On the Middle Income Trap, the Industrialization Process and Appropriate Industrial Policy

In the 1960s, Kaldor defined the manufacturing sector as the engine of growth, suggesting that industrialization might help accelerate growth rates in low income economies. This is still relevant in today’s world, where growth rates in countries in the middle income trap slow down, extending their time in the trap. In some of these economies, industrialization slows down while others face “premature deindustrialization.” Adding to this scenario, this paper describes, in Kaldorian fashion, the streamlined features of industrialization, technical capabilities and technical progress, which offer explanations as to why sectoral industrial policies are necessary in releasing countries from the trap. It presents a taxonomy of industrial policies and discusses how industrial policy and science, technology and innovation policies should be sequenced along the process of industrialization. Finally, the paper develops a methodology to identify the “strategic” sectors on which industrial policy could focus.