‘financialization’. The triple A credit ratings in Germany have allowed the
KfW to become one of the first national development banks to follow in the footsteps of
the supranational World Bank and European Investment Bank in tapping into inter-
national capital markets (Naqvi et al., ). The dramatic rise in assets of the CDB
have all been driven by its ability to issue primarily domestic (but also international)
bonds. Indeed, it has played a central role in creating the domestic bond market (Xu,
). On the other hand, BNDES in Brazil has grown substantially on the more
¹⁰ The East Asian economies largely achieved high savings rates through the coercive power of the
state, which was deployed through various forms of ‘forced savings’. Among the coercive elements were
restrictions on consumer credit, financial restraint, mandatory provident pension contributions (used in
Singapore and Malaysia), and encouragement of postal savings (Stiglitz and Uy, ). Other factors that
contributed to high levels of private savings were banking and industrial policies (including entry
restrictions) that guaranteed high levels of profitability, capital accumulation, and income growth
(Stiglitz and Uy, ; Storm, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
precarious and politically fragile basis of relying on government transfers of earmarked
taxes and treasury transfers (Musacchio et al., ). This is because the legacy of
hyperinflation in the s and s generated macro stabilization policies anchored
in high real interest rates to accommodate investors’ demand for short-term returns
and liquidity (see section .).
. D D
F M I
P
..................................................................................................................................
While most national development banks are majority or wholly state owned, it is
important to note that the vast majority of total investment, even where NDBs have
been pivotal to effective industrial policy and structural transformation (East Asia,
Germany, France, Brazil) is private, particularly for middle-income and high-income
economies. This draws attention to why and how NDBs can crowd in private invest-
ment and thus leverage their benefits to the greatest possible extent.
The early experiences of development banking marked the role of government in
enabling the development of private development banking. In France and Germany
from the nineteenth century until the Second World War, government support for
private emerging development banks took the form of share capital provision, loans at
lower than market interest rates, the provision of state guarantees underwriting these
institutions’ bond issues, or a combination of the three. From the early s, the
Japanese government bought a substantial share of the bonds issued by private long-
term credit banks and was a catalyst ensuring that other private banks and financial
institutions subscribed to these bonds. It allowed development banks to issue long-
term bonds or debentures, whose market the government helped create. This privilege
helped redress the mismatch between the maturity structure of the banks’ assets and
their liabilities, a problem that had plagued commercial banks (Stiglitz and Uy, ).
Limiting competition also enabled the long-term credit banks to obtain funds more
cheaply than they otherwise could have (Stiglitz and Uy, ). Only in the post-
Second World War period do we find that almost all national development banks are
state-owned enterprises (SOEs), mostly financed through retained profits and domestic
taxation (particularly a portion of personal income taxes [PAYE], but also through
domestic government bonds, international capital markets, and concessional finance)
(on the varied sources of NDB finances, ownership and lending patterns, see
UNCTAD, ; and Griffith-Jones and Ocampo, ).¹¹
¹¹ According to a World Bank survey (De Luna-Martinez and Vicente, : ), almost three-
quarters of NDBs surveyed are per cent state owned, per cent have between and per cent
state ownership, and in only per cent do governments have minority ownership.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The current association of national development banking as a state-led process
distracts attention from the wide variation in the importance of private long-run
financing across countries, particularly at low- and middle-income levels. Indeed, it
is possible to identify two basic patterns of relation-based sources of late-development
and innovation-oriented financing. The dominant pattern in most LDCs since the
Second World War has been the single/limited long-run financing model. This gener-
ally involves reliance on one dominant national development bank financing public
and private industrial firms. Perhaps the most well-known example is BNDES in Brazil
(for a discussion of BNDES and how it has worked, see Amsden, ; Musacchio and
Lazzarini, a, b; Colby, ; Tavares de Araujo, ). In single long-run
financing situations, such economies lack depth but also diversity in long-run financing
mechanisms. This may, as we shall see in the case of Brazil, be the result of macro
instability and chronically high inflation and uncertainty due to balance-of-payments
crises that inhibit long-run government and corporate bond markets, and/or explicit
government policies limiting cross-shareholdings between banks and industrial firms.
The latter would mean that while business conglomerates may develop, such groups
grow outside manufacturing.
The second basic model, and one more likely to sustain the investment and innova-
tive capacity of the economy, is a diversified/multiple financing model. This would
include a national development bank co-financing projects with state/regional devel-
opment banks and bank-based industrial conglomerates, as in Japan, South Korea,
Taiwan, and Germany. In China, the model is based around a national development
bank, policy banks in agriculture and trade, and a decentralized system of state
government (town and village enterprises [TVEs,] and later local government finan-
cing vehicles), which constitute multiple poles of long-run financing as well as com-
peting with each other in the large internal market (Qian and Weingast, ; Ang,
). In the United States, it is based on the large retained earnings of corporations,
public banks, and a vibrant investment and venture-capital sector.
Indeed, national development banking has been effective in crowding in productive
investment when it has been able to draw on and nurture the construction of bank-
based industrial business groups. Historical evidence suggests that bank-based indus-
trial business groups have been central to the catch-up processes in Germany, France,
Italy, Sweden, Japan, South Korea, Taiwan, and Israel (Khanna and Yafeh, ). Such
relation-based financiers are able to take a longer-run view of catch-up investments
(and therefore become more ‘patient’ investors) than either stock markets or inde-
pendent commercial banks, both of which operate under impersonal, rules-based
systems. There is evidence that, when a dominant national development bank inter-
venes, co-financing arrangements and/or co-ownership with private financial institu-
tions can enhance the returns to capital of state-led long-run financing (De Aghion,
).
The multi-financing model has several advantages for crowding in private invest-
ment in productive ways. First, it reduces the extent to which rent-seeking in search of
long-run funds becomes a political game centred on one or a small number of state
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
banks. While there may be considerable legal and illegal rent-seeking involved in trying
to obtain access to selective long-run state finance, the existence of several bank-based
industrial conglomerates will likely increase the competition and contestation over
such funds. Such contestation, even in countries with substantial cronyism and cor-
ruption, may provide incentives to generate more viable and dynamic production
empires, since economic prowess will improve the prospects of winning these rent-
seeking contests.
Second, it enhances the prospects of exchange of information, expertise, and collab-
oration between the public and private development banks. Business conglomerates are
able to pool scarce managerial talent and provide internal financing to undertake risky
ventures that are difficult to otherwise finance in the context of underdeveloped capital
markets (Leff, ; Amsden, ; Khanna and Yafeh, ). The so-called transac-
tion banks in such conglomerates (particularly in Germany, Japan, Taiwan, and South
Korea) complement the financial, engineering, and other technical expertise to monitor
sectoral investments. Such conglomerates are important not only because in many
catch-up processes, large and concentrated firm size is a key to competitiveness (where
scale economies are relevant), but also because they provide an important complement
to state planning and coordination (Mahmood and Rufin, : ‒).
Third, it increases the incentives for private business groups to monitor the quality
of investments, to increase their technology learning efforts, and to become more
innovative, because they have a stake in long-gestating and complex ventures. Indeed,
one of the reasons behind the successes of NDBs in East Asia in developing dynamic
firms and sectors has been the requirement on the part of governments to demand
substantial collateral in return for loans as a way to incentivize effort (Stiglitz and Uy,
; Xu, ).
Finally, the diversity of long-run financing enhances innovation because it enables a
greater variety of experimentation. Apart from the need to generate a high volume of
long-run investment funds, the diversity of these funds becomes as important. This is
because a greater diversity of venture capital ‘bets’ increases the likelihood of success.
As Mokyr () notes: ‘Diversity is the root of creativity, and much of what we call
technological creativity is the ability to absorb, assimilate and apply ideas borrowed
from others’ (: ). Indeed, the diversity of experimentation is also central to why
the process of market competition and rivalry produces discovery and innovation, a
process neoclassical economics has been ill-equipped to explain (Hayek, ). It is not
a coincidence that the highest rate of patent applications and approvals (an albeit
imperfect proxy of innovation) come from OECD countries but also emerging econ-
omies with diverse sources of long-run financing (e.g. South Korea, China).
Recent evidence from the McKinsey Global Institute on the characteristics of
countries with the fastest long-run growth rates (so-called ‘outperformers’) suggests
a greater presence and performance of large firms (defined as firms with at least
US$ million in sales). Moreover, this success is accompanied by greater competition
or ‘creative destruction’ among large firms within these economies: per cent of the
top quintile are replaced within a decade compared to less than per cent among
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
slower-growing economies (Woetzel et al., ). The report further argues that, rather
than just picking winning firms or sectors, the focus was on boosting productivity and
enabling competition. Performance criteria and the limited time frame of subsidies,
and exposure to export markets, all increased firm effort and disciplined lagging
performance. Large firm development also received government support in the form
of subsidies for infant industries, including low-cost loans, preferential exchange rates,
low tax rates, and R&D subsidies.
In sum, scale, and diversity of long-run financing are two central features of
industrial policy that delivers dynamic growth and structural transformation. As
Amsden () first observed, the structure and size of business organizations matters
for achieving the scale and scope necessary to achieve dynamic infant industries and
exporters in latecomers. The above discussion suggests it matters in other ways, such as
providing a diversity of financing options to support learning and experimentation, as
well as providing the prospect of internal competition among competing business
groups. All the cases of long-run growth identified as ‘outperformers’ have been
countries with access to multiple sources of long-run financing. For economies without
this diversity in sources of long-run financing, an important policy issue is how to
diversify these sources. Several options are being pursued today. First, setting up several,
more specialized policy banks could diversify organizational effort. In fact, apart from
the main development bank, CDB, China has large policy banks such as the Export–
Import Bank of China and the Agricultural Development Bank of China. Second,
attracting foreign direct investment (FDI) diversifies long-run finance since multi-
nationals have retained earnings and access to global capital markets. Third, reaching
out to a large diaspora is an option for some countries such as Israel, India, Bangladesh,
and Ethiopia. The latter, for instance, raised substantial capital through diaspora bonds
to fund the Renaissance Dam project. Finally, and most important for low-income
countries, international development banks have enhanced the diversity of funding.
The World Bank Group has done this in two ways. First, it has undertaken local
currency bond issuance through their signalling and demonstration effects, which
strengthens confidence in a country’s domestic bond markets attracting foreign issuers
and investors. Second, investment funds, such as the International Finance Corporation
(IFC), have invested in both established and emerging private-sector companies.
. C S: T P E
D B B
..................................................................................................................................
The Brazilian case is useful for examining the broader political economy in which
national development banking takes place. While Brazil’s main national development
bank, BNDES, has been central to one of the most remarkable stories of growth and
structural transformation since the s, its policies have been insufficient to prevent
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
a dramatic slowdown in manufacturing performance in the post- period. Even
more intriguing is that the latter period is subject to enormous variations in manufac-
turing performance: a great industrial divide involving the rise of national champions
and the fall of the rest.
.. The Positive Side of Development Banking in Brazil
On the one hand, Brazil has had one of the best-performing and most successful
national development banks in the world. The national development bank, founded in
, initially focused on financing infrastructure as part of the country’s drive towards
modernization and industrialization. Later in the decade, its focus broadened to
support the country’s capital goods industry and then, in the s and s, other
industrial sectors (Armijo, ). The state also introduced important ‘forced savings’
schemes which were used to fund significant growth of the national development bank,
BNDES, and the spectacular growth of relatively well-run SOEs in heavy industry and
mining, which contributed to public savings via their profitability and provided a focal
point for technological development (Trebat, ).¹² BNDES was central to the long-
run financing that enabled rapid growth and structural transformation in the period
to during which Brazil developed one of the most diversified and sophisti-
cated industrial and manufacturing sectors among middle-income countries.¹³
Since the s, BNDES has been the focal point of industrial restructuring and
‘strategic’ large-scale privatizations (maintaining corporate control through ‘golden
share’ minority positions), and has supported exporting sectors (with a focus on capital
goods and engineering services) and, more recently, the internationalization of large
national corporations, the so-called national champions.¹⁴
The extensive privatization programme, in particular, transferred ownership on
preferential terms to established and emerging domestic business groups (Almeida,
; Massi, ). This process resulted in the emergence of firms in agri-business,
steel, aerospace, mining, oil and gas, paper and pulp, engineering and construction, and
telecommunications, many of whom have become innovative frontier firms.
¹² On the growth of SOEs in this period, see Musacchio and Lazzarini (b). The expansion of
SOEs meant that the SOE share of total gross fixed capital formation increased from per cent in
to per cent in (Frieden, : ).
¹³ It is well documented that BNDES played a dominant role in deploying subsidized long-run credit
in this period (see Barros de Castro, ; Tavares de Araujo, Jr., ; Colby, ). In the period
to , between and per cent of all lending went to the public sector. In to , the
private sector received an average of per cent of all lending, rising to an average of approximately
per cent of all loans going to the private sector in the period to (Colby, : ), mostly in
intermediate and capital goods.
¹⁴ In –, loan disbursements increased from R$ billion to R$ billion at constant prices, a
growth of per cent in real terms (UNCTAD, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The restructuring of Brazilian capitalism, or what Musacchio and Lazzarini (a)
refer to as the ‘re-invention of state capitalism’, involved the construction of multiple
and diversified sources of long-run financing and a governance focal point around
sectoral restructuring for these targeted firms. This process took two basic forms. First,
under BNDES leadership, the government pursued a policy of purposefully construct-
ing ‘national champions’, largely through what were called ‘strategic privatizations’.
The equity of many of the viable, but financially strapped SOEs was transferred to
private domestic business groups, but BNDES (through its investment banking arm,
BNDESPar) and state pension funds also maintained strategic minority shares. In the
case of oil and gas and some electricity firms, the state maintained a majority share but
also received vast amounts of BNDES loans.¹⁵ In both cases, export credits also
increased substantially. These state policies enhanced the value of rents by enhancing
the profitability and technical capacity of these firms to compete in export markets.
Second, the centrepiece of the construction of innovative ‘national champions’ was
long-run subsidized credit financing, most of which came from BNDES.¹⁶ The out-
come of the processes of privatization coordinated in the Cardoso administrations
(‒) had created a change in ownership patterns that was effectively a ‘coord-
inated’ process of restructuring innovative firms close to the technological frontier. The
basic pattern is described by Aldrighi and Postali () as follows:
The complex arrays that have led BNDESPar, Banco do Brasil, Petrobras, and
pension funds of companies currently or formerly controlled by the government
to hold large equity stakes or even to take part in the controlling coalitions in some
business groups stem primarily from their participation in the privatization process.
Given its intent to maximize revenues from the privatization auctions, the Federal
Government urged BNDES and pension funds to act as financiers for the bidders,
notably Brazilian private groups. (Aldrighi and Postali, : )
The state created rents by assuming the socialization of risk in promoting innovative
activity and increasing the scale of business groups and firms through a combination of
loans and taking equity positions. With the rise in BNDES funding in the post-
period (reaching a peak of . per cent of GDP in ), these loans tended to target the
largest firms in the country: in the period to , the ten largest loans made up
per cent of all BNDES disbursements (Hochstetler and Montero, : , table ).
Other mechanisms through which the state increased the diversity of long-run finan-
cing and growth potential of emerging national champions were the increasing equity
¹⁵ In the latter case, and in particular the case of Petrobras, the state has anchored much of its
industrial policy around developing linkages from large offshore oil finds into shipbuilding, construc-
tion, and deep-sea oil exploration equipment. During this period, Petrobras set in motion a US$
billion investment programme for these projects.
¹⁶ The value of loans disbursed by BNDES in was more than three times the total amount
provided by the World Bank in (Musacchio and Lazzarini, b: ) and still twice that amount in
(Torres and Zeidan, : ). Between and , subsidies from the treasury to BNDES
loans totalled US$ billion (The Economist, December ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
participation of state pension funds (Almeida, ), the provision of export subsidies
and credits,¹⁷ and the promotion of local content laws, through public procurement
policies, in sectors such as oil, shipbuilding, automobiles, and wind turbines (Almeida
and Schneider, : ).
The strategy of creating frontier, innovative firms was not just about financing, but
also about increasing their scale, promoting their internationalization into emerging
multinationals able to compete at the apex of global value chains, and promoting their
innovative capacity. The result of this process is a series of world-class Brazilian
multinationals at the cutting edge of frontier technologies¹⁸ in aerospace, high-tech
agriculture, agri-business, steel, telecoms, mining, oil and gas, bio-fuels, automobiles,
and bio-technology (Brainard and Martinez-Diaz, ; Musacchio and Lazzarini,
a, b; Perez-Aleman and Chaves-Alves, ; Ferraz and Coutinho, ).¹⁹
Many of Brazil’s ‘national champions owe their existence to past capacities that were
constructed and developed as state firms in this period’ (Aldrighi and Postali, ).
By , BNDES was the third-largest national development bank in the world, after
the China Development Bank and Germany’s KfW. In the context of a country where
commercial banking has focused on short-term loans, BNDES, with its strong technical
expertise and record of promoting structural transformation, has been held up as a role
model for countries considering setting up development banks (UNCTAD, ).
¹⁷ Interview with João Carlos Ferraz, vice-president of BNDES (August ).
¹⁸ In historical perspective, there are several features that unite the stories behind the emergence of
these innovative firms. First, all of them have their origins as domestic business enterprises. Second, most
of these firms come from sectors that have built up substantial productive and managerial capabilities
over long periods of time, going back in some cases to the early twentieth century, and have benefited
from long periods of protectionism (whether as a result of explicit state strategies or as unintended
consequences). Third, all these firms have benefited from state policies, whether in the form of access to
long-run, subsidized financing, protectionist policies, state-financed research and development, or
public procurement. Fourth, exposure to international markets, and particularly growing through
exports, even during the protectionist era, allowed these firms to gather information on the demands
of foreign consumers and compelled them to seek out productivity-enhancing innovations to compete in
world markets. Fifth, the military played a key role from the Vargas era in the s through the s in
creating a discourse around the development of ‘strategic’ sectors, beginning with the steel industry, but
also in oil and gas, and aerospace. This discourse not only helped governance focal points emerge around
such sectors but also provided continuity of funding even in times of macroeconomic crisis and distress
as well as providing research clusters and long-run financing facilities and using SOEs as focal points to
train and attract scientists and engineers. This is most evident in the case of Embraer (the world’s third-
largest aerospace company).
¹⁹ By , agricultural production in Brazil ranked first in the world in coffee, orange juice, and beef;
it ranked second in soybeans; third in chickens; fourth in corn and pork; and fifth in cotton (Nassar,
). By , the yields for Brazil’s main crops (sugarcane, corn, cotton, soybeans, and wheat) reached
levels similar to those of developed economies (Elstrodt et al., : ‒;) agricultural productivity
growth has been among the fastest in the world since (Arias et al., : ‒). Brazil is also a world
leader in mining (e.g. Vale is the world’s second-largest mining company and Petrobras is a leading oil
company and a producer of sophisticated deep-sea oil exploration equipment) (Brainard and Martinez-
Diaz, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. The Limitations of BNDES and the Importance
of Broad Political Economy Factors
Since , despite the best efforts of BNDES to increase disbursements and fund
world-class national champions, overall GDP and manufacturing output and product-
ivity growth rates have collapsed and there was substantial de-industrialization from as
early as .²⁰ The share of the manufacturing sector in total GDP fell from a peak of
. per cent in to less than per cent in . While BNDES investment may
have ‘crowded in’ private-sector investments, it has done so within a range that is far
too low: the private investment rate maintained a rate in the ‒ per cent range
throughout the period, which is well below East Asian counterparts. Whatever the
particular design of industrial policy, this low level of investment ultimately generates
fewer experiments, risks, and learning processes.
The Brazilian experience suggests that macroeconomic policy and context as well as
policy decisions on banking laws have contributed to reliance on a single/limited long-
run financing model. As a result, both scale and diversity of long-run financing
mechanisms have been limited, even during periods of rapid growth. The subsequent
slowdown in growth after suggests that the nature of development patterns
matters more for avoiding growth collapses that are common features of LDCs. Let
us examine the historical evolution of the processes behind this problem.
First, a series of development banking laws and policies inhibited the development of
private-bank-based industrial conglomerates, and therefore limited multiple sources of
long-run finances. Many of these policies, either initiated or enforced by BNDES, were
meant to promote internal competition. BNDES put conditions on its loans specifying
low debt/equity ratio ceilings that constrained the size of national firms (Amsden, :
). This decision, along with a banking law in which restricted banks and
industrial firms from having cross-holdings (Armijo, ) was meant to both create
internal competition and prevent further concentration of industrial assets which
historically were linked to the ‘insider’ advantages that big businesses had with a
banking system with limited access to credit (Calomiris and Haber, : –).
In a country with historically very high levels of income and asset distribution, the
rationale for this policy is understandable. However, the policy constrained the size of
domestic manufacturing firms (Amsden, : ) which is one of the reasons why
there were very few capital goods firms that exported. They simply did not have the
scale and scope to compete. It was thus not surprising to find, among all less developed
(that is, non-OECD) countries, there was no private Brazilian business group in
²⁰ Manufacturing growth in the period to averaged nearly per cent per year but averaged
around per cent per year in the post- period. According to Aldrighi and Colistete (), while
average annual manufacturing labour productivity grew at . per cent in the period to , it
declined to . per cent in the period to and then collapsed to minus . per cent in the period
to .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
manufacturing in the top (ranked by sales) in the world in (Amsden, : ,
table .).
The second factor that limited the development of private investment banking in the
twentieth century was the increasingly excessive use of the inflation tax (by printing
money) through the mid-s. Inflation rates averaged over per cent in the period
to , and were to reach ‒ per cent by ‒ (Calomiris and Haber,
: ). This ultimately culminated in hyperinflation in the s and early s.
Chronic and high inflation resulted in increasing uncertainty and an increase in
transaction costs, both of which inhibited the emergence of a private investment banking
sector and resulted in the state becoming the main source of long-run development
financing. Second, it limited the credibility of government bonds, reducing the borrow-
ing capacity of the state to fund investments, and also tended to restrict the development
of private banking credit. This limited both the level and diversity of private credit
expansion through the banking system, which, in turn, limited the financing of invest-
ment (Calomiris and Haber, ). Finally, strong inflationary pressure tended to
generate cycles of overvalued exchange rates which reduced the competitiveness of
domestic manufacturing firms and thus their ability to increase exports.²¹
Third, the growing reliance on external debt made the economy vulnerable to
balance-of-payments crises. The main culprit behind the worsening economic per-
formance of the late s to the mid-s was the reliance on a debt-led growth
strategy, which resulted in a growing balance-of-payments crisis, increasing external
debt and rising inflation (Fishlow, ; Bacha and Bonelli, ). Due to the unfore-
seen dramatic rise in world interest rates, the country was forced to declare a suspen-
sion of external debt payments at the end of .²² The inability of the central
government to control and discipline state financing contributed to a spiralling and
unsustainable debt. Throughout the s and into the s, governors used the state
banks to finance expanding deficits, accumulating staggering debts. State bank debts
had reached US$ billion by and amounted to a massive US$ billion in
(Kingstone, : ). State and local governments were responsible for about two-
thirds of Brazil’s US$ billion foreign debt (Mainwaring, : ). The climate of
hyperinflation and the debt restructuring imposed led to a series of policies that would
both hamper state finances and negatively affect the investment climate (Aldrighi and
Postali, : ‒).
Fourth, the macro policies after to handle the legacy of inflation also inhibited
private investment banking. Macro stability, in particular sustaining low inflation, was a
²¹ Despite its rapid industrial catch-up, Brazil’s share in world market exports was to decline from
. per cent in to . per cent in , and would remain at that share through (Bulmer-
Thomas, : ).
²² The ‘big push’ strategy of PNDII development plan did not generate the net foreign exchange to
finance debt payments in the s, something East Asian economies were able to accomplish. The
country’s foreign debt (in constant dollars) grew from US$. billion in to US$. billion in
and further increased to US$. billion in , which represented two and a half times the value
of the country’s exports (Malan and Bonelli, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
main priority of each of the administrations in this period. The history of inflation taxes
and episodes of hyperinflation had eroded the political support of the poor (who mostly
paid for this tax) and asset owners, particularly within industry, who were unable to
undertake meaningful long-run strategic planning. This price stability was achieved,
however, by maintaining real interest rates that were among the highest in the world, as
well as an overvalued exchange rate, in the period to (Afonso et al., ).²³
The legacy of hyperinflation meant that Brazilian savers demanded two things: high
interest rates and short-term returns to ensure liquidity (Orair and Gobetti, : ).
Among the consequences of this macro policy environment is that it reduces the
effectiveness of BNDES action on industrial policy. First, in the period to ,
interest payments on debt absorbed more government spending than did infrastruc-
ture, education, and health (De Magalhães and Costa, : ‒). Second, high real
interest rates reduced the extent to which BNDES policies could ‘crowd in’ private
investors who were unwilling to undertake risks despite government efforts provide a
substantial amount of loans at subsidized interest rates (Ferraz and Coutinho, ).
As a result, the ‘national champions’ policies, while generally successful, appropriated
a significant proportion of long-run financing. This occurred in the context of an
economy that did not have alternative forms of long-run financing investment arrange-
ments, such as bank-based industrial conglomerates, or well-financed regional devel-
opment banks. While BNDES disbursements increased to . per cent of GDP after
, per cent of that funding essentially went to fund the formation of ‘national
champions’. That left only per cent (or a little over . per cent of GDP) available for
long-run subsidized funding for potentially innovative smaller and medium-sized
firms—not enough to drive productive investment. Moreover, policies to reduce the
role of state development banks, while understandable given their previous activities
building up massive external debts in the s, undermined the extent to which a more
decentralized and diversified set of long-run financing organizations would emerge
across levels of government, as has occurred in China, South Korea, or Germany. In
, fiscal governance was reformed by the adoption of hard-budget constraint
legislation—the Fiscal Responsibility Law—which imposed transparency requirements
on states, and municipalities’ accounts and imposed a ceiling on states’ spending.
.. Policy Debates: Assessing the Role and Effectiveness
of BNDES in Brazil
There are several specific criticisms of the ‘national champions’ model. The first set of
arguments revolves around the criticism that BNDES was focusing too much of its
²³ In the new model, the guarantee of government credibility became a requirement of the inter-
national market, and the liberalization that saw the opening up of the economy commercially and
financially served, together with privatization, to guarantee the Brazilian government a supply of
liquidity (Afonso et al., ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
lending on sectors that were already internationally competitive, such as Petrobras and
the agri-business sector (Almeida, ; Almeida and Schneider, ; Tavares de
Araujo, ; Musacchio and Lazzarini, b). According to this line of argument,
lending should not have focused on firms that were at the frontier, since industrial
policy should focus on providing incentives to stimulate novel learning instead of
reinforced specialization in utilities and commodities such as mining, oil, steel, agri-
business, and aerospace (Almeida and Schneider, ; Musacchio and Lazzarini,
b: ‒).
It is true that BNDES followed a strategy of ‘going with winners’ or ‘betting on the
strong’ rather than ‘picking winners’. This is revealed in the fact that the default rates
on its loans in the period to are almost nil, at . per cent compared to the
national financial system rate of . per cent (Colby, : ). This is hardly the profile
of a venture capitalist investment fund. One can also make the case that because
BNDES maintains these equity shares, they are not ‘letting go of winners’ by selling
on these shares to private equity firms.
The second, and related, criticism is that BNDES lending reinforced a pattern of so-
called ‘low-technology-intensive’ sectors. Almeida and Schneider () argue that ‘if
industrial policy is supposed to create new competitive advantages, then it has failed to
do so: the most competitive industrial sectors in , measured by the trade surplus,
are the same as in , despite the goals in successive industrial policies to promote
technology-intensive sectors . . . Rather the bias towards conservatism has consoli-
dated the specialization of Brazilian exports around resource-based industries and
commodities’ (: ‒). Both criticisms add up to the diagnosis that there was a
misplaced focus on competitive ‘insiders’ at the expense of potentially more innovative
‘outsiders’ who were not yet competitive and thus the share of medium- and high-tech
production suffered as a result.
A third criticism concerns the returns to capital investment that BNDES equity
participations, through its investment banking arm, BNDESPar, have yielded. Bruschi
et al. () compare the individual performance of the shares held by BNDESPar with
returns on the Ibovespa index, the main stock market index in Brazil. For firms that
BNDESPar acquired after , they find that per cent of the shares performed
worse than the stock market index in the same period, to . Their conclusion
is that BNDES will be unlikely to continue to generate the majority of their income
from equity investments.
The criticism that BNDES subsidized already competitive firms is misleading. These
lending patterns need to be seen in historical and political context. First, the fragility of
BNDES financing in the s has created an understandable conservative bias in its
spending since . The legacy of macroeconomic instability can impair the ability of
state development banks to finance risky new ventures in the high-tech and capital
goods sectors, since the very legitimacy of the bank’s mission needs to be reconstructed.
Second, it is not clear that many of these near-frontier technology firms would have
been competitive in the context of the well-known custo Brazil (Brazil Cost)—the
relatively high prices of many domestic goods and services, a reflection of the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
concentrated production structure, and the failure of government regulation to
introduce competition laws (which implicitly meant that producers in several sectors
are effectively earning large rents).²⁴
Third, it is not at all clear that without long-run subsidized financing and state equity
injections many of them would have become the innovative firms they did. There are
not many examples of foreign investment banks funding long-run R&D programmes
of firms in LDCs and there is little evidence that the private domestic banking system
would have done so either. Moreover, many of the export credits were essential to the
export success of these firms: Embraer, for instance, depended on them to keep its
products competitive (as KfW has done with Airbus).
Fourth, since NDBs take risks, there will be inevitable failures. Equity positions will
allow them to reap some of the financial rewards in order to offset the inevitable
failures and ensure a stable funding source so it does not lose its appetite for risk
(Mazzucato and Penna, ).
Fifth, the idea that BNDES lending patterns have reinforced the pattern of ‘low-
technology’ exports is misleading. The categories ‘low-tech’ and ‘high-tech’ direct
attention away from the point made by Baldwin () that the integration of global
value and supply chains means sectors are less relevant than the stages of production.
And what matters is the capacity to innovate at the level of design and product
development. In this respect, most of the ‘national champion’ firms are innovative or
based on state-supported R&D investments. The fact that Brazil is competitive in agri-
business (supposedly ‘low-tech’) as well as in aerospace (supposedly ‘high-tech’) owes
more to the capacity to design and develop new products than to the sector it is
producing for. There are many countries in South Asia and sub-Saharan Africa,
including South Africa, and even in South East Asia, that would more than welcome
the innovative capacity of so many so-called ‘low-tech’ sectors in agri-business, steel,
and oil and gas that Brazil has developed (see Chapter of this volume for a discussion
of the problems of outdated categorization of what is ‘industrial’ or ‘low-tech’, which
obscures dynamic, technologically sophisticated activities taking place within resource-
based industries, agriculture, and services).
.. The Politics of Development Banking in Brazil
This discussion of development banking in Brazil suggests that policy design and
reform need to be understood in terms of broader political economy dynamics. The
economy in the post- period maintained a limited diversity of long-run financing
²⁴ There are numerous examples (The Economist, : ). In , ‘cost of doing business’ surveys
indicate that exporting costs US$, per container in Brazil compared with an average of US$, in
the rest of Latin America, and US$, in the United States. To take another example, the cost of
electricity for industrial users in Brazil is the third highest in the world—about twice those of China and
Korea, and two and a half times that of the United States (The Economist, a).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
organizations, in large part because the dominant large business groups had their core
businesses outside manufacturing, and also because commercial banks were deriving
substantial profits from purchasing high-yielding government assets (as a result of
anchoring inflation on high real interest rates and maintaining fiscal surpluses) and
other financial assets (particularly equities and derivatives). This made the opportunity
cost of investing in risky innovation-based start-ups and/or in experienced but finan-
cially strapped capital goods industries and start-up ventures very high. In this context,
the amount of subsidized long-run financing that was left over for ‘outsider’ but
potentially innovative firms was simply too small to provide the vast amount of
long-run financing that innovation-based strategies require. What is more, the
BNDES leadership was well aware of the need to promote innovation and there were
indeed many smaller loans to a variety of innovative firms (see Hochstetler and
Montero, ). The ‘insider/outsider’ problem was not due to a lack of technically
competent, well-meaning, and informed technocrats; it is generally accepted that Brazil
does not have a skills shortage in its main development and banking agencies. Rather,
this problem, along with the insufficient savings and investment rates, has much more
to do with the historical political economy dynamics, and in particular, the way
economic and political order was maintained in this period.
The political nature of development banking is evident in recent political crises in
Brazil. The discovery of the disappearance of nearly US$ billion from the accounts of
Petrobras in late set off the largest corruption scandal in Latin American history.
The Lava Jato probe, undertaken by an increasingly proactive and independent judi-
ciary and federal police in , has uncovered a complex bribery and kickback scheme
in which, among other things, the biggest construction companies and other private
industrial groups, many of whom received massive BNDES financing, paid bribes to
politicians’ personal accounts and to political party campaign funds in exchange for
padded government contracts in construction, shipbuilding, and other Petrobras
investments.
Large-scale corruption scandals are not new to Brazil, nor is there evidence that
BNDES knew of the corrupt practices of its clients, but the magnitude and political fall-
out reveal more profound tensions than the merely political. An important aspect of
the discontent concerns the alienation, for a number of reasons, of much of the middle
class. First, there was growing discontent around the poor quality of public services
such as transport, education, and health, as well as increasingly expensive housing,
fuelled by the boom in financial and commodity markets. Much of the frustration was
compounded by the inability of the government to address the growing levels of crime
and urban violence. Second, much of middle-class discontent stemmed from the fact
that they have borne the brunt of the increased tax burden to fund pro-poor expansions
in the welfare state and have not received proportionate benefits (Saad Filho and
Morais, ). Third, middle-class groups were losing much of their economic privil-
eges relative to lower income groups. This has occurred because of the stagnation of
average real wages in the context of minimum wages rising, and because there was a
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
decline in the creation of well-paid employment, most likely the result of the stagnation
in manufacturing employment and the rise of lower-paid service employment.²⁵
A further source of discontent, not only among the middle class, but also among
some big business groups, was the perceived ‘insider bias’ in the massive loan portfolio
of BNDES, the main provider of long-run financing.²⁶ The most infamous case, and a
focal point of protest, was the case of JBS, the meat-packing company, which borrowed
over . billion reais from BNDES to purchase meat-packing companies in the United
States, Europe, and Australia, and became the world’s largest meat packer. In the
process, BNDES purchased a . per cent stake in JBS in (Leahy and Schipani,
). While big business groups in oil, shipbuilding, and construction, along with
some food groups, comprised an inner circle of support for the Workers Party (PT)-led
administrations between and , other groups, particularly the banking sector
and media conglomerates, were committed opponents of these strategies, which they
viewed as promoting crony capitalism and excessive state control over resources.
The discontent over such ‘corporate welfare’ became a focal point for middle-class
groups, finance, and the media in street protests against the government from
onwards and were a focal point of anti-corruption discourse against the PT and the
broader political party system. The corruption scandal became an instrument of
political contestation and protest (Leahy and Schipani, ). Given media and
banking opposition to PT, it was not surprising that a focal point of the scandal was
the link between Petrobras and big insider supporters of PT in oil, shipbuilding,
construction, and food (despite the fact that all political parties were involved in
Lava Jato; Leahy and Schipani, ). Within Congress, the opposition to the PT
ultimately led to the impeachment of President Dilma Rousseff and the demise of
the legitimacy of state-led development banking.
Of course, the corruption scandal itself has had a profoundly negative effect on the
economy because of increased political uncertainty. The companies involved in the
scandals, some of the largest in the country, have faced profound financial conse-
quences. Petrobras, which in accounted for approximately per cent of Brazil’s
gross domestic product, was estimated to have lost at least US$ billion by mid-.
Petrobras and Odebrecht have sold assets worth billions of dollars to pay their debts.
Unemployment in Brazil hit a new high in April at . per cent, more than
²⁵ The real wage (deflated by domestic prices), while rising slightly in the period to , has
generally stagnated in the period to (Aldrighi and Colistete, : , figure ).
²⁶ In the period to , about US$ billion was channelled to the food industry, and US$-
billion to Petrobras (Tavares de Araujo, Jr., : ). By Petrobras became by far the largest
borrower, with almost per cent of total loans held by listed corporations (Musacchio and Lazzarini,
b: ‒). From to , BNDES subsidized loans increased five-fold, reaching R$ billion
(US$ billion) (Leahy and Schipani, ). The main beneficiaries included Odebrecht (the country’s
largest engineering and construction firm); Petrobras (the state oil company which accounts for per
cent of GDP); Embraer (the world’s third-largest commercial jet builder); Ambev (the Brazilian arm of
the world’s largest brewer, ABInBev); and JBS (the world’s largest meat packer) (Leahy and Schipani,
).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
double the rate it was in late , prior to the start of Lava Jato. Thus even a well-run
organization like BNDES has not been immune to the tempests of political contests and
controversies. The current administration under President Jair Bolsonaro has initiated
a process of reducing its role in the economy.
. G P C
..................................................................................................................................
First, the effectiveness of a national development bank depends upon the same factors that
make industrial policy effective more generally. It requires a clear set of ‘carrot and sticks’,
and the ability to ‘let go of losers’ (Amsden, ). From this perspective, the focus on
simple, objective performance criteria, such as export growth, has been helpful for
implementing reciprocal control mechanisms. When successful, national development
banks have been able to monitor projects and loans with sectoral experts, many of whom
hold PhDs in a wide range of areas. Relying on financial experts alone is insufficient.
Of course, the effective implementation of a reciprocal control mechanism implies
that the state has the power and authority to mobilize resources and provide a ‘carrot-
and-stick’ mechanism. Implicit in this is the political power to remove subsidies from
powerful economic elites when their infant industries perform poorly. Moreover, if a
reciprocal control mechanism is to be financed, the state requires the political power
not only to mobilize resources but to ensure that a high proportion of loanable funds in
the financial sector are channelled towards long-gestating manufacturing or other
high-value investments as well as securing sources of funding for development banking
(Woo, ; Kapadia, ).²⁷
Second, NDBs do not necessarily need to finance all of the venture capital on projects.
The experience of East Asian and other economies (such as Germany, and in some
instances, Brazil) suggests that policymakers should consider diversified/multiple
financing sources by getting endowment funds, donors, domestic banks, and conglom-
erate groups and foreign firms to co-finance targeted projects. Even when the state
privatizes SOEs in strategic sectors, that does not mean it needs to lose control over
industrial policy.
Instead, the state can maintain ‘golden shares’ in priority projects to maintain state
control over strategic decisions, as has been practised in the privatization process
overseen by BNDES in Brazil. In fact, according to Musacchio and Lazzarini (a,
²⁷ As Woo-Cummings (: ), notes: ‘finance is the tie that binds the state to the industrialists in
the developmental state.’ Theda Skocpol (as quoted in Woo-Cummings, : ) further adds that ‘[t]
he answers [to questions about financial resources] provide the best possible general insight into the
direct or indirect leverage a state is likely to have for realizing any sort of goal it may pursue. For a state’s
means of raising and deploying financial resources tell us more than could any other single factor about
its existing (and its immediately potential) capacities to create or strengthen state organizations, to
employ personnel, to co-opt political support, to subsidize economic enterprises, and to fund social
programs.’
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
b), the ‘state as minority shareholder’ model has several advantages. First, it limits
the use of SOEs as a conduit for clientelist practices and expensive social policies such
as (uneconomic) employment creation. Second, majority private shareholding
enhances the incentives for focusing on profitability, which should increase firm
efficiency and growth. Third, the state is still in a position, as a significant shareholder,
to influence corporate strategy and development policies in strategic sectors. Finally,
state holdings provide access to long-run financing, which is underdeveloped and
expensive in private Brazilian capital markets. Indeed, in a survey on the re-emergence
of state capitalism, The Economist (b) refers to the ‘Leviathan as minority share-
holder’ model as ‘one of the sharpest new tools in the state-capitalist toolbox’ (b: ).
Third, and related to the previous point, NDBs need to secure stable sources of funds so
that they can act like venture capitalists and ‘lenders of first resort’. That is, NDBs ‘must
be able to strike the right balance between risks and rewards, ensuring that investments
are structured across a risk-return spectrum so that lower risk investments help to
cover higher risk ones’ (Mazzucato and Penna, ). The ability to secure long-run
bond financing is one main option along with maintaining equity stakes. The latter
allows the bank to benefit from the rare successes in order to offset the inevitable
failures. Equity shares also help the state more easily monitor the frequent tax evasion
strategies of firms who have benefited from NDB financing. There is evidence from
mineral and fuel mining that governments retain a higher share of the proceeds
from mineral and fuel rents when state equity shares in these sectors are higher
(Lundstøl et al., , ). This is because state presence on boards of directors
makes it harder for companies to evade tax.
Fourth, in order to ensure macroeconomic sustainability in its balance of payments,
NDBs should target sectors and projects that generate net foreign exchange earnings.
This is particularly the case for growth strategies that rely on the increasing use of
foreign savings to finance investment as in, say, contemporary Ethiopia. When plans
for NDB financing do not consider the importance of generating net foreign exchange,
balance-of-payments crises tend to follow, which can in turn precipitate a growth
collapse, even in countries where the NDB is sound in terms of technical capacity (e.g.
Brazil, ‒).
Fifth, the historical evidence suggests that national development banks have contrib-
uted to effective industrial policy through the financing of ‘national champions’. This has
been achieved through the financing of infrastructure and agricultural research in a
range of sectors and heavy industrial projects, particularly in the steel, chemical,
electronics, automotive, and mining sectors, aerospace, and capital goods. This
financing has been oriented towards public enterprises, but also towards large-scale
domestic private conglomerates. The emphasis on financing domestic firms stems from
the evidence that the most dynamic and innovative firms in LDCs are not generally
subsidiaries of multinationals (Amsden, ). This emphasis on vertical industrial
policy, or national firm formation, is central to the development of sophisticated and
complex production (Amsden, ), since firms form the focal point through which
people with skills and ideas can collaborate and eventually migrate to form new
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ventures. It is no accident that major industrial clusters, such as Detroit in the s or
Silicon Valley in the s, took off from the spin-offs of workers from one lead firm in
each case (Hausmann, ).
Sixth, effective NDB financing achieves sectoral and firm success when it involves
‘targeted ambition’. NDB have unwritten complex missions in aerospace, high-tech
agriculture, capital goods, high-speed trains, wind and solar technology, bio-fuels and
bio-technology, among others. These missions have worked when they involved
funding hundreds or even thousands of PhDs to work in relevant research centres to
help firms design and develop the technology for innovative capacity, and when the
NDB has collaborated with relevant government agencies (e.g. see Perez-Aleman and
Alves, on Brazilian bio-technology efforts; Figueiredo, on Brazilian agricul-
ture; Moslener et al., on Airbus). Albert Hirschman long ago pointed out that ‘big
push’ development projects can overwhelm government capacity. However, he also
argued that development is about taking on ambitious projects and developing the
capacity to solve problems as they arise in the process of learning and experimentation.
NDBs provide a focal point to implement selective industrial policy by providing the
patient capital and sectoral expertise to undertake these missions.
Seventh, macroeconomic policy and conditions need to enable the development of
private capital markets and long-run government bond markets. While financial
deregulation poses many challenges to state intervention and industrial policy, the
dramatic increases in the size of the Chinese and German development banks is the
result of their credit ratings and ability to issue long-run bonds. In the case of China,
the CDB has itself been instrumental in creating bond markets. It is ironic that some of
the most orthodox central banks (e.g. Bundesbank in Germany) provide the context
through which significant increases in state development banks (e.g. KfW) can grow.
R
Abramovitz, Moses () ‘Catching up, Forging ahead and Falling behind’, Journal of
Economic History (): –.
Acemoğlu, Daron, Philippe Aghion, and Fabrizio Zilibotti () ‘Distance to Frontier,
Selection, and Economic Growth’, Journal of the European Economic Association ():
–.
Afonso, José, Eliane Araújo, and Bernardo Guelber Fajardo () ‘The Role of Fiscal and
Monetary Policies in the Brazilian Economy: Understanding Recent Institutional Reforms
and Economic Changes’, The Quarterly Review of Economics and Finance : –.
Aldrighi, Dante and Renato P. Colistete () ‘Industrial Growth and Structural Change: Brazil
in a Long-run Perspective’. USP Working Paper No. . Department of Economics-FEA.
Aldrighi, Dante and Fernando A. Postali () ‘Business Groups in Brazil’, in Asli
M. Colpan, Takashi Hikino, and James R. Lincoln (eds) The Oxford Handbook of Business
Groups. Oxford: Oxford University Press.
Almeida, Mansueto () ‘Desafios da real política industrial brasileira do século XXI’.
Discussion Paper No. , Instituto de Pesquisa Econômica Aplicada (IPEA).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Almeida, Mansueto and Ben Ross Schneider () ‘Globalization, Democratization, and the
Challenges of Industrial Policy in Brazil’. Korean Development Institute, July.
Amsden, Alice () Asia’s Next Giant. Oxford: Oxford University Press.
Amsden, Alice () The Rise of ‘the Rest’. Oxford: Oxford University Press.
Amsden, Alice () ‘The Wild Ones: Industrial Policies in the Developing World’, in Narcís
Serra and Joseph E. Stiglitz (eds) The Washington Consensus Reconsidered: Towards a New
Global Governance. Oxford: Oxford University Press, pp. –.
Ang, Yuen Yuen () How China Escaped the Poverty Trap. New York: Cornell University
Press.
Arias, Diego, Pedro A. Vieira, Elisio Contini, Barbara Farinelli, and Michael Morris ()
Agriculture Productivity Growth in Brazil: Recent Trends and Future Prospects. Washing-
ton, DC: World Bank.
Arizala, Francisco, Jesus R. Gonzalez-Garcia, Charalambos G. Tsangarides, and Mustafa
Yenice () Growth Breaks and Growth Spells in Sub-Saharan Africa. Washington, DC:
International Monetary Fund.
Armijo, Leslie () ‘Brazilian Politics and Patterns of Financial Regulation, –’, in
Sylvia Maxfield, Chung H. Lee, and Stephan Haggard (eds) The Politics of Finance in
Developing Countries. New York: Cornell University Press, pp. –.
Armijo, Leslie () ‘The Public Bank Trilemma: Brazil’s New Developmentalism and the
BNDES’, in Peter Kingstone and Timothy J. Power (eds) Democratic Brazil Ascendant.
Pittsburgh, PA: University of Pittsburgh Press, pp. –.
Arrow, Kenneth J. () ‘The Economic Implications of Learning by Doing’, Review of
Economic Studies (): –.
Bacha, Edmar L. and Regis Bonelli () ‘Padrões de desenvolvimento industrial no Brasil:
passado e futuro’. Mimeo.
Bagnai, Alberto, Arsène Rieber, and Thi Anh-Dao Tran () ‘Sub-Saharan Africa’s Growth,
South–South Trade and the Generalised Balance-of-payments Constraint’, Cambridge
Journal of Economics (): –.
Baldwin, Richard () ‘Trade and Industrialization after Globalization’s Second Unbund-
ling: How Building and Joining a Supply Chain are Different and Why it Matters’, in Robert
C. Feenstra and Alan M. Taylor (eds) Globalization in an Age of Crisis: Multilateral
Economic Cooperation in the Twenty-first Century. Chicago, IL: University of Chicago
Press, pp. –.
Barros de Castro, Lavínia () ‘Financiamento do desenvolvimento: experiência comparada
Brasil-Coreia (–)’. Available at https://web.bndes.gov.br/bib/jspui/handle//
.
Brainard, Lael and Leonardo Martinez-Diaz (eds) () Brazil as an Economic Superpower?
Understanding Brazil’s Changing Role in the Global Economy. Washington, DC: Brookings
Institution Press.
Bruschi, Claudia, Sergio G. Lazzarini, and Aldo Musacchio () ‘Análise do retorno dos
investimentos do BNDESPAR por meio de variações nos preços das ações investidas’.
INSPER Research Report, São Paolo.
Bulmer-Thomas, Victor () The Economic History of Latin America since Independence.
Cambridge: Cambridge University Press.
Burlamaqui, Leonardo () ‘Global Finance and Chinese Financial Development: The
Emergence of a State-led Financial Model of Globally Oriented Financial Governance’.
IPEA Working Paper, Brasília.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Calomiris, Charles W. and Stephen Haber () Fragile by Design: Banking Crises, Scarce
Credit, and Political Bargains. Princeton, NJ: Princeton University Press.
Cameron, Rondo E. () ‘The Credit Mobilier and the Economic Development of Europe’,
Journal of Political Economy : .
Colby, Seth () ‘Explaining the BNDES: What It Is, What It Does and How It Works’.
CEBRI Working Paper Artigos Vol. , Ano VII, Rio de Janeiro.
Colby, Seth () ‘Searching for Institutional Solutions to Industrial Policy Challenges:
A Case Study of the Brazilian Development Bank’. PhD dissertation, Johns Hopkins
University.
De Aghion, Beatriz Armendariz () ‘Development Banking’, Journal of Development
Economics (): –.
De Luna-Martinez, José and Carlos C. Vicente () ‘Global Survey of Development Banks’.
Policy Research Working Paper No. . Washington, DC: World Bank.
De Luna-Martinez, José, Carlos C. Vicente, Ashraf bin Arshad, Radu Tatucu, and Jiyoung
Song () Survey of National Development Banks. Washington, DC: World Bank.
De Magalhães, Luis C. and Carla Rodrigues Costa () ‘Arranjos institucionais, custo da
dívida pública e equilíbrio fiscal: a despesa “ausente” e os limites do ajuste estrutural’. IPEA
Discussion Paper , Brasilia.
Dewatripont, Mathias and Eric Maskin () ‘Credit and Efficiency in Centralized and
Decentralized Economies’, The Review of Economic Studies (): –.
Elstrodt, Heinz-Peter, James Manyika, Jaana Remes, Patricia Ellen, and César Martins ()
‘Connecting Brazil to the World: A Path to Inclusive Growth’. McKinsey Global Institute, May.
Ferraz, João C. and Luciano Coutinho () ‘Investment Policies, Development Finance and
Economic Transformation: Lessons from BNDES’, Structural Change and Economic
Dynamics : –.
Figueiredo, Paulo N. () ‘Technological Catch-up and Indigenous Institutional Infrastruc-
tures in Latecomer Natural Resource-related Industries: An Exploration of the Role of
EMBRAPA in Brazil’s Soybeans and Forestry-based Pulp and Paper Industries’. IRIBA
Working Paper No. . London: Department for International Development (DFID).
Fishlow, Albert () ‘Latin American Failure against the Backdrop of Asian Success’, The
Annals of the American Academy of Political and Social Science (): –.
Frieden, Jeffry A. () Debt, Development, and Democracy: Modern Political Economy and
Latin America, –. Princeton, NJ: Princeton University Press.
Gallagher, Kevin P. and Sarah Sklar () ‘Nationalizing Development Finance: Putting
National Development Banks in Context’. Boston University Global Economic Governance
Initiative Working Paper. (Cited in Rogerio Studart and Kevin P. Gallagher () ‘Infra-
structure for Sustainable Development: The Role of National Development Banks’. GEGI
Policy Brief No. . Global Economic Governance Initiative, Boston University.)
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cam-
bridge, MA: Harvard University Press.
Griffith-Jones, Stephany and Ricardo Gottschalk () ‘Exogenous Shocks—Dealing with
the Only Certainty: Uncertainty’. Paper presented at Commonwealth Secretariat Finance
Ministers Meeting Tokyo, October.
Griffith-Jones, Stephany and José Antonio Ocampo () ‘A Counter-cyclical Framework
for a Development-friendly IFA’, in José Maria Fanelli (ed.) Macroeconomic Volatility,
Institutions, and Financial Architectures: The Developing World Experience. New York:
Palgrave Macmillan, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Griffith-Jones, Stephany and José Antonio Ocampo (eds) () The Future of National
Development Banks. Oxford: Oxford University Press.
Griffith-Jones, Stephany, José Antonio Ocampo, Felipe C. Rezende, Alfredo Schclarek, and
Michael Brei () ‘The Future of National Development Banks’, in Stephany Griffith-
Jones and José Antonio Ocampo (eds) The Future of National Development Banks. Oxford:
Oxford University Press, pp. –.
Hamilton, Alexander () Report on Manufactures.
Hausmann, Ricardo () ‘Development Collective Know-how and Us’. Lecture at London
School of Economics, January. Available at http://www.lse.ac.uk/Events/Events-Assets/
PDF//-LT/-Ricardo-Hausmann.pdf.
Hayek, Frederick A. () ‘The Use of Knowledge in Society’, American Economic Review
(): –.
Hochstetler, Kathryn, and Alfred P. Montero () ‘The Renewed Developmental State: The
National Development Bank and the Brazil model’, Journal of Development Studies ():
–.
Kapadia, Anush () ‘The Structure of State Borrowing: Towards a Political Theory of
Control Mechanisms’, Cambridge Journal of Regions, Economy and Society (): –.
Khanna, Tarun and Yishay Yafeh () ‘Business Groups in Emerging Markets: Paragons or
Parasites?’, Journal of Economic Literature (): –.
Kindleberger, Charles P. and Robert Z. Aliber () Manias, Panics and Crashes: A History
of Financial Crises. Basingstoke: Palgrave Macmillan.
Kingstone, Peter () Crafting Coalitions for Reform: Business Preferences, Political Insti-
tutions, and Neoliberal Reform in Brazil. University Park, PA: Pennsylvania State Univer-
sity Press.
Kornai, Janos () Economics of Shortage. Amsterdam: North Holland.
Krieckhaus, Jonathan () ‘Reconceptualizing the Developmental State: Public Savings and
Economic Growth’, World Development (): –.
Krugman, Paul () ‘Is Free Trade Passé?’, Journal of Economic Perspectives (): –.
Leahy, Joe and Andres Schipani () ‘Culture of Corruption Engulfs Brazilian Elite’,
Financial Times, May.
Leff, Nathaniel H. () ‘Industrial Organization and Entrepreneurship in the Developing
Countries: The Economic Groups’, Economic Development and Cultural Change ():
–.
Lundstøl, Olav, Gaël Raballand, and Fuvya Nyirongo () ‘Low Government Revenue from
the Mining Sector in Zambia and Tanzania: Fiscal Design, Technical Capacity or Political
Will?’. ICTD Working Paper No. .
Lundstøl, Olav, Gaël Raballand, and Fuvya Nyirongo () ‘Revenue Sharing in Mining in
Africa: Empirical Proxies and Determinants of Government Take’. ICTD Working Paper
No. .
Mahmood, Ishtiaq P. and Carlos Rufin () ‘Government’s Dilemma: The Role of
Government in Imitation and Innovation’, Academy of Management Review (): –.
Mainwaring, Scott () Rethinking Party Systems in the Third Wave of Democratization:
The Case of Brazil. Stanford, CA: Stanford University Press.
Malan, Pedro and Regis Bonelli () ‘The Success of Growth Policies in Brazil’, in Simon
Teitel (ed.) Towards a New Development Strategy for Latin America: Pathways from
Hirschman’s Thought. Washington, DC: IDB/Johns Hopkins University Press, pp. –.
Maskin, Eric S. () ‘Theories of the Soft Budget-constraint’, Japan and the World Economy
(): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Massi, Eliza () ‘The Political Economy of Development Finance: The BNDES and
Brazilian Industrialisation’. PhD dissertation, SOAS, University of London.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths, Vol. . London: Anthem Press.
Mazzucato, Mariana and L. Randall Wray () ‘Financing the Capital Development of the
Economy: A Keynes–Schumpeter–Minsky Synthesis’. Levy Economics Institute of Bard
College Working Paper No. .
Mazzucato, Mariana and Caetano C. Penna () ‘Beyond Market Failures: The Market
Creating and Shaping Roles of State Investment Banks’, Journal of Economic Policy Reform
(): –.
Mazzucato, Mariana and Caetano C. Penna () ‘National Development Banks and
Mission-Oriented Finance for Innovation’, in Stephany Griffith-Jones and José Antonio
Ocampo (eds) The Future of National Development Banks. Oxford: Oxford University
Press, pp. –.
McKinnon, Ronald and Edward Shaw () ‘Financial Deepening in Economic Develop-
ment’. Washington, DC: Brookings Institution.
Mokyr, Joel () ‘Technological Change, –’, in Roderick Floud and Deirdre
McCloskey (eds) The Economic History of Britain since , Vol. : –. Cambridge:
Cambridge University Press, pp. –.
Moslener, Ulf, Matthias Thiemann, and Peter Volberding () ‘National Development
Banks as Active Financiers: The Case of KfW’, in Stephany Griffith-Jones and José Antonio
Ocampo (eds) The Future of National Development Banks. Oxford: Oxford University
Press, pp. –.
Musacchio, Aldo and Sergio Lazzarini (a) Reinventing State Capitalism. Cambridge, MA:
Harvard University Press.
Musacchio, Aldo and Sergio Lazzarini (b) Workshop on State-Owned Enterprises in the
Development Process: The Case of Brazil. Paris: OECD.
Musacchio, Aldo, Sergio Lazzarini, Pedro Makhoul, and Emily Simmons () ‘The Role
and Impact of Development Banks’. Mimeo. Available at http://people.brandeis.edu/
~aldom/papers/The%Role%and%Impact%of%Development%Banks%-
%--.pdf.
Naqvi, Natalya, Anne Henow, and Ha-Joon Chang () ‘Kicking away the Financial
Ladder? German Development Banking under Economic Globalisation’, Review of Inter-
national Political Economy (): –.
Nassar, André M. () ‘Brazil as an Agricultural and Agroenergy Superpower’, in Lael
Brainard and Leonardo Martinez-Diaz (eds) Brazil as an Economic Superpower? Under-
standing Brazil’s Changing Role in the Global Economy. Washington, DC: Brookings
Institution Press.
North, Douglass () Institutions, Institutional Change and Economic Performance. Cam-
bridge: Cambridge University Press.
Orair, Rodrigo O. and Sergio W. Gobetti () ‘Brazilian Fiscal Policy in Perspective: From
Expansion to Austerity’. Working Paper No. . International Policy Centre for Inclusive
Growth, UNDP and Government of Brazil.
Perez-Aleman, Paola and Flavia Chaves Alves () ‘Reinventing Industrial Policy at the
Frontier: Catalysing Learning and Innovation in Brazil’, Cambridge Journal of Regions,
Economy and Society (): –.
Qian, Yingyi and Barry R. Weingast () ‘Federalism as a Commitment to Reserving
Market Incentives’, Journal of Economic Perspectives (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Rodrik, Dani () ‘Rethinking Growth Strategies’, WIDER Annual Lecture . Helsinki: UN-
WIDER.
Rodrik, Dani () ‘The Real Exchange Rate and Economic Growth’, Brookings Papers on
Economic Activity (): –.
Rodrik, Dani () ‘An African Growth Miracle?’, Journal of African Economies (): –.
Saad-Filho, Alfredo and Lecio Morais () ‘Mass Protests: Brazilian Spring or Brazilian
Malaise?’, Socialist Register : –.
Sayers, Richard S. () Central Banking after Bagehot. Oxford: Oxford University Press.
Stiglitz, Joseph E. and Marilou Uy () ‘Financial Markets, Public Policy, and the East Asian
Miracle’, The World Bank Research Observer (): –.
Stiglitz, Joseph E. and Andrew Weiss () ‘Credit Rationing in Markets with Imperfect
Information’, American Economic Review (): –.
Storm, Servaas () ‘Structural Change’, Development and Change (): –.
Studwell, Joe () How Asia Works: Success and Failure in the World’s Most Dynamic
Region. London: Open Road+ Grove/Atlantic.
Tavares de Araujo Jr, José () ‘The BNDES as an Instrument of Long-run Economic Policy
in Brazil’. CINDES Working Paper, Rio de Janeiro.
The Economist (a) ‘Economic Policy in Brazil: Sparking Recovery’, September.
The Economist (b) ‘A Special Report on State Capitalism’, January.
The Economist () ‘Grounded: Special Report on Brazil’, September.
Thirlwall, Anthony P. () ‘Balance-of-payments-constrained Growth Models: History and
Overview’, PSL Quarterly Review (): –.
Thirlwall, Anthony P. () ‘Thoughts on Balance-of-payments-constrained Growth after
Years’, Review of Keynesian Economics (): –.
Torres, Ernani and Rodrigo Zeidan () ‘The Life-cycle of National Development Banks:
The Experience of Brazil’s BNDES’, The Quarterly Review of Economics and Finance :
–.
Trebat, Thomas J. () Brazil’s State-owned Enterprises: A Case Study of the State as
Entrepreneur. Cambridge: Cambridge University Press.
United Nations Centre for Trade and Development (UNCTAD) () The Role of Develop-
ment Banks in Promoting Growth and Sustainable Development in the South. Geneva:
UNCTAD.
Woetzel, Jonathan, Anu Madgavkar, Jeongmin Seong, James Manyika, Kevin Sneader, Oliver
Tonby, Andrés Cadena, Rajat Gupta, Acha Leke, Hayoung Kim, and Shishir Gupta ()
‘Outperformers: High-growth Emerging Economies and Companies that Propel Them’,
McKinsey Global Institute (MGI).
Woo, Jung-en () Race to the Swift: State and Finance in Korean Industrialization.
New York: Columbia University Press.
Woo-Cummings, Meredith (ed.) () The Developmental State. New York: Cornell
University Press.
Xu, Jiajun, Xiaomeng Ren, and Xinyue Wu () ‘Mapping Development Finance Institu-
tions Worldwide: Definitions, Rationales, and Varieties’, Institute of New Structural
Economics. Peking University.
Xu, Qiyuan () ‘China Development Bank: Born Bankrupt, Born Shaper’, in Stephany
Griffith-Jones and José Antonio Ocampo (eds) The Future of National Development Banks.
Oxford: Oxford University Press, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
,
‘
’,
.............................................................................................................
. I
..................................................................................................................................
I is a complex process involving interdependent changes across
multiple domains and structures of the economy. Since the First Industrial Revolution,
technical change has been increasingly recognized as one of the most fundamental
drivers of these structural transformations and one of the most distinctive features of
modern economic growth (Schumpeter, ; Kuznets, ; Rosenberg, ;
Lazonick, ; Abramovitz, ). Technical change makes it possible to improve
products, diversify them, and even introduce completely new ones. It is also responsible
for increasing productivity within sectors and, in turn, for changes in the way in which
enterprises organize production processes and engage with other producers along the
value chain—that is, industry organization (Richardson, ). Technical change is
thus intertwined with several innovation processes and can lead to the transformation
of the ‘organizational economy’ (Simon, ) and the creation of new markets
(Schumpeter, ). Over the long run, technical change and related innovation finally
trigger broader changes in the fabric of society, its institutional and political configur-
ation, and the distribution of power among organizations and even nations
(Hirschman, ; Dosi, ; Amsden, ; Chang, ; Pérez, ; Reinert,
; Andreoni and Chang, , ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
In some cases, technical change can be so transformative—that is, it can change
products and production so much—that the nature and boundary of traditionally
defined economic sectors also change. For example, what used to be called an agricul-
tural product or sector becomes more like a manufacturing product or industry, and a
manufacturing industry can become more like a service one (and vice versa). These
sectoral shifts make it difficult to draw the boundaries of the traditionally defined
‘sectoral terrains’ of agriculture, industry, and services (and sub-sectors within them).
From a dynamic point of view, these sectoral shifts also challenge a simplistic ‘linear’
idea of structural change according to which countries develop by moving from the
primary to the secondary sector and from the secondary to the tertiary sector.
Pre-classical (Antonio Serra, Giovanni Botero, and Pietro Verri) and classical pol-
itical economists (Adam Smith, Karl Marx, and David Ricardo) relied on the concept of
division of labour and rents to account for technical change and scarce resources in
economic development (Scazzieri, ; Andreoni and Scazzieri, ; Reinert,
Chapter , this volume). Within the classical economic framework, these dynamics
were linked to and framed within different sectors of the economy—that is, primary
and secondary. The idea of sector was also critical among development economists of
the twentieth century in the study of structural change (for a review including circular
and cumulative causation theories, see Toner, ) and in accounting for the input‒
output relationships (and linkages) constituting the production matrix of an economy
(Leontief, ; Hirschman, ). Several other scholars (Kaldor, in particular;
see also Andreoni and Chang, ) have used the same concept of sector to highlight
the special properties of manufacturing, with respect to technical change and product-
ivity dynamics. More recently, with the revival in structural economic analysis (Lin,
; Rodrik et al., ), there has been an increasing focus on sectoral productivity
and countries’ normal patterns of structural change, and the ways in which these
analyses can inform ‘new’ industrial policy thinking (see Andreoni and Chang,
for a critical review).
The conventional way of defining a ‘sector’ is by reference to a class of goods to be
consumed and traded in the market (see Weiss, Chapter , this volume, for a discussion
on industrial policy from a neoclassical perspective). This standard concept of sector is
useful in many respects: for example, it helps in capturing sectoral and sub-sectoral
differences; linking a cluster of production activities to specific demand dynamics and
markets; and finally, from a policy point of view, identifying and coordinating sets of
organizations and institutions around specific sectoral industrial strategies.
While widely used in empirical and policy work, the concept of sector has, however,
become increasingly problematic in analysing technical change and informing indus-
trial policymaking in both advanced economies and among late industrializers. This is
particularly the case as technical change has been increasingly shifting the ‘terrain of
the industrial’ and, in doing so, has made conventional approaches unable to capture
important sectoral dynamics and ‘industrial mutations’ (Schumpeter, ). These
dynamics and mutations include changes in the innovation mode and productivity
scope of each sector, sectoral boundaries, and structural change dynamics.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
In this chapter we address these limitations in three main steps. First, we review
different concepts of sector and assess their usefulness (and limitations) with respect to
different analytical questions and policy objectives. We present five reasons why a
standard concept of sector alone is problematic for understanding technical change
and the shifting terrain of the industrial. Next, we move to the analysis of how technical
change is driving the shifting terrain of the industrial. Drawing on Andreoni (), we
advance an ‘industrial ecosystem framework’ made up of several sectoral value chains
underpinned by different technology platforms. Within this framework, we highlight
the role of digital technologies alongside other key enabling technologies and discuss
technological change trajectories and patterns of sectoral diversification. Example cases
representing several forms of ‘industrial mutations’ are introduced, that is, cases in
which technical changes have redesigned the boundaries and technical content of
traditionally defined sectors. We examine these developments, identifying both
sector-specific and industrial ecosystem targets for industrial policies, and in particular
focus on the new ‘digital terrain’ emerging from digital technical change. We conclude
by arguing that digitalization makes the rethinking of sectors particularly critical and
that industrial policies are becoming even more important in filling the digital cap-
ability gap across developing countries.
. T C
C S: ‘T W’,
‘T H’, ‘T W’
..................................................................................................................................
Over the last century, since the provocative work of Clapham () denouncing the
use of the ‘empty economic boxes’ in the analysis of sectors, economists have widely
debated different conceptualizations of sector, in particular, what accounts for the
‘terrain of the industrial’, that is, the industrial sector. The terms of this debate were set
by classical political economists in the nineteenth century. Their definition of ‘primary’
and ‘secondary’ sectors stemmed from a set of holistic considerations, including
different human needs (primary and secondary); different social classes; the materiality
(vis-à-vis intangible nature) of produce; and specific technical properties of production,
that is, its return dynamics. Specifically, division of labour as a form of technical change
was associated with increasing returns, while rents and non-reproduceable scarce
resources were associated with decreasing returns.
Building on these classical analytical categories, several contributions have advanced
different conceptualizations of sector, often in relation to technical properties of
production or produce, and their changes. Indeed, in his seminal work, Piero Sraffa
() challenged the foundations of supply curve economics by unpacking the
unfolding of increasing and diminishing returns in different sectors of the economy
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(for a development, see Andreoni and Scazzieri, ). In doing so, Sraffa had to
confront the problem of defining a sector, its boundaries and its relationship with other
sectors. Sraffa recognized two potentially alternative concepts of sector: one according
to which sectors are defined by ‘all the undertakings which employ a given factor of
production, as, for example, agriculture or the iron industry’; and another more
restrictive concept of sector including ‘only those undertakings which produce a
given type of consumable commodity as, for example, fruit or nail’ (Sraffa, : ).
While the latter commodity/product-based concept of sector has acquired signifi-
cant traction among economists since the s, as observed by Becattini (), it
does shift the problem of defining the sector to one of defining the commodity/product.
Commodities can be conceptualized as a pure ‘means of exchange’ or as a ‘means of
satisfying specific human needs’. The first definition was adopted in the study of
market competition and developed along the idea of different degrees of commodity/
product differentiation (Robinson, ). The second, commodity/product-based def-
inition of sector sees it as a collection of goods that satisfy the same function or class of
human needs (Lancaster, ).
Following Lancaster’s idea that consumers do not consume goods but aggregates of
characteristics, we could claim that a sector is not made up of enterprises producing a
certain type of good, but rather of a group of enterprises which produce a certain
‘characteristic’, for example, mobility, communication. The challenges in such a con-
ceptualization of sectors are thus shifted from the level of market exchange to the level
of the structure of needs and means at a certain historical moment. Interestingly, the
concept of ‘tertiary production’ was first advanced by Fisher () to capture those
industries (beyond transport and commerce) directly satisfying consumer wants. By
using the consumer’s perspective, Fisher identified and ranked sectors in a sort of
descending order of consumption urgency—from primary to secondary and tertiary.
From a more empirical perspective, by adopting a relatively simple and common-
sensical commodity/product taxonomy and classes, economists have been able to
link sectoral-commodity/product dynamics to specific properties of demand/markets,
for example differences in price elasticity. Others have also attempted to develop
taxonomies of products based on their technological qualities and content. For
example, building on the classification proposed by the OECD () and other
indicators of technological activity and rankings in manufacturing sectors, Lall
() developed a technological classification of tradable products distinguishing
‘resource-based manufactures’, ‘low-technology manufactures’, ‘medium-technology
manufactures’ and ‘high-technology manufactures’. Each of these product clusters
were also associated with traditionally defined economic sectors in an empirical
analysis of industrialization and structural change. However, while Lall’s widely used
classification is aimed at distinguishing different products (and associated sectors),
their ‘technological ranking’ is intuitively associated with both technical properties of
commodities and the technical properties of the production processes underpinning
them (e.g. the technology or R&D intensity of these products/sectors).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The alternative conceptualization of sectors is indeed based on ‘factors of
production’ more than commodities and their properties, as already pointed out by
Sraffa (). This production-based conceptualization of sectors found some devel-
opments in the s and s, especially among applied economists. For example,
Wolfe (: ) proposed to ‘define the primary sector as that group of industries in
which an increase in productivity, in terms of goods and services per man-hour, is
limited by natural growth factors, the secondary by mechanical factors, and the tertiary
by relatively unaided human skills’. Scholars using input‒output analysis similarly
recognized a sector as defined by firms using the same production function.
Building on the Marshallian definition of a sector proposed in Industry and Trade
(), other scholars defined a sector as the set of firms which are capable—at least
potentially—of performing each other’s production processes within certain param-
eters of efficiency. This definition of sector recognizes how the boundaries of the sector
are not necessarily set but can change depending on the number of firms that have the
incentives and capabilities to engage in certain production activities. A company might
be potentially in multiple sectors, even if it is operating in only one commodity/pro-
duct-defined sector. Indeed, as we shall see, diversification and lateral migration across
sectors are typical dynamics of the growth of the firm (Penrose, ; Lazonick, ;
Best, ; Andreoni, ; Chapter , this volume).
Within this family of production-based (more than commodity/product-based)
definitions of sector, other scholars have advanced a conceptualization of sector
based on their ‘technical progress’ and distinctive ‘patterns of innovation’. With respect
to the first one, for example, Fourastie (: ) proposed calling ‘primary and
secondary, activities that have enjoyed great technical progress, reserving the term
primary for agricultural activities and the term secondary for nonagricultural activ-
ities’. According to him, tertiary activities are those which have enjoyed ‘only slight
technical progress’. While this type of definition remains unsatisfactory, it introduces a
further dynamic criterion to distinguish sectors, that is, their scope for technical
change.
More recently, Pavitt () introduced an innovative taxonomy to study sectoral
patterns of technical change and innovation modes. Pavitt’s taxonomy consists of four
categories of industrial firms:
(a) Supplier-dominated, including firms mainly operating within traditional manu-
facturing sectors such as textiles and agriculture which tend to rely on technical
innovations external to the firm;
(b) Scale-intensive, including large firms producing basic materials like steel and
plastics and consumer durables such as automotive. For firms operating in these
industries, innovation may be both internal and external to the firm with a
medium level of appropriability;
(c) Specialized suppliers, including smaller firms and specialist contractors whose
main activity is to produce high-tech machineries, tooling, and instruments.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Given their specialization and customization capability, these firms have a high
level of technology appropriability;
(d) Science-based firms, including high-tech R&D-intensive enterprises relying on
both internal and external sources of innovations (e.g. public laboratories,
university research), typically operating in industries like pharmaceuticals and
electronics. Given their continuous focus on product and process innovation,
these are firms with a high degree of appropriability from tacit knowledge and
formalized, though protected, knowledge, that is, patents.
As pointed out by Castellacci (): ‘Pavitt’s model of the linkages between science-
based, specialized suppliers, scale-intensive and supplier-dominated industries pro-
vides a stylized and powerful description of the core set of industrial sectors that
sustained the growth of advanced economies during the Fordist age.’ Unlike the
commodity/product-based definition of sectors, the Pavitt taxonomy enables sectors
to be defined according to the ways in which technical change and innovation occur
within different types of companies within these sectors and, thus, how organizations
become competitive (Lazonick, ).
Competitiveness conditions—and, in particular, profitability—are also determined
by the degree of barriers to entry and concurrent imperfect competition. Reinert ()
uses these two parameters to establish a dynamic taxonomy of economic activities and
measures the extent to which profitability results (or not) in the ability of firms to raise
wages. In this framework, how fast technical change becomes subject to ‘perfect
competition’—the ‘gravity’ in the system—will be a key determinant of the ability of
an economic activity to raise living standards. The dynamic imperfect competition that
leads to high barriers to entry—high profits and the possibility of high wages and high
taxation—historically was mainly found in manufacturing industry, although new
sectors have been witnessing similar patterns.
Alongside the two main conceptualizations of sector—commodity/product-based or
production/technology-based—briefly reviewed so far, there is one last definition which
is associated with a more sociological and spatial way of clustering economic activities
and firms. Building on Alfred Marshall, Giacomo Becattini (, ) resurrected the
concept of ‘industrial district’ as a way of defining clusters of firms based on their social
ties, geographical proximity, technological interdependencies, and mixed relationships
of cooperation and competition. This neo-Marshallian idea of identifying firms accord-
ing to their ‘sense of belonging’ points to the fact that the relationships with a certain
location of production (and market) define the firm better than its produce or produc-
tion technologies. The idea of industrial district points to the existence of a unit of
production beyond the individual firm, that is, a cluster of ‘locally embedded firms’
whose characteristic features result from their embeddedness rather than referring to a
simplistic product- or production-based classification of sector. Two firms in the same
sector are going to be very different, despite producing the same product (or using the
same factors of production) if one of them is embedded in a certain industrial district,
while the other is not (see also Andreoni, ; Andreoni and Lazonick, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
This brief excursus into the history of economic analysis reveals how sectors (and
firms as their components) can be defined according to the ‘what’ they produce—
commodity/product-based classification—, the ‘how’ they produce—production/
technology-based classification, and the ‘where’ they produce—location-based classifi-
cation. Each of these definitions tends to reveal certain issues, while concealing others.
And according to our epistemological stance in the conceptualization of sector, we
might end up having a more or less clear picture of the ‘sectoral terrain’ we are
considering, its boundaries and its role in driving structural change. In this respect,
and with a focus on goods, Oscar Lange writes: ‘the classification of goods cannot be
made on a purely arbitrary basis, because the laws of economics would be then
dependent on the particular classification adopted. This would restrict the significance
of the propositions of economics to a degree that would make them valueless. Each
proposition can be changed in its opposite by a mere reclassification of goods’ (Lange,
: ).
Let’s then consider issues that arise from different classifications of sectors and how
they impact our understanding of technical change.
To start with, a commodity/product-based classification of sectors tends to become
quickly outdated because of changes in products and their differentiation. The fact that
since the ICT revolution material products might become platforms for accessing
intangible contents or services has accelerated this disconnect between traditionally
defined sectors and their differentiated products (Andreoni, Chang and Labrunie,
). Thirty years ago, Becattini (: ) had already posed the following question:
‘What is the significance today—amid the growing differentiation and personalization of
products, intense intra-sectoral fragmentation, and the proliferation of “cross-sectors”—
of the traditional “industries” and the old, clearly-defined markets for substantially
homogeneous items?’
Moreover, as we have seen, when we adopt a definition of sector simply based on
‘what’ is produced, there is a tendency to define primary sectors like agriculture or
fishing as ‘low’-technology sectors. Their produce is perceived as relatively basic, with
unfavourable terms of trade and targeting relatively inelastic demand. However, if we
instead conceptualize a sector according to the ‘how’ and, potentially, ‘where’ of
production, we realize a number of important factors associated with technical change
which are also relevant for industrial policy.
First, the issue of heterogeneity in the how of production. If we look at the ‘how’ of
production we discover that products within the same product groups can be obtained
from extremely different production processes involving different types, combinations,
and levels of technology (Andreoni, ). This means that product-based definitions
of sectors might obfuscate high degrees of structural heterogeneity within sectors and
might induce the wrong type of comparative assessments across sectors (Andreoni and
Chang, ; see also Andreoni and Tregenna, on problems of structural hetero-
geneity in the analysis of premature de-industrialization). For example, let’s look at the
food and beverage industry. Food can be (and, indeed, still is) produced using trad-
itional techniques and relatively basic machinery (especially in developing countries);
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
however, in other countries food production has reached extremely high levels of
industrial sophistication. Food products are obtained from ‘industry-type’ controlled
processes, involving complex and highly automated technologies to benefit from scale
economies and meet quality standards. In these cases, food production also relies on
just-in-time global supply chains—as in the automotive industry—and the distribution
of the produce involves sophisticated cold and logistics chains for timely market
delivery. All this suggests that food and beverages can be a medium/high-tech industry,
depending on the ‘how’ of production.
Second, as already noted, this heterogeneity in the ‘how’ of production is often
associated with heterogeneity in the ‘where’ of production. Becattini () distinguishes
firms within the same sectoral classification—for example, garments—according to the
external economies they can benefit from. A garment firm might be ‘encamped’ in its
location and receive very little help; thus, this firm might easily move from that location
without a reduction in productivity or innovativeness. In contrast, another garment
firm might be ‘rooted’ in its location and benefit from externalities arising from its
productive surroundings and relationships with other firms or markets. These collect-
ive capabilities are major drivers of innovation, technical change, and diversification
(Penrose, ; Freeman, ; Andreoni, ). Even if these two firms are both
sectorally defined as garment firms, the encamped firm is distinctively different from
the rooted firm when it comes to their production, technological, and organizational
capabilities. In this case, the ‘where’ of production, that is, being rooted in a certain
industrial district or not, becomes the main unit of analysis for understanding
heterogeneity.
Third, the issue of industrial mutations. In order to reach ever-rising product
standards, even a sector traditionally perceived as low tech must transform itself into
a higher-tech sector. This means it will have to adopt complex processes and tech-
nologies and rely on quite sophisticated supply chains. For example, producing and
selling fresh fruit might require more sophisticated technologies than producing a T-
shirt, if to retain freshness firms in the sector must engage with sophisticated cold-
chain and logistic solutions (Cramer and Sender, ). An agrobusiness firm involved
in this sector and operating in markets that value freshness will undergo an innovative
process of ‘industrial mutation’ making it more like what would be traditionally
considered a manufacturing company.
Fourth, the issue of the sources of technical change. By changing the ‘how’ of
production, that is, changing the technologies and processes required to obtain a
certain product or reach a certain market, even traditional sectors can become major
drivers of technical change and innovation. Indeed, by responding to location specific
challenges and opportunities in the production of agro-commodities, firms in the
agricultural sector or mining have triggered and steered innovation in a number of
machineries, tooling, and instrumentation industries. Again, if we simply limit our
attention to the commodity/product itself without looking at the production process
behind it, we might miss these important technical changes. For a long time, the
agricultural sector has been associated with decreasing returns and other stylized
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
features which undermine the scope for ‘manufacturing agrarian change’ (Andreoni,
and ).
Fifth, understanding structural change as a non-linear process. Grading sectors from
primary to secondary and tertiary according to a simple focus on the ‘what’ produced
or a superficial understanding of the ‘how’ of production, has often resulted in a ‘linear’
view of structural change. According to this view and traditional sectoral categoriza-
tions, countries are naturally supposed to move from agriculture to manufacturing and
finally to services. This linear view of structural change is, however, problematic with
respect to the analysis of the relationships between agriculture and manufacturing,
between manufacturing and services, and between services and agriculture. The reason
is that in the process of structural change, traditionally defined sectors continuously
cross their boundaries and thus shift their sectoral terrains. Technical change and
technological interdependencies across sectors make for a large part of these sectoral
crossings and shifts along the process of structural change.
Kay () pointed out how the relationship between agriculture and manufacturing
is symbiotic in economic development, as the development of each sector creates the
conditions for the development and productivity increases of the other in a circular and
cumulative fashion, more than in linear process. Increasing agricultural productivity
results from industrializing agricultural processes through technical change stemming
mainly from manufacturing (Andreoni, ). These intersectoral linkages are des-
tined to change and ‘vary according to the particular phase of the development process
and as structural conditions and international circumstances change’ (Kay, : ).
For example, it has been observed that, with the increase of productivity in agriculture,
linkages between agriculture and services have also been expanding in magnitude and
quality. Examples include post-harvest facilities such as transport, communications,
information services for production control in agriculture, market services. Some of
these activities sit at the boundaries of traditionally defined agricultural and service
sectors.
Similarly, since the s, several scholars have pointed out how the boundaries
between manufacturing and services have become blurred as a result of two parallel
processes of change. These are, first, the outsourcing of several activities like R&D from
manufacturing companies to service companies and second, the ‘servitization’ of
manufacturing companies, the process whereby companies in manufacturing sectors
increasingly add value to their products by adding post-sales services (for a review see
Baines et al., ). Because of the outsourcing of business- and production-related
activities from traditionally defined manufacturing companies, we have witnessed the
expansion of the service sector (also from a national accounting point of view).
If we look at product-based classifications of sector, companies engaging in R&D or
technology scaling-up are in the ‘service sector’, as they provide business services.
However, if we look at the ‘how’ they produce these services we realize that this
happens by engaging in technology activities which were traditionally classified within
the manufacturing sector. Similarly, many companies included in manufacturing
sectors are increasingly offering a wide array of product‒services combinations. For
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
example, traditional downstream services are built into the product—‘embedded
services’, such as in-flight monitoring of aero engine systems. In other cases, such as
the provision of network-infrastructure solutions in information and communication
technology (ICT), a company can provide an ‘integrated product‒service solution’
satisfying several consumer needs. Beyond case study research, Park and Chan (:
) were among the first to show empirically how ‘the evolution of the intersectoral
relationship between services and manufacturing in the course of development is
symbiotic, in the sense that . . . structural change of the former is bound to affect
that of the latter’.
To summarize, going beyond the commonly used commodity/product-based clas-
sification of sectors, in this section we have shown how the ‘what’, the ‘how’, and the
‘where’ of production matter. Each conceptualization of sector offers different analyt-
ical lenses for navigating the traditionally defined sectoral terrains, and their hetero-
geneity and evolving boundaries in modern industrial economies. Technical change is
the main driver of these heterogeneous and evolving structural transformations. We
have pointed out how, with changing production technologies, technical change
constantly reshapes the nature of traditionally defined sectors as it changes the
production activities that firms are conducting within them. For example, firms in
the traditionally defined agricultural sector might start using advanced technologies to
guarantee quality standards of certain products for the international market. Similarly,
manufacturing companies in mechanical industries might start using advanced digital
technologies to perform activities which were traditionally associated with electronics
industries. Finally, manufacturing companies might become service companies, and
vice versa (for a detailed discussion on ‘technology fusion’, see Andreoni et al., ).
In section . we will look at how technical change underpins changes across
different and blurred sectoral terrains and how, in doing so, it opens space for
diversification and innovation in the what, how and where of production. In some
cases, even completely ‘new’ sectors can emerge at the interfaces of traditionally defined
sectors. This more systemic/cross-sectoral focus does not mean abandoning traditional
sectoral distinctions or undermining the existence of sectoral differences across eco-
nomic activities. As we have seen in this section, different types of conceptualization of
sectors serve different analytical purposes and can lead to different industrial policy
considerations and different sectoral targeting decisions.
However, we suggest looking at traditionally defined sectors from different perspec-
tives and within a systemic framework that fully acknowledges interdependencies
across sectors and cross-cutting technical change dynamics. This is particularly
important in the study of technical change. As stressed by Nathan Rosenberg ():
It is necessary to discard the familiar Marshallian approach, involving as it does the
definition of an industry as a collection of firms producing a homogenous
product—or at least products involving some sufficiently high cross-elasticity of
demand. For many analytical purposes it is necessary to group firms together on the
basis of some features of the commodity or final product; but we cannot properly
appraise important aspects of technological developments in the nineteenth century
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
until we give up the Marshallian concept of an industry as the focal point of
our attention and analysis. These developments [rapid technical change in the
American production of machine tools] may be understood more effectively in
terms of certain functional processes which cut entirely across industrial lines in the
Marshallian sense. (Rosenberg, : ; italics added)
. ‘S T’: T
C D
I E
..................................................................................................................................
Modern industrial economies consist of complex and dynamic interdependencies
spanning along and across various traditionally defined ‘sectoral terrains’ and technol-
ogy platforms. As eloquently documented by Tassey (: ): ‘Most modern tech-
nologies are systems, which means interdependencies exist among a set of industries
that contribute advanced materials, various components, subsystems, manufacturing
systems, and eventually service systems based on sets of manufactured hardware and
software. The modern global economy is therefore constructed around supply chains,
whose tiers (industries) interact in complex ways.’
In fact, while some technologies (including organizational techniques) are sector
specific, several others are cross-cutting traditionally defined sectoral boundaries, that
is, they are deployed (or deployable) transversally. These are not simply traditionally
defined general purpose technologies (GPTs),¹ but also clusters of technological and
organizational capabilities which firms deploy in producing different products, reach-
ing certain product standards and functionalities (Penrose, ; Richardson, ;
Andreoni, ). Because of these cross-sectoral technological and organizational
interdependencies, technical change like the introduction of a new chemical process,
industrial material, machine, tooling, sensor, or embedded software can stem from one
sector and then ‘reverberate’ across many sectors and several companies constituting
them. Sector-specific adaptations of these new technologies are always present,
although in the applications of these technologies companies from different sectors
rely on the same technology platforms (Andreoni, ).
These interdependencies involve different types of business organizations and sup-
ply chains both competing and cooperating along sectoral chains of production tasks
and activities. Back in the s, Luigi Pasinetti () stressed how the term ‘indus-
trial sector’ fails to describe the structure of economic sectors. It was for this reason that
Pasinetti introduced the concept of ‘vertically integrated sector’ to analyse the chain
structure of tasks and activities of economic sectors. Along these lines, more recently,
¹ GPTs have been studied especially with reference to the emergence of new technology paradigms and
their broader impact on the economy (for a review see Jovanovic and Rousseau, ; Brenahan, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the literature on global value chains/global production networks has focused on the
global governance and distribution of production functions, activities, and tasks among
different networked production units located in different countries (a multi-tiered
organizational structure). Within this framework, the dynamics of value creation and
capture have been centre stage (Milberg and Winkler, ; Gereffi, ; Ponte et al.,
). These studies tend to go beyond the sector as the main unit of analysis, replacing
it with ‘task’ and ‘chain/network’. A production task is linked to a certain functional
stage of the production process or the production of a finite intermediate product
component. The network is multi-country (often more regionally confined than truly
global) and composed of multiple productive organizations involved in different stages
and potentially operating in multiple sectors (for a critical review see Andreoni, a).
A number of ecosystem frameworks have been introduced with a view to capturing
both these systemic dynamics of technical and organizational change, thus capturing
the new terrain of the industrial. Among them, Andreoni () developed a model of
industrial ecosystem consisting of a matrix of distinct sectoral value chains under-
pinned by different technology platforms (also called clusters of capability domains in
specific industrial locations). The idea of sectoral value chain is based on a product-
based conceptualization (and empirical operationalization) of sector, the ‘what’ of
production. However, it also integrates other insights into sector-specific supply-
chain features, different degrees of ‘vertical integration’, and spatial distribution of
production activities in different locations. Each sectoral value chain is underpinned by
a sector-specific combination of technologies; thus, each sectoral value chain can also
be identified according to the ‘how’ of production. These combinations of technologies
draw from broader cross-sectoral technology platforms constituting several types of
key enabling technologies, including modern digital ones. These enabling technologies
can be potentially deployed across a range of different sectoral value chains, bypassing
the traditional idea that certain sectors are doomed to be low tech or characterized by
low scope for innovation and technical change. Figure . illustrates the industrial
SECTORAL VALUE CHAINS
…
ear s ins
sin
g
o otw i ca l erc
e cha
ces &f hem y ve mm lue
o-p
ro s,
&c tal
s ner oti
-co
va
t ile Me chi tom e ral
agr tex stic
s
Ma Au l& cto
d & ng, Pla tai se
Foo t hi Re Ne
w
Clo
TECHNOLOGY
PLATFORMS
Sector-specific combination of technologies
Sector-specific combination of technologies
Sector-specific combination of technologies
Sector-specific combination of technologies
Sector-specific combination of technologies
Sector-specific combination of technologies
Sector-specific combination of technologies
Sector-specific combination of technologies
Advanced
manufacturing
New sources of data
DIGITAL
Cloud computing
TECHNOLOGY
Big data analysis
Artificial intelligence (AI)
Cross-sectoral Technological Platforms
Technical change and diversification
Advanced materials
OTHER KEY Nano-technologies
ENABLING
TECHNOLOGY Bio-technologies
Photonics
. Industrial ecosystem framework
Source: Author.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ecosystem framework, with a focus on a number of digital technology platforms (and
other key enabling technologies) and a list of representative sectoral value chains.
Within this framework, technical change is a sector-specific process as it involves
changing sector/product-specific combinations of technologies whereby products are
designed, produced, commercialized, and serviced. However, technical change is also a
cross-sectoral process of transformation constantly redefining the boundaries across
sectors and the emergence of new ones. Emerging technologies tend to have a disrup-
tive impact on existing technology platforms, and require organizations to develop new
sectoral value chains capable of producing and/or deploying and/or commercializing
them for the market.
With the increasing transformation of the global manufacturing landscape and the
digitalization of the economy, cross-sectoral technical change and innovation dynamics
have acquired increasing importance. Traditionally, industrial ecosystems structured
around vertically integrated sectors would mainly experience internal processes of ‘struc-
tural learning’ (Andreoni, ), whereby a new technical solution emerging in one sector
would be increasingly adopted by firms in the same sector to transform their business.
In modern industrial ecosystems characterized by the presence of multiple sectoral
supply chains involving multiple actors (at different levels/tiers) located in various
locations, the emergence of an innovative digitally networked solution can rapidly
spread across sectoral value chains. These technical change dynamics are ultimately the
result of innovative processes occurring within business enterprises (and other organ-
izations and institutions) and their continuous attempt to strike a balance between
their specialization and diversification, given certain market opportunities/incentives
and their capabilities. While often presented as disruptive technological changes, many
digital technologies have evolved and emerged from the same engineering and organ-
izational principles as in previous industrial revolutions and have been incrementally
diffused across sectoral value chains since the s (Andreoni and Anzolin, ;
Andreoni et al., ).
These innovative processes often involve firms crossing sectoral boundaries and
venturing into different sectoral terrains. Interfaces between sectoral value chains
become areas for the development of cross-sectoral ‘symbiotic relationships’. For
example, advanced materials such as membranes and polymers for micro-tubing
developed in the design and manufacture of medical devices can be adopted to increase
the performance of components and technology systems in the automotive sector. The
production of the same advanced materials might also require fundamental innov-
ations in the production technology supply chains (e.g. co-injection technologies for
micro-tubing), and a set of infra-technologies to test and validate the new products or
production technologies. These new production technologies, in turn, can lead to
advances and the removal of bottlenecks in the production technologies underpinning
other sectoral supply chains (Andreoni, ).
The industrial ecosystem framework points to the importance of tracking these
trajectories of technical change, cutting across sectoral boundaries and constantly
reshaping each sectoral terrain. For example, throughout the s and s,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
technical change and innovations in electronics and mechatronics have transformed
the automotive and machine tool industries—today electronics is dominant even in
traditional metal mechanical sectors. Similarly, the increasing reliance on digital
technology platforms in modern production is altering the nature of agriculture and
manufacturing production, while blurring the boundaries between physical and digital
production technologies and service systems. Across all sectors we can see signs of
these ‘industrial mutations’: from satellite systems controlling autonomous tractors or
data-driven feeding systems in agriculture to advances in intelligent automated sys-
tems, robotization, and additive manufacturing, and related data analytics—IoT, digital
platforms, and digital supply chains in industrial and service sectors (Sturgeon, ).
Industrial mutations driven by technological change—in particular, the widespread
diffusion of digital technologies—have started shifting the terrain of the industrial and
led several scholars to claim that we are on the verge of a new industrial revolution.
However, these shifts are not occurring in the same ways across all production
locations, regions, and countries. The ‘where’ of production does matter when we
move from a stylized discussion of technical change across sectoral value chains and
technology platforms to a more specific analysis of technical change in context. Digital
technical change opportunities are not equally distributed as companies, regions, and
countries face different challenges. The effective adoption of these new technologies
presupposes the existence of productive organizations and supply chains around them
endowed with basic and intermediate production capabilities and supported by enab-
ling infrastructures such as reliable electricity, standardization, and connectivity. If we
look at a wide range of fast emerging and developing countries throughout the first two
decades of the twenty-first century, these conditions are still largely missing for most
developing countries, as well as in many regions across mature industrial economies
(Andreoni and Anzolin, ).
Among late industrializers like China and India, while the use of digital production
technologies is speeding up, these technologies are still concentrated in a few sectoral
value chains (and companies and supply chains within them) and the full automation
of routinized tasks is far from being as diffused as many observers seem to suggest.
There are multiple reasons for this, including the infrastructural preconditions and
trade-offs posed by digital production technologies, with respect to both the hardware
and software of these technologies and, even more critically, their production system
integration. Having said that, several production locations have started connecting and
cross-sectoral value chains using digital production technologies are gradually emer-
ging, also thanks to industrial policies by governments such as those of China,
Thailand, and Malaysia (Andreoni, b).
In low- and middle-income countries, such as Brazil and South Africa, companies
are facing more fundamental problems related to access to these digital production
technologies, their integration and retrofitting into existing production systems, not to
mention the availability of basic production capabilities and enabling infrastructure. In
these countries, the lack of job creation is not so much the diffusion of digital
technologies as, largely, the result of structural and political economy problems,
including premature de-industrialization, lack of productive organizations in key
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
GVC stages, and basic productive capabilities (Andreoni and Tregenna, ). In
countries like Thailand and Vietnam where the political economy configuration—
developmental state coalition—has led to high levels of investment and increasing
numbers of export-led competitive companies, governments are pushing for digital
technical change and diffusion, especially in sectors like automotive and electronics.
In least developed countries, especially in the African continent, the lack of com-
petitive productive organizations makes the deployment of these digital technologies in
production even more rare. While there are suitable applications for some basic
information and communication technologies (ICTs), such as for financial transactions
on online finance platforms or sharing some basic agriculture price data, these are in
fact more like applications of the Third Industrial Revolution than actual digital
production technologies. A limited number of companies are experimenting with the
use of digital production technologies, to the extent they are involved in production
activities. So, for example, we see some experimental applications in high-value
agricultural products, extractive processes, and trade logistics. Unfortunately, given
the limited amount of manufacturing industries and competitive companies, these
countries are still unable to capture the potential ‘digital dividend’ promised by the big
new wave of technical change.
To summarize, the diffusion and effective deployment of digital technologies
across several sectoral value chains will be determined by several factors. In particu-
lar, the extent to which these new technologies are the most cost-effective way to
produce a certain component or product (still not always the case), and the extent to
which companies have a sufficient bundle of capabilities to make the absorption and
effective deployment of these technologies possible. Without the development of
basic and intermediate-level capabilities, that is, basic production capabilities, and
technology absorption and retrofitting capabilities, digital technical change will
remain a technological mirage. Industrial policy can, however, play an important
role in shaping technical change and redesigning the sectoral boundaries and terrain
of the industrial.
The final section before the conclusions (section .) looks at the implications of
technical change and the shifting terrain of the industrial for industrial policy design
(what selectivity means), and implementation (what cross-sectoral institutions are
required).
. I P: C
O N
D T
..................................................................................................................................
Since the First Industrial Revolution, industrial policies have always shaped and driven
the transformation of the economy, particularly when engagement with new technolo-
gies was uncertain and required coordination and the commitment of resources
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(Chang, ; Andreoni and Chang, ). The theoretical perspectives advanced in
this contribution have pointed to the fact that the opportunities associated with
technical change are very heterogeneous, in some cases sector and process specific, in
other cases relying on cross-sectoral technology platforms underpinning several sec-
toral value chains.
With the emergence of a new ‘digital terrain’, several manufacturing industries
remain the main target of industrial policy investment. However, while some of
them—the machine tool industry, for example—might play a key ‘technology push
role’, others—high-tech agriculture and production-related services in particular—
will play a key ‘demand pull role’. For example, the application of manufacturing
principles to agricultural production could deliver dramatic productivity gains and
better international market access, while creating the demand for an increasingly
advanced and data-driven agricultural equipment industry. The enormous potential
of digitalization in mining could similarly be a demand pull factor towards the
development of world-leading mining equipment industries in the African continent
and several other countries in Latin America. By targeting investments at the inter-
section of these demand pull and technology push dynamics, developing countries
can also manage to decrease their reliance on pre-made machinery from advanced
industrial economies—and the associated trade burden. Investing in these intersec-
tions of emerging industrial ecosystems can be also a way of laterally entering sectoral
value chains and engaging with technologies which would be otherwise difficult to
access.
The specific challenges faced by developing countries in engaging with the Fourth
Industrial Revolution can be clustered in five main groups.
.. Technology Absorption, Deployment,
and Technical Change: ‘Capability Threshold’
First, the basic and more advanced production capabilities required for the absorption
and effective deployment of the new digital production technologies, and their diffu-
sion along the supply chains, are scarce and unevenly distributed. Moreover, digital
production technologies have also raised the ‘capability threshold’ that companies are
required to achieve to make effective use of the new technologies. This is not because
parts of these technologies are completely new—for example, automated machinery
goes back at least as far as the Second Industrial Revolution (IR), but mainly because
the Fourth Industrial Revolution (IR) is about the ‘fusion of existing and new
technologies’ into complex integrated technology systems (Tassey, ; Andreoni,
Chang, and Labrunie, ). Managing complex integrated technology systems like a
fully automated production line, combining robots and IoT technologies, is an
extremely demanding task for a productive organization in a developing country.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Production System: Retrofitting and Integration
Second, industrialization is about commitment of resources under conditions of
uncertainty (Chang and Andreoni, ). Most of these commitments involve physical
capital that embodies certain technologies and cannot be remoulded in any significant
way to embody other technologies. Very often the commitments are organizational too,
involving individuals specializing in specific skills. These commitments are critical
because they raise productivity, for example by enabling economies of scale in pro-
duction. However, depending on the degree of reversibility of the investments, these
commitments make future changes more difficult. This introduces a very specific
challenge in developing countries. Existing companies that can make technology
investments have already committed resources and have to see how they can retrofit
and integrate new digital production technologies into their existing production plants.
Setting up brand-new plants is less common as it requires significant long-term
investment and access to markets, and these new plants may be difficult to run given
the lack of basic and digital infrastructure.
.. Infrastructure: Basic and Digital
Third, digital production technologies are very demanding when it comes to the
infrastructure required to enable their use in production. Developing countries face
significant challenges providing affordable and reliable electricity, as well as good
enough connectivity. In some cases, these infrastructural bottlenecks have been
bypassed by off-grid energy technologies and wireless connectivity systems. While
these solutions work in certain areas, they are not always able to provide the quality
and reliable services needed to run digital production technologies effectively. As a
result, the productivity and quality improvements that digital production technologies
offer are offset by these infrastructural bottlenecks, which can make technology
investments by individual companies too risky and ultimately uneconomical.
.. Technology Diffusion: IR Islands and the Digital
Capability Gap
Fourth, despite the fact that in almost all developing countries it is possible to find ‘IR
islands’, that is, a company which is engaging with some digital production technolo-
gies, many of these technologies remain contained within the company and their
production cells. Occasionally, a few close suppliers who have the basic production
capabilities to make use of them might be linked to these IR islands. Moreover, the
IR islands often rely on enabling infrastructural capabilities (connectivity, electricity,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
etc.) built by the same company at their own cost for their own plants. Without these
infrastructures, companies would not even be able to switch on digital production
technologies. Around these IR islands the large majority of companies and sectors are
still operating fully within the Third Industrial Revolution technology paradigm and
are unable to operate at the same standards as the island companies. In some other
cases, especially among least developed countries, companies have not even engaged
with the Second Industrial Revolution yet. This means that it is extremely difficult for
the leading companies—such as an OEM—to link backward and nurture their supply
chains. The ‘digital capability gap’ between company islands and suppliers is so
extreme and so costly to address (given the existing endogenous asymmetries—see
section ..) that the diffusion of IR technologies remains very limited.
.. Technology Access and Affordability:
Endogenous Asymmetries
Fifth, digital production technologies are complex and are controlled by a limited
number of advanced countries and their leading companies. Developing countries rely
enormously on the importation of these technologies from advanced economies, and in
many cases even when they are able to mobilize significant resources to access them,
they are tied to their buyers with respect to both hardware and software components.
International buyers and OEMs control the source, type, and utilization of the digital
production technologies by setting parameters of engagement for the suppliers. Those
who cannot meet these parameters are cut out. The importance of using common
protocols and software platforms for the deployment of digital production technologies
carries the risk of a verticalization and concentration of power. Also, many of these
technologies are not ‘plug and play’, that is, the acquisition of the hardware goes hand
in hand with the need for expensive technology services and royalties for the use of the
related software (Sturgeon, ).
To capture these opportunities and address these new challenges, the most recent
international industrial policy experiences point to the importance of adopting new
industrial policy frameworks and principles (Andreoni, , a; Andreoni and
Chang, ; Andreoni and Tregenna, ). These new frameworks should capture
the changing reality of production systems and products, and their underlying tech-
nology platforms and organizational models, that is, the industrial ecosystem. New
industrial policy principles should also reflect the need for more strategic coordination
among (and within) public and private sectors; better targeting and policy alignment;
and the introduction of feasible policies whose implementation goes hand in hand with
a change in the country’s political economy and the emergence of new productive
alliances, the following sentence refer to all five points above ..–...
Against this background, the following five industrial policy design principles must
be considered if the opportunities of the new digital terrain are to be captured:
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
• Digital industrialization opportunities are about both incremental changes in
production and disruptive technological innovations. Industrial policy must be
appropriate, that is, it must address those foundational—basic and intermediate—
technical and organizational capability requirements without which the digital
innovation opportunities cannot be captured, effectively deployed, and diffused
across the industrial ecosystem.
• Digital industrialization is sustainable and inclusive only if it creates conditions for
more domestic value creation, capture, distribution, and retention. Digital tech-
nologies provide new platforms for developing linkages in the ecosystem, includ-
ing more and new productive organizations and customers. Governing the
technological, competition, and regulatory processes through which these linkages
are formed (or prevented) is critical for sustainable value addition and distribution
in the economy. Digitalization introduces a new policy dimension in the strategic
management and regulatory enforcement of ‘glo-cal’ relationships.
• Systemic changes call for systemic policy frameworks. Digital industrialization is
about a systemic transformation of the economy, that is, the emergence of a new
industrial ecosystem. This is why the effectiveness of a digital industrial policy will
depend on interventions able to reflect both the specificities of existing sectors and
the new opportunities emerging within and across them.
• Strategic targeting, coordination, and policy alignment are critical for effective
implementation. Systemic transformation cannot be achieved with generic policy
frameworks. Strategic choices have to be made to unleash the potential that digital
technologies offer for the innovative industrial renewal of existing sectors, and the
emergence of new competitive players in the industrial ecosystem. For successful
policy implementation, these choices must be effectively coordinated and aligned,
and budgetary inconsistencies and scarce public resource dispersion and capture
avoided.
• New coalitions for change forged around better aligned productive interests are
necessary for the successful implementation of industrial policy. The design of
industrial policy must take into account the different interests, capabilities, and
distribution of power within and among different organizations and constituen-
cies in the economy, and must find ways in which policies can lead to better
alignment of productive interests. Without such alignment, policies tend to be
fragmented, difficult to enforce, and vulnerable to unproductive rent capture.
The digital industrial policy principle and targets highlighted above point to the need
for both sector-specific digital industrial policy and cross-sectoral interventions, as well
as new ways of factoring in an assessment of the political economy feasibility of
industrial policy interventions.
• Sector-specific measures will take into account the organization, needs and condi-
tions of firms within a particular industry, in particular the specific types of: digital
skills; digital technology infrastructures and services; challenges and barriers to
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
linkages development; competition conditions and value capture; and sectoral
regulatory frameworks and incentives, including procurement and market
regulation.
• Cross-sectoral interventions should focus on those opportunities and challenges
that are faced by different firms across sectors, especially those related to broader
foundational capabilities (e.g. basic and transversal digital skills, digital and
manufacturing extension services), technology infrastructure (e.g. digital software
licensing, connectivity, data quality, and affordability) and broader financing,
investment, and regulatory conditions in the country.
The effectiveness of sectoral and cross-sectoral interventions across key policy areas
will depend on the extent to which the government is able to reach strategic alignment
between sectoral measures and cross-sectoral interventions, and to develop a govern-
ance framework beyond policy silos. Breaking out of policy silos is thus both a matter
of what/how policy interventions are designed as well as how resources are allocated
and governed along different structural cycles (Andreoni et al., ; Andreoni and
Chang, ). The industrial ecosystem (Andreoni, ) provides the framework to
operationalize and foster cross-sectoral innovations around mission-oriented indus-
trial policies (Mazzucato, ; Mazzucato and Kattel, Chapter , this volume).
Mission-oriented industrial policy provides a vision for the creation of new
productive sectors and markets around emerging human needs and social challenges.
These missions are not simply visions; they are also focal points for coordination
within an industrial ecosystem as they trigger transformations along and across
technology platforms and sectoral value chains. For example, the environmental
sustainability grand challenge requires a concerted transformation in the patterns of
production and consumption of several sectoral value chains. It also requires the
introduction and cost-effective diffusion of new sources of energy, new advanced
materials, new industrial processes. All these technical changes trigger a reconfigur-
ation of the technology platforms on which modern industrial ecosystems are built as
well as a change in the industry organization.
While industrial policy design and governance frameworks are critical, the effective
implementation and enforcement of any industrial policy will critically depend on the
extent to which the policy is able to promote the emergence of a new coalition of
productive interests, or offer existing powerful groups alternative and more productive
ways to operate in the economy. In other words, especially in developing and middle-
income countries with a poorly developed capitalist class, industrial policies will have
to be designed taking into account the political economy feasibility of interventions.
This assessment should not discourage bold industrial policy measures; rather, it
should help identify feasible and incremental pathways for transformation (Chang
and Andreoni, ).
There are a number of sectors in which productive interests predominate, while
capabilities and power are relatively evenly distributed. In these sectors, the political
settlement structure might allow for quick wins and the emergence or consolidation of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
new coalitions for change. In other sectors, where interests have been more entrenched
and have even resulted in state capture, consolidated power structures are more
difficult to change and open up to new actors and competition. Here, competition
policy alongside other regulatory and incentive restructuring can force the emergence
of new deals. These deals can open the way to transition paths towards more product-
ive and technologically dynamic sectors.
Overall, digital industrialization will also produce potential trade-offs and new
conflicts in the economy, for example with respect to employment. Given the chal-
lenges faced by SMEs, digital technologies, if not suitably governed, can exacerbate the
existing divide between big and small firms to the detriment of the much-needed
re-industrialization of the country. Digital industrial policy must therefore govern
these processes and make sure that the digital industrial dividend is incrementally
distributed across different firms, their employees, and society more broadly.
. C
..................................................................................................................................
Economists have always struggled to grasp the complex structure and dynamics of
productive transformation. Since the First Industrial Revolution, several concepts of
sectors have been used as compositional heuristics to group and differentiate economic
activities, markets, and firms. These heuristics and resulting taxonomies have been also
used to capture the way in which technical change constantly shifts the sectoral terrains
of traditionally defined agriculture, industry, and services. In this contribution we have
provided an analytical discussion of the evolution of different concepts of sectors and
demonstrated how different concepts can serve different purposes.
With a focus on technical change in the digitalization era, we have relied on an
industrial ecosystem framework to discuss several processes of innovation, industrial
mutation, and shifting sectoral terrains. Indeed, traditional sectoral terrains have been
increasingly shifting and blurring as a result of changes in the technological platforms
underpinning sectoral value chains. Many of these platforms have been increasingly
acquiring a data-driven and networked character. Since , digitalization has
emerged as the dominant form of technical change.
However, digital transformation in production and products is diffusing unevenly
across the world. Industrial policies are central to boosting technical change, and their
effectiveness depends critically on the adoption of appropriate sectoral and cross-
sectoral instruments. Industrial policy targeting requires a focus on key parts of
modern industrial ecosystems. New heuristics are critical to reveal opportunities and
challenges within sectoral value chains and those nested at the interstices of industrial
ecosystems. Mission-oriented initiatives can play a key coordinating role and support
countries in developing context-specific pathways to capture the new windows of
digital opportunities.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
A
Thanks to Ha-Joon Chang, Simon Roberts, and Timothy Sturgeon for discussions and Eric
Reinert and Eva Paus for comments to an early version of this chapter. Also, thanks to all
participants to the workshops held in preparation of the OUP Handbook, and in particular the
editors of the volume.
R
Abramovitz, Moses () Thinking about Growth. Cambridge: Cambridge University Press.
Amsden, Alice () ‘Diffusion of Development’, American Economic Review : –.
Andreoni, Antonio () ‘Manufacturing Agrarian Change: Agricultural Production, Inter-
sectoral Learning and Technological Capabilities’. DRUID Working Paper Series No. /
.
Andreoni, Antonio () ‘Structural Learning: Embedding Discoveries and the Dynamics of
Production’, Structural Change and Economic Dynamics : –.
Andreoni, Antonio () ‘Varieties of Industrial Policy: Models, Packages and Transform-
ation Cycles’, in Akbar Noman and Joseph E. Stiglitz (eds) Efficiency, Finance, and Varieties
of Industrial Policy. New York: Columbia University Press, pp. –.
Andreoni, Antonio () ‘The Architecture and Dynamics of Industrial Ecosystems: Diver-
sification and Innovative Industrial Renewal in Emilia Romagna’, Cambridge Journal of
Economics, : –.
Andreoni, Antonio (a) ‘A Generalised Linkage Approach to Local Production Systems
Development in the Era of Global Value Chains, with Special Reference to Africa’,
forthcoming in Ravi Kanbur, Akbar Noman, and Joseph E. Stiglitz (eds) Quality of Growth
in Africa. New York: Columbia University Press, pp. –.
Andreoni, Antonio (b) ‘Robotising Regions: A Comparative Analysis of Industrial Policy
for Robotisation across China, Malaysia and Thailand’. South African Research Chair in
Industrial Development, SARChi Working Paper, University of Johannesburg.
Andreoni, Antonio and Guendalina Anzolin () ‘A Revolution in the Making? Challenges
and Opportunities of Digital Production Technologies for Developing Countries’. UNIDO
Working Paper No. /. Vienna: UNIDO.
Andreoni, Antonio and Ha-Joon Chang () ‘Bringing Production and Employment back
into Development’, Cambridge Journal of Regions, Economy and Society (): –.
Andreoni, Antonio and Ha-Joon Chang () ‘The Political Economy of Industrial Policy:
Structural Interdependencies, Policy Alignment and Conflict Management’, Structural
Change and Economic Dynamics : –.
Andreoni, Antonio and William Lazonick () ‘Local Ecosystems and Social Conditions of
Innovative Enterprise’, in Arkebe Oqubay and Justin Yifu Lin (eds) The Oxford Handbook
of Industrial Hubs and Economic Development. Oxford: Oxford University Press.
Andreoni, Antonio and Roberto Scazzieri () ‘Triggers of Change: Structural Trajectories
and Production Dynamics’, Cambridge Journal of Economics : –.
Andreoni, Antonio and Fiona Tregenna () ‘Beyond the Inverted U: The Changing
Nature and Structural Heterogeneity of Premature Deindustrialisation’. International
Workshop: The Future of Industrial Work: New Pathways and Policies of Structural
Transformation? UNIDO, Vienna, – September.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Andreoni, Antonio and Fiona Tregenna () ‘Escaping the Middle-income Technology
Trap: A Comparative Analysis of Industrial Policies in China, Brazil and South Africa’,
Structural Change and Economic Dynamics, forthcoming.
Andreoni, Antonio, Ha-Joon Chang, and Matheus Labrunie () ‘Natura non facit saltus:
Challenges and Opportunities for Digital Industrialisation across Developing Countries’,
European Journal of Development Research, forthcoming.
Andreoni, Antonio, Frederico Frattini, and Giorgio Prodi () ‘Structural Cycles and
Industrial Policy Alignment: The Private–Public Nexus in the Emilian Packaging Valley’,
Cambridge Journal of Economics : –.
Baines, Tim, Ali Ziaee Bigdeli, Oscar Bustinza, Victor Shi, James Baldwin, and Keith Ridgway
() ‘Servitization: Revisiting the State-of-the-art and Research Priorities’, International
Journal of Operations & Production Management (): –.
Becattini, Giacomo () Il concetto d’industria e la teoria del valore. Torino: Bollati
Boringhieri.
Becattini, Giacomo () ‘Dal “settore” industriale al “distretto” industriale. Alcune con-
siderazioni sull’unità di indagine dell’economia industriale’, Rivista di Economia e Politica
Industriale (): –. (English translation: ‘Sectors and/or Districts: Some Remarks on the
Conceptual Foundations of Industrial Economics’, in E. Goodman, J. Bamford, and
P. Saynor (eds) Small Firms and Industrial Districts in Italy. London: Routledge, ,
pp. –.)
Becattini, Giacomo () ‘Industrial Sectors and Industrial Districts: Tools for Industrial
Analysis’, European Planning Studies (): –.
Best, Michael H. () The New Competition: Institutions of Industrial Restructuring.
Cambridge: Polity Press.
Brenahan, Timothy () ‘General Purpose Technologies’, in Bronwyn H. Hall and Nathan
Rosenberg (eds) Handbook of Economics of Innovation. Amsterdam: Elsevier, pp. –.
Castellacci, Fulvio () ‘Technological Paradigms, Regimes and Trajectories: Manufactur-
ing and Service Industries in a New Taxonomy of Sectoral Patterns of Innovation’, Research
Policy (–): –.
Chang, Ha-Joon () Kicking away the Ladder: Development Strategy in Historical Perspec-
tive. London: Anthem Press.
Chang, Ha-Joon and Antonio Andreoni () ‘Industrial Policy in the st Century’,
Development and Change (): –.
Clapham, John Harold () ‘Of Empty Economic Boxes’, The Economic Journal ():
–.
Cramer, Christopher and John Sender () ‘Agro-processing, Wage Employment and
Export Revenue: Opportunities for Strategic Intervention’. Working Paper for the Depart-
ment of Trade and Industry, Trade & Industry Policy Strategies (TIPS), Pretoria.
Dosi, Giovanni () ‘Technological Paradigms and Technological Trajectories: A Suggested
Interpretation of the Determinants and Directions of Technical Change’, Research Policy
(): –.
Fisher, Allan () ‘Production in Primary, Secondary and Tertiary’, Economic Record ():
–.
Fourastie, Jean () Machinisme et bien-etre. Paris: Les Editions des Minuit.
Freeman, Chris () The Economics of Industrial Innovation. London: Pinter.
Gereffi, Gary () Global Value Chains and Development: Redefining the Contours of
st Century Capitalism. Cambridge: Cambridge University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Hirschman, Albert Otto () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Hirschman, Albert Otto () ‘A Generalized Linkage Approach to Economic Development
with Special Reference to Staples’, Economic Development and Cultural Change : –.
Jovanovic, Boyan and Rousseau, Peter () ‘General Purpose Technologies’, in Philippe
Aghion and Steven Durlauf (eds) Handbook of Economic Growth, Vol. B, Amsterdam:
Elsevier, pp. –.
Kaldor, Nicholas () Strategic Factors in Economic Development. Ithaca, NY: Cornell
University Press.
Kay, Cristobal () ‘Development Strategies and Rural Development: Exploring Synergies,
Eradicating Poverty’, Journal of Peasant Studies (): –.
Kuznets, Simon () ‘Modern Economic Growth’, American Economic Review : –.
Lall, Sanjaya () ‘The Technological Structure and Performance of Developing Country
Manufactured Exports, –’, Oxford Development Studies (): –.
Lancaster, Kelvin John () ‘A New Approach to Consumer Theory’, Journal of Political
Economy : –.
Lange, Oscar () Price Flexibility and Employment. Chicago, IL: Cowles.
Lazonick, William () Competitive Advantage on the Shop Floor. Cambridge, MA:
Harvard University Press.
Lazonick, William () Business Organisation and the Myth of the Market Economy.
Cambridge: Cambridge University Press.
Leontief, Wassily () The Structure of American Economy, –. Cambridge, MA:
Harvard University Press.
Lin, Justin Yifu () New Structural Economics: A Framework for Rethinking Development
and Policy. Washington, DC: World Bank.
Marshall, Alfred () Industry and Trade: A Study of Industrial Technique and Business
Organization, and of their Influences on the Conditions of Various Classes and Nations.
London: Macmillan.
Mazzucato, Mariana () ‘Mission-oriented Innovation Policies: Challenges and Oppor-
tunities’, Industrial and Corporate Change (): –.
Milberg, William and Deborah Winkler () Outsourcing Economics. Cambridge: Cam-
bridge University Press.
OECD () Globalisation and Competitiveness: Relevant Indicators. Paris: OECD Direct-
orate for Science, Technology and Industry, DSTI/EAS/IND/WP().
Park, Se-Hark and Kenneth Chan () ‘A Cross-country Input–Output Analysis of Inter-
sectoral Relationships between Manufacturing and Services and their Employment Impli-
cations’, World Development (): –.
Pasinetti, Luigi Ludovico () Structural Change and Economic Growth. A Theoretical Essay
on the Dynamics of the Wealth of Nations. Cambridge: Cambridge University Press.
Pavitt, Keith () ‘Sectoral Patterns of Technical Change: Toward a Taxonomy and a
Theory’, Research Policy : –.
Penrose, Edith () The Theory of the Growth of the Firm. Oxford: Oxford University Press.
Pérez, Carlota () Technological Revolutions and Financial Capital: The Dynamics of
Bubbles and Golden Ages. Northampton, MA: Edward Elgar.
Ponte, Stefano, Gary Gereffi, and Gale Raj-Rechert () Handbook of Global Value Chains.
Cheltenham: Edward Elgar.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Reinert, Erik S. () ‘Catching-up from Way Behind: A Third World Perspective on First
World History’, in Jan Fagerberg, Bart Verspagen, and Nick von Tunzelmann (eds) The
Dynamics of Technology, Trade, and Growth. Aldershot: Edward Elgar, pp. –.
Reinert, Erik S. () How Rich Countries Got Rich and Why Poor Countries Stay Poor.
New York: Public Affairs.
Richardson, George () ‘The Organisation of Industry’, The Economic Journal ():
–.
Robinson, Joan () The Economics of Imperfect Competition. Basingstoke: Macmillan.
Rodrik, Dani, Margaret McMillan, and Claudia Sepulveda (eds) () Structural Change,
Fundamentals, and Growth: A Framework and Case Studies. Washington, DC: Inter-
national Food Policy Research Institute.
Rosenberg, Nathan () ‘Technological Change in the Machine Tool Industry, –’,
Journal of Economic History (): –.
Rosenberg, Nathan () Perspectives on Technology. Cambridge: Cambridge University
Press.
Scazzieri, Roberto () A Theory of Production: Tasks, Processes, and Technical Practices.
Oxford: Clarendon Press.
Schumpeter, Joseph () Business Cycles: A Theoretical, Historical, and Statistical Analysis
of the Capitalist Process. New York: McGraw-Hill Book Company.
Schumpeter, Joseph () Capitalism, Socialism, and Democracy. New York: Harper &
Brothers.
Simon, Herbert A. () ‘Organisations and Markets’, Journal of Economic Perspectives ():
–.
Sraffa, Piero () ‘The Laws of Returns under Competitive Conditions’, The Economic
Journal (): –.
Sturgeon, Timothy () ‘The “New” Digital Economy and Development’. UNCTAD
Technical Note on ICT for Development. Geneva: UNCTAD.
Tassey, Gregory () The Technology Imperative. Cheltenham: Edward Elgar.
Tassey, Gregory () ‘Rationales and Mechanisms for Revitalising US Manufacturing R&D
Strategies’, Journal of Technology Transfer : –.
Toner, Phillip () Main Currents in Cumulative Causation. Basingstoke: Macmillan.
Wolfe, Martin () ‘The Concept of Economic Sectors’, The Quarterly Journal of Economics
(): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
. I
..................................................................................................................................
I October , the Intergovernmental Panel on Climate Change (IPCC), the most
authoritative global organization advancing climate-change research, issued an alarm-
ing report titled Global Warming of . . This report emphasized the imperative of
limiting the increase in global mean temperatures to . degrees above pre-industrial
levels as opposed to the previous consensus target . degrees. The IPCC concluded
that limiting the global mean temperature increase to . rather than . degrees by
will dramatically lower the likely negative consequences of climate change. These
include the risks of heat extremes, heavy precipitation, droughts, sea level rise, bio-
diversity losses, and corresponding impacts on health, livelihoods, food security, water
supply, and human security.
The IPCC estimates that to achieve the . degrees maximum global mean
temperature increase target as of , global net CO₂ emissions will have to fall by
about per cent as of and reach net-zero emissions by . I focus in this
chapter on what it will take for the global economy to reach net-zero CO₂ emissions
by , and specifically, in terms of the industrial and financing policies that will be
needed for this project to succeed. In the interests of space, I do not delve into the
additional specific challenges around also hitting the IPCC’s intermediate target of a
per cent CO₂ emissions reduction by , though important additional chal-
lenges do emerge with achieving this goal.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
In fact, purely as an analytic proposition and policy challenge—independent of the
myriad of political and economic forces arrayed around these matters—it is entirely
realistic to allow that global CO₂ emissions can be driven to net zero by . By my
higher-end estimate, it will require an average level of investment spending throughout
the global economy of about . per cent of global GDP per year, focused in two areas:
) dramatically improving energy-efficiency standards in the stock of buildings, auto-
mobiles and public transportation systems, and industrial production processes; and
) equally dramatically expanding the supply of clean renewable energy sources—
primarily solar and wind power—available at competitive prices to all sectors and in all
regions of the globe.
This level of clean energy investment spending would amount to about $. trillion¹
in the first year of the programme, which I will set as and rise to an average of
about $. trillion per year between and . This assumes that the project
actually begins in , but that the full-scale expansion in clean energy investments
requires a three-year lead time. Thus the start date for the full-scale programme
becomes . Total clean energy investment spending for the full-scale twenty-
seven-year investment cycle – would amount to about $ trillion.
These figures are for overall investment spending, including from both the public and
private sectors. Establishing the right mix between public and private investment will be a
major consideration within the industrial and financing policies framework. As an initial
rough approximation, I assume that the breakdown should be divided equally—that is,
per cent public and private investment. For the first year of full-scale investment activity
in , this would break down to $. trillion in both public and private investments.
A major part of the policy challenge will be to determine how to leverage the public
money most effectively to create strong incentives for private investors.
It is important to emphasize at the outset that this clean energy investment project will
pay for itself in full over time. More specifically, it will deliver lower energy costs for
energy consumers in all regions of the world. This results because raising energy-
efficiency standards means that, by definition, consumers will spend less for a given
amount of energy services, such as being able to travel miles on a gallon of petrol with
a high-efficiency hybrid plug-in vehicle as opposed to miles per gallon with the average
car on US roads today. Moreover, the costs of supplying energy through solar and wind
power, as well as geothermal and hydro, are now, on average, roughly equal to or lower
than those for fossil fuels and nuclear energy. As such, the initial upfront investment
outlays can be repaid over time through the cost savings that will be forthcoming.
For , global clean energy investments levels, including both energy efficiency
and clean renewable investments, were at about $ billion, equal to about . per cent
of global GDP. Thus, the increase in clean energy investments will need to be in the
range of . per cent of global GDP—that is, about $. trillion at the current global
GDP level of about $ trillion, then rising in step with global GDP growth thereafter
¹ All $ values are in US dollars.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
until . The consumption of oil, coal, and natural gas will also need to fall to zero over
this same thirty-year period. The rate of decline can begin at a relatively modest . per
cent in the initial years of the transition programme, but will then increase every year in
percentage terms, as the base level of fossil-fuel supply contracts to zero as of .
Of course, both the privately owned fossil-fuel companies, such as Exxon-Mobil and
Chevron, and equally, the publicly owned companies such as Saudi Aramco and
Gazprom in Russia, have massive self-interests at stake in preventing reductions in
fossil-fuel consumption as well as enormous political power. These powerful vested
interests will simply have to be defeated. How exactly this is accomplished is beyond
the scope of this chapter, other than to recognize that a critical foundation for
advancing a successful global Green New Deal will be to establish a viable set of
industrial and financing policies to support the project.
The structure of this chapter is as follows. Section . asks the first critical question
for designing a global clean energy investment project, which is: what is clean energy?
I review evidence on natural gas, nuclear energy, and various forms of geoengineering as
providing clean energy alternatives to fossil fuels. But I conclude that all these approaches
present major problems. This conclusion then becomes the basis for recognizing that
building a global clean energy economy should rely mostly on dramatically expanding
investments in energy efficiency and clean renewable energy sources.
In considering the prospects for achieving major gains in energy efficiency, I introduce
the concept of ‘energy intensity ratios’ and review evidence on this ratio for the global
economy as well as for seven representative national economies, that is, China, the
United States, Brazil, Germany, Indonesia, South Africa, and South Korea. I will also
focus on Brazil, Germany, Indonesia, South Africa, and South Korea later in this study.
With respect to ‘clean renewable energy sources’, as I use the term, it excludes many
forms of bioenergy, such as ethanol from corn or sugarcane using conventional refining
methods. This is because, considered over a thirty-year life cycle, the emissions
generated from these energy sources are comparable to those from fossil fuels.² The
clean renewable sources on which I focus in section . and throughout the study are
solar and wind power, as well as, to a more modest extent, geothermal and hydro
power, as well as bioenergy generated through low-emissions technologies.
Section . presents a simple model through which I calculate the investment
requirements for creating a global net-zero-emissions economy as of . I show
through this model that investments in energy efficiency and clean renewable energy at
an average . per cent share of global GDP per year will be sufficient for achieving this
end. The model builds from the assumption of the most recent global energy model of
the International Energy Agency (IEA), which assumes that global GDP grows at an
average annual rate of . per cent per year over –.
Section . then considers the industrial and financial policy measures that will be
needed to support this global clean energy investment project. I examine a range of
² See Pollin et al. (: –).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
policy approaches that have been implemented throughout the world to varying
degrees. I also propose specific sources of funding that are capable of bringing total
clean energy investments to $. trillion as of —that is, . per cent of global GDP
in —along with the capacity to increase funding at a rate corresponding with
global GDP through .
In section ., I consider the domestic resource capacities in various countries to
support its clean energy transformation, focusing, again, on Brazil, Germany,
Indonesia, South Africa, and South Korea. To the extent that a country runs up against
domestic productive capacity constraints while expanding its investments in energy
efficiency and clean renewable energy, it then must either scale back the clean energy
investment project or rely increasingly on imports to maintain the ambitious invest-
ment agenda. For the five representative economies, I show how this domestic resource
constraint will be manageable.
One factor that will be important in enabling the expansion of domestic production
in clean energy will be the fact that the fossil-fuel sectors in all countries will be
correspondingly contracting. Thus, in section ., I show how the freeing up of
economic resources out of the activities tied to the fossil-fuel sector will be substantial
in all cases, including countries such as Germany and South Korea, which are presently
dependent on imports as their source of fossil-fuel energy.
In the concluding section ., I briefly summarize the full set of findings in sections
.–.. These findings demonstrate how a global clean energy project—that is, a
Global Green New Deal, as I understand the term—does indeed provide a viable path
for achieving a net-zero-emissions global economy as of . I also show that the
industrial and financial policy tools needed to deliver on this project are well under-
stood and have been well tested in various parts of the world, under a range of
circumstances. These policy tools now need to be implemented on a scale appropriate
to the magnitude of the challenge we now face with climate change.
This chapter covers a large number of issues within a relatively brief amount of
space. At the same time, due to space limitations, it does not cover several topics that
are also critical for understanding the full scope of industrial policy requirements for
implementing a successful global Green New Deal. One such critical set of issues covers
the employment impacts of the global clean energy investment project, which, in turn,
breaks down into two components. The first is assessing the large employment creation
opportunities that will be generated through investing . per cent of GDP in clean
energy projects in all regions of the world. The second is recognizing the job losses that
will result through the contraction of the global fossil-fuel industry, and the imperative
of establishing a set of just transition policies for both the workers and communities
that will be negatively impacted as a result. I have addressed these issues at length
elsewhere and will continue to do so in future research.³
³ See Pollin (), Pollin et al. (), Pollin and Callaci (), and Pollin et al. () for
discussions and further references on employment effects and Just Transition policies.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Related to this is the large set of questions on the developmental impact of the clean
energy transition on economies that are presently net fossil-fuel exporters. These
questions are linked to the broader literature around the so-called ‘resource curse’.
These issues, again, lie beyond the scope of this chapter, even while the relevant
literature is quite extensive.⁴
Another set of critical issues that I have not been able to address here are the land use
requirements for building a global clean energy infrastructure. The work of the
physicist Mara Prentiss demonstrates that, in fact, through well-designed policies,
these land-use requirements will be relatively modest. But the overall global Green
New Deal project will benefit through developing with greater specificity the frame-
work that Prentiss has developed.⁵
. W C E?
..................................................................................................................................
.. Natural Gas
There are large differences in the emissions levels resulting through burning oil, coal,
and natural gas, with natural gas generating about per cent fewer emissions for a
given amount of energy produced than coal and per cent less than oil. It is therefore
widely argued that natural gas can be a ‘bridge fuel’ to a clean energy future, through
switching from coal to natural gas to produce electricity.⁶ Such claims do not withstand
scrutiny. At best, an implausibly large per cent global fuel switch to natural gas
would reduce CO₂ emissions by only per cent. But even this calculation does not take
account of the leakage of methane gas into the atmosphere that results through
extracting natural gas through fracking. Recent research finds that when more than
about per cent of the gas extracted leaks into the atmosphere through fracking, the
impact eliminates any environmental benefit from burning natural gas relative to coal.
Various studies have reported a wide range of estimates as to what leakage rates have
actually been in the United States, at fracking operations have grown rapidly. A recent
survey paper puts that range at between . and . per cent for different specific
sites in North Dakota, Utah, Colorado, Louisiana, Texas, Arkansas, and Pennsylvania.
It would be reasonable to assume that if fracking expands on a large scale in regions
outside the United States, it is likely that leakage rates will fall closer to the higher-end
figures of per cent, at least until serious controls could be established. This then
⁴ Two recent survey articles on the Resource Curse are Ross () and Venables ().
⁵ See Prentiss () for her calculations on land-use requirements and a brief application of her
framework in Pollin (: –).
⁶ https://www.yaleclimateconnections.org///pros-and-cons-the-promise-and-pitfalls-of-
natural-gas/.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
would greatly diminish, if not eliminate altogether, any emission-reduction benefits
from a coal-to-natural-gas fuel switch.⁷
.. Nuclear Energy
As of , nuclear power provided quadrillion British Thermal Units (Q-BTUs) of
energy throughout the global economy, amounting to per cent of total global supply.
Nearly per cent of global nuclear power supply is generated in North America,
Europe, China, and India. In terms of the world reaching a net-zero CO₂ emissions
target by , nuclear power provides the important benefit that it does not generate
CO₂ emissions or air pollution of any kind while operating. At the same time, the
processes for mining and refining uranium ore, making reactor fuel, and building
nuclear power plants all require large amounts of energy.
But even if we put aside the emissions that result from building and operating
nuclear power plants, we still need to recognize the long-standing environment and
public safety issues associated with nuclear energy. These include:
• Radioactive wastes. These wastes include uranium mill tailings, spent reactor fuel,
and other wastes, which according to the US Energy Information Agency (EIA)
‘can remain radioactive and dangerous to human health for thousands of years’
(EIA, : ).
• Storage of spent reactor fuel and power plant decommissioning. Spent reactor fuel
assemblies are highly radioactive and must be stored in specially designed pools or
specially designed storage containers. When a nuclear power plant stops operat-
ing, the decommissioning process involves safely removing the plant from service
and reducing radioactivity to a level that permits other uses of the property.
• Political security. Nuclear energy can obviously be used to produce deadly weap-
ons as well as electricity. Thus, the proliferation of nuclear energy production capacity
creates dangers of this capacity being acquired by organizations—governments or
otherwise—which would use that energy as instruments of war or terror.
• Nuclear reactor meltdowns. An uncontrolled nuclear reaction at a nuclear plant
can result in widespread contamination of air and water with radioactivity for
hundreds of miles around a reactor.
Even while recognizing these problems with nuclear energy, it is still the case, as
noted above, that nuclear power presently supplies over per cent of global energy
supply. For decades, the prevalent view throughout the world was that these risks
associated with nuclear power were relatively small and manageable, when balanced
against its benefits. However, this view was upended in the aftermath of the March
⁷ See, for example, Alvarez et al. (), Romm (), Howarth (), and Peischl et al. ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
nuclear meltdown at the Fukushima Daiichi power plant in Japan, which
resulted from the massive . Tohuku earthquake and tsunami. The full effects of the
Fukushima meltdown cannot possibly be known for some time. Still, these safety
considerations with nuclear energy must be accorded significant weight. This is
especially the case, given the high probability that the necessary tight standards for
regulating nuclear power plants will become compromised if the number of such plants
were to expand significantly on a global scale. As such, nuclear energy cannot be seen as
providing a major reliable long-term source of non-carbon-emitting energy supplies.
.. Geoengineering
This includes a broad category of measures whose purpose is either to remove existing
CO₂ or to inject cooling forces into the atmosphere to counteract the warming effects of
CO₂ and other greenhouse gases. One broad category of removal technologies is carbon
capture and sequestration (CCS). A category of cooling technologies is stratospheric
aerosol injections (SAI).
CCS technologies aim to capture emitted carbon and transport it, usually through
pipelines, to subsurface geological formations, where it would be stored permanently.
One straightforward and natural variation on CCS is afforestation. This involves
increasing forest cover or density in previously non-forested or deforested areas, with
‘reforestation’—the more commonly used term—as one component.
The general class of CCS technologies has not been proven at a commercial scale,
despite decades of efforts to accomplish this. A major problem with most CCS tech-
nologies is the prospect for carbon leakages that would result under flawed transporta-
tion and storage systems. These dangers will only increase to the extent that CCS
technologies are commercialized and operating under an incentive structure in which
maintaining safety standards will reduce profits. By contrast, afforestation is, of course, a
natural and proven carbon removal technology. At the same time, most deforestation
projects throughout the globe were undertaken to make space for raising crops and
livestock. Relying heavily on afforestation as a climate change strategy would therefore
likely present serious land-use competition problems.
The idea of stratospheric aerosol injections builds from the results that followed
from the volcanic eruption of Mount Pinatobo in the Philippines in . The eruption
led to a massive injection of ash and gas, which produced sulphate particles, or aerosols,
which then rose into the stratosphere. The impact was to cool the earth’s average
temperature by about . C for fifteen months.⁸ The technologies being researched
now aim to artificially replicate the impact of the Mount Pinatubo eruption through
deliberately injecting sulphate particles into the stratosphere. Some researchers
⁸ https://earthobservatory.nasa.gov/images//global-effects-of-mount-pinatubo.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
contend that to do so would be a cost-effective method of counteracting the warming
effects of greenhouse gases.
Lawrence et al. () published an extensive review on the range of climate
geoengineering technologies, including literature references. Their overall conclu-
sion from this review is that none of these technologies are presently at a point at which
they can make a significant difference in reversing global warming. They conclude:
Proposed climate geoengineering techniques cannot be relied on to be able to make
significant contributions . . . towards counteracting climate change in the context
of the Paris Agreement. Even if climate geoengineering techniques were actively
pursued, and eventually worked as envisioned on global scales, they would very
unlikely be implementable prior to the second half of the century . . . This would
very likely be too late to sufficiently counteract the warming due to increasing levels
of CO₂ and other climate forcers to stay within the .⁰C temperature limit—and
probably even the C limit—especially if mitigation efforts after do not
substantially exceed the planned efforts of the next decade (: –).⁹
.. Energy Efficiency and Clean Renewable Energy
Given these major problems with natural gas as a ‘bridge fuel’, nuclear energy, and
geoengineering, it follows that we focus instead on the most cautious clean energy
transition programme, that is, investing in technologies that are well understood,
already operating at large scale, and, without question, safe. In short, we focus on
investments that can dramatically raise energy-efficiency standards and equally dra-
matically expand the supply of clean renewable energy sources.
.. Energy Efficiency
Energy efficiency entails using less energy to achieve the same, or even higher, levels of
energy services from the adoption of improved technologies and practices. Examples
include insulating buildings much more effectively to stabilize indoor temperatures;
driving more fuel-efficient cars or, better yet, relying increasingly on well-functioning
public transportation systems; and reducing the amount of energy that is wasted both
through generating and transmitting electricity and through operating industrial
machinery.
Expanding energy-efficiency investments support rising living standards because
raising energy-efficiency standards, by definition, saves money for energy consumers.
⁹ In his paper, ‘There Is No Plan B for Dealing with the Climate Crisis’, the leading climate
scientist and lead co-author of the Third Assessment Report of the IPCC Raymond Pierrehumbert is
even more emphatic in arguing that geoengineering does not offer a viable solution to the climate crisis.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
A major study by the US National Academy of Sciences (NAS) found, for the US
economy, that ‘energy-efficient technologies . . . exist today, or are expected to be
developed in the normal course of business, that could potentially save per cent of
the energy used in the US economy while also saving money’. Similarly, a McKinsey
& Company study, focused on developing countries, found that, using existing technolo-
gies only, energy-efficiency investments could generate savings in energy costs in the
range of per cent of total GDP for all low- and middle-income countries.
In her book, Energy Revolution: The Physics and Promise of Efficient Technol-
ogy, Mara Prentiss argues, further, that such estimates understate the realistic savings
potential of energy-efficiency investments. This is because, in generating energy by
burning fossil fuels, about two-thirds of the total energy available is wasted while only
one-third is available for powering machines. By switching to renewable energy
sources, the share of wasted energy falls by per cent. This is what Prentiss terms
the ‘burning bonus’.
After taking account of the burning bonus as well as the efficiency gains available in
the operations of buildings, transportation systems, and industrial equipment, Prentiss
concludes, with respect to the US economy specifically, that economic growth could
proceed at a normal rate while total energy consumption could remain constant or
even decline in absolute terms. Prentiss’s conclusions regarding the US economy are
consistent with the most recent projections for global energy demand by the Inter-
national Energy Agency (IEA, ). As I discuss further in section .., the IEA
assumes that the global economy will grow at a . per cent average annual rate
between and . Nevertheless, under their most conservative Current Policies
Scenario, the IEA assumes that global energy consumption will grow at a much slower
. per cent per year. Under their more ambitious Sustainable Development Scenario,
they assume that global energy consumption will actually fall at an average rate of –.
per cent per year, while economic growth still proceeds at a . per cent average rate.¹⁰
A useful way to measure the relationship between the level of economic activity and
the energy resources consumed to support that activity is the energy intensity ratio. The
energy intensity ratio is, straightforwardly, the level of total energy resources consumed
in any given economy divided by the economy’s GDP. I report in Table A. (in the
Appendix) below the most recent energy intensity figures for the world economy as
well as for seven representative large economies—China, the United States, Brazil,
Germany, Indonesia, South Africa, and South Korea.
In section .., I will focus on this ratio for the world economy as a key variable for
estimating the costs of reaching a zero CO₂ emissions global economy by . For
now, it will be useful to consider the patterns for the global economy and the respective
national economies. The units in which I measure the ratio are Q-BTUs of energy
consumed/trillion dollars of GDP. As the table shows, the intensity ratio, as of ,
was . Q-BTUs for every $ trillion of global GDP. With the individual country
¹⁰ The IEA summarizes its three scenarios—the Stated Policies Scenario, the Sustainable Develop-
ment Scenario, and the Current Policies Scenario, on p. of its World Energy Outlook.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
figures, we see that the intensity ratios vary widely by country. Germany is the most
efficienct economy, with the lowest . intensity ratio. The United States is next, at with
a . intensity ratio, following by Brazil at .. South Korea and Indonesia are at similar
efficiency levels, with . and . intensity ratios respectively. China is operating at a
relatively low efficiency level, with a . intensity ratio. South Africa is the least energy
efficient of the countries in our sample, with an intensity ratio of ..¹¹
.. Estimating Costs of Efficiency Gains
This range of energy intensity figures notwithstanding, the aim of the clean energy
investment project will be to achieve dramatic improvements in efficiency in all
national economies across the global economy. The question we therefore need to
address is: how much will it cost to achieve such large-scale efficiency gains?
In fact, estimates as to the investment costs for achieving energy-efficiency gains vary
widely. In Table A. in the Appendix, I show summary estimates from three sets of
studies. As we see, the World Bank study by Taylor et al. puts average costs at $.
billion per Q-BTU of energy savings, based on a study of projects in both industrial
and developing economies. A study by McKinsey estimates costs for a wide range
of non-OECD economies at $ billion per Q-BTU of energy savings. Focusing just on
the US economy, NAS estimated average costs for energy-efficiency savings in the
buildings and industrial sectors at about $ billion per Q-BTU.¹²
It is not surprising that average costs to raise energy-efficiency standards would be
significantly higher in industrialized economies. A high proportion of overall energy-
efficiency investments are labour costs, especially projects to retrofit buildings and
industrial equipment. However, these wide differences in cost estimates shown in
Table A. do not simply result from variations in labour and other input costs by
regions and levels of development.
Thus, the World Bank estimate of $. billion per Q-BTU includes both industrial-
ized and developing countries, while the McKinsey $ billion per Q-BTU estimate—
nearly six times greater than the World Bank figure—is primarily coming from
developing-country projects. These alternative studies do not provide sufficiently
¹¹ It is, however, important to note that the pattern with these ratios is highly sensitive to the method
by which one measures national GDP figures. The figures reported here are based on nominal US dollars
calculated according to each country’s exchange rate. If, alternatively, we measured national GDP figures
based on purchasing power parity, the GDP figures would be significantly higher for the lower-income
economies. This would in turn lower their energy intensity ratios. How best to deal with these
methodological issues is an important question, but it is beyond the scope of this chapter.
¹² I am not aware of more recent studies that have attempted to provide comparable aggregated cost
estimates. However, recent studies on the building sector in the US economy have generated results
similar to those in the NAS study. These more recent studies include Molina (), Ackerman
et al. (), and Rosenow and Bayer ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
detailed methodological discussions that would enable us to identify the main factors
generating these major differences in cost estimates. But it is at least reasonable to
conclude from these figures that, with on-the-ground real-world projects, there are
likely to be large variations in costs down to the project-by-project level. Thus, the costs
for energy-efficiency investments that will apply in any given situation will necessarily
be specific to that situation, and must always be analysed on a case-by-case basis. At the
same time, for our present purposes, we need to proceed with some general rules of
thumb for estimating the level of savings that is attainable through a typical set of
efficiency projects in various regions of the world, and more precisely an aggregated
estimate for the global economy.
A conservative approach will be to allow that, relative to the World Bank and
US National Academy of Sciences figures, the mid-range cost estimate provided by
McKinsey at $ billion per Q-BTU of savings, is appropriate for low- and middle-
income economies, such as Brazil, Indonesia, and South Africa. Along the same lines,
we could assume that the cost figure for Germany will be equivalent to what the NAS
study estimated for the United States, at around $ billion per Q-BTU of savings. The
South Korean economy would then be an approximate midpoint between those two
other figures, at around $ billion per Q-BTU. As a working approximation for the
global economy, this same midpoint figure of $ billion per Q-BTU of savings should
be a credible high-end estimate, especially while recognizing that the World Bank
estimate for projects in both developing and advanced economies is ten times
higher, at about $ billion per Q-BTU of savings.
.. Rebound Effects
Raising energy-efficiency levels will generate ‘rebound effects’—i.e. energy consump-
tion increases resulting from lower energy costs. But such rebound effects are likely to
be modest within the current context of a global project focused on reducing CO₂
emissions and stabilizing the climate. Among other factors, energy consumption levels
in advanced economies are close to saturation points in the use of home appliances and
lighting—that is, we are not likely to clean dishes much more frequently because we
have a more efficient dishwasher. The evidence shows that consumers in advanced
economies are likely to heat and cool their homes as well as drive their cars more when
they have access to more efficient equipment. But these increased consumption levels
are usually modest. Average rebound effects are likely to be significantly larger in
developing economies.¹³
But it is critical that all energy-efficiency gains will be accompanied by complimen-
tary policies (as discussed in section ..), including setting a price on carbon
emissions to discourage fossil-fuel consumption. Most significantly, expanding the
¹³ See the discussion and references in Pollin et al. (: –).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
supply of clean renewable energy will allow for higher levels of energy consumption
without leading to increases in CO₂ emissions. It is important to recognize, finally, that
different countries presently operate at widely varying levels of energy efficiency. For
example, as we saw in Table A., Germany presently operates at an efficiency level
roughly per cent higher than that of the United States. Brazil is at an efficiency
level that is nearly three times that of South Africa. There is no evidence that large
rebound effects have emerged as a result of these high efficiency standards in Germany
and Brazil relative to those of the United States and South Africa.
.. Renewable Energy
A critical point for building a net-zero global economy by is the fact that, on
average, the costs of generating electricity with clean renewable energy sources are now
at parity or lower than those for fossil-fuel-based electricity. Table A. in the
Appendix shows the most recent figures reported by the International Renewable
Energy Agency (IRENA), for and , on the ‘levellized costs’ of supplying
electricity through alternative energy sources. Levellized costs takes account of all costs
of producing and delivering a kilowatt of electricity to a final consumer. The cost
calculations begin with the upfront capital expenditures needed to build the generating
capacity, continue through to the transmission and delivery of electricity, and include
the costs of energy that is lost during the electricity-generation process.
As we see in Table A., the levellized costs for fossil-fuel-generated electricity
range between . and cents per kilowatt hour as of . The average figures for the
four clean renewable sources are all within this range for fossil fuels as of , with
hydro at cents, onshore wind at cents, geothermal at cents and solar PV at
cents. The costs of geothermal and hydro did not fall, and actually rose modestly,
between and . However, the costs of onshore wind fell by per cent, from
to cents. The most impressive result though is with solar PV, in which levellized
costs fell by per cent from to , from cents to cents per kilowatt hour.
These average cost figures for solar and wind should continue to decline by significant
amounts as advances in technology and economies of scale proceed along with the
rapid global expansion of these sectors.
We emphasize that these cost figures from the IRENA are simple averages. They do
not show differences in costs due to regional or seasonally specific factors.¹⁴ In
particular, solar and wind energy costs will vary significantly by region and season.
Moreover, both wind and solar energy are intermittent sources—that is, they only
generate energy, respectively, when the sun is shining or the wind is blowing. Of course,
the central role of energy storage systems to address these matters will need to be fully
¹⁴ Such detailed figures are also available in IRENA ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
accounted for when clean renewable energy systems are designed to provide a major
share of an economy’s overall energy load.¹⁵
Keeping all such considerations in mind, we can still roughly conclude from these
figures that, for the most part, clean renewable energy sources are rapidly emerging
into a position at which they can produce electricity at comparable or lower costs than
non-renewable sources. As such, assuming that wind, solar, and geothermal energy
production can be scaled up to meet virtually all global demand by , then the costs
to consumers of purchasing this energy should not be significantly different from what
these consumers would have paid for non-renewable energy. Indeed, overall, the costs
to consumers of purchasing electricity from clean renewable sources, including hydro
as well as wind, solar, and geothermal power, are likely to be lower than what they
would be from fossil-fuel sources. It is critical to also emphasize that this is without
factoring in the environmental costs of burning oil, coal, and natural gas.
.. Costs of Expanding Renewable Capacity
By a substantial amount, the largest share of overall costs in generating electricity from
renewable sources are capital costs—that is, the costs of producing new productive
equipment, as opposed to the costs of operating that productive equipment once it has
been built and is generating energy. These capital costs are at about per cent of total
costs for geothermal, per cent for onshore wind, and per cent for solar PV.¹⁶
From these figures on levellized costs, we can also estimate the capital costs of installing
renewable energy capacity as a lump sum—that is, how much investors need to spend
upfront to put this capital equipment into place and in running order.
I produce estimates of these lump sum capital costs in Table A. in the Appen-
dix. Specifically, these figures represent the present values of total lump-sum capital
expenditures needed to produce one Q-BTU of electricity from onshore wind, solar
PV, and geothermal energy.¹⁷ As we see, the average lump-sum costs range from
$ billion per Q-BTU for geothermal, $ billion for onshore wind, and
$ billion for solar.
If we assume that, roughly speaking, the global expansion of clean renewable
energy capacity will consist of per cent from wind and solar PV technologies, and
per cent from geothermal energy, this would place the average costs of producing
one Q-BTU of overall renewable energy equipment at about $ billion, which we can
round up to $ billion per Q-BTU of clean renewable capacity. This $ billion
figure can therefore serve as a benchmark for estimating the average costs of
expanding the supply of clean renewable energy on a global scale. At the same time,
¹⁵ See IRENA () on electricity storage costs and markets through .
¹⁶ These figures are from the US Energy Information Agency (EIA, ).
¹⁷ The full methodology for generating these costs is presented in Pollin et al. (: –).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
as with our cost estimate for investments in energy efficiency, we will want to err, if
anything, on the side of overestimating, rather than underestimating, the costs of
expanding clean renewable energy. Moreover, with the expansion of the globe’s clean
energy supply proceeding rapidly over –, the average costs are likely to rise as
production bottlenecks emerge. We therefore will assume that the average costs of
expanding the clean energy supply will be $ billion per Q-BTU, that is, about per
cent higher than the $ billion average figure we have derived from the levellized
costs data.
We can now work with our two rough high-end estimates of the overall costs of both
raising energy-efficiency standards and building new clean renewable energy cap-
acity—$ billion per Q-BTU for efficiency gains and $ billion per Q-BTU for
expanding renewable capacity—to generate an estimate of the total costs of achieving a
net-zero global economy by .
. E G E
R
..................................................................................................................................
In this section, I present a simple model to illustrate how the global economy can
achieve net-zero CO₂ emissions by through investing about . per cent of global
GDP per year to raise energy-efficiency standards and to expand the supply of clean
renewable energy sources. The model works from the following assumptions:
. Average costs for increasing energy efficiency and expanding clean renewable
production. As discussed, I assume that the average costs to increase energy
efficiency by Q-BTU will be $ billion. I also assume that the average costs
to expand productive capacity of clean renewable energy by Q-BTU will be $
billion.
. Global GDP growth trend. The IEA’s forecast assumes an average global GDP
growth rate of . per cent between and (: ). My model
incorporates this figure. To date, the IEA has not published a global GDP growth
forecast that extends beyond . For the purposes of the current exercise,
I assume that the . per cent average global GDP growth rate will extend to .
. Clean renewable energy sources supply per cent of global energy demand. As
discussed, there may be a case for relying to a limited extent on nuclear energy
and some types of carbon capture technologies beyond afforestation as a supple-
ment to clean renewable sources. But this model demonstrates how, as of , it
will be cost effective as well as technically feasible to deliver per cent of global
energy supply through clean renewables.
. Three-year delay in bringing the project to scale. This is a thirty-year investment
project. But given that the current level of clean energy investments is in the range
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
of . per cent of global GDP,¹⁸ we must realistically allow for some incubation
time to pass before we can expect investments to rise by . percentage points as a
share of GDP, to a . per cent of annual GDP level. To reflect this consideration,
I assume, as noted above, that it will require three years of major initiatives within
the realms of industrial policy and financing to raise global clean energy invest-
ments by roughly . per cent of GDP relative to current investment levels. We
therefore assume that the . per cent of GDP per year level of clean energy
investments will occur over twenty-seven years within the full thirty-year invest-
ment cycle, that is, between and . The initial three years of the model,
–, will be needed to develop an adequate industrial policy and financing
environment to sustain clean energy investments at this level.
The results of this model are presented in Tables .–..
.. Global Model Framework and Calculations
In Table ., we start with the actual global GDP figure in of $ trillion.¹⁹ We
then work with the IEA’s assumption of average global GDP growth over the subse-
quent thirty years at . per cent per year. From our initial GDP figure of $
trillion and our assumption of . per cent average annual growth, we can then
estimate the level of GDP every year through . Under these assumptions, global
GDP will be $ trillion in . The model projects global GDP in at $
trillion. We can also then calculate the ‘midpoint’ GDP figure over the – thirty-
year investment cycle. I define this midpoint figure as being equal to the average of the
estimates of GDP in and , assuming average annual GDP growth at . per
cent. This midpoint figure, as we see, is $ trillion. From this midpoint figure, we can
then readily calculate a ratio for average annual clean renewable investments.
In Table ., I estimate the level of clean energy investments necessary to bring the
average global energy intensity ratio down from its current level of . (Q-BTUs/
¹⁸ Renewable investments = $ billion in , https://about.bnef.com/blog/clean-energy-
investment-exceeded--billion-/; but $ billion in according to IEA (p. ). But it
doesn’t break out bioenergy from the others. Energy efficiency, from IEA in is $ billion
(p. ). Total is therefore $ billion. But if we take out ~ per cent for high-emissions bioenergy,
that gets us to $ billion. $ billion/$ trillion = . per cent GDP.
¹⁹ This $ trillion global GDP figure comes from World Development Indicators. It is derived from
the prevailing exchange rates between the United States and all other global currencies as of . The
most widely utilized alternative measure of global GDP is derived through establishing purchasing
power parities between countries. Measured according to the purchasing power parity methodology,
global GDP in was $ trillion (World Development Indicators). For the purposes of this exercise,
it is important to, if anything, err by underestimating the prospects for a clean energy investment
programme over the thirty-year investment cycle. Therefore, for this exercise, I utilize the lower
$ trillion figure derived on the basis of exchange rates as of .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table 15.1 Thirty-year global GDP growth trajectory, 2021–50
2018 global GDP $86 trillion
Projected average annual GDP growth rate through 2040 (from IEA, 2019: 753) 3.4%
Projected 2021 GDP (with 3.4% average annual GDP growth) $95 trillion
Projected 2024 GDP (First year of 27-year investment cycle; with 3.4% average $104 trillion
annual GDP growth)
Projected 2050 GDP (with 3.4% average annual GDP growth) $260 trillion
Midpoint GDP value for investment spending estimates (= (2021 GDP + 2050 GDP)/2) $178 trillion
Sources: World Development Indicators; International Energy Agency, World Energy Outlook, 2019.
trillion dollars of GDP) to ., a per cent improvement in average global energy
efficiency. The . energy intensity ratio is the figure projected by the IEA in its
Sustainable Development Scenario. This will be while, according to the IEA model,
average global GDP is growing at . per cent per year.
As section A of Table . shows, if the global economy continues to operate at its
current . energy intensity ratio through , global energy consumption will be at
, Q-BTUs in . By contrast, if the global economy does succeed in driving
down the energy intensity ratio to . through efficiency investments, it follows that
global energy consumption will be at Q-BTUs as of .
As we then see in section B of Table ., total energy savings achieved through
operating the global economy at a . rather than a . average intensity ratio will be
, Q-BTUs. Since, as our high-end figure, we assume that the average global cost of
achieving efficiency gains is $ billion per Q-BTU, this means that achieving ,
Q-BTUs in global efficiency gains will cost a total of $. trillion. As Panel B of
Table . shows, the average annual investment level of the twenty-seven-year invest-
ment period is therefore $ billion.
In Table ., we work with the global energy consumption figure of
Q-BTUs from Table . to calculate the investment requirements for meeting this
level of total energy demand through clean renewable sources. As the table shows, as
of the most recent IEA figures, global supply of clean renewables is Q-BTUs. This
means that the expansion of supply as of will need to be Q-BTUs. It also means
that the average growth rate for expanding the global supply of clean renewable energy
will need to be at around per cent per year for the full – investment cycle.
In terms of estimating the costs of this investment project, I then, again, assume a
high-end average cost figure for expanding global clean energy capacity, at $ billion
per Q-BTU. Working from this figure, it follows, as shown in Table ., that the total
costs of expanding global clean energy supply by Q-BTUs as of will be $.
trillion. The average annual costs over the twenty-seven-year investment cycle will
therefore be $. trillion.
In Table ., I then summarize the figures for total and annual average costs for
achieving a net-zero global economy strictly on the basis of large-scale investments in
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table 15.2 Global energy demand and energy-efficiency cost projections for 2050
A) Total energy demand through alternative scenarios
2050 Energy Average annual Average 2050
consumption energy demand global energy
growth rate intensity ratio
2050 energy demand, with 1,716 Q-BTUs 3.4% 6.6
constant energy intensity ratio
2050 energy demand through 512 Q-BTUs –0.3% 2.0
IEA Sustainable Development
Scenario
B) Cost of achieving energy savings through the IEA sustainable development scenario
1. Total energy savings through the IEA Sustainable 1,204 Q-BTUs (= 1,716 Q-BTUs – 512
Development Scenario Q-BTUs)
2. Average cost of energy savings through efficiency $20 billion/Q-BTU
investments
3. Total cost of energy savings through efficiency $24.1 trillion (= rows 2 x 3)
investments
4. Average annual cost of energy savings through efficiency $891 billion ($24.1 trillion/27 years)
investments
Notes: Actual 2018 global energy consumption = 568 Q-BTUs; global energy intensity ratio = 6.6.
Source: IEA (2019: 678).
Table 15.3 Global clean renewable energy expansion and cost projection for 2050
1. Total 2050 energy consumption through the Sustainable 512 Q-BTUs
Development Scenario
2. 2018 clean renewable energy supply (from IEA, 2019: 678) 26 Q-BTUs
3. Net expansion of clean renewables as of 2050 486 Q-BTUs (= row 1 – row 2)
4. Average cost of expanding clean renewable supply $200 billion/Q-BTU
5. Total cost of expanding global clean renewable supply by 486 $97.2 trillion (= row 3 x row 4)
Q-BTUs as of 2050
Average annual cost of expanding global clean renewable supply $3.6 trillion (= row 5/27)
by 286 Q-BTUs as of 2050
Source: IEA (2019).
energy efficiency and clean renewables. As we see, total costs come to $. trillion.
Over the twenty-seven-year investment cycle, this amounts to an average of $.
trillion per year. Working from the estimates presented in Table ., our figure for
midpoint global GDP between and is $ trillion. This is how, finally, we
are able to estimate that the overall investment requirement for reaching a net-zero-
emissions global economy as of will amount, on average, to . per cent of global
GDP per year.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table 15.4 Costs of thirty-year clean energy investment project as share of average
GDP, 2021–50
Total costs of clean energy investments
1. Energy efficiency $24.1 trillion
2. Clean renewable energy $97.2 trillion
3. TOTAL (= rows 1 + 2) $121.3 trillion
2024 costs of clean energy investments (year 1 of 27-year investment cycle)
4. Energy efficiency $500 billion
5. Clean renewable energy $2.1 trillion
6. TOTAL (= rows 5 + 6) $2.6 trillion
Average annual costs of clean energy investments (27-year cycle)
7. Energy efficiency $891 billion/year
8. Clean renewable energy $3.6 trillion/year
9. TOTAL (= rows 7 + 8) $4.5 trillion/year
Total costs of clean energy investments as share of midpoint GDP
10. Midpoint GDP (from Table 15.1) $178 trillion
11. Clean energy investments as share of midpoint GDP (= row 6/row 7) 2.5%
Source: IEA (2019).
. I F P
..................................................................................................................................
.. Industrial Policies
Depending on specific conditions within each country, industrial policies will be
needed to promote technical innovations and, even more broadly, adaptations of
existing clean energy technologies. Again depending on circumstances, governments
will need to deploy a combination of industrial policy instruments, including research
and development support, preferential tax treatment for clean energy investments, and
government procurement policies. Clean energy industrial policies will also need to
include regulations of both fossil-fuel and clean energy prices as well as emission
standards.
One major policy intervention that can facilitate the creation of a vibrant clean
energy market will be for governments to themselves become both large-scale investors
in energy efficiency and purchasers of clean renewable energy. An important compar-
able historical experience was the development of the Internet within the US military,
beginning in the s. In the process of bringing the Internet to commercial scale, the
US military provided a guaranteed market for thirty-five years, which enabled
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the technology to incubate while private investors gradually developed effective
commercialization strategies.²⁰
But guaranteeing stable prices with the private-sector purchases of clean renewables
is also critical here. Such policies are termed feed-in tariffs. Specifically, these are
contracts that require utility companies to purchase electricity from private renewable
energy generators at prices fixed by long-term contracts. Feed-in tariffs were first
implemented in the United States in the s, and a number of state and local
programmes are currently operational in the United States today. However, the impact
of feed-in tariffs has been much more significant outside of the United States, especially
in Germany, Italy, France, Spain, and Canada. A study by the US Department of
Energy found that these policies in Europe ‘resulted in quick and substantial renewable
energy capacity expansion’.²¹ This basic result has been affirmed through more recent
research, including that by Milanes-Montero et al. (), which showed how feed-in
tariffs ‘have had a significant positive influence on the economic profitability’ on solar
PV companies in Europe. The key factor in the success of these European programmes
is straightforward: the guaranteed prices for renewable energy were set to adequately
reflect the costs of producing the energy along with a profit for the energy provider.
This then encouraged private renewable energy investors by providing a stable long-
term market environment.²²
Feed-in tariffs have also had some successes as a policy tool in Africa. The African
Development Bank reports as follows:
Public investment is critical in bridging the gap between public demonstration of
new technologies and mature deployment. Feed-in tariffs are a prominent example
of such subsidies. These tariffs are a policy mechanism that offers compensation to
renewable energy producers, based on the difference between the cost of electricity
generation of each technology and the market price of electricity generation that, in
the case of RETs, is usually lower. In Kenya, for example, feed-in tariffs led to the
high level of uptake of solar PV. As of , African countries used feed-in tariff
policies. (African Development Bank Group, )
Another important set of policies are those that aim to directly reduce fossil-fuel
consumption. These include carbon caps and carbon taxes. In principle at least, a
carbon cap establishes a firm limit on the allowable level of emissions for major
polluting entities, such as utilities. Such measures will also raise the prices of oil, coal,
and natural gas by limiting their supply. A carbon tax, on the other hand, will directly
raise fossil-fuel prices to consumers, and aim to reduce fossil-fuel consumption through
the resulting price signals. Either approach can be effective as long as the cap is strict
enough, or tax rate high enough, to significantly reduce fossil-fuel consumption and as
long exemptions are minimal to none. Raising the prices for fossil fuels will also, of
²⁰ See Ruttan ().
²¹ Cory, Couture, and Kreycik (: ).
²² Cointe and Nadaï () emphasize this point and contrast it with the official EU aim of
liberalizing renewable energy markets.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
course, create increased incentives for both energy-efficiency and clean renewable
investments, as well as a source of revenue to help finance these investments. We return
to this point in section ..
However, significant problems are also associated with both approaches. Establish-
ing a carbon cap or tax will have negative distributional consequences that will need to
be addressed in the policy design. All else equal, increasing the price of fossil fuels
would affect lower-income households more than affluent households, since petrol,
home-heating fuels, and electricity absorb a higher share of lower-income households’
consumption. An effective solution to this problem is to rebate to lower-income
households a significant share of the revenues generated either by the cap or tax to
offset the increased costs of fossil-fuel energy.²³
Renewable energy portfolio standards for utilities, and energy-efficiency standards
for buildings and transportation vehicles, are similar in their intent to a carbon cap.
That is, renewable portfolio standards set a minimum standard that utilities must
achieve in generating electricity from renewable energy sources. Energy-efficiency
standards for automobiles set minimum miles-per-gallon levels (or comparable meas-
ures) that a given auto fleet must achieve to be in compliance with the law. Comparable
efficiency standards can also be established for buildings in terms of allowable levels of
energy consumption for a given building size.
However, a major problem that has emerged with carbon caps as well as renewable
and efficiency standards has been with enforcement. As a major case in point, when
these cap programmes are combined with a carbon permit option—as in ‘cap-and-
trade’ policies—the enforcement of a hard cap becomes difficult to sustain or even
monitor, thereby weakening the impact of the policy.²⁴
.. Providing Cheap and Accessible Financing
There are two separate, but interrelated policy considerations here. The first is: where
will the funding come from to support approximately $. trillion in new clean energy
investments in and $. trillion as an annual average over –? The second
issue is: how can these funds be most effectively channelled into the full range of
specific projects that will need to advance every year in order to build a net-zero global
economy? We consider these issues in turn.
²³ See Boyce () for an effective solution to the distributional problem, via what he terms ‘carbon
dividends’. Azad and Chakraborty () expand on the idea of an egalitarian carbon dividend
programme to the global economy.
²⁴ See, for example, Teeter and Sandberg (). There is also the problem of the caps, or renewable
portfolio standards, being established in law but then ignored in policy implementation. This has been
the experience, for example, in New York State. See Pollin et al. (: –).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Sources of Aggregate Funding
In principle, it should not be especially challenging to solve this problem. To begin
with, as of , Credit Suisse estimates that the total value of global financial assets
was $ trillion.²⁵ The $. trillion that I am proposing to channel into clean energy
investments as of amounts to . per cent of this total financial asset pool.
Still, it is important to anchor the discussion in specific proposals. Therefore, for
purposes of illustration, I propose four large-scale funding sources to support public
investments in clean energy. Other approaches could also be viable. These four funding
sources are: ) a carbon tax, in which per cent of revenues are rebated back to the
public but per cent are channelled into clean energy investment projects; )
transferring funds out of military budgets from all countries, but primarily the United
States; ) a Green Bond lending programme, initiated by both the US Federal Reserve
and the European Central Bank; and ) eliminating all existing fossil-fuel subsidies and
channelling per cent of the funds into clean energy investments. Strong cases can be
made for each of these funding measures. But each proposal does also have vulner-
abilities, including around political feasibility. The most sensible approach is therefore
to combine the measures into a single package that minimizes their respective weak-
nesses as standalone measures. Table A. in the Appendix presents this set of
combined proposals in summary form.
. Carbon tax with rebates. As noted above, carbon taxes have the merit of impacting
climate policy through two channels—they raise fossil-fuel prices and thereby discour-
age consumption while also generating a new source of government revenue. At least
part of the carbon tax revenue can then be channelled into supporting the clean energy
investment project. But the carbon tax will hit low- and middle-income people
disproportionately, since they spend a larger fraction of their income on electricity,
transportation, and home-heating fuel. An equal-shares rebate, as proposed by Boyce
(), is the simplest way to ensure that the full impact of the tax will be equalizing
across all population cohorts.
Consider, therefore, the following tax-and-rebate programme. Focusing, again, on
, the first year of the full-scale investment programme, we begin with a tax at a low
rate of $ per ton of carbon. Given current global CO₂ emissions levels, that would
generate about $ billion in revenue. If we use only per cent of this revenue to
finance clean energy investments, that amounts to roughly $ billion for investment
projects. The per cent of the total revenue that is rebated to the public in equal shares
would then amount to $ billion. This amounts to about $ for every person on the
planet, or $ for a family of four.²⁶
²⁵ file:///C:/Users/RPollin/Downloads/global-wealth-report--en.pdf.
²⁶ Azad and Chakraborty () develop a more complex rebate structure, that rewards residents of
countries according to the emissions levels of each country.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. Transferring funds out of military budgets. Global military spending in was at
$. trillion.²⁷ The US military budget, at about $ billion, accounted for nearly
per cent of the global total. There are solid logical and ethical grounds for transfer-
ring substantial shares of each country’s total military budget to supporting climate
stabilization, if we take at face value the idea that military spending is fundamentally
aimed at achieving greater security for the citizens of each country. But to remain
within the realm of political feasibility, let us assume that per cent of global military
spending will transfer into supporting climate security. That would amount to $
billion.
. Green Bond funding by the Federal Reserve and European Central Bank. It was
demonstrated during the – global financial crisis and subsequent Great Recession
that the Federal Reserve is able to supply basically unlimited bailout funds to private
financial markets during crises. The extensive study, The Costs of the Crisis, by
Better Markets concludes that the Federal Reserve committed approximately $.
trillion to stop the crash of the financial system, stabilize the economy, and try to spur
economic growth. I would propose $ billion in Green Bond financing supplied by the
Fed. This would amount to a miniscule . per cent of the Fed’s – bailout
operations during the crisis. The Fed’s funding support could be injected into the global
economy through straightforward channels. That is, various public entities, such as the
World Bank, could issue long-term zero interest rate Green Bonds. The Fed would
purchase these bonds. The various public entities issuing these bonds would then have
the funds to pursue the full range of projects that will fall under the rubric of the global
clean energy project.
This framework has not yet been introduced into policy discussions at the Federal
Reserve. But they are becoming a central area of focus at the European Central Bank.
Thus, the Financial Times reported on // that the recently installed ECB President
Christine Lagarde is moving quickly on the matter. The Financial Times reports that:
Christine Lagarde . . . is pushing to include climate change considerations in a
review the central bank is due to hold into the way it conducts monetary policy.
Until now, the expectation was for a review into purely monetary matters, such as
whether the inflation target should be revised. An explicit focus on climate change
policy would be a huge move. Because the central bank is by far the biggest
influence on financial conditions in the market, it can make a significant difference
to investment decisions that determine how Europe’s climate transition goes.²⁸
The Financial Times article makes clear that the specific channels through which the
ECB would intervene to support clean energy financing will require substantial fleshing
out. The type of approach I have sketched for a Federal Reserve intervention would
seem like a relatively straightforward and modest form of intervention. I therefore
propose that the ECB undertakes Green Bond purchases at the same level as the Federal
²⁷ https://www.sipri.org/media/press-release//world-military-expenditure-grows--trillion-.
²⁸ https://www.ft.com/content/ff-bc-ea-a-dbfcfeae.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Reserve, that is, at $ billion as of , and growing over time to support clean
energy investments continuing at an average rate of . per cent of global GDP per year.
. Eliminating fossil fuel subsidies and channelling per cent of funds to clean energy
investments. One recent estimate of direct fossil-fuel subsidies to consumers—
measured as the difference between supply and consumer prices to purchase fossil-
fuel energy—is about $ trillion globally as of , or about . per cent of global
GDP.²⁹ Channelling these funds, in full, into supporting public clean energy invest-
ments would therefore more than pay for the $. trillion estimate for total clean
energy investments as of . This $ trillion would also represent more than double
the amount necessary to cover a global public investment level of $. trillion.
However, such fossil-fuel subsidies are largely used as a form of general support for
all energy consumers. Lower- and middle-income households are therefore major
beneficiaries of these subsidies, along with, of course, the fossil fuel energy suppliers.
Therefore, in terms of global income distribution, eliminating these subsidies
altogether would likely have a significant regressive impact, comparable to establishing
a carbon tax without an accompanying rebate programme. As such, to continue to
provide support for lower-income households, most of the funds that are now being
channelled to these households through fossil-fuel subsidies should be redirected into
either supporting lower consumer prices for clean energy or to provide direct income
transfers for lower-income households.
Given that we will have raised $ billion from the carbon tax, military spending
transfers and central bank Green Bond programmes, we could then assume that per
cent of the $ trillion received as fossil-fuel subsidies be transferred into the clean
energy investment fund. That would amount to $ billion. With these funds, we will
have reached the total $. trillion in public investment funds necessary to attain the
total of public and private investment spending of $. trillion as of .
.. Channelling Financial Resources into Specific
Investment Projects
Both general purpose development banks as well as special-purpose green development
banks are already significantly engaged in financing clean energy investments. It will be
crucial to build from these efforts to achieve the necessary level of financing for clean
energy investments.
²⁹ Coady et al. (). This study distinguishes direct fossil-fuel subsidies—what it terms ‘pre-tax’
subsidies—and ‘post-tax’ subsidies. They define post-tax subsidies as including global warming damages,
air pollution damages, and vehicle externalities, including congestion, accidents, and road damage. They
estimate post-tax subsidies as amounting to roughly per cent of global GDP. These are valuable
calculations. But for the purposes of this discussion on financing, the standard, and much more narrowly
defined, measure of pre-tax subsidies are more directly relevant.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Germany’s KfW Bank. The case of Germany is instructive, since it has been the most
successful large advanced economy to date in developing its clean energy economy.
The publicly owned development bank in Germany, KfW, has been critical to this
success. Griffith-Jones () considers KfW’s impact on Germany’s overall green
transformation, including renewable energy as well as energy-efficiency investments.
She finds that KfW has underwritten roughly one-third of all financing for green
investments in Germany. KfW has thus been instrumental in moving policy ideas
into effective investment projects, with respect to both energy efficiency and clean
renewables. KfW has also been highly active in financing green investment projects
elsewhere in Europe and in developing countries. As Griffith-Jones writes:
KfW plays a key role, domestically and internationally, in supporting energy
revolution, through funding major investments in renewable energy and in energy
efficiency. In the national German case, this was to a large extent implemented
within a clear institutional and policy framework, namely the renewable energy law,
through strong policy measures, such as feed in tariffs (FITs) and reverse competi-
tive auctions, which made investment in renewables commercially attractive.
A similar modus operandi existed for energy efficiency . . . The combination of
clear government policies and associated development bank targets has produced
very positive results in green infrastructure in Germany, which can be replicated in
emerging and developing countries. (: )³⁰
Griffith-Jones also describes the financing terms offered by KfW in all of their areas of
active lending. These include long-term loans and below-market interest rates, per
cent disbursement rates, up to three years holidays in making repayments, and
repayment bonuses of up to . per cent.
