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The Oxford Handbook of Industrial Policy
 9780198862420, 0198862423

Table of contents :
Cover
The Oxford Handbook of Industrial Policy
Copyright
Acknowledgements
Contents
List of Figures
List of Tables
List of Contributors
Part I: Introduction
Chapter 1: Intoruction to Industrial Policy and Development
1.1 An Overview of Industrial Policy and Development
1.1.1 History and Debate in Industrial Policy
1.1.2 Evolving Challenges to Industrial Policy
1.1.3 The Shifting Terrain of Industrial Policy
1.1.4 Political Economy and Industrial Policy
1.1.5 The Cabinet of Policy Errors
1.2. Aims and Approaches of the Handbook
1.2.1 Aims and Approaches
1.2.2 Process
1.3 Organization and Structure
1.3.1 Part I: Introduction
1.3.2 Part II: Theoretical Perspectives
1.3.3 Part III: Context and Connections
1.3.4 Part IV: Experiences in Advanced Economies
1.3.5 Part V: Experiences in Emerging and Developing Countries
References
Chapter 2: The Theory and Practice of Industrial Policy
2.1 Introudction to the Theory and Practice of Industrial Policy
2.2 Theoretical Perspectives of Industrial Policy
2.2.1 The Concept of Industrial Policy
2.2.2 Structural Transformation and Industrial Policy
2.2.2.1 Perspectives on Structural Transformation
2.2.2.2 Manufacturing as an Engine of Growth and Structural Change
2.2.2.2.1 Linkages and Complementarities
2.2.2.3 The Strategic Role of Exports
2.2.2.4 Structural Transformation and its Implications for Industrial Policy
2.2.3 The Infant Industry Theory
2.3 Evolving Thinking on Industrial Policy: Technological Learning and Catch-up
2.3.1 Technical Change and Economic Development
2.3.2 Theoretical Underpinning of Catch-up and Late Development
2.3.3 Technological Learning and Industrial Policy
2.3.3.1 Technological Learning
2.3.3.2 Innovation Systems and Infrastructure
2.3.3.3 Implications for Technological Learning and Industrial Policy
2.4 The State and the Politics of Industrial Policy
2.4.1 The Dynamics of the State‒Market Mechanism
2.4.2 Politics and Political Economy
2.4.3 Disciplining the Private Sector and Reciprocity
2.4.4 Conflict and Political Stability
2.4.5 Myths Surrounding Industrial Policy
2.5 The Practice of Industrial Polciy: Dynamics, Adaptability, and Principles
2.5.1 Linkage Dynamics and Interdependence
2.5.2 Industrial Ecosystem and Cluster Dynamics
2.5.3 Tensions in Industrial Policy
2.5.3.1 Strategic Compatibility and Coherence
2.5.3.2 Synergy and Connections to Other Policies
2.5.3.3 Competitiveness and Discipline
2.5.4 Summary
2.6. Concluding Remarks: Observations and Emerging Issues
2.6.1 The Middle-income Trap
2.6.2 Changing Patterns of Global Production and World Economy
2.6.3 Accelerated Technological Advancement
2.6.4 Sustainability and Green Industrial Policy
Acknowledgements
References
Part II: Theoretical Perspectives
Chapter 3: Industrial Policy, Macroeconomics, and Structural Change
3.1. Introduction
3.2 Growth Patterns
3.3 The Dynamics of Production Structures
3.3.1 Innovations
3.3.2 Complementarities
3.3.3 The Interplay of Innovations and Complementarities
3.3.4 The Links between Productivity and Growth
3.4 Commodity Dependence
3.5 Macroeconomics, Finance, and Structural Change
3.6 Policy Implications
Acknowledgements
References
Chapter 4: Industrial Policies, Patterns of Learning, and Development: An
Evolutionary Perspective
4.1. Introduction
4.2 The Fundamental Properties of Technology
4.2.1 Technological Paradigms and Trajectories
4.2.2 Paradigms, Routines, Organizations
4.3 Technological Dominance, Micro-Heterogeneity, and Non-substitution
4.4 Some General Interpretative Implications
4.5 Structural Changes as a Fundamental Feature of Catching up
4.5.1 The Evolution of Technological Capabilitiesa nd Production Specializations
4.6 The Crucial Role of Industrial Polices
4.6.1 Emulation and, sometimes, Leapfrogging as a General Principle Inspiring Policies
4.6.2 The Complementarity between Technological Learning and the Development of Production Capacity
4.6.3 The Necessity of Nurturing Infant Industries
4.6.4 Industrial Policies in a Sino-centric World: Some Conclusions
4.7 Appendix: Shift-and-Share Decompoistion Methodology
Acknowledgements
References
Chapter 5: Neoclassical Economic Perspectives on Industrial Policy
5.1 Introduction
5.2 Theory of Domestic Distortions and the Policy Hierarchy
5.3 Structural Adjustment Era
5.4 Revival of Interest in Neoclassical Industrial Policy after 2000
5.5 New Structural Economics
5.6 Doomed to Choose: How to Implement Selectivity
5.7 Efficiency Indicators
5.8 Product Space
5.9 Dothese Calculations have any Role?
5.10 Conclusions
References
Chapter 6: Enterprises and Industrial Policy: Firm-based Perspectives
6.1 Introduction
6.2 Theory of the Firm and Enterprises in Industrial Development
6.2.1 Resource-based Theory of the Firm
6.3 Marret Power, Competition, and Enterprise Strategies
6.3.1 Competition and Productivity
6.3.2 Economic Power of Companies
6.3.3 Economic Power, Rents, and Political Settlement
6.4 Dimensions of the Internationalization of Production
6.5 Digitalization of Production, Enterprises, and Industrial Policy
6.5.1 Digitalization of Production
6.5.2 Digital Platforms
6.5.3 Industrial Policy Implications
6.6. Conclusion
References
Chapter 7: Radical Perspectives on Industrial Policy
7.1. Introduction
7.2 Radical Approaches to the Role of Manufacturing and Industrialization
7.2.1 Kaldorian and Structuralist Approaches: Manufacturing as a Special Engine of Growth
7.2.2 A Marxist Approach to Manufacturing and Industrialization
7.3 Marxism and Industrial Policy: Beyond Sectors and Developmen
7.3.1 Value, Exploitation, and Power in Capitalism
7.3.2 Industrial Policy: The Analytic and the Prescriptive
7.3.3 Climate Change: The Potential and Necessity of Radical Industrial Policy Today
7.4 Experiences of 'Radical' Industrial Policies
7.4.1 Statist Models of Industrialization
7.4.2 Labour-centred Industrial Development: Worker Co-operatives
7.4.3 Models of Industrial Policy with Participatory Planning
7.5 Conclusion
References
Part III: Context and Connections
Chapter 8: Global Value Chains and Regionally Coordinated Industrial Policy: The Case of ASEAN
8.1 Regional Economic Integration, The Core of ASEAN Industrial Policy
8.2 The Deepening of GVC Integraion: ASEAN, by Numbers
8.3. The Evolution of ASEAN Industrial Policy: From Import-substitution Industrialization to Export-oriented Industrialization to The Deepening of GVC Integraion
