Industrial policy: Clarifying options through taxonomy and decision trees

Motivation Industrial policy is on the government agenda in many countries at different stages of development. Despite an extensive academic literature, much of the discussion is too general to guide policy‐makers. Purpose The article reviews the taxonomies of industrial policy in the literature, highlights some of their limitations and offers a simple alternative based on constraints to industrial development. It applies this framework in the context of one low‐income country —Ethiopia—and suggests a problem‐tree approach to address the binding constraints to growth in particular sectors. Methods Case studies of Ethiopia’s garment, leather goods and cut‐flowers sectors are used as illustrations of the simple taxonomy proposed. Conclusion In low‐income countries, the key issues for industrial policy often relate to basic issues, such as the provision of adequate infrastructure and access to land, rather than to the choice of particular forms of incentive. Policy Implications By focusing on different markets, the simple taxonomy proposed could clarify government options in deciding how best to overcome critical constraints to competitiveness in a given sector.