Green banks. Special purpose green development banks have also become increas-
ingly active in recent years. A OECD study defines a green investment bank as ‘a
publicly capitalized entity established specifically to facilitate private investment into
domestic low-carbon and climate-resistant infrastructure and other green sectors such
as water and waste management’ (: ). These special purpose banks have been
established at the national level in Australia, Japan, Malaysia, Switzerland, and the
United Kingdom. Within the United States, the states of California, Connecticut,
Hawaii, New Jersey, New York, and Rhode Island have created green banks. The
OECD study describes the banks as having ‘diverse rationales and goals, including
meeting ambitious emissions targets, mobilizing private capital, lowering the cost of
capital, lowering energy costs, developing green technology markets, supporting local
community development and creating jobs’ (: ). The OECD study does not
provide systematic evidence as to the scale at which these institutions are currently
³⁰ Griffith-Jones’s conclusions are fully in line with those of other researchers. For example, the
overview of the IEA’s Energy Efficiency Market Report concluded that ‘Germany is a world leader in
energy efficiency. Germany’s state-owned development bank, KfW, plays a crucial role by providing
loans and subsidies for investment in energy-efficiency measures in buildings and industry, which have
leveraged significant private funds’ (IEA, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
providing investment financing. But considering other references, it is reasonable to
assume that, in general, their scale of operations is much smaller than KfW.³¹ This
raises the question as to whether the necessary level of financing can be achieved
without the full backing of large-scale national or regional entities, such as the
equivalent of KfW.
Emerging trends in developing countries. Within developing economies there has
been a general movement in the aftermath of the – global financial crisis away
from the predominant neo-liberal financial market policy framework that prevailed
prior to the crisis. This trend has included the formation or expansion of development
banks. For example, Grabel () describes the emergence of the Development Bank
of Latin America and the New Development Bank as potentially significant new
sources of subsidized long-term financing for developing economies, including in the
area of green energy investments.
Recent studies by the World Bank (Hussain, ) and African Development Bank
(African Development Bank Group, ) examine specific financial models for
advancing green investments in developing countries. Both studies consider financing
arrangements through which concessionary public financing can be mobilized to
encourage, as opposed to crowd out, private investments, thereby creating viable
public–private partnerships with clean energy investment projects. The World Bank
study in particular, which focuses on renewable energy investments, emphasizes that
the long-term funding for these investments has been limited by the range of risks
private investors face while working with still relatively unfamiliar technologies.
These risks include uncertainty over the reliability of the technology within any
given project and shifts in the relevant regulatory environment. The World Bank
proposes a series of financing techniques for reducing these risks for private investors.
Yet the overall point remains that the public financing interventions—whether they be
implemented through formal development banks or otherwise—will need to absorb a
disproportionate share of these risks in order for the financing levels to reach scale
rapidly enough.
With respect to financing clean energy investments in developing countries in
particular, it is also critical that the benefits of these investments be shared fully by
society’s least-advantaged groups. Spratt, Griffith-Jones, and Ocampo emphasize this
consideration in their study ‘Mobilizing Investment for Inclusive Green Growth
in Low-income Countries’. This would mean, as important examples, expanding
access to electricity and providing clean energy for electricity and other needs at
affordable prices.³² To accomplish these ends, Spratt et al. emphasize that it is not
³¹ See, for example, Pollin et al. () for a discussion of the New York State green bank and related
public financing initiatives within New York State. See also Pollin et al. () for a discussion of green
banks within the US economy, and as one element within a broader framework of measures to support
clean energy investments.
³² As one specific policy proposal, Azad and Chakraborty () develop a programme for rapidly
advancing the expansion of renewable energy supply in India. The proposal includes a carbon tax, with
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
realistic to expect clean energy investments to consistently generate profits for private
businesses at rates comparable to mature investment areas, including fossil-fuel energy.
The requirement that the financing terms for clean energy investments be affordable for
borrowers—that is, not always yielding high returns for lenders—reinforces the central-
ity of public investment banks with clear social criteria guiding their financing strategies.
. D R C
C E I
..................................................................................................................................
One of the major questions that all countries will face in undertaking a clean energy
transformation will be the extent to which the large-scale expansion in clean
energy investment activity can be accomplished through utilizing domestic resources
as opposed to having to rely increasingly on imports. To the extent that a country runs
up against domestic productive capacity constraints while expanding its investments in
energy efficiency and clean renewable energy, it then faces two alternatives: either scale
back the clean energy investment project or rely increasingly on imports to maintain
the ambitious investment agenda.
Within this framework, it is critical to establish some measures of the range at which,
in any given country, import dependency is likely to increase as it establishes a clean
energy investment project at around . per cent of the country’s GDP. To generate a
rough estimate of this, I examine here the relative domestic and import content for the
set of industrial sectors that will be mobilized to expand a country’s energy-efficiency and
renewable energy investments. I report these figures for five large economies in different
regions of the world, that is, Brazil, Germany, Indonesia, South Africa, and South Korea.
To be more specific, I undertake the following exercise. Working from the most
recent country-specific input–output tables from the OECD, those from , I first
calculate the current level of domestic content for all activities that will be mobilized to
undertake clean energy investments in five major areas. These five areas are energy-
efficiency investments in building retrofits, industrial-efficiency and grid upgrades as
well as renewable investments in solar and wind power. Two examples of the specific
set of inputs within a given investment project, along with the relative contributions of
each of these inputs, are as follows:
• Solar industry investments in Brazil:
▪ Computer and electronic products— per cent weight
▪ Construction— per cent weight
▪ Business sector services— per cent weight
the revenues from the tax being channelled into clean renewable energy investments that will then
supply free electricity to low-income communities, many of which still have no access to electricity.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
▪ General machinery and equipment products— per cent weight
▪ Basic metals manufacturing— per cent weight
• Grid upgrades in South Africa:
▪ Construction— per cent weight
▪ Computer and electronic products— per cent weight
▪ Electrical equipment— per cent weight
▪ General machinery and equipment products— per cent weight
Within these input–output frameworks, I then divide each of the specific activities
associated with each of the five investment projects into non-tradable and tradable
activities. Following from the literature, I define a ‘tradable’ activity as one in which less
than per cent of this activity’s inputs come from domestic sources.³³
Within these definitions of ‘tradable’ and ‘non-tradable’ activities, I then assume that
the domestic content levels for non-tradable activities will remain constant as the
country’s clean energy investment project proceeds. These non-tradable activities include
construction, ground transportation, and administration. With tradable activities, I allow
that domestic content will fall by up to per cent. This enables us to then observe how
much overall domestic content within any given investment project area will decline
when the domestic content of specific tradable activities declines by per cent.
In Table A. in the Appendix, I show the results of this exercise for the five clean
energy investment areas and five representative countries. As we see, overall, domestic
content levels are generally high for all five countries with all five clean energy projects.
In virtually all cases, domestic content levels are higher than per cent. When we then
allow domestic content for tradable activities to fall by per cent, we still find that, in
virtually all cases, overall domestic content remains above per cent.
Thus, after the per cent decline in domestic content for tradable activities, we
see that the largest declines in overall domestic content are with grid upgrades in
South Africa, in which domestic content falls from to per cent; grid upgrades
in South Korea, in which overall domestic content falls from to per cent; and
wind energy in South Africa, in which overall domestic content declines from to
per cent. These changes would all represent significant increases in the respective
countries’ import requirements. But they should not entail major strains in the
countries’ overall balance of payments. Thus, for the most part, most countries should
be able to undertake clean energy transformations mostly through mobilizing the
country’s existing supply of domestic resources.
³³ This discussion and set of calculations are an updated version of that presented in Pollin et al.
(: –). Full references on methodology and related matters are presented in this
publication.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Fossil Fuel Consumption and Imports/Exports
One factor in enabling the expansion of domestic production in sectors of economies
linked to clean energy will be the fact that the fossil-fuel sectors in all countries will be
correspondingly contracting. The freeing up of economic resources out of the activities
tied to the fossil-fuel sector will be substantial in all cases. These activities include
extracting, transporting, refining, and the retail distribution of fossil-fuel energy, along
with all the sectors that provide supplies to support these activities.
The data in Table A. in the Appendix provide a sense of the magnitudes involved.
The first column of the table shows, for , the extent to which each of our five
representative economies relies on fossil fuels to meet its overall energy consumption
levels.³⁴ As we see, fossil fuels supply more than half of each country’s total energy
consumption. Brazil has the lowest proportion of fossil-fuel consumption, at per
cent of total energy consumption. This is because of its uniquely high levels of both
hydro and biofuel production. Indonesia is next lowest, at per cent reliance on fossil
fuels. But this figure includes Indonesia’s still heavy reliance on burning peat as a high-
emissions renewable energy source. Exclusive of peat, coal, oil, and natural gas provide
roughly per cent of Indonesia’s remaining energy supply. Germany, South Africa,
and South Korea all rely on fossil fuels for between about and per cent of their
overall energy supply. These figures show that, as these economies undergo transitions
to clean energy sources, major shares of their economies’ overall resources will be
released from the current demands generated by their fossil-fuel sectors.
We obtain additional perspective as to how such scenarios might play out through
the figures shown in the second column of Table A.. Here I show the import shares
as a proportion of total energy consumption for our five selected economies as of .
As we see, Indonesia and South Africa were energy exporters, both through their coal
exports. With Brazil, as the table shows, imports constituted a relatively modest per
cent of its overall energy supply as of , while Germany and South Korea were
major energy importers, at and per cent of their overall energy supply. These
figures are representative of longer-term energy consumption patterns for both
countries.
Of course, the energy-importing countries, Brazil, Germany, and South Korea, are
presently utilizing a smaller share of their total domestic resources in the fossil-fuel
sector. Their share of total economic resources devoted to energy-linked activities
could rise as a result of increasing investments in energy efficiency and renewable
energy. However, the share of total domestic resources devoted to supplying oil, coal,
and natural gas in these importing countries is still substantial. In Germany, the shares
are per cent for the coal sector and per cent for oil and gas. In South Korea, the
proportions are per cent for coal and per cent for oil and gas. Thus, even with
³⁴ The data reported in Table A. are the most recent complete set of figures for all five
countries.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Germany and South Korea, as major energy importers, the move out of fossil fuels and
into clean energy will entail releasing domestic resources that can be repurposed for the
clean energy transition.
. C
..................................................................................................................................
This chapter has demonstrated that achieving a net-zero-emissions global economy by
—in line with the IPCC’s climate stabilization goals—is an entirely feasible project
with respect to its technical and economic requirements. As its foundation, it will
require investments in energy efficiency and clean renewable energy at an average of
$. trillion per year globally between and . This is a formidable level of
spending in absolute terms, but still amounts to only . per cent of average global GDP
per year over –. Put another way, it implies that . per cent of global economic
activity can proceed largely independently of the clean energy investment project, as
long as the . per cent of GDP goal is achieved each year.
The success of the global clean energy investment project—and thereby, the Global
Green New Deal—will depend on whether effective industrial and financial policies
will be enacted. Fundamentally, the Green New Deal amounts to a unified, and globally
coordinated set of industrial policies—policies, which, taken as a whole, are capable of
creating an entirely new global energy industry infrastructure within thirty years.
Accomplishing this goal will require a range of specific policy initiatives, working in
conjunction with each other to undergird energy-efficiency and clean renewable energy
investments on an unprecedented scale. The first specific requirement will be to
mobilize a large enough pool of investment funds to finance the project at the needed
scale. As an illustration, I have shown how this can be achieved through a combination
of four major funding sources—a per cent share of funds from carbon tax revenues;
a transfer of per cent of military spending into clean energy investments; Green Bond
purchases by both the Federal Reserve and the European Central Bank, at an initial
combined level of $ billion and rising with economic growth thereafter; and the
elimination of all fossil-fuel subsidies and the transfer of per cent of these funds into
clean energy projects.
Working with this pool of funds, public investments will need to play the leadership
role in ramping up clean investment activities in most countries at the required pace.
But private investments will be equally critical over time. Indeed, I have assumed that
public and private investment levels will need to be roughly comparable in magnitude
in order to maintain the overall project at scale. Both carrots and sticks will be needed
to induce and sustain a sufficient level of private investments. These include, as carrots,
generous financial subsidies, concessionary borrowing rates, and guaranteed markets.
As sticks, they include an ambitious renewable portfolio and energy-efficiency stand-
ards whose requirements cannot be readily circumvented, in contrast with some
existing cap-and-trade and renewable portfolio systems. Achieving the appropriate
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
mix of these measures in any given country setting will represent a major challenge in
industrial policy design.
Operating at the ground level, to advance this clean energy investment project at
scale will of course require the mobilization of productive resources in all countries.
But as I have shown, this should not create major problems with respect to domestic
capacity bottlenecks, at least not after an initial adjustment period. For one thing, the
domestic content levels for most clean energy investment activities are already high in
the relevant productive sectors in most countries. Domestic content ratios should also
remain high even as the demands on these sectors grow with the scaling up of clean
energy investment activities. This is because a high proportion of the productive
activity that will be required are in non-tradable sectors, such as construction, ground
transportation, and administration. In addition, the fossil-fuel sectors in all countries
will be undergoing major contractions as the clean energy sectors grow, thereby freeing
up resources that can be redeployed into clean energy activities.
In summary: the challenge facing humanity today with climate change is without
precedent. Within the context of this urgent historical moment, the design and
implementation of an effective set of clean energy industrial policies will play a
critical role towards achieving the target of net-zero emissions in the global economy
by .
. A
..................................................................................................................................
Table A15.1 Energy intensity ratios, global average and
selected countries
World Average 6.6
China 12.7
United States 5.3
Brazil 7.2
Germany 3.5
Indonesia 9.8
South Africa 20.3
South Korea 9.3
Note: Energy Intensity = Q-BTUs of energy consumed/GDP (in trillions
of US dollars) World average for 2018; Individual Country figures for
2016. GDP figures in current US dollars.
Sources: Energy consumption figures from EIA, International Energy
Statistics, http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=
44&pid=44&aid=2. GDP figures from World Development Indicators:
https://data.worldbank.org/indicator.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table A15.2 Estimates of cost savings from energy-efficiency investments
Source Regions/Countries/Sectors Estimated savings in
estimated Q-BTUs
World Bank (Taylor et al., 455 projects in eleven industrial and $1.9 billion per Q-BTU
2008: 29) developing countries
McKinsey & Co. (2010: 27) Africa, India, Middle East, South East $11 billion per Q-BTU
Asia, Eastern Europe, China
United States National United States ~ $29 billion per Q-BTU
Academy of Sciences for buildings, industry
(2010)
Source: Pollin et al. (2015: 88).
Table A15.3 Average global levellized costs of electricity from utility-scale
renewable energy sources vs. fossil-fuel sources, 2010–17
2010 2017
Solar PV 36 cents 10 cents
Onshore wind 8 cents 6 cents
Geothermal 5 cents 7 cents
Hydro 4 cents 5 cents
Note: Average levellized costs for fossil-fuel generated electricity: 4.5–14 cents per kilowatt hour.
Source: https://www.irena.org/Statistics/View-Data-by-Topic/Costs/LCOE-2010-2017.
Table A15.4 Capital expenditure costs for building renewable
electricity productive equipment, present values of total
lump-sum capital costs per Q-BTU of electricity
Wind $160 billion
Solar PV $190 billion
Geothermal $112 billion
Average costs $169 billion
Assuming investments are 45 per cent wind, 45 per cent
solar, and 10 per cent geothermal
Source: EIA, https://www.eia.gov/outlooks/aeo/pdf/electricity_generation.
pdf. See Pollin et al. (2014: 136–7) for methodology in converting levelized
costs per Q-BTU into lump-sum capital costs.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table A15.5 Major funding sources for global clean energy investments
Investment level for 2024—Year 1 of investment cycle: $2.6 trillion in public and private investments, at
2.5 per cent of GDP
Clean energy investment areas:
• Clean renewable energy: $2.1 trillion
◦ Wind, solar, geothermal, small-scale hydro, low-emissions bioenergy
• Energy efficiency: $500 billion
◦ Buildings, transportation, industrial equipment, grid and battery storage upgrades
Public sources of funds: $1.3 trillion:
• Carbon tax revenues: $160 billion
◦ 25 per cent of revenues from tax; 75 per cent returned to consumers as rebate
• Transfers from military budgets: $90 billion
◦ 5 per cent of global military spending
• Green bond purchases by Federal Reserve and European Central Bank: $200 billion
◦ 1.6 per cent of Federal Reserve Wall Street bailout support during financial crisis
• Transfers of 25 per cent of fossil-fuel subsidies: $750 billion
◦ Total fossil-fuel subsidies = $3 trillion
◦ 75 per cent of funds for lower clean energy prices or direct income transfers for lower-income
households
Private sources of funds: $1.3 trillion:
• Policies for Incentivizing Private Investors
◦ Government procurement
◦ Regulations
▪ Carbon caps and taxes
▪ Renewable energy portfolio standards for utilities
▪ Energy efficiency standards for buildings and transportation vehicles
◦ Investment Subsidies
▪ Feed-in tariffs
▪ Low-cost financing through development banks and green banks
Table A15.6 Change in overall domestic content of clean energy investment
activities after 20 per cent import increase with tradable activities
Energy efficiency investments Renewable investments
Building Industrial Grid upgrades Solar Wind
retrofits efficiency
Brazil 95 per cent ! 93 per cent ! 87 per cent ! 90 per cent ! 92 per cent !
95 per cent 84 per cent 75 per cent 81 per cent 85 per cent
Germany 91 per cent ! 88 per cent ! 85 per cent ! 88 per cent ! 87 per cent !
91 per cent 80 per cent 72 per cent 79 per cent 75 per cent
Indonesia 91 per cent ! 87 per cent ! 82 per cent ! 86 per cent ! 83 per cent !
91 per cent 79 per cent 70 per cent 78 per cent 73 per cent
South 86 per cent ! 84 per cent ! 79 per cent ! 84 per cent ! 83 per cent !
Africa 69 per cent 73 per cent 63 per cent 70 per cent 68 per cent
South 89 per cent ! 89 per cent ! 84 per cent ! 86 per cent ! 87 per cent !
Korea 71 per cent 77 per cent 67 per cent 72 per cent 71 per cent
Sources: 2015 OECD input–output country-specific tables. Methodological details in Pollin et al. (2015:
chapter 5 and appendix 2).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table A15.7 Reliance on fossil fuels and imports as energy sources in selected
countries, 2014
Fossil fuels as a share of total energy Imports as a share of total energy
consumption consumption
Brazil 59.1 per cent 11.9 per cent
Germany 79.7 per cent 60.9 per cent
Indonesia 66.1 per cent –103.1 per cent
South Africa 86.8 per cent –14.5 per cent
South Korea 82.4 per cent 81.7 per cent
Note: Negative figures indicate net export proportion.
Source: World Development Indicators, World Bank.
R
Ackerman, Frank, Pat Knight, and Bruce Biewald () ‘Estimating the Cost of Saved
Energy’. Available at http://www.synapse-energy.com/sites/default/files/COSE-EIA--
Database-–.pdf.
African Development Bank Group () African Development Report : Towards Green
Growth in Africa. Tunis: African Development Bank Group. Available at https://www.afdb.
org/fileadmin/uploads/afdb/Documents/Publications/African_Development_Report_
.pdf.
Alvarez, Ramón A., Stephen W. Pacala, James J. Winebrake, William L. Chameides, and
Steven P. Hamburg () ‘Greater Focus Needed on Methane Leakage from Natural Gas
Infrastructure’, Proceedings of the National Academy of Sciences of the United States of
America (): –.
Azad, Rohit and Shouvik Chakraborty () ‘Balancing the Climate Injustice: A Proposal for
a Differential Global Carbon Tax’, in Sevil Acar and Erinc Yeldan (eds) Handbook of Green
Economics. London: Elsevier, pp. –.
Azad, Rohit and Shouvik Chakraborty () ‘Green Growth and the Right to Energy in
India’, Energy Policy : .
Better Markets () ‘The Cost of the Crisis: $ Trillion and Counting’. Available at https://
bettermarkets.com/newsroom/-trillion-cost-financial-crisis-.
Boyce, James () The Case for Carbon Dividends. Cambridge: Polity Press.
Coady, David, Ian Party, Louis Sears, and Baoping Shang () ‘How Large are Global Fossil
Fuel Subsidies?’, World Development : –.
Cointe, Beatrice and Alain Nadaï () Feed-In Tariffs in the European Union. Basingstoke:
Palgrave Macmillan.
Cory, Karlynn, Toby Couture, and Claire Kreycik () ‘Feed-in Tariff Policy: Design,
Implementation, and RPS Policy Interactions’. Golden, CO: National Renewable Energy
Laboratory. Available at http://www.nrel.gov/docs/fyosti/.pdf.
EIA (US Energy Information Administration) () ‘Nuclear Explained: Nuclear Power and
the Environment’. Available at https://www.eia.gov/energyexplained/index.cfm?page=
nuclear_environment.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
EIA (US Energy Information Administration) () ‘Levelized Costs and Levelized Avoided
Cost of New Generation Resources in the Annual Energy Outlook ’. Available at
https://www.eia.gov/outlooks/aeo/pdf/electricity_generation.pdf.
Grabel, Ilene () When Things Don’t Fall Apart: Global Financial Governance and
Developmental Finance in an Age of Productive Incoherence. Cambridge, MA: MIT Press.
Griffith-Jones, Stephany () ‘National Development Banks and Sustainable Infrastructure:
The Case of KfW’. GEGI Working Paper No. , Boston University, Global Economic
Governance Initiative.
Howarth, Robert () ‘Methane Emissions and Climatic Warming Risk from Hydraulic
Fracturing and Shale Gas Development: Implications for Policy’, Energy and Emission
Control Technologies : –. Available at https://www.dovepress.com/methane-emissions-
and-climatic-warming-risk-from-hydraulic-fracturing–peer-reviewed-article-EECT.
Hussain, Mustafa Zakir () Financing Renewable Energy: Options for Developing Finan-
cing Instruments Using Public Funds. Washington, DC: The World Bank and Climate
Investment Funds. Available at http://documents.worldbank.org/curated/en/
/pdf/WPFinanBoxBPUBLIC.pdf.
IEA (International Energy Agency) () Energy Efficiency Market Report : Market
Trends and Medium-term Prospects. Paris: OECD/IEA.
IEA (International Energy Agency) () World Energy Outlook . Paris: OECD/IEA.
IRENA (International Renewable Energy Agency) () Electricity Storage and Renewables:
Costs and Markets to . Abu Dhabi: International Renewable Energy Agency.
IRENA (International Renewable Energy Agency) () Renewable Power Generation Costs
in . Available at https://www.irena.org/publications//May/Renewable-power-
generation-costs-in-.
Lawrence, Mark, Stefan Schafer, Helene Muri, Vivian Scott, Andreas Oschlies, Naomi
E. Vaughan, Oliver Boucher, Hauke Schmidt, Jim Haywood, and Jurgen Scheffran ()
‘Evaluating Climate Geoengineering Proposals in the Context of the Paris Agreement
Temperature Goals’, Nature Communications. Available at https://www.nature.com/
articles/s---#citeas.
McKinsey & Company () Energy Efficiency: A Compelling Global Resource. New
York.
Milanes-Montero, Patricia, Alberto Arroyo-Farrona, and Esteban Perez-Calderon ()
‘Assessment of the Influence of Feed-in Tariffs on the Profitability of European Photovol-
taic Companies’, Sustainability, September. Available at https://www.researchgate.net/
publication/_Assessment_of_the_Influence_of_Feed-In_Tariffs_on_the_Profit
ability_of_European_Photovoltaic_Companies.
Molina, Maggie () ‘The Best Value for America’s Energy Dollar: A National Review of the
Cost of Utility Energy Efficiency Programs’. Washington, DC: American Council for an
Energy-Efficient Economy. Available at http://assets.fiercemarkets.net/public/smartgridnews/
ACEEE-Energy-Efficiency-Costs.pdf.
NAS (National Academy of Sciences), NAE (National Academy of Engineering), and NRC
(National Research Council) () Real Prospects for Energy Efficiency in the United States.
Washington, DC: National Academies Press.
Peischl, Jeff, Anna Karion, Cora Sweeney et al. () ‘Quantifying Atmospheric Methane
Emissions from Oil and Natural Gas Production in the Bakken Shale Region of North
Dakota’, Journal of Geophysical Research: Atmospheres (): –. https://agupubs.
onlinelibrary.wiley.com/doi/full/./JD.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Pierrehumbert, Raymond () ‘There Is No Plan B for Dealing with the Climate Crisis’,
Bulletin of the Atomic Scientists (): –.
Pollin, Robert () Greening the Global Economy. Cambridge, MA: MIT Press.
Pollin, Robert () ‘Degrowth vs. the Green New Deal’, New Left Review (July/August):
–.
Pollin, Robert and Brian Callaci () ‘The Economics of Just Transition: A Framework for
Supporting Fossil-fuel-dependent Workers and Communities in the United States’, Labor
Studies Journal (): –.
Pollin, Robert, Heidi Garrett-Peltier, James Heintz, and Bracken Hendricks () Green
Growth: A US Program for Controlling Climate Change and Expanding Job Opportunities.
Washington, DC: Center for American Progress. Available at https://cdn.american
progress.org/wp-content/uploads///PERI.pdf.
Pollin, Robert, Heidi Garrett-Peltier, James Heintz, and Shouvik Chakraborty () ‘Global
Green Growth: Clean Energy Industrial Investments and Expanding Job Opportunities’,
United Nations Industrial Development Organization and Global Green Growth Institute.
Available at http://gggi.org/wp-content/uploads///GGGI-VOL-I_WEB.pdf.
Pollin, Robert, Heidi Garrett-Peltier, and Jeannette Wicks-Lim () ‘Clean Energy Invest-
ments for New York State: An Economic Framework for Promoting Climate Stabilizing
and Expanding Good Job Opportunities’, Political Economy Research Institute, November.
Available at https://www.peri.umass.edu/publication/item/-clean-energy-investments-
for-new-york-state-an-economic-framework-for-promoting-climate-stabilization-and-
expanding-good-job-opportunities.
Pollin, Robert, Jeannette Wicks-Lim, Shouvik Chakraborty, and Tyler Hansen ()
‘A Green Growth Program for Colorado’. Political Economy Research Institute, April.
Available at https://www.peri.umass.edu/publication/item/-a-green-growth-program-
for-colorado.
Prentiss, Mara () Energy Revolution: The Physics and the Promise of Efficient Technology.
Cambridge, MA: Harvard University Press.
Romm, Joe () ‘Methane Leaks Wipe out any Climate Benefit of Fracking, Satellite
Observations Confirm’, Think Progress. Available at https://thinkprogress.org/methane-
leaks-wipe-out-any-climate-benefit-of-fracking-satellite-observations-confirm-acdd/.
Rosenow, Jan and Edith Bayer () ‘Costs and Benefits of Energy Efficiency Obligation
Schemes’. Available at http://www.raponline.org/wp-content/uploads///rap-rosenow-
bayer-costs-benefits-energy-efficiency-obligation-schemes-.pdf.
Ross, Michael L. () ‘What Have We Learned about the Resource Curse?’, Annual Review
of Political Science : –.
Ruttan, Vernon W. () Is War Necessary for Economic Growth? Military Procurement and
Technology Development. New York: Oxford University Press.
Spratt, Stephen, Stephany Griffith-Jones, and José Antonio Ocampo () ‘Mobilising
Investment for Inclusive Green Growth in Low-Income Countries’. Berlin: Deutsche
Gesselllschaft für Internationale Zusammenarbeit. Available at http://www.stephanygj.
net/papers/MobilisingInvestmentforInclusiveGreenGrowth.pdf.
Teeter, Preston and Jorgen Sandberg () ‘Constraining or Enabling Green Capability
Development? How Policy Uncertainty Affects Organizational Responses to Flexible
Environmental Regulations’, British Journal of Management (): –.
Venables, Anthony J. () ‘Using Natural Resources for Development: Why Has It Proven
So Difficult?’, Journal of Economic Perspectives (): –.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
......................................................................................................................
.............................................................................................................
. I
..................................................................................................................................
T economics of development and structural change highlight the importance of
industrialization as a means for countries to move from poverty to higher living
standards and well-being. Industrial policy—that is, an articulated policy path to
industrialization and the production of higher valued-added goods and services—is a
means to achieve that goal. Markets on their own, however, do not ensure that the
benefits of industrialization are equitably shared. With the scope of industrial policy
becoming far broader than had traditionally been conceived, integration of issues of
equality and inclusion are both timely and needed.¹
While greater equality that ensures the benefits of structural change and industrial
upgrading are broadly shared is a goal in its own right, a large body of research on
feedback loops from intergroup equality to the macroeconomy² suggests that the
degree of equality itself impacts the effectiveness of industrial policy. For example,
correctly implemented, industrial policies that promote greater equality generate the
aggregate demand required to absorb increased output, putting the economy on a path
to equity-led structural change and growth. And at the same time, greater equality has
positive supply-side effects on the quality of the labour force and knowledge assets, key
components of successful industrial policies.
Attention to the role of gender equality in the success of industrial policies is yet
another, albeit relatively neglected, way in which the industrial policy frame can
usefully be expanded. This chapter explores the two-way relationship between gender
¹ On the changing landscape and scope of industrial policy, see Oqubay (Chapter , this volume) and
UNCTAD ().
² See, for example, UNDP () and Ostry et al. ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
and industrialization and the consequent implications for industrial policy design. In
terms of the effect of industrialization on gender, the employment, consumption, social
reproduction, and knowledge production channels are the most salient. Regarding
employment, in the early stages of industrialization of developing countries, women’s
share of manufacturing employment rose substantially, albeit under conditions of
insecure employment and low wages, with little opportunity to move up the ladder
to better paid jobs. That trend appears to reverse as countries industrially evolve, with
evidence of women excluded from jobs in more knowledge- and capital-intensive
industries. This has occurred despite the fact that gender educational disparities have
narrowed and even closed in a number of countries.
Women are also underrepresented in high-tech firms, and more generally, in job
categories associated with innovation and technological change. Apart from the loss of
women’s talent in such jobs, this limits the types of innovations generated, and omits
the interests and needs of women as consumers in product design. It also leads to a lack
of attention to technologies that could reduce unpaid care work, with which women are
disproportionately burdened. As outlined in this chapter, substantial economic gains
could be achieved by industrial policies that promote gender equality. This suggests
that gender should figure prominently in industrial policy design from the start,
expanding the scope of industrial policies related to sustainability and inclusion.
. T I I P
S C G
E
..................................................................................................................................
At the broadest level, the aim of industrial policy is to stimulate productivity growth in
order to raise living standards. The way to do this is to generate the conditions for the
production of high value-added goods, in particular manufactured products but also
services and agricultural goods (Oqubay, Chapter , this volume; Cramer and
Tregenna, ). To achieve this goal, industrial policies target activities that promote
gains in productivity and employment, foreign exchange earnings via export competi-
tiveness, production arrangements that support backward and forward linkages, and
perhaps most importantly, knowledge production, including learning by doing, in
order to support dynamic comparative advantage.
Governments face significant social, economic, and environmental challenges that, if
left unaddressed, can undermine progress in achieving the objectives of industrial policy.
For example, the negative environmental impacts of pursuing industrialization and
development with current energy technologies are by now well understood. The ‘green-
ing’ of industrial strategies has been advanced as a means to address environmental
challenges while promoting growth of output and employment (Rodrik, ; Pollin,
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Chapter , this volume). The Green New Deal is an example of an industrial policy that
addresses environmental goals as well as equity issues (Ocasio-Cortez, ).
Gender inequality is also impacted by industrial policies, and thus requires targeted
efforts to design gender-equalizing policies. There are several channels through which
industrial policies affect the degree of gender inequality. Among them, the most
important are the following: () structural change influences access to employment
and wages, and may be gender equalizing or dis-equalizing due to the existence of
gender job segregation, unrelated to human capital differences; () industrial policies
influence innovation pathways that result in the diffusion of new varieties of industrial
goods that may benefit some groups more than others; and () public investment in
infrastructure may reduce or exacerbate gender inequalities, especially in the sphere of
social reproduction.
.. Gender, Employment, and Industrialization
The impact of industrial policy, industrialization, and structural change on women’s
relative access to paid employment has long been a topic of feminist economics
research. A gender division of labour continues to be pervasive globally and is one of
the main sources of gender income inequality. Two salient aspects to this phenomenon
are that: () women are socially assigned responsibility for unpaid labour that produces
and reproduces the labour key to the industrialization process; and () even within the
paid sector of the economy, jobs are ‘gendered’, with women slotted into lower-quality
occupations and industrial sectors of the economy.
I begin with a discussion of the relationship between industrial policy, industrial-
ization, and gender job segregation. Industrial policies, whether in the United States in
the s or in semi-industrialized countries since the s, began with the develop-
ment and expansion of labour-intensive manufacturing industries, most notably gar-
ments and textiles. Due to their lower wages than similarly qualified men, women have
been the target labour force in these and other labour-intensive industries. The pursuit
of cheap labour sources is intensified in economies that rely on exports to stimulate
growth, with export competitiveness enhanced by low unit labour costs and thus
low-wage labour. The recent period of globalization that began in the s in response
to the liberalization of trade and investment flows has exacerbated the pressure on
early industrializers to rely on low-wage female labour as a means to attain competi-
tiveness. Two descriptive terms have emerged for this trend—the ‘global feminization
of labour’ (Standing, ) and the ‘feminization of foreign exchange earnings’
(Samarasinghe, ).³
³ The feminization of foreign exchange earnings is particularly salient in developing countries. With
few exceptions, countries cannot run persistent current account deficits. This implies that national
income cannot grow faster than the rate at which export growth at least equals import growth (Thirlwall,
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
This is not to say that industrial policies have explicitly identified women as the
preferred source of low-wage workers in labour-intensive jobs. Rather, export-led
labour-intensive industrialization has been passively compatible with, and indeed,
has relied on patriarchal norms. Those norms, which assign women the responsibility
for unpaid labour, meant that women have often been barred from light manufacturing
employment once married.⁴ This proved essential to the success of industrial policies in
so far as women provided the unpaid labour that produced and reproduced the labour
force. That labour includes the care, socialization, and training of children and
activities to ensure the productivity of adult workers (e.g. cooking and other tasks
that maintain the household, as well as provision of emotional labour). Young unmar-
ried women, as a result, have been the target factory workers in a number of industri-
alizing countries in the last four decades.⁵ This is due to their low wages, perceived
docility,⁶ ideologically constructed stereotypes about women (such as their supposedly
‘nimble fingers’),⁷ and the flexibility of hiring and firing women to reduce labour costs
in response to fluctuations in product demand.
What are the channels through which gender wage inequality stimulates growth?
Women’s low wages are less a function of their skills than of overt gender wage
discrimination as well as job segregation that reduces women’s bargaining power,
depressing their wages. There is evidence that women’s low wages have been a causal
factor in the success of the industrial policies that have stimulated the growth of export
manufacturing in a number of newly industrializing economies (Seguino, ; Busse
and Spielmann, ). Women’s low wages have substituted for (or complemented)
currency devaluation, making exports cheaper than they would otherwise be and thus
stimulating demand as well as a country’s share of global supply. This serves to relax
the balance-of-payments constraint. Women’s low wages in labour-intensive manu-
facturing therefore act as a subsidy that supports the acquisition of intermediate inputs
and technology required in more capital- and skill-intensive manufacturing industries.
Neoclassical theory posits that women’s subordinate position in the industrialization
process will improve over time. This view is based on the assumption that the strong
demand for female labour and increased educational opportunities for women would
). Developing countries, typically dependent on imported intermediate and capital goods (for which
demand is price inelastic), therefore rely heavily on exports to relax the balance-of-payments constraint.
⁴ The ‘marriage bar’, once widely practised in Europe and the United States in the s, and more
recently by some late industrializing economies such as South Korea and Taiwan, has resulted in
employers terminating women workers upon marriage.
⁵ The Industrial Revolution was also characterized by its heavy reliance on women’s factory labour
(Berg, ; Freeman, ).
⁶ Perceptions of docility were, however, challenged by women factory workers’ militancy, a notable
case being that of South Korea in the s and s, to which the government retaliated with force
(Nam, ).
⁷ This refers to the assumption of greater manual dexterity making women more productive than
men in some types of factory work, like assembly production, and less suitable for jobs requiring ‘brawn’
such as mining and heavy manufacturing. For a ground-breaking article on this topic, see Elson and
Pearson ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
contribute to rising female wages and a narrowing of the gender wage gap over time.
Scholarly work on trends in gender wage inequality indicates that such optimism is not
warranted. There is evidence that the discriminatory portion of gender wage gaps has
widened in a number of industrializing countries, such as China, India, Mexico, and
Vietnam, despite a strong demand for women’s labour (Braunstein, ).
Downward pressure on women’s manufacturing wages is due to several factors.
Women workers’ concentration in labour-intensive export industries as compared to
men’s in non-tradables or capital-intensive export goods production results in
women’s weaker bargaining power. Labour-intensive firms that are more mobile
than ‘male’ industries can more easily relocate to other countries, should wages rise,
holding down women’s wages (Seguino, ). Further, many firms in developing
countries are subcontractors in global buyer- or producer-driven commodity chains.
The outsized bargaining power of the dominant firms in the chain allows them to
obtain low-cost components and assembled goods from subcontracting firms in
developing countries, squeezing the wages of (women) workers. Again, the gendered
effect is a function of the forms that gender job segregation takes in industrializing
countries that have promoted export-led growth.
As semi-industrialized countries have moved up the industrial ladder, employing
production technologies that are more capital and knowledge intensive, there is
substantial evidence of de-feminization—that is, of women’s declining share of manu-
facturing employment (Tejani and Milberg, ; Kucera and Tejani, ; Saracoglu
et al., ). Kucera and Tejani () conducted a decomposition analysis to more
fully understand this trend, focusing on two causal mechanisms of de-feminization.
The first is the reallocation effect—that is, the impact on women’s share of employment
due to the shift in production to more capital- and knowledge-intensive goods. The
second is the within-industry employment effect, whereby industrial upgrading within
an industry contributes to the decline in women’s share of employment. While they
find evidence of both effects, within-industry effects in the manufacturing sector
dominate in explaining the declines in female shares of manufacturing employment.
Kucera and Tejani (: ) explain:
Though structural change in the process of economic development is indeed
characterized by shifts toward less labour-intensive, higher value-added manufac-
turing industries, it is developments within industries that generally matter more in
accounting for patterns of feminization and de-feminization for the manufacturing
sector as a whole.
In addition to women’s declining share of manufacturing employment as capital
intensity of production rises, there is evidence of increased gender job segregation,
with a declining share of women employed in industry⁸ (a broader measure than
⁸ Industry comprises mining, manufacturing, construction, electricity, water, and gas.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
manufacturing) relative to the share of men employed in industry.⁹ This is indicative of
increased exclusion of women (relative to men) from jobs in the industrial sector as a
whole, where employment tends to be of higher quality than in the agricultural and
services sectors.¹⁰
Data in Figure . demonstrate that gender job segregation is increasing in
countries at varying stages of development over the period to , reflecting
women’s declining access to industrial employment (and thus crowding into jobs in
other sectors of the economy). Panel A shows these trends by region.¹¹ Gender job
segregation is measured as the ratio of the share of women employed in industry
relative to the share of men employed in industry—dubbed ‘women’s relative concen-
tration in industrial-sector employment’. The largest decline in women’s relative
concentration (– per cent) occurred in the most industrially dynamic region, East
Asia and the Pacific, closely followed by the Middle East and North Africa (MENA),
and Central Europe and the Baltics. Sub-Saharan Africa has experienced increased
relative exclusion of women from industrial-sector jobs as well, but to a lesser extent
than more industrialized regions. South Asia has not experienced an increase in gender
job segregation and this may be due to the fact that this region is still engaged primarily
in labour-intensive export production.
Panel B displays trends in gender job segregation by stage of development. As would
be expected, in low-income countries, industrialization is less likely to be characterized
by a decline in women’s relative concentration in industrial-sector employment. The
most substantial decline ( per cent) is in middle-income countries. The increase in
job segregation in high-income countries is also strong. There, women’s relative share
of industrial jobs declined by per cent over this period.
Finally, changes in women’s relative concentration in industrial-sector jobs in
selected noteworthy industrializing countries are shown in Panel C. The largest
increase in job segregation among these countries has taken place in Ethiopia, with
women’s relative concentration falling per cent (from per cent to per cent)
over this time period. Note that this occurred in the context of expanding industrial
output, such that the percentage of women employed in the industrial sector as well as
the percentage of men so employed rose during the period, but men’s rose more than
women’s (from . per cent to . per cent as compared to . per cent to . per cent
⁹ Though a related concept, de-feminization is measured differently from gender job segregation.
The former is the percentage of manufacturing employees that are women. The latter represents how
women (relative to men) are distributed across sectors of the economy, and in particular, in industry as
compared to other sectors.
¹⁰ That agricultural employment tends to be of lower quality than industrial employment is not
contested. It might be argued, however, that service-sector jobs can be of high quality. Although there is
some validity to that argument, service-sector jobs are bifurcated in quality with low-wage service jobs
typically held by women and racial/ethnic minorities and high-quality professional jobs in the financial
sector, health services, and product design dominated by men.
¹¹ Regional categories are defined using World Bank categorizations in World Development
Indicators.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Panel A. Change in women’s relative concentration by region
–22.8% –21.4% –18.2% –17.6% –14.1% –10.7% –2.8%
0%
–5%
–10%
–15%
–20%
–25%
East MENA Central LAC OECD North Sub- South
Asia & Europe America Saharan Asia
Pacific & Baltics Africa
Panel B. Change in women’s relative concentration by country income level
–2.6% –7.3% –20.7% –15.8%
0%
–5%
–10%
–15%
–20%
–25%
Low Income Lower middle Middle High income
income income
Panel C. Change in women’s relative concentration, selected countries
10%
85.4% 41.5% 33.2% 28.9% 18.6% 17.3% 15.8% –8.4% –5.3% 1.3%
0%
–10%
a
ico
sia
il
a
M ia
ia
in
di
ric
re
az
na
op
ys
ne
ex
Ko
In
Ch
Br
Af
et
a la
hi
–20%
do
M
Vi
h
Et
In
ut
So
–30%
–40%
–50%
–60%
–70%
–80%
–90%
. Change in women’s relative concentration in industrial-sector employment,
–
Note: LAC is Latin America and the Caribbean. MENA is the Middle East and North Africa. OECD is
the Organisation for Economic Cooperation and Development. Women’s relative concentration in industrial-sector
employment is defined as (share of employed women in industry)/(% of employed men in industry).
Source: Author’s calculations from World Development Indicators (accessed November ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
for women).¹² Similarly, in China, Indonesia, Vietnam, and India, the decline in
women’s relative concentration in industrial employment is due to a more rapid
increase in men’s concentration in industrial employment than women’s. In Malaysia,
Republic of Korea, and South Africa, the share of women employed in industrial-sector
jobs declined more than did the share of men so employed. And in Brazil and Malaysia,
the share of women in industry fell while the share of men employed in industry rose.
These trends do not bode well for the ability of structural change and industrial
upgrading to contribute to gender equality. Why is de-feminization and increased
gender job segregation occurring? The mainstream explanation for women’s exclusion
(whether absolutely or relative to men) from high value-added jobs is that women’s
lack of education renders them less qualified for skill-intensive jobs. That, however,
ignores the fact that for many workers, skills are acquired on the job through training
and learning by doing—and that educational gaps have in any case narrowed substan-
tially over time.¹³
A number of other factors, including restrictive gender norms and stereotypes,¹⁴
contribute to women’s exclusion from good jobs as the economy upgrades. Moreover,
as industries become less labour intensive, labour costs are not as much of a constraint
on product demand or firm profits—and therefore, employing men at higher wages
(than women’s) is not a significant hindrance to competitiveness or profits. In other
words, gender discrimination in access to good jobs becomes less costly as economies
evolve industrially.
Those explanations, however, cannot fully explain the process of de-feminization
and job segregation observed in industrializing countries. To understand gender
employment dynamics occurring with structural change requires an analytical frame-
work able to explain the determinants of intergroup inequality—and in this particular
case, gender inequality as evidenced by women’s increased exclusion from higher-
equality jobs in the industrial sector. Stratification theory argues that intergroup
inequality is created and reproduced by dominant groups in order to maintain their
privileged access to, and control over, resources. Two mechanisms are used to maintain
dominance: exploitation (paying people less than the value of what they produce), and
opportunity hoarding (or exclusion) of prized economic assets such as high-quality
jobs (Blumer, ; Tilly, ).
¹² Data are author’s calculations, based on modelled ILO employment data and reported in the World
Development Indicators. A caveat in interpreting these results is that labour market statistics in a
number of African countries have weaknesses so results should be interpreted with caution.
¹³ Moreover, Borrowman and Klasen (), using data on sixty-nine developing countries, find that
rising education levels, either overall or of females relative to males, tend to increase rather than decrease
segregation.
¹⁴ Norms are informal ‘rules’ about behaviour that solicit punishment if violated. Stereotypes are
generalizations we make about groups of people that may or may not be accurate. More generally, they
tend to reflect limiting and often negative assumptions about the characteristics of a particular group of
people.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Gender inequality persists and indeed is increasing in terms of job segregation as a
result of these dual processes. Gender norms and stereotypes saddle women with the
responsibility for unpaid labour that others benefit from (exploitation), and justify
men’s right to the highest quality and status jobs, affirming a gender hierarchy. ‘Gender
police’ are not required to enforce a system of stratification. Gender norms and
stereotypes work to consolidate perceptions of group differences that justify exclusion.
In the case of gender, for example, a widely held norm is that men are the primary
breadwinners, and are thus most deserving of high-wage jobs. More recently, the
stereotype has emerged that men are more suited to science and technology jobs
than women. The gendering of newly created types of jobs in technologically upgrading
industries demonstrates that even as old occupations associated with one gender or the
other disappear in the process of structural change, gender stereotypes recreate gender
inequality in new occupations and work environments (Ridgeway, ).
The processes of de-feminization and increased gender job segregation are exacer-
bated in the context of increasingly scarce industrial-sector employment. In recent
years, patterns of stalled industrialization or premature de-industrialization have been
observed in a number of developing countries, limiting the growth of industrial-sector
jobs (UNCTAD, ). The result is a relative downsizing of the core industrial sector.
A falling share of industrial jobs in total employment can intensify competition for the
fewer jobs available, triggering the forces of stratification that influence job access.
Seguino and Braunstein () present empirical evidence that structural change, as
evidenced by increases in capital/labour ratios, combined with declining industrial
employment shares of total employment, have contributed to a worsening of gender
job segregation since .
As a result of stratification dynamics, structural change induced by industrial
policies can, and has, led to increased exclusion of women from employment in
upgrading sectors in countries, resulting in women being crowded into other sectors
of the economy, and putting downward pressure on their wages. This discussion
underscores two key points. First, industrial policies that promote structural change
and the shift to higher valued-added production using more sophisticated technologies
can contribute to and exacerbate already existing gender inequality. Women as workers
may be the losers, absent attention to the dynamics that lead to their exclusion from
newly created jobs.
Second, macroeconomic conditions matter. Productivity growth is not sufficient for
workers to obtain the benefits of industrial upgrading. An exclusive focus on a supply-
side increase in output through industrial policy misses the fact that aggregate demand
and other macro-level policies (such as exchange rate, trade, and investment policies)
may not be sufficient to ratify the increases in potential output that comes with effective
industrial policy. Without sufficient demand growth for industrial output, there will be
negative effects on employment, that is, de-industrialization, and ultimately, more
intense gender job competition that contributes to gender inequality.
These problems are not fatal to industrial policies that intend to be inclusive. Below
I discuss approaches to industrial policies that can alleviate the potential for upgrading
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
to worsen gender inequality. Suffice it to say that just as industrial upgrading is unlikely
to happen without government intervention in the form of industrial policy, so too
industrial policy is unlikely to be gender equitable, absent specific policies to override
gender dis-equalizing practices embedded in labour markets and other institutions.
. G E F L:
I S I
P
..................................................................................................................................
Just as industrial policies may affect women and men differently—and potentially
unequally, via gendered employment effects—so too does gender (in)equality affect
the potential success of industrial policies, and the desired structural change that
accompanies those policies. The following discussion, while not exhaustive, highlights
salient aspects of feedback loops with regard to labour productivity and knowledge
production.
.. Gender and Labour Productivity Growth
A key question identified in section . is how to make industrial policy inclusive,
given that gender job segregation is prevalent, with women slotted into lower-wage jobs
and unpaid labour, and men dominating in higher-wage industrial jobs. This question
is all the more pertinent due to the complementarities between production methods
and a country’s level of skills and capabilities. As a country moves up the industrial
ladder to the production of more knowledge- and capital-intensive goods and services,
governments must ensure that human capability improvements, the invisible founda-
tion of a country’s successful economic development, keep pace.
Conventional economics portrays labour productivity as merely a function of the
level of formal education and on-the-job training of the individual. That narrow
characterization misses the important fact that long before arriving at the factory or
office door, people as a resource have been produced through significant amounts of
material investment as well as time. Recognizing this, feminist economists have
expanded the concept of human capital in a way that treats it as an asset that is co-
produced by families and government, rather than simply a product of the formal
education system (Folbre, ). To differentiate the use of this term from its trad-
itional definition employed in economics, we use the term human capacities, which
reflects the full breadth of learning and socialization that extends beyond formal
education and is required for workers to be productive.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Investments in human capacities raise future productive capacity (i.e. generate
economic growth) in ways similar to building more factories and equipment, though
investing in the future labour force is almost never treated as investment in macro-
economic models (Braunstein, van Staveren, and Tavani, ; Heintz, ).
Although governments and men also participate in human capacities development, it
is primarily women who carry out the work of social reproduction by doing both paid
and unpaid caring labour.¹⁵
Macroeconomic and economic development theory err by assuming women’s
unpaid care work is infinitely elastic. But women’s participation in the paid economy
necessarily affects the quantity of investment in human capacities—that is, the more
time spent in paid work, the less time and energy is available for investments in human
capacities. Failing to track and ensure sufficient human capacities investments can
cause industrial and other macroeconomic policies to inadvertently undermine social
reproduction with negative effects on the current and future labour supply’s product-
ivity and ability to provide the complementary skilled labour needed as countries
industrially upgrade.
How can industrial policy take account of and address this problem? Through public
policies and infrastructure investment, governments can redistribute and reduce¹⁶
unpaid care work, creating the conditions for women to participate in the paid
economy without sacrificing investments in the care labour required to ensure children
become a productive future labour force. Public policy can influence the distribution of
care work between women and men, and can also reduce the amount of necessary care
work through public investment in physical infrastructure (roads, sanitation, and
electricity that reduce the time necessary for care activities such as fetching water
and fuel), as well as social infrastructure (spending on publicly funded care services).
These expenditures, which can reduce women’s unpaid care burden and redistribute
social reproduction to the state and to men, also support the goals of industrial policy.
Attention to issues of social reproduction, then, is another way in which the scope of
industrial policies can be expanded beyond its traditional frame.
Braunstein, Bouhia, and Seguino () present a model and empirical analysis that
links structures of class-driven growth of output, employment, and productivity with
those of social reproduction and gender inequality. How social reproduction is organ-
ized (Who does it? Does it take place in the household, or in public or market sectors?)
influences long-run productivity. The analysis covers the period ‒. Principal
components analysis (PCA) scores, based on indicators of social reproduction and
¹⁵ Social reproduction is a concept with origins in Marx’s concept of the development of productive
forces (Cohen, ). It includes activities directly involved in the maintenance of life on a daily basis
and intergenerationally, including the development of children and the regeneration of workers and is
thus a far broader concept than human capital. The latter is defined as capacities developed through
formal and informal education at school and at home, and through training and experience. For a
critique of human capital theory from a social reproduction perspective, see Folbre ().
¹⁶ Diane Elson () describes the government’s task with regard to work as the Rs—recognize,
redistribute, and reduce.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
equality-led vs. profit-led growth, are used to categorize national economies into one of
four regime types: mutual, time squeeze, wage squeeze, and exploitation. Applying PCA
to this typology, the authors identify the conditions under which systems of growth on
the one hand and social reproduction on the other reinforce or contradict one another,
with a focus on the role of gender (in)equality.
Mutual regimes are the ideal—production and social reproduction dynamics mutu-
ally reinforce each other. In this scenario, more gender equality (higher wages, more
time spent in paid labour) raises growth of output, employment, and productivity
because it raises aggregate demand¹⁷ and promotes human capacities development
more than it cuts into profits. Strong public support for care, the availability of care
commodities, and men stepping up to provide care all add to the beneficial impact of
gender equality on growth and social reproduction.
In time squeeze countries, more gender equality in the form of higher wages for
women or for care workers supports investment and growth because it raises human
capacities. However, as women’s labour-force participation increases, the time devoted
to care work decreases (because men do not contribute enough to care work, market
care services and commodities are inadequate,¹⁸ and/or due to infrastructure inad-
equacies). This inhibits structural change and the success of industrial policies more
generally, owing to the negative effect on labour productivity growth.
In wage squeeze countries, higher wages for women raise human capacities but not by
enough to outweigh the negative effect of those higher wages on profits, investment, and
thus growth. The more profit-led (or inequality-led) the structure of the macroeconomy,
the more likely wage squeeze is likely to be obtained. The more open to the global
economy, the greater the probability an economy is profit-led, exacerbating the contra-
dictions between gender equality, social reproduction, and growth (Blecker, ).
And finally, the exploitation regime is one in which higher wages for women reduce
growth because they dampen profits and aggregate demand more than they raise
human capacities investment. And women’s higher wages and increased market
participation squeeze time spent on social reproduction, a problem that is accentuated
in the event of lack of public or male support, and absence of adequate care commod-
ities and infrastructure to replace women’s decreased care time. In this regime, growth
is predicated on exploiting women’s (unpaid) reproductive labour.
Gender/growth regimes vary widely among the countries that have adopted indus-
trial policies in the last several decades (Table .). This variation is demonstrated by
the BRICS, among which Brazil’s is the only regime to fall into the mutual category.
The recent increases in social protection spending there are instructive, demonstrating
the importance of public policy to promote gender equality. But Brazil’s poor
¹⁷ One channel through which this takes place is that improvements in women’s labour-market
outcomes (both wages and employment) allow them to replace some of their unpaid labour with paid
care services, thus stimulating demand.
¹⁸ This could be due to lack of quality market (paid) care services, as well as insufficient capital goods
such as stoves or washing machines.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Table 16.1 Gender regimes in BRICS and
selected developing and developed
countries
Regime type
BRICS
Brazil Mutual
Russia Wage squeeze
India Exploitative
China Wage squeeze
South Africa Wage squeeze
Developing Africa
Ethiopia Time squeeze
Nigeria Time squeeze
Rwanda Time squeeze
Developing Asia
Bangladesh Time squeeze
Hong Kong Wage squeeze
Indonesia Wage squeeze
Malaysia Wage squeeze
Singapore Wage squeeze
South Korea Wage squeeze
Thailand Wage squeeze
Developed economies
Finland Mutual
France Mutual
Germany Wage squeeze
Ireland Wage squeeze
Norway Mutual
Poland Exploitation
Sweden Mutual
United States Time squeeze
Source: Braunstein, Bouhia, and Seguino (2020).
macroeconomic performance (relative to other successful industrializers) reminds us
that a mutual regime does not automatically or inherently induce economic growth,
absent supportive macroeconomic policies such as appropriate exchange-rate policy
(Astorga, Cimoli, and Porcile, ).¹⁹
¹⁹ Argentina, Colombia, and Ecuador also have mutual regimes. For a full list of regime types in
countries by region and at varying levels of development, see Braunstein, Bouhia, and Seguino ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
In contrast, China, Russia, and South Africa are characterized as wage squeeze
regimes. In those cases, higher wages for women show slow growth (these are profit-
led economies, due to the structure of production and macro-level policies) because the
benefits to human capacities production are outweighed by the negative effect of higher
wages on profits, investment, and demand.²⁰
India is a case of an exploitative gender/growth regime. Improvements in gender
equality in the paid economy negatively impact growth, while movement of women
into the paid economy reduces human capacities due to government’s failure to take
action to redistribute unpaid care work, lack of adequate infrastructure, and insuffi-
cient male participation in care work.
Among developing African economies that have adopted industrial policies,
Ethiopia, Nigeria, and Rwanda have time squeeze regimes (as do many other African
economies). As more women enter the labour market in these countries, the conse-
quent strain on women’s time limits human capacities development and the growth of
labour productivity. The policy implication of this combination is clear: increasing
women’s paid employment must be accompanied by more support for care and social
reproduction to sustainably deliver growth—and absent attention to this, industrial
policies may very well not succeed in the longer run due to insufficiently productive
workers, whose labour is complementary to industrial upgrading.²¹
In developing Asia, most regimes can be characterized as wage squeeze. Those that
have adopted extensive industrial policies fall into this category—South Korea, Malay-
sia, Indonesia, and Thailand. Finally, developed economies have a higher number of
mutual regimes (Finland and Norway, for example), but here too we find wage squeeze
(Germany and Ireland), time squeeze (United States), and exploitation (Poland).
It is apparent from this analysis that industrial policies can succeed by exploiting
women’s time, and/or excluding them from participating in the development
process—although those that structurally constrain investments in care and social
reproduction are likely to pay a cost in the longer run due to lower labour product-
ivity growth. Ensuring a win‒win scenario—that is, structural change that induces an
²⁰ To be clear, this does not imply wages for women should be lowered in order to promote growth.
Macro policies, such as exchange-rate policies to maintain export competitiveness, can attenuate
negative demand-side effects of higher female wages. Moreover, managed trade policies and restrictions
on financial and firm mobility can create conditions for equality-led growth (Seguino and Grown, ).
And a shift in the structure of production to reduce reliance on labour-intensive homogeneous export
goods and a shift to skill- and capital-intensive goods production—with women integrated into new
industries—can contribute to the creation of a mutual regime. That is because the latter types of goods
and services tend to be price inelastic, such that higher wages have a much smaller negative effect on
demand than on labour-intensive goods.
²¹ Among economists noting the complementarity of labour’s skills with industrial upgrading,
Nelson and Phelps () have argued that the rate at which the gap between the technology frontier
and the current level of productivity is closed depends on the level of human capital. In a more detailed
analysis, Nübler () offers a theory of knowledge-based capabilities (a broader concept than human
capital) whereby capabilities and structural change co-evolve and are mutually causative, and applies this
to an analysis of the divergent paths of South Korea and Costa Rica.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
economy’s movement to higher value-added production with women included in
that process—requires attention to tendencies towards excluding women from
higher-wage and more technically sophisticated jobs and necessitates appropriate
public investment and policies that promote human capacities development by
redistributing and reducing the care burden women differentially shoulder.
.. Gender and Knowledge Production
Knowledge production, situated in formal education and research, as well as workplace
teams, is vital to the success of industrial policies. Gender inequality and in particular
gender exclusion from these sites, however, can hinder innovation and the acquisition
of knowledge. STEM (science, technology, engineering, and mathematics) education
and research are essential to industrial policy, and here women are underrepresented,
even though they are now the majority of university students in most countries
(UNESCO, ).²² The challenge is that exclusion of women results in a selection
bias problem with significant costs in terms of knowledge production and economic
growth (European Institute for Gender Equality, ). That is, gender-unequal
participation in STEM programmes in universities and research institutes can result
in overinvestment in less qualified males, and failure to capture the benefits of an
excluded talent pool of women, which has costs in terms of knowledge production.²³
In part, the low representation of women in STEM fields and research entities is due
to gender-unequal norms and stereotypes that shape attitudes of the gatekeepers—
professors, and directors and managers of research institutes. STEM subjects are
typically characterized as ‘male’ and that characterization is not too distant from the
facts. The majority of professors of STEM are male, sending an often unconscious
message about what scientists look like. This both discourages women from entering
STEM, and also causes implicit biases that can lead to subtle and overt forms of
discrimination on the part of male faculty and students that make STEM a hostile
environment for women. To make clear the point advanced here, the loss of women’s
talent in STEM, a critical set of fields for industrial upgrading, may appear to be a
labour-supply problem attributed simply to women’s lack of interest in science and
engineering. But a more accurate understanding is that while this is a labour-supply
problem, it results from exclusionary practices in both universities and research
institutes (and tech-related workplaces) that create a hostile environment for women.
²² It is often argued by way of explanation that women simply choose to study topics other than
science. That view, however, is inconsistent with the fact that women are the majority of students in the
natural sciences and mathematics and statistics, even as they lag men in engineering, manufacturing, and
construction ( per cent of all students), and information and communication technologies ( per cent
of all students) (UNESCO, : ).
²³ Several studies also show that gender inequality in education in general has negative effects on
growth (Bandara, ; Klasen and Lamanna, ). See also İzdeş and Tregenna ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Learning and upgrading for late industrializers is also predicated on the ability of
organizations to incentivize and coordinate learning (Amsden, ). The composition
of organizations impacts their effectiveness in the problem solving so central to
industrial upgrading. A by now large body of research underscores that diverse
organizations function more effectively than homogeneous ones. Economist and
complex systems theorist Scott Page () finds evidence, for example, that
identity-diverse groups (e.g. based on gender, race/ethnicity) can outperform homo-
geneous groups due to their greater functional diversity—that is, differences in how
people define problems and approach solving them.
With regard to the industries that are critical to industrial upgrading, Vasilescu et al.
() similarly find that team diversity in open software development projects
correlates positively with team output. Male and female engineers who collaborate
with both genders are roughly twice as productive—that is, they produce more
citations in peer-reviewed articles—than those who only collaborate with one gender
(Ghiasi et al., ). Group composition matters, in other words, and in particular, lack
of gender diversity in STEM activities, industries, and organizations can limit know-
ledge generation.
Given that gender inclusion contributes to success in high-tech organizations, what
factors explain women’s low representation? Discrimination, due to implicit or explicit
bias, is an important factor.²⁴ As an example, one study finds that women’s open-
source software coding has a higher acceptance rate than men’s when a coder’s gender
is unknown. But when the gender of the coder is known, acceptance rates of women
coders’ proposed changes to a software project’s code or documentation fall (Terrell
et al., ). Tech workplaces more generally are widely reported to be hostile towards
women scientists, with undermining by male managers a key reason given by women
for leaving tech jobs (Mundy, ). This state of affairs, predicated on gender
hierarchical practices embedded in organizations, is a market failure to be addressed
by industrial policy.
.. Gender, Diversity, and Technical Design
Exclusion of groups of people (e.g. women) from technological domains and activities
can lead to their absence as users or consumers of technology because products
²⁴ Explicit bias refers to conscious attitudes and beliefs we have about people or groups of people. In
contrast, implicit bias is an unconscious association or belief towards a social group. Implicit bias is
shaped by social conditioning in response to dominant norms and stereotypes, such as that women are
less good at science, that men are more intelligent, and so on. Stratification theorists argue that
hierarchical norms and stereotypes are intentionally cultivated as a means for dominant groups (men)
to legitimize their privileged position in institutions and broader society (Darity et al., ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
developed do not reflect women’s needs and preferences. According to Wajcman
(: ):
Empirical research on everything from the microwave oven . . . the telephone . . .
and the contraceptive pill . . . to robotics and software agents . . . has clearly dem-
onstrated that the marginalisation of women from the technological community
has a profound influence on the design, technical content, and use of artefacts.
In contrast, drawing on women for design can lead to benefits for women consumers of
technology, whose needs are more likely to be taken into account—and could have the
added benefit of addressing and reducing time required for social reproduction.²⁵
Several examples of the failure of technological innovation to represent the needs of
women are instructive. A wide variety of products marketed as gender neutral are in
fact biased towards men’s bodies: virtual reality headsets too big for women’s heads,
smart watches too big for women’s wrists, and calorie counts on treadmills calibrated to
men’s bodies are just a few examples (Perez, ). The problem is particularly serious
when it comes to testing and safety. Although women are more likely to contract HIV
than their male counterparts, they represent just per cent of antiretroviral drug
subjects in clinical trials (Ovseiko et al., ). Crash-test dummies, used to test the
safety of automobiles, are typically male, despite the fact that women are at higher risk
of serious injury in automobile accidents (Holder, ).
This discussion underscores that inclusion of women in technical design can gen-
erate a more equitable distribution of the benefits of industrialization. Inclusion of
women in the design of products could also contribute to a reduction of the grind of
domestic housework that women disproportionately bear. Addressing the time squeeze
of social reproduction, as noted in section ., has a positive effect on the long-run
success of industrial policies.
. C
..................................................................................................................................
As a number of chapters in this volume indicate, the conceptualization of industrial
policies has broadened, and is beginning to encompass sustainability and greening
²⁵ The introduction of labour-saving consumer durables (such as washing machines and vacuum
cleaners) reduced the time required for household work, contributing to the rise of women’s labour-
force participation in the twentieth century (Greenwood et al., ). I do not know of any recent studies,
however, that measure the pace of household labour-saving technological change that reduces the time
needed for care work. Much of the current research on this topic focuses on estimating the gender-
equalizing benefits of public infrastructure investment. See, for example, de Henau and Himmelweit ()
and Fontana and Natali (). There is also some evidence that information and communication
technologies (ICT) reduce women’s time burden although, to be clear, ICT development was not originally
targeted to reduce unpaid care burdens (Grassi, Landberg, and Huyer, ). A concern is that techno-
logical innovation emerges from the global North and is ill suited to the needs of women from the global
South, who have a greater need for clean water and electricity than digital technologies (Mitter, ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
policies in addition to the themes of technology, innovation, and knowledge
production. The relationship between gender and industrial policies, however, has
not yet been comprehensively explored or integrated into the industrial policy litera-
ture. To address that gap, this chapter highlights several key channels through which
gender and industrial policy interact: employment, consumption, social reproduction,
and knowledge production and innovation.
Regarding the employment channel, research has identified women’s instrumental
role in providing the labour linked to the success of early-stage late industrialization
efforts via women’s segregation in labour-intensive export manufacturing industries.
As countries move up the industrial ladder, however, women become increasingly
excluded as workers in industry, and are crowded into low-wage employment. Gender
exclusion from employment in the dynamic sector of the economy is an important
challenge for industrial policy. With respect to social reproduction, industrializing
countries have also relied on women’s unpaid labour to nurture the development of
the human capacities required of a skilled, productive labour force. This has unduly
burdened women, and contributed to the gender wage and income gap. Further, by
failing to recognize and redistribute the burden of unpaid caring labour—or social
reproduction—productivity growth is hampered.
The research discussed in this chapter also identifies the economic costs of the
absence of equitable gender inclusion in processes of innovation and technological
upgrading. Exclusion of women from knowledge-intensive workplaces can negatively
affect the efficiency of firms’ learning and innovation efforts. Women’s limited repre-
sentation in high-tech firms and occupations is often attributed to their preference for
fields of studies such as humanities and the arts, rather than sciences. But this ignores
the exclusionary practices and distorted gender norms and stereotypes that contribute
to women’s exclusion from high-tech workplaces. Further, failure to include women in
technology design undermines the ability of technological innovation to produce
benefits for women as consumers.
A challenge, then, is for industrial policy advocates, whether academics or policy-
makers, to adopt a gender lens so as to improve the efficacy of industrial upgrading
efforts and to make those efforts more inclusive (Fontana, ). The tools that
governments use to nudge, cajole, and encourage the private sector and research
institutions to cooperate with industrial upgrading plans can also be used to address
gender disparities identified in employment. Reciprocal control mechanisms, such as
making subsidies and other supports contingent on achieving performance targets, can
be used to incentivize gender inclusion. For example, governments could require (and
some already do) that research teams on government-funded grants be gender bal-
anced as a means of promoting gender inclusion in research that influences product
and technology design.
Governments could also use innovative monetary policy tools to achieve gender
inclusion. Asset-based reserve requirements (ABRRs) are one such mechanism,
whereby central banks use non-interest-bearing reserve requirements to guide the
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
allocation of credit towards areas deemed of strategic importance.²⁶ Women-owned
tech firms, or firms with an equitable representation of women in high-level positions
could be the targets. Of course, state-owned development banks could also target their
lending to achieve strategic goals, including those that promote gender equality.
Social reproduction policies are also legitimately part of an industrial strategy.
Publicly funded physical infrastructure, targeted at reducing women’s care burden in
developing countries, can reduce time poverty, enabling women to join the paid labour
force. Moreover, other social policies such as publicly funded care of children, the sick,
and elderly, as well as policies that promote male participation in care, are critical to
redistributing and reducing care work, promoting gender inclusion in employment. It
also reduces any potential negative trade-off between women’s increased paid employ-
ment and investment in children’s and workers’ human capacities and, ultimately,
long-run productivity growth. The message, then, for both scholars and policymakers
is that the distributional effects of industrial policy should be understood and inter-
ventions designed to ensure that the benefits are broadly shared. Doing so also
contributes to the effectiveness of industrial policy.
A
I am grateful to Christopher Cramer, Fiona Tregenna, Will Milberg, and James Heintz for
providing valuable comments and suggestions on earlier versions of this chapter. Any
omissions or errors are my own.
R
Amsden, Alice () Asia’s Next Giant: South Korea and Late Industrialization. Oxford:
Oxford University Press.
Astorga, Rodrigo, Mario Cimoli, and Gabriel Porcile () ‘The Role of Industrial and
Exchange Rate Policies in Promoting Structural Change, Productivity and Employment’,
in José Manuel Salazar-Xirinachs, Irmgard Nübler, and Richard Kozul-Wright (eds)
Transforming Economies: Making Industrial Policy Work for Growth. Geneva: International
Labour Office, pp. –.
Bandara, Amarakoon () ‘Economic Cost of Gender Gaps: Africa’s Missing Growth
Reserve’, Feminist Economics (): –.
Berg, Maxine () ‘Women’s Work and the Industrial Revolution’, in Anne Digby, Charles
Feinstein, and David Jenkins (eds) New Directions in Economic and Social History, Vol. .
Basingstoke: Macmillan International Higher Education, pp. –.
²⁶ For more on ABRRs and other innovative tools central banks can utilize to promote development,
see Epstein ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Blecker, Robert () ‘Wage-led versus Profit-led Demand Regimes: The Long and the Short
of It’, Review of Keynesian Economics (): –.
Blumer, Herbert () ‘Prejudice as a Sense of Group Position’, Pacific Sociological Review
: –.
Borrowman, Mary and Stephan Klasen () ‘Drivers of Gendered Sectoral and Occupa-
tional Segregation in Developing Countries’. Discussion Paper No. . Göttingen: Courant
Research Centre.
Braunstein, Elissa () ‘Neoliberal Development Macroeconomics: A Consideration of its
Gendered Employment Effects’. Research Paper No. –. Geneva: UNRISD.
Braunstein, Elissa, Rashid Bouhia, and Stephanie Seguino () ‘Social Reproduction,
Gender Equality and Economic Growth’, Cambridge Journal of Economics (): –.
Braunstein, Elissa, Irene van Staveren, and Daniel Tavani () ‘Embedding Care and
Unpaid Work in Macroeconomic Modeling: A Structuralist Approach’, Feminist Econom-
ics (): –.
Busse, Matthias and Christian Spielmann () ‘Gender Inequality and Trade’, Review of
International Economics (): –.
Cohen, Gerald A. () Karl Marx’s Theory of History: A Defence. Princeton, NJ: Princeton
University Press.
Cramer, Christopher and Fiona Tregenna () ‘Industrial Policy and the Implications for
Industrial Hubs’, in Arkebe Oqubay and Justin Yifu Lin (eds) The Oxford Handbook of
Industrial Hubs and Economic Development. Oxford: Oxford University Press.
Darity, William, Darrick Hamilton, Patrick Mason, Gregory Price, Alberto Davila, Marie
Mora, and Sue Stockly () ‘Stratification Economics: A General Theory of Intergroup
Inequality’, in Andrea Flynn, Susan Homberg, Dorian Warren, and Felicia Wong (eds) The
Hidden Rules of Race. Cambridge: Cambridge University Press, pp. –.
de Henau, Jerome and Sue Himmelweit () ‘Developing a Macro–Micro Model
for Analysis of Gender Impacts of Public Policy’. Paper presented at Gender and
Macroeconomics: Current State of Research and Future Directions, Levy Economics
Institute, Bard College, New York City, March.
Elson, Diane () ‘Recognize, Redistribute, and Reduce’, New Left Review (): –.
Elson, Diane and Ruth Pearson () ‘ “Nimble Fingers Make Cheap Workers”: An Analysis
of Women’s Employment in Third World Export Manufacturing’, Feminist Review ():
–.
Epstein, Gerald () ‘Central Banks as Agents of Economic Development’. Research Paper
No. /. Helsinki: UNU-WIDER.
European Institute for Gender Equality (EIGE) () Economic Benefits of Gender Equality
in the EU. Paris: EIGE.
Folbre, Nancy () ‘The Political Economy of Human Capital’, Review of Radical Political
Economics (): –.
Fontana, Marzia () Inclusive and Sustainable Industrial Development: The Gender
Dimension. Vienna: UNIDO.
Fontana, Marzia and Luisa Natali () ‘Gendered Patterns of Time Use in Tanzania: Public
Investment in Infrastructure Can Help’. Paper prepared for the IFPRI Project on Evaluat-
ing the Long-Term Impact of Gender-focused Policy Interventions.
Freeman, Joshua () Behemoth: History of the Factory and the Making of the Modern
World. New York: W. W. Norton.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Ghiasi, Gita, Vincent Lariviere, and Cassidy Sugimoto () ‘On the Compliance of Women
Engineers with a Gendered Scientific System’, PLOS One. Available at https://journals.plos.
org/plosone/article?id=./journal.pone..
Grassi, Flavia, Josephine Landberg, and Sophia Huyer () Running Out of Time: The
Reduction of Women’s Work Burden in Agricultural Production. Rome: Food and Agricul-
ture Organization.
Greenwood, Jeremy, Ananth Seshadri, and Mehmet Yorukoglu () ‘Engines of Liberation’,
Review of Economic Studies (): –.
Heintz, James () The Economy’s Other Half: How Taking Gender Seriously Transforms
Macroeconomics. Newcastle upon Tyne: Agenda Publishing.
Holder, Sarah () ‘A Clue to the Reason for Women’s Pervasive Car-safety Problem’,
CityLab. Available at https://www.citylab.com/transportation///car-accident-injury-
safety-women-dummy-seatbelt//.
İzdeş, Ozge and Fiona Tregenna () ‘Gender, Industrialization, and Industrial Hubs’, in
Arkebe Oqubay and Justin Yifu Lin (eds) The Oxford Handbook of Industrial Hubs and
Economic Development. Oxford: Oxford University Press.
Klasen, Stephan and Francesca Lamanna () ‘The Impact of Gender Inequality in Edu-
cation and Employment on Economic Growth: New Evidence for a Panel of Countries’,
Feminist Economics (): –.
Kucera, David and Sheba Tejani () ‘Feminization, Defeminization and Structural Change
in Manufacturing’, World Development : –.
Mitter, Swasti () ‘Globalization, ICTs, and Economic Empowerment: A Feminist Cri-
tique’, Gender, Technology and Development (): –.
Mundy, Liza () ‘Why Is Silicon Valley So Awful to Women?’, The Atlantic Monthly, April.
Nam, Jeong-Lim () ‘Labor Control of the State and Women’s Resistance in the Export
Sector of South Korea’, Social Problems (): –.
Nelson, Richard and Edward Phelps () ‘Investment in Humans, Technological Diffusion,
and Economic Growth’, American Economic Review : –.
Nübler, Irmgard () ‘A Theory of Capabilities for Productive Transformation: Learning to
Catch Up’, in José Manuel Salazar-Xirinachs, Irmgard Nübler, and Richard Kozul-Wright
(eds) Transforming Economies: Making Industrial Policy Work for Growth. Geneva: Inter-
national Labour Office, pp. –.
Ocasio-Cortez, Alexandra () ‘H.Res.: Recognizing the Duty of the Federal Govern-
ment to Create a Green New Deal’. Available at https://www.congress.gov/bill/th-
congress/house-resolution//text.
Ostry, Jonathan, Andrew Berg, and Charalambos Tsangarides () ‘Redistribution,
Inequality, and Growth’. Staff Discussion Note No. /. Washington, DC: IMF.
Ovseiko, Pavel et al. () ‘A Global Call for Action to Include Gender in Research Impact
Assessment’, Health Research and Policy Systems (). Available at https://www.ncbi.nlm.
nih.gov/pmc/articles/PMC/.
Page, Scott () The Diversity Bonus: How Great Teams Pay off in the Knowledge Economy.
Princeton, NJ: Princeton University Press.
Perez, Caroline Criado () Invisible Women: Data Bias in a World Designed for Men.
New York: Abrams Press.
Ridgeway, Cecelia () Framed by Gender: How Gender Inequality Persists in the Modern
World. Oxford: Oxford University Press.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Rodrik, Dani () ‘Green Industrial Policy’, Oxford Review of Economic Policy ():
–.
Samarasinghe, Vidyamali () ‘The Feminization of Foreign Currency Earnings: Women’s
Labour in Sri Lanka’, Journal of Developing Areas (): –.
Saracoglu, Dürdane, Emel Memis, Ebru Voyvoda, and Burça Kizilirmak () ‘Changes in
Global Trade Patterns and Women’s Employment in Manufacturing, –’, Feminist
Economics (): –.
Seguino, Stephanie () ‘Gender Inequality and Economic Growth: A Cross-country
Analysis’, World Development (): –.
Seguino, Stephanie () ‘Is More Mobility Good? Firm Mobility and the Low Wage Low
Productivity Trap’, Structural Change and Economic Dynamics (): –.
Seguino, Stephanie and Elissa Braunstein () ‘The Costs of Exclusion: Gender Job
Segregation, Structural Change and the Labour Share of Income’, Development and Change
(): –.
Seguino, Stephanie and Caren Grown () ‘Gender Equity and Globalization: Macroeco-
nomic Policy for Developing Countries’, Journal of International Development ():
–.
Standing, Guy () ‘Global Feminization through Flexible Labour’, World Development
(): –.
Tejani, Sheba and William Milberg () ‘Global Defeminization? Industrial Upgrading and
Manufacturing Employment in Developing Countries’, Feminist Economics (): –.
Terrell Josh, Andrew Kofink, Justin Middleton, Clarissa Rainear, Emerson Murphy-Hill,
Chris Parnin, and Jon Stallings () ‘Gender Differences and Bias in Open Source: Pull
Request Acceptance of Women Versus Men’, PeerJ Computer Science : e. Available at
https://doi.org/./peerj-cs..
Thirlwall, Anthony () ‘The Balance of Payments Constraint as an Explanation of
International Growth Rate Differences’, Banca Nazionale del Lavoro Quarterly Review
(): –.
Tilly, Chris () Durable Inequality. Berkeley, CA: University of California Press.
UNCTAD () Trade and Development Report: Structural Transformation for Inclusive and
Sustained Growth. New York: United Nations.
UNCTAD () World Investment Report . New York: United Nations.
UNDP () Humanity Divided: Confronting Inequality in Developing Countries. New York:
UNDP.
UNESCO () Cracking the Code: Girls’ and Women’s Education in Science, Technology,
Engineering, and Mathematics. Paris: UNESCO.
Vasilescu Bogdan, Daryl Posnett, Baishakhi Ray, Mark Van den Brand, Alexander Serebrenik,
Preemkumar Devanbu, and Vkadunur Filkov () ‘Gender and Tenure Diversity in
GitHub Teams’, Proceedings of the rd Annual ACM Conference on Human Factors in
Computing Systems, pp. –.
Wajcman, Judy () ‘Feminist Theories of Technology’, Cambridge Journal of Economics
: –.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
......................................................................................................................
- ,
,
.............................................................................................................
. I
..................................................................................................................................
A ‘competitive’ exchange rate became Beijing’s de facto industrial policy, by default or
design, after China’s WTO membership (in ) blocked the country from utilizing
more traditional instruments, such as export subsidies or measures to promote access
to foreign technology (Rodrik, ; Guzman et al., ). Indeed, maintaining a
stable, undervalued exchange rate helped the country increase its exports, and facili-
tated import substitution and economic diversification, helping China to turn an
‘infant’ manufacturing sector into a mature, internationally competitive industry that
now employs tens of millions of people and serves as a factory for the world. What
China’s successful experience using the exchange rate as a tool for economic develop-
ment and transformation reveals is that the ‘right’ management of the macroeconomy
can strengthen, supplement, or even replace the power of traditional industrial policy
instruments. The ‘right’ macro policies ‘generate the essential enabling environment
for industrial policies to be effective’, write Guzman, Ocampo, and Stiglitz (: );
in the example of China, macro and industrial policies have been complementary and
mutually reinforcing.¹ However, China’s success contrasts with multiple failures by
other late industrializing economies that have been unable to employ macroeconomic
policy in sync with industrial policy. In many such cases, the opposite occurred: an
unduly appreciated exchange rate limited the long-run diversification of production
¹ While a currency devaluation may initiate growth acceleration (as we argue later in this chapter), it
is unlikely to sustain it indefinitely without supportive industrial and fiscal policies (Storm and
Naastepad, ; Rodrik, ; Thirlwall, ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
and export structures, often even leading to ‘premature de-industrialization’ (Storm,
; Diao, McMillan, and Rodrik, ). Negative impacts of a ‘mistaken’ macroeco-
nomic policy stance regularly outweigh any positive impacts of industrial policy
decisions—which brings us to the central argument of this chapter: a failure to
effectively manage the macroeconomy and aggregate demand in ways that support
industrialization and economic development disables industrial policy, often fatally so.
Macroeconomic mismanagement underlies many historical cases of failed industri-
alization pushes in South East Asia, Latin America, and Africa. This mismanagement is
in no small measure due to clear supply-side biases of industrial policy, based on the
belief that the impediments to late industrialization were to be found and resolved on
the supply side of the economy. The aggregate-demand side of the economy, in
contrast, was expected to more or less passively accommodate and even facilitate the
structural changes brought about by the industrialization process (Storm, ).
Macroeconomically speaking, domestic resource mobilization to finance investment
was seen as the binding constraint on the industrialization programme; hence the key
challenge was to raise domestic savings supply:
The central problem in the theory of economic development is to understand the
process by which a community which was previously saving, and investing, or
per cent of its national income or less, converts itself into an economy where
voluntary savings are running at about or per cent of national income or
more. (Lewis, : )
Industrial policy scholars and policymakers have thus been led to focus on the building
up of capital-goods (machine-tool) industries, the strengthening of inter-industry
(supply) linkages, the rationing of scarce (often imported) inputs and foreign exchange,
the mobilization of enough (domestic) savings to finance industrial development, and
the accumulation of the technological, managerial and engineering knowledge neces-
sary for efficient manufacturing. Unfortunately, for most late industrializers things did
not work out as planned—industrialization processes ran into aggregate demand
constraints, showing up in overvalued exchange rates, unsustainable trade deficits
and external debts, profit squeezes, increased inequalities, and domestic demand
collapses (Storm, ).
This chapter analyses ways in which macroeconomic policy can support, or hurt, the
industrialization process, using a simple (Kaldorian) open-economy growth model of a
‘typical’ late industrializing economy, which features ‘cumulative causation’ as well as
an explicit balance-of-payments (BoP) constraint. The approach builds on the theor-
etical analyses by Storm and Naastepad (), Naastepad (), Blecker (), and
the New Structuralist tradition which integrates Keynesian models of BoP-constrained
growth (Thirlwall, , ; Cimoli et al., ) and Kaldorian-Schumpeterian
insights into endogenous technical progress, innovation, and structural change in
productive and export specialization (Kaldor, ; Taylor, ; Cimoli and Porcile,
; Porcile and Sartorello Spinola, ). The remainder of this chapter is organized
as follows. We first present the export-led growth model, before introducing the
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
long-run BoP constraint in the model and considering the macro impacts of a
traditional (supply-side) ‘big push’ industrialization drive. We next identify three
(historically relevant) macro mechanisms through which an aggregate demand short-
age can slow or even halt the industrialization process: (a) an ‘agrarian-cum-foreign
exchange constraint’, which through higher food prices and higher industrial wages
reduces manufacturing profits and investment (a Ricardian–Kaleckian story); (b) a
drop in domestic (private and/or public) expenditure, which hurts growth, investment,
and diversification (a Robinsonian story); and (c) restrictive fiscal and monetary
policies, often intended to keep imports and inflation down, or to mop up additional
domestic savings, and/or placate foreign financial investors, which has direct negative
impacts on manufacturing investment and growth (a Keynesian story). Section .
considers the ‘primary-commodity specialization trap’ and examines how macroeco-
nomic policy can support economic diversification and upgrading (a Kaldorian-
Thirlwallian narrative). Finally we zoom in on the role of wages and labour regulation
and argue that the widely held claim that strong labour laws are a ‘luxury’ developing
countries cannot afford, is wrong from a Weberian-Marxian-Schumpeterian perspec-
tive. If anything, labour regulation and higher real wage growth do further industrial-
ization, when given adequate macroeconomic and industrial policy support.
Section . summarizes the lessons learned.
. S S: A E-
M E G
..................................................................................................................................
To organize the discussion we use a model of export-led growth adapted with some
modifications from Storm and Naastepad (, ), Naastepad (), and Blecker
() and which captures both the central mechanisms of demand-led growth and
the critical (supply-side) constraints on the process of late industrialization. The
model has been specified in aggregate (one-sector) terms to highlight the macroeco-
nomic mechanisms at work in a typical late industrializing, export-led economy which
is open to trade and cross-border financial flows. Implicitly we assume that the
economy has a Lewisian ‘labour surplus’ consisting of underemployed workers in
agriculture and other primary industries; real wages in the model reflect the cost of
subsistence and are socially determined. The model is expressed in growth rates and
defines a stable medium-run growth path in which the late industrializing economy
settles for a period of time, given a certain set of exogenous structural demand and
productivity conditions (Blecker, ). For convenience, all variables are measured in
instantaneous rate-of-change form (or differences in natural logarithms). Table .
provides empirically grounded estimates of the model parameters, which can be read
as ‘stylized facts’ describing the economic structure of our typical late industrializing
economy.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Table 17.1 Late industrializing economies: stylized facts and parameter values
Structural Meaning Source
parameter
α ¼ 0:75 Share in GDP of autonomous demand *
χ ¼ 0:25 Shares in GDP of exports of goods and services (1990‒2018) A
η ¼ 0:28 Shares in GDP of imports of goods and services (1990‒2018) A
ξ ¼ 0:10 The impact of a one percentage point increase in real wage growth on B
domestic demand growth
ε ¼ 1:20 World income elasticity of export demand C
μ ¼ 1:40 Income elasticity of import demand D
ε
μ ¼ 0:86
ρ ¼ 0:54 Relative price elasticity of export demand C
δ ¼ 0:52 Relative price elasticity of import demand D
’ ¼ 0:10 ’ ¼ F =ðPX þ F Þ = ratio of financial inflows to foreign exchange *
earnings
Marshall‒Lerner condition: ð1 ’Þρ þ δ 1 0
γ ¼ 0:55 Share of unit labour cost in output price E
β ¼ 0:40 Kaldor‒Verdoorn coefficient F
Ω ¼ 0:73 1
Ω¼ ¼ 0:73
1 þ ημ þ ðξ βγðχρ þ ηδÞÞ
dyE dlE
¼ 0:04; ¼ 1
dw dz0
g ¼ 2:75 Growth rate of world income (1990‒2018) A
a ¼ 2:75 Growth rate of autonomous demand *
z0 ¼ 1:00 Exogenous (‘technology-push’) labour productivity growth *
Equilibrium yE ¼ yB ¼ 2:15; zE ¼ 1:85; lE ¼ 0:30; wB ¼ 0:30
outcomes
Sources: (A) average for the period 1990‒2018 for low- and middle-income countries, World Devel-
opment Indicators, World Bank; (B) Onaran and Galanis (2014); (C) Senhadji and Montenegro (1998):
median of long-run estimates for sixty-six countries (1969‒93); see also Bussière et al. (2016: table 2);
(D) Senhadji (1997): median of long-run estimates for sixty-six countries (using data for 1969‒93); see
also Bussière et al., (2016: table 3); (E) γ is defined in fn. 2; we assume that ν ¼ 0:35; see Table 17.4
below; (F) McCombie, Pugno, and Soro (2002); Storm and Naastepad (2005: tables 6 and 12); and (*)
assumed.
Starting on the demand side, real GDP or output growth (y) is determined by the
growth of aggregate demand, as in equation ():
y ¼ αa þ χx ηm þ ξðw zÞ α; χ; η; ξ > 0 ð1Þ
where a is the growth rate of (real) autonomous demand, x is the growth rate of (real)
exports, m is the growth rate of (real) imports, w is (exogenous) real wage growth and z
is labour productivity growth. Coefficients α; χ and η are the shares in GDP of autono-
mous demand, exports, and imports, respectively (Table .). If real wage growth
exceeds labour productivity growth (w – z) > , the country’s wage share in GDP is
growing. We assume in eq. () that wage share growth contributes to faster growth of
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
domestic demand. This reflects the fact that, at low average levels of income, higher real
wage growth raises consumption growth strongly—and even if it does depress invest-
ment growth, this negative effect is assumed to be more than offset by the faster growth
of consumption demand (see Table .). Autonomous demand growth a is exogen-
ous. Export growth (x) is endogenous:
x ¼ εg þ ρ ðe þ pW pÞ ε; ρ > 0 ; ð2Þ
where ε is the world income elasticity of export demand, g is the growth of rest-of-the-
world income, ρ is the price elasticity of export demand, e > is the rate of nominal
exchange rate depreciation (with the nominal exchange rate measured in home
currency per unit of foreign currency), and pW and p are the rates of change in the
foreign and home price levels, respectively. Note that the expression ðe þ pW pÞ
represents the rate of real depreciation of the home currency. Foreign price inflation is
taken as being exogenous (here we are invoking the small-country assumption). Home
price inflation p is a function of the growth in unit labour cost (w – z), the growth of
unit intermediate input cost h and the growth of the profit mark-up factor π:
p ¼ π þ γðw zÞ þ h.² We refrain from explicitly incorporating changes in mark-
ups here and assume that π ¼ 0; and since the focus is on unit labour cost, we further
simplify by assuming that h ¼ 0. Under these assumptions, eq. () can be rewritten as:
x ¼ εg þ ρ e þ pW γðw zÞ ð2#Þ
Import growth m is determined by growth of output y and the rate of increase in the
relative price of foreign goods ðe þ pW pÞ :
m ¼ μy δðe þ pW pÞ ¼ μy δ e þ pW γðw zÞ μ; δ > 0 : ð3Þ
Coefficients μ and δ are the income elasticity and the price elasticity of import demand,
respectively. Assuming that π ¼ 0 and h ¼ 0, substituting (#) and () into (), and
rearranging, gives the following expression for demand-determined output growth y:
1
y¼ ½αa þ χεg þ ðχρ þ ηδÞðe þ pW Þ þ γ ξ ðχρ þ ηδÞ ðw zÞ ð4Þ
1 þ ημ
Demand-driven growth increases when there is an increase in autonomous demand
growth (a) and world income growth (g) and when the currency loses value in
nominal terms. The sign of the impact of higher real wage growth and faster labour
² This equation can be derived as follows. First, assume that the price level P=W̿ Z + H, where Π= +
the profit mark-up, W̿ = the nominal wage, Z = the level of labour productivity, and H = intermediate
input cost per unit of output. Expressed in instantaneous rate-of-change form (differences in natural
logarithms), we get this equation for home price inflation: p=π+ν w̿ -z+-ν h. ν = W̿ Z – P or the ratio of
unit labour cost, the profit mark-up factor and the price level. Nominal wage growth w̿ is defined as w̿ =
w+p; substituting this into the equation for home price inflation and rearranging, we obtain: p=π+γ w–
z+h, where γ = – ν.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
productivity growth can be positive or negative. To see this, consider the derivative of
y with respect to w:
dy 1
¼ ½ξ γðχρ þ ηδÞ ð5Þ
dw 1 þ ημ
dy
I assume that the sign of dw is negative or ξ < γðχρ þ ηδÞ, that is, the increase in
domestic demand growth due to an increase in real wage growth is smaller than (the
absolute value of) the decline in net export growth due to higher wage growth (see
Table .). It is in this sense that the late industrializing economy is ‘export led’: lower
wage growth does hurt the domestic market, but this damage is more than offset by its
positive impact on net export growth. Given eq. (), the impact of higher productivity
growth on output growth must be positive:
dy 1
¼ ½ξ γðχρ þ ηδÞ > 0 ð6Þ
dz 1 þ ημ
Given that equation () describes demand-determined output growth, what about the
supply side of this economic system where productivity growth is being determined?
The supply side is given by the Kaldor‒Verdoorn relationship, according to which
labour productivity growth (z) is a positive function of output growth:
z ¼ z0 þ βy z0 > 0; 0 < β < 1 ; ð7Þ
where z₀ is exogenous productivity growth due to technology policies (such as R&D
subsidies and public investment in basic research) and β is the Kaldor‒Verdoorn
coefficient (which reflects dynamic increasing returns to scale; see Storm and
Naastepad, , ). We assume that 0<β<1.³
Equations () and () together constitute a system of two linear equations in two
endogenous variables (z and y) which is illustrated in Figure .. The demand-growth
curve is upward sloping in the (z, y) plane (following eq. ()); the productivity-
growth curve is (more strongly) upward sloping. Assuming that a stable growth
equilibrium exists,⁴ equilibrium growth (yE) is determined by substituting eq. () into
eq. () and rearranging:
yE ¼ Ω ½αa þ χεg þ ðχρ þ ηδÞðe þ pW Þ þ ðξ γðχρ þ ηδÞÞðw z0 Þ ð8Þ
where the multiplier term Ω ¼ 1þημþðξβγðχρþηδÞÞ
1
> 0 for empirically plausible reasons
(see Table .). Given yE, equilibrium productivity growth becomes:
zE ¼ z0 þ βyE ; ð9Þ
³ Empirical evidence on the Kaldor‒Verdoorn coefficient for China, Malaysia, Singapore, South
Korea, Taiwan, and Thailand by Storm and Naastepad () shows that β=..
⁴ The system solves for a unique and stable equilibrium, as we assume the slope of the productivity-
growth curve to be steeper than the slope of the demand-growth curve.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
output growth (y)
employment growth (l)
productivity growth
demand growth
yE
lE
employment growth
0 zE labour productivity growth (z)
. An export-led growth model with cumulative causation
Source: Constructed by author.
and we can also determine equilibrium employment growth lE as follows:
lE ¼ yE zE ¼ ð1 βÞyE z0 ð10Þ
The curve for employment growth also appears in Figure .. Using eq. (), (), and
(), it follows that an increase in a raises equilibrium output, productivity, and
employment growth, because dy da ¼ αΩ > 0, da ¼ βαΩ > 0, and da ¼ ð1 βÞαΩ > 0.
E dzE dlE
The same is true for a rise in g and a nominal currency depreciation. In contrast,
higher real wage growth is not good for ‘export-led’ growth:
dyE
¼ Ω½ξ γðχρ þ ηδÞ < 0: ð11Þ
dw
This drop in equilibrium output growth in turn depresses both labour productivity
dyE dyE
growth (since dzdw ¼ β dw < 0) and employment growth (because dw ¼ ð1 βÞ dw < 0).
E dlE
Let us finally consider the macro effects of industrial policy, which succeed in
bringing about an increase in productivity growth (i.e. Δz0 > 0), and hence contribute
to faster net export and output growth:
dyE
¼ Ω½ξ γðχρ þ ηδÞ > 0 ð12Þ
dz0
Clearly, productivity growth must go up as well:
dz dyE
¼1þβ >0 ð13Þ
dz0 dz0
These growth impacts of industrial policy are illustrated in Figure .. The curve for
demand growth shifts up (in line with eq. ()) and the curve for productivity growth
shifts down (as per eq. ()). The new growth path features higher output growth as
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
y.ι
productivity growth
yE1 demand growth
yE0
ι0
ι1 employment growth
0 zE0 zE1 z
. Successful industrial policy raises equilibrium output growth and productivity
growth but reduces employment growth
Source: Constructed by author.
well as faster productivity growth. However, the sign of the industrial policy impact on
employment growth is ambiguous, because:
dlE dyE
¼ ð1 βÞ 1⋛0 ð14Þ
dz0 dz0
Equilibrium employment growth could, in principle, increase if output growth rises
dlE
more in response to industrial policy than productivity growth. Formally, dz 0
> 0 if
dyE 1
dz0 > 1β and this could happen only if (i) the price elasticities of exports (ρ) and
imports (η) are large; (ii) unit labour cost makes up a sizeable part of the price (i.e. γ
is large); and (iii) the shares of exports (χ) and imports (η) in GDP are large. Late
industrializing economies do not generally meet these conditions (see Table .),
however, and hence, dz dlE
0
< 0 (as in Figure .). Therefore, industrial policymakers face
an unpleasant trade-off: raising productivity growth increases output growth, but slows
down job growth. Storm and Naastepad (), Pieper (), Roncolato and Kucera
(), and Junankar () provide empirical evidence on the ‘productivity growth–
employment growth’ for late industrializing countries.⁵ Figure . illustrates the trade-
off using historical evidence for a sample of twenty-four industrializing countries. Only
a few East Asian countries managed to escape the trade-off, but in other Asian and Latin
American developing economies a step up in z has meant a decline in lE.
Macro-policy can be used to overcome this ‘nasty’ trade-off. For example, a nominal
currency depreciation Δe > 0 will raise output growth (assuming it can be maintained
for some time), as (from eq. ()) we know that dydeE ¼ Ωðχρ þ ηδÞ > 0. This means that
⁵ Long-run econometric estimates by Storm and Naastepad () and Junankar () for a panel of
low- and middle-income countries indicate that dlE/dz₀ –. We obtain the same elasticity value here,
using the stylized facts in Table ..
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
6
Taiwan South
Korea
Thailand Singapore
4 Turkey China
Pakistan Malaysia
Vietnam
Indonesia
Sri Lanka Brazil
2 I
Mexico
Myan Colombia Ecuador Guatemala
Argentina Bangladesh Philippines
0
Venezuela
–2
1 2 3 4 5
Employment growth
(average annual growth rate in %)
. Trade-off between labour productivity growth and employment growth in twenty-
four late industrializing countries, ‒
Notes: () Employment is defined as the number of persons in civilian employment; () labour productivity is
GDP (at constant prices) per person employed; () labour productivity and employment growth
rates for India, Indonesia, Malaysia, Myanmar, Pakistan, Singapore, Korea, Sri Lanka, Taiwan,
Thailand, and Vietnam are for ‒; the figures for China are for ‒; and
() the statistically significant regression line was estimated for eighteen countries, i.e. excluding China,
Malaysia, Singapore, Korea, Taiwan, and Thailand.
Source: Storm and Naastepad ().
the demand-growth curve in Figure . shifts up even further. Note that exchange rate
depreciation will also shift the productivity-growth curve to the right. However,
because 0 < β < 1, productivity growth rises less strongly than output growth—and
employment growth must increase. This can be seen directly by taking the derivative of
employment growth with respect to e:
dlE
¼ ð1 βÞΩðχρ þ ηδÞ > 0 ð15Þ
de
It is in this context that capital account regulations (CARs), especially restraints on
financial outflows, become a critical tool for economic development (Frenkel and
Taylor, ; Guzman et al., ). First, CARs can block a currency appreciation in
a country with a persistent current account surplus and help maintain a competitive
exchange rate. Maintaining a competitive exchange rate allows developing countries to
open up new lines of (technologically more sophisticated) exports (Freund and Pierola,
; Cimoli et al., ). Second, CARs can favour foreign direct investment and
discriminate against volatile short-term (portfolio) flows. Finally, CARs increase mon-
etary policy autonomy by partly curtailing the interest-rate and exchange-rate effects of
(a reversal of) financial flows.
Eq. () suggests that there are good grounds for combining an industrial policy
push by the state with supportive measures by a development-oriented central bank
which allow the currency to depreciate as part of its macro-management of the capital
account of the BoP. With CARs in place, monetary authorities can lower the interest
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
rate, which would weaken the currency by encouraging a financial outflow out of the
country. As an added benefit, the lowered interest rate will encourage an increase in
business investment; in our model, this shows up as an increase in autonomous
demand growth. Higher a increases output growth more than productivity growth,
contributing to faster employment growth:
dlE
¼ ð1 βÞΩα > 0 ð16Þ
da
Alternatively, to prop up employment growth the state could step up public
investment—which again would imply an increase in a. This way, supportive macro-
economic policy helps to buttress and reinforce the industrial policy initiative. How-
ever, if this is true, the reverse can occur as well: the wrong kind of macro policies,
including a sustained currency appreciation,⁶ an unsupportive increase in interest rates
(Frenkel and Taylor, ), and/or wrongly timed fiscal austerity (Neto and Porcile,
), can (partly or completely) erode the potential cumulative growth impacts of
industrial policymaking.
.. Enter the Balance-of-Payments Constraint
Successful industrial policy, when combined with supportive macroeconomic policies,
raises the equilibrium growth rates of output and productivity, while maintaining job
growth. But such a growth acceleration could be inconsistent with the long-run
requirements of BoP equilibrium, if the growth of necessary imports (of food, capital
goods, and technology) exceeds the growth of exports and of financial inflows
(Thirlwall, , ). The industrial policy-induced virtuous cycle of faster techno-
logical progress, rising investment and exports, and higher output growth may not last,
because the country is unable to finance its growing imports through either export
growth or higher financial inflows (McCombie and Thirlwall, ). Following Blecker
(), the long-run BoP equilibrium condition can be written as follows:
ð1 ’Þðx þ pÞ þ ’f ¼ e þ pW þ m ð17Þ
where f is the growth rate of financial inflows F (measured in domestic currency) and
’ ¼ PXþF
F
is financial inflows as a ratio of total ‘receipts’ in the BoP. We assume that
F > . Substituting equations (#), (), and () into () gives, after rearranging, the
following general solution for the BoP-constrained growth rate:
ð1 ’Þεg þ ’f þ ½ð1 ’Þρ þ δ 1ðe þ pW γðw þ z0 ÞÞ
yB ¼ ð18Þ
μ βγ½ð1 ’Þρ þ δ 1 þ ’
⁶ Elbadawi et al. () provide evidence that currency overvaluations had a negative impact on
export diversification for eighty-three sub-Saharan countries (‒).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
We assume that the denominator of () is positive, which appears empirically
plausible, because 0 < β < 1, 0 < γ < 1 (see Table . below) and the extended Mar-
shall‒Lerner condition with financial flows ð1 ’Þρ þ δ 1 > 0 is unlikely to hold,
because the price elasticities ρ and δ are in general low for late industrializing countries
(Table .). The expression ðe þ pW γðw þ z0 ÞÞ gives the effect on BoP-constrained
growth of an improvement in the country’s terms of trade. Note that if relative
purchasing power parity holds, then ðe þ pW γðw þ z0 ÞÞ = and the expression
drops out of eq. ().⁷ While this may be the case in the long run, it is true that terms-
of-trade improvements can raise the BoP-constrained growth for some time, as
illustrated by the commodity-price booms in Africa (Bagnai et al., ) and Latin
America (Ocampo, ) in the s. But such terms-of-trade effects have always
been transitory (e.g. Nureldin Hussain, ). Let us simplify () by accepting ‘price
elasticity pessimism’ as a stylized fact of late industrializing nations (Blecker, ).
That is, we assume that the extended Marshall‒Lerner condition is not satisfied⁸ and
that changes in the international terms of trade have no impact on the trade balance:
ð1 ’Þρ þ δ 1 ¼ 0. This simplifies eq. () to:
ð1 ’Þεg þ ’f
yB ¼ ð19Þ
μ β’
The BoP-constrained growth rate yB increases if world income growth (g) increases and
also following an increase in the growth rate of financial inflows f; in both cases, the
BoP constraint is relaxed and the country can have higher imports which in turn allows
for faster growth. Note that a permanent increase in f is implausible in the long run,
particularly if the growing financial inflows come in the form of foreign debt and
increase faster than nominal GDP. In this case, the late industrializing country runs the
risk of an unmanageable rise in its foreign indebtedness. Hence if we set f = and
further assume that ’ ¼ 0 (which means trade must be balanced in the long run), then
eq. () becomes:
ε
yB ¼ g ð20Þ
μ
Eq. () is known as Thirlwall’s Law and it highlights the structural (long-run)
determinants of a nation’s BoP-constrained growth rate (Thirlwall, , ): the
growth rate of world income (g) and the ratio of the world income elasticity of export
demand (ε) and the country’s income elasticity of import demand (μ).
This ratio of income elasticities depends on the degree of diversification of the
production structure of this economy as well as on the technological and knowledge
intensity of its pattern of (export) specialization. In general, as is shown by the data
⁷ The econometric evidence on long-run relative purchasing power parity is inconclusive, and is
sensitive to the currencies, price indices, time periodization, and econometric methods used (Blecker,
).
⁸ For empirical evidence, see Rose () and Bahmani et al. ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Table 17.2 Income elasticity of exports (ε) and imports (μ): selected late industrializing countries, 1962‒2006/2014
World income elasticity of export demand ε:
Primary Resource-based Low-technology Medium-technology High-technology Weighted μ
products manufactures manufactures manufactures manufactures aggregate ε
Argentina 0.66 0.69 0.79 0.82 0.93 0.84 1.24
Brazil 0.62 0.87 1.74 2.23 4.14 1.10 1.18
Chile 1.05 1.10 1.51 2.26 3.85 0.81 1.23
Mexico 0.77 1.12 2.26 2.83 6.91 1.67 1.28
South 0.98 1.25 2.61 1.94 8.07 1.83 1.17
Korea
Malaysia 0.77 0.76 8.47 12.22 4.54 1.38 1.22
Philippines 0.76 0.74 2.85 4.81 10.07 1.32 1.21
High-income OECD countries 1.61 1.22
Low-income countries 1.00 1.21
Lower middle-income countries 1.20 1.20
—China 1.55 1.15
—India 1.42 1.14
Upper middle-income countries 1.28 1.21
Sources: The commodity-wise estimates for Argentina, Brazil, Chile, and Mexico (using data for 1962‒2014) are from Neto and Porcile (2017); the commodity-wise
estimates for South Korea, Malaysia, and the Philippines (using data for 1962‒2006) are from Gouvêa and Lima (2010); all weighted averages for (ε) and (μ) are from
Gouvêa and Lima (2013) and based on data for 1965‒99.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
collected in Table ., ε takes a low value for primary and resource-based products
and much higher values for medium- and high-tech manufactures. The more technol-
ogy intensive the export commodity, the higher is its world income elasticity of
demand (Gouvêa and Lima, , ; Bottega and Romero, ). Accordingly,
the more developed, differentiated, and sophisticated the technological capabilities of a
country, the higher the income elasticity of export demand (ε) and hence the higher yB.
‘What you export matters’ is how Hausmann et al. () sum it all up. The policy
message is plain: a country should reorient its exports as much as is possible to fast-
growing markets and plan for import substitution in those imports for which the
income elasticity of demand is high (Thirlwall, ). For many late industrializing
nations, the ratio ε=μ<1 (see Table .), which means their BoP-constrained rate of
economic growth is lower than world income growth; this is in line with what we
assume in Table .. It is precisely here that industrial policies take on a critical
developmental role, because if they succeed in promoting investment and technological
learning, and bringing about a diversification and technological upgrading of the
production and export structures, this will raise ε=μ and consequently yB.⁹ Conversely,
a failure to increase the technological sophistication of the export basket may result in
adverse structural change, leading to a decline in ε=μ and yB. This occurred in both
Indonesia (Felipe et al., ) and Thailand (McCombie and Tharnpanich, ), as
the export earnings of these countries became more heavily dependent on natural
resources and low value-added manufacturing after the Asian financial crisis of .
If we accept that long-run growth of late industrializing countries must be based on
long-run balance in the BoP’s current account, this implies that the equilibrium output
growth yE (determined in eq. ()) cannot permanently exceed the BoP-constrained
growth rate yB (Blecker, ). The reason is that if yE > yB , the country is running a
current account deficit in excess of what it can structurally finance in the long run; this
outcome cannot be sustained and restoring (long-run) external balance requires that yE
is forced down to yB. On the other hand, if yE < yB , the country’s current account deficit is
below what long-run BoP equilibrium would permit and there is no need for a realign-
ment of yE and yB. Figure . presents the export-led growth model (of Figure .) with
the horizontal BoP constraint—assuming that long-run equilibrium implies: yE ¼ yB .
. ‘B P’ I
..................................................................................................................................
Below a critical minimum of investment, industrial production may fail to benefit from
economies of scale and consequently private returns to individual manufacturing
investment turn out to be low, even if the rates of return to coordinated industrial
⁹ The point is illustrated by comparing the world’s most successful industrializer China (ε/μ = . in
Table .) and a less successful industrializer such as Brazil (ε/μ = .). For a given rate of growth of
world income (of, say, . per cent), China’s yB will be . per cent compared to . per cent in Brazil.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
investments would have been high. Industrialization therefore requires a ‘big push’:
the coordination of complementary investments, in the presence of significant scale
economies and capital market imperfections (Storm, ). ‘Big push’ models of
(import-substitution) industrialization in BoP-constrained developing countries were
proposed by Rosenstein-Rodan (), Mandelbaum (), Singer (), Nurkse
(), and Prebisch (). What was assumed in these models is that the demand
side of the economy would, more or less passively, support the industrialization
process. Likewise, it was held that national growth projects could remain unperturbed
by global capital markets. The failure of Latin American import-substitution industri-
alization (Bertola and Ocampo, ) and the running out of steam of India’s Nehru‒
Mahalanobis industrialization strategy in the s (Chakravarty, ) are proof that
both assumptions were wrong.
Let us assume that the late industrializing economy raises public investment as part
of a ‘big push’ strategy. In the model, this is captured by an increase in a. Its
consequences for the equilibrium growth path of the late industrializing nation are
illustrated in Figure .. An increase in a raises output growth from yE₀ to yE1 > yB .
Productivity growth accelerates as well (from zE₀ to zE₁), while employment growth
declines from lE₀ to lE₁, but remains positive. The supply-driven ‘big push’ strategy
appears to be working well. Let us further suppose that the industrialization pro-
gramme is not export oriented; indeed, as Ocampo () argues, state-led industrial-
ization in Latin America during ‒ was characterized by a significant anti-export
bias. We also assume that the programme is not successful in reducing the nation’s
dependency on (medium- and high-tech) imports. Taken together, this means that the
BoP-constrained growth rate yB remains unaffected by the ‘big push’, because ε and μ
remain unchanged. The industrialization process thus runs into the BoP constraint: the
output growth ( y)
employment growth (l)
productivity growth
demand growth
yE = yB
BoP-constrained growth
ιE
employment growth
0 zE labour productivity growth (z)
. An export-led growth model with cumulative causation and a balance-of-
payments constraint
Source: Constructed by author.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
growth acceleration cannot be sustained, because the country’s current account deficit
and external debt are continuously rising relative to GDP.
How are demand-led growth and BoP-constrained growth reconciled? East Asian late
industrializers succeeded in taking the high road, raising yB to yE₁. They achieved this by
aggressively encouraging investment in the desired export-oriented and import-
substitution activities by every available means, including the offer of tax concessions,
subsidies, temporary and conditional trade protection, cheap credit, and considerable
informal pressure (Wade, ; Akyüz et al., ; Amsden, ; Storm and Naastepad,
). Scitovsky () appositely characterized East Asia’s investment regime as a
‘forced investment’ one. But East Asia’s late industrializers are the successful exceptions
(Cherif and Hasanov, ). Most other late industrializing countries went down the
‘low road’, as yE₁ was ‘forced’ down to equal yB. This happened in three distinct ways.
.. The ‘Wage-Goods Inflation’ Barrier:
A Ricardian–Kaleckian Mechanism
‘Everyone knows,’ wrote Ragnar Nurkse (: –), ‘that the spectacular industrial
revolution [in England] would not have been possible without the agricultural revolu-
tion that preceded it.’ Arthur Lewis (: ) concurred:
Now if the capitalist sector produces no food, its expansion increases the demand
for food, raises the price of food in terms of capitalist products, and so reduces
profits. This is one of the senses in which industrialisation is dependent upon
agricultural improvement; it is not profitable to produce a growing volume of
manufactures unless agricultural production is growing simultaneously. This is
also why industrial and agrarian revolutions always go together and why economies
in which agriculture is stagnant do not show industrial development.
As shown by the experiences of South Korea, Taiwan, and China, rapid industrializa-
tion requires parallel or prior increases in agricultural productivity and food produc-
tion to avoid the danger of running into the Ricardian trap (Saith, ; Storm, ).
In our BoP-constrained economy (Figure .), the ‘big push’-induced acceleration of
output growth raises the demand of the industrial sectors for intermediate inputs and
wage goods (food and other subsistence goods) produced by the domestic agricultural
sector. Domestic agriculture may be unable to increase the growth rate of wage-goods
supply, even in the presence of a Lewisian reserve of underemployed workers, because
the growth of agricultural productivity and output is constrained by technical as well as
institutional factors (notably a highly unequal distribution of land ownership, the small
size of average land holdings, and exploitative and insecure tenancy systems)—and
therefore the growth of wage-goods supply is relatively price inelastic even in the longer
run (Karshenas, ; Kay, ; Storm, , ).
Under these conditions, as argued by Kalecki (, ), faster (industrial) growth
leads to a structural excess demand for wage goods and to wage-goods inflation—
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
output growth (y)
employment growth (l)
productivity growth
yE1 demand growth
yE0 = yB
BoP-constrained growth
lE0
lE1 employment growth
0 zE0 zE1 productivity growth (z)
. Successful industrial policy raises equilibrium output growth above the BoP-
constrained growth rate
Source: Constructed by author.
which (in the presence of a BoP constraint) will drive up nominal and real wage growth
(in manufacturing) and this, in turn, will raise the (industrial) wage share, lower the
(industrial) profit share and thus erode private investment (Chakravarty, ).
Attempts to finance industrial investment through a forced extraction of resources
from a technologically stagnant and socially unequal agriculture would inevitably
dissipate in inflationary spirals. Note that Kalecki’s diagnosis that wage-goods inflation
arising from the (price) inelasticity of agricultural supply could lower aggregate
demand and output growth is one of the earliest references in the literature to the
phenomenon that came to be known as ‘stagflation’. In the model, the Ricardian–
Kaleckian wage-goods inflation mechanism would work through an increase in real
wage growth w, which lowers yE (per eq. ()) and shifts the demand-growth curve in
Figure . down.¹⁰ It is possible, by combining the expression for yB given by eq. ()
and eq. () for yE, to determine the ‘BoP-constrained growth rate for real wages’:
ð1 μΩχÞεg αa þ ðχρ þ ηδÞðe þ pW Þ
wB ¼ þ z0 ð21Þ
μΩðξ γðχρ þ ηδÞÞ ξ γðχρ þ ηδÞ
wB is the growth rate of real wages which ensures long-run balance between yE and yB.
Noting that ½ξ γðχρ þ ηδÞ<0, it can be seen from () that dw
da > 0, which means that
B
¹⁰ This can be justified as follows. The real wage is w =W̿ /P; we can write: w = ðPWF Þ ðPPF Þ, where
̿
W̿
PF = the price of wage goods (food). The term ðPF Þ ¼ wF is the ‘product wage’, or the nominal wage
deflated by the price of wage goods (Chakravarty, ). If wF is socially determined and fixed and if
food prices rise faster than the general price level P, then w must increase. This is the mechanism
underlying eq. ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
BoP-constrained real wage growth is forced up by the wage-goods inflation, which in
turn depresses domestic demand for manufactures and thus stifles industrial growth.
This particular mechanism was at work in large, populous, and foreign-exchange-
constrained countries such as Brazil in the s and s (Taylor and Bacha, ;
Kay, ) and India in the s and s (Chakravarty, ; Storm, , ),
when domestic demand for manufactures was eroded by wage-goods inflation caused by
the fact that under-prioritized agriculture was unable to produce enough food and raw
materials for the growing industrial workforce and expanding manufacturing sector.¹¹
.. A Drop in Domestic Expenditure Growth:
A Robinsonian Mechanism
A second mechanism realigning yE with (unchanged) yB has been suggested by Porcile
and Yajima (), who following Robinson () propose that the growth of private-
sector (investment) demand will go down. Robinson argued that a growing external
deficit is likely to depress the ‘animal spirits’ of the capitalist class, and therefore private
investment, because it signals a growing risk of a BoP crisis, a depreciation of the
currency, a rising foreign debt burden and/or a sudden stop in foreign credit:
The most important benefit of a surplus on income account [of the BoP], which
affects the whole economy, is that, provided there are energetic enterprises and
thrifty capitalists to take advantage of it, it permits home investments to go full
steam, while a deficit country is nervously pulling on the brake for fear of excessive
imports. (Robinson, : ‒)
This fall in private investment, so Robinson adds, slows down technical progress and
hurts the country’s competitive position, tightening the BoP constraint even further. If
there is a currency depreciation, this could hurt firm profits (assuming that firms
cannot completely protect their profit mark-ups and pass higher import costs on to
prices)—and private investment would go down. In the present model, autonomous
expenditure growth a would fall, which shifts the demand-growth curve down to where
it was before the public investment drive. In this adjustment process, higher public
investment ‘crowds out’ private investment, not through higher interest rates, but
rather through depressed ‘animal spirits’ of private firms and/or through a manufac-
turing profit squeeze.
¹¹ Note that in Latin America, Africa, and India, the resulting more unequal distribution of rural
incomes restricted the growth of the domestic market, contributed to a distorted industrial structure and
(via imports of consumer goods) contributed to chronic BoP problems (Kay, ; Karshenas, ;
Chakravarty, ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
.. Forced Savings, Restrictive Monetary Policy, and
Destabilizing Austerity: Three Keynesian Mechanisms
In terms of macroeconomic accounting, a structural current account deficit reflects the
fact that the country is unable to increase domestic savings to the same level as the
expanded domestic (public + private) investment—and hence the country has to rely
on foreign savings (a net financial inflow) to finance its capital accumulation. For most
late industrializing countries, access to global capital markets is restricted and it is in this
context of a shortage of foreign exchange that early development models—including the
Harrod‒Domar model, the Lewis model and the Mahalanobis model—emphasized the
importance of mobilizing domestic savings to finance capital formation growth.
A failure to do so can, in a foreign-exchange-starved economy, lead to a process of
forced savings (Storm, ), as the excess of demand allows firms to raise the profit
mark-up factor (π > ), which then leads to home price inflation and a redistribution of
income in favour of profit recipients (who have a higher propensity to save than wage
earners). The higher profit share contributes to rising inequality in household incomes
and higher savings, which reduces domestic demand and, by limiting the size of the
home market, puts a brake on industrial investment, output, and productivity growth,
as argued by Kalecki (, ) and Taylor and Bacha (). Lack of domestic
demand slows down industrialization, forcing yE down to yB.
This drag on growth can be avoided for as long as the current account deficit can be
financed by foreign funds—but foreign indebtedness will rise and the external imbal-
ance will have to be rectified at some point. Exchange rate devaluations will generally
not be effective at doing this (Bahmani et al., ). The only way to reduce the external
imbalance is by import compression—but to achieve this, demand must be depressed.
Fiscal austerity is one way to depress demand, and it was part and parcel of the World
Bank/IMF structural adjustment programmes adopted by, and imposed on, debt-
ridden industrializing countries in Latin America and sub-Saharan Africa in the
s and s. In our model, fiscal austerity means a decline in variable a, which
by depressing growth and imports restores BoP equilibrium. The demand-growth curve
shifts down again to where it was before the public investment drive (Figure .). In
Latin America, the cure of fiscal austerity and pro-market reforms proved to be worse
than the disease. As large exchange-rate devaluations were not effective in reducing
current account deficits, Latin American governments imposed drastic cuts in public
expenditure (mostly in public investment) and raised taxes in order to continue
servicing their high external debts (Bertola and Ocampo, ). Private investment
predictably suffered—and economic growth stagnated, industrial diversification and
upgrading got stalled, and Latin American economies became more strongly dependent
on the export of a few (primary) commodities. As Neto and Porcile (: ) write, ‘a
fall in public investment reinforces backwardness in technology, infrastructure and
productivity, which heightens the external deficit and disequilibrium’. Austerity rein-
forced Latin America’s comparative advantage in natural resource- and labour-
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
abundant sectors, led to a re-commodification of their production and export structures
(Ocampo, ), and resulted in considerable de-industrialization (Diao et al., ).
Persistent current account deficits will also alarm monetary policy authorities, who
will raise interest rates in an attempt to mop up additional domestic savings and/or
attract (or keep attracting) foreign finance. If successful, the central bank’s restrictive
monetary policy raises domestic savings (thereby lowering consumption) and
depresses (or ‘crowds out’) private investment—and as a result, domestic demand
and import demand are forced down; this will also realign yE with yB. These
mechanisms are called ‘Keynesian’ because they all constitute a failure to manage
aggregate demand in ways supportive of the big push industrialization process.
. V L E-
I S
..................................................................................................................................
The challenge for late industrializing countries is to escape from the primary-
commodity specialization trap in which they find themselves (Ocampo, ; Cherif
and Hasanov, ). The question is how to defy comparative advantage, and how far
from comparative advantage the state should push. To illustrate, South Korea’s devel-
opment path after would have been radically different if it had followed the policy
advice it was given at the time to continue focusing on what were then its main exports
(rice, raw silk and wolfram), instead of embarking on developing shipbuilding, elec-
tronics and automotive industries (Cherif and Hasanov, ). In principle, a
commodity-price boom could provide the launch pad for an industrialization drive
and a structural transformation of the economy. Exactly such an opportunity for
industrialization was created during ‒ as the windfall export gains (caused by
a global commodity-price boom) and a (China-led) surge in natural resource-seeking
foreign direct investment revived economic growth in Africa and Latin America
(Ocampo, ). This commodity boom turned African economies into the fastest
growing on the planet (Bagnai et al., ) and this, for some time, led to much
optimism about prospects for accelerated industrialization based on commodities.
But overall, sub-Saharan African and Latin American countries have been unable to
fully capture the benefits from commodity booms. Industrialization based on com-
modities is not at all easy—mostly because macroeconomic imbalances can throw the
growth process off the rails.¹²
¹² Cycles in commodity prices introduce (enhanced) cyclicality in fiscal revenues (because govern-
ment revenue is heavily dependent on taxation of natural resource-intensive industries) and in business
investment (which tends to increase as commodity prices go up). Short-run stabilization emergencies
(for instance in response to a sudden collapse of commodity prices) may seriously conflict with a long-
run policy focus on industrialization and structural change (Ocampo et al., ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
.. The ‘Dutch Disease’
Let us explore the macroeconomic consequences of a prolonged commodity-price
boom in terms of the growth model of Figure ., by assuming that the growth rate
of world prices pW increases. The higher export earnings constitute a windfall gain, and
assuming (for the moment) that these are not invested in projects intended to diversify
and upgrade the country’s production and export structures, yB stays the same. Note
further that a higher pW does not affect the long-run BoP-constrained growth rate yB,
because we assume ð1 ’Þρ þ δ 1 ¼ 0. However, the commodity-price boom drives
up equilibrium output growth, since:
dyE
¼ Ωðχρ þ ηδÞ > 0 ð22Þ
dpW
and as a result, the demand-growth curve shifts up as is illustrated in Figure .. The
labour productivity growth does not shift, but through the Kaldor‒Verdoorn mechan-
ism, productivity rises (along the curve) from zE₀ to zE₁. Employment growth increases
as well (from lE₀ to lE₁), because output growth increases more than productivity
growth (since 0 < β < 1). The commodity-price hike thus triggers a process of cumula-
tive growth.
Before proceeding, we should note that while the late industrializing nation is
enjoying a surplus in its current account due to the increase in export earnings, the
step-up in its economic growth has raised the growth rate of the country’s imports;
the growth rate of real exports has remained unchanged. Accordingly, in real terms, the
country is running a larger current account deficit than is allowed by the BoP
constraint (eq. ()). Hence, notwithstanding the fact that the country is enjoying a
temporary current account surplus (in nominal terms), it is running a trade deficit in
output growth (y)
employment growth (l)
productivity growth
yE1 demand growth
yE0 = yB
BoP-constrained growth
lE1
lE0
employment growth
0 zE0 zE1 productivity growth (z)
. The macroeconomic impacts of a commodity-price boom
Source: Constructed by author.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
real terms—which it is able to finance using the higher export earnings only for as long
as the commodity-price boom endures.
But the new equilibrium growth path is unlikely to last, if the monetary authority
fails to maintain a ‘competitive’ exchange rate. Global demand for the country’s
currency increases as a consequence of the export commodity-price boom, and the
nominal exchange rate will appreciate Δe < 0. A ‘non-competitive’ exchange rate
may strangle the development of the tradable manufacturing industries. The
currency appreciation realigns equilibrium growth yE with yB as in Figure ..
The currency appreciation (a fall in e) shifts the demand-growth curve downward, as
dyE
de ¼ Ωðχρ þ ηδÞ > 0, and the resource-rich country remains locked into the
commodity-specialization trap. The mechanism is known as the ‘Dutch disease’,¹³
and is one manifestation of a larger pathology summarized under the heading of
‘natural-resource curse’: countries with abundant natural resources tend to have
lower and more unstable economic growth than countries with fewer natural resources
(Venables, ; Ocampo, ). A big part of the reason for this is that coping with
massive fluctuations in export earnings (or with huge inflows of foreign finance) is
challenging for any government.¹⁴ An escape from this trap is possible only when the
country succeeds in diversifying and upgrading its production and export structures.
For Hans Singer () and Raúl Prebisch () it was clear that this required strict
and careful management of the BoP in the context of a long-run strategy of import-
substitution industrialization.
.. Escaping the Primary-Commodity Specialization Trap
Economic growth yE in our late industrializing economy can only be increased in a
lasting way if the country succeeds in simultaneously raising its BoP-constrained
growth rate yB. The BoP-constrained growth rate is a reflection of the developing
economy’s (initial) position in the international division of labour, specializing in
natural resources and agricultural exports and importing mostly medium- and high-
tech manufactured goods. But a country’s pattern of specialization is not given—to
paraphrase the famous dictum of Joan Robinson—by God and factor endowments¹⁵
(Porcile and Sartorello Spinola, ), but can be changed and improved by deliberate,
state-guided strategies to change the structure of production towards activities with
¹³ The term was coined in by The Economist to describe the decline in manufacturing in the
Netherlands after the country had become a big natural gas producer and exporter in the s.
¹⁴ Part may be due to weak governance, which has, in some cases, created space for patronage politics
and domestic conflicts. See Venables ().
¹⁵ In , only three South Korean export industries within the ‘machinery and transport equip-
ment’ category (at the SITC -digit level) had a revealed comparative advantage index greater than one,
singling them out as promising sectors for future development. But by , all three had disappeared as
export industries, while Korea’s top exporting industries in did not even exist in (Cherif and
Hasanov, ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
higher productivity—which means productively absorbing existing new technologies,
catching up with the technological leading countries (as described most clearly by
Gerschenkron, ), mobilizing resources and guiding investment to more sophisti-
cated industries (Wade, ), prioritizing credit to targeted industries (with the
strongest linkages and spillovers), enforcing export orientation, maintaining a ‘com-
petitive’ exchange rate (Guzman et al., ) and managing the BoP, and learning how
to manufacture by just doing it and keeping on doing it (as described most powerfully
by Amsden, ). To capture the power of a developmental state to (gradually but
critically) improve the pattern of specialization of the economy, we modify our growth
model following Cimoli and Porcile (), assuming that:
ε 0
¼ f ðaÞ; f > 0 ð23Þ
μ
Equation () defines progressive structural change in the economy, away from natural
resources-based activities and towards manufacturing, as a function of mission-
oriented public investment in infrastructure and more risky, innovation-related activ-
ities (Mazzucato, ; Neto and Porcile, ) and state-guided private investment
(Wade, ; Amsden, ), which are both elements of autonomous demand growth
a. A successfully coordinated public and private investment drive will diversify the
production system, reducing the country’s import dependence (which lowers μ), while
raising the share in exports of more technology-intensive manufacturing goods (which
raises ε). A higher ratio ε=μ raises the country’s yB in eq. (). The relaxation of the BoP
constraint next allows the late industrializing country to step up its demand-
determined rate of growth.
This is illustrated in Figure .. Initially, the economy grows at yE0 ¼ yB0 . The state
then initiates a big public investment programme and imposes effective industrial policy
guidance on business investment—both elements of this industrialization strategy lead
output growth (y)
employment growth (l)
productivity growth
yE1= yB1 demand growth
yE0 = yB0
BoP-constrained growth
lE1
lE0
employment growth
0 zE0 zE1 z
. Escaping the primary-commodity specialization trap
Source: Constructed by author.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
to successful diversification and upgrading of national production and export structures.
In Figure ., higher public investment (higher a) pushes up the demand-growth
curve. But this time (and after a while), the industrial policy thrust raises ε=μ and yB
shifts up as well. The economy can now settle in a new, higher-growth equilibrium
yE1 ¼ yB1 , which will be determined by how much industrial policy manages to raise
ε=μ. Equilibrium productivity growth rises along the productivity-growth curve from
zE₀ to zE₁ in line with Kaldor–Verdoorn relation (in eq. ()). Figure . further shows
that employment growth is higher in the novel growth equilibrium. A final point to note
is that the structural relaxation of the BoP constraint lowers the BoP-constrained
growth rate of real wages wB. To see this, we differentiate wB in eq. () with respect
to the ratio of income elasticities of demand ε=μ and get:
dwB ð1 μΩχÞg
ε ¼ Ωðξ γðχρ þ ηδÞÞ < 0 ð24Þ
dð Þ
μ
which is negative because ½ξ γðχρ þ ηδÞ < 0(see Table .). What eq. () tells us is
that the structural loosening of the BoP constraint has lowered the pressure of wage-
good inflation in the economy—the spectre of stagflation has been exorcized by
successful industrial diversification and the system has more space for demand-led
development. However, actual real wage growth can be higher than before, because
equilibrium productivity growth has increased. Workers gain because employment
growth and real wage growth will rise.
. L L I
I P
..................................................................................................................................
Successful late industrialization that steers clear of persistent external disequilibria and
an unsustainable external debt, requires the pattern of specialization to be re-oriented
towards more technology-intensive industries with higher income elasticities of
demand for exports. The market mechanism is unlikely to bring about the growth-
enhancing structural change that is needed (Storm, ) and hence the ‘leading and
guiding hand of the state’ (Amsden, ; Wade, ; Cherif and Hasanov, )
must design and use (selective) industrial policy instruments to target exports with
growth potential and identify imports where there is potential for import substitution
(Storm and Naastepad, ; Thirlwall, ). Crucially, late industrializing nations
can complement their industrial policy by using labour regulation designed in such a
way that it serves as a ‘beneficial constraint’, forcing firms to upgrade, diversify, and
become more productive (Storm and Capaldo, ; Storm, ). This suggestion
may appear outlandish: after all, how can the late industrializing economy benefit from
labour laws and regulations, as these will just raise labour costs and prices, and
therefore harm net exports, business profits, and firm investment?
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
It is true that not so long ago, it was received opinion that labour protections for
ordinary workers were a ‘luxury developing countries cannot afford’, because ‘laws
created to help workers often hurt them’, as the World Bank (: ) concluded.
However, it is now clear that this ‘perversity thesis’, while remaining influential among
‘madmen in authority, hearing voices in the air’, is no longer empirically tenable. Meta-
analyses of the empirical literature on labour regulation and economic performance by
Nataraj et al. () and Broecke et al. () find that the effects of regulation on
growth and employment are generally small or absent, and negligible compared to
those on income distribution. The reason why the ‘perversity thesis’ is wrong is that it
sees labour laws as exclusively driving up unit labour cost, while neglecting their
considerable positive impacts on domestic demand, productivity growth, and diversi-
fication and upgrading (Storm and Capaldo, ; Storm, ).
.. Wages and Demand
Higher real wage growth (in combination with stable and growing employment) raises
consumption growth and expands the home market (Ocampo et al., ; Storm, ;
UNIDO, ). However, if wage growth exceeds labour productivity growth, this
raises unit labour cost and prices, which damages net exports and consequently
business profits and investment. It follows that the macro impact of higher wage
growth is the net outcome of faster domestic demand growth, captured in the model
by the coefficient ξ in eq. (), and lower net export growth, reflected by the expression
½γðχρ þ ηδÞ in eq. () (Bhaduri and Marglin, ). So far we have assumed that
½ξ γðχρ þ ηδÞ < 0, meaning that on balance, higher real wage growth does lower
economic growth. While the negative sign is empirically plausible, we must recognize
that the macro impact of higher real wage growth in most late industrializing nations is
surprisingly small (in absolute terms) and should not be exaggerated.
The point is illustrated by Table ., which presents internationally comparable
econometric evidence on ξ and ½γ ðχρ þ ηδÞ for seven major late industrializing
economies (Onaran and Galanis, ). First, it can be seen that a one percentage point
increase in real wage growth raises domestic demand growth by . percentage points
on average (ξ > ) for six countries (excluding South Africa). Second, a one percentage
point increase in real wage growth reduces net export growth by ‒. percentage
points on average (when we exclude the estimate for China).¹⁶ This limited sensitivity
of net export growth to real wage growth is perhaps surprising but the reasons are not
difficult to understand. To begin with, as illustrated by Table ., (nominal) unit
labour costs (multiplied by the profit mark-up) make up only one-third of the price
¹⁶ China is the ‘outlier’ in Table .: its net export growth is found to decline by almost two
percentage points in response to a one percentage point increase in real wage growth. But note that
Onaran and Galanis () find much higher price elasticities of exports and imports for China than
Bussière et al. () and Bottega and Romero ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
Table 17.3 Impact on economic growth of a one percentage point increase in real
wage growth, selected late industrializing countries
Change in domestic Change in net export Change in economic
demand growth ξ growth γðχρ þ ηδÞ growth ½ξ γðχρ þ ηδÞ
Argentina 0.14 ‒0.19 ‒0.05
China 0.41 ‒1.99 ‒1.57
India 0.29 ‒0.31 ‒0.02
Mexico 0.28 ‒0.38 ‒0.10
South Africa 0.02 ‒0.51 ‒0.49
South Korea 0.42 ‒0.36 0.06
Turkey 0.49 ‒0.28 0.21
Source: Onaran and Galanis (2014). The estimation period is 1970‒2007 for all countries (but
1978‒2007 for China).
Table 17.4 Share of wages in the gross output price, selected regions and countries
¼ 1
Labour- Profit Share of intermediate ν ¼ ΠWP Z ν
γ ¼ 1ν
income share inputs in gross output
share
Africa 0.467 0.533 0.54* 0.28 0.39
South 0.515 0.485 0.54 0.30 0.44
Africa
Latin 0.495 0.505 0.51* 0.33 0.48
America
Brazil 0.587 0.413 0.51 0.36 0.37
East Asia 0.514 0.486 0.69* 0.19 0.23
China 0.495 0.505 0.69 0.18 0.23
South 0.416 0.584 0.51* 0.29 0.40
East Asia
India 0.544 0.456 0.51 0.35 0.53
Note: *The regional estimate is assumed to be equal to the corresponding country estimate.
Sources: Labour-income shares and profit shares are from ILOSTAT https://ilostat.ilo.org/topics/labour-
income/. Data on the share of intermediate inputs in gross output are based on the input‒output tables
of Brazil, China, India, and South Africa, OECDSTAT https://stats.oecd.org/Index.aspx?DataSetCode=
IOTS. See footnote 2, this chapter, for an explanation of the symbols.
level—which in terms of our model means that ν, defined in footnote , takes a value of
⅓ and hence γ is ½ (Table .). This means that a one percentage point increase in
real wage growth will increase home price inflation by around . percentage points, on
the assumption that firms decide to pass on the full increase in wages. However,
empirical evidence indicates that this is not what firms actually do: operating under
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
competitive conditions, firms are found to pass only around per cent of the increase
in wages on to final prices, absorbing the other half in lower profit mark-ups.¹⁷ This
then means that a more realistic value for γ is around ¼—which explains why the
impact of higher real wage growth on net export growth is relatively limited (in
Table .). Taking Table .’s findings on ξ and ½γðχρ þ ηδÞ together, the net
impact of higher real wage growth on economic growth ½ξ γðχρ þ ηδÞ is about
zero—as is indeed the case in Argentina, India, Mexico, and South Korea. In sum,
aggregate economic growth is not very sensitive to variations in real wage growth, and
consequently, the effects of labour regulation on employment must also be small. This
corroborates the conclusions of World Bank researchers Kuddo et al. () that the
effects of regulation on growth and employment are much smaller than the heat of the
debates suggests, and of the IMF (: ) that ‘reforms that ease dismissal regula-
tions with respect to regular workers do not have, on average, statistically significant
effects on employment and other macroeconomic variables’. It follows that attempts to
industrialize by a strategy of ‘beggaring one’s neighbour’ (suppressing national real
wage growth below wage growth abroad) are just pointless.
.. ‘Technology-forcing’ Labour-Market Regulation
Labour laws may constitute ‘beneficial constraints’ on firms’ decision-making (Streeck,
), which, far from undermining markets and capitalism, raises the static as well as the
dynamic efficiency of economic activity in distinct ways. A first—Weberian—efficiency-
enhancing mechanism operates by improving legitimacy. Since labour-market institutions
inject fairness into the employment contract (by limiting inequality and facilitating risk
sharing), they create goodwill and political legitimacy amongst workers and enhance
productivity, perhaps as an unintended consequence (Lee and McCann, ). A second
channel through which labour regulations enhance productivity is a Marxian one: higher
real wage growth (made possible by regulation) raises the rate of labour-saving technical
progress. Such ‘Marx-biased technical progress’ can be included in eq. ():
z ¼ z0 þ βy þ #w z0 > 0; 0 < β < 1; 0 < # < 1 : ð25Þ
where # represents the impact of higher real wage growth on labour productivity
growth through labour-saving innovations. Empirical evidence on # for a sample of
developing countries suggests that # takes a value of around ..¹⁸ Using eq. (), the
derivative of equilibrium growth with respect to real wage growth becomes:
dyE
¼ ð1 #ÞΩ½ξ γðχρ þ ηδÞ < 0 ð26Þ
dw
¹⁷ See Holz and Mehrotra () for evidence on China.
¹⁸ See Storm and Naastepad () and De Souza ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
Higher real wage growth may still continue to depress export-led growth, but the negative
effect dwindles (in absolute terms) the closer # is to unity. A third and final channel
through which labour regulation may enhance labour productivity, competitiveness, and
industrial upgrading is a Schumpeterian one, which operates by spurring innovation
(Streeck, ). Tougher labour rules favour the stronger, more productive firms, as these
will change work practices and upgrade production technology, and in the process these
firms displace established, but less productive, competitors. This ‘cleansing’ or
‘technology-forcing’ effect of labour-market standards has been observed to have been
at work in China (Huang et al., ) and India (Acharya et al., ).
From a Weberian-Marxian-Schumpeterian perspective, it makes sense to use labour
standards deliberately designed to ‘force’ firms to comply with technological norms
that are not currently viewed as economically feasible. This way, labour regulation and
resulting higher wages can be made to contribute to export diversification:
ε 0 0
¼ f ða; wÞ; fa > 0; fw > 0 ð27Þ
μ
Eq. () expresses the ‘technology-forcing’ potential of labour market regulation and
higher real wage growth: higher wage growth forces firms that can no longer compete
on low wages and low-tech (labour-intensive) products to diversify and move into
higher-tech more capital-intensive goods, and as a result of this, ε=μ increases—raising
the country’s BoP-constrained rate of growth in turn. If the ‘technology-forcing’ labour
regulation is combined with a mission-oriented public investment programme (an
increase in a) to diversify and upgrade exports, we are back to Figure ., as this will
push up the BoP-constrained growth rate yB even more. Properly designed labour
regulation thus reinforces the process of progressive structural change through which
the late industrializing country can free itself from the shackles of primary-commodity
specialization and climb up the industrial ladder.
.. The Wage and the Profit Rate
To hammer home the point that labour regulation and higher wages are not automat-
ically antithetical to business interests, let me define the rate of profit (ρ) as the real
return on invested capital, as follows:
Π Π Y
ρ¼ ¼ YY ¼ π u κ ð28Þ
K Y K
where π = (Π/Y) = the share of real profits (Π) in real income (Y), u ¼ ðY=Y Þ=
capacity utilization, and κ ¼ ðY =KÞ = the ‘normal’ output‒capital ratio. K is the capital
stock (at constant prices) and Y is ‘normal’ (trend) output. κ is assumed to be a long-
run constant. Eq. () can be extended using this definition of the profit share π (Storm
and Naastepad, ):
π ¼ 1 θ ¼ 1 W Z 1 ð29Þ
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
The (+/–) impacts of a higher real wage on the profit rate (ρ)
decline in the profit share ρ goes down +/–
sign
dyE
impact on aggregate demand ≈ 0 (Table 17.3) of net
dw
impact
higher
real wage ‘Marx-biased’ technical progress higher z ρ goes up
‘technology-forcing’ upgrading
ε
leading to a higher ratio μ higher utilization u
. The (+/–) impacts of a higher real wage on the profit rate (ρ)
Source: Constructed by author.
where θ = the wage share, W = the real wage, and Z = the level of labour productivity.
Substituting () into () gives this decomposition of ρ:
ρ ¼ ð1 W Z 1 Þ u κ ð30Þ
The business profit rate thus has three determinants: W, Z and u. A higher real wage
raises the wage share, reduces the profit share and therefore decreases ρ. Higher
productivity, on the other hand, reduces the wage share, increases the profit share
and therefore raises the profit rate. And if demand and capacity utilization go up, this
must raise ρ. We use eq. () to assess the impacts of a higher real wage rate on firms’
profitability. First, a higher real wage rate directly and one-for-one reduces the profit
share and hence the profit rate. Second, higher real wages have positive and negative
impacts on aggregate demand and growth—as in eq. (). We assume that dy dw 0
E
(Table .). Third, higher real wages spur labour-saving technical progress
(via Weberian–Marxian–Schumpeterian channels, as in eq. ()), and thus raise z in
eq. (). Finally, the ‘technology-forcing’ potential of higher wages and labour regula-
tion raises ε=μ and hence yB. Demand-led growth yE will adjust (going up), pushing up
capacity utilization u in eq. (). If the ‘technology-forcing’ labour regulation is
combined with public investment to diversify and upgrade exports, this will further
push up yB, yE, and u. Empirically, the sign of the net impact of a higher wage on the
profit rate ρ is probably negative, but (as Figure . makes clear), the impact may be
surprisingly small (in absolute terms), if the Marx-biased technical progress channel
and the ‘technology-forcing’ mechanism are strong. Plus, with a little help from fiscal
stimulus, which raises u and hence ρ, higher real wages can be made compatible with
rising business profit rates. The ‘perversity thesis’ does not hold water.
. M-P L L
I
..................................................................................................................................
If developing countries are to improve their long-run growth performance, they must
industrialize, building up a broad and technologically sophisticated domestic industrial
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
base with strong potential for high productivity, income, and export growth, in ways
that improve the trade balance and raise BoP-constrained growth. The challenge is to
develop industries with growth potential, in defiance of static comparative advantage,
and to keep pushing innovation, structural change, and industrial diversification to the
next level of sophistication. Fiscal, monetary, exchange-rate and labour-market policies
must be designed in ways that support the industrialization strategy—otherwise, the
industrial policy drive will be frustrated by growing external deficits and unsustainable
debts, or alternatively, by processes of domestic stagflation or austerity-induced defla-
tion. We can derive a few guiding principles for macroeconomic policymaking based
on our model analysis, but with the qualification that successful macro-management
requires pragmatism, and rule-based ‘one-size-fits-all’ approaches should be avoided.
A first lesson is that it is critical for late industrializing nations to use CARs to
maintain competitive exchange rates, because a competitive exchange rate can
strengthen the effectiveness of industrial policy and reward export orientation. CARs
also increase monetary policy autonomy, increasing the policy space for central banks
to use interest rates and prioritized credit allocation in support of industrialization. But
undervalued exchange rates cannot permanently sustain growth transitions. Further-
more, we must recognize that undervaluing one’s exchange rate is essentially a mer-
cantilist, ‘beggar-thy-neighbour’ strategy, which will be counter-productive if adopted
by many countries at the same time. Second, fiscal policy is of paramount importance as
an enabler of industrial policy—public investment increases long-term (productivity)
growth, helps diversification and raises employment, while stabilizing short-term
demand. Progressive taxation, luxury consumption taxes, import tariffs (to protect
infant industries), counter-cyclical export taxes and taxes on foreign financial inflows
(of equity and portfolio finance) can be used to mobilize resources for financing public
investment in physical and social infrastructure in non-inflationary ways, which helps
to resolve the limited supply-responsiveness of critical wage goods-producing sectors
such as agriculture.¹⁹ Wrongly timed fiscal austerity can be destabilizing and may
undermine the industrialization process.
Third, persistent trade deficits and the threat of a sudden financial outflow may force
central banks to raise interest rates, but overly restrictive monetary policy will trigger a
recession. The way for the monetary authorities to maintain a ‘development-oriented’
policy regime, consistent with a targeted exchange rate and accommodating to fiscal
and industrial policy, is to impose exchange controls and restrictions on financial
outflows. A ‘development-oriented’ monetary policy also implies that inflation target-
ing cannot be the only goal of central bank policy. Fourth, wage restraint is funda-
mentally ineffective and undesirable as a strategy for trying to improve external
competitiveness and raise growth. Sustained growth of domestic demand requires
sustained growth of real wages—which raises capacity utilization and profit rates.
Labour regulations can be designed as being ‘technology forcing’ in nature, and thus
¹⁹ Agrarian modernization requires more than just public investment. East Asia’s dirigiste states
relied on egalitarian technology policy (hybridization and chemical fertilizers), infrastructure and
irrigation investment, rural credit, and radical institutional and land reforms (Storm, ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
support and amplify the impacts of industrial policy aimed at export diversification and
upgrading. However, the biggest lesson to be learned from the analysis is that successful
macro-management of late industrializing economies requires discretion, rather than
rigid fiscal, monetary, or exchange rate policy rules. What is required are pragmatism, a
flexibility to deal with country-specific conditions and historical context, and above all,
as John Maynard Keynes wrote in a letter to Roy Harrod (dated July ), ‘vigilant
observation of the actual working of our system’ in order to be able to choose good
models. Elaborating his point, Keynes wrote:
Economics is a science of thinking in terms of models joined to the art of choosing
models which are relevant to the contemporary world. It is compelled to be this,
because, unlike the typical natural science, the material to which it is applied is, in
too many respects, not homogeneous through time. The object of a model is to
segregate the semi-permanent or relatively constant factors from those which are
transitory or fluctuating so as to develop a logical way of thinking about the latter,
and of understanding the time sequences to which they give rise in particular cases.
The open-economy, BoP-constrained growth model used here has been shown to be
relevant to the contemporary world, not least because it has highlighted the critical
importance of a development-oriented management of aggregate demand for success-
ful late industrialization.
R
Acharya, Viral V., Ramin P. Baghai, and Krishnamurthy V. Subramanian () ‘Labour
Laws and Innovation’, Journal of Law and Economics (): ‒.
Akyüz, Y., Ha-Joon Chang, and Richard Kozul-Wright () ‘New Perspectives on East
Asian Development’, Journal of Development Studies (): ‒.
Amsden, Alice H. () The Rise of ‘The Rest’: Challenges to the West from Late-
Industrializing Economies. New York: Oxford University Press.
Bagnai, Alberto, Arsène Reiber, and Thi Anh-Dao Tran () ‘Sub-Saharan Africa’s Growth,
South–South Trade and the Generalised Balance-of-payments Constraint’, Cambridge
Journal of Economics (): –.
Bahmani, Mohsen, Hanafiah Harvey, and Scott W. Hegerty () ‘Empirical Tests of the
Marshall–Lerner Condition: A Literature Review’, Journal of Economic Studies ():
‒.
Bertola, Luis and José Antonio Ocampo () The Economic Development of Latin America
since Independence. Oxford: Oxford University Press.
Bhaduri, Amit and Stephen A. Marglin () ‘Unemployment and the Real Wage: The
Economic Basis for Contesting Political Ideologies’, Cambridge Journal of Economics ():
‒.
Blecker, Robert A. () ‘Long-run Growth in Open Economies: Export-led Cumulative
Causation or a Balance-of-payments Constraint?’, in Geoffrey C. Harcourt and Peter
Kriesler (eds) Oxford Handbook of Post-Keynesian Economics. Oxford: Oxford University
Press, pp. ‒.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
Bottega, Ana C. and João P. Romero () ‘Innovation, Export Performance and Trade
Elasticities across Different Sectors and Countries’. CCEPP Working Paper –. Cam-
bridge: University of Cambridge, Department of Land Economy.
Broecke, Stijn, Alessia Forti, and Marieke Vandeweyer () ‘The Effect of Minimum Wages
on Employment in Emerging Economies: A Survey and Meta-analysis’, Oxford Develop-
ment Studies (): ‒.
Bussière, Matthieu, Guillaume Gaulier, and Walter Steingress () ‘Global Trade Flows:
Revisiting the Exchange Rate Elasticities’. Working Paper No. . Paris: Banque de France.
Chakravarty, Sukhamoy () Development Planning: The Indian Experience. Oxford: Clar-
endon Press.
Cherif, Reda and Fuad Hasanov () ‘The Return of the Policy That Shall Not Be Named:
Principles of Industrial Policy’. Working Paper No. WP//. Washington, DC: IMF.
Cimoli, Mario and Gabriel Porcile () ‘Technology, Structural Change and BoP-
constrained Growth: A Structuralist Toolbox’, Cambridge Journal of Economics ():
‒.
Cimoli, Mario, Sebastian Fleitas, and Gabriel Porcile () ‘Technological Intensity of the
Export Structure and the Real Exchange Rate’, Economics of Innovation and New Technol-
ogy (): ‒.
Cimoli, Mario, Gabriel Porcile, and Sebastian Rovira () ‘Structural Change and the BoP
Constraint: Why Did Latin America Fail to Converge?’, Cambridge Journal of Economics
(): ‒.
Diao, Xinshen, Margaret McMillan, and Dani Rodrik () ‘The Recent Growth Boom in
Developing Economies: A Structural Change Perspective’, in Massiko Nissanke and José
Antonio Ocampo (eds) The Palgrave Handbook of Development Economics. London:
Palgrave Macmillan, pp. –.
Elbadawi, Ibrahim A., Linda Kaltani, and Raimundo Soto () ‘Aid, Real Exchange Rate
Misalignment, and Economic Growth in Sub-Saharan Africa’, World Development ():
‒.
Felipe, Jesus, Matteo Lanzafame, and Gemma Estrada () ‘Is Indonesia’s Growth Rate
Balance-of-payments Constrained? A Time-varying Estimation Approach’, Review of
Keynesian Economics (): –.
Frenkel, Roberto and Lance Taylor () ‘Real Exchange Rate, Monetary Policy and
Employment’. UN-DESA Working Paper No. . New York: United Nations.
Freund, Caroline and Martha Denisse Pierola () ‘Export Surges’, Journal of Development
Economics (): ‒.
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cam-
bridge, MA: Harvard University Press.
Gouvêa, Raphael Rocha and Gilberto Tadeu Lima () ‘Structural Change, Balance-of-
payments Constraint and Economic Growth: Evidence from the Multi-sectoral Thirlwall’s
Law’, Journal of Post Keynesian Economics (): ‒.
Gouvêa, Raphael Rocha and Gilberto Tadeu Lima () ‘Balance-of-payments-constrained
Growth in a Multisectoral Framework: A Panel Data Investigation’, Journal of Economic
Studies (): ‒.
Guzman, Martin, José Antonio Ocampo, and Joseph E. Stiglitz () ‘Real Exchange Rate
Policies for Economic Development’, World Development (): ‒.
Hausmann, Ricardo, Dani Rodrik, and Jason Hwang () ‘What You Export Matters’,
Journal of Economic Growth (): –.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Holz, Carsten and Aaron Mehrotra () ‘Wage and Price Dynamics in a Large Emerging
Economy: The Case of China’. BIS Working Paper No. . Basel: Bank for International
Settlements.
Huang, Yi, Prakash Loungani, and Gewei Wang () ‘Minimum Wages and Firm Employ-
ment: Evidence from China’. IMF Working Paper No. WP//. Washington, DC: IMF.
IMF () ‘Time for a Supply-side Boost? Macroeconomic Effects of Labor and Product
Market Reforms in Advanced Economies’, World Economic Outlook . Washington,
DC: IMF, pp. –.
Junankar, Pramod N. () ‘Is There a Trade-off between Employment and Productivity?’.
IZA Discussion Paper No. . Bonn: Institute for the Study of Labor.
Kaldor, Nicholas () Strategic Factors in Economic Development. Ithaca, NY: Cornell
University Press.
Kalecki, Michal () ‘The Problem of Financing Indian Economic Development’, Indian
Economic Review (): ‒.
Kalecki, Michal () ‘Problems of Financing Economic Development in a Mixed Economy’,
in Michal Kalecki, Selected Essays on the Economic Growth of the Socialist and Mixed
Economy. Cambridge: Cambridge University Press, pp. ‒.
Karshenas, Massoud () ‘Agriculture and Economic Development in Sub-Saharan Africa
and Asia’, Cambridge Journal of Economics (): ‒.
Kay, Cris () ‘Why East Asia Overtook Latin America: Agrarian Reform, Industrialization
and Development’, Third World Quarterly (): ‒.
Kuddo, Arvo, David A. Robalino, and Michael Weber () ‘Balancing Regulations to
Promote Jobs: From Employment Contracts to Unemployment Benefits’. Working Paper
No. . Washington, DC: World Bank.
Lee, Sangheon and Deirdre McCann (eds) () Regulating for Decent Work: New Directions
in Labour Market Regulation. London: Palgrave Macmillan.
Lewis, W. Arthur () ‘Economic Development with Unlimited Supplies of Labour’, The
Manchester School (): ‒.
Mandelbaum, Kurt () The Industrialisation of Backward Areas. Oxford: Blackwell.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths. London: Anthem Press.
McCombie, John S. L. and Nat Tharnpanich () ‘Balance-of-payments-constrained
Growth, Structural Change, and the Thai Economy’, Journal of Post Keynesian Economics
(): –.
McCombie, John S. L. and Anthony P. Thirlwall (eds) () Essays on Balance of Payments
Constrained Growth: Theory and Evidence. London: Routledge.
McCombie, John S. L., Maurizio Pugno, and Bruno Soro () Productivity Growth and
Economic Performance: Essays on Verdoorn’s Law. London: Palgrave Macmillan.
Naastepad, C. W. M. () ‘Technology, Demand and Distribution: A Cumulative Growth
Model with an Application to the Dutch Productivity Growth Slowdown’, Cambridge
Journal of Economics (): ‒.
Nataraj, Shanti, Francisco Perez-Arce, Sinduja V. Srinivasan, and Khrisna B. Kumar ()
‘The Impact of Labor-market Regulation on Employment in Low-income Countries:
A Meta-analysis’, Journal of Economic Surveys (): ‒.
Neto, Antonio S. M. and Gabriel Porcile () ‘Destabilizing Austerity: Fiscal Policy in a
BoP-dominated Macro-dynamics’, Structural Change and Economic Dynamics ():
‒.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
-, ,
Nureldin Hussain, Mohammed () ‘The Balance of Payments Constraint and Growth
Rate Differences amongst African and East Asian Countries’, African Development Review
(): –.
Nurkse, Ragnar () Problems of Capital Formation in Underdeveloped Countries.
New York: Oxford University Press.
Ocampo, José Antonio () ‘Commodity-led Development in Latin America’, in Gilles
Carbonnier, Humberto Campodónico, and Sergio Tezanos Vázquez (eds) Alternative
Pathways to Sustainable Development: Lessons from Latin America. International Devel-
opment Policy Series No. . Geneva: Brill-Nijhoff, pp. ‒.
Ocampo, José Antonio, Codrina Rada, and Lance Taylor () Growth and Policy in
Developing Countries: A Structuralist Approach. New York: Columbia University Press.
Onaran, Özlem and Giorgos Galanis () ‘Income Distribution and Growth: A Global
Model’, Environment and Planning A (): ‒.
Pieper, Ute () ‘Deindustrialization and the Social and Economic Sustainability Nexus in
Developing Countries: Cross-country Evidence on Productivity and Employment’, Journal
of Development Studies (): ‒.
Porcile, Gabriel and Danilo Sartorello Spinola () ‘Natural, Effective and BoP-constrained
Rates of Growth: Adjustment Mechanisms and Closure Equations’, PSL Quarterly Review
(): ‒.
Porcile, Gabriel and Giuliano Toshiro Yajima () ‘New Structuralism and the Balance-of-
payments Constraint’, Review of Keynesian Economics (): –.
Prebisch, Raúl () ‘Commercial Policy in Under-developed Countries’, American Eco-
nomic Review, Papers and Proceedings : –.
Robinson, Joan () The New Mercantilism: An Inaugural Lecture. Cambridge: Cambridge
University Press.
Rodrik, Dani () ‘Second-best Institutions’, American Economic Review (): ‒.
Rodrik, Dani () ‘An African Growth Miracle’, Journal of African Economies (): –.
Roncolato, Leanne and David Kucera () ‘Structural Drivers of Productivity and Employ-
ment Growth: A Decomposition Analysis for Countries’, Cambridge Journal of Eco-
nomics (): ‒.
Rose, Andrew K. () ‘The Role of Exchange Rates in a Popular Model of International
Trade: Does the “Marshall–Lerner” Condition Hold?’, Journal of International Economics
(–): ‒.
Rosenstein-Rodan, Paul N. () ‘Problems of Industrialisation of Eastern and South
Eastern Europe’, The Economic Journal (/): ‒.
Saith, Ashwani () ‘Development Strategies and the Rural Poor’, Journal of Peasant
Studies (): ‒.
Scitovsky, Tibor () ‘Economic Development in Taiwan and South Korea –’,
Stanford Food Research Institute Studies (): –.
Senhadji, Abdelhak () ‘Time-series Estimation of Structural Import Demand Equations:
A Cross-country Analysis’. IMF Working Paper No. WP//. Washington, DC: IMF.
Senhadji, Abdelhak and Claudio Montenegro () ‘Time-series Estimation of Export
Demand Equations: A Cross-country Analysis’. IMF Working Paper No. WP//.
Washington, DC: IMF.
Singer, Hans W. () ‘The Distribution of Gains between Investing and Borrowing
Countries’, American Economic Review, Papers and Proceedings (): ‒.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Souza, Joao Paulo de () ‘Real Wages and Labor-saving Technical Change: Evidence from
a Panel of Manufacturing Industries in Mature and Labor-surplus Economies’, Inter-
national Review of Applied Economics (): ‒.
Storm, Servaas () ‘Domestic Constraints on Export-led Growth: A Case Study of India’,
Journal of Development Economics (): ‒.
Storm, Servaas () ‘Structural Change’, Development and Change (): ‒.
Storm, Servaas () ‘Labor Laws and Manufacturing Performance in India: How Priors
Trump Evidence and Progress Gets Stalled’. Working Paper No. . New York: Institute for
New Economic Thinking.
Storm, Servaas and Jeronim Capaldo () ‘Labour Institutions and Development under
Globalization’, in Massiko Nissanke and José Antonio Ocampo (eds) The Palgrave Hand-
book of Development Economics. London: Palgrave Macmillan, pp. ‒.
Storm, Servaas and C. W. M. Naastepad () ‘Strategic Factors in Economic Development:
East Asian Industrialization –’, Development and Change (): ‒.
Storm, Servaas and C. W. M. Naastepad () Macroeconomics beyond the NAIRU. Cam-
bridge, MA: Harvard University Press.
Streeck, Wolfgang () ‘Educating Capitalists: A Rejoinder to Wright and Tsakalotos’,
Socio-Economic Review (): ‒.
Taylor, Lance () Reconstructing Macroeconomics: Structuralist Proposals and Critiques of
the Mainstream. Cambridge, MA: Harvard University Press.
Taylor, Lance and Edmar Bacha () ‘The Unequalizing Spiral: A First Growth Model for
Belindia’, Quarterly Journal of Economics (): –.
Thirlwall, Anthony P. () ‘The Balance of Payments Constraint as an Explanation of
International Growth Rate Differences’, Banca Nazionale del Lavoro Quarterly Review :
‒.
Thirlwall, Anthony P. () ‘Thoughts on Balance-of-payments-constrained Growth after
Years’, Review of Keynesian Economics (): –.
UNIDO () Industrial Development Report . Demand for Manufacturing: Driving
Inclusive and Sustainable Industrial Development. Vienna: UNIDO.
Venables, Anthony J. () ‘Using Natural Resources for Development: Why Has It Proven
So Difficult?’, Journal of Economic Perspectives (): ‒.
Wade, Robert H. () Governing the Market: Economic Theory and the Role of Government
in East Asian Industrialization. Princeton, NJ: Princeton University Press.
Wade, Robert H. () ‘What Room for the Developmental State in an Era of Financializa-
tion, Global Production Chains and Knowledge Monopoly?’, Development and Change
().
World Bank () Doing Business: An Independent Evaluation Report. Washington, DC:
World Bank.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
, ,
.............................................................................................................
. I
..................................................................................................................................
T organization of production inside firms and along the supply chain change to
respond to disruptions in the technology and in the nature and geography of demand.
A wealth of literature going back to the s has dissected the drivers of firms’
production internationalization strategies (the ‘why’) and related operations (the
‘how’) (Hymer, ; Dunning, ; Mathews, ). Such internationalization
strategies of multinational corporations (MNCs) have been driven by the contribution
that different ‘places’ can make to MNCs’ overall division of value. The globalization of
production activities that emerged from the combined offshoring of manufacturing
activities created so-called global value chains (GVCs) (Gereffi and Fernandez-Stark,
). Consequently, the Smithsonian division of labour became a division of ‘value
additive functions’, whereby each production stage contributes to a higher or lower
extent to the value addition of the final output. This space-neutral approach has been
criticized by Scholte () who argued that the globalization of production activities
has ‘de-territorialized’ production choices. The global organization of production in
GVCs started to be challenged with the global financial crisis in – when it
became clear that two decades of mass offshoring had left a painful mark on some
regions and places in advanced economies, which were de-industrialized or hollowed
out. The socio-economic costs of offshoring were unveiled and this prompted a process
of soul searching that has, belatedly, led to a more critical approach to globalization
(Bailey and Tomlinson ).
At the same time, the global economy found itself at the end of a technological cycle
with incremental innovations increasingly exhausting technological opportunities
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(Rifkin, ). A wave of new technologies is emerging associated with digital and
green technologies and these are expected to disrupt firms, value chains, regions,
markets, and ultimately the whole economy.
Against this backdrop, this chapter explores the impact of technological change on
GVCs and what initiatives and instruments governments in advanced economies can
deploy to support firms and people during the transition. There are signs that the
global economy is ‘de-globalizing’ with firms seeking to co-locate manufacturing and
innovation activities; this offers an opportunity to regions and places to upgrade and
transform their economies, leveraging industrial legacy with frontier technologies.
However, this is not going to happen automatically, as has been discussed with—for
example—so-called ‘reshoring’ in developed economies; rather, an active industrial
policy is required (Bailey and De Propris, ; Bailey et al., a, b).
In this chapter we discuss the implications for a transformative industrial policy that
we see comprising three objectives: () to connect embedded industries to new
technologies; () to repopulate embedded industries with new firms and start-ups; and
() to use regulation and procurement to create new markets and allow exploration.
. T C
F I R
..................................................................................................................................
A wave of new technologies is driving a shift in our techno-socio-economic paradigm
(Pérez, ). These new technologies are expected be pervasive and disruptive,
changing not only the organization of production inside the firm and thereby the
workplace by altering the balance between capital and labour, but also re-drawing
the organization of production between firms and along the value chain whether local
or global. These new technologies include a range of advances in biotech, nanotech,
neuro-technologies, green and renewables, ICT and mobile tech, cloud technology, big
data, D printing, artificial intelligence, Internet of things, robotics, sensoring, space
technology, and drones. Some of the current debate on the impact of these technologies
on the economy and society has drawn on the seminal work of Kondratiev () on
technological waves to argue that they amount to a Fourth Industrial Revolution (FIR)
(De Propris, ; OECD, a; Rifkin, ; Schwab, ).
The First Industrial Revolution coincided with the British Industrial Revolution
between the last decades of the eighteenth century and the first half of the nineteenth
century with new technologies related to steam power, cotton, steel, and railways,
coupled with mechanization and the surge of the factory system. The Second Industrial
Revolution was triggered by the introduction in the post-war period of electricity, heavy
and mechanical engineering (automotive and aviation) and synthetic chemistry (oil-
based production). New business forms emerged as large firms started producing away
from the domestic market, becoming multinational firms. The Third Industrial Revolution
coincided with the introduction of electronics and computers, petrochemicals and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
aerospace in the last decades of the twentieth century. Volatile demand required
more flexible organizational forms, such as firm clusters and industrial districts,
which became global hubs due to their competitive advantage (De Propris, ). New
technologies also enabled faster communications and transport, kicking off a process of
globalization in production that led to multiplications of GVCs (Gereffi, ).
The ‘digital revolution’ argument is captured by the debate on Industry . (Deloitte,
; European Commission, ; PWC, ) and on technologies enabling the emer-
gence of smart and connected factories. Often referred to as cyber-physical spaces (GTAI,
), production places will see humans working side by side with digitally connected
robots or other forms of automation with the novelty that the latter will communicate with
each other rather than just being operated by humans. This will transform the flow and use
of inputs in the factory, with capital investment in automation expecting to replace some
human tasks. Therefore, in factories we expect automation to displace labour-intensive
productions for increasingly complex and non-routine functions.
While FIR technologies will bring about a disruptive change that has been wrongly
reduced by some to simply a ‘digital revolution’ linked to artificial intelligence and the
Internet of things (Deutsche Bank, ), we believe that as a technological revolution,
its -degree transformative power will be felt not only in the world of production but
also in the world of consumption and usage and in everybody’s ways of life.
To fully appreciate the transformational shift that the deployment of new technolo-
gies will have on firms’ value creation, it has been argued that a broader understanding
of the impact that new technologies will have must be acknowledged; on this De
Propris and Bailey () propose a more holistic conceptualization of Industry .
that takes into account five interlinked transformations brought about by new tech-
nologies (see Figure .).
The concept of Industry .+ allows us to understand changes in the nature of
business and markets (Bailey and De Propris, ). These transformations are:
a. the creation of new radical markets
b. the design and manufacture of radically new products
c. the adoption of new business models
d. the experimentation of new product-service innovations
e. the exploration of new customer-centred innovations.
These transformations will possibly trigger two major new trends: one is a recou-
pling of innovation and production; and two, the scaling-down of production for niche
markets. In particular, radically new products can create radically new markets that
either address new demand needs or push new technology-driven offers. Either way,
radical innovations require exploration, experimentation, and testing that are likely to
call for a recoupling of innovation with production. As new products are launched or
tested in the market, a smoother, direct, closer, more frequent, and more meaningful
interaction between innovation and production will be necessary. The experimental
nature of these high-tech markets and products means that a co-location between
innovation and production is likely to emerge. Other disruptive transformations arising
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
INCLUSIVE GROWTH
. Industry .+
Source: Authors.
from the FIR include the servitization of manufacturing and changes in firms’ business
models. The servitization of manufacturing introduces a product–service innovation
(Bustinza et al., ; Dimache and Roche, ; Baines et al., ) that is linked to
the choice of businesses and customers to move from a product-based business model
to a service-based business, whereby buyers overcome the need to own products and
rather prefer to hire or lease them. As the relationship between producer and user is
woven around the specific characteristics of the servitized good, again such relationship
intensifies with constant exchanges that in this latter case extend beyond the moment
when user receives the ‘good’ because they are not buying ‘the good’ but the function;
that is, the usefulness and the service attached to it (Vendrell-Herrero and Bustinza,
). As the servitized good is designed, produced and supplied around the specifi-
cations of the user, the relation between innovation, production, and consumption
becomes closer. The need for an innovation–production–consumption continuum
may result in firms strategically experimenting with new business models where co-
innovation with consumers occurs in the design of products—with personalized
offers—and in delivery with elements of servitization.
The other major trend is the efficient scaling-down of production. Some new tech-
nologies such as cloud technology, big data, and data analytics will enable the design,
manufacturing, and delivery of personalized products (goods and services) thanks to a
two-way flow of information and data between the producers and its customers. The
flourishing of a growing number of start-ups or entrepreneurial activities linked to
digital technologies but with the ethos of producing something has been widely
documented in the ‘makers movement’. These ‘digital artisans’ utilize new technologies
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
to create new—emerging or existing—niche markets or to address the demand for
small-scale, specific products. The key point here is that digitally enabled technologies
can be efficiently scaled down to support small-scale productions whose markets are
very thin and geographically dispersed. Makers tend to appear in places where there is
already an ‘industrial commons’ (Anderson, ) with localized specialized compe-
tences because their attachment to the tacit and cumulated knowledge of the place
provides a unique advantage that they couple with an ability to master digital tech-
nologies. Another example of an efficient scaling-down of production is the use of
additive manufacturing or D-printing that has enabled production at the point-of-
consumption with the related benefits of reducing time lags, lower disruption, storage,
stockpiling, and so on (De Propris and Bailey, ).
Digital technology and automation are therefore expected to transform buyer–
supplier relationships along the whole supply chain. Indeed, the Internet of things, sensor-
ing, space technology, and mobile technology are, for instance, expected to enable remote
machine-to-machine communications that can allow for the coordination of complex
production operations via a smooth integration of functions geographically dispersed.
The attribution of value creation along the value chain is likely to be completely re-
drawn by FIR technologies. We are used to visualizing value attribution along the value
chain with the smile curve (Mudambi, ) and this framework has (arguably)
explained three decades of production decoupling (Baldwin, ) as MNCs adopted
strategies to shave costs from low-value-adding functions by relocating them in
low-cost economies. However, we would argue that the five transformations above-
mentioned are likely underpinned by a re-distribution of value creation across produc-
tion functions in ways that are not yet fully understood. The adoption and application
of new technologies will disrupt the parameters and the processes of value creation for
firms, leading to a radical rethink of value creation along the supply chain. This means
that production is no longer a low-value-added function but it can embody equal, if not
more, value addition than innovation (design and R&D) since the two go hand in hand.
We can think therefore of a flat or even of a ‘sad curve’ (see Figure .).
High
Value
added
R&D–design assembly logistics marketing-advertising
Value chain
. The sad curve
Source: Authors’ elaboration.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
In summary, technological change is expected to bring about disruptive transform-
ations that will encourage a re-coupling of innovation with production, while also
easing a scaling-down of efficient production. Overall this will likely reshape value
creation along the value chain by redistributing value addition differently from before.
The big question is what impact this will have on the geographical dispersion of the
value chain. We are proposing that there is some initial evidence suggesting an
increasing interest in co-locating innovation and production leading to some de-
globalizing trends.
. GVC M
H O
..................................................................................................................................
A wealth of literature going back to the s has dissected the drivers of MNCs’
production internationalization strategies (the ‘why’) and related operations (the
‘how’) (Hymer, ; Dunning, ; Mathews, ). The globalization of production
activities that emerged from the combined offshoring of manufacturing activities
created so-called GVCs (Gereffi and Fernandez-Stark, ). Consequently, the
Smithian division of labour became a division of ‘value-added functions’, whereby
each production stage contributes, to a higher or lower extent, to the value addition of
the final output. The location choices of multinational enterprises (MNEs) were
motivated by the contribution that different ‘places’ could make to their overall
division of value, but in practice such choices were place-neutral in the sense that
MNEs were indifferent across places given equal features. Production choices were
fundamentally ‘de-territorialized’ (Scholte, ) and places were replaceable, espe-
cially for low-value functions.
In particular, what was relocated were low-value-adding functions, namely labour-
intensive manufacturing functions, to low-labour-cost countries via the creation of
GVCs. This framework sees the production process as a value chain, that is ‘the full
range of activities which are required to bring a product or a service from conception,
through the different phases of production . . . delivery to final consumers and the
final disposal after use . . . Production per se is only one of a number of value added
links’ (Kaplinsky and Morris, ). So each function is weighted in the firm’s strategy
depending on its value creation contribution: what contributes the most to the value
added of the final production is clearly what is likely to be seen by the firm as a ‘core
activity’ or a ‘strategic activity’ and is therefore internalized, while what contributes the
least, on the contrary, is seen as secondary and can be outsourced. GVCs comprise,
therefore, components that embody different value-adding content and which contrib-
ute differently to the overall value added (Timmer et al., ). In this framework,
manufacturing, production, and assembly are deemed to produce low levels of value
added, because when the technology is mature, in imperfectly competitive markets (i.e.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
global markets), a reduced price elasticity can only be constructed by embodying in
products a high content of intangible value through product development, advertising,
and marketing. These are the functions that most contribute to firms’ extraction of
market power and are therefore higher in value added. This trend has been extensively
documented in the literature on GVCs (OECD, b).
The GVC framework was introduced by Gereffi and Fernandez-Stark () to
describe and analyse the impact that manufacturing offshoring had on developing
and emerging economies, especially in terms of working conditions and labour stand-
ards (Barrientos et al., ), and trajectories of upgrading (Humphrey and Schmitz,
). One of the key tenets of the GVC framework is that inter-firm relationships are
determined by their relative decision-making powers, namely their governance (Gereffi
et al., ). Suppliers producing low-value-added and standardized components are
constantly competing on price; they are likely to be in a captive relationship with their
buyer who can easily replace them with a cheaper supplier. Lee and Gereffi ()
argue that to overcome this vulnerable position, suppliers attempt to upgrade their
capabilities to extend the portion of the value chain they can cover. This allows them to
extend their bargaining power by moving towards building more relational transac-
tions based on the uniqueness and value of the suppliers’ competences.
Governance and upgrading are therefore the ‘twin pillars of the GVC framework’
(Gereffi, : ) to the extent that they determine the dynamics of economic
development in developing economies. Under the assumption of a value chain shaped
like the ‘smile curve’ above-described, any aspiration to greater value capture does not
rest only on individual firms, suppliers, but it requires ‘economic actors—nations,
firms, and workers—to move from low-value to relatively high-value activities in global
production networks’ (Gereffi, : ). In other words, economic upgrading takes
on a systemic connotation that supports and strengthens any upgrading attempts of
individual suppliers. For such systemic upgrading to occur, national or regional
governments are required to proactively intervene in the macro- and micro-
components of the economy. Gereffi and Sturgeon () suggest moving away from
import-substitution policies or export-oriented policies, to embrace value-chain-
oriented policies that strategically target specific industries where growth is favoured.
Economic upgrading in such specific industries—using the GVC approach—would
mean supporting suppliers to develop a global customer base, develop a competitive
advantage in high-value niches, in specialized value chains, and finally moving towards
the top end of the value chain (Gereffi and Sturgeon, ).
There are two points worth making as we are building up to discuss how IP can
leverage the reshaping of global production due to technological change. One is that
GVCs describe models of organizing production based on decoupling and offshoring at
a time when the technology was mature, innovations were incremental, and competi-
tion was on price or on market imperfections and segmentations (e.g. branding).