8.4 A Closer Look at ASEAN Industrial Policy in the Era of GVCs
8.4.1 Reshaping ASEAN Industrial Policy in the Era of GVCs: Towards a more Inclusive Participation
8.4.2 ASEAN Industrial Policy in GVCs: Success or Failure?
8.5 ASEAN's Regional Policy Coordination: The Case of the Auto Industry in Indonesia and Thailand
8.5.1 The GVC in the Automotive Industry
8.5.2 A Path to Development and Industrial Upgrading
8.5.3 ASEAN’s Regional Policy Coordination in the Automotive Industry
8.6 The Future Milestones in ASEAN Industrial Policy
References
Chapter 9: Managing Trade through Productive Integration: Industrial
Policy in an Interdependent World
9.1 Introduction
9.2 The Multifaceted Connections Between Trade Integration and Development
9.2.1 Gains from Trade?
9.2.2 Trade Composition, Structural Transformation, and Diversification
9.3 Productive Integration: The Emergence of Global Value Chains
9.3.1 Mapping GVCs
9.3.2 Assessing the Impact of GVCs
9.4 Managing Integration, Facing the Policy Challenges Ahead
9.4.1 Active versus Passive Policies
9.4.2 Upgrading and Sophistication
9.4.3 Regional Value Chains
9.5. Conclusion
References
Chapter 10: Greening Industrial Policy
10.1 Why Green Industrial Polciy?
10.2 General Features of the Greening of Industrial Policy
10.2.1 Energy
10.2.2 Materials/Resources
10.2.3 Finance
10.3 Effective Industrial Policy/Green Growth Initiatives in India and China
10.3.1 Green Industrial Policy in India and its Impact on Trade
10.3.2 Green Industrial Policy in China and its Impact on Trade
10.4 Opportunities for Late Latecomers to Apply Green Industrial Policies to Drive Development
10.5 Why Would any Country Wish to Continue with Fossil-Fuelled D evelopment?
10.6 Greening as Enhancing Energy and Resource Security: Working with the Differential Principle
10.7 Concluding Comments
References
Chapter 11: Globalization Narratives and Industrial Policy
11.1 The Approach Adopted in this Chapter
11.2 Theoretical Persectives
11.3 Hyper-Globalization and De-Globalization
11.4 Narratives in Action I: Globalization Indices
11. 5 Narratives in Action II: Three Storylines
11.5.1 Globalization as Inexorable yet Malleable
11.5.2 Regionalization as a Process that can Refract Global Neo-liberalism
11.5.3 Digital Industrialization: Distant Promise or Catalyst of Inequality?
11.6 Next Steps
11.7 Leveraging Storylines as Policy Space
Acknowledgements
References
Chapter 12: Grand Challenges, Industrial Policy, and Public Value
12.1 Introduction
12.2 From Marret Failure to Marret Shaping
12.3 Learning from History:The Evolution of Mission-oriented Policies
12.4 Instrumentalizing Missions as Industrial Policy
12.5 R: Routes and Directionality—A Mission-oriented Approach
12.6 O: Organizational Capabilities in the Public Sector
12.7 A: Assessment and Evaluation
12.8 R: Risks and Rewards
12.9 Conclusion
Acknowledgements
References
Chapter 13: The Political Economy of Development Banking
13.1 Introduction
13.2 The Economic Rationale for Development Banking
13.3 Lessons from Effective Development Banks
13.4 Diversification of Development Financing Matters for Industrial
Policy
13.5 Case Study: The Political Economy of Development Banking in Brazil
13.5.1 The Positive Side of Development Banking in Brazil
13.5.2 The Limitations of BNDES and the Importance of Broad Political Economy Factors
13.5.3 Policy Debates: Assessing the Role and Effectiveness of BNDES in Brazil
13.5.4 The Politics of Development Banking in Brazil
