Reinventing Industrial Strategy: The Role Of Government Policy In Building Industrial Competitiveness

As liberalization and globalization gather pace, some developing countries cope well but the majority do not. Diverging industrial competitiveness is one of the causes of the growing disparities in income: the potential that globalization offers for industrial growth is being tapped by a relatively small number of countries, while liberalization is driving the wedge between them and laggards deeper. This paper examines two approaches to this problem: neoliberal and structuralist. The neoliberal approach is that the best strategy for all countries and in all situations is to liberalize. Integration into the international economy, with resource allocation driven by free markets, will let them realise their .natural. comparative advantage, optimize dynamic advantage and yield the maximum attainable growth. No government intervention can improve upon this but will only reduce welfare. The structuralist approach puts less faith in free markets and more in the ability of governments to mount interventions effectively. It questions the theoretical and empirical basis for the argument that untrammelled market forces account for the industrial success of the East Asian Tigers (or the presently rich countries). Accepting the mistakes of past strategies and the need for greater openness, it argues that greater reliance on markets also needs a more proactive role for the government. The paper reviews the nature of current globalization and evidence on the growing divergence in competitive performance in the developing world. It goes on to consider the case for industrial policy, arguing that interventions are necessary to overcome market failures in building the capabilities required for industrial development. The approach adopted draws on evolutionary theories of technical change as applied to development in the technological capability approach. The paper then describes the strategies adopted by the Asian Tigers to build industrial competitiveness, pointing out the pervasiveness of selective interventions and significant strategic differences between them. The paper concludes with lessons for other developing countries: the kinds of industrial policy needed in the current international setting are clearly different from the traditional forms of inward-looking industrialisation strategies of the early post-war era, but globalization and technical change do not eliminate the need for intervention. On the contrary, given path dependence, cumulativeness and agglomeration economies, they increase the need. There is therefore a compelling need to reconsider the rules of the game constraining the exercise of industrial policy, and for international assistance in designing and implementing appropriate policies.