Therefore, firms could only innovate incrementally and adopt cost-saving strategies.
The second point is that in the global economy there was a convenient divide between
countries holding technological capabilities and countries holding lower-costs
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
resources; such ‘complementarity’ in our view drove what some saw as a ‘turbocharged
globalization’ (Friedman, ). Indeed, the need and policy will of emerging/transition/
developing economies to enter the global economy met with the strategic determination
of MNEs to seek cost efficiencies.
These dynamics played out until , when the global financial crisis occurred. The
relocation of manufacturing to Asia introduced a novel international division of labour
that turned out to have significant implications for the erosion of the manufacturing
base of advanced economies with a dangerous concentration on untradable sectors.
The manufacturing hollowing-out presented a number of costs for EU economies.
Various streams of research contested the assumption that manufacturing processes
and innovation might easily be decoupled and relocated independently of each other
(Pisano and Shih, ; Ketokivi and Ali-Yrkkö, ). Indeed, the offshoring of labour-
intensive manufacturing functions started pulling along also more innovation-intensive
ones, thereby destabilizing the EU innovation basis. This is already occurring in pharma-
ceutical, advanced engineering, and ICT.
The GVC framework has very recently been applied to describe the international-
ization of Italian industrial districts as a systemic strategy that had implications for the
home economies (De Marchi et al., ) in terms of changing the reconfiguring and
breaking up local value chains as well as losing crucial competences to offshored
functions. It became clear that the demise of manufacturing activities resulted in an
impoverished ‘industrial commons’ eroding advanced economies’ innovation capabil-
ities (Pisano and Shih, ), while allowing suppliers in emerging economies to
gradually climb up the value ladder, through so-called processes of learning by
supplying (Alcacer and Oxley, ). The loss of skills, competences, and tacit know-
ledge across a sufficiently diversified suite of sectors has had a long-lasting effect on the
ability of EU regions to maintain an industrial base able to secure long-term prosperity
for its citizens. Indeed, critiques of novel forms of organization pointed to the larger
societal drawbacks of the offshoring bandwagon, highlighting how the ‘hollowing-out’
of the large corporation and the relocation of manufacturing abroad contributed to the
increasing levels of inequality recorded in advanced societies.
Sectoral imbalances in some EU economies and the United States towards services and
untradable sectors also reduced the ability of these economic systems to respond to the
financial shocks, which led to a much more precarious and lengthy economic recovery
(Aiginger, ), in some economies like the United States overcome only by significant
and sustained fiscal expansionary policies. Those countries that had chosen to maintain a
solid manufacturing base, such as Germany, Belgium, or France, were found to reset
their economy more quickly and therefore to be more resilient. Other economies with an
equally healthy manufacturing base lingered, however, in a long and painful recession
due to stringent austerity policies, such as Italy (Aiginger, ). Post-financial crisis, a
lively debate emerged on the importance of manufacturing for advanced economies to
maintain a balanced economic and skills base: what was often referred to as a need for
‘rebalancing’ or a new manufacturing renaissance (Bailey and Tomlinson, ).
This renewed interest in manufacturing had three aspects. First, it engaged policy-
makers who understood a call to defend and promote domestic jobs and factories by
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
supporting domestic firms and sectors. Second, protectionist trade policies and more
recently aggressive trade wars have been defended to protect, for example, ‘American
jobs’ (Forbes, ); however, this fails to understand the interconnectedness of global
production and the consequences of such actions. Finally, it coincided with the
surfacing of the debate on technological change and a ‘new’, ‘smart’ manufacturing
model; in other words, there was an opening for high-cost economies to develop and
anchor new technological capabilities across EU manufacturing sectors to support jobs
creation and a higher standard of living. This also meant a new competitive scenario for
firms where low-value-adding labour-intensive functions had to be redefined.
The adoption of new technologies by the manufacturing sector will transform the
manufacturing model in ways discussed above, which we argue will also entail a new
global organization of production.
. S D-
..................................................................................................................................
The renewed interest in manufacturing of advanced economies translated into policy-
makers’ commitment to re-build their manufacturing base. This meant attempting to
slow down offshoring, but also encouraging a new trend that saw firms which had
previously offshored some production functions looking to bring those activities back
home. Indeed, evidence emerged that some firms with operations abroad were con-
sidering or actively pursuing reshoring strategies. Reshoring has been used to capture
the choice of a multinational firm to move back to their home economy a production
operation previously offshored—either via a new investment or domestic outsourcing
(Bailey and De Propris ). Reshoring has since become something of a buzzword
with many country case studies emerging in relation to the United States, Spain, Italy,
and Germany (Kinkel, ; Kinkel et al., ; Ernst & Young, ) over the last few
years. Company case studies have also emerged, documenting individual firms’ stra-
tegic rationale for reshoring part of their operations back to the home economy, such as
Walmart, Apple, Google, Caterpillar, and General Electrics (Reshoring Institute, ;
Bals et al., ) or the case of the Finnish bicycle company which moved production
from Taiwan back to Finland (Gylling et al., ).
Many studies have discussed some of the push factors that have convinced firms to
reconsider the actual cost and benefit of offshoring (Kinkel et al., ). Value chain
frictions and disruptions due to natural disasters or geo political factors have shown
that global operations have so far ignored important hidden costs (Gray et al., ;
Kinkel and Maloca, ) linked to the increasing complexity of value-chain govern-
ance (Lavissiére et al., ), a lack of flexibility and responsiveness due to long lags,
and overlooked quality and control limitations (Bailey and De Propris, ). On the
other hand, the decision to move back to relatively high-cost locations in advanced
economies has also been driven by some pull factors that have made them attractive,
especially in relation to the emergent technological change: such as greater flexibility
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and responsiveness; closer integration with design and product development; better
control on quality and variety, shorter lead time, and the use of new technologies to
make cost savings. These location decision strategies have been linked to changes in the
distribution of value creation along the value chain, as discussed above, with a shift
from a smiling curve to a flatter one (see Figure .).
Some scepticism has been expressed on the small scale of the reshoring phenom-
enon, notwithstanding the visible and active commitment of policymakers to leverage
it to repopulate their industrial base (see, for instance, the US tax change to encourage
MNEs to repatriate their profits, New York Times, ). This has been in part due to
difficulties in capturing empirically the changes in firms’ production decisions: data on
firms’ decision to swap a foreign supplier for a domestic supplier is hard to find. Easier
to trace have been changes in firms’ investment decisions; however, these have tended
to be more rigid in the short term and in some countries very much constrained.
However, reshoring trends have been an important signal of a change in the perception
of business over whether choosing to have globalized operations is always superior to
having national or locally bound operations. Indeed, we see reshoring representing
firms’ longer-term strategy to better face a new competitive environment (Młody, ;
Navarro, ), and must therefore be read as an early sign of a transformation that is
being unleashed at the moment.
Firms’ supply chains are shortening and the cost-saving attraction of production
offshoring is receding. This opens two levels of questions: one is to what extent we can
talk about de-globalizing forces shaping a new production order, and the other is
whether regional economies in advanced economies are capable of picking up this
challenge and become fertile ground for a flourishing of new dense and geographically
short value chains.
An emerging literature on de-globalization is starting to look into what this might
mean (Livesey, , ; van Bergeijk, ; Martin et al., ). Some have drawn
on data on long-term changes in FDI and import/export trends and have argued that
there is evidence of a reduction in the global production activities (Pegoraro et al.,
) with supply chains being geographically shorter.
. I P B
..................................................................................................................................
The term ‘industrial policy’ has gone through many fashions and has meant different
things at different times. Government intervention in the productive parts of the
economy was justified by instances of market failure or any time the market was
unable to allocate resources efficiently or equitably. This view justified national cham-
pions in industries deemed to be natural monopolies, for instance in the utilities. All
this was of course turned on its head by a massive wave of privatizations in the s in
Europe, where competition and liberalization allowed market forces in industries of
strategic societal importance such as water, energy, and telecoms. At the same time,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
industrial policy has been associated with interventionist governments promoting
national champions or picking winners, that is, sectors, in a global competitive
environment characterized by inter-country competition and home-rooted large
firms. This was the case when industrial policies were aimed at supporting the growth
of domestic champions and turning a blind eye to their sometimes-anticompetitive
dominant position domestically, in view of allowing them to become competitive in
foreign markets (Bianchi and Labory, ; Bianchi et al., ).
We would argue that the industrial policy of picking sectors of the s and s
occurred at a time of technological change coinciding roughly with the Third Industrial
Revolution, so government intervention to promote industry development was aimed
at supporting domestic champions positioning themselves in new industries vis-à-vis
foreign competitors in a competitive environment shaped by absolute advantage and
trade.
The emergence in the s of MNEs controlling more complex GVCs changed the
balance of power between large firms and their home government as MNEs started
dealing with foreign governments keen to host their operations and offering favourable
terms to attract them. In some countries, such as Ireland, the attraction of FDI was part
of a national industrial policy to promote the emergence and development of some
industries (Bailey et al., ). In such a globalized context and a time when technology
was mature and known, the term industrial policy fell from grace, replaced by a
heightened attention to the contribution of places and regions with their industrial
specializations to create national competitive advantages (Porter, ). Indeed gov-
ernment intervention was recast to promote, not national champions, but a favourable
national business environment, a national innovation system (Chaminade et al., ),
and to create systemic conditions for businesses to thrive from telecoms infrastructure
and education/skills, to transport connectivity and regulatory framework. These fell
under different labels though, such as regional policy, innovation policy, or competi-
tiveness policy. The latter had in common in our view two elements; one is that their
prescriptions assumed maximum impact with minimum government intervention, as
their gestation and delivery occurred at times where the dominant thinking was free
market and deregulation. The second common element is that they introduced, for
the first time, an appreciation of the importance of places as local engines of growth
contributing to a country’s competitiveness.
Yet, industrial policy is now back on the agenda after years of neglect (Bailey et al.,
), with this revived enthusiasm coming at a time of technological transformation.
Over the last decade, ‘place-based’ approaches have increasingly been used to develop
regional industrial policies, as dissatisfaction with spatially blind approaches has
grown. Place-based approaches emphasize tailoring policy to develop place-specific
specialisms and capabilities, on which a region can thrive. Barca (), for instance,
defines a place-based approach as a long-term strategy aimed at tackling persistent
underutilization of potential and persistent social exclusion in specific places through
external interventions and multilevel governance. This place-based focus has begun to
be applied to a wide range of policy settings including industrial policy (Bailey et al.,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
a, b), research on place-based leadership (Beer et al., ), and in managing
the impacts of economic shocks (RSA, ). The place-based approach chimes with
modern perspectives on industrial policy more broadly, where industrial policy is seen
as a process of discovery requiring strategic collaboration between the private sector
and state in unlocking growth opportunities, where policy ideally has the quality of
‘embedded autonomy’ (see Rodrik, ). It is not captured by firms and sectors, but
focuses on bringing together actors in a discovery process, where firms and the state
learn about underlying costs and opportunities and engage in strategic coordination.
To be successful, place-based approaches require strengthened local and regional
institutions, a need for local stakeholders to be active in order to deliver success, the
development of human capital, and the critical embrace of innovation (Tomaney, ).
However, as the Regional Studies Association () notes, government initiatives
badged as ‘place-based policy’ often fall well short, with governments simply relabelling
long-established programmes as ‘place-based policy’, or only partially innovating.
In the context of the EU’s regional policy, smart specialization strategies at the
regional level were designed to empower regional actors to identify trajectories of
industrial renewal drawing on their embedded specializations. Although smart spe-
cialization strategies are seen as having paved the way in place-based approaches,
Gianelle et al. () suggests that regions and countries have, in reality, put in place
mechanisms that may circumvent the very rationale of smart specialization. They note
that this could arise from the result of lobbying activities, higher political return from
widespread public support measures, a risk-averse attitude of policymakers, and a lack
of adequate institutional and administrative capacity that can be observed at national
and regional levels. Furthermore, Barzotto et al. (a and b) argue that special-
ization strategy projects are more likely to be identified in stronger regions, which boast
a strong entrepreneurial talent pool and business networks; with the result that policy
implementation may inadvertently be a-spatial and could exacerbate regional
imbalances.
The arrival of radical and disruptive FIR technologies associated with Industry .,
poses challenges for policymaking and the role of governments. Technological change
will fundamentally transform industries and markets, as this will inevitably impact on
regions and places. The big question is whether the focus on regional policy and
concerns about wider socio-economic cohesion and growth should still dominate, or
whether industrial policy can regain centre stage as a strategic intervention to shape a
country’s productive competitiveness. Recent work has stressed that the disruptions
brought about by such technologies have the potential to introduce new layers of socio-
economic divides (De Propris and Bailey, ), with a concomitant call for a more
holistic transformative industrial policy that brings together technology, sectors, and
place. Against this backdrop, the policymakers risk underestimating the fundamental
role that policy and public interventions need to play just as the economy and wider
society are embarking on transformations that will shape work, industry, mobility,
communications, and more for decades ahead.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
. T I P
..................................................................................................................................
As suggested in the definition of Industry .+, new technologies will not only
fundamentally change the organization of production, but crucially the nature of
industries and markets and with them society. The global organization of production
that we have witnessed so far is responding to these changes with visible reconfigur-
ations of value chains in more compact networks that stretch within continents as
production spaces and final markets (Schwab, ).
Such radical and disruptive change cannot occur without the pro active role of
governments and policymaking. Industrial policies must move towards having a truly
transformative power, by enabling new technologies to penetrate and redefine existing
sectors, as well as create brand new markets and industries. Indeed, awareness and
adoption are crucial steps to ensure that the existing manufacturing base shifts onto the
new technological paradigm despite the inevitable resistance from incumbent actors.
This can, however, only be successful if the technological transformation of industries
is rendered against the place-based unique characteristics of such localized industries in
regions. We therefore advocate for a transformative place-based industrial policy that
acts at the intersection across three dimensions: the place (cluster and region), the
industry with its value chain, and the new technologies.
This requires three levels of intervention. First, industrial policy must connect the
industries already embedded in regions to new technologies through a process of
accessing, adopting, and adapting to the latter. This could, in the European context
for example, embody smart specialization strategies with a heightened attention
towards the creation and adoption of FIR technologies in different regions so as to
bring together technology, sectors, and place. A transformative industrial policy needs
to think beyond sectors alone and, rather, identify, nurture, and diffuse the key cross-
cutting technologies (such as digitalization, the Internet of things, robotics, and
artificial intelligence) that have an enabling role across manufacturing and services.
Industrial and regional policy needs to recognize and exploit such technologies by
making them accessible to businesses in different regions. Furthermore, a transforma-
tive regional industrial policy needs to be developed in a holistic sense (for example, on
skills, access to finance, clusters, supply chains, and innovation) so as to enable policy
to be better suited to the distinctive characteristics and advantages of different scales.
The latter requires regionally based industrial development strategies promoting
‘related diversification’ capitalizing on the FIR. Such strategies need to recognize (i) the
need to bring together different but related activities in a region via cross cutting FIR
technology platforms (such as via Living Labs or digital demonstration hubs) and (ii)
the differing potentials of regions to diversify, due to different industrial, knowledge,
and institutional structures linked to specific regional historical trajectories. This
requires tailor-made policy actions embedded in and linked to the specific needs and
available resources of regions, starting with the existing knowledge and institutional
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
base in that region. These need to capitalize on region-specific assets, rather than
attempting to replicate and apply policies that may have worked in quite different
places (Bailey et al., b).
Other elements of a transformative regional industrial policy would need to involve,
inter alia, the need for: new skills to be developed and constant re-skilling and up-
skilling processes as the FIR progresses. However, to transform the region’s potential
based on ‘unrelated variety’, and to broaden and renew the region’s industrial structure
by helping it branch into new related activities, policy must also encourage crossovers
between manufacturing and service industries and between manufacturing and new
technologies. This could come via knowledge-transfer mechanisms that connect
related and unrelated industries.
Second, a place-based industrial policy must favour the creation of new firms and
start-ups in the embedded industries. This new generation of entrepreneurs is crucial
to explore, create, and experiment with market niches often at the intersection between
sectors. This will require SMEs to have access to funding and finance to embrace digital
technologies; recognizing and exploiting possibilities to reposition firms, industries,
and regions on new parts of the GVC as the value added of manufacturing changes
over time; creating and seizing re-shoring opportunities as re-localization opportun-
ities open up, namely involving policies to rebuild supply chains in Europe. The EU
Industrial Policy (European Commission, ) suggests that new technologies
offer a great opportunity to strengthen European firms to export in ‘fast growing world
markets’ (European Commission, : ) and to leverage firms’ competitive advan-
tage in new technologies by gaining a ‘strategic independence from foreign suppliers’
(European Commission, : ). This confirms, in the case of the EU (likewise for
Asian and US competitors; Schwab, ), the commitment to control the emerging
new technologies and to be able to deploy them horizontally across sectors in tightly
knit networks of buyers and suppliers.
At the same time, new technologies open up endless possibilities for exploration and
innovation and this should stimulate the entrepreneurial, risk-taking nature of new
businesses and start-ups. Now more than ever, initiatives—like incubators, science
parks, accelerators—that enable the realization of such ventures should be supported
and expanded. Drawing on the triple helix model, the embeddedness of these facilities
in regional spaces with a dynamic (albeit mature) manufacturing specialization, can
offer true path renewal strategies for local firm clusters, as they connect systemically
businesses with academia or research organizations. These new innovative businesses
will provide an injection of technological novelty in the local industry with transforma-
tive powers: a holistic regional industrial policy (Harrison et al., ). An example of
this is the Vinnväxt programme of Vinnova (the Innovation System Agency of the
Swedish Government) which supports regions that have declining industries to identify
new industrial trajectories thanks to a systemic effort that brings together universities,
local institutions, and the local business community. The Vinnväxt programme pro-
vides prime funding to help regional stakeholders work together to graft one or more
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
relevant new technologies onto the local industry with the promotion of new firms and
new local value chains.
Finally, the redefinition and use of regulation and procurement to create new
markets for technological change also means technological uncertainty as the old
paradigm is setting, but many new ones are still leaving space for doubt and hesitation.
In this transition, a pro active and far-sighted government is necessary to share the risk
of technology adoption with business. This means first of all, significant infrastructural
investment to embrace new technologies (e.g. G) and enable firms and citizens to
become aware of users of such technologies. More significantly, the transformative
power of an industrial policy that is prioritizing technological transformation requires
the use of ‘smart regulation’ to change behaviours and incentives and a risk-sharing
procurement policy that creates new markets and allows the exploration of new
products or services. This idea was introduced first by Porter and van der Linde
() who controversially suggested that to overcome firms’ resistance to adopt new
technologies (in their article linked to sustainability) ‘properly designed—govern-
ment—regulations’ can support firms’ innovation via technological adoption and
applications at times of technological change. In protected domestic markets, firms
can achieve levels of innovation and performance that allow them to compete inter-
nationally and engage in GVCs at the highest levels of value creation. Advocates of a
pro active role of government have become more vocal recently thanks to the work of
Mazzucato () who argued for an entrepreneurial role for government by inspiring,
risk-sharing, and supporting businesses’ mission to innovate. By designing mission-
oriented policies associated to innovation and technological change, government can
use procurement to favour the creation of small-scale value-chain networks of firms
with purposeful links with research organizations. The design and deployment of new
products or processes for protected public markets allow firms to gain a competitive
advantage that will redraw completely their position and value creation contributions
in GVCs.
. C
..................................................................................................................................
This chapter has examined the impact of technological change on GVCs and what
initiatives and instruments governments in advanced economies might deploy to
support firms and people during the transition. There are signs that the global economy
is ‘de-globalizing’, with firms seeking to co-locate manufacturing and innovation
activities; this offers an opportunity for regions and places to upgrade and transform
their economies, leveraging industrial legacy with frontier technologies. We have
discussed the implications for a transformative industrial policy that we see comprising
a number of dimensions. A transformative industrial policy needs to think beyond
sectors alone and, rather, identify, nurture, and diffuse the key cross-cutting
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
technologies (such as digitalization, the Internet of things, robotics, and artificial
intelligence) that have an enabling role across manufacturing and services. Policy
also needs to recognize and exploit such technologies by making them accessible to
businesses in different regions. Furthermore, a transformative regional industrial
policy needs to be developed in a holistic sense (e.g. on skills, access to finance, clusters,
supply chains, and innovation) so as to enable policy to be better suited to the
distinctive characteristics and advantages of different scales.
A
The writing of this chapter has been supported by the EU Horizon project ‘MAKERS’,
which is a Research and Innovation Staff Exchange under the Marie Sklodowska-Curie
Actions, grant agreement number , and via the Economic and Social Research
Council’s ‘UK in a Changing Europe’ programme, Grant Reference: ES/T/.
R
Aiginger, Karl () ‘Industrial Policy for a Sustainable Growth Path’, in David Bailey, Keith
Cowling, and Philip R. Tomlinson (eds) New Perspectives on Industrial Policy for a Modern
Britain. Oxford: Oxford University Press, pp. –.
Alcacer, Juan and Joanna Oxley () ‘Learning by Supplying’, Strategic Management
Journal (): –.
Anderson, Chris () Makers: The New Industrial Revolution. New York: Random House.
Bailey, David and Lisa De Propris () ‘Manufacturing Reshoring and its Limits: The UK
Automotive Case’, Cambridge Journal of Regions, Economy and Society (): –.
Bailey, David and Lisa De Propris () ‘. Industry ., Regional Disparities and Trans-
formative Industrial Policy’, Regional Studies Policy Impact Books (): –.
Bailey, David and Philip R. Tomlinson () ‘Industrial Policy since the Crisis’, in Philip
Arestis and Malcolm Sawyer (eds) Economic Policies since the Global Financial Crisis.
International Papers in Political Economy Series. London: Palgrave Macmillan, pp. –.
Bailey, David, Carlo Corradini, and Lisa De Propris (a) ‘ “Home-Sourcing” and Closer
Value Chains in Mature Economies: The Case of Spanish Manufacturing’, Cambridge
Journal of Economics (): –.
Bailey, David, Ann Glasmeier, Philip R. Tomlinson, and Peter Tyler () ‘Industrial Policy:
New Technologies and Transformative Innovation Policies?’, Cambridge Journal of
Regions, Economy and Society (): –.
Bailey, David, Helena Lenihan, and Alex de Ruyter () ‘A Cautionary Tale of Two Tigers:
Industrial Policy “Lessons” from Ireland and Hungary’, Local Economy (): –.
Bailey, David, Christos Pitelis, and Philip R. Tomlinson (b) ‘A Place-based Developmen-
tal Regional Industrial Strategy and/for Sustainable Capture of Co-created Value’, Cam-
bridge Journal of Economics (): –.
Baines, Tim, Ali Ziaee Bigdeli, Oscar F. Bustinza, Victor Ghuang Shi, James Baldwin, and
Keith Ridgway () ‘Servitization: Revisiting the State-of-the-art and Research Priorities’,
International Journal of Operations and Production Management (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Baldwin, Richard () The Great Convergence. Cambridge, MA: Harvard University Press.
Bals, Lydia, Jon F. Kirchoff, and Kai Foerstl () ‘Exploring the Reshoring and Insourcing
Decision-making Process: Toward an Agenda for Future Research’, Operations Manage-
ment Research (–): –.
Barca, Fabrizio () ‘An Agenda for a Reformed Cohesion Policy: A Place-based Approach to
Meeting European Union Challenges and Expectations’. Available at http://www.interact-eu.
net/downloads//An_Agenda_for_a_Reformed_Cohesion_Policy.pdf.
Barrientos, Stefanie, Gary Gereffi, and Arianna Rossi () ‘Economic and Social Upgrading
in Global Production Networks: A New Paradigm for a Changing World’, International
Labour Review (–): –.
Barzotto, Mariachiara, Carlo Corradini, Felicia Fai, Sandrine Labory, and Philip R. Tomlinson
(a) Revitalising Lagging Regions: Smart Specialisation and Industry .. London:
Routledge.
Barzotto, Mariachiara, Carlo Corradini, Felicia Fai, Sandrine Labory, and Philip R. Tomlinson
(b) ‘Enhancing Innovative Capabilities in Lagging Regions: An Extra-Regional Col-
laborative Approach to RIS’, Cambridge Journal of Regions, Economy and Society, ():
–.
Beer, Andrew, Sarah Ayres, Terry Clower, Fabian Faller, Alessandro Sancino, and Markku
Sotarauta () ‘Place Leadership and Regional Economic Development: A Framework for
Cross-regional Analysis’, Regional Studies (): –. doi:./..
Bianchi, Patrizio and Sandrine Labory () A Concrete Experiment of Industrial Policy for
the Manufacturing Revolution. Cheltenham: Edward Elgar.
Bianchi, Patrizio, Clemente Ruiz Durán, and Sandrine Labory (eds) () Transforming
Industrial Policy for the Digital Age: Production, Territories and Structural Change.
Cheltenham: Edward Elgar.
Bustinza, Oscar F., Ferran Vendrell-Herrero, Emanuel Gomes, and Esteban Lafuente ()
‘Product–Service Innovation and Performance: Unveiling the Complexities’, International
Journal of Business Environment (): –.
Chaminade, Cristina, Bent Åke Lundvall, and Shagufta Haneef () Advanced Introduction
to National Innovation Systems. Cheltenham: Edward Elgar.
Deloitte () Industry .. Challenges and Solutions for the Digital Transformation and Use
of Exponential Technologies. Zurich: Deloitte.
De Marchi Valenina, Elisa De Maria, and Gary Gereffi () Local Clusters in Global Value
Chains. London: Routledge.
De Propris, Lisa () ‘How the Fourth Industrial Revolution is Powering the Rise of
Smart Manufacturing’, World Economic Forum. Available at https://www.weforum.org/
agenda///how-the-fourth-industrial-revolution-is-powering-the-rise-of-smart-
manufacturing.
De Propris, Lisa and David Bailey () ‘Disruptive Industry .+: Key Concepts’, in Lisa De
Propris and David Bailey (eds) Industry . and Regional Transformations. London: Taylor
and Francis.
Deutsche Bank () ‘Industry .: Upgrading of Germany’s Industrial Capabilities
on the Horizon’. Available at https://www.dbresearch.com/PROD/RPS_EN-PROD/
PROD/Industry__%A_Upgrading_of_Germany%E%%s_
industrial_ca.pdf.
Dimache, Aurora and Thomas Roche () ‘A Decision Methodology to Support Servitisa-
tion of Manufacturing’, International Journal of Operations and Production Management
(–): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Dunning, John H. () ‘The Eclectic Paradigm as an Envelope for Economic and Business
Theories of MNE Activity’, International Business Review (): –.
Ernst & Young () Reshoring Manufacturing—Time to Seize the Opportunity. London:
Ernst & Young.
European Commission () Industry .. Brussels: European Commission.
European Commission () Industry Report. Luxembourg: Publication Office of the
European Union.
Forbes () ‘The Trade War That Never Stops’. Available at https://www.forbes.com/sites/
stevehanke////the-trade-war-that-never-stops/#dcdd.
Friedman, Thomas L. () The Lexus and the Olive Tree. New York: Farrar, Straus
& Giroux.
Gereffi, Gary () ‘International Trade and Industrial Upgrading in the Apparel Commod-
ity Chain’, Journal of International Economics (): –.
Gereffi, Gary () ‘Economic Upgrading in Global Value Chains’, in Stefano Ponte, Gary
Gereffi, and Gale Raj-Reichert (eds) Handbook on Global Value Chains. Cheltenham:
Edward Elgar, pp. –.
Gereffi, Gary and Karina Fernandez-Stark () ‘Global Value Chain Analysis: A Primer’,
Center on Globalization, Governance & Competitiveness (CGGC), Duke University, North
Carolina, United States.
Gereffi, Gary and Timothy Sturgeon () ‘Global-value-chain-oriented Industrial Policy:
The Role of Emerging Economies’, in Deborah K. Elms and Patrick Lows (eds) Global
Value Chains in a Changing World. Geneva: WTO, pp. –.
Gereffi, Gary, John Humphrey, and Timothy Sturgeon () ‘The Governance of Global
Value Chains’, Review of International Political Economy (): –.
Gianelle, Carlo, Fabrizio Guzzo, and Krzysztof Mieszkowski () ‘Smart Specialisation:
What Gets Lost in Translation from Concept to Practice? Regional Studies May: –.
./...
Gray, John V., Gökçe Esenduran, Johnny M. Rungtusanatham, and Keith Skowronski ()
‘Why in the World Did They Reshore? Examining Small to Medium-sized Manufacturer
Decisions’, Journal of Operations Management : –.
GTAI () ‘Industrie .. Smart Manufacturing for the Future’, German Trade and Invest-
ment. Available at https://www.deloitte.com/content/dam/Deloitte/ch/Documents/
manufacturing/ch-en-manufacturing-industry---.pdf.
Gylling, Michael, Jussi Heikkilä, Kari Jussila, and Markku Saarinen () ‘Making Decisions
on Offshore Outsourcing and Backshoring: A Case Study in the Bicycle Industry’, Inter-
national Journal of Production Economics : .
Harrison John, Mercedes Delgado, Ben Derudder, Isabelle Anguelovski, Sergio Montero,
David Bailey, and Lisa De Propris () ‘Pushing Regional Studies beyond its Borders’,
Regional Studies (): –.
Humphrey, John and Hubert Schmitz, () ‘How Does Insertion in Global Value Chains
Affect Upgrading in Industrial Clusters?’, Regional Studies (): –.
Hymer, Stephen H. () The International Operations of National Firms: A Study of Direct
Foreign Investment. Cambridge, MA: MIT Press.
Kaplinsky, Rafael and Mike Morris () A Handbook for Value Chain Research. Brighton:
Institute of Development Studies.
Ketokivi, Mikko and Jyrki Ali-Yrkkö () ‘Unbundling R&D and Manufacturing: Post-
industrial Myth or Economic Reality?’, Review of Policy Research (–): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
, ,
Kinkel, Steffen () ‘Industry . and Reshoring’, in Lisa De Propris and David Bailey (eds)
Industry . and Regional Transformations. London: Taylor and Francis.
Kinkel, Steffen and Spomenka Maloca () ‘Drivers and Antecedents of Manufacturing
Offshoring and Backshoring: A German Perspective’, Journal of Purchasing & Supply
Management (): –.
Kinkel Steffen, Diletta Pegoraro, and Rosemary Coates () ‘Reshoring in the US and
Europe’, in Lisa De Propris and David Bailey (eds) Industry . and Regional Transform-
ations. London: Taylor and Francis.
Kondratieff, Nikolai D. () ‘The Long Waves in Economic Life’, The Review of Economics
and Statistics (): –.
Lavissière, Alexandre, Tibor Mandják, and Laurent Fedi () ‘The Key Role of Infrastruc-
ture in Backshoring Operations: The Case of Free Zones’, Supply Chain Forum: An
International Journal (): –.
Lee, Joonkoo and Gary Gereffi () ‘Global Value Chains, Rising Power Firms and Economic
and Social Upgrading’, Critical Perspectives on International Business (–): –.
Livesey, Finbarr () From Global to Local. London: Profile Books.
Livesey, Finbarr () ‘Unpacking the Possibilities of Deglobalisation’, Cambridge Journal of
Regions, Economy and Society (): –.
Martin Ron, Peter Tyler, Michael Storper, Emil Evenhuisd, and Ann Glasmeier ()
‘Globalization at a Critical Conjuncture?’, Cambridge Journal of Regions, Economy and
Society : –.
Mathews, John A. () ‘Dragon Multinationals: New Players in st-century Globalization’,
Asia Pacific Journal of Management : –.
Mazzucato, Mariana () The Entrepreneurial State. London: Demos.
Młody, Michal () ‘Backshoring in Light of the Concepts of Divestment and De-
internationalization: Similarities and Differences’, Entrepreneurial Business & Economics
Review (): –.
Mudambi, Ram () ‘Location, Control and Innovation in Knowledge-intensive Indus-
tries’, Journal of Economic Geography (): –.
Navarro, Peter () ‘China : The Year of Reshoring to America?’, Financial Executive
(): –.
New York Times () ‘Trump’s Push to Bring Back Jobs to U.S. Shows Limited Results’,
August.
OECD (a) The Next Production Revolution: Implications for Governments and Business.
Paris: OECD.
OECD (b) Global Value Chain Development Report : Measuring and Analyzing the
Impact of GVCs on Economic Development. Paris: OECD.
Pegoraro, Diletta, Lisa De Propris, and Agnieszka Chidlow () ‘De-globalisation, Value
Chains and Reshoring’, in Lisa De Propris and David Bailey (eds) Industry . and Regional
Transformations. London: Taylor and Francis.
Pérez, Carlota () ‘Technological Revolutions and Techno-economic Paradigms’, Cam-
bridge Journal of Economics (): –.
Pisano, Gary P. and Willy C. Shih () ‘Restoring American Competitiveness’, Harvard
Business Review (–): –.
Porter, Michael E. () ‘The Competitive Advantage of Nations’, Harvard Business Review
(): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Porter Michael E. and Claas Van der Linde () ‘Toward a New Conception of the
Environment–Competitiveness Relationship’, Journal of Economic Perspective ():
–.
PWC () ‘Industry .: Building the Digital Enterprise’. Available at https://www.pwc.
com/gx/en/industries/industries-./landing-page/industry-.-building-your-digital-
enterprise-april-.pdf.
Reshoring Institute () ‘Companies Case Studies’. Available at https://reshoringinstitute.
org/reshoring-knowledge-library/reshoring-case-studies/.
Rifkin, Jeremy () The Third Industrial Revolution: How Lateral Power is Transforming
Energy, the Economy, and the World. New York: Palgrave Macmillan.
Rodrik, Dani () One Economics, Many Recipes: Globalization, Institutions, and Economic
Growth. Princeton, NJ: Princeton University Press.
RSA (Regional Studies Association) () Place-based Leadership. Available at http://pla
celeadershipnetwork.org/rsa-policy-expo-enabling-best-practice-in-place-based-policy.
Scholte, Jan A. () Globalization: A Critical Introduction. New York: Macmillan.
Schwab, Klaus () The Fourth Industrial Revolution. Geneva: World Economic Forum.
Schwab, Klaus () Shaping the Future of the Fourth Industrial Revolution. London:
Penguin Random House.
Timmer Marcel P., Abdul A. Erumban, Bart Los, Robert Stehrer, and Gaaitzen J. de Vries
() ‘Slicing up Global Value Chains’, Journal of Economic Perspectives (): –.
Tomaney, John () Place-based Approaches to Regional Development: Global Trends and
Australian Implications. Sydney: Australia Business Foundation.
Van Bergeijk, Peter A. G. () ‘On the Brink of Deglobalisation . . . Again’, Cambridge
Journal of Regions, Economy and Society : –.
Vendrell-Herrero, Ferran and Oscar F. Bustinza () ‘Servitization in Europe’, in Lisa De
Propris and David Bailey (eds) Industry . and Regional Transformations. London: Taylor
and Francis.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.............................................................................................................
.............................................................................................................
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
A Long-term Perspective and Overview
of Theoretical Arguments
......................................................................................................................
.
Wee felt it before in sense; but now wee know it by science.
Edward Misselden, The Circle of Commerce or the Balance
of Trade, London, Dawson for Nicholas Bourne (: )
. N P C W
E T: A S,
D R, P S
R
..................................................................................................................................
I it is of some importance to gain a broader perspective of what has
developed into ‘general truths’ of the neoclassical economics during the Cold War.
The fact that David Ricardo’s theory of comparative advantage in international trade
dates back to conveys an impression that this principle has been ruling economic
theory since then. It is also assumed that David Ricardo merely solidified the free-trade
principles of Adam Smith. However, the following quote from the young Adam Smith
shows how far away his principles were from the logic of comparative advantage and
neo-liberalism:
When the legislature establishes premiums and other encouragements to advance
the linen or woollen manufactures, its conduct seldom proceeds from pure sym-
pathy with the wearer of cheap or fine cloth, and much less from that with the
manufacturer or merchant. The perfection of police (i.e. policy), the extension of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
trade and manufactures, are noble and magnificent objects. The contemplation of
them pleases us, and we are interested in whatever can tend to advance them. They
make part of the great system of government, and the wheels of the political machine
seem to move with more harmony and ease by means of them.
(Smith, [], vol. : ; my emphasis)¹
It is important to note that in his main work The Wealth of Nations (), Adam
Smith refers to ‘the invisible hand’ only once: when private individuals prefer English
goods to imported goods, which would happen around this time after about years
of England protecting its own manufacturing industry. But this is an argument for
when to give up protectionism rather than against protectionism as a principle.
It is also worth noticing that the term ‘free trade’ historically did not at all have the
unequivocal meaning it is usually given today. In a volume Edwin Seligman—
Colombia University’s eminent economics professor and an avid collector of econom-
ics books—makes the following point as regards the meaning of ‘free trade’ in Edward
Misselden’s work:
Free trade . . . denoted in those days something very different from what it signifies
today. It did not mean freedom to import goods without the payment of duty. On
the contrary . . . freedom to export goods as over against the companies which
possessed a monopoly of trade, like the East India Company . . . Almost all free
traders were in fact what we should today call protectionists. (Seligman, : ix)
Cold War economics—the theories that stood victorious after the fall of the Berlin
Wall—had its roots in David Ricardo in . However, recent n-gram technology has
made it possible to illustrate how David Ricardo and his theory of ‘comparative
advantage’ were virtually neglected until Paul Samuelson brought them into the core
of economics at the start of the Cold War with two articles in The Economic Journal in
and . Communism advanced under the utopian slogan ‘from each according
to his ability, to each according to his needs’. With his renewed interpretation of David
Ricardo, Paul Samuelson produced a counter-utopia: under the standard assumptions
of neoclassical economics free trade would produce a tendency towards factor price
¹ A more complete quote from Adam Smith ():
The same principle, the same love of system, the same regard to the beauty of order . . .
frequently serves to recommend those institutions which tend to promote the public
welfare . . . When the legislature establishes premiums and other encouragements to
advance the linen or woollen manufactures, its conduct seldom proceeds from pure
sympathy with the wearer of cheap or fine cloth, and much less from that with the
manufacturer or merchant. The perfection of police [i.e. policy], the extension of trade
and manufactures, are noble and magnificent objects. The contemplation of them pleases
us, and we are interested in whatever can tend to advance them. They make part of the
great system of government, and the wheels of the political machine seem to move with more
harmony and ease by means of them. We take pleasure in beholding the perfection of so
beautiful and grand a system, and we are uneasy till we remove any obstruction that can in
the least disturb or encumber the regularity of its motions.
(Smith, [], vol. : ; my emphasis)
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
equalization: the prices of labour and capital would tend to equalize across the planet.
This became the ‘noble lie’ of neoclassical economics and neo-liberalism and appeared
to make industrial policy superfluous.
The n-grams below show how Cold War economics brought David Ricardo out of
the shadows. Compared to other English economists and economic philosophers—such
as father and son James and John Stuart Mill—David Ricardo had indeed been much
less important during the first years after his theory (Figures . and .).
On the theoretical level, the Cold War (‒) was fought between two cosmo-
political theories. Neither in neoclassical/neo-liberal theory nor in communism was
the nation state a unit of analysis. In both theories the nation state was not seen as
having a place. Neoclassical economics is built on methodological individualism—no
state needed—and also in Marxism the state was supposed to wither away as obsolete
after a brief ‘dictatorship of the proletariat’. In practice, of course, it was not the state
but the rights of individuals that withered away under communism.
0.000180%
0.000160%
0.000140%
0.000120%
0.000100% John Stuart Mill
0.000080%
0.000060%
0.000040%
James Mill
0.000020%
0.000000% David Ricardo
1820 1830 1840 1850 1860 1870 1880 1890 1900 1910
. The frequency of ‘David Ricardo’ (in English) during the first years after the
publication of his main work, Principles of Economics, compared to that of two other, then
much more famous, English economists
Source: Author and Google N-Gram.
0.000240%
0.000220%
0.000200%
0.000180%
0.000160%
0.000140%
0.000120% comparative advantage
0.000100%
0.000080%
0.000060%
0.000040%
0.000020%
0.000000%
1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
. Frequency of the term ‘comparative advantage’ (in English) from until today
Note: As is clearly shown, the term was very little used for the first 100 years of its existence, but its use
started with the birth of the planned economy and exploded with the start of the Cold War in the late 1940s.
Source: Author and Google N-Gram.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Both political extremes were far too abstract to be practical guides to human
societies. The implicit conclusion in , however, was that because communism
had been proven to be wrong, neo-liberalism—the other political extreme—had to be
perfect. This belief has led to increasing poverty in many countries. A key economist in
the historical tradition in which this chapter is written, Gustav Schmoller (‒),
clearly saw that both political extremes were unfit for practical purposes. In his
inaugural speech as Rector of the University of Berlin, Schmoller expressed the hope
that he had seen the end of the two ideological extremes, Manchester Liberalism
(today’s neo-liberalism) and communism. His characterization of both these ideologies
was harsh: ‘the naïve optimism of “laissez-faire” and the childish and frivolous appeal
to revolution, the naïve hope that the tyranny of the proletariat would lead to world
happiness, increasingly showed their real nature, they were twins of an ahistorical
rationalism’ (Schmoller, , my translation and emphasis).
In practice, the ideological extremes of ‘the irrational twins’ opened up a wide
spectrum of possible economic policies. In Western Europe, Germany’s soziale Markt-
wirtschaft (social market economy) (Müller-Armack, )² and Sweden’s Middle Way
(Childs, ) were successful models navigating the broad spectrum of opportunities
between the ‘irrational twins’. After the fall of the Berlin Wall and with the rule
of the Washington Consensus, these ‘middle ways’ were in practice outlawed.
. T H R
I P T
..................................................................................................................................
From manufacturing you may expect the two greatest ills of humanity, super-
stition and slavery, to be healed.
Ferdinando Galiani (–), Italian economist
More than two decades ago, when I was working on another paper on the history of
economic policy, David Landes, the eminent Harvard economic historian, gave me a
serious warning: be careful, if not you are likely to end up with Adam and Eve. The
point is well taken: it is possible to argue that in his Poroi of (also called Ways
and Means), Xenophon, arguing that a city’s economic problems could be improved by
increasing the size of the population, could be seen as understanding increasing returns
or economies of scale. In order to avoid the Adam and Eve problem, the story told in this
chapter starts in the s, with practical policies, and with a systemic theoretical
understanding that essentially starts in with Giovanni Botero’s bestselling On the
Greatnesse of Cities (Botero, ; Figure .),³ relatively unknown today.
² Economist Alfred Müller-Armack used the term in a book, also defining it as a Third Way, but
it became popular later.
³ However, a modern version is found in Symcox ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
One important note on earlier European history, though: if we allow US economic
historian Richard Goldthwaite to be our guide, the history of the rise of European
civilization was in fact a process of import substitution. From the twelfth century
onwards manufactured goods which had previously been imported from the Levant
started to be produced in Europe. At the core of what is generally referred to as ‘the
commercial revolution’ was the growth of an industrial sector, Goldthwaite argues:
Initially Europeans had an unfavourable balance of payment . . . and initially they
made up the difference through piracy and plundering, but above all through the
export of silver and gold . . . With the growth and development of the European
economy, the Italians steadily improved their situation. They began to produce for
themselves the manufactured goods they had been importing, and by the fifteenth
century they had gone beyond import substitution and were exporting these very
goods to the Muslim world. (Goldthwaite, : )
This was later the logic of all European countries that have succeeded in upgrading
their industrial sector, starting with England in the s up until and including
classical development economics and the Marshall Plan.⁴ Only during very brief
periods—the last of them being from around until about now—has this principle
of creating wealth through structural upgrading of national productive sectors been
abandoned. Just as industrial companies almost by definition initially go through
several years of loss, and need ‘subsidies’ from the owners, so whole national systems
also need years of subsidies and protection before they are profitable. This period of
protection—which the great liberal John Stuart Mill () called infant industry
protection—is still needed.
Old economic policies were carried out with varying degrees of understanding of the
underlying principles. These policies were, in our meaning of the word, not based on
what we would normally call scientific analysis, but on ‘clues’, on a mode of inference
called abduction—or phronesis, Aristotle’s third form of knowledge (Reinert and
Daastøl, ).⁵ This tradition is continued by the Italian philosopher Giambattista
Vico (‒), in the US philosophical tradition of C. S. Pierce and in economics in
Nicholas Kaldor’s ‘stylized facts’. According to Pierce: ‘[Induction] can never originate
any idea whatever. No more can deduction. All the ideas of science come to it by the
way of abduction. Abduction consists of studying facts and devising a theory to explain
them. Its only justification is that if we are ever to understand things at all, it must be in
that way’ (Lawson, : –).⁶ Pierce here describes the role played by the formu-
lation of hypotheses as the fundamental element in the creation of new knowledge. This
reasoning is also in line with the philosophy that lies at the root of the German
historical school of economics, in the eighteenth-century philosophers Gottfried von
Leibniz and Christian Wolff.
⁴ The only exception to this appears to be the Dutch Republic. On this see Reinert (a).
⁵ For a more general discussion of these issues, see Reinert and Daastøl ().
⁶ Pierce (: ). Quoted in Lawson (: ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
No doubt most historical arguments have their points, but history shows that it has
also been possible ‘to be right for the wrong reason’. We shall try to illustrate how the
creation of industrial policy was generated through abductive reasoning with a parallel
from the history of medicine. From the twelfth century sailors in the Mediterranean
used lemons to prevent scurvy (Villner, : –). This was a very effective policy.
However, the explanation as to why this policy worked only appeared in the early
twentieth century with the discovery of Vitamin C (Mervin, : –). In the
meantime, acidity had been seen as the curative element, which led to disastrous
experiments with vinegar instead of citrus fruits.
Likewise, we would claim that it is entirely possible to establish good economic
policies for a time, without fully understanding the factors involved. For example,
identifying ‘progress’, or the ability to pay more taxes, with the use of machinery in an
increasing number of industries would result in a beneficial public policy, even if the
causal relationship between the use of machinery and wealth were not clearly estab-
lished, or had been ‘unlearned’. The intuitive abduction often precedes what we would
think of as a more ‘scientific’ type of knowledge. This view that abduction anticipates
‘science’ was expressed in the above quote from English economist Edward
Misselden—an economist who was heavily influenced by Giovanni Botero—in :
‘Wee felt it before in sense, but now wee know it by science.’
England is an example of a country which appears to have created an industrial
policy without much theory, other than a clear recognition of what at Harvard Business
School used to be called ‘we are in the wrong business’. In the fifteenth century,
England was a poor nation, heavily indebted to her Italian bankers. Her main export
was wool. But over a relatively short period, England went from being a poor nation on
the periphery of Europe to being the leading nation of the world—from being a poor
farming country to possessing a global empire on which the sun never set.
There are different versions of the story as to how this happened. Probably a policy
originally intended to increase national revenues—a tax on the export of raw wool—
ended up having the unintended by-product of creating a domestic industry of woollen
cloth. The story is likely to have started earlier, but let us look at the version of Daniel
Defoe—the polymath historian best known as the author of Robinson Crusoe—who
described the English strategy retrospectively in his book Plan of English Commerce in
(Defoe, ).
Henry VII, who came to power in , had grown up in exile in Burgundy, where
English wool was being spun into cloth. The wealth he observed there contrasted sharply
with the poverty he later found in England. But, the Prince observed, the wealth in
Burgundy depended totally on the import of English raw materials: wool and the Fuller’s
earth used to clean it. When he came to the throne of England, Henry employed the anti-
Ricardian logic which during subsequent centuries dominated, not only in England, but
also on the continent: don’t accept your comparative advantage, shape it. Manufacturers
are rich, producers of raw materials are poor. Therefore, to get rich and develop the
country, we must promote the production of manufactures. Selling manufactures is
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
‘good’ trade—in today’s language, it makes us competitive—while selling raw materials is
‘bad’ trade (King, , vol. I: ).
The Tudor strategy, which started with King Henry, was to bring England into the
wealth-creating downstream activities in wool manufacturing that he had observed
abroad. Practice preceded theory, which is not uncommon when historical circum-
stances conspire to make certain facts, if not the deeper economic mechanisms at work
or the theory explaining them, palpably visible, along with obvious policy measures.
England’s economic growth (her economy had been essentially static, like all pre-
modern agriculture societies, for centuries before this) started by observing the eco-
nomic structure of richer countries and emulating—copying and trying to improve
upon—their economic structure (Reinert, b). This meant pushing into manufac-
turing, the quintessential (if today not the only) home of ‘advantageous’ economic
activities, the key to sustained growth.
The English strategy was gradual, and started with import substitution, which to this
day is a common first move in development plans. In , tariffs on cloth were
increased, and local cloth manufacturing was encouraged. The Crown paid for skilled
foreign workers to be brought in, and businessmen were paid bounties (in modern
terms, subsidies) for establishing textile manufacturing firms. And when sufficient
manufacturing capacity had finally been achieved to process all domestic wool pro-
duction, England prohibited the export of raw wool. During the next century, in the
reign of Elizabeth I, the death penalty was introduced for the export of raw wool from
England. See Figure . for an example of similar harsh punishments for sins against
‘the cult of added value’ in the Republic of Venice.
. T K W U
S C A V
R M L D
L: G B ()
..................................................................................................................................
I first met practical industrial policy as a young student and assistant to the professor of
Spanish at the Latin American Institute at the University of St. Gallen in Switzerland.
In , the Swiss Federal Technical Cooperation, in cooperation with UNCTAD in
Geneva, organized an export-promotion training course for representatives of Spanish-
speaking South American nations. I was recruited to travel to Latin America to select
the candidates who had been presented by the local governments, and also to organize
the part of the course that took place in St. Gallen in the summer of .
The core idea of the course was to promote Latin American exports with higher
value than the traditional raw materials. In cooperation with the local Swiss embassies,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
my task was also to pick one product from each country on which the participants, in
addition to theoretical courses, should do practical market research during their two
months’ stay in St. Gallen and Geneva. Although the idea was completely in line with
classical development economics, as it was still practised at the time, neither I—nor
probably anyone else—had any idea that this idea of added value had been at the very
core of theories explaining the differences in national incomes. Value added had been
the key explanation for what created wealth in the few cities of wealth in Europe—like
Amsterdam, Florence, and Venice—since Giovanni Botero’s work On the Greatness of
Cities (Botero, ). By , Botero’s book had been published in around forty-two
editions in all the important European languages,⁷ and his thoughts were also spread in
German-speaking areas by Veit Ludwig von Seckendorff ’s book on The German
Principality (Seckendorff, )⁸—which remained continuously in print for
years—and in English through the works of Francis Bacon.⁹
Two apparently different economic traditions, cameralism and mercantilism, seem
to have grown out of the extremely widely diffused works of Giovanni Botero
(–)¹⁰ as a common platform and point of reference. Botero, in turn, built
on two much older traditions: his work Ragion di Stato—of which On the Greatness of
Cities is part—satisfied the oldest tradition in economic policy advice, the tradition of
Fürstenspiegel, a kind of owner’s manual to the numerous small states of Europe.¹¹
Botero’s other main work, Relazioni Universali (Botero, ) satisfied another very
old tradition: the need for surveys and the fact-finding missions’ quest for geographical,
cultural, and anthropological knowledge.¹² All in all, at the time when the knowledge of
the whole world and its cultures became codifiable, Giovanni Botero provided an
unusually complete range of social sciences.¹³ It is worth noting that in contrast to
the many utopias of the period, Botero’s reasoning was based on observations of
history and facts. In his work he clearly distances himself from ‘bullionism’—the idea
that a nation’s wealth consists in the amount of precious metals owned—of which
mercantilism is sometimes accused.
⁷ Reinert et al. () and Reinert and Reinert ().
⁸ Reinert ().
⁹ Trace () documents Botero’s influence on Bacon and other English authors.
¹⁰ See Firpo (, ).
¹¹ The Fürstenspiegel (‘Kings’ Mirror’) literature, bringing advice to the rulers on how to govern, can
be seen as part of this broader tradition. The Sachsenspiegel, from German Saxony, about , is the
best known, but even in peripheral Norway, this tradition goes back to a text from around : Konungs
skuggsjá (Old Norse for ‘King’s mirror’).
¹² The tradition of accurate country surveys and descriptions, dating back to De magnalibus urbis
mediolani of Bonvesin de la Riva () and later works also on the Florentine state. Such descriptive
surveys were the purpose of costly and extensive visitas in the Spanish provinces of the New World,
some of which have been republished (Ortiz de Zúñiga, /).
¹³ Of course, Botero made mistakes, such as when his sources were not correct. The remarkable thing,
however, is the acuteness of his analysis of generalized wealth and policy prescriptions that came to
typify the centuries of economics that go under the name of cameralism and mercantilism. Botero was
involved in the process of making the Vatican’s list of prohibited books, which in his day also comprised
the works of Jean Bodin (–). This position clearly gave him access to much new material.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
. The cover of the first edition of the book that laid the earliest foundations for a
theory of industrial policy: Botero’s volume
Note: Botero (1589) was translated into all important European languages—the first
translations in Germany were from Italian into Latin—and the book reached a record of forty-two
editions between 1589 and 1671.
Source: Reinert family library.
Giovanni Botero was born in the small town of Bene Vagienna in the province of
Cuneo in the Italian Piedmont region. As a Jesuit, he was keenly interested in non-
European cultures. From the point of view of now long-standing Western Eurocentrism,
the ability of the Jesuits to engage in two-way cultural communication reminds us
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
that Eurocentrism is not necessarily a ‘natural’ state of affairs. Jesuit Matteo Ricci
(–), a contemporary of Botero, ventured with a small group to China, where
he translated not only Christian and Western scientific texts into Chinese, but also
Chinese texts into Latin. By entering foreign cultures—from the Chinese to the
Guaraní in South America—Jesuit travellers also played the role of anthropologists.
As one observer says, Botero ‘brought together an immense mass of geographical and
anthropological information, which he tried to organize according to broad methodo-
logical categories (like “resources,” “government” and “religion”)’ (Rubies, : ).
Little appears to unite Sir Walter Raleigh (–), Francis Bacon (–),
utopian Tommaso Campanella (–), English economist Edward Misselden
(–), Spanish economist Gerónimo de Uztáriz (–) and Swedish tech-
nologist and economist Christopher Polhem (–). But one thing does: they all
convey key insights found originally in Giovanni Botero, but following the practice of
the time they do not quote him or anyone else as to the origins of these insights. As
mentioned, the work of the first German bestseller, Veit von Seckendorff (–) is
clearly also very much influenced by Botero (Reinert, ). There are still thirty
editions of Botero’s works (mainly uncatalogued) from the time of Seckendorff ’s
librarianship in the Gotha Library, which he formed for Ernest the Pious (Ernst der
Fromme) of Sachsen-Gotha-Altenburg, and Botero was on the reading list Seckendorff
made for the education of princes. The large number of translations of Botero’s works
testify to his strong influence on the European seventeenth-century zeitgeist (Reinert
and Reinert, ).
Botero argues that one of the reasons for the economic superiority of cities over
the countryside is that the ability to invent new things is much greater there than in the
countryside. Here we find an early trace of ‘Schumpeterian’ thinking, which was
followed up by Francis Bacon’s essay ‘Of Innovations’.¹⁴
Botero’s Ragion di Stato () was the first modern economics bestseller. In
English, Ragion di Stato came to be called Reason of State and in German Staatsräson.
In his work on Staatsräson, Friedrich Meinecke mentions Botero’s many follow-
ers and the ‘true catacombs of forgotten literature’ which follow in Botero’s path.¹⁵ (A
new translation of Botero’s The Cause of the Greatnesse of Cities has an excellent
introduction by Geoffrey Symcox.)¹⁶
The understanding that grew out of Botero’s work was that only in barren areas
lacking natural resources and with limited possibilities for food production—but in
favourable geographical positions such as Venice and Amsterdam—would economic
development tend to arise ‘naturally’. In virtually all countries, heavy-handed government
¹⁴ Bacon’s () Essays represent the transition from innovations being a threat to the status quo
and therefore doubtful, as when Roger Bacon was arrested in Oxford around for ‘suspicious
innovations’, into something desirable. Before Bacon’s Essays had been translated into Dutch,
French, German, Spanish, and Swedish.
¹⁵ ‘Wahre Katakomben von vergessener Literatur’ (Meinecke, : n).
¹⁶ Symcox ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
policies were required during the transition from diminishing-returns activities
(agriculture) to increasing-returns activities (manufacturing), as they were identified
by Antonio Serra in (S. Reinert, ); or from ‘natural activities’ to ‘artificial
activities’, to use the later terminology of Thomas Mun (Mun, ). This was the
essence of the thinking that Botero’s influence turned into the economic mainstream
at the time. What Venice and the Dutch Republic had achieved—rather than the
policies of Venice and the Dutch Republic—was the object of attention of foreign
economists and foreign rulers alike. Edward Misselden argued in that it was
necessary to understand the difference between heaps of stones and logs and a house.
Between them was the added value of human knowledge and skills. This rings a bell
when reading Botero, the first English translation of which was in :¹⁷
Some will aske me; whether Fertilitie of Land, or Industrie of Man, importeth more
to make a place Great, or populous? Industrie, assuredly. First because Manufac-
tures framed by the skilfull hand of Man, are more in number,¹⁸ and price,¹⁹ than
things produced by Nature: For Nature giveth matter, and subject: but the Cur-
iositie and Art of Man addeth unspeakable varietie of formes. Wool, from Nature, is
a rude and simple Commoditie: What fair things, how various, and infinite, doth
Art make out of it?²⁰
Compare the Marbles, with the Statues, Colossuses, Columns, Borders, and infinite
other Labours, taken. Compare the Timber, with the Galleys, Galleons, Vessels of
many sorts, both of Warre, Burthen, and Pleasure: Compare also the Timber, with
the Statues, the Furnitures for Building, and other things innumerable, which are
built with the Plane, Chesill, and Turners-Wheele. Compare the Colours with the
Pictures.²¹
Botero’s basic ideas around the geographical clustering of economic activities lead-
ing to progress have had many modern followers. Although geography was obviously
present in other economists, in relatively modern times it was not until the publication
of Johann Heinrich von Thünen’s first volume of Der Isolirte (sic) Staat (The Isolated
State) (von Thünen, )²² that location theory based around a core industrial city—
as Botero had—was rediscovered. Von Thünen (‒) also places the industrial
city at the geographical and economic core of the modern state (Figure .).
Von Thünen drew a map of civilized society with four concentric circles around a
core of increasing returns activities—the city. Moving outwards from the city core, the
use of capital and advanced skills gradually decreases and the use of nature gradually
¹⁷ The second English translation is clearer on this and is used here (Botero, : ‒).
¹⁸ That is, greater diversity of products.
¹⁹ Presumably this indicates that these products command a higher price and therefore a higher profit
for the producer. Today we could say that manufactured goods are produced under higher barriers to
entry than most raw materials, and under increasing rather than diminishing returns. Both these factors
would produce a higher profit margin for manufactured goods than for raw materials.
²⁰ The second English translation is clearer on this and is used here (Botero, : ‒).
²¹ Botero (: ‒).
²² von Thünen ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
01/;h./
NOt SOPRA PROVEDITORI~
& Proueditori aJle Biaue,
C Ommetternoa te
Ball:ion, e Magazen
Capo del
altra o
perfona, chc affifte in e!fo,& che di tempo in tempo fi rroue-
ranno a fernir in detto Magazen , che forro pena di Ducati
cinguanta da e!fer tolci fubico ogni volta , che concrafarai al
prefente noll:ro ordine da elfer datta la merta aWaccufator , e
l'alrra meta applicara alii luoghi Pij di guell:a Circa, oltre tre..t
tracti di Corda, non poffi, he debbi vender, ne permetter, che
o
fia venduco in detro Ball:ion , Magazen niuna forte di Panu
Forell:iero, o di Ca!a, o .Buffetco da Pif'tor di q uell:a Circa, rna
folamente di ragliaco , e trauerfo del voftro Piftor , che lei foc-
topoll:o , & obligato . Douendo in conformira delle leggi re-
fiar in tutti prohibita l'introdutrone del Pan Foreftiero, di Ca·
fa, c Buftcrro come di fopra eefpreifo, fia di che forte fi voglia,
niuna eccertuara. Et il prefente noftro ordine donerai rener in
luoco confpimo , accio po!li elfer ofseruato a chiara hotitia di
cad a uno, confert1andolo per douerlo refticuire al Magdharo no-:-
ih o, ogni gual volta che vi fara tichiell:p.
Dara dal Magi!haro noftro li
[ Bernardo Marcello Sopra Proueditor.
L Fiero Foflarim Sopra Proueditor.
[ Zuanne Battaia Proueditor.
[ Zorz..,i Priuli Proueditor.
L M11rc'Antonio Morefini Proueditor.
Alberto Colombo N odaro.
- ------------------------ - -
Srampaco per Gio: Pierro Pinelli, Sramparor Dllca!e•.
. An example of the practical consequences of ‘the cult of value added’
Source: Contemporary Venetian broadside. Reinert family collection.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Isolated State Modified Conditions
tre
enc
Central city
b-
Su
Navigable river
Market gardening and
milk production
Firewood and lumber
production
Crop farming without
fallow
Crop farming, fallow
and pasture
Three-field system
Livestock farming
. von Thünen’s map of a modern state, with the industrial city at its core
Source: von Thünen (1826).
increases. Near the city the most perishable products are produced, such as dairy
products, vegetables, and fruit; grain for bread is produced further out, and in the
periphery there is hunting in the wilderness. Economists today have rediscovered von
Thünen’s approach to economic geography, but many miss the crucial point he
stresses, which stands on the lines of the first page of Der Isolirte Staat: ‘Man denke
sich eine sehr große Stadt in der Mitte einer fruchtbaren Ebene gelegen’; a very big city in
the middle of a fertile plain is at the core of society. As with Botero, here also the city is
at the core of the system. It is worth noticing that already very early on economists
distinguished between manufacturing cities (like Venice or Milan) from which wealth
spread, and administrative cities (the typical example was Madrid) that played more of
a parasitic role.
Since von Thünen was a farmer and mainly interested in the improvement of
agriculture, he does not pay too much attention to the factories in the city, even though
they are also mentioned in his book. Von Thünen did not argue against the accepted
knowledge of the time that a state needed manufacturing industry, and that this
industry needed tariff protection. Underlying what happened in von Thünen’s outer
circles was a development machine at the core of the concentric circles—the urban
increasing-returns industries (manufacturing)—which, for a time at least, needed tar-
geting, nurturing, and protecting. In other words, the presence and state of development
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
of the core city would also determine the standard of living in the rest of the country, in
these outer circles.
In von Thünen’s map the most ‘modern’ sector—manufacturing—formed the city
core, and the most ‘backward’ sector—hunting and gathering—formed the periphery
furthest from the city. Moving outwards away from the city, the use of nature as a
factor of production increases and the use of capital decreases. Only the city will have
authentic increasing returns, free from nature’s flimsy cyclicality and supply of
resources (land, minerals) of different qualities.
As one moves from the city towards the periphery, man-made comparative advan-
tage (subject to increasing returns) gradually diminishes and nature-made comparative
advantage (subject to diminishing returns) increases. As we move outwards in the
circles, the carrying capacity of the land in terms of population also diminishes.
The importance of the linkages and synergies for agricultural development, seeing
the benefits accruing to agriculture from the proximity of manufacturing, was not
uncommon in eighteenth-century economics: ‘Husbandry . . . is never more effectually
encouraged than by the increase of manufactures,’ says David Hume in his History of
England ().
Von Thünen’s model pictures all the stages of development inside one nation state,
one labour market, one school and university system, and one social security system.
The synergies that David Hume points to are partly the result of an equal access to basic
institutions and government services accruing to the ‘hunters’ in the outermost circle as
well as to the city dwellers. The local city market does to national agriculture what an
international market can never do. Proximity to a city in the same labour market,
rather than abroad, assures employment for the second and third son on the farm. The
wage pressure from the city activities makes labour more expensive in the countryside,
allowing for technological change that would never be profitable with low wage rates.
The proximity to the city gives access to advanced technology and expertise that a
rural-only nation would never achieve. All in all, von Thünen’s model provides a useful
picture for development as a synergy between town and countryside.
Late in the nineteenth century, in his Principles of Economics (Marshall, ) and in
an earlier work (Marshall and Marshall, ), Alfred Marshall introduces ‘industrial
districts’. In , Alfred Weber publishes Über den Standort der Industrie (Theory of
the Location of Industries). After the Second World War, Botero’s ideas of geography-
based economic agglomerations appear in August Lösch’s The Economics of Location:
A Pioneer Book in the Relations between Economic Goods and Geography (), with
French economist François Perroux as ‘growth poles’ (Perroux, ) and with
Harvard Business School’s Michael Porter as ‘clusters’ (Porter, ). In Italy, Giacomo
Becattini re-introduced ‘Marshallian industrial districts’, and ‘The Third Italy’—the
economic power of the many small and medium-sized enterprises in Central Italy—
generated much attention. In the Third World, the importance Albert Hirschman gave
to ‘linkages’ also reflects this way of thinking.
It is worth noticing that some of these ideas had clear Schumpeterian influences.
August Lösch was a student of Schumpeter in Bonn, and François Perroux wrote a
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
-page introduction to the French translation of Schumpeter’s Theory of Economic
Development ().
. I R: F A
S () A M ()
P K ()
..................................................................................................................................
I apprehend (the elimination of Diminishing Returns) to be not only an error,
but the most serious one, to be found in the whole field of political economy. The
question is more important and fundamental than any other; it involves the
whole subject of the causes of poverty; . . . and unless this matter be thoroughly
understood, it is to no purpose proceeding any further in our inquiry.
John Stuart Mill, Principles of Political Economy ()
Joseph Schumpeter gave Antonio Serra the honour of having been ‘the first to compose
a scientific treatise . . . on economic principles and policy’ (Schumpeter, : ).
Schumpeter’s succinct description of Serra’s work confirms the author’s anti-bullionist
bias, the normal criticism against mercantilists:
Its chief merit does not consist in his having explained the outflow of gold and silver
from the Neapolitan Kingdom by the state of the balance of payments but in the fact
that he did not stop there but went on to explain the latter by a general analysis of
the conditions that determine the state of an economic organism. Essentially, the
treatise is about the factors on which depend the abundance not of money but of
commodities—natural resources, quality of the people, the development of industry
and trade, the efficiency of government—the implication being that if the economic
process as a whole functions properly, the monetary element will take care of itself
and not require any specific therapy.²³
Regardless whether this long theoretical tradition which dominated Europe until the
late eighteenth century be labelled mercantilist, Colbertist, or cameralist, Botero’s
narratives and Serra’s theories in a sense laid the foundations for all three schools by
establishing two crucial dichotomies in economics. The taxonomies Serra established
are important for understanding the wealth and poverty of nations, and indeed provide
a continuing key to what his contemporaries called buon governo, or good government
(Patalano and S. Reinert, ).²⁴
²³ Schumpeter (: ). Note the term ‘economic organism’, which indicates a type of economic
theory based on biological metaphors, rather than on metaphors from physics as is present-day theory.
²⁴ See Patalano and S. Reinert ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Serra’s two dichotomies, I will argue, were in the recent past still part and parcel of all
three dominant ideologies and their economic policies in the s,²⁵ but were
subsequently lost with the formalization of modern neoclassical economics, and are
conspicuously absent in the rather superficial discussion of good governance presented
by the Washington Institutions today. The first is a dichotomy separating economic
activities subject to increasing returns from those subject to diminishing returns.
Putting ‘manufacturing’ in a different category from ‘raw materials’ from the point of
view of policymaking had already been the core element of the English Tudor strategy
from , promoting woollen manufactures at the expense of the export of raw wool
by slowly building up the export duties on raw wool. (For a thorough discussion see
Reinert, .)
There had been scattered references to the wisdom of such practices,²⁶ but what
Giovanni Botero did in his volume was to elaborate the vision of the role of manufac-
turing, the insight that civilization was based on adding knowledge and value to
nature’s raw material, into a full-fledged theory of economic development.
In Botero’s volume the degree of economic and societal development manifested
itself as the ability of a city to hold the maximum number of inhabitants in satisfactory
conditions. This again was the result of the number of different professions that were
exercised in the city: in other words, the degree of division of labour—the degree of
complexity—would determine the wealth of a city. This argument has recently been
convincingly recreated and proven (Hausmann, Hidalgo et al., ). Botero explained
the mechanisms, but Serra’s big contribution was to explain why. He did so by
highlighting the key difference between the production of raw materials and manu-
factured goods, that is, what happens to the development of costs as production is
increased. In manufacturing there were increasing returns, and the synergies of the
multitude of artisanal and manufacturing activities, each of them subject to increasing
returns, produced the synergies, linkages, and cumulative causations that Botero and
Serra saw as the main factor attracting so many people to the city-states that had
specialized in manufacturing.
In the first edition of his Principles of Economics, Alfred Marshall, the founder of
neoclassical economics, emphasizes the crucial importance of diminishing returns:
‘The tendency to a Diminishing Return was the cause of Abraham’s parting from
Lot,²⁷ and of most of the migrations of which history tells’ (Marshall, : ). Today
the migration experienced in Europe is from nations dominated by diminishing-
returns activities (for example, Eritrea) to nations where increasing-returns activities
dominate (for example, Holland).
The second dichotomy is that separating the financial sector from the real economy.
As already mentioned, this dichotomy is of course much older than Serra’s work.
²⁵ I am here referring to communism, fascism, and Roosevelt’s New Deal.
²⁶ Luis Ortiz’s memorandum to King Philip II of Spain is a famous example.
²⁷ Marshall’s footnote here: ‘The land was not able to bear them that they might dwell together; for
their substance was great so that they could not dwell together.’ Genesis xiii.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
An academic expression of the problems that may arise when the financial and
monetary spheres decouple hails back at least to Nicolaus Oresme (c.–)²⁸ and
to the Bible. This dichotomy is not there in Botero’s Greatness of Cities—which
concentrates on the real economy—but it is very much there in Antonio Serra’s
discussion with his contemporary MarcAntonio de Santis on how to deal with the
outflow of money from the kingdom.²⁹ De Santis was of the opinion that the lack of
money in the kingdom was due to the excessively high level of the exchange rate. On
the basis of his theory, several measures had been introduced to manage the rate of
exchange and limit the export of metallic money, without positive results. Serra, on the
other hand, starts by noting that there are countries with no natural supplies of metals
from domestic mines that nevertheless manage to have an abundance of money. In
other words, Serra asks: why on earth do the gold and silver which flow into Spain from
the New World end up accumulating in places like Venice, which have no mines and
raw materials at all?
Serra’s reply was based on Botero’s analysis of what attracted people and resources to
some cities and not to others, above all the abundance of different manufacturing
industries. In other words, the solution to the problems posed by dichotomy two—the
conflict between the financial and the real economy—lies in observing the insights
emanating from dichotomy one: money will leave the cities and countries with no
increasing-returns activities, being attracted to cities with manufacturing and increas-
ing returns. In Schumpeter’s quote above, he emphasizes Serra putting the real
economy centre stage: ‘if the economic process as a whole functions properly, the
monetary element will take care of itself and not require any specific therapy.’³⁰
In fact, digging deeper into Serra’s arguments, we can argue with him that de Santis’s
fiddling with monetary variables—as long as these monetary variables did not posi-
tively affect the health of the real economy—were not only completely in vain, but
potentially destructive to the real economy. The present tragedy of Greece inside the
European Union carries with it the same type of discussion as that between Messrs de
Santis and Serra more than years ago.
The jury is still out on whether the policies carried out from the start of the financial
crisis until the present () by the Federal Reserve—and even more so those of Mario
Draghi and the European Central Bank—again will justify Antonio Serra’s warning:
fiddling around with financial variables, which in reality do not improve conditions in
the real economy, will not help, but will probably worsen the situation. Schumpeter saw
the need for economic ‘cold showers’ provided by financial crises, because unproduct-
ive capital lost its value and the system was reset with a clean slate. From that point of
view, we can ask whether Draghi, by providing more liquidity and more debt, is
currently preventing Europe from taking the necessary ‘shower’, liberating itself from
²⁸ Oresme (). For a recent discussion see Schefold (/).
²⁹ This was a problem of the whole of Spain, not only in the Spanish Viceroyalty of Naples where the
discussions between Serra and de Santis took place.
³⁰ Schumpeter (: ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
a huge debt overhang and kick-starting the real economy. Increasing debt and demand
contraction in vicious circles—as a result of austerity policies—seem to prevent the
virtuous circles that originate in Serra’s increasing returns to scale (that is, falling unit
costs as the volume of production increases).³¹
The key factor being put back into trade theory is, again, increasing returns, and the
key person in the process of rediscovery is MIT’s Paul Krugman. Krugman correctly
observes that economic theory ‘has followed the perceived line of least mathematical
resistance’.³² His explanation is that the reason scale effects were excluded was that the
profession was unable to express these mathematically.
Starting in , Krugman published a series of articles introducing increasing
returns in international trade theory. His article (Krugman, ) models a
world where an initial discrepancy in capital/labour ratio exists between two countries
or groups of countries. A period of increasing international trade follows, where only
the industrial sector works under increasing returns to scale. The result of this is a
world divided into two groups, a rich industrialized centre and a poor underdeveloped
periphery. In this article, one of the very few in which he includes both increasing and
diminishing returns, Krugman, a later recipient of the Nobel Memorial Prize in
Economic Sciences, picks up a model of the increasing/diminishing returns dichotomy
from US economist Frank Graham () and also recognizes the result of this
mechanism: ‘This might mean that in addition to exporting capital, the industrial
region might, in the second stage of growth, begin importing labour—a point also
noted both by John Hobson and by the same Vladimir Lenin.’ Krugman’s references
here place the increasing-vs.-diminishing-returns dichotomy in the context of works
on imperialism by Hobson () and Lenin (). In the same article, Krugman also
refers to development economics and to Myrdal, Frank, Baran, and Wallerstein.
This breakthrough in international trade theory was the result of using models
originating in the study of imperfectly competitive markets in the field of industrial
economics. Krugman inadvertently opened a Pandora’s box, where international
markets are no longer fully competitive, and where countries may grow poorer in the
presence of free trade than under autarky. Paradoxically, the wave of Reaganomics free-
market policies which hit the developing countries in the early s coincided with
the first proof of neoclassical trade theorists that government intervention really could
improve the free-trade situation of a poor country. After the early s, however,
Krugman seems not to have used models with both increasing and diminishing
returns. Schumpeter had referred to using overly abstract models with limited practical
relevance such as Ricardian trade theory as ‘the Ricardian Vice’. To this I added the
³¹ It should be noted that empirically it may be difficult to distinguish the effects of increasing returns
to scale from the effects of technological change, simply because advanced techniques only exist in large-
scale production (Henry Ford’s technology did not exist in small-scale production). Schumpeter
therefore suggests using the term ‘historical increasing returns’ to cover the combined effects of scale
and technological change (Schumpeter, : ).
³² Krugman (: ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
concept of ‘the Krugmanian Vice’: having much more relevant theory but refusing to
apply it in practical economic policy.
The core of nineteenth-century protectionism is exactly what Krugman points out:
by protecting the national market for national industries the market was extended,
because the increasing returns which accrued to new industries more than outweighed
the initial increase in price caused by the protection. A higher initial price for industrial
goods was traded off for an even higher increase in real wages and profits in the
protecting nation—a phenomenon which is inexplicable without the existence of
imperfect competition and/or increasing returns. The worker as a wage earner would
be more than compensated for the initially higher prices that the same person would
have to pay as a consumer.
. H E A D,
L C, S
T C
..................................................................................................................................
Figure . ranks the development of fifty-one industrial sectors in the United States
from to according to three factors: (a) the increase in production (output),
(b) the number of employees (wage earners) in the industry, and (c) the increase in
productivity (measured as the lowered use of manpower behind each unit of produc-
tion). The sector with the highest increase in output, almost , per cent, was the
automotive industry. In this industry, however, the number of wage earners only
increased by just over , per cent. The number of wage earners per unit of product
(the third column) was reduced by more than per cent. Figure . is also an
indication of Verdoorn’s Law: that industries with the largest increase in volume of
production also tend to present the largest growth in productivity.³³
Assuming perfect competition, the differences in Figure . would not have had
any impact on the rate of economic development in countries that had an automotive
industry vs. countries that did not. In reality, however, the automotive industry became
a wage leader, pulling up the general wage level in the United States. In March ,
Henry Ford doubled the wages of his workers, from US$. a day to $ a day. The
Marshall Plan policy to distribute important high-growth/high-productivity-growth
industries among all large nations dominated until the end of the s. Italy’s car
industry was protected from foreign competition by an annual import ceiling of ,
engines for assembling the Italian version of the Morris Mini, the Innocenti. With the
integration of Spain into the EEC during the s, tariffs were lowered gradually,
³³ Verdoorn ().
Percentage
change
Industry Industry
200,000
1 Automobiles, incl. bodies and parts 27 Cotton goods
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
2 Chemicals, industrial, incl. compressed gases and rayon 28 Hats, wool–felt
INDIVIDUAL MANUFACTURING INDUSTRIES 3 Petroleum refining 29 Shoes, leather
20,000 Change in physical output, wage earners employed, and 4 Beet sugar 30 Cane sugar
5 Fruits and vegetables, canned 31 Salt
wage earners employed per unit of product, 1899–1937 6 Ice 32 Meat packing
7 Glass 33 Cottonseed products
10,000 Output 8 Paper and pulp 34 Leather
8,000 9 Silk and rayon goods 35 Woolen and worsted goods
Wage earners 10 Knit goods 36 Liquors, malt
6,000 Wage earners per unit 11 Printing and publishing, total 37 Shoes, rubber
12 Butter, cheese, and canned milk 38 Carpets and rugs, wool
4,000 13 Cigars 39 Lead
14 Rice 40 Cordage and twine
15 Paints and varnishes 41 Gloves, leather
16 Coke-oven products 42 Hats, fur–felt
2,000 17 Zinc 43 Chewing and smoking tobacco
18 Liquors, distilled 44 Flour
19 Steel–mill products 45 Ships and boats
20 Tanning and dye materials 46 Cars, railroad
1,000 21 Copper 47 Lumber-mill products
800 22 Explosives 48 Turpentine and rosin
23 Wood–distillation products 49 Linen goods
600 24 Fertilizers 50 Locomotives
25 Blast–furnace products 51 Carriages, wagons, and sleighs
400 26 Jute goods
200 200
100 100
0 0
–20 –20
–40 –40
–60 –60
–80 –80
–90 –90
Ratio scale
–95 –95
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51
Industry Industry
. How industries differ
Source: Fabricant (1942).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
while support was given to local industries, particularly to the important Spanish
automotive industries with many subcontractors. The last per cent duty on Japanese
cars imported into the European Union was abolished in December . Although the
theoretical reasons for these policies were gone from the Washington Institutions
paradigm, in the rich countries the policies themselves lingered on in practice.
During what we could call the nation-based development paradigm, most countries
had the whole range of production represented in Figure .. There was of course
much trade, but mostly symmetrical trade: France and Germany exporting cars to each
other. Smaller countries also had car production: Holland had their DAF and Yugo-
slavia had a car called the Yugo, rudimentary and inexpensive. But with globalization
came Daewoo and Hyundai from a military-dominated South Korea, where wages
were lower than in Yugoslavia. Korea’s strategic significance for the United States—
especially after the defeat in Vietnam—allowed Korea to use protectionist rules,
contrary to what was prescribed by the Washington Consensus. An independent
communist Yugoslavia could not, and the Yugo disappeared.
This is but one very brief example of what happened when the global economy took
over from the nation-based economy. Many countries lost the high value-added
activities on the left side in Figure ., and world trade became much more of a
winner-takes-all game (see Table .).
Figure . shows a virtual ‘productivity explosion’ in the automotive industry to the
left in the graph. Figure . shows the First Industrial Revolution as another such
‘productivity explosion’. All European countries attempted to get their share of this by
attracting such activities to their own states: they would bring higher wages, higher
profits, and higher tax incomes to the state treasury.
Table 19.1 How the game changed
Nation-based capitalism Global capitalism
High-tech, high-growth industries present High-tech, high-growth industries disappear in
in all countries of any size peripheral countries (from Greece to Mexico)
Move advanced economic activities to Move human beings from one country to the other.
lagging countries
Adjust exchange rates (Europe) Freeze exchange rates (Europe)
Create jobs in order to solve crises (Keynes) Create money in order to solve crises (EU Central Bank
President Mario Draghi)
Strong government and labour unions Gradual power shift to the financial sector (the rule of
(balance of countervailing powers) the one per cent)
Harmonization (harmony created through Polarization (spontaneous chaos)*
economic policy)
Note: My book Spontaneous Chaos was published in Norwegian in 2009 and has been translated into
Russian and Serbian.
Source: Author.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
An early productivity explosion
The mechanization of cotton spinning in the first paradigm
Ave. annual 30.0
increase in
productivity
25.0
20.0
15.0
10.0
5.0
0.0
1750 1800 1850 1900 1950 2000 2050
Years
. Productivity explosion: cotton spinning
Source: Carlota Pérez/Reinert (2008).
18
16
Man-hours required by best-practice methods
14 of producing a pair of medium-grade men’s
shoes at selected dates in the United States
12
10
Year Man-hours per pair
8
1850 15.5
6 1900 1.7
4 1923 1.1
2 1936 0.9
0
1850 1900 1923 1936
. US learning curve in men’s shoes, –
Note: An important aim for industrial policy is to produce where the learning curves are steep.
Source: Reinert (1980).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Figure . shows similar dynamics in the form of a learning curve, plotting the
number of man-hours per unit of production. A similar tool—the experience curve³⁴—
plots the lowering of total costs. These are useful tools for any industrial policy
research. The natural dynamics of global competition tends to farm out mature
products with flat learning curves to poor countries: the lack of technical change
means that such products appear ‘labour intensive’ and as such suitable for low-wage
countries. The mechanism—that technological dead-ends tend to be farmed out to
poor countries—is a key tool automatically reinforcing the vicious circles of national
poverty.
. O ‘Q’ E
A: B E,
H S, D
I C
..................................................................................................................................
Salomon Fabricant’s chart—reproduced as Figure .—shows the vast differences in
volume of production, productivity growth and employment between various US
industries in the early twentieth century. However, the chart does not distinguish
between qualitatively different types of competition.
By the time the third edition of his Principles of Political Economy and Taxation
() appeared in , David Ricardo had probably heard that the extensive use of
machinery might make his theory of comparative advantage invalid. In this edition
Ricardo therefore explicitly assumed that the use of machinery would simply lower the
price of the goods. In that case, Fabricant’s taxonomy of economic activities would not
have any consequences. Especially so because David Ricardo’s trade theory—the
essence of modern capitalist trade theory—does not at all consider capital as a factor
of production. The assumption behind this theory—one which was later to be picked
up by Karl Marx—is the labour theory of value.
On the basis of this I distinguish between two types of competition. One is classical
competition, based on the classical economist David Ricardo, where the only thing
technological change does is to lower the prices of production. Its counterpoint,
collusive competition, is collusive in the sense that, as a result of dynamic imperfect
competition and high barriers to entry, capitalists (profits), workers (wages), and
government (taxes) are able to ‘collude’ and prevent prices from falling at the same
rate as the productivity increases (Reinert, ). This is a main reason why industrial
policy is important. Table . sets out the mechanisms which create, respectively,
collusive and classical modes of diffusion of productivity improvements.
³⁴ Boston Consulting Group ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Table 19.2 Characteristics of the collusive and classical modes of diffusion of
productivity improvements
Collusive Classical
Characteristics of mode
Divisibility of investments Indivisible, comes in ‘chunks’ Divisible
Degree of perfect Imperfect (e.g. patents, internal Perfect (competitive market for
information R&D) technology itself)
Source of technology from Internal, or external in big External
user company point of chunks = high degree of
view economies of scale
Barriers to entry Increase No change
Industry structure Increases concentration Neutral
Economies of scale Increase No change
Market shares Very important Unimportant
How benefits spread
GNP as measured Highly visible (at producer level) Tends not to appear (Solow-
paradoxes)
Profits level Increases stakes: possibilities for No change
larger profits or losses
Monetary wages Increase No change
Real wages (nationally) Increase Increase
Price level No change Decreases
Terms of trade No change Turns against industries
experiencing technological
progress
Examples of innovations in New pharmaceuticals, Electricity, online sales of hotel
the two groups automotive paint production, bookings and used books, use of
Microsoft, Google, Facebook PCs, dispersion paint
production, containers
Where found Traditionally mainly in industry, In primary and tertiary industry,
in recent products and use of new basic technologies,
processes, in IT-related mature industry
monopolies
Source: Reinert (1994), modified.
In Fabricant’s graph (Figure .) we find that industry , beet sugar, appears to have
a very high score in output and productivity increase. However, we can safely assume
that a commodity like sugar will operate under near-perfect competition, so we cannot
expect profits or wages to increase as they do in the automotive industry. In fact we find
that in all developed countries beet sugar—which in productivity is inferior to tropical
cane sugar—is, like so many agricultural products, subsidized by governments.
The conceptual quality index of economic activities (Figure .) adds the dynamics
of profits, wages, and taxes from oligopolistic competition and the lack of such
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
innovations
new technologies
Dynamic imperfect competition
(high-quality activity)
Characteristics of high-quality
activities
• new knowledge with high market value
• steep learning curves
• high growth in output
• rapid technological progress
• high R&D content
• necessitates and generates learning-by-
doing
• imperfect information
Shoes (1850–1900) • investments come in large chunks/are
indivisible (drugs)
• imperfect, but dynamic, competition
• high wage level
Golf balls
• possibilities for important economies of scale
and scope
• high industry concentration
Automotive paint • high stakes: high barriers to entry and exit
• branded product
• produce linkages and synergies
• product innovations
• standard neoclassical assumptions irrelevant
Characteristics of low-quality activities
• old knowledge with low market value
• flat learning curves
• low growth in output
• little technological progress
• low R&D content
• little personal or institutional learning required
House paint • perfect information
• divisible investment (tools for a baseball
Shoes (2020) factory)
• perfect competition
• low wage level
Baseballs • little or no economies of scale/risk of
diminishing returns
• fragmented industry
• low stakes: low barriers to entry and exit
Perfect competition
• commodity
(low-quality activity)
• produce few linkages and synergies
• process innovations, if any
• neoclassical assumptions are reasonsable
proxy
. The quality index of economic activities
Source: Reinert (1994: 184).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Table 19.3 ‘Good’ and ‘bad’ economic activities
Characteristics of economic activities that are Characteristics of bad/unsmart economic
good/smart to specialize in activities
Increasing returns to scale (higher volume = Diminishing returns (higher volume = higher
lower costs) costs, after a point)
Rapid technological development (steep learning Slow technological change (flat learning curves)
curves)
Technical change leads to higher wages to the Technical change tends to lower prices to the
producers (Fordist wage regime) consumers
Dynamic imperfect competition Perfect competition (commodity competition)
Have stable prices Show strong price fluctuations
Generally skilled labour Generally unskilled labour
Create a middle class Create ‘feudal’ class structure
Irreversible wages (‘stickiness’ of wages) Reversible wages
Create large synergies (linkages, clusters) Create few synergies
Source: Reinert (2007).
Table 19.4 Average wage per cluster category in Europe, based on 255 European
regions
Cluster category Average Cluster category Average
wage, € wage, €
Aerospace 44,718 Paper products 24,995
Financial services 43,930 Sporting and children’s goods 23,498
Biotech 42,384 Building fixtures 22,827
Pharmaceuticals 40,735 Stone quarries 21,183
Analytical instruments 39,519 Processed food 20,993
Chemical products 38,381 Construction 20,894
Information technology 37,360 Construction materials 20,063
Oil and gas 36,073 Textiles 17,902
Telecommunication equipment 35,960 Jewellery and precious metals 16,303
Production technology 32,371 Furniture 16,131
Automotive 29,399 Leather products 15,594
Plastics 29,066 Maritime 14,274
Medical devices 28,927 Tourism and hospitality 13,961
Power generation and transmission 28,927 Agricultural products 13,852
Lighting and electrical equipment 28,767 Tobacco 13,567
Transportation and logistics 27,462 Education and knowledge creation 13,132
Heavy machinery 26,393 Apparel 11,885
Metal manufacturing 26,269 Footwear 11,238
Business services 25,964 Entertainment 11,034
Distribution 25,888 Farming and animal husbandry 3,859
Media and publishing 25,556
Source: http://www.foreurope.eu/fileadmin/documents/pdf/Workingpapers/WWWforEurope_WPS_no014_
MS47.pdf. Accessed September 2019.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
dynamics from perfect competition (commodity competition) to Fabricant’s graph.
New inventions and innovations enter at the top—initially under near-monopoly
conditions—but fall, with very different gravity, towards perfect competition. Eco-
nomic theory generally only defines well monopolies (black, at the top of the quality
index) and perfect competition (white, at the bottom).
Most economic activities are in between, and in the absence of new innovations tend to
fall towards perfect competition. For example, when a patent expires on a medicine,
this product would experience a sharp drop on the quality index (towards perfect
competition). As a product matures and the learning curves flatten out (Figure .),
the same thing will happen. The fact that only continuous innovations will secure
continuous profits is the main source of dynamism in an economy. Rich countries
produce goods with a high score on the quality index, poor countries tend to produce
goods with a low score (see Reinert, , for more details).
These dynamics make it possible to theorize about industrial policy around ‘good’
and bad’ economic activities, and around the recent EU concept of ‘smart specializa-
tion’ and its counterpart, ‘unsmart’ specialization (Reinert, ). Table . sets out
their contrasting characteristics.
Empirically the effect of these activities can be measured as in Table ..
. C I P
..................................................................................................................................
Two recent works on early economics bestsellers—defined as economics books appear-
ing in ten editions or more before (Reinert et al., )³⁵—reveal that many works
in economics, which were very influential in their time, are today virtually forgotten.
And forgotten to the extent that there are not even entries on them in Wikipedia.³⁶
In this context we shall only mention one work, published by Joshua Gee in ,
which is typical of English industrial policy before Adam Smith. It is also typical of
much of English colonial practice until long after Smith and Ricardo.
The massive title, in the tradition of the day, reads:
The trade and navigation of Great-Britain considered: shewing that the surest way
for a nation to increase in riches, is to prevent the importation of such foreign
commodities as may be rais’d at home. That this Kingdom is capable of raising
within itself, and its colonies, materials for employing all our poor in those manu-
factures, which we now import from such of our neighbours who refuse the admission
of ours. Some account of the commodities each country we trade with take from us,
and what we take from them; with observations on the Balance.
London: Printed by Sam. Buckley, in Amen-Corner. MDCCXXIX
³⁵ Reinert et al. () and Reinert and Reinert ().
³⁶ This has recently changed as my students at Tallinn University of Technology have been writing
such entries as partial fulfilment of their course obligations.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
There were at least twenty editions of Gee’s work between and , and the
issues are unusually widely spread geographically. There are English editions published
in London, Glasgow, and Dublin, French translations (the first in ), published in
London, Amsterdam, and Geneva, Dutch (), Spanish (), and German
(in Copenhagen, ).
One factor leading both to the geographical spread of this book, and to its later
oblivion is probably that Gee was not only very straightforward when he described
England’s interest in protecting its manufacturing industry, he was also unusually
honest about the intention of colonialism being the opposite, to hinder manufacturing
in the colonies:
That all Negroes shall be prohibited from weaving or spinning or combing of Wool,
or manufacturing hats . . . Indeed, if they set up manufactures, and the Government
afterwards shall be under a Necessity of stopping their progress, we must not expect
that it will be done with the same ease that now it may.
At the time it must have occurred to those who published the edition of Gee’s
volume that not only were blacks subject to this policy, so was Ireland. In , John
Hely-Hutchison—then Provost of Trinity College, Dublin—anonymously published
The Commercial Restraints of Ireland considered in a series of letters addressed to a
Noble Lord, containing an historical account of the affairs of that Kingdom, so far as they
relate to this subject (Hely-Hutchinson, ).³⁷ The English authorities thought Hely-
Hutchinson’s book protesting against the prohibition on exporting woollen manufac-
tures from Ireland so insidious that it became the last book in the United Kingdom to
be publicly burned by the hangman.
Joshua Gee was a contributor to the journal The British Merchant which opposed a
commercial treaty that would have established free trade with France. The polemical
articles from this journal were published in in three volumes as The British
Merchant; or, Commerce preserv’d, with Charles King as the author/compiler, and
became another bestseller (King, ).
Together with Charles King and John Cary (Cary, : see also S. Reinert, ),
Joshua Gee’s volume probably scores higher than any other book on this list on what
we could call the ‘fame to oblivion axis’: compared to their popularity at the time these
volumes seem to be the least remembered today. These were the three authors who
probably were the most honest in explaining the policies that were actually carried out
by the English. They show, without modesty, that the industrial policy of colonialism
was preventing manufacturing from taking place in the colonies.
This was, of course, an important reason for the United States to wish independence
from England, an event which caused another economics bestseller—that of Alexander
Hamilton ()—to clearly spell out the reasons why the United States would not be a
wealthy country without a manufacturing industry.³⁸
³⁷ Dublin, William Hallhead, . For the reproduction of a second edition (Dublin, M. H. Gill
& Son, ), see http://www.gutenberg.org/files//-h/-h.htm.
³⁸ Hamilton ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
. T M P N
R E
I, T, P
D
..................................................................................................................................
There is a phase of this matter which is both interesting and serious. The farmer
has always produced the foodstuffs to exchange with the city dweller for the other
necessities of life.
This division of labor is the basis of modern civilization. At the present time it is
threatened with breakdown.
George Marshall, announcing the future Marshall Plan,
Harvard University, June (emphasis added)
Curiously the immediate post-Second World War era saw two contradictory types of
economic theory grow simultaneously. On the one hand, with the Marshall Plan,
we saw, at the practical level, a repeat of the principles that this chapter has traced back
to England in the s: the only way to create widespread national wealth is through
industrialization. Indeed, the Marshall Plan re-industrialized Europe, but also created a
‘sanitary belt’ of wealthy industrial countries around the communist block from
Norway in the North-west via Italy, Greece, and Turkey to South Korea and Japan in
the North-east. On the other hand, Paul Samuelson’s theoretical papers in The Eco-
nomic Journal in and (cited in section .), based on Ricardian trade
theory, argued almost the exact opposite: whatever you produced, international trade
tended to create ‘factor price equalization’.
The two opposite theories—that manufacturing was needed for wealth creation and
that it was not—lived side by side, but slowly, as the Cold War developed, Samuelson’s
theory got the upper hand over years of experience. The Washington Consensus
ideology triumphed over the Marshall Plan ideology, which had also been hatched in
Washington. While the Marshall Plan ideology successfully stopped the spread of com-
munism, the Washington Consensus—especially after the death of communism—in effect
put back the old type of colonial policy: surprisingly, with the thinly veiled excuse of David
Ricardo—which hardly anyone had listened to until the Cold War—as its main tool.
The UN institutions, including UNCTAD and initially UNIDO, defended the old
Marshall Plan order, while the Washington Institutions—the International Monetary
Fund (IMF) and the World Bank (WB)—started basing their recommendations on the
Ricardo/Samuelson theories. As the communist threat waned, a Washington-based
type of neo-colonialism was initiated, often with disastrous economic results.³⁹
³⁹ There are several examples in Reinert (). On Mongolia as a particularly ugly example, see
Reinert (: ‒).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
At the very core of the Marshall Plan was a profound understanding of the
relationship between a nation’s economic structure and its carrying capacity in terms
of population density. We argue that it is necessary to rediscover this theoretical
understanding—which has profound implications for trade and industrial policy—in
the mutual interest of poor and rich countries.
In early , worries grew in Washington that an impoverished Germany, where
manufacturing industry had been forbidden under the Morgenthau Plan, would fall an
easy prey to the Soviet Union. US President Truman therefore sent former president
Herbert Hoover on a fact-finding mission to Germany. One powerful sentence in
Hoover’s report of March zeroed in on the basic problem:
There is the illusion that the New Germany left after the annexations can be
reduced to a ‘pastoral state’ [i.e. a country without industry]. It cannot be done
unless we exterminate or move ,, out of it.⁴⁰
Hoover understood that the population density of a country is determined by its
economic structure. Industrialization makes it possible to dramatically increase the
population-carrying capacity of a nation. ‘Exterminate’ was a very strong word to use
after the horrors of the Second World War, and everyone understood that there was no
place where million Germans could be sent. Re-industrialization was the only
option.
The lesson from the Marshall Plan is that only extreme danger, in this case a
communist takeover of Germany, will convince the West temporarily to give up
what has been called ‘free-trade imperialism’. Temporarily, we argue, two events
come together that may enable a rediscovery of the relationship between the economic
structure and population densities of nations, and consequently benefit Africa.
At the moment—facing a situation similar to that of England after the crisis—
the United States under Donald Trump is withdrawing from the ideology of free trade.
‘Donald Trump can embed a single visceral truth in a welter of falsehoods,’ wrote Rana
Foroohar in The Financial Times in . The ‘visceral truth’ is that David Ricardo’s
trade theory is being marginalized. The last time that Ricardian trade theory
collapsed—in the s—marked the start of a process of industrialization in Latin
America that lasted for decades. We argue that the current situation similarly presents
a major opportunity for Africa and other poor countries.
A second event is migration. In , Herbert Hoover stated the facts regarding
industrialization and population density. However, Alfred Marshall, the founder of
neoclassical economics, in his textbook Principles of Economics, had already
provided a framework of understanding: activities subject to diminishing returns
(agriculture, mining, fisheries) must after a point shed population, while activities
subject to increasing returns attract population. As mentioned before, Marshall empha-
sized the huge impacts of diminishing returns: ‘This tendency to Diminishing Returns
was the cause of Abraham’s parting from Lot, and of most of the migrations of which
⁴⁰ Quoted in Baade ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
history tells.’ This includes the present migration from Africa, we argue. In an attempt
to show us the age of this fundamental insight—as we have seen in the footnote in
section .—Marshall refers to Genesis xiii: : ‘And the land was not able to bear them
that they might dwell together; for their substance was great so they could not dwell
together.’⁴¹
Alfred Marshall essentially rediscovered what was already old knowledge. All over
Europe, development economics of the s and well into the s was dominated
by the insights of Giovanni Botero’s On the Greatness of Cities (), a work that
appeared in more than forty editions in all the main European languages. Botero
explained why the only ‘islands’ of wealth in Europe were a few cities, such as Venice,
Amsterdam, and Florence, where adding value to raw materials, producing manufac-
tures, was the key to wealth. In , Antonio Serra⁴² added the basic theoretical
foundation to this: the production of raw materials was subject to diminishing returns,
while manufacturing was subject to increasing returns. Consequent productivity
increases and barriers to entry made it possible for manufacturing cities simultaneously
to raise wages and lower the cost of their goods.
Centuries of trade policy followed the principles of Botero and Serra all over Europe
and in the United States. Former World Bank Chief Economist Justin Yifu Lin put it
very succinctly: ‘Except for a few oil-exporting countries, no countries have ever gotten
rich without industrialization first.’⁴³
In line with this analysis, we suggest it is time for Africa and poor countries
elsewhere to follow Alfred Marshall’s recommendation: ‘One simple plan would be
the levying of a tax by the community on their own incomes, or on the production of
those goods which obey the Law of Diminishing Returns, and devoting the tax to a
bounty on the production of those goods with regard to which the Law of Increasing
Returns acts sharply.’⁴⁴ Here Marshall describes what all presently wealthy countries
have done, mostly through the protection of increasing returns activities through
tariffs, ever since England in the s started to tax the export of raw wool, while at
the same time subsidizing the local production of woollen cloth. This was the essence
of import-substitution industrialization that took some non-Western countries out of
economic colonialism. For centuries, colonies were essentially areas where the produc-
tion of most industrial products was prohibited, as in the United States until .
The United States under Donald Trump is now ideologically and indirectly paving
the way for the industrialization of Africa. This must be an industrialization not
primarily focused on the nation state, as Latin America’s industrialization was. Nor
can it be based primarily on supplying global markets, as East Asia’s industrialization
was. It must be focused on the African continent, producing industrial goods that rich
countries take for granted, but whose production has not reached Africa to any extent.
An unintended consequence of the apartheid boycott of Zimbabwe was the rapid
growth of the country’s industrial sector, which reached more than per cent of
⁴¹ Marshall (: ). ⁴² S. Reinert (). ⁴³ Lin (: ).
⁴⁴ Marshall (: ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
GDP. Recently, de-industrialization there has rapidly increased outward migration,
proving the principle Herbert Hoover explained in still true.
A consequence of Africa’s industrialization could very well be reduced migration
because more Africans will be able to find jobs in Africa. In , a possible communist
takeover of Germany was a sufficient threat for the West to temporarily abandon free-
trade imperialism. The threat now is the million people worldwide who were
undernourished in , according to the FAO. Migration cannot solve their problems.
Industrialization can. We can only hope the West sees the light after the
Coronavirus crisis as it did in .
. ‘I’: A F A
R A C
E D
..................................................................................................................................
Early economic theory saw strong arrows of causality between the modes of production
of a society and its social and economic structures. Arab economist Ibn Khaldun
(–) concluded that ‘the differences between different peoples arise out of
the differences in their occupations’.⁴⁵ Francis Bacon, a scholar who was heavily
influenced by Giovanni Botero,⁴⁶ wrote in his Novum Organum () that ‘there is
a startling difference between the life of men in the most civilized province of Europe,
and in the wildest and most barbarous districts of New India. This difference comes not
from the soil, not from climate, not from race, but from the arts.’ The same point is
strongly emphasized by German economist Karl Bücher (–) in his bestseller
Die Entstehung der Volkswirtschaft () in the English translations rendered as
Industrial Evolution.
This way of thinking represents an attempt to systematize the understanding of
different categories of human societies—much in the same way as Linnaeus did with
plants—freeing economics from what Nobel Laureate James Buchanan called the
equality assumption in economic theory. In English economist Charles King
made a classification of international trade in the same spirit as the quality index
presented in this chapter. Importing manufactured goods and exporting raw material
was ‘bad trade’ for a country, while importing raw materials and exporting manufac-
tured goods was ‘good trade’. Interestingly, exchanging manufactures for other manu-
factures was considered ‘good trade’ for a nation. The principle expressed by King was
based on the same observations as those of Giovanni Botero () and Antonio Serra
(). UNCTAD’s idea of symmetrical trade as being good for all trading partners
years later recalls King’s ideas.
⁴⁵ Ibn Khaldun quoted in Issawi (: ). ⁴⁶ See Trace ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
The craving for taxonomies also created the so-called stage theories,⁴⁷ to which
Adam Smith also subscribed. In German these theories have recently been referred
to as Wirtschaftsstile,⁴⁸ which implicitly emphasizes the fact that different economic
styles—or stages—may coexist at the same time in different places.
At the core of stage theories is that the mode of production—that is, whether you are
in the Stone Age or the computer age—will determine your institutional structure. In
this stage tradition, the structure of production tends to influence the institutional
structure more than the other way around.⁴⁹
On a personal note, having worked with pastoralists in the high Andes and with
Saami reindeer herders in Northern Fennoscandia, I can testify to the striking simi-
larities in the social organization of pastoralists under extreme climatic conditions in
such different areas and cultures. Here, as under other extreme climatic conditions, the
market economy has not penetrated (other than in the extraction of minerals). These
societies have sequential usufruct of land over the years, not private property.
Clearly some institutional innovations are crucial to economic development.
Primogeniture—the right of the firstborn legitimate son (or child) to inherit his parents’
entire estate—has created stability in European kingdoms compared, for example, to the
Arab world. In agriculture, primogeniture prevented farm sizes from diminishing
into or beyond self-sufficiency. Werner Sombart, the great historian of capitalism,
sees the birth of two institutions—double-entry book-keeping and bankruptcy—as the
two key institutional ingredients making the system possible. Historically these
institutions bring us back to Venice in the twelfth and thirteenth centuries.⁵⁰
However, it is generally most useful to see institutions being born out of the mode of
production itself, as in the quotes from Ibn Khaldun and Francis Bacon above. With
their book Why Nations Fail: The Origins of Power, Prosperity, and Poverty ⁵¹
Daron Acemoğlu and James Robinson in practice come to the defence and salvation of
neoclassical trade theory by blaming former European colonies for not ‘getting the
institutions right’. They seem to disregard the key point that the ‘extractive institutions’
they blame for the lack of development represent the very essence of Western coloni-
alism. When explaining that ‘North America became more prosperous [than Peru and
Mexico] precisely because it enthusiastically adopted the technologies and the advances
of the Industrial Revolution’ (: ), Acemoğlu and Robinson leave out that Peru
and Mexico for a long time were colonies, and that a key element in colonial policies
was precisely to prohibit manufacturing there (see Gee, ). When Peru and Mexico
later gained formal independence, they were still de facto colonies, as power just shifted
from Spaniards in Spain to Spaniards residing locally,⁵² with the same vested interests
⁴⁷ Meek (). ⁴⁸ Schefold (/).
⁴⁹ Some anthropologists argue that the institution of cannibalism tends to appear in environments
with limited sources of animal protein, for example in Central America and the Caribbean. The
conditions create the institutions, not the other way around.
⁵⁰ Mueller and Lane (). ⁵¹ Acemoğlu and Robinson ().
⁵² Bollinger ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
in exporting raw materials.⁵³ In this way Acemoğlu and Robinson, far from attacking
the colonial policies we have emphasized in this chapter, appear to be blaming the
victims of colonialism for their own poverty.
I would argue, in the Bücher tradition, that the Venetians did not invent an official
property register (catasto), around , later to create capitalism, but rather because
the capitalist growth of the city created a need for the property register. The problem
appeared before the solution. Likewise, one could argue that the Venetians did not
invent insurance, and then—based on this—start long-distance trading. Rather, one
would argue that the previous system of spreading risk through ever smaller percent-
ages of ownership of ships and cargo became impracticable because of the many
owners, and that the impracticability of this fractionalized ownership is the origin of
a system of insurance: instead of diluting ownership, risk was externalized. In practice,
economic activities and their institutions co-evolve, and the first geographical area
where this process of co-evolution created capitalism was in the twelfth-century Italian
city-states.⁵⁴
In short, historical observations tend to reverse the arrows of causality in eco-
nomic development compared to the formal theorizing of modern institutional
economics (as opposed to the classical institutional economic of Thorstein Veblen
and his contemporaries).
. W I P I
C R T T
..................................................................................................................................
Economists are unlikely to say to their children: ‘My son (or my daughter), I have
observed your efficiency in washing the dishes. It is clear to me that you have a
comparative advantage in this activity, and I would recommend a career washing
dishes in restaurants.’ As a parent, the economist would react according to the pre-
Ricardian logic we have described in this chapter. As an economist—advising the
children of Africa—their advice would be based on David Ricardo.
This is a clear example of what US economist Thorsten Veblen warned against: that
formal education might contaminate healthy human instincts (Reinert and Viano,
). Exoteric knowledge—practical and intuitive knowledge—could with higher
education be lost to much more prestigious but of little practical use—esoteric
⁵³ There were examples of local industrial policies in Latin America, in Peru when the exports of
silver had died out and before guano exports started, and in Brazil before gold was found in the province
of Minas Gerais. But the local elites fell back on traditional raw material exports whenever a new
commodity became available. In that way the industrial mentality hardly had a chance to be established.
⁵⁴ The massive work on Der Moderne Kapitalismus by Werner Sombart (–) argues for the
origins of capitalism in the Italian city states. A first English translation of the four-volume edition
of this work is scheduled to be published as Modern Capitalism (Springer, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
knowledge, such as Ricardian trade theory. As already referred to, Schumpeter referred
to this as ‘the Ricardian Vice’; bringing the theory to such a high level of abstraction
that it became irrelevant.
It is also intuitively obvious that, in spite of the theories of David Ricardo, free trade
between a Stone Age society and a computer-age society will not tend to produce factor
price equalization. A similar intuitive reasoning made presidential candidate Bill
Clinton in advocate high-tech industries. The reply from George H. W. Bush’s
economic adviser Michael Boskin came straight out of the neoclassical economic
textbook: ‘computer chips, potato chips, what’s the difference?’ With time, Boskin
seems to be on the losing side when it comes to US industrial policy, but not when it
comes to US trade policy towards Africa.⁵⁵
. N: A ‘I’
P S A
..................................................................................................................................
The twentieth century was dominated by standardized mass production. Henry Ford’s
statement in that ‘any customer can have a car painted any color that he wants so
long as it is black’ expresses the need to standardize in order to keep costs down.
Gradually, and especially with the introduction of information technology, it was
possible to produce smaller runs. The need for standardization diminished.
In agricultural production, more so in Northern than in Southern Europe, stand-
ardization increased as a by-product of the economic crisis of the s. Some
agricultural economists claim, probably correctly, that agriculture is the first economic
activity to enter into an economic crisis and the last to leave it. Due both to market
power and to strong unions, during the crisis of the s the industrial workers who
kept their jobs tended to keep their wages. The crisis had a completely different effect
on agriculture: farmers’ sales prices and their incomes fell precipitously. John Stein-
beck’s The Grapes of Wrath captures the drama of the situation.
After the Second World War it was understood that farmers could not produce their
way out of their problems; this would only cause overproduction and falling prices.
Agriculture was seen as needing more market power, and in that sense agriculture
ought to be more like industry. For this reason, national farmers’ cooperatives were
given monopoly powers, and in the United States agriculture was (and still is) exempt
from anti-trust and often heavily subsidized.
⁵⁵ As an early confrontation between neoclassical economics and common sense this quote is
precious. But potato chips unfortunately are not a good example to use in international trade. This
product is very intensive in transportation costs and is normally not carried over long distances.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
This brought agricultural production, previously locally based, into the logic of
Fordist mass production. While previously in Europe every farm, or every region or
valley, had its own cheese, cheese production became more and more industrialized
and more and more standardized. This coincided with the rise of big supermarket
chains that came to dominate the retail food market. Farm products became bulk
products, and when competition slowly opened up the farmers found themselves in the
clearly inferior position of being specialized in bulk products, basically left to compete
on price alone. A very ‘bad specialization’.
In Southern Europe the local and regional pattern survived much longer, and big
supermarkets also came to dominate later there than in Northern Europe. People
wanted their local cheese and their local salame, so price competition between bulk
producers was much less dominant. The local niche products, and with them decen-
tralized production, survived.
General de Gaulle once rhetorically asked: ‘How can you govern a country which has
varieties of cheese?’ According to a book on Italian cheeses, Italy beats that number
by more than varieties, registering different varieties of cheese.⁵⁶ Having
avoided the bulk- and mass-production paradigm, French and Italian cheese, as well
as some cheeses from Spain and Switzerland, became a ‘smart specialization’.
The organizational principle of Fordist mass production in bulk was economies of
scale in hierarchies, while ‘smart specialization’ depended on economies of scope
among small players in networks. Competition here is based on quality and product
differentiation, not on price as in the mass-production paradigm.
In agriculture and food production there is today ever-increasing diversity, more so
in Southern Europe than in Northern Europe and the United States. Italy has of course
hundreds of different types of pasta, and this diversity multiplies because regional
differences between pasta types—often with the same names—are enormous. The
casoncelli of Lombardy—a kind of ravioli—are very different in Cremona from those
in Bergamo or Brescia. In many ways this Italian diversity is a remnant of pre-Fordism.
More than most countries, France and Italy have managed to preserve variety in food
and agriculture, while at the same time utilizing the industrial economies of scale. At
the other extreme of the scale, Norway, with only about million people, was probably
the country where Fordist mass production—killing off previous niches—most came to
dominate agricultural production, both meat and milk.
The development and importance of diversity is illustrated by figures from modern
biological research. Figure . is from Harvard biologist Stephen Jay Gould’s
() Full House: The Spread of Excellence from Plato to Darwin. The illustration
shows the evolution of the diversity of biological species from a common ‘ancestor’.
In the case of horses, it would be a kind of Urpferd or Sifrhippus. Each end point
further to the right represents a new biological variety descending from the same
‘ancestor’ (to the left in the drawing), like Shetland ponies, Peruvian paso horses,
⁵⁶ di Corato ().
Time
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Size
. Increasing diversity and specialization over time (= ‘tid’)
Source: Gould (1996).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
zebras, and donkeys. In Gould’s scheme a small number of varieties grow much
larger than the rest as a result of random evolution. This is represented by the larger
varieties at the bottom of the time axis (the varieties to the right, seen from the point
of view of the ‘ancestor’).
If we transfer this illustration to economic diversity, we create a graph that corres-
ponds to Botero’s idea of increasing value added the further one moves away from the
raw material. In this graph the end points represent a product. For example, let this
common ‘ancestor’ be milk (the single starting point to the left). As the biological
‘ancestor’, the starting point is generic and non-specialized. Milk can come from a
variety of animals, from cows to sheep, reindeer, and moose. The first more specialized
branch could be the product cheese. The product cheese is again divided into new and
ever more specialized products as we move towards the right of the time axis. Other
products could be yoghurt, buttermilk, whole milk, cream, sour cream, and so on. Far
out to the right on the diversity tree of cows’ milk, we find, for example, Appenzell
cheese, which is only produced in two small cantons in Switzerland, or—as an extreme
example— Parmesan cheeses coming from different cheese factories which all
produce technically slightly different cheeses. (On the biological axis far out to the right
we find the koala, which is so specialized that it only eats the leaves from one specific
kind of eucalyptus.)
Wine is an example of extreme nichification. If we look at Gould’s starting point at
the left (bottom) of Figure ., the single starting point would be that by fermenting
grapes you can produce wine. If we add that there are green and red grapes, and that
red grapes may be left with the skin for a while to create rosé wine, you have the next
stage of diversification in Gould’s graph: white, red, and rosé wine. Then, further to the
right, a huge variety of grapes and climates produce a never-ending variety of niche
wines. These niches—from Barolo in Piedmont to Zinfandel in California—make it
possible to compete along other aspects than price: more value is added as in Botero’s
theory. The wine industry was the first to use terroir—clusters of environmental factors
affecting quality—as a marketing tool. Reportedly, the first such geographical protec-
tion was established in by Cosimo III de’Medici, the Grand Duke of Tuscany, for
the Chianti wine.
With the end of Fordist mass production and the introduction of information
technology, the potential for decentralization increased: on Gould’s axis many produc-
tion processes moved towards the right, towards a far greater diversity. The possibilities
not only vary from industry to industry, but also from product to product. In the last
instance it is also the human will—no invisible hand—deciding to what extent the
decentralizing element in the present economic paradigm shift should be used to
strengthen the economic periphery. Also, in the new organizational paradigm we
have large industries—like Boeing and Microsoft in Seattle—representing the larger
varieties at the bottom right of the time axis. When it comes to both large and small
industries, it is the increasing amount of human knowledge that advances the process.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
One of Gould’s main points in the book is that over time the small units, in spite of the
many visible large units (read ‘firms’), dominate ever more. We see the same develop-
ment in the economy during the transition from the Fordist to the future techno-
economic paradigm. Gould’s second important point from this worldview is that to
utilize average values becomes more and more meaningless as development advances.
In the economic world there are different degrees of demand for the original generic
product (the ‘ancestor’ and the basis for the illustration)—commodities, for example
generic ‘milk’. It is only natural that different business strategies make some firms
specialize in production of the generic product, where the demand is for low prices
rather than high quality. Here the margins are very small, and this strategy needs an
enormous turnover (and/or low wage rates) to survive (a result of economies of scale).
Here we find giants like Cargill in the world grain markets. It is worth noting that the
strategy in this volume market essentially implies a fight for market shares because high
volume = low unit costs.
Emilia-Romagna in Italy is an interesting area from the point of view of nichifica-
tion. In Emilia-Romagna the high-volume/low-cost strategy was represented by the
production of ultra-pasteurized milk by the giant firm Parmalat, which built on the
importance of globalization and economies of scale in this market by, for example,
buying up thirty-six dairies on the East Coast of South America. However, at the time
operating in more than thirty countries, Parmalat came close to bankruptcy in the
midst of a financial scandal.
The high-volume/low-cost strategy bulk production failed Emilia-Romagna’s agri-
culture. What makes Emilia-Romagna agriculture so special is the fact that in many
agricultural products—milk, ham, vinegar, olive oil—local raw materials are used.
Producers in this region receive higher prices than the producers of the same raw
materials do in the rest of Italy. The explanation is that Emilia-Romagna delivers very
high-quality niche products that we find far to the right in Figure .. Industrial giant
Parmalat mass-produced its standard-quality milk based on milk imported from
Bavaria in Germany. When this author researched this issue in , the producers
delivering milk for Parmesan cheese achieved per cent higher prices than did the
producers of normal consumer milk in nearby regions. When it comes to milk
production this region has managed to get the best of all worlds:
) High prices for local raw materials for niche products, higher prices than for the
same products in many parts of Europe.
) A decentralized production of niche products utilizes the partly rugged geo-
graphical territory in the Apennines very well (: dairies producing milk
for Parmesan cheese).
) To the extent this still lasts, economies of scale in high-tech mass production of
bulk milk based on the import of cheap milk imported from Germany (Parmalat
etc.).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
. W’ N P
I P G?
..................................................................................................................................
As regards industrial policy, the US Republican Party platform in sounded as if it
had been based on the writings of Giovanni Botero almost years earlier:
The largest diversity of industry is most productive of general prosperity, and of the
comfort and independence of the people. We, therefore, demand that the impos-
ition of duties on foreign imports shall be made, not ‘for revenue only’, but that in
raising the requisite revenues for the government, such duties shall be so levied as to
afford security to our diversified industries and protection to the rights and wages of
the laborer; to the end that active and intelligent labor, as well as capital, may have
its just reward, and the laboring man his full share in the national prosperity.
Against the so-called economic system of the Democratic party, which would
degrade our labor to the foreign standard, we enter our earnest protest.⁵⁷
Policies to this effect could be achieved by allowing all raw materials free of duty into
the country, and by increasing the customs duty in proportion to the added value to the
raw materials. The principle of industrial policy was to apply the highest duty to the
technologically most sophisticated product.
Since then, many developments have complicated the issue. The minimum efficient
size of industrial firms—and therefore also of nations—has increased considerably.⁵⁸ In
the s a country like Estonia, at the time richer than Finland, with a population of
only million people, could have internal competition in many industries. This is no
longer possible. The Cecchini Report⁵⁹ arguing for a single market in Europe had
a good point when predicting that most of the benefits from the single market would
occur because of increasing returns to scale in manufacturing industry. What Cecchini
did not calculate was that, particularly with the help of a frozen exchange rate in the
form of the euro, manufacturing industry would tend to die out in the countries in the
European periphery, thus creating a win‒lose situation where Germany in the end
appears to be the biggest, or sole, winner.
From a perceived hierarchy of increased value added based on raw materials, the
appearance of global value chains has complicated the issue. Often global value chains
can be analysed using the quality index in this chapter, but sometimes the categories,
such as high-tech goods, contain a large diversity of products of different levels of
sophistication. The trade tensions between the United States and China illustrate the
issue. One thing is clear, though, that by putting high tariffs on important products that
are already subsidized—like soy beans—China hit a weak point in US trade policy.
⁵⁷ Johnson and Porter (: ‒).
⁵⁸ Minimum efficient size is discussed in Reinert (: –).
⁵⁹ Cecchini ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
. C: U U
B C
E W
..................................................................................................................................
The naive optimism of ‘laissez-faire’ and the childish and frivolous appeal to
revolution, the naive hope that the tyranny of the proletariat would lead to world
happiness, increasingly showed their real nature, they were twins of an ahistor-
ical rationalism . . . The period – led to the theoretical and practical
bankruptcy of both the old schools.
Gustav Schmoller, German economist, Inaugural speech as
Rector of the University of Berlin,
Again we appear to stand at the intellectual bankruptcy of a school of economics, of a
big vision of how the world was supposed to work. This time it is neo-liberalism, the
modern version of Manchester liberalism, one of the two ahistorical twins Schmoller
refers to above. Since one irrational twin, communism, died in , in the ideological
triumphalism that followed we allowed the other twin, neo-liberalism, to rule the field
virtually alone for thirty years. One curious aspect of this is that in the balance of
countervailing power that had existed between capitalism and communism the indus-
trial policy of Friedrich List had ruled on both sides: West Germany (Deutsche
Bundesrepublik) and East Germany (Deutsche Demokratische Republik) both issued
stamps with the same portrait of Friedrich List. List’s textbook on industrialism
had been ruling on both sides. The disappearance of this ideology was probably the
most important defect when neo-liberalism went from theory to practical policy
following the fall of the Berlin Wall.
Austrian-Swiss economist Felix Somary (–) made the perceptive observa-
tion that all big universalist projects of Europe have boomeranged, and caused the
opposite of what was intended:⁶⁰
. The Crusades to the Holy Land should bring the infidels to Christianity and
strengthen the union of the Catholic Church. Instead the Crusades led to the fall
of Constantinople—of the Eastern Roman Empire and its Church—to the
Muslims.
. The basic rule of religious tolerance under the Reformation—cuius regio, eius
religio (‘whose realm, his religion’)—meaning that the religion of the ruler was to
dictate the religion of the country, suffered the indignity of centuries of devas-
tating religious wars and more intolerance (including anti-Semitism). After the
Peace of Westphalia—which brought an end to this period—there were
around small states in Germany alone.
⁶⁰ Somary ( []).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
. A little more than years later the French bourgeoisie started its revolution for
political and economic freedom, which led to a bloodbath, despotism, and four
generations of dictatorship. Adam Smith had taught us that: ‘It is not from the
benevolence of the . . . baker that we expect our dinner, but from [his] regard to
[his] own self-interest.’ However, what Smith had not envisioned was that in the
decades before the French Revolution much more money could be made from
withholding flour and grain from the market—causing prices to rise—than by
baking bread.⁶¹ To most economistes of the time—Physiocrats—it was inconceiv-
able that money made from producing goods and services could have different
effects in the economy than money made from increasing the prices of things
already produced (i.e. from speculation).⁶²
French minister of finance Jacques Necker (‒), born in the Republic of
Geneva, was in ardent opposition to the Physiocratic laissez-faire doctrine which was
mainly responsible for the shortage of bread in Paris. When the French Revolution
broke out with the storming of the Bastille on July , the fact that Necker had
been dismissed as minister of finance three days earlier was a main reason for these
disturbances. Necker’s popularity as an economist is proven by the fact that he is the
only author—of more than eighty—represented with four different works on the list of
economics bestsellers before .⁶³
Today we can observe—in the spirit of Somary—that the lofty ideals of the
European Union project resulted in countries divided by a common currency with
serious economic problems in the periphery; that the United States is faced with
falling real wages, a dwindling middle class, and increased mortality of white males;
and that the vision of globalization as an exercise in increasing harmony—propelled
by the Ricardian Cold War visions of Paul Samuelson—often proves to be more an
exercise in factor price polarization than in factor price equalization (with China as
the great exception).
During the French Revolution, the supposedly ‘natural’ forces of automatic har-
mony, from Franz Anton Mesmer’s quack science of Mesmerism,⁶⁴ and its supposed
creation of a Society of Universal Harmony, to the Physiocrats’ idea of laissez-faire
provided the opposite: famine and revolution. This shows that the nature of economic
systems obeys Charles Darwin more than it obeys any unrealistically abstract theories
creating illusions of automatic harmony: economic harmony is man-made. A point
which has become very clear now, when decades of neo-liberal policies have created
⁶¹ Kaplan ().
⁶² In Florence, the practice—apparently dating from the s—of prohibiting the movement of food
out of the city, shows that this problem had once been understood. It is worth noting that while the
French economists at the time, the Physiocrats, argued that all economic activities other than agriculture
were sterile, and therefore rendered much power to the feudal lords, the practice of Florence—one of our
earliest democracies—was to exclude landowners from the political process.
⁶³ See Reinert et al. (). ⁶⁴ Darnton ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
massive problems of inequality. We therefore need meso-level theories adapted to the
specific contexts of each nation. From this point of view neoclassical economics and
neo-liberal theory have functioned as snake oil, a cure-all for most ailments. Googling
the term ‘austerity’ together with ‘snake oil’ in fact gives a surprisingly large number
of hits.
The wealth and poverty of a country are to such a degree a result of its economic
structure, that industrial policy, in its widest sense, is necessary in order to create peace
and economic justice. The present ecological crises only reinforce the need for the
understanding of the mechanisms of diminishing returns (which created Malthus’
‘dismal science’) and increasing returns under which it is possible to harvest a generous
nature rather than to unrenewably extract the products of nature.⁶⁵ Utopian visions of
automatic harmony resulting from free trade are main drivers of human migration
away from un-industrialized or de-industrialized countries in Africa and Latin
America to Europe and North America.
In , the WTO director-general, Renato Ruggiero, declared—in the spirit of Paul
Samuelson’s interpretation of David Ricardo—that we should unleash ‘the borderless
economy’s potential to equalize relations among countries and regions’.⁶⁶ This is the
foundation upon which the whole world economic order came to rest, and also
the ideological marching order for the Washington Institutions—the International
Monetary Fund and the World Bank—in their policies towards the poor countries of
the world. It is again important to emphasize that, in terms of industrial policy, this
theoretical understanding was exactly the opposite of the theory on which the
extremely successful Marshall Plan had been built.
‘The worse the situation, the less laissez-faire works,’ said Keynes. Historical
developments proved this to be true: the negative effects of laissez-faire first showed
up in the Third World, then in the Second (former communist) World, and in the
end in the core of the First World, in the United States and the European Union
(Reinert, ).
One important side-effect of the policies of the Washington Institutions is that
dictatorships obtain a considerable advantage over countries which try to be demo-
cratic. China and Singapore are doing extremely well under their system of well-
managed free trade—opening up to free trade where it suits them as Europe used to
do—while the policies of the Washington Institutions de-industrialize and impoverish
many democratic countries (Figure .). The virtual ‘prohibition’ of industrial policy
through the conditionalities of the Washington Institutions has, in many places, been
very costly in terms of failed development and economic retrogression.⁶⁷
In , real wages in Ukraine were considerably higher than those in Belarus.
The reason real wages in Belarus now are about double those in Ukraine is not because
⁶⁵ Mathews and Reinert ().
⁶⁶ Ruggiero ().
⁶⁷ Reinert () presents two particularly ugly case studies, Mongolia and Peru.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
100
Percentile of income distribution 90
80
70
60
50
40
30
20
10
0
Ukraine
Montenegro
Serbia
Tajikistan
Georgia
Maldova
Bosnia and Herz
Azerbaijan
Croatia
Russia
Estonia
Latvia
Lithuania
Bulgaria
Slovenia
Uzbekistan
Slovak Rep.
Belarus
Poland
Egypt
Jordan
Morocco
Tunisia
Kyrgyz Rep.
Kazakhstan
FYR Macedonia
Romania
Armenia
Turkmenistan
Hungary
Turkey
Income below 1989 levels
Income growth below G7 average
Income growth above G7 average --- Median
. Economic growth since (fall of the Berlin Wall), selected countries:
percentiles of population with income growth above/below the level/the G average level
Source: European Bank for Construction and Development,
Transition Report 2016–2017, London, 2016.
the statue of Lenin still stands on the main square in Minsk, it is probably not that
Belarus is less corrupt than its neighbours, it is mainly because, as a dictatorship, the
country does not have to follow the foreign dictates of the Washington Institutions and
can actually pursue a national industrial policy.
We are in a period when the attitude towards industrial policy is slowly changing,
but in the reverse order of what should happen if we follow Keynes’ insight above.
The clearest changes in favour of industrial policy are taking place in Germany and
in the United States. The process is much slower in poor countries where there has
been a prohibition of industrial policy and where it is most needed. In , asked
to contribute to an annual report on the development of the OECD, I was able to
observe how alternative ideas are only extremely slowly filtering into this powerful
global institution. It is difficult for a whole generation of experts to admit that they
were wrong, and the virtual monopoly of neoclassical economics at the university
level makes it difficult to recruit professionals with alternative views. In a sense the
world faces the same kind of intellectual monoculture that faced the universities in
former East Germany at the German unification: there were twenty-three
professors of Marxist economics at the universities in former East Germany, and
little else.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
R
Acemoğlu, Daron and James Robinson () Why Nations Fail: The Origins of Power,
Prosperity, and Poverty. London: Profile Books.
Baade, Fritz () ‘Gruß und Dank an Herbert Hoover’, Weltwirtschaftliches Archiv ():
–.
Bacon, Francis () Novum Organum. London: J. Billum.
Bacon, Francis () ‘An Essay on Innovation’, in The essayes or counsels, civill and morall, of
Francis Lo. Verulam, Viscount St. Alban. Newly written. London: printed by John Haviland
for Hanna Barret.
Bollinger, Armin () Widersprüche zwischen Unabhängigkeit und Dekolonisation in
Lateinamerika. Zürich: Orell Füssli.
Boston Consulting Group () Perspectives on Experience. Boston, MA: Boston Consulting
Group.
Botero, Giovanni () Della Ragion di Stato: Libri dieci, con Tre Libri delle Cause della
Grandezza, e Magnificenza delle Città. Venice: Appresso i Gioliti.
Botero, Giovanni () Relazioni Universali. Venice: Alessandro Vecchi.
Botero, Giovanni () The Cause of the Greatnesse of Cities. Three Bookes, With Certaine
Observations concerning the Sea. Written in Italian by John Botero . . . London: Printed by
E.P. for Henry Seile.
Bücher, Karl () Die Entstehung der Volkswirtschaft. Tübingen: Laupp. (English transla-
tion: Industrial Evolution . London: G. Bell & Sons. New York: H. Holt.)
Cary, John () An Essay on the State of England. Bristol: W. Bonny.
Cecchini, Paulo () The European Challenge : The Benefits of a Single Market.
Aldershot: Wildwood House.
Childs, Marquis William () Sweden: The Middle Way. New Haven, CT: Yale University
Press.
Darnton, Robert () Mesmerism and the End of Enlightenment in France. Cambridge, MA:
Harvard University Press.
Defoe, Daniel () Plan of English Commerce. London: Rivington.
di Corato, Riccardo () formaggi d’Italia. Catalogo storico-gastronomico delle varietà
regionali. Milan: Sonzogno.
Fabricant, Solomon () Employment in Manufacturing, –. New York: National
Bureau of Economic Research.
Firpo, Luigi () ‘Botero, Giovanni’, Dizionario Biografico degli Italiani, . Available at
http://www.treccani.it/enciclopedia/giovanni-botero_(Dizionario-Biografico).
Firpo, Luigi () ‘La “Ragion di Stato” di Giovanni Botero: redazione, rifacimenti, fortuna’,
in Gianrenzo Clivio and Riccardo Massano (eds) Civiltà del Piemonte. Studi in onore di
Renzo Gandalfo nel suo settantacinquesimo compleanno, Vol. I. Turin: Centro Studi
Piemontesi, pp. –.
Gee, Joshua () The Trade and Navigation of Great-Britain Considered . . . London:
Printed by Sam Buckley.
Goldthwaite, Richard A. () The Economy of Renaissance Florence. Baltimore, MD: Johns
Hopkins University Press.
Gould, Stephen Jay () Full House: The Spread of Excellence from Plato to Darwin.
New York: Harmony Books.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Graham, Frank () ‘Some Aspects of Protection Further Considered’, Quarterly Journal of
Economics (): –.
Hamilton, Alexander () Report of the Secretary of the Treasury of the United States on the
subject of manufactures: Presented to the House of Representatives, December , .
Philadelphia, PA: Childs and Swaine.
Hausmann, Ricardo, César Hidalgo et al. () The Atlas of Economic Complexity.
Cambridge, MA: Center for International Development, Harvard University, Harvard
Kennedy School.
Hely-Hutchison, John () The Commercial Restraints of Ireland considered in a series of
letters addressed to a Noble Lord, containing an historical account of the affairs of that
Kingdom, so far as they relate to this subject. Dublin: William Hallhead. For a reproduction
of a second edition: Dublin: M. H. Gill & Son, . Available at http://www.gutenberg.org/
files//-h/-h.htm.
Hobson, John A. () Imperialism: A Study. London: Nisbet.
Hume, David () History of England, Vol. . London: Cadell.
Issawi, Charles () An Arab Philosophy of History: Selections from the Prolegomena of Ibn
Khaldun of Tunis (–). Princeton, NJ: Darwin Press.
Johnson, Donald Bruce and Kirk H. Porter (eds) () National Party Platforms –.
Urbana, IL: University of Illinois Press, pp. –.
Kaplan, Steven () Bread, Politics and Political Economy in the Reign of Louis XV. nd
edition. London: Anthem.
King, Charles () The British Merchant; or, Commerce Preserv’d. vols. London: John Darby.
Krugman, Paul () ‘Trade, Accumulation and Uneven Development’, Journal of Develop-
ment Economics : –.
Krugman, Paul () Rethinking International Trade. Cambridge, MA: MIT Press.
Lawson, Tony () ‘Abstraction, Tendencies and Stylised Facts: A Realist Approach to
Economic Analysis’, in Tony Lawson, J. Gabriel Palma, and John Sender (eds) Kaldor’s
Political Economy. London: Academic Press.
Lenin, Vladimir () Imperialism, the Highest Stage of Capitalism. New York: International
Publishers.
Lin, Justin Yifu () New Structural Economics: A Framework for Rethinking Development
and Policy. Washington, DC: World Bank.
Lösch, August. . The Economics of Location: A Pioneer Book in the Relations between
Economic Goods and Geography. New Haven, CT: Princeton University Press.
Marshall, Alfred () Principles of Economics. London: Macmillan.
Marshall, Alfred, and Mary Paley Marshall () The Economics of Industry. London:
Macmillan.
Mathews, John and Erik Reinert () ‘Renewables, Manufacturing and Green Growth: An
Energy Strategy Based on Capturing Increasing Returns’, Futures : –.
Meek, Ronald () Social Science and the Ignoble Savage. Cambridge: Cambridge University
Press.
Meinecke, Friedrich () Die Idee der Staatsräson in der neueren Geschichte. Berlin:
Oldenbourg.
Mervin, Leonard () Vitamin C. Willingborough: Thorsons Publishers.
Mill, John Stuart () Principles of Political Economy. London: Parker.
Misselden, Edward () The Circle of Commerce or the Balance of Trade. London: Dawson
for Nicholas Bourne.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Mueller, Reinhold and Frederic Lane () The Venetian Money Market: Banks, Panics, and
the Public Debt: –. Baltimore, MD: Johns Hopkins University Press.
Müller-Armack, Alfred () Wirtschaftslenkung und Marktwirtschaft. Hamburg: Verlag für
Wirtschaft und Sozialpolitik.
Mun, Thomas () England’s Treasure by Forraign Trade. London: Thomas Clark.
Oresme, Nicolas () De Moneta. Manuscript reprinted with Schefold, Bertram ()
Vademecum zu einem Klassiker der Mittelaterlichen Geldlehre. Düsseldorf: Verlag
Wirtschaft und Finanzen.
Ortiz de Zúñiga, Iñigo () Visita de la provincia de León de Huánuco en , Huánuco,
Perú: Universidad Nacional Hermilio Valdizán, Facultad de Letras y Educación.
Patalano, Rosario and Sophus Reinert (eds) () Antonio Serra and the Economics of Good
Government. London: Palgrave.
Perroux, François () ‘Note sur la notion de pôle de croissance’, Economie Appliquée ,
pp. –.
Pierce, Charles S. () in Collected Papers of Charles Sanders Pierce, Vol. V, ed.
C. Hartshorne and P. Weiss. Cambridge, MA: Harvard University Press.
Porter, Michael () The Competitive Advantage of Nations, New York: Free Press.
Reinert, Erik S. () ‘International Trade and the Economic Mechanisms of Underdevel-
opment’, PhD thesis, Cornell University.
Reinert, Erik S. () ‘Catching-up from Way Behind: A Third World Perspective on First
World History’, in Jan Fagerberg, Bart Verspagen, and Nick von Tunzelmann (eds) The
Dynamics of Technology, Trade, and Growth. Aldershot: Edward Elgar, pp. –.
Reinert, Erik S. (ed.) () Globalization, Economic Development and Inequality: An Alter-
native Perspective. Cheltenham: Edward Elgar.
Reinert, Erik S. () ‘A Brief Introduction to Veit Ludwig von Seckendorff (–)’,
European Journal of Law and Economics : –.
Reinert, Erik S. () How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor.
London: Constable.
Reinert, Erik S. (a) ‘Emulating Success: Contemporary Views of the Dutch Economy
before ’, in Oscar Gelderblom (ed.) The Political Economy of the Dutch Republic.
Aldershot: Ashgate, pp. –.
Reinert, Erik S. (b) ‘Emulation vs. Comparative Advantage: Competing and Comple-
mentary Principles in the History of Economic Policy’, in Mario Cimoli, Giovanni Dosi,
and Joseph E. Stiglitz (eds) Industrial Policy and Development: The Political Economy of
Capabilities Accumulation. Oxford: Oxford University Press, pp. –.
Reinert, Erik S. () ‘Neo-classical Economics: A Trail of Economic Destruction since the
s’, Real-world Economics Review : –. Available at http://www.paecon.net/
PAEReview/issue/Reinert.pdf.
Reinert, Erik S. () ‘Smart Specialization: Theory and Brief Case Studies’. A Report to the
European Commission, Directorate General JRC, JRC Seville. The Other Canon Founda-
tion and Tallinn University of Technology Working Papers in Technology Governance and
Economic Dynamics, No. . Available at http://technologygovernance.eu/eng/the_core_
faculty/working_papers/.
Reinert, Erik S. and Arno Daastøl () ‘Exploring the Genesis of Economic Innovations:
The Religious Gestalt-switch and the Duty to Invent as Preconditions for Economic
Growth’, European Journal of Law and Economics : –.
Reinert, Erik S. and Fernanda Reinert () ‘ Economic Bestsellers Published before ’,
The European Journal of the History of Economic Thought : –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Reinert, Erik S. and Francesca Viano () Thorstein Veblen: Economist for an Age of Crises.
London: Anthem.
Reinert, Erik S., Kenneth Carpenter, Fernanda A. Reinert, and Sophus A. Reinert () ‘
Economic Bestsellers before : A Fresh Look at the History of Economic Thought’. The
Other Canon Foundation and Tallinn University of Technology Working Papers in
Technology Governance and Economic Dynamics No. .
Reinert, Sophus A. (ed.) () Antonio Serra, A Short Treatise on the Wealth and Poverty of
Nations (). London: Anthem.
Ricardo, David () Principles of Political Economy and Taxation. London: John Murray.
Rubies, Joan-Pau () Travel and Ethnology in the Renaissance. Cambridge: Cambridge
University Press.
Ruggiero, Renato () Speech in Berlin, October. Available at https://www.wto.org/
english/news_e/sprr_e/berlin_e.htm.
Samuelson, Paul A. () ‘International Trade and the Equalisation of Factor Prices’,
Economic Journal : –.
Samuelson, Paul A. () ‘International Factor-Price Equalisation Once Again’, Economic
Journal : –.
Schefold, Bertram (/) Wirtschaftsstile. vols. Frankfurt: Fischer.
Schmoller, Gustav () Wechselnde Theorien und feststehende Wahrheiten im Gebiete der
Staats- und Socialwissenschaften und die heutige deutsche Volkswirthschaftslehre: Rede bei
Antritt des Rectorats gehalten in der Aula der Königlichen Friedrich-Wilhelms-Universität
am . October . Berlin: W. Büxenstein.
Schumpeter, Joseph () Théorie de l’Evolution Economique. Paris: Dalloz.
Schumpeter, Joseph () History of Economic Analysis. New York: Oxford University Press.
Seckendorff, Veit Ludwig von () Teutscher Fürsten-Stat (sic). Frankfurt: Götz.
Seligman, Edwin () Curiosities of Early Economic Literature. San Francisco, CA: John
Henry Nash.
Smith, Adam () The Wealth of Nations.
Smith, Adam ( []) ‘The Theory of Moral Sentiments’, in Collected Works, Vol. .
London: Cadell and Davies.
Somary, Felix ( []) Krise und Zukunft der Demokratie. Jena: TvR Medienverlag.
Sombart, Werner () Der Moderne Kapitalismus, vols. Munich and Leipzig: Duncker &
Humblot. (English translation: Modern Capitalism, ed. Erik S. Reinert. Berlin/Heidelberg:
Springer, forthcoming ).
Steinbeck, John () The Grapes of Wrath. New York: Viking Press.
Symcox, Geoffrey (ed.) () Giovanni Botero, On the Causes of the Greatness and Magnifi-
cence of Cities (). Toronto: University of Toronto Press.
Trace, Jamie () ‘Giovanni Botero and English Political Thought’, PhD thesis, Cambridge
University.
Verdoorn, J. P. () ‘Fattori che regolano lo sviluppo della produttività del lavoro’,
L’industria : –.
Villner, Katarina () Blod, Kryddor och Sott. Stockholm: Carlsson Bokförlag.
von Thünen, Johann Heinrich () Der Isolirte Staat. Hamburg: Perthes.
Weber, Alfred () Über den Standort der Industrie (Theory of the Location of Industries).
Tübingen: Mohr.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
-
Market Myths and Production Realities
.............................................................................................................
.
. I E
P S P
F
..................................................................................................................................
T s marked a dramatic turning point in the performance of the American
economy. Manufacturing employment’s share of total US employment declined stead-
ily from near per cent in to per cent in (Baily and Bosworth, :
figure ).¹ Real weekly wages in were around per cent below their peak for
private-sector production and non-supervisory workers (Blanchflower, : ).
Described as the ‘great reversal’, wages that had risen year on year in the post-war
era for those with no more than a high-school education began to fall in the s and
continued to do so for three consecutive decades (Acemoğlu and Autor, ; Frey,
: ). From to , Piketty, Saez, and Zucman () find that none of the
growth in per-adult national income went to the bottom per cent, while per cent
went to the th to the th percentile, per cent to the top per cent, and
¹ After , the absolute level of US manufacturing employment fell by one-third to under
million in (Atkinson et al., : figure ). In the s, US manufacturing suffered its worst
performance in US history in terms of employment. Not only did the United States lose . million
manufacturing jobs, but the decline as a share of total manufacturing employment ( per cent)
exceeded the rate of loss in the Great Depression (Atkinson et al., ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
per cent to the top per cent. Productivity growth and the nation’s trade balance
both declined as well.²
What has gone wrong? In this chapter, I examine the role of industrial policy not as
an external fine-tuner to a self-organizing, autonomous economy but as integral to the
productive structures and core processes that constitute an economy and how it
operates. The industrial policy of a nation is more than a technical issue in economics:
it is at the core of competing visions of a nation’s ideals.
The two major approaches guiding national economic policymaking frameworks in
the world today can be traced back to the economics of Adam Smith (Best, ). For
simplicity one can be called market-centric and the other production-centric.
Given the logic of market-centric economics, industrial policy can only fail as the
market knows best.³ But real-world governments are known to craft production-
centric policy frameworks that foster rapid growth and industrial transformation.
For example, arguably the most successful industrial policy experience in history was
conducted by the US government during the Second World War. New industries were
created, others transformed, and output nearly doubled in half a decade. Policymakers
of late developers like Japan, Korea, and China learned about the primacy of productive
structures to economic performance from successful growth experiences, crafted stra-
tegic production-centric policy frameworks, and galvanized business enterprises to
drive them. These experiences open a broader context in which to consider the role of
industrial policy and state agencies/activities in shaping how economies are organized
and that address the defining questions of textbook economics: what gets produced,
how it gets produced, and for whom.
Industrial policy calls attention to the powers and responsibility of government to
advance the manufacturing base of a region or nation, because the manufacturing
sector has unique characteristics in determining prosperity. Its products are tradable,
improvements in its processes are the source of productivity gains, and it is the last link
in an innovation process chain that includes the translation of scientific and techno-
logical innovations into products. Industrial policy is not about correcting for market
failure; it is about shaping a nation’s and region’s productive structures.
The question that motivates this chapter is: why did post-war American manufac-
turing and the nation’s industrial heartland undergo severe de-industrialization so
soon after its pivotal contribution to the victory of the Allies in the Second World
² Labour productivity grew at an average rate of . per cent over decades but fell to . per cent in the
mid-s and . per cent since . In the mid-s, the US overall trade balance began a decline
from a surplus of approximately per cent gross domestic product to a deficit of – per cent in ,
followed by a recovery before plunging again to a deficit of between and per cent in the s (Pisano
and Shih, : ).
³ The market failure approach offers policy guidelines in the form of taxes and subsidies to correct for
deviations of the prices and outputs from an idealized perfectly competitive market system. For
economic modelling the attraction is that the theory is context- and history-blind and assumes that
production is subject to the same optimality rules and equilibrium conditions as the world of consump-
tion. If only real-world production systems cooperated.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
War? I apply an economic analysis of comparative policy frameworks and production
systems to better understand what went wrong. It takes us inside a set of intercon-
nected processes linking political power, policy frameworks, production capabilities,
business organization, and skill formation.
The argument is that the American mass-production system that won the war came
under threat from two existential challenges: the emergence of more advanced pro-
duction systems abroad, exemplified by Japan and Germany, but more importantly an
abrupt and historical shift in the nation’s economic policy framework. With the s
triumph of neo-liberalism, the regulations, progressive tax system, labour legislation,
and manufacturing support infrastructures around which the nation’s industrial heart-
land had been built and the war had been won were eroded and dismantled.
The neo-liberal policy perspective and its economic and social consequences are not
new to the s; they are as old as the Republic. It is a policy framework and a political
economy perspective with roots in the plantation economy of the American South.
Ironically, the idea that free markets and democracy are interconnected has long been
used to legitimize repressive labour regimes, beginning with defenders of slavery
(Einhorn, a). What is new is that the s marked a historic shift in political
power and direction of national economic policymaking undertaken by both major
parties. Neo-liberalism resonates with, and is a triumph of, the economic philosophy,
policy frameworks, extractive industries, and social hierarchy upon which the produc-
tion system and autocratic business model of the South were built and have endured for
four centuries.
The power of wealth and corporate elites to influence politics and dictate policymaking
is not the whole story, important as it is. It is also a story of the power of economic ideas to
persist, whatever evidence to the contrary may be readily observable. The market-centric
economics axiom that industrial policy cannot lead to improved economic performance
has long outlived its contradiction by post-war Japan and Germany as well as the US
Second World War economic experience. Nevertheless, since the s, US economic
policymakers have continued to act on the myth and deny the reality.
The policymaking regime ‘assumed’ that strategic Japanese industrial policy could
not be a threat to America’s manufacturing leadership. The post-war economic theory
and policy debates centred around monetarist versus Keynesian macroeconomic
stabilization policies. Lacking an economics of production, the debates were blind to
the success of governments abroad in crafting strategic policy frameworks based on
advancing their nation’s business and production capabilities to target the vulnerabil-
ities of post-war American industry. The goal of policymakers abroad was not to attack
the American working class; it was a consequence of statecraft lessons drawn from the
Second World War experience and elsewhere.
American economic policymaking turned in a different direction. Neo-liberalism is
an economic growth agenda that appeals to the ‘invisible hand’ parable to justify
‘market’ deregulation and tax reductions on corporations and the wealthy. Its corol-
laries include that deregulation improves business performance, as better managed
firms win in free markets; that deregulated financial markets ensure that the resources
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
of poorly managed firms get reallocated to superior firms; and that increased product-
ivity generates profits that trickle down to workers and reduce prices to consumers.
As noted, neo-liberalism is not a new agenda to America. The South has always
practised a version of neo-liberal policymaking, beginning with the plantation econ-
omy. What changed in the post-war era was the migration of neo-liberal policymaking
from the South to the national level. A centuries-old civil war between policy frame-
works was won by the South. The historic production-informed policymaking regime
of the North succumbed in the s to the South’s low-tax, deregulation, anti-union,
‘rentier capitalism’ policy regime which for the first time became the federal govern-
ment’s economic policymaking regime. Apart from the rentier elite, it never worked for
the South and for the last four decades it has severely eroded the production capabilities
and infrastructural foundations of the nation’s industrial heartland.
The nation’s policymaking leadership, of both political parties, did not foresee the
de-industrialization consequences of neo-liberalism. The economics they ‘knew’
assumed that the power of the profit motive, if liberated from taxes and regulations,
would incentivize business managers to pursue activities that would maximize national
prosperity. It left them blind to the potential for a neo-liberal policy agenda to shift the
managerial incentive structure from value creation to wealth-extraction strategies with
devastating consequences.
The economics they ‘knew’ ignored the historic public-sector role in shaping the
organizational and extra-firm infrastructural foundations of the nation’s manufactur-
ing system and their dependence on public investment on the one hand and their
vulnerability to competition from foreign production systems on the other. The
production engineering expertise and managerial culture by which manufacturing
enterprises had invested heavily in innovative production and technological capabil-
ities and skills to the benefit of the nation gave way to shareholder pressures and
innovations in financial engineering practices to the benefit of wealthy and sharehold-
ing elites. The reduction in taxes in the deregulated environment created a new
incentive structure for corporate managers to join the shareholding elites and amass
fortunes. It unleashed the drivers of a rapid increase in inequality. Even as the nation’s
manufacturing belt became the ‘Rust Belt’, the financialization of America’s industrial
enterprises created huge profit opportunities for hedge fund owners, asset management
companies, and investment banking. The rentier landowning class of the South was
joined by a rentier financial elite.
Policymakers, too, fell victim to the power of free-market economics as a political
weapon to shape popular economic discourse and influence economic policy. Eco-
nomic policymakers did not reckon on the power of special interests, if unchecked by
government regulation, to ‘financialize’ a nation’s manufacturing enterprises, toxify
their workplace environments, and undermine their productive structures. Absent the
strategic direction from political leadership and policymakers’ awareness of the cost in
loss of production capabilities and manufacturing employment to America’s industrial
heartland, the neo-liberal agenda became national policy with devastating conse-
quences on the families and communities on which they depended.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
The policy framework of the South has always been, in effect, anti-skill-intensive
manufacturing. The South has, with rare exception, never developed learning firms,
manufacturing clusters or innovative city dynamics and, except for foreign car com-
panies, has always imported rather than produced manufactured products. This,
tragically, is the anti-industrial policy framework that has become national policy
over recent decades. It is the story of how Dixie won a centuries-old, North–South
civil war of production systems.
In defending and expanding on these claims, this chapter is organized as follows.
First, we bring America’s Second World War production ‘miracle’ down to earth with
an examination of the policy framework, implementation agencies, and organizational
change methodologies through which policymakers organized a transformative
advance in the nation’s industrial performance. It takes us deep into the internal
productive structures of business enterprises and change programmes by which gov-
ernment and business joined forces to upgrade production methods, educate a work-
force with the requisite skills, and advance productivity on such a scale as to make a
step change in national economic performance. Successful implementation drew upon
the active participation of management, production engineers, and skilled labour to
make changes in organizational practices. While the US Second World War experience
is a special case, it is consistent with historical accounts of the role of government
leadership in crafting strategic policy frameworks and organizing enterprise change
methods and infrastructural agencies to advance the productivity of a region’s or
nation’s business enterprises (Best, ).
Next we examine the post-war policy legacy. The Second World War experience
permanently transformed the interconnectedness of government and the economy in
major ways. The US transitioned from a virtually non-existent pre-war weapons
industry to a defence budget larger than that of all other nations combined. A huge
government-contractor system was created with an estimated , defence research
contracts in expanding to perhaps , in .
Wartime organizational innovations in economic governance and industrial policy
were selectively adapted and permanently institutionalized in the post-war era. For
example, the wartime creation of administrative agencies to design and produce
technologically advanced weapons systems became the world’s biggest and most
advanced science and technology infrastructure. In contrast, wartime successes in
designing management and manpower development methodologies to foster work-
force participation in decision-making and continuous innovation were, unfortunately,
not institutionalized. In other countries, such as Japan and West Germany, they
became the manufacturing cells of rival production systems with superior new product
development and technology management capabilities.
Post-war macroeconomic policy was profoundly changed by the transition from the
era of Pax Britannica to Pax America. Pax America offered the defeated nations of
Japan and Germany open access to the vast American market. It involved a free-trade
policy and an overvalued exchange-rate policy that created opportunities for the
defeated nations to craft export-driven industry policy frameworks organized around
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
innovation-led manufacturing systems and Schumpeterian business strategies. US
macroeconomic policy, in contrast, focused on stabilization policy issues based on
the belief that US technological leadership would ensure US manufacturing leadership.
The strategic policy framework of Japan both built on the strengths of the American
mass-production model and exposed its weaknesses. Japan’s manufacturing advantage
was not based on building a bigger science and technology infrastructure than that of
the United States. Instead, Japanese business leaders and policymakers focused on
building competitive advantage by superior manufacturing capability. They began by
applying lessons from the US Second World War experience about the policy inter-
connectedness of production capabilities, business organization, and skill formation.
As they progressed rapidly up the production capability spectrum (Best, , ),
American mass production became a victim of its past success.
The war-winning advantage of American mass production was organized around
economies of speed (throughput efficiency) and the principle of single product flow. It
maximized throughput and productivity by hardwiring the factory to a single product
and a single design (Best, ). The product’s design was frozen because design
changes required the whole production line to be re-engineered. A single product
was required because multiple products would mean changing machine set-ups and
require specialist expertise to change over from one product to another, which could
cause the production line to be shut down for hours or days, if not more. It was a highly
productive system, but it was inflexible. As Henry Ford famously said, ‘Any customer
can have a car painted any color that he wants so long as it is black.’
Japanese engineers created a flexible mass-production system based on the principle
of multi-product flow. They built factories that were organized to produce multiple
products on the same assembly line and to transition from one to another and back
again in minutes. Participatory and multi-skilled labour practices enabled quick
changeovers from product to product and continuous improvement (kaizen) in pro-
duction methods to design quality into the production process. It was a labour system
in which work teams, multi-skilled workers, and manufacturing cells replaced the
single-task worker as the primary work unit. The result was revolutionary; it set a
new global standard for throughput efficiency, cost, quality, and delivery time (Best,
). It was a challenge that demanded a transformation in national-production
industrial policy at a time in which market-centric economics was hegemonic.
However, an internal challenge to America’s industrial heartland was looming in the
form of a rival production system with roots going back four centuries. Manufacturing
as a system of production and industrial policy took root in the north-east roughly a
century and a half after the plantation economy, coincided with the founding of the
Republic, and evolved into a highly diversified manufacturing production system in the
cities and states of what became the nation’s manufacturing belt. The Northern ‘social
democratic’ policy framework involved collecting taxes for the public provision of
material and organizational infrastructures, such as public education and the federal
armouries, and a financial and regulatory environment to support the development of
the nation’s nascent manufacturing enterprises. Concentrations of wealth were limited
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
by highly progressive income and wealth taxes; by anti-trust and regulatory policies;
and by restricting the involvement of corporations in politics. The historic activist state
that sought the advantages of corporate economic power while limiting the disadvan-
tages of corporate political and market powers were leveraged by both New Deal and
Second World War industrial policymaking. The Second World War industrial policy
framework went beyond the New Deal in galvanizing the synergistic power of US
business and labour working together to build a highly productive economy. Tragically,
this constructive alliance was immediately attacked with the passage of the anti-union
Taft Hartley Act in , which heralded the first major neo-liberal victory.
The Cotton Belt of the South began as a plantation economy with a landholding
aristocracy and slave labour. From its early days the policy framework of the South was
crafted to protect the institution of slavery, based on fears that the North would use
national policymaking powers, such as taxation, to suppress and destroy the forced
labour regime (Einhorn, a). The Southern hierarchy defined itself in opposition to
the emergent manufacturing development initiatives of the Northern colonies from
their origins in the s, as it was clear that the latter would depend upon free labour.
Fast forward to the massive New Deal federal transfers, physical infrastructure, and
military spending that turned the ‘Cotton Belt’ into the post-war ‘Sun Belt’. The
political elites, the policy framework, and the dominance of extractive industries did
not change. The oil and gas industry along the southern coast extended westward, and
with mining and forestry northward joined the historic mining industries in the Rocky
Mountain states. The manufacturing strategy of southern states and towns was to
compete with one another to attract Northern companies seeking government subsid-
ies, low taxes, anti-union laws, and lax regulation. Indigenous manufacturing did not
take hold.
The South’s manufacturing strategy worked to the extent that many Northern firms,
faced with a choice between restructuring to meet the new world-class production
standards and relocating to the anti-union, low-cost environment of the South, chose
the latter. However, by the s, the ‘smokestack-chasing’ manufacturing strategy
failed, as the South’s major labour-intensive industries, led by textile and furniture
firms, succumbed not only to low-wage competition but to enterprises with more
advanced manufacturing capabilities from China and elsewhere. Consequently, gas and
oil production and mining, combined with federal defence spending, have become the
mainstays of the region’s economic livelihood.
Given four centuries of failed economic progress it seems incomprehensible that the
anti-labour policy framework of the South would be adopted as national policy.
Critically, political leadership, mainstream economics, and economic policymakers
failed to learn from the policy framework of the American South and all other
plantation economies before dismantling progressive income and wealth taxes, indus-
trial policies, and regulatory agencies.
In academic economics, macroeconomic modelling absorbed Keynesian demand
management as a special case of market failure, and stabilization policy dominated
economics education and popular discourse. The stagflation era of the s eroded
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
public confidence in the efficacy of stabilization instruments to fine-tune the economy
and created the opening for an anti-industrial policy and a neo-liberal economics
agenda to shape public discourse.
Even though the South benefited most from America’s de facto industrial policy of
military contracts and subsidized corporate clients, its apparent antipathy to industrial
policy was central to its political ideology. In the real world of industrial policymaking,
the South fostered a new American version of ‘state capitalism’ in which political elites
leverage their government insider power to become rentier capitalists (Lind, ).⁴
In the name of free enterprise, the neo-liberal policy framework campaigned for
deregulation of financial markets, elimination of anti-trust legislation, the passage of
anti-union organizing laws such as the Labor Management Relations Act of
(better known as the Taft Hartley Act), and relaxation of social controls and historic
norms of corporate governance. Critically, the historic stakeholder model of business
organization and management norms was overtaken by the ideology propounded by
Milton Friedman and Michael Jensen that the only purpose of business was to make
profits and enrich shareholders.
The appointment of Lewis Powell to the Supreme Court by President Nixon in
signalled the elevation of a key player in the crafting of the Southern strategy. Powell,
an attorney for the tobacco industry, authored the Powell Memorandum, a secretive
campaign to mobilize billionaires to fund neo-liberal think tanks to influence public
opinion about the ideals of free markets. The goal of the neo-liberal campaign was the
passage of legislation to dismantle New Deal institutions but also to promote market
fundamentalist leadership of the economic policymaking agencies at the national level,
including the Treasury Department, the Federal Reserve Bank, and the Commerce
Department. It was a campaign that did not depend upon who was elected but aimed to
sway public opinion independent of political party. Thus began the age of dark money
in American politics, funded by the wealthy beneficiaries of extractive and monopol-
ized industries.
The costs to the North of the neo-liberalism era have run deep not only in fiscal
transfers to the South but more especially in the erosion of the nation’s material and
extra-firm infrastructures (educational, banking, engineering support) that co-evolved
with the nation’s manufacturing belt and upon which the nation’s industrial leadership
had been built. The industrial heartland lost its voice in policymaking at great cost to
the nation’s industrial performance in loss of production capabilities, skills, high-wage
employment, and tax bases upon which the region’s once prosperous cities depended.
In the final part of this chapter, an economics perspective and industrial policy
framework is introduced to address the task of transforming the American economy to
meet the challenges of climate change and four decades of eroding infrastructural
foundations, both material and organizational. The term ‘capability triad’ is presented
as an expository device that draws upon the common policy dimensions of a series of
⁴ Elizabeth Shermer’s Sunbelt Capitalism: Phoenix and the Transformation of American Politics offers
a similar account of the civil war of policy frameworks ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
transformative experiences on the scale of economic ‘miracles’ led by Franklin
Roosevelt (Second World War), Deng Xiaoping (China), Taiichi Ohno/Edwards
Deming (Japan), Ludwig Erhard (West Germany), Ralph Flanders (Massachusetts),
and Kenneth Whitaker (Ireland) (Best, ).
The economic ideas that informed the New Deal are contrasted with those that
informed the Second World War policy framework. President Roosevelt drew critically
important lessons from the failure of the New Deal as a transformative policy agenda.
The Tennessee Valley Authority (TVA) was the centrepiece of the New Deal policy
framework. It was hugely successful in the electrification of the South as the Hoover
Dam was in the South-west and Grand Coulee Dam was in the North-west. As material
infrastructure, they were critical to building the Arsenal of Democracy, but not
sufficient.
The TVA experience is instructive from a capability triad perspective. It created a
growing demand for electricity which did become a regional export industry, but as
new sources of hydro power ran out the TVA turned to coal as a source of energy
(Jacobs, ).⁵ It did not shift the South’s structural dependence on extractive
industries or the interconnnected labour system and deeply anti-democratic skill
formation system that applied in both public and business spheres. Dixie has always
meant a steadfast commitment to not increasing the skills of the region’s workforce. It
started with reconstruction-era fears that a numerate workforce would understand how
to counter the debt-peonage system and instigate worker rebellion. But without
advancing skills, business enterprises cannot successfully pursue Schumpeterian
product-led competitive strategies and build new product development or technology
management capabilities.
This was a hard-earned lesson that distinguished the focus of President Roosevelt’s
Second World War industrial policy on fostering business capability development and
harnessing the production engineering and human capital expertise of America’s most
successful manufacturing enterprises. It worked. It provided lessons that were taken up
by the defeated nations but unfortunately ignored by the victorious.
. T US S W W
P- P
F
..................................................................................................................................
The most successful industrial policy experience in history is arguably that conducted
by the US government during the Second World War, in which President Roosevelt’s
vision of an ‘Arsenal of Democracy’ involved a near doubling of national output in a
⁵ The TVA became a World Bank development model around the world long after its flaws were well
known (Jacobs, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
half a decade. How was it done? The answer was to organize an interdependent
innovation-process chain linking basic research, developmental research, and applied
research, combined with the diffusion of world-class production capabilities. The US
business system was transformed to harness the driving force of innovating enterprises.
In the process, the US production system was, in effect, re-engineered to accomplish a
step change in performance standards. An inter-organizational technology manage-
ment capability was institutionalized as a consequence.
The manufacturing process in virtually every enterprise in the United States was re-
engineered to achieve the output targets. It required a national translational research
capability to be created that linked ‘top-down’ enabling agencies with ‘bottom-up’
operational drivers. Implementation involved the combined efforts of a set of unified
extra-firm infrastructural agencies led by the Office of Scientific Research and Devel-
opment (OSRD), the War Production Board (WPB), the Manpower Development
Commission (MDC), and the Defense Plant Corporation (DPC). Each was dismantled
at the end of the war.
The key to implementation was inter-organizational connectedness. The OSRD, led
by Vannevar Bush, was tasked with building a national science and technology ‘extra-
firm’ infrastructure that could create an inter-organizational capability to design,
develop, and produce technologically advanced weapons systems. Examples such as
microwave or radar, penicillin, and synthetic rubber required basic, developmental,
and applied research to be married with design for manufacturability by mass-
production facilities. The latter required the production base of the country to be re-
engineered to meet the performance standards of cheaper, better, faster. When adopted
and extended by Japan in the post-war era, the process innovations became widely
known, imitated, and diffused as JIT, TQM, and SDWTs.⁶
With million Americans transferred into the armed services, the production
system had to be transformed. Designing the means to undertake the transformation
across the economy to meet the production targets was the task of the WPB and the
MDC. For example, meeting the production target of one B- bomber per hour
required the supply chain to deliver . million parts to the factory gates per hour.
The War Manpower Commission designed and operationalized the functional equiva-
lent of a fast-track national training programme to equip both management and labour
with the skills and organizational methods to meet the production targets.
Economic statisticians played a key role. The engineering challenge through which
the nation’s production system was restructured was critical to the implementation of
the Victory Program itself written by Simon Kuznets, chief economist at the War
Production Board. He and fellow economic statisticians diligently created statistical
tables on the existing and planned output of the nation’s manufacturing enterprises.
They identified sequential bottlenecks that required investments to remove them.
Kuznets, as the father of US national income and production accounts, was the perfect
⁶ Just-in-time, total quality management, and self-directed work teams.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
person and perhaps the only person who could have linked the nation’s production
system requirements with the Allies’ war strategy.
No doubt, the US Second World War policymaking experience was a special case.
Nevertheless, it is informative with respect to an economics of production, innovation
dynamics, and enterprise capability development.
It also offers a powerful negative lesson, examined more fully in section .. US
post-war policymaking has been dominated by debates over stabilization instruments
and targets that, in effect, rendered the production side of the economy invisible. The
focus of the Department of Commerce’s national account measurements of Keynesian
expenditures and income reflects this invisibility, as does the failure to incorporate a
production side into macroeconomic models. The dominance of macro stabilization
economics and the omission of production knowledge has prevailed at the Federal
Reserve Bank and the Treasury, the pinnacle of economic policymaking over recent
decades.
Kuznets and his team of statisticians did not have computers or today’s sophisticated
data-generating survey techniques, but they did construct tables measuring the pro-
duction capacity of the nation’s enterprises with estimates of the links between existing
output and the output that could be achieved by undertaking macroeconomic bottle-
neck analysis and diffusing the best human resource change methodologies. These
calculations were necessary inputs into the estimates of the nation’s supply capabilities
that lay behind the strategic military decision to delay the Allied invasion of Europe
until . Without them, the supply lines required for the D-Day landings would have
been problematic, and the decision was made to not land in Europe until the supplies
were in place to support the military drive across Europe of up to million men and
million tanks, aircraft, and vehicles in the year-long effort.
The wartime government did not depend upon or seek centralized authority to plan
the economy as demanded by the military. It meant subordinating military authority
over production planning to the economic statisticians at the WPB and subordinating
the technology priorities of the military authorities to the OSRD. Within the WPB, the
economic statisticians, partnering with production engineers, did not seek to supplant
operational decision making at the enterprise level. Instead, they devised policies,
including innovative planning accounting measures, to galvanize the energies of
those with the requisite expertise, skills, and experience to design methods and
practices to make advances in production performance happen.
The government took over the banking system’s role described by Schumpeter as the
‘headquarters of the capitalist system’. During the war, two-thirds of expenditure on
industrial facilities was directly financed by the government (White, : ; Jones
and Angly, ). Economic policymakers went outside the market system to create a
leasing mechanism to negotiate the industry–government divide. The Defense Plant
Corporation (DPC) was created in as a subsidiary of the Depression-era Recon-
struction Finance Corporation (RFC), ‘with such powers as it may deem necessary to
aid the Government of the United States in its national defense program’ (White, :
). The rules governing the RFC’s Depression-era financing of industry were
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
modified in May and June of to enable subsidiaries of the RFC to finance and own
defence plants, and to lease them to private industry (White, : ). Jessie Jones,
the head of the DPC, was described by Time magazine in the following terms: ‘In all
the U.S. today there is only one man whose power is greater: Franklin Roosevelt’
( January ).
. P-W P L
..................................................................................................................................
The Second World War experience permanently transformed government and busi-
ness institutional relationships in major ways. The neglect of economic analysis of
these changes and consequences stems in part from the triumph of the free-market
paradigm in post-war economic theory and policymaking. In this section, legacies of
the Second World War transformational experience that permanently changed gov-
ernment and industry inter-relationships are sketched.
First, while the Second World War mobilization agencies that implemented the
transformation and galvanized growth were disbanded, many of their functions were
incorporated into rapidly expanded departments of the federal government. The
Department of Defense and the Department of Energy became the lead agencies in
building a vast science/technology infrastructure which linked government agencies,
industrial, university, and government laboratories, and business enterprises. The
publicly stated purpose was national security. The Manhattan Project and the atom
bomb seared into the body politic the role that science and scientists could play in
defence and war. It was a de facto industrial policy administered by the Department of
Defense. The United States does not have a department of industry, as industrial policy
is ostensibly run by the Department of Commerce, but the title of the department is a
giveaway: it is not about industry as the domain of production.
Second, and closely related, the US government established an unrivalled manage-
ment capability in inventing disruptive technologies that to date business enterprises
have found difficult if not impossible to emulate. DARPA (Defense Advanced Research
Projects Agency) has had a major influence on the invention of, for example, the
Internet, UNIX, GPS, stealth fighters, the Windows operating system, the World Wide
Web, videoconferencing, and Google Maps.
Third, wartime planning, coordination, and accounting practices originally devel-
oped to manage multi-divisional enterprises were adapted to create a national indus-
trial planning capability. Known as control materials planning (CMP), the
performance accounting system involved the creation of a new tier of inter-
organizational management by which officers in government departments and prime
contractors worked together, shared offices, and moved freely between government
and contractor employment (Best, ). Today Boeing, for example, has a thousand
employees working in the Federal Aviation Authority.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Fourth, the government institutionalized a vast procurement capacity, as it was and
has remained the major customer of emergent technology-driven sectors. In fact, major
export industries of America in the post-war period received substantial government
R&D and purchasing support in their formative, low-productivity years (Markusen
and Yudken, ). This included aircraft, computers, electronics, telecommunica-
tions, and instruments. It has been estimated that the federal government funded
per cent of the R&D for the emerging electronics industry in the s but as late as the
mid-s the government purchased over two-thirds of the output of the aircraft
industry.
The wartime armaments industry morphed into a huge permanent government-
contractor system and created what H. L. Nieburg () termed the ‘contract state’. In
the words of Daniel Kevles (): ‘For almost a quarter century after , defense
research expenditures rose virtually exponentially, even in constant dollars, accounting
through for percent or more of the entire federal R&D budget. In , it was
estimated that there were , defense research projects; in the early s, perhaps
,’ (: , cited in Hounshell, : ).⁷
Fifth, in macroeconomic policymaking the government combined Keynesian
demand management with military expenditures which became a de facto long-term
employment policy. While economics employment policy discourse focused on fiscal
and monetary instruments, real-world high employment was dependent upon military
spending.
No other country had a science and technology infrastructure and government
participation in the business world approaching the scale of the United States. In this
respect, US defence policy is, in fact, its post-war industrial policy. Within the defence
establishment it is celebrated as dual-use technology policy. Government-funded R&D
for defence purposes generates new product and process ideas that can be put to
commercial use as well as that of national security. As industrial policy its success
record is mixed. On the plus side, it has fostered world-leading, high-tech regional
innovation systems in Silicon Valley and Greater Boston. Both regions have enjoyed a
rapidly expanding technology base, replenished by technological breakthroughs at an
unprecedented rate by rapidly growing spin-off firms from world-leading universities.
However, important as they have been in technology development, policy initiatives
elsewhere to establish high-tech clusters have not proven tractable, particularly in
localities suffering from the loss of manufacturing enterprises. This is understandable.
The wartime government’s Office of Scientific Research and Development attracted
many thousands of scientists and engineers to research, develop, and design advanced
technology weapons systems in California and Massachusetts at huge expense. The
result was a legacy post-war science, technology, and skill base which formed the
⁷ The extended global reach of the Pentagon was part of the process. In the s, the US armed
forces were stationed in only three countries abroad. During the Second World War the number grew to
thirty-nine. By the s the United States had over , military bases spread out over sixty-four
countries (Best and Connolly, []: –).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
foundation for emergent industrial ecosystems in which early-stage technology devel-
opment business systems could flourish. No single or even multiple state governments
can invest more than a small fraction of what the federal government invested in
Greater Boston and California from San Francisco south to San Diego (Wright, ).
In any case, de-industrialization has persisted despite the combination of New Deal
infrastructure investment in the South, the creation of the world-leading science and
technology infrastructure, and a huge government procurement programme including
for emergent sectors. Manufacturing employment declined by one-third between
and and by a third again in the s. While service and temporary employment
offset the lost manufacturing jobs, they did not provide the US$/hour-wage plus
benefits for non-college educated workers.
Macroeconomic policies did not come to the rescue. In fact, the wartime legacy
turned what had been an inward-looking to an outward-looking orientation which,
unintentionally, was a major force in driving American de-industrialization. The
Second World War ended the long era of the British Empire and Pax Americana filled
the vacuum. The United States and the Pentagon became the administrator of the
nation’s , military bases around the world. In exchange for becoming allies in the
Cold War the new US foreign industrial policy removed all barriers to imports and
offered open access to the world’s biggest market. The defeated nations took full
advantage of free entry into the massive US market to build manufacturing export
industries. Moreover, these countries pursued exchange-rate and interest-rate policies
in support of rebuilding their manufacturing bases. The exchange- and interest-rate
policies pursued by the United States, meanwhile, decimated domestic manufacturing
and supported the strategic export-driven policy frameworks of other nations.
Most prominently, the long, costly, and unpopular war in Southeast Asia was largely
funded by monetary creation rather than fiscal policy and the resultant inflation of the
s (Best, ). Federal Reserve Chairman Paul Voelker, appointed from Goldman
Sachs in by President Carter, increased the interest rate to per cent, seven
points over the inflation rate, with devastating effects on the cost of credit upon which
manufacturing investment is dependent. The high interest rates attracted huge capital
inflows and the demand for US dollars led to a per cent increase in the exchange rate
over the next four years. The consequences were devastating for the profitability and
global competitive advantage of US manufacturing. It marked the end of the Keynesian
macroeconomic era and ushered in the Voelker-Greenspan-Reagan era of neo-
liberalism. Clinton acquiesced and agreed to Japan’s manipulation of the value of the
yen in order to support Japanese manufacturing growth.
In its simplest terms, the United States turned to a stabilization-informed macro-
economic policy framework at the same time other nations were subordinating stabil-
ization policies to export-driven, capability-informed macroeconomic frameworks.
The high interest rates attracted short-term capital inflows which drove up the demand
for dollars and offset the growing trade imbalance in manufactured goods. Here
America’s macro and trade policies contributed hugely to the conversion of the
manufacturing belt into the Rust Belt.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
. T J E M:
R T M
P
..................................................................................................................................
It is now conventional wisdom that, first in Japan and then in Germany, competitors
emerged that built manufacturing export platforms based on more advanced produc-
tion systems capable of achieving higher performance standards. In time they gained
market share in the United States, which had been the world’s leading manufacturing
nation. But less appreciated is that competition between the Japanese and American
production systems was at the same time competition between two rival models of
technology management at both the enterprise and industrial policy levels. In fact,
foreign rivals pursued policy frameworks that turned America’s massive advantage in
science and technology to their own manufacturing advantage.
The competitive challenge to American industry began to appear in the s when
the United States first began losing market share to Japan in the steel industry. It was
attributed to a lack of investment in new continuous casting technologies by lethargic
American steel companies, long-time members of a cosy cartel. But market share
declines in complex production industries such as cameras, cars, and motorcycles
soon followed. There was little cause for concern as various interpretations of the
causes of decline in ‘traditional’ industries all agreed that America’s strength in high-
tech industries was unassailable. Heads finally turned in the early s as the pattern
was repeating itself in semiconductors followed by semiconductor equipment makers
and downstream industries such as advanced consumer electronics, computers, and
telecommunications. In the late s, Japanese machine-tool companies mounted a
vigorous and successful attack on America’s machine-tool industry with devastating
effect. They did so by ramping up the production of CNC (computer-controlled)
machine tools, a technology that had been invented in the United States but diffused
rapidly into manufacturing in Japan.
The Japanese production system evolved, in stages, into a superior technology
management capability that exposed a weakness in the American production system.
During the wartime production miracle, technological innovations were separated
from manufacturing. Innovations in radar systems, for example, were not introduced
to the aircraft production lines. The weakness of Germany and the reason it could not
expand production of aircraft even close to the US scale is that they continuously
changed aircraft design to improve its functioning. The United States did not; the
design was frozen. The miracle advances in technologically advanced weapons systems
were organized entirely separately.
Japan’s manufacturing advantage was not based on building a bigger science and
technology infrastructure than the United States. The Japanese business leaders and
policymakers focused on building competitive advantage by superior manufacturing
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
performance. They began by applying lessons about the primacy of production capabil-
ities, business organization, and skill formation from the US Second World War experi-
ence, and progressed rapidly up the production capability spectrum (Best, , ).
Japanese enterprises advanced and institutionalized Second World War US produc-
tion and management principles in the form of just-in-time, the quality movement,
and kaizen. Unlike US post-war industrial policy, their policy framework was strategic.
For example, they learned from W. Edwards Deming that US manufacturing enter-
prises did not embrace or even understand the fundamental organizational principle of
system integration and systems thinking.⁸ America’s leadership in industry had been
based on production engineering; but production engineering was never a concept in
economic policymaking in the post-war era and without policies based on an accurate
conception of production there could be no production economics. Second, Japanese
enterprises moved beyond competitive advantage in production performance in cost,
quality, and throughput efficiency to rapid new product development and technology
management. Third, based on superior technology management capability, Japanese
manufacturers converted access to America’s scientific and technology infrastructure
into a strategic competitive advantage against US manufacturing.
Unfortunately, in the post-war era, much of American business had turned to price-
led, low-cost strategies which locked them into productive structures and work organ-
izational practices and blinded them to the real competitive threat of enterprises
elsewhere that emphasized increasing labour productivity rather than lowering wage
costs.
The emergent Japanese manufacturing advantage can also be described as a rival
technology policy paradigm anchored not in leadership in science but in organizing an
industrial ecosystem in which business enterprises could pursue a strategy based on
building world-class manufacturing capabilities in production, new product develop-
ment, and technology management. In the United States the presumption was that US
technology policy would prevail, since Japan lacked a vast science and technology
infrastructure that included an unrivalled research-intensive university system produ-
cing scientists and engineers.
The result was a change in the dominant form of competition from price led to
product led. The defining feature of the mass-production system when it emerged, and
the reason that it put all other production systems on notice in its time was that it drove
down the costs and prices of production. The defining feature of the New Competition
emergent in Japan was rapid new product development created by the marriage of
⁸ Deming remarked that what he took to Japan was the ‘theory of the system’ (personal conversations,
). He meant, in part, that much of US business enterprise was functionally departmentalized into
profit centres to achieve local optimization without regard to interdependencies, and that with Japanese
management came managing interrelationship across business activities, hence the organizational
principle of process integration, later adopted by management consultants as process re-engineering.
Instead of optimizing business functions A, B, and C independently as in US business, the Japanese
focused on AB, AC, and ABC, thereby filling in white spots in the organizational charts of US firms
(Best, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
productivity and innovation, and the redefinition of both. The result was a new
interactive manufacturing and innovation dynamic. Japan did it, not by investing
heavily in the creation of a science and technology infrastructure, but by building a
production capability that could turn America’s technology knowledge base into a
national competitive advantage for Japan at the expense of American manufacturing.
The rival technology paradigm was about shifting the technological base from the
science end of the spectrum to the production end. Technological innovation is driven
as much by competitive dynamics as by ‘science push’.⁹ Research in fundamental
science is less important than cultivating the already existing technology base which
can be harvested for new technological combinations and permutations as part of the
product development process.
They all involve the creation of new technological knowledge. Knowledge is certainly
crucial to new product development. But knowledge is not research; knowledge is the
accumulated stock of wisdom that can be reinterpreted, combined and recombined in
new ways. Technological knowledge, unlike scientific knowledge, is not always codified
or even explicit. Polanyi, Penrose, and others have stressed the role of technological and
experiential knowledge as tacit or informal knowledge often built into collective
organizational practices, much as craft skills are inseparable from the muscle memory
of machinists and technicians who have learned by doing.
To summarize, product-led competition engendered new organizational capabilities
which involve the redefinition and integration of three processes:
. Manufacturing. The cell is the building block of the whole edifice; without cellular
manufacturing the rest of the business system cannot drive product-led
competition.
. Design/manufacturing cycle. Companies need to compete on the basis of rapid
new product development, or they will fall behind in technology adoption.
. Technology diffusion. This is pulled by the first two processes as distinct from
being pushed by autonomous R&D activities.
The US technology leadership paradigm was based on three implicit assumptions. In
this it was a failed industrial policy strategy.
The first assumption was that technological innovation travels along a one-way
sequence of activities proceeding from basic science to applied science to engineering
science to engineering design and development to production. The presupposition was
that scientific pre-eminence generated technological pre-eminence which, in turn, assures
product pre-eminence. The second assumption was that technology diffusion follows a
–-year cycle. By the time that Japan and other countries were able to capitalize on
⁹ Stephen Kline () presented a long list of industries that were formed without direct linkage to
science, at least new science developed in R&D laboratories: the jet engine, sewing machines, weaving
machinery, machine tools, most construction methods, space shuttles, turbomachinery, combined-cycle
power plants, vertical and slant take-off and landing aircraft, and integrated circuits.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
the commodity production stage of the product life cycle, US firms would have moved on
to leadership in the development of new products. The third assumption was that
organizational capabilities are not important in explaining competitive advantage.
Therefore, the threat to US manufacturing competitiveness came as a surprise. It was
witnessed first in an order-of-magnitude advance in both lower-cost and higher-quality
performance previously assumed to be a trade-off. Anchored in a participatory model
of work organization, the Japanese production system established new performance
standards for cost, quality, and time to market. The latter was a consequence of
superior new product development and technology management capabilities. The
consequences of the loss of competitiveness of American manufacturing were evident
with the unexpected fiscal crises of US manufacturing belt cities as early as the s.
To understand these new dynamic forces, including the structural roots of de-
industrialization, we must go inside the policy frameworks and core processes that
drive modern economies both in the United States and other nations.
. P S L:
T N S
..................................................................................................................................
The United States has always been divided between a Northern and a Southern
production system and social structures. While part of a single nation, the two regions
evolved radically distinctive models of capitalism, modes of economic governance,
business organization, and labour systems. From the early days of the plantation
economy, the South has been organized around extractive industries. In contrast,
from the early days of the manufacturing economy, the North underwent a historical
trajectory of industrial transition and technological innovation.
Economies are complex and terms arise in economics discourse to simplify and
enable discussion. For example, the term ‘miracle’ is commonly used to describe rapid
economic transformations that are outside conventional economic theory and policy
frameworks. I suggest that in the United States a common taxonomy of geographical
belts is another example. Miracles and belts are metaphors that facilitate communica-
tion about economic matters that are deemed important, but which are not anchored
within the boundaries of market-centric economics. Efforts to better understand both
require concepts that undermine the assumptions required by market fundamentalism.
In this section I apply the metaphor of economic ‘belts’ to contrast regionally distinct-
ive systems of production and economic governance that evolved in the United States.
It has a second purpose. The major argument of the chapter is that the neo-liberal
policy revolution in the s was not new to the nation but has always dominated
economic governance in the South. Its extension to the national policy framework for
the first time was a triumph of the South’s political elite and the production system it
governs.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
.. The Manufacturing Belt
America’s economic governance practices going back to the founding of the Republic
focused attention on infrastructural requirements, both physical and organizational, to
advance the nation’s productive structures. Educational, technical, and financial infra-
structures were organized within a strategic economic governance framework to
promote manufacturing and national independence.
Alexander Hamilton’s attention to manufacturing is well known, but I suggest that
Thomas Jefferson was an equally important developer of the emerging and globally
distinctive Northern production system (Best, ; Winchester, ).¹⁰ As President
Washington’s ambassador to France, Jefferson, like Benjamin Franklin, was highly
learned in the advances being made in French science and engineering. Jefferson
brought to America the production principle of interchangeability, a French invention
but not practice, and championed its introduction in the nation’s armouries. Under
Colonel Roswell Lee, the Springfield Armory in Massachusetts was organized to
operationalize the principle of interchangeability of parts which institutionalized
product engineering as a defining characteristic of what the British termed the ‘Ameri-
can system of manufacturing’ or just the ‘American System’ (Marshall, []:
–). This became the strategic industrial policy that organized the creation of the
first machine-tool industry based on interchangeability, a precondition for American
mass production. It also unleashed the competitive drive for ever-smaller dimensions
and precision engineering, perhaps the most important and enduring source of Ameri-
can technological leadership. The drive to ever-smaller critical-size dimensions is at the
core of America’s unmatched advantage in opening new technological domains (see
figure . in Best, ).
Industrial policies that are informed by fundamental production principles are
integral to advancing a nation’s productive structures and establishing industrial
success and national competitive advantage. But implementation depends upon invest-
ment in engineering education. As president, Jefferson founded the nation’s first
engineering college at West Point, birthing the Army Corps of Engineers. Thus
began the institutionalization of the American civil engineering expertise which
enabled physical infrastructural investments in transportation and energy and the
creation of America’s ‘industrial heartland’. Presidents Abraham Lincoln, a railroad
lawyer, and Franklin Roosevelt also undertook nationwide policies to advance engin-
eering and science education to upgrade the production capabilities of the nation’s
business enterprises and increase the skills and productivity of the nation’s labour
force. It is but one form of extra-firm infrastructure that impacts on business system
development, opportunities for innovation, and national productivity.
¹⁰ See Smith and Clancey (: ) for Jefferson’s letters on manufacturing, for example, ‘experi-
ence has taught me that manufactures are now as necessary to our independence as to our comfort’,
January ; and Marx (: ) for Jefferson’s views on machines and ‘technology’, before the term
was coined in by Jacob Bigelow.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
In these ways the skill formation domain of the triangular relations linking govern-
ment, education, and industry was shaped in sync with the emergence of a machinist
community that was integral to the emergence and growth of many new sectors and the
diffusion of the American practice of product engineering as the catalyst for tool design
and the historical trajectory of driving down critical-size dimensions. Precision engin-
eering opened new technological domains. Cities, including Springfield, MA, Provi-
dence, RI, and greater Boston, grew and extended to push the emergent manufacturing
belt westward.
Thus began the establishment of America’s industrial heartland, commonly
described as the manufacturing belt. Early in the s, in the words of Paul Krugman,
‘geographers noted the great bulk of U.S. manufacturing was concentrated in a
relatively small part of the Northeast and the eastern part of the Midwest . . . within the
approximate parallelogram Green Bay—St. Louis—Baltimore—Portland’ (Krugman,
: ). It proved remarkably persistent from its peak in when it is estimated
to have accounted for per cent of America’s manufacturing employment up until
when it still contained per cent of the nation’s manufacturing jobs. Equally remark-
able, until well into the twentieth century, ‘most of the manufacturing activities outside
[the manufacturing belt] were concentrated in processing of primary products or
manufacturing for a very local area’ (Krugman, : –).
This was the heartland of American manufacturing which propelled the nation’s
industrial leadership and was a platform for realizing Roosevelt’s Arsenal of Democ-
racy vision. It encompassed both the ‘American system of manufacturing’, driven by
the world’s first machine-tool industry based on the principle of interchangeability in
the nineteenth century, and the first mass-production enterprises organized by the
principle of flow in the first half of the twentieth century.¹¹
Wages increased with productivity; the public school system was funded by business
and local property taxes; research-intensive universities established by the Morrill Act
of flourished in every state throughout the region and established an educational
pathway to an engineering curriculum in sync with the needs of emerging technologies,
fast-growing enterprises, sectors, and clusters; the machine-tool industry acted as an
extra-firm infrastructure working closely with technology-innovative firms but also
provided the tooling, machines, instruments, and equipment for the mass producers
required for continuous innovation; state-chartered banks provided due diligence and
patient capital for growing enterprises, whole sectors, and cluster dynamic processes;
and the federal government designed, engineered, often funded, and organized the
building of transportation, energy, and communication material infrastructures that
turned the wheels of a multi-state region, combining a regional production system with
its productivity and wages with a matching demand side in the form of a large and
accessible market.
¹¹ Flow lines had existed but none before were organized around the engineering principle of
equalizing cycle times for all activities. This is a requirement for manufacturing without inventory.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
The post-war mythology has been that free markets created America’s industrial
heartland; but markets do not create, only people and organizations have the power to
create. Groups of people working together build and organize companies and, with the
support of government policies and infrastructures, mutually create industrial ecosys-
tems that foster cluster dynamic processes. The bottom line is that firms, individually
and collectively, are the drivers of innovation and production capability development;
markets are the servants of successful economic policymaking, not the masters.
Governments are organizers of the requisite regulatory systems and infrastructures
that can turn markets into useful servants of policy frameworks. Regulation is a
bulwark to prevent corporate political power from capturing government and fostering
a business culture dependent upon subsidization as distinct from an entrepreneurial
business culture that fosters innovation.
No other part of the nation had cities populated by symbiotically networked groups
of specialist innovative enterprises which collectively and cumulatively advanced a
region’s production capabilities, skill formation processes, and distinctive technology
bases. Manufacturing enterprises in the rest of the nation were largely concentrated in
the processing of primary products or producing for a local market. While some were
individually successful, none were embedded in innovative industrial ecosystems that
advanced a region’s production capabilities and skill base.
Krugman and others explain the geographical concentration of manufacturing in the
manufacturing belt in terms of declining transportation costs and expanding access to
an increasing national market, but these were the effect of successful industrial and
infrastructural policies. Market fundamentalism ignores how important the ways in
which the interrelations between government and the economy are organized is to
development. Historians debate whether it was the states or the federal government
that did more to lay the foundations of US industrial development. It was both
together. Lamoreaux and Wallis (n.d.) conclude that in the mid-western states an
‘extraordinary penetration of the state and civil society . . . was often strongly regulatory
in its impetus yet sustained by an unusual degree of legitimacy’. This is what distin-
guished the governance institutions upon which the industrial heartland of the United
States was built. It was an extraordinary example of social democracy.
.. The Sun Belt
In contrast to the Midwest, the South did not attach itself to the manufacturing system
that began along the north-east coast. Emancipation ended the plantation system in
and freed million slaves. The slaves were liberated, but the production system
was not transformed. The land remained concentrated, and the social and political
structure of the plantation economy persisted. New forms of labour coercion were
created, and the industrial structure remained one of resource extraction rather than
organizational capability development. What Eric Foner () calls the unfinished
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
revolution was entrenched along with race hierarchy. The th Amendment to the
Constitution prohibited slavery and involuntary servitude but it had an escape clause.
Anyone duly convicted of a crime was exempted from the prohibition. Rapidly, a vast
number of ex-slaves became subject to newly passed local laws such as vagrancy, which
included not being able to show current employment, to create a post-emancipation,
peonage labour system composed of various forms of involuntary servitude such as
penal labour, convict leasing, and debt bondage.¹² The debt-peonage system was
dependent on sharecroppers’ lack of numeracy. President Lyndon B. Johnson abol-
ished peonage in , which ‘rapidly decreased sharecropping in every plantation
nationwide’.¹³
Manufacturing was limited to large processing factories in lumber, tobacco, and
chemicals or to small craft enterprises serving local markets. The ubiquitous metal-
working machine shops supplying parts, tooling, and machinery critical to the emer-
gence of the manufacturing belt cities were non-existent in the South. Post-Civil War
tenant farmers and sharecroppers, unlike landowning farmers of the North, did not
create enough demand to foster local village or small-town markets and stimulate city-
region growth dynamics.
David Meyer estimates that the South’s share of national value added in manufac-
turing remained about per cent from to (: ). Textiles were the
growth exception, increasing from to per cent over the period. During the period
only textile firms relocated into or started in the South in pursuit of large supplies of
low-wage labour. With this exception, the industrial ecosystems and the markets of the
Northern manufacturing cities provided too many advantages for firms to move
outside the manufacturing belt.
Robin Einhorn’s (a) classic comparison of the tax systems of the North and the
South has become highly relevant to the present period. From the beginning the
Northern colonies collected taxes for the public provision of material and organiza-
tional infrastructures, such as education and the federal armouries, and legislated for a
financial regulatory environment that would support the development of the nation’s
nascent manufacturing capabilities. It evolved into a three-tier system of local, state,
and national-level government, each with tax-raising power to fund public services and
otherwise foster industry–government partnerships, and develop the businesses,
employment opportunities, and communities that came to constitute the nation’s
industrial heartland.
The South had an entirely different agenda. In the words of Einhorn (b):
Slaveholders had little need for transportation improvements (since their land was
often already on good transportation links such as rivers) and hardly any interest in
an educated workforce (it was illegal to teach slaves to read and write because
slaveholders thought education would help African Americans seize their freedom).
¹² https://en.wikipedia.org/wiki/Peon; https://en.wikipedia.org/wiki/Slavery_in_the_United_States.
¹³ https://en.wikipedia.org/wiki/History_of_unfree_labor_in_the_United_States.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Slaveholders wanted the military, not least to promote the westward expansion of
slavery, and they also wanted local police forces (‘slave patrols’) to protect them
against rebellious slaves. They wanted all manner of government action to protect
slavery, while they tended to dismiss everything else as wasteful government
spending.
The Southern colonies feared that taxes on wealth (i.e. slaves) could be a Trojan horse
threatening the institution of slavery. In the name of states’ rights and freedom from
federal government interference and regulations, the South opposed all forms of public
power and public decision-making. Manufacturing cities did not develop, even with
huge subsidies from TVA, and other national infrastructure and low-cost energy
supplied by the federal government. State and local government were not organized
to learn from their rapidly growing Northern counterparts.
By the early decades of the twentieth century, Southern political leaders began to
pursue a strategy of modernizing state government, improving public facilities, and
subsidizing business enterprises to encourage industrial growth (Cobb, : –). By
the s and s states had sanctioned and supervised the sale of municipal bonds
to finance industrial plant construction. While the granting of subsidies by towns to
encourage access to railroad companies, for example, had long existed, it became the
centrepiece of the region’s industrial policy. It began a new era of competitive subsid-
ization by state and local governments attracting and adopting ‘footloose’ branches of
enterprises from the manufacturing belt rather than investing in the infrastructures to
grow indigenous manufacturing enterprises (Cobb, ). The labour strategy of the
South did not include establishing skill-formation institutions, either within business
enterprises or public education. It did not stem the Great Migration in which million
African Americans migrated out of the South between and .¹⁴
The Depression of the s hit hard. In , President Franklin D. Roosevelt
declared that America’s number one economic problem was the continued impover-
ishment in the South. The New Deal imposed the most extravagant regional-cum-
industrial policy in the nation’s history and set the stage for the South’s growth during
the Second World War and the post-war decades. In his account of the impact of the
New Deal in South Carolina, Jack Irby Hayes, Jr writes that the Public Works
Administration (PWA)—created under the National Industrial Recovery Act during
the first wave of New Deal legislation—‘literally changed the face of the Palmetto State.
Its visible legacy a half-century later included hundreds of low-cost housing units to
replace urban slums, miles of modern highways, a host of schools, courthouses,
hospitals, post offices, and administrative buildings, a thriving shipyard, a number of
new sewage and water systems, and two huge hydroelectric projects’ (Hayes, : ).
Gavin Wright (, ) confirms the size of the New Deal’s infrastructural
investments in the South. In , one-third of the nation’s urban population drank
untreated water; by , less than . per cent. Southern cities were disproportionate
beneficiaries of this remarkable upgrade, but prior to the New Deal, many of them
¹⁴ (https://en.wikipedia.org/wiki/Great_Migration_(African_American).)
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
lacked the fiscal capacity or political will to improve basic public services. Altogether,
the New Deal spent more than US$ billion in the South, much of which supported ‘the
types of services that southern cities would not have provided even in good times’.
Equally important for regional development was the electrification of farms, homes,
and industries. By far the most visible and controversial New Deal electric power
programme was the Tennessee Valley Authority (TVA), created during the first
hundred days of legislation in . Between and , the TVA completed
seven major dams. Rapid diffusion of electricity usage was encouraged not just by lower
rates but by subsidized loans for rural service, initially from the TVA but after
through the Rural Electrification Administration (REA), primarily to cooperatives. By
, per cent of households in the valley were electrified, compared to just per
cent in .¹⁵
The South’s post-war industrial strategy was two-pronged: first, to build a regional
competitive advantage in high-volume, low-cost, price-led production processes to
become dominant in the national market. The business strategy was to attract enter-
prises and particularly branches of labour-intensive enterprises primarily from the
manufacturing belt. The New Deal infrastructural investments in transportation, elec-
tric power, and communications were necessary for the success of the business strategy.
The large textile and furniture factories set a pattern for much of subsequent Southern
industrialization. In contrast to the product-led business strategies required to compete
in the rapidly changing complex production industries, the sectors in which the South
specialized did not entail investing in workforce skills, which precluded transitioning to
world-class manufacturing practices or participatory forms of work organization and
which ultimately made the South vulnerable to off-shoring for low-wage labour.
The second part of the strategy was to build and exercise political muscle in Wash-
ington, DC to attract federal funding concentrating heavily on military installations and
bases from the Department of Defense, the Atomic Energy Commission and its succes-
sor the Department of Energy, and NASA. During the Second World War the WPB gave
special treatment to the South and invested heavily in military bases and production.
The South’s share of military prime contract awards roughly doubled from under per
cent in to roughly per cent in the years – to nearly one-quarter in the
s (Schulman, : , table .). In the words of Schulman, ‘Defense dollars
permeated nearly every town in the region’ (: ), and by more Southerners
worked in defence-related industries than in textiles, synthetics, and apparel combined.
The South was hugely successful in attracting defence contractors. ‘During the
s, the New York Times reported that defence was the single largest employer in
four southern states, outpacing agriculture, textiles, lumber and all the others. And of
the top ten US defence contractors, seven, including Lockheed, McDonnell-Douglas,
General Dynamics, and Rockwell operated large installations in the South’ (Schulman,
: ). Marietta, Georgia, the home of Lockheed-Georgia, the single largest
¹⁵ See Robert Caro (: –) for a description of rural life without electricity.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
business organization in the Southeast in the s and s, employed workers in
fifty-five of Georgia’s counties (Schulman, : ). But the strategy was not
limited to military contracts. The South long played the role of commissary to the
nation’s armed forces, providing textiles, tobacco, food, and coal.
The South had become fortress Dixie and the Sun Belt became the southern
periphery of the Gun Belt.
.. The Gun Belt
The United States transitioned from a virtually non-existent pre-war weapons industry
to a defence budget larger than the defence budgets of all other nations combined.¹⁵
Defence expenditures remained over per cent of GDP into the s and over per
cent until the end of the Cold War.¹⁶ Harry Magdoff and Paul Sweezy () argued
that the success of the New Economics of Keynesian demand-management theory
rested heavily on military expenditures. Out of the total federal purchases of US$.
trillion between and , US$. trillion were defence-related spending (includ-
ing debt payments for previous wars, veterans’ benefits, space exploration, and the
Atomic Energy Commission). Without this spending, they argue, unemployment rates
in the post-war period would have approximated those of the Great Depression.
Geographically, the Gun Belt forms a periphery along the east and west coasts and
across the South (Markusen et. al., ; Markusen and Yudken, ; Wright, ).
The Gun Belt is a composite of two types of industrial policy. The first involves large
R&D expenditures to design and develop technologically advanced weapons systems.
It has fostered high-tech regional innovation systems consisting of research-intensive
universities, open-system business models, and ‘manufactories of new sectors’
(Best, ), of which Silicon Valley and Greater Boston are the leading examples.
Other cities or regions that have leveraged defence department R&D to build research-
intensive universities and develop distinctive technology bases include the North
Carolina Research Triangle, Los Angeles, San Diego, and Seattle.¹⁷ Federal funds
are complemented by city and state government infrastructural support to
¹⁵ To quote Jessica Mathews (): ‘Today U.S. defense spending is exceptional in two ways. First, it
spends more than the next eight largest spenders combined—China, Saudi Arabia, India, France, Russia,
Britain, Germany, and Japan. Second, defense accounts for almost three-fifths of the federal govern-
ment’s discretionary budget. This is a measure of all federal spending other than mandatory allotments
to entitlements and interest on the national debt. Discretionary spending is everything else the govern-
ment does.’
¹⁶ In the Second World War defence spending peaked at per cent of GDP, and then declined to
about per cent at the height of the Cold War. Thereafter it declined to – per cent of GDP, with
surges during the s and the s (https://www.usgovernmentspending.com/defense_spending).
¹⁷ Northern Virginia is a special case; most of its research activity is classified. See Best ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
establish industrial ecosystems that foster localized technology and enterprise
capability development.¹⁸
The second form of defence-driven industrial policy is purchasing contracts for
supply of the myriad provisions required to support the various arms and activities of
the defence department at home and abroad. The major labour-intensive industries of
the South, such as textiles and furniture, have long-established supply relationships to
the government to complement commercial sales. But the production system is that of
the South, which specializes in commodity products for which design changes are rare
and investment in skilled labour is not required.
The South has attracted Gun-Belt federal funding for high-tech programmes, most
notably NASA in Florida and Houston, and research universities in Atlanta, Austin,
and San Antonio. But the region has not established cities that foster indigenous
innovative enterprises and the cluster growth dynamics that historically populated
the North and built the nation’s industrial heartland.
In terms of employment, the Gun Belt became as important to the US economy and
industrial policy in the post-war era as the manufacturing belt and industrial policy
that fostered manufacturing infrastructures and nurtured city growth dynamics had
been to the pre-war and wartime economy. Moreover, the high-tech regions have been
hugely successful in advanced technology weapons systems and creating new spin-off
information technology sectors. Nevertheless, despite the huge defence expenditures
on R&D and high-tech business development, and other military spending, manufac-
turing’s share of total US employment dropped from close to per cent in to
per cent in (Baily and Bosworth, ). What the Gun Belt has not done is to
create high-paying manufacturing employment on the scale of the manufacturing belt
in the United States’ industrial heartland.
.. The Rust Belt
The s were a turning point in US industrial leadership and policymaking. The
manufacturing belt became the Rust Belt.¹⁹ Factory employment in the nation’s
manufacturing sector declined by one-third between and .
In an ironic twist with tragic consequences, the industrial heartland in the United
States, where management and labour worked together to meet the production targets
to win the Second World War, became the victim of the nation’s success. At exactly the
time when industrial policy was most necessary to address the challenge of restructur-
ing the nation’s manufacturing system, US political leadership and economic policy-
makers chose to look the other way. The fate of the US industrial heartland was
¹⁸ See Gavin Wright () for a history of the ‘handful of “knowledge economy” clusters that dot the
country’s western coastline’. Wright maintains that ‘World War II was indeed the triggering shock that
set in motion chains of events whose outcome was the Pacific coast economy as we know it’.
¹⁹ https://en.wikipedia.org/wiki/Rust_Belt.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
subordinated to the pursuit of the United States’ new political role in the global
economy. It was an opportunity seized upon by the South’s political leaders to pursue
a campaign to dismantle tax, regulatory, and labour policies and the manufacturing
infrastructures that had long been integral to the nation’s industrial heartland.
The political and business leadership of the South has never accepted the production
organization challenge of Henry Ford to make changes in the organization of produc-
tion, engineering principles, and work practices to advance productivity and deliver
the wages upon which the US middle class was built. The New Deal came up against the
hierarchical social structure of the South and its dependence on maintaining the
repressive labour systems and the political power of the beneficiaries of the extractive
industries upon which vast fortunes had been built that had endured for centuries.
History offers few if any examples of the landowning elites of plantation economies
establishing transformative policy frameworks. New territories were developed and
new types of extractive industries have been organized, but the autocratic, exploitative
business model is a constant.
The first signs of what became a long-term de-industrialization process were in the
s when the fortunes of the cities that constituted the manufacturing belt began to
suffer from declining tax bases, which came to a head in the fiscal crisis of big-city
governments in the s (O’Connor, ; Best and Connolly, []; Bluestone
and Harrison, ).
Historian Jon Teaford examined twelve large cities in the manufacturing belt, each of
which had a population of over a half a million in . None of these cities had lost
population before the decade of the s and most had enjoyed the reputation of a
boomtown, doubling in population every ten years. All these cities, except for New
York, declined in population during every decade from to (Teaford, : ).
Only Boston was later to recover as the region became known as the Rust Belt. All other
cities undertook industrial policies to revitalize, but to little effect. Larger forces were at
play. Teaford states:
It was a gradual slide from a position of economic supremacy, that slide beginning
prior to World War II and persisting throughout the remainder of the century.
Midwestern cities no longer were economic miracles as in bygone days . . . at the
close of the s they all feared an emerging vision of the interior as void . . .
Midwestern cities were on the defensive, and their economic and political leaders
would embody every tactic, offer every lure, and unleash every power at their
command to keep a corporate headquarters, revive an aging steel plant, or halt
the slow death of downtown retailing. (Teaford, )
The de-industrialization dynamics have not been limited to the North. The United
States lost one-third of its manufacturing employment in the decade of the s but
this time it was disproportionately in small towns of the rural South. David Carlton and
Peter Coclanis () cite the example of North Carolina, the leading manufacturing
state of the South. In the first decade of this century, North Carolina’s manufacturing
employment dropped by per cent, from , to ,. Two of North
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Carolina’s major industries suffered the most: textiles lost per cent of its employ-
ment between and , and furniture lost nearly per cent.
. N- D
‘A S’
..................................................................................................................................
The s marked the beginning of the end of the tradition of the anti-trust and pro-
regulation agenda based on the distrust of concentration of political and economic
power going back to Thomas Jefferson and James Madison, the framers of the
Constitution and the authors of Federalist Paper No. . They argued the nation
could have democracy or concentrated wealth, but not both. While corporations barely
existed at the time of the ratification of the United States Constitution and Bill of
Rights, stark warnings about the risks to the survival of democratic institutions of
corporations with unaccountable power engaging in political activities were articulated
by Jefferson and Madison a quarter-century after their ratification.
In , Jefferson, second president of the United States, urged that we ‘crush in its
birth the aristocracy of our monied corporations which dare already to challenge our
government to a trial of strength, and bid defiance to the laws of our country’. Madison,
fourth president and also hailed as the ‘father of the Constitution’, was equally blunt:
‘There is an evil which ought to be guarded against in the indefinite accumulation of
property from the capacity of holding it in perpetuity by ecclesiastical corporations . . . the
growing wealth acquired by them never fails to be a source of abuses’ (Whitehouse
and Stinnett, : –).
In the time of Jefferson and Madison, the challenge of political dominance of
government by ‘monied corporations’ had only begun. By the Gilded Age of the last
decades of the s the power of corporations to foster economic prosperity and to
capture government were both operating in high gear. But the power of the ‘robber
barons’ to control government and subvert democracy did not last. The resulting
increase in inequality and economic hardship provoked the progressive era in US
politics.
President Theodore Roosevelt engineered the passage of the Tillman Act in
which outlawed corporate contributions to politics.²⁰ In , President Woodrow
Wilson passed into law the Federal Reserve Act which was to supervise banks and had
the dual mandate of maximizing employment and keeping inflation low, in the
Clayton Antitrust Act was passed prohibiting anti-competitive mergers, predatory and
discriminatory pricing, and other forms of unethical corporate behaviour, and the
²⁰ The Tillman Act did not require proof of corrupt intent by the corporation, mere contribution of
corporate funds to politicians sufficed to establish ‘corruption’. Political spending was not potentially
corrupting, it was corruption as the term was used in the Act (Whitehouse and Stinnett, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Federal Trade Commission was created also in to protect consumers. President
Franklin Roosevelt signed the United States Banking Act (Glass–Steagall) in , which
decentralized and restructured the banking industry, including the separation of com-
mercial banks from investment banks and securities dealers; and the National Labor
Relations Act (Wagner) in , which guarantees the right of private-sector employees
to organize into trade unions, to engage in collective bargaining, and to take collective
action such as strikes. His administration also launched anti-trust investigations into
‘housing, construction, tire, newsprint, steel, potash, sulphur, retail, fertilizer, tobacco,
shoe, and various agricultural industries’ (Stoller, ).²¹ The Celler–Kefauver Act was
passed in to reform and strengthen the Clayton Antitrust Act of , which had
amended the Sherman Antitrust Act of .The anti-trust tradition dating back to
Thomas Jefferson lasted for the first three post-Second World War decades.
Matt Stoller () dates the dismantling of the regulation tradition to the alliance of
the post-Watergate generation of congressional Democrats with the traditional anti-
regulation Republicans which in combined to overthrow Wright Patman, the
chairman of the US House Committee on Banking and Currency. A former cotton
tenant farmer, he had served in Congress since . In the words of Stoller:
It was a revolution and signalled the end of an era in which banks and big business
were largely kept under control. In Patman authored the Robinson–Patman
Act, followed by the Bank Secrecy Act, successfully defended Glass–Steagall . . .
authored the Employment Act of and initiated the first investigation into
the Nixon administration over Watergate. With Supreme Court Justice Louis
Brandeis . . . the New Dealers drafted legislation into legally actionable ideas to
formalize the sentiment that big business and democracy were rivals. ‘We may
have democracy, or we may have wealth concentrated in the hands of the few,’
Brandeis said, ‘but we can’t have both.’ (Stoller, )
President Jimmy Carter deregulated the trucking, banking, and airline industries with
the appointment of Alfred Kahn as ‘anti-inflation czar’. President Reagan went further;
the dismantling of regulation became his major legacy and heralded the end of
regulatory policies to constrain economic and political power. President Clinton joined
the deregulation crusade and oversaw rapid increases in monopoly and accompanying
political power in banking, media, oil, and telecommunications.
Not by coincidence, the s marked the beginning of a shift in economic discourse
from the mixed economy of Paul Samuelson’s economics textbooks to the policy-
making dominance of market fundamentalism. Alan Greenspan captured the essence
²¹ Franklin D. Roosevelt described the powerful forces of ‘organized money’ as ‘this resolute enemy
within our gates’: ‘Never before in all our history have these forces been so united against one candidate
as they stand against me—and I welcome their hatred. I should like to have it said of my first
administration that in it the forces of selfishness and of lust for power met their match. I should like
to have it said of my second administration that in it these forces met their master’ (Whitehouse and
Stinnett, : ; see also Phillips-Fein, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
of market fundamentalism: ‘The ultimate regulator of competition in a free economy is
the capital market.’²² He became the nation’s single most powerful economic policy-
maker. From to Greenspan was chairman of the Council of Economic
Advisors under President Gerald Ford before becoming chair of the Federal Reserve
Bank of the United States from to . As observed by Stoller: ‘The following
year the financial crisis exploded the myth that the nation’s deregulated financial
institutions were the guarantors of economic progress. The financial bailouts also
illustrated their political power.’
Perhaps an even greater measure of the myth of de-regulation to foster economic
prosperity has been the explosive growth in inequality and the hollowing out of the
nation’s manufacturing capabilities in recent decades. In the s, a period of
widespread prosperity, the ratio between executive pay and worker pay was :; it
reached over : in . In , the Securities and Exchange Commission issued a
new rule—b- of the Securities Exchange Act. Historically, stock buybacks by
corporate managers were illegal. The new rule enabled corporate managers to purchase
large quantities of their company’s stock without being accused of stock-price manipu-
lation. Buybacks reward investors and CEOs only. The consequences for workers and
their communities have been devastating. In a study of companies listed continu-
ously in the S&P between and , William Lazonick found stock buybacks
consumed per cent and dividends per cent of net income. In his words:
‘Excluding the recession years and , buybacks and dividends taken together
have averaged per cent of net earnings for all corporations since ’ (). This
leaves little for R&D, investing in production capabilities, new product development,
technology management, worker training, worker benefits, worker salaries.
The corporate business model, by which the nation established global leadership in
manufacturing, was swept away and the engineering culture and worker skills upon
which it depended went with it. Put simply, the value-creating business system gave
way to a value-extracting business system organized to drive up CEO salaries and
shareholder returns. Business enterprises were financialized as activist investors, aka
vulture capitalists, who buy a controlling stake in a corporation, cut jobs and other
costs to drive up the share price, and get out leaving a weakened business behind. They
ignore the long-term work of building a company and all too often destroy it instead.
The destructive consequences of neo-liberalism for the common good have been
obscured by billionaire-funded foundations and thinktanks to shape economic dis-
course.²³ The American Enterprise Institute, the Cato Foundation, the Heritage
²² From a paper presented at the Antitrust Seminar of the National Association of Business Econo-
mists in Cleveland, September . Available at https://www.aei.org/carpe-diem/alan-greenspan-
on-monopoly-and-antitrust-policy-in-/.
²³ President Richard Nixon appointed Lewis Powell, a long-time attorney for the tobacco industry, to
the Supreme Court in . He was the author of the Powell Memorandum, a secretive call to action for
billionaires to overthrow the tyranny of regulation by spreading the doctrine of market fundamentalism
(Mayer, ; Phillips-Fein, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Foundation, and the Olin Foundation are major benefactors and champions of
billionaire-funded neo-liberal economic discourse.
The economics they espouse did not alert the nation to the destructive consequences
of the neo-liberalism. The reality is that the nation’s once powerful manufacturing
enterprises were left ill equipped to compete against production systems organized
around world-class manufacturing principles and self-directed work teams as in Japan,
co-determination models for building innovative business enterprises as in Germany,
or the latecomer advantage successfully implemented by Chinese policymakers starting
at the bottom but undertaking a business development strategy organized to move up
the production capability spectrum (Best, ).
We turn next to an alternative economics perspective and policy framework that draws
lessons from the building of the nation’s industrial heartland, the building of the Arsenal
of Democracy, as well as successful post-war transformative experiences elsewhere.
. T C T P
F
..................................................................................................................................
The catastrophic consequences of four decades of neo-liberal policymaking are becom-
ing increasingly apparent. The once world-leading productive structures of the US
economy have undergone perhaps the sharpest organizational erosion in history. The
challenge of overcoming deficits in production capabilities, worker skills, infrastruc-
tures, and industrial ecosystems to reclaim the American Dream are formidable, even
without pandemics and climate change.
The first requirement is an objective assessment of the state of the nation’s economy.
The second requirement is to learn lessons from historical experiences of successful
economic transformations. These are called economic miracles, and it will take a
transformative vision and political leadership on the economic ‘miracle’ scale to
address the combined challenges of pandemics, climate change, and nearly half a
century of neo-liberalism. Besides Franklin Roosevelt and the Second World War,
examples of such leadership include the work of Deng Xiaoping (China), Taiichi Ohno/
Edwards Deming (Japan), Ludwig Erhard (West Germany), Ralph Flanders (Massa-
chusetts), and Kenneth Whitaker (Ireland) (Best, ). These are all architects of
strategic policy frameworks that have transformed economies facing serious challenges.
I use the capability triad as an expository device to characterize common policy
framework lessons. It asserts the following proposition:
Rapid growth can only be achieved through the careful pursuit of interconnected
strategies in each of three domains: production capabilities, business organization,
and skill formation. The three domains are not separable and additive components
of growth, but mutually interdependent sub systems of a single developmental
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
process. No one of the three elements of the capability triad can contribute to
growth independently of mutual adjustment processes involving all three elements.
(Best, : ; Best, )
Roosevelt’s Arsenal of Democracy policy framework is informative with respect to the
failure of the New Deal. The latter was based on a Keynesian-like deficient demand
economics in which increased spending and infrastructure investments would expand
demand and incentivize business to increase production. Like all market-centric
economics, the focus did not go inside the organization of production and business
organization to focus on capability development; the focus instead was on taxes and
subsidies without regard to the structures of production and business organization.
President Roosevelt’s vision of creating an Arsenal of Democracy to win the war
against fascism called for a policy framework to achieve an order of magnitude increase
in output without an increase in the civilian labour force. Unlike the New Deal, it was
anchored in a policy framework informed by the critical interdependence of mutual
adjustment processes linking the three domains of production, business, and skills.
The Arsenal of Democracy policy framework drew upon production engineers of the
nation’s enterprises with the most advanced production capabilities. It required process
engineering leaders in organizational innovation like Charles Sorensen of Ford Motor
Company (production principle of flow), William Knudsen of General Motors, and the
senior leaders of skill training programmes at leading companies, to develop and
implement the organizational changes in management practices needed to transform
the nation’s productive structures and double output in under five years. It also
required the creation of the Defense Plant Corporation as a subsidiary of the New
Deal’s Reconstruction Finance Corporation, ‘with the powers as it may deem necessary
to aid the Government of the United States in its national defense program’ (White,
: ).
The capability triad extends New Deal policymaking in a second major way. It
broadens the policy framework from material and social infrastructures such as
transportation, energy, water supply, communication, social housing, and public health
and sanitation to organizational infrastructures critical to business development,
including access to human capital, long-term finance, science and technical expertise,
and a machine tool/software engineering sector. I refer to the latter as extra-firm
infrastructures or more narrowly manufacturing infrastructures. All have suffered as
a consequence of neo-liberalism.²⁴
Roosevelt learned from the New Deal experience that material infrastructure invest-
ment is not enough to foster economic transformation. The TVA programme, the
²⁴ By one estimate, with a precipitous drop in water infrastructure spending per capita since the
s, the United States has built up a debt of US$ trillion that must be paid over the next twenty-five
years (Madrigal, ). The American Society of Civil Engineers estimates it will cost US$. trillion to
get the United States back to an acceptable level of debt in the nation’s material infrastructures
(Madrigal, ; Bipartisan Policy Center, ). To these must be added the erosion of public health
infrastructural investments exposed by the Covid- pandemic.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
biggest ever regional development policy in the United States, is an example. It
succeeded as material infrastructure policy but even with massive investments in
electrification, transportation, clean water, and communication it did not galvanize
the emergence of a critical mass of capability-developing business enterprises and
thereby industrial development. The whole region did not produce a single import-
replacing and export-generating city (Jacobs, : ). The South continued to
import virtually all the manufactured products it had historically imported. It failed
as industrial development and innovation policy.²⁵
The United States’ Second World War experience provides examples of extra-firm
infrastructures designed and coordinated to target productive structure changes within
and across regional or national populations of enterprises. The experience is an
exemplar of industrial policies that focus on enterprise change methodologies to
advance production, new product development, and technology management capabil-
ities at the macroeconomic level.
The German post-war economic miracle is an exemplar of industrial policy in the
form of local and state governments as organizers of industrial ecosystems in which
small and medium-sized business enterprises are supported by a range of capability-
enabling infrastructures (Best, ). Local governments have the local knowledge to
coordinate, focus, and galvanize participation in the historically specific range of
infrastructural agencies required to drive holistic organizational change cutting across
the three domains of production, business, and skill formation. At the same time,
sustained growth depends upon national governments providing budget support for
physical and organizational infrastructure, ideally by investing in and nurturing
regional industrial ecosystems in which a whole host of innovation dynamics charac-
terized by Babbage, Marshall, Young, Penrose, Schumpeter, Richardson, and Jacobs
can be found (Best, ).
The crafting of strategic policy frameworks has both a capability-informed micro-
economic dimension with respect to industrial and regulatory policies and a capability-
informed macroeconomic policy dimension including stabilization, exchange rate, and
interest-rate policies. A common feature of rapid growth experiences is that govern-
ment stabilization policy is subservient to capability development policy. Manufactur-
ing performance is highly sensitive to the pursuit of stabilization policies that are
subservient to capability development policies, and the failure to do so is a key feature
differentiating post-war policymaking in the United States from that of her major
manufacturing rivals. The tragedy is that while the industrial policy by which the US
leadership in production was created has not been appreciated within the United
States, it has provided lessons which latecomer nations have put to good use.
When an economic system is trapped in a fragmented, low-level capability triad,
government leadership is required to craft a strategic policy framework, outline a
roadmap of the way ahead, invest in the requisite extra-firm infrastructures, and
²⁵ The South, with rare exceptions, did not promote industrial districts or cluster dynamic processes
that are integral to industrial innovation. See Best ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
galvanize the energies of all those required to progress the roadmap, transition to a
more advanced capability triad, and thereby transform the production system. This is
not what markets do. It is what government leadership has, in special cases, organized
with outstanding success. It offers the only way to address the climate-change challenge
in the time required to make it happen.
. A: M C
C I
P
..................................................................................................................................
Production as the sphere of technological innovation became a subject of political
economy with the publication in of Charles Babbage’s On the Economy of
Machinery and Manufactures.²⁶ He went beyond Smith’s rhetorical pin factory to
explore the interiors of the most technologically innovative enterprises of his day.
Babbage introduced a research methodology of systematic observation of change to
political economy.²⁷ He undertook, in his words, an ‘examination of the workshops . . .
which contain within them a rich mine of knowledge’ (Babbage, []: ) to
understand the ‘processes of manufactures’ and to apprehend their ‘general principles
and mutual relations’ (Babbage, []: –). He distinguished ‘mechanical
principles’ from the principles of political economy which ‘seemed to pervade many
establishments’. But at the same time, he found that the ‘interior economy of factories’
and questions of political economy were ‘so interwoven . . . that it was deemed inad-
visable to separate the two subjects’ (Babbage, []: ). Unfortunately, as with
his drawings of the first computer, Babbage’s contribution to political economy has
long been neglected and only rediscovered in recent times.²⁸
Joseph Schumpeter paid tribute to Babbage’s book more than a century after its
publication as follows:
This work which was widely used (also by Marx), is a remarkable performance by a
remarkable man. Babbage . . . was an economist of note. His chief merit was that he
combined a command of simple but sound economic theory with a thorough first-
²⁶ For an extended treatment from which this is drawn, see Best ().
²⁷ Babbage’s pursuit of principles of change was an application of the systemic observation approach
to scientific progress being advanced by his fellow natural philosophers at Cambridge University. The
pursuit of systemic-observational principles of change united the emerging sciences of evolutionary
biology, geology, and astronomy. In the case of political economy, scientific investigation started with
observation of production in workshops and factories in which engineering practices were most
innovative and change was most dramatic.
²⁸ The Babbage ‘new system of manufacturing’ did not, however, disappear in the real world; instead
the integration of technology development within production and scientific research reappeared in the
form of real-world, vertically integrated industrial enterprises that drove the Second Industrial Revolu-
tion in the United States (Chandler, ; Lazonick, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
hand knowledge of industrial technology and of the business procedure relevant
thereto. This almost unique combination of acquirements enabled him to provide
not only a large quantity of well-known facts but also, unlike other writers who did
the same thing, interpretations. He excelled, amongst other things, in conceptual-
ization, his definitions of a machine and his conception of invention are deservedly
famous. (Schumpeter, : , cited in Hyman, : )²⁹, ³⁰
Schumpeter made a distinction between price-led and product-led competition and
stressed the necessary role of credit to invest in capability development. Babbage
distinguished types of manufacturing systems and the role of principles of production,
distinguished technology from science, and stressed the critical role of a policy frame-
work in promoting innovation capabilities. Both insisted on the interconnectedness of
production and business organization and together characterized the mediating role of
extra-firm infrastructures in fostering the building of successful manufacturing enter-
prises: in Babbage’s case, government investment in science and technology, and in
Schumpeter’s, banking institutions for investment for the creation of ‘future values’,
innovation, and capability development. Failure to do so, as in the case of the United
Kingdom in Babbage’s day, would cause the prosperity of the nation to suffer from a
loss of competitive advantage and markets.
The idea of a production system extends economics beyond the firm and the form
of competition to the dynamics of industrial change. Alfred Marshall’s Principles of
Economics, first published in , extended Babbage into an emergent theory of
industrial organization.³¹ In a celebrated passage, Marshall described economies aris-
ing from an increase in the scale of production as falling into ‘two classes—those
dependent on the general development of the industry, and those dependent upon the
individual houses of business engaged in it and the efficiency of their management; that
is into external and internal economies’ ( []: and repeated on ).
External economies ‘result from the growth of correlated branches of industry which
mutually assist one another’ (Marshall, []: ). With the inclusion of
organization and inter-firm dynamics as a variable, Marshall’s ‘law of increasing
²⁹ For the modern reader, Babbage’s On the Economy of Machinery and Manufactures can be read as
an early version of Vannevar Bush’s highly influential Science the Endless Frontier, published in .
Both were pioneers in designing complex machines that preceded the computer. Both combined deep
practical and scientific knowledge surrounding the leading-edge engineering innovations and ‘mechan-
ical principles’ of their times. Both authored, although over a century apart, a visionary text in which
productivity and national wealth could be continuously advanced by iterative co-adaptation of science
and production engineering.
³⁰ Simon Kuznets and Babbage also shared a common theme. Kuznets’ empirical studies of long-run
trends attributed gains in productivity to the marriage of science and production, and the creation of
new industries. But while Vannevar Bush and Kuznets linked economic progress to scientific advance,
Babbage articulated a political economy framework which brings technology out from the shadow of
science.
³¹ In Marshall’s words, ‘The law of increasing return may be worded thus: An increase of labour and
capital leads generally to improved organization, which increases the efficiency of the work of capital’
( []: ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
returns’ introduces a growth dynamic of cumulative increasing returns, later advanced
by Thorstein Veblen, Allyn Young, and Gunnar Myrdal.
Edith Penrose went inside the business enterprise to distinguish resources that are
purchased in the market from productive resources that require experience and
teamwork to develop (). The growing firm develops distinctive productive
resources or capabilities to meet emergent market opportunities, but success not only
produces new products but also releases resources that can be put to work identifying a
new round of opportunities. This is the learning theory of the growth of the firm.
Jane Jacobs asked the questions: Why do cities grow? Why did today’s major cities
undergo a period of explosive growth? Why do some cities continue to grow over a
long period while others go into decline? She examines cities historically, giving special
attention to cases of rapid growth to discover patterns of complex interactions in their
most pronounced forms. She sees cities as the engines of economic advance, providing
markets, jobs, capital, and technology for themselves, the regions around them, and
other cities as well.
Jane Jacobs’ The Economy of Cities was published in . Rather than celebrating
economic efficiency, Jacobs celebrates a city’s growth dynamics as expressed in the rate
of addition of new goods and services. Sustained city growth is simultaneously a
process of increasing differentiation of skills and an experimental process of new
product development and sector evolution. In her words: ‘Existing divisions of labor
multiply into more divisions of labor by grace of intervening added activities that yield
up more sums of work to be divided’ (Jacobs, : ). The ‘intervening added
activities’ are described in terms of new ‘work’ combined with multiple trials and
errors linking the old to the new divisions of labour. The increasing differentiation in
skills increases the opportunities for innovation and for sustained city growth.
A
I wish to thank Eva Paus and Lindsay Whitfield for extensive comments on an early draft of
this chapter. As always, I owe a debt to John Bradley for feedback and advice along the way.
I am most grateful to Rick Best, Carol Heim, and Gavin Wright for sharing their accumulated
experience, knowledge, and wisdom in conversations over these matters. They have offered
insights, ideas, references, and corrections that I have incorporated throughout the chapter.
We all share a passion for the issues, but I alone am responsible for the claims being made and
the shortcomings that will inevitably have to be addressed.
R
Acemoğlu, Daron and David Autor () ‘Skills, Tasks, and Technologies: Implications for
Employment and Earnings’, in Orley Ashenfelter and David Card (eds) Handbook of Labor
Economics, Vol. B. Amsterdam: Elsevier, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Atkinson, Robert D., Luke Stewart, Scott Andes, and Stephen Ezell () ‘Worse Than the
Great Depression, What Experts Are Missing about American Manufacturing Decline’.
Washington, DC: The Information Technology & Innovation Foundation.
Babbage, Charles ( []) On the Economy of Machinery and Manufactures. Cirences-
ter: Echo Library.
Baily, Martin and Barry Bosworth () ‘US Manufacturing: Understanding its Past and its
Potential Future’, Journal of Economic Perspectives (): –.
Best, Michael H. () ‘Notes on Inflation’, The Review of Radical Political Economics IV():
–.
Best, Michael H. () The New Competition: Institutions of Industrial Restructuring.
Cambridge, MA: Harvard University Press.
Best, Michael H. () The New Competitive Advantage: The Renewal of American Industry.
Oxford: Oxford University Press.
Best, Michael H. () ‘Review of Internet Alley: High Tech in Tysons Corner, –,
Cambridge: MIT Press, by Paul Ceruzzi’, in Business History (): –.
Best, Michael H. () ‘Greater Boston’s Industrial Ecosystem: A Manufactory of Sectors’,
Technovation –: –.
Best, Michael H. () How Growth Really Happens: The Making of Economic Miracles
through Production, Governance, and Skills. Princeton, NJ: Princeton University Press.
Best, Michael H. () ‘The Economics of Innovation behind Cluster Dynamic Processes’, in
Justin Yifu Lin and Arkebe Oqubay (eds) Oxford Handbook of Industrial Hubs and
Economic Development. Oxford: Oxford University Press.
Best, Michael H. and William E. Connolly ( []) The Politicized Economy. nd
edition. Lexington, MA: D. C. Heath.
Bipartisan Policy Center () ‘America’s Aging Water Structure’. Washington,
DC. Available at https://bipartisanpolicy.org/wp-content/uploads///BPC-Aging-
Water-Infrastructure.pdf.
Blanchflower, David () Not Working: Where Have All the Good Jobs Gone? Princeton, NJ:
Princeton University Press.
Bluestone, Barry and Bennett Harrison () The Deindustrialization of America: Plant
Closings, Community Abandonment, and the Dismantling of Basic Industry. New York:
Basic Books.
Carlton, David and Peter Coclanis () ‘The Roots of Southern Deindustrialization’,
Challenge (–): –.
Caro, Robert () The Path to Power: The Years of Lyndon Johnson. New York: Knopf.
Chandler, Alfred () The Visible Hand. Cambridge, MA: Harvard University Press.
Cobb, James () The Selling of the South: The Southern Crusade for Industrial Development
–. nd edition. Urbana, IL: University of Illinois Press.
Einhorn, Robin (a) American Taxation, American Slavery. Chicago, IL: University of
Chicago Press.
Einhorn, Robin (b) ‘Tax Aversion and the Legacy of Slavery’. Available at https://www.
press.uchicago.edu/Misc/Chicago/.html p.
Foner, Eric () The Fiery Trial: Abraham Lincoln and American Slavery. New York:
W. W. Norton.
Frey, Carl () The Technology Trap. Princeton, NJ: Princeton University Press.
Hayes, Jack I. () South Carolina and the New Deal. Columbia, SC: University of South
Carolina Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.
Hounshell, David A. () ‘The Evolution of Industrial Research in the United States’, in
Richard S. Rosenbloom and William J. Spencer (eds) Engines of Innovation: U.S. Industrial
Research at the End of an Era. Boston, MA: Harvard Business School Press, pp. –.
Hyman, Anthony () Charles Babbage: Pioneer of the Computer. Oxford: Oxford Univer-
sity Press.
Jacobs, Jane () The Economy of Cities. New York: Random House.
Jacobs, Jane () Cities and the Wealth of Nations. New York: Vintage.
Jones, Jesse H. and Edward Angly () Fifty Billion Dollars: My Thirteen Years with the RFC
(–). New York: The Macmillan Company.
Kevles, Daniel J. () The Physicists: The History of a Scientific Community in Modern
America. New York: Knopf.
Kline, Stephen () ‘Innovation is Not a Linear Process’, Research Management
(Jul–Aug): –.
Krugman, Paul () Geography and Trade. Cambridge, MA: MIT Press.
Lamoreaux, Nancy R. and John J. Wallis (n.d.) ‘General Laws and the Mid-nineteenth-
century Transformation of American Political Economy: Massachusetts, New York,
Indiana, and Beyond’, National Bureau of Economic Research.
Lazonick, William () Business Organization and the Myth of the Market Economy,
Cambridge: Cambridge University Press.
Lazonick, William () ‘Profits without Prosperity’, Harvard Business Review, September:
–.
Lind, Michael () Made in Texas: George W. Bush and the Southern Takeover of American
Politics. New York: Basic Books.
Madrigal, Alexis C. () ‘The Toxic Bubble of Technical Debt Threatening America’,
Atlantic, October.
Magdoff, Harry and Paul Sweezy () ‘Capitalism and Unemployment’, Monthly Review
June: –.
Markusen, Ann and Joel Yudken () Dismantling the Cold War Economy. New York:
Basic Books.
Markusen, Ann, Peter Hall, Scott Campbell, and Sabina Deitrick () The Rise of the
Gunbelt: The Military Remapping of Industrial America. New York: Oxford University
Press.
Marshall, Alfred ( []) Principles of Economics. th edition. London and New York:
Macmillan.
Marx, Leo () ‘The Machine’, in Merritt Roe Smith and Gregory Clancey (eds) Major
Problems in the History of American Technology: Documents and Essays. Boston, MA:
Houghton Mifflin, pp. –.
Mathews, Jessica T. () ‘America’s Indefensible Defense Budget’, The New York Review of
Books, July.
Mayer, Jane () Dark Money: How a Secretive Group of Billionaires is Trying to Buy
Political Control in the US. London: Scribe Press.
Meyer, David R. () The Roots of American Industrialization. Baltimore, MD: Johns
Hopkins University Press.
Nieburg, H. L. () In the Name of Science. Chicago, IL: Quadrangle Books.
O’Connor, James () The Fiscal Crisis of the State. New York: St. Martin’s Press.
Penrose, Edith () The Theory of the Growth of the Firm. Oxford: Basil Blackwell and New
York: John Wiley and Sons. Revised edition . Oxford: Oxford University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
-
Phillips-Fein, Kim () Invisible Hands: The Businessmen’s Crusade against the New Deal.
New York: W.W. Norton & Company.
Piketty, Thomas, Emmanuel Saez, and Gabriel Zucman () ‘Distributional National
Accounts: Methods and Estimates for the United States’, Quarterly Journal of Economics
(): –.
Pisano, Gary and Willy Shih () Producing Prosperity: Why America Needs a Manufac-
turing Renaissance. Boston, MA: Harvard Business Review Press.
Schulman, Bruce () From Cotton Belt to Sunbelt. Durham, NC: Duke University Press.
Schumpeter, Joseph () History of Economic Analysis. London: Allen and Unwin.
Shermer, Elizabeth () Sunbelt Capitalism: Phoenix and the Transformation of American
Politics. Philadelphia, PA: University of Pennsylvania Press.
Smith, Merritt Roe and Gregory Clancey (eds) () Major Problems in the History of
American Technology: Documents and Essays. Boston, MA: Houghton Mifflin.
Stoller, Matt () ‘How Democrats Killed their Populist Soul’, The Atlantic, October.
Teaford, Jon C. () The Rough Road to Renaissance: Urban Revitalization in America,
–. Baltimore, MD: Johns Hopkins University Press.
Teaford, Jon C. () Cities of the Heartland: The Rise and Fall of the Industrial Midwest.
Bloomington, IN: Indiana University Press.
White, Gerald T. () ‘Financing Industrial Expansion for War: The Origin of the Defense
Plant Corporation Leases’, The Journal of Economic History (): –.
Whitehouse, Sheldon and Melanie Wachtell Stinnett () Captured: The Corporate Infil-
tration of American Democracy. New York: The New Press.
Winchester, Simon () Exactly: How Precision Engineers Created the Modern World.
London: William Collins.
Wright, Gavin () Old South, New South: Revolutions in the Southern Economy since the
Civil War. New York: Basic Books.
Wright, Gavin () ‘The New Deal and the Modernization of the South’, Federal History,
Jan. Issue .
Wright, Gavin () ‘World War II, the Cold War, and the Knowledge Economies of the
Pacific Coast’, in Mark Brilliant and David Kennedy (eds) World War II and the West It
Wrought. Stanford, CA: Stanford University Press, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
A Comparative Perspective
.............................................................................................................
. I
..................................................................................................................................
T chapter examines industrial policy implemented in European countries across
time, especially after the Second World War and in recent years. It briefly shows that
industrialization never occurs without strong supporting industrial policy providing
the enabling conditions for the deep structural changes involved, such as infrastructure,
capabilities, and human capital, and often direct involvement in production, especially
in strategic sectors. This is true for the pioneer of industrialization, Britain in the
eighteenth century, as well as later industrializers in continental Europe in the nine-
teenth and twentieth centuries. Industrialization is associated with the creation and
consolidation of nation states, and industrial policy has been carried out to strengthen
the power of these states, not only because industrial development increased wealth,
hence economic and political power, but also because industrialization contributed to
military equipment and capacity. This led to national perspectives on industrial
development and industrial policy, at the expense of regional imbalances.
After the Second World War, industrial policy continued as an instrument of the
power of nation states, especially in the first phase of reconstruction and development
where it was massively, though selectively, implemented. Three phases of industrial
policy since can be distinguished (Bianchi and Labory, , a): strong and
selective intervention in the first three decades of the period, market-led approaches in
the s and s, and what has been called a pragmatic approach at the turn of the
century.
The first phase is that of interventionist and selective industrial policy, characterized
by direct intervention in markets, with the government often being producer through
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
state ownership. Such policies tended to favour ‘national champions’ or consisted of
‘picking winners’. In Europe, this was also accompanied by a lax implementation of
competition policy and regulation of the ‘command-and-control’ type. This type of
policy started to be questioned in the s, when state-owned firms began to display a
number of inefficiencies and were unable to restructure after crises.
The second period is the s and s, when competition policy was imple-
mented more stringently, regulation became incentive based, and measures to favour
structural changes were preferably horizontal—implemented across all sectors of the
economy rather than sector or firm specific. Preferred measures included policies for
SMEs, favouring their networking and supporting entrepreneurship by simplifying
firm creation procedures, providing training, better access to finance, innovation
policies favouring R&D collaborative programmes, financing research projects on
important—generic—technologies, and then favouring the interaction between uni-
versities and industry for technological transfer. The aim of industrial policy in that
period was to provide the conditions for the competitiveness of industry.
The focus on providing the conditions for the competitiveness of firms and the
development of sectors continues in the third period of industrial policy. This essen-
tially starts at the turn of the new century, when industrial firms, concerned with the
intensification of global competition induced by globalization, increasingly call for
industrial policy. Globalization means the integration of the world market, thanks to
new technologies and to political changes in a number of countries that have allowed
them to enter world trade agreements (China entered the WTO in ). Competition
policy is still stringently applied, regulation is rather incentive based, measures and
actions are primarily horizontal and aim at providing the conditions for competitive-
ness and development; however, vertical measures in the sense of measures specific to
sectors are also envisaged if they are necessary to reach the objectives.
The term ‘industrial policy’ is also used again, not to mean the selective policies of
the past, but to indicate the support necessary for industrial development, namely
structural changes, requiring new infrastructure, adoption of new technologies, devel-
oping new capabilities and new institutions.
Industrial policy strategies proposed at the turn of the new century emphasize the
importance of knowledge creation, and hence innovation policy, as well as policies on
education and training to raise the skills in the labour force. Bottom-up processes have
increasingly been stressed, with industrial development starting in specific poles or
territories where particular knowledge and competencies are concentrated. Hence, for
instance, the policy of clusters, especially high-tech ones, implemented in many
countries. The new century is characterized by significant and numerous technological
changes, and innovations in many scientific and technological fields to which indus-
tries have to adapt by digitalizing, and changing products, production processes, and
distribution channels as digital platforms become powerful new market intermediaries
(Bianchi and Labory, ). These challenges, which most European countries are
addressing in their industrial policies, are those of the Fourth Industrial Revolution.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
This chapter examines the experiences of industrial policy implementation in some
European countries. The aim is not an exhaustive review of all European countries’
policies, nor a systematic comparison of all instruments. Rather, broad policy lines are
compared, and what emerges is that while all European countries have followed
broadly similar policies, some divergence exists regarding particular focuses, such as
attention to regional imbalances and the empowerment of regional or local govern-
ment levels to contribute to industrial development, or the strength of support for
particular firm size. For instance, Germany has paid attention to its SME base, the
Mittlestand, while France and the United Kingdom have not effectively done so, or at
least not at the appropriate time: offshoring by large firms in the latter two countries
has caused major difficulties for their SMEs and perhaps contributed to more acute de-
industrialization.
This chapter is structured as follows. We first provide a definition and taxonomy
of industrial policy, followed by a review of the role of industrial policy in the first
three industrial revolutions. We then analyse countries’ experiences from before
looking at the current phase of industrial policy implementation, which is character-
ized by a number of challenges, such as globalization and the Fourth Industrial
Revolution. In section . we reflect on the evidence provided in the chapter and
draw conclusions.
We largely use previous research (Bianchi and Labory, a, b, , a,
b) to make the review in the first part of this chapter, while the analysis of current
industrial policy essentially confronts official documents on the national strategies.
. I P: D
T
..................................................................................................................................
There are numerous definitions of industrial policy in the literature, making it an
‘elusive concept’ (Vanden Bosch, ). Some definitions are restrictive and selective
and exclude horizontal measures that treat all firms and all sectors the same (R&D
programmes, training, SME support, and so on). Thus, Brander (: ) defines
industrial policy as a ‘coordinated selection’, namely firm or industry selection through
government planning (coordination). This type of definition is closely linked to
industrial policies implemented in the immediate aftermath of the Second World
War, when ‘national champions’ were strongly supported, leading to a lack of struc-
tural adjustment when shocks arose or the competitive context changed.
Other definitions are broader. For instance, Donges (: ) considers industrial
policy as comprising all government measures that influence industry, such as national
investment policy, regional and labour policy. For Curzon-Price (: ), industrial
policy consists in sets of measures implemented with the objective of impeding or
favouring structural change.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
Recent literature (Cimoli et al., ; O’Sullivan et al., ; Chang et al., ;
Bailey and Tomlinson, ; Andreoni and Chang, ; Bianchi and Labory, a,
) can be synthesized to provide a definition that seems to be widely accepted today.
First, industry does not mean exclusively manufacturing but includes all productive
activities, including services. This makes sense because manufacturing activities are
increasingly bundled with services (see Chang and Hauge, , for an interesting
discussion on this). Industry, then, is the capacity to organize production by mobilizing
both tangible and intangible resources. Second, industrial policy comprises a variety of
instruments and actions that are combined in order to set competitive rules and
accompany structural change. The competitive conditions in which firms operate
frequently change for various reasons, such as variations in the extent of the market
or technological innovations. Industrial policy must adjust the rules of the game as a
result of these changes; it must also adopt a long-term perspective to favour the
structural adjustment of enterprises.
Industrial policy can be defensive—protecting existing firms in the face of structural
changes, or proactive—anticipating changes and implementing measures that favour
structural changes. The former type of industrial policy often impedes or delays
inevitable changes, ultimately raising the costs of transformations.
Many policy actions affect industries: fiscal, monetary, environmental, trade, innov-
ation, and labour policy instruments have a direct or indirect impact on industries. It
can therefore be argued that all countries and territories implement industrial policies
in one way or another. However, what is important to stress is that industrial policy is a
deliberate attempt by the government (at the local, regional, or national level) to
orientate industrial development towards specific paths. Such orientation can take
various forms, from building infrastructure to favour particular sectors to promoting
the adoption of new technologies in existing sectors in order to induce their upgrading.
It can be ‘interventionist’, or ‘picking the winner’, in the sense of choosing specific
industries that are developed from scratch, with for instance high investments, creation
of appropriate infrastructure and training of human capital, and sometimes state
ownership. It can be more inclined to letting market forces play, for instance by
providing the conditions for industrial development, and letting entrepreneurs make
choices and implement strategies as a result of which new industries can emerge.
A taxonomy of industrial policy actions can be created from this definition (Labory,
: Pelkmans, ), dividing actions into two categories: measures not aimed at
industry but which have an impact on it; and measures aimed at industry. The first
group includes macroeconomic stabilization policies (monetary policies influence
inflation and interest rates, affecting both consumer purchasing power and business
investment opportunities), or social and labour policies. Education policies aim at the
social development of the territory but also influence the availability of human capital
for business.
The second group includes all measures directly aimed at industry, which can be
divided into three subgroups: (i) measures defining competitive conditions, such
as antitrust policy and product regulation; and measures aimed at enhancing
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
business capabilities which can be (ii) horizontal, concerning all firms and industries,
such as support to R&D, development of human capital, access to financing, and so on,
or (iii) vertical, specific to particular industries, such as public procurement of specific
products, investment in specific technologies or specific skills, for example, creation of
engineering schools.
A particular issue in the definition of industrial policy is coherence, given that the
wide variety of possible measures may have conflicting objectives or unintended
combined effects (Bianchi and Labory, a). Instruments are often used for various
objectives: for instance, training policy is useful both for social purposes and for the
provision of appropriately skilled human capital; energy policy often has both social
(access to energy for all at reasonable cost) and industrial goals (ensuring energy costs
do not negatively affect business competitiveness), and sometimes also geopolitical
ones (relations with producing countries). The objectives can sometimes conflict, as
when geopolitical interests lead to a preference for certain energy sources although
their efficiency might not be optimal. Similarly, trade policy usually aims at eliminating
trade barriers, which can conflict with industrial policy when the new industries need
temporary protection to develop.
. I I
P
..................................................................................................................................
Industrial policies have been implemented in most countries since the First Industrial
Revolution at the end of the eighteenth and beginning of the nineteenth century,
although with varying degrees of deliberate planning and monitoring. The main reason
is that industrial capacity becomes the main determinant of the wealth of nations, as
stressed by Adam Smith (). Countries have to develop this capacity in order to
affirm their strength, both directly because it determines wealth generated in the
country, and indirectly because industries also produce military equipment.
Industrialization requires complex sets of policy instruments even in the First
Industrial Revolution. They are generally determined by a new technological system
(Gille, ) or paradigm (Freeman and Lourça, ), but also new needs in society
and a changing organizational model which adapts to the new context so that techno-
logical progress impacts on economic development. In the First Industrial Revolution,
the factory system transforms the organization of production from craftsmanship to
the division of labour. Its diffusion requires new resources and skills, and a new social
structure. Entrepreneurs creating and managing factories constitute a new social class,
which increasingly influences the political process. Cities transform with the creation of
factories, since the latter attract a workforce previously hired in agriculture, hence a
rural exodus and the growth of urban areas, which have to re-organize and offer new
services, from transport to housing and progressively schooling.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
The state must therefore intervene at the local level to develop new services in cities
(transport, housing, and schooling), but also at the national level since industrialization
requires a new institutional framework, including contract law, protection of intellec-
tual property rights, financial and insurance systems. Countries industrializing after the
pioneers have to implement particularly strong industrial policy in terms of direct
intervention in markets, since their industries are developing in a competitive context
where they are immediately challenged by first-industrializer industries. They also have
to absorb new knowledge and new technologies rapidly, since technological change
proceeds continuously in the nineteenth and twentieth centuries: knowledge absorp-
tion has to be combined with the development of research competencies if it is to follow
and take an active part in the innovation process.
The first industrial revolutions (IRs) are based on the increasing use of coal as energy
source; iron (First Industrial Revolution) and later steel (Second Industrial Revolution)
as main raw material; and the diffusion of the steam engine in many activities. In the early
nineteenth century, electricity becomes an integral part of continued innovations in the
Second Industrial Revolution. Railways are a key element in nineteenth-century industrial
development because they enlarge the market from regional to national and international.
Steamships complement railways to facilitate international trade. The development of
railways also stimulates further innovations, since they require infrastructure such as
bridges, but also a specific organization and planning to avoid incidents and delays. The
organizational innovations introduced in the management of railway companies are often
argued to have been implemented in the large companies that progressively emerged in
the second half of the nineteenth century (Bianchi and Labory, ).
.. The United Kingdom
The United Kingdom was the pioneer of the First Industrial Revolution, in the sense
that key inventions were made in that country and the first factories developed
there. Industrialization then diffused to other European countries (Belgium, France,
Germany), the United States, and later Japan. Policies to support this process were
especially strong in countries which followed the United Kingdom. Even in the latter
part of the twentieth century, catching-up countries such as Korea, Taiwan, and China
did implement industrial policy (see Lall, ; Allen, ).
Whether the United Kingdom also implemented industrial policy in the First
Industrial Revolution is debated. Bairoch () claims that the British government
implemented industrial policy well before the First Industrial Revolution, using instru-
ments such as tariff protection, subsidies, and export taxes from as early as the
fourteenth century to support development of the woollen textile industry. This
support was later extended to all industrial sectors. Complementary measures included
massive investment in infrastructure and development of the financial sector to
support it. Measures were taken to protect the new industry and avoid imitation in
other countries, such as a ban on exports of machines in the late eighteenth and early
nineteenth century.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
However, a number of scholars argue that the measures taken by the British
government were not part of an intentional industrialization programme, but rather
aimed at protecting particular lobbies (Mokyr, ; Allen, ). According to them,
for instance, the aim of the Calico Act was to protect the lobbies in the cotton industry
(Mokyr, ), although it had the secondary effect of promoting the development of
that industry. Another example is the heavy taxation imposed by the central govern-
ment, which was mainly used for military purposes and not industrial development;
however, this spending allowed Britain to gain dominance over sea routes, which was
favourable to trade. The development of education, science, and technology was left to
private initiative rather than being defined in an industrialization programme (Van
Neuss, ).
Industrialization starts in Great Britain around , with a series of inventions (the
spinning jenny, the water frame, and the mule) making it possible to use machines in
production, especially in the cotton sector. The rapid pace of innovation contributes to
the development of factories and industries, and especially of the steam engine,
continuously improved throughout the nineteenth century. Industrialization acceler-
ates thanks to the railways boom from the s. France starts industrializing between
and with the diffusion of weaving looms and the building of the first
railways. From , Germany, Canada, and the United States become rivals of France
and the United Kingdom, while Japan and Russia join after .
According to Allen (), industrial policy implemented by followers consisted of
four main actions: unification of the internal market; external tariffs to protect domes-
tic industry; development of infrastructure such as roads and later railways; and
development of human capital, with better health thanks to improvements in agricul-
ture and food security, as well as education and training. Sweden and Germany appear
to have been pioneers in the latter, establishing universal basic education in and
respectively.
.. Germany
Germany was the most active in this forced industrialization (Landes, ). Until the
unification of the Reich, King Frederick the Great (–) actively promoted new
industry: factories were set up, particularly in the steel and linen industries, together
with road and railway infrastructure. The financial system was developed with the
creation of investment banks. The availability of human capital was also ensured with
compulsory education, resulting in a schooling rate of per cent (Landes, ).
Academic research also substantially improved with a focus on industrial applications,
both for the state (military equipment) and for business (for instance, chemistry). The
market was unified with the Zollverein of and protected, following the recom-
mendations of List who had observed trade protection policy in the United States
(Bianchi and Labory, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
.. France
Industrialization was realized in a similar way in France, thanks to the creation of factories
by entrepreneurs, state investment in public goods such as railways and other infrastruc-
ture, and the development of a financial system based on banks and shareholders’
associations (known as caisses). Industrial policy in France was based on the Colbertist
doctrine, named after the seventeenth-century minister who created specific companies
belonging to the monarchy that were granted monopoly (Levy-Leboyer, ). State
intervention remained important in France especially after the Second World War.
.. Italy
Italy started industrializing in the late nineteenth and early twentieth century, with
strong intervention by the state, culminating in the creation of the Institute for
Industrial Reconstruction at the beginning of the s, which took shares in numer-
ous companies in strategic sectors (steel, energy, transport, and communications) after
the financial crisis.
Throughout the twentieth century, innovations continue at a sustained pace, based
on scientific discoveries in all fields generating two new industrial revolutions. The
Second Industrial Revolution is primarily based on electricity and steel, but also
chemicals and the automobile industry, where mass production begins and is later
diffused to all industries. The Third Industrial Revolution after the Second World War
concerns oil as the main energy source, but also nuclear energy, aerospace, automobile,
computer, and telecommunications industries (Freeman and Lourça, ).
. I P
T- C
..................................................................................................................................
European countries implemented industrial policies after the Second World War,
initially reconstruction after the devastation of war. Many industries had been turned
into war industries and had to re-organize. The United States provided financial
support for this effort with the Marshall Plan (European Recovery Programme) of
. The political economy of industrial policy at that time was to ensure that
Western European countries would recover to become prosperous economies that
could face the threat of communism during the Cold War, besides providing a market
for American firms.
Industrial policy was interventionist in the first phase, with the state often the
producer through state-owned enterprises, especially in infrastructural (transport
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and telecommunications) and strategic sectors, such as coal and steel. This strong
intervention also translated into the promotion of national champions that could deal
with international competition: the explicit aim of this policy in France was to have
large firms able to compete against American ones.¹ Another aim was to develop the
defence industry as a Cold War deterrent, and this led to important R&D programmes,
for instance in the nuclear and telecommunications industries in France and the
United Kingdom in particular; much less so in Germany and Italy, which were defeated
countries.
Other European countries that were more politically neutral or at a different stage of
development made different strategic choices. All European countries benefited from
the economic integration programme, starting with the ECSC (European Coal and
Steel Community) in and the EEC (European Economic Community) in .
The Treaty of Rome set up a common market between the member states following
different stages of integration, from trade union to the single market (see Landesmann
and Stöllinger, Chapter of this volume). The market therefore enlarged for the
member states, allowing firms to exploit higher economies of scale and scope, since
both volume and product variety could increase. The original six member countries—
France, Germany, Italy, the Netherlands, Belgium, and Luxembourg—expanded to
include Denmark, the United Kingdom, and Ireland in , Greece in , Spain and
Portugal in , Austria, Finland, and Sweden in , and the countries of Eastern
and Central Europe from onwards.²
The single market is thus often considered as the main industrial policy of the
European Union (Pelkmans, ). Other aspects of industrial policy at the European
level are competition policy and trade policy. Ensuring fair competition on the
European market is therefore a key element, as well as ensuring open trade worldwide.
While the European level has constantly stressed the importance of innovation
policy, with a number of European R&D programmes, such as ESPRIT and EUREKA
in the s (see Chapter by Landesmann and Stöllinger in this volume), the main
competence regarding industrial policy (of which innovation policy is a part) is at the
national level. European treaties have included an article on industrial policy since the
Maastricht Treaty of , but it invites member states to support the competitiveness
of their industries with particular attention to SMEs and their collaboration, as well as
R&D and innovation, privileging horizontal measures, that is, measures not specific to
firms or sectors. Industrial policy (called enterprise or competitiveness policy) is
mentioned at the European level only in the second phase of industrial policy imple-
mentation, starting with the new approach formulated by Commissioner Bangemann
in . Earlier debates at the European level had included the Colonna Report of ,
which stressed that the creation of the single market and other exogenous factors would
¹ An influential reflection on this subject was published by Jean-Jacques Servan-Schreiber in :
‘Le défi américain’ (the American Challenge).
² Cyprus, Czech Republic, Poland, Estonia, Lithuania, Latvia, Slovakia, Slovenia, Malta, and Hungary
in ; Bulgaria and Romania in ; Croatia in .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
make the structural adjustment of European firms necessary. However, after the
difficulties for European industries generated by the oil crisis of the s, the reaction
of the member states was to pursue a defensive policy. The best illustration is the
Davignon Plan of , which intervened to support the steel industry in crisis:
minimum prices and important firm subsidies were provided to reduce production
capacity. This led to protection of the existing firms (avoidance of failures) but without
encouragement to realize structural adjustment.
The increasing trade in the European Community was, however, beneficial to
businesses and economy in the member states, which supported their industries during
this first period.
.. Italy
In Italy, the literature agrees on the important role of the state in its industrial develop-
ment (e.g. Bianchi, ). After the Second World War the country was still lagging
behind the United Kingdom, Germany, and France. The government intervened to
modernize and develop the country, mainly with subsidies to industry and large invest-
ment through the state-holding Institute for Industrial Reconstruction, with large state-
owned companies acting as leader. Trade was progressively liberalized in the s, first
in the ECSC and in the EEC from . Italy then chose a growth strategy based on
exports. The government supported declining industries in the s, while the emphasis
shifted in the s when it realized both the importance of SMEs in the industrial
system, especially those grouped in industrial districts, and the need to promote research
and innovation. Support to industrial districts started being provided at the regional
level, using the European structural funds. IRI was closed at the end of the s, after a
big wave of privatizations and the adoption of a national antitrust law in .
Many authors, such as Federico and Foreman-Peck () and Bianco ()
criticize the incompleteness of the Italian industrial policy: some measures have been
taken, but many elements are missing, such as an efficient capital market, simple
bureaucratic procedures especially for firm creation, and support for new industries
(Malerba, ; Rolfo and Calabrese, ). Nonetheless, Italy ranks second in manu-
facturing in the European Union today.
.. France
In France, industrial policy was a national strategy defined by a specific entity, the
Commissariat Général au Plan, created in . In the decades after this planning
office used state ownership, among other instruments, to support large firms that could
compete against American ones. The country has experienced two waves of national-
ization when the state acquired private enterprises: in –, various firms in the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
financial, energy, utility, and transport sectors came under state ownership; in the
s, the state acquired firms in declining industries, such as steel and shipbuilding, as
well as strategic sectors such as chemicals, pharmaceuticals, and electronics. Privatiza-
tions started in the s, but many former state-owned companies remained under
state control through ‘golden shares’.
As well as state ownership, French industrial policy provided large subsidies to
industry, as well as large R&D programmes (grands programmes) in strategic sectors.
These programmes were characterized by state-owned companies and public procure-
ment, with a strong research focus in science and technology that had important
military applications (aerospace, nuclear, and telecommunications). Industrial policy
was definitively relaunched at the beginning of the s.
.. The United Kingdom
The United Kingdom also based industrial development on state ownership, subsidies,
knowledge transfer, and fiscal policy in the period to . Restrictions on
international trade were implemented in the s. The government acquired private
enterprises in difficulties, such as Rolls Royce in the s. Skills development was
strong right up to the s, but perhaps not enough emphasis was put on intermediate
skills: in , per cent of -year-olds passed their maths and mother-tongue test,
against per cent of German, per cent of French and per cent of Japanese people
of the same age (Foreman-Peck and Hannah, ). Some specific sectors, for instance
aerospace and information technology, and all activities with military applications,
were supported. As early as the United Kingdom was also the first European
country to adopt antitrust law.
From , with the advent of the Thatcher government, industrial policy was
abandoned. There were privatizations and liberalization of utilities, old industries
closed down with heavy social costs and the only remaining industrial policy measures
were innovation policy (although this was not effective according to von Tunzelmann,
) and FDI attraction (as a result of which Japanese producers attracted by the
European market set up factories in the United Kingdom in the s).
.. Germany
According to Feldenkirchen (), industrial policy was continuously applied in
Germany in the twentieth century. While the overall approach was to provide the
conditions for industry to prosper, specific support was also given to industries or firms
(Donges, ; Feldenkirchen, ) in declining or strategic sectors, with military
applications in particular. Despite mergers and demergers experienced due to the
political and economic upheavals before and after the Second World War, German
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
big businesses remained stable. They were concentrated in the heavy industries (coal
and steel), with, for instance, Hoesch, Krupp, and Mannesmann, chemicals (IG
Farben), electrical engineering (Siemens, AEG) and automobiles. Germany regained
a world-leading position in the chemical industry after the Second World War, with
four main companies created from the dismantling of the IG Farben company: Bayer,
Hoechst, Agfa, and BASF. Only large banks suffered after , when the Allies forced
the dismantling of the three major banks, the Deutsche Bank, the Dresdner Bank, and
the Commerzbank. However, they reunited in the s.
In addition, German industrial policy has been export oriented, especially in the
European economic integration process. Innovation has also been an element of this
policy, with a strong focus on the industrial application of research: for instance, the
Fraunhofer Institutes were created in with a focus on industrial application
research, while other institutions like the Max Planck Institute focused on basic
research. Fraunhofer Institutes establish links with both large firms and especially
SMEs (Mittlestand), the backbone of the German industrial system.
Germany also has a specific banking system focused on long-term lending to
industry. The German government created a number of public or quasi-public banks
during the s to ease industry access to finance. Thus, the Kreditanstalt für
Wiederaufbau (KfW) was created in in order to manage the Marshall funds
allocated to the country for reconstruction. It soon became focused on financing to
SMEs. Other activities were progressively added, such as export financing in the s,
financing of infrastructure on behalf of the municipalities and other local administra-
tions in the s and s, and financing of the reconstruction of East Germany in
the s. Mittlestand companies were supported with access to finance since they also
benefited from the Bank for Settlements (AG) and a decentralized network of savings
banks (Sparkassen) and credit cooperatives. There are about savings banks³ and
cooperative banks⁴ in Germany, which together provide about two-thirds of all
lending to Mittelstand companies.
Industrial policy acquired a new impetus in the s with reunification. Alongside a
decisive effort to modernize and reconvert industry in the former East Germany,
measures for industry in West Germany continued, focused on providing the appro-
priate conditions for competitiveness and spurring innovation.
Characteristic of German industrial policy is the coherence of its multilevel govern-
ance framework between the local, the regional (Länder), and national (federal) levels.
It is also proactive, trying to anticipate changes so that industry can adapt to changing
competitive and technological conditions, for example, in the recent policy supporting
the structural transformations implied by Industry ..
³ Markgraf and Véron (), Bruegel Institute, https://bruegel.org///germanys-savings-
banks-uniquely-intertwined-with-local-politics/.
⁴ National Association of German Cooperative Banks (), https://www.bvr.de/Press/Press_
releases/Cooperative_Financial_Network_publishes_its__consolidated_financial_statements_Stable_
earnings_in_the_operational_customer_business_profit_before_taxes_of_Euro__billion.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
This institutional coherence also prevails in Sweden and Finland. Both countries
have implemented industrial policies with instruments similar to those of other
European countries. Up to the s these policies tended to be selective, directed,
for example, at forest industries which were important in these countries’ economy at
the beginning of industrialization and remain so today (Blomström and Kokko, ).
A new approach was adopted in the s, with a higher focus on innovation and
technological transfer, as well as the local roots of industrial development, and import-
ant cluster policies (Blomström and Kokko, ; Ylä-Anttila and Palmberg, ).
An important feature is the adoption of a systemic view in which great attention is paid
to the relationships between actors in the innovation process. Policies have been
defined in dialogue with stakeholders, establishing public–private partnerships espe-
cially at local and regional levels. Industrial application of research has thus been
rooted locally but favouring the networking of local clusters and excellence centres at
a national level (Ketels, ).
.. Finland
The case of Finland deserves more analysis, because this country achieved very deep
structural changes in only a few decades. More than half the population and per cent
of output were still in the primary sector in the s. However, the country had
already become a mature industrial economy by the s. The evidence suggests that
Finland’s industrialization was strongly backed by the state through industrial policy.
From the s an important intervention was made, based on a strong consensus
between the state at all levels of government, businesses, and other stakeholders, that
defined a vision of industrial development as well as measures towards this aim. ‘The
Finnish business elites colluded to distort the markets in a way that sustained high
investment rates’ (Jäntti and Vartiainen, : ). Actions included large investments,
particularly in forestry and metals, that were enabled by the high rate of savings
available in the economy at that time. Interest rates were also controlled by credit
rationing. Human capital was developed by investment in education and the develop-
ment of the welfare state. Social cohesion was therefore high, partly for political
reasons, since Finland had ‘recently’ become independent from the USSR () and
the feeling in the population was that the country had to grow to justify its independ-
ence and workers had to be cared for to avoid increasing support for communist ideas
and the possible influence of its neighbour country. Trade unions were encouraged to
take part in the discussions on industrial policy and unionization was encouraged.
The industrial system developed, favouring economic growth and maintaining social
cohesion. Moderate wage increases were agreed in the negotiations between the state,
businesses, and labour to maintain the international competitiveness of Finnish firms.
Finland was a dynamic knowledge-based economy by the beginning of the s,
thanks to a second industrial transformation in the s, characterized by the rise of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
the ICT sector with the dominant firm Nokia, promoted by an industrial policy aimed
at developing new sectors defined at the beginning of the s, and comprising
actions aimed at raising higher education, clusters, and R&D investments.
The flagship company Nokia grew exponentially in the s and became the best-
selling mobile phone brand in the world in . The company represented about per
cent of the country’s GDP, per cent of its total exports and about half of total
national R&D in (Ali-Yrkkö, ). However, the company missed the shift to
smartphones and went into deep and rapid trouble from onwards. The firm
represented only . per cent of GDP and per cent of the country’s exports in .
In just six years ( to ), the market value of Nokia declined by per cent.
Nokia was taken over in by Microsoft, which started a drastic re-organization,
laying off employees and closing some factories and research centres in Finland. The
Finnish government made an agreement with Microsoft to avoid excessive lay-offs.
More importantly, the government immediately started a strong policy to support firm
creation: the budget of the Finnish agency for research and innovation, Tekes, was
substantially increased to support new and innovative businesses; Vigo, a start-up
accelerator, was launched in by the Finnish Ministry of Employment and the
Economy. Since then the country has remained an innovation leader in the European
Union, as witnessed by the European Innovation scoreboards.⁵
.. Ireland
Like Finland, Ireland developed rapidly from the s to . The effects of the
financial crisis were particularly severe in Ireland, seemingly due to structural weak-
nesses that were not addressed by industrial policy.
Yet the country had experienced average annual GDP growth rates of more than
per cent, leading commentators to speak of the ‘Celtic Tiger’. This development was
eased by industrial policy of a very different kind from that of Finland. While the latter
country based its industrial policy on the development of autonomous capacity, Ireland
tended to import industrial capacity from outside. Irish development in the s was
spurred by the boom of the high-tech sector, especially in electronics and pharmaceut-
icals, but the bulk of the sector was and still is foreign owned. The latter represented
about per cent of output in , while employment was almost equally divided
between the two types of firms (Kirby, : –). The Irish industrial policy model has
been very open and based on the attraction of foreign companies with mainly low tax
rates (Bailey et al., ). Different authors (Kirby, ; Cullen, ) have shown that
this strategy came at a high social cost, in that the benefits of industrial development
have not been shared among the population; the poverty rate rose during the s at a
time of high growth.
⁵ https://ec.europa.eu/growth/industry/innovation/facts-figures/scoreboards_en.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The European integration process has deeply influenced the industrial policies of
European countries. First, it has offered new opportunities for national industries,
thanks to the enlargement of the market, allowing static and dynamic scale and scope
economies. Second, it has induced member countries to coordinate their policies, some
industrial elements of which (competition and trade policy) have become common
policies. Other policies such as innovation policy, have included a progressively
European dimension. However, the main competence on industrial policy remains at
the national level in the EU. Third, the European Commission has played an important
role in monitoring and benchmarking industries and economies, highlighting the
economic challenges and helping to focus policy efforts on them. National industrial
policies remained focused on declining industries up to the s, together with R&D
programmes. The awareness that globalization accelerated at the end of the s led to
the definition of a new approach to industrial policies by Commissioner Bangemann in
. The term ‘industrial policy’ was no longer used, because of its association with
the interventionist and selective policies of the past. Policies supporting structural
changes in industries were called competitiveness or enterprise policies.
The new approach consisted in providing the conditions for the competitiveness of
industries, privileging horizontal measures and instruments as well as fair market
competition. The role of the state was defined as a pioneer and catalyst of industrial
development, identifying future technologies and industries and promoting their
adoption and expansion. It was formalized in Article of the Maastricht Treaty.
The new horizontal approach, however, does not appear to have been successful in
reducing the competitiveness gap between the European Union and its main rivals in
the s, Japan and the United States. The problem was not lack of innovation, but a
limited capacity to transform innovation into commercial success, which the European
Commission called the ‘European paradox’ in (European Commission, ;
Dosi et al., ). This is particularly challenging as new rivals have emerged since
, especially from Asia, and China and Korea in particular.
As a consequence, the debate on industrial policy emerged again in the European
Union at the beginning of the new century, especially in when the heads of state of
France and Germany (respectively Jacques Chirac and Gerhard Schroeder) openly
expressed concern over de-industrialization and called for industrial policy. The
European Commission has published numerous communications on industrial policy
since then, proposing to increase R&D effort and industrial applications for research, as
well as training and education, while maintaining a strong emphasis on competition
policy and open trade. Some measures specific to sectors have also been suggested, for
instance in the chemicals sector. The numerous communications of the European
Commission on the subject in the last fifteen years (Bianchi and Labory, a;
Landesmann and Stöllinger, Chapter in this volume) are perhaps signs of a search
for what industrial policy should look like. The competitiveness gap has persisted and
somehow widened because it now also exists with respect to China.
Another issue is that although member states are aware of the need to support
industries, most have only been able to do so in a limited manner, especially during
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
crises, because budget constraints in the eurozone impose limits on spending. In
particular, the golden rule adopted after the financial crisis (the fiscal compact of
) has been criticized by macroeconomists as severely limiting the ability to use
fiscal policies for stabilization purposes in a manner consistent with moderate long-run
debt levels (Whelan, ). The ability of EMU countries to implement fiscal stimulus
is extremely limited, and this has been a problem in the recession that followed the
financial crisis and that lasted several years (Eyraud et al., ; Darvas et al.,
).
While the horizontal approach has helped, it has the disadvantage of spreading
financial efforts over a large number of actors, which can lead to results that are, at best,
diluted. This is particularly problematic when resources are scarce, as in the case of
strict constraints on public deficit, which is what happened in the first decade of the
s, and led to a new approach, namely smart specialization.
Section . reviews current industrial policies in European countries, starting from
a review of the importance and evolution of the manufacturing sector in recent
decades.
. N I P
T C
..................................................................................................................................
Manufacturing value added as a percentage of GDP tended to fall in all countries over
the period to (Figure .). Germany is the European country where the
manufacturing sector remains most important in the national economy: manufactur-
ing value added represents per cent of GDP in , against about per cent in
Finland, Italy, and Sweden (respectively ., ., and . per cent). Countries with
the lowest shares are France ( per cent) and the United Kingdom (. per cent).
Figure . shows that all countries encountered a long phase of restructuring,
whereby the importance of the manufacturing sector in GDP declined, followed by a
stabilization phase. However, the timing and length of the restructuring process differs
across countries: Germany saw a reduction of the share of the manufacturing sector in
GDP in the first five years of the s, followed by a stabilization and slight growth
after the financial crisis. In France, Italy, and the United Kingdom the decline carries
on up to the financial crisis. In Finland and Sweden, the decline starts later, in ,
and lasts about ten years. For all countries except Germany, the decline becomes
steeper after , corresponding to the entry of China to the WTO () and the
period where globalization was most strongly felt, in the sense of intensification of
world competition following the massive entry of new protagonists such as China and
the BRICS countries.
China has become the global manufacturing centre, with manufacturing value added
representing about per cent of GDP against per cent in the United States in .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
30
25
France
20
United Kingdom
15 Germany
Italy
10
Finland
5 Sweden
0
91
93
95
97
99
01
03
05
07
09
11
13
15
17
19
19
19
19
19
20
20
20
20
20
20
20
20
20
. Manufacturing value added as a percentage of GDP, selected countries, –
Source: World Bank data,
https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=CN.
Chinese production is no longer (or not only) of low quality, since the country has
become a world leader in innovation. For instance, China’s share of world patent
applications increased from . per cent to nearly a third of world patent applications
(. per cent) in the period to , mainly at the expense of Japan (. to .
per cent), while the shares of the EU- and of the United States slightly reduced.
Overall, European countries invest in R&D, but their size is too small to reach the
level of expenditure (input) but also innovation (output, as shown by patenting
activity) of China and the United States. The innovation capacity of the European
Union as a whole is much higher and comparable to that of China and the United
States, although it has slightly declined in the last decade: the share of world patent
applications of the European Union as a whole (twenty-eight countries) was more than
per cent in and was about per cent in . OECD data on triadic patent
families⁶ show that only a few advanced countries increased their share over the period
to ; the EU’s share reduced from . to . per cent, the United States
experienced the same downward trend from to . per cent, while China’s share
increased from . to . per cent (OECD, ).
Especially in a period of dramatic transformations, and the continuing Fourth
Industrial Revolution, support for structural changes and upgrading/renewal in indus-
tries is fundamental. European countries are implementing industrial policy to adapt to
the industrial revolution, but their effort is small in size relative to countries such as the
United States and China, and European countries would gain from further integrating
their efforts.
⁶ A triadic patent family is defined as a set of patents registered in the three major patent offices: the
European Patent Office (EPO), the Japan Patent Office (JPO), and the United States Patent and
Trademark Office (USPTO).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
The Fourth Industrial Revolution is characterized by the development of scientific
breakthroughs and disruptive technologies such as the Internet of things (IoT), robot-
ics, virtual reality (VR), and artificial intelligence (AI), but also nanotechnologies,
genomics, and new materials, which are changing the economy and the society. The
Third Industrial Revolution was characterized by the development of computers and
IT (information technology) in the second half of the twentieth century. The Fourth
Industrial Revolution builds on innovations of the third but is considered a new era
because it generates technological development that is massive and disruptive (Bianchi
and Labory, ; Schwab, ).
The growing awareness of the deep transformations involved and the importance for
industry to adapt and participate in the process have led governments to design and
implement industrial policy aimed at supporting these structural changes. European
countries have been among the first countries to do so.
.. Germany
Germany in particular can be argued to be the first country to have adopted an
industrial policy for the manufacturing revolution.
The term ‘Industry .’ was first publicly introduced in as Industrie . by a
group of business, government, and academia representatives who gathered to reflect
on how to enhance German competitiveness in the manufacturing industry. The
German federal government adopted their proposal in its High-Tech Strategy for
. A working group was created to further advise on the implementation of
Industry ., which made recommendations in . They stressed the deep changes
occurring in manufacturing, since ‘these cyber-physical systems comprise smart
machines, storage systems, and production facilities capable of autonomously exchan-
ging information, triggering actions, and controlling each other independently. This
facilitates fundamental improvements to the industrial processes involved in manu-
facturing, engineering, material usage, and supply chain and life-cycle management.’
The term is now widely used to indicate the transformation of productive processes
induced by the technological changes of the Fourth Industrial Revolution: a new
organization of production is possible in the ‘smart’ or ‘digital’ factory, where machines
and robots interact to adapt and manufacture customized products on a large scale,
thanks to cyber-physical systems that also interact directly with the customer.
Bianchi and Labory (a) argue that this implies a change in the manufacturing
system, since the Fourth Industrial Revolution allows the setting up of largely auto-
mated manufacturing processes that enable products to be personalized (economies of
scope) on a large scale (economies of scale). Mass production had high volumes (scale)
but low differentiation (scope). Industry . (mass customization) allows both high
scale and high scope. These changes allow business to develop new products, launch
new markets, and change existing ones. Disruption in industry is even increased by the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
emergence of new market intermediaries in the form of digital platforms (Bianchi and
Labory, ).
Germany’s industrial policy has therefore been focused on Industry . in recent
years (together with the earlier focus on green technologies), and the prime importance
of technological and innovation policy, since this revolution is primarily about scien-
tific discoveries and technological breakthroughs in various fields. The governance
process is participative, in the sense that it is based on a dialogue with stakeholders—
industry, science, and social partners. The funding model is based on public sources,
targeting research, partnership-building, competence centres, and test-beds, but industry
also contributes, especially larger firms who contribute proportionately more. German
industrial policy for the manufacturing revolution is particularly concerned about SMEs,
which may lack access to finance and other resources for the transition and structural
changes involved. The government strategy requires industry co-financing, but large firms
provide proportionately more financing than SMEs. The German government has also
been increasingly concerned over the protection of its industrial know-how, especially
since Chinese organizations have started to acquire German firms. This led the German
economics minister Peter Altmaier to announce the possibility of the German state buying
stakes in German companies in order to maintain its industrial know-how.⁷
.. The United Kingdom
After the period of policies characterized by privatization, deregulation, and the free
market in the s and s, the United Kingdom economy had a weak performance
at the turn of the twenty-first century: increasing trade deficit, decreased manufactur-
ing capacity, and rising regional inequalities (Bailey and Tomlinson, ; O’Sullivan
et al., ; Chang et al., ). The financial crisis made the situation even worse, and
the government realized that countries with stronger manufacturing bases had better
capacity to recover. Concern over de-industrialization increased and successive gov-
ernments introduced different measures to support a revival of British industries. By
the end of the second decade of the new century, however, the performance of the
British economy had not substantially improved, productivity being particularly low
relative to other advanced countries (Bailey and Tomlinson, ).
The United Kingdom has good research capacity, with four universities in the top
ten in the world. However, the manufacturing base is so weakened that it has been
unable to transform this research capacity into upgraded commercial products. It is a
question not only of strengthening the links between research institutions and industry,
but also of increasing manufacturing capacity, particularly through the development of
⁷ Reuters, February : https://www.reuters.com/article/us-germany-industry/german-state-
ready-to-buy-company-stakes-to-protect-core-industry-idUSKCNPUD.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
manufacturing skills. The United Kingdom particularly lacks the intermediate skills
that are so important to industry.
Catapult centres have been created, following the German model of Fraunhofer
Institutes, in order to increase the capacity to transform innovation into industrial
products and processes. They are based on specific technologies and scientific domains
and aim at gathering stakeholders, particularly universities and industry, to promote
the industrial application of research. They are funded by private businesses, the UK
government, and other sources (such as EU funds). According to Bailey and
Tomlinson (), the public funds allocated to catapult centres have been limited so
far, at least compared to efforts made in other countries. Another problem is the lack of
engagement with SMEs.
As a result of both the fear of de-industrialization and lagging productivity, UK
governments have regularly adopted industrial strategies. The measures announced
have been promising, but the problem is that governments have changed and so have
strategies, so the overall picture is confusing and amounts to myriad different meas-
ures, some remaining from the past and some new, but their coherence is largely
uncertain.
Businesses in the United Kingdom complain about the lack of support for SMEs and
for training and education. SMEs do not have the resources to define and implement
their own training and education programmes, so they rely on public programmes,
which are lacking in the United Kingdom.⁸
A Green Paper on ‘Building our Industrial Strategy’ was adopted in January to
relaunch industrial policy. However, it largely reiterates existing measures (Bailey and
Tomlinson, ). The government has also committed to a rise in R&D effort in the
Green Paper, as well as raising skills with the creation of Institutes of Technology that
could provide the lacking intermediary skills.
Surprisingly, the Green Paper does not mention Industry ., on which industrial
policy in other European countries, such as Germany and France, is focused. Given the
evidence regarding this important industrial transformation, leading to a new manu-
facturing paradigm (Bailey and Tomlinson, ) or manufacturing regime (Bianchi
and Labory, a), industrial policy should be centred on support to the important
structural changes involved. Transition to the new manufacturing regime, moreover,
could be an opportunity for the United Kingdom to rebuild British industry following
new technologies.
Another important point concerns regional imbalances. We argued above that
German industrial policy is extremely coherent in its multilevel governance frame-
work, with the regional governments (Länder) tailoring federal policy to regional
characteristics, namely to the regional mix of industries. This is particularly true with
respect to R&D and training efforts; for instance, intermediate skills are provided in
apprenticeship programmes that are broadly defined at the federal level but specifically
⁸ For instance, in the Financial Times, ‘Is the UK’s New Industrial Strategy Starting to Work?’ ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
defined together with industrial actors at the regional level. This favours industrial
development, but also balanced development across the country. From this perspective,
the UK economy has strong regional inequalities, but recent industrial policy initiatives
have not addressed this issue. The recent abolition of Regional Development Agencies
(RDAs) and their replacement by Local Enterprise Partnerships (LEPs), which are
development agencies operating at very small scale, namely that of local authorities,
does not seem to help regional rebalancing. LEPs are too small and fragmented to be
able to implement effective industrial policy.⁹
.. Italy
Like the United Kingdom, Italy has strong regional inequalities, despite a relatively
strong manufacturing sector. In fact, the latter sector is strong mainly because the
north of the country reaches development levels and industry sophistication compar-
able to the most advanced regions in the European Union. In contrast, the southern
part of the country (the Mezzogiorno) has continuously declined in recent decades.
National policies have failed to address this problem (see Barzotto et al., ).
Industrial policy at the national level has been missing, apart from a few initiatives
that sometimes could not even start due to political instability. One initiative that has
been effective is Industria ., launched in in order to finance the adaptation of
Italian industry to the Fourth Industrial Revolution. However, the populist coalition
that took office in did not relaunch that policy.
It can be argued that the main industrial policy implemented in Italy is at the
regional level, mainly due to a reform of the constitution providing regions with
competence over development policy, particularly industrial development. For
instance, Bianchi and Labory (b, b) have analysed the effective industrial
policy carried out in the Emilia-Romagna region in recent decades. Not all regions,
however, have the institutional capacity to define and implement appropriate industrial
policies; southern regions are particularly disadvantaged in this respect, and decentral-
ization has not helped them.
.. France
The French government relaunched industrial policy in , with the main objective
of promoting specialization in new, technology-intensive sectors. The two main meas-
ures were the creation of ‘competitiveness poles’ and an Agency for Industrial
⁹ This has been stressed to the UK Parliament by economists of the Regional Studies Association:
https://publications.parliament.uk/pa/cm/cmselect/cmbis/writev/lep/m.htm.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
Innovation (AII) that coordinated actions for the new sectors and also intervened in
some of the competitiveness poles. The policy thus constituted an attempt at decen-
tralization, inviting territories to identify possible synergies between activities so as to
create these poles around specific productions. Each pole gathered together businesses,
training and research centres, and the local government to reach the necessary critical
mass for international visibility.
The mission of the AII was to promote and support big programmes of industrial
innovation that would be led by large groups, hopefully leading to commercial success
in new markets. The AII would help with technological foresight and project selection,
financing, and monitoring. The initial budget amounted to € billion, mainly financed
by privatizations. However, the agency only operated for twenty-seven months. Pro-
grammes initiated before are now followed by OSEO, a state-controlled company
that supports financial access to businesses, especially SMEs. In fact, the absorption of
the AII into OSEO is associated with a shift of industrial policy towards major support
for small and medium-sized firms ( to employees), as well as enterprises of
intermediate size (entreprises de taille intermédiaire, ETI, to , employees),
which are lacking in the country. OSEO is characterized by decentralization, in the
sense that it has regional offices which allow it to be closer to territorial entrepreneurs.
It favours collaborative projects between SMEs in strategic sectors that have concrete
commercialization prospects at the world level. The objective is to help the emergence
of European champions. A good part of the financing provided by OSEO goes to
competitiveness poles.
In , a state holding, BPI France, was created, bringing together OSEO, CDC
Enterprises (public institutional investor), and the sovereign fund FSI (Fond Stratégi-
que d’Investissement). In other words, all sovereign funds existing in France at the time
were grouped into a single organization. BPI France supports enterprise growth and
internationalization through innovation. It is controlled by the state and the Caisse des
Dépôts, an institution that uses public funds to finance public projects.
The French state has thus returned to stronger intervention in markets. The turning
point was the intervention to save the enterprise Alstom, producer of railway equip-
ment, from failure in , leading to a return of industrial policy in . The new
industrial policy is pragmatic in that while horizontal measures are favoured, direct and
selective interventions are considered when necessary.
However, French industrial policy does not appear to have been consistent across the
years since . While the general approach has continued to be innovation and
support to SMEs and firms of ‘intermediate’ size, measures have been constantly either
changed or re-dimensioned. For instance, in the objective of the competitiveness
poles was to bring together regional stakeholders to favour the launch of new products
and process; in , the objective was to realize ‘fabrics of projects’, while in it
was again to realize new products. Each pole brings together a very large number of
participants, apparently too many to focus projects and reach critical mass for each of
them. In addition, the overall financing of the poles, provided by the Fond Unique
d’Innovation (FUI, Single Innovation Fund), has decreased by about per cent over
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the period to (François, ).¹⁰ Evaluations of this policy do not appear to
have assessed the performance of the poles in terms of product and firm creation, and
business competitiveness, although Hassine and Mathieu () show that the partici-
pation of SMEs and ‘intermediate-sized’ firms has allowed them to invest more in
R&D.
The overall objective is to rebuild ‘industrial France’ or develop industries of the
future, but the measures being taken are fragmented and inconsistent, lacking an
industrial development vision for the country and a mobilization of efforts towards
this vision. Industrial policy requires specific choices and substantial financial support,
both of which are missing. The present government’s project to build a New Industrial
France is based on the plan for industrial reconquest, comprising thirty-four plans,
launched by the previous government in . As a result, French industrial policy has
been essentially defensive. Large firms have been saved from failure, such as Areva
(nuclear sector), STX France (shipbuilding), and Alstom. This contrasts with the
German policy, which has been proactive.
A number of fiscal reliefs for business have been adopted by President Macron since
his election, but whether industries have used the money saved to invest in long-term
growth plans remains to be seen. What is clear is that the policy defined under the
previous government and pursued by the new one has not produced positive effects:
the condition of the French industrial sector has not substantially changed, with two
million jobs in industry lost since the s.
. C
..................................................................................................................................
All European countries have followed similar trends in industrial policy. From a
historical perspective, industrial policy has been an instrument of the power of the
state. Thus, continental European countries implemented strong policies to industri-
alize and reach the development level of the United Kingdom, pioneer of the First
Industrial Revolution. This was important both to raise the economic performance of
the country, and hence its wealth, but also to enhance its military capacity with new
technologies and an increased power of deterrence in international relations. Especially
among the first industrializers, economic and military, therefore political power, are
intimately linked. This was also the case after the Second World War, when the United
States, but also European countries, invested heavily in new technologies in a race to
affirm their status as world powers. This race in turn fed industrial development, since
many innovations made for defence purposes had numerous industrial applications in
a variety of sectors. Strengthening industry has been an important strategy for China,
which is now a world power.
¹⁰ Computation by the authors from data shown in François (: ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
Industrial policy has also been stronger in times of market disruptions caused both
by changes in the extent of the market, such as the opening of international trade and
later globalization, and by technological progress, especially in industrial revolutions.
Once markets and production systems are established and incumbent firms defined,
the role of industrial policy reduces. However, when new technologies appear, or new
businesses with improved or renewed products enter markets or create new ones,
established firms have to change their structure, and hence whole industries might be
threatened or in need of transformation, calling for government intervention.
Today the focus of industrial policy in European countries is on the adoption of the
new technologies of the Fourth Industrial Revolution to upgrade manufacturing
processes, as well as introducing new products that can encourage new industries.
One notable difference concerns regional imbalances: some countries have consistently
addressed them (Germany, Finland), while others have not (France and the United
Kingdom). Yet a regional (or local) focus is particularly required today for two reasons.
First, globalization has made the locational footprint more important for companies
today, not less. Firms develop or locate in centres of excellence, where institutions are
coherently defined and infrastructure well developed, and where human capital with
appropriate skills and learning/innovation capabilities is available. Territories not able
to construct these strengths are left behind (Bianchi and Labory, b). Second,
incumbent firms in established sectors can only be challenged by small, innovative
actors that develop from the bottom up. Territories must therefore implement indus-
trial policies in order to develop the capacity to favour the emergence of these smaller,
game-changing actors. This is also important to maintain social cohesion in times of
deep structural changes. Finland is an example, with the failure of Nokia spurring
important government programmes to favour the creation of new, innovative firms at
national and regional levels.
Attention is also required at higher levels of the multilevel governance (MLG)
process. Coherence and action are important between national and international levels
of government, as well as between national and lower levels. In a globalized world,
many issues introduced by the Fourth Industrial Revolution have to be addressed at an
international level, such as regulation of digital platforms and standards for emerging
new products and processes, such as robots and artificial intelligence. Environmental
sustainability and climate change are also global issues.
The discussion in this chapter adds another consideration regarding higher levels of
the MLG process: European countries on their own do not have adequate size and
scope to compete against the United States and China. Some truly joint and integrated
efforts should be made in order to favour competitive European businesses such as
Airbus. There are no European firms in a number of key sectors of the manufacturing
revolution: there are no European Googles, Amazons, or Alibabas; the most powerful
supercomputers produced in the world today are produced in Japan, the United States,
and China; and there is only one European company (SAP, Germany) among the top
ten big-data companies in the world in .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
R
Ali-Yrkkö, Jyrki (ed.) () ‘Nokia and Finland in a Sea of Change’. Helsinki: ETLA,
Research Institute of the Economy of Finland, Taloustieto Oy.
Allen, Robert C. () Global Economic History: A Very Short Introduction. Oxford: Oxford
University Press.
Andreoni, Antonio and Ha-Joon Chang () ‘The Political Economy of Industrial Policy:
Structural Interdependencies, Policy Alignment and Conflict Management’, Structural
Change and Economic Dynamics : –.
Bailey, David and Philip R. Tomlinson () ‘Back to the Future? UK Industrial Policy after
the Great Financial Crisis’, in Philip Arestis and Malcolm Sawyer (eds) Economic Policies
since the Global Financial Crisis. Basingstoke: Palgrave Macmillan, pp. –.
Bailey, David, Helena Lenihan, and Ajit Singh () ‘Tiger, Tiger, Burning Bright? Industrial
Policy “Lessons” from Ireland for Small African Economies’, in Akbar Noman, Kwesi
Botchwey, Howard Stein, and Joseph E. Stiglitz (eds) Good Growth and Governance in
Africa: Rethinking Development Strategies. Oxford: Oxford University Press, pp. –.
Bairoch, Paul () Economic and World History. Brighton: Wheatsheaf.
Barzotto, Mariachiara, Carlo Corradini, Felicia M. Fai, Sandrine Labory, and Philip
R. Tomlinson () ‘Enhancing Innovative Capabilities in Lagging Regions: An Extra-
regional Collaborative Approach to RIS’, Cambridge Journal of Regions, Economy and
Society : –.
Bianchi, Patrizio () La rincorsa frenata. L’industria italiana dall’unità nazionale all’uni-
ficazione Europea. Bologna: Il Mulino.
Bianchi, Patrizio and Sandrine Labory (eds) () International Handbook of Industrial
Policy. Cheltenham: Edward Elgar.
Bianchi, Patrizio and Sandrine Labory (a) Industrial Policy after the Crisis: Seizing the
Future. Cheltenham: Edward Elgar.
Bianchi, Patrizio and Sandrine Labory (b) ‘Industrial Policy after the Crisis: The Case of
the Emilia-Romagna Region in Italy’, Policy Studies (): –.
Bianchi, Patrizio and Sandrine Labory () Industrial Policy for the Manufacturing Revo-
lution. Perspectives on Digital Globalisation. Cheltenham: Edward Elgar.
Bianchi, Patrizio and Sandrine Labory (a) ‘Manufacturing Regimes and Transitional
Paths: Lessons for Industrial Policy’, Structural Change and Economic Dynamics : –.
Bianchi, Patrizio and Sandrine Labory (b) ‘Regional Industrial Policy for the Manufac-
turing Revolution: Enabling Conditions for Complex Transformations’, Cambridge Journal
of Regions, Economy and Society (): –.
Bianco, Magda () L’industria italiana. Bologna: Il Mulino.
Blomström, Magnus and Ari Kokko () ‘From Natural Resources to High-Tech Produc-
tion: The Evolution of Industrial Competitiveness in Sweden and Finland’. EIJS Working
Paper Series No. , Stockholm School of Economics, The European Institute of Japanese
Studies.
Brander, James A. () ‘Shaping Comparative Advantage: Trade Policy, Industrial Policy
and Economic Performance’, in Richard G. Lipsey and Wendy Dobson, (eds) Shaping
Comparative Advantages. Toronto: C. D. Howe Institute, pp. –.
Chang, Ha-Joon and Jostein Hauge () ‘The Role of Manufacturing versus Services in
Economic Development’, in Patrizio Bianchi, Sandrine Labory, and Clemente Ruiz Duran
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
:
(eds) Transforming Industrial Policy for the Digital Age: Production, Territories and Struc-
tural Change. Cheltenham: Edward Elgar, pp. –.
Chang, Ha-Joon, Antonio Andreoni, and Leon Kuan, M. () ‘International Industrial
Policy Experiences and the Lessons for the UK’. Report for the UK Government’s Foresight
Future of Manufacturing, London.
Cimoli, Mario, Giovanni Dosi, and Joseph E. Stiglitz (eds) () Industrial Policy and
Development: The Political Economy of Capabilities Accumulation. The Initiative for Policy
Dialogue Series. Oxford: Oxford University Press.
Cullen, Elizabeth () ‘Unprecedented Growth, But for Whose Benefits?’, FEASTA Review
: –.
Curzon-Price, Victoria () Industrial Policies in the European Community. London:
Macmillan.
Darvas, Zsolt, Philippe Martin, and Xavier Ragot () ‘European Fiscal Rules Require a
Major Overhaul’. Policy Contribution Issue No. , Bruegel Institute. Available at https://
bruegel.org/wp-content/uploads///PC-_.pdf.
Donges, Juergen () ‘Industrial Policy in West Germany’s Not So Market-oriented
Economy’, World Economy (): –.
Dosi, Giovanni, Patrick Llerena, and Mauro Sylos Labini () ‘The Relationships between
Science, Technologies and their Industrial Exploitation: An Illustration through the Myths
and Realities of the So-called “European Paradox” ’, Research Policy : –.
European Commission () Green Paper on Innovation. Brussels: European Commission.
Eyraud, Luc, Gaspar Vitor, and Tigran Poghosyan () ‘Fiscal Politics in the Euro Area’.
IMF Working Paper No. /. Washington, DC: IMF.
Federico, Giovanni and James Foreman-Peck (eds) () Industrial Policies in Europe.
Oxford: Oxford University Press.
Feldenkirchen, Wilfried () ‘Germany: The Intervention of Interventionism’, in Giovanni
Federico and James Foreman-Peck (eds) Industrial Policies in Europe. Oxford: Oxford
University Press, pp. –.
Financial Times () ‘Is the UK’s New Industrial Strategy Starting to Work?’, November.
Available at https://www.ft.com/content/bb-efb-e-c-ddc.
Foreman-Peck, James and Leslie Hannah () ‘Britain: From Economic Liberalism to
Socialism—and Back?’, in Giovanni Federico and James Foreman-Peck (eds) Industrial
Policies in Europe. Oxford: Oxford University Press, pp. –.
François, Philippe () ‘Pôles de compétitivité: , Phase IV, le temps des résultats’.
Available at https://ifrap.org/emploi-et-politiques-sociales/poles-de-competitivite--
phase-iv-le-temps-des-resultats.
Freeman, Chris and Francisco Lourça, () As Time Goes by: From the Industrial Revolu-
tions to the Information Revolution. Oxford: Oxford University Press.
Gille, B. () Histoire des techniques: technique et civilisations, technique et science. Paris:
Gallimard, Collection La Pleiade.
Hassine, Haithem-Ben and Claude Mathieu () ‘Évaluation de la politique des pôles de
compétitivité: la fin d’une malédiction?’/France Stratégie, Document de Travail No. /
. Available at https://www.strategie-gouv.fr.
Jäntti, Markus and Juhana Vatiainen () ‘The Finnish Developmental State and its Growth
Regime’. Research Paper No. /. Helsinki: UNU-WIDER.
Ketels, Christian () ‘Clusters, Cluster Policy, and Swedish Competitiveness in the Global
Economy’. Expert Report No. to Sweden’s Globalisation Council, Stockholm. Available
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
at https://www.hhs.se/contentassets/fbedefacdabde/clusterscluster
policyswedishcompetitivenessde.pdf.
Kirby, Peadar () Celtic Tiger in Collapse: Explaining the Weaknesses of the Irish Model.
nd edition. Basingstoke: Palgrave Macmillan.
Labory, Sandrine () ‘La politica industriale in un’economia aperta e basta sulla con-
oscenza’, L’Industria : –.
Lall, Sanjaya () ‘Industrial Policy in Developing Countries: What Can We Learn from
East Asia?’, in Patrizio Bianchi and Sandrine Labory (eds) International Handbook of
Industrial Policy. Cheltenham: Edward Elgar, pp. –.
Landes, David () The Unbound Prometheus. Cambridge: Cambridge University Press.
Levy-Leboyer, M. (ed.) () Histoire de la France Industrielle. Paris: Larousse.
Malerba, Franco () ‘Il sistema innovativo italiano’, in Franco Malerba (ed.) Economia
dell’innovazione. Roma: Carocci, pp. –.
Markgraf Jonas and Nicolas Véron () ‘Germany’s Savings Banks: Uniquely Intertwined
with Local Politics’. Bruegel Institute. Available at https://bruegel.org///germanys-
savings-banks-uniquely-intertwined-with-local-politics/.
Mokyr, Joel () ‘Editor’s Introduction: The New Economic History and the Industrial
Revolution’, in Joel Mokyr (ed.) The British Industrial Revolution: An Economic Perspective.
nd edition. Boulder, CO: Westview Press, pp. –.
OECD () Main Science and Technology Indicators. Available at https://read.oecd-ilibrary.
org/science-and-technology/main-science-and-technology-indicators/volume-/issue-
_ggfbe-en#page.
O’Sullivan, Eoin, Antonio Andreoni, Carlos Lopez-Gomez, and Mike Gregory () ‘What is
New in the New Industrial Policy? A Manufacturing System Perspective’, Oxford Review of
Economic Policy (): –.
Pelkmans, Jacques () ‘European Industrial Policy’, in Patrizio Bianchi and Sandrine
Labory (eds) International Handbook of Industrial Policy. Cheltenham: Edward Elgar,
pp. –.
Rolfo, Secondo and Giuseppe Calabrese () ‘Traditional SMEs and Innovation: The Role
of the Industrial Policy in Italy’, Entrepreneurship and Regional Development : –.
Schwab, Klaus () The Fourth Industrial Revolution. Geneva: World Economic Forum.
Smith, Adam () An Enquiry into the Wealth of Nations, reprinted in by J. M. Dent &
Sons Ltd, London ( vols).
Vanden Bosch, Xavier () ‘Industrial Policy in the EU: A Guide to an Elusive Concept’.
Egmont Paper No. . Brussels: The Royal Institute for International Relations.
Van Neuss, Leif () ‘Why Did the Industrial Revolution Start in Britain?’, Working Paper,
University of Liège.
von Tunzelmann, Nick () ‘Technology and Technology Policy in the Postwar UK:
“Market Failure” or “Network Failure”?’, Revue d’économie industrielle –: –.
Whelan, Karl () ‘Golden Rule or Golden Straightjacket?’, VOX, CEPR Policy Portal,
February. Available at https://voxeu.org/article/golden-rule-or-golden-straightjacket-
critique-europe-s-fiscal-compact.
Ylä-Anttila, Pekka and Christopher Palmberg () ‘Economic and Industrial Policy Trans-
formations in Finland’, Journal of Industry, Competition and Trade : –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
’
.............................................................................................................
.
ö
. I
..................................................................................................................................
I policy is back on the agenda around the globe. UNCTAD reports that
since no less than eighty-four countries have adopted formal industrial policy
strategies (UNCTAD, ). The return of industrial policy (Wade, ) followed a
period of industrial policy fatigue in the s and s. One of the reasons for the
renewed interest in industrial policy is dissatisfaction with the growth and structural
outcomes of the non-interventionist period of the s and early s. In the
European Union (EU), concerns about de-industrialization in several member states,
changing global context, as well as the experiences of persistent regional disparities and
the uneven impact of the financial and economic crisis after , have played their
part in altering the way industrial policies are perceived.
Industrial policy in the EU has traditionally been a mixed approach, incorporating
horizontal as well as sector-specific measures—with significant variation in focus
throughout the decades. More recently, policy frameworks have multiplied with new
approaches emerging from various fields ranging from Schumpeterian growth theories
(Aghion et al., ) to empirically driven patterns of industrial development across
product spaces (Hidalgo et al., ) to new conceptual frameworks that guide policy
initiatives at the EU level, such as ‘mission-oriented’ policies (Mazzucato, ) or
‘smart specialization’ (Foray et al., ; Foray, ).¹ One unifying theme, though,
¹ For an overview see, for example, Radosevic ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
seems to be the rather general assertion that purely horizontal industrial policy is either
inadequate or simply not possible.²
Identifying the industrial policy stance of the EU is complicated by at least three
factors. First, due to the high importance assigned to competition policy within the
single market, subsidies are prohibited by default. More precisely, the European state
aid rules prohibit subsidies that distort or threaten to distort competition between
member states, unless they are justified by reasons of general economic development.
While there are several exceptions to the general ban (e.g. projects of common
European interest such as the Airbus endeavour), the assessment of the legitimacy of
state aid is still governed by a market-failure approach. So the strict competition rules
of the single market, itself part and parcel of the EU’s industrial policy (and arguably
one of its greatest successes), has to be considered along with continued state aid
support by EU member states, all of which must have been cleared by the European
Commission and deemed compatible with the rules of the Single Market.
Second, and related to the point above, industrial policy action takes place at both
member-state and EU levels. Furthermore, member states, to varying degrees, delegate
the formulation and implementation of industrial policy to the regional level. The same
is true for the EU’s cohesion policy, realized via the numerous European Structural and
Investment Funds (ESIF), a cornerstone of EU industrial policy.
Third, at the EU level, making sense of industrial policy action is difficult, given the
numerous strategies, programmes, actions, and initiatives that are announced, as it
seems, at ever shorter intervals. Recently, the EU has developed the habit of publishing
a new or adopted industrial policy strategy every second year or so (see European
Commission, , a, , , a, ) with the latest one calling for
investment in a smart, innovative, and sustainable industry. Triggered by the European
Commission’s blocking of the planned Siemens-Alstom merger,³ intense negotiations
about yet another reformed industrial policy (EPSC, ; European Commission,
) are taking place at this time. The rise of China with its geopolitically motivated
One Belt, One Road (OBOR) Initiative and its comprehensive and ambitious industrial
policy strategy, entitled ‘Made in China ’, is another major trigger for the new
European industrial policy drive.
China’s successful catching-up process and ambitious industrial strategy shows that
EU industrial policy (be it at the supranational, the national or the regional level) is
not conducted in a vacuum but is necessarily context specific. Changing global and
² This is because any form of industrial policy, even if designed as a horizontal measure such as R&D
support or even a slightly undervalued exchange rate, will affect sectors differently or, as Rodrik puts it:
‘In practice most interventions, even those that are meant to be horizontal, necessarily favor some
activities over others’ (Rodrik, : ).
³ The motivation behind the deal was to create a European player in the rail sector which has
sufficient scale to compete with the rapidly expanding (state-owned) Chinese rivals. The European
Commission’s decision has intensified the perception that the tough European competition rules in the
areas of merger control, state aid, or also public procurement put European firms at a disadvantage vis-à-
vis foreign competitors who do not always play according to the same rules.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
socio-economic circumstances are shaping policy efforts and priorities. The contextual
nature implies that all discussions on European industrial policy are embedded in
overarching economic challenges the EU is facing, namely, the objectives that it has set
itself in the Lisbon Agenda and subsequent strategies. Interestingly, for the EU some of
the challenges and associated objectives of industrial policy have remained surprisingly
constant over decades. Others have been added following the EU’s growth in both size
and diversity or with new global trends such as climate change and the deterioration of
the environment more generally. The most pressing economic challenges may be
summarized as follows:
(i) Technological/innovation challenge: Keeping pace with the technologically
most advanced economies in future-oriented technological areas, which
includes the digital transformation. This has been one of the long-standing
aspirations of EU industrial policy. In order to defend the European Union’s
position at the technology frontier in many technology-driven industries, it is
imperative to build on inherited strengths of industrial, technological, and
human capital structures.
(ii) Emerging markets challenge: Meeting the challenge of fast-catching-up emer-
ging economies through both competition and collaboration. In this, China
merits special attention due to its dynamic growth as well as both its geopol-
itical ambitions realized via OBOR and its technological ambitions as laid down
in ‘Made in China ’, the country’s ambitious industrial policy strategy.
(iii) Cohesion challenge: To foster progress in the field of convergence and cohesion
policy within the European Union. A major issue in an industrial context here
is the fact that peripheral regions and countries, in order to make progress in
their initial industrialization or structural upgrading process, are confronted
with strong agglomeration tendencies inherent in tradable activities in core
areas of Europe’s economy.
(iv) Environmental challenge: Dealing with the challenges of the Paris Agreement
on climate change and sustainability issues more generally. Given the com-
paratively strong regulatory framework for environmental protection, Euro-
pean industry is bound to adjust and incorporate resource efficiency, emission
reduction, and sustainability in a cost-efficient manner. The implications for
the competitiveness of European industry of such a shift to the aspired circular
economy are as yet unclear and differ across industries. On the one hand,
regulations that force firms to increasingly rely on sustainable or re-usable
goods (including packaging) may develop first-mover advantages in a series of
new materials and technologies. On the other hand, initially several of these
regulations will impose additional costs on firms producing within the EU.
The structure of the remainder of this chapter is as follows. Section . briefly reviews
the evolution of industrial policy in Europe and of the supranational (EC and then EU)
layer in particular. Subsequent section . puts numbers on the relative importance of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
EU industrial policy action. This quantitative exercise identifies the policy priorities
based on member states’ (compulsory) notifications of state aid⁴ to enterprises and at
the EU level based on budgetary expenditures on (broadly defined) industrial policy
measures. This represents an important supplement to the conventional analysis of
European industrial policy based on the study of policy documents. The quantitative
approach seems appropriate as an effective industrial policy requires not only a sound
policy formulation but also proper implementation⁵ including the appropriate fund-
ing.⁶ The penultimate section, section ., discusses the extent to which current
industrial policies and the identified priorities can contribute to the key challenges
ahead. The conclusion, section ., presents recommendations for EU industrial
policy for the future.
. T E EU I
P N
..................................................................................................................................
The history of industrial policy in the EU can be divided into three phases: an early
interventionist phase (–), a liberal phase (–), and the current phase
which Bianchi and Labory () have dubbed the ‘pragmatic’ phase.⁷ The three phases
and some of their main features as well as selected key measures and initiatives are
summarized in Table . and briefly reviewed in the following sub-sections (see also
Bianchi and Labory, Chapter this volume).
.. The Interventionist Phase (–)
During the interventionist phase, European industrial policy was mainly conducted
and shaped by national governments. As a consequence, industrial policies in most of
the six founding members of the European Economic Community (EEC) were nation-
ally oriented.⁸ The public policy grip on industry was much stronger back in the s
and throughout the s than it is nowadays.
Despite notable differences in type and intensity of industrial policy across member
states, a common feature was the identification of, and particular support for, ‘strategic
⁴ ‘State aid’ is EU jargon for subsidies provided by national governments.
⁵ To policy formulation and implementation, one should also add evaluation.
⁶ This is true at least for active industrial policy measures. In contrast, framework policies might be
budget-neutral.
⁷ Bianchi and Labory () use a slightly different temporal delimitation of the liberal and the
pragmatic phase.
⁸ The founding members of the EEC (as well as the European Community for ECSC) were Belgium,
France, Germany, Italy, Luxembourg, and the Netherlands.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
Table 22.1 The three phases of industrial policy in the European Union
Interventionist phase Liberal phase (1980–2005) Pragmatic phase (since 2005)
(1950–80)
Member-state level
Heyday of sector-specific Full shift of emphasis on framework Return of specific industrial
industrial policies and horizontal policies policies resulting in an
industrial ‘policy mix’
Blend of interventions in Policies influenced by the Industrial policies constrained
sunset industries, high-tech Washington Consensus; gradual by fiscal and competition
industries, and public withdrawal of national subsidy rules
utilities policies
Nurturing of national Privatization of utilities Initiatives towards ecological
champions transformation (some
member states)
Experimentation with Active FDI policies
European Champions
(Airbus, 1970)
EU level
Creation of the Common Emergence of EU technology policy Europe 2020 Strategy
Market (1957) and the (ESPRIT, 1980)
Customs Union (1960)
Competition rules in Tightening of EU competition policy: Further focus on RTI policies
place (1957) but largely modernization of state aid rules
ineffective (2012); introduction of merger
control (1989)
Sectoral policies for coal, European Economic Act ICT-sector programme
steel, and nuclear energy
Lisbon Strategy (2000) focused on Strategic Investment Plans
knowledge-based competitiveness
Smart Specialisation Strategy
(2012) institutionalized in
regional policy
Mission-oriented industrial
innovation policies (planned)
Global Europe Strategy (2006)
Source: Authors’ own representation using the periodization in Bianchi and Labory (2006).
industries’. There was a considerable overlap with respect to the targeted industries,
defined on the basis of specific economic characteristics such as strong linkages with
other parts of the economy and high-technology content (e.g. aircraft, computers,
automotive industry) but also social considerations such as their importance for
employment (e.g. coal and steel, shipbuilding) (Owen, ). Equally important,
network industries with public goods characteristics (i.e. public infrastructure such as
electricity generation, telecommunications, railway companies) were administered
almost exclusively by state-owned companies.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
In countries such as France and the United Kingdom,⁹ the selection of strategic
industries was inextricably linked with the aim of creating national champions, that
is, dominant domestic companies that should become successful in international
markets.¹⁰ National champions are the most characteristic element in the European
industrial policy set-up during the s. Taking place in an environment of com-
paratively protected domestic markets (by the standards of the s), the plan for
creating a national champion typically consisted of a complex web of numerous
support measures, including direct subsidies and preferential loans but also public
procurement, the provision of technology by government-supported agencies, merger
promotion, industrial diplomacy, export credits, and subsidies to domestic upstream
suppliers to ensure access to strategic inputs (Owen, ). In France, such endeavours
were often linked to a ‘grand project’, a prestigious technological undertaking, which
constituted the primary mission of the future superstar firm.¹¹
Underlying these ambitious industrial policy projects was a belief in the need for
technological (and in the case of France also military) independence, especially from
the United States. This shows that even half a century ago, industrial policy in Europe
was already driven by concern about an existing technology gap vis-à-vis the United
States. Hence, one encounters here Europe’s enduring objective of matching
(or catching-up with) the United States in strategic technologies or defending leader-
ship positions already achieved, such as in car manufacturing. However, more often
than not, such as in the highly subsidised computer industry, international competi-
tiveness and export success did not materialize.
In addition to the high number of failures and the high cost to taxpayers involved,
the dirigiste policy approach in the industrial sector also lost appeal due to the creation
of the EEC and the common market (the predecessor of the single market), followed by
the completion of the customs union in . The European Common Market,¹²
establishing the free movement of goods, services, capital, and people, was comple-
mented with far-reaching competition rules, including a general prohibition of state
aid,¹³ to ensure its proper functioning. The enforcement of the competition rules was
⁹ The United Kingdom joined the EEC in (together with Ireland and Denmark).
¹⁰ Approaches to industrial policy, while highly selective and comprehensively employed during this
era, were by no means uniform—neither throughout the three decades stretching from the s to the
s, nor across member states. The German economic model differed in so far as it embraced
ordoliberalism as its guiding economic principle. The specificity of the ordoliberal concept, often
considered as the key to the German ‘economic miracle’ of the post-war period, was its strong emphasis
on competition and market forces. Still, the state had a much greater role to play than in the Anglo-
Saxon liberal conception in so far as it had to provide vital infrastructure, an inclusive training and
educational system, and to ensure regional cohesion.
¹¹ A prime example dating from the s was the construction of a super-fast train, the Train à
Grande Vitesse (TGV), developed by Alstom.
¹² The European Common Market came into being with the creation of the EEC in .
¹³ According to these rules, governments were not allowed to grant aid ‘which distorts or threatens to
distort competition . . . in so far as it affects trade by member states’. See Article of the Treaty on the
Functioning of the European Union (TFEU).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
entrusted to the European Commission. This was a remarkable arrangement in a
period that was still characterized by massive government subsidization and protec-
tionism at the national level, even if the general prohibition on trade-distorting aid was
qualified by a number of exceptions (e.g. regional aid or aid to projects of common
European interest). Nevertheless, control over state aid by sovereign governments was
obviously a delicate issue and the European Commission had to show a high degree of
pragmatism in this respect (Doleys, ). In the historical context of the time this
meant that the state aid rules were only laxly enforced during the early phase of the
common market.
Hence, one could argue that it was dissatisfaction with the outcome of interventionist
policies in a more open-economy environment, together with the fiscal strains imposed by
them, rather than the introduction of stringent competition rules, which caused the
industrial policy pendulum to swing towards the more market-oriented policies that
were to dominate for the following quarter of a century.
.. The Liberal Phase (–)
The s saw a remarkable shift in the industrial policy focus towards less interven-
tionism and a more market-oriented policy stance. Pioneered by the United Kingdom,
which joined the EEC in , sectoral planning and support for individual companies
was severely reduced or abandoned altogether. While also in this case there was
considerable heterogeneity with regard to the stringency and comprehensiveness of
the policy shift, there can be no doubt that competition, ‘horizontal’ measures, and
improving the framework conditions increasingly replaced the quest for national
champions. Especially in the United Kingdom the emphasis on market principles
and competition implied a wave of privatizations that included most public utilities,
including British Telecom in (Owen, ).
A second novel element of the new industrial policies, which were increasingly
referred to as ‘enterprise policy’, was the vanishing resistance against foreign takeovers,
including by US and Japanese companies, though this was truer in the United Kingdom
than, for example, in France, which continued to insist on domestic ownership of the
country’s key industrial assets for much longer.
An event of greater geopolitical significance during this phase was the collapse of the
Soviet bloc and the dramatic transformation of the former communist regimes of
Eastern Europe. Relevant for this discussion is that the radical system change dis-
credited any form of state planning. This led to a dismantling of existing state capacities
that were deemed to be compromised, and there was a general suspicion of anything
that smacked of ‘industrial policy’. The substitute for industrial policy was the attract-
iveness of quite a few of the Central and Eastern European (CEE) economies to foreign
direct investment. This led to a process of ‘re-industrialization’ in some of the CEE
economies (those close to the German–Austrian borders) after an initial phase of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
collapse of industrial production. This drive was led by Western European firms that
found the existing skilled (and comparatively low-waged) labour force attractive.
Various support measures by governments (such as export-processing zones) encour-
aged FDI before accession of the CEE countries to the EU, which then had to be
withdrawn to comply with the Acquis Communautaire. Importantly, the geographic
closeness to the high-wage industrial zones in Germany and Austria encouraged the
build-up of vertical cross-border production networks (see Stehrer and Stöllinger,
; Stöllinger, ).
These developments (both in Western and Central and Eastern Europe) suggest a
certain degree of convergence in industrial policies across countries between the s
and the middle of the s. This convergence was further nurtured by the changed
economic environment characterized by more open economies, the appearance of new
players in the global trade arena and, not least, the emergence of regional and global
production networks which called for an adjustment and, as it turned out, a retreat of
active industrial policies (Landesmann and Stöllinger, ).
Less clear was the growing importance of the EU, which emerged as a more relevant
player in the industrial policy sphere during the second half of the liberal phase. The
heightened importance of the supranational level in the field of industrial policy was
both a contributing factor to the convergence in national policies and a consequence of
member states’ growing belief in ‘horizontal policies’ that were seen as compatible with
free and fair competition in open markets.
EU industrial policy took shape in three quite distinct directions. The first and most
far-reaching of these was the Single Market Programme introduced in . Its
purpose was the deepening and strengthening of the already existing common market
by further harmonization of regulations and a stronger integration of services markets.
As such, the Single Market Programme is the archetypical framework policy and
constitutes the top layer of industrial policy defining the boundaries and possibilities
of other EU industrial policy activities.
Second, the existing competition rules were broadened and strengthened. Compe-
tition law,¹⁴ including state aid rules, merger control, and public procurement, can be
seen either as a part of industrial policy or as its natural antagonist. In any case, it acts
as a disciplining layer of industrial policy, monitoring and disciplining state interven-
tions by national governments and uncompetitive behaviour by firms. The third layer,
which emerged during this phase, comprises active horizontally designed industrial
policy at the supranational level, mainly in the domain of technology R&D collabor-
ation and innovation as well as regional policy (Figure .).
Third, active, horizontally designed support policies targeting R&D collaborations
were fostered, as were regional policies, due to the growing heterogeneity of an enlarged
EU. Early attempts to spur R&D collaboration at the EU level in the s were largely
¹⁴ The EU competition rules form part of the single market programme but given its great import-
ance and its distinct features and consequences, they are considered as a separate component.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
Top layer:
Single Market
Disciplining layer:
Competition rules
Active layer:
Industrial policy initiatives
Industrial Policy Horizontal
VI
by Member States Programmes
. The industrial policy structure of the EU
Note: VI = vertical initiatives, including projects of European interests. Dark grey areas indicate the EU level,
light grey areas indicate the level of member states.
Source: Authors’ own representation.
unsuccessful,¹⁵ at least, with a view to achieving the main objective of closing the
technology gap with the United States (and increasingly with Japan) in advanced
industries such as electronics or aircraft. Despite the limited successes of the early
R&D cooperation programmes, technology and R&D policy remained the cornerstone
of the EU’s support for industrial development. This is reflected in both the wording of
the Article on Industrial Policy¹⁶ that was introduced with the Treaty of Maastricht in
and also in the Lisbon Agenda, the EU’s major growth strategy devised in .¹⁷
The new article on industrial policy, which anchored the competences of the European
Commission in this area in the EU treaties,¹⁸ however, has never attained great
practical relevance.
With regard to regional policy, which dates back to with the establishment of
the European Fund for Regional Development (EFRD),¹⁹ it was the successive rounds
of enlargement²⁰ that advanced ‘cohesion’ to become one of the main EU policy
domains. This implies that the European Structural and Investment Funds (ESIF) are
concerned with distributive impacts (Schwengler, ). As will be seen, the scale of
spending is quite large, providing finance not only for investments in infrastructure but
¹⁵ The first collaboration programmes included the European Strategic Programme on Research in
Information Technology (ESPRIT) and the European Research Coordination Programme (EUREKA).
¹⁶ Article () of the TFEU dealing with industrial policy stipulates that the EU ‘shall ensure that
the conditions necessary for the competitiveness of the Community’s industry exist’.
¹⁷ The Lisbon Agenda aimed at making the EU ‘the most competitive and dynamic knowledge-based
economy’.
¹⁸ Article () makes industrial policy a ‘shared competence’, which means that member states
remain the main actors but with complementary activities and regulatory power at the EU level.
¹⁹ The ERDF was the first of the European Structural and Investment Funds (ESIF). Currently, the
ESIF family comprises five distinct funds: the ERDF, the European Social Fund (ESF), the Cohesion
Fund (CF), the European Agricultural Fund for Rural Development (EAFRD), and the European
Maritime & Fisheries Fund (EMFF).
²⁰ Greece entered the EC in , followed by Portugal and Spain in .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
for a wide array of activities including labour-market and qualification measures,
technology and environmental policy measures.
The allocation of funds from the ESIF changed fundamentally with the EU enlarge-
ment of because of the much lower per capita income of the CEE countries
entering compared to the ‘old’ member states. Payments from the ESIF became an
essential source for the financing of infrastructure investments in the CEE countries,
which also made extensive use of European funds to attract foreign direct investment
(FDI).
Despite the propping up of activities in the domain of innovation and technology
policy and the heightened role of regional policy, the EU’s approach to industrial policy
throughout the liberal phase is best described as horizontal in design, aiming at creating
favourable framework conditions and correcting market failures, both with the ultim-
ate objective of supporting the industrial competitiveness of EU firms. While it was to
become more heterogeneous and multi faceted over time, this approach would also
remain dominant during the subsequent pragmatic phase.
.. The Pragmatic Phase (Since )
Starting sometime between and the global financial crisis, the current pragmatic
phase of industrial policy is hard to characterize as it is still evolving. Some authors
argue that the Commission’s blocking of the planned Siemens–Alstom merger in
has initiated a fourth phase of European industrial policy (see EPSC, ). In this
view, member states, dissatisfied with the tough EU competition rules against the
background of growing international competition (often deemed unfair), demand a
loosening of the competition rules in order to (re-)establish a level playing field—
especially vis-à-vis Chinese companies. However, it seems too early for such a conclu-
sion, so for the purpose of this chapter the pragmatic phase is considered to be still
ongoing.²¹
It was nevertheless true that a renewed interest in more active industrial policies
developed, especially in member countries that experienced a crippling loss of com-
petitiveness of their industries within the European Monetary Union (vs. Germany)
but also those which had undergone waves of de-industrialization which generated not
only macroeconomic problems but also deep structural regional imbalances.
The straightjacket of EU competition policy and the interdependencies in an
increasingly integrated world economy tightly linked by global value chains made it
²¹ Apparently, France and Germany pressed the European Commission to come up with a new
Industrial Policy Communication which should facilitate the creation of European champions, ideally by
amending EU competition law (EPSC, ). The new Industrial Policy Communication (European
Commission, ) was finally issued in March and only marginally reflects the Franco-German
demands and focuses instead on technological leaders in digital markets and a transformation to a
‘green’ economy.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
impossible to reactivate the industrial policy toolkit of the past. As a consequence,
member states had to turn to new designs for their industrial strategies that were both
compatible with the single market and in particular with its competition rule, on the
one hand, and more effective (and therefore more specific) policies than the purely
horizontal approach followed until the early s, on the other.
The attempts by governments to square this circle have been diverse, ranging from
barely noticeable changes in policy (e.g. in most CEE member states which essentially
held onto their FDI attraction policies) to a quite explicit revitalization of industry,
technology, or skill-specific policies. In all this it is important to note that the search for
new industrial policy tools and concepts did not mean that the cherished preference for
horizontal policy objectives was abandoned (Radosevic, ).
Hence, the focus on R&D and innovation policy remained, though arguably with a
slight twist as member states increasingly try to link their R&D and innovation efforts
to societal challenges such as the digital transformation or mitigating climate change.
Likewise, the EU’s main research support programme, the Horizon programme,
features ‘societal challenges’, one of which is Climate Action, Environment, Resource
Efficiency and Raw Materials.²² This way, ‘Industry .’²³ and ‘green’ industrial policies
aiming at a structural transformation towards renewable energies and circular (instead
of linear) resource flows became integral parts of R&D and innovation policies. The
Digital Agenda had already made an appearance in the European Commission’s
industrial policy strategy of ²⁴ and has since then advanced to become one of
the key themes in subsequent strategies.²⁵
The link between industrial policies and societal challenges further led to the
incorporation of ‘mission-oriented innovation policies’ (Mazzucato, ) in the
industrial policy frameworks of several member states. Such missions are less encom-
passing than the great societal challenges they should help solve and, above all, are
defined in a way that clearly allows assessment of whether the mission has been
accomplished.²⁶ At the EU level, missions will become part of the EU’s relabelled
Horizon Europe (formerly Horizon ) programme in the next multi-annual finan-
cial framework period (–) (see European Commission, b).²⁷
²² See: https://ec.europa.eu/programmes/horizon/en/h-sections.
²³ The term ‘Industry .’ originates from the German High-Tech Strategy and has since become a
general term for either preparing for, and/or successfully embracing, the new production technologies
associated with the Fourth Industrial Revolution (notably cyber-physical production systems). Industry
. constituted the German government’s Project for the Future, initiated in and developed into a
platform in . See: https://www.bmbf.de/de/zukunftsprojekt-industrie---.html.
²⁴ See An Integrated Industrial Policy for the Globalisation Era (European Commission, ).
²⁵ See Investing in a Smart, Innovative and Sustainable Industry (European Commission, a).
²⁶ The prime example of a mission from the past is sending a man to (and returning him from) the
moon.
²⁷ See: https://www.ucl.ac.uk/bartlett/public-purpose/partnerships/ucl-commission-mission-oriented-
innovation-and-industrial-strategy-moiis#UK%IS’s%GC. For this purpose the European Commis-
sion also engaged Mariana Mazzucato as an adviser and commissioned a report on mission-oriented
innovation and industrial strategy (Mazzucato, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
Global value chains (GVCs) and the implied geographically dispersed production
processes are another phenomenon that new industrial policy concepts try to take into
account. The significant impact of GVCs on changing international trade and invest-
ment patterns in the EU and beyond implies a great potential for achieving industrial
policy objectives. In general, however, in the context of industrial policy, GVCs seem so
far to have become a buzzword that has entered the policy discourse but without any
substantial effect on policy formulation, not to mention on actual implementation. For
example, the European Commission’s industrial policy strategy calling for a European
Industrial Renaissance (European Commission, ) urges member states to imple-
ment measures that facilitate the integration of EU firms in GVCs to boost their
competitiveness. No guidance is provided though as to what kind of measures would
be appropriate, nor are types of value chains or segments of value chains suggested that
firms, regions, and countries should try to get involved in. This raises a question mark
over the relevance of the participation in GVCs in the current EU industrial policy
toolkit. This is regrettable as the analysis of functional specialization (i.e. specialization
by value-chain functions such as R&D, production, or marketing) shows marked
differences in functional profiles across member states (see Stöllinger, ). The
general pattern is that the more advanced member states specialize in knowledge-
intensive activities such as R&D or managing the production network (‘headquarters
functions’) while especially the Central and Eastern European member states act as
‘factory economies’ (Baldwin and Lopez-Gonzalez, ) responsible for the actual
production (including final assembly).
Equally related to the global economy, an important change in EU trade policy, with
consequences for industrial strategies, occurred in with the adoption of the Global
Europe strategy (European Commission, ). The strategy implies a marked shift
away from a multilateral (WTO-based) approach to liberalization and towards a
bilateral liberalization strategy. Since then, the EU has been concluding a series of
deep and comprehensive free-trade agreements with several extra-European partners,
including Korea, Japan, and Canada. Given the current disturbances in the global trade
architecture emanating from the United States, the EU may be forced to change its very
liberal stance towards international trade, too. Already a marked shift in the EU’s trade
policy is noticeable. It seems that the EU is less convinced of the advantages of
unilateral liberalization. And indeed, especially for the poorer member states, asym-
metric liberalization efforts combined with tough EU competition rules and question-
able practices by partner countries that follow a state capitalism model poses severe
competitive challenges. The abandonment of the belief in the advantages of unilateral
liberalization is also visible in the reform of the EU’s public procurement rules.²⁸
A key aspect of this reform is the principle of reciprocity, which means that bidders
from third countries that do not open their public procurement markets to EU
companies can in turn be barred from EU tenders for public contracts.
²⁸ A summary of the reform is provided on the website of the European Commission at: https://ec.
europa.eu/growth/single-market/public-procurement/rules-implementation_en.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
In the realm of regional policy, a new variant of place-based innovation-oriented
industrial policy, known as smart specialization strategies (see Foray et al., )—or
S for short—is currently being propagated by the European Commission. It is seen as
a tool to improve the technological capacities especially of lagging European regions,
which could be one way to reduce the currently vast technological asymmetries (as
evidenced by the complementary functional specialization patterns) within the EU. For
this reason, the formulation of a smart specialization strategy has become a (formal)
conditionality for regions to access funds from the EFRD for R&D and innovation
purposes.
Finally, there are calls for more projects of European interest, which so far have been
rare, Airbus being one of the few examples. The new French industrial policy calls for
the ‘Airbus of tomorrow’ in fields such as energy, multimedia networks, or emissions-
free vehicles (Cohen, ).
Hence, for the time being the EU follows a ‘mixed’ industrial policy approach (which
continues to be embedded in the single market and subject to the competition rules).
According to the European Commission () this policy mix consists of a ‘horizontal
basis’ which considers all sectors as important and tailor-made approaches to all these
sectors. To what extent this view is compatible with the growing importance of
mission-based thinking about industrial policy and the concept of smart specialization
strategies remains to be seen. This issue will be taken up again in section ..
. EU I P P:
T N
..................................................................................................................................
There is no lack of documents outlining the EU’s industrial policy strategies. Typically,
these documents put forward a large number of objectives and initiatives. Since ,
the Commission has launched five industrial policy strategies, each supplementing and
fine-tuning the previous ones. The strategy (European Commission, ) is
strongly influenced by the fall out from the global recession of – and the
subsequent European debt crisis, and therefore focuses on investment in new tech-
nologies and innovation—a recurring topic throughout all strategies. The document
defines six investment priorities (‘priority action lines’) plus ten further fields for key
action (ranging from developing ‘raw materials diplomacy’ to matching skills with jobs,
to the introduction of the concept of smart specialization with regard to the use of
regional funds).
The industrial policy strategies are complemented by countless communications,
strategies, and initiatives which are in one way or another related to the EU’s industrial
policy strategy. The updated industrial policy strategy of (European Commission,
a) lists no less than forty-eight such communications, strategies, and initiatives,
including the Strategy on Digitising European Industry, the New Circular Economy
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
Package, the extension of the European Fund for Strategic Investment (EFSI), or the
free-trade agreement with Japan.
While the strategy documents are a valuable source for learning about the EU’s
general approach to industrial policy and main objectives, to some extent the vast
number of strategy documents and the varying priorities obscure, even if unintention-
ally, the true priorities of the EU’s industrial policy. This chapter therefore supplements
the information on industrial policy priorities available in official documents with data
on actual spending on policy objectives that are related to industrial policy. The two
main sources of data used for this quantitative exercise are the Multi-Annual Financial
Framework (MFF)—the EU’s budget plan—for the period – and the EU State
Aid Scoreboard (SAS) which records the value of the aid elements involved in the
subsidies granted by member states.²⁹ SAS data for the period – are used to align
with the MFF data.
The analysis reveals first of all the relative importance of spending on industrial
policy at the EU level on the one hand and at the level of member states or regions
within member states on the other (level dimension). At both levels the data are further
dissected to identify the priorities of industrial policy (thematic dimension), and
differences in these thematic priorities across member states or groups of states are
discussed (country dimension).³⁰
.. The Level Dimension: Industrial Policy Spending
at EU and Member-state Levels
Against the background of the historical developments in EU industrial policymaking,
it is not surprising that on the whole, expenditure on industrial policy by member states
far exceeds the amounts spent at the supranational level (Figure .). The financial
resources from the EU budget flowing to industrial-policy-related measures amounted
to . per cent of the EU’s GDP annually during the period –.³¹ In contrast,
industrial policy spending by member states was in the order of . per cent of GDP
during the same period. The latter figure includes, apart from the state aid provided,
²⁹ For details see Appendix A...
³⁰ Note that this approach captures only policy actions that have budgetary implications and,
therefore, other potentially important measures such as regulations or the conclusion of a free-trade
agreement are left out.
³¹ Note that this share of industrial-policy-related spending is lower than that in Pellegrin et al. ()
who subsume per cent of the EU MFF – to ‘Relevant programmes from an industrial policy
perspective’ (see table , pp. –). This would result in EU industrial-policy spending of about . per
cent of EU GDP. The main difference between the numbers in this chapter and those in Pellegrin et al.
() is that these authors include all spending on the Common Agricultural Policy (CAP) and the
Maritime and Fisheries Policies (amounting together to about per cent of the EU budget) in their
analysis.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
0.75 0.10%
(Co-financing)
0.50
in % of GDP
0.67%
0.25
0.35%
0.00
EU Member States
. Spending on industrial policy in the European Union, average –
Note: EU funding is the sum of expenditure items related to industrial policy in the MFF over the years –.
Co-financing amounts by member states are estimations which are calculated as the ratio between planned
allocation and actual spending by member states in the MFF –. All these expenditures are expressed
as nominal values in per cent of GDP. National State Aid by member states is the subsidy element
contained in national state aids, also expressed in per cent of GDP.
Source: European Commission (state aid scoreboard) available at http://ec.europa.eu/competition/state_aid/
scoreboard/index_en.html; DG budget data (EU expenditure and revenue –) available at
http://ec.europa.eu/budget/graphs/revenue_expediture.html; statistics on European Structural and
Investment Funds (ESIF) available at https://ec.europa.eu/regional_policy/en/funding/available-budget/),
authors’ calculations.
member states’ contributions to EU programmes financed by the ESIF, which are
known as co-financing by member states.
While the subsidy spending by member states obviously forms part of their national
industrial policy activities, the co-financing part should, in principle, also reflect to
some extent European industrial policy objectives, although specific projects financed
by the ESIF are selected and designed by national or regional governments.
The finding that member states’ funding of industrial policy exceeds that at the EU
level by more than two to one³² also reflects the fact that industrial policy is a shared
competence with only subsidiary powers of the supranational level, while member
states assume the role of main actors in this domain (see also Wyns, ).
The combined spending on industrial policy by member states and the EU amounts
to about . per cent of EU GDP. This is certainly a non-negligible amount of public
support but is low by historical standards, given that during the s subsidy spending
in the EU is estimated to have amounted to per cent of GDP and was still around
³² While not surprising, this is still a remarkable result given the rather generous allocation of funds
from the EU budget to the realm of industrial policy in the calculations, which includes public
infrastructure expenditure and parts of active labour-market policies.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
per cent during the s (European Commission, b). This can be interpreted in
two different ways. Either the proclaimed ‘renaissance’ of industrial policy in Europe
has not materialized, or the new industrial policies of the twenty-first century are not
just old wine in new bottles but do indeed have some new features. In particular, these
new policies are often described as being more subtle, less interventionist and better
aligned with market forces, with governments or their agencies sometimes only acting
as facilitators (‘honest brokers’).³³ In this narrative the comparatively low amounts
spent at the aggregate level reflect the fact that the new industrial policies involve less of
the old-fashioned ‘hard’ support policies and more ‘soft’ policies resulting in less
government expenditure.
.. The Thematic Dimension: Priorities in Industrial Policy
The categorization of industrial policy in this exercise is mandated by the structure of
the MFF and reflects various drivers of competitiveness. More precisely, the following
broad support categories are distinguished: (i) research, development, innovation, and
technology (RDI&T); (ii) support for small and medium-sized enterprises (SMEs); (iii)
employment, education, and training; (iv) ecological transformation (‘green’ industrial
policy); and (v) investment in infrastructure. Two further categories, sectoral industrial
policy and regional policy, are added, though the latter can be further allocated to the
other thematic fields in the case of industrial policy spending at the EU level.
Table . shows the absolute amounts spent on these industrial policy fields, along
with their shares in GDP and their share in overall industrial policy spending.
At the supranational level, the data reveal two main policy priorities: regional policy
and support for RDI and technology. Taken by itself, the EU’s regional policy, that is,
the activities of the ESIF,³⁴ accounts for the lion’s share of EU industrial policy
spending. Forty billion euros or almost per cent of the total industrial policy-
related expenditure at the EU level is disbursed via the ESIF. The fact that industrial
policy spending at the EU level is dominated by regional policy has important
implications for policy formulation. This is because in contrast to industrial policy
measures financed via the central EU budget (e.g. the Trans-European Networks), the
projects financed by the ESIF are designed and selected by the member states or their
regions.³⁵ Hence, with regard to the design of policies it is useful to distinguish between
EU industrial policy in a narrow sense, which is financed and predominantly designed
by the EU institutions, and the EU’s regional industrial policy.
³³ See also Wade () describing US industrial policy.
³⁴ Note that this quantitative exercise does not include all spending under the ESIF but only that of
the European Social Funds (ESF) and the European Funds for Regional Development (EFRD) as well as
the Cohesion Fund (CF).
³⁵ EU institutions are monitoring the projects and the disbursement of funds though, which is also an
important function.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
Table 22.2 EU and member states’ spending on industrial policy by policy field,
2014–17 (annual averages)
EU State aid by EU State aid by EU State aid by
industrial member industrial member industrial member
policy states policy states policy states
Industrial Policy Field Absolute amounts % in GDP % of total IP
(in $ bn) spending/state aid
Ecological transformation 0.29 51.90 0.00 0.35 0.01 0.52
Employment, education, 0.44 3.13 0.00 0.02 0.01 0.03
training
Infrastructure 1.44 0.00 0.01 0.00 0.03 0.00
RDI and technology 7.47 9.07 0.05 0.06 0.14 0.09
Regional policy 40.96 11.13 0.28 0.08 0.79 0.11
SME support 0.09 4.68 0.00 0.03 0.00 0.05
Sectoral industrial policy 1.32 7.02 0.01 0.05 0.03 0.07
Other 0.00 12.33 0.00 0.08 0.00 0.12
TOTAL 52.01 99.25 0.35 0.67 1.00 1.00
Note: See Figure 22.2. Co-financing amounts by member states are excluded in the table.
Source: European Commission; authors’ calculations. For details see Appendix A.22.6.2.
The second key policy at the EU level, support for RDI and technology policy,
accounts for another per cent of the EU’s industrial policy budget. As will be
discussed in detail, the main policy vehicle in this domain is Horizon , a grant-
based programme for research institutions, enterprises, and universities which finances
collaborative research activities of all kinds.
Moving on to the state aid activities of the member states, Table . suggests that
the industrial policy priorities at the national level are quite different from those at the
supranational level. While member states also spend considerable amounts on RDI and
technology policies (€ bn) and regional policy (€ bn), the most prominent state aid
category is green industrial policy,³⁶ that is, state aid granted for ecological transfor-
mation. The importance assigned to ‘green’ industrial policy measures is attributable
above all to Germany’s massive expenditure on the Energiewende (energy transition),
parts of which constitute state aid.
Also noteworthy is that during the period –, only marginal sums were
spent on sector-specific industrial policy. This is true for the EU level where €. bn
( per cent) was spent on specific industries, essentially space, aircraft, and electronics,
³⁶ This result is influenced by the fact that we defined industrial-policy spending by member states
rather narrowly, limiting it to state aid which therefore excludes most of the investment expenditure on
public infrastructure.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
R&D and Technology Ecological Transformation
Employment, Education, Training SME Support
Infrastructure Regional Policy
Sectoral Industrial Policy Other
All sources of funding 0.14 0.40 0.08 0.06 0.07
State aid by MS 0.09 0.52
Co-financing by MS 0.15 0.22 0.21 0.12 0.11
EU Regional Funds 0.11 0.25 0.18 0.09 0.19
EU Industrial Policy ex ESIF 0.68 0.13
0% 20% 40% 60% 80% 100%
. Funding of industrial policy in the European Union by themes, average –
Note: EU Industrial Policy ex ESIF is the sum of expenditure items related to industrial policy in the MFF over the
years –. For the EU Regional Funds, the total actual financing flows by the ESIF are assigned to
individual funds using the shares of these funds in the planned budget allocations in the MFF –.
Co-financing amounts by member states are calculated using the ratio between planned allocation and the
actual spending by member states in the MFF –. National State Aid by member states is
the subsidy element contained in national state aids, also expressed in per cent of GDP.
Source: European Commission (state aid scoreboard) available at http://ec.europa.eu/competition/state_aid/
scoreboard/index_en.html; DG budget data (EU expenditure and revenue –) available at http://ec.
europa.eu/budget/graphs/revenue_expediture.html; statistics on European Structural and Investment Funds
(ESIF) available at https://ec.europa.eu/regional_policy/en/funding/available-budget/), authors’ calculations.
and € bn ( per cent) by member states. In the latter case, this includes restructuring
and bail-out aid, for example, for airlines (former national carriers).
Returning to the EU level and the ESIF, Figure . presents the same data but this
time with the ESIF funds split into corresponding categories of industrial policy.³⁷
At the EU level, this presentation of the expenditure on industrial policy confirms
the point made above that EU industrial policy predominantly coincides with R&D and
innovation policy. Approximately per cent of ‘central’ EU industrial policy spending
is destined for RDI and technology. The other two categories of industrial policy that
are of high relevance in financial terms are infrastructure investments and sector-
specific policies, which accounted for per cent and per cent of the industrial
policy spending from the ‘central’ EU budget respectively.
The EU’s infrastructure-related industrial policy is embedded in its Trans-European
Network (TEN) policy. This policy comprises several instruments including the
³⁷ The disaggregation of ESIF funds into categories of industrial policies is possible because ESIF
funds are structured into ‘thematic objectives’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
Connecting Europe Facility (CEF), which provides financial support for strategic
investment in transport, energy, and increasingly digital infrastructure.³⁸ A key object-
ive of the CEF is to create pan-European energy networks and European transport
corridors in order to overcome Europe’s nationally fragmented energy and transport
systems. While this objective is laudable, the effectiveness of the CEF is curtailed by
persistent financing gaps in relation to member states’ declared needs (European
Commission, c) and arguably also by their nationally oriented priorities.
One particularly obvious aspect of the EU’s infrastructure-related industrial policy is
that policy efforts are scattered across too many programmes. While the fact that
infrastructure, including the TEN, is apart from the CEF also financed via the ESIF
is understandable given the different policy objectives, the need for an additional
infrastructure programme that was set up with the European Fund for Strategic
Investments (EFSI)³⁹ is less clear. The EFSI, better known as the ‘Juncker Plan’ after
its main promoter, former European Commission president Jean-Claude Juncker, was
set up as a response to the financial crisis. The investment plan was initially intended as
a temporary fiscal stimulus measure⁴⁰ but has been extended until . In the
meantime, it is clear that the EFSI will become a permanent EU programme in the
MFF – under the name EUInvest. Unfortunately, the design of the EFSI leaves
much to be desired, constituting as it does an old-style industrial and investment
approach. To start with, its actual budget is much too small to have a great impact.
Contrary to the € billion announced, the actual funds provided by the EU
amounted to only about €. billion for the original three-year period, with some
additional funds coming from the European Investment Bank. The difference stems
from the fact that official EU documents include the private investments that would
supposedly be mobilized by the EFSI. While the figures for the investments actually
triggered and published by the European Commission suggest that the target of €
billion has even been exceeded, auditors have cast doubt on these figures, arguing that
the claims by the European Investment Bank (EIB), which is managing the EFSI, have
been overstated.⁴¹
Given the current experiences with the EFSI, it also remains unclear what is strategic
about the fund. The areas eligible for financing by the EFSI are so broad and diverse
that hardly any priorities are discernible. The fields of operation include energy and
transport projects, but also support to SMEs, R&D, and the digital economy.⁴²
³⁸ See: https://ec.europa.eu/transport/themes/infrastructure_en.
³⁹ The European Fund for Strategic Investments (EFSI) is the central pillar of the Investment Plan for
Europe. See EU regulation / on the European Fund for Strategic Investments, the European
Investment Advisory Hub and the European Investment Project Portal.
⁴⁰ The initiative was initially scheduled for three years (–).
⁴¹ See: ‘EIB and Commission Defend Juncker Plan Following Auditors’ Criticism’, EuroActiv,
January . https://www.euractiv.com/section/economy-jobs/news/eib-and-commission-defend-juncker-
plan-following-auditors-criticism/.
⁴² For a distribution of the projects financed by the EFSI by country and topic, see: https://ec.europa.
eu/commission/priorities/jobs-growth-and-investment/investment-plan-europe-juncker-plan/investment-
plan-results_en.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
Agriculture and social matters are also covered. Hence, to some extent the EFSI, and
the future InvestEU programme, is likely to duplicate existing programmes. The EFSI is
already linked to the Connecting Europe Facility (CEF), with part of its budget simply
redirected from the CEF, the EU’s main infrastructure investment programme.
The greatest problem of the EFSI, however, is that it does not seem to live up to its
proclaimed principle of additionality. The EFSI was supposed to only support programmes
that otherwise could not be realized (which, by the way, was one of the explanations given
for the high leverage effects). A look at the project list, however, casts doubt on the
additionality of projects and the dire need of the beneficiaries for public support from
EU funds. A prime example is the purchase of new rolling stock (CityJets) for regional
passenger transport by the Austrian Railways at a total cost of €. billion. The project is
supported with a € million loan from the EIB backed by an EFSI guarantee. In all
likelihood the Austrian railways would have bought this new rolling stock anyway as the
new material was long overdue. This is just one example demonstrating that, in all
likelihood, the support provided by EFSI is plagued by rent-seeking behaviour of firms
who hope to benefit from improved financing conditions thanks to EFSI.
In summary, the EFSI as well as the InvestEU programme are examples of a poorly
targeted, old-style industrial policy programme and a rather unfortunate attempt to
revive EU industrial policy. As will be shown, though, the EU is also following more
promising industrial policy avenues.
Staying in the domain of infrastructure-related industrial policy but moving to the
European Structural Funds, an interesting finding regarding the ESIF’s spending profile
is that infrastructure is no longer the primary thematic objective. Though it is still
important, accounting for roughly a fifth of total ESIF spending, the number one
priority within the ESIF according to the categorization employed is funding for
ecological transformation, that is, regional green industrial policy.
While it is reassuring to see that the EU is providing funds for the ecological
transformation of industry and infrastructure, it should be borne in mind that the
projects are selected by member states. From this perspective it is surprising that ‘green
industrial’ policy enjoys much greater prominence (as measured by budgetary outlays)
in national industrial policy budgets than at the EU level.⁴³ This is surprising in so far
as the mitigation of climate change, and the protection of the environment more
generally, constitute an archetypal global public good (see, e.g. Rodrik, ). As
such one would expect that the design and funding of green industrial policies would
be ideally placed at the supranational level.
Given the quantitative importance of national governments’ state aid expenditure in
EU industrial policy spending, the thematic priorities set by member states are strongly
determining the major industrial policy spending patterns. Overall, per cent of
industrial policy spending in the EU is ‘green industrial policy’ of some sort, an issue to
which we shall return.
⁴³ Certainly, the priorities of the central EU budget are also ultimately decided by member states.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
EU industrial policy funding state aid & co-financing by MS
Total (EU + MS) ratio EU/MS (right axis)
4.0 3.72 3.0
3.49
3.5 1.67
1.31
ratio EU / Member States
IP spending in % of GDP
3.0 0.82 1.04 1.31
0.20 0.26 0.41 1.0
2.5 0.13 2.86
0.10
2.0
1.42
1.5 1.10 1.17 –1.0
0.92
1.0 0.56 0.62
0.52
0.5
0.0 –3.0
ly
s
y
ce
an
di
lti
an
-1
E-
ut
U
Ita
an
or
Ba
EU
alk
So
CE
m
Fr
N
er
-B
EU
all
G
EU
sm
er
th
O
. Spending on industrial policy from the EU and from member states, by country
groups, average –
Note: EU-Balkans = HR, BG, RO; Other small EU- = AT, BE, NL, LU, IE; CEE- = HU, CZ, SK, PL, SI; EU South = CY,
EL, ES, MT, PT. For the EU Regional Funds, the total actual financing flows by the ESIF are assigned to individual
funds using the shares of these funds in the planned budget allocations in the MFF –. Co-financing
amounts by member states are calculated using the ratio between planned allocation on EU spending and
the actual spending by member states in the MFF –. National State Aid by member states is the
subsidy element contained in national state aids equally expressed in per cent of GDP.
Source: European Commission (state aid scoreboard) available at http://ec.europa.eu/competition/state_aid/
scoreboard/index_en.html; DG budget data (EU expenditure and revenue –) available at http://ec.
europa.eu/budget/graphs/revenue_expediture.html; statistics on European Structural and Investment
Funds (ESIF) available at https://ec.europa.eu/regional_policy/en/funding/available-budget/),
authors’ calculations.
.. The Country Dimension: Substantial Differences
in Industrial Policy Expenditure
Going beyond EU averages across member states and zooming into the activities of
individual member states (or groups of member states),⁴⁴ Figure . reveals a great
deal of heterogeneity in spending priorities at both governance levels.
A first key insight is that the dominance of industrial policy funding from member
states’ own resources, which emerged in the aggregate, is not present across all country
groups. In particular, for the CEE member states and the Southern cohesion countries,
the industrial policy funding received from the EU budget exceeds national expend-
itures. The ratio between industrial policy funding received from the EU and the
national sources is : in the case of the CEE- and even : for the EU Balkan
countries (Croatia, Bulgaria, and Romania).
⁴⁴ For the groupings of member states see Appendix ...
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
At the lower end of the spectrum is Germany which, due to its high expenditure on
energy transition, has a funding ratio of only : (or : in favor of national industrial
policy spending). For this reason, Germany is also the country with the highest aid
expenditure among the EU-, not only in absolute terms but also in relation to
GDP. Including the funding for industrial policy obtained from the EU budget,
German expenditure on industrial policy amounted to . per cent of GDP, slightly
higher than the EU average of . per cent.
The reason for the patterns of industrial policy spending observed is that the CEE
and the Southern cohesion countries are the main beneficiaries of the ESIF as they have
more regions eligible for funding from the ERDF and the Cohesion Fund. Therefore,
the pronounced differences in industrial policy spending across member states are, to a
large extent, explained by the large differences in income levels within the bloc.
The combination of comparatively high state aid levels and generous receipts from
the ESIF resulted in expenditures for industrial policy amounting to . per cent of
GDP for the CEE- (with per cent of GDP coming from the EU budget); . per cent
for the Baltic countries; and . per cent for the EU Balkan countries. These figures are
high even by historical standards given that the amount of state aid was estimated to
have been around per cent of GDP during the s, the heyday of industrial policy.
This has to be borne in mind when discussing possible industrial policy initiatives,
especially because the effectiveness of various ESIF programmes has been shown to
decline with the amount of funding received (e.g. Becker et al., ). Hence, in some
regions there may be a risk of overspending. In these cases, new initiatives should not
be added to existing support programmes but should be substituted for some of the less
successful support mechanisms in place.
Section .. shows that industrial policy spending across member states not only
varies with regard to the amounts spent but also targets different thematic fields.
.. The Country Dimension: Different Countries,
Different Priorities
Differences in industrial policy priorities across member states are discernible in the
funds received from the central budget (Figure ., panel a) and those channelled via
the ESIF (Figure ., panel b).
The most striking feature in the central EU budget is doubtless the dominance of
industrial policy spending on RDI and technology. For the Nordic countries, the
United Kingdom, and the other small EU- member states, RDI and technology
accounts for more than three-quarters of the total funding of industrial policy. The
shares are similarly high for Germany and Italy. The most notable exception here is the
Central and Eastern European member states. For the CEE-, the Baltic countries, and
the EU Balkan countries, the corresponding share is about per cent or less. This
comparatively smaller role of RDI and technology support is compensated by larger
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(a) Funding of industrial policy from Central EU budget
R&D and Technology Ecological Transformation Employment, Education, Training
SME Support Infrastructure Sectoral Industrial Policy
1.00
0.80
0.60
0.40
0.20
0.00
E
FR
IT
h
an
lti
di
E-
-1
ut
D
or
Ba
EU
alk
So
CE
N
-B
EU
all
EU
sm
er
th
O
(b) Funding of industrial policy from European Regional and Investment Funds (ESIF)
R&D and Technology Ecological Transformation Employment, Education, Training
SME Support Infrastructure Sectoral Industrial Policy
Other
1.00
0.80
0.60
0.40
0.20
0.00
E
FR
IT
h
an
lti
di
E-
-1
ut
D
or
Ba
EU
alk
So
CE
N
-B
EU
all
EU
sm
er
th
O
. Spending on industrial policy from the EU budget, by country groups and themes,
average –
Note: EU-Balkans = HR, BG, RO; Other small EU- = AT, BE, NL, LU, IE; CEE- = HU, CZ, SK, PL, SI; EU
South = CY, EL, ES, MT, PT. The numbers are the share of the respective industrial policy theme in a
country or country group’s total EU policy spending funded by either the central budget or the ESIF.
Source: European Commission (state aid scoreboard) available at http://ec.europa.eu/competition/state_aid/
scoreboard/index_en.html; DG budget data (EU expenditure and revenue –) available at http://ec.europa.
eu/budget/graphs/revenue_expediture.html; statistics on European Structural and Investment Funds (ESIF)
available at https://ec.europa.eu/regional_policy/en/funding/available-budget/), authors’ calculations.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
spending on infrastructure financed by the EU budget, mainly through the Trans-
European Network (TEN) projects.
While the distribution of funds is more evenly split across the different industrial
policy fields in the case of the ESIF, the pattern that infrastructure-related industrial
policy is more important in the Central and Eastern European member states is also
discernible in the ESIF budget. The same is true for the more limited role of RDI and
technology policies in these countries compared to the EU-.
It also seems that the share of funds destined for ecological transformation account
for a relatively larger share of the overall industrial policy spending financed via the
ESIF in the CEE-, the Baltic countries, and the EU Balkan countries than in the other
member states. This might reflect the legacy in Central and Eastern European
countries still dealing with the communist-era priority given to heavy and energy-
intensive industries. Given member states’ state aid spending profile, however, this
seems to indicate a compensation for a lack of domestic spending rather than policy
priorities.
Finally, it should be mentioned that France’s high share of sector-specific industrial
policies in the total funds it received from the EU budget does not reflect the country’s
supposedly interventionist stance on industrial policy but is linked to France’s leading
role in the European Earth Observation Programme, now called Copernicus, which the
EU is operating jointly with the European Space Agency (ESA).
Returning to the more general differences across countries in Figure ., it is worth
mentioning that the stronger focus on infrastructure-related industrial policy detect-
able for the Central and Eastern European member states and the stronger emphasis on
RDI and technology policies in the EU- signal different needs of member states.
These different needs in turn are to a large extent again explained by the still prominent
differences in development levels across member states.
The key policy question in this respect is to what extent not only the EU’s industrial
policy spending, but also the possibilities for member states in terms of state aid
spending, should accommodate for these differences. This is a delicate issue as it
touches directly upon the competition rules, that is, the disciplining layer of EU
industrial policy and one of the building blocks of the single market. An alternative
(or complementary) approach would be to ensure that the national innovation systems
(NISs) in the Central and Eastern European member states are significantly strength-
ened in order to allow these countries to benefit to a greater extent from the EU’s R&D
and innovation grants and programmes.
In this context the Horizon programme, the EU’s main R&D flagship pro-
gramme, is of key importance, as is the thematic objective R&D and technology within
the ERDF. Both are highly relevant, not only because of the significant amounts of
support involved but also because they incorporate new industrial policy approaches.
The Horizon programme supports collaborative R&D and innovation projects
to the tune of €. billion in the form of grants allocated via competitive funding. Its
main objectives are to stimulate excellent science, build industrial leadership, and
provide solutions to the grand societal challenges. The programme is structured into
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
three pillars: excellent science (targeting ‘frontier research’);⁴⁵ industrial leadership
(targeting closer-to-the-market research focused on ‘key enabling technologies’);⁴⁶
and societal challenges (European Commission, b).⁴⁷
The most interesting pillar of the Horizon programme and of its successor in
the coming MFF, the Horizon Europe programme, is the grand societal challenges
pillar. Here the European Commission has discovered the mission-oriented approach
to industrial and innovation policy and seems determined to fully embrace it in the
Horizon Europe programme.⁴⁸
The mission-oriented approach to industrial and innovation policy is rooted in a
systemic perspective of innovation and is based on a number of assumptions and
characteristics. The first assumption is that successful innovation necessarily involves a
large number of actors, both private and public—hence the notion of an ‘entrepre-
neurial state’ (Mazzucato, ). Second, the impact of public funds is strongly
enhanced if the money is not spent on narrowly defined and often isolated projects
but channelled to related research endeavours that all serve a common purpose. Third,
with regard to granularity,⁴⁹ research money should be linked to clearly defined
missions. Ultimately, research projects will serve a grand societal challenge such as
health, secure societies, and climate change. Missions are one level down in the
granularity (compared to societal challenges) with the key features that they are clearly
specified and, above all, measurable. Unfortunately, for the time being it is not quite
clear how these missions will be defined in an EU context, although some concrete
proposals exist (see Mazzucato, ). An implementation-related issue of the EU’s
main research programmes continues to be the uneven distribution of funds. So
naturally, the question of who defines these missions and who will participate in
such missions will arise. Already now, the bias in favour of the most advanced EU
member states is observable in the applications for Horizon grants (Figure .).
The EU’s regional funds have incorporated elements of new industrial policy
thinking. In particular, since , support from the ERDF in the field of research,
technological development, and innovation (thematic objective )⁵⁰ require that the
region has a Research and Innovation Strategy for Smart Specialisation in place. This
⁴⁵ See ERC website at: https://erc.europa.eu/about-erc/mission.
⁴⁶ The key enabling technologies (KETs) include, but are not limited to: advanced materials,
nanotechnology, micro- and nano-electronics, biotechnology, and photonics (European Commission,
). The KETs are regarded as the basis for innovation in a range of products across all industrial
sectors. In particular, they should support the modernization of Europe’s industrial base and the shift to
a greener economy.
⁴⁷ These numbers refer to the evaluation period –.
⁴⁸ See https://ec.europa.eu/info/horizon-europe-next-research-and-innovation-framework-programme_en.
⁴⁹ See also the discussion in section ...
⁵⁰ The same is true for thematic objective , information and communication technologies (ICT).
In the quantitative exercise, these two objectives are subsumed under the themes ‘RDI and technology’
and ‘sector-specific industrial policies’, respectively. Note that the S conditionality also applies to TO
of the EAFRD (Fostering knowledge transfer and innovation in agriculture, forestry, and rural areas).
However, we have excluded the EAFRD from the analysis in this chapter.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
EU
CEE-5 Balkans
Baltic 7% 2% UK
1% 14%
Nordic
8%
IT
13%
Small EU-15
15%
DE
12%
EU South FR
19% 9%
. Share of Horizon applications per EU member state, average –
Note: EU-Balkans = HR, BG, RO; Other small EU- = AT, BE, NL, LU, IE; CEE- = HU, CZ, SK, PL, SI;
EU South = CY, EL, ES, MT, PT.
Source: European Commission (). Authors’ own calculations.
‘ex ante conditionality’ for accessing funds from the ESIF confirms the view that smart
specialization has gained a strategic and central function within the new Cohesion
Policy of the EU (Foray et al., ). In quantitative terms, the actual expenditures
during the period to amounted to approximately € billion annually,
including co-financing by member states.
The Strategy for Smart specialization is a regional and innovation-oriented form of
industrial policy developed within Europe. The central idea underlying S is the ‘entre-
preneurial discovery process’ (Hausmann and Rodrik, ). Entrepreneurial discovery is
central because it is the process by which regions can find out about promising niches in
which to specialize. The rationale for the government to get involved in entrepreneurial
discovery processes (which in principle should be the responsibility of firms) is that first
movers, that is, firms that invest in products that are new to the region or country, cannot,
if successful, reap the full benefits from their ‘discovery’ (the well-known ‘externality’
impact of an innovating firm à la Schumpeter). This is the case because, once it has been
revealed that a certain product or service can be successfully produced in the region, other
firms from the region will enter production, driving down economic rents accruing to the
first mover. Economic rents, however, would be necessary to cover the fixed costs
associated with the investment in the discovery process. The likely scenario is, therefore,
a too-low number of attempts to discover profitable new niches (Hausmann and Rodrik,
). Public support—that is, S—is therefore needed to encourage entrepreneurial
discovery processes. Hence, it is assumed here that countries and regions possess latent
comparative advantages which can be turned into effective comparative advantages with
the appropriate policy interventions.
While the economic model by Hausmann and Rodrik () would apply to both
innovation and (physical) investment for the production of products new to the region,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
the concept of smart specialization has been developed in the context of R&D and
innovation policies (see Foray et al., ). S has been designed as a place-based
(i.e. regional) innovation-oriented industrial policy.
Despite the huge potential of the place-based S there is, however, also scepticism
about the appropriateness of this policy for less-developed regions (e.g. Capello and
Kroll, ). Based on case studies, Trippl et al. (), for example, found that while
there is policy learning in less-developed regions, they are struggling with the issue of
stakeholder involvement either due to a lack of capable stakeholders (e.g. universities)
or the unfamiliarity of actors with this type of cooperation. Radosevic () argues
that for less-developed regions the switch from an individual entrepreneurial discovery
process to a collective one is difficult to achieve. Also, in order to avoid conflicts
regarding alternative entrepreneurial opportunities of a region, stakeholders would
agree on the lowest common denominator, which often leads to the selection of very
broad technological areas. In such environments the value added of S can be expected
to be rather limited.
. EU I P E
L M C A
..................................................................................................................................
The wide spectrum of industrial policy and the large set of measures make the overall
assessment of industrial policy an elusive task. This is all the more true as EU
programmes and initiatives set different, potentially conflicting objectives and have
different underlying intervention logics (see also Pellegrin et al., ). The potential
conflict in objectives becomes evident when considering the four major challenges of
industrial policy that were discussed in the introduction to this chapter. It is against
these challenges that the strengths and achievements as well as the weaknesses and
neglects of the current EU industrial policy are discussed in this section. The discussion
pays due attention to the fact that industrial policy, to be effective, needs to be not only
well formulated but also appropriately implemented and continuously evaluated.
.. The Technological/Innovation Challenge
As regards the long-standing challenge of defending or attaining technological leader-
ship, many excellent studies assess the record, scope, and current ambitions of EU
innovation policy, evaluating the EU’s policy initiatives in the areas of electrical
vehicles, digitization, the ‘battery alliance’, and others (Veugelers et al., ;
Veugelers and Baltensperger, ). In fact, the initiatives and measures taken by the
EU in the area of innovation policy can be considered one of the success stories of EU
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
cooperation. This is no small achievement given, as was confirmed by the quantitative
exercise, that ‘innovation policy’ is at the core of what the EU sees as ‘industrial policy’.
As described above, European R&D and innovation policy could be further sharp-
ened by fully embracing the mission approach within the upcoming Horizon Europe
framework programme.⁵¹ These missions will be defined within the realm of five
clusters that have already been determined.⁵² Certainly, the effectiveness of the mission
approach depends strongly on the type of missions that are going to be defined. Among
the five clusters, climate, renewable energy and the environment figure prominently,
which provides an excellent opportunity to link the technological challenge to the
environmental challenges.
At this stage it is noteworthy that the Horizon Europe programmes may also tackle
the digital transformation which, for many, is the key technological challenge lying
ahead of EU economies with potentially transformative power for the EU’s entire
production system. While most EU countries seem to be well-positioned to master
the digital challenge, given its innovation and industrial capabilities (see, e.g. World
Economic Forum, ), concerns are nurtured by the fact that EU industry does not
possess any major global player in the Internet business.⁵³ This may indeed turn out to
be a disadvantage for the transition towards Industry ., in which cyber-physical
systems combining the physical and virtual worlds are set up. While it is far too early to
judge whether the EU will be falling behind, it is clear that the EU economy will need
heavy investment in digital technologies and the required infrastructure. Efforts in this
respect vary significantly across member states,⁵⁴ which is why a strong impetus
originating at the EU level (as envisaged by the Digital Union) is required.
As in the past with mechanization, and more recently with IT, encompassing
technological changes go along with rapid changes in the composition and the
demand for different types of skills, and changes in occupational structures with
some occupations disappearing and others emerging. This requires strong adaptation
processes from the labour force, and in education and training programmes. Euro-
pean industrial policy requires a two-pronged approach: on the one hand, to be at
the forefront of technology developments and tapping into the full potential of
such new technologies and production processes for productivity advances and
improving ‘the comforts of life’; on the other hand, to make a major effort to
also deal with the distributive and adjustment challenges of the impacts of rapid
technological and structural change.
⁵¹ Horizon Europe is the R&D and innovation framework programme of the MFF –, which is
to replace the current Horizon programme.
⁵² These clusters are: Health; Culture, Creativity, and Inclusive Society; Civil Security for Society;
Digital, Industry, and Space; Climate, Energy, and Mobility; and Food, Bioeconomy, Natural Resources,
Agriculture, and Environment.
⁵³ See EPSC (). The German software company SAP may be an exception here.
⁵⁴ This is, for example, revealed by the Digital Economy and Society Index (DESI) available at
https://ec.europa.eu/digital-single-market/en/desi.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
Against this background, innovation support plays an ever-bigger role in EU
industrial policy. And while European innovation policy has strongly improved since
its shaky beginnings in the early s, there is one important shortcoming which
needs to be dealt with. At the moment European innovation-oriented industrial policy
is mostly oriented towards the most advanced economies, companies, and regions that
are at the forefront of technological developments. Ideally, the EU’s industrial policy
should be conceived in a way that gives equal prominence to the developmental needs
of those regions, countries, and (industrial and company) segments that are not on (or
close to) the global technology, in other words, Europe’s middle-ranked as well as
peripheral regions, and countries that have to overcome massive structural challenges.
Some of these countries are seriously lagging or falling behind in economic devel-
opment. Again, this assessment is supported by the figures: even though the cohesion
countries benefit disproportionately from industrial policy-related support pro-
grammes from the EU budget—especially when the ESIFs are included—the share of
R&D and innovation support going to the CEE member states is comparatively small.
This is related to the tendering process through which R&D grants are allocated. While
the open tendering process is doubtless a strong point in the design of EU R&D and
innovation support programmes, it is also clear that it favours countries with strong
national innovation systems (NISs).
Essentially, there are two ways to address this issue. One is to further adjust the
tender rules to make sure research consortia that apply for Horizon/Europe funds
become more balanced geographically with regard to the participating institutions. The
alternative approach is to refocus the ESIF towards creating and improving the NISs of
CEE member states. This would entail the creation of tertiary teaching institutions like
the European University Institute in Florence in a number of other member states.
Another important avenue would be support for technical research agencies compar-
able to the Frauenhofer Institute in Germany.
.. The Emerging Markets Challenge
The dominance of EU industrial policy in support of technological leadership globally
to some extent deflects from the challenge posed by catching-up economies and also
the cohesion process (discussed in sub-section ..). Both are crucial in the circum-
stances in which the EU (and closely connected neighbouring countries) currently
finds itself. EU industrial policy needs to face vital structural development issues which
the European economy confronts in today’s global environment. As recognized early
on by authors such as Rosenstein-Rodan (), Hirschman (), and Gerschenkron
(), such structural development issues were traditionally at the centre of industrial
policy strategies (see also Rodrik, ; Wade, ; Cimoli et al., ) and the EU
would be well advised to reconsider their importance in the formulation of its future
industrial policy initiatives.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
The structural development issue is closely connected to the emergence of new major
players in the global trade arena,⁵⁵ first and above all China, because the greater overlap
in economic structure between the CEE and Southern EU member states and emerging
economies exposes them to fiercer competition. The key concern here is not the sectoral
composition of economies which have strongly converged within the EU. Rather, it is the
more recent functional and vertical dimension of specialization that was opened up with
the emergence of GVCs.⁵⁶ Recent empirical evidence in this respect (Stöllinger, ;
Timmer et al., ) suggests that the international division of labour with regard to
value-chain functions (e.g. R&D, head office functions, production, back offices) within
the EU continues to be very asymmetric, or in fact complementary,⁵⁷ with CEE member
states specializing predominantly in production-related activities. In this respect they
resemble countries such as Mexico and the economies in the third and fourth row of the
Southeast Asian flying-geese formation (e.g. Vietnam, Laos, or Thailand). Baldwin and
Gonzalez-Lopez () termed countries which specialize functionally in this manner
‘factory economies’, in contrast to ‘headquarter economies’ whose companies specialize
predominantly in R&D and in organizing global value chains.
For these reasons it is not surprising that the ‘China shock’ has affected the CEE and
Southern European member states much more in terms of exports than the rest of the
EU (Ciani and Mau, ; Celi et al., ).
.. The Cohesion Challenge
Tightly linked to the stiff global competition presented by emerging economies, but still
in itself a challenge, is the EU internal cohesion process. As has been emphasized
throughout this chapter, a lot of funds are dedicated to cohesion objectives via the EU’s
ESIF. Yet, despite the substantial amount of money spent on cohesion objectives,
‘peripherization’ has become a critical issue both at regional and country levels. This
development has contributed to the issue of ‘North–South imbalances’ and severe
tensions have arisen with respect to the formulation of a proper fiscal and structural
policy framework at the EU level to deal with such imbalances (see Celi et al., ).
The issue of external imbalances is closely related to the phenomenon of agglomer-
ation of industrial activity (see Stehrer and Stöllinger, ), but also to that of other
tradable activities (business services, financial centres; see also Landesmann, and
on this). Apart from the macroeconomic implications, agglomeration phenomena
have an inherent characteristic of giving rise to cumulative virtuous and vicious circles
⁵⁵ Arguably, the CEE member states are also new actors in the global economy but when referring to
emerging economies we think of extra-EU partner countries.
⁵⁶ Functional specialization refers to the specializing in specific segments of the value chain within an
industry-specific value chain.
⁵⁷ The same is true for other tightly integrated regional blocs such as (former) NAFTA and Southeast
Asia.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
that can deepen persistent disparities across European regions. Economic geography
has pointed to such dynamic processes where concentration of economic clusters goes
along—especially in the context of the single market with its four freedoms—with
factor mobility and thus with disparate demographic developments and the concen-
tration of skills (people with high levels of training, competence, and education) in
some centres and the outflow of such skills and a deteriorating age profile in other
regions (see, e.g. Martin, ; Iammarino et al., ). This cumulatively saps devel-
opment potential from peripheral regions and countries, which has been shown to also
have strong political implications (see Rodriguez-Pose, ). All these trends raise
some questions about the effectiveness of the EU’s cohesion policy and the ESIF, an
issue on which the empirical evidence is still inconclusive.
As mentioned earlier, a very promising avenue for improving the effectiveness of the
EU’s cohesion efforts is the concept of smart specialization, which has been incorpor-
ated in the ERDF, one of the major EU funds. The smart specialization strategies, as a
territorial approach, are argued to favour the relatively poorer countries in the EU, that
is, cohesion and CEE countries. Still, whether this is really the case in the context of the
ERDF programmes remains doubtful as several cohesion countries are struggling with
numerous implementation issues that are related to existing deficiencies in their (pol-
itical) institutions. One way to tackle this issue is to change the support mechanism of
the ESIF from a grant-based system to a support system that relies on financial
instruments, essentially EU-backed guarantees administered by the EIB and involving
commercial banks that would provide the actual finance for eligible projects. This would
reduce the role of political institutions in the selection and implementation process, but
it might also make the support less targeted, which must be seen as a major disadvantage
in an era where industrial policy aspires to be linked to missions and societal challenges.
.. The Environmental Challenge
The more recent but arguably the most pressing and fundamental challenge which
extends far beyond industrial policy and in fact beyond the economic sphere, is climate
change and environmental protection more generally. Doubtlessly, this challenge has
received due attention more recently at EU and national levels through the formulation
of both mission-oriented policies’ and ‘innovation policy’ (i.e. policies directed at the
technological leadership challenges), as well as within the context of regional policy
(and thus under the schemes supported by cohesion funds).
As with S policies, it will be important to monitor how effective ‘mission-oriented’
policies (which take a systemic view of policy interventions) turn out to be once they
have been implemented for some time and can be evaluated. Given the comparatively
strong regulatory framework in environmental issues, European industry is bound to
adjust and incorporate resource efficiency, emissions reduction, and sustainability. The
implications for the competitiveness of European industry of such a shift towards the
aspired circular economy are as yet unclear and are not the same across different
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
industries. On the one hand, regulations that force firms to increasingly rely on
sustainable or re usable goods (including packaging) may develop first-mover advan-
tages in a series of new materials and technologies. On the other hand, initially several
of these regulations will impose additional costs on firms producing within the EU. In a
longer-term perspective, however, the balance can be expected to be positive, especially
if the mission approach is successful and leadership in environmentally sustainable
technologies can be obtained. Acting quickly in order to secure first-mover advantages
could be vital in this respect as Korea’s and China’s latest industrial policy strategies are
also clearly targeting ‘green’ technologies and green industrial policies more generally.
Unfortunately, acting fast is not exactly the EU’s greatest strength. Still, the integration
of mission orientation and smart specialization into the EU’s industrial policy formu-
lation is an important step in the right direction. Ideally, we would see the EU’s three
layers of industrial policy interacting with each other to support the defined missions
and the territorial approach demanded by the smart specialization concept. The
coming years will show whether EU member states are capable of moulding the various
interests and objectives into well-defined missions whose accomplishment will help
meet the key challenges ahead.
. C
..................................................................................................................................
Starting with a brief recap of historical developments, this chapter went beyond the
usual investigation of official documents and made a serious attempt to reveal the
actual amounts spent on and priorities targeted by EU industrial policy. A first, rather
unexpected, finding is that the supranational level, while on average still second to
national governments’ state aid activities, has become substantial too. Especially for the
CEE member states, the funding of industrial policy by EU programmes is of utmost
importance and much larger than national expenditure. Given the substantial amounts
disbursed via the EU’s regional and structural funds, the overall industrial policy
budgets for this country group are large even by historical standards, and comparable
to those seen in the s.
If one adds to the EU industrial policy programmes the European Commission’s
regulatory power in areas such as competition policy (including inter alia state aid,
mergers and acquisitions, and public procurement) and trade policy, it is obvious that
the EU level has become a central pillar, even if formerly member states remain the
primary actors.
The growing importance of the EU institutions in designing and also implementing
industrial policy is welcome given that none of the key challenges, ranging from
technological leadership to environmental transformation, can realistically be met by
any of the member states individually. The flip side of this is that the EU’s industrial
strategies as a whole, as well as individual programmes, need to be designed and
implemented in a coherent and effective manner. With the incorporation of mission-
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
oriented thinking about industrial and innovation policies and at the regional level the
concept of smart specialization, the EU has made formidable progress in the formulation
of industrial policy. The effective implementation of the sophisticated strategies, how-
ever, in many instances remains curtailed by policy incoherence (with rival or even
contradictory objectives) and a host of programmes and initiatives, many of which lack
critical mass. If the official announcements are to be believed, the upcoming budget
period (–) will see a noticeable reduction in the number of programmes and the
elimination of duplications.
With regard to policy priorities, the existing focus of industrial policy on R&D and
innovation support is likely to remain and these areas will be strengthened, according
to the European Commission’s current budget proposal for the period –. What
seems important here is that efforts in the realm of R&D and innovation policy are not
only aiming at the technological frontier and the leading edge vis-à-vis the United
States (and increasingly China). Rather, it is imperative that, in line with the initial
smart specialization concepts, R&D and innovation support is also a policy tool for the
EU cohesion countries. While this is fully acknowledged by official rhetoric, the actions
on the ground seem to be different, as regions from CEE economies (and laggards such
as Bulgaria and Romania in particular) are underrepresented in the various pilot
projects and R&D cooperation initiatives within the smart specialization strategy
(e.g. when it comes to European Innovation Hubs).
An additional aspect of the EU R&D and innovation strategies is that they too suffer
from an overload of rival programmes. While this is understandable, given that such
programmes are necessarily a compromise, reflecting the interests and priorities of all
member states, it is necessary to have better-defined technological priorities which are
derived from a vision of the technological trajectory European societies want to embark
on. This is where a mission-oriented policy comes into play again. Guidance on how this
trajectory may look can be taken from national governments’ industrial policy priorities,
where the state aid figures clearly identify the ecological transformation as the number
one target.⁵⁸ In other countries, concentration on avoiding a drift into a vicious circle of
‘peripherization’ and aiming towards a more balanced pattern of economic development
across the European Union, will be the priority.
Whatever member states decide the missions are going to be (which will be
enshrined in the next R&D framework programme, the Horizon Europe programme),
it should be clear that they need to be limited in numbers, ideally not more than three
to four at any time. Otherwise, there is a risk that projects for the achievement of the
⁵⁸ Translating ‘green’ industrial policies into missions therefore seems the logical next step. If
industrial policies aim at altering the economic structure, then the shift towards a sustainable, less
resource-intensive and circular economy based on renewable energies is the obvious policy target given
the pressing challenge of climate change but also the policy priorities revealed by member states. To this
one should add that the prevalence of multiple market failures in the context of a greening of the
economy, which include massive externalities, path dependencies favouring pollution-intensive tech-
nologies, and the public good characteristic of a clean environment, makes striving for an ecological
transformation the number one objective for a credible industrial policy at the European level.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
missions remain underfunded so that the fragmented policy efforts will not develop
their full potential. Provided member states identify the missions and the underlying
societal challenges, it is also likely the projects at the regional level funded by the
structural funds are aligned with the defined missions. If the smart specialization
strategies work out, each region should find its niches in the key enabling technological
domains needed for completing the missions. Hence, what is needed first of all is a
consensus on appropriate missions which, if achieved, would substantially support the
EU’s competitive position in tomorrow’s industries.
. A
..................................................................................................................................
22.6.1 Member States and Country Groupings
Table A22.1 List of member states, country codes, and country groups
Country Iso-3-code EU code Country group
Austria AUT AT Other small EU-15
Belgium BEL BE Other small EU-15
Bulgaria BGR BG EU Balkan
Cyprus CYP CY EU South
Czechia CZE CZ Central Europe (CEE-5)
Germany DEU DE Germany
Denmark DNK DK Nordic
Estonia EST EE Baltics
Greece GRC EL EU South
Spain ESP ES EU South
Finland FIN FI Nordic
France FRA FR France
Croatia HRV HR EU Balkan
Hungary HUN HU Central Europe (CEE-5)
Ireland IRL IE Other small EU-15
Italy ITA IT Italy
Lithuania LTU LT Baltics
Luxembourg LUX LU Other small EU-15
Latvia LVA LV Baltics
Malta MLT MT EU South
Netherlands NLD NL Other small EU-15
Poland POL PL Central Europe (CEE-5)
Portugal PRT PT EU South
Romania ROU RO EU Balkan
Sweden SWE SE Nordic
Slovenia SVN SI Central Europe (CEE-5)
Slovakia SVK SK Central Europe (CEE-5)
United Kingdom GBR UK United Kingdom
Source: Authors’ own country groupings.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
.. Selection of EU Budget Items and Assignment
to Industrial Policy Themes
... Mapping of budget items in the MFF – to the
industrial policy themes
The discussion of the EU’s budgetary expenditure on industrial policy-related issues
during the period – is based on a selection of items within the Multi-Annual
Financial Framework (MFF) –, which are subsumed in the realm of industrial
policy. Table A. lists all budget items that were selected to qualify as industrial
policy related. The numbers used refer to actual disbursements.
Table A22.2 Industrial policy item within the MFF 2014–20
Section in Description Assigned industrial policy
MFF category
1.1.10 European Fund for Strategic Investments (EFSI) Infrastructure
1.1.11 Implementation and exploitation of European satellite Sectoral policy
navigation systems (EGNOS and GALILEO)
1.1.13 European Earth Observation Programme (Copernicus) Sectoral policy
1.1.31 The Framework Programme for Research and Innovation RDI
(Horizon 2020)
1.1.4 Programme for the Competitiveness of Enterprises and SME
Small and Medium-sized Enterprises (COSME)
1.1.6 EU Programme for Employment and Social Innovation Employment, education,
(EaSI) training
1.1.81 Energy Infrastructure
1.1.82 Transport Infrastructure
1.1.83 Information and Communications Technology (ICT) Sectoral policy
1.1.9 Energy projects to aid economic recovery (EERP) Infrastructure
1.2.5 Youth Employment Initiative (specific top-up allocation) Employment, education,
training
1.2.6 Contribution to the Connecting Europe Facility (CEF) Infrastructure
2.0.4 Programme for the Environment and Climate Action (Life) Ecological
1.2.11 Less-developed regions (Regional convergence) Regional—for the thematic
breakdown see Table A22.3
1.2.12 Transition regions Regional—for the thematic
breakdown see Table A22.3
1.2.13 More-developed regions (Competitiveness) Regional—for the thematic
breakdown see Table A22.3
1.2.14 Outermost and sparsely populated regions Regional—for the thematic
breakdown see Table A22.3
1.2.15 Cohesion fund (incl. contribution to the CEF) Regional—for the thematic
breakdown see Table A22.3
Source: European Commission at http://ec.europa.eu/budget/graphs/revenue_expediture.html.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
... Mapping of thematic objectives in the ESIF to the industrial
policy themes
For the budget items representing expenditure of the European Structural and Invest-
ment Funds (ESIF) additional information on the ‘thematic objectives’ of the funds
were used. However, for these targets, only the figures from the projected expenditure
as allocated in the MFF – were available. This information was exploited to
assign the regional policy expenditures to individual targets/objectives. The implicit
assumption here was that the actual disbursements (both from the EU budget and
national co-financing) have the same distribution across objectives as the projected
amounts in the MFF –. Since the classification of the MFF – does not
allow distinguishing between expenditure under the European Social Funds (ESF) and
the European Funds for Regional Development (EFRD), these two funds are treated
together, distinguished, however, by objectives. The data on regional fund allocations is
found at: https://ec.europa.eu/regional_policy/EN/funding/available-budget/.
Spending under the Cohesion Fund, which was not found in the budget allocations,
is assigned to infrastructure as it must be assumed that this spending is made in respect
of the Connecting Europe Facility (CEF) which is also included in this budget item.
... Assumption made for the co-financing by member states
of ESIF projects
For national co-financing no actual numbers are available. Therefore the ratio of
budget allocation between EU financing and national co-financing was assumed to
prevail also for the actual financing.
Table A22.3 Categorization of the thematic objectives in the ESIF into industrial
policies themes
Code Target objective of structural funds Assigned industrial policy category
1 Research and innovation RDI
2 Information and communication technologies Sectoral policy
3 Competitiveness of SMEs SME
4 Low-carbon economy Ecological
5 Climate change adaptation and risk prevention Ecological
6 Environment protection and resource efficiency Ecological
7 Network infrastructures in transport and energy Infrastructure
8 Sustainable and quality employment Employment, education, training
9 Social inclusion Social
10 Educational and vocational training Employment, education, training
11 Efficient public administration Institutions
12 Outermost and sparsely populated Social
TA Technical assistance Institutions
DM Discontinued measures Not assigned
Source: European Commission at https://ec.europa.eu/regional_policy/EN/funding/available-budget/.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
R
Aghion, Philippe, Jing Cai, Mathias Dewatripont, Luosha Du, Ann Harrison, and Patrick
Legros () ‘Industrial Policy and Competition’, American Economic Journal: Macro-
economics (): –.
Baldwin, Richard and Lopez-Gonzalez, Javier () ‘Supply-chain Trade: A Portrait of
Global Patterns and Several Testable Hypotheses’, The World Economy (): –.
Becker, Sasha, Peter Egger, and Maximilian von Ehrlich () ‘Too Much of a Good Thing?
On the Growth Effects of the EU’s Regional Policy’, European Economic Review ():
–.
Bianchi, Patrizio and Sandrine Labory () ‘Empirical Evidence on Industrial Policy using
State Aid Data’, International Review of Applied Economics (): –.
Capello, Roberta and Henning Kroll () ‘From Theory to Practice in Smart Specialisation
Strategy: Emerging Limits and Possible Future Trajectories’, European Planning Studies
(): –.
Celi, Giuseppe, Andrea Ginzburg, Dario Guarascio, and Annamaria Simonazzi () Crisis
in the European Monetary Union: A Core-Periphery Perspective. New York: Routledge.
Ciani, Andrea and Karsten Mau () ‘European Integration, Trade, and Globalization:
Eastern Europe’s Response to Chinese Competition’. Paper presented at the International
Conference Economics of Global Interactions: New Perspectives on Trade, Factor Mobility
and Development, Bari, – September.
Cimoli, Mario, Giovanni Dosi, and Joseph E. Stiglitz (eds) () Industrial Policy and
Development: The Political Economy of Capabilities Accumulation. Oxford: Oxford Uni-
versity Press.
Cohen, Elie () ‘Industrial Policies in France: The Old and the New’, Journal of Industry,
Competition and Trade (): –.
Doleys, Thomas () ‘Managing the Dilemma of Discretion: The European Commission
and the Development of EU State Aid Policy’, Journal of Industry, Competition and Trade,
(): –.
European Commission () ‘Global Europe—Competing in the World: A Contribution
to the EU’s Growth and Jobs Strategy’. COM() final. Brussels: European
Commission.
European Commission () ‘Preparing for our Future: Developing a Common Strategy for
Key Enabling Technologies in the EU’. COM() final. Brussels: European Commission.
European Commission () ‘An Integrated Industrial Policy for the Globalisation Era.
Putting Competitiveness and Sustainability at Centre Stage’. COM(). Brussels:
European Commission.
European Commission (a) ‘Industrial Policy: Reinforcing Competitiveness’. COM()
final. Brussels: European Commission.
European Commission (b) ‘State Aid Scoreboard: Report on State Aid Granted by
the EU Member States, Autumn Update’. COM() final. Brussels: European
Commission.
European Commission () ‘A Stronger European Industry for Growth and Economic
Recovery. Industrial Policy Communication Update’. COM()/. Brussels: European
Commission.
European Commission () ‘For a European Industrial Renaissance’. COM().
Brussels: European Commission.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
European Commission (a) ‘Investing in a Smart, Innovative and Sustainable Industry:
A Renewed EU Industrial Policy Strategy’. COM() final. Brussels: European
Commission.
European Commission (b) ‘Towards a Mission-oriented Research and Innovation Policy
in the European Union, ESIR Memorandum: Executive Summary’. Brussels: European
Commission. Available at https://ec.europa.eu/info/sites/info/files/an_esir_memorandum-
towards_a_mission-oriented_research-and-innovation_policy_in_the_european_union-
executive_summary.pdf.
European Commission (c) ‘Delivering TEN-T: Facts and Figures’, September .
Available at http://www.connectingeu.eu/documents/Delivering_TEN_T.pdf.
European Commission () ‘EU Industrial Policy’. Brochure, March . Available
at https://ec.europa.eu/commission/sites/beta-political/files/brochure_industrial_policy_
euco_.pdf.
European Commission () ‘A New Industrial Strategy for Europe’. Communication by the
Commission, COM() final. Brussels: European Commission.
European Political Strategy Centre (EPSC) () ‘EU Industrial Policy after Siemens-
Alstom: Finding a New Balance between Openness and Protection’. Brussels. Available at
https://ec.europa.eu/epsc/sites/epsc/files/epsc_industrial-policy.pdf.
Foray, Dominique () ‘The Economic Fundamentals of Smart Specialisation’, Ekonomiaz
(), –.
Foray, Dominique, Paul David, and Bronwyn Hall () ‘Smart Specialisation: The Con-
cept’. Knowledge Economists Policy Brief No. , June.
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cam-
bridge, MA: Harvard University Press.
Hausmann, Ricardo and Dani Rodrik () ‘Economic Development as Self-discovery’,
Journal of Development Economics (): –.
Hidalgo, Cesar, Baily Klinger, Albert-Laszlo Barabási, and Ricardo Hausmann () ‘The
Product Space Conditions the Development of Nations’, Science (): –.
Hirschman, Albert () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Iammarino, Simona, Andrés Rodriguez-Pose, and Michael Storper () ‘Regional Inequal-
ity in Europe: Evidence, Theory and Policy Implications’, Journal of Economic Geography
: –.
Landesmann, Michael A. () ‘The New North–South Divide in Europe: Can the European
Convergence Model Be Resuscitated?’, in Jan Fagerberg, Staffan Laestadius, and Ben
R. Martin (eds) The Triple Challenge for Europe: The Economy, Climate Change and
Governance. Oxford: Oxford University Press, pp. –.
Landesmann, Michael A. () ‘External Imbalances and European Integration’, in Christina
Marcuzzo, Antonella Palumbo, and Paola Villa (eds) Economic Policy, Crisis and Innov-
ation: Beyond Austerity in Europe. Milton: Routledge, pp. –.
Landesmann, Michael A. and Roman Stöllinger () ‘Structural Change, Trade and Global
Production Networks: An “Appropriate Industrial Policy” for Peripheral and Catching-up
Economies’, Structural Change and Economic Dynamics : –.
Martin, Ron () ‘National Growth versus Spatial Equality? A Cautionary Note on the New
“Trade-off” Thinking in Regional Policy Discourse’, Regional Science, Policy and Practice : –.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths. London: Anthem Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
’
Mazzucato, Mariana () Mission-Oriented Research and Innovation in the European
Union: A Problem-solving Approach to Fuel Innovation-led Growth. Luxembourg: Publica-
tions Office of the European Union. Available at https://ec.europa.eu/info/sites/info/files/
mazzucato_report_.pdf.
Owen, Geoffrey () ‘Industrial Policy in Europe since the Second World War: What Has
Been Learnt?’, ECIPE Occasional Paper No. , The European Centre for International
Political Economy, Brussels. Available at http://eprints.lse.ac.uk///Industrial_pol
icy_in_Europe_since_the__Second_World_War_what_has_been_learnt%lsero%.pdf.
Pellegrin, Julie, Louis Colnot, Francesco Prota, Francesca Ardizzon, Laura Delponte, Michele
Capriati, Agnieszka Olechnicka, and Chris Smith () ‘How to Tackle Challenges in a
Future-oriented EU Industrial Strategy? Volume ’. Study commissioned by ITRI, June.
Available at http://www.europarl.europa.eu/RegData/etudes/STUD///IPOL_
STU()_EN.pdf.
Pellegrin, Julie, Maria Giorgetti, Camilla Jensen, and Alberto Bolognini () ‘EU Industrial
Policy: Assessment of Recent Developments and Recommendations for Future Policies’.
Study commissioned by the Directorate-General for Internal Policies, Policy Department
A. Economic and Scientific Policy, February. Available at http://www.securepart.eu/down
load/ipol_stu--_en.pdf.
Radosevic, Slavo () ‘Assessing EU Smart Specialisation Policy in a Comparative Perspec-
tive’, in Slavo Radosevic, Adrian Curaj, Radu Gheorghiu, Liviu Andreescu, and Imogen
Wade (eds) Advances in the Theory and Practice of Smart Specialisation. London: Academic
Press, pp. –.
Rodriguez-Pose, Andres () ‘The Revenge of the Places That Don’t Matter (and What to
Do about It)’, Cambridge Journal of Regions, Economy and Society : –.
Rodrik, Dani () ‘Industrial Policy: Don’t Ask Why, Ask How’, Middle East Development
Journal (): –.
Rodrik, Dani () ‘Green Industrial Policy’, Oxford Review of Economic Policy ():
–.
Rosenstein-Rodan, Paul () ‘Problems of Industrialisation of Eastern and South-Eastern
Europe’, The Economic Journal : –.
Schwengler, Barbara () ‘Einfluss der europäischen Regionalpolitik auf die deutsche
Regionalförderung’. IAB Discussion Paper No. /. Available at http://doku.iab.de/
discussionpapers//dp.pdf.
Stehrer, Robert and Roman Stöllinger () ‘The Central European Manufacturing Core:
What is Driving Regional Production Sharing?’. FIW-Research Report No. /().
Stöllinger, Roman () ‘Structural Change and Global Value Chains in the EU’, Empirica
: –.
Stöllinger, Roman () ‘Testing the Smile Curve: Functional Specialisation in GVCs and
Value Creation’. wiiw Working Paper No. , February.
Timmer, Marcel, Sebastien Miroudot, and Gaaitzen J. de Vries () ‘Functional Specialisa-
tion in Trade’, Journal of Economic Geography (): –.
Trippl, Michaela, Elena Zukauskaite, and Adrian Healy () ‘Shaping Smart Specialisation:
The Role of Place-specific Factors in Advanced, Intermediate and Less-Developed Euro-
pean Regions’. Online. Regional Studies ().
UNCTAD () World Investment Report . Investment and New Industrial Policies.
Geneva: UNCTAD.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. ö
Veugelers, Reinhilde and Michael Baltensperger () ‘Europe: The Global Centre for
Excellent Research’. Study requested by the ITRE Committee of the European Parliament,
Brussels.
Veugelers, Reinhilde, Gustav Fredriksson, Alexander Roth, Simone Tagliapietra () ‘Is the
European Automotive Industry Ready for the Global Electric Vehicle Revolution?’. Policy
Contribution No. . Brussels: Breugel.
Wade, Robert H. () ‘Return of Industrial Policy?’, International Review of Applied
Economics (): –.
World Economic Forum () Readiness for the Future of Production Report . Geneva:
WEF.
Wyns, Tomas () ‘A Mapping of the EU Industrial and Innovation Policy’. VUB IES
Working Paper, November. Available at http://i-c.eu/wp-content/uploads//
/Industrial-policy-mapping_ic_T.Wyns_.pdf.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
A Schumpeterian and Capability-based View
.............................................................................................................
. I
..................................................................................................................................
A notable result of the global financial crisis has been the revival of industrial
policy, initiated by the work of Stiglitz and Lin (). While classical work, such as
Johnson (), defined industrial policy as policies that improve the structure of a
domestic industry in order to enhance a country’s international competitiveness, the
meaning has evolved to meet the context of the twenty-first century (Radosevic et al.,
). This chapter presents a Schumpeterian and capability-based view of industrial
policy (Lee and Malerba, ; Lee, b), reflecting upon its practices in Korea over
the last several decades.
It is critical for a developing country to enhance its capability to produce and sell
products in the international market so that the country may earn foreign currency that
it can then use to pay for imports of investment goods. However, the challenging part
of this process is how to increase that capability. Thus, it is typical for many developing
countries to suffer from capability failure (Lee, c; Lee and Malerba, ). Further,
industrial policy should go beyond correcting market failure to aim at overcoming
capability failure (Lee, c, ). The market-failure perspective focuses on pro-
viding optimal incentives to correct externalities associated with public goods like
R&D, with a hidden assumption that firms are already equipped with capabilities.
However, in the absence of capabilities, incentives alone are not sufficient to start
innovation. It is not about picking winners, but more about picking good students and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
allowing them time to learn and build capabilities until they are able to compete with
incumbent firms from developed countries (Lee and Malerba, ).
Capability building was the focus of a World Bank study compiled by Chandra
(). A World Bank () assessment of the reform decade of the s concluded
that growth entails more than the efficient use of resources, and that growth-oriented
action may be needed, for example, for technological catch-up or the encouragement of
risk-taking for faster accumulation. Lee and Mathews () synthesize the capability-
based view as the Beijing–Seoul–Tokyo (BeST) consensus, which is commensurate
with their firm-level study (Lee and Mathews, ).
Capability building, not the state–market dichotomy, is the essence of the Korean
model of catch-up. This chapter argues that because Korea built and enhanced the
capabilities of private firms, it was able to sustain growth for several decades until it
joined the club of high-income economies (Lee, b). If we consider industrial
development as a long-term process that takes over ten or twenty years, it is natural
for the policy tools to change over the course of economic growth. Such a dynamic view
of industrial policy is warranted, because the capability level of the beneficiaries of such
intervention would change over time as well.
This chapter discusses specific industrial policy tools practised in Korea at different
stages of the country’s development: tariffs to protect infant industry (Shin and Lee,
); licensing of technology imports to promote building of absorptive capacity
(Chung and Lee, ); entry control to guarantee rents to be paid for fixed and
R&D investment (Jung and Lee, ); and public–private joint R&D to break into
higher-end products and sectors (Lee et al., ; Lee, a). While these tools differ
in their concrete contents, a common aspect is that they allow some rents (extra profits)
for targeted sectors which can be used to pay for building variants of capabilities, such
as production capabilities in the case of tariffs or technology licensing in the s,
investment capabilities in entry control in the s, and technological (R&D) cap-
abilities in the case of public–private joint R&D in the s.
Sections ., ., and . discuss technology licensing, tariffs and entry control,
and public–private joint R&D, and are followed by some conclusions.
. T L
A C
..................................................................................................................................
Absorptive capacity (AC) was first introduced by Cohen and Levinthal (, ) as
the ability of a firm to identify, value, assimilate, and exploit knowledge from the
environment. AC is also recognized as an important binding constraint in the devel-
opment of latecomer economies. Borensztein, Gregorio and Lee () performed a
country panel regression and found that foreign direct investment will produce a
growth effect only if a country has a certain level of AC. Although several empirical
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
studies emphasize the importance of absorptive capacity using in-house R&D or
human capital as proxy (Keller, ; Mowery and Oxley, ), recent findings
indicate that AC cannot be appropriately proxied by R&D or staff quality alone
(Flatten et al., ; Lane et al., ). The earlier studies fail to discover other origins
of AC aside from formal R&D or education.
Relying heavily on Chung and Lee (), this section examines the origin of AC in
Korea. How can we tell whether this capacity is established in a firm? This question is
particularly relevant in the context of latecomer countries in which firms are usually
uncertain about conducting their own R&D and continue to rely on imported tech-
nology by specializing in assembly-type production. Scholars studying Korea as an
example of a successful latecomer economy have emphasized the importance of AC in
enabling Korean firms to learn and assimilate external knowledge (Evenson and
Westphal, ; Keller, ; Pack, ).
As a latecomer economy, Korea has successfully transformed itself from a
technology-importing to a technology-generating country. Korean firms only began
to conduct in-house R&D in the mid-s after undergoing a period of learning,
assimilating, and adapting foreign technologies (OECD, ; Lee, b). Chung and
Lee () observed that the number of foreign technologies acquired by Korean firms
increased from as early as the late s, followed by an increasing trend towards
private R&D two decades later. In other words, a significant increase in foreign
technology inflow preceded local R&D efforts and innovation outcomes in Korea.
Many researchers assert that access to external knowledge is especially important in
the development of latecomer firms (Bell and Pavitt, ; Kim, ; Laursen and
Meliciani, ; Jaymin Lee, ; Park and Lee, ).
Leading firms in Korea generally acquired various forms of know-how, such as
operational skills and elementary process technology, before starting their own capital
investment (Enos and Park, ; Kim, , ). These firms built their basic
technology proficiency during the building and testing of their production facilities,
enabling Korean engineers to assume responsibility for daily operations as early as
possible.
The Foreign Exchange Control Act of addressed two objectives relating to
foreign technology acquisition. The first was to ensure that foreign exchange, which
became scarce after the Korean War, would only be used for critical technologies.
Second, the government wanted to use acquired technology as a stepping stone on
which Korean firms could build their own technological capabilities (Korea
Development Bank, ). The scarcity of foreign exchange during the s com-
pelled Korean firms to seek government approval prior to signing a contract with a
foreign counterpart if they wanted to receive technical assistance for a year or more and
if they paid their counterparts in foreign currencies. All applications were scrutinized
by the Ministry of Commerce and Industry (Korea Development Bank, ).
Korean industries attempted to build production and export capabilities in labour-
intensive or light industries, such as textiles, wigs, rubber footwear, and stuffed toys,
from the s and into the s. However, during the s firms realized that these
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industries had low profit margins and insufficient cash inflow to produce the necessary
foreign debt services. Therefore, both the government and the private sector wanted to
integrate backwards into intermediate goods which, if secured within the country,
would reduce the need for foreign exchange in the long run. Under the Economic
Development Plan, a raft of legislation was enacted to promote the general machinery,
electronics, oil refinery and petrochemicals, transport equipment, steel and shipbuild-
ing industries (Byun and Park, ). The approval procedure for the acquisition of
foreign technologies in these target sectors was also simplified.
By the late s, many of the initial entrants into the ‘heavy’ industries were
acquiring both physical capital and relevant technology from foreign sources.
Westphal, Kim, and Dahlman (: –) reported that more than a quarter of
gross domestic investment in Korea from to was spent on foreign capital
goods. In , an automatic approval system for the acquisition of foreign technology
was introduced in general and electrical machinery, shipbuilding, chemicals, textiles,
and finance under the following conditions: () the duration of the contract must be
three years or shorter; () the down payment must be US$, or less; () the
running royalty rate must be per cent or lower; and () the fixed fee must be US
$, or less. From onwards, most sectors, except weapons, explosives, and
nuclear power, were granted automatic approval for their projects subject to satisfying
the conditions.
Deregulation continued in the s and s, with the filing requirement abol-
ished in and the approval process simplified to a filing-and-confirmation process
from . From , foreign exchange banks were assigned to handle a certain level
of foreign technology acquisition applications (Korea Development Bank, ; Korea
Industrial Technology Association, : ).
The Korea Industrial Technology Association, a semi-government agency, published
a data book, KOITA (), covering foreign acquisition in the period –. The
value of this unique data set lies in the fact that all contracts are reported and classified
into three categories: know-how-only acquisition, know-how-and-patent-rights acqui-
sition and patent-rights-only acquisition. Know-how-only acquisition typically con-
sists of technical services and training that are bundled with relevant documents.
Know-how-and-patent-rights transfer consists of technical services, training, and
documentation protected by the patent system. Patent rights only consists of patent-
right licensing.¹ Chung and Lee () made a number of findings from analysis of this
database.
First, they found that contracts for know-how licensing dominated in the early years,
whereas contracts that involve patents followed later. The shares of know-how-only,
know-how-and-patent-rights, and patent-only contracts during the period –
were per cent, per cent and per cent, respectively. However, these shares
amounted to per cent, per cent and per cent between and , reflecting
¹ We follow Kiyota and Okazaki () in using the term ‘foreign technology acquisition’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the subsequent increase in know-how-and-patent-rights licensing. This pattern may
imply that those firms that successfully assimilated basic operational skills and elem-
entary process technology through know-how acquisition advanced to the acquisition
of technologies that involve patent rights at later stages. These contracts include not
only printed information and blueprints, but also technical services and training
information. Expatriate engineers usually come to Korea to ensure that the initial
operation of new facilities goes according to plan. Selected Korean engineers are
sometimes sent abroad for training, which emphasizes the importance of human
capital investment in building AC, as demonstrated by leading firms in Korea, such
as Hyundai Motors (Kim, ) and POSCO (Pohang Steel Co.) (Song, ).
Various types of training, particularly overseas and on-site training, were arranged
or provided by the firms’ foreign suppliers of facilities and equipment. For instance,
after Hyundai entered into an agreement with Ford to assemble compact cars on a
semi-knocked-down basis, Ford transferred ‘packaged’ technologies to Hyundai with an
accompanying set of explicit knowledge, such as blueprints, technical specifications, and
production manuals. Ford also provided tacit knowledge to Hyundai, sending ten Ford
engineers to Hyundai and training Hyundai engineers at Ford sites in procurement plan-
ning, procurement coordination, production engineering, process engineering, production
management, welding, painting, after-service, and marketing (Kim, ). In the case of
POSCO, the company sent thirty-nine engineers to Japan in – and , staff members
abroad from to during the construction of its first mill (Song, : ).²
Second, they found that the acquisition of foreign technologies is dominated by four
capital-intensive sectors—electricals and electronic equipment, chemicals, transport
equipment, and general machinery—rather than by labour-intensive sectors. These
findings reflect the industrial policy of the Korean government and the efforts of firms
to enter these sectors from the early s. The contracts in these four industries made
up more than per cent of the total contracts filed in the sampling period and
throughout each sub-period.³ This finding indicates that the state’s control over foreign
technology acquisition was critical for the structural transformation of Korean indus-
tries from labour intensive to capital intensive, which has ultimately helped them
achieve industrial upgrading. Korea’s ‘pillar’ companies, such as Samsung Electronics,
Hyundai Motors, and POSCO, were all established around .
The entry of Korean firms into these industries typically involved the manufacture of
products that were new to Korea yet common in the developed world. According to a
survey by the Korea Development Bank () on foreign technology acquisition in the
s, per cent of these acquisitions by Korean firms related to mature technologies
² These foreign-trained engineers played very substantial roles in the early days of POSCO, with their
share in the workforce in charge of facility operation and maintenance reaching per cent and per cent,
respectively (Song, : ).
³ However, this was not evident during the period from to , when heavy investment in
social overhead capital increased the demand for technology in cement and utility firms, such as
electricity.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
in developed countries, whereas per cent related to the expansion of product mix.
With Korean firms finding the knowledge embedded in manufacturing facilities
insufficient for their operations, they sought additional services and training (or
know-how-and-patent licensing) from firms in developed countries at an appropriate
price.
From the suppliers’ point of view, concealing mature technologies was pointless
because providing know-how was a way of exporting large manufacturing facilities.
The Japanese government’s decision to move away from ‘pollution-prone’, ‘natural-
resource-consuming’ heavy and chemical industries in provided a favourable
environment for Korean firms (Enos and Park, ). Selling unnecessary technologies
proved profitable for Japan (Enos and Park, : ), and was consistent with the
‘flying-geese’ pattern of economic growth in East Asia, where Japanese companies serve
as leaders for their follower firms from Korea or Taiwan by transferring their tech-
nologies or relocating their factories abroad (Akamatsu, ; Kojima, ). In this
regard, as noted by several scholars, including Kiyota and Okazaki (), Korean
industries followed a similar path to those of Japan, with foreign technology acquisition
in the form of licensing rather than FDI nurturing their domestic absorptive capacity
and improving their performance (Lee and Kim, ).
According to the Korea Development Bank (), technologies that were bundled
with patent rights were more expensive or had a higher value than those that were only
bundled with know-how. This arrangement suggests that Korean firms may have
demanded something more than the mere operation of manufacturing facilities after
stabilizing their daily production. Patented technologies may have been adopted as a
means of completing the assimilation and improvement processes that were initiated
by investment and know-how acquisition.
Imported capital goods have been regarded as among the most important forms of
technology transfer in Korea (Lee and Kim, ; OECD, ). However, these goods
become ineffective without the transfer of technology, and especially of tacit know-
ledge, through know-how-only contracts. Thanks to frequent on-site training by
foreign expatriate engineers, Korean engineers quickly learnt to manage their daily
operations efficiently. If the knowledge were deemed insufficient, the turnkey contrac-
tor and/or other sources, including R&D specialty companies or equipment providers,
were contacted for additional information. Enos and Park () argue that even in the
most successful cases, such as POSCO and Hanyang Chemicals, time and effort were
necessary for Korean firms to become able to use foreign technologies effectively.
Finally, the econometric analysis in Chung and Lee () shows that know-how
licensing associated with imported capital led Korean firms to build AC and then to
start in-house R&D, whereas patent-only licensing was not significantly related to
being able to conduct R&D. Therefore, a substitution effect may be observed between
the introduction of foreign patents and the initiation of own R&D activities at the early
stages of development. A similar econometric exercise for the second step shows that
conducting in-house R&D leads firms to generate innovations, in terms of either patent
applications or increased productivity, during the later stages of their development.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Moreover, there is a significant correlation between know-how licensing experience
and firms’ first-time patent applications, whereas patent-only licensing helps stimulate
the subsequent generation of patents. The study also finds that firms generally spend at
least three to four years building their AC, from the first year of know-how licensing to
the first year of patent applications.
Chung and Lee’s study () was the first to verify the dynamic link between the
learning of tacit knowledge and the formation of AC, as well as the first to measure the
actual length of time firms take to build this capacity. This finding verifies the two-step-
based differentiation of ‘potential’ and ‘realized’ AC that is proposed by Zahra and
George (), as well as the decomposition of AC into learning capacity and problem-
solving capacity by Kim (). In contrast to Jaymin Lee (), our view is that the
substituting or inducing effect of foreign technology acquisition on indigenous R&D
depends on the specific licensing method. Patent-only licensing exhibits a substituting
relationship, whereas know-how licensing tends to have an inducing effect on in-house
R&D. Moreover, a learning process that involves foreign technology, especially tacit
knowledge in the form of know-how, occurs before firms can conduct in-house R&D
and innovation. However, this specific learning process may not be the only way to
build AC, given the importance of worker education, on-the-job training, and overseas
training.
Lee (b), arguing that it may be difficult to derive generalizable lessons from the
state-versus-market view of Korean economic development, proposed instead a
‘capability-based’ view and elaborated various modes of capability building that may
be useful in other latecomer countries. Chung and Lee’s () econometric study
provides a microeconomic foundation for a macro-level view of economic develop-
ment, from which several generalizable implications may be derived.
First, the building of AC is a dynamic process that may become more effective when
combined with access to foreign knowledge, particularly tacit knowledge (know-how).
This suggests, second, that know-how transfer should be an essential element in
technology-licensing contracts for a latecomer firm. Moreover, third, the potential
substituting effect of foreign patent licensing may interfere with formation of in-
house AC, especially if it is not linked to the start of in-house R&D activities or
contracting for know-how transfer.
. I I P
T E C
..................................................................................................................................
One of the most traditional industrial policy tools is infant industry protection through
tariffs. However, empirical studies on the effectiveness of tariffs report conflicting results.
According to Beason and Weinstein (), tariff protection, preferential tax rates,
and subsidies did not affect the rate of capital accumulation or total factor productivity
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(TFP) in Japan from to . Lee () found no impacts of tariffs on TFP in
Korean industries from to , such that nominal tariff was negative and
significant to the growth rate of labour productivity and TFP at the sectoral level.
Nevertheless, several studies verify the positive contribution of industrial policy, in
particular tariffs.
Shin and Lee (), using the same period and sectoral data as Lee (), find that
tariff protection, especially when combined with export-market discipline, leads to the
growth of export share and RCA (revealed comparative advantages). They also argue
that in the early stages the goal of this type of industrial policy was not productivity—as
in the s—but output or growth in market share. Aghion et al. () also find that
subsidies widely distributed among Chinese firms have had a positive impact on both
TFP and the innovation of new products in sectors with a high level of competition.
Both of these recent studies identify competition or discipline as a common precon-
dition for effective industrial policy.
An example of success with tariffs is the case of Hyundai Motors, established in
. Hyundai’s first own-brand car was the Pony, which had a per cent market
share in Korea in . However, it was protected by tariffs on imported cars, for
example from Japan, as high as per cent. While its domestic market price was about
US$, dollars, it was exported to the US market for US$,. In other words, it was
only this ‘dumping’ that enabled Hyundai to compete with other cars, and it was only
possible owing to extra profits associated with the oligopoly market situation based on
tariffs; at that time, Japanese or German cars in a similar segment were selling at US
$, in US markets. In other words, domestic profit compensated for the loss of
foreign markets, and it was these guaranteed profits that helped Hyundai to survive and
pay for fixed and R&D investment for expansion.
Thus, it can be argued that if Korea had been opened up from the beginning without
tariffs, the Korean economy would not have been so successful in promoting indigen-
ous firms and sustaining their catch-up in market share. A hidden assumption of trade
liberalization is that local firms are sufficiently competitive to potentially compete
against foreign companies or imported goods. This assumption is not true in many
cases. In such circumstances, naïve trade liberalization may lead to monopoly by
foreign goods or the destruction of local industrial bases.
A smart or better opening strategy, as discussed in Shin and Lee (), is ‘asym-
metric opening’, in which latecomer economies liberalize the import of capital goods
for the production of final or consumer goods, while protecting their own consumer
goods industries by charging high tariffs on imported goods. Korea implemented an
asymmetric tariff policy for consumer and capital goods, with extremely high tariffs for
consumer goods (e.g. around per cent for household electrical appliances in the
s) which were promoted as export industries, but considerably lower tariffs for
capital goods, such as machinery which it needed to import for its assembly industries,
mostly in the consumer goods sector.
Another form of industrial policy in Korea was entry control. Put simply, the idea is
that five profit-making firms is better than ten firms in the same sector with no profits.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
This type of entry control has typically been practised in the past by Japan, and copied
in Korea, where it has been regarded as an industrial policy copied from the Japanese
(Johnson, ). The practice has two meanings: to sort the ‘good’ from the ‘bad’
producers; and to allow stable profits for the selected producers to encourage them to
invest further in fixed capitals for business expansion.
This practice also has the effect of return rates that are higher than interest rates.
This is good for boosting private investment in manufacturing, which corresponds to
low rates of return with longer time horizons. Manufacturing sectors can earn ‘rents’
associated with entry control, and the government’s industrial policy consisted in
working out the optimum number of each sector, taking market size into account, so
that the firms admitted are guaranteed a minimum level of profits (rents) which can
provide the following period’s investment funds.
Of course, the protection of local firms through tariffs and entry control leads to an
oligopolistic domestic market. However, a study by Jung and Lee () demonstrates
that monopoly rents can be used to fund R&D investment because firms are exposed to
the discipline of world export markets, while their privileged protected status is not free
but rather is linked to their export performance. In other words, the combination of
rent-generating protection in the domestic market and discipline from world markets
was one of the most important aspects of industrial policy in Korea during its catching-
up stage (mid-s and s). Jung and Lee’s () study confirms that R&D
financed in this way led to Korean firms developing enhanced innovation capabilities,
which enabled their productivity catch-up with Japanese firms from to .
In other words, in-house R&D eventually became more important than foreign
technology acquisition because () foreign firms became increasingly reluctant to
provide core technology to their potential competitors in Korea, () labour cost-
based competitiveness gradually disappeared, and () government support for private
R&D increased (OECD, : –).
. P–P J R&D
..................................................................................................................................
The final stage of industrial policy consists of public–private R&D consortia that can
serve as important vehicles for breaking into higher-end segments or sectors which
demand both more capital and more risk.
An early example was the government-led R&D consortia in the telecommunica-
tions equipment industry, specifically the accompanying local development of tele-
phone switches. This led to the successful localization of telephone switches in the
s and s in several latecomer countries, including China, Korea, India, and
Brazil (Lee, Mani, and Mu, ). In the s and s most developing countries
experienced serious telephone service bottlenecks. With neither domestic telecommu-
nications equipment manufacturing industry nor their own R&D programme, they
imported expensive equipment and related technologies, and local technicians merely
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
installed foreign switching systems into the country’s domestic telephone networks.
With industrial and commercial bases developing rapidly—along with population
growth—a number of countries decided to build their own manufacturing capabilities.
First in Brazil in the s, followed by Korea and India in the mid-s, and finally
by China towards the late s, a state-led system of innovation in the telecommu-
nications equipment industry was developed with a government research institute at
the core. The research institute developed more or less ‘indigenous’ digital telephone
switches that were then licensed to public and private domestic enterprises. In all four
countries, a common pattern in the indigenous development of digital switches was the
tripartite R&D consortium between government research institutes in charge of R&D
functions, state-owned enterprises or the ministry in charge of financing and coord-
ination, and private companies in charge of manufacturing at the initial or later stages.
However, subsequent waves of industry privatization and market liberalization in
Brazil and India contrasted with consistent infant industry protection in Korea and
China (Lee, Mani, and Mu, ). At one extreme, the indigenous manufacturers of
China and Korea took over from the importers and MNCs. The enhanced capabilities
in wired telecommunication they had been accumulating over the preceding decades
led to the growth of indigenous capabilities in wireless telecommunications. At the
other extreme, Brazil and India have increasingly become net importers of telecoms
equipment, and their industries are now dominated by affiliates of the MNCs.
As noted by Mathews (), examples from Taiwan include calculator and laptop
computer production. The calculator is an example of the acquisition of more funda-
mental design capability (basic design platform) enabled with the help of a government
entity such as the Industrial Technology Research Institute (ITRI). Another example is
the – public–private R&D consortium to develop laptop computers (Mathews,
). This consortium developed a common mechanical architecture for a prototype
that could easily translate into a series of mass-produced standardized components.
The consortium represented an industry watershed, and even after several failed
attempts, it succeeded in establishing new ‘fast-follower’ industries in Taiwan.
While the telephone switch case localized somewhat mature technologies, the same
public–private joint R&D model can be used to leapfrog into emerging technologies or
products. A Korean example is digital TV development, the decisive final watershed
that enabled Korea to begin overtaking Japan in the TV business. Examples from China
include recent moves towards solar power and electric cars. In these areas, there are no
products for latecomers to imitate: advanced and latecomer countries enter the market
at the same time. If the former latecomers succeed first, there is a strong momentum for
them surpassing the middle-income group and joining the rich-country club. The
public–private R&D consortium plays a more vital role in this leapfrogging endeavour,
given that the risk involved is huge and different. Furthermore, coordinated initiatives
on exclusive standards and incentives for early adopters would be important in
reducing the risk faced by the weak initial market.
In these public–private R&D consortia in mature stage, private firms take the lead
over the public labs in conducting R&D jointly whereas the opposite would work
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
during the early stage of public-private joint R&D. Thus, in the final stage of the R&D
consortium, the public research arm would be in charge of monitoring the technology
trends as well as providing information about technology standards and identifying
suitable foreign partners (e.g. Qualcomm for mobile phone development and Zenith
for digital TV development) for collaborative development. The foreign company’s role
will also change. In the second stage, the foreign company is the direct teacher in the
co-development contract, but in the final stage, it becomes the supplier of source
technology to be commercialized by the latecomer firm or their consortium. The
final stage features horizontal collaboration or an alliance based on complementary
assets. Some Korean firms (e.g. Samsung) have reached this stage, and are now engaged
with Intel, Sony, Toshiba, and Microsoft in diverse modes of alliances.
The probability of leapfrogging success may therefore be higher when a new techno-
economic paradigm or a new generation of technologies begins to emerge. Pérez and
Soete () and Freeman and Soete () observe that some latecomers may be able
to leapfrog older versions of technology, bypass heavy investment in previous technol-
ogy systems, and grasp new technologies to take over the market from the incumbent
firms or countries. This leapfrogging strategy makes more sense at the time of a
paradigm shift, because every country or firm is a beginner in using the new techno-
economic paradigm, and the entry barriers tend to be low. Furthermore, the ‘winner’s
trap’ may operate in the sense that the incumbent tends to ignore new technologies and
continue to use the existing dominant technologies until it exhausts its investment in
the existing facility. The concept of leapfrogging is consistent with the idea of techno-
logical discontinuity proposed by Anderson and Tushman () and Tushman and
Anderson (), that competence-destroying discontinuity may lead to the emer-
gence of new entrants.
Korea’s catch-up with Japan in the development of high-definition TVs (HDTVs)
would not have been successful if Korean electronics companies, such as Samsung and
LG, had not targeted the emerging digital technology-based products more aggressively
than Japanese companies that opted to continue manufacturing the dominant analogue
products.⁴ The Japanese firms developed analogue-based HDTV in the late s and
suggested that Korean companies follow new technologies and products by learning
from them—which was the strategy they used to pursue in the s and s.
Instead, Korean companies tried a leapfrogging strategy of developing an alternative
and emerging technology—producing digital technology-based HDTVs. They success-
fully formed the public–private R&D consortium that marked the beginning of Korean
hegemony in the global display market previously dominated by Japan. If it had not
been for this risk-taking leapfrogging strategy, Korean catch-up with Japan would have
taken much longer or might have never happened.
Leapfrogging is more likely to happen where there are sectors with more frequent
changes in technologies or generation changes in products. This is closely linked with
⁴ The case of digital TV production is further explained by Lee et al. (). A direct comparison of
Samsung and Sony can be found in the work of Joo and Lee ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
the length of the technology cycle, as these features indicate the speed with which
technologies change or become obsolete over time, paving the way for the continued
emergence of new technologies. We can reason that it is advantageous for qualified
latecomers to target and specialize in short-cycle technology-based sectors. Although
this is risky, it is also logical because latecomers do not have to rely substantially on the
existing technologies dominated by the incumbents; moreover, there are always more
growth opportunities associated with constantly emerging technologies.
Finally, we should note the importance of carefully handling the risks involved in
choosing a leapfrogging strategy. As Lee et al. () explain, one of the biggest risks is
choosing the right technology or standard in the ex post sense. In the competition for
standard setting and market creation, the role of the government is to facilitate the
adoption of specific standards, thereby influencing the formation of markets at the
right time, especially when the target involved is in the area of information or other
emerging technology. Isolated development without considering standards might cause
the entire project to fail. Collaboration and partnership with rivals or suppliers of
complementary products is essential for standard setting. Another key factor is deter-
mining who creates and reaches the market first, given the fact that market size
determines the success or failure of one standard in relation to another.
The above case for successful public and private joint R&D for leapfrogging in Korea
can be contrasted with a mixed case in South Africa, which was also discussed in Lee
(). Swart () explains that the South African government provided the initial
funding to establish Optimal Energy in , which by December had developed
four roadworthy electric car prototypes. The Joule Electric Vehicle was a ‘born electric’
five-seater passenger car incorporating a locally developed battery, motor, and software
technologies. However, the government decided to stop the funding required to start
large-scale production because of uncertainties over marketing success, and the com-
pany closed in June . The failure of Joule cars was caused by the lack of private
companies to take on volume production and sales. Existing foreign multinational
companies and local auto companies did not want this new ‘disruptive innovator’, a
state-owned company, to grow into another rival.
A better outcome would have been for the government to form a public–private
consortium so that volume production would be carried out by private actors after the
consortium developed the prototype. Private firms need to be involved for two reasons:
they know where market demand is, and they eventually run the show. However,
public-sector agents are better placed to deal with technological and financial uncer-
tainty. This South African case can therefore be considered one of ‘design failure’ rather
than a ‘targeting failure’. The sources are often mixed together. While one might expect
more cases of targeting failure, this is not always the case. Uncertainty diminishes if
targeting is seen in terms of identifying potential or existing markets as long as the
private sector, with its knowledge of markets, is involved. If not on the frontier, the
targets may be obvious because there is often a clear benchmark case which enables
niches between existing firms and projects to be identified. Numerous public initiatives
fail because of design or capability (low execution capability) failure.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. C R
..................................................................................................................................
Reports on the effectiveness of industrial policy in the empirical literature provide
conflicting or ambiguous results. This may be so because it is difficult to verify the
average positive impact of industrial policy as the effects tend to appear only in certain
conditions, depending upon specific contexts (countries or sectors). Moreover, the
results change depending upon the criteria used to assess the effectiveness of industrial
policy. As discussed in this chapter, while expansion of production volume and sales to
increase market share had been the primary goal in the earlier stages of catch-up,
productivity has become an important criterion only since the late s, when the
Korean government shifted its policy from tariffs to R&D subsidies as well as joint R&D
(Jung and Lee, ).
Given that structural change in an economy is a long-term process, the idea of
adopting different policy tools over time is consistent with the reasoning that industrial
policy should deal with the various dimensions of capabilities of firms and industries in
the latecomer countries. Different tools are necessary, depending on whether the target
involves simple operational or production capabilities, investment capabilities, or
advanced technological capabilities.
In Korea, tariffs and other forms of protection led to export and output expansion
through fixed investment during the early period (s and s), according to the
study by Shin and Lee (), whereas Jung and Lee () find that for a later period
(the mid-s to ), R&D investment stimulated by tax exemptions led to
productivity growth. The two studies find that for both periods, the disciplinary impact
of export orientation is significant, because it promoted the rents associated with tariffs
(earlier period) and with an oligopolistic market structure (late period) used for
fixed (earlier period) and R&D investments (later period), respectively. In sum, while
the specific tools and contents of the industrial policies were different, they both
allowed some rents for the targeted sectors or firms so that the extra profits could be
used to build variants of capabilities, such as production capabilities in the case of
tariffs or technology licensing in the s, investment capabilities in entry control in
the s, and technological (R&D) capabilities in the case of public–private joint R&D
in the s.
Such a dynamic shift in policy tools is not simply imposed by the government but
also reflects the available and/or desired level of firm capability, which changes over
time. Although Korea had been growing fast with exports of labour-intensive low-end
goods, this growth strategy reached a peak by the mid-s. Around that time, Korea
saw an increase in its own wage rate, which coincided with the emergence of lower-
wage countries able to compete in world markets. As Korean firms realized the need to
upgrade to higher-end or value-added goods, they began, for the first time, to establish
in-house R&D centres, after which the industrial policy tools switched towards tax
exemption on R&D (Lee, b; Lee and Kim, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The Korean experience indicates a dynamic shift in the form of government activism
from traditional industrial policy (tariffs and undervaluation) in the early stages of
development, to technology policy (R&D subsidies and public–private R&D consortia)
in the later stages. This dynamic shift is required for a developing country to evolve
from low-income to middle-income status, and eventually move on up to higher-
income status. It can be argued that without such a shift, any country may be stuck in
what is called the middle-income trap, struggling to remain competitive as a site for
low-cost, high-volume production (World Bank, ; Lee, b).
A
The author thanks the editors of this volume and the participants of the Review Workshop,
held in Addis Ababa in September , in particular Arkebe Oqubay and John Weiss, for
their useful comments and discussion.
R
Aghion, Philippe, Mathias Dewatripont, Liqun Du, Ann Harrison, and Patrick Legros ()
‘Industrial Policy and Competition’. CEPR Discussion Paper No. .
Akamatsu, Kaname () ‘The Historical Patterns of Economic Growth in Developing
Countries’, Developing Economies (s): –.
Anderson, Philip and Michael Tushman () ‘Technological Discontinuities and Dominant
Designs: A Cyclical Model of Technological Change’, Administrative Science Quarterly
: –.
Beason, Richard and David E. Weinstein () ‘Growth, Economies of Scale, and Targeting
in Japan (–)’, The Review of Economics and Statistics (): –.
Bell, Martin and Keith Pavitt () ‘Technological Accumulation and Industrial Growth:
Contrasts between Developed and Developing Countries’, Industrial and Corporate Change
(): –.
Borensztein, Eduardo, Jose R. De Gregorio, and Jongwha Lee () ‘How Does Foreign
Investment Affect Growth?’, Journal of International Economics (): –.
Byun, Hyung-Yoon and Dong Chul Park () ‘Development of Capitalism in Korea:
Formation and Development of Monopolistic Capital’, in Hyung-Yoon Byun (ed.) The
Korean Economy. Seoul: Yupoong Publishing Company (in Korean).
Chandra, Vandana (ed.) () Technology, Adaptation, and Exports: How Some Countries
Got It Right. Washington, DC: World Bank.
Chung, Moon Young and Keun Lee () ‘How Absorptive Capacity is Formed in a
Latecomer Economy: Different Roles of Foreign Patent and Know-how Licensing in
Korea’, World Development : –.
Cohen, Wesley M. and Daniel A. Levinthal () ‘Innovation and Learning: The Two Faces
of R&D’, The Economic Journal (): –.
Cohen, Wesley M., and Daniel A. Levinthal () ‘Absorptive Capacity: A New Perspective
on Learning and Innovation’, Administrative Science Quarterly (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Enos, John L. and Woo Hee Park () The Adoption and Diffusion of Imported Technology:
The Case of Korea. New York: Croom Helm.
Evenson, Robert E., and Larry Westphal () ‘Technological Change and Technology
Strategy’, in Jere Behrman and T. N. Srinivasan (eds) Handbook of Development Economics,
Vol. . Amsterdam: North Holland, pp. –.
Flatten, Tessa, Andreas Engelen, Shaker Zahra, and Malte Brettel () ‘A Measure of
Absorptive Capacity: Scale Development and Validation’, European Management Journal
(): –.
Freeman, Chris and Luc Soete () ‘Development and the Diffusion of Technology’, in
Chris Freeman and Luc Soete (eds) The Economics of Industrial Innovation. London: Pinter
Publishers, pp. –.
Johnson, Chalmers () MITI and the Japanese Miracle: The Growth of Industrial Policy
–. Palo Alto, CA: Stanford University Press.
Joo, Si H. and Keun Lee () ‘Samsung’s Catch-up with Sony: An Analysis Using US Patent
Data’, Journal of the Asia Pacific Economy (): –.
Jung, Moosup and Keun Lee () ‘Sectoral Systems of Innovation and Productivity Catch-
up: Determinants of the Productivity Gap between Korean and Japanese Firms’, Industrial
and Corporate Change (): –.
Keller, Wolfgang () ‘Absorptive Capacity: On the Creation and Acquisition of Technol-
ogy in Development’, Journal of Development Economics (): –.
Kim, Linsu () Imitation to Innovation: The Dynamics of Korea’s Technological Learning.
Boston, MA: Harvard Business School Press.
Kim, Linsu () ‘Crisis Construction and Organisational Learning: Capability Building in
Catching-up at Hyundai Motors’, Organization Science (): –.
Kiyota, Kozo and Tetsuji Okazaki () ‘Foreign Technology Acquisition Policy and Firm
Performance in Japan, –: Micro-aspects of Industrial Policy’, International Jour-
nal of Industrial Organization (–): –.
Kojima, Kiyoshi () ‘A Macroeconomic Approach to Foreign Direct Investment’, Hitot-
subashi Journal of Economics : –.
Korea Development Bank () Analysis of Effects of Technology Acquisition. Seoul: Korea
Development Bank (in Korean).
Korea Industrial Technology Association () Records of Technology Acquisition Contracts:
–. Seoul: Korea Industrial Technology Association (in Korean).
Lane, Peter J., Balaji R. Koka, and Seemantini Pathak () ‘The Reification of Absorptive
Capacity: A Critical Review and Rejuvenation of the Construct’, Academy of Management
Review : –.
Laursen, Keld and Valentia Meliciani () ‘The Relative Importance of International vis-à-
vis National Technological Spillovers for Market Share Dynamics’, Industrial and Corpor-
ate Change (): –.
Lee, Jaymin () ‘Technology Imports and R&D Efforts of Korean Manufacturing Firms’,
Journal of Development Economics (): –.
Lee, Jong-wha () ‘Government Interventions and Productivity Growth’, Journal of
Economic Growth : –.
Lee, Keun () ‘The Washington Consensus and East Asian Sequencing: Understanding
Reform in East and South Asia’, in José María Fanelli and Gary McMahon (eds) Under-
standing Market Reforms, Vol. . Basingstoke: Palgrave, pp. –.
Lee, Keun (a) Schumpeterian Analysis of Economic Catch-up: Knowledge, Path-creation
and the Middle-income Trap. Cambridge: Cambridge University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Lee, Keun (b) ‘How Can Korea Be a Role Model for Catch-up Development?
A “Capability-based View”’, in Augustin K. Fosu (ed.) Achieving Development Success:
Strategies and Lessons from the Developing World. Oxford: Oxford University Press, pp. –.
Lee, Keun (c) ‘Capability Failure and Industrial Policy to Move beyond the Middle-
income Trap: From Trade-based to Technology-based Specialization’, in Joseph E. Stiglitz
and Justin Yifu Lin (eds) The Industrial Policy Revolution, Vol. I. Basingstoke: Palgrave
Macmillan, pp. –.
Lee, Keun () ‘Smart Specialization with Short-cycle Technologies and Implementation
Strategies to Avoid Both Target and Design Failures’, in Slavo Radosevic, Adrian Curaj,
Radu Gheorghiu, Liviu Andreescu, and Imogen Wade (eds) Theory and Practice of Smart
Specialization. Amsterdam: Elsevier, pp. –.
Lee, Keun () The Art of Economic Catch-up. Cambridge: Cambridge University Press.
Lee, Keun and Yee Kyoung Kim () ‘IPR and Technological Catch-up in Korea’, in
Hiroyuki Odagiri, Akira Goto, Atsushi Sunami, and Richard R. Nelson (eds) Intellectual
Property Rights, Development, and Catch Up: An International Comparative Study. Oxford:
Oxford University Press, pp. –.
Lee, Keun and Franco Malerba () ‘Economic Catch-up as Evolutionary Process’, in
Richard R. Nelson (ed.) Modern Evolutionary Economics: An Overview. Cambridge: Cam-
bridge University Press, pp. –.
Lee, Keun and John A. Mathews () ‘From the Washington Consensus to the BeST
Consensus for World Development’, Asian-Pacific Economic Literature (): –.
Lee, Keun and John A. Mathews () ‘Firms in Korea and Taiwan: Upgrading in the Same
Industry and Entries into New Industries’, in Edmund Amann and John Cantwell (eds) The
Innovative Firms in the Emerging Market Economies. Oxford: Oxford University Press,
pp. –.
Lee, Keun, Chaisung Lim, and Wichin Song () ‘Emerging Digital Technology as a
Window of Opportunity and Technological Leapfrogging: Catch-up in Digital TV by the
Korean Firms’, International Journal of Technology Management (–): –.
Lee, Keun, Sunil Mani, and Qing Mu () ‘Divergent Stories of Catch-up in Telecom:
China, India, Brazil, and Korea’, in Franco Malerba and Richard R. Nelson (eds) Economic
Development as a Learning Process. Cheltenham: Edward Elgar, pp. –.
Mathews, John A. () ‘The Origins and Dynamics of Taiwan’s R&D Consortia’, Research
Policy : –.
Mowery, David C. and Joanne E. Oxley () ‘Inward Technology Transfer and Competi-
tiveness: The Role of National Innovation Systems’, Cambridge Journal of Economics
: –.
OECD () Reviews of National Science and Technology Policy: Republic of Korea. Paris:
OECD.
Pack, Howard () ‘Learning and Productivity Change in Developing Countries’, in Gerald
K. Helleiner (ed.) Trade Policy, Industrialization, and Development: New Perspectives.
Oxford: Clarendon Press, pp. –.
Park, Kyoo-Ho and Keun Lee () ‘Linking the Technological Regime to the Technological
Catch-up: Analyzing Korea and Taiwan Using the US Patent Data’, Industrial and Cor-
porate Change (): –.
Pérez, Carlota and Luc Soete () ‘Catching-up in Technology: Entry Barriers and Win-
dows of Opportunity’, in Giovanni Dosi et al. (eds) Technical Change and Economic
Theory. London: Pinter Publishers, pp –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Radosevic, Slavo, Adrian Curaj, Radu Gheorghiu, Liviu Andreescu, and Imogen Wade (eds)
() Theory and Practice of Smart Specialization. Amsterdam: Elsevier.
Shin, Hochul and Keun Lee () ‘Asymmetric Trade Protection Leading Not to Product-
ivity But to Export Share Change: The Korean Case from to ’, Economics of
Transition (): –.
Song, Sungsoo () ‘Historical Development of Technological Capabilities in Korean Steel
Industry: Posco from the s to the s’, PhD thesis, Seoul National University (in
Korean).
Stiglitz, Joseph E. and Justin Yifu Lin (eds) () The Industrial Policy Revolution, Vol. I.
Basingstoke: Palgrave Macmillan.
Swart, Gerhard () ‘Innovation Lessons Learned from the JOULE EV Development’, The
IAMOT Conference Proceedings.
Tushman, Michael and Philip Anderson () ‘Technological Discontinuities and Organ-
izational Environments’, Administrative Science Quarterly : –.
Westphal, Larry E., Linsu Kim, and Carl J. Dahlman () ‘Reflections on the Republic of
Korea’s Acquisition of Technological Capability’, in Nathan Rosenberg and Claudio
Frischtak (eds) International Technology Transfer: Concepts, Measures, and Comparisons.
New York: Praeger, pp. –.
World Bank () Economic Growth in the s: Learning from a Decade of Reform.
Washington, DC: World Bank.
World Bank () Exploring the Middle-income Trap. World Bank East Asia Pacific Eco-
nomic Update: Robust Recovery, Rising Risks, Vol. . Washington, DC: World Bank.
Zahra, Shaker and Gerard George () ‘Absorptive Capacity: A Review, Reconceptualiza-
tion, and Extension’, Academy of Management Review (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.............................................................................................................
.............................................................................................................
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
.............................................................................................................
. I
..................................................................................................................................
T latecomer industrialization thesis has acted as a powerful policy instrument in the
promotion of the industrialization, as well as the economic growth, of the United
States, Germany, Japan, and the East Asian economies. However, there has been little
explanation in the literature as to why several other economies that attempted to
industrialize are facing premature deindustrialization. Thailand was never colonized;
Indonesia, Malaysia, the Philippines, and Singapore gained independence in ,
, , and respectively. Despite introducing industrial policies as a major
instrument to stimulate economic development, only Singapore has managed to
sustain sufficiently rapid growth to enjoy a per capita income of US$, in
(current US$), . times higher than that of Malaysia (US$,), and . times higher
than that of Thailand. Malaysia and Thailand enjoyed the second- and third-highest
per capita income in South East Asia in . On average in US$ prices, the GDP
per capita incomes of Singapore, Thailand, Malaysia, Indonesia, and the Philippines
grew by ., ., ., ., and . per cent per annum respectively between
and .¹ Thailand’s growth rate over the period – was higher than that
of Malaysia, even though the per capita income in US$ prices of Malaysia
(US$,.) was much higher than of Thailand (US$,.) in . This was
because Thailand’s starting per capita income (US$.) base was much smaller
than Malaysia’s (US$,.).
¹ Computed using data from World Bank ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
This chapter seeks to explain how industrial policy has driven sustained rapid
economic growth and structural change in Indonesia, Malaysia, the Philippines,
Singapore, and Thailand.² However, whereas Singapore has carefully managed upgrad-
ing to become a developed country, the rest are stuck in the middle-income trap. Going
beyond the typical broad-brush framework used by latecomer exponents, the chapter
examines the shortcomings associated with policies in these countries that failed to
spur differentiation and division of labour, and technological upgrading—both across
and within industries. Malaysia launched explicit industrial policies and developed the
science, technology, and innovation infrastructure to stimulate upgrading, while Indo-
nesia, the Philippines, and Thailand had ad hoc strategies in place to support techno-
logical upgrading. Unlike the experiences of Japan, South Korea, and Taiwan, where
industrialization was propelled by national firms, foreign transnational corporations
(TNCs) have played a major role in stimulating manufacturing expansion in the South
East Asian market economies. However, all five countries have begun to experience de-
industrialization. As a share of value added in GDP, Thailand and Malaysia enjoyed the
highest expansion of manufacturing among these countries, but they have neither
managed to stimulate upgrading to high value-added activities, nor succeeded in
developing national firms to reach the technology frontier. Singapore has managed
to specialize in the high-value-added segments in shipbuilding and petrochemicals, in
which it enjoys relative comparative advantage, and in TNC-driven export-oriented
manufacturing, by quickly shifting its industrial specialization to sustain industrial
upgrading.
This chapter seeks to explain the industrial policies introduced in Indonesia, Malaysia,
the Philippines, Singapore, and Thailand, and their impact on industrialization.
We begin with key theoretical arguments to locate the analysis, before discussing first,
the import-substitution industrialization (ISI) policies, and second, the export-oriented
industrialization (EOI) policies implemented in the South East Asian market economies.
Section . assesses their industrialization and de-industrialization experiences, fol-
lowed by an examination of the impact of technological upgrading initiatives in these
countries. Section . presents the conclusions.
. T C
..................................................................................................................................
South East Asia’s industrialization did not follow the paths begun by latecomers, such as
the United States, Germany, Japan, South Korea, and Taiwan. The early introduction of
² We have excluded the transition economies of Cambodia, Lao PDR, Myanmar, Vietnam, Timor-
Leste, and Brunei from South East Asia only because the first five economies were integrated into the
capitalist world economy much later (starting with Vietnam since ) and Brunei has been an oil- and
gas-driven economy that has not implemented any industrial policies.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
export-oriented industrialization in the South East Asian market economies of Indonesia,
Malaysia, the Philippines, Singapore, and Thailand largely took the form of attempts to
diversify exports to reduce dependence on a narrow range of commodities and avoid the
occurrence of ‘fallacy of composition’ problems (see Prebisch, ; Singer, ).
The initial focus was on the promotion of light labour-intensive manufactured goods
to generate employment through the stimulation of foreign direct investment (FDI).
Indonesia, Malaysia, the Philippines, and Thailand did introduce ISI but that strategy
failed to contribute significantly to rapid economic growth as it was not accompanied
by a rapid switch to export orientation. In addition, little attention was devoted to
technological upgrading. In contrast, the massive growth and structural change
enjoyed by Singapore was achieved by switching completely to export orientation in
and focusing on technological upgrading since .
Smith () and Young () argued over the differentiation and division-of-
labour potential of manufacturing to produce dynamic increasing returns. Industrial
expansion through technological upgrading can be traced to latecomer strategies. The
latecomer thesis on industrialization originally focused on broad-brush approaches
that simply documented how Britain industrialized; the subsequent catch-up experi-
ences of the United States, Germany, and other countries were documented by
Gerschenkron () and Abramovitz (). This argument was later extended by
Kaldor (), Chang (), and Reinert ().³
Amsden (, ) and Kim () offered empirical dynamics to the latecomer
catch-up thesis by focusing on the diffusion of innovation from abroad using specific
host-site firms in South Korea. They extended the developmental state arguments of
Johnson () and Wade () on how industrial policy was used successfully to
stimulate economic development. It is in this tradition that Mazzucato () was able
to frame their mission-oriented and smart intervention industrial policy arguments.
Ocampo (Chapter , this volume) connects policy with technological learning and
upgrading through incremental innovations. Rasiah () went further by incorpor-
ating Schumpeter’s (, ) concepts of incremental and radical innovations using
the experience of firms in South Korea (e.g. Samsung Semiconductors) and Taiwan
(e.g. TSMC), showing how, despite their contrasting industrial policies, they success-
fully shaped catch-up and leapfrogging in the integrated circuits industry (Yap and
Rasiah, ).
South Korea and Taiwan did not integrate into the world economy in the same way
as the South East Asian economies. Both countries focused on the latecomer catch-up
model from the early s by prioritizing national ownership in strategic industries
(Amsden, ; Wade, ). They also introduced monetary policies to ensure that
volatile fluctuations in capital and trade flows did not destabilize their industrialization
³ Johnson () and Wade () addressed significant elements of industrial policy implemented
in Japan and Taiwan respectively, but did not link it to manufacturing being a critical engine of growth.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
initiatives. While prudent monetary policies ensured that the New Taiwan dollar’s
exchange rate against the US$ did not fluctuate sharply, South Korea imposed foreign
exchange controls from till the s, including on borrowings from abroad by
private entities, maintaining ownership of banks by the state until the s. South
Korea also fixed the won against the US$ between and to stem the negative
impact of growing balance-of-payment imbalances and debt service problems follow-
ing the first oil crisis, when oil prices rose by a factor of from to . With
targeted firms, especially chaebols, enjoying subsidized interest rates, the deliberate
imposition of high arbitrage interest rate differentials between borrowing and lending
assisted the government to gradually lower its external debt, as well as support targeted
firms (Chang, ).⁴
The generation and adaptation of technologies, incentive systems, and appropriation of
knowledge flows were critical for stimulating individuals, firms, and organizations to
connect and coordinate with knowledge nodes that provide the synergy for catching up.
Since the knowledge necessary to stimulate innovation can be regarded as a public good,
its governance should prioritize technological upgrading. Embodied knowledge—both
foreign and domestic—is continuously adapted to raise industrial productivity. The
organizational set-up can vary between countries, as initial conditions and economic
structures affect how they are shaped. Combining the key arguments on the manufac-
turing experiences of particularly South Korea and Taiwan (the most recent successful
industrializers), we present a stylized model of industrial policy in Figure ., showing a
framework of how incremental and radical innovations (including interactive learning)
support technological upgrading in successful economies.
Institutions must be structured to pursue macroeconomic policies that provide the
financing (incentives and grants) essential to support innovative economic activity, as
well as insulation from external shocks. Institutions need strengthening to meet
stringent appraisal standards to check unproductive rent seeking. Amsden ()
and Kim () provide a lucid account of innovation appropriation and economic
catch-up from foreign sources in South Korea and Taiwan. The public-good charac-
teristics of knowledge creation and appropriation (innovation) were harnessed effect-
ively in Taiwan and South Korea.
The critical organizations relevant to institutionalizing knowledge creation and
appropriation on a national scale, such as universities, public labs, standards organ-
izations, and incubators at science parks, must play an active role in stimulating
incremental and radical innovations with a focus on evolving experiential and tacit
knowledge (see Penrose, ; Polanyi, ; Dosi, ; Rasiah, ; Best, ).
While first movers initiate cycles of innovation, latecomers engage in incremental
innovation (Schumpeter, ). As economies move from the ‘least-developed coun-
tries’ category to middle-income countries, governments should ensure that gross
⁴ We would argue that the abrupt liberalization since the s, but especially following the Plaza
Accord of , denied the South Korean government the space to insulate the national economy from
private borrowings from abroad and exchange rate volatility.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Existing stocks of Organizations
embodied knowledge (universities, training
(manuals, machinery, centres, technical and Creative
humans, methods, and vocational schools, imitation
organization, R&D labs, and business (incremental
irrigation, drainage, advisory centres innovation)
species)—foreign and
domestic
Science and
technology
parks
Realm of knowledge flows
and adaptive innovations
Radical innovations
Individuals, parastatals/organizations, farms, and firms
. Innovation-driven industrial policy
Source: Adapted from Rasiah ().
expenditure on R&D (GERD) gradually rises, with a focus on R&D targeted at
generating new stocks of knowledge. Instead of simply seeking to gradually replace
government expenditure with business expenditure in GERD, non-business public
expenditure should be included to address the public goods characteristics of science,
technology, and innovation (STI) infrastructure.
. I- P
..................................................................................................................................
Influenced by advice from the World Bank and the United Nations Industrial Devel-
opment Organization (UNIDO) to limit manufacturing to consumption goods, in the
late s Indonesia, Malaysia, the Philippines, Singapore, and Thailand all began to
promote ISI to replace imports (Chenery et al., ). Only in some extended
backward-linkage industries, such as iron and steel, and cement, was there a focus on
intermediate products. Corruption through smuggling was rampant, with rising tariffs
encouraging clientelist relationships. Capital goods were not emphasized until the
s in Indonesia and Philippines, and the s in Malaysia and Thailand. Singapore
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
introduced EOI immediately after its separation from Malaysia in ,⁵ so the ISI
focus in this chapter will be confined to the other four countries.
.. Indonesia
Suharto became president of Indonesia in , following a period of international
isolation arising from Sukarno’s declaration of independence and nationalist policies.
The New Order government had the support of the United States as it sought to
promote import-replacement policies following the launching of the First Plan
(–). Foreign ownership was discouraged but joint ventures were allowed
(Anwar, ). Incentives and import credits cheapened the processing and assembly
of consumption goods in the country. Incentives for existing projects included carry-
over losses over the first six years, accelerated depreciation allowance up to a maximum
of per cent, exemption from dividend tax, an investment allowance of per cent
over four years, and exemption from property tax (Poot, ). The Investment
Coordinating Board offered new projects with additional fiscal incentives, which
included exemptions from import duties and restrictions on imported machinery
and raw materials, and exemption from corporate income tax, dividend tax, and
company tax on reinvestments over five years.
Booming oil revenues following the first oil crisis (–) supported the launching
of the aircraft industry in with special support from the state. Krakatau Steel was
also launched by the state to support heavy industrialization (Prawiro, ). While
diversification into manufacturing was viewed by policymakers as important for
averting the ‘fallacy of composition’ syndrome, three major instruments undermined
the growth of ISI industries in Indonesia. First, protection and incentives were given
without clear performance standards, while there was no condition requiring import
substitution industries to switch to EOI as in South Korea and Taiwan. Second, there
was no institutional support for technological upgrading by firms. The combination of
these two drawbacks saw a rise in production costs for downstream firms, and a lack of
pressure to bring costs down. Third, the oil boom that began in (which raised the
share of oil to per cent of Indonesian exports), resulted in the appreciation of the
rupiah, which undermined manufacturing as cheap imports replaced domestic pro-
duction over the period – (Tee, ). Although manufacturing grew by an
annual average of . per cent over the period –, (almost double the growth
over –), its ‘Dutch Disease’ effect stunted inward-oriented industries, such as
food and beverages.
The steep fall in oil prices after forced Indonesia to consider a shift to EOI, and
particularly to manufactured exports. However, until the late s serious balance-of-
payments problems forced the government to focus on monetary stabilization,
⁵ Singapore’s ISI lasted from till (Phang and Tan, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
financial deregulation to allow state banks to set deposit and lending rates, and a
massive devaluation of the rupiah in March (Hill, : ; Prawiro, ). Steel
and aircraft manufacturing continued, as did state-led ISI, with the launching of large
state-owned resource-processing heavy industries, which included the Timor–KIA
joint venture deal to assemble cars (Rasiah, ).
.. Malaysia
Malaysia raised tariffs on final consumption goods following the Pioneer Industry
Ordinance of . A combination of a small domestic market and a lack of techno-
logical upgrading policies confined manufacturing to ‘screwdriver operations’
(Edwards, ). Not only had manufacturing growth become sluggish by the mid-
s (Malaysia, ), the sector had also become a major source of imports as capital
goods and a variety of consumption goods continued to be imported on a large scale
(Alavi, ).
The extension of ISI policies that took place from the s without due attention to
their impact on downstream industries and technological upgrading merely sapped the
domestic economy of resources. Protection levels remained high in the country
(Edwards, ; Alavi, ), though estimations of effective rates of protection
(ERP) did not take account of tax and tariff holidays of firms located in export-
processing zones (EPZs), which were opened in Malaysia from . Free-trade
zones (FTZs) and licensed manufacturing warehouses followed (Rasiah, ). The
lack of export promotion as a condition for ISI undermined the competitiveness of
firms. The lack of integration between the IS and the export-oriented sectors also
discouraged linkages between the two (Jomo and Edwards, ).
A second round of ISI began in with the Fourth Malaysia Plan and the launch
of the Look East Policy (Malaysia, ). Perwaja (steel), Proton (cars), and Kedah
Cement were among the heavy industries promoted by the Heavy Industry Corpor-
ation of Malaysia (HICOM) in an attempt to imitate South Korea through subsidized
credit and heavy protection (Malaysia, ). The construction of the North–South
Highway in the s helped to stimulate these industries. While the focus of ISI was
on national firms for the first time, the lack of effective selection and appraisal,
technological upgrading, and exposure to export markets rendered the first two
industries inefficient, though Proton did export using a questionable export subsidiza-
tion strategy in the late s (Rasiah, ). Nevertheless, the massive expansion of
construction and technology transfer made cement and construction firms competitive
(Chang et al., ).
Arguably the most catastrophic reason for the failure of IS strategies in Malaysia was
the lack of policies to stimulate technological upgrading. With little emphasis on
developing a science and technology infrastructure in the country, production costs
began to rise, cheaper locations emerged from abroad (e.g. China and Vietnam
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
following economic reforms in and respectively), and Malaysian manufac-
turing could not upgrade to higher value-added activities. Meanwhile, while export
diversification helped avert the ‘fallacy of composition’ syndrome, the appreciation in
the ringgit in the face of chronic current account deficits between and caused
by strong FDI and portfolio equity inflows undermined inward-oriented industries,
including food and beverages (Rasiah, ).
.. The Philippines
The Philippines gained independence from Spain in ; largely due to balance-of-
payment (BoP) problems, ISI policies were introduced in (Bautista, ).
Controls on both imports and foreign exchange became the prime instruments to
curb imports, and the manufacturing sector lacked competitiveness due to lack of
policies to stimulate technological upgrading. By the s it became obvious that ISI
had become a drain on the Philippines’ economy, which drove the government to
stimulate FDI inflows. Reconstruction assistance from the United States offset the
negative balance of trade in the Philippines. However, while import restrictions
stimulated manufacturing, import controls resulted in the substitution of domestic
production by imports of textiles, paper and paper products, and non-metallic mineral
products. Nevertheless, manufacturing grew at per cent per annum on average
between and (Bautista, ).
However, the Philippines faced economic and political turmoil in the late s as
the peoples’ car launched under ISI policies by the government failed to take off
(Ofreneo, ) which, along with rising imports, caused a return of the BoP crisis
in . Economic growth remained sluggish, particularly in the manufacturing sector
which was heavily dependent on processing of primary commodities such as coconut
products, sugarcane, forest products, copper, and gold. To combat its BoP difficulties,
the government implemented the Republic Act and the Export Incentives Act of
to encourage FDI through per cent ownership of pioneering industries
(textiles and garments, and electrical and electronics). Non-pioneering industries
were allowed to be per cent foreign owned and were offered accelerated depreciation
allowance, tax exemptions on imported capital equipment, and tax holidays.
However, in the s the bulk of the FDI was heavily import dependent (Ofreneo,
). Additionally, non-tariff barriers were implemented in the country to protect
industries like vehicles and equipment, textiles, basic metals, and fabrics in the prin-
cipal customs area. Instead of discouraging imports, the devaluation of the peso
negatively affected the ISI industries that were dependent on imports of capital
equipment, intermediate goods, and raw materials. While the proliferation of EPZs
raised manufacturing growth to . per cent in the period –, driven largely by
TNCs assembling and processing imported items from their own value chains, the
Philippines’ economy suffered from rising external debt caused by the oil crises of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
– and –. The strong oligarchy supporting the government applied
clientelist pressures to retain unproductive protection rents. Growing poverty and
unemployment drove hundreds of thousands of Filipinos abroad, which eventually
made overseas remittances a major source of revenue for the Philippines.
.. Thailand
Following the First Development Plan (–), but especially after the enactment of
the New Investment Promotion Act of , the Thai government raised tariffs and
offered indirect subsidies to promote ISI. Three groups of industries were promoted by
the Board of Investment (BoI). Category I industries were given full exemption from
import duties on raw materials and intermediate inputs and business taxes, category II
industries, one-half exemption, and category III industries, one-third exemption.
Tariffs targeted at final goods for the domestic market continued to be promoted
under the Second Five-Year Plan (–), but duties on imported inputs were
reduced to a third. Manufacturing value added grew at per cent on average per
annum over the s with ISI policies the prime propellant (Bautista, : ).
Food processing, beverages, and tobacco dominated manufacturing in the early
s, but began to contract from the late s with the growth of import-replacing
industries, such as petroleum products, transport equipment, non-durable consumer
goods, and EOI industries, such as textiles, clothing, and electronic products (Bautista,
: ). Although EOI began in the s, ISI remained potent with the govern-
ment’s stimulation of domestic investment under the Investment Promotion Law,
through which the BoI reconstituted ISI strategies in Thailand (Akrasanee, ). The
BoI’s promotion of minimum plant size also led to the establishment of large-scale
manufacturing firms, which in general were found to be more capital intensive and
import dependent than small firms (Tambunlertchai and Loohawenchit, ). While
manufacturing value added still grew by an average of per cent per annum during
–, chronic BoP deficits and mounting external debt service (followed by a .
times rise in oil prices in –) drove the government to seek assistance from the
World Bank and the International Monetary Fund (IMF). Between and ,
with massive inflows of FDI and portfolio equity investment and no trade surplus, the
baht began to appreciate, leading to the ‘Dutch Disease’ effect of damage to inward-
oriented industries (Akrasanee, ).
.. Summary
In short, high domestic production costs and the absence of initiatives to gradually
lower protection levels undermined export competitiveness, but the inability of ISI to
support long-term growth in manufacturing was principally due to a lack of effective
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
technological upgrading policies to transform the economies of Indonesia, Malaysia,
the Philippines, and Thailand from low to high value-added activities. To make matters
worse, unproductive rentier operations through clientelism behind high tariffs and
quotas aggravated the state’s capacity to sustain them over the long run.
. E- P
..................................................................................................................................
A combination of small domestic markets, the disastrous costs of poorly conceived IS
policies, and TNCs relocating their labour-intensive production stages drove the South
East Asian market economies to switch to EOI policies. Singapore and Thailand
attracted foreign TNCs with tariff-free operations and tax holidays. Malaysia launched
manufacturing as the engine of growth through its New Economic Policy (Malaysia,
). Indonesia allowed export-oriented TNCs to relocate in Batam from with
total ownership and tariff-free and tax holiday privileges (Prawiro, ).
.. Indonesia
With the Plaza Accord of and further falls in the oil price, Indonesia effectively
began EOI in . The withdrawal of the generalized system of preferences (GSP)
from South Korea, Taiwan, and Singapore in drove massive FDI inflows into
South East Asia. The surge in Indonesia’s manufactured exports since is largely a
consequence of the introduction of the duty exemption and drawback scheme. The
Badan Koordinasi dan Penanaman Modal (Investment Coordination Board) promotes
industrial investment in Indonesia (Prawiro, ).
Indonesia also offered total equity ownership of export-oriented firms in selected
locations, such as Bantam, leased to Temasik Holdings of Singapore to manage from
the late s. As the EOI strategy began to proliferate in Indonesia, continued
stagnation in the oil price and cumbersome integration of inward-oriented firms in
heavy industries caused by dualistic policies restricted the capacity of EOI to synergize
the whole economy. The rupiah appreciating against major currencies from the s
undermined the IS industries owing to cheap imports, which aggravated the balance of
payments and debt service. The unsustainable exchange rates affecting most East Asian
economies caused Indonesia to succumb to the – Asian financial crisis, which
brought down the rupiah and resulted in a massive capital flight from Indonesia
(UNCTAD, ).
The IMF-imposed structural adjustment package, as well as the low exchange rate,
began to attract FDI inflows into Indonesia in , reviving manufacturing growth.
The restructuring included the closure of the Timor–KIA aircraft manufacturing joint
venture (Rasiah, ). Although Indonesian manufacturing was not seriously affected
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
by the – global financial crisis, since its trade was decoupled from exports to the
United States, a combination of cumbersome administrative procedures and a lack of
technological upgrading undermined further growth.
.. Malaysia
Although the Investment Incentives Act of initiated the shift to EOI, it was only
following the opening of FTZs (and their equivalent in licensed manufacturing ware-
houses) in that export-oriented manufacturing expanded strongly (Malaysia,
, ). Through aggressive promotion by the Malaysian Industrial Development
Agency (an organ of the Ministry of International Trade and Industry (MITI)),⁶ EOI in
the s focused on lowering unemployment with light industries and generating
exports. Giant TNCs from the United States, Europe, and Japan relocated labour-
intensive operations to Malaysia. The electrical and electronics, and textile and clothing
industries dominated EOI in the s (Rasiah, ).
Without significant backward linkages, the fortunes of EOI fluctuated with the
vicissitudes of volatile external demand swings. Hence, not only did manufacturing
wages grow little in the s, but workers were also often exposed to retrenchments.
Although a second round of ISI policies beginning in changed the emphasis to
heavy industrialization, rising external debt service and falling export commodity
prices pressured the government to revive EOI policies, and new financial incentives
were offered to TNCs to invest in Malaysia from the mid-s (Rasiah, ).
As the EOI phase gained momentum with massive inflows of FDI from Japan, South
Korea, Taiwan, Hong Kong, and Singapore in the late s, the government shifted its
focus from simply creating jobs to promoting technological upgrading in the s.
Plans were announced limiting financial incentives to capital- and technology-
intensive TNCs, while R&D incentives were offered to stimulate technological upgrad-
ing. Parastatals were launched to create and strengthen the STI infrastructure in the
country. The Human Resource Development Council, Malaysia Industry Government
High Technology, the Multimedia Development Corporation, and the Multimedia
Super Corridor were launched in the s for this purpose. The Malaysian Institute
of Microelectronics Systems was corporatized, and science and technology parks were
built over the Western Corridor to house incubators.
While carrots were given to selected firms to undertake R&D, there was little
monitoring and no sticks were applied to non-performers. The selection procedure
for leadership of STI parastatals and designated technology firms excluded Malaysians
with experiential and tacit knowledge in the respective industries. The preference was
for extending the legacy of creating Bumiputera chief executive officers, which had
become the government’s important goal since the promulgation of the Permodalan
⁶ ‘International’ was added to the Ministry of Trade and Industry in the s (Rasiah, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Nasional Berhad in , and had been actively pursued since . The ethnic
coloration of industrial policy resulted in standards taking a back seat, rendering the
STI parastatals ineffective, while the firms created for support failed to compete in
export markets. Perwaja, Proton, and Silterra are three examples of national firms that
have continued to sap the national economy. The control of Proton was finally taken
over by China’s Geely in (Zhang et al., ), while Silterra is languishing at the
bottom of the world semiconductor ladder (Rasiah and Yap, ).
.. The Philippines
Although EOI was launched in the Philippines in the s when the Board of
Investment (BoI) started promoting export-oriented FDI, ISI continued to lead, as
industries located outside EPZs remained protected. Indeed, there were virtually no
links between the tariff-free operations in the EPZs that attracted primarily electrical
and electronics, and textile and garment firms from abroad. However, chronic BoP
deficits and debt service attracted structural adjustment packages from the IMF that,
inter alia, required the liberalization of tariffs from the s as the Philippines’
integration into ASEAN intensified following the ASEAN Free Trade Area (AFTA)
agreement in .
The Foreign Investment Act of increased foreign equity ownership to per
cent in non-EPZ industries. Tariffs were reduced on raw materials and finished
products, which helped reduce external debt (Menardo, ). Although largely
ineffective, these generous incentives attracted FDI into particularly electrical, elec-
tronics, and automotive components. However, the lack of a strong STI infrastructure,
together with smuggling and the absence of proactive promotion of technological
upgrading, restricted manufacturing expansion so that its share in overall exports
only reached . per cent in before falling again.
.. Singapore
As one of the first to promote EOI in Asia, and located strategically as an entrepôt,
Singapore was in a position to promote industries relevant to the country’s economic
development. Given the high unemployment rates of the s, Singapore’s Economic
Development Board (EDB) promoted labour-intensive export-oriented FDI from
until the saturation of the labour market and rising wages shifted the emphasis from
to attracting capital- and technology-intensive industries. Exports are promoted
principally through financial incentives, withdrawal of which discourages incompatible
industries. Strategic industries, such as shipbuilding, petrochemicals, information
communication, and bio-technologies, have also been offered R&D grants and facilities
(Singapore, a, b).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Singapore fits the mission and smart industrial policy argument advocated by
Mazzucato (). The EDB’s agile leveraging role takes account both of Singapore’s
endowments and of changes in TNC strategies, to attract the adaptation required in a
broad Schumpeterian sense to sustain technological upgrading and phase out incom-
patible industries (see also Wong, ; Rasiah and Yap, ). Three clear strategies
can be observed in the conduct of the EDB. First, Singapore took advantage of its
intermediate role in trade to launch oil refineries that expanded into petrochemicals
and to develop shipbuilding. Second, incompatible industries were replaced with
compatible industries. For example, Singapore phased out disk-drive firms in
– once it became clear that the industry was labour intensive, and the semicon-
ductor industry from because of the lack of related research capability to support
upgrading (Rasiah and Yap, ). Indeed, the notable semiconductor firms in Singa-
pore, such as TSMC, Seagate, and Avago, were only fabricating low-end chips.⁷ Third, a
science park was established to stimulate commercialization.
Singapore’s leveraging strategy to transform the economy from low to high value-
added activities by offering R&D grants and facilities attracted regional operations
from TNCs. Similarly, the government’s promotion of shipbuilding and downstream
petrochemical industries allowed the country to become industry leaders. Both indus-
tries offered Singapore strategic positioning as the country gradually rose, through
refining imported oil, and repairing and building ships, rigs, and platforms, to the
status of the busiest in the world. The EDB’s quick approach to world-class firms,
handling of registration, customs coordination, and developing institutional support by
linking R&D labs and universities has gone a long way to wards evolving a world-class
shipbuilding and petrochemical industry (Singapore, a, b; ASMI, ).
In addition, Singapore’s entrepôt trade has continued to thrive, despite ASEAN
economies gradually establishing their own trade routes. Around half of merchandise
exports over the period – were re-exports, which in benefited from a
network of twenty-one regional and bilateral free-trade agreements with thirty-two
trading countries. In fact, merchandise trade through preferential trading agreements
accounted for about per cent of Singapore’s imports and per cent of exports in
(WTO, ).⁸ Through lucrative incentives and grants, and careful selection of
foreign experts, Singapore has evolved a strong biotechnology industry.
.. Thailand
Although the Export Promotion Act of initiated Thailand’s export orientation,
EOI only became the dominant industrial strategy of Thailand from the early s
⁷ See Rasiah and Yap () for a detailed study of Singapore’s inferior location in the semiconductor
technology trajectory.
⁸ Singapore’s low corporate tax base of per cent in , along with the FTAs, make it an attractive
regional headquarters for TNCs.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
when mounting debt and BoP problems forced the government to accept an IMF
structural adjustment package amounting to US$ million. The promotion of
exports became a key instrument to clear the BoP deficit, which on average amounted
to around US$ billion since the second half of the s (Akrasanee, ). Through
increased production and productivity, EOI was expected to lead manufacturing value-
added growth to an average annual rate of . per cent during the plan period –.
The government began to reduce tariffs, promote regional dispersal of industry, and
offer tax incentives to exporting firms. Five industrial estates with excellent infrastruc-
ture were added to the four that had existed earlier.
Thailand faced a contraction in manufacturing value added owing to falling com-
modity prices and a cyclical downturn in the electronics industry in the mid-s.
However, serious unemployment problems were largely avoided as factory workers
returned to rural farms to support themselves (Phongpaichit and Baker, ). The
country also experienced a massive inflow of export-oriented manufacturing invest-
ment from the late s, which helped fuel rapid growth again. The appreciation of
the yen, won, NT dollar, and Singapore dollar from following the Plaza Accord,
and the withdrawal of the GSP from South Korea, Taiwan, and Singapore in February
resulted in substantial capital flight from these countries to South East Asia.
Thailand also depreciated the baht to attract further FDI inflows. Further deregulation
in the s resulted in giant foreign automobile firms relocating their operations to
Thailand.
While manufacturing value added expanded over the period –, the lack of
technology policies undermined the capacity of manufacturing to sustain wage
increases and technological upgrading from low to high value-added activities.
Minor ad hoc incentives and high-tech facilities were offered to large firms in the
automobile (including an automobile university) and electronics industries
(Intarakumnerd and Chaoroenporn, ), but the lack of development of a compre-
hensive STI infrastructure to support incremental and radical innovations resulted in
manufacturing value added’s contribution to GDP plateauing in and subse-
quently declining.
.. Summary
Overall, EOI offered the appropriate scale to stimulate expansion in exports and
employment creation. With foreign frontier TNCs spearheading EOI, the difficulties
associated with competition from abroad were reduced. While Singapore enjoyed first-
mover advantages in Asia, the creation of EPZs allowed the other four market
economies to offer the excellent basic infrastructure essential for attracting labour-
intensive operations. However, the lack of a focused industrial policy to stimulate
upgrading and the lack of stringent appraisal mechanisms for firms enjoying incentives
and grants stifled their upgrading in global value chains. Lack of connectivity between
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ISI and EOI firms also discouraged the development of linkages. Singapore did not face
these problems; its EDB managed to stimulate industrial upgrading by promoting
compatible industries while dis-incentivizing incompatible industries using a strong
appraisal mechanism.
. I D-
..................................................................................................................................
While industrial expansion began with the launch of ISI in the s and s, the
growth was fastest during EOI owing to a combination of bigger export markets
enjoyed by TNCs relocating operations from abroad compared to small domestic
markets and the use of labour-intensive technologies. Indonesia, Malaysia, the Philip-
pines, and Thailand’s experience with ISI drained the economies of foreign exchange
from imports of intermediate inputs and capital machinery equipment, while under-
mining performance owing to a lack of strong technological upgrading policies. While
the powerful liberalizing initiatives through Asia-Pacific Economic Cooperation
(APEC) and the World Trade Organization (WTO) reduced the significance of IS
policies, (particularly after the formation of the AFTA in ), it is also the lack of
effort to pressure ISI industries to shift to EOI that resulted in manufacturing either
stagnating or declining in importance in Indonesia, Malaysia, the Philippines, and
Thailand (Figure .).⁹ Although manufacturing has also started to fall in Singapore,
35
30 28.2
25
Per cent (%)
20
19.6
15
10 10.6
5
4.5
0
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Year
Indonesia Malaysia Philippines Singapore Thailand
. Manufacturing value added share in GDP, selected economies, –
Source: World Bank ().
⁹ All uncited statistics on manufacturing composition and growth rates were computed from World
Bank ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
its almost per cent share in GDP for a city-state and being characterized by high-
value-added activities is positive.
Although EOI became the dominant industrial strategy, all five South East Asian
market economies examined in this chapter have begun undergoing de-
industrialization. At its peak, manufacturing contributed over per cent of GDP in
Indonesia, Malaysia (–), and Thailand (–). The steady expansion of
manufacturing in these countries began to slow down and contract once FDI-led light
manufacturing firms could not upgrade to compete with cheaper sites in China,
Bangladesh, and Indo-China. Heavy industries, such as iron and steel, cement, and
automobiles have remained owing to the preferential tariffs and incentives enjoyed
under the ASEAN Economic Community (AEC), which stipulates a rule-of-origin
condition of per cent value to be added cumulatively for firms to enjoy liberal access
to domestic markets.
As liberalization and incentives propelled exports, the trade structure of the five
South East Asian market economies quickly shifted towards manufactured goods
(Figure .), particularly electricals and electronics, automotive components, and
textiles and garments. Except for declines caused by external crises, manufactured
export shares in the total exports of Indonesia, Malaysia, the Philippines, and Singa-
pore reached their peaks in –. Thailand enjoyed its highest export share in
. The rapid expansion of manufacturing, including diversification within the
sector, helped the South East Asian economies avert problems caused by the ‘fallacy
of composition’.
100.0
90.0
80.0
70.0
60.0
Per cent (%)
50.0
40.0
30.0
20.0
10.0
0.0
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Year
Indonesia Malaysia Philippines Singapore Thailand
. Manufactured exports share in total merchandise exports, selected economies,
–
Source: Computed from data collected from World Bank ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Owing to problems of data availability and reliability, in evaluating the performance
of manufacturing among the five economies we focus on the most common industries:
machinery; electricals and electronics; transport vehicles and equipment; food, bever-
ages and tobacco; and chemical industries. We have used the trade balance with South
Korea and Taiwan of the key export-oriented industry of electricals/electronics (HS)
and the key import-substituting industry of motor vehicles (HS) over the period
to as the benchmark to examine the competitiveness of these industries.
Using trade balance (TB) as the indicator of competitiveness is not without its
problems.¹⁰ Although export volume and TB are used to measure the competitiveness
of critical high-technology electric/electronics, and motor vehicles and components
industries in the four countries,¹¹ as value added in gross output, the figures are often
distorted by both tariff and non-tariff barriers. Non-tariff barriers are still important in
the motor vehicles industry, although Thailand has largely phased them out since the
late s in its efforts to turn the country into a regional platform for motor vehicle
manufacturing.
Singapore led initially on electrical and electronics (EE) exports, a massive propor-
tion of which were re-exports. In fact, Singapore exported more EE goods than South
Korea until (Figure .). South Korea and Taiwan overtook Singapore in
and respectively. The three countries enjoyed their highest exports of US$
billion, US$ billion, and US$ billion, respectively, in . Exports from Malay-
sia followed, peaking at US$ billion in . Exports from Thailand and the
Philippines amounted to US$ billion and billion respectively in , while
Indonesia exported US$ billion in . Most South Korean and Taiwanese exports
are generated by their domestic firms, while those of the South East Asian market
economies are generated by foreign firms, which often has negative BoP implications
once profits are repatriated away from the host countries. Consequently, firms from
these countries have better control over global value chains.
South Korea enjoyed a clear lead in the export of motor vehicles and parts, reaching
a peak of US$ billion in before falling to US$ billion in (Figure .).
Except for – when external demand fell owing to the global financial crisis,
motor vehicle and parts exports have risen steadily from the countries illustrated.
Thailand overtook Taiwan in to become the second-largest exporter of motor
vehicles, with exports reaching US$ billion in . Exports from Taiwan, Indonesia,
Singapore, Malaysia, and the Philippines followed, reaching US$ billion, US$
billion, US$ billion, US$ billion, and US$ billion respectively in . Again,
most South Korean and Taiwanese exports are generated by domestic firms, and
¹⁰ We have avoided using total factor productivity and labour productivity measures to examine
performance owing to serious problems associated with them.
¹¹ We avoided using revealed comparative advantage (RCA) owing to the lack of reliable information
on value-added share in gross output, which is seriously compromised because of varying degrees of
protection in these countries. Also, it does not distinguish specific industries within the categories based
on their technological sophistication.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
200
180
160
140
120
US$ Billions
100
80
60
40
20
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Year
Chinese Taipei South Korea Indonesia Malaysia
Philippines Singapore Thailand
. Electric and electronics exports, selected economies, –
Source: Computed from data gathered from WTO ().
80
70
60
50
US$ Billions
40
30
20
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Year
Chinese Taipei South Korea Indonesia Malaysia
Philippines Singapore Thailand
. Motor vehicle exports, selected economies, –
Source: Computed from data gathered from WTO ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
0.800
0.600
0.400
(X-M)/(X+M)
0.200
0.000
–0.200
–0.400
–0.600
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
18
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Year
Chinese Taipei South Korea Indonesia Malaysia
Philippines Singapore Thailand
. Trade balance, electric and electronics, selected economies, –
Note: X – exports; M – imports.
Source: Computed from data collected from WTO ().
those of the South East Asian market economies are generated by foreign firms, with
negative BoP implications. A significant proportion of motor vehicle and parts exports
from South Korea originate from lead national firms, including from their subsidiaries
abroad, while there are only two national car assemblers in Malaysia (both heavily
reliant on foreign technology) and none in the remaining South East Asian market
economies. It therefore appears that firms from South Korea have better control over
their global value chains.
The least export-oriented economy among the five countries until the turn of the
millennium, Indonesia, enjoyed the highest TB in the EE industry during –.
However, following liberalization, Indonesia’s TB fell to –. in (Figure .). In
the same year Thailand had the second-lowest TB, and Taiwan and South Korea the
highest (at . and .). Malaysia, Singapore, and the Philippines also enjoyed a
positive TB, but owing to the dominance of foreign capital in the ownership of the EE
industry much of the profits are likely to have been repatriated abroad.
Thailand was the only country to enjoy a positive TB in the motor vehicles and parts
industry in – (Figure .). Indonesia and South Korea had a positive TB in this
sector in some years, but Taiwan, Malaysia, and the Philippines consistently faced
negative TB over the period. Although the automotive industry cluster generated
, jobs and per cent of GDP in , the foreign-dominated industry still
specialized in low-margin vehicles that paid low salaries and generated little savings for
the national economy owing to repatriation of profits abroad (Intarakumnerd and
Chaoroenporn, ; Maikaew, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
0.800
0.600
0.400
(X-M)/(X+M)
0.200
0.000
–0.200
–0.400
–0.600
–0.800
–1.000
01
02
03
20 4
05
20 6
20 7
08
09
10
11
12
13
20 4
15
16
17
18
0
0
0
1
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Year
Chinese Taipei South Korea Indonesia Malaysia
Philippines Singapore Thailand
. Trade balance, motor vehicles, selected economies, –
Notes: X – exports; M – imports.
Source: Computed from data collected from WTO ().
We next discuss the key industries by country to assess how they have fared,
including additionally the outward-oriented industry of textiles and garments, and
the inward-oriented industries of food, beverages and tobacco, and chemicals. All real
growth rates were computed using local currencies and national base years.
.. Indonesia
In , as Indonesia was emerging from a political crisis, manufacturing accounted
for only . per cent of GDP. By it had risen to . per cent (Figure .). The
– and – oil crises resulted in booming exports and with that an appre-
ciation of the rupiah as oil prices soared. A flood of cheap imports saw the food,
beverages, and tobacco industry contracting, with growth of –. per cent. Textiles and
garments, and the chemical industry grew on average by . and . per cent,
respectively, per annum. Nevertheless, government-protected heavy industries grew
rapidly to record the highest annual average growth rate of . per cent during
–. Thus, the low base and the expansion in heavy industries caused manufac-
turing value added to grow by . per cent on average per annum over this period.
Despite falling oil prices in the s, protected IS industries (including downstream
wood-based industries) drove manufacturing value added to grow by . per cent per
annum on average between and . The annual average growth rate of
machinery, electrical and electronics, transport vehicles and equipment (. per
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
cent), food, beverage, and tobacco (. per cent), and chemicals (. per cent) was
the highest in –. The share of manufacturing in GDP continued to expand in
trend terms to reach a peak of . per cent of GDP in , despite a fall in –
following the – Asian financial crisis. Manufacturing value added grew by .
per cent on average per annum in –. Machinery, electrical and electronics,
and transport vehicles and equipment recorded the highest growth rate of . per cent
on average per annum in the same period. Electronics exports soared as the liberal
environment in Batam and Bintan attracted massive inflows of low-end
manufacturing.
Indonesia began to de-industrialize in , with the share of manufacturing in GDP
falling in trend terms from . per cent in to . per cent in (Figure .).
Manufacturing value added grew on average by . per cent per annum in –.
The restructuring of incentives and deregulation of tariffs from slowed down the
growth of machinery, electricals and electronics, and transport vehicles and equipment
to an average of . per cent per annum, while food, beverages and tobacco, and the
chemical industry grew on average by . and . per cent per annum in –. The
end of the Multi-Fibre Arrangement (MFA) in negatively affected the textile and
garment industry, which recorded an average annual growth rate of –. per cent. The
advent of liberal policies shifted the focus to the food, beverages, and tobacco industry,
which grew on average by . per cent per annum in –. The rapid scaling down
of protection has resulted in machinery, electrical and electronics, and transport
vehicles and equipment industries growing by –., and the chemical industry by .
per cent on average per annum in –. The textile and garment industry recorded
an annual average growth rate of . per cent in – as new locations outside Java
Island became attractive for low-wage operations.
.. Malaysia
The manufacturing sector increased its share in GDP in trend terms from till
(Figure .). The early increase, from till , was largely due to a decline in other
sectors, as the Malaysian economy was facing a deflationary environment caused by a fall
in tin and rubber prices and ethnic riots in (Rasiah and Salih, ). The low
starting base, as well as massive relocation of labour-intensive export-oriented TNCs,
expanded the manufacturing sector, which grew by . per cent on average per annum
in –. The highest average annual growth of . per cent was recorded in the
textile and garment industry, followed at . per cent by machinery and transport
vehicles and equipment (which also comprises electrical and electronics equipment). It
was in the s that the giant polyglot company Toray relocated its massive textile
manufacturing operations to Penang. Intel, Advanced Micro Devices, National Semi-
conductor, Texas Instruments, Hewlett Packard, and Hitachi also relocated their assem-
bly operations in Malaysia in the s (Rasiah, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The manufacturing sector grew little in the period – owing to a shift in
incentives to ISI heavy industries and a cyclical downturn in the electronics industry.
However, it grew again from the late s with the renewal of incentives for EOI firms
and massive inflows of FDI into the sector (Rasiah, ). Consequently, manufactur-
ing grew by . per cent on average per annum in –. The highest growth rate of
. per cent was recorded by the chemical industry, followed by the machinery, and
transport vehicles and equipment industry (. per cent).
The manufacturing sector grew by . per cent on average per annum in –.
While food, beverages and tobacco (. per cent), chemicals (. per cent), and textiles
and garments (. per cent) began to slow down, machinery, and transport vehicles and
equipment recorded its highest annual average growth rate of . per cent in
–. The export-oriented electrical and electronics industry was the biggest
contributor to this growth, which resulted in machinery, EE, and transport vehicles and
equipment accounting for a . per cent share of manufacturing in , before falling
to . per cent in .
Deindustrialization began to creep into Malaysia from as the share of manu-
facturing value added in GDP began to contract from . per cent in to . per
cent in (Figure .). The manufacturing sector recorded an annual average
growth rate of . per cent in –. Labour shortages, rising wages, and the
emergence of cheaper sites abroad saw textiles and garments contract with a growth
rate of –. per cent. Food, beverages and tobacco (. per cent), and chemicals (. per
cent) recorded the highest average annual growth rates. Machinery, electrical and
electronics, and transport vehicles and equipment (. per cent) experienced their
lowest growth.
Deindustrialization continued in – as manufacturing recorded its slowest
growth of . per cent on average per annum. Machinery, electrical, electronics, and
transport vehicles and equipment grew by . per cent per annum on average, food,
beverages, and tobacco by . per cent, textiles and garments by . per cent, and
chemicals by . per cent.
.. The Philippines
The Philippines was the earliest to industrialize rapidly in South East Asia. Its manu-
facturing share in GDP rose from . per cent in to its peak of . per cent in
(Figure .). However, manufacturing’s share of GDP has largely stagnated
through the period –. Between and , manufacturing value added
grew on average by . per cent per annum as textiles and garments, machinery,
electricals, electronics, transport vehicles and equipment, and the chemical industries
grew by ., ., and . per cent respectively. De-industrialization began to grip the
Philippines from the s, with average annual manufacturing value added growing
by only . per cent per annum in –. Machinery, electricals and electronics, and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
transport vehicles and equipment (–. per cent), the chemical industry (–. per cent),
and textiles and garments (–. per cent) contracted.
Deregulation of tariffs and the provision of export-oriented financial incentives
stimulated rapid FDI-driven growth in the machinery, electricals and electronics, and
transport vehicle and equipment industry, which grew by . per cent on average per
annum from to . However, a contraction in textiles and garments (–. per
cent), and food, beverages, and tobacco (–. per cent), and a slowdown (. per cent)
in the chemical industry slowed manufacturing value-added growth to an annual
average of . per cent. Manufacturing growth began to pick up in – and
–, growing on average by . per cent and . per cent respectively. The
deregulation process began in with the introduction of AFTA, and the subsequent
formation of the ASEAN Economic Community (AEC) in saw the rationalization
of tariff measures in South East Asia, resulting in food, beverages, and tobacco, and
textiles and garments growing on average by . per cent and . per cent per annum
in –. However, the trend towards de-industrialization continued, with manu-
facturing’s share in GDP falling to . per cent in (Figure .).
.. Singapore
After launching EOI in , Singapore enjoyed first-mover advantages in Asia, with
manufacturing’s share of GDP reaching . per cent in (Figure .). The peak of
. per cent was reached in . While labour-market saturation offered the gov-
ernment the opportunity to promote skills development and higher value-added
activities, rising wages and labour shortages discouraged further FDI inflows. Manu-
facturing value added grew by . per cent per annum in –. Machinery,
electricals and electronics, and transport vehicles and equipment, textiles and gar-
ments, and chemicals grew by . per cent; textiles and garments by ., and
chemicals by . per cent on average per annum.
The saturation in the labour market, the floating of the Singapore dollar in , and
the withdrawal of the GSP in did not seriously affect the manufacturing sector,
which grew by . per cent on average per annum in – following restructuring
of incentives and a focus on the STI infrastructure. Further upgrading initiatives and
careful macroeconomic management sustained manufacturing value-added growth of
. per cent on average per annum in –. The machinery, electricals, electron-
ics, and transport vehicle and equipment (especially electronics and ships), and
chemical (especially petrochemicals), industries grew on average by . and . per
cent respectively.
Although de-industrialization began to take root after manufacturing’s share in GDP
peaked at . per cent in , with the share at . per cent, Singapore’s
manufacturing sector has remained strong despite the country’s small size. The
country’s competitive advantage regionally within ASEAN has ensured that the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
chemical, food, beverages, and tobacco industries, machinery, electricals, and electron-
ics industries, and transport vehicles and equipment industries enjoyed annual average
growth rates of ., ., and . per cent respectively in –. The textile and
garment industry contracted (–. per cent) in this period. Consequently, manufac-
turing value added grew on average by . per cent per annum. The food, beverage, and
tobacco, and chemical industries grew further by . and . per cent respectively
while the textiles and garments industry, and the machinery, electricals, electronics,
and transport vehicles and equipment sector slowed down to grow by only . and .
per cent respectively in –. Annual average manufacturing value added grew by
. per cent in –.
.. Thailand
Burgeoning BoP deficits following the – and – oil crises drove the
government to promote exports. The share of manufacturing in GDP rose from .
per cent in to . per cent in – before falling in trend terms to . per
cent in (Figure .). Manufacturing value added grew on average by . per cent
per annum in –. The shift to EOI raised manufacturing value-added growth as
the machinery, electrical and electronics, transport vehicles and equipment, textile and
garment industries grew on average by . per cent and . per cent respectively per
annum following the relocation of TNCs from abroad in –. Consequently,
manufacturing value added grew by . per cent per annum despite the food,
beverages and tobacco industry contracting (–. per cent) in this period.
The food, beverages, and tobacco industry grew by . per cent, chemicals by .
per cent, and machinery, electrical and electronics, and transport vehicles and equip-
ment by . per cent on average per annum in –. However, manufacturing
value added only grew by . per cent per annum on average in – because of a
decline in inward-oriented industries, such as iron and steel and metals in the first half
of the s as a strong baht attracted massive imports. The machinery, electricals and
electronics, and transport vehicles and equipment industry grew by . per cent on
average per annum in – following Thailand’s emergence as South East Asia’s
regional production base for cars. Food, beverages, and tobacco, and chemicals grew on
average by . and . per cent respectively. However, manufacturing value-added
growth slowed to . per cent on average in – owing to a contraction (–. per
cent) in the textile and garment industries.
.. Summary
In short, after a long period of expansion since particularly the s, the South East
Asian market economies has all faced de-industrialization. Export-orientation through
TNC operations have been the prime propellant of industrialization in these countries.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
However, only Singapore has so far avoided premature de-industrialization through
strong industrial upgrading. Malaysia, Indonesia, the Philippines, and Thailand are
experiencing premature deindustrialization as these countries have not managed to
achieve significant industrial upgrading.
. T U
I
..................................................................................................................................
With the exception of Singapore, the South East Asian market economies have under-
performed compared to South Korea and Taiwan, especially in the two critical high-
technology industries of electrical/electronics, and motor vehicles and parts. Although
all the South East Asian market economies eventually switched to EOI, not only has
institutional support to stimulate technological upgrading varied, but Indonesia,
Malaysia, the Philippines, and Thailand have not managed to transform their manu-
facturing industries to become global leaders. While South Korea and Taiwan expertly
used export quotas to quickly expose IS industries to external competition (a glaring
omission in Indonesia, Malaysia, the Philippines, and Thailand), the underfunded STI
infrastructure and its weak governance in the latter four countries undermined the
capacity of their governments to finance industrial upgrading. Whereas Singapore and
Malaysia began to stimulate industrial upgrading on a national scale in and
respectively, Indonesia, the Philippines, and Thailand only launched broad-based STI
development policies in . Also, whereas Singapore’s mission-oriented and strategic
industrial policy drove rapid technological upgrading, a lack of appraisal mechanisms
and connectivity and coordination between STI infrastructure organizations, and
institutions and firms restricted technological upgrading in the other countries. Ad
hoc incremental innovation from knowledge inflows from abroad has been critical to
supporting infrastructure and maintenance, mining, and agriculture in all these coun-
tries. This section explains the link between STI infrastructure and industrial upgrading
in the five economies.
.. Indonesia
Strategic policies targeted heavy industries in Indonesia, for example, for the aircraft
industry from until it was discontinued following the – Asian financial
crisis. The first formal STI policy in Indonesia can be traced to the launch of the
Vision and Mission of Indonesian Science and Technology Statement which incorp-
orated four-year plans to be rolled out until by the National Research Council of
Indonesia (Aminullah, ; UNESCO, ; OECD, ). The first two plans
(– and –) addressed the need to support business R&D in strategic
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
4.5
4
3.5
Per cent (%) 3
2.5
2
1.5
1
0.5
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Year
Indonesia South Korea Malaysia
Philippines Singapore Thailand
. GERD in GDP, South East Asian market economies, – (%)
Source: UNESCO ().
sectors. However, R&D expenditure did not increase significantly, and hence much of
Indonesia’s STI capacity has remained in public organizations, with only per cent of
the budget allocated to the Institute of Sciences by the National Research Council of
Indonesia to spearhead R&D activities (Oey-Gardiner, ; see also Figure .).
The focus has been on resource-based industries with steel, shipbuilding, palm oil,
and coal identified for Sumatra; food and beverages, textiles, transport equipment,
shipping, information communication technology (ICT), and defence identified for
Java; steel, bauxite, palm oil, coal, oil, gas, and timber strategized for Kalimatan; nickel,
food and agriculture (including cocoa), oil, gas, and fisheries specified for Sulawesi;
tourism, animal husbandry, and fisheries classified for Bali and Nussa Tengarra (Lesser
Sunda Islands); and nickel, copper, agriculture, oil and gas, and fisheries targeted for
Papua and Maluku Islands (UNESCO, ). By , the government had only
committed per cent of the US$ million for infrastructure development
(Rasiah, : ). In addition, the role played by the private sector is modest, and
the ratio of GERD to GDP (. per cent) was negligible in (Aminullah, ),
reaching about . per cent in .¹²
.. Malaysia
In the s, with increased demand for proximate sourcing, technology diffusion
through TNCs appeared promising (Rasiah, ). Indeed, significant supplies of
¹² Communication with Erman Aminullah on October in Bandung.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
precision tools, semi-automated machinery, and fabrication opportunities were estab-
lished between multinational and national firms in Penang in the s and s.
The Action Plan for Industrial Technology Development was launched in to
stimulate industrial upgrading. Several organizations were introduced to solve collect-
ive action problems and to promote the innovation essential to make Malaysia a
developed country by (Malaysia, ). The government then launched the
second STI policy (NSTP) (–) and the third NSTP (–) to stimulate
technological upgrading.
In the s the government launched the Human Resources Development Council
(HRDC), the Malaysian Technology Development Corporation, the Multimedia
Development Corporation, the Malaysia Industry–Government Group for High Tech-
nology, and the Multimedia Super Corridor (MSC) to support structural transform-
ation of industry from low to high value-added activities. The HRDC collects per cent
of the payroll from firms with or more employees, which the firms can only reclaim
through approved training expenditure. Collaborative Research in Engineering, Sci-
ence and Technology (CREST) was formed in to strengthen R&D collaboration
between universities, government, and industry.¹³ R&D expenditure in GDP also
increased from (Figure .).
Several R&D funds have been introduced since the s: Commercialization of R&D
(); Technology Acquisition (); Biotechnology Acquisition (); Biotechnol-
ogy Commercialization (); Industrial Technical Assistance (); the Techno
(); the E-Content (); the Demonstrator Application Grant Scheme (); the
MSC Malaysia R&D Grant Scheme (); the Science Fund (); the Agro-
Biotechnology R&D Initiative (); the Genome and Molecular Biology R&D Initiative
(); the Pharmaceutical and Nutraceutical R&D Initiative (); the Fundamental
Research Grant Scheme (); the Long-Run Research Grant Scheme (); and High
Impact Research (). However, despite the long-standing role of Malaysia’s govern-
ment in funding R&D programmes, there is no systematic appraisal and monitoring
mechanism (Rasiah, ).
.. The Philippines
The Philippines’ low GDP growth rates are largely a consequence of the country’s
specialization in low-value-added activities. The Philippine Development Plan
– launched strategies for using STI to boost productivity and competitiveness
in agriculture and small businesses (including in manufacturing), especially in geo-
graphical areas dominated by poor, vulnerable, and marginalized residents. The Har-
monized Agenda for Science and Technology – sought to promote the
establishment of five government-funded centres of excellence by in
¹³ Interview conducted by the author on December in Georgetown.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
biotechnology, nanotechnology, genomics, semiconductors, and electronics design.
The Philippines Genome Centre, which operates two core facilities for DNA sequen-
cing and bioinformatics, was built at the University of the Philippines Diliman. The
Advanced Device and Materials Testing Laboratory, located at the Department of
Science and Technology’s compound in Bicutan in Taguig City, started operations in
with three laboratories in surface, thermal, chemical, and metallurgical analysis.
The Electronics Product Development Centre is due to be built at the Department of
Science and Technology in Bicutan, and will provide cutting-edge design, prototyping,
and testing facilities for printed circuit boards.
The government supported an expansion in the number of graduates, including
doctoral graduates, between and . Hence, while the Philippines only invested
. per cent of GDP in higher education in , tertiary enrolment experienced a rise
from . million in to . million in . The number of doctoral graduates more
than doubled from , in to , in (UNESCO, ). However, not only
has GERD in GDP remained low (Figure .), but neither the research undertaken in
universities nor the human capital produced by them have participated actively in the
commercialization of manufactured products in the Philippines.
.. Singapore
Through the EDB, Singapore has systematically stimulated technological upgrading in
the country, leveraging its world-class infrastructure, efficient civil service, and provi-
sion of incentives and grants in return for continuous technological upgrading by
foreign TNCs. Science parks and R&D have been supported through the development
of STI infrastructure to finance strategic technologies in knowledge-based industries.
By , the two science parks that acted as R&D hubs for companies housed more
than organizations and companies.
Singapore’s GERD-to-GDP ratio of . per cent was far below the . per cent
and . per cent enjoyed by Israel and Korea respectively (UNESCO, ;
Figure .). The government has invested heavily in the development of science and
technology at Singapore’s leading universities—the National University of Singapore
(NUS) and Nanyang Technical University—with cutting-edge research facilities,
including R&D labs, machinery, and equipment, and has opened employment in the
country to world-class scientists and engineers. Biopolis opened in to promote
biomedical research, while Fusionopolis was established in to promote ICT
research. The National Framework for Innovation and Enterprise enjoyed a total
allocation of SG$. billion during –. Singapore has emerged as a leader of
incremental innovation activity in South East Asia owing to its world-class basic
infrastructure, integration in global markets, and connectivity and coordination
between firms and organizations. Laboratories at NUS have been a major platform
for petrochemical innovations, which support over a hundred firms in Singapore
(Singapore, a; ASMI, ). Similar support is also enjoyed by the shipbuilding
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industry, which includes strong research linkages between firms, and labs in NUS and
Nanyang University (Singapore, b).
.. Thailand
Since the s, the Thai government has promoted technology diffusion and innov-
ation, starting with the National Science and Technology Development Agency, which
established the Industrial Consultancy Services in to promote alliances between
local and foreign technical consultants. The agency launched a Software Park to
stimulate innovation in start-up firms. The BOI also developed the Unit for Industrial
Linkage Development programme to strengthen linkages among small and medium-
sized manufacturers (UNCTAD, ). However, the lack of human capital, the
absence of R&D grants to stimulate design and R&D, and the lack of electronics-
based research in universities and other laboratories drove American chip manufac-
turing out of Thailand from the s (Rasiah, ). Nevertheless, designing of ICs
related to automotive systems has emerged with collaborative links with the univer-
sities of Chulalongkorn, Mongkut, and Chiang Mai (Intarakumnerd et al., ). The
founding of the Hard Disk Drive (HDD) Institute helped provide scientific infrastruc-
ture for the HDD industry by establishing a central laboratory and networks of
government laboratories. National firms, such as Hana Microelectronics, Stars Micro-
electronics Thailand, and Silicon Craft Technology, began designing customized inte-
grated circuit packaging (Intarakumnerd et al., ).
While Thailand is South East Asia’s leading producer of disk drives and automobiles,
a transition to higher value-added activities would require strong R&D funding, which,
however, fell from . per cent of GDP in to . per cent in (Figure .).
Nevertheless, the National Science and Technology Development Agency has become
an anchor for stimulating R&D, which in employed over per cent of the country’s
full-time researchers in four organizations: the National Centre for Genetic Engineering
and Biotechnology; the National Electronics and Computer Technology Centre; the
National Metal and Materials Technology Centre; and the National Nanotechnology
Centre. However, although it is part of the ten-year National Science and Technology
Action Policy (NSTAP), –, targeted at developing the STI infrastructure, it has
made little progress. The – NSTAP attempted to focus on infrastructure devel-
opment, capacity building, regional science parks, industrial technology assistance, and
tax incentives for R&D. While it set a target of per cent GERD of GDP by , it still
only offered tax exemptions for R&D without any grants up front.
Except for the Asian financial crisis period of –, all the South East Asian
market economies showed an intellectual property right (IPR) TB inferior to that of
South Korea from to . Singapore has managed to close the gap with South
Korea since , while Malaysia has improved since (Figure .). Although
there were improvements in some years, Indonesia, the Philippines, and Thailand have
remained strongly dependent on foreign intellectual property. The IPR TB figures for
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
–0.2
[X-M]/[X+M] –0.4
–0.6
–0.729
–0.8
–1
–1.2
19 1
19 3
19 5
19 7
19 9
19 1
19 3
19 5
19 7
20 9
20 1
20 3
20 5
20 7
20 9
20 1
20 3
20 5
17
8
8
8
8
8
9
9
9
9
9
0
0
0
0
0
1
1
1
19
Year
Indonesia South Korea Malaysia
Philippines Singapore Thailand
. Intellectual property trade balance, selected economies, –
Source: World Bank ().
Malaysia, Indonesia, Thailand, and the Philippines in were ., ., .,
and ., respectively. This hugely negative coefficient partly explains why firms in
these countries have not been able to upgrade into higher value-added activities to
enjoy positive de-industrialization.
.. Summary
Overall, except for Singapore, the STI infrastructure of the South East Asian market
economies have serious shortcomings. A combination of low R&D funding, especially
in Indonesia, the Philippines, and Thailand, and poor governance instruments in
Malaysia, has undermined catching up and leapfrogging in these countries. Conse-
quently, Malaysia, the Philippines, Indonesia, and Thailand have no cutting-edge
manufacturing operations. This stark reality is reflected in heavy reliance on foreign
technology as the IPRs of these countries are well below those of South Korea and
Singapore (Figure .). Despite not having national manufacturing firms at the
technology frontier, Singapore has managed to continuously renew its manufacturing
structure through ingeniously leveraging on its endowments, and attracting TNCs and
foreign researchers to support high value-added manufacturing activities. Singapore
has also managed to close the IPR trade gap with South Korea since , following
grants offered to biotechnology labs and firms.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. C
..................................................................................................................................
Manufacturing has played a major economic role in raising GDP growth, reducing
unemployment, and alleviating poverty in the South East Asian market economies,
especially since the s. Although ISI began in Indonesia, Malaysia, the Philippines,
Singapore, and Thailand in the s, the lack of performance standards and initiatives
to pressure relevant firms to export undermined the competitiveness of import-
replacing industries. Ambitious heavy industry promotion in Indonesia, Malaysia,
and the Philippines also largely failed. As IS industries drained the economies, BoP,
debt service, and rising unemployment problems drove the South East Asian market
economies to introduce EOI. Foreign direct investment arrived in the form of giant
TNCs from developed countries relocating low-end stages of production to stimulate
exports from all these economies. Indeed, FDI has been the main engine of export
manufacturing growth in all the South East Asian market economies.
Indonesia, Malaysia, Thailand, and the Philippines have all experienced premature
deindustrialization, with the value added in manufacturing gross output falling before
reaching developed status. Singapore has managed to become developed, focusing on
incremental innovation by continuously renewing its composition of cutting-edge
industries using a leveraging strategy that offers incentives to attract leading foreign
firms. In addition to shipbuilding and petrochemical industries, Singapore has also
evolved a strong bio-pharma industry. Malaysia began to develop its STI infrastructure
in but a lack of stringent appraisal mechanisms in the selection and monitoring of
firms for support caused a massive dissipation of rents. Ethnically coloured policies
also prevented industries from attracting world-class diaspora members to return and
lead both national firms and the organizations created to solve collective action
problems (Rasiah, ).
Whereas the South East Asian market economies largely prevented the twin troubles
of ‘fallacy of composition’ and ‘Dutch Disease’ from dragging them to the debt
precipice, the lack of effective policy coordination to avert such problems cost Indo-
nesia, Malaysia, the Philippines, and Thailand considerable resources. Singapore not
only managed to prevent these problems from becoming chronic, but its sophisticated
petrochemical, biotechnology, and shipbuilding industries have evolved to become
world leaders. The lack of scale, and related research in its universities, have contrib-
uted to Singapore reaching its critical limits in electronics manufacturing. However, the
remaining four market economies have populations and land space exceeding that of
South Korea and Taiwan, and therefore the contraction of the manufacturing sector
since the turn of the millennium suggests that they are facing premature de-
industrialization. While Singapore’s textile and clothing, and electricals and electronics,
and vehicle manufacturing sectors have declined, the ‘mission-oriented state’
(Mazzucato, ) has successfully removed incentives from them, rapidly moving
them away from the country and gradually replacing them with new compatible
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industries, such as biotechnology, while retaining the shipbuilding and petrochemical
industries. Indonesia, Malaysia, the Philippines, and Thailand have not managed to
create an integrated STI infrastructure that can stimulate transformation of the manu-
facturing sector to the technology frontier as South Korea and Taiwan have done.
Singapore, however, has managed to stay ahead of these countries with a sophisticated
STI infrastructure, and using a flexible strategy that has continuously renewed the
industries required to support a rise in value added.
R
Abramovitz, Moses () ‘Resource and Output Trends in the United States since ’,
American Economic Review (): –.
Akrasanee, Narongchai () Economic Development of Thailand and ASEAN Economic
Cooperation. Canberra: Australian University Press.
Alavi, Rokiah () Industrialization in Malaysia: Import Substitution and Infant Industry
Performance. London: Routledge.
Aminullah, Erman () ‘Learning, R&D Intensity and Economic Prosperity in Low R&D
Countries (LRDCs): Envisioning the Indonesian Future’. Keynote speech presented at the
th International ASIALICS conference, Jogjakarta, – September.
Amsden, Alice () Asia’s Next Giant: South Korea and Late Industrialization. New York:
Oxford University Press.
Amsden, Alice () ‘Diffusion of Development: The Late-Industrializing Model and
Greater East Asia’, American Economic Review (): –.
Anwar, Arsjad () Trade Strategies and Industrial Development in Indonesia. Canberra:
Australian National University Press.
ASMI () ‘Singapore Marine Industry Milestones’, Association of Singapore Marine
Industries (ASMI). Available at http://www.asmi.com/index.cfm?GPID=.
Bautista, Romeo () ‘Industrial Policy and Development in the ASEAN Countries’,
Philippines Institute for Development Studies, Monograph No. , Manila.
Best, Michael () The New Competitive Advantage. Oxford: Oxford University Press.
Chang, Ha-Joon () The Political Economy of Industrial Policy. Basingstoke: Palgrave
Macmillan.
Chang, Shan-Fang, Rajah Rasiah, and Wei-Meng Chan () ‘Understanding Innovations in
Malaysia’s Construction Industry: A Study of Four Large National Firms, Asian Journal of
Technology Innovation (): –.
Chenery, Hollis, Sherman Robinson, and Moshe Syrquin () Industrialization and
Growth: A Comparative Study. Washington, DC: World Bank.
Dosi, Giovanni () ‘The Nature of the Innovative Process’, in Giovanni Dosi, Christopher
Freeman, Richard R. Nelson, Gerald Silverberg, and Luc Soete (eds) Technical Change and
Economic Theory. London: Pinter Publishers, pp. –.
Edwards, Christopher () ‘Protection, Profits and Policy: An Analysis of Industrialization
in Malaysia’, PhD thesis, University of East Anglia.
Gerschenkron, Alexander () ‘Economic Backwardness in Historical Perspective’, in Bert
F. Hoselitz (ed.) The Progress of Underdeveloped Areas. Chicago, IL: University of Chicago
Press, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Hill, Hal () The Indonesian Economy since : Southeast Asia’s Emerging Giant.
Cambridge: Cambridge University Press.
Intarakumnerd, Patarapong and Peera Chaoroenporn () ‘The Roles of Intermediaries
and the Development of their Capabilities in Sectoral Innovation Systems: A Case Study of
Thailand’, Asia Pacific Business Review (S): –.
Intarakumnerd, Patarapong, Pun-Arj Chairatana, and Preeda Chayanajit () ‘Global
Production Networks and Host-Site Industrial Upgrading: The Case of the Semiconductor
Industry in Thailand’, Asia Pacific Business Review (): –.
Johnson, Chalmers () MITI and the Japanese Miracle. Stanford, CA: Stanford University
Press.
Jomo, Kwame Sundaram and Christopher Edwards () ‘Malaysian Industrialization in
Historical Perspective’, in Kwame Sundaram Jomo (ed) Industrialising Malaysia: Policy,
Performance, Prospects. London: Routledge, pp. –.
Kaldor, Nicholas () Strategic Factors in Economic Development. Ithaca, NY: Cornell
University Press.
Kim, Lin-Su () From Imitation to Innovation: The Dynamics of Korea’s Technological
Learning. Cambridge, MA: Harvard Business School Press.
Maikaew, Piyachart () ‘Automotive Industry at a Turning Point: Regional Competition
and the Shift to EVs Will Test Local Competitiveness in Cars’, Bangkok Post, January.
Available at https://www.bangkokpost.com/business//automotive-industry-at-a
-turning-point.
Malaysia () First Malaysia Plan –. Kuala Lumpur: Government Printers.
Malaysia () Second Malaysia Plan –. Kuala Lumpur: Government Printers.
Malaysia () Fourth Malaysia Plan –. Kuala Lumpur: Government Printers.
Malaysia () Fifth Malaysia Plan –. Kuala Lumpur: Government Printers.
Malaysia () Action Plan for Industrial Technology Development. Kuala Lumpur: Govern-
ment Printers.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths. London: Anthem Press.
Menardo, Amelia A. () ‘Tariff Reforms in the Philippines’. Available at https://www.
mofa.go.jp/policy/economy/apec/conference/present/philippines.pdf.
OECD () ‘Innovation in Southeast Asia—Vietnam’. Available at http://www.oecd.org/sti/
inno/innovation-in-southeast-asia---en.htm.
Oey-Gardiner, Mayling () ‘Study of the Role of the Indonesian Institute of Science (LIPI)
in Bridging between Research and Development Policy’. Final report submitted to Insan
Hitawasana Sejahtera, Jakarta. Available at https://dfat.gov.au/about-us/publications/
Documents/indo-ks-lipi.pdf.
Ofreneo, Rene () ‘Growth and Employment in De-industrializing Philippines’, Journal of
the Asia Pacific Economy (): –.
Penrose, Edith () The Theory of the Growth of the Firm. New York: John Wiley & Sons.
Phang, Eng-Fong and Hui-Heng Tan () ‘Employment and Export-led Industrialization:
The Experience of Singapore’, in Rashid Amjad (ed.) The Development of Labour-Intensive
Industry in ASEAN Countries. Bangkok: International Labour Organization, pp. –.
Phongpaichit, Pasuk and Chris Baker () Thailand: Economy and Politics. Oxford: Oxford
University Press.
Polanyi, Michael () ‘The Logic of Tacit Inference’, Philosophy (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Poot, Huib () ‘The Development of Labour-intensive Industries in Indonesia’, in Rashid
Amjad (ed.) The Development of Labour-intensive Industry in ASEAN Countries. Bangkok:
ILO Asian Employment Programme, pp. –.
Prawiro, Radius () Indonesia’s Struggle for Economic Development: Pragmatism in Action.
Oxford: Oxford University Press.
Prebisch, Raúl () ‘The Economic Development of Latin America and its Principal
Problems’. Economic Commission for Latin America. New York: United Nations Depart-
ment of Economic Affairs.
Rasiah, Rajah () ‘The Semiconductor Industry in Penang: Implications for the New
International Division of Labour Theories’, Journal of Contemporary Asia (): –.
Rasiah, Rajah () ‘Competition and Restructuring in the Semiconductor Industry: Impli-
cations for Technology Transfer and Absorption in Penang’, Southeast Asian Journal of
Social Sciences (): –.
Rasiah, Rajah () Pembahagian Kerja Antarabangsa: Industri Separa Konduktor di Pulau
Pinang. Kuala Lumpur: Malaysian Social Science Association.
Rasiah, Rajah () Foreign Capital and Industrialization in Malaysia. Basingstoke:
Macmillan.
Rasiah, Rajah () ‘Expansion and Slowdown in Southeast Asian Electronics Manufactur-
ing’, Journal of the Asia Pacific Economy (): –.
Rasiah, Rajah () ‘Industrialization in the Second-tier NIEs’, in Rajah Rasiah and Johannes
Dragsbaek Schmidt (eds) The New Political Economy of Southeast Asia. Cheltenham:
Edward Elgar, pp. –.
Rasiah, Rajah () Malaysian Economy: Structure and Social Change. Shah Alam: Oxford
University Press.
Rasiah, Rajah () ‘Innovation Policy, Inputs and Output’, in Masahito Ambashi (ed.)
Innovation Policy in ASEAN. Jakarta: Economic Research Institute for ASEAN and East
Asia, pp. –.
Rasiah, Rajah and Kamal Salih (eds) () Driving Development: Revisiting Razak’s Role in
Malaysia’s Economic Progress. Kuala Lumpur: University of Malaya Press.
Rasiah, Rajah and Xiao-Shan Yap () ‘Institutional Support, Technological Capabilities
and Domestic Linkages in the Semiconductor Industry in Singapore’, Asia Pacific Business
Review (): –.
Rasiah, Rajah and Xiao-Shan Yap () ‘How Much of Raymond Vernon’s Product-cycle
Thesis is Still Relevant Today: Evidence from the Integrated Circuits Industry’, Inter-
national Journal of Technological Learning, Innovation and Development (): –.
Reinert, Erik S. () How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor.
London: Anthem Press.
Schumpeter, Joseph () Theory of Economic Development. Cambridge, MA: Harvard
University Press.
Schumpeter, Joseph () Capitalism, Socialism and Democracy. Cambridge, MA: Harvard
University Press.
Singapore (a) ‘Energy and Chemicals, Economic Development Board (EDB)’. Available
at https://www.edb.gov.sg/en/our-industries/energy-and-chemicals.html.
Singapore (b) ‘Key Milestones, Maritime and Port Authority of Singapore (MPA)’.
Available at https://www.mpa.gov.sg/web/portal/home/maritime-companies/research-
development/milestones-projects/key-milestones.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Singer, Hans () ‘The Distribution of Gains between Investing and Borrowing Countries’,
American Economic Review (): –.
Smith, Adam () The Wealth of Nations. London: Strahan and Cadell.
Tambunlertchai Somsak and Chetsada Loohawenchit () ‘Labour Intensive and Small
Scale Manufacturing Industries in Thailand’, in Rashid Amjad (ed.) The Development of
Labour Intensive Industry in ASEAN Countries. Bangkok: ILO Asian Employment
Programme.
Tee, Kian-Wee () ‘Policies for Private-sector Development in Indonesia’. ADB Institute
Working Paper No. , Tokyo.
UNCTAD () Trade and Development Report. Geneva: United Nations Conference for
Trade and Development.
UNCTAD () ‘Transfer of Technology for Successful Integration into the Global Econ-
omy: A Case Study of the Electronics Industry in Thailand’. Working Paper No. UNCTAD/
ITE/IPC//. Geneva: United Nations Conference for Trade and Development. Avail-
able at http://unctad.org/en/docs/iteipc_en.pdf.
UNESCO () UNESCO Science Report: Towards . Geneva: United Nations Educa-
tional, Scientific and Cultural Organization (UNESCO).
Wade, Robert H. () Governing the Market: Economic Theory and the Role of Government
in East Asian Industrialization. Princeton, NJ: Princeton University Press.
Wong, Poh-Kang () ‘Leveraging Multinational Corporations, Fostering Technopreneur-
ship: The Changing Role of S&T Policy in Singapore’, International Journal of Technology
Management (/): –.
World Bank () World Development Indicators. Washington, DC: World Bank.
World Bank () World Development Indicators. Washington, DC: World Development
Institute.
WTO () ‘WTO Trade Review: Singapore’. Available at http://www.intracen.org/BB-
---WTO-Trade-Policy-Review-Singapore/.
Yap, Xiao-Shan and Rajah Rasiah () Catching Up and Leapfrogging: The New Latecomers
in the Integrated Circuits Industry. Abingdon: Routledge.
Young, Allyn () ‘Increasing Returns and Economic Progress’, Economic Journal ():
–.
Zhang, Miao, Rajah Rasiah, and John Kean-Yew Lee () ‘Navigating a Highly Protected
Market: China’s Chery Automobile in Malaysia’, Journal of Contemporary Asia ():
–.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
......................................................................................................................
,
,
......................................................................................................................
. I
..................................................................................................................................
I the s and s, massive and rapid privatization-cum-liberalization was the
core strategy of industrial reform prescribed by the mainstream transition economics
for socialist countries. It was argued that ‘the government is in a race against time’ and
the achievement of reforms cannot be maintained unless privatization occurs ‘quickly
and on a vast scale’ (Sachs, : ‒). The existing industrial system inherited from
the communist past was seen as an inefficient fossil to be phased out, and the challenge
of restructuring was primarily ‘to efficiently close much of the old structure and allow
for a rapid expansion of a new one’ (Blanchard et al., : ). Many argued that
transition economies should not imitate the industrial policies of Japan and South
Korea, and instead should shift their state‒business relations towards an ‘arm’s-length’
type under competitive market structures and private ownership.
China’s reforms since the s, however, have been characterized by a combination
of market-oriented transition and the persistent practice of industrial policies. A key
dimension of China’s industrial policy has been to transform and consolidate the core
of its large state-owned enterprises sector into a batch of state-controlled big businesses
with international competitiveness. The rise of China’s ‘national champions’, defined
here as the giant central state-controlled corporations, business groups, and financial
institutions in the ‘commanding heights’ sectors, has reshaped the landscape of China’s
business system. Now China has the second-largest number of Fortune Global
companies in the world. In , there were a total of large firms from Mainland
China in the Fortune Global by revenue, among which fifty-eight are central
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
state-controlled national champions (apart from seven large financial institutions; the
rest are under the supervision of China’s State-owned Assets Supervision and Admin-
istration Commission, hereafter SASAC). Orchestrated by state-led restructuring, each
of these national champions occupies a leading position in China’s domestic markets in
their respective business areas and many of them, such as CNOOC, Sinopec, China
State Construction Engineering Corporation, COSCO, CITIC Group, Bank of
China and Industrial & Commercial Bank of China, have started to build significant
operations outside China, going increasingly global.
This chapter examines the origin and evolution of China’s national champions
industrial policy in the context of economic reforms. It reviews three key analytical
perspectives on this issue: () the mainstream transition economics view; () the state
capitalism view; and () the late industrialization and developmental state view. It then
examines how state industrial policy has shaped the rise of China’s national champions
in both the industrial and financial sectors. It shows that the central plank of China’s
national champions industrial policy is to restructure the core assets and enterprise
units of the socialist command economy into a batch of state-controlled corporations,
business groups, and financial institutions viable in a predominantly market-oriented
environment. China has chosen to reinvent the core of its ‘old structure’ by innova-
tively combining the existing bureaucratic institutions and resources with new gov-
ernance forms and practices learnt from the advanced economies’ capital markets and
big businesses. This process has involved continuous organizational learning and
capability building at both government and enterprise levels and has led to some
unique features of state‒business relations in China. The current governance regime
of China’s national champions can be characterized as a networked hierarchy that
interweaves multiple mechanisms of institutional bridging and reciprocal control. This
chapter concludes by evaluating the position of China’s national champions in the
global business system. It shows that despite their remarkable size and growth, China’s
national champions are still at a relatively early stage of developing their international
competitiveness.
. I P, B B,
C’ E R
..................................................................................................................................
The period since the early s has witnessed China’s persistent national champions
industrial policy consolidating the core of China’s existing industrial ministries and
financial system into a batch of large central state-controlled corporations, business
groups, and financial institutions (Nolan, a, b; Sutherland, ; Li, ).
However, until recently, this aspect of China’s industrial policy had been relatively
overlooked by the mainstream literature on China’s economic reforms and industrial
development. This section reviews three key analytical perspectives which provide
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
different frameworks to understand China’s national champions industrial policy and
reforms: () the mainstream transition economics view; () the state capitalism view;
() the late industrialization and developmental state view. They reflect different
perspectives on the roles of industrial policy and big business in economic development
and transition.
.. The Mainstream Transition Economics View
Mainstream transition economics pays limited attention to the roles of oligopolistic big
business in the economic and technical progress of advanced capitalist countries,
tending to assume that countries grow prosperous through free markets and perfect
competition. It interprets the ‘East Asian miracle’ primarily through the lens of market
forces, getting the prices right and following comparative advantage (World Bank,
; Stiglitz, ; Nolan, a; Lin et al., ). Under Communist planning, China
and the former USSR each had a small number of relatively large plants in many
industrial sectors such as iron and steel, power equipment, aerospace, and defence
industries, but neither had real modern multi-plant corporations with substantial
vertical integration and diversification like Exxon Mobil, General Electric, and Siemens
(Nolan, a; Shmelev and Popov, ; Popov, ; Popov, Chapter in this
volume). In advising on the industrial reforms of transition economies, mainstream
economics focuses primarily on the privatization of individual plants and disregards
the feasibility and desirability of merging and developing these plants to produce large,
globally competitive multi-plant firms (Nolan, a, b). Consistent with the
Washington Consensus, the ‘transition orthodoxy’ dismisses industrial policy as
government-induced distortions that undermine market efficiency and fairness.
National champions are typically viewed as either powerful interest groups influencing
the government’s policymaking for their own benefit or the state’s instruments for
achieving political goals, such as maintaining control and social stability.
In the mainstream transition economics literature, China’s reforms are often char-
acterized as ‘the retreat of the state, and the advance of the market’, their dominant
logic described as the gradual establishment of a free and competitive private enterprise
system by changing the government‒business relationship to one of an arm’s-length
type (Tian and Liang, ; Qian, , ; Qian and Wu, ; Lin et al., ; Wu,
; Steinfeld, ). The key to understanding China’s rapid economic growth and
industrial development during the reforms is, it is argued, China’s shift towards an
industrial structure that reflects its comparative advantage. Small and medium-sized
enterprises (SMEs) are regarded as the most dynamic part of China’s industrial
economy (World Bank, ; Lin et al., ). In assessing China’s industrial policies
of targeting the perceived ‘pillar industries’ and supporting selected large state-owned
enterprises (SOEs) in the s, World Bank (: ) argues that ‘it is difficult to say
what this policy really means’ and concludes that ‘it is quite likely they work at cross
purposes and in unintended ways that distort development’. When China
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
implemented the strategy of ‘grasping the large and letting go of the small’ in the late
s and early s, the central government’s policy focus was on ‘grasping the
large’, that is, concentrating resources and policy support on targeted large SOEs
through the privatization of local small and medium-sized SOEs (Wang, ;
Huang, ). However, neo-liberal analyses of China’s industrial reforms tend to
focus exclusively on the ‘letting go of the small’ (Li, ). Around China’s WTO entry
in , it was widely predicted that state‒business relations in the country would
converge towards an arm’s-length type compatible with the norms of Western modern
market economies and ‘unless privatized, the SOEs have no chance of surviving’ in
market competition (Tian and Liang, : ; Qian and Wu, ). With regard to
China’s state control over large SOEs, Qian () interpreted it as a second-best
transitional arrangement which would soon be phased out as the market reforms
deepen. It was argued that in the early stage of its development, China’s industrial
economy should be based on small-scale, labour-intensive industries rather than using
industrial policy to support the growth of big businesses in capital-intensive and
technology-intensive industries (Lin et al., ; Lin and Chang, ). China’s indus-
trial policymaking to support national champions is criticized as a departure from
economic rationality and a symptom of the ‘partial reform traps’ that lead to capital
misallocation and rent seeking (Steinfeld, ; Huang, ).
.. The State Capitalism View
Recent studies on the rise of China’s ‘state capitalism’ or ‘state-led capitalism’, however,
suggest that there have been fundamental changes in the nature of China’s industrial
reforms since the early s. Some even argue there was a ‘great reversal’ of reforms as
the state-controlled system regained the policy upper hand over the entrepreneurial
private sector (Bremmer, ; Huang, , ). While earlier studies along these
lines tend to label China as a unitary and yet only vaguely defined model of ‘state
capitalism’, the recent political-economy literature has produced more nuanced per-
spectives and many important insights into the common features and sectoral variation
in state control and regulation, corporate governance, ownership patterns, and managerial
practices of China’s national champions (Lin and Milhaupt, ; Liebman and Milhaupt,
; Milhaupt, ; Milhaupt and Zheng, ; Naughton and Tsai, ).
The focus of this ‘state capitalism’ literature is not on the aggregate ownership
structure of China’s industrial system, but on the significance of China’s industrial
policy, the development of a robust state sector in combination with a predominantly
market-oriented economy and emerging capital markets, and in particular, the rise of
China’s national champions during recent decades (Lin, ; Szamosszegi and Kyle,
; Naughton and Tsai, ; Lardy, ). The ‘state capitalism’ narratives empha-
size that a crucial part of China’s industrial system has been evolving along a heterodox
path defying the mainstream model of neo-liberal transition and institutional
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
convergence (Li, ). In particular, Pearson () argues that China’s economy has
developed a hierarchical, three-tiered structure, with large state-controlled enterprises
in strategic ‘commanding heights’ industries in the top tier. As China’s party-state
becomes disengaged from direct management and ownership of enterprises in non-
strategic economic sectors, it has upgraded its interests and capability in developing
national champions in strategic industries. Emphasizing the role of China’s central
government, Lin () argues that China has been evolving towards ‘centrally man-
aged capitalism’. There is now also a growing literature that analyses the central role of
the Chinese Communist Party (CCP) in governing China’s national champions
(Brødsgaard, ; Lin and Milhaupt, ; Liebman and Milhaupt, ; Li, ,
; Leutert, a, b).
.. The Late Industrialization and Developmental
State View
The literature of late industrialization and the developmental state associates the degree
of state intervention in industrialization with the level of backwardness as well as the
timing and international environment for latecomers seeking to catch up with
advanced industrial economies. Gerschenkron’s () backwardness thesis contends
that the more backward a country is (vis-à-vis early developers), the more state-led its
process of industrialization tends to be. The rise of the communist party-state and
command economy in the USSR and China can be seen as extreme forms of state
intervention to promote late industrialization. In the s, emulating the organiza-
tional structures of modern capitalist big businesses, the Soviet communist party had
grouped major industrial enterprise units into a number of ‘trusts’. Then as the USSR
pushed forward rapid industrialization through the First Five-Year Plan under Stalin,
these ‘trusts’ were reorganized as various ministerial departments, absorbed by the
party and state’s administrative hierarchies as the foundation of the Stalinist system of
industrial ministries (Nove, ; Harrison and Markevich, ). Pursuing heavy
industries-oriented catch-up, China developed similar institutional arrangements in
the s and s (Lin et al., ; Wu, ; Li, ). The rapid industrialization of
Japan and South Korea, with their extensive use of industrial policy, has provided a
different paradigm from both the neo-liberal Washington Consensus and socialist
central planning. Japan and South Korea have been considered quintessential examples
of late development, in which the developmental state coordinated economic develop-
ment through rational industrial policies designed and implemented by an elite
bureaucracy (Johnson, ; Amsden, , ; Amsden and Singh, ; Chang,
; Kasza, ; Lee, Chapter in this volume).
The late industrialization and developmental state literature has emphasized the
complex relations and crucial roles of the state and big business in modern economic
development and technological innovation (Gerschenkron, ; Chandler, ,
; Chandler et al., ; Nolan, a, b; Colpan et al., ). With economies
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
of scale and scope, big businesses are ‘the fertile learning ground for technological,
managerial, and organizational knowledge for an entire economy’ (Chandler et al.,
: ; Penrose, ). Lee et al. () have shown that big businesses have a
significant and positive effect on economic growth and are positively associated with
stability in economic growth. Many developing countries have fewer big businesses
than predicted by their size and thus failed to escape the middle-income trap (Lee,
). Apart from responding to market failures (or institutional void), large business
groups in developing countries can serve as the organizational device for economic
catch-up under state activism (Lee, , ; Hahn and Lee, ; Khanna and
Yafeh, ; Lee and Jin, ). In particular, large business groups in both Japan
(kereitsus) and South Korea (chaebols) featured prominently in their economic mir-
acles. Both Japanese and South Korean governments used various industrial policies to
support their domestic big businesses to gain international competitiveness, including
actively encouraging mergers between their leading indigenous firms in strategic
industries, but they also encouraged oligopolistic rivalry to avoid monopoly, using
exports and international market shares as the performance goals to evaluate big
businesses supported by government policy (Amsden and Singh, ; Chang, ;
Amsden, ; Nolan, a, b; Lee, Chapter in this volume).
China’s national champions industrial policy has drawn inspiration from non-
mainstream economic theory and the policy practices of other late industrializing
countries as well as from political considerations of nationalism and power (Nolan,
a). In particular, it has been heavily influenced by selective policy learning from
Japan and South Korea (Heilmann and Shih, ). As Nolan () pointed out in the
s, it is conceivable that the communist party bureaucracy in China could adapt
and be effectively transformed into a new type of developmental state. Rather than to
‘efficiently close much of the old structure’, an alternative approach for enterprise
reform could be to learn from the industrial policies used by Japan and South Korea
during their catch-up phase of growth, so the enterprise system built up under the
command economy could be upgraded instead of demolished. Although it was largely
overlooked in the World Bank’s policy prescriptions for transition economies, China
has in effect adopted this heterodox approach over the past three decades (Nolan and
Wang, ; Nolan, a, b; Sutherland, ; Li, ). There is now a growing
literature of firm-level empirical studies examining China’s industrial policies and the
performances of China’s national champions since the early s, such as the pio-
neering contributions of Nolan (a, b, , ) on the development of
China’s national champions in multiple sectors; as well as a number of single-sector
studies, including, for example, the petroleum and petrochemical industry (Zhang,
, , ), the aerospace and aviation industry (Liu, ), the automobile
industry (Sutherland, ; Lu and Feng, ; Thun, ), the shipbuilding industry
(Moore, ), the coal mining industry (Nolan and Rui, ; Rui, ), the steel
industry (Sun, , ; Nolan and Rui, ), and banking (Nolan, ).
China’s industrial policy is broadly similar to those of Japan and South Korea in
terms of performing the functions of stimulating investment and structural changes
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
with the development of large indigenous business groups under the guidance of an
elite economic bureaucracy. However, China’s model also fundamentally differs from
Japan and South Korea in several key aspects, especially in terms of direct state
ownership and control, the institutional configuration of state bureaucracy, and the
openness to foreign direct investment (FDI) (Naughton and Tsai, ). Moreover,
China’s national champions are typically not as diversified across a range of industrial
sectors as Japanese and South Korean business groups. They tend to be more vertically
integrated, each focusing on a core sector, such as CNPC and Sinopec in oil and gas,
ICBC in commercial banking, China Mobile in telecom, and CRRC Group in railway
rolling-stock manufacturing (Nolan, a, b; Steinfeld, ; Lin and Milhaupt,
). Fierce competition in China’s domestic markets with high penetration by
foreign multinational corporations tend to restrict excessive diversification of domestic
firms (Lee and Woo, ). China’s central government has also directed that its
national champions should focus on their core business areas rather than pursuing
unrelated diversification (Li, ). Being less diversified, China’s national champions
might be more vulnerable to firm-specific or sector-specific risks than Japanese ker-
eitsus and Korean chaebols (Lee and Woo, ), but this is mitigated by common
strategic state ownership in these national champions. From this perspective, China’s
industrial policy has generated innovative features that adapt to its own specific
political and economic conditions as well as a different international policy environ-
ment from that which Japan and South Korea encountered in their catch-up (Nolan
and Wang, ).
. I P R
C’ N C
..................................................................................................................................
China’s national champions industrial policy practices reflect its unorthodox approach
of reforming its former central planning system and promoting industrial catch-up.
The historical origin of China’s national champions can be traced back to the mid-
s, when all large-scale industrial production and finance in Mainland China were
consolidated into a handful of vertical administrative hierarchies led by the Chinese
Communist Party bureaucracy. With decades of reform experiments, China has
selectively imitated the governance forms, corporate structures, and practices of
advanced industrial countries, and combined them with the existing institutional
arrangements and resources in its bureaucratic structures. In particular, since the
early s, a key goal of China’s industrial policy has been to nurture and consolidate
selected large enterprise units into a number of modern large corporations and
business groups as China’s ‘main force’ to catch up and compete with Western
multinational big businesses. With continuous organizational learning and capability
building at the levels of both government bureaucracy and enterprises, the core
productive assets of China’s system of industrial ministries were transformed into a
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
group of national champions under SASAC. Parallel restructuring has occurred in the
state-controlled financial system which has given rise to a group of increasingly
modernized, giant financial institutions as China’s national champions in finance.
.. The Rise of China’s National Champions
in Industrial Sectors
China’s policy experiment of restructuring the Stalinist system of central industrial
ministries into certain forms of large multi-plant business organizations under the
state’s control has a long history. It can be traced back to the early s when
President Liu Shaoqi proposed that China should establish a number of giant national
‘corporate trusts’ (tuolasi) as socialist China’s counterparts of Western big businesses.
In the s, the State Economic Commission (SEC) in China was tasked with studying
how modern big businesses were organized in advanced industrial countries such as
the United States, the United Kingdom, France, and Japan, notably including some
relatively detailed analyses of General Electric and Westinghouse Electric, as well as
earlier Soviet practices under Lenin. While this policy approach was halted by political
campaigns launched by Chairman Mao, the long-term impact of this essential idea
recurred in different forms. In the s, China had two competing industrial policy
approaches. On the one hand, China established a set of large central state-controlled
zonggongsi (literally translated as ‘general corporation’), such as Sinopec, as national
administrative corporations to emulate Western big businesses. On the other hand, the
dominant approach of industrial reforms promoted decentralization and enhancing
‘enterprise autonomy’ for individual plants. Many large industrial plants or enterprise
units previously controlled by central industrial ministries were transferred to local
governments (primarily at the levels of provinces and cities). Challenged by decentral-
ization reforms, some industry-wide zonggongsi were dissolved, while others devolved
managerial authority to their subordinate plants, with varied outcomes across sectors
(Li, , ).
Since the early s, however, industry policy of nurturing national champions has
been a high priority endorsed with strong political commitments by China’s leadership.
Building a number of central state-controlled oligopolistic big businesses in the form of
large corporations and large business groups has been at the core of China’s industrial
policymaking over the past three decades. These national champions are supposed not
only to dominate the ‘commanding heights’ of China’s national economy, but also to
gradually develop international competitiveness. Indeed, as China deepens its integra-
tion with the global economy, domestic industrial consolidation is regarded as impera-
tive for national champions to survive and compete in international markets (Nolan,
a, b; Sutherland, ; Li, ; Naughton, ). This policy logic is
illustrated by the following quote from Wu Bangguo, former vice premier of China’s
State Council in charge of industrial reforms in the late s and early s:
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
In our world today, economic competition among nations is in fact among each
nation’s large enterprises and business groups. A nation’s economic might is
concentrated and manifested in the economic power and international competi-
tiveness of its large enterprises and business groups . . . the United States, for
example, relies on General Motors, Boeing, Du Pont and a batch of other multi-
national corporations. Japan relies on its six large business groups and Korea relies
on its ten large commercial conglomerates. In the same way now and in the next
century our nation’s position in the international economic order will be to a large
extent determined by the position of our nation’s large enterprises and business
groups . . . If we let our strong large-scale enterprises and business groups all fight
alone, everyone will still find it difficult in the ever-intensifying domestic and
international competition to compete on equal terms with large international com-
panies. We must therefore unite and rise together, develop economies of scale and
scope and nurture a ‘national team’ capable of entering the world’s top .
(Jingji Ribao, January , quoted from IIECASS, : )
During this period, instead of creating industry-wide monopolies or pursuing com-
prehensive decentralization, China’s central government selected the core productive
assets and enterprise units in sectors perceived as strategic, carved them out from their
respective ministries, consolidated them into large central state-controlled corporate
groups, and promoted oligopolistic rivalries between them. Those assets and enterprise
units deemed outside this category were decentralized and privatized as the reforms
proceeded. For example, the Ministry of Electricity Industry in China was first
reorganized into the State Electricity Industry Corporation as an industry-wide zong-
gongsi, then split up into separate corporate groups; the ministries of coal, chemicals,
machinery, and metallurgy industries were downgraded to state bureaus and later
reorganized as industrial associations; the Ministry of Post & Telecommunications
and Ministry of Electronics Industry were merged. All of them had their selected core
assets carved out and reorganized as large corporate groups (Li, ).
By , most of the key large designated ‘backbone’ state enterprise units in China’s
system of central industrial ministries had been carved out and consolidated into
large central state-controlled business groups. They constitute China’s ‘national
team’ in industrial sectors. SASAC was established to exercise state ownership and
supervise these business groups on behalf of the party and state. Far from being a
passive shareholder, SASAC has actively shaped the strategies and structures of its
subordinate big businesses. As stated by Li Rongrong, head of SASAC between
and , the goal of SASAC is that ‘China must nurture its own multinationals to
challenge the dominance of foreign corporations’ and SASAC was to ‘vigorously
pursue a strategy of creating major corporate conglomerates’ and ‘accelerate the
strategic adjustment of China’s economic structure’ (Buckley, ). Without taking
the boundaries of its subordinate firms as given, SASAC directed that the business groups
under its supervision should be consolidated into eighty to one hundred competitive big
businesses in targeted strategic industries, among which thirty to fifty were supposed to
become large corporate groups with strong international competitiveness (SASAC, ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
As Naughton () commented, ‘increasingly, the SASAC formulates its agenda in terms
that a Wall Street investment bank would understand’; under SASAC’s supervision, each
of these large business groups were supposed to become No. , , or in the markets of its
core business areas, or it would be discarded through state-directed mergers, acquisitions,
or even outright bankruptcy. Guided by this overarching policy goal, SASAC has initiated
comprehensive reform programmes to restructure and strengthen the national team. At
the industry level, it has clarified the definition of strategic industries targeted by the state
to maintain control. According to SASAC’s designation, central state-controlled business
groups should operate in three categories of sectors: () key industries concerning national
security and the lifeline of the national economy; () basic and pillar industries; and ()
other targeted industries. The first category of key industries comprises seven sectors:
defence, power generation and distribution, oil and gas and petrochemicals, telecommu-
nications, coal, aviation, and shipping. The state maintains absolute control over these
sectors, promoting a number of large ‘backbone’ firms within them as first-class global
companies (Li, ).
At the firm level, transforming traditional state-owned enterprises into corporations
is at the core of SASAC’s policy agenda. Corporatization clarifies the relations between
owners and managers, the scope of managerial authority and responsibility, and
incentive mechanisms (Naughton, ). Establishing modern corporate governance
structures and listing their minority stakes in stock markets is critical for the rise of
China’s national champions, with the government filtering potential candidates for
public listing on domestic and international stock markets and prioritizing the needs of
targeted large ‘key’ enterprises. In particular, the late s saw the rise of international
stock market listings for China’s central state-controlled corporate groups carved out
from various industrial ministries or the State Council. The pioneering deals included
the initial public offerings (IPOs) of China Mobile, PetroChina (the listing company of
CNPC), and Sinopec. Each of these companies took over a large chunk of industrial
assets and enterprise units previously managed under their old industrial ministries. It
was these international listings that started to bring China’s emerging ‘national team’
onto the global stage.
Since its establishment, SASAC has been a major force shaping the use of stock
markets to support national champions. The listing strategy preferred by SASAC is the
holistic IPO, which corporatizes each entire business group as a whole and lists its
minority stakes, rather than separately listing the subsidiary enterprise units of the
larger business group. For example, China Railway Group as a whole listed a minority
stake of per cent in Shanghai and Hong Kong stock markets for RMB. billion in
; China State Construction Engineering Corporation as a whole listed a minority
stake of per cent in Shanghai for around RMB. billion in . After their IPOs,
national champions can raise further capital through various secondary offerings and
refinancing without diluting the central government’s corporate control (Walter and
Howie, , ; Li, ).
Under its industrial targeting framework, SASAC has led several rounds of industrial
restructuring and consolidation. Most of China’s national champions started as rela-
tively loosely amalgamated groupings. With a core ‘parent company’ serving as the
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
group’s headquarters, each group incorporated many ‘son companies’, ‘grandson
companies’, and even ‘great-grandson companies’ engaged in a wide spectrum of
disparate business activities, many of which have nothing to do with the group’s
designated core business areas. While diversification might be profitable from the
perspective of the individual group, from the central government’s point of view it
was considered detrimental to the overall goal of strengthening China’s ‘national team’.
To rein in ‘undisciplined’ diversification, SASAC has designated ‘core businesses’ for
each of the national champions. The approach of SASAC is to consolidate national
champions’ designated core businesses, gradually spinning off their existing non-core
businesses and discouraging new investments in non-core business areas. To achieve
this goal, SASAC strengthened its supervision of national champions’ investment
management process and required them to obtain its approval before making substan-
tial investments in non-core business areas. It also pushed national champions to
streamline their internal management hierarchies and improve their core competences
in the designated key business areas.
To strengthen the international competitiveness of China’s ‘national team’ as a
whole, SASAC has conducted a series of mergers and consolidation programmes
among China’s national champions. For instance, SASAC consolidated China’s avi-
ation industry in with the merger of the Aviation Industry Corporation of China
I and II. Over the past decade, SASAC has consolidated a variety of sectors including
transportation infrastructure, machinery building, energy, steel and non-ferrous metal-
lurgy industries, with the rate of state-led mergers accelerating in recent years. For
example, in , SASAC merged CNR Group and CSR Group into CRRC, which has
overtaken Alstom and Siemens to become the world’s largest manufacturer of railway
equipment. In , SASAC merged Baosteel Group and Wuhan Iron & Steel Group to
create the second-largest steel producer in the world. In , it further merged China
Guodian Corporation and Shenhua Group into China Energy Investment Corporation
(China Energy), forming the world’s largest producer of coal, thermal power, wind
power, coal-to-liquid fuels and coal chemicals. The guiding principle of SASAC-led
restructuring is to transform the national team into a small number of large corpor-
ations and business groups capable of dominating their core business areas in the
domestic markets and competing against top incumbent multinationals in their
respective industries. By the end of , the original business groups under
SASAC had been restructured and consolidated into ninety-six groups. Between
and , the total assets of these business groups under SASAC increased
from RMB. trillion to . trillion, growing around per cent per annum on
average. Their combined revenues and profits increased from RMB. trillion and
. trillion in to RMB. trillion and . trillion respectively in . The total
taxes they paid to the state also grew from RMB. trillion to over trillion during this
period (SASAC, , ). Occupying the ‘commanding heights’ of China’s strategic
sectors such as oil and gas, power generation, telecommunications, aerospace, aviation,
automobile, mining, airlines, and nuclear, these business groups are a key pillar of
China’s industrial economy.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
.. The Rise of China’s National Champions in Finance
Between the s and the s, China’s financial system was organized as a ‘mono-
bank’ that amounted to no more than a bureaucratic appendage of China’s Ministry of
Finance. Driven by a combination of market-oriented reforms and industrial policies
since the s, China has now developed a complex network of financial institutions,
with a handful of large state-controlled commercial and policy banks, asset manage-
ment companies, and insurance companies, and two stock exchanges at the apex of
the system. China’s financial reforms have given rise to its national champions in
finance, which also sustain critical support for the reforms and growth of the
industrial-sector national champions as they channel financial resources to support
the targeted firms.
The focus of China’s financial reforms in the s was to deal with the soft-budget
constraints and moral hazard inherent in China’s enterprise system. The reforms
aimed at carving out financial institutions from the government bureaucracy and
providing them with more operational autonomy. In particular, China established
three new state-owned policy banks: China Development Bank, the Export-Import
Bank of China, and Agriculture Development Bank of China. The idea was to reduce
the policy burdens facing China’s large commercial banks by spinning off their policy
loan responsibilities to the three new policy banks. However, this separation of policy
banks and commercial banks did not reduce the importance of large commercial banks
in China’s industrial policy. While China Development Bank and the Export-Import
Bank of China have played increasingly important roles in financing targeted large
enterprises, large commercial banks have consistently been the chief source of funding
for China’s industrial restructuring and large state-owned enterprises reform. In
particular, between and , the five largest commercial banks generated well
over RMB billion of non-performing loans to their SOE clients. The accumulation
of these non-performing loans was partly due to inefficiency and lax internal control
within these banks, as well as interference by various levels of local government, but
also due to absorbing the costs of implementing the central government’s industrial
policy (Li, ).
In the context of the Asian financial crisis and China’s entry into the WTO, it
became increasingly clear that China’s commercial banks had profound weaknesses.
With massive non-performing loans, weak risk management, backward technologies
and operational mechanisms, together with deeply problematic corporate governance,
their prospects of competing with the giant global banks on the ‘global level playing
field’ of the WTO were bleak (Nolan, ). In the late s, China’s central
government implemented major banking reforms to mitigate financial-sector fragility
and improve the competitiveness of its large commercial banks. The state arranged a
massive capital injection of RMB billion into the four largest state-owned commer-
cial banks (Yi, ). By spinning off staff from the commercial banks, China Orient,
Cinda, Great Wall, and Huarong were established in as the ‘Big Four’ asset
management companies (AMCs) under the Ministry of Finance. Funded by the
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Ministry of Finance (MoF) and the People’s Bank of China, they took on around
RMB. trillion of problematic assets at face value from the China Construction Bank
(CCB), Bank of China (BOC), Industrial and Commercial Bank of China (ICBC),
Agriculture Bank of China (ABC), and China Development Bank (CDB) in –.
While these asset acquisitions cleaned up the big banks’ balance sheets, they fell short
of significantly strengthening their risk-management capabilities. Indeed, as their
lending grew in subsequent years, non-performing loans rapidly accumulated again
to reach a staggering level of around RMB. trillion by the end of . This made the
big banks vulnerable against the backdrop of China’s WTO entry, as China was
expected to open its financial services sector to foreign financial institutions after .
Following intense policy debates in ‒, China announced the goal of developing
‘internationally competitive modern financial enterprises’ and decided to continue to
restrict the roles of foreign financial institutions in China, limiting their permitted
ownership shares in China’s indigenous financial institutions. China’s central govern-
ment also decided not to split up the large state-owned commercial banks, but to reform
them as ‘complete corporate entities’. This entailed further removals of non-performing
loans; creating a strategic partnership with leading global banks to facilitate learning;
investing heavily in advanced information technology; upgrading their risk management,
human resources, and operational mechanisms; and eventually floating their minority
shares on international and domestic stock markets. To implement this strategy, China’s
central government established the Central Huijin Investment Corporation in as
the key organizational vehicle to facilitate the reform of targeted financial institutions.
The Big Four AMCs were directed to acquire a second batch of non-performing loans
between and from big commercial banks, totalling around RMB. trillion
(Walter and Howie, ). The MoF also stepped in directly and made an innovative
arrangement establishing ‘co-managed funds’ with ICBC and ABC respectively in
and . Funded by the issue of MoF debts, the central government further offloaded
around RMB billon of non-performing loans from ICBC and ABC into the co-
managed funds. By , China’s five largest commercial banks had all completed their
public listings in Shanghai and Hong Kong Stock Exchanges. All but ABC had introduced
leading global financial institutions as foreign ‘strategic investors’ to acquire some por-
tions of their minority stakes. Public listings on stock markets exposed these banks to
the scrutiny of global investors and provided them with market-based capital-raising
channels and discipline (Pan, ; Nolan, ). While these public listings amount
to partial privatization, China’s central government has maintained absolute majority
ownership after their IPOs; it remains the single largest shareholder in all of the
five largest commercial banks and still fully owns the three policy banks. During
the restructuring process, China’s central government prohibited foreign financial
institutions from acquiring control of any major domestic financial institutions in
China. Global banks such as Citigroup and HSBC had to build up their own branch
networks step by step in China. By , when all the five largest state-controlled
commercial banks had completed their public listings, foreign banks only accounted for
around per cent of China’s total financial assets (Walter and Howie, ; Nolan, ;
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
Li, ). Over the past decade, China’s national champion banks have ranked among the
global top banks in terms of revenue, profits, market capitalization, and capital adequacy
ratios, while the market shares of foreign banks remain negligible in China despite the fact
that China’s government has removed many of its policy restrictions.
Guided by the state’s industrial policy, there has been close strategic cooperation
between China’s national champions in industrial sectors and in finance. Large state-
controlled banks were crucial in channelling credit to support corporate restructuring
in the industrial sectors. For example, in the s, inspired by the Japanese experience,
China’s central government designated ‘main banks’ to guarantee credit supply to
(later expanded to ) key enterprises. In the early s, the central government
approved extensive debt/equity swaps for central state-owned business groups, with a
total of around RMB billion in debts owed to big banks converted into equities held
by the Big Four AMCs and China Development Bank, which profoundly relieved the
financial burdens facing those enterprises (SASAC, : ). Guided by the industrial
policy to upgrade China’s aircraft industry, Aviation Industry Corporation of China
(AVIC) established various strategic partnership agreements with China’s banking
champions, gaining RMB billion in credit lines from them in . Commercial
Aircraft Corporation of China (COMAC) received over RMB billion in credit-line
support from these banks by (Li, ).
Both state-controlled commercial banks and policy banks have played crucial roles
in financing the overseas business growth of China’s industrial national champions.
For example, China Development Bank and the Export-Import Bank of China are the
most important strategic partners of China’s oil national champions (Sinopec, CNPC,
and CNOOC) in their efforts to secure long-term supplies of oil and gas overseas, with
various ‘loan for oil’ and ‘loan for gas’ deals with countries such as Turkmenistan,
Kazakhstan, Ghana, Venezuela, Brazil, and Russia totalling around US$ billion
(Jiang and Sinton, ; Downs, ; Jiang and Ding, ; Zhang, ).
. S‒B R
G C’ N
C
..................................................................................................................................
As shown earlier in the chapter, the central plank of China’s national champions
industrial policy is to transform the core assets and enterprise units of the former
command economy into large state-controlled corporations and business groups
that are competitive in a predominantly market-oriented environment. Rather than
‘efficiently closing much of the old structure’, China has chosen to reinvent the core of
its old industrial structure. This process has taken advantage of the existing institutions
and resources of the party-state, and has innovatively combined them with new
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
institutional elements, governance forms and practices learnt from advanced econ-
omies. It involves continuous capability building, learning, and organizational changes
at both the government and enterprise levels, which have also led to some special
features of state‒business relations in China.
.. Government Capability and Learning
In the s and s, the ‘transition orthodoxy’ focused on excluding communist
bureaucrats from participating in the reforms of transition economies. It was argued
that ‘the collapse of communist one-party rule was the sine qua non for an effective
transition to a market economy’; ‘it is naïve to think of existing bureaucracy as
equipped, professionally and temperamentally, to implement sophisticated policies
based on Western-style theories of the “second best”’; and ‘the bureaucracy cannot be
relied upon for efficiency in regulating monopoly prices, promoting infant industries, or
implementing industrial policy’ (Lipton and Sachs, : –). In China, however,
industrial reforms have been consistently led by the existing communist party bureau-
cracy with emphases on organizational learning and capability building to implement
industrial policy.
Following Deng Xiaoping’s cadre modernization scheme, the educational level and
technical competence of China’s communist party cadres and economic bureaucrats
has improved dramatically since the s (Lee, ; Li, ; Zheng, , ).
Large state-owned enterprises and central industrial ministries also served as a major
reservoir from which the Party could draw its top leadership talent. China’s industrial
policymaking primarily reflects the training, work experience, and ideological outlook
of these elite cadre-bureaucrats. From industrial ministries to modern big businesses,
the transformation of organizational forms, coordination mechanisms, and personnel
roles undoubtedly requires the acquisition of new knowledge, skills, capabilities, and
behaviours. As China’s State Council put it, ‘to restructure government administrative
ministries into firm-like economic organizations is a vital experiment for the
economic system reform, and we need a process of exploration and learning’ (The
State Council, ).
Over the past four decades, China’s central government has undertaken multiple
rounds of administrative reforms to streamline and upgrade the bureaucracy’s cap-
abilities and mitigate coordination failures, creating new pivotal agencies such as
SASAC and MIIT (Ministry of Industry and Information Technology) to strengthen
its industrial policy practices with increasingly professionalized, efficient, and focused
modes of intervention (Pearson, ; Jung, ; Naughton and Tsai, ). Using
SASAC and Central Huijin as its key vehicles, China’s central government has also
learnt to increasingly use financialized means of managing assets and governing its
national champions (Wang, ). In particular, the stock markets have been used as
key industrial policy instruments to nurture national champions (Walter and Howie,
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
, ). The Chinese Communist Party also upgraded its cadre training and
personnel management system as national champions became corporatized and listed
in stock markets (Brødsgaard, ; Li, ).
.. Enterprise Capability and Learning
Developing countries typically suffer from firm-level capability failure and size failure
(Lee, ). It is difficult for them to generate indigenous firms with sufficient research
and development (R&D) or technological capabilities and of sufficient size to achieve
economies of scale. Under the traditional industrial ministries system, the very defin-
ition of ‘firm’ or ‘enterprise’ was ambiguous in China. Between the s and s,
most of the ‘large state enterprises’ were merely large-sized individual plants (or
projects, factories, mines, and research institutes, etc.) which had no distinct organ-
izational boundaries from their governing industrial ministries and corresponded only
to the lowest levels of production entity in a typical modern big business in an
advanced industrial economy (Komiya, a, b; Nolan, , a, b).
The coordination of these state enterprises’ activities was fragmented among various
government bureaucratic agencies. They hardly qualify as autonomous organizations
of production, let alone fully fledged business firms.
China’s corporatization reforms and state-led restructuring to create national cham-
pions have involved a crucial learning process about how to define the boundaries of
firms and to develop organizational capabilities at the level of large multi-plant firms
and business groups. In particular, the corporatization and initial public offerings of
China Mobile, Sinopec, and CNPC on the eve of China’s WTO entry demonstrated the
feasibility of China consolidating core assets and enterprise units of traditional indus-
trial ministries into giant corporate groups in a relatively short period of time (Zhang,
, ). Guided by this approach, the state-controlled corporate groups and listed
companies became the new units and organizational devices of firm-level catch-up.
Similarly, China’s banking sector restructuring was also designed to promote organ-
izational learning and capability building at the level of large nationwide banks.
Overall, listing the minority stakes of China’s national champions in stock markets is
not just about raising capital, but more about absorbing modern corporate governance
practices, management structures and market-based disciplinary mechanisms, and
creating partnership with international banks, law firms, auditors, accountants, regu-
lators, and institutional investors to facilitate such learning. The strategies employed by
China’s industrial policymakers and national champions thus involve building linkages
with incumbent multinational corporations and global capital markets, targeting
resources for leverage which are imitable and transferable, and enhancing organiza-
tional learning to catch up (Matthews, ). Starting from relatively loose amalgam-
ations of enterprise units carved out from former bureaucratic hierarchies, these
business groups and financial institutions have gradually become fully fledged modern
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
firms, with coherent corporate structures coordinating and performing various busi-
ness functions including strategic planning, operations, financing, procurement, mar-
keting and sales, human resources, and inhouse R&D.
.. Networked Hierarchy, Institutional Bridging,
and Reciprocal Control
The governance of China’s national champions in industrial sectors is embedded in a
complex organizational architecture, which can be seen as a gigantic pyramid. With the
Party centre and the State Council at the apex, tiers of national champions are
organized under the central government and strategically linked to each other
(Naughton, ). Lin and Milhaupt () proposed the notions of networked
hierarchy and institutional bridging to characterize China’s unique model of industrial
organization: a hierarchical system in terms of state ownership and control, the
formulation and implementation of industrial policy, and the internal structures of
these firms. China’s industrial national champions are typically vertically integrated
groups with multiple layers of member enterprise units linked by ownership arrange-
ments (typically including a parent holding company, one or a few core publicly listed
subsidiaries, some internal research institutes and finance companies and several tiers
of operational enterprise units). SASAC exercises shareholder’s rights on behalf of the
state, but its control rights are incomplete as the Party maintains ultimate control of
key corporate appointments (such as chairman and CEO) in these firms (Brødsgaard,
; Li, ). A dense structure of inter-organizational networks connects firms with
the Party and various government agencies as well as other firms. These institutional
bridging networks facilitate the flow of information, collaboration, and relationship
building in the system (Lin and Milhaupt, ; Li, ). The governance regime of
China’s national champions in finance shares similar features, with the Ministry of
Finance and Central Huijin as the most important shareholders, and the Party retains
control over key personnel appointments in major state-owned commercial banks,
policy banks, insurance companies, asset management companies, and stock exchanges
(Heilmann, ; Pistor, ; Pistor et al., ).
The Chinese Communist Party’s nomenklatura control and personnel management
system are crucial in the governance of China’s national champions. The Party controls
the appointments and career prospects of top-level corporate leaders in national
champions as well as key officials in SASAC, MoF, and all financial regulators. It
aims to establish a meritocratic system to identify and promote cadres with both strong
political loyalty and professional competence. It often rotates and transfers cadres
among different national champions, regulatory agencies, and even local government
leadership positions. Candidates for key leadership positions in the few dozen most
important national champions are groomed and monitored directly by the Party’s
Central Organization Department (COD) (Lin, ; Brødsgaard, ; Pistor, ;
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
Li, , ; Leutert, a, b). These appointments concern not only each
specific national champion, but also the needs of the system as a whole. It is often the
case that a key change of personnel will call for, and be accompanied by, a series of top
personnel reshuffles, involving multiple institutional units apparently independent of
each other. Like the former central industrial ministries, China’s national champions
have served as a talent pool for the Party to recruit its top political elites and a pathway
for ambitious cadres to advance their political careers (Li, ; Lin, ). These
linkages tend to generate what Lin (: ) calls ‘synchronized incentives and
mobility’: top personnel are motivated by both political and professional achievement,
and can be moved back and forth across political hierarchy and state-controlled
corporate hierarchy under the Party’s personnel management system. Lin and
Milhaupt () argue that this structure amounts to an ‘encompassing organization’
and policy coalition whose members have an incentive to promote the prosperity of the
overall system (Olson, ).
A core policy challenge of late industrialization is how to exert discipline over the
interactions between the state and firms. The market paradigm relies on competitive
market structures and creative destruction induced by technological changes serving as
disciplinary forces, while the command economy paradigm relies on direct state
planning and monitoring, which is typically characterized by soft budget constraints.
Successful industrial policies typically have mechanisms to establish certain forms of
reciprocal control in state‒business relations, with performance standards and discip-
linary conditions attached to the state support that firms receive (Amsden, ). The
rise of China’s national champions has relied on extensive state supports such as
subsidies, domestic market protection, preferential access to finance, state-orchestrated
mergers, and bailouts. How to strengthen financial discipline and harden budget
constraints has been a critical policy challenge.
Over the past three decades, China has gradually developed its own approach to
reciprocal control in governing its national champions. First, it builds on the Party’s
personnel management and disciplinary system to shape competition for promotion
among cadres (Lin, ; Brødsgaard, ; Pistor, ; Li, , ). Second, while
erecting high entry barriers and nurturing the rise of giant business groups in strategic
sectors, China’s central government has promoted oligopolistic rivalries among
national champions and encouraged them to compete in international markets,
although export competitiveness is not a key performance criterion. Moreover, China
has developed and increasingly resorted to various financialized policy tools and
channels to impose discipline, creating the unique structure of a ‘shareholding state’
(Wang, ). On the one hand, the corporatization and public listings of national
champions have rendered these firms increasingly sensitive to shareholder value. As a
controlling shareholder, SASAC has developed a sophisticated performance evaluation
system for national champions, setting various benchmarks and targets with an array of
indicators such as profits, economic value added, technical progress, return on equity,
return on asset, leverage ratios, and corporate social responsibility, and factoring in the
different industrial environments within which different national champions operate. In
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
some respects, the relations between SASAC and national champions now resemble the
ways private equity funds manage their portfolio companies.
On the other hand, the restructuring of China’s banking sector has also made its
large state-controlled commercial banks more effective disciplinarians. These banks
now face strong pressure from the central government (as the controlling shareholder)
to create shareholder value, strict capital adequacy regulatory requirements consistent
with global standards and more robust internal risk management systems. Between
and , China’s central government had offloaded a total of around RMB
trillion non-performing loans from the big banks through various vehicles of the
People’s Bank of China, MoF, and the Big Four AMCs. While the big banks were
recapitalized by the state with the MoF issuing new government bonds to fund the
restructuring, they were required to pay out sufficient dividends from their profits in
the subsequent years for the MoF to pay off the bonds. This imposes additional
discipline on banks’ operational performance. Overall, China’s Ministry of Finance
has been a fairly prudent ‘gatekeeper’ and disciplinarian during the industrial and
banking reforms of the past two decades (Walter and Howie, ; Pan, ;
Jiang, ).
However, it remains too early for China to declare success in developing an effective
system of governing China’s national champions. The Party’s personnel management
and cadre disciplinary system is prone to complex principal‒agent problems, often
intertwined with cronyism and factionalism. Given the informational constraints, it is
difficult for the Party to rely on personnel control to effectively monitor and discipline
politically well-connected business leaders who possess substantial managerial auton-
omy in daily business operations. As the recent anti-corruption campaigns reveal,
corruption in China’s national champions often involves hidden political networks
stretching across the Party and government hierarchy (Brødsgaard, ; Li, ).
SASAC’s ownership control rights are also incomplete and it faces strong resistance
from the national champions (Naughton, ). To what extent and how China’s big
banks and capital markets can impose effective discipline remains an open question as
the Chinese economy shifts to a ‘new normal’ of slower growth and China’s financial
system further liberalizes. Above all, industrial policy is a highly politicized process of
resource allocation, creating winners and losers with different interests and political
voices. Now China’s national champions industrial policy is facing increasing criti-
cisms and external pressure from international organizations and Western advanced
countries (World Bank, ; Wu, ).
. I C
C’ N C
..................................................................................................................................
Over the past four decades, as China has deepened its reform and opening up, the
business systems of the advanced countries have also experienced profound
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
restructuring which was arguably no less revolutionary than the rise of modern big
businesses during the late nineteenth and early twentieth century (Nolan, a,
b; Steinfeld, ; Nolan, ). The rise of giant global firms, the emergence of
big-business-centred production networks and the explosion of mergers and acquisi-
tions dramatically reshaped the landscape of global business competition. The com-
manding heights of the global business system were almost entirely occupied by firms
from high-income countries with superior technologies and powerful brands. These
constituted the ‘system integrators’ at the apex of global value chains. As they consoli-
dated their leading positions, the system integrator firms, with enormous procurement
expenditures, exerted intense pressures on their supply chains to minimize costs and
stimulate technical progress. This established the global context within which China’s
central government designed and practised its national champions industrial policy
(Nolan, a, b; Zhang, ; Nolan, et al., ; Nolan, , ).
While giant multinational companies headquartered in advanced economies have
increasingly penetrated the Chinese economy since China’s WTO entry, China’s
national champions still occupy the apex of China’s strategic sectors. They have built
up corporate structures that increasingly resemble the global leading big businesses of
their respective industries. They have developed significant technological capabilities
and well-trained, sophisticated managerial leadership, floated their minority shares on
domestic and international stock markets, established joint ventures or strategic
partnerships with global leading big businesses, and achieved a scale unprecedented
in China’s business history (Nolan, ; Li, ). In , there were only a total of
forty-three Mainland Chinese firms in the Fortune Global , among which thirty-
eight were central state-controlled national champions. By , however, the number
had increased to . Among them, fifty-eight were national champions which gener-
ated a total of US$. trillion combined revenue and US$ billion combined profit in
/ (Table .). Among the best performing were ICBC whose profits alone
reached US$. billion, roughly equivalent to the combined profits of JP Morgan
Chase and Bank of America; China Mobile’s profits reached over US$. billion,
compared with US$. billion for Softbank and US$. billion for Deutsche Telekom.
China’s State Grid, Sinopec, and CNPC all ranked among the world’s five largest
energy companies by revenue. Among the world’s ten largest aerospace and defence
companies, five are China’s national champions: China North Industries Group, AVIC,
China South Industries Group, China Aerospace Science and Technology Corporation,
and China Aerospace Science and Industry Corporation. Among the world’s ten largest
engineering and construction companies, there are also five Chinese national cham-
pions: China State Construction Engineering, China Railway Engineering Group,
China Railway Construction, China Communications Construction, and PowerChina.
However, China’s national champions overall are still far from catching up with the
global leading big businesses in terms of international competitiveness. Most of China’s
national champions’ sales and profits come from China’s domestic markets where they
still enjoy varying degrees of protection by the state’s industrial policies against
competitive pressures from both foreign multinational companies and domestic
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Table 25.1 China’s National Champions in Fortune Global 500, 2018
Ranking Company Name Revenue Profit Core business
(million (million
US$) US$)
2 State Grid Corporation of China 3,48,903 9,533 Power grid
(SGCC)
3 Sinopec Group 3,26,953 1,538 Petroleum and petrochemicals
4 China National Petroleum 3,26,008 691 Petroleum and natural gas
Corporation (CNPC)
23 China State Construction 1,56,071 2,675 Construction engineering
Engineering Corporation
(CSCES)
26 Industrial & Commercial Bank of 1,53,021 42,324 Banking
China
31 China Construction Bank 1,38,594 35,845 Banking
40 Agricultural Bank of China 1,22,366 28,550 Banking
42 China Life Insurance 1,20,224 267 Insurance
46 Bank of China 1,15,423 25,509 Banking
53 China Mobile 1,10,159 10,932 Telecom
56 China Railway Group (CRECG) 1,02,767 1,170 Infrastructure construction &
equipment manufacturing
58 China Railway Construction 1,00,855 1,309 Infrastructure construction &
Corporation (CRCC) equipment manufacturing
65 Dongfeng Motor Corporation 93,294 1,400 Automobile
86 China Resources Group 82,184 3,152 Diversified
87 China National Offshore Oil 81,482 3,019 Petroleum and natural gas
Corporation (CNOOC)
91 China Communications 79,417 1,545 Infrastructure construction &
Construction Company equipment manufacturing
(CCCC)
98 Sinochem Group 76,765 753 Energy and chemicals
101 China Energy Investment 75,522 2,495 Energy and chemicals
Corporation (CHN Energy)
109 China Minmetals Corporation 72,997 211 Metallic minerals
110 China Southern Power Grid 72,787 1,938 Power Grid
(CSG)
113 China Post Group 72,197 4,961 Postal service and logistics
117 The People’s Insurance Company 71,579 2,382 Insurance
of China (PICC)
122 COFCO Group 69,669 394 Diversified
125 China FAW Group 69,524 2,856 Automobile
140 China North Industries (Norinco 64,646 858 Defence
Group)
141 China Telecommunications 63,974 1,820 Telecom
149 CITIC Group 61,316 3,225 Diversified
161 Aviation Industry Corporation of 59,263 363 Aviation and defence
China (AVIC)
162 China Bauwu Steel Group 59,255 22 Steel
167 China National Chemicals 57,989 739 Chemicals
Corporation (ChemChina)
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
168 Bank of Communications 57,711 10,390 Banking
182 Power Construction Corporation 53,870 947 Energy and infrastructure
of China (PowerChina)
194 China National Pharmaceutical 51,844 690 Healthcare
Group (Sinopharm)
222 Aluminum Corporation of China 46,684 429 Aluminium
(Chalco)
242 China South Industries Group 44,785 740 Defence and automobile
243 China National Building Material 44,701 15 Building materials
Group (CNBM)
245 China Shipbuilding Industry 44,431 716 Shipbuilding
Corporation (CSIC)
256 Sinomach Group 42,638 472 Machinery Manufacturing
273 China United Network 40,664 63 Telecom
Communications
280 China Merchants Group 39,971 4,039 Diversified
289 China Huaneng Group 38,872 216 Power generation
312 China Poly Group 37,002 1,153 Diversified
322 China Everbright Group 35,840 1,895 Diversified
333 China Energy Engineering Group 35,048 372 Energy engineering
(Energy China)
335 China Cosco Shipping 34,668 1,404 Shipping and logistics
Corporation
343 China Aerospace Science & 34,254 2,225 Aerospace
Technology Corporation
346 China Aerospace Science & 34,073 1,607 Aerospace
Industry Corporation
369 China Electronics Group 31,990 167 Electronics
371 China National Aviation Fuel 31,942 402 Aviation fuel
Group (CNAF)
381 Xinxing Cathay International 31,078 440 Diversified
(XXCIG)
385 CRRC Corporation 30,634 1,598 Rail Transit Equipment
388 China Electronic Technology 30,176 1,774 Electronics
Group Corporation (CETC)
393 China State Shipbuilding 29,797 371 Shipbuilding
Corporation Limited (CSSC)
395 State Power Investment 29,727 199 Power Generation
Corporation (SPIC)
397 China Huadian Corporation 29,612 333 Power Generation
428 Ansteel Group 27,792 61 Steel
465 China Taiping Insurance Group 25,598 449 Insurance
468 China Datang Corporation 25,299 342 Power Generation
Source: Fortune Global 500 (2018).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
challengers. In particular, they benefit from government procurements and buying
products from each other. The profitability of China’s national team is highly concen-
trated and sensitive to government regulatory and price policies (Nolan, ;
Naughton, ; Li, ). Apart from their remarkable success in building infrastruc-
ture in developing countries, the export competitiveness of China’s national champions
remains limited. In terms of foreign investment, despite being supported by the ‘going
out’ strategy of China’s central government, China’s national champions are still at an
early stage of international expansion. In , there were only two Mainland Chinese
firms (both are national champions under SASAC) in the world’s top non-financial
multinational enterprises ranked by foreign assets: CNOOC and COSCO. CNOOC had
a total of US$. billion foreign assets, less than per cent of Royal Dutch Shell’s
foreign assets. In , China’s total outward FDI stock was less than the combined
foreign assets of five top multinational companies from the advanced countries (Royal
Dutch Shell, Toyota, BP, Total, and Anheuser-Busch InBev) (UNCTAD, ). More-
over, China’s national champions face tremendous barriers in conducting major cross-
border mergers and acquisitions. Their attempts to gain control over established firms
in high-income countries have often ended in failure. Even their efforts to acquire
substantial minority stakes have encountered formidable political and regulatory resist-
ance from high-income countries (Nolan, ; Naughton, ; Wu, ; Gordon
and Milhaupt, ). While China’s five largest commercial banks have expanded their
international operations through a combination of organic growth and acquisitions,
none of them entered the world’s top fifteen transnational financial corporations ranked
by the extent of their geographical spread in (UNCTAD, ).
As successors of former central industrial ministries, China’s national champions
have long concentrated most of China’s indigenous technological capabilities in their
respective strategic sectors. They have achieved remarkable technological progress in
industries such as aerospace and defence, oil and gas, high-speed railway, telecoms, and
electronics as well as power generation and related equipment. However, the gap in
R&D capabilities between most of China’s national champions and the global leading
big businesses in their respective sectors remains huge. According to the EU’s
Industrial R&D Scoreboard, the world’s top , companies ranked by R&D expend-
iture together invested around €. billion, approximately per cent of the world’s
business-funded R&D in /. They include US companies for per cent of
the total investment, EU companies for per cent, Japanese companies for
around per cent, Chinese companies for per cent and from the rest of the
world for per cent (European Commission, ). Among the largest Chinese
companies ranked by R&D expenditure, twenty are China’s central state-controlled
national champions (or their member firms), which together invested a total of around
€. billion in R&D, compared with €. billion by Samsung alone and €. billion
by Volkswagen. Nonetheless, these twenty national champions contributed around
per cent of the total R&D invested by the Chinese companies ranked among the
global top ,. As shown in Table ., the R&D intensity of China’s national
champions is generally low and the investment is heavily concentrated in oil and gas,
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
construction and materials, and industrial engineering (primarily infrastructure build-
ing and related equipment).
Following China’s entry to the WTO, the Chinese government has actively main-
tained its industrial policies to secure technology transfers from global leading big
businesses to its national champions. The results of this strategy have been mixed. In
some sectors, notable success has been achieved: for example, in the high-speed railway
and metro sector, China’s national champions have rapidly absorbed technologies
from leading multinationals such as Alstom, Siemens, and Kawasaki Heavy Industries,
and have produced substantial indigenous innovation. In other sectors such as auto-
mobiles, the strategy has been far less successful, if not a failure. For example, China’s
national champions in the automobile sector are now heavily dependent upon the
technologies and brands of global leading automobile companies that they have
partnered with in joint ventures: FAW relies heavily upon Volkswagen and Toyota,
and Dongfeng relies heavily upon Nissan and Peugeot SA (Lu and Feng, ; Nolan,
; Li, ). Overall, despite their dominant sizes in China’s domestic markets,
China’s national champions are still at an early stage of developing their international
competitiveness in terms of building up the necessary capabilities, technologies,
brands, and global production networks to compete globally, especially in the markets
of high-income countries.
. C R
..................................................................................................................................
China’s national champions industrial policy practices reflect its unorthodox approach
to reforming the former socialist command economy. It also represents China’s
adaptive responses to the challenges of late industrialization in a new global business
environment. The ‘commanding heights’ sectors are typically characterized by high
capital intensity, technology complexity, asset specificity, and substantial economies of
scale. Developing countries face tremendous barriers to build viable indigenous firms
with sufficient capabilities and sizes to compete with incumbents from advanced
countries in the same sectors. The institutional limitations of the socialist command
economy were not only about the absence of properly functioning markets, but also the
absence of viable modern big-business firms. It should not be assumed that the
deficiencies of firm-level organizational capabilities in transition economies and devel-
oping countries can be spontaneously resolved by marketization.
Moreover, the industrial governance of transition economies comprises complex
inter-organizational linkages which, in the old socialist command economy structure,
connected various government agencies, enterprise units, and financial organizations
that were a reservoir of talent, knowledge, and experience. There are substantial
complementarities and valuable resources in these organizations. Instead of wasting
existing resources and capabilities, the rise of China’s national champions suggests that
it is possible to integrate and restructure the core assets and enterprise units inherited
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Table 25.2 National Champions in the top 100 companies ranked by R&D in mainland China
World Company Industry R&D 2017/ Net sales R&D Capex Capex Operating Employees
rank 18 (€mn) (€mn) intensity (€mn) intensity profits (€mn)
(%) (%)
86 China State Construction Construction & 1,585.9 1,32,857.8 1.2 2,230.4 1.7 9,053.5 2,70,467
Engineering Corporation Materials
88 PetroChina Oil & Gas Producers 1,578.0 2,58,137.7 0.6 29,354.4 11.4 9,304.3 4,94,297
99 China Railway Construction & 1,421.8 88,198.4 1.6 1,677.5 1.9 3,945.1 2,83,637
Materials
102 CRRC Industrial 1,343.5 26,512.3 5.1 1,009.4 3.8 1,984.4 1,76,754
Engineering
105 China Railway Construction Construction & 1,331.4 86,183.2 1.5 3,871.1 4.5 3,508.7 2,61,333
Corporation Materials
126 China Communications Construction & 1,104.9 61,538.5 1.8 1,692.8 2.8 3,871.6 1,16,893
Construction Company Materials
144 Power Construction Corporation Construction & 972.7 33,518.1 2.9 9,365.5 27.9 2,259.1 1,31,091
of China Materials
166 Sinopec Oil & Gas Producers 822.5 3,02,226.2 0.3 8,136.5 2.7 12,198.6 4,46,225
200 Metallurgical Corporation of General Industrials 683.3 30,848.6 2.2 522.4 1.7 1,887.5 97,771
China
219 China Merchants Bank Banks 607.1 28,274.4 2.1 1,575.7 5.6 11,611.7 72,530
237 Dongfeng Motor Automobiles & 546.7 16,008.5 3.4 418.6 2.6 4.0 1,46,843
Parts
251 Baoshan Iron & Steel Industrial Metals & 506.4 36,619.6 1.4 1,700.1 4.6 3,320.5 57,154
Mining
271 China Energy Engineering Construction & 447.6 30,011.4 1.5 538.4 1.8 1,776.7 1,30,295
Group Materials
290 Chongqing Changan Automobiles & 413.6 9,658.6 4.3 423.7 4.4 29.8 39,138
Parts
303 China Shipbuilding Industrial 392.2 4,835.8 8.1 186.3 3.9 145.7 36,315
Engineering
465 AviChina Industry & Technology Industrial 237.8 4,174.1 5.7 245.8 5.9 353.9 49,672
Transportation
475 China National Chemical Construction & 231.4 7,419.0 3.1 195.6 2.6 505.1 41,588
Engineering Group Materials
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
496 CNOOC Oil & Gas Producers 222.7 23,867.5 0.9 6,112.4 25.6 5,928.3 19,030
501 China Gezhouba Group Construction & 221.0 13,409.3 1.6 1,095.7 8.2 1,032.5 41,241
Materials
537 NARI Technology Development Software & 205.7 3,048.3 6.7 153.1 5.0 556.3 5,865
Computer
Services
Source: The EU Industrial R&D Investment Scoreboard (2018) and company reports.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
from the command economy into viable big-business firms as organizational devices to
coordinate indigenous industrial development in a predominantly market-oriented
economic environment. Effective industrial reform should recognize and take advan-
tage of such institutional legacies.
Under appropriate industrial policies, the danger of ‘ossification’ can be turned into
a spur to new adaptation and growth. The key is, first, to promote continuous
organizational learning and capability building at both the government and enterprise
levels, strategically coordinating complementary reforms. Second, it is important to
establish workable governance arrangements that adapt to a country’s own institu-
tional conditions to facilitate learning and to discipline the recipients of state policy
support. In particular, the state can innovatively use corporatization, commercial and
policy banks, capital markets, and other financial means as industrial policy tools. The
rise of China’s national champions is the result of its adaptive policy responses to its
own specific political and economic conditions as well as the changing global business
environment. Taking advantage of its large and continuously growing domestic mar-
kets, China’s industrial policy has created strategic space and opportunities for its
national champions to acquire new capabilities and achieve remarkable growth. How-
ever, they are still at an early stage of developing international competitiveness in terms
of building their global footprints and capabilities.
R
Amsden, Alice H. () Asia’s Next Giant: South Korea and Late Industrialization. Oxford:
Oxford University Press.
Amsden, Alice H. () The Rise of ‘The Rest’: Challenges to the West from Late-
Industrializing Economies. Oxford: Oxford University Press.
Amsden, Alice H. and Ajit Singh () ‘The Optimal Degree of Competition and Dynamic
Efficiency in Japan and Korea’, MPRA Paper (–): –.
Blanchard, Olivier, Rudiger Dornbusch, Paul Krugman, Richard Layard, and Lawrence
Summers () Reform in Eastern Europe. Cambridge, MA: MIT Press.
Bremmer, Ian () ‘State Capitalism Comes of Age—the End of the Free Market’, Foreign
Affairs : .
Brødsgaard, Kjeld Erik () ‘Politics and Business Group Formation in China: The Party in
Control?’, The China Quarterly : –.
Buckley, Chris () ‘China’s “Nanny” Overhauls State Enterprises’, The New York Times,
June.
Chandler, Alfred D. () The Visible Hand: Managerial Revolution in American Business.
Cambridge, MA: Belknap Press of Harvard University Press.
Chandler, Alfred D. () Scale and Scope: The Dynamics of Industrial Capitalism. Cam-
bridge, MA: Harvard University Press.
Chandler, Alfred D., Franco Amatori, and Takashi Hikino () Big Business and the Wealth
of Nations. Cambridge, MA: Cambridge University Press.
Chang, Ha-Joon () The Political Economy of Industrial Policy. New York St. Martin’s
Press.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
Colpan, Asli M., Takashi Hikino, and James R. Lincoln () The Oxford Handbook of
Business Groups. Oxford: Oxford University Press.
Downs, Erica Strecker () Inside China, Inc.: China Development Bank’s Cross-border
Energy Deals. Washington, DC: The John L. Thornton China Center at Brookings.
European Commission () The EU Industrial R&D Investment Scoreboard. Luxembourg:
Publications Office of the European Union.
Fortune () ‘Global ’. Available at http://money.cnn.com/magazines/fortune/glo
bal/index.html.
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective: A Book of
Essays. Cambridge, MA: Belknap Press of Harvard University Press.
Gordon, Jeffrey N. and Curtis J. Milhaupt () ‘China as a National Strategic Buyer:
Toward a Multilateral Regime for Cross-border M&A’, Columbia Business Law Review
: .
Hahn, Donghoon and Keun Lee () ‘Chinese Business Groups: Their Origins and Devel-
opment’, in Sea-Jin Chang (ed.) Business Groups in East Asia: Financial Crisis, Restructur-
ing, and New Growth. Oxford: Oxford University Press, pp. –.
Harrison, Mark and Andrei Markevich () ‘Hierarchies and Markets: The Defense
Industry under Stalin’, in Mark Harrison (ed.) Guns and Rubles: The Defense Industry in
the Stalinist State. New Haven, CT: Yale University Press, pp. –.
Heilmann, Sebastian () ‘Regulatory Innovation by Leninist Means: Communist Party
Supervision in China’s Financial Industry’, The China Quarterly : –.
Heilmann, Sebastian and Lea Shih () ‘The Rise of Industrial Policy in China, –’.
Available at http://www.harvard-yenching.org/features/hyi-working-paper-series-sebastian-
heilmann-and-lea-shih.
Huang, Yasheng () Capitalism with Chinese Characteristics: Entrepreneurship and the
State. Cambridge: Cambridge University Press.
Huang, Yasheng () ‘Rethinking the Beijing Consensus’, Asia Policy : –.
IIECASS (Institute of Industrial Economics of Chinese Academy of Social Sciences) ()
Zhongguo Gongye Fazhan Baogao (China Industrial Development Report). Beijing: Econ-
omy & Management Publisher.
Jiang, Jianqing () Zhongguo Daxing Shangye Yinghang Gugaishi (History of China’s Large
Commercial Bank Shareholding Reforms). Beijing: China Finance Publisher.
Jiang, Julie and Chen Ding () Update on Overseas Investments by China’s National Oil
Companies. Achievements and Challenges since . Paris: International Energy Agency.
Jiang, Julie and Jonathan Sinton () Overseas Investments by China’s National Oil Com-
panies: Assessing the Drivers and Impacts. Paris: OECD/International Energy Agency.
Johnson, Chalmers () MITI and the Japanese Miracle: The Growth of Industrial Policy:
–. Stanford, CA: Stanford University Press.
Jung, Joo-Youn () ‘Reinvented Intervention: The Chinese Central State and State-owned
Enterprise Reform in the WTO Era’, in Jean Chun Oi (ed.) The Politics of Corporate
Restructuring and System Reform: Going Private in China. Stanford, CA: Walter
H. Shorenstein Asia-Pacific Research Center, pp. –.
Kasza, Gregory J. () ‘Gerschenkron, Amsden, and Japan: The State in Late Development’,
Japanese Journal of Political Science (): –.
Khanna, Tarun and Yishay Yafeh () ‘Business Groups in Emerging Markets: Paragons or
Parasites?’, Journal of Economic Literature (): –.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Komiya, Ryutaro (a) ‘Japanese Firms, Chinese Firms: Problems for Economic Reform in
China, Part I’, Journal of the Japanese and International Economies (): –.
Komiya, Ryutaro (b) ‘Japanese Firms, Chinese Firms: Problems for Economic Reform in
China, Part II’, Journal of the Japanese and International Economies (): –.
Lardy, Nicholas () The State Strikes Back: The End of Economic Reform in China?
Washington, DC: Peterson Institute for International Economics.
Lee, Hong Yung () From Revolutionary Cadres to Party Technocrats in Socialist China.
Berkeley, CA: University of California Press.
Lee, Keun () ‘Business Groups as an Organizational Device for Catch-up’, in Junji
Nakagawa (ed.) Managing Development: Globalization, Economic Restructuring and Social
Policy. London: Routledge, pp. –.
Lee, Keun () ‘Business Groups in China’, in Asli M. Colpan, Takashi Hikino, and James
R. Lincoln (eds) The Oxford Handbook of Business Groups. Oxford: Oxford University
Press, pp. –.
Lee, Keun () The Art of Economic Catch-up: Barriers, Detours and Leapfrogging in
Innovation Systems. Cambridge: Cambridge University Press.
Lee, Keun and Xuehua Jin () ‘The Origins of Business Groups in China: An Empirical
Testing of the Three Paths and the Three Theories’, Business History (): –.
Lee, Keun, and Wing T. Woo () ‘Business Groups in China: Compared with Korean
Chaebols’, in The Post-Financial Crisis Challenges for Asian Industrialization, edited by
R. Hooley and J. Yoo, –. New York, JAI Press.
Lee, Keun, Byung-Yeon Kim, Young-Yoon Park, and Elias Sanidas () ‘Big Businesses and
Economic Growth: Identifying a Binding Constraint for Growth with Country Panel
Analysis’, Journal of Comparative Economics (): –.
Leutert, Wendy (a) ‘Firm Control: Governing the State-owned Economy under Xi
Jinping’, China Perspectives –: –.
Leutert, Wendy (b) ‘The Political Mobility of China’s Central State-owned Enterprise
Leaders’, The China Quarterly : –.
Li, Chen () China’s Centralized Industrial Order: Industrial Reform and the Rise of
Centrally Controlled Big Business. London: Routledge.
Li, Chen () ‘Holding “China Inc.” Together: The CCP and the Rise of China’s Yangqi’,
The China Quarterly : –.
Li, Chen () ‘China’s Central State Corporatism: The Party and the Governance of
Centrally Controlled Businesses’, in Lance L. P. Gore and Yongnian Zheng (eds) The
Chinese Communist Party in Action: Consolidating Party Rule. London: Routledge,
pp. –.
Li, Cheng () China’s Leaders: The New Generation. Lanham, MD: Rowman & Littlefield
Publishers.
Li, Cheng () China’s Midterm Jockeying: Gearing up for (Part : Top Leaders of
Major State-Owned Enterprises). Washington, DC: Brookings Institution.
Liebman, Benjamin L. and Curtis J. Milhaupt () Regulating the Visible Hand? The
Institutional Implications of Chinese State Capitalism. Oxford: Oxford University Press.
Lin, Justin Yifu and Ha-Joon Chang () ‘Should Industrial Policy in Developing Countries
Conform to Comparative Advantage or Defy It? A Debate between Justin Lin and Ha-Joon
Chang’, Development Policy Review (): –.
Lin, Justin Yifu, Cai Fang, and Li Zhou () The China Miracle: Development Strategy and
Economic Reform. Hong Kong: Chinese University of Hong Kong Press.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
Lin, Li-Wen () ‘Reforming China’s State-owned Enterprises: From Structure to People’,
The China Quarterly : –.
Lin, Li-Wen and Curtis J. Milhaupt () ‘We Are the (National) Champions: Understand-
ing the Mechanisms of State Capitalism in China’, Stanford Law Review : –.
Lin, Nan () ‘Capitalism in China: A Centrally Managed Capitalism (CMC) and its
Future’, Management and Organization Review (): –.
Lipton, David and Jeffrey Sachs () ‘Creating a Market Economy in Eastern Europe: The
Case of Poland’. Brookings Papers on Economic Activity. No. : –. Washington, DC:
Brookings Institution.
Liu, Chunhang () Multinationals, Globalisation and Indigenous Firms in China. London:
Routledge.
Lu, Feng and Kaidong Feng () Fazhan Woguo Zizhu Zhishi Chanquan Qiche Gongye De
Zhengce Xuanze (The Policy Choice of Developing Chinese Automobile Industry with
Independent Intellectual Property Rights). Beijing: Peking University Press.
Matthews, John () ‘Competitive Advantages of the Latecomer Firm: A Resource-based
Account of Industrial Catch-up Strategies’, Asia Pacific Journal of Management :
–.
Milhaupt, Curtis J. () ‘Chinese Corporate Capitalism in Comparative Context’, in
Weitseng Chen (ed.) The Beijing Consensus? How China Has Changed the Western
Ideas of Law and Economic Development. Cambridge: Cambridge University Press,
pp. –.
Milhaupt, Curtis J. and Zheng Wentong () ‘Beyond Ownership: State Capitalism and the
Chinese Firm’, Georgetown Law Journal : –.
Moore, Thomas G. () China in the World Market: Chinese Industry and International
Sources of Reform in the Post-Mao Era. Cambridge: Cambridge University Press.
Naughton, Barry () ‘SASAC Rising’, China Leadership Monitor (). Available at http://
media.hoover.org/sites/default/files/documents/clm_bn.pdf.
Naughton, Barry () ‘The Transformation of the State Sector: SASAC, the Market
Economy and the New National Champions’, in Barry Naughton and Kellee S. Tsai (eds)
State Capitalism, Institutional Adaptation and the Chinese Miracle. New York: Cambridge
University Press, pp. –.
Naughton, Barry and Kellee S. Tsai () State Capitalism, Institutional Adaptation and the
Chinese Miracle. New York: Cambridge University Press.
Nolan, Peter () China’s Rise, Russia’s Fall: Politics, Economics and Planning in the
Transition from Stalinism. Basingstoke: Macmillan.
Nolan, Peter () ‘Large Firms and Industrial Reform in Former Planned Economies: The
Case of China’, Cambridge Journal of Economics (): –.
Nolan, Peter (a) China and the Global Business Revolution. London: Palgrave.
Nolan, Peter (b) China and the Global Economy: National Champions, Industrial Policy
and the Big Business Revolution. London: Palgrave.
Nolan, Peter () Is China Buying the World? Cambridge: Polity Press.
Nolan, Peter () Chinese Firms, Global Firms: Industrial Policy in the Era of Globalisation.
London: Routledge.
Nolan, Peter () ‘The West and China: Globalisation and Competition in Financial
Services’, Journal of Chinese Economic and Business Studies (): –.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Nolan, Peter and Huaichuan Rui () ‘Industrial Policy and Global Big Business Revolu-
tion: The Case of the Chinese Coal Industry’, Journal of Chinese Economic and Business
Studies (): –.
Nolan, Peter and Huaichuan Rui () ‘The Global Industrial Consolidation and the
Challenge for China: The Case of the Steel Industry’, in Peter Nolan (ed.) Integrating
China: Towards the Coordinated Market Economy. London: Anthem Press, pp. –.
Nolan, Peter and Xiaoqiang Wang () ‘Beyond Privatization: Institutional Innovation and
Growth in China’s Large State-owned Enterprises’, World Development (): –.
Nolan, Peter, Jin Zhang, and Liu Chunhang () The Global Business Revolution and the
Cascade Effect: Systems Integration in the Aerospace, Beverages and Retail Industries.
Basingstoke: Palgrave Macmillan.
Nove, Alec () The Soviet Economic System. London: Allen & Unwin.
Olson, Mancur () The Rise and Decline of Nations: Economic Growth, Stagflation, and
Social Rigidities. New Haven, CT: Yale University Press.
Pan, Gongsheng () Dahangdiebian: Zhongguo Daxing Yinhang Fuxing Zhilu (Meta-
morphose: The Rejuvenation of Chinese Big Banks). Beijing: China Financial Publisher.
Pearson, Margaret () ‘The Business of Governing Business in China: Institutions and
Norms of the Emerging Regulatory State’, World Politics (): –.
Pearson, Margaret () ‘State-owned Business and Party–State Regulation in China’s
Modern Political Economy’, in Barry Naughton and Kellee S. Tsai (eds) State Capitalism,
Institutional Adaptation, and the Chinese Miracle. New York: Cambridge University Press,
pp. –.
Penrose, Edith () The Theory of the Growth of the Firm. Oxford: Oxford University
Press.
Pistor, Katharina () ‘The Governance of China’s Finance’, in Joseph Fan, Randall Morck,
and Bernard Yeung (eds) Capitalizing China. Chicago, IL: University of Chicago Press,
pp. –.
Pistor, Katharina, Guo Li, and Zhou Chun () ‘The Hybridization of China’s Financial
System’, in Benjamin L. Liebman and Curtis J. Milhaupt (eds) Regulating the Visible Hand?
The Institutional Implications of Chinese State Capitalism. Oxford: Oxford University
Press, pp. –.
Popov, Vladimir () ‘Successes and Failures of Industrial Policy: Lessons from Transition
(Post-Communist) Economies of Europe and Asia’. Available at https://mpra.ub.uni-
muenchen.de/id/eprint/.
Qian, Yingyi () ‘The Institutional Foundations of China’s Market Transition’. Annual World
Bank Conference on Development Economics, Working Paper No. , Washington, DC:
World Bank. Available at https://pdfs.semanticscholar.org//aaebfbfcabfc
eeae.pdf.
Qian, Yingyi () ‘The Process of China’s Market Transition (–): The Evolutionary,
Historical, and Comparative Perspectives’, Journal of Institutional and Theoretical Eco-
nomics (): –.
Qian, Yingyi () ‘Government Control in Corporate Governance as a Transitional Insti-
tution: Lessons from China’, in Joseph E. Stiglitz and Shahid Yusuf (eds) Rethinking the
East Asian Miracle. Washington, DC: World Bank, pp. –.
Qian, Yingyi and Wu Jinglian () ‘China’s Transition to a Market Economy: How Far
across the River?’. SCID Working Paper No. . Stanford, CA: Stanford Institute for
Economic Policy Research.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
, ,
Rui, Huaichuan () Globalization, Transition and Development in China: The Case of the
Coal Industry. London: Routledge.
Sachs, Jeffrey () ‘Poland’s Big Bang: A First Report Card’, The International Economy
(): –.
SASAC () Zhongguo Guoyou Zichan Jiandu Guanli Nianjian (China State-Asset Super-
vision and Administration Yearbook). Beijing: China Economy Publisher.
SASAC () Zhongguo Guoyou Zichan Jiandu Guanli Nianjian (China State-Asset Super-
vision and Administration Yearbook). Beijing: China Economy Publisher.
SASAC () Guowuyuan Guoziwei Nian Huigu (the State Council SASAC’s
Review). Beijing: China Financial & Economic Publishing House.
SASAC () Zhongguo Guoyou Zichan Jiandu Guanli Nianjian (China State-Asset Super-
vision and Administration Yearbook). Beijing: China Economy Publisher.
Shmelev, Nikolai and Vladimir Popov () The Turning Point: Revitalizing the Soviet
Economy. New York: Doubleday.
Steinfeld, Edward S. () ‘China’s Shallow Integration: Networked Production and the New
Challenges for Late Industrialization’, World Development (): –.
Steinfeld, Edward S. () Playing our Game: Why China’s Economic Rise Doesn’t Threaten
the West. Oxford: Oxford University Press.
Stiglitz, Joseph E. () ‘Some Lessons from the East Asian Miracle’, The World Bank
Research Observer (): –.
Sun, Pei () ‘Industrial Policy, Corporate Governance, and the Competitiveness of China’s
National Champions: The Case of Shanghai Baosteel Group’, Journal of Chinese Economic
and Business Studies (): –.
Sun, Pei () ‘Is the State-led Industrial Restructuring Effective in Transition China?
Evidence from the Steel Sector’, Cambridge Journal of Economics (): –.
Sutherland, Dylan () China’s Large Enterprises and the Challenge of Late Industrialisa-
tion. London: Routledge.
Szamosszegi, Andrew and Cole Kyle () An Analysis of State-owned Enterprises and State
Capitalism in China. Washington, DC: US–China Economic and Security Review
Commission.
The State Council of China () ‘Guowuyuan Guanyu Chengli Zhongguo Chuanbo Gongye
Zonggongsi De Tongzhi (the State Council’s Notice on the Establishment of China
Shipbuilding Industry Corporation)’. Available at http://www.gov.cn/gongbao/shuju/
/gwyb.pdf.
Thun, Eric () Changing Lanes in China: Foreign Direct Investment, Local Governments
and Auto Sector Development. Cambridge: Cambridge University Press.
Tian, Guoqiang and Liang Hong () ‘What Kind of Privatization?’, in Andrew J. Nathan
(ed.) Dilemmas of Reform in Jiang Zemin’s China. London: Lynne Rienner, pp. –.
UNCTAD () World Investment Report. Geneva: United Nations Conference on Trade
and Development.
UNCTAD () World Investment Report. Geneva: United Nations Conference on Trade
and Development.
Walter, Carl E. and Fraser J. T. Howie () Privatizing China: Inside China’s Stock Markets.
Singapore: John Wiley & Sons.
Walter, Carl E. and Fraser J. T. Howie () Red Capitalism: The Fragile Financial Founda-
tion of China’s Extraordinary Rise. Singapore: John Wiley & Sons.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Wang, Haibo () Zhonghua Renmin Gongheguo Gongye Jingjishi .– (the
Industrial Economic History of the People’s Republic of China, .–). Taiyuan:
Shanxi Economy Publisher.
Wang, Yingyao () ‘The Rise of the “Shareholding State”: Financialization of Economic
Management in China’, Socio-Economic Review (): –.
World Bank () The East Asian Miracle: Economic Growth and Public Policy. New York:
Oxford University Press.
World Bank () China . Washington, DC: World Bank.
World Bank () China : Building a Modern, Harmonious and Creative High-Income
Society. Washington, DC: World Bank.
Wu, Jinglian () Understanding and Interpreting Chinese Economic Reform. Singapore:
Thomson.
Wu, Mark () ‘The “China, Inc.” Challenge to Global Trade Governance’, Harvard
International Law Journal : –.
Yi, Gang () Zhongguo Jinrong Gaige Sikaolu (On the Financial Reforms of China). Beijing:
The Commercial Press.
Zhang, Jin () Catch-up and Competitiveness in China: The Case of Large Firms in the Oil
Industry. London: Routledge.
Zhang, Jin () ‘China’s Oil Industry: Investment in Developing Countries’, in Carla
P. Freeman (ed.) Handbook on China and Developing Countries. Cheltenham: Edward
Elgar, pp. –.
Zhang, Jin () ‘Western Ideas of Corporate Governance: China’s Reform of Large State-
owned Enterprises’, in Malcolm Warner (ed.) The Diffusion of Western Economic Ideas in
East Asia. London: Routledge, pp. –.
Zhang, Jin () ‘State Structures, Business–State Relations, and Multinational Corporate
Behaviours: A Case Study of Chinese Multinational Oil Companies’, in Xiaoke Zhang and
Tianbiao Zhu (eds) Business, Government and Economic Institutions in China. Basingstoke:
Palgrave Macmillan, pp. –.
Zheng, Yongnian () Globalization and State Transformation in China. Cambridge:
Cambridge University Press.
Zheng, Yongnian () The Chinese Communist Party as Organizational Emperor: Culture,
Reproduction and Transformation. London: Routledge.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
......................................................................................................................
. I
..................................................................................................................................
T chapter discusses industrial policies in the BRICS (Brazil, Russia, India, China,
and South Africa). The discussion corroborates that the emergence of systems of
innovation and the dynamics of industrial development and structural change in
BRICS cannot be explained without considering the active role of national govern-
ments, which have supported specific sectors, industries, and even firms to grow from
national champions to major global manufacturing and technological players (Vértesy,
; Scerri and Lastres, ; Kahn, Martins de Melo, and Pessoa de Matos, ).
This active industrial policy approach is likely to continue at both the individual and
the collective level.
The chapter moves on from previous contributions to the literature, where the
notion of BRICS is used as a reference to analyse individual country experiences, and
to draw common elements and the main differences in policy models followed by
BRICS (Di Maio, ; Brigante Deorsola et al., ). Instead, the chapter interrogates
how the BRICS notion has been endorsed by the countries involved, to the extent that
they are undertaking efforts to strengthen integration and collaboration. Industrial
development in general, and industrial policy in particular, are relatively recent,
yet already integral topics in the BRICS integration process.
The analysis also sheds light on the extent to which the recent industrial perfor-
mance of each BRICS country influences their participation in group dynamics. Differ-
ences in industrial development paths within BRICS suggest widening industrialization
gaps, with China increasingly differentiated from the rest. This is likely to raise tensions
in the integration process. Looking to the future, the chapter explores how the
BRICS are responding to the opportunities and challenges associated with the Fourth
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Industrial Revolution (IR) (Schwab, ; Hallward-Driemeier and Nayyar, ).
This new wave of technological change has the potential to alter industrial leadership,
affecting prospects and conditions for catching up and forging ahead (Liu et al., ;
Lee et al., ).
Finally, we briefly introduce an international dimension, looking into BRICS inter-
action with third-party countries and regions. While each BRICS is a recognized
economic and political powerhouse in their respective geographical regions, Africa
seems to constitute a place of convergence for all of them.
. T T I
P BRICS
..................................................................................................................................
Common among the BRICS is that recent industrial performance has accompanied
processes of sustained capability accumulation and continuous policy reform to under-
pin substantive economic and institutional transformations. These experiences lend
support to those who advocate active public interventions as the basis for industrial-
ization, including conditions for resources mobilization, and more generally, for social
and economic agents to thrive.
Cimoli, Dosi, and Stiglitz (: ) argue that as ‘intrinsic fundamental ingredients
of all development processes’, industrial policies encompass interventions across mul-
tiple policy domains (Di Maio, ; Stiglitz, ):
• Science and technology and innovation—including intellectual property rights
(IPRs);
• Trade policies;
• Policies to foster demand for manufacturing, including public procurement;
• Policies to attract foreign direct investments (FDI) and other financial resources;
• Policies to foster development of specific industries—including but not limited to
the promotion of infant industries;
• Competition policies and regulation, among others.
From the end of the Second World War onwards, several of these policy domains
have been integral components of each of the BRICS’ industrial policy programmes. In
addition to direct contributions to the building of domestic systems of innovation
(Scerri and Lastres, ), BRICS governments have fostered the articulation of
industrial policies together with innovation, education, and other policies to underpin
technological and productive capability building. Hence, interlinkages across distinct
policy domains have been instrumental for the industrial development trajectories of
BRICS (Di Maio, ; Liu et al., ; Dominguez Lacasa et al., ). Such interplay
characterizes co-evolutionary processes whereby investments in science, technology,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
and innovation (STI) capabilities on the one hand, and industrialization and structural
change on the other hand, have fed—or failed to feed—on each other historically
(Nelson, ; Scerri and Lastres, ).
The scope of industrial policies has varied over time and across countries according
to changes in the prevailing needs and conditions of sectors, industries, or firms.
External influences on the role of government generally, and industrial policy in
particular, are important in fostering development. Periods of strong government
intervention—import substitution, for example—alternate with more liberal
stances—inspired largely by the Washington Consensus—towards the rule of markets
in the economy.
BRICS have actively used trade policies in the early stages of industrialization.
Regarding FDI policies, Andreff () documents that unlike Brazil and India,
where outward FDI mainly responds to economic purposes, China and Russia also
target foreign policy, diplomacy, and even state ideology goals. Similarly, the author
comments that the larger share of state-owned companies (SOCs) among Chinese and
Russian multinationals means tighter state controls over corporate strategic decisions.
A constant across the board is support to national champion firms, including
through direct investment or through the creation of SOCs who then lead the devel-
opment of specific industrial sectors, encouraging them to become major global
manufacturing and technological players (Rodriguez-Arango and Gonzalez-Perez,
; Santiago, ; Liu et al., ; Di Maio, ). Interventions to assist domestic
champions to weather the effects of global economic crises or shocks in relevant
markets for their products or services (Simachev et al., ; Vértesy, ), or
mobilization of national banks and SOCs to leverage private investment in strategic
sectors or activities are also common (Di Maio, ; Simachev et al., ).
BRICS support for champion firms remains debatable. Cui, Jiao, and Jiao ()
argue that in BRICS where government ownership is comparatively high, firms tend to
show a lower probability of engaging in innovation; they have strong incentives to
capitalize on monopoly positions and protection, and willingness to tackle emerging
market opportunities through entrepreneurship and innovation is low. Liu et al. ()
illustrate this through the case of innovations in the growing online payments business,
which is often associated with booming e-commerce in China. While none of the four
largest state-owned banks was willing to develop such systems, the Alibaba Group took
the initiative to develop Alipay, which has become a world-renowned model since its
launch in .
Turning attention to individual country experiences, in the case of Brazil, Di Maio
() asserts that, setting aside controversies over the results of the period of import
substitution (s to the s), during those years the Brazilian government undertook
great commitments to enhance domestic technological capabilities and economic diver-
sification. It actively guided the direction and pace of industrialization, often as a direct
investor and owner/manager of firms (Di Maio, ). However, after the collapse of the
import-substitution model (see Ocampo and Porcile, Chapter in this volume) during
the s, disappointment with active industrial policies led the Brazilian government,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
like those of other Latin American countries, to endorse a programme of economic
reforms inspired by the Washington Consensus (Di Maio, ). The dismantling of
trade barriers, the widespread privatization of publicly owned assets, efforts to restructure
the economy, and a generalized opening of domestic markets to multinationals charac-
terized this period. More recently, although the emphasis on structural change has faded,
the government’s involvement in industrial development and capability building con-
tinues, with an emphasis on STI, support to small and medium-size enterprises (SMEs),
and the promotion of clusters and investment in specific sectors, for example, automobiles
(Di Maio, ).
Russia has experienced difficulties managing the transition towards a market-driven
economy, inspired mainly by the Washington Consensus and the corresponding hiatus
in the government’s ability to implement active industrial policy during the s (Di
Maio, ). One structural characteristic is the severe lack of transparency in state‒
business interactions and the capture of industrial policymaking by lobbyist and
interest groups with differing views on how to govern industrial policy implementation
(Simachev et al., ). In recent years, Di Maio () notes a ‘slide to the past’, with a
growing participation of the Russian government in economic activities. State control
of a large share of productive assets is characteristic of the current economic model,
heavily influenced by an industrial policy oriented towards fostering import substitu-
tion, employment, and a selective and tightly controlled FDI policy. At the same time,
Simachev et al. () assert that over the last decade or so, Russia has sought to
harmonize industrial policy with STI policy as the basis for economic diversification,
development of technology-driven sectors, and continued growth; this is occurring
amidst a somewhat adverse international environment and a heavy burden imposed by
political affairs at home and abroad. In , the Russian government introduced an
ambitious digital economy programme, which intends to foster the institutional
structure and infrastructure necessary for digitalization and the use of data at a large
scale to increase competitiveness, economic growth, and sovereignty (Government of
the Russian Federation, ).
Similar to the other BRICS, India’s rapid industrialization starts with an import-
substitution model adopted by the newly independent country in the early s.
Industrial development has been guided by five-year plans that give the Indian
government great leverage to intervene in economic matters, including by identifying
areas suitable for state monopoly and others where private investors could participate
(Di Maio, ). The breakdown of the import-substitution model and the ensuing
reforms of the early s granted greater freedom to private investors and expanded
the scope of partnerships with external economic agents by reducing controls on FDI,
allowing foreign majority ownership, and facilitating technology transfer. Liberaliza-
tion and privatization of manufacturing are tangible in the structure of Indian manu-
facturing today. The country’s specialization in information and communication
technologies (ICTs) benefited from accumulated investments in education and research
institutions, including several private-sector-run initiatives, which also contribute to
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
explaining the rapid expansion of services (Di Maio, ). Lee (a) argues that such
expansion has been mostly at the expense of agriculture, while the share of manufac-
turing in total GDP remains constant. According to the author, this process, led by three
giants, Infosys, Tata Consultancy Services (TCS), and Wipro, suggests that India has
bypassed the stage of manufacturing-led growth, leapfrogged into service-led growth,
and then back to promote manufacturing (Lee, a).
China’s outstanding industrial and economic performance coincides with an ambi-
tious period of economic reforms that started during the s. The country’s leader-
ship committed to giving greater weight to the markets, without renouncing active
government influence and the steering of the economic system. This pragmatic
approach to industrial policy has been dominant since the s. China has supported
structural transformation towards a market-driven economy, combined with heavily
selective support, including through FDI and compulsory—including coercive—
technology transfer, to strategic activities and sectors (Di Maio, ; Santiago, ).
Investment in large infrastructure projects is noticeable; the provision of physical and
digital infrastructure has been a priority, particularly over the last twenty to twenty-five
years (Liu et al., ); and preferential credit and fiscal treatment has been given
particularly to manufacturing and non-agricultural raw materials. China is getting close
to or is already at the end of a rapid catching-up phase (Liu et al., ; Tourk and Marsh,
). She searches for the next policy cycle, away from top-down approaches to
industrial development, and increasingly under the rule of markets, private entrepreneur-
ship, and distinct institutional conditions for economic agents to operate (Liu et al., ;
OECD, ).
In South Africa, the democratic transition that started in immediately led to
efforts to reinsert the country into the international scene. The new leadership com-
mitted to dismantling industrial initiatives characteristic of the apartheid regime,
including a large privatization programme. In parallel, the government adopted the
Black Empowerment Programme to redress profound inequalities in access to skills,
employment, and economic opportunities for black South Africans. Accession to the
WTO and the signing of free-trade agreements with the EU and the Southern African
Development Community (SADC) signalled the government’s intention to promote
internationalization of large domestic firms, particularly in mining (Di Maio, ).
The evidence suggests that the positive income effects associated with this moderniza-
tion programme may have started to wear off, as industrial competitiveness seems
stagnant. Industrial policy measures also face difficulties boosting exports and diver-
sifying manufacturing (Di Maio, ). In recent years, a relevant change in the post-
apartheid orientation of industrial policy has been the shift towards an emphasis
on skills and innovation, and from a sectoral focus to functional approaches (Di
Maio, ).
Considering this heterogeneous past engagement with industrial policy, how do we
explain the recent emergence of BRICS as a novel political and economic entity in the
global landscape?
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. T BRICS BRICS
..................................................................................................................................
The literature, particularly from a political science perspective, documents debates on
the epistemological, methodological, and geopolitical underpinnings of BRICS, and the
implications of the term for the rest of the world, particularly least-developed regions
such as Africa. Considering the great heterogeneity characteristic of BRICS, is the term
a valid geopolitical configuration? What are the strengths and limitations of the study
of BRICS as an academic enterprise? Are BRICS a legitimate alternative to contem-
porary global, West-dominated economic and political governance, or are they merely
an extension of it (Gray and Murphy, ; Gray and Gills, ; Mittelman, )?
While addressing these debates is beyond the scope of this chapter, in what follows
we offer food for thought from an industrial policy perspective. Notwithstanding
efforts at the highest possible political level towards a common BRICS development
agenda, differences in recent individual industrial performances have introduced
tensions into the BRICS integration process.
.. From BRIC to BRICS
From , Jim O’Neill and colleagues at Goldman Sachs released several papers
proposing the acronym BRIC to acknowledge the growing power and influence of
the large and dynamic economies of Brazil, Russia, India, and China over global
political and economic dynamics (O’Neill, , ; O’Neill, Wilson, and
Purushothaman, ). Wilson and Purushothaman () argued that given the
pace of their GDP growth, income per capita, and currency movements, the BRIC
could become a major driver of the world economy by . They could overtake
several of the G economies—G minus Canada—in US dollar terms by (Wilson
and Purushothaman, ). The changed geography of the ten largest economies in the
world, in GDP terms, would result in a more complex and more diversified scenario
(Wilson and Purushothaman, ).
O’Neill () advocated an ‘upgraded’¹ G—the United States, Japan, the United
Kingdom, Germany, France, Italy, and Canada—to include the BRIC, or at least some
of them, granting them a stronger say in global policymaking. While China appeared a
natural candidate, the potential influence of the other three was undeniable, on a par
with Canada or Italy. At the same time, O’Neill cautiously wondered whether the BRIC
would want to integrate and embrace their potential counterbalancing role in global
economic and political affairs (O’Neill, , ). After several informal meetings, at
Russia’s initiative the first formal meeting of the BRIC foreign ministers took place in
Yekaterinburg, Russia on May . The first summit of the BRIC heads of state
¹ Emphasis in the original by the author.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
followed in June , also in Yekaterinburg. The induction of South Africa in
expanded the group to form BRICS as we know it today (BRICS, ). Ever since,
BRICS has sought to tighten collaboration in mutually beneficial ways.
Today, BRICS cooperation mechanisms include the annual summits, which convene
the heads of state of each member country, the most recent of which took place in
Brasilia in November . A diversity of meetings on specific topics involve repre-
sentatives from all sorts of public, private, and academic organizations and hierarchies.
Meetings regularly sideline those of multilateral organizations such as the United
Nations, the G, or the Bretton Woods Institutions. Several expert working groups
contribute to a broader collaboration agenda (BRICS, ).
.. BRICS to Build an Economic Block?
Economic collaboration among BRICS evolves gradually. Framed against the global
financial and economic crises, negotiations at the early leaders’ summits centred on
financial, trade, and sustainable growth issues (BRIC, , ). As interactions
intensified and diversified, largely influenced by individual approaches to industrial
and other related policies, the agenda began to incorporate broader STI issues—
including IPRs—employment creation, connectivity and ICT, and a Framework for
BRICS e-commerce Cooperation.
At the end of the Fortaleza Meeting in , the BRICS leaders agreed to develop a
BRICS Economic Cooperation Strategy and a Framework of BRICS Closer Economic
Partnership (BRICS, ). The former was adopted at the Ufa Summit (BRICS, a)
and, together with the BRICS Action Plan on Economic and Trade Cooperation
(BRICS, b, a), guides actions intended to strengthen economic collaboration.
Progress in the implementation of the Strategy for the BRICS Economic Partnership is
reviewed every five years, or earlier as necessary (BRICS b, a).
The BRICS Economic Cooperation Strategy sets out guidelines to increase, expand,
and promote intra-trade and investment, manufacturing and minerals processing,
energy, STI, connectivity, and ICT among other areas (BRICS, b). The Action
Plan calls for joint economic- and trade-related initiatives, including on industrial and
technical upgrading, to foster economic complementarity and diversification (BRICS,
a). It also targets a reduction in the digital divide and the associated economic and
social implications both within and beyond BRICS. Collaboration on e-commerce
should contribute to industrial development and inclusive growth in the BRICS and
elsewhere (BRICS, a).
A similarly incremental approach characterizes the BRICS’ search for collaboration
on industrial development and industrial policy. These topics were absent from the
joint statements at the first two BRIC leaders’ summits. The term ‘industrialization’
appeared for the first time in the Sanya Declaration of , in reference to the
BRICS’ interest in supporting industrialization in Africa (BRICS, ). The associated
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
action plan proposed cooperation in pharmaceuticals as part of STI collaboration
(BRICS, ).
The term ‘manufacturing’ appeared in the Strategy for the BRICS Economic Part-
nership at the th BRICS leaders’ meeting in . The Strategy acknowledges the
significant contribution of manufacturing to structural change, the creation of quality
jobs, and economic growth (BRICS, b). The joint agenda proposes to expand
manufacturing and minerals processing (BRICS, a) and to foster such industries as
mining and metals, chemicals and petrochemicals. BRICS committed to intensifying
industrial production capabilities and promoting industrial parks and clusters, tech-
nology parks, and engineering centres; similarly, they intend to support specialized
training for engineering and technical personnel and managers, while encouraging
innovation and the development of high-tech industries (BRICS, a, b).
Investment in railways, roads, ports, and airports is also envisaged. At the
BRICS leaders’ summit in Johannesburg, they recognized energy efficiency as a factor
conditioning the achievement of economic targets such as industrial competitiveness,
economic growth and job creation, and environmental sustainability (BRICS, ).
Advancing collaboration in the ocean economy, including through coastal industrial
zone development, is also on the agenda (BRICS, ).
.. Industrial Policy Coordination
The launch of the BRICS Industry Ministers Meetings institutionalized collaboration
on industrial development and industrial policy matters. The first meeting took place
in in Moscow, under the Russian presidency (BRICS Industry Ministers, ).
Intra-BRICS cooperation expects to boost trade and sustainable economic growth,
strengthening comprehensive industrial ties, promoting technology transfer and
innovation, and improving investment climates and job creation (BRICS Industry
Ministers, ). Joint training and skill development programmes are proposed, as
are common research and business opportunities in several broadly defined industrial
areas (BRICS Industry Ministers, ).
The scope of collaboration was subsequently refined with the adoption of a seven-
point Action Plan at the end of the second ministerial meeting in Hangzhou, China
(BRICS Industry Ministers, ). The Action Plan acknowledges the emergence of
IR and two other major transformations in global manufacturing: the increasing
interdependence of manufacturing and manufacturing-related services, with the latter
increasingly driving economic development; and the transformational power of con-
cepts such as digitalization, networking, and ‘intellectualization’ and their significance
for production and business models with the potential to create new industries (BRICS
Industry Ministers, ). The Action Plan reaffirms the BRICS commitment to
enhance collaboration in industrial capacity building, SME development, industrial
policy coordination, standards, development of new industrial infrastructure, and
technology- and innovation-related projects.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Collaboration in industrial policy matters reaches out to the UN system, for
example, to the United Nations Industrial Development Organisation (UNIDO) in
establishing the BRICS Consolidated Technology Platform, with a mandate to boost
cooperation in the upgrading and/or development of new high-tech engineering
industries and innovation, and in the development of capital goods and machinery
related to manufacturing and minerals processing (BRICS, c; BRICS Industry
Ministers, ).
Consonant with the BRICS long-standing tradition of supporting large firms, the
eThekwini Declaration encourages existing SOCs to explore cooperation, exchange of
information, and best practices (BRICS, ). Simultaneously, each country’s minis-
tries and agency responsible for local SMEs is exploring opportunities to collaborate,
particularly in international trade, innovation, and joint R&D (BRICS, ).
The BRICS approach to collaboration is consistent with individual traditions of
creating interdependence and complementarity between industrial policies and
other policy areas. This recurs in several of the declarations and action plans across
different policy areas. Common interests include technology transfer, support for joint
research agendas, intention to leverage on initiatives around training, skilling, and
upskilling, firm registration, and other crosscutting or horizontal policy interventions.
Successful integration of different policy areas into a single BRICS industrial develop-
ment programme should have major implications for manufacturing development in
each individual BRICS.
. T C H
I P
..................................................................................................................................
The ability of the BRICS to overcome their distinct individual economic, political, and
social conditions and traditions, and to collectively contribute to global economic and
political checks and balances is the subject of debate. Degaut and Meachan (),
Di Maio (), and Dominguez Lacasa et al. () perceive BRICS as a heteroge-
neous collection of industrial upgrading models, each of them with distinct perspec-
tives and approaches to the accumulation of technological, productive, and other
capabilities. However, as we discuss later, China’s dominance in the group dynamic
poses major challenges to the BRICS integration. Kejin () argues that with Chinese
choices and capabilities continuing to frame the scope of cooperation, attempts to
enhance economic cooperation and build consensus are encountering difficulties.
.. Contribution to Global Economic Activity
The BRICS’ growing global economic importance is evident (Figure .). In , they
represented . per cent of global GDP, a three-fold increase on (. per cent).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Share in world's GDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1990 1995 2000 2005 2010 2017
WLD CHN IND BRA RUS ZAF
. BRICS’ growing but heterogeneous contribution to global economic dynamics
Source: Author, based on World Bank Development Indicators.
Similarly, they contributed about a third of total global manufacturing value added in
. Despite this enhanced collective presence, the individual shares are heteroge-
neous. China largely drives the dynamics in terms of both total GDP and manufactur-
ing value added, although the rate of expansion has receded slightly in recent years. The
most dramatic gains appear in manufacturing value added. In around a decade, China’s
contribution rose from about per cent () to about a quarter of the world total in
. The shares of the rest of the BRICS are either growing less rapidly (India), are
stagnant (Russia and Brazil), or are shrinking (South Africa). India’s share in both GDP
and manufacturing value added has overtaken that of Brazil and Russia. Differences in
individual contributions to both group and global economic dynamics should continue
to deepen in the short run (Mbele, ).
The BRICS’ export performance over the period ‒ further illustrates the
heterogeneity within the group. China reports the largest and fastest-growing share
of manufacturing in total exports. Brazil records a steady increase in the share of
exports of agricultural and mining products and, to a lesser extent, services. In Russia
and South Africa, manufacturing exports are giving way to mining and services, while
services account for per cent of Indian exports.
The short-term dynamics should conform to Mbele (), who qualifies BRICS
growth trajectories as singling out distinct subgroups. China will continue to upgrade
her position in global supply chains, consolidating as a major global manufacturing centre
and boosting her share in manufacturing exports within the BRICS and from the BRICS
to the world. Brazil, Russia, and South Africa, in turn, should consolidate as exporters of
natural resources-based products, while India continues to bounce between a manufac-
turing- and a predominantly services-based economy (Amirapu and Subramanian, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Structural Change and Capability Accumulation
Industrial development implies structural change, or the transformation from trad-
itional agriculture or natural resource-based economies into economies led by increas-
ingly complex manufacturing activities (Haraguchi, Cheng, and Smeets, ). There
are three dimensions to structural change: technological, industrial, and organizational.
It involves deliberate and decisive efforts to learn and accumulate different capabilities
(UNIDO, , ). Liu et al. () argue that building innovation capabilities is a
precondition to overcoming middle-income traps; they assert that the lack of capabil-
ities, more than political institutions, may be the most significant binding constraint for
middle-income countries.
Countries achieve productive and technological upgrading by balancing different
framework conditions to support capabilities to absorb and use different kinds of
knowledge, to mobilize investments, and to accumulate the necessary capital to
undertake structural change, sustain catch-up, and eventually, leapfrog (Abramovitz,
). At least two kinds of capability accumulation processes are possible (Lee,
b). First, production capabilities, which refers to the accumulation of advanced
physical capital and the associated human capital required to run productive facilities
at given levels of efficiency. Second, innovation capabilities assist economic agents to
master and change the technology they already use, eventually allowing them to create
new technology. They also help latecomers to close the gap relative to the technological
frontier and, under certain conditions, seek to overtake incumbents and assume
leadership in furthering the technological frontier (Lee and Malerba, ). By tapping
into emerging market opportunities, through exports for example, latecomers may
reduce dependence on global value chains, steadily capturing market shares, and
increasing domestic value addition (Lee, b).
However, because capability building is path dependent, it may constrain the ability
to identify and capture emerging windows of opportunity to further upgrading (Lee
and Malerba, ) and limit the flexibility to accommodate changes in technological
and productive trajectories (Abramovitz, ). Globalization and international con-
ventions around IPRs also restrict the scope of technology transfer, and limit the
possibilities of imitating and reproducing technologies through R&D (Dominguez
Lacasa et al., ; Lee, a). Latecomers should focus on developing small but
incremental innovations while avoiding confrontation with incumbents and their
IPRs (Hobday, Rush, and Bessant, ).
... Productive Capabilities
Compared to other developing countries, and thanks to a process broadly described as
economic modernization, BRICS productive competencies tend to feature greater
technological content and complexity relative to peer countries. Moreover, each of
the BRICS hosts several of the largest and most important multinational firms in the
developing world (Rodriguez-Arango and Gonzalez-Perez, ; Andreff, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Several of those firms are challenging, or have attained, global leadership in areas
traditionally reserved for firms from highly industrialized countries, including aero-
space, transport, pharmaceuticals, and advanced ICT applications (Daudt and Willcox,
; Santiago, ).
However, modernization is insufficient to ensure long-term sustainability and
growth (Cimoli, Dosi, and Stiglitz, ). Notwithstanding progress in specific sectors
or individual firms, the BRICS’ economic structures are yet to achieve sustainable
catch-up. They face overexposure to external shocks and risk dependence on external
technology suppliers; moreover, differences in their endowments, technological pro-
gress, and integration into global flows of trade and investment remain significant
(Di Maio, ).
Figure . illustrates these points. It plots industrial and economic performance of
each of the BRICS over the last twenty to twenty-five years along two dimensions. First,
the x-axis plots long-term industrial performance, as measured by each individual
country’s score on UNIDO’s Competitive Industrial Performance Index (CIPIndex),
which benchmarks a country’s ability to produce and export manufactured goods
competitively (UNIDO, ). The index helps to identify the occurrence of structural
change towards high value-added technology-intensive industrial sectors, and assess
the impact of a country’s industrial production on the world market. Second, the y-axis
plots the value of gross national income (GNI) per capita measured in constant
US dollars of .
Heterogeneous performance within BRICS is evident. China stands out, as it has
managed to combine and sustain structural change with a rapid expansion in GNI per
capita. According to CIPIndex scores, China’s increased industrial competitiveness was
fuelled mainly by a rapid expansion in her ability to generate manufacturing value
12000
2015
10000 2015
GNI per capita (000 US$ 2010=100)
1990
8000 2015
1990 2015
6000
1990
4000
2000 2015
1995
1990
0
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40
Industrial competitiveness - CIP Index
Brazil China India South Africa Russia
. BRICS: structural change and catching up, ‒
Notes: Constant thousand US$ (=). CIP Index: the earliest date available for CIP Index for China is .
Source: Author’s based on UNIDO CIP database and World Bank Development Indicators.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
added and a strong export-led growth model that seems to have reached a tipping point
(Tourk and Marsh, ). Positive industrial performance has accompanied a five-fold
increase in GNI per capita in about two decades.
By contrast, the CIP Index scores of Russia, Brazil, and South Africa suggest
processes of gradual industrial recession; in the best-case scenario, these countries
are stuck in a period of industrial stagnation. Russia, in particular, is slowly recovering
from the negative effects on industrial competitiveness that represented the end of the
Soviet era. While GNI per capita continues to grow, albeit at a slower pace relative to
China’s, the country’s CIP Index score remained constant for most of the ‒
period. Similar conclusions can apply to Brazil, although the descent in CIP Index
rankings seems to have accelerated during the s. By contrast, South Africa’s gains
in income per capita have seldom accompanied improvements in its industrial com-
petitiveness. This loss results from weak production skills and digital infrastructure,
poor access to finance and high energy costs, while firms that have addressed such
challenges have continuously upgraded their capabilities and invested in innovative
technologies (UNIDO, ). Finally, India records much steadier growth in terms of
both industrial competitiveness and GNI per capita, but from a much lower base
relative to South Africa, Brazil, or Russia. Overall, the data show that relative to the
other BRICS, China is rapidly closing the gap in terms of GNI per capita while her
relative distance in terms of industrial competitiveness is forging fast ahead.
... Innovation Capabilities
Dominguez Lacasa et al. () argue that innovation, broadly defined as a process that
includes but is not limited to R&D, is at the core of technological upgrading. While
improvements in infrastructure and the institutional environment have generally
enhanced innovation in the BRICS, particularly in China, performance remains modest
relative to developed-country standards (Franco and Oliveira, ). Innovation perform-
ance corroborates the very distinct development paths followed by individual BRICS.
Building on patent data to study technological upgrading in the BRICS over the
period ‒, Dominguez Lacasa et al. () propose a statistical framework,
which distinguishes between three interrelated dimensions: intensity of technology
upgrading, structural change, and global interaction. The authors find multiple unique
paths of technology upgrading in the BRICS, with differences across the three dimen-
sions. Generally, the BRICS have increased their innovation capabilities, while reducing
dependence on foreign actors and external knowledge transfer in order to catch up.
They have progressively developed the ability to carry out technological frontier-
pushing activities—with the sole exception of Russia. As a result, the structure of
technological knowledge—measured through the share of high-tech and knowledge-
intensive patent applications—has increased across countries (Dominguez Lacasa et al.,
). China and Russia are the only ones to have augmented, or at least kept
constant, the intensity of behind-the-frontier technological activities. China is
unique in this regard, as she has rapidly enhanced innovation capabilities, diversified
technology knowledge bases and entered into dynamic frontier-pushing areas.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The country is fostering structural change and global interactions towards techno-
logical frontier-expanding activities—a process that, according to Dominguez Lacasa
et al. (), emulates Korea or Taiwan during earlier periods of technological upgrad-
ing and catching up (see Rasiah, Chapter in this volume). In contrast, foreign
knowledge still tends to crowd out domestic behind-the-frontier technological efforts
in Brazil, India, and South Africa.
Massive R&D investments evidence China’s stronger commitment to the building of
productive and particularly technological capabilities relative to other BRICS. In ,
China became the world’s second-largest investor in R&D in volume terms, second
only to the United States (UIS, ). While in GDP terms China still ranks behind
most developed countries, it tends to outperform the other BRICS. The R&D funding
and execution structure shows that business enterprises account for about three-
quarters of the total, a structure similar to advanced countries and in stark contrast
with the general situation of government-driven R&D in most other BRICS and other
developing countries.
.. Integration through Trade and Investment
Integration through value addition incorporated in manufacturing exports within
BRICS has grown steadily over the past decade, but bilateral relationships are rather
mixed (Table .). With the exception of China, and to a lesser extent Russia, the
BRICS have enhanced their backward integration with others in the group. For
instance, the share of value addition of Brazilian manufacturing exports coming from
the BRICS grew from . per cent in to . per cent in . The figures for India
and South Africa are more significant, from . per cent to . per cent and from
. per cent to . per cent, respectively. These two countries show the strongest level of
backward linkage with other BRICS. At less than . per cent, Chinese exports
maintain the lowest level of backward integration.
The situation is less straightforward if one considers the industry of origin of value
added in each of the BRICS’ manufacturing exports. Generally, Chinese manufacturing
value added contributes per cent or more of the manufacturing exports of other
BRICS. In contrast, with the exception of India, which contributes about . per cent
of Chinese manufacturing exports, the rest of the BRICS have seen declining shares of
local manufacturing value addition incorporated into Chinese manufacturing exports.
In , the figures were . per cent for Brazil, . per cent for Russia and . per cent
for South Africa. Long-term trends show a decline in the intra-BRICS value-added
content of Chinese manufacturing exports, while supplies of mining and quarrying
products are the main input to Chinese manufacturing exports. While South African
exports tend to incorporate a more significant share of manufacturing supplies from
other BRICS, mining and quarrying products are the main source of South African
value added incorporated into other BRICS manufacturing exports. This intra-BRICS
Table 26.1 Composition of gross manufacturing exports by country of origin of value added, 2005–15
2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015
Brazil China India Russia South Africa
Brazil — — — 0.3 0.6 0.4 0.2 0.4 0.4 0.2 0.2 0.1 0.3 0.4 0.7
China 0.6 1.1 2.0 — — — 1.5 2.7 3.7 0.7 1.8 2.0 1.2 2.2 4.7
India 0.2 0.3 0.3 0.4 0.4 0.3 — — — 0.1 0.2 0.2 0.4 0.7 1.1
— — —
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Russia 0.3 0.3 0.3 0.8 0.6 0.5 0.8 0.9 0.6 0.2 0.3 0.4
South Africa 0.1 0.1 0.1 0.2 0.3 0.2 0.7 0.8 0.5 0.1 0.2 0.1 — — —
Domestic value added 86.3 86.9 83.8 71.6 77.4 81.3 74.8 66.5 72.7 85.9 86.3 85.9 77.8 76.1 70.1
BRICS 1.2 1.8 2.7 1.7 1.9 1.4 3.2 4.8 5.2 1.1 2.4 2.4 2.1 3.6 6.9
Rest of the world 12.5 11.4 13.4 26.7 20.9 17.4 21.9 28.7 22.0 13.1 11.4 11.7 20.0 20.3 23.0
Notes: BRICS minus the specific member country reporting exports.
Source: Author’s based on OECD’s Trade in Value Added (TiVA) database. http://oe.cd/tiva.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
pattern of trade should continue to influence the bargaining power of individual group
members, particularly vis-à-vis China.
The BRICS have emerged as major destinations and sources of FDI. In they
represented per cent of the FDI inflows and around per cent of the inward FDI
stock in the world (UNCTAD, ). Despite this growing importance at the global
level, and notwithstanding positive growth trends in intra-BRICS FDI in the early
s (UNCTAD, ), the level of integration within the group remains low
(Table .). The strongest linkages appear in inward FDI stock from China in South
Africa (. per cent), followed by Russia (. per cent), while the share of South Africa
and Russia in Chinese inward FDI stock is considerably lower. South African invest-
ments in India (. per cent) stand out among the rest of the BRICS, which generally
show very limited integration; individual shares hardly exceed . per cent of total
inward FDI stocks in each individual BRICS. Overall, South Africa is the country with
the largest share of inward FDI stocks from BRICS (. per cent), followed by India
(. per cent) and Russia (. per cent). The data also corroborate the greatest
importance of circular FDI flows (round-tripping) for China and Russia. Andreff
() attributes this to the tradition of BRICS multinationals targeting tax havens
or, in the case of China, benefiting from the favourable tax conditions offered to foreign
investors in mainland China.
The low level of integration through FDI can largely be explained by BRICS
multinationals’ predominantly market-seeking strategy, which shows a preference for
investing within regional value chains—including through trans-border mergers and
acquisitions—and in tax havens or markets in (tax-friendly) developed countries
(UNCTAD, ; Andreff, ). China, and to a lesser extent Russia, show a stronger
inclination to diversify geographically, including to developing regions—notably Africa
and in the case of China, also Latin America (Andreff, ).
Table 26.2 UNCTAD FDI estimates by ultimate investor, share in inward FDI stock,
2017
Recipient
Investor Brazil China India Russia South Africa
Brazil 0.0 0.1 0.0 0.0 0.0
China 0.7 7.8 0.8 1.6 5.0
India 0.1 0.2 1.6 0.3 0.4
Russia 0.2 0.3 0.3 6.5 0.2
South Africa 0.1 0.5 1.2 0.1 0.1
BRICS 1.1 1.1 2.3 2.0 5.7
Notes: UNCTAD estimates for 108 recipient countries, corresponding to 93 per cent of the value of
global inward FDI stock. Details in Casella (2019).
Source: UNCTAD (2019).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
According to Andreff (), BRICS investment in developed countries mainly takes
the form of mergers and acquisitions rather than greenfield investments. Regarding
sectoral composition, the evidence suggests a resource-seeking behaviour with relevant
shares in primary-sector activities, followed by services in overall outward FDI.
. BRICS IR
..................................................................................................................................
An analysis of patent and trade data conducted by (UNIDO, ), and involving the
advanced digital technologies usually associated with the IR—industrial Internet of
things, big-data analytics, advanced robotics, artificial intelligence, cloud computing,
and additive manufacturing—characterized the global landscape of production and the
use of those new technologies. About economies were divided into four distinct
groups according to their level of engagement with the new technologies.
Looking at the BRICS, only China made it to the frontrunners’ group, which
includes the top ten countries—mostly developed—in terms of innovation in advanced
digital production technologies. These economies account for more than per cent of
all patent applications and about per cent of the exports of goods associated with
these technologies (UNIDO, ). The other four BRICS appear in the follower group,
economies that actively engage with the new technologies, producing and selling in
international markets, but to a much lesser extent than the frontrunners. Some
differences persist within this group. While Brazil, Russia, and India appear as produ-
cers and exporters of IR technologies, South Africa remains mainly a user—
importer—of them (UNIDO, ).²
Lee et al. () question how much the IR represents a window of opportunity for
upgrading or whether, on the contrary, this is a process likely to reinforce the risk of
becoming stuck in middle-income traps. Similar questions influence strategic thinking
and policymaking within BRICS, and efforts are already ongoing towards a BRICS joint
IR development agenda. The emerging evidence suggests that each country is posi-
tioning itself differently depending on individual industrial development trajectories
and individual approaches to industrial policy.
Generally, the BRICS are among the few developing countries where a dedicated
strategy, or at the very least, some explicit policy efforts, are geared to addressing the
IR (UNIDO, ; Santiago, ). BRICS aspire to foster innovation-driven economies,
away from commodities and traditional industrial products and moving increasingly into
higher value-added sectors. China, in particular, is steadily moving towards industrial
² The classification further includes a group of latecomers, economies with marginal patent or trade
activity in this field, but that have already engaged with IR technologies. Finally, a larger group of
laggards includes economies with no or very low engagement with these technologies (UNIDO, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
development strategies that seek to capitalize on her increasing ability to reproduce and
produce new technologies; the search for value addition and enhanced technological
content is superseding traditional cost advantage strategies (Li, ).
Similar to the case of advanced countries, the BRICS national strategies around the
IR are a blend of policy realms and approaches, including industrial policies (China
and South Africa) or STI plans (Brazil and South Africa), digitalization strategies
(Russia) or national digital agendas (China), or standalone documents using such
terms as ‘Industry .’ and ‘advanced manufacturing’, or referring to specific technolo-
gies (UNIDO, ). South Africa exemplifies the latter approach, as it has recently
introduced a strategy around additive manufacturing (CSIR and DST, ). Alterna-
tively, India is leveraging on existing industrial development plans, such as Make in
India, strengthening linkages to the digitalization of industry.
An interesting feature of IR is its ability to underscore the need for novel
approaches to strategy setting. In his study of industrial policy in the BRICS countries,
Di Maio () asserts that a recent trend in industrial policy design is the adoption of
principles of the so-called new industrial policy, stressing multi-stakeholder participa-
tory processes and the contribution of public‒private dialogues to policy design and
implementation. UNIDO () supports this finding, as several BRICS have followed
participatory processes in the preparation of national IR strategies. Country responses
are often built around a ‘multiple helix’ involving government, academia, private
entities, and civil society; the challenging nature of these consultative approaches
cannot be underestimated. Future research on the BRICS should consider how to
organize, govern, and sustain such participatory processes and, more importantly,
how BRICS are moving forward in the implementation of those strategies at the
individual and, as we discuss in section .., the collective level.
.. Collective Responses
At the end of their most recent meeting, the BRICS industry ministers acknowledged
that tightening collaboration in industrial development matters should assist them in
addressing what they termed the ‘Digital Industrial Revolution’ (BRICS Industry
Ministers, ). They committed to boosting industrialization through new high-
tech-driven innovative policy and regulatory frameworks (BRICS, b) and the
adoption of joint initiatives around the IR (Business Report, ). While at this
early stage it is difficult to document BRICS initiatives in the field, few proposals have
been tabled. Based on a somewhat common approach to industrial policy design ideas,
such proposals can be characterized along three core areas: building basic framework
conditions, fostering the demand for and adoption of IR technologies, and strength-
ening skills and research capabilities at different levels (López-Gómez et al., ;
UNIDO, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
... Building Basic Framework Conditions
Framework conditions refers to regulations and digital infrastructure. They also
include the institutional framework for strategy setting, policy formulation, and gov-
ernance, which is increasingly perceived as multi-stakeholder and involving close
private‒public collaboration. BRICS have started the dialogue. At the summit in
Johannesburg, the BRICS leaders endorsed the creation of a BRICS Partnership on
New Industrial Revolution (PartNIR) (BRICS, ), as previously agreed by the
respective ministers of industry at their third ministerial meeting (BRICS Industry
Ministers, ). An Advisory Group to include representatives from BRICS ministries
of industry and experts from all BRICS members will be responsible for operational-
izing the PartNIR. The terms of reference and work plan will focus on digitalization,
industrialization, innovation, inclusiveness, and investment (BRICS Industry
Ministers, ). Close collaboration with the private sector is prescribed through
working groups on a wide variety of industrial and manufacturing sectors.
The ultimate intended outcomes of the PartNIR include boosting economic growth,
strengthening sustainable industrial production capacity, and creating networks of
science parks and technology business incubators; of particular importance is the
inclusion of SMEs in technology-intensive areas (BRICS, : item ). Concrete
initiatives include the establishment of the BRICS Networks of Science Parks, Tech-
nology Business Incubators and Small and Medium-sized Enterprises (BRICS, ).
Regarding infrastructure, UNIDO () documents that digitalization remains a
binding constraint for the development of advanced manufacturing. South Africa, a
laggard among BRICS, needs to address high-cost and limited bandwidth, skill short-
ages in ICT and data analysis, not to mention innovation system weaknesses such as
poor interaction between firms, universities, and research centres (UNIDO, ).
More generally, upgrading of ICT infrastructure and connectivity are among BRICS
priorities; they are committed to promoting internationally accepted and applicable
rules for security of ICT infrastructure, data protection, and the Internet (BRICS,
b). All these initiatives are consequential on the BRICS’ intention to foster the
digital economy through the BRICS ICT Development Agenda and Action Plan
(BRICS, b).
Global debates around the developmental implications of big data cannot be over-
looked as capabilities to generate, process, and extract value from rapidly expanding
pools of datasets are prone to high concentration both geographically and in terms of
monopolistic power (Cable, ; Marr, ). The BRICS can potentially play major
roles in advancing a global agenda around the development of big data and its
associated implications for security, privacy, and the capabilities required for handling
growing and increasingly complex volumes of varied forms of data (Mahrenbach,
Mayer, and Pfeffer, ).
China is among the most advanced developing countries in the use of data as an
economic driver; development strategies prescribe data analytics and big-data plat-
forms to support new industries and foster upgrading of traditional ones (Mahrenbach,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Mayer, and Pfeffer, ). The Chinese government encourages innovation and funds
big-data research, while scientists are compelled to link and share research findings
with industry, and companies are expected to increase productivity and growth via
incorporation of big data and associated technologies in high-tech manufacturing and
in new business models (Mahrenbach, Mayer, and Pfeffer, ). All private-sector
activities have to remain within specified regulatory and incentive frameworks.
While this performance potentially locates China among the forerunners in the
development of big data at the global level, any counterbalancing or supplementary
role for the other BRICS in the consolidation of generally agreed guidelines for
governing development of markets for big data is yet to emerge. Sing () proposes
three possible emerging models. At the one end is a model led mostly by the United
States, centred on a global laissez-faire approach and dominated largely by domestic
digital firms and free and unregulated data flows. At the opposite end is the Chinese
approach to state-led capitalism, where the government enjoys strong surveillance
rights and control of digital transactions. In between these two, Sing () places
mixed-economy approaches to digitalization, as emerging in India or the European
Union, where governments play major roles in fostering infrastructure and regulation
to support competitive and efficient open data market operations, without renouncing
control of monopolies and concentration, or the oversight of areas of social and
economic importance.
Similarly, as part of the BRICS Action Agenda on Economic and Trade Cooperation,
the group adopted an Intellectual Property Rights Cooperation Mechanism (BRICS
IPRCM) which should enhance cooperation and coordination in this area, particularly
through the BRICS IPR Cooperation Guidelines and an Action Plan on BRICS IPR
Cooperation (BRICS, a). Concrete activities include fostering information
exchange among the IPR offices of BRICS countries and capacity building on IPR
issues.
... Fostering Demand and Adoption of IR Technologies
UNIDO () argues that even if suitable framework conditions are put in place,
countries need to encourage adoption and adaptation of advanced digital production
technologies. Given the novelty of many of the products and services that can be
derived from the IR technologies, economic agents find it difficult to appraise their
value propositions relative to competing existing technologies, while challenges to
assessing the expected return on investment contrast with perceived high upfront
investment requirements (Steinmueller, ). Addressing this situation requires con-
centrated policy efforts to raise awareness of firms about the potential benefits of the
new technologies. It also requires funding of their adoption to be facilitated. Countries
may adopt and jointly implement dedicated programmes and incentives to raise
awareness and rally the interest of domestic agents, or to foster emerging behaviours
and initiatives related to the IR.
The BRICS expect to enhance collaboration on STI through joint proposals to
mobilize their accumulated technological and R&D capabilities (BRICS, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
BRICS exploration of collaboration is already motivating joint research activities and
innovation agendas on big data, ICT, and other advanced manufacturing technologies
and their applications, and on ICT infrastructure and connectivity (BRICS, b).
Concrete proposals include establishing the BRICS Institute of Future Networks, which
will support joint BRICS research and innovation in ICT—including Internet of things,
cloud computing, big data, data analytics, nanotechnology, artificial intelligence, and
G—and their applications (BRICS, b). The suggested approach is to encourage
partnerships between multiple stakeholders to devise and implement proofs-of-con-
cept and pilot projects in these areas.
... Strengthening Skills and Research Capabilities
UNIDO () documents that governments can play a major role in the creation of
the capabilities required to adopt IR technologies, for example, through dedicated
learning centres and new approaches to technical and vocational education and training.
Expanding the scope and number of research institutions specifically to deal with these
technologies is key for their absorption and adaptation to local circumstances.
López-Gómez et al. () advocate the building of human capabilities, particularly
to enable adjustments in labour markets and systems of education, training, and
retraining. Concrete activities along these lines are yet to emerge but, as agreed in
the most recent ministers of industry meeting, the BRICS intend to enhance policy
coordination around advanced technical skills and training, exchange of information,
and best practices with respect to digitization. Securing inclusive and equitable growth,
while developing synergies in the use of financial and human resources, is likewise
important (Business Report, ).
Interesting initiatives implemented recently at the individual country level may serve
as examples for larger, BRICS-level interventions. For instance, in Russia, the Agency
for Strategic Initiatives (ASI) and Skolkovo (Moscow School of Management) have
developed the Atlas of New Professions, an online platform intended to help under-
stand what the twenty-five most promising sectors will be for the next fifteen to twenty
years, together with relevant occupations and their respective skill requirements and
associated organizational practices; likewise important is the stocktaking of more than
fifty occupations that are bound to become outdated—including both routine and
high-skilled ones (ASI and Skolkovo, ). In parallel, ASI initiatives such as Skill
Development for Industrial Growth are working to improve matching between indus-
try’s skill demands and the supply from educational establishments (Roland Berger
GMBH, ).
According to Tourk and Marsh (), China is fostering programmes to attract
foreign talent to supplement its limited domestic innovation capabilities. For example,
in , the Fozhou Bureau of Foreign Experts Affairs was established in Fozhou,
capital city of Fujian province, providing free work spaces and funding for start-up
companies and arranges matching them with potential investors (Tourk and Marsh,
). By the end of , ten start-ups had settled in the city, and it recorded a
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
significant flow of returning students; moreover, the model had attracted the attention
of other provincial governments in China (Tourk and Marsh, ).
. T I D
..................................................................................................................................
The BRICS cooperation agenda is broad, with an ever-growing number of items. From
an initial focus on global governance and diplomacy—including UN reform and
enlargement of the UN Security Council to include some BRICS as permanent
members—or the reform of current international financial architecture, the agenda
has evolved to include STI topics and economic development. BRICS expect to
influence global peace and security, energy and climate change, and social and eco-
nomic issues in a non-confrontational spirit together with other global governance
arrangements (BRICS, ).
The creation of a New Development Bank (NDB) is a major initiative articulating
the BRICS’ collective presence and global influence. The NDB mobilizes resources for
infrastructure and sustainable development projects in BRICS and other emerging and
developing economies (New Development Bank, a).³ In addition to strengthening
intra-BRICS cooperation, the NDB expects to supplement the funding of multilateral
and regional financial institutions (BRICS, ). The bank became operational with
the signing of the Headquarters Agreement with the government of China and the
Memorandum of Understanding with the Shanghai Municipal People’s Government
on February (BRICS, ). The first loans, approved in ‒, support
projects in green and renewable energy, transportation, water sanitation, and irrigation
(BRICS, ). By the end of , the total loan portfolio should amount to US$
billion (New Development Bank, c), double the US$. billion at the end of
(New Development Bank, b).
Creation of the NDB has not been without tensions. Its operational structure
prescribes an initial authorized capital of US$ billion, with a first subscription of
US$ billion equally shared among founding members. Governance and leadership
are split among the BRICS, with headquarters in Shanghai and an Africa Regional
Centre in South Africa (BRICS, ). Kejin () and Degaut and Meachan ()
assert that although the BRICS contribute equally to the first tranche of capitalization
of the NDB, China seems the only member standing ready and able to expand and fulfil
future commitments. China could take the lion’s share of the decision-making power,
particularly as the conditions for non-BRICS membership of the NDB remain uncer-
tain (Kejin, ).
³ The BRICS have also enacted a Contingency Reserve Arrangement to support one another in
situations of balance-of-payments instability (BRICS, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
.. Africa in Focus
It is no surprise that Africa occupies a prominent place in the BRICS agenda. Even
before their integration, each had established close social, political, and economic ties
with the continent. The steady increase in BRIC FDI in Africa suggests attempts at
breaking customary regional specialization regarding destination countries. At the
same time, the growing presence of BRIC among Africa’s major trade and investment
partners is perceived as a counterbalance to traditional partners, the United States,
Europe, or Japan (Kimenyi and Lewis, ). Similarly, the BRIC were already import-
ant donors in the region through concessionary and soft loans, credit lines and grants;
China in particular actively supports infrastructure projects (Kimenyi and Lewis,
).
Coincident with South Africa’s accession to BRICS, the Sanya Declaration made
explicit the BRICS’ intention to collaborate with Africa, with the New Partnership for
Africa’s Development (NEPAD) identified as the relevant interlocutor (BRICS, ).
Engagement with South African Union countries followed at the fifth BRICS leaders’
summit in Durban, under the overarching theme of ‘BRICS and Africa: Partnership for
Development, Integration and Industrialization’ (BRICS, ). BRICS support to
Africa’s industrialization seeks to potentiate the continent’s development efforts
through FDI, knowledge exchanges, capacity building, and trade diversification.
A priority is to assist the continent in redressing its infrastructure deficits, required
to boost regional integration and industrialization (BRICS, ). This is consistent
with the long-standing BRIC presence in the African infrastructure market (Kimenyi
and Lewis, ) and the potential gains offered by a continent where investments in
infrastructure to provide basic services to the population compete heavily against
resources to improve or expand on transport and other economic infrastructure
(Oxford Economics and Global Infrastructure Hub, ). The establishment of a
Multilateral Agreement on Infrastructure Co-Financing for Africa with support from
the BRICS’ export‒import and development banks is proposed to move collaboration
forward (BRICS, ).
The BRICS presence in Africa provokes some criticisms. Kimenyi and Lewis ()
decry the perceived appetite for Africa’s natural resources, notably oil—with princi-
pally China’s and Brazil’s expanding presence in Angola, Nigeria, and Sudan—mining
in Liberia and Mozambique, and gas in Nigeria. Similarly, India’s presence has
expanded in textiles, social services—health and education—ICT, and automobiles.
Mbele () stresses the asymmetrical patterns of trade and investment between the
BRICS and Africa. South Africa’s accession to BRIC provoked strong criticism; in
addition to the huge economic asymmetries, South Africa is perceived as supporting
the BRIC and particularly Chinese interest in the continent. Kimenyi and Lewis ()
note ties between Chinese investments and Chinese-sponsored infrastructure develop-
ment projects over the last two decades, while South African firms provide the platform
for a cooperation model based on African exports of raw materials and manufacturing
imports (Carmody, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Africa is likely to continue to play a major role in the context of China’s Belt and
Road Initiative (BRI), launched in , which endeavours to transform six trade and
investment corridors across Asia, Europe, and Africa, with an emphasis on infrastruc-
ture and connectivity. Underscoring the benefits of BRICS’ closer collaboration will be
the possibilities of channelling funding through the NDB and other funding
mechanisms—for example the Asian Infrastructure Investment Bank—in which
BRICS participate. However, geopolitical tensions associated with BRI should not be
ignored, particularly as India and Russia maintain close ties and interests in regions
directly located along several BRI main economic corridors.
. C
..................................................................................................................................
The conformation of the BRICS block is a work in progress, at very early stages of
development. The process faces significant constraints rooted in the history, structure,
and recent economic and industrial performance of the countries involved. Several
significant shortcomings could deepen in the near future. In particular, this chapter has
corroborated the widening gap in performance between China and the other
BRICS. This is potentially a major hindrance, as it exacerbates differences in interests
and capabilities within the group (Degaut and Meachan, ). While BRICS integra-
tion would benefit from closing productive and technological capability gaps, recog-
nition of this challenge remains largely absent from policy documents governing the
integration process.
BRICS seem to understand the value of conforming a strong block. Those who
dismiss the possibility of their achieving closer collaboration should remember that
BRICS is mostly an informal collaboration mechanism; each participant plays accord-
ing to its own rules and interests (Kejin, ). BRICS integration is and will continue
to be gradual but systematic, through dedicated strategies or action plans to govern
collaboration in several areas. Other, more mature international governance
mechanisms—the G or even the G—have been built progressively; there is no
reason to expect the BRICS to move any faster or any deeper.
As areas for collaboration expand at every leaders’ or ministerial or expert meeting,
systematic and empirically driven evaluation of commitments and their tangible
outcomes is necessary to draw conclusions. This chapter proposes that industrial
development offers great potential for further follow-up in the future. Despite its
novelty within the BRICS collaboration agenda, industrial development is an area that
could integrate and expand individual BRICS approaches to STI, IPRs, e-commerce,
infrastructure, and other related areas.
BRICS, and particularly China, attract significant attention regarding strategic policy
responses to the IR. Unlike many other developing countries, they have generally
undergone significant structural change with strong reliance on manufacturing.
They are, and will remain, role models for other developing countries where
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industrial development is yet to take root. As the ongoing technological and productive
transformations continue to unfold in uncertain directions, BRICS are continuing to
foster structural change and the development of innovation-driven economies, moving
away from commodities and traditional industrial products and increasingly into
higher-value-added sectors and products. At the same time, BRICS’ strides up the
ranks of global industrial leadership increase the risks of widening gaps relative to least-
developed economies (Liu et al., ; Mayer, ).
Among the BRICS, China seems ready to tap into the current juncture to explore
new development paths, steadily shifting from a catching-up mindset centred on
labour-cost advantages to one of capitalizing on its growing role as a leading global
technology and manufacturing centre (Li, ; The Economist, ). Implications for
the future of industrial dynamics in both developed and developing countries may be
significant.
Finally, yet importantly, from a historical perspective the experience of BRICS
reminds us that catching up entails active industrial policies to underpin the creation
of absorptive technological and productive capabilities. This characteristic should
continue to assist the BRICS in their individual and collective development efforts.
A
Earlier versions of this manuscript benefited from comments and suggestions from Nobuya
Haraguchi, Professor Fantu Cheru, Professor Li Chen, the editors of this volume, and
participants at two review workshops held in Addis Ababa in April and September .
R
Abramovitz, Moses () ‘Catching up, Forging ahead, and Falling behind’, The Journal of
Economic History (): –.
Amirapu, Amrit and Arvind Subramanian () ‘Manufacturing or Services? An Indian
Illustration of a Development Dilemma’, SSRN Scholarly Paper ID . Rochester,
NY: Social Science Research Network. Available at https://papers.ssrn.com/abstract=
.
Andreff, Wladimir () ‘Outward Foreign Direct Investment from BRIC Countries: Com-
paring Strategies of Brazilian, Russian, Indian and Chinese Multinational Companies’, The
European Journal of Comparative Economics (): –.
ASI and Skolkovo () ‘Atlas of Emerging Jobs’. Available at http://atlas.ru/en/.
BRIC () ‘Joint Statement of the BRIC Countries’ Leaders’. Yekaterinburg, Russia, June.
BRICS Information Centre—University of Toronto. Available at http://www.brics.
utoronto.ca/docs/-leaders.html.
BRIC () ‘nd BRIC Summit of Heads of State and Government: Joint Statement’. Brasília,
April. BRICS Information Centre—University of Toronto. Available at http://www.
brics.utoronto.ca/docs/-leaders.html.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
BRICS () ‘Sanya Declaration’. Sanya, Hainan, China, April. BRICS Information
Centre—University of Toronto. Available at http://www.brics.utoronto.ca/docs/-
leaders.html.
BRICS () ‘BRICS and Africa: Partnership for Development, Integration and Industrial-
isation. EThekwini Declaration’. Durban, South Africa, March. BRICS Information
Centre—University of Toronto. Available at http://www.brics.utoronto.ca/docs/-
statement.html.
BRICS () ‘Fortaleza Declaration’. th BRICS Summit, July, Fortaleza, Brazil. BRICS
Information Centre—University of Toronto. Available at http://www.brics.utoronto.ca/
docs/-leaders.html.
BRICS (a) ‘ Ufa Declaration’. th BRICS Summit, Ufa, Russia, July. BRICS
Information Centre—University of Toronto. Available at http://www.brics.utoronto.ca/
docs/-ufa-declaration_en.html.
BRICS (b) ‘Strategy for the BRICS Economic Partnership’. BRICS. Available at file:///C:/
Users/santiagf/Downloads/partnershipstrategy_eng.pdf.
BRICS (a) ‘BRICS Action Agenda on Economic and Trade Cooperation’. BRICS. Available
at http://economy.gov.ru/wps/wcm/connect/dc-ece--ae-cdfada/
.pdf?MOD=AJPERES&CACHEID=dc-ece--ae-cdfada.
BRICS (b) ‘BRICS Leaders Xiamen Declaration’. BRICS. Available at http://www.brics.
utoronto.ca/docs/-xiamen.html.
BRICS (c) ‘Progress Report on the Implementation of the Strategy for BRICS Economic
Partnership’. BRICS. Available at https://www.ranepa.ru/images/media/brics//BRICS
%Strategy%Progress%Report_...pdf.
BRICS () ‘BRICS in Africa: Collaboration for Inclusive Growth and Shared Prosperity in
the th Industrial Revolution. Johannesburg Declaration’. th BRICS Summit, Johannes-
burg, South Africa, July. BRICS Information Centre—University of Toronto. Available
at http://www.brics.utoronto.ca/docs/-johannesburg.html.
BRICS () ‘BRICS Information Portal’. Available at http://infobrics.org/.
BRICS Industry Ministers () ‘Declaration of the BRICS Industry Ministers.
Industrial Cooperation of the BRICS Countries: New Opportunities for Growth’. Moscow,
Russia, October. BRICS. Available at http://www.brics.utoronto.ca/docs/-indus
try.pdf.
BRICS Industry Ministers () ‘BRICS Heads Decide on a -Point Action Plan’. BRICS
Information Portal. Available at http://infobrics.org/post/.
BRICS Industry Ministers () ‘Declaration of the Third BRICS Industry Ministers’
Meeting’. TRALAC. Available at https://www.tralac.org/news/article/-declaration-
of-the-third-brics-industry-ministers-meeting.html.
Brigante Deorsola, Adriana, Marcia Cristiane Martins Ribeiro Leal, Milene Dantas Caval-
cante, Ingrid Jensen Schmidt, and Edimilson Junqueira Braga () ‘Intellectual Property
and Trademark Legal Framework in BRICS Countries: A Comparative Study’, World
Patent Information : –.
Business Report () ‘Declaration of the BRICS Industry Ministers’. IOL Business Report.
Available at https://www.iol.co.za/business-report/economy/declaration-of-the-brics-
industry-ministers-.
Cable, Vince () ‘The Tech Titans Must Have Their Monopoly Broken—and This Is How
We Do It’, The Guardian, April.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Carmody, Pádraig () ‘The Geopolitics and Economics of BRICS’ Resource and Market
Access in Southern Africa: Aiding Development or Creating Dependency?’, Journal of
Southern African Studies (): –.
Cassella, Bruno () ‘Looking through Conduit FDI in Search of Ultimate Investors—a
Probabilistic Approach’, Transnational Corporations: Investment and Development ():
–. Available at https://unctad.org/en/PublicationsLibrary/diaeiad_en.pdf.
Cimoli, Mario, Giovanni Dosi, and Joseph E. Stiglitz () The Political Economy of
Capabilities Accumulation: The Past and Future of Policies for Industrial Development.
Oxford: Oxford University Press.
CSIR and DST () ‘A South African Additive Manufacturing Strategy’. Council for
Scientific and Industrial Research and Department of Science and Technology.
Available at https://site.rapdasa.org/wp-content/uploads///South-African-Additive-
Manufacturing-Strategy.pdf.
Cui, Yu, Jie Jiao, and Hao Jiao () ‘Technological Innovation in Brazil, Russia, India,
China, and South Africa (BRICS): An Organizational Ecology Perspective’, Technological
Forecasting and Social Change : –.
Daudt, Gabriel and Luiz Daniel Willcox () ‘Reflexões Críticas a Partir Das Experiências
Dos Estados Unidos e Da Alemanha Em Manufatura Avançada’, BNDES Setorial : –.
Degaut, Marcos and Carl Meachan () ‘Do the BRICS Still Matter?’. Center for Inter-
national and Strategic Studies. Available at http://enotus.com/wp-content/uploads//
/Do-the-Brics-Still-Matter_.pdf.
Di Maio, Michele () ‘Industrial Policy in the BRICS: Similarities, Differences, and Future
Challenges’, in Wim Naudé and Nobuya Haraguchi (eds) Structural Change and Industrial
Development in the BRICS. Oxford: Oxford University Press, pp. –.
Dominguez Lacasa, Iciar, Björn Jindra, Slavo Radosevic, and Mahmood Shubbak ()
‘Paths of Technology Upgrading in the BRICS Economies’, Research Policy (): –.
Franco, Camila and Renan Henrique de Oliveira () ‘Inputs and Outputs of Innovation:
Analysis of the BRICS: Theme —Innovation Technology and Competitiveness’, RAI
Revista de Administração e Inovação (): –.
Government of the Russian Federation () ‘Digital Economy Program of the Russian
Federation’. Moscow: Government of the Russian Federation.
Gray, Kevin and Barry K. Gills () Rising Powers and South–South Cooperation. London:
Routledge.
Gray, Kevin and Craig N. Murphy () ‘Introduction: Rising Powers and the Future of
Global Governance’, Third World Quarterly (): –.
Hallward-Driemeier, Mary and Gaurav Nayyar () Trouble in the Making? The Future of
Manufacturing-led Development. Conference edition. Washington, DC: World Bank.
Haraguchi, Nobuya, Charles Fang Chin Cheng, and Eveline Smeets () ‘The Importance
of Manufacturing in Economic Development: Has This Changed?’, World Development
: –.
Hobday, Michael, Howard Rush, and John Bessant () ‘Approaching the Innovation
Frontier in Korea: The Transition Phase to Leadership’, Research Policy (): –.
Kahn, Michael, Luiz Martins de Melo, and Marcelo Pessoa de Matos () Financing
Innovation: BRICS National Systems of Innovation. New Delhi: Routledge and IDRC.
Kejin, Zhao () ‘The Limits of Cooperation among BRICS Countries’. Carnegie-Tsinghua
Center (blog). Available at https://carnegietsinghua.org////limits-of-cooperation-
among-brics-countries-pub-.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Kimenyi, Mwangi and Zenia Lewis () ‘The BRICs and the New Scramble for Africa’, in
Foresight Africa: The Continent’s Greatest Challenges and Opportunities for . Washington,
DC: Brookings Institution Press, pp. –. Available at https://www.brookings.edu/multi-
chapter-report/foresight-africa-the-continents-greatest-challenges-and-opportunities-for-/.
Lee, Keun (a) ‘Economics of Technological Leapfrogging’. Background paper for the
UNIDO Industrial Development Report . Inclusive and Sustainable Development
Working Paper Series. Vienna: United Nations Industrial Development Organization.
Lee, Keun (b) The Art of Economic Catch-up: Barriers, Detours and Leapfrogging in
Innovation Systems. Cambridge: Cambridge University Press.
Lee, Keun and Franco Malerba () ‘Theory and Empirical Evidence of Catch-up Cycles
and Changes in Industrial Leadership’, Research Policy (): .
Lee, Keun, Chan-Yuan Wong, Patarapong Intarakumnerd, and Chaiyatorn Limapornvanich
() ‘Is the Fourth Industrial Revolution a Window of Opportunity for Upgrading or
Reinforcing the Middle-income Trap? Asian Model of Development in Southeast Asia’,
Journal of Economic Policy Reform. Available at https://doi.org/./..
.
Li, Ling () ‘China’s Manufacturing Locus in : With a Comparison of “Made-in-
China ” and “Industry .” ’, Technological Forecasting and Social Change ©:
–.
Liu, Xielin, Sylvia Schwaag Serger, Ulrike Tagscherer, and Amber Y. Chang () ‘Beyond
Catch-up—Can a New Innovation Policy Help China Overcome the Middle-income
Trap?’, Science and Public Policy (): –.
López-Gómez, Carlos, David Leal-Ayala, Michele Palladino, and Eoin O’Sullivan ()
‘Emerging Trends in Global Advanced Manufacturing: Challenges, Opportunities and
Policy Responses’. United Nations Industrial Development Organization and University
of Cambridge’s Institute for Manufacturing.
Mahrenbach, Laura, Katja Mayer, and Jürgen Pfeffer () ‘Policy Visions of Big Data: Views
from the Global South’, Third World Quarterly (): –.
Marr, Bernard () ‘Here’s Why Data is Not the New Oil’, Forbes (blog). Available at
https://www.forbes.com/sites/bernardmarr////heres-why-data-is-not-the-new-oil/.
Mayer, Jörg () ‘Digitalization and Industrialization: Friends or Foes?’. Research Paper
No. . Geneva: UNCTAD. Available at https://unctad.org/en/pages/PublicationWebflyer.
aspx?publicationid=.
Mbele, Sizwe () ‘Opportunity Africa: Will the BRICS Countries Manage Mutual Cooper-
ation?’. BRICS. Available at http://infobrics.org.
Mittelman, James H. () ‘Repositioning in Global Governance: Horizontal and Vertical
Shifts amid Pliable Neoliberalism’, Third World Quarterly (): –.
Nelson, Richard R. () ‘The Co-Evolution of Technology, Industrial Structure, and
Supporting Institutions’, Industrial and Corporate Change (): –.
New Development Bank (a) ‘History’. New Development Bank (blog). Available at
https://www.ndb.int/about-us/essence/history/.
New Development Bank (b) ‘NDB Board of Governors and Board of Directors Meetings
Held in Cape Town, South Africa’. New Development Bank (blog). Available at https://
www.ndb.int/press_release/ndb-board-governors-board-directors-meetings-held-cape-town-
south-africa/.
New Development Bank (c) ‘New Development Bank (NDB) Outlines Ambitious Plans
to Boost Loans, Increase Impact of Investment’. New Development Bank (blog). Available
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
at https://www.ndb.int/press_release/new-development-bank-ndb-outlines-ambitious-plans-
boost-loans-increase-impact-investment/.
OECD () ‘China and the Next Production Revolution’, in The Next Production Revolution:
Implications for Governments and Business. Paris: Organisation for Economic Cooperation and
Development, pp. –.
O’Neill, Jim () ‘Building Better Global Economic BRICs’. Global Economics Paper,
Goldman Sachs.
O’Neill, Jim () ‘Jim O’Neill: Revisiting the Next BRIC Economies’. Available at https://
www.fnlondon.com/articles/jim-oneill-revisiting-the-next-bric-economies-.
O’Neill, Jim, Dominic Wilson, and Roopa Purushothaman () ‘How Solid are the BRICs?’.
Global Economics Paper, Goldman Sachs.
Oxford Economics and Global Infrastructure Hub () ‘Global Infrastructure Outlook:
Infrastructure Investment Needs Countries, Sectors to ’. Oxford Economics.
Available at https://outlook.gihub.org/.
Rodriguez-Arango, Liliana, and Maria Alejandra Gonzalez-Perez () ‘Giants from Emer-
ging Markets: The Internationalization of BRIC Multinationals’, in Rob Van Tulder, Alain
Verbeke, Jorge Carneiro, and Maria Alejandra Gonzalez-Perez (eds) The Challenge of BRIC
Multinationals. Progress in International Business Research . Bingley: Emerald Group
Publishing, pp. –.
Roland Berger GMBH () ‘Skill Development for Industry .: White Paper Summary’.
BRICS Business Council, India Section. Available at http://www.ficci.in/spdocument/
/Whitepaper-brics-skill.pdf.
Santiago, Fernando () ‘Innovation Policy and Industrial Policy at the Crossroads:
A Review of Recent Experiences in Advanced Developing Countries’. Inclusive and Sus-
tainable Development Working Paper No. /. Vienna: UNIDO, Research, Statistics
and Industrial Policy Branch.
Santiago, Fernando () ‘You Say You Want A Revolution: Strategic Approaches to
Industry . in Middle-income Countries’. Inclusive and Sustainable Development Work-
ing Paper No. . Vienna: UNIDO, Research, Statistics and Industrial Policy Branch.
Scerri, Mario and Helena Maria Martins Lastres (eds) () The Role of the State: BRICS
National Systems of Innovation. New Delhi and Abingdon: IDRC and Routledge.
Schwab, Klaus () The Fourth Industrial Revolution. New York: Crown Business.
Simachev, Yuri, Mikhail Kuzyk, Boris Kuznetsov, and Evgeniy Pogrebnyak () ‘Russia on
the Path towards a New Technology Industrial Policy: Exciting Prospects and Fatal Traps’,
Foresight-Russia (): –.
Sing, Parminder Jeet () ‘Digital Industrialisation in Developing Countries—A Review of
the Business and Policy Landscape’. Bangalore: IT for Change. Available at http://
itforchange.net/sites/default/files//Digital-industrialisation-May-.pdf.
Steinmueller, Edward () ‘ICTs and the Possibilities for Leapfrogging by Developing
Countries’, International Labour Review (): –.
Stiglitz, Joseph E. () ‘Industrial Policy, Learning, and Development’, in John Page and
Finn Tarp (eds) The Practice of Industrial Policy: Government–Business Coordination in
Africa and East Asia. WIDER Studies in Development Economics. Oxford: Oxford Uni-
versity Press, pp. –.
The Economist () ‘Made in China?’, The Economist, May. Available at http://stage.
economist.com/news/leaders/-asias-dominance-manufacturing-will-endure-will-
make-development-harder-others-made.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Tourk, Khairy and Peter Marsh () ‘The New Industrial Revolution and Industrial
Upgrading in China: Achievements and Challenges’, Economic and Political Studies ():
–.
UIS () ‘How Much does your Country Invest in R&D?’. Available at http://www.uis.
unesco.org/_LAYOUTS/UNESCO/research-and-development-spending/index-en.html.
UNCTAD () ‘Global Investment Trends Monitor’. Global Investment Trends Monitor
No. . Geneva: United Nations Conference on Trade and Development. Available at
https://unctad.org/en/PublicationsLibrary/webdiaeiad_en.pdf.
UNCTAD () ‘World Investment Report ’. Geneva: United Nations Conference on
Trade and Development. Available at https://unctad.org/en/pages/PublicationWebflyer.
aspx?publicationid=.
UNIDO () ‘Industrial Development Report /: Competing through Innovation and
Learning’. Vienna: United Nations Industrial Development Organization.
UNIDO () ‘Industrial Development Report : Capability Building for Catching-up.
Historical, Empirical and Policy Dimensions’. Vienna: United Nations Industrial Develop-
ment Organization.
UNIDO () ‘Competitive Industrial Performance Report ’. Biennial CIP Report.
Vienna, Austria: United Nations Industrial Development Organization. Available at
https://www.unido.org/sites/default/files/files/–/CIP.pdf.
UNIDO () ‘Industrial Development Report . Industrializing in the Digital Age’.
Vienna: United Nations Industrial Development Organization.
Vértesy, Dániel () ‘Interrupted Innovation: Emerging Economies in the Structure of the
Global Aerospace Industry’, PhD thesis, Maastricht University.
Wilson, Dominic and Roopa Purushothaman () ‘Dreaming with BRICs: The Path to
’. Global Economics Paper, Goldman Sachs.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
......................................................................................................................
......................................................................................................................
. I: I
P E D
..................................................................................................................................
T increase in the share of the service sector, especially of trade and finance, at the
expense of industry (de-industrialization) occurred in all post-communist economies.
Previously in the centrally planned economies, the service sector, in particular trade
and finance, was underdeveloped. In Russia, for instance, the share of industry in GDP
fell from about half in to about one-third by the mid-s, whereas in industry
itself the share of the primary sector (fuel, energy, steel, and non-ferrous metals) in
total industrial output increased from per cent to over per cent, and the share of
secondary manufacturing declined accordingly (Popov, ). Part of the decline was
due to the change in relative prices (domestic prices for resources and services
increased more than for manufactured and agricultural goods), but relative changes
in physical output also played a role—real decline in secondary manufacturing and
agriculture was more pronounced than in services and resource industries.
The structure of exports in most post-communist states has also become more
primitive in the past two decades—the share of manufactured goods in total exports
either declined or did not show any clear tendency towards increase. This was partly
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
due to the increase in resource prices and the resource boom—the expansion of fuel
production and exports in Azerbaijan, Kazakhstan, Russia, Turkmenistan, and
Uzbekistan. In Russia, the share of fuel, minerals, metals, and diamonds in total exports
grew from per cent in (USSR) to per cent in and to per cent in ,
whereas the share of machinery and equipment fell from per cent in (USSR) to
per cent in and to . per cent in . But the real shifts (in constant prices)
were also in favour of resources at the expense of ready-made goods.
International comparison of the structure of the economy at different stages of
development may provide some insights into what kind of structural shifts occur
during the transition from the agricultural to the industrial stage and to the post-
industrial stage. The Chenery hypothesis (Chenery, ) predicts changes in the
relative shares of three major sectors of the economy (agriculture, industry, services)
in the process of economic development. The data suggest that the share of agriculture
constantly decreases, the share of services constantly increases, whereas the share of
manufacturing increases before countries reach a level of per capita income of about
, international dollars of (ln = .), that is, about , in today’s
prices, and then declines. To put it differently, at a stage of development of below
$, GDP per capita in today’s prices, resources were transferred from agriculture
to industry and services, whereas after the level of $, per capita GDP, resources
were transferred from both agriculture and industry to services (i.e. the service sector
was growing at the expense of not only agriculture, but also industry) (Herrendorf
et al., : figure ).
The level of development, of course, is not the only determinant of the structure of
the economy. The other determinants are the size of the economy and its resource
endowment, as was pointed out in the early literature on the issue. Syrquin and
Chenery () concluded that higher income growth and more marked transform-
ation are found among countries with large populations, a predominance of manufac-
tures in exports, and a larger role of exports.
Changes in industrial structure are not the result of the ‘invisible hand of the market’
alone. As Greenwald and Stiglitz (, ) state, market failures are pervasive;
private rewards and social rewards virtually always differ, so governments are inevit-
ably involved in shaping the industrial structure of the economy, both by what they do
and by what they do not do. As many authors point out, the secret of ‘good’ industrial
policy in East Asia, as opposed to ‘bad’ industrial policy in the former Soviet Union,
Latin America, and Africa may be associated with the ability to reap the benefits of
export externalities (Khan, ; Gibbs, ). Exporting to world markets, especially
to developed countries, enables the upgrading of quality and technology standards and
yields social returns in excess of returns to particular exporters. The greatest increases
in productivity are registered at companies that export to advanced (Western) markets
and that export high-tech goods (Harris and Li, ; Shevtsova, ). It has been also
shown that the gap between the actual level of development (per capita income) and
the hypothetical level that corresponds to the degree of sophistication of a country’s
exports is strongly correlated with productivity growth rates (Hausmann et al., ).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
To put it differently, it pays to promote exports of sophisticated and high-tech goods.
Not all the countries that try to promote such exports succeed, but those that do not try,
virtually never engineer growth miracles.¹
It should be noted though that there is an opposite view—for instance, the recent
World Bank paper (Gill et al., ). It concludes that it is not clear whether diversi-
fying exports and production is necessary for development and that governments need
to worry less about the composition of exports and the profile of production and more
about national asset portfolios—the blend of natural resources, built capital, and
economic institutions.
. O C
S E
P- C
..................................................................................................................................
After the fall of the Berlin Wall (), the collapse of the Union of Soviet Socialist
Republics (USSR, ), and market-oriented reforms in successor states, the perform-
ance in the post-Soviet space varied greatly (Figure .). In retrospect, it is obvious
that rapid economic liberalization did not pay off: many gradual reformers from the
former Soviet Union in this region performed better than the champions of ‘big bang’
liberalization—the Baltic states and Central Europe. In Turkmenistan and Uzbekistan,
for instance, privatization was rather slow—over per cent of their GDP is still
produced at state enterprises, but their performance is superior to that of more
liberalized economies. Resource abundance has definitely helped resource exporters,
such as Azerbaijan, Kazakhstan, and Turkmenistan, to maintain higher incomes
recently, when resource prices were high, but was not a sine qua non for growth—
resource-poor Tajikistan, as well as Uzbekistan, self-sufficient in fuel and energy, did
much better than resource-rich Russia (Figure .).
As past research shows, the crucial factor in economic performance was the ability to
preserve the institutional capacity of the state (Popov, , , for a survey).
The story of transition was very much a government failure, not a market failure story.
¹ One exception could be Botswana, which had one of the highest rates of per capita GDP growth in
the last fifty years ( per cent during ‒), primarily driven by exports of primary commodities
(namely, diamonds) and not of high-tech goods. The other exception may be Oman: out of twenty
economies with average growth rates of GDP per capita in ‒ of per cent and more a year,
Oman was the only oil-rich state (nearly per cent growth a year) (Popov and Jomo, ). True, many
other oil and gas exporters in the Persian Gulf and elsewhere quickly became rich in recent decades, but
not due to higher growth rates of output (it was moderate), but due to the improvement of the terms of
trade—their income from resource exports grew much faster than their output and exports.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
370
320
270
Turkmenistan
Uzbekistan
Azerbaijan
Kazakhstan
220 Tajikistan
Central Europe
Belarus
Estonia
Kyrgyzstan
170 Armenia
Lithuania
Latvia
Russia
Georgia
120
Moldova
Ukraine
70
20
89
91
93
95
97
99
01
03
05
07
09
11
13
15
17
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
. GDP change in economies of the former Soviet Union, = %
Note: Central Europe is the unweighted average for Czech Republic, Hungary, Poland, Slovakia, and Slovenia.
Source: EBRD Transition Reports for various years.
In all former Soviet republics and in Eastern European countries, government spending
fell during transition and the provision of traditional public goods, from law and order
to health care and infrastructure, worsened. This led to an increase in crime, the
shadow economy, income inequalities, corruption, and mortality.
But in countries with the smallest decline in government spending (countries very
different in other respects—from Central European states to China and Vietnam and to
Uzbekistan), these effects were less pronounced, and the dynamics of output was better
(Popov, ). China carried out gradual reforms from , Vietnam, gradual reforms
in ‒ and radical reforms in , but both countries managed to avoid the
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
transformational recession² due to their ability to preserve state institutional capacity
(Popov, ).
All former communist countries had centrally planned economies and all of them
inherited distortions in industrial structure and interregional trade patterns created by
central planning. Central planners gave high priority to industry, especially heavy and
high-tech industries (at the expense of resources industries and agriculture) and to self-
sufficiency achieved through import-substitution policy. As a result, secondary manu-
facturing industries took a high share of the national economy (as compared to other
countries with similar per capita incomes), but they were less efficient and competitive.
After the deregulation of prices and the opening of the economy, market forces were
allowed to influence the allocation of resources and most secondary manufacturing
and high-tech industries proved to be uncompetitive, so their output shrank. All
former communist countries (with the exception of China and Vietnam) experienced
transformational recession, de-industrialization and a decline in R&D potential in the
s after the transition to the market economy. There was also rapid ‘resource-ialization’
after the transition to the market in . An increase in the share of the service sector,
especially trade and finance, at the expense of industry (de-industrialization) occurred in
all post-communist economies.
It seems, however, that in many of these economies de-industrialization went too far.
In Eastern European countries, especially in the countries of Central Europe (Czech
Republic, Hungary, Poland, Slovenia, Slovakia) the decline was less pronounced than in
many former Soviet Union (FSU) countries. In Tajikistan, for example, the share of
services in GDP nearly doubled, increasing from about per cent in the early s to
per cent in , whereas the share of manufacturing in GDP fell from per cent
in to per cent in (Figures ., ., and .). In Armenia, the share
of industry fell from per cent in to per cent in and the share of
manufacturing, from about per cent to per cent, whereas the share of services
increased from about to per cent in the late s/early s, and to over per
cent in .
In resource-rich FSU countries, the decline of the share of manufacturing was most
dramatic—it was driven not only by the expansion of the service sector, but also by the
expansion of the resource industries that became most competitive with the new price
ratios. The contrast with China and Vietnam—two countries with active industrial
policies to support export-oriented manufacturing—was extremely pronounced. In
Azerbaijan, Kazakhstan, and Russia the share of manufacturing fell below the level of
much poorer Vietnam ( per cent), not to mention China ( per cent).
A comparison of Figures . and . is quite instructive. The share of manufac-
turing in total value added (GDP) has declined in almost all post-communist countries
² While Vietnamese industry, excluding constantly and rapidly growing oil production, experienced
some downturn in ‒ (– per cent in and per cent in ) agricultural growth remained
strong, so that GDP growth rates remained virtually stable at ‒ per cent a year.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Eastern European countries Non-resource-rich FSU and Mongolia
44
29 39
Belarus
Czech Republic
Kyrgyz Republic
Slovenia 34
Ukraine
Slovak Republic
24 Moldova
Romania 29
Georgia
Hungary
Armenia
Poland
24 Tajikistan
Lithuania
19 Mongolia
Serbia
Bulgaria 19
Estonia
Croatia 14
14
Latvia
9
9 4
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
China, Vietnam and resource-rich FSU
39
34
29
China
24
Turkmenistan
Vietnam
Russian Federation
19 Kazakhstan
Azerbaijan
14
4
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
. Share of manufacturing value added in GDP in post-communist transition coun-
tries between and , %
Source: World Development Indicators (there is no data for Uzbekistan in WDI).
and is now at a very low level of to per cent (Figure .), whereas in the late s
it was at a level of about to per cent. And of course this share is way lower than in
China, where it has remained at a level of about per cent in recent years, consid-
erably higher than in other developing countries.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Eastern European countries
65
Non-resource-rich FSU and Mongolia
55
60
Bulgaria 50
55
Czech Republic
Estonia 45
50 Croatia
Hungary Mongolia
40
45 Bosnia and Belarus
Herzegovina
Tajikistan
Lithuania 35
40 Kyrgyz Republic
Latvia
Armenia
Slovak Republic 30 Ukraine
35 Slovenia
Georgia
Poland
25 Moldova
30 Serbia
Romania
20
25
15
20
10
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
15
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
China, Vietnam and resource-rich FSU
70
60
Turkmenistan
50 Azerbaijan
China
Vietnam
40 Kazakhstan
Russian Federation
Uzbekistan
30
20
10
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
. Share of industry value added in GDP of post-communist countries, –, %
Source: World Development Indicators.
The share of industry as a whole (which includes not only manufacturing, but also
mining and utilities—electricity and gas distribution; Figure .),³ as a rule of thumb,
despite sharp fluctuations, did not decline much in resource-rich countries (Azerbaijan,
Kazakhstan, Russia, Turkmenistan), but declined in non-resource-rich countries. The
only exception is Uzbekistan, which has a medium resource abundance (self-sufficient in
energy), but managed to increase the share of industry to over per cent after it fell from
to below per cent in ‒ (Figure .).
The structure of exports in most post-Soviet states has also become more primitive
in the last two decades; the share of manufactured goods in total exports either declined
³ Unfortunately, there are no comparable statistics on the shares of mining and utilities separately.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
90
80
70
Kazakhstan
60
China
Armenia
50
Kyrgyz Republic
Uzbekistan
40
Azerbaijan
Afghanistan
30
Tajikistan
Turkmenistan
20
10
0
19 5
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15
17
8
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
. Share of service value added in GDP in selected post-communist countries,
–, %
Source: World Development Indicators.
or did not show any clear tendency towards increase. Perhaps surprisingly, Kyrgyzstan
was the only country where the share of manufacturing exports in total exports
increased (Figure .).
. S E
T I P
..................................................................................................................................
The crucial question, of course, is whether the government should participate in the
process of structural shifts (and if yes, then how), or whether the structure of the economy
should be totally determined by market forces. Government preferences (tax, trade, credit,
other) for particular industries are called industrial policy and the huge literature on
industrial policy (see Popov, , for a summary) focuses on three key issues:
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
100
90
80
China
70 Kyrgyz Republic
Georgia
60 Armenia
Russian Federation
50 Kazakhstan
Afghanistan
40
Azerbaijan
Tajikistan
30
Turkmenistan
20
10
0
09 011 013 015 017
89
91
93
95
97
99
01
03
05
07
20 2 2 2 2
19
19
19
19
19
19
20
20
20
20
. Manufacturing exports, % of merchandise export, in some post-communist
countries
Source: World Development Indicators.
. Is industrial policy necessary for successful development or does the market know
better how to allocate resources?
. If industrial policy is needed, how should industries that need to be supported be
selected?
. What are the appropriate tools/instruments to support particular industries?
To give one example of what industrial policy can do, consider a resource-rich
country that previously (under central planning) favoured secondary manufacturing
and now (after transition to the market and the change in relative prices of resources
and ready-made goods) is experiencing, under the pressure of market forces, the
reallocation of capital and labour from manufacturing to mining and primary manu-
facturing (oil, gas, electric energy, diamonds, steel, non-ferrous metals). Available
calculations of total factor productivity show that in resource-rich countries, such as
Azerbaijan, Kazakhstan, Russia, Turkmenistan, Uzbekistan, it is much higher in
mining than in other industries, with the possible exception of trade and finance
(Popov, , ; Gharleghi and Popov, b). No wonder that capital and labour
are being reallocated from non-resource to resource industries. Should the government
just observe the process without interfering, should it oppose the market forces, or
should it try to promote structural shifts already under way to ensure that they happen
faster? And what tools should be used to promote desirable shifts: subsidies, cheap
credits, tax concessions, import tariffs, or exchange rate management?
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Page () argues that Africa should industrialize because without structural
change it cannot sustain recent growth. Economies with more diverse and sophisti-
cated industrial sectors tend to grow faster. But since Africa has de-industrialized.
Page’s paper shows that between and the size, diversity, and sophistication
of industry in Africa have all declined. He argues that an industrialization strategy
containing two elements is needed:
▪ The first is straightforward: refocusing current investment climate reforms on
infrastructure, skills, and regional integration. These actions alone will not be
sufficient, however.
▪ Africa must also learn to compete through strategies to create an export push,
develop industrial clusters, and attract task-based production.
A recent IMF paper (Cherif and Hasanov, ) highlights the key role of industrial
policy in the Asian miracles, for the United States after the Civil War, for Germany
under Bismarck, and for Japan after the Meiji Restoration. Jomo () argues that
East Asian industrial policies contributed to the economic miracle stories and, despite
the current conventional wisdom, can be successfully emulated by other developing
countries.
Stiglitz (), however, states that export-led growth was the model behind the
twentieth-century growth miracles. There was unprecedented growth in East Asia—
closing the gap in income per capita and standards of living with the advanced
countries. That model, he claims, will not work in the future in the way and to the
extent that it did in the past. He suggests a multi-pronged strategy for developing
countries, entailing a combination of manufacturing, agriculture, services, and natural
resources.
It is always difficult, of course, to predict the efficiency of the growth model. The
famous example is that of Gunnar Myrdal () who in his Asian Drama was
extremely pessimistic about the prospects of Asian future growth exactly at a time
when Asian dragons and tigers were taking off to propel themselves out of poverty and
become economic miracles.
. I P: W
I S?
..................................................................................................................................
As the UN ESCAP () report on diversification states:
Implementing strategic diversification requires an industrial policy—the selective
promotion of particular economic activities over others. Here, new economic
activities should be promoted that would encourage greater levels of product
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
complexity and allow for further diversification in the future. Active public
intervention is required that is aimed at supporting infant industries and creating
the necessary complementary productive infrastructure, including industrial estates
and economic zones. Intervention would also be aimed at encouraging marketing
and export market development, together with other promotional measures under
industrial policy. (UN ESCAP, : viii)
Not only is industrial structure shaped by the development process; it also has
important implications for economic development. The Chenery hypothesis
(Chenery, ) states that countries at similar levels of economic development should
have similar patterns of resource allocation between sectors. But in theoretical models
it is often assumed that there are externalities from industrialization and industrial
export (Murphy et al., ; Polterovich and Popov, , ). There is growing
evidence that countries which are more industrialized and countries with more
technologically sophisticated industrial exports are growing faster than others
(Hausmann et al., ; Rodrik, ).
The important stylized fact is that no economic miracle in the developing world was
based either on agricultural or service industries. A Canadian economist, Harrold
Innis, was the author of the staple theory of economic development (Innis, ). He
claimed that Canadian economic (and not only economic, but also social and cultural)
development was determined by exports of staple goods, in chronological order since
the seventeenth century: furs, fish, lumber, wheat, mined metals, and coal. It could be
also claimed that some countries that are now members of the ‘rich-country club’ made
their fortunes on resource and agricultural exports; examples would be (in addition to
Canada) Australia, New Zealand, and the United States. But by the twentieth century,
after the income gap between developed and developing countries widened, cases of
successful catch-up development (Popov and Jomo, ) were associated with manu-
facturing exports, not with exports of agricultural or resource commodities. Oil-rich
countries, like Persian Gulf states or Equatorial Guinea, which have now achieved
developed-country levels of per capita income, did so due to terms-of-trade improve-
ment (increase in fuel prices), not due to exceptionally high rates of growth of output
(Oman is the exception, see footnote ).
The reduction in the share of industry and manufacturing in GDP and the increase
in the share of services is an objective process; but in fast-growing countries (e.g.
China), this decline was slower than in others with a similar level of development
(Figures ., ., and .). The increase in the share of machinery and equipment in
manufacturing output, as in China, usually accompanies rapid growth or even becomes
the engine of growth. We are not aware of cases of rapid growth (‘economic miracles’)
that are based on accelerated growth of the service sector.
The question ‘What are the particular manufacturing industries which could become
the engine of growth?’ is a difficult one (Popov and Chowdhury, ). Unfortunately,
economic theory does not suggest any definite clues, with the exception of the idea that
these industries should have the highest externalities, that is, their social returns should
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
be higher than private returns. Yet, it is not easy to measure these externalities.
Nevertheless, upon examination of the literature and the experience of countries
with industrial policy, it is possible to isolate methods which can aid in identification
of industries that should be supported.
For example, one can support several industries which seem promising on condition
that assistance ends if the increase in exports is not achieved within, say, five years. This
is called ‘EPconEP’—effective protection conditional on export promotion (Jomo,
). Economic policymakers in this case are similar to the military commander
who begins an offensive on several fronts, but throws reserves at where there has been a
breakthrough.
Alternatively, one can attempt to determine specific industries where limited invest-
ment can produce the greatest effect, leading to the creation of globally competitive
production. These are most likely to be industries that lag behind the most advanced
countries in total factor productivity, but not so much as other industries.
It is also possible to choose at random. In this case, it is important to be consistent by
embarking on the path of support for a particular industry and not withdrawing even if
there is no immediate success or breakthrough in world markets. After all, the modern
theory of international trade explains country specialization not by comparative
advantages, but rather by ‘learning by doing’.
If a country does not have any comparative advantage, like post-war Japan for
example, it is necessary to create them (‘dynamic comparative advantages’) by mas-
tering the production of goods that have not been produced before. Supporting such
production and consistently encouraging exports for some time without giving up is
likely to have the learning-by-doing effect, allowing the country to gradually become
competitive.
There are two opposing views on how technologically advanced industries sup-
ported in the framework of industrial policy ought to be. Justin Lin, former chief
economist of the World Bank, developed the idea of comparative-advantages-following
(CAF) and comparative-advantages-defying (CAD) industrial strategy. The best result,
according to his argument, can be achieved if countries develop industries that are
consistent with their comparative advantages, as determined by their endowment
structure, and do not try to bypass necessary stages aiming at exporting the goods
which are exported by very advanced countries (Lin, ). Middle-income oil-rich
countries, like Kazakhstan and Azerbaijan, for instance, according to this logic, should
aim at developing heavy chemical, not computer industries.
This view is consistent with the ‘flying geese’ paradigm: as more competitive
countries move to more advanced types of exported products, the vacated niches are
occupied by less developed countries. It is known that relatively poor countries began
to export textiles and shoes, then moved on to the export of steel products and heavy
chemicals, then to the export of cars and electrical consumer products such as
washing machines and refrigerators, then to consumer electronics and computers.
Newcomers can benefit from the experience of other countries by trying to replicate
their success.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
The transition from one exported good to another could be dictated by the cycle of
innovations. As Lee () suggests, the cycle is short for electronics and long for
pharmaceuticals and chemicals. This may explain why East Asian countries which
focused mostly on industries with short cycles managed to avoid growth slowdowns
while moving from one export niche to another.
The debate between Justin Lin and Ha-Joon Chang (Lin and Chang, ) is telling
in this respect. The latter was defending the idea of CAD industrial policy which
favours industries that defy the country’s comparative advantages. Such industries take
time to develop, yet they can be worthwhile. For example, ‘Japan had to protect its car
industry with high tariffs for nearly four decades, provide a lot of direct and indirect
subsidies, and virtually ban foreign direct investment in the industry before it could
become competitive in the world market. It is for the same reason that the electronics
subsidiary of the Nokia group had to be cross subsidized by its sister companies for
years before it made any profit. History is full of examples of this kind, from
eighteenth-century Britain to late twentieth-century Korea’ (Lin and Chang, ).
Hausman, Hwang, and Rodrik’s position (Hausmann et al., ; Rodrik, ) may
be rather different from Chang’s CAD strategy and the policy of promoting high-tech
industries and R&D in relatively poor countries. The CAD strategy does not necessarily
imply a transition to more technologically sophisticated industries, but rather, to
industries that are not linked to the comparative advantages of a particular country.
Theoretically, it could be a transition from chemicals to machine building with
the same, or even a lower, level of R&D intensity and technological sophistication.
Hausman, Hwang, and Rodrik’s idea is that externality benefits from the production
and export of new products are proportional to the degree of their technological
sophistication, which is measured by the comparison of the export structures of rich
versus poor countries. High-income countries export on average more high-tech
products. Developing high-tech production in poor countries may be costly, yet the
returns from such a policy can be greater. It may well pay a relatively poor country to
make ‘a big leap forward’ by investing heavily in the education of the labour force and
high-tech industries, bypassing the intermediate stages of producing goods with
medium research intensity.
Uzbekistan, for instance (a low-income country, not even a middle-income country),
started to invest massively in the development of the auto and heavy chemical
industries at the stage of development at which other countries export mostly resource
goods, textiles, and leather products. It remains to be seen whether these investments
will be justified (see Box .).
Rodrik et al. () consider two sources of productivity growth: within the industry;
and due to structural shifts, that is, reallocation of resources to more productive industries.
Which is more efficient: relying on productivity growth within existing industries or
promoting structural shifts from less productive to more productive industries?
In a similar vein, Rodrik () describes two approaches to development: bottom
up and top down. The former focuses directly on the poor, and on delivering services,
such as education, health care, and microcredit, to their communities. As Reddy ()
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Box 27.1 What Uzbekistan knows about industrial policy that other countries do
not know
In the last two decades the economy of Uzbekistan has been extremely successful—high
growth ( per cent), low unemployment and reasonable macroeconomic stability, low domes-
tic and international debt, relatively low inequality. Even more impressive are the structural
shifts that have happened in less than thirty years since Uzbekistan became an independent
country: () decrease in production and export of cotton (which was previously a mono
culture), increase in food production and achievement of self-sufficiency in food; () achieve-
ment of self-sufficiency in energy and becoming a net fuel exporter; () increase in the share of
industry in GDP and the share of machinery and equipment in industrial output and export
(a competitive export-oriented auto industry was created from scratch) (Popov, , ).
In recent years Uzbekistan has promoted heavy chemical industries (production of
synthetic fuel and polypropylene goods from natural gas). This is the next stage of
industrial policy after reaching food and energy self-sufficiency and successful auto-
industry development. In it became the fifteenth country in the world to launch a
high-speed train line, between Tashkent and Samarkand (it was continued to Bukhara and
Karshi in and ). The train is made by Spanish company Talgo and travels the
km between Tashkent and Bukhara in hours minutes.
Uzbekistan’s development achievements, even though not as spectacular as those of
China, have been due to deliberate government policies. True, Uzbekistan enjoyed a
favourable external environment, but its rapid growth is due to reasonable macroeconomic
stability and industrial policies rather than simply to market reforms that triggered growth
conforming to its factor endowment and/or natural comparative advantages.
What makes Uzbekistan different and even unique is its low exchange rate policy. It
promotes export-oriented development, similar to Japan in the s to s, South
Korea in the s to s and China and the ASEAN countries since the s (Dollar,
; Easterly, ; Polterovich and Popov, ; Rodrik, ; Bhalla, ). Under-
valuation of the exchange rate via accumulation of foreign exchange reserves becomes a
powerful tool of industrial policy creating stimuli for tradable goods at the expense of non-
tradables (Greenwald and Stiglitz, ). Other former communist countries of Eastern
Europe and the USSR did not implement such a policy; on the contrary, their exchange
rates were and often are overvalued, especially in countries that export resources (they
suffer from the ‘Dutch disease’).
Since Uzbekistan has probably been the only country in the post-Soviet space that
has carried out gradual, predictable nominal devaluation of the currency to a slightly greater
extent than is needed to counter the differences in inflation rates between Uzbekistan and its
major trading partners, so that the real effective exchange rate is depreciating slowly. The real
exchange rate of the som versus the US dollar has appreciated a bit, though not as much as
currencies of other countries. However, the real effective exchange rate (i.e. with respect to
currencies of all major trading partners) decreased by over per cent in ‒—a sharp
contrast with other countries of the region on which data are available.
The relatively successful economic performance of the country is even more impressive
given that Uzbekistan is not a major oil and gas exporter and is one of two doubly
landlocked countries in the world—that is, a country completely surrounded by other
landlocked countries (the other being Liechtenstein).
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Uzbekistan remains a poor country, with PPP GDP per capita of below US$, in
against over $, in Russia and Kazakhstan, $, in Azerbaijan, and over
$, in Turkmenistan; and many Uzbeks are migrating to find work in Russia, not vice
versa. It is important, however, to distinguish between growth rates and the level of per
capita income. It is necessary to separate the effects associated with the dynamics of output
from the effects of the terms of trade and financial flows. At the end of the Soviet era, in the
s, real incomes in Uzbekistan were about half those in Russia. After the collapse of the
USSR real incomes in non-resource republics fell dramatically due to the change in relative
prices—oil, gas, and other resources became several times more expensive relative to
ready-made goods (Uzbekistan was a large importer of oil and its trade with all countries,
including other Soviet republics, if recalculated in world prices, yielded a deficit of per
cent of GDP; IMF, ). To add insult to injury, with the collapse of the Soviet Union
financial flows from Moscow dried up (in inter-budgetary transfers—from the Union
budget—amounted to per cent of the revenues of the republican budget; IMF, ).
Diversification in industry and expansion of manufacturing exports was mostly the
result of protectionism and the government/central bank’s low exchange rate policy. Like
China, Uzbekistan maintained a low (undervalued) exchange rate due to rapid accumu-
lation of foreign exchange reserves. In addition, there were non-negligible tax measures to
stimulate exports of processed goods ( per cent lower tax rate for manufacturing
companies that export per cent or more of their output). Although comparable statistics
from WDI for Uzbekistan are lacking, national statistics suggest that the share of non-
resource goods in exports increased to over per cent against less than per cent in
before independence (Popov, , ).
explains, this tradition’s motto could be: ‘Development is accomplished one project at a
time.’ The other approach takes an economy-wide perspective. It emphasizes broad
reforms that affect the overall economic environment, and thus focuses on areas such
as international trade, finance, macroeconomics, and governance.
The first approach uses widely randomized controlled trials as an instrument that
could allow good policies to be formulated: vaccinations and microcredit, additional
teachers in schools, and mosquito nets dipped in insecticide being examples of small
projects that are leading to big breakthroughs. But without reforms at the macro level
it is often impossible to ensure the efficiency of micro projects (Reddy, ). If assistance
provided for particular investment projects merely crowds out government or private
investment in other areas, the macro impact of the assistance will be zero.
As Rodrik () writes, ‘poverty is often best addressed not by helping the poor be
better at what they already do, but by getting them to do something different’. This
latter approach is exactly the one defended here: the global South can gain much more
from economy-wide reforms aimed at promoting export-oriented growth based on
domestic savings than from meagre official foreign assistance or even from all foreign
financing. A benevolent Western attitude to macro-structural reforms and industrial
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
policy would be more beneficial to catch-up development than a thousand minor
specific development projects with noble goals.
A UN ESCAP study () suggests that there is a strong link between the share of
manufacturing in GDP and the share of the poor in total population. It predicts that
industry-oriented structural transformation that enhances agricultural productivity
through sustainable agriculture and overall efficiency improvements through innov-
ations has the potential to lift an additional million people out of poverty, create
million additional jobs in South Asia and boost GDP by to per cent by
over and above the business-as-usual scenario.
. I P: W
T U?
..................................................................................................................................
Industrial policy tools can be divided into two broad categories: selective and non-
selective. Selective tools are those that apply to specific industries, regions, and com-
panies. Examples are import duties, subsidies, tax concessions. Non-selective tools are
government investment in infrastructure, education, health care, law and order, and so
on, that helps to create a better business climate for all businesses. Management of the
exchange rate is another important tool of non-selective industrial policy—the main-
tenance of the undervalued real exchange rate via accumulation of foreign exchange
reserves (above the normal amount needed to ensure smooth trade and capital account
transactions) is an important instrument for promoting economic growth based on
export of tradable goods, although at the expense of non-tradables (Polterovich and
Popov, ).
There are important differences between import duties and devaluation of the
exchange rate. As Larry Summers once observed: ‘A ten percent decline in the dollar
exchange rate is equivalent to a ten percent tariff on all imported goods and a ten
percent subsidy for all exported goods’ (The New Republic, January, , p. ).
Import duties raise the real exchange rate (level of prices in the country as compared to
the world), whereas real devaluation lowers the real exchange rate. Besides, ‘exchange
rate protectionism’ is a more efficient policy to stimulate growth because decisions on
import duties and government taxes/spending are affected by poor quality of institu-
tions (corruption and inefficiency of implementation), whereas low exchange rate
policy is indiscriminate and non-selective by nature: it cannot be captured and
‘privatized’ by particular interest groups, which makes it an especially efficient
growth-promoting instrument in poor and middle-income countries that generally
suffer from corruption (Polterovich and Popov, ).
As the UN flagship report states (UN WESP, ), ‘reserve accumulation can have
positive externalities on the production and export of tradables and industrial devel-
opment and can thus be a feature of the country’s development model. Undervaluation
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
of the exchange rate can increase the competitiveness of exports, without the need for
sector- or firm-specific subsidies or interventions.’
As Griffith-Jones and Ocampo () observe, the rationale for the accumulation of
foreign exchange reserves ‘is usually found in either one of two explanations: the
“competitiveness” (or, in more pejorative terms, “mercantilist”) and the “self-
insurance” motives’. This mercantilist view that undervaluation of the exchange rate
via accumulation of foreign exchange reserves is in fact an industrial policy, aimed at
promoting export-oriented growth by benefiting the producers of tradables and
exporters at the expense of the producers of non-tradables and importers, which is
gaining support in the literature (Dollar, ; Easterly, ; Rodrik, ; Bhalla,
; Greenwald and Stiglitz, ). If there are externalities from the export and
production of tradables (industrialization, development of high-tech sectors), under-
valuation of the exchange rate resulting from the accumulation of reserves is an
efficient way to provide a subsidy for these activities and this subsidy is automatic,
that is, it does not require a bureaucrat to select possible beneficiaries.
In short, this is a non-selective industrial policy promoting export and production of
tradables that seems to be quite efficient, especially in countries with high corruption
and poor-quality institutions. Thus, accumulation of reserves and undervaluation of
the exchange rate may be good for long-term growth. The formal model demonstrating
how the accumulation of reserves can spur growth, together with empirical evidence, is
presented in Polterovich and Popov (), where it is also shown that, in practice,
accumulation of reserves leads to a disequilibrium exchange rate, which in turn causes
an increase in export/GDP and trade/GDP ratios, which stimulates growth. There is
strong evidence that accumulation of reserves can spur long-term growth in developing
countries, although not in rich countries (Polterovich and Popov, ).
In practical terms, there are no formal limits to the accumulation of reserves by
developing countries, but ‘exchange rate protectionism’ can result in ‘beggar-thy-
neighbour policies’: obviously all countries cannot exercise these policies at the same
time to achieve undervaluation of their exchange rates. If all countries use these
policies, they will all lose, and moreover, it does not work for developed countries.
But for developing countries it does work, and there are good reasons why these
countries should have sufficient policy space to use this tool to promote catch-up
development.
Trade surpluses resulting from undervaluation of the exchange rate due to reserve
accumulation may lead to what are now called ‘global imbalances’, driving the other
countries into debt. However, there is some room for such a trend, which will
reverse the opposite trend of the nineteenth and twentieth centuries (the United States
enjoyed a trade surplus for nearly a hundred years after the Civil War of the s,
driving many developing countries into debt; see Popov, a, b, , for
details).
The policy of reserve accumulation is often considered to be self-defeating because in
order to avoid inflation (which would eat up the impact of devaluation on the real
exchange rate) it is necessary for the monetary authorities to carry out a sterilization
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
policy, that is, to sell government bonds in order to neutralize the impact on the money
supply of the purchase of foreign currency. But sales of government bonds lead to
higher interest rates, which in turn attract capital from abroad that contributes to an
increase in foreign exchange reserves, which should be sterilized again, creating a
vicious circle. That is why economists talk about an ‘impossible trinity’: a country
cannot maintain at one and the same time an open capital account, a managed
exchange rate, and an independent monetary policy.
But many developing countries exercise control over capital flows (China and India
are prime examples) and even without such control, capital mobility—especially for
large economies—cannot be considered perfect. In practice, as the statistics show, the
accumulation of foreign exchange is financed through government budget surplus and
debt accumulation, but not through printing money. That is to say, most countries that
have accumulated reserves rapidly exhibit low inflation and low budget deficit (or
budget surplus), but increased holdings of government bonds by the public (see
Polterovich and Popov, ).
. I P
R- C
..................................................................................................................................
Resource abundance should, logically, be a plus for economic development, but very
often it becomes a constraint—a ‘resource curse’ rather than a ‘resource blessing’
(Sachs and Warner, ; Sala-i-Martin and Subramanian, ; Stiglitz, ;
Polterovich et al., , , ). Whereas resource-rich countries have generally
overvalued their exchange rate (‘Dutch disease’), they also maintain a relatively low
level of domestic fuel prices (Polterovich et al., , , ). This is another
important industrial policy instrument that has at least two implications: first, like the
undervaluation of the RER, low domestic prices for fuel provide competitive advan-
tages to domestic producers and stimulate exports and production (especially of
energy-intensive products); second, low fuel prices lead to energy waste due to higher
energy intensity, and hence imply higher costs.
Today in all resource-rich post-communist countries, Russia being the prime
example, domestic prices for fuel are kept below the world market level through
taxes on exports of fuel and direct restrictions on exports (such as access to the
pipeline). As a result, domestic prices for oil and gas are considerably lower than in
the rest of the world, and this allows energy-intensive industries to flourish. In Russia,
for instance, the production of energy-intensive aluminium is very competitive due to
low energy prices—aluminium is one of Russia’s top export commodities, even though
half of it is produced from imported bauxite.
The argument developed in Polterovich et al. (, , ) is that the under-
valuation of the exchange rate is a preferred industrial policy tool for resource-rich
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
countries, compared to keeping domestic fuel and energy prices below the world
market level. It allows export-oriented development to be stimulated without high
energy intensity. In order to make a transition to a new policy, a delicate policy
manoeuvre is needed. Theoretically it is possible, but it requires bureaucratic compe-
tence to achieve the following:
• Gradual increase in domestic fuel and energy prices (by phasing out export tax
and lifting restrictions on access to pipelines) up to world levels;
• Higher taxes on fuel companies to capture windfall profits from increasing
domestic fuel prices;
• Spending of increased budget revenues on infrastructure and non-tradables;
• Lower real exchange rate (via accumulation of foreign exchange reserves and
import subsidies) to compensate losses of non-fuel industries from higher domes-
tic fuel prices.
. I, R,
D
..................................................................................................................................
Should countries which are behind the technological frontier invest in the adoption of
existing technologies or should they aim to develop completely new technologies and
products? The notion of the ‘advantages of backwardness’ introduced by Alexander
Gerschenkron () implies, among other things, that relatively backward economies
can grow rapidly by investing in and adopting already existing technologies.
Justin Lin believes that countries should not leapfrog over the consecutive stages by
going from processing agricultural goods directly to high-tech industries (see section
.). He suggests, for instance, that Uzbekistan could gain greater benefits by devel-
oping less sophisticated industries such as food, textiles, and leather goods.⁴ The
arguments against, however, are supported by the examples of Israel and South
Korea, which at the end of the twentieth century had mastered the production of
high-tech goods (electronics) and are now leading the world in R&D expenditure as a
share of GDP (Figure .).
Ricardo Hausmann, Jason Hwang, and Dani Rodrik (Hausmann and Rodrik, ;
Hausmann et al., ; Rodrik, ) hypothesize that the more technologically
sophisticated the export structure of a country is, the greater the stimuli for economic
growth. China in and , for example, had the greatest gap between hypothet-
ical per capita income (computed based on the technological sophistication of its
export structure) and the actual per capita income. That is to say, the structure of
⁴ Personal communication with Justin Lin. In general form the theory is presented in Lin ().
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
4.5
4
Israel
3.5 Korea, Rep. of
Japan
3
Finland
2.5 Germany
United States
2
China
1.5 United Kingdom
Russian Federation
1 India
0.5
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
. R&D (research and development) Expenditure in selected countries, % of GDP
Source: World Development Indicators.
Chinese exports was similar to that of countries with several-fold higher levels of
economic development, and this gap stimulated economic growth.
In another article (Hausmann and Rodrik, ), the process of transition from the
production and export of one group of goods to another is compared to the movement
of monkeys in a forest from closer to more distant trees in search of food. The trees rich
with fruits are far away, whereas closer trees do not have as much. Thus, the monkeys
must compare the costs of movement with the benefits of reaching the more fruit-
abundant trees. Like the monkeys, firms and society as a whole must compare the cost
of mastering the new output and export (low for ‘nearby’ industries which are close to
existing technologies and high for ‘far-away’ industries with totally new technological
processes) with the benefits (externalities) associated with developing particular indus-
tries (theoretically, the more sophisticated these industries are, the higher the benefits).
Today the share of R&D expenditure in GDP in most post-communist economies is
lower than per cent (except for several Eastern European countries, Russia and China;
Table .), no higher than in countries with a similar level of economic development,
whereas in the communist past the opposite was normally true. Determining the
optimal level of R&D spending at different stages of development is an important
research question. The answer is probably specific to every country: it depends on the
size of the country, the structure of the national economy and the share of industries
that are close to the technological frontier.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Table 27.1 R&D expenditure in post-communist countries
as a percentage of GDP, 2015
Country R&D as a % of GDP
Slovenia 2.2
China 2.1
Czech Republic 1.9
Estonia 1.5
Hungary 1.4
Slovak Republic 1.2
Russian Federation 1.1
Lithuania 1.0
Poland 1.0
Bulgaria 1.0
Serbia 0.9
Croatia 0.9
Latvia 0.6
Ukraine 0.6
Belarus 0.5
Romania 0.5
Macedonia, FYR 0.4
Vietnam 0.4
Moldova 0.4
Georgia 0.3
Armenia 0.3
Azerbaijan 0.2
Bosnia and Herzegovina 0.2
Uzbekistan 0.2
Albania 0.2
Kazakhstan 0.2
Mongolia 0.2
Kyrgyz Republic 0.1
Tajikistan 0.1
Source: World Development Indicators, World Bank.
. S P S,
G, P, F
I
..................................................................................................................................
There is a debate as to what is the crucial factor behind economic fiascos: market failure or
state failure? The dominant story in the profession is that economic breakthroughs are
achieved only due to a vital and vivid private sector that is dynamic and entrepreneurial,
oriented towards innovation and not afraid of risk-taking, whereas the state is clumsy,
inefficient, and even reactionary, and restricts private initiatives. It is said that the private
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
sector contributes to economic growth and poverty eradication through the building of
productive capacity, creation of decent jobs, promotion of innovation, economic diversi-
fication, and competition. In landlocked developing countries, the private sector is actively
involved in activities related to transit and trade facilitation, including as traders, freight
forwarders, insurance providers, and transporters, and the sector is a source of tax revenue
and domestic investment and is a partner for foreign direct investment. Public‒private
partnerships can play an important role in infrastructure development (Almaty
Programme of Action for Landlocked Developing Countries, ).
Another story, however, is that of the entrepreneurial state: Mazzucato () provides
ample evidence that technological breakthroughs are due to public and state-funded
investments in innovation and technology, and that the private sector only finds the
courage to invest after an entrepreneurial state has made the high-risk investments.
Rodrik and Subramanian () describe the attitudinal shift on the part of national
governments towards a pro-business (as opposed to pro-liberalization) approach, and
attribute the acceleration of Indian economic growth to this factor: they show that the
acceleration of growth has actually occurred since and not since , when
liberalization reforms were carried out.
The problem in many developing countries in general and in post-communist
countries in particular is that the private sector often fails to take the initiative in
promoting development due to an actual or alleged ‘poor investment climate’. As can
be seen from Figure . (and comparing it to Figure .), there is no correlation
between the share of the private sector in the economy and the GDP dynamics. Or, if
there is a correlation, it is rather negative than positive: more privatized economies are
doing worse than less privatized ones.
Some studies suggest that government investments do not crowd private investment, but
have a ‘crowding in’ effect. As can be seen from Figure ., it is not only private but also
public investments that contribute to the increase of the share of investment in GDP. If for
some reason private investments are in limbo, the state can achieve an increase in total
investments through the expansion of its own public investment projects financed through
taxation and/or borrowing. Government savings (financing public investment through the
government budget and/or budget surplus), as studies show, do not crowd out private
savings in a proportion of :, but only in a proportion of ‒ cents for every dollar
(Schmidt-Hebbel et al., ). In low-income countries, as recent research shows, one extra
dollar of government investment does not crowd out, but crowds in private investment,
raising it by roughly two dollars and output by . dollars (Eden and Kraay, ).
If the private sector is not doing the job, the solution may be that government
investment and government entrepreneurship helps to resolve the bottlenecks.
It should be also noted that the impact of foreign direct investment (FDI) on
development is not always positive. Some countries created growth miracles without
relying on FDI (Japan, South Korea, China in ‒), others relied on FDI extensively
(Taiwan, Singapore, Hong Kong, China after ) (Polterovich and Popov, ).
It may be hypothesized that FDI inflows into countries with a poor investment climate
actually do actually more harm than good. First, investors are self-selecting: if the
investment climate is bad, foreign investors come mostly for short-term profit and/or
resource projects, where the transfer of technology, the main benefit of FDI, is at best
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
80
70
EST
ARM
60
AZ
GEORG
50 KYRG
LITH
LAT
40
KAZ
MOLD
30 RUS
UKR
TADJ
20
UZB
BEL
10 TURKM
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
. The share of private sector in GDP in some former Soviet republics, –, %
Source: Transition Report, EBRD (data for years after 2010 unavailable).
limited. Second, foreign investors do not reinvest profits in countries with a poor
investment climate, so the outflow of profits with time outweighs the inflow of
FDI. Third, purchases of companies in countries with bad investment conditions do
not necessarily lead to an increase in total investment because the inflow of FDI is often
completely absorbed by an outflow of short-term capital.⁵
⁵ Regression analysis (Polterovich and Popov, ) supports these conclusions. It implies that FDI
positively influences growth in countries with a good investment climate and negatively in countries
with a poor investment climate:
GR ¼ CONSTANT þ CONTROL VARIABLES þ 0:02*FDI ðICI 80:5Þ;
where GR—annual average growth rates of GDP per capita,
ICI—investment climate index,
FDI—average foreign direct investment inflow as a % of GDP in ‒.
Coefficients are significant at the per cent level or less.
This equation establishes a very high threshold of investment climate index—about per cent, which is
basically the level of developed countries. Only a few developing countries (Botswana, Kuwait) have such
a good investment climate. The worse the investment climate of a country, the larger may be losses from
FDI, hence stronger foreign investments should be regulated by the state.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Gross investment and public investment in 2012, % of GDP
60
Gross fixed capital formation, % of GDP
R2 = 0.3239
Mongolia China
50
Mozambique
Turkmenistan
40
30
20
10
Guinea-Bissau
0
0 5 10 15 20 25 30 35 40
Public investment, % of GDP
Gross investment and private investment in 2012, % of GDP
Gross fixed capital formation, % of GDP
70
R2 = 0.6537
60
Mongolia
50 Mozambique
China
Turkmenistan
40
30
20
10
Guinea-Bissau
0
0 10 20 30 40 50 60
Private investment, % of GDP
Public investment and private investment in 2012, % of GDP
40
Turkmenistan
Public investment % of GDP
35
30
25
China
20
15
10
R2 = 0.0006
5
0
0 10 20 30 40 50 60
Private investment, % of GDP
. Public, private, and gross investment in developing countries as a % of GDP,
Source: World Development Indicators.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
. I T
T P
..................................................................................................................................
Trade specialization (the predominance of particular goods in exports and imports) is the
other side of the coin of the structure of a national economy: if the country exports
manufactured goods and imports food products, the share of manufacturing in its total
output and employment would be high and the share of agriculture low. That is why the
structure of the national economy depends to a large extent on trade developments—
openness to trade in particular sectors and industrial policies to promote exports of some
goods and to provide (or not to provide) protection to particular industries.
.. Trade Liberalization
What kind of trade policy is best for promoting sustainable development? The debates
on whether free trade or protectionism are more conducive to growth are as old as
economic research itself. The advocacy of free trade became commonplace in econom-
ics research and a number of studies demonstrate its benefits (Sachs and Warner, ;
IMF, WB, and WTO, ; OECD, to name a few). However, it was noticed that
free trade does not always lead to an increase in the share of exports and imports in
GDP (Rodriguez and Rodrik, ; Polterovich and Popov, ). The best example is
China after the Opium Wars that forced the country to open up: for a hundred years
afterwards, there was no increase in the external trade-to-GDP ratio and China con-
tinued to fall behind Western countries in per capita income. Other more recent
examples are Japan, South Korea, and Taiwan in the s‒s and China in the
s‒s. In the s Chinese import duties were at the - per cent level and it
was only in the s and s they were gradually reduced to per cent (Prasad, ).
China became a member of the WTO only in , so GDP growth rates of about per
cent a year in the previous two decades (and of the export-to-GDP ratio from per cent in
to per cent in ) cannot be explained by the benefits of trade liberalization.
Studies also show that the benefits of free trade depend on domestic adjustment
policies, without which it is impossible to reap the potential benefits of trade liberal-
ization (IMF, WB, and WTO, ; OECD, ). Stiglitz and Charlton ()
question the conclusion that broad trade liberalization always makes countries better
off. They claim that this conclusion is based on invalid assumptions about full
employment and perfect competition that are lacking in most developing countries.
It is well documented that fast-growing countries are usually more involved in
international trade, and have higher and faster-growing trade/GDP ratios. In addition,
there is a correlation between the share of investment in GDP and the share of export
in GDP—countries which export more invest more as well (Polterovich and Popov,
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
). However, fast-growing and more intensively trading nations are not always and
were not always more open to trade (low tariff and non-tariff barriers) than their less
globalized competitors.
Empirical studies (Rodriguez and Rodrik, ; O’Rourke and Williamson, ;
see, for a survey, Williamson, ) have found that there is no conclusive evidence
that free trade is always good for growth: whereas protectionist countries grew more
rapidly before the First World War, they exhibited lower than average growth after
the Second World War. Rose () estimated the effect on international trade of
multilateral trade agreements such as the WTO, its predecessor the General Agree-
ment on Tariffs and Trade (GATT), and the Generalized System of Preferences (GSP)
extended from rich countries to developing countries, using the standard ‘gravity’
model of bilateral merchandise trade. He found little evidence that countries joining
or belonging to the GATT/WTO have different trade patterns than outsiders, whereas
the GSP, which gives poor countries better access to markets in developed countries,
had a very strong effect on the trade of developing countries (an approximate
doubling of trade).
.. Import Substitution versus Export Orientation
Import substitution is usually associated with protectionism: the idea is to protect
domestic non-competitive industries with trade barriers, so that they can withstand
competition from imported goods and eventually increase their competitiveness and
efficiency. The problem with this kind of policy is that the efficiency of protected
industries does not increase automatically, and protection that is usually designed as a
temporary measure very often becomes a permanent shield preserving industrial
‘dinosaurs’, as inefficient and non-competitive enterprises are often called.
Export orientation is usually understood as a policy of support for exporters (via
subsidies, credits, tax concessions, and other stimuli), but it is important to realize that
export promotion can in fact go hand in hand with protectionist measures. In fact,
there is no contradiction in imposing high import duties on a particular product and
providing export subsidies for it—higher prices in the domestic than the world market
provide finances for restructuring, whereas export orientation in this case is supported
by export subsidies. This was exactly the policy of Japan, South Korea, and Taiwan
(even though not that of Singapore and Hong Kong) in the s‒s.
The difference between import substitution and export orientation is that the first
policy only protects domestic industries (without promoting export orientation),
whereas the second policy not only protects domestic industries, but also stimulates
them to export their output. The criteria for distinguishing between the two types of
policy are the dynamics of the share of export in GDP. If it grows fast, this should be
classified as export-oriented development, if it stagnates it is import substitution.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
The authors of The East Asian Miracle (World Bank, ) found that government
efforts to promote specific industries (without promoting exports) generally did not
increase economy-wide productivity. But government support for exports was a highly
effective way of enhancing the absorption of international best-practice technologies,
thus boosting productivity and output growth.
In the former Soviet Union region, much trade liberalization occurred in the s
and beyond as former Soviet republics made the transition to the market and deregulated
their export/import operations. Kyrgyzstan was the first post-Soviet country to become a
member of the WTO in , followed by the Baltic states (‒), Georgia (),
Moldova (), Armenia (), Ukraine (), Russia (), Tajikistan (), and
Kazakhstan (). But their development looked anything but export oriented. The
share of export in GDP in Central Asian countries, for instance, fell dramatically after the
dissolution of the Soviet Union, and has not increased in the s‒s. A yardstick for
comparison can be Turkey, a country at a similar level of development: it managed to
increase the share of exports in GDP from to . per cent in ‒, whereas in
Central Asian countries this indicator either increased only marginally (Kyrgyzstan,
Turkmenistan) or decreased (Kazakhstan, Tajikistan, Uzbekistan) (Gharleghi and
Popov, a). It is noteworthy that four former Soviet republics that are still not
members of the WTO as of (Azerbaijan, Belarus, Turkmenistan, Uzbekistan) had
higher growth rates over the last thirty years than the others (Figure .).
. C
..................................................................................................................................
In the s, Eastern European and former Soviet Union countries carried out market
reforms and experienced regressive developments in their industrial structure—de-
industrialization, ‘resource-ialization’ and ‘primitivization’ of the structure of their
exports. Extensive liberalization in the s in the former Soviet Union countries
led to premature de-industrialization in the region, which inhibited economic growth.
In contrast, China and Vietnam also carried out market-type reforms (China,
gradual reforms since ; Vietnam, gradual reforms in ‒ and radical reforms
in ) and achieved an acceleration of their economic growth and an impressive
increase in manufacturing output and exports.
The varying performance of post-communist countries can be attributed to a large
extent to different models of industrial policy: whereas China and Vietnam relied on
active promotion of exports (mostly via an undervalued exchange rate), Eastern
European countries did not introduce any sizeable stimulus to particular industries,
and former Soviet republics for a long time assisted domestic producers in a very
inefficient way—by maintaining low prices for energy and fuel in the domestic market.
This is one of the most important lessons of the post-communist transition: market-
oriented reforms alone are not enough, the state needs to maintain strong institutional
capacity and to stimulate progressive structural shifts. A successful industrial policy is
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
needed for structural economic transformation to achieve inclusive and sustainable
development. Industrial policy could use protectionist instruments, but should stimu-
late exports. Protectionism alone is not enough for upgrading the industrial structure
and speeding up economic and social development.
There are many ways to promote manufacturing exports, but the most promising
tool is the undervaluation of the exchange rate and public investment, especially in
infrastructure and education. These policies were widely used by virtually all ‘economic
miracle’ countries and contributed to rapid growth and successful catch-up develop-
ment in East Asia and elsewhere. Undervaluation of the exchange rate is a non-selective
industrial policy that creates stimuli for the tradable goods sector and exports of
tradables, whereas public investments contribute to the acceleration of economic
growth, not only because they lead to the rise of the share of investment in GDP (no
crowding-out effect), but also because they provide public goods (education, infra-
structure) with strong externalities and can eliminate bottlenecks (if private investors
ignore particular areas).
For resource-rich countries, the need for a special policy to lower the real exchange
rate is especially pressing (to avoid ‘Dutch disease’). Today in all resource-rich post-
communist countries, domestic prices for fuel are kept below world market level
through taxes on exports of fuel and direct restrictions on exports (export quotas,
access to the pipeline). This provides subsidies to all producers using fuel and energy,
stimulating economic growth, but at the same time leads to high energy intensity.
A more efficient way to stimulate export-oriented growth is to gradually eliminate
export taxes for fuel and energy, to tax the extra profits of fuel companies and use the
revenues for infrastructure investment, and to stimulate producers of tradables, not via
price subsidies for fuel, but via an underpriced exchange rate.
Since the mid-s and especially in the s and s, many FSU countries have
made substantial economic advances. Six countries in the region (Turkmenistan,
Uzbekistan, Azerbaijan, Kazakhstan, Tajikistan, and Belarus) increased their output
no less than Central Europe (. times and more as compared to ; Figure .).
Uzbekistan’s and Tajikistan’s achievements are especially impressive because they are
only partly based on resource exports. Such positive dynamics are due, to a large extent,
to the efficient industrial policy that resisted de-industrialization and supported manu-
facturing exports through undervalued exchange rates and tax policies.
R
Almaty Programme of Action for Landlocked Developing Countries () ‘ITT for LLDCs.
Priority : Structural economic transformation ()’. Available at http://land-locked.org/
priority--structural-economic-transformation/.
Bhalla, Surjit S. () Devaluing to Prosperity: Misaligned Currencies and their Growth
Consequences. Washington, DC: Peterson Institute for International Economics.
Chenery, Hollis B. () ‘Patterns of Industrial Growth’, The American Economic Review
(): –.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Cherif, Reda and Fuad Hasanov () ‘The Return of the Policy That Shall Not Be Named:
Principles of Industrial Policy’. IMF Working Paper No. /. Washington, DC: IMF.
Dollar, David () ‘Outward-oriented Developing Economies Really Do Grow More
Rapidly: Evidence from LDCs, –’, Economic Development and Cultural Change
(): –.
Easterly, William () The Lost Decades: Explaining Developing Countries Stagnation
–. Washington, DC: The World Bank
Eden, Maya and Aart Kraay () ‘ “Crowding in” and the Returns to Government Invest-
ment in Low-income Countries’. Policy Research Working Paper No. . Washington,
DC: World Bank.
Gerschenkron, Alexander () Economic Backwardness in Historical Perspective: A Book of
Essays. Cambridge, MA: Belknap Press of Harvard University Press.
Gharleghi, Behrooz and Vladimir Popov (a) Changes in the Geographical Structure of
Trade in Central Asia: Real Flows in – versus Gravity Model Predictions. Berlin:
Dialogue of Civilizations Research Institute.
Gharleghi, Behrooz and Vladimir Popov (b) Farewell to Agriculture? Productivity Trends
in and Competitiveness of Agriculture in Central Asia. Berlin: Dialogue of Civilizations
Research Institute.
Gibbs, Murray () ‘Trade Policy’. UN DESA. Available at https://esa.un.org/techcoop/
documents/PN_TradePolicyNote.pdf.
Gill, Indermit S., et al. () Diversified Development: Making the Most of Natural Resources
of Eurasia. Washington, DC: World Bank.
Greenwald, Bruce and Joseph E. Stiglitz () ‘Externalities in Economies with Imperfect
Information and Incomplete Markets’, The Quarterly Journal of Economics (): –.
Greenwald, Bruce and Joseph E. Stiglitz () ‘Learning and Industrial Policy: Implications
for Africa’, in Joseph E. Stiglitz, Justin Yifu Lin, and Ebrahim Patel (eds) The Industrial
Policy Revolution II: Africa in the XXI Century. International Economic Association Series.
London: Palgrave MacMillan, pp. –.
Griffith-Jones, Stephany and José Antonio Ocampo () ‘Sovereign Wealth Funds:
A Developing Country Perspective’. Paper prepared for the workshop on Sovereign Wealth
Funds organized by the Andean Development Corporation. London, February .
Available at http://www.stephanygj.net/papers/SovereignWealthFundsDevelopingCountry
Perspective.pdf.
Harris, Richard I. and Qian Cher Li () ‘Learning-by-Exporting? Firm-level Evidence for
UK Manufacturing and Services Sectors’. Glasgow Business School—Economics, Univer-
sity of Glasgow. Available at http://www.gla.ac.uk/media/media__en.pdf.
Hausmann Ricardo and Dani Rodrik () ‘Doomed to Choose: Industrial Policy as
Predicament’. First Draft. Paper prepared for the first Blue Sky seminar organized by the
Center for International Development at Harvard University, September . Cam-
bridge, MA: Harvard University Press.
Hausmann, Ricardo, Jason Hwang, and Dani Rodrik () ‘What You Export Matters’.
NBER Working Paper No. . Cambridge, MA: National Bureau of Economic
Research. Available at http://www.nber.org/papers/w.pdf.
Herrendorf, Berthold, Richard Rogerson, and Ákos Valentinyi () ‘Growth and Structural
Transformation’. Paper prepared for the Handbook of Economic Growth. Washington, DC:
IMF. Available at https://www.imf.org/external/np/seminars/eng//SPR/pdf/rrog.pdf.
IMF () Soviet Economy: A Study of the Soviet Economy. vols. Washington, DC: IMF.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
IMF, WB, and WTO () Making Trade an Engine of Growth for All: The Case for Trade
and for Policies to Facilitate Adjustment. Washington, DC, Geneva: International Monetary
Fund, World Bank, and World Trade Organization. Available at https://www.wto.org/
english/news_e/news_e/wto_imf_report_.pdf.
Innis, Harold Adams () Essays in Canadian Economic History, edited by Mary Q. Innis.
Toronto: University of Toronto Press.
Jomo, Kwame Sundaram () ‘The Best Approach to Economic Development is Pragma-
tism’, in Piotr Dutkiewicz and Richard Sakwa (eds) Ideas to Fix the World: Conversations
with the World’s Foremost Thinkers. New York: New York University Press, pp. –.
Jomo, Kwame Sundaram () ‘Industrial Policy Finally Legitimate?’, Inter Press Service,
July. Available at http://www.ipsnews.net///industrial-policy-finally-legitimate/.
Khan, Mushtaq H. () ‘Governance, Economic Growth and Development since the s’.
DESA Working Paper No. , August. Available at http://www.un.org/esa/desa/papers/
/wp_.pdf.
Lee, Keun () Schumpeterian Analysis of Economic Catch-up Knowledge, Path-Creation,
and the Middle-income Trap. Cambridge: Cambridge University Press.
Lin, Justin Yifu () ‘From Flying Geese to Leading Dragons: New Opportunities and
Strategies for Structural Transformation in Developing Countries’. Policy Research Work-
ing Paper No. . Washington, DC: World Bank. Available at https://elibrary.worldbank.
org/doi/abs/./--.
Lin, Justin Yifu and Ha-Joon Chang () ‘Should Industrial Policy in Developing Countries
Conform to Comparative Advantage or Defy it? A Debate between Justin Lin and Ha-Joon
Chang’, Development Policy Review (): –.
Mazzucato, Mariana () The Entrepreneurial State: Debunking Public vs. Private Sector
Myths. London: Anthem Press.
Murphy, Kevin M., Andrei Shleifer, and Robert W. Vishny () ‘Industrialization and the
Big Push’, The Journal of Political Economy (): –.
Myrdal, Gunnar () Asian Drama: An Inquiry into the Poverty of Nations. vols. New York:
Pantheon Books.
OECD () Making Trade Work For All. Paris: OECD. Available at https://www.oecd.org/
trade/making-trade-work-for-all.pdf.
O’Rourke, Kevin H. and Jeffrey G. Williamson () ‘From Malthus to Ohlin: Trade,
Growth and Distribution since ’. NBER Working Paper No. . Available at
http://www.nber.org/papers/w.pdf.
Page, John () ‘Should Africa Industrialize?’. WIDER Working Paper No. /, August.
Helsinki: UNU-WIDER.
Polterovich, Victor and Vladimir Popov () ‘Accumulation of Foreign Exchange Reserves
and Long-term Economic Growth’, in Shinichiro Tabata and Akihiro Iwashita (eds) Slavic
Eurasia’s Integration into the World Economy. Sapporo: Slavic Research Center, Hokkaido
University. Available at http://www.nes.ru/%Evpopov/documents/EXCHANGE%RATE-
GrowthDECwithcharts.pdf.
Polterovich, Victor and Vladimir Popov () ‘Appropriate Economic Policies at Different
Stages of Development’. NES. Available at https://papers.ssrn.com/sol/papers.cfm?
abstract_id=.
Polterovich, Victor and Vladimir Popov () ‘Stages of Development, Economic Policies
and New World Economic Order’. Paper presented at the Seventh Annual Global Devel-
opment Conference in St. Petersburg, Russia, January. Available at http://http-server.
carleton.ca/~vpopov/documents/NewWorldEconomicOrder.pdf.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Polterovich, Victor, Vladimir Popov, and Alexander Tonis () ‘Экономическая поли-
тика, качество институтов и механизмы”ресурсного проклятия” ’. Moscow: The
Higher School of Economics Publishing House. Available at http://pages.nes.ru/vpopov/
documents/Resources--HSE-Polterovich-Popov-Tonis.pdf.
Polterovich, Victor, Vladimir Popov, and Alexander Tonis () ‘Mechanisms of Resource
Curse, Economic Policy and Growth’. NES Working Paper No. WP//. Moscow:
New Economic School. Available at https://pages.nes.ru/vpopov/documents/Resource_
Curse_and_Economic_Policy-English-NESFin-Febr.pdf.
Polterovich, Victor, Vladimir Popov, and Alexander Tonis () ‘Resource Abundance:
A Curse or Blessing?’. DESA Working Paper No. . New York: United Nations Depart-
ment of Economic and Social Affairs. Available at http://www.un.org/esa/desa/papers/
/wp_.pdf.
Popov, Vladimir () ‘Shock Therapy versus Gradualism: The End of the Debate (Explain-
ing the Magnitude of the Transformational Recession)’, Comparative Economic Studies
(): –.
Popov, Vladimir () ‘Shock Therapy versus Gradualism Reconsidered: Lessons from
Transition Economies after Years of Reforms’, Comparative Economic Studies ():
–.
Popov, Vladimir (a) ‘Development Theories and Development Experience’. CEFIR and
NES Working Paper No. . Moscow: Centre for Economic and Financial Research at
New Economic School.
Popov, Vladimir (b) ‘Global Imbalances: An Unconventional View’, IDEAs, October.
Popov, Vladimir () ‘Стратегии экономического развития’ (‘Strategies of Economic
Development’). Moscow: The Higher School of Economics Publishing House.
Popov, Vladimir () ‘An Economic Miracle in the Post-Soviet Space: How Uzbekistan
Managed to Achieve What No Other Post-Soviet State Has’. MPRA Paper No. .
Available at https://mpra.ub.uni-muenchen.de///MPRA_paper_.pdf.
Popov, Vladimir () ‘Can Uzbekistan Economy Retain its High Growth Rate? Scenarios of
Economic Development in –’. PONARS Eurasia Working Paper. Washington, DC:
PONARS Eurasia.
Popov, Vladimir and Anis Chowdhury () ‘What can Uzbekistan Tell Us about Industrial
Policy That We Did Not Already Know?’. DESA Working Paper No. . New York:
United Nations Department of Economic and Social Affairs. Available at http://www.un.
org/esa/desa/papers//wp_.pdf.
Popov, Vladimir and Kwame Sundaram Jomo () ‘Are Developing Countries Catching
Up?’, Cambridge Journal of Economics (): –.
Prasad, E. () ‘China’s Growth and Integration into the World Economy: Prospects and
Challenges’. IMF Occasional Paper No. . Washington, DC: IMF.
Reddy, Sandjay G. () ‘Randomise This! On Poor Economics’, Review of Agrarian Studies
(). Available at http://www.ras.org.in/randomise_this_on_poor_economics.
Rodriguez, Francisco and Dani Rodrik () ‘Trade Policy and Economic Growth:
A Skeptic’s Guide to the Cross-National Evidence’, in Ben S. Bernanke and Kenneth Rogoff
(eds) NBER Book Series NBER Macroeconomics Annual, Vol. . Cambridge, MA: MIT
Press, pp. –.
Rodrik, Dani () What’s So Special about China’s Exports? Cambridge, MA: Harvard
University Press.
Rodrik, Dani () ‘The Real Exchange Rate and Economic Growth’, Brookings Papers on
Economic Activity Fall: –.
OUP CORRECTED PROOF – FINAL, 21/9/2020, SPi
Rodrik, Dani () ‘Doing Development Better: Project Syndicate’, May. Available at https://
www.project-syndicate.org/commentary/doing-development-better?barrier=accesspaylog.
Rodrik, Dani and Arvind Subramanian () ‘From Hindu Growth to Productivity Surge:
The Mystery of the Indian Growth Transition’. IMF Working Paper No. WP//.
Washington, DC: International Monetary Fund, May. Available at: https://www.imf.org/
External/Pubs/FT/staffp//–/rodrik.pdf.
Rodrik, Dani et al. () ‘Structural Change, Fundamentals, and Growth: Overview’, in
Margaret McMillan, Dani Rodrik, and Claudia Sepúlveda (eds) Structural Change, Funda-
mentals, and Growth: A Framework and Case Studies. Washington, DC: International Food
Policy Research Institute Washington, pp. –.
Rose, Andrew K. () ‘Do We Really Know that the WTO Increases Trade?’. NBER Working
Paper No. . Cambridge, MA: NBER. Available at http://www.nber.org/papers/w.pdf.
Sachs, Jeffrey D. and Andrew M. Warner () ‘Economic Reform and the Process of Global
Integration’. Brookings Papers on Economic Activity. Washington, DC: Brookings Institu-
tion Press.
Sachs, Jeffrey D. and Andrew M. Warner () ‘Natural Resources and Economic Develop-
ment: The Curse of Natural Resources’, European Economic Review : –.
Sala-i-Martin, Xavier and Arvind Subramanian () ‘Addressing the Natural Resource
Curse: An Illustration from Nigeria’. NBER Working Paper No. . Available at http://
www.nber.org/papers/w.pdf.
Schmidt-Hebbel, Klaus, Luis Serven, and Andres Solimano () ‘Saving and Investment:
Paradigms, Puzzles, Policies’, The World Bank Research Observer (l): –.
Shevtsova, Yevgeniya () ‘International Trade and Productivity: Does Destination Mat-
ter?’. Discussion Papers in Economics /. York: University of York.
Stiglitz, Joseph E. () ‘Making Natural Resources into a Blessing rather than a Curse’, in
Svetlana Tsalik and Anya Schiffrin (eds) Covering Oil: A Reporter’s Guide to Energy and
Development. New York: Open Society Institute, pp. –.
Stiglitz, Joseph E. () ‘From Manufacturing Led Export Growth to a st Century Inclusive
Growth Strategy: Explaining the Demise of a Successful Growth Model and What to Do
About It’. WIDER Development Conference, September.
Stiglitz, Joseph E. and Andrew Charlton () Fair Trade for All: How Trade Can Promote
Development. Oxford: Oxford University Press.
Syrquin, Moshe and Hollis Chenery () ‘Three Decades of Industrialization’, The World
Bank Economic Review (): –.
UN ESCAP () ‘Economic Diversification in Asian Landlocked Developing Countries:
Prospects and Challenges’. Bangkok: United Nations Economic and Social Commission for
Asia and the Pacific, United Nations. Available at https://www.unescap.org/sites/default/
files/Economic%Diversification_low%resolution.pdf.
UN WESP () World Economic Situation and Prospects : Global Economic Outlook.
Available at https://www.un.org/development/desa/dpad/publication/world-economic-
situation-and-prospects-/.
Williamson, Jeffrey G. () ‘Winners and Losers over Two Centuries of Globalization’.
NBER Working Paper No. . Cambridge, MA: NBER. Available at http://www.nber.
org/papers/w.pdf.
World Bank () The East Asian Miracle: Economic Growth and Public Policy. Oxford:
Oxford University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
A Comparative Perspective
......................................................................................................................
ˊ
. I
..................................................................................................................................
I policy is a policy that reshapes incentives to foster technological
and structural change. Since, as the Schumpeterian tradition argues, economic
development is driven by technological innovation and learning, and associated
structural change, industrial policy is at the core of development policies. In an
international system marked by asymmetries in technological capabilities, develop-
ment requires technological catching up and diversification towards a more sophisti-
cated (technology-intensive) pattern of specialization. This defines a desirable path of
structural change for development, as opposed to ‘regressive’ structural change—a path
leading to the loss of knowledge-intensive sectors and growing dependence on primary
exports. The question to be addressed in a comparative study of industrial policy in a
developing economy is in which cases such policy—or its absence—has been effective
in reducing the technology gap and changing the pattern of specialization, and in
which cases it has failed to do so, and why.
What constitutes the best industrial policy for development is far from consensual
among economists—perhaps even less consensual than in other economic policy areas.
There is a strong current in neoclassical economics that argues the best industrial
policy is to have none at all, or at best that only a ‘horizontal’ policy is admissible, that
is, one that provides across-the-board incentives to help all industries without targeting
anyone in particular—such as a general subsidy for research and development (R&D).
This approach considers that ‘vertical’ industrial policies—in which the selection of
sectors to be favoured is explicit—distort incentives, produce allocative inefficiencies,
and encourage rent-seeking activities that compromise productivity growth and capital
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
accumulation in the long run. Vertical industrial policy is described by this view as
‘picking winners’. However, there is an implicit selection of sectors (non-neutrality) in
horizontal industrial policies as well: for instance, an across-the-board subsidy to R&D
will favour mostly industries that are intensive in R&D.
The strong version of the neoclassical view was dominant in the formulation of
industrial policy after the market reforms that took place in the Southern Cone countries
(notably Chile) in the late s, and on a broader basis in Latin America since the mid-
s. Inversely, the quest for structural change was paramount in the policies adopted
by several Latin American countries during the period of ‘state-led industrialization’¹
and by the successful cases of catching up, mostly in East Asia. This chapter compares
industrial policy in different countries and how they shaped different trajectories
of productivity growth and structural change. Although we present the broader Latin
American trends, we focus our analysis on the four largest Latin American economies—
Argentina, Brazil, Colombia, and Mexico—comparing these countries with the Republic
of Korea (henceforth just Korea). We argue that the persistence of industrial policy in
Korea, combined with a macroeconomic policy that avoided the appreciation and
instability of the real exchange rate, were critical for its success, while the abandonment
of industrial policy in the s and the use of the real exchange rate mainly as an anti-
inflationary tool and a policy instrument to adjust to commodity boom–bust cycles,
explain why the Latin American countries failed to catch up.
The chapter is organized into five sections. Following this introduction, we describe
our theoretical framework for the analysis of technical and structural change, combin-
ing micro and macroeconomic variables in what we broadly call the structuralist
tradition. There follows a discussion of industrial and macroeconomic policies in
Latin American countries, taking Korea as a benchmark. Next we use different
indicators of technological catching up and economic transformation to show that
Latin America has been lagging behind East Asia and the world economy since the
s. A final section presents some brief conclusions.
. T, L T
C, S I
..................................................................................................................................
.. The Dynamics of Learning and Industrial Policy
Although there are many different neoclassical models of technical change (see Aghion
and Howitt, ), the orthodox views that are prevalent in the policy debate assume
¹ Following Bértola and Ocampo (), we use this concept rather than the more traditional one of
‘import-substituting industrialization’, because the latter captures only one element of the policy package
of that period, and not necessarily the most relevant one.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
that all sectors are equally capable of promoting technical change and that there are no
significant barriers to the diffusion of technology. This perspective, however, is at odds
with the growing evidence that the velocity of innovation and technological opportun-
ities varies significantly across sectors (Bogliacino and Pianta, ). It is also at odds
with the large international technological gaps that characterize the global economy,
and with the fact that countries that have succeeded in catching up have applied
comprehensive industrial policies ‘distorting’ market incentives.
In contrast with the orthodox view, the structuralist tradition argues that the
international diffusion of technology is slow and irregular. The empirical evidence
coming from firm-level studies of technological innovation and diffusion shows much
less flexibility in the pace and direction of learning than what is implicit in neoclassical
growth models (Dosi et al., ). One major factor is the importance of production
experience as a source of productivity growth, a significant factor underscored by
Arrow’s concept of learning by doing and by the Kaldor–Verdoorn Law (Arrow,
; Kaldor, : chs. , , and ). The key insight in both cases is that technical
change cannot be separated from experience in production and the existing set of
capabilities firms and countries deploy at a certain point in time. The evolutionary
theory of technical change has offered new insights, in particular the concept that
technological capabilities are tacit, in the sense that they cannot be transmitted in a
codified way (i.e. through manuals or printed instructions), and must be incorporated
into the routines of the firm and the skills of shop-floor workers and engineers.
A similar idea was suggested in a pioneering article by Atkinson and Stiglitz (),
who argued that technical change is localized around techniques that firms are using.²
The production function takes the form of disconnected sets (clusters of technologies)
instead of a smooth, continuous isoquant along which the firm chooses the optimal
combination of factors of production.
In other words: what firms learn, the possibility of catching up, and the direction of
innovation depend on current capabilities and experience. This also means that
technological capabilities are embedded in the production structure. The interconnec-
tion between learning and production implies that production structures and technol-
ogy co-evolve. There is a strong element of inertia in specialization and in technological
capabilities that may lead to slow growth and learning traps. In the absence of an
exogenous shock that redefines the prevailing incentives, asymmetries in technology
will endogenously reproduce the ‘old’ structure. The role of industrial policy is to
provide such an exogenous shock to reshape incentives and overcome learning traps.
Changes in relative prices (albeit necessary) may not suffice to bring about
technical change when learning is localized. Upgrading technological capabilities
² ‘It is sometimes argued that the problem of the allocation of resources to research is not relevant for
a present-day underdeveloped country, since it will benefit from technical progress in the advanced
countries, and any independent research would simply be a duplication of effort. But if, as we have
suggested, technical knowledge is highly specific to particular production processes, this will not be the
case’ (Atkinson and Stiglitz, : ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
requires more than adequate price signals. It demands an institutional framework for
the coordination of the various actors (in the private and public sectors, such as R&D
agencies, universities, and centres for technological training and extension) engaged in
learning and innovation, redirecting investments towards new capabilities over a long-
term horizon, and away from the most obvious short-term incentives (Katz and
Stumpo, ; Cimoli and Katz, ; Anderson and Ejermo, ; Bell, ).
A systemic approach is at the core of the evolutionary literature, especially in the
concept of national systems of innovation (Fagerberg and Verspagen, ; Lundvall,
) and their institutional variations across countries. These variations may take the
form of ‘mission-oriented’ and ‘diffusion-oriented’ paradigms in industrial and techno-
logical policies (Chiang, ). Mission-oriented innovation policies are based on large
projects with public and private funding that seek to produce a technological break-
through and shift the international technological frontier, leading to global leadership
in strategic sectors. Diffusion-oriented strategies are those focused on the absorption
and improvement of existing technology, especially in adapting and improving foreign
technology through cumulative minor innovations. Countries that adopt diffusion-
oriented strategies (mostly, but not exclusively, developing economies) seek to create
competitive advantages acting as smart followers rather than as innovators, moving up
(‘trickle-up’) in the technological ladder.
An important issue is to what extent the firms’ nationality matters in the effort to build
a national system of innovation. Amsden () has argued that counting on national
firms was an important ingredient in Korea’s success story, which is at variance with
Latin America. This could have been a factor in the ability of the governments in Asia
and Latin America to effectively implement industrial policies. While we acknowledge
the importance of this point, it will not be discussed in this chapter.
.. The Links between Macroeconomic
and Industrial Policies
Fiscal, monetary, and exchange rate policies are essential to stabilize inflation and
smooth business cycles. However, macroeconomic policy also has substantial effects on
structural change. As GDP growth volatility increases investment risks, avoiding sharp
cyclical fluctuations may be particularly important to promote growth and associated
structural change. This especially compromises innovative sectors, which are in them-
selves subject to larger risks. Macroeconomic policies, and especially the real exchange
rate policy, may also change the composition of output. Changes in the real exchange
rate (RER)³ redefine the structure of relative prices in favour of, or against, the
production of tradable goods. To the extent that tradable and non-tradable goods
³ The RER is defined as q=PfE/P, where Pf are foreign prices and P domestic prices, and E the
nominal exchange rate, expressed as the value of the foreign currency in terms of the domestic currency.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
have different potential for learning and productivity growth, the exchange rate policy
generates long-run effects.
There is substantial evidence suggesting that a stable and slightly undervalued RER
favours structural change and economic growth in the long run (Rodrik, ; Razmi
et al., ; Guzman et al., ). Two mechanisms explain this association. The first is
that growth in developing economies tends to be constrained by the external sector, as
the literature on balance-of-payments-constrained growth suggests. There is also a
strong dependence of short-term economic activity on external shocks, positive and
negative—an effect that one of us has called ‘balance-of-payments dominance’
(Ocampo, ). A country that overvalues its currency will grow at a lower rate
than a country that keeps it in equilibrium or slightly undervalued. This would be
associated with short-term growth risks (the probability of a balance-of-payments
crisis), but also long-term effects, particularly reduced opportunities for investment
and learning by doing in tradable sectors.
The second mechanism is that tradable sectors are at the heart of industrial policy
because high-tech sectors are usually tradable and are exposed to more intense compe-
tition in international markets. Therefore, to be effective, industrial policy should work in
line with macroeconomic policy, especially with the exchange rate policy. If the RER is
overvalued, attempts to promote tradable sectors—for instance, by improving the coord-
ination of R&D agencies and firms, improving technical training, or granting subsidies to
innovation—are doomed to fail. In other words, industrial policy cannot surmount
the disincentive for the production of tradables associated with an appreciated
RER. On the other hand, relying too much on an undervalued currency for competi-
tiveness entails the risk of dependence on cheap labour. Arrow’s learning by doing and
the Kaldor–Verdoorn Law are not automatic forces: the speed of learning out of growth
depends on the industrial and technological policies. In short, the macroeconomic policy
cannot replace industrial policy; and an industrial policy without a competitive RER will
be ineffective in providing incentives for structural change.
. P C
P: I P
D P L A
D
..................................................................................................................................
.. Industrial Policy: From State-led Industrialization
to the Washington Consensus
Why did Latin America fall behind, while several Asian countries succeeded in
converging with the advanced economies? We will argue that the specific combination
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
of industrial and macroeconomic policies these countries pursued explain the different
outcomes. First, we briefly summarize some general trends for the region and subse-
quently focus on Argentina, Brazil, Colombia, and Mexico in Latin America, and Korea
in Asia—the latter as a successful benchmark.
At least three phases in the evolution of industrial policy can be identified in the
post-Second World War period in Latin America (simply post-war hereafter). First,
from the early post-war period⁴ to the late s/early s, state-led industrialization
was the dominant strategy, especially in the largest economies of the region (Bértola
and Ocampo, ). The Latin American governments actively sought to encourage
industrialization and diversification, initially through import substitution, which was
increasingly complemented by export diversification and regional integration. There
were significant improvements in several fields, including the building up of techno-
logical capabilities in new sectors—frequently with a key role for publicly funded
universities or R&D departments in large public-sector firms. State-led industrializa-
tion, however, was challenged by the debt crisis of the s, which subsequently
turned into a major fiscal crisis. There was no room for industrial policy in the s, as
investment collapsed, inflation rocketed, major macroeconomic adjustments were in
place (usually under severe restrictions imposed by the creditor countries) and
resources were transferred to foreign creditors.
Second, in the s, foreign capital inflows returned to Latin America, and the
external constraint was eased. With a less restrictive external environment, there
should have been more space to move beyond the stabilization agenda. However, the
predominance of orthodox views in policymaking, and the trauma left by the high
inflation levels of the s, led to a retreat of the state, keeping industrial policies at
bay. At best, across-the-board policies to enhance competitiveness were admitted
(sometimes focusing on small and medium-sized enterprises; see Peres and Primi,
). Real exchange rate appreciation, facilitated by high liquidity in global financial
markets, reinforced negative signals towards manufacturing and export diversification.
Third, after a series of external crises in the late s and early s, there was a
revival of industrial policies. Disappointment with the results of the pro-market
reforms of the s had led to reform fatigue by the late s, as new generations
of orthodox reforms were called for but were not adopted or had no significant success.
However, the revival of industrial policies was timid and faced powerful countervailing
forces. The – commodity boom (temporarily interrupted by the – North
Atlantic financial crisis) boosted exports intensive in natural resources—a reprimar-
ization of the export structure—particularly in South America, and generated a new
wave of exchange rate appreciation. Some of the industrial policy instruments were
mostly defensive and ill articulated with technological policy.
The emergence of China as a prominent global trader not only contributed to the
reprimarization of Latin America’s export structure through its demand pattern
⁴ In some cases, the strategies went back to the s or even to the late nineteenth and early
twentieth centuries. See Bértola and Ocampo ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(concentrated in natural resources) but also by competing with the Latin American
manufactures in Europe, the United States, and in the region itself. It became more
difficult for Latin American countries to remain competitive in industries with low or
medium technological intensity. As stated by Jenkins and Freitas Barbosa (): ‘it is
clear that the concerns of manufacturers over Chinese competition are found through-
out the region from Mexico to Argentina. They are also prevalent in a wide range of
industries from traditional labour-intensive activities such as clothing, footwear, and
furniture to more technologically advanced and capital-intensive sectors such as steel
and electrical and electronic products.’⁵
During the three periods, a common feature was the weakness of the state when it
came to penalizing firms that received public support without delivering in terms of
technical change and competitiveness. Even during the years of state-led industrializa-
tion, the state’s failure to remove rents when they did not encourage innovation
contrasts with the assertive policies adopted in Asia, where incentives were granted
on the basis of performance, generating ‘reciprocal control mechanisms’, to borrow
Amsden’s () term.
.. From State-led Industrialization to the Debt Crisis
The period of state-led industrialization was a period of convergence (or less intense
divergence) in relative productivity and improvements in the indices of structural
change in Argentina, Brazil, and Mexico, and to a lesser extent Colombia. The RER
remained overvalued for long periods, due to the prevalence of fixed exchange rates in
an inflationary context (Mexico being an exception in this regard, as it showed low
inflation). This problem was partially corrected by the adoption of the crawling peg in
Brazil and Colombia in the mid-s. It was also counterbalanced, in terms of its
effects on tradable sectors, by high levels of protection and export subsidies on non-
traditional exports.
Brazil and Mexico were more successful in convergence. The trend began earlier in
Mexico, as a result of the policy known as stabilizing development, whereas in Brazil
convergence gained momentum in the second half of the s, leading to the
‘Brazilian miracle’. Unlike Argentina and Colombia, Brazil and Mexico continued to
converge in the second half of the s as a result of ambitious plans for building
capital and intermediate goods industries—the Second National Development
Plan in Brazil (Aldrighi and Colistete, ) and the National Plan for Industrial
Development in Mexico (Moreno-Brid and Ros, ). Both plans sought to deepen
⁵ The authors point out that the high share of intermediate Chinese inputs in manufacturing
production in Brazil and Mexico implies the risk of a process of ‘hollowing out’ of the manufacturing
sector if domestic policies are not changed.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
import-substituting industrialization and export diversification, using tariff and
non-tariff barriers, and export subsidies. While Brazil was heavily dependent on oil
imports, partly moderated by a booming sugar-based ethanol industry that was part of
its industrial policy, Mexico had become a significant oil exporter in the mid-s, a
fact that also boosted economic growth. Brazil and Mexico were seen as rising
industrial powers belonging to the group of Newly Industrializing Countries (NICs).
Economic growth could rely in the second half of the s on high liquidity and low
interest rates in the international financial markets. Still, trade liberalization and the
opening up of the capital account in Argentina, and rapid growth in Mexico and Brazil
(including the rising costs of imported oil in the case of Brazil), gave rise to an
unsustainable increase in external debt (Cardoso and Fishlow, ; Dornbusch and
de Pablo, ). Colombia remained immune to that trend thanks to its decision to
save part of the coffee boom that it experienced in –. In turn, domestic financial
liberalization generated a domestic financial boom in all of these economies. It is
important to note that the rise in external debt occurred both in countries that were
still pursuing state-led industrialization (Brazil and Mexico) and in countries that had
already abandoned this development strategy (Argentina, as well as Chile, not analysed
here). The debt crisis came, therefore, from the excessive reliance on foreign capital
rather than on the specific type of industrial policies that were in place.
The debt crisis that sparked in reversed the industrialization drive in Brazil and
Mexico and accelerated de-industrialization in Argentina. It was accompanied by
major macroeconomic adjustments in Argentina, Brazil, and Mexico in the early
s to manage their massive fiscal and balance-of-payments crises, the latter leading
to large exchange rate adjustments that heightened inflationary pressures. Short-run
concerns over stabilization (how to pay the debt and tame inflation) prevailed over
long-run objectives of economic growth. The economic crisis, together with the
political crises in Argentina and Brazil, made the Latin American governments par-
ticularly vulnerable to pressure from banks and international organizations, which
acted in a coordinated way. They demanded austerity measures and a reduction in
public investment to pay for the debt. The region implemented a drastic overhaul of
trade and industrial policies along the lines of the structural-reform agenda being
pushed by the World Bank and embedded in a sequence of stand-by agreements signed
with the IMF. Although Colombia avoided an external debt crisis, it also experienced
fiscal and balance-of-payments problems and slower growth, but not massive exchange
rate adjustments and associated inflationary pressures; hence, it was able to renew
growth in the second half of the s, earlier than the other countries.
Debt and austerity imposed a crucial burden on the development prospects of the
region, one that would persist for many years. Until the late s/early s, the
Latin American countries grew at very low rates while investment rates collapsed,
generating a ‘lost decade’—the term that the Economic Commission for Latin America
and the Caribbean (ECLAC) coined to refer to the s, and that has been widely used
for other parts of the world since then. The strong impact of the debt crisis on
investment seems to have produced a hysteresis phenomenon: the investment rate never
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
returned to the levels it had attained in the three decades before the crisis. Again, due to its
lower debt ratios, Colombia was a partial exception.
.. The Washington Consensus Years
The second phase began in the late s/early s and continued until the early
s, a period that marked the heyday of the Washington Consensus.⁶ It was
characterized by reforms aimed at liberalizing foreign trade, privatizing state-owned
enterprises, and deregulating markets. Many countries abandoned industrial policy
(‘the best industrial policy is no industrial policy’) or at most implemented horizontal
policies to encourage competitiveness and innovation across the board. These policies
were, in theory, aimed at making industrial development and technological change more
efficient—driven by the needs of firms rather than by the decisions of government
agencies. In practice, they dismantled most of the old policies and put in place a poorly
articulated set of incentives to encourage productivity and innovation. Argentina created
the National Agency for Scientific and Technological Promotion. Brazil launched the
Brazilian Programme for Quality and Productivity, and the Programmes for Techno-
logical Development in the industrial and agricultural sectors. Brazil’s National Devel-
opment Bank (BNDES), which had been very active in the s supporting the creation
of new industries, played a new role financing the privatization of public-sector firms.
In Mexico, the Economic Solidarity Plan of began to dismantle trade barriers, a
process that accelerated in the following years. By the s non-tariff barriers had
been almost completely removed, with a few exceptions in the oil, automobile, and
agricultural sectors (Moreno-Brid and Dutrénit, ). In the transition towards more
liberal policies and the abandonment of industrial policy, trade agreements became an
essential element of the new strategy, particularly the North American Free Trade
Agreement (NAFTA). This agreement implied a commitment to eliminate barriers to
trade over a period of ten years. It was expected to allow Mexico to start a phase of
export-led growth based on its privileged access to the US market.
Colombia massively liberalized foreign trade in the early s (with some agricul-
tural goods and car assembling as partial exceptions). It also redesigned its system of
development banks (creating a bank for foreign trade, BANCOLDEX, out of a central
bank rediscount facility for non-traditional exports, and keeping a development bank
⁶ See Stalling and Peres (). The liberalization drive started earlier in Mexico, with the De la
Madrid administration (–). In , Mexico adopted a Programme for Modernizing Industry
and Trade (Programa Nacional de Modernización Industrial y de Comercio Exterior, PRONAMICE,
–), which would subsequently be complemented by further liberalization, as pointed out in the
main text.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
for industrial development, IFI)⁷ and an export promotion agency (PROEXPORT).
The country also launched a series of national and regional competitiveness councils to
support the private sector (Ocampo and Arias, ). However, the effects of trade
liberalization and the exchange rate appreciation—generated in the latter case at least
partly by the foreign exchange and capital account liberalizations that accompanied the
new trade policy—prevailed throughout the manufacturing sector over those of the
moderate competitiveness policies. The latter also lacked continuity across government
administrations.
The s also witnessed a change in the prevailing outlook on economic integration
in Latin America. While integration agreements since the s had been mostly
partial and had been reached in a context of high barriers to international trade, the
‘open regionalism’ of the s sought to reduce overall trade barriers while keeping a
margin of preference for regional trading partners. The Andean Community (previ-
ously Andean Group) and the Central American Common Market were relaunched in
the early s, and the Southern Common Market (Mercosur, according to its
Spanish acronym) was created in . They served as a framework for the significant
growth of intra-regional trade (particularly of manufactures) in the s until the
crisis that struck the region at the end of the decade.
Overall, trade liberalization and the removal of barriers to competition and regula-
tions failed to enhance competitiveness and speed up economic growth to the levels
that had been typical during the period of state-led industrialization. This decade was
also one of sluggish investment and strong RER appreciation. Figure . shows how
the opening up of the capital account (as measured by the Chinn–Ito Index of capital
account openness (Chinn and Ito, ), plotted on the left vertical axis) and the
investment rate (plotted on the right vertical axis) moved in opposite directions in
Latin America (see Cherkasky and Abeles, ).
There were partial exceptions to the horizontal approach to industrial policy. In all
four countries analysed, the automobile industry enjoyed a special regime, which also
sought to foster the production of auto parts. In Brazil, sixteen Sectoral Funds (Fundos
Setoriais) were created in , which represented a new mechanism for funding
investments in science and technology, based on contributions from many different
sources, including royalties from oil exploration. In Argentina, a regional policy
provided incentives for the installation of assembling industries in Tierra del
Fuego—though with very little incentive for developing local capabilities; it was created
in the s and renewed over the years. In Colombia, as indicated, weak competi-
tiveness policies were put in place.
Global financial conditions in this period were favourable for capital inflows towards
the region, which took place, as we have seen, amid capital account liberalization
processes (Ffrench-Davis and Ocampo, ; Ffrench-Davis, ; Freund and
⁷ There were three additional development banks, not relevant for the analysis here: one for rural
development, another for regional and local government projects, and a third one for energy investment,
which was later given the responsibility to promote public–private infrastructure projects.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
0.7 25%
0.6 24%
Investment ratio (% of GDP)
0.5 23%
Chinn–Ito Index
0.4 22%
0.3 21%
0.2 20%
0.1 19%
0.0 18%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Chinn–Ito index of capital account openness
Investment ratio (% of GDP), 3-year moving average
. Investment ratio and capital account openness in Latin America
Source: ECLAC based on the Chinn–Ito Index and Penn World Tables.
Pierola, ; Frenkel and Rapetti, ; Frieden, ). Capital account liberalization
was moderated by taxes on capital inflows in Brazil and by reserve requirements on such
inflows in Colombia (as well as Chile, not analysed here). Global liquidity led to an
appreciation of the RER in Argentina, Brazil, and Colombia (Figure .). While this was
helpful to curb inflationary pressures in Argentina and Brazil, it depressed the competi-
tiveness of industrial production. In both countries, the exchange rate became, therefore,
a nominal anchor to stabilize inflation expectations. Mexico also faced appreciation
pressures, which were interrupted, however, by a balance-of-payments crisis in late .
Deregulation of capital accounts, the loss of competitiveness, and current account
deficits foreshadowed the next external crises. They occurred in (Tequila crisis) in
Mexico, and in – in the other economies, as a contagion of the crises in East Asia
and Russia. Brazil experienced a crisis at the end of the Real Plan in , Colombia
experienced in that year its worst recession of the post-war period, and Argentina saw the
collapse of its Convertibility Plan in after several years of difficulties.⁸ In all cases,
these processes were accompanied by strong exchange rate depreciations (see Figure .).
⁸ Brazil’s Real Plan was less rigid that Argentina’s Convertibility Plan and was abandoned earlier than
the latter (see Salvia, ). In addition, Brazil imposed a tax on capital inflows as a response to their
surge in – (Goldfajn and Minella, ; Carvalho and Garcia, ), which failed, in any case, to
prevent the appreciation of the real, given the attractiveness of the Brazilian market due to high domestic
interest rates. Brazil fell into what has been called a ‘low RER x high interest rates trap’ (Oreiro et al.,
; see also Prates et al., ). After the – turbulences, capital account regulations were lifted
(see Baltar, ). In any case, these regulations made the Brazilian crisis of January (which marked
the end of the Real Plan) milder and shorter than the Argentine crisis of . On the crisis of the late
twentieth century in Colombia, in contrast to its performance during the Latin American debt crisis, see
Ocampo and Romero (: –).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Argentina Brazil Colombia Mexico
. Real exchange rate ( = )
Source: ECLAC; an increase means a real exchange rate depreciation.
.. The Timid Return of Industrial Policy in the s
The external crises of –, and the sense that pro-market reforms had failed to
bring about the expected recovery in growth, led to a gradual return of industrial
policy, mixed in part with new R&D policies and the spread of intellectual property
rights regimes adopted by WTO and free-trade agreements (Peres, ; Primi, ).
The timid return of industrial policies faced, however, a new wave of RER appreciation
in South America, the strong effects of the – North Atlantic financial crisis on
Mexico, and a significant slowdown in South America after the – commodity
boom came to an end.
Also, in contrast to the revitalization of the regional integration agreements in the
s, which had been a significant source of intra-regional trade in manufactures, they
weakened and became embedded in political rivalries with strong ideological content.
Notably, Venezuela left the Andean Community in and joined Mercosur, from
which it was in turn expelled in due to its lack of commitment to democracy.
The split in the Andean Community, together with the political confrontations and the
economic and political crisis of Venezuela, led to the collapse of the second major
bilateral intra-regional trade flow, that between Colombia and Venezuela. A new
integration agreement, the Pacific Alliance, has been the most dynamic regional
agreement since it was launched by four Pacific nations (Chile, Colombia, Peru, and
Mexico) in .
In Brazil, during the first presidency of Lula da Silva in , the Industrial,
Technological and Trade Policy (PITCE by its Portuguese acronym) was approved,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
focusing on encouraging innovation and high-tech sectors. The PITCE included
horizontal instruments along with fiscal and financial incentives for strategic sectors,
such as capital goods, pharmaceuticals, software, nanotechnology, and biotechnology.
An interesting dimension was the development of technologies and capital goods for
deep oil exploration to allow Brazil to fully exploit discoveries that were taking place at
the time, enabling the country to become an international leader in this field. Brazil also
set out a new institutional framework with a key coordinating role for the Agency of
Industrial Development (Portuguese acronym ABDI).
PITCE was subsequently replaced by the Policy of Productive Development (PPD,
–), in which the development bank (BNDES) played a major role in encour-
aging the internationalization of large Brazilian firms. There was also a focus on
coordination with the private sector and with other public-sector programmes, notably
the PAG (Programme for the Acceleration of Growth), primarily focused on invest-
ments in infrastructure. While the crisis of compromised the advance of the PDP,
this program was instrumental in sustaining investments and aggregate demand in the
context of an international recession of industrial countries. Finally, the PDP was
replaced by the Plano Brasil Maior (PBM) in the period –, under President
Dilma Rouseff. The PBM showed a more protectionist stance and was concerned with
lowering production costs, as the appreciation of the RER (boosted by the commodity
boom) harmed growth and employment (see ECLAC, ; Bresser-Pereira, ;
Bresser-Pereira et al., ; Nassif et al., ; Bekerman and Dalmasso, ). In spite
of its ambitious objectives for competitiveness and technical change, PBM mostly
played an anti-cyclical role (Laplane and Laplane, ). It remains to be seen whether
the trade liberalization policy announced by the Bolsonaro administration that started
in will end up reversing the industrial policies of previous administrations, which
is a very likely outcome.
The Brazilian industrial policy of the s had an impact on industry and
R&D. Significant resources were devoted to these programmes, including, as we will
see, relatively large levels of investment in R&D relative to other Latin American
countries, though much lower than those of Korea. Notwithstanding these advances,
industrial policy was fragmented, driven by short-term political pressures, targeting in
many cases sectors not related to advanced technologies. There was no progress in
terms of structural change or reversing the de-industrialization process. Indeed, the
– commodity boom reinforced the Brazilian specialization in natural resource-
intensive exports. The growing role of China as a trade partner of Brazil reproduced the
traditional North–South (centre–periphery) specialization patterns with which struc-
turalist economists were so concerned: Latin American countries exporting commod-
ities in exchange for manufactures. Incentives for investment thus remained
concentrated in traditional comparative advantages.
The lack of synchrony with the macroeconomic policy was indeed an important
factor leading to the reinforcement of the specialization pattern in natural resources
(see Nassif et al., , ). The strong appreciation of the real was a persistent
challenge for industrial competitiveness, except for a short interregnum in late
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
and . Since October , Brazil has deployed a vast array of capital account
regulations to prevent the real from continuing appreciating. A tax on the notional
amount of derivatives was applied, which complemented other measures to close
loopholes that had allowed investors to bypass the regulations. However, differences
in interest rates between foreign and domestic markets remained very high in the s
(Kaltenbrunner and Paincieira, ).⁹ Capital account regulations began to be dis-
mantled from , as the real showed increasing weakness, and monetary policy
became less restrictive.
In Argentina, the Convertibility Plan collapsed in , when the peso was devalued,
and GDP contracted by per cent ( per cent with respect to ).¹⁰ The response
of the new government that took office amidst political and economic turmoil was to
advance in both macroeconomic and industrial policies. Concerning the latter, it
reinvigorated the science and technology policy, and (especially since ) recovered
instruments that had become redundant in the s, including investments in
technology by state-owned enterprises, using government purchases as an industrial
policy instrument and some elements of trade management. Policymakers sought to
articulate large public projects with investments in R&D and technological develop-
ment. Sectoral technology funds and sectoral innovation funds (FTS and FITS, accord-
ing to their Spanish acronyms) were created to encourage technological learning in
biotechnology, nanotechnology, and agro-industries. There were also public research
programmes in satellites and nuclear energy, and a rise in technology investments by
large public firms, such as the (re)nationalized REPSOL in the oil sector (Stumpo and
Rivas, ).
On the macroeconomic front, and for a short time, RER management encouraged
industrial growth. In , the government adopted a system of differential taxes on
exports (retenciones) that amounted to a multiple exchange rate system, penalizing
agricultural exports and favouring manufacturing. Taxes on exports of primary goods
increased from per cent to per cent between – and –. Inversely,
these taxes remained at per cent for manufactures processing industrial inputs during
the whole period – (Lavarello and Mancini, : ). However, RER appreci-
ation eroded competitiveness over time. This made the government turn to protection-
ism (as happened in Brazil), particularly after the crisis, in the form of quotas, non-
automatic import licensing (since ), and managed trade and export requirements.
The differential taxes were dismantled by the incoming Macri administration in late
(apart from for soybeans), but were re-established as a fiscal adjustment device in
September .
The launch of the Strategic Industrial Plan and Argentine Innovation in
represented important steps in the quest for a coherent industrial plan
for Argentina. However, industrial and technological efforts remained dispersed and
⁹ Kaltenbrunner and Paincieira (: ) observed that the composition of financial investments
was heavily concentrated in short-term maturity assets.
¹⁰ See IMF () for an analysis of this crisis.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ill-articulated. Most of the resources for industrial policy went to the automobile sector
and to special regimes like in electronics in Tierra del Fuego, in which assembling
activities are dominant. The main pro-manufacturing incentives came, as we have
indicated, from the system of differential export taxes. But, as in the case of Brazil (and,
as we will see, Colombia), the – commodity boom redefined incentives in a way
that penalized the industrial sector. Neither Brazil nor Argentina were able to prevent
the RER from neutralizing the potential gains in productivity that arose from the return
of industrial policy instruments.
The return of industrial policy has been much less assertive in Mexico than in
Argentina and Brazil. President Fox recognized the importance of sector-specific
policies in his National Development Plan (–) but did not put resources behind
the plan to make a difference compared to the previous administrations (Moreno-Brid,
). The idea of recovering the role of industrial policy was resuscitated by the Peña
Nieto administration in the National Development Plan – and the quest for
‘democratizing productivity’.¹¹ According to this plan, industrial policy should be
directed at raising productivity and increasing value added in manufacturing produc-
tion. The need for a renewed industrial policy was put in the following terms by
economic minister Videgaray in March : ‘We should have a country in which
every year productivity grows; but for that we need an industrial policy . . . This concept
was practically forbidden in Mexico during many years . . . But we have to come back and
dare to pursue an industrial policy . . . for a more competitive industry and for raising the
country’s productivity’ (quoted in Moreno-Brid and Dutrénit, : ).
In practice, however, there was little progress in this direction, and few resources
were effectively allocated to industrial policy programmes. The emphasis was on
policies that should boost the existing comparative advantages rather than defying
them. A Programme for Innovative Development (PRODEINN, –) was adopted
to enhance productivity. But it had only a slight impact, as reflected in the stagnation of
R&D expenditures at low levels. In the same vein, the government approved new
legislation in to create special economic zones, which would receive fiscal and
financial incentives, and investments in infrastructure aimed at reducing regional
inequalities and attracting higher-productivity activities to depressed territories, espe-
cially in the south of Mexico. As happened with other policy initiatives, implementa-
tion was sluggish and few resources were allocated. They failed to alter the scenario of
slow productivity growth and slow structural change of the Mexican economy.
All in all, industrial policy continues to be relegated to a secondary position in
Mexico, a problem aggravated by low rates of public investment, which dwarfs
the capacity of the government to effectively implement its development plans. By
expecting that NAFTA and trade liberalization would provide enough incentives for
export-led growth, Mexico remained locked in its static comparative advantages
(notably the maquila system in which low wages are still a key driver of
¹¹ The concept was ill-defined, but probably made reference to the need to spread productivity gains
from a small group of exporters to the rest of the economy.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
competitiveness), missing the key link between trade and industrial policy as a tool for
structural change in the Asian economies. A comparison with other major manufac-
turing exporters, China and the Republic of Korea, indicates that Mexico has been able
to extract less value added from its exports and is showing a negative rather than a
positive trend in this regard.¹² The absence of a national development bank as powerful
as BNDES has also been a significant difference between the experiences of industrial
policy in Mexico and Argentina compared to Brazil (Santarcángelo et al., ).
For its part, and following the pattern set in the s, Colombia continued with the
trade liberalization processes, now enhanced by free-trade agreements with developed
countries, starting with the United States in . Proexport continued to play the role
of export-promoting agency and was transformed into Procolombia in , with the
additional tasks of promoting tourism and foreign direct investment. The foreign trade
development bank (Bancóldex) absorbed the industrial bank (IFI) in . Bancóldex
also emphasized a programme of entrepreneurial modernization, has been active in
promoting financing of firms in their early stages of development, notably through the
angel investor network (Red Nacional de Ángeles Inversionistas), and has promoted
private-equity venture funds to support business growth in a diverse set of sectors
(Ocampo and Arias, ).
These policies were accompanied by a sequence of national and regional competi-
tiveness strategies, which operated mainly as horizontal industrial policies. It also
included sectoral initiatives, largely aimed at breaking bottlenecks to development,
supporting regional clusters and strengthening regional agents promoting innovation
and entrepreneurial development. The sectoral growth covenants (Pactos por el creci-
miento y la generación de empleo), launched in , belong to this family. There are
also specific programmes that provide technological, administrative, and financial
support to firms—particularly innovative firms—at the microeconomic level through
Colombia Productiva (formerly Programa de Transformación Productiva) and
iNNpulsa (managed by Bancóldex), adopted in and . These initiatives have
been formulated in the context of the Production Development Policy, which had its
roots in and was improved in when it was approved by the National Council
of Economic and Social Policy (CONPES), the top national economic authority
(CONPES, ). Additional support at the firm level and for regional clusters is
implemented by chambers of commerce. A private-sector council (Consejo Privado
de Competitividad), created in , provides regular analysis of competitiveness and
productivity issues.
However, the effect of these policies has been restricted due to scale and discontinu-
ity across administrations. There has been a remarkable lack of coordination between
national and regional programmes and limited resources have been allocated to them.
Indeed, some of the local programmes run by the most dynamic chambers of com-
merce, which also support individual firms and regional clusters, have had greater
¹² See the recent OECD-WTO data in this regard (https://www.oecd.org/sti/ind/measuring-trade-in-
value-added.htm#access).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
continuity and impact.¹³ Also, investment in R&D remained very low, at the lowest
level of the four countries analysed here (see Figure .).
Furthermore, as in the case of Argentina and Brazil, macroeconomic policy over-
whelmed the effects of industrial policy—particularly, again, the exchange rate effects
of the – commodity boom. Manufacturing did experience a revival in the mid-
s, when the balance-of-payments crisis that hit the country in was over: the
exchange rate was still competitive (see Figure .), and a temporary boom in
manufacturing exports to Venezuela also helped. But the exchange rate effects of the
commodity boom soon led to the renewal of the de-industrialization trend. In contrast
to and –, when reserve requirements were imposed on foreign borrowing
to limit short-term capital flows and the exchange rate appreciation they generated,
similar policies were not put in place during the second phase of the commodity boom,
–.
The paths identified for the four Latin American countries confirm the observation
of Peres and Primi (: ), who argue that: ‘Latin America’s development trajec-
tory is linked to the fact that these policies have never been among the top priorities for
governments—at least since the s. Macroeconomic stability and a certain compli-
ance with what was considered to be a respectable and conventional economic policy
have been the main shapers of national development strategies.’ The efforts of the
s to revive industrial policy in the region were too weak to reverse the loss of the
institutional and political capabilities it suffered in the s. What, on paper, was a
quest for industrial efficiency in the shape of a move from a vertical to a horizontal
industrial policy, was in practice a feeble and fragmented policy.
. K B
..................................................................................................................................
In contrast to the Latin American experience in recent decades, the role of industrial
policy in targeting more sophisticated industries through time has been the hallmark of
the Korean development process in the post-war period.¹⁴ Korea is a paradigmatic
example of the development pattern that characterized several economies in East Asia
(traditionally called the ‘flying geese’, though China has already changed that pat-
tern),¹⁵ which combined widespread government intervention with a strong presence
in international markets (Khan, ).
¹³ For an evaluation of existing programmes, see Acosta () and OECD (). The latter
proposes an interesting set of initiatives for the country in this field.
¹⁴ The classic work is Amsden (). See also Kim (, ), Lee (), Rodrik (), and
Wade ().
¹⁵ China may be seen as the last (and more dramatic) example of the flying-geese strategy of
industrialization, but it has changed the pattern, and now dominates Asian manufacturing. See Lo
and Wu ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
A watershed in the evolution of industrial policy in Korea occurred with the military
government in the s, which focused on establishing an industrial base that would
allow the country to counterbalance the military power of North Korea and reduce its
dependence on foreign finance and aid. The Economic Planning Board, created in July
, was in charge of designing and implementing five-year development plans.
Firms’ export performance was a key criterion for resource allocation based on the
leverage provided by the government’s control over the financial sector (Lim, :
). In parallel, Korea invested heavily in education, expanding the supply of highly
qualified labour to an increasingly complex industrial sector.
Comprehensive policy support, structured in successive five-year plans, helped
transform the production structure from consumer goods to heavy industries in the
s, and since the s towards electronics, ICT, optics, and aerospace. In the
s, the quest for new engines of growth led to the promotion of green industries,
high-tech convergence, and high value-added services (Koh, ).
The broad transformation of the industrial structure was accompanied by a rise in
R&D spending, led at first by the public sector and subsequently, from the s, by the
private sector, whose share in total R&D increased from per cent in the late s to
per cent in (Koh, ). The liberalization of imports was gradual and followed
the path set by industrial upgrading (Koh, : –). Indeed, as pointed out by Nassif
et al. (), the gradual, step-by-step approach to industrial policy in Asia (and its
consistency with macroeconomic policy) is in sharp contrast with the shock therapy
observed in Latin America (see also Suzigan and Furtado, ).
Differences between Korea and Latin America were not confined to industrial policy,
but can also be found in their financial and macroeconomic policies. Korea combined
import substitution and export promotion to varying degrees throughout its develop-
ment process, but emphasized export promotion from the early s. In this transi-
tion, the won went through a major depreciation in February and October and in
May (when the price of the dollar jumped from to won per dollar). The
system of multiple exchange rates was then replaced by a single fluctuating exchange
rate (Koh, : ).
Financial market and credit allocation and interest rates remained tightly controlled
in the s and s. Several specialized public banks directed – per cent of
domestic loans to selected industries, particularly in the capital and intermediate goods
sectors (Yoon and Kim, ).¹⁶ Such a policy, combined with export promotion (the
‘acid test’ of learning), gave Korea the opportunity to redefine its comparative advantages.
For a long time, Korea had capital account regulations in place (Noland, ). As
set out by the former minister of trade, industry, and energy in Korea, Joong-Kyung
Choi, strict regulations of foreign exchange flows were crucial in the early stages of
¹⁶ Noland (: ) points out that ‘modest financial-sector liberalizations that had been under-
taken in the late s were reversed in , when interest rates were lowered and direct government
control of the banking system was increased in order to channel capital to preferred sectors, projects, or
firms’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
development, and probably necessary even in the mature stages (Choi, : –). In
the light of the impact of the crisis, he observed that ‘a financial crisis is much
more painful than inflation . . . Thus, controlling the cross-border flow of capital is
more important than containing inflationary pressures’ (Choi, : ).
As part of the process of joining the OECD in , Korea eased its financial and
capital account regulations (Noland, ). This was not matched by the setting up of a
domestic macro-prudential framework to contain short-term debt and RER appreci-
ation.¹⁷ The rapid increase in the current account deficit, along with the short-term
maturity of debts contracted in the external market, led to the economic crisis.
The intensity of the crisis was aggravated by a contractionary fiscal and monetary
policy adopted in December and implemented in the first half of —which was
part of the agreement signed with the IMF that provided a US$ billion rescue package.
Although the trend continued to be towards opening the capital account, Korea has, in
some cases, resorted to safeguards to protect the country against financial instability and
crises similar to those of and .¹⁸ In addition, the country sought to build up its
stock of foreign reserves to reduce its vulnerability to capital flight.
All in all, although the transition to democracy in the s and the decision to join
the OECD led to some changes in economic policy, industrial and technology policies
remained highly developmentalist, as reflected more recently in very high levels of
R&D. The crisis also led to the return of more interventionist macroeconomic
policies aimed at avoiding new financial crises.
. S F: A C
V P
S L A
..................................................................................................................................
.. Phases of Convergence and Divergence
The impact of industrial policy on productivity and structural change should be seen
from a long-term perspective. Between and , labour productivity in Latin
America was between and per cent of that in the United States, with a slight
upward trend (Figure .A). In contrast, there is a great divergence in productivity
trends since : it dropped to about one-fifth of US productivity between and
, experienced a moderate recovery during the years of the commodity boom (‘the
super-cycle’) of –, to stabilize at approximately one-fourth of the comparative
¹⁷ A Financial Supervisory Commission responsible for setting regulations and standards in the
financial market was established in .
¹⁸ For instance, in Korea placed some restrictions on derivative markets, but setting limits on the
foreign-exchange derivatives relative to the capital base of the financial institutions.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
A. Total Latin America
0.45
0.40
0.35
0.30
0.25
0.20
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
B. Individual Latin American countries vs. Korea
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Argentina Brazil Colombia Mexico Korea
. Relative productivity vs. United States
Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on Total Economy.
benchmark. The stylized fact that emerges is quite clear: a phase of convergence with
the developed world between and , followed by a phase of divergence since
around , with a mild spurt of convergence in the commodity-boom years (see
Correa and Stumpo, ).
The relative productivity in the four largest Latin American countries—particularly
those of Brazil and Mexico—also tended to converge with that of the United States
until the late s/early s and to diverge thereafter (Figure .B). In Argentina,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
divergence began in the mid-s, a few years before Brazil and Colombia, whereas it
came a bit later in Mexico, in the very early s. In turn, the short period of
convergence—or interruption of divergence—in the s benefited the South American
economies, which are important commodity exporters, but not Mexico. The relative
productivity of Latin American countries vis-à-vis the United States remained, in any
case, at a dismal level. Inversely, Korea began at a much lower level of labour productivity
in the s but went through a persistent process of convergence with the United States
and Latin America, surpassing Brazil and Colombia in the mid-s, and Argentina and
Mexico in the late s.
These productivity patterns were also reflected in GDP trends. Overall, Latin
American GDP growth fell by half between – and – (leaving aside
the lost decade): from . per cent to . per cent a year. Growth also became more
volatile, as reflected in two prolonged crises, in – and –. Among
the four countries analysed here, the long-term slowdown was particularly strong in
Brazil and Mexico (which grew by . and . per cent, respectively, in –,
versus . and . per cent in the period of state-led industrialization), followed by
Colombia (. versus . per cent); Argentina had been a poor performer during state-
led industrialization but delivered an equally poor performance in the recent period
(. per cent growth in both cases).
An interesting comparison in terms of productivity performance is that of Brazil and
Korea. In , labour productivity in Brazil was about . times higher than in Korea,
while in it was less than half. Convergence (in favour of Korea) was not uniform
and was much faster after Brazil entered into an era of divergence vis-à-vis the United
States. Brazil/Korea relative labour productivity declined by about per cent in the
four decades between and , and by about per cent in the four decades
between and .
A similar pattern is obtained comparing the Latin American countries with devel-
oped economies. For instance, labour productivity in Brazil was, on average, about
– per cent of that of Denmark in the s and s, and per cent in the s,
attaining a peak of per cent in , but relative productivity in Brazil fell after-
wards. Since it has stabilized at about one-third of Danish productivity. Even
during the commodity-boom years, Brazilian/Danish relative productivity increased
just one percentage point (from to per cent, as estimated from data of the Total
Economy Database of the Conference Board).
.. Structural Change and Convergence
How does the evolution of relative productivity relate to structural change? A first
aspect to highlight is the evolution of the share of manufacturing in GDP. For Latin
America as a whole, Figure . shows the relevant trend, according to the three series
of national accounts estimated by ECLAC. The period of stable productivity vis-à-vis
the United States coincided with a significant increase in the share of manufacturing in
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
29.0% 21.0%
20.0%
27.0% 19.0%
1970 prices
1990 prices 18.0%
1970 and 1990 prices
2010 prices
2010 prices
25.0% 17.0%
16.0%
23.0% 15.0%
14.0%
21.0% 13.0%
12.0%
19.0% 11.0%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
. Latin America: Share of manufacturing in GDP, –
Source: ECLAC.
GDP, which, as shown by Bértola and Ocampo (: ch. ), depended on the size of
the economies, in terms of both strength and diversification. In contrast, the period of
divergence since the s has been accompanied by a strong de-industrialization,
which in this case, was not interrupted, but rather speeded up by the –
commodity boom. If we make a broad abstraction from changes in the base years of
the national accounts, Latin America is essentially back to the levels of industrialization
it had in the early s. As underscored by Palma (, ), the process can be
characterized as one of premature de-industrialization, as manufacturing lost ground
in GDP at a lower level of GDP per capita than when this process had started to take
place in the developed countries.
The share of manufacturing in GDP declined in all the larger Latin American
countries (Figure .). The decline started earlier, in the mid-s, in Argentina
and Colombia, and in the s in Brazil and Mexico. The sharp decline of manufac-
turing in Argentina was remarkable: it went from representing per cent of GDP
in (more than percentage points above Mexico) to per cent in
( percentage points below Mexico). The collapse of Brazilian manufacturing after
was also impressive, as was to a lesser extent that of Colombia. Thanks to its
strong manufacturing export sector, the reduction was much more moderate in
Mexico. In contrast, manufacturing’s share in Korean GDP increased by about
percentage points during the same period.
The composition of manufacturing production also changed. The share of engin-
eering industries (deemed to be the main drivers of technical change) in total manu-
facturing value added declined, while the share of less technology-intensive sectors
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Argentina Brazil Colombia Mexico Korea
. Share of manufacturing in GDP: Largest Latin American countries vs. Korea
Source: World Bank national accounts data,
https://data.worldbank.org/indicator/nv.ind.manf.cpod.
increased. To keep a comparative approach, we computed the ratio between the share
of the engineering industries in total manufacturing value added in Argentina, Brazil,
Colombia, Mexico, and Korea relative to the same share in the United States
(Figure .). This ratio is the Index of Relative Participation of engineering industries
in total manufacturing value added (IRP;¹⁹ see ECLAC, ). It increased until around
in Brazil and Mexico and remained more or less stable thereafter—with a fall in
the s and a strong recovery in the s in the case of Mexico, and smaller
fluctuations in Brazil. In Argentina, this index stagnated in the s at lower levels
than Brazil and Mexico by the later part of that decade and began to fall in the s, in
such a way that it had lost about half of the value it had in the early s. Colombia
had a less developed engineering sector compared to the other Latin American
countries analysed, and also experienced a decline in the s. In contrast, Korea
experienced a steady increase of this indicator, starting from levels slightly higher than
¹⁹ The IRP is defined as IRP=(ei/mi)/(eUSA/mUSA), where e is engineering value added and m total
manufacturing value added; the superscript i denotes the country and the superscript USA denotes the
reference country, in this case, the United States. The engineering industries are: metal products, non-
electrical machinery, electrical machinery, transport equipment, and scientific and professional instru-
ments (categories to of the Standard Industrial Classification, SIC).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
04
06
08
10
12
14
16
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
Brazil Argentina Mexico Colombia Korea
. Index of the share of engineering industries in manufacturing value added vs.
United States
Source: Authors’ estimates based on ECLAC data.
4.5
4.0
3.5
2007 2016/17
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Korea, OECD Latin Brazil Argentina Mexico Colombia
Rep. of America
. Research and development as % of GDP
Source: UNESCO.
those of Colombia in the early s, surpassing Brazil and Mexico by the late s
and even surpassing the United States in the s.
Poor economic diversification was associated with very limited investment in R&D.
Latin America’s investment in R&D is only a fraction of the average for the OECD, with
only Brazil having attained levels higher than per cent of GDP (Figure .). The levels
of investment in R&D of Argentina and Brazil are less than half of those of Brazil
and remained minimal in Colombia. The contrast with Korea is remarkable, as Korea
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
2.6
2.4
2.2
2.0
1.8
1.6
1.4
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Argentina Brazil Mexico Korea
. Strength of the National Systems of Innovation (NIS)
Source: Lee and Lee (2019).
invests more than per cent of GDP, indeed one of the highest levels in the world, and in
recent years almost twice the average for the OECD.
Another direct indicator of technological capabilities is the NIS computed by Lee
and Lee () (see Figure .). Using US patent data, this index aims at providing a
comprehensive picture of the innovative output of different countries, based on a set of
standardized indicators of the patenting activity. The NIS is only available since ,
but does not include Colombia. Econometric exercises by Lee and Lee show that this
index is a more robust predictor of economic growth than other indicators used in the
literature. The evolution of the NIS points in the same direction as the previous
indices when the economic performance of the Latin American countries is compared
with that of Korea. First, Korea attained higher levels of NIS than in Latin American
countries. Second, the trend in Korea was mostly positive, while in the case of the Latin
American countries, the trend was more irregular, and there was no positive evolution
over the long run. Brazil shows an almost flat NIS for the whole period. Mexico shows
some fluctuation, but its most recent level is similar to that which it achieved in the
early s. This captures the lack of backward linkages that the maquila-type export
specialization, followed by Mexico within the NAFTA agreement (being replaced by
the United States–Mexico–Canada Agreement, USMCA), contributing to techno-
logical learning in a laggard economy. In Argentina, there was a fall with the crisis of
, a recovery after that, and finally a flat trend with some fluctuations.²⁰
Summing up, the pattern that emerges from relative productivity is confirmed by
the evolution of various indices of structural change and technological capabilities.
²⁰ Lee and Lee () reach a similar conclusion running growth regressions using the NIS in the set
of explanatory variables: ‘economies with successful growth experiences, such as South Korea, China,
and Taiwan . . . mostly show upward sloping lines over time.’ These authors also note that in economies
with less successful growth experiences, such as Brazil, Mexico, Thailand, and South Africa, ‘the NIS
index does not increase much in certain periods or even declines’.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
The decline in relative productivity in Latin America, particularly after , and the
more dynamic performance of Korea, are associated with continuous structural change
in the Korean case and stagnation or even reversion of industrial transformation in
Latin America. Although these outcomes are the result of many different factors, the
specific combination of industrial and macroeconomic policies adopted in the Latin
American countries vis-à-vis Korea, as well as the low levels of investment in R&D, are
crucial to explaining why they fell behind.
. C R
..................................................................................................................................
The dismantling of the state-led industrialization policies that many Latin American
countries pursued in the post-war period—and in most cases since the s—led to a
divergence of productivity levels and technological capabilities vis-à-vis the developed
countries. This was the path followed by Argentina and Colombia since the mid-s,
and by Brazil and Mexico since the early s. The return of industrial policies in the
early twenty-first century has been hesitant, failing to prevent the loss of knowledge-
intensive sectors in the production structure or to stimulate investments in R&D,
except partially in Brazil.
Structural change and specialization are stagnant, and there has been a reprimariza-
tion of export structure in recent decades in South America. Mexico relies on a
specialization pattern based on exports of manufactures with low levels of domestic
value added relative to the more successful insertion in global value chains of countries
like China and Korea. In turn, Argentina, Brazil, and Colombia have reinforced their
specialization in natural resources as a result of the – commodity boom and
their growing trade with China. These paths are in sharp contrast with the experience
of Korea, where active industrial policies aimed at deepening technological develop-
ment and high levels of R&D spending have been the rule.
The political economy of industrial policy was critical for the success of Korea.
‘Reciprocal control mechanisms’ helped discipline the large Korean firms and monitor
the effectiveness of public policy in supporting the emergence of new industries and
capabilities. On the other hand, these mechanisms were fragile in Latin America before
the debt crisis and became still more fragile after it struck the region. The debt crisis
first, the uncritical adoption of the Washington Consensus later, and a political
economy which favours the capture of rents from natural resources over the creation
of rents from technical change, have compromised the effectiveness and the willingness
of economic actors to implement industrial policies.
Macroeconomic policy, and particularly its effects on RER, has also been crucial.
Recurrent RER appreciations have also contributed to the de-industrialization process
and recurrent external crises. Periods of high financial liquidity in international
markets have led to massive capital inflows, particularly when associated with capital
account liberalization. The use of the exchange rate as an inflation anchor in many
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
periods has contributed to that result. RER appreciation also resulted from the –
commodity boom in the South American economies. This boom had adverse effects on
manufacturing and counteracted the positive impact of the moderate return of indus-
trial policies. Although Korea was not immune to the adverse effects of financial
liberalization and capital account booms in the s, it returned to a macroeconomic
and financial policy that aimed at avoiding these effects after the crisis it faced.
The tasks to be accomplished by the Latin American economies to catch up are still
more daunting now than in the past. The technological revolution is shifting the
international technological frontier very quickly, which makes it urgent for the region
to finance and carry out massive investments in education, R&D, and institutional
capabilities to respond to this more demanding competitive challenge. In addition, the
socio-political context is in flux (at the international and domestic levels): demands for
equality and sustainability need to be made compatible with the quest for technological
change. As long as industrial policies continue to be a topic of secondary importance in
the policy agenda, it will be increasingly difficult for Latin America not to fall behind.
A
We are very grateful to Arkebe Oqubay, Eva Paus, Dirk Willem, Juan Carlos Moreno-Brid,
and Andre Nassif for comments on a previous version of this chapter.
R
Acosta, Jaime () ‘Economía de la innovación, territorios y equidad para Colombia’,
Análisis, No. , Friedrich Ebert Stiftung, Bogotá. Available at http://library.fes.de/pdf-
files/bueros/kolumbien/.pdf.
Aghion, Philippe and Peter Howitt () Endogenous Growth Theory. Cambridge, MA: MIT
Press.
Aldrighi, Dante and Renato Colistete () ‘Industrial Growth and Structural Change: Brazil
in a Long-run Perspective’. Working Paper Series No. –, Department of Economics,
University of Sao Paulo.
Amsden, Alice () Asia’s Next Giant: South Korea and Late Industrialization. New York:
Oxford University Press.
Amsden, Alice () The Rise of the Rest: Non-Western Economies’ Ascent in World Markets.
Oxford: Oxford University Press.
Anderson, Martin and Olof Ejermo () ‘Technology and Trade: An Analysis of Technology
Specialization and Export Flows’. Working Paper No. /, CIRCLE, Lund University.
Arrow, Kenneth () ‘Path Dependence and Competitive Equilibrium’, in William
A. Sundstrom and Timothy Guinnane (eds) History Matters: Essays on Economic Growth,
Technology and Demographic Change. Stanford, CA: Stanford University Press, pp. –.
Atkinson, Anthony and Joseph E. Stiglitz () ‘A New View of Technological Change’,
Economic Journal (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
Baltar, Carolina () ‘Inflation and Economic Growth in an Open Developing Country:
The Case of Brazil’, Cambridge Journal of Economics (): –.
Bekerman, Marta and Gonzalo Dalmasso () ‘Políticas productivas y competitividad
industrial: El caso de Argentina y Brasil’, Revista de Economia Política (): –.
Bell, Martin () ‘Time and Technological Learning in Industrialising Countries: How
Long Does It Take? How Fast Is It Moving (If At All)?’, International Journal of Technology
Management (–): –.
Bértola, Luis and José Antonio Ocampo () The Economic Development of Latin America
since Independence. Oxford: Oxford University Press.
Bogliacino, Francesco and Mario Pianta () ‘The Pavitt Taxonomy, Revisited: Patterns of
Innovation in Manufacturing and Services’, Economia Política : –.
Bresser-Pereira, Luiz Carlos () ‘Dutch Disease and its Neutralization: A Ricardian
Approach’, Brazilian Journal of Political Economy (): –.
Bresser-Pereira, Luiz Carlos, Jose Luiz Oreiro, and Nelson Marconi () Developmental
Macroeconomics. London: Routledge.
Cardoso, Eliana and Albert Fishlow () ‘The Macroeconomics of the Brazilian External
Debt’, in Jeffrey Sachs (ed.) Developing Country Debt and the World Economy. Chicago, IL:
Chicago University Press, pp. –.
Carvalho, Bernardo and Márcio Garcia () ‘Ineffective Controls on Capital Inflows under
Sophisticated Financial Markets: Brazil in the Nineties’, in Sebastian Edwards and Márcio
Garcia (eds) Financial Markets Volatility and Performance in Emerging Markets. Cam-
bridge, MA: National Bureau of Economic Research, pp. –.
Cherkasky, Martín and Martín Abeles () ‘Régimen monetario e instituciones laborales:
una interpretación alternativa de la tendencia a la declinación del traspaso del tipo de
cambio (pass-through) en los países periféricos’, Revista de la CEPAL August: –.
Chiang, Jing-Tsong () ‘From “Mission Oriented” to “Diffusion Oriented” Paradigm: The
New Trend of US Industrial Technology Policy’, Technovation (): –.
Chinn, Menzie and Hiro Ito () ‘A New Measure of Financial Openness’, Journal of
Comparative Policy Analysis (): –.
Choi, Jiung-Koon () Upside-Down Success Story of Korea’s Economic Development. Seoul:
Daewon.
Cimoli, Mario and Jorge Katz () ‘Structural Reforms, Technological Gaps and Economic
Development: A Latin American Perspective’, Industrial and Corporate Change (): –.
CONPES (Consejo Nacional de Política Económica y Social) () ‘Política nacional de
desarrollo productivo’, Documento CONPES , Bogotá, Departamento Nacional de
Planeación, August.
Correa, Felipe and Giovanni Stumpo () ‘Brechas de Productividad y Cambio Estructural’,
in Mario Cimoli, Mario Castillo, Gabriel Porcile, and Giovanni Stumpo (eds) Políticas
Industriales y Tecnológicas en América Latina. Santiago: ECLAC.
Dornbusch, Rudiger and Juan Carlos de Pablo () ‘Debt and Macroeconomic Instability in
Argentina’, in Jeffrey Sachs (ed.) Developing Country Debt and the World Economy.
Chicago, IL: University of Chicago Press, pp. –.
Dosi, Giovanni, Marco Grazzi, and Daniele Moschella () ‘Technology and Costs in Inter-
national Competitiveness: From Countries and Sectors to Firms’, Research Policy : –.
ECLAC (Economic Commission for Latin America and the Caribbean) () Structural
Change for Equality: An Integrated Approach to Development. Santiago de Chile: United
Nations.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Fagerberg, Jan and Bart Verspagen () ‘Technology Gap, Innovation-Diffusion and
Transformation: An Evolutionary Interpretation’, Research Policy : –.
Ffrench-Davis, Ricardo () ‘Employment and Real Macroeconomic Stability: The Regres-
sive Role of Financial Flows in Latin America’, International Labour Review (–):
–.
Ffrench-Davis, Ricardo and José Antonio Ocampo () ‘The Globalization of Financial
Volatility’, in Ricardo Ffrench-Davis (ed.) Financial Crises in ‘Successful’ Emerging Econ-
omies. Washington, DC: Brookings Institution Press/ECLAC, pp. –.
Frenkel, Roberto and Martin Rapetti () ‘A Concise History of Exchange Rate Regimes in
Latin America’, in José Antonio Ocampo and Jaime Ros (), The Oxford Handbook of
Latin American Economics. Oxford: Oxford University Press, pp. –.
Freund, Caroline and Martha Pierola () ‘Export Surges: The Power of a Competitive
Currency’, Journal of Development Economics (): –.
Frieden, Jeffry () Currency Politics: The Political Economy of Exchange Rate Policy.
Princeton, NJ: Princeton University Press.
Goldfajn, Illan and Andre Minella () ‘Capital Flows and Controls in Brazil: What Have
We Learned?’, NBER Working Paper No. . Cambridge, MA: NBER.
Guzmán, Martin, José Antonio Ocampo, and Joseph E. Stiglitz () ‘Real Exchange Rate
Policies for Economic Development’, World Development : –.
IMF (International Monetary Fund) () ‘Lessons from the Crisis in Argentina’. Prepared
by the Policy Development and Review Department in consultation with the other Depart-
ments, October, p. .
Jenkins, Rhys and Alexandre de Freitas Barbosa () ‘Fear for Manufacturing? China and
the Future of Industry in Brazil and Latin America’, The China Quarterly : –.
Kaldor, Nicholas () Further Essays on Economic Theory. London: Duckworth.
Kaltenbrunner, Annina and Juan Pablo Paincieira () ‘Developing Countries’ Changing
Nature of Financial Integration and New Forms of External Vulnerability: The Brazilian
Experience’, Cambridge Journal of Economics (): –.
Katz, Jorge and Giovanni Stumpo () ‘Sectoral Regimes, Productivity and International
Competitiveness’, CEPAL Review : –.
Khan, Mushtaq () ‘Rent-seeking as Process’, in Mushtaq Khan and Jomo Kwame
Sundaram (eds) Rents, Rent-Seeking and Economic Development: Theory and Evidence in
Asia. Cambridge: Cambridge University Press, pp. –.
Kim, Eun Mee () ‘The Korean Development Alliance between Business, Labour and
Government’. Paper presented to the seminar organized by UNRISD and KOICA, Seoul,
South Korea, September.
Kim, Linsu () ‘Korea’s National Innovation System in Transition’. Science and Technol-
ogy Policy Institute, Korea.
Koh, Youngsun () ‘The Growth of Korean Economy and the Role of Government’, in Il
SaKong and Youngsun Koh (eds) The Korean Economy: Six Decades of Growth and
Development. Seoul: Korean Development Institute, pp. –.
Laplane, Mariano and Andrea Laplane () ‘Planes industriales y los desafíos del desarrollo
sostenible en Brasil’, in Mario Cimoli, Mario Castillo, Gabriel Porcile, and Giovanni Stumpo
(eds) Políticas Industriales y Tecnológicas en América Latina. Santiago: ECLAC, pp. –.
Lavarello, Pablo and Matías Mancini () ‘Política industrial y recuperación manufacturera
en Argentina’, in Mario Cimoli, Mario Castillo, Gabriel Porcile, and Giovanni Stumpo (eds)
Políticas Industriales y Tecnológicas en América Latina. Santiago: ECLAC, pp. – .
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ˊ
Lee, Keun () Schumpeterian Analysis of Economic Catch-Up. Cambridge: Cambridge
University Press.
Lee, Keun and Jongho Lee () ‘National Innovation Systems, Economic Complexity, and
Economic Growth: Country Panel Analysis Using the US Patent Data’, Journal of Evolu-
tionary Economics. Available at https://doi.org/./s---.
Lim, Phillip Wonhyuk () ‘Path Dependence in Action: The Adoption and Persistence of
the Korean Model of Economic Development’, in Timothy Guinnane, William Andre
Sundstrom, and Warren Whatley (eds) History Matters: Essays on Economic Growth,
Technology and Demographic Change. Stanford, CA: Stanford University Press, pp. –.
Lo, Dic and Mei Wu () ‘The State and Industrial Policy in Chinese Economic Develop-
ment’, in José M. Salazar-Xirinachs, Irmgard Nübler, and Richard Kozul-Wright (eds)
Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Develop-
ment. Geneva: UNCTAD-ILO, pp. –.
Lundvall, Bengt-Åke () ‘From the Economics of Knowledge to the Learning Economy’, in
Bengt-Åke Lundvall (ed.) The Learning Economy and the Economics of Hope. London:
Anthem Press, pp. –.
Moreno-Brid, Juan Carlos () ‘Industrial Policy: A Missing Link in Mexico’s Quest for
Export-led Growth’, Latin American Policy (): –.
Moreno-Brid, Juan Carlos and Jaime Ros () Development and Growth in the Mexican
Economy. A Historical Perspective. Oxford: Oxford University Press.
Moreno-Brid, Juan Carlos and Gabriela Dutrénit (eds) () ‘Políticas de Desarrollo Pro-
ductivo en México’, OIT Américas, Informes Técnicos, /, October.
Nassif, Andre, Luiz Carlos Bresser-Pereira, and Carmen Feijó () ‘The Case for Reindus-
trialisation in Developing Countries: Towards the Connection between the Macroeconomic
Regime and the Industrial Policy in Brazil’, Cambridge Journal of Economics : –.
Nassif, Andre, Carmen Feijo, and Eliane Araujo () ‘Structural Change and Economic
Development: Is Brazil Catching up or Falling behind?’, Cambridge Journal of Economics
(): –.
Nassif, Andre, Carmen Feijo, and Eliane Araujo () ‘Structural Change, Catching up and
Falling behind in the BRICS: A Comparative Analysis Based on Trade Patterns and
Thirlwall’s Law’, PSL Quarterly Review (): –.
Noland, Marcus () ‘South Korea’s Experience with International Capital Flows’, in
Sebastian Edwards (ed.) Capital Controls and Capital Flows in Emerging Economies:
Policies, Practices and Consequences. Chicago, IL: University of Chicago Press, pp. –.
Ocampo, José Antonio () ‘Balance-of-Payments Dominance: Implications for Macro-
economic Policy’, in Mario Damill, Marín Rapetti, and Guillermo Rozenwurcel (eds)
Macroeconomics and Development: Roberto Frenkel and the Economies of Latin America.
New York: Columbia University Press, pp. –.
Ocampo, José Antonio and Paola Arias () ‘Colombia’s System of National Development
Banks’, in Stephany Griffith-Jones and José Antonio Ocampo (eds) The Future of National
Development Banks. Oxford: Oxford University Press, pp. –.
Ocampo, José Antonio and Carmen Astrid Romero () ‘La búsqueda, larga e inconclusa
de un nuevo modelo (–)’, in José Antonio Ocampo (ed.) Historia económica de
Colombia. Bogotá: Fondo de Cultura Económica and Fedesarrollo, pp. –.
OECD (Organisation for Economic Co-operation and Development) () Production
Transformation Policy Review of Colombia: Unleashing Productivity. Paris: OECD Devel-
opment Pathways.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Oreiro, José Luiz, Lionello Punzo, and Eliane Araujo () ‘Macroeconomic Constraints to
Growth of the Brazilian Economy: Diagnosis and Some Policy Proposals’, Cambridge
Journal of Economics (): –.
Palma, José Gabriel (), ‘Four Sources of “De-industrialization” and a New Concept of the
“Dutch Disease” ’, in José Antonio Ocampo (ed.) Beyond Reforms: Structural Dynamics and
Macroeconomic Vulnerability. Palo Alto, CA: Stanford University Press, ECLAC and
World Bank, pp. –.
Palma, José Gabriel () ‘How the full opening of the capital account to highly liquid
financial markets led Latin America to two and a half cycles of “mania, panic and crash” ’.
Cambridge Working Papers in Economics No. , January.
Peres, Wilson () ‘The (Slow) Return of Industrial Policies in Latin America and the
Caribbean’, in Mario Cimoli, Giovanni Dosi, and Joseph E. Stiglitz (eds) The Political
Economy of Capabilities Accumulation: The Past and Future of Policies for Industrial
Development. Oxford: Oxford University Press, pp. –.
Peres, Wilson and Annalisa Primi () ‘Industrial Policy and Learning: Lessons from Latin
America’, in Arkebe Oqubay and Kenichi Ohno (eds) How Nations Learn: Technological
Learning, Industrial Policy, and Catch-up. Oxford: Oxford University Press, pp. –.
Prates, Daniela, Andre Cunha, and Marcus Lelis () ‘La Gestión del Régimen Cambiario
en Brasil’, Revista de la CEPAL : –.
Primi, Annalisa () Promoting Innovation in Latin America. Maastricht: Maastricht
University Press.
Razmi, Arslam, Martin Rapetti, and Peter Skott () ‘The Real Exchange Rate and Eco-
nomic Development’, Structural Change and Economic Dynamics (): –.
Rodrik, Dani () ‘Getting Interventions Right: How South Korea and Taiwan Grew Rich’.
NBER Working Paper No. . Cambridge, MA: NBER.
Rodrik, Dani () ‘The Real Exchange Rate and Economic Growth’, Brookings Economic
Studies Program (): –.
Salvia, Sebastian Pedro () ‘The Boom and Crisis of the Convertibility Plan in Argentina’,
Revista de Economia Política (): –.
Santarcángelo, Juan E., Daniel Schteingart, and Fernando Porta () ‘Industrial Policy in
Argentina, Brazil, Chile and Mexico: A Comparative Approach’, Revue Interventions
économiques, Papers in Political Economy : –.
Stalling, Barbara and Wilson Peres () Growth, Employment and Equity: The Impact of
Economic Reforms in Latin America and the Caribbean. Washington, DC: Brookings
Institution Press.
Stumpo, Giovanni and Diego Rivas () ‘La industria manufacturera argentina –.
Reconstruyendo capacidades para enfrentar los desafíos del siglo XXÏ’, in Giovanni Stumpo
and Diego Rivas (eds) La industria argentina frente a los nuevos desafíos y oportunidades
del siglo XXI. Santiago: ECLAC, pp. –.
Suzigan, Wilson and João Furtado () ‘Política Industrial e Desenvolvimento’, Journal of
Political Economy (): –.
Wade, Robert H. () ‘East Asia’s Economic Success: Conflicting Perspectives, Partial
Sights, Shaky Evidence’, World Politics (): –.
Yoon, Je Cho and Joon-Kyung Kim () ‘Credit Policies and the Industrialization of Korea’.
World Bank Discussion Paper No. . Washington, DC: World Bank.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
......................................................................................................................
. I
..................................................................................................................................
S-S A (SSA) countries experienced a growth spurt from the mid-
s to the mid-s, after decades of economic stagnation and even contraction.
However, despite over two decades of growth, very few African countries created
manufacturing industries that were internationally competitive and diversified their
exports away from dependence on a few primary commodities, and most countries
were still importing the majority of their manufactured goods (UNECA, ). The
‒ global financial crisis and the associated collapse of the global commodity
‘supercycle’ by the mid-s highlighted the pitfalls of a narrow reliance on commod-
ities and revived interest in structural transformation as key to providing jobs, increasing
incomes, and raising the standard of living. There has been a slew of publications and
processes exploring the prospects for a revival of industrial policy in SSA.
Structural transformation is not just about attracting human and physical capital out
of low-productivity and subsistence economic activities and into more productive
enterprises. This definition does not capture the multiple, complex, and interacting
processes that drive and sustain productivity growth. Rather, transformation involves
moving the economy away from being a set of assets based on primary products exploited
by unskilled labour towards an economy built on knowledge-based assets exploited by
skilled labour (Amsden, : ). The term ‘technological capabilities’ refers to these
knowledge-based assets: technical, managerial, and organizational skills that firms need
in addition to formal education and scientific knowledge in order to achieve the level of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
productivity that established firms have achieved, which set the (international) market
standard. The more technological capabilities that firms have, the greater their ability
to sustain national income growth by moving into higher-value economic activities and
innovating as well as responding flexibly to changing competitive conditions. The
technological capability approach to understanding structural transformation and its
concomitant focus on industrial policy as promoting local firm learning and capability
building stems from an evolutionary economics perspective (see Cimoli et al.,
Chapter in this volume). In examining industrial policies aimed at transforming
African economies in the twenty-first century, this chapter focuses on how these
industrial policies help locally owned firms become internationally competitive
through building these capabilities.
The chapter also examines the challenges that late-late industrializing countries in
SSA face in the context of a global economy defined by international trade in inter-
mediate goods through global value chains (Gereffi, ). Historically, the manufac-
turing sector is where technological capabilities were nurtured and wealth was
produced as a result of imperfect competition, barriers to entry, and increasing returns,
and this is why industrialization was key to generating wealth in Northern European
countries and the United States (Reinert, ). When other countries tried to emulate
this process, they used a combination of import-substitution and export-oriented
industrial policies to build similar manufacturing industries (Schwartz, ). How-
ever, the expansion of manufacturing capabilities to more countries in the post-Second
World War period and the concomitant outsourcing of manufacturing by Western and
Japanese corporations led to the rise of global value chains. This took place in the
context of extensive liberalization of trade, a dramatic expansion of the global work-
force engaged in global trade, and rising pressure on corporations to raise returns to
shareholders. Western and Japanese corporations now focus on economic activities in
the pre- and post-manufacturing stages, such as research and development, branding,
marketing, and retail, where they can still create high barriers to entry through
proximity to markets, first-mover advantages, and intellectual property rights. Manu-
facturing activities are fragmented and dispersed globally in a spatial hierarchy of
production sites depending on countries’ wage costs and their firms’ capabilities
(Schwartz, ; Coe and Yeung, ). Production activities and functions in global
value chains are characterized by different levels of competition, generating different
levels of wealth and income, hence the hierarchy. The lowest function in buyer-driven
global value chains, the assembly of imported inputs, is characterized by near perfect
competition (including perfect substitutability). As a result, firms producing this type
of manufactured export are price takers, and it is global buyers generally located in
developed countries that capture productivity increases rather than the developing-
country producers, as was the case with agricultural exports from developing countries
in the twentieth century (Kaplinsky, ). At the same time, agribusiness industries
and knowledge-based service industries now have characteristics that manufacturing
historically did, such as sophisticated organization and production processes that
require technological capabilities to be built (and thus increasing returns through
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
learning) and the ability to create wealth through barriers to entry through research
and development, specialization, economies of scale, and so on.¹
As a result, industrial policies can target agribusiness, manufacturing, and
knowledge-based services for international, regional, and domestic markets as a way
to build the technological capabilities of local firms, generate wealth, tap into high
demand through export markets, and create deeper linkages within the domestic
economy. However, SSA countries may not be able to use the same industrial policy
strategies as previously industrializing countries. The import-substitution industrial-
ization (ISI) and export-oriented industrialization (EOI) policies of past decades were
never mutually exclusive alternatives; rather, they were used in combination to access
foreign knowledge but also to protect local firms while they were learning. However, it
has become difficult for SSA late-late industrializers to implement them in the same
way. Entry into a new industry and its export markets generally requires entry into
global value chains, often through assembly of imported parts. Thus, industrialization
begins with vertically specialized industrialization and generally low-value-added
exports, then local firms upgrade within the global value chain by producing more of
the imported inputs locally (Milberg et al., ). In other words, firms start with a new
form of EOI, acquiring foreign tacit knowledge and social connections to global buyers
and input suppliers, and then move to a new form of ISI that works backwards from
assembly to intermediate inputs to raw materials. Thus, successful industrialization
through global value chains corresponds with declining vertical specialization. It also
increasingly involves a move from export markets to regional and domestic markets, so
that local firms can move into branding, marketing, and retailing (where more wealth
can be captured), and then sometimes a re-coupling with global value chains where
local firms enter at higher-value functions (Coe and Yeung, ).
However, many SSA countries are still at the early stages of diversifying their
economies away from natural resources, building knowledge-based assets, and creating
deeper linkages within the domestic economy, especially in the context of the colonial
trading economies that they inherited at independence (see Whitfield, ). Thus,
they need industrial policies focusing on domestic industries and non-tradable sectors
that face different challenges from entering global value chains, such as the need to
stimulate domestic demand through government expenditure, linkages between agri-
culture and industrialization, and promoting several industries at the same time that
can concurrently generate sustained domestic demand. These are old challenges
discussed by structural development economists, but still very real for SSA countries.
The aim of this chapter is to discuss these issues through an examination of the
recent experiences of selected SSA countries implementing industrial policies. Notably,
many SSA governments have not pursued industrial policies, reflecting policy continu-
ity from the period of structural adjustment (see Chitonge and Lawrence, Chapter in
this volume). The cases of industrial policy examined in this chapter focus on types of
¹ For further details, see the review in Whitfield et al. (), and the discussion on agribusiness and
services in Newfarmer, Page, and Tarp ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industries, markets, and industrial policies, and not on the entirety of country experi-
ences. The first case involves industrial policies to promote the cement industry, a non-
tradable heavy industry, in Nigeria, contrasted with Ethiopia. We focus not only on
how local firms emerged in an industry dominated by multinational corporations in
most SSA countries, but also on how domestic market demand was created and
sustained. The second case considers industrial policies in Ethiopia to create an apparel
export industry. It examines the challenges for local firms entering labour-intensive
manufacturing global value chains, and the challenges for SSA governments in imple-
menting industrial policies that compel local firms to build the required capabilities as
well as to create more of the value chain within the country. The third case explores
industrial policies to promote knowledge-based service sectors in Rwanda and Kenya.
In particular, it examines their governments’ attempts to promote local firm partici-
pation in export-oriented knowledge services such as business-process outsourcing.
The fourth and final case assesses industrial policies in South Africa aimed at diversi-
fying manufacturing beyond heavy industries, focusing on the automobile and apparel
sectors. In doing so, it illustrates some of the challenges of using industrial policy to
promote apparel production for export when local firms are domestically oriented, and
to promote greater production of inputs locally for the export-oriented automobile
sector and thus move beyond the early stage of vertical specialization industrialization
through global value chains.
Following the evolutionary economics approach, the chapter takes a firm-level
perspective on industrial policy theoretically and empirically. While capability-
building processes are embedded within broader industry-level, national, and inter-
national processes, they take place at the firm level. Section . provides an overview
of the limited progress in SSA of developing manufacturing sectors. We consider why
this has been the case by exploring the role of industrial policy in supporting and
compelling local firms to build their technological capabilities. Industrial policy in the
targeted sectors in Nigeria, Ethiopia, Rwanda, Kenya, and South Africa is then pre-
sented. In concluding, we draw out some of the implications of these sector
experiences.
. L P S
T S-S A
..................................................................................................................................
SSA countries struggle with industrialization more than other developing-country
regions as a result of historical factors that have been compounded, creating path
dependencies that are hard to escape. At independence these countries found them-
selves far behind the world technological frontier and lacked skill endowments, espe-
cially in terms of experience in manufacturing compared to other developing countries
(Amsden, ). This limited manufacturing experience in most SSA countries at the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
start of decolonization was an important factor shaping the poor performance of
import-substitution industrialization strategies of the s and s, as firms started
with very low capabilities (Kennedy, ). In addition, import-substitution industri-
alization strategies in SSA countries generally focused on capital investments and often
failed to build the technological capabilities of local firms, regardless of the ownership
structure: public, private, or public‒private joint ventures (Stewart et al., ). Despite
these weaknesses, some African countries were beginning to gain international com-
petitiveness in areas of labour-intensive manufacturing by the s (Sundaram and
Von Arnim, ). However, external debt crises and fiscal deficits led SSA countries to
adopt structural adjustment policies in the s and s that undermined those
gains (for a review, see Whitfield, ).
The limited stock of technological capabilities explains why manufacturing and
agro-processing industries in SSA countries were hit so hard by structural adjustment,
especially compared to other developing-country regions (Whitfield et al., ). Struc-
tural adjustment reforms removed types of state intervention that in some cases turned
out to be more harmful than helpful, but the ideological position embedded in these
policies of complete reliance on the market also meant that these reforms had important
negative economic effects. Trade liberalization under structural adjustment programmes,
which was more rapid in SSA countries than their Asian counterparts, largely wiped out
low-productivity African firms because they were given no buffer or support to become
competitive (Lall, ; Sundaram and Von Arnim, ). SSA countries that had more
competitive industries before structural adjustment did better in certain sectors.
The growth revival starting in the mid-s was driven largely by increases in
international commodity prices; economic liberalization, which led to the allocation of
resources to sectors in which SSA countries already had comparative advantages; new
discoveries of natural resources, using foreign direct investments to extract them; and
government spending fuelled by foreign aid (Arbache and Page, ; Whitfield et al.,
: ‒). From the mid-s, SSA growth was increasingly driven by China’s rapid
industrialization, which fuelled demand for the region’s natural resources, as well as
Chinese direct investments in infrastructure, primary sectors, and manufacturing
sectors in SSA economies (Farooki and Kaplinsky, ). However, when growth in
China slowed so did growth in SSA countries, as the international prices of the
commodities they exported began to fall significantly from .
The subsequent moderation of SSA growth brought into sharp focus the limited
sustainability of growth and welfare improvements without underlying structural
transformation. Since the s, SSA has undergone consistent declines in the share
of manufacturing in GDP; output and employment have fallen, and the diversity and
complexity of manufacturing sectors have declined (Page, ). Thus, the quality of
growth was characterized by ‘static gains’ but ‘dynamic losses’ with respect to structural
transformation (de Vries et al., ). Projected medium-term growth on the continent
is insufficient to make a dent in unemployment due to population growth and
economic structures that continue to depend heavily on primary commodities and
the extractive sector (ADB, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. T P: U
I P E
L T
..................................................................................................................................
In all developing countries, locally owned firms in industries new to the country are
initially often unprofitable due to their low productivity, which stems from constraints
external and internal to firms. Internal constraints have to do with low technological
capabilities. Technological capabilities can only be acquired through experience and
purposive investment in learning (Lall, ). Firms have to undergo a period of
learning in which they may well operate at a loss, and it is uncertain how long they
will do so. The risk is highest for the first investors when the knowledge and infra-
structure required to become competitive in new economic activities do not yet exist
and have to be acquired and adapted to local conditions. For local investors, the cost
and uncertainty involved in learning is too high to be worth the risk, leading to what
Khan () calls a learning trap: local firms do not invest in building their capabilities
because the gap between their initial capabilities and what is required to be inter-
nationally competitive is too large, leaving them stuck in low-productivity activities.
This learning trap is particularly acute in SSA countries, where local firms have very
low initial capabilities and limited capital, knowledge, and networks on which to draw,
leading to a large capability gap.
In addition, all firms (local and foreign) in new industries in SSA countries initially
face constraints external to the firm that result in high market costs: high-cost and
limited access to capital, land, and skilled labour; high cost and poor quality of
infrastructure and transport logistics; limited access to foreign exchange or banking
instruments tailored to exporting; and so on. These constraints drive up the cost of
production for firms, but they are costly or impossible for individual firms to address
on their own. Furthermore, they make it even harder for locally owned firms to bridge
the capability gap, as it increases the costs and risk.
Whether local entrepreneurs decide to invest in a new industry depends on their
perception of the risk, which in turn is shaped by the size of their capability gap plus the
market costs that all firms face, but also the normal profit rate in the domestic market
or the global value chain in a particular function and end market when global
productivity norms are achieved. Khan () refers to the normal profit rate as the
size of the prize, and it is determined largely by the degree of competition (or
substitutability). Local investors compare the ‘prize’ in new industries to the risk/profit
ratio of other economic opportunities in the national economy. The issue in SSA
countries is often not the lack of capital, but the capability gap, which leads local
investors to put their capital into economic opportunities that require lower capabil-
ities and thus have lower risks, such as the import trade, real estate, and hotels.
Escaping from the learning trap requires industrial policies that reduce the risk for
local firms of investing in new manufacturing activities by subsidizing the initial costs
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
of investment, reducing market costs, and facilitating and subsidizing the learning
process. But these industrial policies are difficult to implement because they involve
government agencies creating rents and ensuring that local firms use the rents to invest
in learning (Whitfield et al., ; Khan, ). The norm is for local firms to engage in
‘satisficing behaviour’, and the larger the capability gap, the more likely they are to do
so (Khan, ). Thus, industrial policies that are essentially learning rents have to be
tied to performance targets: what Amsden () called reciprocal control mechan-
isms. In this context, ex post rents (conditional on the achievement of competitive
success) are often more successful in developing countries than ex ante rents (those
provided before performance targets are met) because they do not depend on govern-
ment agencies having the technical capacity and political power to enforce them
(Di Maio, ; Khan, ). However, the process of creating and managing rents
as part of industrial policy can easily become entangled with the processes of rent
creation and distribution linked to political stability and the survival of the ruling
political elites (Khan, ). Furthermore, the capacity of a state to monitor and
enforce learning rents is derived from the ruling elites who govern the state and the
ruling coalition that keeps them in power. What matters is how coalitional pressures
shape the political costs of certain policies and the ability to implement them, given the
resistance or support from powerful groups within and outside the ruling coalition
(Whitfield et al., ). Thus, domestic politics is just as important as economics in
determining the success of industrial policies.
. I- I
P: T C S N
E
..................................................................................................................................
Cement is an intermediate or heavy industry with large economies of scale and capital
intensity and is a core input in the construction industry. Several Asian countries used
the cement industry as a springboard for industrialization and to develop technological
capabilities within local firms, including professional management skills (on Korea, see
Amsden, ). Cement is characterized as a low-value, high-volume product, so it is
generally not traded internationally. Cement is a classic oligopoly due to high entry and
exit barriers, and requires certainty of market demand. Thus, government industrial
policies are necessary to help create the market demand, but also to turn an oligopol-
istic market to more efficient means (Oqubay : ‒). Cement production in
SSA countries tends to be dominated by a small number of multinational corporations.
South Africa, Nigeria, and Ethiopia are the three largest cement-producing countries in
SSA, in that order, and notably their sectors contain local firms. This section compares
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
experiences of industrial policy to promote the cement industry in Nigeria and
Ethiopia.²
In both countries local cement production increased in the s and domestic
demand was met entirely by domestic production by in Ethiopia and in
Nigeria (Akinyoade and Uche, ; Oqubay, ). In both cases, government
interventions played a key role: directly through industrial policy and indirectly
through increasing domestic demand. Local cement firms, which dominate the cement
sectors in these countries, were developed through a combination of learning rents and
oligopolistic rents. Cement production in both countries uses almost entirely locally
sourced inputs such as minerals from quarries and packaging. Yet, domestic demand
remained too small to sustain more than a handful of firms, leaving them with excess
production capacity.
Both Nigeria and Ethiopia had state-owned cement firms as a result of state-directed
import-substitution industrial policies between the s and the s, and they had
regulations on imported cement ranging from outright bans to import licensing
schemes in order to conserve foreign exchange. The expansion of the cement industry
in both countries was driven by just one or two local firms as ‘first movers’. However,
the role of the state differed significantly, as a result of the political settlement, which
had important implications for some aspects of cement industry development in each
country.³
In Nigeria, the key government policies included the privatization of state-owned
cement factories, which were bought by local and foreign investors, and the backward
integration policy of (Akinyoade and Uche, ). Together, they effected a shift
from importing cement to domestic production. The backward integration policy
banned imported bagged cement and involved a scheme for phasing out bulk cement
imports by allowing investors in local cement production to continue importing bulk
cement as a means to finance their investments in cement factories. New import
licences linked the volume that could be imported in proportion to the demonstrated
investment in local plant production capacity. Dangote, a private firm, was the only
local firm initially to take advantage of this incentive, and became the first mover. In
contrast, in Ethiopia the first movers were a state-owned firm and a greenfield
investment by a firm linked to the TPLF, the dominant party within the EPRDF ruling
coalition at the time (Oqubay, ).
The backward integration policy in Nigeria also included several fiscal incentives.
Firms investing in cement factories were given ‘pioneer’ status, which meant a five-year
tax holiday, and paid smaller duties on equipment for mining quarries and making
cement, as well as no VAT on equipment and reduced VAT on factory construction
² This section draws primarily on research by Richard Itaman and Christina Wolf () on the
cement industry in Nigeria, and the research of Arkebe Oqubay () on the cement industry in
Ethiopia.
³ On the concept of political settlement and its application to sub-Saharan Africa, see Whitfield et al.
().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
materials not available in Nigeria. The industrial policies did not include financial
incentives such as access to cheap long-term loans for investing in expensive cement
factories where the return on investment is only realized over the medium to long term.
Dangote was the first mover among local firms because they already held a licence to
import cement through political connections and thus could use capital accumulated
from oligopoly rents in the regulated import trade to purchase a state-owned cement
factory in . They could also use their political connections to reduce the risk by
ensuring policies necessary to the expansion of the domestic market would be put in
place and enforced (Itaman and Wolf, ). As a result of these industrial policies,
there were four cement-producing firms in Nigeria by , including two local and
two foreign firms. Dangote controlled per cent of the domestic cement market, its
closest competitor being Lafarge (a French multinational) with per cent.
In Ethiopia, the government started promoting the cement industry in when it
opened the sector to foreign direct investment and offered a standard package of fiscal
incentives including a three-year tax holiday, duty-free equipment imports, and
income-tax exemption for expatriates for two years. It also facilitated access to factory
land and quarries for minerals at low prices, and provided low-cost electricity (Oqubay,
). The state-owned development bank offered investment loans covering per
cent of the investment over a fifteen-year period at per cent interest, and cement
factories had preferential access to foreign currency (in the context of government
capital controls). Between and , there were only two firms manufacturing
cement in Ethiopia, the state-owned firm and the party-owned firm mentioned above.
However, between and , several additional local investments were made. The
larger investments included a local business group that acquired a state-owned factory
and invested in upgrading and expanding it; a greenfield investment by former
managers of the state-owned cement factory that became the first mover; and several
factories that emerged from joint ventures between Ethiopian and Chinese firms. By
, there were sixteen firms, including mini cement plants as well as medium and
large ones. The mini cement plants began operating in , but they had insignificant
influence in the industry due to their small market shares. The state-owned and party-
owned cement factories had a de facto monopoly until , when three large cement
factories became operational, shifting it to an oligopolistic market structure. Notably,
local firms accounted for half of total installed capacity in Ethiopia.
These industrial policies targeting the cement sector were necessary, but not suffi-
cient, for local investments; expanding domestic market demand was key. In both
countries, government spending on infrastructure projects accounted for over per
cent of the demand and up to two-thirds in Ethiopia. Thus, the government was the
main buyer. In turn, government infrastructure projects depended significantly on
Chinese financing and Chinese contractors. Itaman and Wolf () note that the
average annual value of construction projects completed by Chinese firms in sub-
Saharan Africa between and was the highest in Angola, followed by Ethiopia
and then Nigeria. In Ethiopia, the government had an explicit strategy of using
investments in public housing, roads, and universities as an industrial policy tool to
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
increase domestic construction and thus stimulate demand for the manufacturing of
cement as well as other building materials such as glass and steel (Oqubay, ). The
cement industries in both countries ran into domestic demand constraints as the
governments reduced public investments, in the context of lower global oil prices in
Nigeria and unsustainable external debt from Chinese financing in Ethiopia.
In Nigeria, Dangote began exporting to the region in as well as opening cement
factories in other African countries in response to saturated domestic demand. Itaman
and Wolf () calculate that Dangote Cement had profit margins of ‒ per cent
during to , due to the continued import tariffs and low tax rates, as the
company continued to benefit from its pioneer status with a tax exemption on export
sales. Dangote also made investments in economies of scale and scope through an
explicit strategy to become the market leader and sustain high profit margins. Due to
the political connections of Dangote’s owner with subsequent ruling coalitions in
Nigeria, Dangote continues to pay very little tax, and as Itaman and Wolf ()
show, the firm has not significantly raised the wages of its workers despite productivity
gains. Thus, little of the value captured in the cement industry has been redistributed to
workers or to other parts of the population through government expenditure based on
taxes, which would have had multiplier effects in terms of increasing domestic demand
for cement. In Ethiopia, in response to the excess supply of cement, the government
banned new FDI in the sector and reduced incentives for local firms. However, it has
not pursued industrial policies to encourage cement exports or to stimulate domestic
market demand. Oqubay () notes that local firms need to increase quality and
productivity in order to be competitive in regional exports. The price of cement is lower
in Ethiopia than in Nigeria and expected to fall further as more investments come on
stream. There are more large firms in Ethiopia and no single firm wields as much
influence over the market, and thus pricing, as Dangote does in Nigeria.
. I P L-
E M:
A E E
..................................................................................................................................
The apparel export sector has been a first step for most countries in the early stages of
industrialization. The globalized apparel industry became a buyer-driven GVC char-
acterized by decentralized, globally dispersed production networks coordinated by lead
firms who control higher-value activities such as design, branding, and marketing (due
to higher entry barriers), but often outsource all or most of the manufacturing process
to a global network of suppliers. Buyers have tended to increase the manufacturing and
non-manufacturing functions they require from their suppliers. Furthermore, the
asymmetric power between global buyers and an increasing number of apparel
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
suppliers has led to a ‘squeeze’ on supplier firms, which are facing low prices and
stringent buyer requirements (Gibbon and Ponte, ).
Madagascar is the number one apparel exporter in SSA, overtaking Mauritius in
, followed by Lesotho, Kenya, Swaziland, and then Ethiopia, but Ethiopia is the
new rising star with impressive growth rates. Apparel exports rose in Ethiopia from less
than US$ million in to US$ million in and US$ million in . In
contrast to the other SSA apparel exporters, only the Ethiopian government has
pursued industrial policy targeting the apparel sector. The Ethiopian government’s
apparel sector-specific industrial policies have evolved, importantly, through trial and
error and can be grouped into three largely chronological waves of industrial policy
(Staritz and Whitfield, ).⁴
Ethiopia had a basic national supply chain from cotton to textiles to apparel for the
domestic market dominated by state-owned firms (Staritz and Whitfield, ). In the
early to mid-s, the government privatized the state-owned firms and offered
incentives for local firms to invest in the apparel export sector, as part of the first
wave of industrial policy. These incentives included concessional credit from the state-
owned Development Bank of Ethiopia, income-tax exemptions, access to land or
industry sheds at concessional rates, as well as general export incentives such as
duty-free imported inputs, export credit guarantees, and partial retention of foreign
exchange (in a context of capital controls) as incentives for local and foreign investors
in apparel exports. However, there were no performance targets attached to these
incentives, and the government created general incentives to encourage investment in
manufacturing whether for export or the domestic market. Thus, the incentives to
export were only marginal additions to the general benefits offered to manufacturers
(Gebreyesus and Demile, ). Only fifteen local investors established new apparel
factories between and . These pioneer firms struggled to export and only a
few other local investors had entered the apparel export sector by .
As part of a second wave of industrial policy, the government created the Textile
Industry Development Institute (TIDI) to support local firms. TIDI offered free
benchmarking studies that came with foreign experts providing advice on how to
improve production processes and training for newly hired sewing-machine operators,
and it helped to direct global buyers to local firms. Again, these industrial policy rents
had very weak or no performance standards attached to them, which was also the case
with the donor agency programmes that provided local firms with foreign experts,
attendance at trade fairs, and grants for buying equipment through matching grant
schemes.
⁴ This section draws on research carried out by Lindsay Whitfield in collaboration with Cornelia
Staritz, as part of the African-owned Firms Building Capabilities in Global Value Chains (Africap)
project funded by the Danish Council for Independent Research, Grant number DFF––. The
research included a survey on technological capabilities carried out with all locally owned apparel-
exporting firms, and interviews with staff in relevant government agencies and industry associations as
well as global buyers and buying agents.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The local firms struggled to learn, and by , many local firms had exited the
apparel sector or shifted to producing only for the domestic market, while those that
continued with apparel exports were operating at a loss or just breaking even. Local
firms that survived in apparel exports were part of diversified business groups, which
meant that their other businesses subsidized the cost of learning and made up for low
profit margins, while the export industry provided the foreign exchange required
for the other businesses. In general, the local apparel firms put limited effort into
building their capabilities in order to become competitive in the export market, but
their decisions on how much effort to put in and the result of that effort were shaped by
external factors linked to the structural country context and GVC dynamics that
created disincentives for investing in learning.
Local investors had limited knowledge about the apparel global value chain and what
was required to be competitive. Furthermore, there was a large gap between their initial
capabilities and the capabilities required to enter and remain competitive in apparel
assembly: ‘cut-make-trim’ (CMT), the lowest node in the apparel GVC. Thus, the local
firm owners underestimated the time, resources, and effort they would have to put into
this sector. At the same time, apparel exports on a CMT basis had very low profit
margins, due to the high level of global competition, which created a limited ‘prize’ for
investors willing to take the risk, especially compared to production for the domestic
market or other economic opportunities. Furthermore, the bargaining power of sup-
plier firms in terms of meeting cost, quality, time, and flexibility requirements of buyers
was very limited, which created a narrow ‘margin for error’ and led to loss of orders
when the buyers’ terms were not fulfilled, further driving up the risk and costs.
Production based on full package, where suppliers are responsible for sourcing all
inputs and delivery of the product, brings higher unit prices but also requires higher
merchandizing, financing, and logistics capabilities and comes with additional risks.
Moreover, local firms faced challenges outside the firm that made it difficult for them to
develop capabilities, which reduced their incentives to invest in learning given that
these external factors would undermine the results. The external factors included costly
and slow transport of imported and exported goods through the Djibouti port, limited
inputs available locally, scarcity of foreign exchange in the country and high labour
turnover.
A high level of sticks and carrots would be required to incentivize local investments
and compel local firms to invest in learning. However, the industrial policy rents for
apparel exporters were not significant compared to broad investment incentives for
manufacturing, which did not distinguish between exporters and non-exporters
(Gebreyesus and Demile, ). The limited additional export-related rents contained
in the industrial policy measures were ex ante and came with weak compulsions to
invest in learning as no clear performance targets were attached to them. TIDI required
that all exporting firms submit annual export plans, but staff had no authority to take
action against firms that failed to meet their targets. Furthermore, TIDI staff initially
had limited knowledge of the apparel export sector and thus lacked the ability to
monitor local firms’ performance and understand their challenges. Research on
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industrial policy and local firms in Ethiopia’s floriculture sector comes up with similar
findings (Melese, , ).
Furthermore, the government’s other industrial policy measures to protect domestic
apparel production had contradictory effects on promoting exports.⁵ The new apparel
firms used profits from the domestic market to subsidize learning in the export sector,
but the protected domestic market also undermined incentives to invest in learning.
Firms that originally only exported started diversifying into the domestic market, while
other firms always straddled domestic and export markets or moved from the domestic
market into exports to get access to foreign exchange but remained focused on their
domestic market business. Most of the local firms that were producing for the domestic
market decided not to even try exporting given the higher profits and lower require-
ments of the domestic market. There were forty-nine local textile and apparel firms in
, and only fourteen exported part or all of their production.
The third wave of industrial policy involved the creation of apparel-specific indus-
trial parks and a more targeted promotion of foreign direct investment involving
linkages with global buyers who in turn encouraged their first-tier suppliers to invest
in Ethiopia. The industrial parks were crucial for attracting these first-tier foreign
apparel firms, as they made investing in a ‘greenfield’ apparel supplier country easier.
Attracting big foreign apparel firms was pursued as a way to quickly increase exports
and employment, but also as a means for local firms to leverage access to global
markets, technology, and skills. Thus, the government reserved some units in the
industrial parks for local firms, which were to receive access to investment loans
from state-owned banks, subsidies for worker training and hiring expatriate managers,
and support linking to buyers. However, by mid-, there were only three local
investors with premises in Hawassa Industrial Park, the first park to be completed—
two apparel firms and one input supplier—but they had not yet started exporting
apparel by mid-. This industrial policy approach to developing an apparel export
sector and supporting local firms may turn out differently, because the industrial parks
provide internationally compliant factory premises and close proximity to internation-
ally competitive foreign firms. Furthermore, industrial policy around the parks was
implemented by the Ethiopian Investment Commission, where government officials
have a greater understanding of the apparel export sector and greater enforcement
capabilities. Local firms that invest in the parks also face more compulsion to invest in
learning than was the case under the previous waves of industrial policy, as they must
export per cent of their production. However, the outcome depends on how many
local firms invest in the parks as well as the implementation of policy measures
intended to provide more direct support to local firms, not only by subsidizing the
cost of foreign experts and training workers, but also supporting linkages with global
buyers and foreign firms.
⁵ The domestic market for textiles and apparel was still protected with a tariff rate of per cent and
an additional per cent surcharge and per cent excise taxes, as well as a ban on second-hand
clothing imports.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The Ethiopia apparel export case shows that a core focus of industrial policy to
support local firms in new export sectors has to be supporting and compelling them to
invest in learning. This must include measures that subsidize the learning costs,
especially given the ‘small’ prize but high level of efficiency and capabilities required
to enter the lowest node of global value chains (where competition is highest). This
kind of industrial policy to support learning is also very difficult, because it requires
technical knowledge to support learning, coupled with the political ability to compel it
with reciprocal control mechanisms. TIDI had neither the technical knowledge nor the
political authority, and it remains to be seen how the Ethiopia Investment Commission
will support more local firms in the industrial parks and their learning process.
Nevertheless, the Ethiopian government has demonstrated learning in the evolution
of its industrial policy targeting the apparel export sector, and it is the only SSA
government to pursue industrial policies to support manufactured exports that go
beyond creating general export-processing zones with their standard package of fiscal
and financial incentives (see Whitfield and Staritz, ).
. L M?
K- S K
R
..................................................................................................................................
The governments of Kenya and Rwanda pursued development strategies in the s
that emphasized ‘knowledge-based services’ as the key economic driver, with a relative
de-emphasis on manufacturing. In Rwanda, this included its Vision , adopted in
, which highlighted finance, ICT, and tourism as priority sectors to drive growth
(Government of Rwanda, ). In Kenya, the government’s efforts have been more
targeted, singling out the business-process outsourcing (BPO) sector in its Vision
as the key service sector targeted to drive growth. This sector was expected to be export
oriented, generating jobs for young professionals, and driven by investments from
Kenyan firms (Mann and Graham, ). This section assesses the experiences of
Kenya and Rwanda with promoting services, especially export-oriented services and
services like tourism that generate foreign exchange, rather than manufacturing.
Rwanda staged a substantial economic recovery after the genocide with GDP
growth averaging . per cent between and , driven chiefly by a combination
of public investment, agricultural productivity upgrading, and promotion of tourism
(Ggombe and Newfarmer, ). Rwanda made substantial gains through its industrial
policy for the tourism sector, which involved public investment in the national airline
and airport infrastructure, international marketing, skills development, and investment
incentives (UNECA, ). Tourism became the largest contributor to foreign
exchange earnings ( per cent) in (Ggombe and Newfarmer, ). It is also a
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
significant employer, accounting for . per cent of total employment in
(UNECA, ). However, the tourism sector remains heavily dependent on a specific
segment of the market which can only be expanded to a limited extent: visits to view its
rare mountain gorillas (Government of Rwanda, ). Thus, the government also
promoted the meetings, incentives, conferences, and events (MICE) sector as part of its
tourism strategy, aiming to attract business tourism to conferences and events. The
centrepiece of state support was the construction of the Kigali Convention Centre and
concurrent investments in hotels in and outside the capital, complemented by the
expansion of state-owned Rwandair’s fleet of aircraft (Behuria and Goodfellow, ).
As part of efforts to foster knowledge-based services, the government also targeted
the finance, insurance, and real estate (FIRE) sector. The main policy measures to
promote investments in this sector included financial liberalization aimed at fostering
the entry of foreign banks and selling shares in struggling state-owned commercial
banks. The number of commercial banks increased significantly, directing a large
proportion of investment finance towards the construction sector. While this partly
reflects the building of hotels linked to the tradable tourism and MICE sectors, it also
includes construction of high-end real estate for relatively affluent domestic pur-
chasers. The government also invested directly, with other groups, in large real-estate
projects. Private and public investments in the MICE and FIRE sectors have focused on
high-end, luxury international markets, but there was evidence of an oversupply in
the high-end market and a chronic housing shortage for the mass market (Behuria and
Goodfellow, ).
Lastly, the Rwandan government also promoted the information communication
and technology (ICT) sector through investment in G fibre-optic and mobile broad-
band infrastructure and the extension of ‘e-government’ services (Government of
Rwanda, ). Substantial increases in Internet penetration were recorded, with
mobile broadband access at per cent by , as well as the digitization of a number
of government services and other innovative ways to render public services, such as the
Zipline programme using drones to deliver medical supplies (World Bank, ). In
particular, the government attempted to promote the BPO sector with two broad
policies (Mann et al., : ‒). The first was to encourage local investors in the sector
through public investment in training. The government established the Kigali Institute
of Science and Technology, sent students abroad for training in advanced engineering,
and convinced Carnegie Mellon University to open a graduate degree programme in
Kigali. It also financed a technology innovation hub with the goal of encouraging tech
start-ups. The second policy was to attract large multinational firms to set up regional
headquarters in the country and help upgrade the country’s infrastructure, and it was
hoped that Rwandan workers and businesses would benefit through knowledge trans-
fer. However, Mann and colleagues found Rwanda’s BPO sector to be at an incipient
stage in . There was a limited amount of business-process outsourcing for inter-
national markets; rather, firms focused on domestic and regional markets, and local
firms were usually part of a regional network of companies with headquarters in
Nairobi. In fact, many Rwandan-based financial companies and call-centre and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
customer-service firms were headed by Kenyan nationals. The only firms that were able
to attract international BPO work had personal and family connections abroad that
allowed them to compete for foreign clients (Mann et al., : ). In short, socio-
economic connections were necessary for local firms to access international BPO
markets. This point is taken up below when discussing Kenya’s experience with
promoting the BPO sector.
Notwithstanding significant progress, a number of limitations are apparent in
Rwanda’s attempt to leapfrog the industrialization stage straight into modern services.
The finance, insurance, and real-estate as well as ICT service sectors are largely skill
intensive and have not been able to generate large-scale employment (Behuria, ;
Behuria and Goodfellow, ). The BPO sector has more potential to generate semi-
skilled jobs, but it has not expanded as rapidly as envisioned. Thus, claims by Ggombe
and Newfarmer (: ) that this services-led strategy has ‘inverted the normal
sequence of structural change’ appear exaggerated and ignore fundamental weaknesses.
For instance, these scholars include government services, accounting for per cent of
exports in , in their calculations to bolster the claim that Rwanda ‘is rapidly
becoming a services-exporting economy’. However, the growth in government services
predominantly reflects the government’s peace-keeping activities in the East Africa
region. Financial and ICT services each only contributed per cent to export revenues
in (Ggombe and Newfarmer, : ). Furthermore, promoting non-tradable
real-estate construction is likely to exacerbate the balance-of-payments constraint to
growth, rather than reduce it. Indeed, balance-of-payments constraints and the need to
generate broader sources of employment prompted the government to change course
by the late s and place greater policy emphasis on manufacturing (Behuria, ).
As Mann and colleagues (: ) note, ‘Kenya is widely considered to be an East
African success story in the realm of ICTs because of its status as a Pan-African “ICT
Hub”.’ However, as these researchers show, the government’s efforts to promote
international inflows of BPO work—equivalent to service exports—have been less
successful, with most firms focusing on the domestic and regional markets. The
government’s main policy measures included public investment in fibre-optic Internet
cables alongside private investments, which were completed in , together with the
creation of a government agency to promote the sector and a proactive marketing
campaign highlighting Kenya as a place for BPO work and encouraging foreign firms
to invest in Kenya’s BPO sector. While the cables were under construction, the
government also subsidized the cost of satellite bandwidth for BPO firms, as the cost
was much higher than in existing BPO countries such as India and the Philippines.
However, both the government and locally owned BPO firms, which set up in response
to the government’s policies, underestimated the difficulty of entering and becoming
competitive in the BPO global value chain (Mann and Graham, ). In contrast to
international discourses about ICT as a flat or ‘disintermediated’ economy that made it
easier for developing-country firms to enter, Kenyan-owned BPO firms discovered that
the BPO global value chain was an ‘extremely personal, socially connected economy’
(Mann and Graham, : ). Kenyan firms did not have the tacit knowledge, social
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
networks, or trust to secure direct connections to foreign clients, nor did they have the
economies of scale and ability to correctly value and price BPO work. A few large firms
hired foreign experts to advise them on how to structure their operations and to train
their workers, but smaller firms could not do this and thus failed to meet deadlines and
to make profits. In general, the latter had to depend on sub-contracted work from BPO
firms in India or elsewhere that secured large contracts directly from foreign clients in
the United States and then gave Kenyan firms small parts of it, but usually the least
valuable parts. Research on small local firms in South Africa comes to the same
conclusions, showing that these local firms were dependent on sub-contracting as
they did not have the reputation to find work directly from international clients, and
thus the BPO sector was largely oriented towards the domestic market (Anwar and
Graham, ).
. C E-
I- P:
A A
S A
..................................................................................................................................
Apartheid industrial policies bequeathed South Africa an industrial structure built
around a mineral-energy-complex (MEC) dependent on mining and heavy industry
exports, within a highly concentrated conglomerate structure that failed to develop a
more diversified manufacturing base (Fine and Rustomjee, ; Freund ). In the
post-apartheid period, trade liberalization and other orthodox economic policies
facilitated corporate restructuring that prompted rapid de-industrialization, with the
share of manufacturing in GDP falling from per cent in to per cent in
(World Bank, n.d.). Over this period there were only limited pockets of industrial
policy interventions. This section evaluates the record of industrial policy in the only
two sectors outside heavy industry that have benefited from sector-specific industrial
policies: automobiles and clothing/textiles. It also briefly assesses government efforts
since to mobilize a more coherent overarching industrial policy, as well as
constraints on its implementation.
Emerging from the apartheid period, the automobile sector was focused on the
domestic market and was characterized by a proliferation of the range of vehicles
produced, with limited economies of scale. In , the Motor Industry Development
Programme aimed to consolidate the industry to produce a narrower range of vehicles
at considerably greater scale and focused on supplying the export market, led by
foreign firms that were already transnational producers in the automobile global
value chain as original equipment manufacturers (OEMs). OEMs are the global system
integrators that control the design, assembly, and marketing channels of relatively
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
sophisticated multi-component manufactures such as vehicles. Within a framework of
declining tariffs, the Programme allowed OEMs and component suppliers to earn
import rebate credit certificates when they exported vehicles and components. OEMs
could use these import rebate credit certificates to import vehicles that they did not
produce in South Africa or components for their own production, or to sell on the
certificates. As tariffs on both vehicles and components were lowered, more exports
were required to secure a given value of import rebate credit certificates. This system
acted as an effective reciprocal control mechanism to compel assemblers to double
production to around , vehicles per year and to raise the share of vehicles
exported from under per cent in to over per cent since (Barnes and
Black, ). Through the Programme, automobiles became the leading manufacturing
export outside heavy industry, contributing per cent of total exports in (Bell
et al., ).
However, the benefits of the programme relative to its costs have been contested (e.g.
Flatters, ), and some weaknesses are apparent. Chief among the weaknesses are the
relatively low local content at per cent, large-scale imports of components and a
correspondingly large trade deficit in vehicles and components, little employment
growth, and limited participation by black-owned component suppliers, even at the
second- and third-tier levels (Barnes et al., ). In , the Automotive Production
and Development Programme (APDP) replaced the Motor Industry Development
Programme, with the objective of addressing these weaknesses, particularly by raising
volumes and local content. Rather than being entirely reliant on import credits (which
fuelled the trade deficit), the new programme supported fixed investment by OEMs
and component suppliers through an on-budget grant, while import rebate credit
certificates were earned for production rather than exports. While production volumes
have increased since the introduction of the APDP, local content has remained at
approximately per cent, with limited development of second- and third-tier com-
ponent suppliers, particularly black-owned component suppliers. The limited gains
under the APDP reflect in large part the dominance of transnational OEMs in securing
a programme design even more financially favourable to them, relative to component
suppliers. OEM bargaining power was bolstered by the fact that the APDP was
concluded just as the shockwaves of the global financial crisis caused a slump in
automobile demand, with US OEMs in particular financial distress. Limited employ-
ment growth and perceived lack of progress by the automobile industry in promoting
black economic empowerment since the introduction of the APDP has also tempered
political support for the industry. The government’s Automotive Masterplan
seeks to address these weaknesses, inter alia by increasing local content to per
cent, doubling employment, and developing black-owned tier-two and tier-three
component suppliers. This involves amendments to the APDP that raise direct levels
of support for domestic component manufacturing and shift support for assembly
from sales to local value addition (Barnes et al., ; NAACAM, ).
The clothing and textile sector provides an example of the switch from an inappro-
priately designed industrial policy to a considerably more effective one. Thus, this
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
sector reflects a case of industrial policy learning, where a programme that was unable
to stem a large-scale flood of clothing imports and associated job losses was replaced by
a more effective one, albeit after a long time lag. The South African clothing and textile
industry in the early s was characterized by production almost exclusively for the
domestic market behind significant tariffs. The thinking behind the immediate post-
apartheid economic strategy was that rapid trade liberalization was all that was
required to compel manufacturers producing for the domestic market to raise their
competitiveness to compete internationally. The Duty Credit Certificate Scheme
was meant to provide a boost to exporting firms, along similar lines to the
MIDP. Exporting apparel firms could earn Duty Credit Certificates (DCCs) that they
could then sell, typically to retailers who used them to lower the costs of their clothing
imports. However, the scheme led to about per cent of apparel firms exporting, which
also fuelled imports as domestic retailers used DCCs to realize even lower effective
tariffs than the applied rate. Furthermore, the applied tariff of per cent on clothing
was dramatically undercut by widespread under-invoicing and customs mis-
declaration (NEDLAC, ).
An additional weakness was that the industrial policy for the clothing and textile
sector, which consisted almost entirely of the DCC policy instrument, did not take into
consideration the looming expiry in of the WTO Agreement on Textiles and
Clothing which imposed quotas on developing-country exports to industrialized econ-
omies. Upon its expiry and China’s entry into the World Trade Organization, Chinese
exports of clothing and textile products surged to per cent of world trade and rapidly
became the largest source of imported clothing in South Africa. Thus, the Duty Credit
Certificate Scheme ultimately failed. It contributed to the flood of imports and associ-
ated job losses, while doing little to support sustainable exports. It effectively operated
as a substantial subsidy to the small group of exporters that were largely unable to
compete without it.
When the Duty Credit Certificate Scheme expired in , it was replaced with an
on-budget support programme called the Clothing Textiles Competitiveness Pro-
gramme (CTCP), similar to the automobile sector. This programme allowed manufac-
turers to earn a value-added-based production incentive in the form of credits that
could be redeemed only through investments in specific competitiveness and upgrad-
ing activities. A number of retailers supported the programme and sought to help
revive their domestic supply base, motivated both by more competitive and responsive
domestic manufacturers and rising Chinese wages. The Programme has broadly
stabilized employment in the sector, while supporting the highest levels of labour-
productivity growth within the overall manufacturing sector in South Africa.
The government’s clothing and textile industrial policies have been contested by
academics. A major theme is that tariff reductions should have been accompanied by
labour-market deregulation to allow wages to fall (Kaplan, ; Nattrass, ).
However, these arguments fail to engage with important empirical realities as well as
political economy impediments to a labour-deregulation path. First, as measured by
the World Bank, South Africa has an intermediate level of labour-market flexibility
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
relative to peer middle-income economies, which cannot fully account for massive job
losses in clothing and South Africa’s overall extreme unemployment levels (DTI, ;
Zalk, ). Second, these arguments do not engage with the political feasibility of
labour-market deregulation in the context of the strong alliance between the ANC
government and COSATU, the largest trade union federation.
It was only after South Africa had experienced profound de-industrialization that
the National Industrial Policy Framework (NIPF) was adopted in , followed by
associated annual Industrial Policy Action Plans (IPAPs) setting out strategies for other
sectors as well as overhauling the automobile and clothing and textile strategies, as
described above. However, notwithstanding formal adoption of the NIPF, industrial
policy has been undermined in practice by a number of factors (DTI, ; Zalk, ,
). Large private business groups have focused on sectors in which they have been
able to achieve high levels of profitability, predominantly in non-tradable service
sectors and capital-intensive tradable sectors over which market dominance could be
asserted, but with limited economy-wide linkages and scope for structural transform-
ation. With high financial returns available in these sectors, capital has not flowed to
diversified manufacturing industries that are subject to higher levels of competition
from imports due to trade liberalization. The misalignment of macroeconomic policy
with structural transformation, including pervasive currency overvaluation and falling
real budget allocations for industrial financing, undermines efforts to promote manu-
factured exports and creates further disincentives for firms to invest in manufacturing.
Increasing patronage and corruption since , itself arguably a consequence of the
failure to develop a more productive and employment-generating economy, has further
undermined conditions for investment in diversified manufacturing. Large-scale cor-
ruption at strategic state-owned enterprises Eskom and Transnet has fundamentally
undermined their formal mandate to provide reliable and cost-effective electricity, and
rail and ports services.
. C
..................................................................................................................................
While we agree to some extent with Milberg and colleagues () on the need for
vertical specialization and industrial policies tailored towards global value chains, they
underestimate the challenges for local firms in SSA countries to enter even the lowest
function in global value chains, as the cases of apparel exports in Ethiopia and
business-process outsourcing in Kenya and Rwanda show. SSA countries need indus-
trial policies targeting local firms to help them build their capabilities even at the lower
end of value chain activities. Such industrial policies involve not only creating and
monitoring learning rents, but also bringing foreign knowledge into the country
through various means such as foreign direct investment, joint ventures between
foreign and local firms, or other schemes through which local firms can access foreign
tacit knowledge.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The case of the cement industry in Nigeria and Ethiopia illustrates that the
constraint of domestic demand is real, and as a result, domestic markets tend towards
oligopolistic structures, even more so in capital-intensive sectors where there are higher
barriers to entry and large first-mover advantages. Yet Nigeria and Ethiopia are some of
the most populous and thus largest economies in sub-Saharan Africa. Without expand-
ing purchasing power through manufactured exports (which are minimal in Nigeria)
or redistribution of wealth, domestic markets cannot support competitive intermediate
and heavy industries that do not export. Thus, domestic market and export-oriented
manufacturing that depends on sources of demand external to national economies
have to go hand in hand.
The cases of business-process outsourcing in Kenya and Rwanda show that global
value chains in knowledge-based services operate just as manufacturing global value
chains do. Entering requires much more than just low wages to become profitable. In
particular, it requires tacit knowledge that can only be acquired outside the country
from people who have experience working in the global industry, and it requires
contact and trust to be established with clients across distance, which is not easy.
Sub-contracting can be an easier way to enter export markets, but it comes with very
low prices and thus firms cannot stay in that node of the global value chain for very
long. Furthermore, as Kenyan firms and the government came to realize, the poor
performance of some local firms can affect the overall image and reputation of the
country as a supplier country. As a result, local BPO firms in Kenya realized that they
needed to build up knowledge and experience by supplying the domestic and regional
markets first, before trying again in the global value chain (Mann and Graham, ).
The government then shifted its policy to focus on promoting higher-value IT-enabled
services for the domestic market, and on attracting big multinational firms in order to
build Kenya’s reputation in the eyes of foreign clients. Mann and Graham (: )
conclude that the synergy between the BPO sector and local software developers could
allow Kenya to develop a longer-term potential for higher-value BPO. This strategy
resembles what Coe and Yeung () discuss as coupling, de-coupling, and re-
coupling with global value chains in order to build capabilities but also eventually
capture great value from participation in global value chains. Thus, export-oriented
and domestic market strategies have to be combined.
Industrial policies in the South African automotive and apparel sectors have
achieved some successes in raising firm capabilities, albeit with limitations. However,
a confluence of economy-wide factors has prevented the reversal of de-industrialization.
Macroeconomic and financial-sector policies have hindered rather than supported struc-
tural transformation and industrial policy. Large private business groups have restruc-
tured and shifted capital to sectors over which they can exert market dominance,
particularly non-tradable service sectors, allowing for high profitability with limited
commitment of fixed investment, particularly in diversified manufacturing sectors. Low
fixed investment coupled with high unemployment and inequality has contributed to
conditions for patronage networks and corruption to flourish, further impeding the
accumulation of productive capabilities.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
This analysis implies that SSA countries need to draw upon a wide range of
industrial policy instruments. These include mobilizing investment in traditional and
modern infrastructure; deepening intermediate inputs including cement, metals, and
chemicals; exploring ways to stimulate domestic demand through government expend-
iture; forging stronger linkages between agriculture and manufacturing; promoting a
range of industries that can concurrently generate sustained domestic demand and
relieve the balance-of-payments constraint through exports.
R
African Development Bank Group (ADB) () African Economic Outlook . Abidjan.
Akinyoade, Akinyinka and Chibuike Uche () ‘Development Built on Crony Capitalism?
The Case of Dangote Cement’, Business History (): –.
Amsden, Alice () Asia’s Next Giant: South Korea and Late Industrialization. Oxford:
Oxford University Press.
Amsden, Alice () The Rise of ‘the Rest’: Challenges to the West from Late Industrializing
Economies. Oxford: Oxford University Press.
Amsden, Alice () ‘The Wild Ones: Industrial Policies in the Developing World’, in Narcis
Serra and Joseph E. Stiglitz (eds) The Washington Consensus Reconsidered: Towards a New
Global Governance. Oxford: Oxford University Press, pp. –.
Anwar, Mohammad Amir and Mark Graham () ‘Does Economic Upgrading Lead to
Social Upgrading in Contact Centers? Evidence from South Africa’, African Geographical
Review (): –.
Arbache, Jorge Saba and John Page () ‘How Fragile is Africa’s Recent Growth?’, Journal
of African Economies (): –.
Barnes, Justin and Anthony Black () ‘The Motor Industry Development Programme
–: What Have We Learned?’, in International Conference on Manufacturing-led
Growth for Employment and Equality, pp. –.
Barnes, Justin, Anthony Black, Douglas Comrie, and Tamryn Hartogh () ‘Geared for
Growth: South Africa’s Automotive Industry Masterplan to ’. Available at https://
www.thedti.gov.za/news/SA_Auto_Masterplan.pdf.
Behuria, Pritish () ‘The Domestic Political Economy of Upgrading in Global Value
Chains: How Politics Shapes Pathways for Upgrading in Rwanda’s Coffee Sector’, Review
of International Political Economy (): –.
Behuria, Pritish and Tom Goodfellow () ‘Leapfrogging Manufacturing? Rwanda’s
Attempt to Build a Services-led “Developmental State”’, The European Journal of Development
Research (): –.
Bell, Jason, Sumayya Goga, Pamela Mondliwa, and Simon Roberts () ‘Structural Trans-
formation in South Africa: Moving towards a Smart, Open Economy for All’. Available at
https://static.squarespace.com/static/ebaefbce/t/bed
ffff//CCRED+Working+Paper+__Structural+Transform
ation_BellGogaMondliwaRoberts.pdf.
Coe, Neil and Henry Wai-chung Yeung () Global Production Networks: Theorizing
Economic Development in an Interconnected World. Oxford: Oxford University Press.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Di Maio, Michele () ‘Industrial Policies in Developing Countries: History and Perspectives’,
in Mario Cimoli, Giovanni Dosi, and Joseph E. Stiglitz (eds) Industrial Policy and Develop-
ment: The Political Economy of Capabilities Accumulation. Oxford: Oxford University Press,
pp. –.
DTI () ‘Concept Note: Placing Structural Transformation at the Centre of Economic
Revival under the New Dawn’, Department of Trade and Industry. Available at https://
gallery.mailchimp.com/dedabac/files/faead-be-b-d-fcb
ded/Concept_Note_Structural_Transformation_under_the_New_Dawn_DraftV.pdf.
Farooki, Masuma and Raphael Kaplinsky () The Impact of China on Global Commodity
Prices: The Global Reshaping of the Resource Sector. London: Routledge.
Fine, Ben and Zavareh Rustomjee () The Political Economy of South Africa: From
Minerals-energy Complex to Industrialisation. London: C. Hurst & Co.
Flatters, Frank () ‘The Economics of MIDP and the South African Motor Industry’.
Presented at the TIPS/NEDLAC South Africa Trade and Poverty Programme (SATPP)
Policy Dialogue Workshop, November . Johannesburg: Queens University, Canada.
Freund, Bill () Twentieth-century South Africa: A Developmental History. Cambridge:
Cambridge University Press.
Gebreyesus, Mulu and Ashagrie Demile () ‘Why Export Promotion Efforts Failed to
Deliver? Assessment of the Export Incentives and their Implementation in Ethiopia’. EDRI
Working Paper No. . Addis Ababa: Ethiopian Development Research Institute.
Gereffi, Gary () ‘Global Value Chains in a Post-Washington Consensus World’, Review of
International Political Economy (): –.
Ggombe, Kasim Munyegera and Richard S. Newfarmer () ‘Rwanda: From Devastation to
Services-first Transformation’, in Richard S. Newfarmer, John Page, and Finn Tarp (eds)
Industries without Smokestacks: Industrialization in Africa Reconsidered. Oxford: Oxford
University Press, pp. –.
Gibbon, Peter and Stefano Ponte () Trading Down: Africa, Value Chains and the Global
Economy. Philadelphia, PA: Temple Press University.
Government of Rwanda () Rwanda: Vision . Kigali: Ministry of Finance and
Economic Planning.
Government of Rwanda () Rwanda National Export Strategy. Kigali: Ministry of Trade
and Industry.
Itaman, Richard and Christina Wolf () ‘Industrial Policy and Monopoly Capitalism in
Nigeria: Lessons from the Dangote Business Conglomerate’. CAE Working Paper
No. :. Roskilde University, Denmark: CAE. Available at http://www.ruc.dk/cae.
Kaplan, David () ‘The Structure and Performance of Manufacturing in South Africa’, in
Wim Naudé, Adam Szirmai, and Nobuya Haraguchi (eds) Structural Change and Indus-
trial Development in the BRICS. Oxford: Oxford University Press, pp. –.
Kaplinsky, Raphael () Globalization, Poverty and Inequality: Between a Rock and a Hard
Place. Cambridge: Polity Press.
Kennedy, Paul () African Capitalism: The Struggle for Ascendency. Cambridge: Cam-
bridge University Press.
Khan, Mushtaq () ‘Learning, Technology Acquisition and Governance Challenges in
Developing Countries’. Available at mercury.soas.ac.uk/users/mk.
Khan, Mushtaq () ‘Political Settlements and the Design of Technology Policy’, in Joseph
E. Stiglitz, Justin Yifu Lin, and Ebrahim Patel (eds) The Industrial Policy Revolution II:
Africa in the Twenty-first Century. Basingstoke: Palgrave Macmillan, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Khan, Mushtaq () ‘Knowledge, Skills and Organizational Capabilities for Structural
Transformation’, Structural Change and Economic Dynamics : –.
Lall, Sanjaya () ‘Technological Capabilities and Industrialization’, World Development
(): –.
Lall, Sanjaya () ‘Structural Adjustment and African Industry’, World Development
(): –.
Mann, Laura and Mark Graham () ‘The Domestic Turn: Business-process Outsourcing
and the Growing Automation of Kenyan Organisations’, Journal of Development Studies
(): –.
Mann, Laura, Mark Graham, and Nicolas Friederici () ‘The Internet and Business-
process Outsourcing in East Africa: Value Chains and Networks of Connectivity-based
Enterprises in Kenya and Rwanda’. Report of the Oxford Internet Institute. Available at
http://www.oii.ox.ac.uk.
Melese, Ayelech Tiruwha () ‘Ethiopian-owned Firms in the Floriculture Global Value
Chain: With What Capabilities?’, CAE Working Paper No. : . Roskilde University,
Denmark: Center of African Economies.
Melese, Ayelech Tiruwha () ‘African-owned Firms and Investment in Learning: Local
Firms in the Ethiopian Floriculture Export Sector’. PhD thesis, Department of Social
Sciences and Business, Roskilde University, Denmark.
Milberg, William, Xiao Jiang, and Gary Gereffi () ‘Industrial Policy in the Era of
Vertically Specialized Industrialization’, in Irmgard Nubler, José Manuel Salazar-
Xirinachs, and Richard Kozul-Wright (eds) Transforming Economies: Making Industrial
Policy Work for Growth, Jobs and Development. Geneva: International Labour Office,
pp. –.
NAACAM () ‘Business Guide’. National Association of Automotive Component &
Allied Manufacturers. Available at https://www.naacam.co.za/assets/content/page.pdf.
Nattrass, Nicoli () ‘A South African Variety of Capitalism?’, New Political Economy
(): –.
NEDLAC () ‘Report on Customs Fraud in Respect of Textile, Clothing and Footwear’.
Trade and Industry Chamber. Available at http://nedlac.org.za/wp-content/uploads///
NEDLAC-REPORT-ON-CUSTOMS-FRAUD-IN-RESPECT-OF-TEXTILE-CLOTHING-
AND-FOOTWEAR.pdf.
Newfarmer, Richard S., John Page, and Finn Tarp (eds) () Industries without Smoke-
stacks: Industrialization in Africa Reconsidered. Oxford: Oxford University Press.
Oqubay, Arkebe () Made in Africa: Industrial Policy in Ethiopia. Oxford: Oxford
University Press.
Page, John () ‘Can Africa Industrialize?’, Journal of African Economies (Supplement ):
ii–.
Reinert, Erik S. () How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor.
London: Constable.
Schwartz, Herman Mark () States versus Markets: Understanding the Global Economy.
rd edition. London: Palgrave Macmillan.
Startiz, Cornelia and Lindsay Whitfield () ‘Made in Ethiopia: The Emergence and
Evolution of the Ethiopian Apparel Export Sector’. CAE Working Paper No. :. Centre
of African Economies, Roskilde University, Denmark. Available at http://www.ruc.dk/cae.
Staritz, Cornelia and Lindsay Whitfield () ‘Light Manufacturing in Ethiopia: The Case of
the Apparel Export Industry’, in Fantu Cheru, Christopher Cramer, and Arkebe Oqubay
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
(eds) The Oxford Handbook of the Ethiopian Economy. Oxford: Oxford University Press,
pp. –.
Stewart, Francis, Sanjaya Lall, and Samuel Wangwe (eds) () Alternative Development
Strategies in Sub-Saharan Africa. London: Macmillan.
Sundaram, Jomo and Rudiger Von Arnim () ‘Economic Liberalization and Constraints
to Development in Sub-Saharan Africa’. Working Paper No. . UN, Department of
Economics and Social Affairs.
UNECA (United Nations Economic Commission for Africa) () Transformative Indus-
trial Policy for Africa. Addis Ababa: Economic Commission for Africa.
de Vries, Gaaitzen, Marcel Timmer, and Klaas de Vries () ‘Structural Transformation in
Africa: Static Gains, Dynamic Losses’, The Journal of Development Studies (): –.
Whitfield, Lindsay () ‘An Introduction to the Political Economy of Development’, in Nic
Cheeseman, Lindsay Whitfield, and Carl Death (eds) The African Affairs Reader: Key Texts
in Politics, Development, and International Relations. Oxford: Oxford University Press,
pp. –.
Whitfield, Lindsay () Economies after Colonialism: Ghana and the Struggle for Power.
Cambridge: Cambridge University Press.
Whitfield, Lindsay and Cornelia Staritz () ‘Industrial Hubs and Technology Transfer in
Africa’s Apparel Export Sector’, in Arkebe Oqubay and Justin Yifu Lin (eds) The Oxford
Handbook of Industrial Hubs and Economic Development. Oxford: Oxford University
Press.
Whitfield, Lindsay, Ole Therkildsen, Lars Buur, and Anne Mette Kjær () The Politics of
African Industrial Policy: A Comparative Perspective. Cambridge: Cambridge University
Press.
World Bank () Future Drivers of Growth in Rwanda: Innovation, Integration, Agglomer-
ation, and Competition. Washington, DC: World Bank Group.
World Bank (n.d.) World Development Indicators. Washington, DC: World Bank.
Zalk, Nimrod () ‘Industrial Policy in a Harsh Climate: The Case of South Africa’, in José
M. Salazar-Xirinachs, Irmgard Nübler, and Richard Kozul-Wright (eds) Transforming
Economies: Making Industrial Policy Work for Growth, Jobs and Development. Geneva:
ILO, pp. –.
Zalk, Nimrod () ‘The Things We Lost in the Fire: The Political Economy of Post-
apartheid Restructuring of the South African Steel and Engineering Sectors’, PhD thesis,
University of London, School of Oriental and African Studies.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
......................................................................................................................
, ‒
......................................................................................................................
. I
..................................................................................................................................
A countries have enjoyed relatively high rates of GDP growth over the last two
decades, largely as a result of the commodity booms that have been driven by the rapid
industrial growth of China and other Asian countries. However, this has not resulted in
the structural transformation of African economies, that is, a transition from low- to
high-productivity activities, most rapidly achieved by the growth of manufacturing
industry, but rather the opposite (McMillan and Rodrik, ; Weiss and Jalilian,
). In Africa, industrial policy (IP), a deliberate attempt by governments to promote
manufacturing industries through specific economic and financial policies, began to a
limited extent under colonial rule, continued through the early years of independence,
and was effectively abandoned under structural adjustment. It is now back in favour as
the central role of the state in past industrializations has been increasingly acknow-
ledged (Chang, ; Rodrik, ; UNECA, ; Weiss, ) and seen for Africa as
‘a necessary economic tool . . . to correct major sectoral and other misallocations’
(Stiglitz et al., ).
This chapter examines IP in post-independence Africa through the lens of power
relations and the state, traditionally the focus of political economy. We find the origins
of IP in Africa lying in the colonial period and analyse policy before and after
independence, focusing on changes in the strategies adopted and the reasons why.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
We examine the main IP of import substitution, a strategy begun under colonial rule
and intensified after independence and explain why it did not result in deeper indus-
trialization. We then discuss IP, or its absence, during the phase of economic liberal-
ization, following that with a discussion of current ideas together with some case
examples of the return of IP in practice as a consequence of the failure of liberalization
to deliver the transformation that it promised. Although we acknowledge the various
organizational and technical explanations usually given for the failure of industrial
transformation in Africa, our focus, unlike much of the literature in this area, is on
issues of the character of state power, class relations, and the role of global capital and
international financial institutions in determining the trajectory of African industrial
policy and industrialization.
. C I P: T
B I-
I
..................................................................................................................................
Colonial economic policy was geared to ensuring that supplies of agricultural and
mineral primary products were secured for processing and consumption in the imper-
ial countries while the colonies provided markets for the metropolis’s manufactures
(Rodney, ; Chitonge, ). The protection of the imperial powers’ manufacturing
industry by not engaging in such production in the colonies was the accompanying
arm of economic policy—‘the metropolitan and colonial economies were complemen-
tary not competitive’ (Havinden and Meredeth, : ).
There is, however, some debate about the degree to which manufacturing in Africa
was already established at independence. Although it is usual to think of colonial
regimes not having an IP, the literature on the subject suggests that by the s
they began to turn attention to diversifying economic activity through industrialization
(Butler, ). Whether this change of direction was the result of realizing that the
colonies would eventually become independent, or whether it was to use such diver-
sification to keep the populations content with colonial rule is debatable. Yet in spite of
this apparent change in policy, the main strategy, even by the latter part of the decade,
remained to restore colonial infrastructure neglected during the Second World War by
securing imports of such critical products as cement and steel, such infrastructure
being the result of initial colonial investment policy to facilitate the exports of primary
products (Butler, ). In the case of the French colonies, however, the shortages they
endured during the Second World War stimulated African manufacturing activity
which by the end of the war was sufficiently well established to withstand competition
from French-based companies and was also helped by French government policy of
supporting industrialization in the colonies (Thompson and Adloff, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
The British vehicle for developing industrial activity was the UK government’s
Colonial Development Corporation (CDC), deemed to be more locally acceptable
than private companies such as the United Africa Company (UAC). However, by
this time (around ) the government view had changed from one supporting
diversification through industrialization to one arguing for specialization in agricul-
tural exports. As a result, the investment by the CDC was directed to increasing
colonial exports to US-dollar-earning destinations and producing primary products
that could go to the United Kingdom; both measures aimed to ease the United
Kingdom’s chronic balance-of-payments deficits (Butler, ).
The settler regimes of South Africa and Southern Rhodesia were exceptions and
established significant manufacturing capabilities. There was a strong European con-
stituency in favour of industrialization, especially in South Africa whose main IP was to
protect domestic manufacturing through tariffs and to subsidize electricity and steel
production. The strength of the mining industry meant that export revenues enabled
the import of goods not produced domestically while also building up the necessary
infrastructure for manufacturing to flourish (Fine and Rustomjee, ). In Southern
Rhodesia, the government started intervening in the economy in , nationalizing
iron and steel production, and taking steps to establish a textile industry. IP was based
less on protective tariffs and more on subsidizing losses, partly the result of poor
management skills and a greater interest among white Rhodesians in trade and
property (Kilby, ).
Other parts of Africa where there were significant but not large settler populations
also developed some manufacturing: Senegal, the Belgian Congo, and Kenya, aided to
some extent by subsidies in the case of Senegal. Angola and Mozambique, Portuguese
colonies until the early s, developed some manufacturing capacity, especially in
the later years, although in the case of Mozambique, this was hampered by the
proximity of an industrialized South Africa (Abshire, ). Much of manufacturing
across the continent was in the hands of European and Asian settlers (Kilby, ) and
colonial administrations assisted such enterprises, as, for example, with the formation
of the Uganda Development Corporation in . There were also policies to develop
technical education, for example, in Nigeria, and also to encourage import-substitution
industries with some investment support in collaboration with private companies such
as the UAC (Pedler, ; Kilby, ). Transfers of funds, a precursor of development
aid, became much more significant after the Second World War (Munro, ).
However, the absence of an industrial labour force in the peasant economies and the
shortage of skilled labour in the settler economies of South Africa, especially because of
its colour bar and job reservation policy, ensured that investments in manufacturing
were capital intensive (Austin, ).
By the end of the s and the early s imperial development policy saw the
colonies as a source of primary-product export revenue used to import capital goods
and develop infrastructure to attract private investment. As Havinden and Meredeth
() note, this approach was problematic. Fluctuating export income from unstable
commodity prices, import expenditure on ‘luxury’ consumer goods for the
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
high-income settler population, poor linkages between the export sector and the rest of
the economy, and profit outflows from the activities of foreign trading enterprises and
foreign banks all made the prospect of export-led growth and development unlikely
and anticipated the problems that would be faced by the newly independent African
countries in the following decade. Nonetheless in some colonies, development funds
were made available which allowed the beginnings of import-substitution industrial-
ization (ISI), anticipating the industrial policy and strategy of the post-colonial gov-
ernments (Kilby, ).
Leaving South Africa aside, by the end of the colonial period the Belgian Congo and
Southern Rhodesia had the largest manufacturing sectors in terms of their contribution
to GDP, followed by Kenya and Senegal (Kilby, ). Production was centred on such
products as cement, soap, textiles, baked foods, breweries, and food processing (Austin
et al., ). The policy of promoting import-substituting manufacturing by largely
private metropolitan companies was supplemented variously by tariff protection,
subsidies, industrial training and development funds (Munro, ). These policies
formed the basis of post-colonial industrial strategies in Africa.
. I-
I A: T
E P- E
..................................................................................................................................
In spite of the low level of industrial development, its overall neglect during colonial
rule in Africa was confirmed at independence. Typically, African economies were
dominated by the export of agricultural and mineral primary products (GATT,
). The agricultural sector itself, including both cash crops for export and food
crops for domestic consumption, accounted for ‒ per cent of GDP. Manufacturing
value added as a share of GDP in ranged from per cent to per cent but for
most countries it was below per cent (see Table .). Capital and consumer goods,
even non-durables, were mostly imported (Ackah et al., : ).
Generally, ISI during the first decade of independence was implemented as part of
the broad development strategy elaborated in the national development plans (NDPs)
which almost every independent African country formulated. Countries did not
develop a separate IP in which they outlined the ISI strategy; ISI was embedded in
the NDPs (Chitonge, ). For most post-colonial African governments, the estab-
lishment of domestic industrial capabilities was not only seen as a means of lessening
dependence on former colonial powers but as a way of achieving economic and social
development.
ISI as a long-term strategy has been understood as a two- or three-stage process. The
first ‘easy’ phase (Hirschman, ) was the local production of previously imported
Table 30.1 Manufacturing performance during early ISI, 1960–80
Manufacturing Average annual growth Manufacturing Average annual growth
share of GDP rates of MVA share of GDP rates of MVA
Country 1963 1980/81 1960–70 1971–80 Country 1963 1980/81 1960–70 1971–80
Countries with high MVA share in 1963 Countries with medium MVA share in 1963 (cont’d)
Algeria 10.0 17.0 7.7 11.6 Ethiopia 9.6 4.4 8.2 2.8
Burkina-Faso 11.3 14.7 18.3 4.6 Gabon 7.2 4.6 10.9 14.9
Central African Rep. 12.1 7.2 5.4 –4.3 Gambia 3.0 4.9 6.1 4.2
Côte d’Ivoire 11.6 8.1 11.6 5.8 Ghana 9.7 7.8 6.9 1
Eswatini (Swaziland) 18.2 18.0 18.1 6.7 Kenya 8.7 10.9 5.6 12.2
Madagascar 10.6 11.2 9 –0.4 Mali 5.1 6.5 4.0 2.0
Malawi 10.4 12.3 14.9 6.7 Mozambique 8.5 7.4 4.8 3.8
Mauritius 13.5 13.0 2.3 9.5 Namibia 5.8 8.5 6.6 -6.1
Morocco 15.7 18.0 8.0 5.6 Sierra Leone 5.7 4.9 4.5 3.7
Senegal 12.8 13.5 4.2 –4.5 Tanzania 9.7 9.1 10.2 2.9
–10.4
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
South Africa 20.6 20.5 8.7 4.5 Togo 9.7 7.8 14
Sudan 14.4 6.8 5.6 1.5 Tunisia 8.0 11.8 7.6 11.7
Zimbabwe 16.0 20.7 11.8 2.8 Uganda 8.2 4.3 5.3 –9.3
Zambia 5.5 16.9 11.5 0.3
Countries with medium MVA share in 1963 Countries with low MVA share in 1963
Angola 6.2 9.7 7.2 –12.8
Benin 7.4 8.0 6 –0.6 Guinea 4.2 4.4 3.3 2.6
Botswana 5.0 4.4 6.2 17.3 Guinea Bissau 1.3 1.4 8.4 3.4
Burundi 9.3 6.9 13.8 5.9 Lesotho 0.8 7.7 3.4 7.2
Cameroon 9.9 8.8 7.4 7.3 Liberia 4.3 9.4 12.8 5.6
Cape Verde 5.5 — 9 3.2 Libya 2.5 2.5 8.4 18.4
Chad 6.2 11.1 5.4 5.7 Mauritania 4.8 4.8 9.2 4.6
Congo 6.8 7.5 7.4 –1.8 Niger 3.1 3.7 9.6 4.7
Congo DR 8.0 7.6 12.5 0.6 Nigeria 4.4 4.7 7.6 13.4
Equatorial Guinea 5.2 5.5 5.1 –16.1 Rwanda 2.1 15.3 2.2 6.3
Notes: ISI: import-substitution industrialization; SAPs: structural adjustment programmes; MVA share: manufacturing value added as a share of GDP. High = 10 per
cent+; medium= >5<10 per cent; low = <5 per cent.
Sources: World Development Indicators (online); African Statistical Yearbook (various years).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
consumer goods, using foreign capital investment and as much of domestic raw
materials as possible. The second phase involved learning from the experience of
industrial activity together with directed education and training to develop skills in
management and engineering. The second phase would increase productivity and lead
to greater competitiveness in export markets, allowing for the exploitation of econ-
omies of scale. The third stage would involve the production of producer goods:
machines and intermediate production induced by the backward linkages from final
goods output. These stages could overlap (Hirschman, ).
. T P E
O I-
I A
..................................................................................................................................
African leaders saw the growth of the industrial sector as the quickest way to catch up
with the developed countries and reduce their dependence on former colonial rulers.
Demonstrating their independence was expressed concretely by not embracing capit-
alism, which was a system closely associated with colonial powers. The perception of
capitalism as the system of the colonisers was clearly articulated by Leopold Senghor,
the president of Senegal, who argued that ‘there is naturally, in the mind of proletarian
nations, complete identification between capitalism and colonialism, between the
political system and the economic system’, hence the rejection of capitalism by ‘the
most conscious leader’ (cited in Mohan, : –). Berg (: ) made a similar
observation that all African leaders view capitalism with suspicion as the ‘economy of
the colonizers’ and see the two as mechanisms for oppressing African societies. Some
countries therefore pursued variants of ‘African socialism’, some of which were a thinly
disguised acceptance of capitalism, as in Kenya, or overtly state socialist, as in, for
example, Ghana, Guinea, and Tanzania and later Mozambique (Akyeampong, ;
Mohan, ; Saul, ).
In the absence of a surplus-accumulating domestic capitalist class, the state took on
the task of mobilizing domestic resources and attracting foreign direct investments to
compensate for the low levels of domestic savings and technology. ISI required a strong
interventionist state that would protect and support new industries by determining
tariff levels on competing imports and, in many cases, take part or total ownership of
industrial enterprises in partnership with the foreign multinationals that managed the
firms under agreements between states and multinationals. Through these policies,
many African states created considerable latitude for intervening in the economy
(Chitonge, ).
The economic arguments which justified ISI included the need to overcome the
domination of export-enclave activities concentrated on resource extraction with little
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
connection to other sectors of the economy (Mhone, ; Ake, ). Conversely, ISI
would promote linkages between the different sectors of the economy, ensuring that
the natural resources were used in the industrial sector to manufacture consumer and
intermediate goods (Ogujiuba et al., ). ISI would thus lead to the saving of foreign
currency which could be used to import the intermediate and heavy-duty capital goods
required for developing the manufacturing and agriculture sectors, thus promoting the
growth of local industries and achieving faster social and economic transformation.
Promoting the diversification of exports by developing extensive industrial sectors was
the ultimate objective of ISI (Ogujiuba et al., ).
. I P I-
I
..................................................................................................................................
Although African countries implemented ISI differently during the first two decades of
independence, one common feature was the adoption of protectionist policies against
competing imports. These included tariffs, import quotas, subsidies, exchange-rate
management, and special preference licences aimed at supporting the infant domestic
industrial sector (Ogujiuba et al., ). The idea was to protect infant industries up to
the point where they were able to withstand competition from outside (Westphal,
).
For example, in East Africa, the average weighted tariff rate for the region was .
per cent in before the liberalization policy was adopted, with some countries such
as Kenya imposing higher than the average tariff rate of per cent: Tanzania with
per cent, Uganda per cent, and Burundi per cent having higher than average tariff
rates (UNECA, ). The average weighted tariff rate for North Africa in the ‒
period was . per cent, . per cent for West Africa, per cent for Central Africa,
and . per cent for Southern Africa, and . per cent for Africa as a whole (Ackah
and Morrissey, ).
Contrary to what might be expected from a policy protecting manufactures, tariffs
on these products were . per cent, with those on agricultural products at . per
cent and mining/resources at . per cent¹ over the same reference period (Ackah and
Morrissey, ). In countries where the ISI strategy was effectively implemented, these
tariffs were meant to protect local producers from foreign competition. When imple-
mentation was weak tariffs did not offer any form of effective protection (Mendes et al.,
); in some cases where protective tariffs existed, imported products were still
cheaper and, if not, they were of higher quality, ultimately displacing local products.
¹ These last two tariffs targeted the import of crops and minerals for re-export, which was common in
many African countries. For example, a large share of copper exported from Zimbabwe, Kenya, and
South Africa was actually imported from the DRC and Zambia.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Many African governments used other measures to support infant industries deemed
unable to withstand international competition. To curb imports there were quantitative
restrictions such as quotas, outright prohibition, and restrictions on foreign currency
allocation to specific importers (Bienen, ). In a number of countries, other
measures such as the provision of subsidized loans, preferential licensing, and special
foreign currency allocations to firms in strategic sectors were employed to promote the
growth of local manufacturing capability.
The protectionist element of ISI was further justified on the basis that the tariffs
imposed on imported goods provided a substantial source of revenue for the state. In
Sudan, for example, it has been reported that taxes on external trade amounted to
per cent of total government revenue during the s (Bienen, : ). As we shall
see later, some African economies were reluctant to liberalize their markets even under
extreme pressure from the IMF, the World Bank, and donors, because this entailed the
loss of a significant portion of public revenue.
In many countries state-owned enterprises (SOEs) were created to promote the
growth of local manufacturing (Chitonge, ). SOEs became a common feature in
most African countries prior to the liberalization programme of the s (Bates,
), and covered a wide range of sectors from transport to produce marketing to
retail chain stores. They were not always fully state owned: the foreign partners often
owned up to per cent of the shares. The advantage of bringing in foreign capital was
ostensibly to raise levels of capital, technology, and skills. Although there were some
choices when it came to technology, in general, the choice of product to manufacture,
and its history of technological development, determined the choice of technique used
in production (Stewart, ). As a result, the manufacturing processes for consumer
goods were capital rather than labour intensive and thus unable to make use of the
surplus unskilled labour available in most countries. Usually the SOE strategy was
complemented by a suite of institutions, including those dedicated to mobilizing and
providing development finance to the broader industrial sector (Chitonge, ).
In spite of the identification of capitalism with colonialism, as noted above, it was not
long before a small but significant domestic capitalist class was found to be emerging
with the spread of capitalist social relations in agriculture and industry (Sender and
Smith, b). This was the case even in those countries where industrialization was
initially dominated by SOEs and across countries with different political ideologies. In
the agricultural sector, there were increasing numbers of large farmers employing
permanent and seasonal labour; in manufacturing, there were domestic capitalist
enterprises employing wage labour, in some cases looking for collaboration with
foreign investment, and there was a trading class, accumulating capital and investing
in productive activities (Swainson, ; Kennedy, ; Sender and Smith, b). In
spite of the domination of foreign capital in ISI and the small size of the emerging
capitalist class, it was the increasing capital accumulation by this class-in-formation
that was critical. It allied with foreign capital to gain the technological capacity and
competed against foreign capital, later using its connections to elements of the state to
achieve its goals (Leys, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. I P U
I- I
..................................................................................................................................
Manufacturing output initially grew rapidly with a large number of countries reporting
high growth rates of manufacturing value added (MVA) (see Table .). MVA growth
continued through the s and s with most countries peaking in the s,
though Madagascar and Swaziland’s MVA peaked as late as , and Lesotho even
later in . For parts of the continent, in the first two decades considerable progress
was recorded in replacing imports with locally manufactured goods (Bates, ) and
MVA growth rates in some cases reached double figures. The dominant sectors in most
economies were food and drink and textiles and clothing, with only South Africa
having a significant capital goods sector.²
However, the ISI strategy did not succeed in Africa for various interrelated reasons.
First, it did not foster the learning process which would have moved ISI on to its second
and third stages. The advanced education and training required to produce a highly
skilled engineering and technically skilled labour force failed to materialize (Bienen,
; Sender and Smith, b). Second, there was an absence of long-term coordin-
ation by a capable interventionist state to plan and resource ISI and to ensure that it
matched the country’s supply of natural resources, rather than using imported raw
materials used by the foreign investors in their activities elsewhere in the world: a sign
of quality but also a reflection of the imbalance in power and knowledge between the
state and foreign capital (Hirschman, ; Sender and Smith, b). Low capacity
and corruption (Ogujiuba et al., ) further undermined attempts to have such a
domestically oriented ISI. Third, the small size of domestic markets coupled with the
inability to compete in export markets further limited ISI (Mendes et al., ). Fourth,
there was a general failure to monitor and evaluate the impact of protection on the
economy and to identify strategic sectors and firms for support (Bienen, ). Fifth,
state expenditure was arguably directed less to productive investment and more to
generating state employment (Sender and Smith, b).
In sum, the industries supported through ISI required imported machinery and
spare parts and a sufficiently large domestic market to take advantage of economies of
scale together with enough foreign exchange earnings to pay for the imports, earnings
being heavily dependent on the exports of primary commodities and subject to
fluctuating world prices. The strategy’s success also required an overvalued domestic
currency to be maintained in order to keep imports relatively cheap. But this adversely
affected non-traditional exports in particular, restricting foreign exchange inflows,
especially when primary commodity prices sharply declined after ‒. It also
adversely affected prices received by farmers for their export crops and this, together
² For more detail and explanation of African countries’ manufacturing performance, see Lawrence
(, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
with a tendency to write off the primary-product export sector, resulted in a decrease in
export volumes and thus a further exacerbation of the foreign exchange constraint
(Sender and Smith, a). As a consequence, ISI became unsustainable by the end of
the s and was an easy target during the s when pressure from the IMF and
World Bank to restructure African economies mounted.
. R- N-
B I P: A
A S?
..................................................................................................................................
What was the alternative for the African elites who had been elected on promises that
as independent countries they would do better for their populations than the colonial
powers? Was there an alternative to ISI as it was executed? Was there an alternative to
the ‘extraverted periphery’ (Amin, a: ) that would continue colonial policies?
One industrial strategy that was proposed in the mid-s was to ‘effect a convergence
of the pattern and rate of domestic resource use and domestic demand’ (Thomas, :
): a more introverted strategy of development of both agriculture and industry. This
required the domestic needs of the ‘broad mass of the people’ to be defined (Thomas,
: ):
Generalizing from human experience, it appears as if the level of material welfare
hinges largely on the output and consumption of certain tangible and intangible
products. The intangibles are mainly education, recreation, and travel, together
with the usual array of medical, cultural and social services. The tangibles are
adequate housing, food, clothing, a proper living environment, and the service of
such important consumer durables as transportation, electronic entertainment
equipment and durable household goods furniture, washing machines, refriger-
ators, etc. (Thomas, : ‒)
The closest any countries came to this was in the processing of domestic agricultural
crops such as grains, beverages, and some fruits and vegetables.
Once the population’s needs were defined, production could be oriented towards
them using, wherever possible, domestic resources. This required a considerable degree
of state planning. Thomas was writing at a time when in spite of the many failings of
socialist states in Europe and Asia, there was evidence that state planning was geared to
the basic needs of the mass of the population. Where ISI began with producing goods
previously imported for a narrow, largely urban elite, industrialization based on the
needs of the mass of the population would start with planning to manufacture products
which would satisfy those basic needs. This would require the use of domestic rather
than foreign natural-resource inputs. Large- and small-scale supply industries would
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
need to be established, based wherever possible on local deposits of mineral inputs.
Countries would pursue an active science and technology and research and develop-
ment policy to adapt imported technologies to local needs and make full use of the
interlinkages between the different sectors of manufacturing, and between them and
the agricultural and mineral primary products.
Such a strategy would have put a strain on the limited capacity of the state and
therefore would have needed the building of institutions to make such intervention and
direction effective. In particular, the planning of manufacturing industry in an inte-
grated, rather than ‘shopping list’ fashion would have required substantial organization
and the planned sequencing of production. The use of foreign expertise to negotiate,
where necessary, with foreign capital might also have helped to produce more effective
manufacturing investment (Thomas, ). This strategy of industrialization was
closely related to that of ‘delinking’ from the global economy (Amin, : ).
Recognizing the difficulties countries of the global South faced in effecting structural
transformation because of their integration into a world economy dominated by global
capital, Amin argued for a strategy based on agriculture, on control of foreign capital to
import a mixture of technologies which matched existing levels of development, and on
an egalitarian distribution of income (Amin, : )
Although attractive in theory, a key problem with these alternatives was identifying
the forces that were likely to be able to push states to pursue such policies. Even if states
adopted such strategies, it was unlikely that they had the capabilities, let alone power
and control, to plan industrialization in the way proposed. As for introverted strategies,
there were strong arguments to suggest that an outward-looking approach that gener-
ated increased output of primary-product exports would be effective in creating
backward linkages to support both a growing export sector and second- and third-
stage ISI (Sender and Smith, a).
. L
I P
..................................................................................................................................
While the ISI strategy had the opportunity to transform African economies, its
implementation was cut short when structural adjustment programmes (SAPs) were
introduced in Africa, leading to the abandonment not just of ISI, but IP in general (Lall,
; Olukoshi, ; Mkandawire and Soludo, ). Sundaram (), for instance,
argues that when other countries adopted the ISI strategy, African countries were
under colonial rule, and when independent African countries adopted ISI, it was only
implanted for about a decade before liberalization policies were introduced.
These policies, which began during the s, had both economic and political
dimensions, and seriously impacted on the industrialization of Africa. At first, the focus
was on addressing the apparent economic crisis in Africa manifested by unsustainable
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
levels of foreign debt, shortages of foreign currency and macroeconomic instability.
The political dimension of the liberalization programme was largely a consequence of
the economic dimension; it focused mainly on reducing the role of the state, reforming
the reputedly inefficient and bloated public sector and promoting competitive politics
to mirror competitive markets through multi-party democracy and free elections
(Olukoshi, ).
Market liberalization and a diminished role for the state effectively meant that there
was no need for IP: competition in the global market could determine the level and
scope of industrial activity and which industrial sectors to promote. In this can be seen
the ‘extreme neoliberal position of the early s which denied any role for the
government beyond providing essential public goods and security’ (Lall, : ).
Further underlying the World Bank’s approach was a degree of pessimism about the
prospects for industrialization in Africa, in spite of the variety of experience and
performance across the continent and especially in those cases where manufacturing
growth did not slow down (see Tables . and .; Sender and Smith a).
During the s, almost all African countries implemented SAPs to varying degrees
(Kirkpatrick and Weiss, ). The programmes’ rationale was that African economies
had structural problems resulting from extensive state intervention in the economy
through industrial and infrastructure enterprises, the marketing and price-setting of
agriculture produce, the restrictions on importing goods and services, the imposition of
tariffs on imports, and the rigid exchange-rate policies resulting in overvalued local
currencies (World Bank, ). The structural reforms undertaken by African govern-
ments focused on liberalizing trade and currency markets, reducing the role and size of
the state through privatization and retrenchment, and stabilizing the macroeconomy.
Trade liberalization, floating exchange rates, and privatization replaced industrial
strategy under the SAPs. The first required the protectionist policies introduced as part
of ISI during the s and s to be dismantled (Ackah and Morrissey, ) in
order to remove any form of restriction on trade. Liberalizing imports in particular
would promote efficiency in the local economy by subjecting local producers to
international competition. For example, while in most African countries import tariffs
averaged per cent prior to the liberalization programme, after liberalization, average
tariffs fell sharply. In Kenya, where the trade liberalization programme was vigorously
implemented in , the average weighted tariff declined from . per cent in to
per cent in and to per cent by (UNECA, : ). For Africa as a
whole, average tariffs declined from . per cent over the ‒ period to . per
cent in . Average tariffs on agriculture and manufacturing declined from . and
. per cent to . and . per cent respectively over the reference period (Ackah
and Morrissey, : ).
Floating exchange rates resulted in severe depreciation of local currencies against the
US dollar. Prior to the SAPs, foreign currency in most African countries was allocated
to strategic sectors by dedicated state institutions to promote the growth of local
industries. When SAPs were introduced, foreign currencies were auctioned to the
highest bidder; according to the theory, this was the most transparent and efficient
Table 30.2 Manufacturing performance during SAPs, 1981–2000
Manufacturing share of Average annual growth rates of Manufacturing share of Average annual growth rates of
GDP MVA GDP MVA
Country 1981 2000 1981–90 1991–2000 Country 1981 2000 1981–90 1991–2000
Countries with high MVA share in 1963 Countries with medium MVA share in 1963 (cont’d)
Algeria 11.0 4.6 4.4 –1.5 Ethiopia 4.4 5.6 3.0 1.9
Burkina-Faso 14.4 12.3 2.6 3.1 Gabon 4.0 4.5 2.5 2.7
Central African Rep. 13.1 6.1 6.5 0.4 Gambia 5.7 6.8 7.5 1.4
Côte d’Ivoire 15.6 17.2 2.4 –0.5 Ghana 14.1 9.0 4 –1.0
Eswatini (Swaziland) 23.9 38.7 16.8 2.6 Kenya 13.3 10.3 4.8 1.2
Madagascar 10.1 12.0 1.5 –0.9 Mali 8.6 7.2 5.9 –0.7
Malawi 12.7 11.6 4.2 0.5 Mozambique 7.4 14.8 — 9.2
Mauritius 13.5 19.7 9.8 5.3 Namibia 9.7 10.0 3.9 2.9
Morocco 19.1 18.5 3.2 2.7 Sierra Leone 5.6 3.3 — -1.5
Senegal 13.8 14.9 4.8 3.1 Tanzania 5.8 9.4 –9.4 2.9
South Africa 22.6 17.5 1.4 1.4 Togo 7.1 7.5 3.5 4.2
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Sudan 7.8 5.7 — — Tunisia 11.9 16.2 3.4 5.7
Zimbabwe 20.4 13.4 3.5 –0.5 Uganda 1.9 7.1 3.4 5.7
Zambia 17.7 9.5 4.6 1.6
Countries with medium MVA share in 1963 Countries with low MVA share in 1963
Angola 4.0 3.0 –4.6 2.6
Benin 6.7 21.0 7.4 5.9 Guinea 4.2 3.8 3.3 2.6
Botswana 6.1 5.6 12.2 6.8 Guinea Bissau 1.3 10.1 8.4 3.4
Burundi 7.3 10.9 5.5 –3.1 Lesotho 9.5 13.6 14.9 7.5
Cameroon 9.7 20.8 7.4 0.2 Liberia 4.3 3.0 — —
Cape Verde 12.6 9.2 — 9.7 Libya 2.5 3.0 — 18.4
Chad 7.5 8.9 — –2.1 Mauritania 6.3 10.6 –1.8 2.8
Congo 6.3 3.5 8.2 –2.4 Niger 3.4 6.8 8 3.1
Congo DR 7.6 2.9 0.2 –9.1 Nigeria 20.3 13.9 –3.4 –2.0
Equatorial Guinea 6.2 18.3 — — Rwanda 15.7 7.0 2.9 –0.8
Notes: ISI: import-substitution industrialization; SAPs: structural adjustment programmes; MVA share: manufacturing value added as a share of GDP. High = 10 per cent+;
medium= >5<10 per cent; low = <5 per cent.
Sources: World Development Indicators (online); African Statistical Yearbook (various years).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
way of allocating resources. For the manufacturing industry, currency depreciation
increased the costs of imported inputs and therefore market prices and they were
unable to compete with the now liberalized imports (Bienen, ; Kirkpatrick and
Weiss, ).
Under privatization, the focus was on selling inefficient and uneconomic SOEs.
Using conditionality attached to loans, the World Bank and IMF forced many African
countries to sell off SOEs, sometimes at give away prices. The privatization programme
was not only restricted to the industrial SOEs, it included the service sector such as
water and other utilities, transport, and many other social services (Nafziger, ;
Sundaram, ). Through privatization, most of the SOEs created during the time of
ISI were dismantled.
The stabilization programme was mainly focused on prudent macroeconomic man-
agement, on the fiscal side by drastically cutting public expenditure through a rigid
commitment to a balanced budget and on the monetary side by competitive market-
determined interest rates. Both fiscal and monetary elements affected the industrial
sector, the first by reducing the state’s capacity to subsidize industry and the second by
increasing borrowing costs. The SAP stabilization programme was mainly handled by
the IMF (Chitonge, ).
For countries that implemented SAPs, this marked the end of an active IP, and
perhaps the prospect of industrializing the continent. Not only that, most African
countries effectively gave up the sovereign right to formulate and implement their own
policies, including those relating to methods of achieving industrialization (Olukoshi,
). IP, no longer used as a tool for promoting economic growth and transformation,
was declared redundant by market fundamentalism. As has been observed, ‘no region
has been more susceptible to swings in the pendulum of ideas of economic develop-
ment than Africa—from ISI-planning models of the s to the s, to the swing
into massive liberalization and structural adjustment programmes from the s to
date’ (Soludo et al., : ).
In terms of outcomes, these programmes did not achieve most of the objectives
envisioned by those who formulated them. It has been observed, for instance, that
although ‘price controls, exchange rate misalignments, and budget deficits contributed
to Africa’s crisis, the immediate freeing of markets and contraction of [public] spend-
ing could not resolve the disequilibrium’ (Nafziger, : ). Other scholars have
argued that the rapid liberalization of African markets and the downsizing of the public
service resulted in the decline of many industrial activities with the momentum of the
earlier periods lost (Olukoshi, ; Sundaram, ). Economic liberalization’s overall
effect on MVA’s shares of GDP and growth rates varied across the continent with some
countries showing evidence of de-industrialization (Jalilian and Weiss, ), while
there were also cases, though very few and sometimes from a low base, which
experienced double-digit growth rates and an increase in manufacturing MVA’s
share of GDP (see Table .).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
. R P S-
T-S I-
I?
..................................................................................................................................
The need for IP is beginning to find traction with the revival of the state as an economic
actor giving direction to industrial development, examples of which will be given later
in this chapter in the cases of Ethiopia, Nigeria, and Rwanda (see also Chapter ,
Whitfield and Zalk, this volume). The technical possibilities of effecting a more auto-
centric industrialization strategy have always existed. African countries’ natural
resource base in agriculture and minerals was originally expected to form the basis of
its industrialization. There are, and have always been, strong possibilities for both
backward and forward linkages. The processing rather than the direct export of
primary products, both agricultural and mineral, was undertaken to a limited extent
for food and beverages during the first stage of ISI with some success. Industrial
activities which supply products to the agricultural sector are relatively less well
developed and have considerable potential. The extent of linkages that have been
made varies greatly across the continent. In those countries where linkages have been
more strongly developed, they are more vertical than horizontal: skills and competen-
cies learned in the early industrializing sectors have rarely been transferred to other
sectors. However, South Africa, Zambia, and Nigeria, countries with reportedly deeper
vertical linkages, show some signs of horizontal linkages (Morris et al., ).
The need to base successful industrialization on export markets because of the
relatively small size of domestic markets has to some extent been overtaken by the
‘shrinking space for export-led industrialization’ (Ovadia and Wolf, : ) so that
directing investment to industries that supply basic goods to a domestic market now
enlarged by the rapid increases in population will require a reversal of trends in income
distribution to create a mass market for basic goods, which will also lead to a growth in
intersectoral as well as consumer demand (Ovadia and Wolf, ) and stimulate
linkages both forward and backward. One way to have dealt with issues of scale and
market size in the past would have been a continent-wide or at least region-wide
strategy to allocate industries across countries so that markets were larger and indus-
tries internationally competitive and capable of exporting to the global North. At its
inception, the East African Community was an attempt to do just that, but it fell apart
not just because of the Uganda coup but because of inter-country disputes
resulting in duplication of investments and unequal sharing of benefits (Mwase,
). More recently, the development of new regional groupings presents possibilities
for renewed industrial development taking advantage of much larger markets
(UNECA, ).
Successful ISI will also depend on fostering linkages to go beyond its first stage. One
example is the case of the projected iron and steel complex in Tanzania based on
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
domestic resources. The construction of the Tanzania‒Zambia railway in the early
s opened up a part of the south-west of the country that was known to contain
deposits of iron and coal. This could have formed the basis of a steel industry with
possibilities for machine-tool and other downstream production (Luttrell, ).
Although the possibility had some political support, it faced what Luttrell termed an
‘alliance’ of state bureaucracy, foreign capital, foreign consultancies, and donor agencies
which maintained the emphasis on not having an IP and concentrating on the export of
agricultural raw materials and minerals.³ In , a Chinese company won the contract
to develop an iron and steel complex, and agreed incentives with the Tanzanian
government in , but it was reported that by November , the project had not
been rolled out because these incentives had not been forthcoming (Mirondo, ),
raising the issue of how far the so-called alliance is holding up the project. Yet this is
exactly the kind of project which would have substantial forward linkages to a range of
capital goods manufacturing sectors with onward supply to the consumer goods sector.
An important part of this domestically oriented or ‘introverted’ strategy of industri-
alization would be the need to promote small and medium-sized enterprises (SMEs) to
supply the larger scale. Much of the research on SMEs in Africa has noted their capacity
to generate employment but also their lack of connection to larger-scale enterprises, or
even to agriculture, through the supply chains that would be found in developed
industrialized countries (Livingstone, ). Many of these enterprises are classified as
part of the ‘informal sector’ and devoted to the production of cheap consumer goods. An
IP that mobilized the self-taught skills of the employees of these enterprises with
additional training for conversion into SMEs that could supply intermediate and end
production would help to generate a more integrated manufacturing sector. A further
question is why some of these small entrepreneurs have rarely become larger and
constituted the embryo of a significant domestic capitalist class that could enter into
collaborative arrangements with global corporates to expand the manufacturing base.
Renewed possibilities for IP and industrial growth in Africa have to be viewed against
the backdrop of developments in global manufacturing over the last four decades. Rapid
technological change resulting from the revolution in information and communications
technology (ICT) offers many different routes to structural transformation. Industrial
processes are increasingly robotized with the result that investment in manufacturing
generates fewer and fewer jobs. The future of capitalism as a system of generating profit
for accumulation (Amin, b) has been called into question as goods become cheaper
to manufacture with relatively little human labour (Mason, ). With a rising African
population of working age, this creates major problems for increasingly urbanized
societies. However, other employment opportunities have been created by the significant
growth in services fuelled by the increasing ‘servicification’ of the manufacturing sector,
which subcontracts its non-manufacturing activities such as accounting, legal, transport,
ICT, and management consulting (Hoekman, ).
³ The reference to this kind of alliance is suggestive of what would now be referred to as a ‘political
settlement’ (section .).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
A further development has been the growth of global value chains in which agricul-
tural and service activities become part of an integrated production process in which
many African economies are closely involved. The examples commonly given, how-
ever, refer to such activities as horticulture and tourism, with the manufactured inputs
for these sectors, and for the manufacturing sector itself, being imported (Newfarmer
et al., ; Spray and Wolf, ). These developments and the changes in trade rules
governed by the WTO have shrunk the policy space available for developing countries
to pursue an integrated and domestically oriented IP, although there are still many
policy options open to them because of their developing country status (UNECA,
). The development of technology to exploit sustainable solar, wind, and hydro-
power energy sources has offered new opportunities for reducing the costs of manu-
facturing investment as well as creating manufacturing linkages (Murray, ). The
growth of ‘industries without smokestacks’ has been aided by government policy,
suggesting movement towards a ‘developmental state’.⁴
Finally, global capital has become increasingly concentrated in the hands of a
relatively small number of large corporates dominated by the financial sector, increas-
ing the power inequality between developing countries and global capital (Vitali et al.,
). This has unintentionally created space for Chinese enterprises to invest in other
parts of Asia and in Africa. Chinese investment in Africa, although still a small part of
its global direct foreign investment, has grown sharply in the last few years. It is
increasingly driven, less by the need to satisfy its demand for raw materials, and
more by the relocation of its more labour-intensive industries to areas of the world
where labour is cheaper (Shen, ). However, as evidenced by the history of the iron
and steel project in Tanzania described above, how far African countries take advan-
tage of this newer source of foreign investment is dependent on the extent to which the
state has, and is able to pursue, an effective IP.
. T A
D S E
I P?
..................................................................................................................................
The history of the last five decades of African industrialization suggests that there is no
shortage of technical solutions to generate rapid manufacturing industrialization across
the African continent going beyond basic agricultural processing and other light
industries. Theories of maximizing backward and forward linkages go back to Hirsch-
man’s seminal work (Hirschman, ) on vertical and horizontal linkages connecting
agriculture and natural resources to light and heavy manufacturing industry.
⁴ We will not attempt a definition of this much-used term here. For a succinct account of the concept
and history of the ‘developmental state’ and its usage, see Whitfield et al. ().
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Explanations of poor performance have included comparative disadvantage in the
choice of industries; SOE inefficiency; corruption and a lack of control over rent
seeking; a low level of managerial and technical capacities; a low level of technological
and planning expertise in the economics ministries; a lack of coordination between
different ministries, SOEs, and foreign and domestic private enterprise; poor power
and communications infrastructure making industrial investment and operations
prohibitively expensive; and a lack of political will (Mendes et al., ; Morris et al.,
; Chitonge, ). However, the key questions are why, irrespective of any of these
possible explanations, governments have not addressed them during the last fifty years,
and why IP has not changed to a more domestically based or regional/continental one?
Answers require some understanding of the politics of decision-making and, more
broadly, a political economy analysis of power relations and the state, and the distri-
bution of such power among different sections of the ruling political class (Soludo et al.,
; Whitfield et al., ).
The political economy explanations include the absence, or small size, of a domestic
industrial bourgeoisie, and of an agricultural one capable of branching out into
industrial activities, in spite of the spread of capitalist relations; the existence of a
political class that allied itself with what became global capital rather than with the
largely rural population; a ‘bureaucratic bourgeoisie’ (Shivji, ) that even in state
socialist countries prioritized consumption over production in decisions about invest-
ment; and finally, pressure from the international financial institutions to prioritize
primary commodity exports to exploit their ‘comparative advantage’ and essentially
abandon IP. This in effect meant a policy of supporting the extractive export industries
which had an established power base within the state rather than developing manu-
facturing. Even in the most industrialized African country, South Africa, manufactur-
ing has been dominated by the mineral and energy sectors to the detriment of other
manufacturing sectors (Fine and Rustomjee, ; Ashman et al., ).
The character of the state is also critical. Under capitalism, a powerful and dominant
capitalist class has a degree of control over the ‘executive of the modern state (which) is
but a committee for managing the common affairs of the whole bourgeoisie’ (Marx and
Engels, : ). Of course there are fractions of the capitalist class with different
interests (manufacturing and mineral extraction or small and large scale), so that the
state bureaucracy itself may mirror those fractions or be captured by one of them.
Where there is a strong labour movement this can make the state an arena of class
struggle.⁵ Where there is no one dominant class, establishing a coherent IP may be
more difficult. For African countries, the different classes or strata of farmers, the
limited, although significant, development of an industrial bourgeoisie and a sizeable
organized working class, the existence of a substantial petit-bourgeoisie of retailing and
trade, as well as the development of a powerful state and parastatal bureaucracy has
meant that no one group has dominant political control of the state. The theory of
⁵ For an early discussion of the nature of the state in Africa, see Review of African Political Economy
() (): The State in Africa.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
political settlements encapsulates this view of the distribution of ‘organizational power’
(Khan, : ) within society.
This political settlement reproduces itself over time, though it may be ruptured as
one dominant group is replaced by another through a coup d’état, for example. To
understand the political settlement it is necessary to study the history of the origin and
development of organizations or institutions. The distribution of power between
organizations is subject to formal rules, more so in the global North, and/or informal
rules, more so in countries like those of Africa.
The importance of such an approach lies in its power to explain, not only the
differences between individual countries’ experiences, but also why IP might be
effective in some countries but not in others. The criticism of other approaches, such
as the widely accepted neo-patrimonialist thesis, is that their universalism does not
explain differences in country outcomes (Behuria et al., ). However, as Kelsall
observes, ‘there is no shortage of evidence that neo-patrimonialism, or at least its
associated phenomena of big-man politics, clientelism, corruption and rent seeking is
widespread on the continent’ (Kelsall, : ). However, as Kelsall concedes, neo-
patrimonialism does not explain everything, nor is it confined to Africa. Nor is it
necessarily the case that it militates against an effective development, let alone IP. The
question is, what is done with the rents, however gained? If the prospect of earning
rents is an incentive to invest in an industry the state is trying to promote through its
IP, then this could generate industrial growth and structural change. However, this will
only happen with an effective IP.
For an effective IP, policymakers need to be knowledgeable about the industry or
industries they are promoting, but also to have the support of the ruling elite, or of a
powerful faction within it, thus creating a ‘pocket of efficiency’ (Whitfield et al., :
). There must be mutual interests between a faction(s) of the state and domestic
capitalists but their relations cannot be too close to avoid state capture. IP is difficult to
pursue in countries where governing elites are fragmented and where there is limited
development of a domestic capitalist class with technological capability, Tanzania
being a case in point. Here, the domestic capitalist class that might have spearheaded
industrial investment with state support was largely associated with a particular ethnic
group, those of Asian origin, so that it was politically unpopular to support this group
with aid as part of an IP.⁶ Corruption on a grand scale became a means of channelling
such support to domestic capitalists, some of whom had a history of high-level
involvement in the ruling party, which still retained strong majority support among
the electorate, despite no longer being the only party (Whitfield et al., ; Gray,
, ).
The state’s role in economic development was always seen at a minimum as the
provision of economic infrastructure, such as roads, railways, and power, but also of
⁶ In this context it is worth recalling Hirschman’s observation for Latin America that ownership of
trading and industrial capital by a minority group gave that group much less influence in persuading the
state to support its expansion beyond first-stage ISI (Hirschman, ).
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
social infrastructure, especially schools and hospitals. Much of Africa’s transport
infrastructure was geared to getting primary products to ports, and while this is still
an important part of provision for African economies, building the infrastructure to
enable the efficient transport of domestically produced final and intermediate goods is
a key part of any programme by a putative developmental state for industrial growth
and structural change. As part of Ethiopia’s state-led programme for economic trans-
formation, for example:
The government has been directly and aggressively investing in infrastructure devel-
opment and human resource development towards this end. For instance, its inter-
ventions to increase electricity generation capacity, expand railways and roads (over
, kilometres of roads, including universal access to rural roads), and create
capacity to train half a million university students amply demonstrate its develop-
mental orientation . . . Enrolment in primary schools has increased from below
per cent in the early s to about . per cent in . (Oqubay, : )
However, the putative developmental state does not confine its activities to social and
economic infrastructure. It has an IP that involves the promotion of specific industries
and sectors, and related infrastructure, either directing resources to nascent domestic
capitalist investors and producers or directly participating in such activities through
SOEs. State direction does not necessarily mean neglect of the private sector. On the
contrary it might involve some privatization of SOEs. A state-led IP can use privatiza-
tion as a means of strengthening the domestic capitalist class and enabling an IP to be
effective without allowing the state to be ‘captured’ by any one faction of capitalists
(Oqubay, ). Nor does IP have to neglect agriculture (ACET, ). Developing
agriculture by investing to raise productivity and increase farmers’ incomes creates
increasing demand for consumer goods and for producer goods for agriculture, feeding
into a general strategy of auto-centric development. IP is also inextricably linked
with trade policy, which both identifies the best way of inserting domestic output
into global value chains and targets tariffs to ensure that necessary imported inputs to
the industries so identified are appropriately priced. These ‘smart’ trade policies
(UNECA, ) also include stimulating cross-border trade, especially within regional
economic groupings.
The state can also promote industrial policies which increase the share of local
content in final production. Nigeria’s Content Development and Monitoring Board:
[i]s now leading a set of initiatives that very much resemble the interventionist
strategies of East Asian developmental states. They have been involved in promoting
infant industries such as steel pipe and subsea equipment manufacturers, spurred the
building of new fabrication and yards and led other initiatives that have created
thousands of jobs and, as of late prior to a change in executive leadership, were
spearheading three industrial parks in the Niger Delta states of Imo, Cross River and
Bayelsa that will specialise in manufacturing of low-cost equipment, component
parts, spare parts and chemicals. (Ovadia and Wolf, : )
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Explanations of more recently successful IP have focused on countries like Ethiopia
and Rwanda which have clear priority sectors and have made impressive progress
in floriculture and leather goods (Ethiopia) and horticulture and tourism (Rwanda).
In both cases there is evidence of a dominant faction giving state direction and
coordination and an effective management of rents with close monitoring of perform-
ance (Oqubay, ; Kelsall, ). However, in countries where power was relatively
equally distributed across organizations, partly as a consequence of political and
economic liberalization, such as Ghana and Tanzania, rent management is less effective
as short-term electoral considerations have led to greater tolerance of corruption and
poor performance (Kelsall, ).
Cement production in Ethiopia, Nigeria, and Tanzania further exemplifies issues of
relative power. The Ethiopian industry has grown, with state support, to become one of
the top three cement producers in Africa. The most effective state support to the
industry was indirect, through the demand created by its housing and infrastructure
programme (Oqubay, ). The Nigerian industry is dominated by two producers,
one domestic and a foreign cement importer, that have almost twice the market share
of the third, foreign-owned, producer. The larger producer started out as a cement
importer but was incentivized to go into production under a government IP offering
tax breaks, licences, and protective import duties. Apart from helping to make Nigeria
the second-largest cement producer in Africa, the larger domestically owned company
has reinvested in other manufacturing sectors in Nigeria and in cement production in
other African countries, making its own linkages to agro-alimentary and petrochemical
sectors (Ovadia and Wolf, ). Mutual interests can also be found with foreign
capital and this again depends on the distribution of power within the ruling elite.
In Tanzania, however, although the government has tried to build up the cement
industry and link it back to construction, the context is very different from Nigeria. The
industry is dominated by foreign companies and while one part of the bureaucracy has
incentivized one firm to invest in cement production, another ministry which seeks to
promote the energy industry is disincentivizing the cement company by determining
that it buys its energy from higher-pricing suppliers (Ovadia and Wolf, ). This is
an example of a lack of coordination between sectors of the state which have conflicting
interests governed by their links with different fractions of capital. It also raises
questions of linkages and choice of technique. As Ovadia and Wolf highlight, ‘what
is noteworthy is that government support for building materials manufacturing in both
countries [Nigeria and Tanzania] primarily extends to the capital-intensive cement
sector. The developmental potential of linkages between the construction and building
materials sector could be enhanced by targeting the production of less capital-intensive
building materials more systematically’ (: ). This comment raises again the
question of why such enhancement does not take place, a question which theories of
the state and its relations with capital might help to explain.
How far have these developments of a more interventionist IP affected performance
across the continent? As with the previous two tables, Table . shows considerable
variation in the share of manufacturing MVA in GDP and in MVA growth rates.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Table 30.3 Manufacturing performance post SAPs, 2001–17
Manufacturing Average Manufacturing Average
share of GDP annual share of GDP annual
growth growth
rates of rates of
MVA MVA
Country 2010 2017 2001–17 Country 2010 2017 2001–17
Countries with high MVA share in 1963 Countries with medium MVA share in 1963
(cont’d)
Algeria 40.0 35.2 1.0 Ethiopia 4.0 6.2 11.5
Burkina-Faso 7.2 5.5 2.6 Gabon 17.1 17.6 25.8
Central African Rep. 18.4 15.7 –1.9 Gambia 14.7 4.5 1.1
Côte d’Ivoire 12.6 12.3 3.6 Ghana 6.4 10.9 4.2
Eswatini (Swaziland) 32.5 30.1 3.3 Kenya 11.3 8.1 3.2
Madagascar 14.5 14.4 4.7 Mali 5.4 6 –0.5
Malawi 11.3 9.0 5.1 Mozambique 10.5 9.0 6.1
Mauritius 14.2 11.8 1.6 Namibia 12.5 11.2 3.8
Morocco 15.6 15.7 2.9 Sierra Leone 2.2 2.0 2.7
Senegal 15.5 19.0 3.7 Tanzania 8.7 7.7 7.8
South Africa 13.1 12.0 1.9 Togo 7.2 8.1 8.8
Sudan 5.6 10.8 7.1 Tunisia 6.5 14.5 2.2
Zimbabwe 9.2 10.8 2.0 Uganda 8.5 8.6 5.3
Zambia 7.6 8.1 5.1
Countries with medium MVA share in 1963 Countries with low MVA share in 1963
Angola 4.5 6.6 7.1
Benin 13.8 12.3 1.5 Guinea 10.6 10.2 3.2
Botswana 6.4 5.1 4.4 Guinea Bissau 11.4 10.5 3.1
Burundi 9.5 9.4 –1.0 Lesotho 12.7 13.7 4.8
Cameroon 14.5 15.1 4.2 Liberia 2.6 1.8 –0.2
Cape Verde 5.4 6.4 2.5 Libya 5.0 3.7 –1.3
Chad 1.0 3.0 9.3 Mauritania 7.1 8.1 1.4
Congo 3.4 6.5 9.2 Niger 4.8 5.7 8.5
Congo DR 16.2 19.5 1.9 Nigeria 6.6 8.7 4.8
Equatorial Guinea 13.3 20 19.3 Rwanda 6.2 5.9 7.7
Notes: ISI: import-substitution industrialization; SAPs: structural adjustment programmes; MVA share:
manufacturing value added as a share of GDP. High = 10 per cent+; medium= >5<10 per cent; low =
<5 per cent.
Sources: World Development Indicators (online); African Statistical Yearbook (various years).
Countries such as Ethiopia and Rwanda, which were highlighted above as examples of
movers towards a developmental state with a clear IP, have posted high MVA growth
rates while others such as Ghana moving in the same direction as regards IP have also
shown relatively high rates of manufacturing growth, and their shares of MVA in GDP
have risen significantly. Tanzania, in spite of the difficulties of advancing to a higher
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
stage of ISI as regards the political settlement, has also enjoyed a high rate of MVA
growth. Morocco has had a relatively steady but low MVA growth rate but has
benefited from its proximity to European markets and its insertion into Europe’s
value chains. More recently, through a focused IP, Morocco has encouraged invest-
ment in aeronautics by companies such as Boeing and Airbus and is promoting
investment in other areas of final-stage manufacturing to locate input suppliers locally
(UNECA, ). However, there is still little sign of the development of a capital goods
sector to supply producer goods in most African countries (Lawrence, ).
. C
..................................................................................................................................
This chapter has set out to survey IP in Africa from colonial rule to the present, broadly
within a political economy framework. We have argued that colonial rule in its later
stages saw the genesis of ISI which then became, on a larger scale, the strategy of the
newly independent states. We discussed the reasons why ISI was not successful in
achieving the structural transformation of the African economies, placing emphasis on
the dependence on imported inputs, on primary-product exports to pay for them, and on
the failure to create backward linkages to the rest of the economy and to build on such
industrial development as there was to orient production to the needs of the majority of
the population. The effective coalition of the ruling elite with foreign capital partly
explained why the path from ISI to a deeper industrial structure was not taken. Any IP
was abandoned during the period of liberalization and structural adjustment as SAPs
determined that inefficient industries should not be supported by the state. Since the late
s we have seen the return of IP to some extent, but also new theories as to why IP has
been unsuccessful or had limited success. In particular, political settlements theory
appears to offer more country-specific explanations than the more generalized theories
associated with neo-patrimonialism. It is certainly clear that paying attention to the
power relations within the state and wider society, and the political behaviours and
struggles around state power, can offer deeper explanations as to why such unresolved
struggles have impeded effective policies and why, in the few cases where the struggles
have been resolved in favour of a dominant group, policies can be successfully effected.
R
Abshire, David M. () ‘Minerals, Manufacturing, Power and Communications’, in David
M. Abshire and Michael A. Samuels (eds) Portuguese Africa: A Handbook. London: Pall
Mall Press, pp. –.
Ackah, Charles and Oliver Morrissey () ‘Trade Policy and Performance in Sub-Saharan
Africa since the s’. Working Paper No. /. University of Nottingham: Centre for
Research in Economic Development and International Trades.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Ackah, Charles, Charles Adjasi, and Festus Turkson () ‘IP in Ghana’, in Carol Newman,
John Page, John Rand, Abebe Shimeles, Mans Soderbom, and Finn Tarp (eds) Manufac-
turing Transformation: Comparative Studies in Industrial Development in Africa and
Emerging Asia. Oxford: Oxford University Press, pp. –.
ACET (Africa Centre for Economic Transformation) () African Transformation Report
. Agriculture Powering Africa’s Economic Transformation. Accra: ACET. Available at
http://acetforafrica.org/acet/wp-content/uploads/publications///ATR-full-report.pdf.
Ake, Claude () A Political Economy of Africa. Lagos: Longman Nigeria.
Akyeampong, Emmanuel () ‘African Socialism; Or, the Search for an Indigenous Model
of Economic Development?’, Economic History of Developing Regions : –.
Amin, Samir (a) Accumulation on a World Scale. New York: Monthly Review Press.
Amin, Samir (b) ‘Accumulation and Development: A Theoretical Model’, Review of
African Political Economy (): –.
Amin, Samir () Delinking: Towards a Polycentric World. London: Zed Books.
Ashman, Sam, Ben Fine, and Susan Newman () ‘Systems of Accumulation and the
Evolving MEC’, in Ben Fine, Jyoti Saraswati, and Daniela Tavasci (eds) Beyond the
Developmental State: Industrial Policy into the st Century. London: Pluto, pp. –.
Austin, Gareth () ‘African Economic Development and Colonial Legacies’, International
Development Policy Revue/Internationale de politique de développement : –.
Austin, Gareth, Ewout Frankema, and Morten Jerven () ‘Patterns of Manufacturing
Growth in Sub-Saharan Africa: From Colonization to the Present’, in Kevin Hjortshøj
O’Rourke and Jeffrey Gale Williamson (eds) The Spread of Modern Industry to the
Periphery since . Oxford: Oxford University Press, pp. –.
Bates, Robert () Markets and States in Tropical Africa: The Political Basis of Agricultural
Policies. Berkeley, CA: University of California Press.
Behuria, Pritish, Lars Buur, and Hazel Gray () ‘Studying Political Settlements in Africa’,
African Affairs (): –.
Berg, Elliot J. () ‘Socialism and Economic Development in Tropical Africa’, The Quarterly
Journal of Economics (): –.
Bienen, Henry () ‘The Politics of Trade Liberalization in Africa’, Economic Development
and Cultural Change (): –.
Butler, Larry J. () ‘The Ambiguities of British Colonial Development Policy, –’, in
Anthony Gorst, Lewis Johnman, and W. Scott Lucas (eds) Contemporary British History,
–: Politics and the Limits of Policy. London: Pinter Press, pp. –.
Chang, Ha-Joon () ‘Industrial Policy: Can Africa Do It?’, in Joseph E. Stiglitz, Justin Yifu
Lin, and Ebrahim Patel (eds) The Industrial Policy Revolution II: Africa in the st Century.
Basingstoke: Palgrave Macmillan, pp. –.
Chitonge, Horman () Economic Growth and Development in Africa: Understanding
Trends and Prospects. New York: Routledge.
Chitonge, Horman () Industrialising Africa: Unlocking the Economic Potential of the
Continent. New York: Peter Lang.
Fine, Ben and Zavareh Rustomjee () The Political Economy of South Africa: From
Minerals-energy Complex to Industrialization. London: Hurst.
General Agreement on Trade and Tariffs (GATT) () Uganda Development Plan. Geneva:
GATT.
Gray, Hazel () ‘Industrial Policy and the Political Settlement in Tanzania: Aspects of
Continuity and Change since Independence’, Review of African Political Economy ():
–.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Gray, Hazel S. () ‘The Political Economy of Grand Corruption in Tanzania’, African
Affairs (): –.
Havinden, Michael and David Meredeth () Colonialism and Development, Britain and its
Tropical Colonies –. London: Routledge.
Hirschman, Albert O. () The Strategy of Economic Development. New Haven, CT: Yale
University Press.
Hoekman, Bernard () ‘Trade in Services: Opening Markets to Create Opportunities’ in
Richard S. Newfarmer, John Page, and Finn Tarp (eds) Industries without Smokestacks:
Industrialization in Africa Reconsidered. Oxford: Oxford University Press, pp. –.
Jalilian, Hossein and John Weiss () ‘De-industrialization in Sub-Saharan Africa: Myth or
Crisis?’, in Hossein Jalilian, Michael Tribe, and John Weiss (eds) Industrial Development
and Policy in Africa. Cheltenham: Edward Elgar, pp. –.
Kelsall, Tim () Business, Politics, and the State in Africa: Challenging the Orthodoxies on
Growth and Transformation. London: Zed Books.
Kennedy, Paul () ‘Indigenous Capitalism in Ghana’, Review of African Political Economy
(): –.
Khan, Mushtaq H. () ‘Political Settlements and the Analysis of Institutions’, African
Affairs (): –.
Kilby, Peter () ‘Manufacturing in Colonial Africa’, in Peter Duignan and Lewis H. Gann
(eds) Colonialism in Africa –. Cambridge: Cambridge University Press,
pp. –.
Kirkpatrick, Colin and John Weiss () ‘Trade Policy Reforms and Performance, in Africa
in the s’, Journal of Modern African Studies (): –.
Lall, Sanjaya () ‘Selective Industrial and Trade Policies in Developing Countries: Theor-
etical and Empirical Issues’, in Charles Soludo, M. Osita Ogbu, and Ha-Joon Chang (eds)
The Politics of Trade and Industrial Policy in Africa. Trenton/Asmara: Africa World Press,
pp. –.
Lawrence, Peter () ‘Explaining Sub-Saharan Africa’s Manufacturing Performance’.
Development and Change (): –.
Lawrence, Peter () ‘Is There an Africa Problem?’, in John Weiss and Michael Tribe (eds)
Routledge Handbook of Industry and Development. London: Routledge, pp. –.
Leys, Colin () ‘Kenya: What Does “Dependency” Explain?’, Review of African Political
Economy (): –.
Livingstone, Ian () ‘A Reassessment of Kenya’s Rural and Urban Informal Sector’, World
Development (): –.
Luttrell, William L. () Post-Capitalist Industrialization: Planning Economic Independence
in Tanzania. New York: Praeger.
Marx, Karl and Friedrich Engels () ‘Manifesto of the Communist Party’, in Karl Marx
and Friedrich Engels, Selected Works Vol . Moscow: Foreign Languages Publishing House,
pp. –.
Mason, Paul () Postcapitalism: A Guide to our Future. London: Allen Lane.
McMillan, Margaret S. and Dani Rodrik () ‘Globalization, Structural Change and Prod-
uctivity Growth’. NBER Working Paper No. . Cambridge, MA: National Bureau of
Economic Research.
Mendes, Ana Paula F., Mário Augusto Bertella, and Rudolph F. A. P. Teixeira ()
‘Industrialization in Sub-Saharan Africa and Import Substitution Policy’, Brazilian Journal
of Political Economy (): –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Mhone, Guy C. Z. () ‘Enclavity and Constrained Labour Absorptive Capacity in South-
ern African Economies’. Paper prepared for the UNRISD meeting on Rethinking Devel-
opment Economics, – September , Cape Town, South Africa.
Mirondo, Rosemary () ‘Chinese Company in $ billion Liganga-Mchuchuma Steel
Project Reacts’, The Citizen (Tanzania), November.
Mkandawire, Thandika and Charles Soludo (). Our Continent, our Future: African
Perspectives on Structural Adjustment. Dakar: CODESRIA.
Mohan, Jitendra () ‘Varieties of African Socialism’, Socialist Register : –.
Morris, Michael, Raphael Kaplinsky, and David Kaplan () One Thing Leads to Another:
Promoting Industrialization by Making the Most of the Commodity Boom in Sub-Saharan
Africa. Available at http://www.prism.uct.ac.za/Downloads/MMCP%Book.pdf.
Munro, J. Forbes () Africa and the International Economy –. London: J. M. Dent
and Sons.
Murray, Sally () ‘New Technologies Create Opportunities’ in Richard S. Newfarmer, John
Page, and Finn Tarp (eds) Industries without Smokestacks. Industrialization in Africa
Reconsidered. Oxford: Oxford University Press, pp. –.
Mwase, Ngila () ‘Regional Economic Integration and the Unequal Sharing of Benefits:
Background to the Disintegration and Collapse of the East African Community’, Africa
Development/Afrique et Développement (–): –.
Nafziger, Wayne () ‘Debt, Adjustment and Economic Liberalization in Africa’, Journal of
Economic Issues (): –.
Newfarmer, Richard S., John Page, and Finn Tarp (eds) () Industries without Smoke-
stacks: Industrialization in Africa Reconsidered. Oxford: Oxford University Press.
Ogujiuba, Kanayo, Uche C. Nwogwugwu, and Enwere Dike () ‘Import-substitution
Industrialization as Learning Process: Sub-Saharan African Experience as Distortion of
the “Good” Business Model’, Business and Management Review (): –.
Olukoshi, Adebayo () ‘Democratization, Globalization and Effective Policy-making in
Africa’, in Charles Soludo, M. Osita Ogbu, and Ha-Joon Chang (eds) The Politics of Trade
and Industrial Policy in Africa. Trenton/Asmara: Africa World Press, pp. –.
Oqubay, Arkebe (). Made in Africa: Industrial Policy in Ethiopia. Oxford: Oxford
University Press.
Ovadia, Jesse S. and Christina Wolf () ‘Studying the Developmental State: Theory and
Method in Research on Industrial Policy and State-led Development in Africa’, Third
World Quarterly (): –.
Pedler, Frederick () ‘British Planning and Private Enterprise in Colonial Africa’, in Peter
Duignan and Lewis H. Gann (eds) Colonialism in Africa –. Cambridge: Cam-
bridge University Press, pp. –.
Rodney, Walter () How Europe Underdeveloped Africa. Washington, DC: Howard
University Press.
Rodrik, Dani () ‘Normalizing Industrial Policy’. Commission on Growth and Develop-
ment Working Paper No. . Washington, DC: World Bank. Available at https://
openknowledge.worldbank.org/handle//.
Saul, John S. () A Difficult Road: The Transition to Socialism in Mozambique. New York:
Monthly Review Press.
Sender, John and Sheila Smith (a) ‘What’s Right with the Berg Report and What’s Left of
its Criticisms?’, in Peter Lawrence (ed.) World Recession and the Food Crisis in Africa.
London: Review of African Political Economy and James Currey, pp. –.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Sender, John and Sheila Smith (b) The Development of Capitalism in Africa. London:
Methuen.
Shen, Xiaofeng () ‘Private Chinese Investment in Africa: Myths and Realities’. Policy
Research Working Paper No. . Washington, DC: World Bank.
Shivji, Issa () Class Struggles in Tanzania. London: Heinemann.
Soludo, Charles, M. Osita Ogbu, and Ha-Joon Chang () The Politics of Trade and
Industrial Policy in Africa. Trenton/Asmara: Africa World Press.
Spray, John and Sebastian Wolf () ‘Industries without Smokestacks in Uganda and
Rwanda’, in Richard S. Newfarmer, John Page, and Finn Tarp (eds) Industries without
Smokestacks: Industrialization in Africa Reconsidered. Oxford: Oxford University Press,
pp. –.
Stewart, Frances () ‘Choice of Technique in Developing Countries’, Journal of Develop-
ment Studies (): –.
Stiglitz, Joseph E., Justin Yifu Lin, Célestin Monga, and Ebrahim Patel () ‘Introduction:
Industrial Policy in the African Context’, in Joseph E. Stiglitz, Justin Yifu Lin, and Ebrahim
Patel (eds) The Industrial Policy Revolution II: Africa in the st Century. Basingstoke:
Palgrave Macmillan, pp. –.
Sundaram, Jomo K. () Economic Liberalization and Development in Africa. CODESRIA
Monograph Series. Dakar: CODESRIA.
Swainson, Nicola () ‘The Rise of a National Bourgeoisie in Kenya’, Review of African
Political Economy : –.
Thomas, Clive () Dependence and Transformation: The Economics of the Transition to
Socialism. New York: Monthly Review Press.
Thompson, Virginia and Richard Adloff () ‘French Economic Policy in Tropical Africa’,
in Peter Duignan and Lewis H. Gann (eds) Colonialism in Africa –. Cambridge:
Cambridge University Press, pp. –.
UNECA (United Nations Economic Commission for Africa) () Two Decades of Trade
Liberalization and Market Expansion in Eastern Africa: Towards a New Economic Geog-
raphy. Addis Ababa: UNECA.
UNECA () Transformative Industrial Policy for Africa. Addis Ababa: UNECA.
UNECA () Transforming African Economies through Smart Trade and Industrial Policy.
Addis Ababa: UNECA.
Vitali, Stefania, James B. Glattfelder, and Stefano Battiston () ‘The Network of Global
Corporate Control’, PLoS ONE (): e.
Weiss, John () ‘Industrial Policy; Back on the Agenda’, in John Weiss and Michael Tribe
(eds) Routledge Handbook of Industry and Development. London: Routledge, pp. –.
Weiss, John and Hossein Jalilian () ‘Manufacturing as an Engine of Growth’, in John
Weiss and Michael Tribe (eds) Routledge Handbook of Industry and Development. London:
Routledge, pp. –.
Westphal, Larry E. () ‘Fostering Technological Mastery by Means of Selective Infant-
industry Protection’, in Moshe Syrquin and Simon Teitel (eds) Trade, Stability, Technology,
and Equity in Latin America. New York: Academic Press, pp. –.
Whitfield, Lindsay, Ole Therkildsen, Lars Buur, and Anne M. Kjaer () The Politics of
African Industrial Policy: A Comparative Perspective. Cambridge: Cambridge University
Press.
World Bank () Accelerated Development in Sub-Saharan Africa: An Agenda for Action.
New York: IBRD/World Bank.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
I N
................................................
Note: ‘n.’ after a page number indicates the footnote number.
A Bailey, David ,
Abramovitz, Moses , , , Bairoch, Paul ,
Acemoğlu, Daron – Balassa, Bela n., n.
Aghion, Philippe Baldwin, Richard ,
Akamatsu, Kaname , Bangemann, Martin ,
Akkemik, Ali Barca, Fabrizio
Akyüz, Yilmaz , Barzotto, Mariachiara
Aldrighi, Dante , n. Baumol, William
Allen, Robert C. Beason, Richard –
Almeida, Mansueto Becattini, Giacomo , , ,
Althoff, Friedrich ,
Altmaier, Peter Bello, Walden
Amin, Samir Bendell, Jem
Amsden, Alice , , , , , , Berg, Elliot J.
, Bértola, Luis n.,
late industrialization , Best, Michael , , , –
reciprocity/reciprocal control Bhagwati, Jagdish
mechanisms , , , Bianchi, Patrizio , ,
Anderson, Philip Bianco, Magda
Andreff, Wladimir , – Blankenburg, Stephanie ,
Andreoni, Antonio n., n., Blecker, Robert A. , ,
n., , Bodin, Jean n.
Ansu, Yaw n. Bolsonaro, Jair
Antràs, Pol Bonvesin de la Riva n.
Aristotle Borensztein, Eduardo
Arocena, Rodrigo Boskin, Michael
Arrow, Kenneth n., , , Botero, Giovanni , , –,
Azad, Rohit n., n., –n. ,
Della Ragion di Stato , , ,
B economic development
Babbage, Charles n., , n., , economic geography ,
n. increasing value added
On the Economy of Machinery and influence of , , ,
Manufactures –, n. a Jesuit
Bacha, Edmar On the Greatnesse of Cities , ,
Bacon, Francis , , , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Botero, Giovanni (cont.) Cramer, Christopher
Relazioni Universali Crespi, Gustavo
translations of Botero’s works , , Cripps, T. Francis n.
Bouhia, Rashid Cristelli, Matthieu
Bourdieu, Pierre , Cui, Yu
Brander, James A. Curzon Price, Victoria
Braunstein, Elissa , Czempiel, Ernst-Otto
Breschi, Stefano , , , n.
Broecke, Stijn D
Bruschi, Claudia Dahlman, Carl J.
Buchanan, James Dallas, Mark
Bücher, Karl , Darwin, Charles
Burkett, Paul Dasgupta, Sukti
Bush, Vannevar , n. Davies, Rob
De Gaulle, Charles
C De Gregorio, Jose R.
Campanella, Tommaso De Propris, Lisa
Carlton, David – De Santis, MarcAntonio
Carter, Jimmy , Dedrick, Jason –
Cary, John Defoe, Daniel
Castellacci, Fulvio Degaut, Marcos ,
Castro, Antonio Barros de DeLong, Bradford
Cecchini, Paulo Delucchi, Mark n.
Chakraborty, Shouvik n., n., Deming, Edwards , ,
–n. Deng Xiaoping n., , ,
Chandler, Alfred , , , Di Maio, Michele –, ,
Chandra, Vandana Dominguez Lacasa, Iciar , –
Chang, Ha-Joon , n., n., Doner, Richard
n., , Donges, Juergen
CAD industrial strategy Dosi, Giovanni , ,
Chauvin, Jasmina nn.– Draghi, Mario –
Chenery, Hollis , , , , Dunning, John
Childs, Marquis William Durkheim, Émile
Chirac, Jacques
Choi, Joong-Kyung – E
Chung, Moon Young , , , – Easterly, William
Cimoli, Mario , , , Einhorn, Robin –
Clapham, John Harold Elbadawi, Ibrahim A. n.
Clinton, Bill , , Elizabeth I, Queen of England and
Coady, David n. Ireland
Coase, Ronald Elson, Diane n.
Coclanis, Peter – Erhard, Ludwig ,
Coe, Neil Erten, Bilge ,
Cohen, Stephen
Cohen, Wesley , , F
Colistete, Renato P. n. Fabricant, Salomon , –
Corden, Max –, , n. Fally, Thibault
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Federico, Giovanni H
Feldenkirchen, Wilfried Hall, Peter
Felipe, Jesus n. Hallward-Driemeier, Mary n.
Fernandez-Stark, Karina Hamilton, Alexander , , , , ,
Ferrari, Enzo – Report on the Subject of Manufactures ,
Fine, Ben – , –
Fisher, Allan Hanlon, W. Walker
Flanders, Ralph , Hart-Landsberg, Martin
Foner, Eric – Harvey, David n.
Ford, Gerald Hassine, Haithem-Ben
Ford, Henry n., , , Hausmann, Ricardo , –, –,
, nn.–,
Fourastie, Jean exports , , –
Fox Quesada, Vicente ‘industrial policy in the small’ ,
Frederick the Great, King of innovation , , –
Germany product space
Freeman, Chris selectivity for resource allocation
Freitas Barbosa, Alexandre de Havinden, Michael
Friedman, Milton Hayes, Jack Irby, Jr
Head, Keith
G Hely-Hutchison, John
Galiani, Ferdinando Henry VII, King of England –
Gallagher, Kevin P. n. Hikino, Takashi ,
Gandhi, Mahatma Hirschman, Albert O. , , , n., ,
Gee, Joshua – , n.
George, Gerard backward and forward linkages , , –
Gereffi, Gary , dynamics of the ‘Hiding Hand’
Geroski, Paul – exports
Gerschenkron, Alexander , , , ISI
, , linkages , , –,
advantages of backwardness , Marxism ,
Gianelle, Carlo Hobday, Michael , n.
Goldthwaite, Richard Hobson, John
Gomory, Ralph Hoover, Herbert ,
Gould, Stephen Jay , , – Hume, David
Gourinchas, Pierre-Olivier Hwang, Jason ,
Grabel, Ilene Hymer, Stephen H. n.,
Graham, Frank
Graham, Mark I
Gramsci, Antonio Ibn Khaldun ,
Granovetter, Mark Imbs, Jean
Greenspan, Alan – Innis, Harrold
Greenwald, Bruce Itaman, Richard
Griffith-Jones, Stephany , n., ,
, J
Grilli, Enzo R. Jacobs, Jane ,
Guzman, Martin n., Jacobson, Mark n.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Jacquemin, Alexis – Kucera, David ,
Jalilian, Hossein n. Kuddo, Arvo
Jeanne, Olivier Kumar, Subodh
Jefferson, Thomas , , Kuznets, Simon , , –, n.
Jenkins, Rhys
Jensen, Michael L
Jiao, Hao Labory, Sandrine , ,
Jiao, Jie Lagarde, Christine
Johnson, Chalmers , , , Lall, Sanjaya , ,
Johnson, Harry Lamoreaux, Nancy R.
Johnson, Lyndon B. Lancaster, Kelvin John
Jomo, Kwame Sundaram Landes, David
Jones, Jessie Lane, Nathan
Juhasz, Reka Lange, Oscar
Junankar, Pramod N. Lawrence, Mark
Juncker, Jean-Claude Lazonick, William ,
Jung, Moosup , Lazzarini, Sergio , –
Lee, Jongwha
K Lee, Joonkoo ,
Kahn, Alfred Lee, Keun , –, , , , –, ,
Kaldor, Nicolas , , , , , , , , , ,
growth/growth laws –, n., , , Fourth Industrial Revolution
, NIS
Kaldorian strategies in industrial policy Leibniz, Gottfried von
Kalecki, Michal –, Lenin, Vladimir , ,
Kalouptsidi, Myrto Leontief, Wassily
Kanwar, Onkar Levinthal, Daniel , ,
Kay, Cristobal Lewis, Michael
Kejin, Zhao , Lewis, W. Arthur , , n.,
Kelsall, Tim Lewis, Zenia
Kessler, Martin Li Keqiang
Kevles, Daniel Li Rongrong
Keynes, John Maynard , , Li, Yuefen
Khan, Mushtaq H. , , Lin, Justin Yifu n., , –, ,
Khoman, Thanat –n. n., ,
Kim, Linsu n., , , , , , CAF/CAD industrial strategy ,
, leapfrogging
Kimenyi, Mwangi selectivity for resource allocation
King, Charles , Lin, Li-Wen ,
Kirchner, Cristina n. Lin, Nan ,
Kiyota, Kozo n., Lincoln, Abraham
Kline, Stephen n. List, Friedrich , , ,
Klinger, Bailey – infant industry theory
Knudsen, William National System ,
Kondratieff, Nikolai D. Little, Ian , n., n.
Kowalski, Przemyslaw welfare theory –n.
Krugman, Paul –, , Liu Shaoqi
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Liu, Xielin , Milhaupt, Curtis J. ,
López-Gómez, Carlos Mill, James ,
Lopez-Gonzalez, Javier Mill, John Stuart , , , ,
Lösch, August Mirrlees, James n.
Lula da Silva, Luiz Inácio Misselden, Edward , , , ,
Mittelman, James H.
M Modi, Narendra –, ,
Macri, Mauricio Mokyr, Joel
Macron, Emmanuel Monga, Célestin n.,
Madison, James Mortimore, Michael n.
Magdoff, Harry Moslener, Ulf
Malerba, Franco , , , n. Mourão, Hamilton ,
Malm, Andreas Müller-Armack, Alfred n.
Mandelbaum, Kurt Mun, Thomas
Mann, Laura –, Musacchio, Aldo , –
Mao Zedong Myrdal, Gunnar ,
Marel, Erik
Marsh, Peter N
Marshall, Alfred n., , , Naastepad, C. W. M. , ,
industrial districts Nassif, Andre
Industry and Trade Nataraj, Shanti
law of increasing return – Naughton, Barry
‘principle of continuity’ Neale, Jonathan n.
Principles of Economics , , Necker, Jacques
–, Nelson, Richard , , , , , ,
Marshall, George The Moon and the Ghetto –,
Marshall Plan , , –, , upgrading n.
Marx, Karl n., , , , n. Neto, Antonio S. M.
labour theory of value Nieburg, H. L.
Marxism and industrial policy – Nixon, Richard , , n.
Marxist approach to manufacturing and Nolan, Peter
industrialization – Noland, Marcus n.
‘modern machine industry’ North, Douglass C.
Mathews, Jessica n. Nübler, Irmgard n.
Mathews, John A. , Nurkse, Ragnar ,
Mathieu, Claude
Mazzucato, Mariana , , , , , O
, Ocampo, José Antonio , , , , ,
Mbele, Sizwe , , , , n.,
McCombie, John n. dynamic efficiency n., n.
Meachan, Carl , innovation ,
Meade, James NDBs
Meinecke, Friedrich Ohno, Kenichi
Meredeth, David Ohno, Taiichi ,
Mesmer, Franz Anton Okazaki, Tetsuji
Meyer, David O’Neill, Jim
Milberg, William Oqubay, Arkebe , , , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Oqubay, Arkebe (cont.) Q
infant industry theory and Qian, Yingyi
manufacturing n.
reciprocity n. R
Ricardian/Kaldorian strategies in industrial Rada, Cordina
policy Radosevic, Slavo
Oresme, Nicolaus Raleigh, Sir Walter
Ortiz, Luis n. Ramaphosa, Cyril n.
Ostrom, Elinor Ramaswami, V. K.
Ramos, Narciso n.
P Rasiah, Rajah
Page, John Reagan, Ronald ,
Page, Scott Reddy, Sandjay G. ,
Palma, José Gabriel , Reinert, Erik S. n., ,
Pasinetti, Luigi Ludovico , , – Ricardo, David , , , , ,
technical knowledge n., n., Cold War economics , , ,
Patman, Wright comparative advantage theory , ,
Paus, Eva n., , , ,
Pavitt, Keith – Principles of Economics ,
Pearson, Margaret ‘Ricardian Vice’ ,
Pellegrin, Julie trade theory , , ,
Peña Nieto, Enrique Ricci, Matteo
Penna, Caetano C. R. Richardson, George
Penrose, Edith , , Rigo, Davide
Peres, Wilson Ritchie, Bryan
Pérez, Carlota , Robinson, James –
Perroux, François – Robinson, Joan ,
Phelps, Edward n. Rodríguez, Francisco
Pieper, Ute Rodrik, Dani –, , , –, , ,
Pierce, C. S. n., , ,
Pierrehumbert, Raymond n. de-industrialization
Pigou, Arthur exports –
Piketty, Thomas , – hyper-globalization
Pisano, Gary , – ‘industrial policy in the small’ ,
Polanyi, Karl , , , poverty
Polhem, Christopher product space
Polterovich, Victor , –, n. selectivity for resource allocation
Popov, Vladimir , n. Roncolato, Leanne
Porcile, Gabriel , , , Roosevelt, Franklin Delano , , ,
Porter, Michael , , ,
Postali, Fernando A. Arsenal of Democracy policy
Powell, Lewis , n. framework , , ,
Prebisch, Raúl , , , , , , , ‘organized money’ n.
Prentiss, Mara , Roosevelt, Theodore
Primi, Annalisa Rose, Andrew K.
Pritchett, Lant , n. Rosenau, James
Purushothaman, Roopa Rosenberg, Nathan –, , –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Rosenstein-Rodan, Paul , on wealth n.,
Ruggiero, Renato The Wealth of Nations ,
Russell, R. Robert Soete, Luc
Rustomjee, Zavareh – Solow, Robert M. n., , ,
Somary, Felix –
S Sombart, Werner , n.
Saez, Emmanuel – Sorensen, Charles
Samuelson, Paul –, , , Spratt, Stephen –
, Sraffa, Piero –,
Sayers, Richard S. – Stalin, Joseph , , ,
Schmoller, Gustav , Steinbeck, John
Schneider, Ben Ross Stiglitz, Joseph , , , ,
Scholte, Jan Aart ,
Schonfield, Andrew , Stoller, Matt ,
Schroeder, Gerhard Storm, Servaas , , ,
Schumpeter, Joseph , , , , Sturgeon, Timothy ,
–, , –, Subramanian, Arvind ,
on Babbage – Suehiro, Akira –
creative destruction , , Suharto n.,
innovation , , Summers, Larry
Theory of Economic Development Sundaram, Jomo K.
Schwab, Klaus Sunkel, Osvaldo n.
Schwartz, Herman , Sweezy, Paul
Scitovsky, Tibor Symcox, Geoffrey n.,
Seckendorff, Veit Ludwig von , Syrquin, Moshe
Seers, Dudley Szirmai, Adam
Seguino, Stephanie ,
Sekara, June T
Seligman, Edwin Tacchella, Andrea
Selwyn, Benjamin Tarling, Roger J. n.
Senghor, Leopold Tassey, Gregory
Serra, Antonio , , –, , Taylor, Lance ,
Shi Zhengrong Teaford, Jon
Shin, Hochul , Teece, David J. , , –
Simachev, Yuri Tejani, Sheba
Sing, Parminder Jeet Thatcher, Margaret
Singer, Hans W. , , , , , Thirlwall, Anthony , –, n.
Singh, Ajit Thomas, Clive
Sisulu, Lindiwe N. Timmer, Marcel P. , –
Sklar, Sarah n. Tomlinson, Philip R.
Skocpol, Theda n. Tourk, Khairy
Slater, Dan Traub-Merz, Rudolf
Smith, Adam , –, , , , Tregenna, Fiona ,
, Trippl, Michaela
free trade , – Truman, Harry S.
‘vent for surplus’ models of international Trump, Donald ,
trade Tushman, Michael
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
U Weinberg, Alvin –
Uy, Marilou Weinstein, David E. –
Uztáriz, Gerónimo de Weiss, John n., n.
Westphal, Larry E.
V Whitaker, Kenneth ,
Valdivia, Walter Whitefoot, Kate
Van Ark, Bart Williams, Raymond
Van der Linde, Claas Williamson, John
Vasilescu, Bogdan Wilson, Dominic
Veblen, Thornstein n., , Wilson, Woodrow
Verdoorn, Petrus Johannes Winter, Sidney , ,
Verdoorn’s Law , , Wolfe, Martin
Verri, Pietro Wolff, Christian ,
Vico, Giambattista Woo-Cummings, Meredith n.
Videgaray Caso, Luis Wright, Gavin , n.
Voelker, Paul Wu Bangguo –
Von Thünen, Johann Heinrich ,
– X
industrial city , Xenophon
Von Tunzelmann, Nick Xi Jinping –, ,
W Y
Wacziarg, Romain Yajima, Toshiro
Wade, Robert , , n., , Yang, Maw Cheng
Wajcman, Judy Yeung, Henry Wai-chung
Wallis, John J. Young, Allyn , , , ,
Wang, Lili
Watanabe, Tsunehiko Z
Weber, Alfred Zahra, Shaker
Weber, Max , Zucman, Gabriel –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
G I
................................................
Note: Page numbers in bold refer to tables and boxes; page numbers in italics refer to figures; ‘n.’
after a page number indicates the footnote number.
Asian financial crisis Blueprint –,
ASEAN n., see also ASEAN
China AEG (General Electricity Company,
deregulation Germany) ,
Indonesia n., , aerospace industry , , , ,
privatization Brazil , , , , ,
global financial crisis , , China ,
– North Atlantic financial NDBs ,
crisis n., –, Africa , ,
EU industrial policy , , , s debt crises n.
globalization narratives African developmental state and effective
GVCs , industrial policy –
Indonesia African socialism
neo-liberalism agricultural sector , , , , ,
revival of industrial policy ,
state responses to BRICS and , , –
US Federal Reserve Bank , capability building ,
capitalism/colonialism identification
A ,
abduction (phronesis) – China and –, , , ,
ABRRs (asset-based reserve ,
requirements) – commodity booms ,
absorptive capacity , n., , , n., de-industrialization ,
, , , – digital production technologies
building of diversification , ,
‘potential’/‘realized’ exchange rates ,
South Korea , – failure of industrial transformation ,
see also capacity –, ,
advanced countries/economies , , , gender/growth regime
energy consumption in GVCs , , ,
R&D spending industrial policy , –,
AEC (ASEAN Economic Community) , industrial policy, colonial period
–, , –,
Blueprint – industrialization –, , , ,
Blueprint , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Africa (cont.) monopoly –
industrialization, introverted strategy nichification –
of , , AI (artificial intelligence) , , , ,
infant industry protection – , , , , , , , ,
infrastructure , ,
liberalization and industrial policy , AIIB (Asia Infrastructure Investment
–, Bank)
macroeconomic policies , Airbus , , , , ,
manufacturing –, , , , Alibaba ,
, allocation
manufacturing value added , , , allocative efficiency , –,
, , allocative optimality
mineral sector , , , , credit allocation ,
political economy , –, re-allocation
post-colonial period – resource allocation , , , , ,
privatization , , , , n.
protectionism selectivity for resource allocation –
resources-/needs-based basic industry Amazon –
policy – antitrust policy ,
SMEs Italy
SOEs , , , UK
structural adjustment programmes , US , , , –
, , –, , , APEC (Asia-Pacific Economic
see also Africa: ISI; sub-Saharan Africa Cooperation)
Africa: ISI , –, Apple –, ,
industrial performance under ISI , Argentina , –, –, ,
– s crisis
industrial policies tools for ISI , Convertibility Plan ,
– de-industrialization ,
political and economic objectives – differential taxes ,
renewed potential for second-/third-stage protectionism
of ISI – trade liberalization
see also Africa see also Latin America
African Development Bank , Armenia ,
agriculture ‘arms-length’ market relationship , ,
s crisis ,
Africa , , , , , , China , ,
agrarian modernization n. ASEAN (Association of Southeast Asian
agricultural employment n. Nations) ,
agriculture/manufacturing linkage , , Asian financial crisis n.,
, , , , , agricultural/agro-processing sectors
ASEAN ASEAN- countries , n.
Cuba ASEAN Summits n.,
industrialization , ‘ASEAN Way’ n.
‘industrialization of freshness’: agriculture/ China and n., , , , –
manufacturing linkage , , competitiveness , n.
manufacturing agrarian change – creation of –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
economic growth policies , BBC (Brand-to-Brand Complementation
ELI – Scheme) ,
FDI , , CEPT (Common Effective Preferential
GDP Tariff) ,
historical evolution of economic CSAP (strategic action plan)
policies – FTAs (free trade agreements)
industrial policy –, – IAI (Initiative on ASEAN
industrial policy, future of – Integration) n.
industrial upgrading , , , , see also ASEAN
, –, , ASEAN: automotive industry , –,
infant industry protection GVCs in , , –
innovation , , , Indonesia ,
IPR –, Kia
ISI , n. regional policy coordination –
manufacturing Thailand , ,
member states n., Toyota , , n.,
non-tariff barriers n., , , wages
, see also ASEAN; ASEAN: GVCs
regional integration , –, ASEAN: firms
, inclusive participation , –,
regional policy coordination , , , lead firms , ,
, – local firms , , , , , ,
state intervention n., , SMEs , –, , –,
n., TNCs ,
see also the entries below for ASEAN; AEC ‘unicorn’ firms
ASEAN: agreements, projects see also ASEAN
ACIA (ASEAN Comprehensive ASEAN: GVCs , , –, –,
Investments Agreements) – benefits from GVCs –
AFTA (ASEAN Free Trade GVC integration ,
Agreement) –n., , , GVCs in automotive industry , ,
, –
AIA (ASEAN Investment Area) policy assessment –, –
AICA (ASEAN Industrial see also ASEAN
Complementation Arrangement) Asia
, gender/growth regime
AICO (ASEAN Industrial industrial policy
Cooperation) –, see also East Asia; South East Asia
AIJV (ASEAN Industrial Joint Asian Development Bank n.,
Venture) –, , Asian Tigers , , , ,
AIP (ASEAN Industrial Project) , ASPAC (Asia and Pacific Council)
ASEAN Complementarity asymmetries ,
Schemes – ‘asymmetric opening’
ASEAN IGA (ASEAN Investment digital production technologies
Guarantee Agreement) information asymmetry , , ,
ASW (ASEAN Single Window) ,
ATIGA (ASEAN Trade in Goods power asymmetry n., ,
Agreement) n., technological asymmetry , , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
austerity banks/banking see development banking;
debt and MDBs; NDBs
de-industrialization and ‘beggar-thy-neighbour’ policies ,
fiscal austerity , , Belarus –, ,
Latin America –, Berlin Wall, fall of () , , ,
authoritarianism/autocracies economic growth since
ASEAN n. big-data analytics , , , , ,
automation , , , , , , ,
, BRICS
Germany China –
labour-intensive production and ‘big push’ industrialization –, n.,
automotive industry –, , , –
automotive demand ‘big push’ models of ISI in BoP-constrained
China , developing countries
Eastern and Central Europe BoP constraint –
employment , demand-side and
Germany bioenergy , n.
global North/global South relation biotechnology , , , n., n.,
India n. , , , ,
Indonesia , R&D ,
Italy , BIS (Bank for International Settlements)
Japan n., , BNDES (Brazil Development Bank) , ,
nation-based development paradigm , , ,
productivity explosion assessment of –
South Africa , –, BNDESPar ,
South East Asia , , corruption –
South Korea , , , emergence of innovative firms n.
Spain importance of broad political economy
Thailand , , , , factors –
US , ‘insider/outsider’ problem , ,
see also ASEAN: automotive industry JBS case
Azerbaijan , , , , , , limitations of –, –
, , long-run finance , , –,
long-run finance, single/limited
B model , , , –
backwardness , , ‘national champions’ , , –, ,
advantages of , –,
backward economies –, privatization programme , ,
backward/forward linkages , , –, ,
–, , , , , , , , SOEs , , n.
, structural transformation
backward integration , – subsidies n., , –, ,
Bahrain n.
Baltic states , , success , ,
Bangladesh , see also Brazil, development banking;
Bank Windhoek (Namibia) development banking
bankruptcy , , , , Boeing , , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
bonds telecommunications
diaspora bonds trade liberalization ,
green bonds – unemployment –
long-run bonds , , wage-goods inflation
book-keeping: double-entry book- see also BRICS; Latin America
keeping Brazil, development banking –
BoP (balance-of-payments) constraints , politics of –
, , , , , , positive side of –
export-led growth model with BoP variations in manufacturing
constraint –, performance
export-led growth model with cumulative see also BNDES
causation and BoP constraint , BRICS (Brazil, Russia, India, China, South
, Africa) , , , –
growth and n. catch-up , ,
macroeconomic policy and challenge of heterogeneous industrial
industrialization , –, –, , performances –,
, , , China , , , ,
South East Asia , , , , , CIP Index (Competitive Industrial
, , Performance Index) –,
BoP crises , , , , , , collaboration , –, ,
, contribution to global economic
BoP dominance activity –,
Botswana n., n. debates on ,
Brazil –, e-commerce ,
s crisis as economic block –
clean energy investment project , economic modernization –
convergence/divergence –, FDI , –,
de-industrialization , , , from BRIC to BRICS –
digital production technologies – globalization narratives , –, ,
economic reforms (Washington –, –, ,
Consensus) GVCs –,
fossil-fuel consumption , ICT , , , , , ,
globalization , , industrial policy , –, –
hard-budget constraint legislation industrialization ,
ISI innovation capabilities –
PAC (Programme for the Acceleration of integration process , , , ,
Growth) integration through trade and
PBM (Plano Brasil Maior) investment –
PDP (Policy of Productive IPRs , , ,
Development) manufacturing , , , –,
PITCE (Industrial, Technological and ,
Trade Policy) – manufacturing value added
privatization , , n., , national champions
, national governments ,
R&D , , productive capabilities –
restructuring of Brazilian capitalism regionalism , –
solar industry – SMEs , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
BRICS (Brazil, Russia, India, China, South developmental state
Africa) (cont.) elite bureaucracy ,
STI collaboration , , , –, industrial policy and , ,
, , , parastatal bureaucracy
structural change and capability Weberian bureaucracy
accumulation –, business models
technology upgrading modularity –
see also the entries below for BRICS open innovation
BRICS and IR , –, –, platforms
building basic framework business-school perspective
conditions – buybacks
fostering demand and adoption of IR
technologies – C
strengthening skills and research Cambodia
capabilities – cameralism ,
BRICS: international dimension , – capabilities
Africa and , , – Africa, capability gap –
BRI (Belt and Road Initiative, China) capabilities accumulation
NDB (New Development Bank) , capability-based view/Beijing–Seoul–Tokyo
, (BeST) consensus ,
NEPAD (New Partnership for Africa’s capability failure , ,
Development) , China, government and enterprise
UN system , capability and learning –,
UNIDO developing countries ,
BRICS: partnerships, programmes, dynamic capabilities –
strategies firms, organizational capabilities , ,
Action Plan , , ,
BRICS Consolidated Technology importance of ,
Platform knowledge-based capabilities n.
BRICS Economic Cooperation mayor contributions to the capability
Strategy perspective –
BRICS ICT Development Agenda and organizational capabilities , ,
Action Plan ,
BRICS Industry Ministers Meetings organizational capabilities in public
BRICS Institute of Future Networks sector , –
BRICS IPRCM (Intellectual Property Rights see also the entries below for capability;
Cooperation Mechanism) production capabilities; technological
Framework of BRICS Closer Economic capabilities
Partnership capability building , , , , ,
PartNIR (BRICS Partnership on New , , ,
Industrial Revolution) Africa ,
Strategy for the BRICS Economic firm level
Partnership GVCs
bullionism , as path dependent
bureaucracy , , , , , , South Korea , , –
‘bureau-maximizing’ behaviour capability development , , , ,
China , –, , firms , , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
capability triad , , , –, – CARs (capital account regulations) , –,
capacity –,
clean energy investment project: domestic catch-up –, , ,
resource capacities –, , BRICS , ,
public-sector capacities catch-up paradoxes
see also absorptive capacity China , , , , , , , ,
capital , , , ,
capital accumulation , , , , developing countries
, duty to catch up
capital-intensive industries East Asia
‘patient capital’ , , , economic catch-up
capital controls , nn.–, , from middle-income to high-income
, levels
capital intensity , , , Germany –,
capital-intensive sectors , , , , industrial policy , , , –, –,
, , , , industrial policy as driver of –
capital market , , , , innovation and ,
capitalism , , investment
capitalism/colonialism identification key aspects of
, labour and ,
capitalist accumulation , , , late industrialization –
capitalist development , –, learning and ,
capitalist industrial development , private sector ,
, Russia
competition South Korea , , , ,
competitive capitalism state intervention ,
co-operative capitalism structural transformation and –
digital capitalism successful catching up
drivers of UNCTAD on –
end to causality , , –
firms and characterization of different CDB (China Development Bank) , ,
capitalisms , , , , , , ,
global capitalism see also China: finance; development
hierarchical capitalism banking
industrial capitalism , , , , , Cecchini Report ()
, Central Asia
industrial policy and – Central Europe , , , , ,
labour and CEOs (chief executive officers) ,
as mixed economy – Chenery hypothesis ,
modern capitalism – Chile
nation-based capitalism CORFO (Chilean development agency)
origins in Italian city states n. China , , , ,
radical industrial policy on –, , th Five-Year Plan
–, Asian financial crisis
rentier capitalism , bureaucracy , –, ,
state intervention – capital/output ratios compared with Italy
see also state capitalism and France , –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
China (cont.) Agricultural Development Bank of
catch-up , , , , , , , China ,
, , , , banking reforms/restructuring –,
digital technologies , , – ,
ELI Big Five –,
exchange rate , Big Four AMCs (asset management
exports –, companies) –, ,
FDI Central Huijin Investment
free trade , Corporation , ,
‘frontier technologies’ commercial banks , ,
globalization –, Export–Import Bank of China ,
industrial policies in a Sino-centric ,
world – Ministry of Finance , , ,
innovation , , , –, – policy banks , , , , ,
leapfrogging rise of China’s national champions in
macroeconomy finance –
‘Made in China ’ , see also CDB; China: national champions;
manufacturing , , , n. SASAC
manufacturing value added , , China: international dimension
–, –, , Africa –, , , , ,
neo-liberalism ASEAN n., , , , –
OBOR (One Belt, One Road) BRICS , , , ,
Initiative , EU , , , , ,
post- approach to industrial policy Germany and
reforms , , , , , , , Japan/South Korea models and –
–, , , Latin America –, ,
rise of , , , US/China trade issues
shift-and-share decomposition China: labour
methodology , – labour productivity and capital/labour
shipbuilding ratios ,
SOEs , , labour productivity compared with Italy
state , , –, and France –, ,
structural change –, labour productivity growth ,
subsidies , labour productivity of exporters and
successful latecomer industrialization , non-exporters ,
, labour productivity ratio –,
technological asymmetries skilled labour, rising costs of
technology , , , – wages n.
telecommunications China: national champions , –,
TNCs n., , ,
within-sector learning vs. structural arm’s-length type state-business
change in productivity growth , relations , ,
– CCP (Chinese Communist Party) , ,
WTO n., , , , , , , , , –, –,
, centrally managed capitalism
see also the entries below for China; BRICS criticism of national champions policy
China: finance , , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
diversification China Mobile , , ,
enterprise capability and learning circular economy , , ,
–, China –,
Fortune Global : –, , – resource security
government capability and learning see also green industrial policy
–, city
industrial policy , administrative city
institutional bridging , – industrial city , –,
international competitiveness , , industrialization –
, , , –, manufacturing city –, , ,
IPOs (initial public offerings) , sustained city growth
late industrialization and developmental civil society , , , , ,
state view – classical political economy , , , ,
mainstream transition economics ,
view – classical social theory
market-oriented environment , , clean energy –
, clean renewable energy sources ,
mergers ,
‘national team’ –, CO₂ emissions , –, –, ,
networked hierarchy , , – –, ,
privatization , geoengineering –
R&D intensity of China’s national global clean energy economy
champions –, – natural gas –
reciprocal control mechanisms , – nuclear energy –
rise of China’s national champions –, see also clean energy investment project;
, energy efficiency; renewable energy
rise of China’s national champions in clean energy investment project
finance – global zero CO₂ emissions , ,
rise of China’s national champions in , , –, ,
industrial sectors , – Brazil –, ,
SMEs clean renewable energy sources
SOEs , – costs , , –, , ,
state-business relations and , – developing countries –
state capitalism view – development banks –
state-controlled corporations , , developmental impact on fossil-fuel
, , –, , exporters
tuolasi domestic resource capacities –,
zonggongsi , ,
see also China: finance; SASAC employment impacts of
China: renewable energy , –, , financial policies , –, ,
, fossil-fuel industry, contraction of ,
LCRs (local content requirements) –,
, Germany , ,
solar energy – global model framework and
wind power , –, calculations –
WWS (water, wind, sun) , increase in clean energy investments
China Exim Bank Indonesia ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
clean energy investment project (cont.) Cold War , , , , , ,
industrial policy –, –, – ,
land use requirements for Cold War economic theory –
infrastructure communism –
public/private investment , –, free trade –
, neo-liberalism –
South Africa , , Ricardo, David , , ,
South Korea , , Colombia , , , –, ,
thirty-year global GDP growth Bancóldex (foreign trade development
trajectory , –, bank) ,
see also clean energy; energy efficiency; CONPES (National Council of Economic
renewable energy and Social Policy)
clientelism , de-industrialization ,
climate change , , , , national development banks –
climate crisis , , , , n. trade liberalization –,
CO₂ emissions see also Latin America
fossil capital – colonialism , , n., , –
IPCC’s climate stabilization goals , capitalism/colonialism identification
radical industrial policy – ,
radical state intervention colonial economic policy
see also environmental issues colonial industrial policy –
clusters , industrial policy and –
Asia n. neo-colonialism
automotive industry Washington Consensus
average wage per cluster category, commodities ,
Europe commodity dependence –,
benefits from – commodity dependence/development
Botero and geographical clustering of links –
economic activities definition of
external linkages and n. ‘financialization’ of commodity
GVCs – markets
industrial city , –, industrialization based on
industrial district , , , , commodities
n., ‘primary-commodity specialization
industrial ecosystem and cluster trap’ , –, ,
dynamics – commodity boom , , ,
as post-Second World War phenomena Africa ,
tech industry , commodity-price boom , –,
UNCTAD n. Latin America , , , , ,
CNPC (China National Petroleum ,
Corporation) , , , , communism –, –, , ,
CO₂ emissions , –, –, China ,
–, ‘the irrational twins’
global zero CO₂ emissions USSR
project , , , , –, comparative advantage , n.,
, CAD (comparative advantage defying)
Colbertism , industrial strategy n., ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
CAF (comparative advantage following) international competitiveness , n.,
industrial strategy n., , ,
‘comparative-advantage-defying’ Latin America
measures , complementarities –,
dynamic comparative advantages dynamics of production structures
efficiency indicators growth and
frequency of the term ‘comparative innovations/complementarities
advantage’ interplay –
harm from policy implications –
industrial policy and , n., consumer ,
Ricardo’s theory of , , , consumer choice –,
specialization according to comparative consumption
advantage FIR technologies and
competition n., , , innovation–production–consumption
capitalism and relation
classical competition , core-periphery relationship , , n.,
collusive competition , ,
competition law , , corporations
competitive capitalism market power of
competitive discipline M-form corporation
domestic market n. US , –,
EU, competition rules , –, , see also MNCs; TNCs
–, , corruption , ,
firms –, US Tillman Act n.
global competition , , Africa , ,
handicap competition BNDES –
imperfect competition , , , , China: national champions
, , corporations n.
innovation-driven market competition South East Asia
international markets cost-benefit analysis , –, ,
Japan, New Competition – ,
LDCs Covid-/Coronavirus pandemic ,
‘new competition’ – n.
optimal competition , CPTPP (Comprehensive and Progressive
perfect competition , , , , , Agreement for Trans-Pacific
, , Partnership) , ,
performance competition Crédit Mobilier
price-led competition , crises
product-led competition –, s crisis
competitiveness , , , , climate crisis , , , , n.
ASEAN , n. Coronavirus crisis
China: national champions , , , debt crises n., ,
, , –, financial crises –
drivers of see also Asian financial crisis;
EU , , , global financial crisis
firms , , , cronyism , , , ,
industrial policy and cross-border flows , , –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Cuba , , – South East Asia, premature
cumulative causation , , , de-industrialization , , ,
export-led growth model with cumulative UK , ,
causation , US , , , ,
export-led growth model with cumulative Washington Institutions
causation and BoP constraint , Zimbabwe
, demand/demand side , , , ,
currency see exchange rate; monetary policies ,
cyber-physical spaces/systems , , ‘big push’ industrialization
n., demand economics ,
macroeconomic policy and
D industrialization , , , ,
D-printing , , –, , –,
debt – wages and demand –,
Africa n. democracy
austerity policies and radical industrial policy , , , ,
Brazil , , ,
debt crises n., , social democracy
debt-peonage system , US
external debt n., , , –, workplace democracy ,
, demographics
Latin America n., , , , population density and
–, industrialization –
public debt deregulation , , ,
unsustainable external debt , , , Asian financial crisis
, neo-liberalism –
US n. South East Asia , , ,
de-globalization South Korea
de-globalization narrative , , –, US , , , –
, Washington Consensus
new technologies and , developed countries see advanced countries
signs of , –, developing countries see emerging and
de-industrialization –, developing countries
Africa , development , , –
austerity and bottom-up/top-down approaches ,
EU , , – capitalist development , –,
France capitalist industrial development ,
Indonesia , ,
Latin America , , –, , , , commodity dependence/development
, , links –
neo-liberalism industrial policy and –, ,
post-communist countries , , nation-based development paradigm
premature de-industrialization –, , , technology and
, , , as town/countryside synergy
Russia trade/development links –,
South Africa , , –,
South East Asia – Von Thünen’s model
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
development banking developmentalism ,
bank-based industrial business groups – dictatorship , , –
clean energy investments – diffusion-oriented policies
developing countries digital platforms , –,
development bank, definition n. big data –
DFIs (development finance competition enforcement –
institutions) n. data ownership and control , ,
diversification of development EU ,
financing –, industrial policy implications –,
economic rationale for – online search/social networks ,
effectiveness of –, –, –, regulation of
– technology giants –
experimentation TNCs
facilitating risk-taking and learning , digital production technologies –,
, ,
France , digital production technologies:
gender equality and challenges –
Germany , , infrastructure: basic and digital
government-led/government-regulated production system: retrofitting and
state development banking integration
green development banks , – technology absorption, deployment, and
Japan technical change: ‘capability
‘life cycle’ of threshold’
macroeconomics , –, technology access and affordability:
‘national champions’, financing of endogenous asymmetries
neo-liberal criticism of technology diffusion: IR islands and digital
private development banking , –, capability gap , –, –
– see also digitalization; Fourth Industrial
reciprocal control mechanism Revolution
regional development banks , , digitalization , , , ,
socializing risks , , benefits from –
as SOEs China , , –
state ownership , concentration and ,
state-sponsored development banking developing countries
technological breakthroughs n. digital capitalism
US digital industrialization –
see also MDBs; NDBs; World Bank digitalization of production , ,
developmental state , , –, –, –,
, , , , economic power
African developmental state and effective EU ,
industrial policy – global South ,
concept of globalization narratives and –,
elite bureaucracy –,
late industrialization and developmental industrial policy implications –,
state view Russia
public-sector capacities and sectoral/cross-sectoral interventions
capabilities –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
digitalization (cont.) East India Company
shortcomings Eastern Europe , , ,
see also digital production technologies: ECLAC (United Nations Economic
challenges; Fourth Industrial Revolution Commission for Latin America and the
diversification , , , – Caribbean) n., , , ,
Africa , , e-commerce , , , n., ,
China: national champions ,
developing countries BRICS ,
economic development and economic activities
importance of , differences among , ,
industrial policy and economic economic harmony as man-made
diversification – ‘good’/‘bad’ economic activities ,
Latin America , quality index of , , , ,
macroeconomic policy and economic geography , , ,
industrialization , , economic growth , ,
trade composition, structural fall of Berlin Wall, economic growth
transformation, and since
diversification –, diversification and
US emerging and developing countries ,
Uzbekistan exchange rate/economic growth link
domestic distortions theory – ,
downsizing , Indonesia , –
DRC (domestic resource cost) ratio –, industrial structure and
, neoclassical approach to
formula n. staple theory of
drones , state and , –
dualism , , structural transformation and , ,
‘Dutch Disease’ , , –, , , ,
South East Asia , , technological change and –, ,
trade/economic growth links –
E see also growth
East African Community economic history , , , ,
East Asia economic miracles , , , , ,
catch-up , ,
competitive discipline economic viability ,
ELI , , economies of scale and scope , , , ,
export growth , , , , , , , ,
‘forced investment’ regime ECSC (European Coal and Steel
high savings rates and coercive state Community) , , n.
power n. education , ,
ICT engineering education , ,
industrial policy success in –, , , Ethiopia
, , , EU
industrializing economies , , –, gender educational gap , , ,
reciprocity –
statist model of industrialization , Germany
, ‘horizontal’ education
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industrial policy and , , embedded industries , ,
knowledge production embedded services
leapfrogging and locally embedded firms
Sweden emerging and developing countries , –,
tertiary teaching , –,
universal basic education capabilities ,
see also training; universities capability failure ,
EEC (European Economic Community) , catch-up
, , , , , clean energy investment project –
founding members of n. constraints in
see also EU development banking
efficiency digital industrialization
allocative efficiency , –, diversification of production structures
dynamic efficiency , , , , , , economic growth in ,
, –, financing –
Pareto efficiency , n. green industrial policy
static efficiency green investments in
throughput efficiency , GVCs –, , –, –,
efficiency indicators –, ,
DRC (domestic resource cost) innovation
ratio –, n., , public, private, and gross investment
ERP (effective rate of protection) , in
n., n. regional integration
EFRD (European Funds for Regional RVCs and
Development) , , n., trade ,
EIB (European Investment Bank) n., employment
, , , agriculture sector n.
elastic factor supplies –, automotive industry ,
electric/electronics industry , , clean energy investment project
, gender and industrial policy ,
South East Asia , , , , , –,
, , , , , , , gender job segregation , –,
ELI (export-led industrialization) , GVCs ,
, renewables-based industries
ASEAN – SMEs employment
China structural transformation and
East Asia , , trade-off between labour productivity
import substitution vs. export growth and employment growth
orientation – –,
Indonesia , –, US manufacturing employment , ,
ISI/ELI relation , , , , –
South East Asia , –, , , emulation see imitation/emulation
see also exports energy
Ellen Macarthur Foundation (UK) n. advanced economies, energy consumption
embeddedness in
embedded autonomy , financialization of –
embedded economies global energy consumption
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
energy (cont.) ESIF (European Structural and Investment
green energy –, Funds) , –, , , ,
see also bioenergy; clean energy; clean –, , , , ,
energy investment project; fossil fuels; assumption made for co-financing by
nuclear energy; renewable energy member States of ESIF projects
energy efficiency –, categorization of thematic objectives in
burning bonus ESIF into industrial policies themes
costs of efficiency gains –, , CF (Cohesion Fund) n., n.,
, EAFRD (European Agricultural Fund for
costs reduction –, Rural Development) n., n.
energy-efficiency standards , –, EFRD (European Fund for Regional
, , , Development) , , n., ,
energy intensity ratios , –, , , ,
–, EMFF (European Maritime & Fisheries
governments and Fund) n.
rebound effects – ESF (European Social Fund) n.,
US n.,
see also clean energy; clean energy EUInvest –
investment project ‘Juncker Plan’
energy security , , mapping of thematic objectives in the ESIF
green industrial policy to the industrial policy themes
engineering , , , n. see also EU industrial policy
engineering education –, , ESPRIT (European Strategic Programme on
engineering industries , , Research in Information
production engineering , , , , Technology) , n.
, n., Ethiopia , , , ,
reverse engineering Addis Ababa
South Korea , apparel export industry , –,
US , , , –, , cement industry , –, ,
England – Development Bank of Ethiopia
import substitution diaspora bonds and Renaissance Dam
Tudor strategy , project
see also UK gender job segregation
enterprises see firms; SMEs; SOEs green industrial policy –
environmental issues , GVCs ,
China – industrial parks ,
environmental sustainability , –, infrastructure and education
environmental taxes leapfrogging
EU , , – learning process
India , TIDI (Textile Industry Development
pollution , Institute) , ,
see also clean energy; clean energy see also sub-Saharan Africa
investment project; climate change; green EU (European Union)
industrial policy; Green New Deal; Colonna Report
renewable energy Davignon Plan
ERP (effective rate of protection) , n. euro ,
formula n. globalization , , , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
member states and country groupings national industrial policies , ,
see also EEC; EU industrial policy; EU new industrial policy at the turn of the
treaties century –
EU industrial policy –, –, R&D , , , –, , , ,
–, –, – , , , , ,
global financial crisis , , Single Market , , , ,
, SMEs ,
EU Industrial Policy SOEs , –,
bilateral liberalization structural development issues –
CEF (Connecting Europe Facility) , subsidies/state aid , n., n.,
, , , –,
challenges , – technology , , , , , ,
China and , , , , , , , , , –,
competition rules , –, , –, TEN (Trans-European Network)
, policy –,
competitiveness , , , TNCs regulation
convergence/cohesion policy , , US and , , ,
–, – see also the entries below for EU industrial
de-industrialization , , – policy; EU; European Commission;
digital industry policy , Finland; France; Germany; Ireland; Italy;
digital platforms: competition smart specialization; UK
enforcement , EU industrial policy, evolution of
education and training – interventionist phase –, ,
emerging markets and , – –, –
environmental issues , , – – liberal phase , , , ,
European Common Market – –
European integration process and , –present: pragmatic phase , ,
‘European paradox’ , –
Fourth Industrial Revolution –, EU and industrial policy funding –
green industrial policies n., , , see also ESIF; EU industrial policy
, , , n. priorities; MFF
GVCs , , , EU industrial policy priorities –,
Horizon Europe/Horizon country dimension: differences in industrial
programme , , , –, policy expenditure –,
, country dimension: different
industrial policy structure , , priorities –,
‘Industry .’ , industrial policy spending at EU and
infrastructure , –, member-state levels –, ,
innovation , , , , , , SAS (State Aid Scoreboard)
, , , , –, , thematic dimension –, ,
Lisbon Agenda , ,
manufacturing value added , see also ESIF; MFF
market-failure approach , EU treaties
‘mission-oriented’ policies , , , Maastricht Treaty , , ,
, , , , , – Rome Treaty
mixed approach , TFEU (Treaty on the Functioning of the
multilevel governance European Union) n., n.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
EUREKA (European Research Coordination premature de-industrialization and –
Programme) , n. real exchange rate , , , , ,
Eurocentrism – , n.
Europe reserve accumulation , –
–twenty-first-century industrial see also monetary policies
policy – exports ,
boomeranged universalist projects benefits from exporting ,
of – China –,
import substitution ‘close’/‘distant’ goods –
industrial policy , East Asia
war industries export basket –, , ,
see also EU export discipline ,
European Central Bank export growth
Green Bond programmes , –, export-led growth model with BoP
European Commission , , , constraint –,
, export-led growth model with cumulative
Global Europe strategy causation ,
policy strategy export-led growth model with cumulative
European Industrial Renaissance causation and BoP constraint ,
policy strategy – ,
Industrial Policy export-led growth model of economic
Communication n. growth –, , –
competition rules , – export performance , , , –,
criteria for selecting missions , ,
Siemens-Alstom merger n., export sophistication/EXPY , , ,
see also EU industrial policy –, , , –, ,
evolutionary economics , , , –, export targets , n.,
, , externalities
systemic approach FDI and
technical change growth and ,
exchange rate , high-tech goods
Africa , income elasticity of exports and
China , imports , ,
commodity dependence and –, Latin America –,
competitive exchange rate , – learning , , ,
devaluation/undervaluation , n., post-communist countries –, ,
, , , , , , , , –,
, –, , , , Russia
euro South Korea ,
exchange rate/economic growth link , strategic role of –
exchange rate protection , –, subsidies , , , ,
, Taiwan
foreign exchange management – Washington Consensus
Latin America , , , , , , see also ELI
, , , – external economies , , , ,
overvaluation , n., , , , externalities , –
, exports externalities ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
industrial policy and n. firm’s ‘strategic dimensions’
informational externalities n., Germany
innovation
F innovation and finance
Facebook innovative enterprise theory
‘factory economies’/‘headquarters institutional-based theories
economies’ , , learning process
FDI (foreign direct investment) market failures in
ASEAN , , neoclassical theories ,
benefits from – organizational capabilities , ,
BRICS , –, ,
China performance of firms –
domestic firms/FDI relationship resource-based theory , , –,
exports and –, ,
financialization of –n. transaction-cost theories –, ,
growth and , – ,
GVCs and , , , , US
Russia firms
Singapore common ownership
South East Asia , competition –,
South Korea competition and productivity –
Washington Consensus competitiveness , , ,
feed-in tariffs concentration of –, ,
feminism , development finance and
finance , n. disciplining mechanisms
capitalism and domestic firms/FDI relationship
clean energy investment project , domestic industrial policies and
–, , regulations
financial globalization , economic power of –,
financial sector/real economy economic power, rents, and political
separation – settlement , –
green finance , – industrial policy ,
macroeconomics/finance/structural innovation , , , ,
change links – internationalization of production ,
see also China: finance; development –, ,
banking knowledge expertise –
financialization , , , , large firms , , , ,
, large firms and technological
of commodity markets capability n.
energy – large firms and wealth
of FDI –n. large international firms , , ,
Finland –, ,
firm, theories of , – lead firms , , , ,
capabilities, development of , , lead firms in GVCs , ,
, ,
capitalism and , learning trap –
competitiveness of firms lobbying ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
firms (cont.) zero consumption of –
market power, competition, and see also energy
enterprise strategies – Fourth Industrial Revolution (IR/FIR, digital
migration to lower-wage locations economy) , , , , ,
monopoly , , IR business model
Pavitt’s taxonomy of industrial IR islands –
firms – EU –,
performance of large firms – FIR disruptive change , –
state and global South and –
value addition , innovation/production co-location
see also ASEAN: firms; digital platforms; ,
MNCs; SMEs; SOEs; TNCs innovation/production/consumption
First Industrial Revolution , , , , continuum
, , –, , innovation/production re-coupling
British Industrial Revolution ,
policy instruments neo-liberal vision of
productivity explosion , technological change and –
UK – WEF
fiscal policy , see also BRICS and IR; digital production
fiscal austerity , , technologies: challenges; digitalization;
see also taxation ‘Industry .’
‘flying geese’ paradigm , , –, France
, , AII (Agency for Industrial
Japan Innovation) –
Latin America n. BPI France
food and beverage industry , –, colonial industrial policy
, , , de-industrialization
Ford Motor Company n., , development banking ,
Fordism , , , FUI (Single Innovation Fund) –
forerunners , , , industrial policy , , –,
Fortune Global : –,
China –, , industrialization
fossil fuels , , –, –, infant industry theory
carbon cap – nationalization –
carbon taxes n., , –, , OSEO
, –n., planning culture
China , , R&D , ,
coal , , , , SMEs ,
consumption of –, state intervention , ,
contraction of industry , subsidies
–, Fraunhofer Institutes ,
disadvantages – free market , , n., , , ,
fracking ,
oil wars see also liberalization
reduction in consumption of –, free trade , ,
– automatic harmony derived from
subsidies, elimination of , benefits of –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
China , innovation and technological change
criticism ,
free-trade imperialism , knowledge production , –
neoclassical economics , labour productivity growth and
Singapore gender –
Smith, Adam , – radical industrial policy ,
UK see also gender/growth regimes; gender
see also laissez-faire; trade liberalization inequality; social reproduction
French Revolution gender inequality , , –, ,
Fürstenspiegel de-feminization of labour , n.,
,
G educational gap , , , –
garments and textiles n., , exclusion , , ,
, exploitation , ,
England – gender division of labour ,
Ethiopia , –, gender job segregation , –,
Multi Fibre Arrangement gender stereotypes , , ,
South Africa , , –, n.,
South East Asia , , , , , gender wage gap ,
, high-tech jobs , , , –
sub-Saharan Africa – low-wage female labour , ,
US , , , –,
Gates Foundation lower-quality occupations
GATT (General Agreement on Tariffs and macroeconomics
Trade) n., , neoclassical theory –
gender/growth regimes –, STEM programmes –
BRICS –, stratification theory , n.
exploitation regime , see also gender and industrial policy;
mutual regime –, n. women
time squeeze regime , , General Motors ,
wage squeeze regime , genomics ,
see also social reproduction geoengineering –
gender and industrial policy –, CCS (carbon capture and
employment , –, sequestration)
feminization of foreign exchange SAI (stratospheric aerosol
earnings injections) –
gender, diversity, and technical Germany
design – automotive industry
gender equality , , banking system
gender equality feedback loops and catch-up –,
industrial policy success – China and
gender equality: impact of industrial policy clean energy investment project ,
and structural change on – ,
gender-inclusive industrial policies , development banking , ,
, education
global feminization of labour Energiewende (energy transition) , ,
industrial upgrading , , –, ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Germany (cont.) EU and , , , ,
fossil-fuel consumption , financial globalization ,
industrial policy , , –, global capitalism
–, –, , global economy ,
industrialization multi-polar global power structure
‘Industry .’ n., , , , regionalism and
n. South Africa , –,
innovation , see also de-globalization
leapfrogging globalization narratives
manufacturing , global financial crisis
market-centric policymaking BRICS , –, , –, –,
Marshall Plan , ,
multilevel governance , critical political-economy approach
post-war economic miracle data , –,
R&D –, de-globalization narrative , , –,
reunification ,
SMEs/Mittlestand , , DHL Global Connectedness Index ,
successful latecomer –
industrialization – digital industrialization –, –,
System Althoff elite globalization narratives and industrial
universities , strategies , ,
US and , –, GDLP (global division of labour and power)
see also KfW Group , , , , , , ,
Ghana , globalization indices , –
global governance , , , globalization as inexorable yet
global North , , , , , n. malleable –,
shift to the global South , , hyper-globalization narrative , ,
global production , , –, , ,
ASEAN n., – keywords n.,
changing patterns of – KOF Globalization Index –
‘de-territorialized’ production choices language
, leveraging storylines as policy space ,
global production networks , , , –
, , methodology –
globalization of production , , narrative traps , ,
see also GVCs neo-liberalism , ,
global South , , – populism , –,
digital industrialization , protectionism , ,
Fourth Industrial Revolution – regionalization and global
knowledge production/industry neo-liberalism –,
linkages storylines , –, –
shift from the global North to , , theoretical perspectives –
globalization , , words, spoken and written ,
Brazil , , goods
China –, classification of
critical approach to , , consumer goods , –, , , ,
dynamic global markets , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
public/private goods decarbonization , , ,
see also commodities; product developing countries
Google –, , , differential principle –
governance energy security
global governance , , , Ethiopia –
good governance , , – EU n., , , , , ,
multilevel governance , , , n.
government green development banks , –
BRICS, national governments , green energy –,
capability triad and – green finance , –
development banking green growth , , –, ,
entrepreneurial role , green resources ,
good governance , , – imitation and emulation
government failure –, – India , –,
government regulation , instruments of n.
industrial policy and , late latecomers and –
information and low-carbon economy
neoclassical economics: government resource security ,
interventions , , –, waste/wasting , ,
role in mixed economy , zero growth , , ,
technological upgrading and see also clean energy investment project;
US , , –, circular economy; environmental issues;
see also state Green New Deal; renewable energy
grand challenges –, , , , , Green New Deal , , , , ,
, ,
challenge-driven innovation policy , see also clean energy investment project
challenge-driven policy frameworks , growth
challenge-led growth BoP constraints and n.
directionality of growth , challenge-led growth
‘heterodox’ policy approaches – complementarities and
market co-creating , , directionality of ,
market failures , –, dynamic efficiency of economic
market shaping , , , , , structures ,
–, exports and ,
SDGs , , , FDI and , –
socio-economic challenges , green growth , , –, ,
technical challenges growth collapses , n.,
see also ‘mission-oriented’ policies; growth patterns –
public value human capital and
Great Depression , n., industrialization and
Greater Boston (US) , , , investment and
Greece Kaldor’s growth laws –, , ,
Green Bond programmes , –, Kaldor-Verdoorn function/Law –, ,
green industrial policy , , –, – , , ,
China –, –, , manufacturing and –, –, –
climate perspective/green growth outperformers –
perspective distinction , productivity/growth links –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
growth (cont.) off-shoring , , –
protection and , participation in –, ,
rapid growth –, rise of
successful industrial policy and –, RVCs and
, , shortcomings , , , –,
sustainable growth structural transformation and ,
sustained city growth system integrators , –
technology and n. TNCs
trade liberalization/growth relation , , upgrading , –, –, ,
, , upstreaming/downstreaming –,
Verdoorn’s law , , ,
World Bank on value addition , –
zero growth , , , World System Theory n.
see also development; economic growth; see also ASEAN: GVCs; value chain
productivity growth GVCs: specific countries/regions/regional
GSP (Generalized System of Preferences) , organizations
, , Africa , , ,
GVCs (global value chains) , , , , BRIC economies –,
, , , , , China
global financial crisis , Ethiopia ,
advanced economies , , EU , , ,
benefits from –, –,
‘buyer-led’/‘producer-led’ GVCs – H
clusters – Harvard Business School ,
concept of Heckscher-Ohlin-Samuelson theorems
coupling, de-coupling, re-coupling human capacities –,
, women, social reproduction and
developing countries –, , –, development of , , , ,
–, , human capital n.,
employment , concept of n.
FDI and , , , , growth and
GDP industrial policy and , , ,
governance structure of , South Korea
ICT and upgrading and n.
impact of – Hyundai Motors (South Korea) , ,
importance of ,
inequality and ,
integration , , I
iPod value chain, uneven returns ICT (information and communications
–, technology) , , –, ,
lead firms in , , , ,
lower-income countries BRICS , , , , , ,
manufacturing hollowing out and – East Asia
mapping GVCs – GVCs and
market liberalization and , ICT-based economy ,
MNCs/MNEs and n., , –, , ICT industry
, , , , India –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
internationalization of production income
Kenya developed/developing countries’ divergence
women and n. of incomes
ideology , , income elasticity of exports and
ASEAN imports , ,
gender stereotypes income linkages
ideological hegemony per capita incomes –, ,
Latin America increasing returns , , , , , ,
Marshall Plan ideology , , , –
myths surrounding industrial policy – clusters
neo-liberalism dynamic increasing returns , , ,
Washington Consensus , ,
IEA (International Energy Agency) , , energy
, n., , increasing/diminishing returns
IFC (International Finance Corporation) dichotomy –, ,
IG Farben (Germany) industrial city and ,
IMF (International Monetary Fund) , , law of increasing return n.
, , , manufacturing , , , ,
Africa neoclassical economics ,
capital market liberalization protection of
industrial policy, importance of static increasing returns ,
structural adjustment programmes , see also returns
, India , , , , ,
‘The Return of the Policy That Shall Not Be automobile sector n.
Named’ , development n.
Washington Institutions , , , digital production technologies
– gender/growth regime
imitation/emulation , –, green industrial policy , –,
adaptive imitation , , ICT technologies –
catch-up industrialization ,
China, from imitation to innovation ISI
, leapfrogging
England manufacturing –,
imperialism n., , renewable energy –, –n.
free-trade imperialism , telecommunications
imports wage-goods inflation
benefits from importing WTO –
England – see also BRICS
import duties , , , , , , Indonesia n., ,
, , Asian financial crisis n.,
import protection , ,
import substitution vs. export global financial crisis
orientation – automotive industry ,
import tariffs , , , , n. clean energy investment project ,
income elasticity of exports and de-industrialization ,
imports , , economic growth , –
see also ISI ELI , –,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Indonesia (cont.) strategic compatibility/coherence
fossil-fuel consumption , tension –
IMF structural adjustment package synergy and connections to other
ISI , –, policies –
manufacturing – industrial policy: history –, , –,
technological upgrading/STI –
infrastructure , – s–s industrial policy fatigue
see also South East Asia historical roots of industrial policy
industrial district , , , , , theory –
n., return/revival of ,
industrial ecosystem framework , –, industrial policy: phases since
, , – interventionist phase –, ,
industrial planning –, –
industrial policy –s/ liberal phase , , ,
adaptability , , , , –
aim of s/–present: pragmatic phase ,
context and connections – , , –
core of –, industrial policy: practice –,
criticism of industrial ecosystem and cluster
debates on , , , , dynamics –
defensive/proactive industrial policies , instruments/tools of industrial policy –,
, , , , , , –, , ,
effectiveness of , , –
failures/‘cabinet of errors’ – linkage dynamics and
government and , interdependence –
multiple policy domains of selecting what industries to
myths surrounding industrial policy – support –
pragmatism , , selective/non-selective tools –,
‘production/productive transformation tensions in industrial policy –
policies’ industrial policy: theoretical perspectives ,
relevance of –, , , , –
role of –, , concept of industrial policy –, ,
shifting terrain of –, , , , –, , , ,
successful industrial policy , , conceptual perspectives on n.
–, , , , , , – ‘market-based’ approach n.
taxonomy – pragmatic approach
unevenness , – ‘promotional’ approach n.
vertical/horizontal industrial policies , trial-and-error approach
, , , , –, –, industrial upgrading , , , ,
see the entries below for industrial policy; ,
radical industrial policy ASEAN , , , , , –,
industrial policy: challenges – ,
competitiveness/discipline tension – gender and , , –,
de-industrialization – see also upgrading
policy space restriction , , – industrialization , , ,
prohibition of industrial policy by agriculture ,
Washington Institutions – BRICS ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
China hyperinflation , , –
growth and inflation tax , ,
importance of inflationary pressure ,
India , wage-goods inflation –,
industrial policy and , – information
industrial policy implemented by government and
followers information asymmetry , , ,
‘industrialization of freshness’ , information flows ,
low-income countries informational externalities n.,
Marxist approach to – infrastructure ,
population density and – Africa
stalled industrialization , , capability triad –
thin industrialization digital production technologies
weak industrialization dynamic development process and
wealth and , , EU , –,
see also ‘big push’ industrialization; Germany
de-industrialization; ELI; First Industrial infrastructural bottlenecks
Revolution; Fourth Industrial innovation systems and –
Revolution; ISI; late industrialization; investment in ,
Second Industrial Revolution; Third new technologies and
Industrial Revolution innovation , , –, ,
‘Industry .’ , –, catch-up and ,
EU , challenge-driven innovation policy
Germany n., , , , n. ,
Industry .+ , , complementarities/innovations
Italy interplay –
structural transformations definition , nn.––, , ,
transformations brought about by , developing countries
, , diffusion of
UK directionality of ,
inequality –, , as driver of economic development
deregulation dynamics of production structures
economic globalization firms , , , ,
GVCs , funding , , –
neo-liberalism and – gender and ,
TNCs incentive to innovate
see also gender inequality incremental and radical innovations ,
infant industry , , , ,
Africa – incremental/true innovations
ASEAN distinction n.
infant industry theory , , – innovation-driven economy , ,
necessity of nurturing infant innovation-driven industrial policy ,
industries – innovation-driven market competition
neoclassical economics –, innovations/complementarities
South Korea , – interplay –
subsidies for , innovations for defence purpose and
inflation , industrial applications
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
innovation (cont.) infrastructure and –
investment and Japan
learning and NISs/national innovation systems –,
market failure perspective , , institutional economics , , –
mayor contributions to the innovation Intel ,
perspective – Inter-American Development Bank
‘mission-oriented’ policies , interest groups ,
neoclassical economics , –, , international trade see trade
, Internet –,
new technologies and innovation/ investment
production co-location , ‘big push’ investments
new technologies and innovation/ catch-up
production/consumption fall in private investment
continuum innovation
new technologies and innovation/ investment climate ,
production re-coupling , investment linkages
organizational innovation n., middle-income trap and
path dependence , , productive capacity, investment in
post-communist countries – ,
private sector , technical change/investment interaction
renewable energy – technological learning and
reward for – see also clean energy investment project
science and IoT (Internet of things) technologies ,
state nn.–, , , – , , , , , , , ,
subsidies – , , ,
taxation and IPCC (Intergovernmental Panel on Climate
technological change , – Change) , n.,
waves of innovation , IPRs (intellectual property rights) , , ,
see also the entries below for innovation; STI ,
innovation: specific countries/regional ASEAN –,
organizations BRICS , , ,
ASEAN , , , intellectual monopoly
BRICS – Latin America
China , , , –, – South East Asia , ,
EU , , , , , , , , see also patents
, , –, , Ireland ,
Finland IRENA (International Renewable Energy
Germany , Agency)
Japan , ISDS (investor–state dispute settlement)
Singapore ,
South Korea , , ISI (import-substitution
Taiwan industrialization) –, , , , ,
UK ASEAN , n.
US , , , import substitution vs. export
innovation systems , , , , , orientation –
collaboration among key economic India
players Indonesia , –,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
ISI/ELI relation , , K
Latin America , , n., , Kaldor-Verdoorn function/Law –, ,
Nigeria – , , ,
protection of increasing returns and Kazakhstan , , , , , , ,
Russia ,
South East Asia , –, , – Kenya
structural transformation and BPO (business-process outsourcing)
see also Africa: ISI; imports sector , –, ,
Italy , , , knowledge-based service sector , –
automotive industry , trade liberalization
Industria . see also sub-Saharan Africa
industrialization KfW Group (Kreditanstalt für Wiederaufbau,
manufacturing German Development Bank) ,
origins of capitalism in Italian city –, , , ,
states n. clean energy economy , ,
populism Kia
regional inequalities Timor–KIA aircraft manufacturing joint
SMEs venture ,
state intervention KLEMS database n.
know-how ,
J commercial know-how
Japan , , n., Germany
automotive industry n., , know-how transfer ,
development banking South Korea , –, –
entry control technical know-how ,
‘flying geese’ paradigm knowledge
Fukushima Daiichi power plant abduction (phronesis) –
meltdown gender and knowledge production ,
indigenous innovation capabilities –
industrial policy , , –, , knowledge absorption
, knowledge accumulation , ,
innovation system , knowledge-based capabilities n.
kaizen , knowledge capital n.
kereitsus , knowledge intensity , , ,
manufacturing advantage – knowledge monopoly
market-centric policymaking knowledge production/industry
MITI (Ministry of International Trade and linkages
Industry) , knowledge spillovers , ,
New Competition – knowledge transfer , , n., ,
successful latecomer industrialization , , , n.,
, surveys and fact-finding
technology , tacit knowledge , , , , , ,
US/Japan rivalry , –, , , , ,
– technological knowledge n., n.,
yen n., –, , , , ,
Jesuits – Krupp (Germany) ,
just-in-time production , , , Kyrgyzstan ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
L South East Asia , , , ,
labour ,
capitalism and US ,
catch-up , laissez-faire n., , , ,
climate jobs naive optimism of ,
de-feminization of labour , n., negative effects of
, Physiocratic laissez-faire doctrine
developing countries and labour see also free trade
regulation late development –, , –, ,
gender job segregation , –, learning and ,
international labour migration NDBs and , , ,
labour laws as industrial policy late industrialization
instruments , –, – catch-up –
labour productivity challenges for ,
labour productivity growth and disadvantages for
gender – green industrial policy –
labour theory of value late industrialization and developmental
‘perversity thesis’ , state view –
radical industrial policy as labour- latecomer industrialization , , , ,
centred , –, , –, , , , , ,
reallocation from low- to high-productivity learning by doing
sectors – macroeconomic policy and late
reallocation from traditional to modern industrialization , , , –
sectors – risks of late industrialization , –
socialization of labour South East Asia , –
trade-off between labour productivity successful latecomer industrialization ,
growth and employment growth ,
–, Latin America –, , , –, n.
see also the entries below for labour; China: s debt crisis n., , , ,
labour; wages; workers –,
labour, division of , , , , , – external crises –
, , s timid return of industrial policy ,
GDLP (global division of labour and –,
power) , , , , , , – commodity boom , , ,
, , , ,
gender division of labour , austerity –,
IDL (international division of labour) China and –, ,
, competitiveness
NIDL (new international division of convergence and divergence, phases
labour) of –
labour-intensive production n., , de-industrialization , , –, ,
, , , , , , ,
Africa , , Development Bank of Latin America
automation and diversification ,
gender and , , , , economic integration ,
GVCs , , , exports –,
renewables industries ‘flying geese’ paradigm n.
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
from state-led industrialization to debt competition
crisis – constraints and n.,
from state-led industrialization to digital industrialization
Washington Consensus – digital production technologies
hierarchical capitalism NDBs ,
ideology leapfrogging , , –, , , ,
industrial policy weak performance ,
–, China
investment ration and capital account education and
openness , Germany
IPRs India
ISI , , n., , public–private joint R&D –
lagging behind East Asia and the world South Korea –,
economy learning n.
local industrial policies n. catch-up ,
macroeconomic policies , , , China, government and enterprise
–, , capability and learning –,
manufacturing , –, , , cross-sectoral learning
middle-income trap as driver of economic development
neoclassical economics economic catch-up and late
NIS (National System of Innovation) development
, exports , , ,
privatization innovation
R&D , , , international learning , , , , ,
real exchange rate , , , , , ,
, , , , – late development ,
reciprocal control mechanisms learning capabilities n.
relative productivity vs. United learning curves ,
States –, ‘learning by exporting’
reprimarization of export learning trap –
structure –, as local and cumulative ,
South Korea as benchmark , –, policy learning ,
, , –, sources of
state failure sub-Saharan Africa, learning costs/
state-led industrialization , , investment –, –,
, technological learning , , –, –,
structural adjustment programmes –, –, –
structural change and convergence – learning by doing , , , , , , ,
structuralism , , , , , ,
trade liberalization –, , advanced countries
Washington Consensus years –, latecomer economies
WTO neoclassical economics n.
see also Argentina; Brazil; Colombia; liberalization , ,
Mexico s ‘business environment reform’
latitude for performance , , ,
LDCs (least developed countries) , , s–s structural adjustment era
, , Africa , –,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
liberalization (cont.) export-led growth model with cumulative
‘asymmetric opening’ causation ,
capital market liberalization export-led growth model with cumulative
Washington Consensus causation and BoP constraint ,
see also free market; free trade; trade ,
liberalization export-led growth model of economic
licensing , , growth –
linear economy , , forced savings, restrictive monetary policy,
linkages , destabilizing austerity –
agriculture/manufacturing linkage , , gender inequality
, , , , growth and successful industrial
backward/forward linkages , , –, policy –, , ,
–, , , , , , , , income elasticity of exports and
, imports , ,
income linkages Kaldorian open-economy growth
industry-university linkages , model
intersectoral linkages , , , , labour laws as industrial policy
investment linkages instruments , –, –
knowledge production/industry late industrializing economy , , ,
linkages – –
linkage dynamics and interdependence , macroeconomic crises ,
– macroeconomic instability
local economies , , , macroeconomic mismanagement ,
location theory , macroeconomic policies , , , –,
, , , –, –
M macroeconomic stability
McKinsey & Company , , macroeconomics/finance/structural change
McKinsey Global Institute – links –
macroeconomy , , macro-policy lessons for
‘big push’ industrialization – industrialization –
BoP constraint , –, –, , , ‘primary-commodity specialization
, , , trap’ , –, ,
CARs (capital account stabilization policies , , –, ,
regulations) –, , , , ,
commodity dependence –, structural change and
commodity-price boom , –, supply-side , ,
cumulative causation ‘technology-forcing’ labour-market
demand-side , , , , –, regulation –, –
, –, trade-off between labour productivity
development banking , –, growth and employment growth
diversification and upgrading , –,
, ‘wage-goods inflation’ barrier –
drop in domestic expenditure growth wages: impact on economic growth of a one
‘Dutch Disease’ – percentage point increase in real wage
ELI strategies – growth –,
export-led growth model with BoP wages: share in the gross output
constraint –, price –,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
wages and demand –, BRICS , , , –, ,
wages and profit rate –, China , , , n.
macroeconomy: specific countries/regions Germany ,
Africa , India –,
China Indonesia –
Latin America , , , –, Italy
, Latin America , –, , ,
US , Malaysia –
Madagascar , , the Philippines –
Malaysia , Russia ,
de-industrialization , Singapore –,
digital production technologies South East Asia –, ,
economic growth , – Thailand
ELI , –, UK –, –
ethnically coloured policies –, US , , , –, , ,
FTZs (free-trade zones) , Vietnam
industrial digitalization manufacturing value added
ISI , –, , Africa , , , , ,
manufacturing – BRICS
technological upgrading/STI China , , –, –, ,
infrastructure –, , , , EU ,
–, post-communist countries –,
see also South East Asia South East Asia , , ,
manufacturing –, , , market
agriculture/manufacturing linkage , , frontier markets
, , , , , market-centric policymaking , ,
decline of manufacturing relative to service market co-creating , , ,
industries , market shaping , , , , ,
de-industrialization – –,
growth and –, –, – market socialism
GVCs, manufacturing hollowing out market unification
and – neoclassical economics
increasing returns , , , , self-regulating markets
infant industry theory social market economy
intersectoral linkages see also free market
manufacturing city –, , , market failure , , , n., ,
Marxist approach to – EU, market-failure approach ,
new technologies and firm, theories of
post-communist countries , ‘government failure’ –
renewed interest in – grand challenges , –,
‘servicification’ , , –, innovation and , ,
structural transformation and – key aspects of , –
structuralism , – market failure paradigm ,
see also the entries below for manufacturing neoclassical economics and –, ,
manufacturing: specific countries/regions/ , , , , , ,
regional organizations policy intervention n.
Africa –, , , , , structural economic change
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
market fundamentalism n., , , , microeconomic theory
–, Microsoft , ,
market imperfections see market failure middle-income trap , –, , , ,
Marshall Plan , , –, , , ,
Marxism IR
approach to manufacturing and innovation capabilities and
industrialization – investment and
capitalist industrial development , Latin America
, South East Asia
industrial policy and – World Bank on n.
‘micro-Marxism’ Middle Way
state and migration , , –, ,
mass production , , ‘flying geese’ pattern of migration, East
US –, , , Asia
materialism international labour migration
MDBs (multilateral development banks) , US Great Migration
, , , military issues
see also development banking global military spending
MENA (Middle East and North innovations for defence purposes and
Africa) industrial applications
mercantilism , , military industrial policy ,
MERCOSUR (South American trade US military spending , , ,
bloc) , , –,
mergers ‘mission-oriented’ policies –, , ,
China , , , ,
digital platforms – assessment and evaluation , –
meritocracy –, directionality of
Mesmerism, science of EU , , , , , , , ,
meso-economic economies/processes , , –
, , , European Commission, criteria for
Mexico , –, , , –, , selecting missions
, evolution of –
Tequila crisis experimentalism
global financial crisis innovation ,
convergence – instrumentalizing missions as industrial
de-industrialization , policy –
trade liberalization , organizational capabilities in public
see also Latin America sector , –
MFF (Multi-Annual Financial Framework, research –
EU) , , , risks and rewards , –
EU industrial policy priorities , ROAR
industrial policy item within the MFF routes and directionality –
– Singapore , ,
mapping of budget items in the MFF technological missions ,
– to the industrial policy see also grand challenges; public value
themes mixed economy –,
see also EU industrial policy government’s role in ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
MNCs/MNEs (multinational corporations/ national champions –,
enterprises) n., , BNDES, Brazil , , –, ,
GVCs n., , –, , , , –,
, , BRICS
location choices of development banking and
‘multinational’ term EU ,
modernization , , , , South Korea
agrarian modernization n. see also China: national champions;
Brazil ‘picking winners’
BRICS – national interests , , –
China nationalism , , ,
economic modernization , nationalization of industries
Mondragon Group (Spain) – France –
monetary policy n., , , , natural resources , ,
countercyclical monetary policy , industrial policy in resource rich
monetary policy autonomy , countries –,
restrictive monetary policy , –, , ‘resource curse’ , ,
South East Asia resource-ialization ,
South Korea –, resource security –, , ,
Taiwan – water security
Uzbekistan , NDBs (national development banks) , ,
see also exchange rate , ,
monopolies , , , assets of n., n.,
agriculture – co-financing , , , ,
firms , , countercyclical financing ,
global monopolization diversified/multiple financing model ,
intellectual monopoly –
regulation of enhancing firm capacities and state
taxation and bureaucracy capacities
Morocco late development
multilateralism LDCs ,
multilateral trade –, , , , loans ,
long-term finance , , –, ,
N main functions , , , n.
NAFINSA (Mexico) relevance of
NAFTA (North American Free Trade Agreement) risks , , ,
, , n., , , sectoral technical expertise , –,
NAICS (North American Industry single/limited long-run financing
Classification System) model , ,
nanotechnology , , , n., , ‘targeted ambition’
, , , , targeting sectors/projects that generate net
NAS (US Academy of Sciences) , , foreign exchange earnings
NASA , , as venture capitalists and ‘lenders of first
nation resort’
industrialization and see also Brazil, development banking;
nation-based capitalism China: finance; development banking;
nation-based development paradigm EIB; KfW Group
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
neoclassical economics , n., exports
, Fourth Industrial Revolution
s ‘business environment reform’ , free market economy n.
, globalization narratives , ,
s–s structural adjustment industrial policy ,
era –, inequality and –
s neoclassical revival of industrial ‘the irrational twins’ ,
policy –, state and
Cold War economic theory – tax reductions on corporations and the
criticism of –, wealthy
domestic distortions theory – trade liberalization
efficiency indicators –, UK , ,
equilibrium US , –, , , –,
firm, theories of , see also Washington Consensus
free trade , neo-patrimonialism ,
gender inequality – the Netherlands ,
government interventions , , New Deal , , , ,
–, failure of
increasing returns , infrastructural investments in the
industrial policy , , –, – South –
infant industry policy and –, see also US
innovation , –, , , New Economics
interventionist industrial policy , , New Public Management reforms
, , – New Structural Economics –,
interventionist vertical/horizontal n-gram technology , ,
measures nichification –
Latin America Nigeria , ,
market failure and –, , , , backward integration –
, , , , cement industry , –, ,
‘modern industrial policy’ ISI –
monopoly of privatization
policy hierarchy , –, , , , see also sub-Saharan Africa
, , NISs (national innovation systems) –,
price system , , , – , , ,
product discovery , Nokia , ,
product space –, n. non-tariff barriers , , , , ,
production subsidy , , , ,
selectivity –, ASEAN n., , , ,
state and non-tradable inputs/activities , , n.,
neo-liberalism , , – , , –, , , ,
global financial crisis ,
China nuclear energy , , –, , ,
Cold War – ,
criticism of –, , –
de-industrialization and O
deregulation – OBM (own brand manufacturer)
development banking ODM (own design and manufacturer)
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
OECD (Organisation for Economic technological upgrading/STI
Co-operation and Development) infrastructure , , , –
countries , , – see also South East Asia
OEM (original equipment manufacturer) , Physiocrats
, – ‘picking winners’ , , , , –
off-shoring , , , , , BNDES
GVCs , , – as common misconception of industrial
receding of , policy
OLI (ownership, location and internalization) interventionist governments and ,
factors vertical industrial policy
Oman , n., see also national champions
‘one-size-fits-all’ approach , place-based approach –
opportunity gain n. place-based policy , –, ,
outsourcing , , , , , , place-based S:
see also transformative industrial policy
P policies
Pacific Alliance ‘capital policy sins’ ,
paradigm challenge-driven policy frameworks
technological paradigms and ‘heterodox’ policy approaches –
trajectories – horizontal policies , ,
theory of production policy capture
patents , policy targets ,
China selective policies ,
EU vertical policies , ,
foreign patents policy hierarchy , –, , –,
generation of ,
patent applications , , –, industry support by alternative
, measures
patent system , , , limitations
South Korea –, – policy learning ,
triadic patent family n. policy space ,
US globalization narratives: leveraging
see also IPRs storylines as policy space ,
path dependency , –
innovation , , national policy space
technological changes neo-liberalism and
Peru – policymakers ,
Petrobras n., n., , , policymaking
PetroChina inaction
the Philippines , interest groups and
de-industrialization , market-centric policymaking
economic growth , , production-centric policymaking
ELI political economy ,
IMF structural adjustment package Africa , –,
ISI , –, , classical political economy , , , ,
manufacturing – ,
overseas remittances industrial policy and –, ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
political economy (cont.) structural economic transformation and
political economy feasibility of industrial policy –,
interventions trade liberalization
politics and – Uzbekistan, industrial policy –
political settlements , , –, WTO
Africa , , postcolonial theories ,
firms , , – poststructuralism
politics poverty , ,
conflict and political stability – poverty reduction , , , ,
corporate elites and –,
industrial policy and , , ‘poverty trap’
political economy and – vicious circles of national poverty
populism , –, Powell Memorandum , n.
POSCO (Pohang Steel Co., South Korea) , pragmatism , –,
, Prebisch–Singer hypothesis , –
positivism price/price system
post-communist countries , – factor price equalization –, ,
changes in structure of economies, ,
overview of –, factor price polarization
de-industrialization , , neoclassical economics , , ,
economic liberalization –
exports –, , –, price-led competition ,
FSU (former Soviet Union) countries , shadow prices ,
, , private sector
government failure – barriers to private-sector expansion
import substitution vs. export catch-up ,
orientation – de-risking by the state ,
industrial policy: tools – disciplining the –
industrial policy in resource rich fall in private investment
countries –, innovation ,
industry value added , post-communist countries ,
innovation, research, and private development banking , –,
development – –
international trade and trade renewable energy
policy – state/private division
manufacturing , state/private sector relation ,
manufacturing value added –, state vs. private sector –
market-oriented reforms , see also firms
private sector, share in GDP , privatization , , , n., ,
privatization Asian financial crisis
R&D expenditure , Africa , ,
resource-ialization , Brazil , , n., , ,
resource rich countries , China ,
service sector , Latin America
service value added New Public Management
state vs. private sector –, Nigeria
, post-communist countries
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
public laboratories structural change and
of research technological learning/production capacity
UK , complementarity –
product productive interests , , –
product complexity/sophistication productivity
–, productivity explosion ,
product discovery , productivity/growth links –
product-led competition –, productivity growth , , n.,
product space –, n. equilibrium productivity growth ,
single/multi-product flow industrial policy and
taxonomies of sources of
production profit
‘de-territorialized’ production choices as only purpose of business
, profit sharing
digitalization of production , , rent/profits distinction
–, protection/protectionism , , ,
dynamics of production structures – s protectionist turn
fragmentation of , , , , Africa
internationalization of production , exchange rate protection , –,
–, , , , ,
new technologies and scaling-down of globalization narratives , ,
production – growth and ,
production engineering , , , , import protection ,
, n., import substitution and
production process as a value chain nineteenth-century
production subsidy , selective protectionism ,
production theory , shrinking protection
production-centric policymaking trade protection , , , ,
spatial hierarchy of production sites UK
technological innovation and US
tertiary production Uzbekistan
see also global production public-choice theory , –
production capabilities , , , , , public-private partnership ,
, , clean energy investment project ,
BRICS – –, ,
South Korea , grand challenges and dynamic public-
technological change and , , , private partnerships
US , , , , , , , , South Korea, public–private joint
, R&D , –
productive capacity , , , , public sector
definition n. organizational capabilities , –
firms: competition and productivity – public debt
industrial policy and public value , , , , ,
investment in , collective theory of value creation
production capacity/technological –
capabilities distinction public good
public value theory and public value theory –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Q labour-centred , –, , –,
Qatar ,
quotas , Marxism and industrial policy –
Marxist approach to manufacturing and
R industrialization –,
R&D , –, , , – participatory planning models –
advanced countries prescriptive level , –, ,
Brazil , , racial issues
China –, –, radical approaches to manufacturing and
EU , , , –, , , , industrialization –
, , , , , state , ,
France , , statist models –,
Germany –, value, exploitation, and power in
global South capitalism –
industrial application of research , worker co-operatives –, ,
, rational choice theory
Japan reciprocal control mechanisms , , –,
Latin America , , , , , ,
market failure approach and China , –
mission-driven research development banking
laboratories gender inclusion
OECD countries Latin America
post-communist countries –, reciprocity , ,
R&D expenditure , , regional development , ,
research – regional development banks , ,
research, privatization of RDAs (Regional Development
‘servicification’ Agencies)
South Korea , , –, , , regional industrial policy , ,
– transformative regional industrial
South Korea, public–private joint policy –,
R&D , – regional integration
spending on , ASEAN , –, ,
UK , BRICS , , , –,
US , , emerging and developing countries
see also innovation EU ,
radical industrial policy – inter-regional integration ,
analytic level , –, , Latin America ,
benefits – regional markets
capitalism –, , –, Regional Studies Association
class and –, –, regional trade , ,
climate change – regionalism ,
democracy and , , , , , BRICS , –
, – globalization narratives and
experiences of – regionalization –,
gender issues , renewable energy , , , , –
Kaldorian and structuralist benefits
approaches –, , capital costs
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
clean renewable energy sources , risks
, de-risking , ,
costs of , –, development banking , ,
costs reduction , , development banking, socializing
employment risks , ,
energy storage systems – late industrialization , –
energy subsidies n. ‘mission-oriented’ policies –
feed-in tariffs NDBs , , ,
geothermal energy , , , risk capital ,
Germany: Energiewende , , , state n., –
governments and robotics , , , , , ,
hydro-energy , , Russia ,
India – catch-up
innovation – de-industrialization
KfW and clean energy , , digital economy programme
levellized costs of , exports
private sector and FDI policy
rise in renewables n. ISI
shift to renewables , , manufacturing ,
SMEs and resource-rich country , ,
targeting SOEs
see also China: renewable energy; clean see also BRICS
energy; clean energy investment project; Rwanda –, , , ,
green industrial policy; solar energy/solar BPO (business-process outsourcing)
PV; wind-power industry sector –, ,
rents knowledge-based service sector , –
Africa, rent seeking , see also sub-Saharan Africa
rent/profits distinction
rent seeking , , , , –, , S
, , – Samsung Electronics (South Korea) , ,
rentier capitalism , ,
state and management of SAP (Systems, Applications & Products in
reshoring , , – Data Processing, Germany) ,
resource allocation , , , , n.
resource-based theory of the firm , , SASAC (State-owned Assets Supervision and
–, , Administration Commission,
shortcomings China) –, , –
resources see natural resources national champions , , , ,
returns see also China: national champions
diminishing returns , , , , Saudi Arabia
–, saving
Law of Diminishing Returns domestic savings –, , , , ,
see also increasing returns , ,
reward system East Asia: high savings rates and coercive
innovation – state power n.
‘mission-oriented’ policies , – forced savings n., , –
Ricardian trap SCBA (social cost-benefit analysis)
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
science –, resource security –, , ,
innovation and water security
social sciences see also energy security
technology and self-discovery , n., ,
US sensoring ,
see also STI service sector
SDGs (Sustainable Development Goals) , decline of manufacturing relative to service
, , industries ,
SDG , mission-oriented job segregation in n.
approach –, Kenya, knowledge-based service
see also sustainable development sector , –
Second Industrial Revolution , , , post-communist countries ,
, , Rwanda, knowledge-based service
sector, conceptualizations of –, sector , –
commodity/product-based concept , ‘servicification’ , , –, ,
, shift-and-share decomposition
location-based concept: industrial methodology , –
district , , Siemens (Germany) , , , ,
production/technology-based concept , Siemens-Alstom merger ,
, Silicon Valley (US) , , ,
‘what’/‘how’/‘where’ of production – Singapore n.,
see also technological changes de-industrialization , –
sectoral value chains , –, , –, economic growth and structural
, change
sectors EDB (Economic Development Board) ,
cross-sectoral investment , ,
cross-sectoral learning EE (electrical and electronics) exports
industrial mutations , , ELI , –, , –, ,
industrial policy and FDI
industrial sector , free trade
intersectoral linkages , , , , growth ,
Marxism innovation
Pavitt’s taxonomy of industrial sectors – ISI
primary/secondary/tertiary sectors , manufacturing –,
, , , ‘mission-oriented state’ , ,
sector specificity of growth , , technological upgrading/STI
sectoral productivity infrastructure , , , , ,
technical change and classification of , , ,
sectors TNCs ,
technological ranking of see also South East Asia
US differences among industrial Sinopec (China) , , , , ,
sectors –, , ,
vertically integrated sector –, smart regulation
see also technological changes smart specialization (EU) , , , ,
security issues , , –
industrial policy and challenges
nuclear energy entrepreneurial discovery
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
‘good’/‘bad’ economic activities , financing
place-based innovation-oriented industrial India, National Solar Mission –,
policy , South Africa
R&D and innovation policies South Korea
Strategy for Smart Specialization – see also renewable energy
‘unsmart’ specialization South Africa n., –,
see also EU industrial policy apartheid industrial policies , ,
SMEs (small and medium-sized ,
enterprises) , , apparel sector , , –,
Africa automotive sector , –,
ASEAN , –, , –, clean energy investment project ,
BRICS , , ,
China corruption ,
digital industrialization de-industrialization , ,
employment digital production technologies –
EU , diversifying manufacturing beyond heavy
France , industries
Germany/Mittlestand , , fossil-fuel consumption ,
Italy globalization , –,
renewable energy Joule Electric Vehicle
UK manufacturing
social market economy modernization programme
social reproduction , , , , privatization
–, , , solar industry
concept of n. trade liberalization
industrial policy and WTO
women, unpaid social reproduction , see also BRICS; sub-Saharan Africa
see also gender/growth regimes; gender and South East Asia , n., –
industrial policy automotive industry , ,
social sciences BoP problems , , , , , ,
socialism , , , ,
African socialism corruption
market socialism de-industrialization –
municipal socialism deregulation , , ,
SOEs (state-owned enterprises) n., ‘Dutch Disease’ , ,
, electrical/electronics , , , ,
Africa , , , , , , , , , , ,
BNDES, Brazil , , n. ELI , –, , ,
China , , , –, EPZs (export-processing zones) , ,
EU , –, ,
Russia ‘fallacy of composition’ syndrome ,
solar energy/solar PV , , , , , ,
Africa FDI ,
Brazil – GERD (gross expenditure on R&D) ,
China – ,
as clean renewable energy IPR , ,
costs of , , , ISI , –, , –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
South East Asia (cont.) Japan and ,
latecomer industrialization , – KFTC (Korea Fair Trade
macroeconomic mismanagement Commission) ,
manufacturing –, , KOITA (Korea Industrial Technology
manufacturing value added , , Association)
, Korea Development Bank ,
middle-income trap Latin America, comparison with ,
monetary policies –, , , –,
motor vehicle exports , , , leapfrogging –,
premature de-industrialization , , macroeconomic policies –,
, manufacturing
smuggling , monetary policies –,
STI infrastructure , –, , , patents –, –
, –, production capabilities ,
technological upgrading , , – public–private joint R&D , –
TNCs , , , , , , , R&D , , –, , , –
, , , , , Schumpeterian and capability-based view
see also Indonesia; Malaysia; the of industrial policy –
Philippines; Singapore; Thailand solar industry
South Korea , – state intervention , –
Foreign Exchange Control Act successful latecomer industrialization ,
crisis , , , , , ,
absorptive capacity , – tariffs , –,
automotive industry , , , technology licensing –,
capability building , , – technology transfer
catch-up , , , , telecommunications
chaebols , , , , training
clean energy investment project , Southern Rhodesia ,
, Soviet Union ,
competition regulation statist model of industrialization
deregulation –,
engineering , space technology ,
entry control , –, Spain ,
exports , specialization , , ,
FDI bad specialization
foreign technology acquisition –, comparative advantage, specialization
fossil-fuel consumption , according to
green industrial policies , evolution of technological capabilities and
growth production specializations –
HCI (Heavy Chemical and Industry) inertia in
policy patterns of , , –, , ,
human capital , ,
industrial policy , , , ‘primary-commodity specialization
infant industry protection , – trap’ , –, ,
in-house R&D , –, , trade specialization ,
innovation , , see also smart specialization
investment capabilities , stage theories
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
stagflation , , , – market failures and –,
standardization , , ‘picking winners’ ,
state – South Korea , –
financial crisis, responses to state activism –
China , , –, technological capability ,
development banking , , STI (science, technology, and innovation)
economic development and , – BRICS , , , –, , ,
entrepreneurial state ,
as facilitator for the private sector South East Asia , –, , , ,
firms and –,
industrial development and structural adjustment (s–s) ,
innovation and nn.–, , , –, ,
– Africa , , , –, , ,
neoclassical economics and Indonesia
as organizer of production , Latin America
as pioneer and catalyst of industrial the Philippines
development structural heterogeneity , , , ,
private sector/state relation , , ,
, structural transformation –, –, ,
radical industrial policy , , ,
rents, management of catch-up and –
risk-taking n., – China –,
state failure , , ‘deep’/‘shallow’ transformation –
state–market interaction , –, distributive effects of structural
state/private division transformation strategies
structural change and economic development and , , ,
trade and GVCs and ,
von Thünen’s modern state –, industrial policy and , , , , –,
welfare state , , –
see also developmental state; state industrial policy as driver of –,
intervention industry-oriented structural
state capitalism , , transformation
China – ISI and
reinvention/re-emergence of , macroeconomics/finance/structural change
US links –
state intervention , , manufacturing and –
– interventionist approach to ‘regressive’ structural change
industrial policy –, , – state and
ASEAN n., , n., successful structural transformation
capitalism – technological change and –
catch-up , technological learning and
climate change trade composition, structural
contradictions transformation, and
dynamic efficiency and diversification –,
France , , structuralism –, , , , –
industrial policy and , , , – exports
Italy Latin American structuralism , ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
structuralism (cont.) Swiss Federal Technical Cooperation
manufacturing , – Switzerland
neo-structuralism
sub-Saharan Africa , , T
s–s growth revival , Taiwan , , ,
apparel sector – exports
capability gap – innovation
cement industry –, monetary policies –
challenges for late-late industrializing TNC-led industrialization n.
countries – Tajikistan , , ,
domestic politics Tanzania –, , , , –
external debt crises targeting , , , , , ,
firms –, China
industrial policy , –, NDBs ,
learning costs/investment –, renewable energy
–, targeting failure
learning rents , , upgrading
learning trap – tariff barriers , , , , ,
limited progress in developing tariff protection n., , ,
manufacturing sectors – –,
technological capabilities taxation
trade liberalization avoidance/evasion of , ,
see also Africa; Ethiopia; Kenya; Nigeria; carbon taxes n., , , , ,
Rwanda –n.,
subsidies –, –, corporate taxation
BNDES n., , –, , n. diversification and
China , England
energy subsidies n. environmental taxes
EU, state aid , n., n., , favouring labour saving over resource
, –, saving
exports , , , , inflation tax , ,
fossil fuels subsidies , innovation and
France monopolies and
infant industries , neo-liberalism
innovation – pre/post-tax subsidies n.
production subsidies , primary role of
tax-subsidies , tax concessions , ,
supply side , , , , , , tax holidays n., ,
macroeconomic mismanagement tax reduction , ,
macroeconomic policy and tax subsidy ,
industrialization , , UK
supply-side biases of industrial policy US , , –,
supply-side interventions see also fiscal policy
sustainable development , , technical progress function –,
sustainable growth technological capabilities , , , , ,
see also SDGs , , , –
Sweden digital capability gap , –, –
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
evolution of technological capabilities and technology
production specializations – borrowing technology
large firms n. development and
production capacity/technological disruptive technologies , –
capabilities distinction frontier technologies , ,
state intervention fundamental properties of –
sub-Saharan Africa GPTs (general purpose technologies)
tacitness of growth and n.
upgrading of – interdependency
see also capabilities new technologies
technological change , –, , , paradigms, routines, organizations –
classification of sectors and science and
cross-sectoral technical change , tacit nature of –
definition technological asymmetries , ,
digitalization/digital technical ,
change –, technological dominance, micro-
economic development and –, , heterogeneity, and non-
evolutionary theory substitution –
Fourth Industrial Revolution and – technological paradigms and
industrial ecosystem framework , trajectories –
–, , , technology diffusion , –
industrial mutations , , technology gaps , , ,
industrial policy and , , – transfer of , , , ,
innovation , – see also automation; catch-up;
interdependency of knowledge; STI
localized technical change technology: specific countries
path dependence China , , , –
relevance of EU , , , , , , , ,
as sector-specific process , , , –,
sectoral shifts Japan ,
shifting terrain of the industrial , South Korea, foreign technology
sources of acquisition –,
structural change as non-linear South Korea, technology licensing
process –,
structural transformation and – US , , –, –, , ,
technical change/investment interaction technology-intensive sectors , , ,
see also digital production technologies: , , , , , , ,
challenges; sector, conceptualizations of ,
technological progress –, , , , telecommunications , , ,
importance of –,
TFP (total factor productivity) TFP (total factor productivity) , ,
technological upgrading n., , –, –
, , Thailand , ,
BRICS automotive industry , , ,
government and ,
South East Asia , , – de-industrialization ,
see also upgrading digital technical change ,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
Thailand (cont.) symmetrical trade ,
economic growth and structural trade composition, structural
change transformation, and
ELI , , –, diversification –,
growth , trade/development links –,
IMF/World Bank assistance , trade/economic growth links –
ISI , , trade/industry connection ,
manufacturing trade law
technological upgrading/STI trade models , , ,
infrastructure , , trade protection , , , ,
universities trade specialization ,
see also South East Asia trade wars , ,
Third Industrial Revolution , , , ‘vent for surplus’ models of international
–, , , trade
Third Way n. see also the entries below related to trade;
Thirlwall’s Law free trade
TNCs (transnational corporations) , , trade integration ,
–, , , , n. active vs. passive policies –
ASEAN , GVCs –
China n., , policy challenges –
digital platforms RVCs (regional value chains) –
global concentration in trade integration/development
inequality and links –,
regulation of upgrading and sophistication –
Singapore , see also GVCs
South East Asia , , , , , trade liberalization , , ,
, , , , , , , –
Taiwan n. Brazil ,
TNC-led industrialization DRC ratio
‘transnational’ term impact of ,
Toyota , , Kenya
ASEAN and , , n., Latin America –, ,
TPP (Trans-Pacific Partnership) , , post-communist countries
, shortcomings –
trade South Africa
bilateral trade , , , sub-Saharan Africa
developing countries , trade liberalization/growth relation ,
gains from – , , ,
Heckscher-Ohlin model of international see also free trade
trade n. trade theory , , ,
large firms and international trade Ricardian trade theory , ,
losses from , ,
multilateral trade –, , , trade union , ,
, anti-union legislation , , ,
post-communist countries – traditional industries
regional trade , , decline of ,
state and upgrading of
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
training , , , , , , UN ESCAP (UN Economic and Social
EU Commission for Asia and the
globalization and , , , Pacific) –,
on-the-job training , UNCTAD (UN Conference on Trade and
South Korea Development) , , , ,
vocational training , World Investment Report
see also education; learning catch-up –
transformative industrial policy , , clusters n.
– symmetrical trade
transformative regional industrial underemployment , , , ,
policy –, unemployment , , , , –
see also place-based approach UNEP (UN Environment Programme)
Trinidad and Tobago UNFCCC (UN Framework Convention on
TRIPS Agreement (Trade-Related Aspects of Climate Change)
Intellectual Property Rights) UNIDO (UN Industrial Development
Turkmenistan , , , , , Organization) , , , , ,
, ,
CIP Index (Competitive Industrial
U Performance Index) –,
UAE (United Arab Emirates) , digitalization/IR technologies , ,
UK (United Kingdom) , , ,
Industrial Strategy White Paper universities
Calico Act Carnegie Mellon University
catapult centres European University Institute,
colonial industrial policy Florence
de-industrialization , , Germany ,
digital platforms: competition industry-university linkages , ,
enforcement – IUCs (industry-university
First Industrial Revolution –, collaborations)
free trade monopoly of neoclassical economics at
industrial policy –, , university level
–, Nanyang Technical University
‘Industry .’ National University of Singapore
innovation research universities , ,
manufacturing – STEM programmes –
‘municipal socialism’ Thailand
neo-liberalism , , UK, catapult centres
privatization , University of the Philippines Diliman
protectionism upgrading , , ,
R&D , Europe
regional inequalities gender and industrial policy , ,
SMEs –,
taxation GVCs , –, –, ,
see also England import substitution
Ukraine labour’s skills/industrial upgrading
UN (United Nations) , , , , – complementarity n.
BRICS and , learning and
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
upgrading (cont.) protectionism
macroeconomic policy and rentier capitalism ,
industrialization , , R&D , ,
see also industrial upgrading; technological slavery , , –
upgrading structural change
US (United States) , , , , , successful latecomer industrialization
, ,
s Depression taxation , , –,
s , n., –, , –, technology , , –, –, ,
s , ,
American North/South divide –, wages, ‘great reversal’
–, –, weapons industry , , ,
anti-union legislation , , World War II , n.
automotive industry , World War II experience/policy , ,
capability triad –, – –, ,
corporations , –, see also the entries below for US; New Deal
dark money US: agencies and departments
debt n. DARPA (Defense Advanced Research
de-industrialization , , , , Projects Agency)
democracy and wealth Department of Commerce ,
deregulation , , , – Department of Defense
development banking Department of Energy
differences among industries –, DPC (Defense Plant Corporation) ,
, , ,
engineering , , , –, , MDC (Manpower Development
garments and textiles , , , Commission)
government , , –, OSRD (Office of Scientific Research and
innovation , , , Development) , ,
leapfrogging PWA (Public Works Administration)
macroeconomic policy , RFC (Reconstruction Finance
Manhattan Project , Corporation) –,
manufacturing , , , –, , TVA (Tennessee Valley Authority) ,
, , , –
manufacturing employment , , , WPB (War Production Board) ,
, – ,
market-centric policymaking US: ‘belts’
mass production –, , , ‘Cotton Belt’
military/defence spending , , , manufacturing belt , , , , ,
–, –, , , , ,
‘municipal socialism’ Rust Belt , , ,
neo-liberalism , –, , , ‘Sun Belt’ , –
–, US: Federal Reserve Bank , , ,
Pax America , ,
plantation economy , , , , – global financial crisis ,
post-war policy –, –, , Federal Reserve Act
, Green Bond programmes , –,
productivity growth macro stabilization
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
US: international dimension GVCs
China/US trade issues new technologies and
EU , , , public value creation ,
Germany , –, value chain –,
Japan/US rivalry , –, , – value extraction , , ,
USSR (Union of Soviet Socialist Venezuela ,
Republics) , , , , Verdoorn’s Law , ,
late industrialization Vietnam , , , –,
see also post-communist countries; Russia digital technical change
Uzbekistan , , , , , –, manufacturing
, , Vinnväxt programme (Sweden) –
virtual reality ,
V
value W
labour theory of value wages
NPV (net present value) ASEAN: automotive industry
see also the entries below for value; public average wage per cluster category,
value Europe
value added , China n.
‘cult of added value’ , demand and –,
domestic value added , –, , gender wage gap ,
foreign value added – high wages
GVCs , – impact on economic growth of a one
increasing value added , , , percentage point increase in real wage
industrial policy theory , , , growth –,
low value-added manufacturing/ low-wage female labour , , –,
trap n., , , lower wages ,
post-communist countries, industry value share in the gross output price –,
added , wage and profit rate –,
post-communist countries, service value wage differentials ,
added wage earners , ,
wealth and wage-goods inflation –,
see also manufacturing value added wage rates ,
value chain Washington Consensus , , , ,
new technologies and – colonial policy
production process as a value chain criticism of
RVCs (regional value chains) – deregulation
sad curve , exports
sectoral value chains , –, , free market
–, , industrial policy and –
‘short’/‘long’ value chains Latin America –,
smile curve , , , , see also neo-liberalism
see also GVCs Washington Institutions see IMF; World Bank
value creation , , , , , wealth
, industrialization and , ,
collective theory of – large firms and
digital industrialization technical knowledge and n.,
OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi
wealth (cont.) The East Asian Miracle
value added and Washington Institutions , , ,
wealth creation –
WEF (World Economic Forum) , , World System Theory n.
, World War II , , ,
welfare economics –n., , clusters as post-Second World War
welfare/welfare state , , , phenomena
wind-power industry , post-Second World War ‘golden age’ ,
China , –, n.
as clean renewable energy US , n.
costs of , US World War II policy , , –,
onshore wind ,
see also renewable energy WTO (World Trade Organization) , ,
women ,
human capacities and , , , Agreement on Textiles and
, Clothing
ICT and n. China n., , , , , , ,
‘marriage bar’ n. ,
unpaid work , , , , constraints posed by
n., e-commerce moratorium ,
weaker bargaining power India –
see also gender and industrial policy; gender ISI policies
inequality; social reproduction Latin America
workers multilateral trade rules –,
austerity for post-communist countries
co-operatives –, ,
see also labour; wages Y
World Bank , n., , , , Yugoslavia
, BOALs (Basic Organizations of Associate
development banking and diversity of Labor) –
funding radical industrial policies , –
on growth
on middle-income trap n. Z
policy hierarchy approach n. Zimbabwe
renewable energy investments apartheid boycott
structural adjustment programmes , de-industrialization
You might also like
- A Heartbreaking Work Of Staggering Genius: A Memoir Based on a True StoryFrom EverandA Heartbreaking Work Of Staggering Genius: A Memoir Based on a True StoryRating: 3.5 out of 5 stars3.5/5 (231)
- The Sympathizer: A Novel (Pulitzer Prize for Fiction)From EverandThe Sympathizer: A Novel (Pulitzer Prize for Fiction)Rating: 4.5 out of 5 stars4.5/5 (120)
- Grit: The Power of Passion and PerseveranceFrom EverandGrit: The Power of Passion and PerseveranceRating: 4 out of 5 stars4/5 (588)
- Devil in the Grove: Thurgood Marshall, the Groveland Boys, and the Dawn of a New AmericaFrom EverandDevil in the Grove: Thurgood Marshall, the Groveland Boys, and the Dawn of a New AmericaRating: 4.5 out of 5 stars4.5/5 (266)
- The Little Book of Hygge: Danish Secrets to Happy LivingFrom EverandThe Little Book of Hygge: Danish Secrets to Happy LivingRating: 3.5 out of 5 stars3.5/5 (399)
- Never Split the Difference: Negotiating As If Your Life Depended On ItFrom EverandNever Split the Difference: Negotiating As If Your Life Depended On ItRating: 4.5 out of 5 stars4.5/5 (838)
- Shoe Dog: A Memoir by the Creator of NikeFrom EverandShoe Dog: A Memoir by the Creator of NikeRating: 4.5 out of 5 stars4.5/5 (537)
- The Emperor of All Maladies: A Biography of CancerFrom EverandThe Emperor of All Maladies: A Biography of CancerRating: 4.5 out of 5 stars4.5/5 (271)
- The Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good LifeFrom EverandThe Subtle Art of Not Giving a F*ck: A Counterintuitive Approach to Living a Good LifeRating: 4 out of 5 stars4/5 (5794)
- The World Is Flat 3.0: A Brief History of the Twenty-first CenturyFrom EverandThe World Is Flat 3.0: A Brief History of the Twenty-first CenturyRating: 3.5 out of 5 stars3.5/5 (2259)
- The Hard Thing About Hard Things: Building a Business When There Are No Easy AnswersFrom EverandThe Hard Thing About Hard Things: Building a Business When There Are No Easy AnswersRating: 4.5 out of 5 stars4.5/5 (344)
- Team of Rivals: The Political Genius of Abraham LincolnFrom EverandTeam of Rivals: The Political Genius of Abraham LincolnRating: 4.5 out of 5 stars4.5/5 (234)
- The Gifts of Imperfection: Let Go of Who You Think You're Supposed to Be and Embrace Who You AreFrom EverandThe Gifts of Imperfection: Let Go of Who You Think You're Supposed to Be and Embrace Who You AreRating: 4 out of 5 stars4/5 (1090)
- Hidden Figures: The American Dream and the Untold Story of the Black Women Mathematicians Who Helped Win the Space RaceFrom EverandHidden Figures: The American Dream and the Untold Story of the Black Women Mathematicians Who Helped Win the Space RaceRating: 4 out of 5 stars4/5 (895)
- Her Body and Other Parties: StoriesFrom EverandHer Body and Other Parties: StoriesRating: 4 out of 5 stars4/5 (821)
- Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic FutureFrom EverandElon Musk: Tesla, SpaceX, and the Quest for a Fantastic FutureRating: 4.5 out of 5 stars4.5/5 (474)
- The Unwinding: An Inner History of the New AmericaFrom EverandThe Unwinding: An Inner History of the New AmericaRating: 4 out of 5 stars4/5 (45)
- What Is A Security AgreementDocument5 pagesWhat Is A Security AgreementJ. Fluellyn100% (2)
- The Yellow House: A Memoir (2019 National Book Award Winner)From EverandThe Yellow House: A Memoir (2019 National Book Award Winner)Rating: 4 out of 5 stars4/5 (98)
- On Fire: The (Burning) Case for a Green New DealFrom EverandOn Fire: The (Burning) Case for a Green New DealRating: 4 out of 5 stars4/5 (73)
- Letter For EOT AEDocument3 pagesLetter For EOT AEDipak PatelNo ratings yet
- Commission On Audit: Qualified OpinionDocument3 pagesCommission On Audit: Qualified OpinionMubarrach MatabalaoNo ratings yet
- IDinsight 2020 Associate Program - Writing ExerciseDocument4 pagesIDinsight 2020 Associate Program - Writing ExerciseSaudamini Sharma0% (1)
- Ang Yu Asuncion Vs Court of AppealsDocument4 pagesAng Yu Asuncion Vs Court of AppealsShazna SendicoNo ratings yet
- RF Guia Do Mundo - 5edab30fdec61Document402 pagesRF Guia Do Mundo - 5edab30fdec61Fernando Barbosa100% (1)
- 2015-Made in Africa Industrial Policy in Ethiopia-OqubayDocument272 pages2015-Made in Africa Industrial Policy in Ethiopia-OqubayReyes J. MoralesNo ratings yet
- 2021-Industrial Policy Sustainable Develpoment Pos Covid-FerranniniDocument15 pages2021-Industrial Policy Sustainable Develpoment Pos Covid-FerranniniReyes J. MoralesNo ratings yet
- 2022-European Union Competition Policy Versus Industrial Competitiveness... - YoshizawaDocument165 pages2022-European Union Competition Policy Versus Industrial Competitiveness... - YoshizawaReyes J. MoralesNo ratings yet
- 2021-Exploring Re Emerge of Industrial Policy-Johnstone Et AlDocument15 pages2021-Exploring Re Emerge of Industrial Policy-Johnstone Et AlReyes J. MoralesNo ratings yet
- 2022-New Approach To Identifying Industrial Transition-YoonDocument11 pages2022-New Approach To Identifying Industrial Transition-YoonReyes J. MoralesNo ratings yet
- 2014-NE A New Challenge For Development Theory From LA-Burchardt & DietzDocument21 pages2014-NE A New Challenge For Development Theory From LA-Burchardt & DietzReyes J. MoralesNo ratings yet
- Dispossession by Accumulation? Mining, Water and The Nature of Enclosure On The Bolivian AltiplanoDocument20 pagesDispossession by Accumulation? Mining, Water and The Nature of Enclosure On The Bolivian AltiplanoMaximiliano Bolados ArratiaNo ratings yet
- Gudynas PDFDocument14 pagesGudynas PDFwendellNo ratings yet
- 2012-Natural Resource Dynamics Posneoliberalism in AL-Veltmeyer H.Document64 pages2012-Natural Resource Dynamics Posneoliberalism in AL-Veltmeyer H.Reyes J. MoralesNo ratings yet
- 2011-South America S Commodities Boom-Cypher J.Document29 pages2011-South America S Commodities Boom-Cypher J.Reyes J. MoralesNo ratings yet
- 2009-The New Extraction Rewriting The Political Ecology of The Andes-Bebbington A.Document10 pages2009-The New Extraction Rewriting The Political Ecology of The Andes-Bebbington A.Reyes J. MoralesNo ratings yet
- 2019-Extraction, Revolution, Plurinationalism-MarstonDocument20 pages2019-Extraction, Revolution, Plurinationalism-MarstonReyes J. MoralesNo ratings yet
- 2020-NE Phyto Socialism, Trees, Bodies... - Briggs CharlesDocument22 pages2020-NE Phyto Socialism, Trees, Bodies... - Briggs CharlesReyes J. MoralesNo ratings yet
- 2020-Review of Resource Radicals - From Petro Nationalism To Post Extractivism Ecuador-M. Del NidoDocument3 pages2020-Review of Resource Radicals - From Petro Nationalism To Post Extractivism Ecuador-M. Del NidoReyes J. MoralesNo ratings yet
- 2020-Political Economy of LA Conflicts Over Mining Extractivism-S. SmartDocument13 pages2020-Political Economy of LA Conflicts Over Mining Extractivism-S. SmartReyes J. MoralesNo ratings yet
- Supplementary Spec To PIP ELSAP04 AC UPS System S 734v2020 11Document11 pagesSupplementary Spec To PIP ELSAP04 AC UPS System S 734v2020 11Serge RINAUDONo ratings yet
- Occupied Iraq - New Year, Same ZionismDocument17 pagesOccupied Iraq - New Year, Same Zionismtrk868581No ratings yet
- Mark Kirveen CandavaDocument15 pagesMark Kirveen CandavaJillian Margarette100% (1)
- Who DeceivesDocument310 pagesWho DeceivesNorman Vincent PealeNo ratings yet
- Associate Membership in Housing SocietyDocument3 pagesAssociate Membership in Housing SocietyRohit JadhavNo ratings yet
- UK Airprox Board Guidelines On Factors and Risk of Airprox 03jun 2019Document2 pagesUK Airprox Board Guidelines On Factors and Risk of Airprox 03jun 2019Kang HsiehNo ratings yet
- POLGOVDocument9 pagesPOLGOVjmNo ratings yet
- Unit Iv PDFDocument12 pagesUnit Iv PDFlena cpaNo ratings yet
- Khamis 21.3.24Document2 pagesKhamis 21.3.24razxxfNo ratings yet
- ProsidingSEMNASHPAV2021 Adhitya Y Pradhana See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/352017846 PENGARUH PROFIL EMOSI DAN SENSORI ICE CREAM DARI VCO PROSES BASAH DAN KERING DENGAN PENAMBAHAN KOLANG-KALING EFFECT OF EMOTION AND SENSORY PROFILE ICE CREAM FROM WET AND DRYDocument529 pagesProsidingSEMNASHPAV2021 Adhitya Y Pradhana See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/352017846 PENGARUH PROFIL EMOSI DAN SENSORI ICE CREAM DARI VCO PROSES BASAH DAN KERING DENGAN PENAMBAHAN KOLANG-KALING EFFECT OF EMOTION AND SENSORY PROFILE ICE CREAM FROM WET AND DRYadhitya yudha PradhanaNo ratings yet
- Audit of ExpensesDocument3 pagesAudit of ExpensesIG RaheesNo ratings yet
- This Content Downloaded From 65.0.53.109 On Tue, 10 Nov 2020 15:30:44 UTCDocument17 pagesThis Content Downloaded From 65.0.53.109 On Tue, 10 Nov 2020 15:30:44 UTCKaran BhardwajNo ratings yet
- Preliminary Chapter Criminal ProcedureDocument9 pagesPreliminary Chapter Criminal ProcedurewalnutwitchNo ratings yet
- G.R. No. 236726, Atty. Francisco vs. Castillo, Et - Al., 14 Sept. 2021Document4 pagesG.R. No. 236726, Atty. Francisco vs. Castillo, Et - Al., 14 Sept. 2021Femme ClassicsNo ratings yet
- 3.1 & 2 Input Tax CreditDocument21 pages3.1 & 2 Input Tax Creditvenkatesh grietNo ratings yet
- Memorandum of AgreementDocument2 pagesMemorandum of AgreementNorhana LumambasNo ratings yet
- Banzon Vs CADocument10 pagesBanzon Vs CASharel LontocNo ratings yet
- 19th Century Philippines As Rizal S Context FullDocument8 pages19th Century Philippines As Rizal S Context FullJoshua del PozoNo ratings yet
- SN Subproje CT Id Subproject Name Governorat e Amount (m3) Length (M)Document2 pagesSN Subproje CT Id Subproject Name Governorat e Amount (m3) Length (M)Mohammed SalmanNo ratings yet
- How Gap Manages ResponsibilityDocument4 pagesHow Gap Manages ResponsibilityudeiyNo ratings yet
- Show Temp - pl-24Document2 pagesShow Temp - pl-24John DodgeNo ratings yet
- The Case of Nancy Cruzan (ANTIPORDA)Document1 pageThe Case of Nancy Cruzan (ANTIPORDA)ALEXANDRA VICTORIA ANTIPORDANo ratings yet
- Water Supply, Inc., Et Al., G.R. No. 168979, 2 DecemberDocument24 pagesWater Supply, Inc., Et Al., G.R. No. 168979, 2 DecemberJohnny Johnny Yes Papa SinsNo ratings yet
- EPG Vs CADocument2 pagesEPG Vs CAabbyhwaitingNo ratings yet