13.6 General Policy Considerations
References
Chapter 14: Technical Change, the Shifting ‘Terrain of the Industrial’,
and Digital Industrial Policy
14.1 Introduction
14.2 Technical Change and the Concepts of Sector: 'The What', 'The How', and 'The Where'
14.3 'Shifting Terrains': Technical Change and Digitalization within Industrial Ecosystems
14.4 Industrial Policy: Challenges and Opportunities in the New Digital Terrain
14.4.1 Technology Absorption, Deployment, and Technical Change: 'Capability Threshold'
14.4.2 Production System: Retrofitting and Integration
14.4.3 Infrastructure: Basic and Digital
14.4.4 Technology Diffusion: 4IR Islands and the Digital Capability Gap
14.4.5 Technology Access and Affordability: Endogenous Asymmetries
14.5 Conclusions
Acknowledgements
References
Chapter 15: An Industrial Policy Framework to Advance a Global Green
New Deal
15.1 Introduction
15.2 What is Clean Energy?
15.2.1 Natural Gas
15.2.2 Nuclear Energy
15.2.3 Geoengineering
15.2.4 Energy Efficiency and Clean Renewable Energy
15.2.5 Energy Efficiency
15.2.6 Estimating Costs of Efficiency Gains
15.2.7 Rebound Effects
15.2.8 Renewable Energy
15.2.9 Costs of Expanding Renewable Capacity
15.3 Economic Growth and Emissions Reductions
15.3.1 Global Model Framework and Calculations
15.4 Industrial and Financial Policies
15.4.1 Industrial Policies
15.4.2 Providing Cheap and Accessible Financing
15.4.3 Sources of Aggregate Funding
15.4.4 Channelling Financial Resources into Specific Investment Projects
15.5. Domestic Resource Capacities for Clean Energy Investiments
15.5.1 Fossil Fuel Consumption and Imports/Exports
15.6 Conclusion
17.7 Appendix
References
Chapter 16: Industrial Policy and Gender Inclusivity
16.1 Introduction
16.2 The Impact of Industrial Policy and Structural Change on Gender Equality
16.2.1 Gender, Employment, and Industrialization
16.3 Gender Equality Feedback Loops: Impact on Success of Industrial
Policies
16.3.1 Gender and Labour Productivity Growth
16.3.2 Gender and Knowledge Production
16.3.3 Gender, Diversity, and Technical Design
16.4 Conclusion
Acknowledgements
References
Chapter 17: Macro-Policy, Labour Markets, and Industrial Policy
17.1. Introduction
17.2 Setting the Stage: An Export-led Model of Economic Growth
172.1 Enter the Balance-of-Payments Constraint
17.3 'Big Push' Industrialization
17.3.1 The ‘Wage-Goods Inflation’ Barrier: A Ricardian–Kaleckian Mechanism
17.3.2 A Drop in Domestic Expenditure Growth: A Robinsonian Mechanism
17.3.3 Forced Savings, Restrictive Monetary Policy, and Destabilizing Austerity: Three Keynesian Mechanisms
17.4 Vicissitudes in the Life of Export-led Industrialization Strategies
17.4.1 The ‘Dutch Disease’
17.4.2 Escaping the Primary-Commodity Specialization Trap
17.5 Labour Laws as Instruments of Industrial Policy
17.5.1 Wages and Demand
17.5.2 ‘Technology-forcing’ Labour-Market Regulation
17.5.3 The Wage and the Profit Rate
17.6 Macro-Policy Lessons for Late I ndustrialization
References
Chapter 18: Technological Disruptions, GVCs, and Industrial Policy
18. 1 Introduction
18.2 Technological Change and the Fourth Industrial Revolution
18.3 GVCs and Manufacturing Hollowing Out
18.4 Signs of De - globalization
18.5 Industrial Policy and Beyond
18.6 Transformative Industrial Policy
18.7 Conclusions
Acknowledgements
References
Part IV: Experiences in Advanced Economies
Chapter 19: Industrial Policy: A Long-term Perspective and Overview
of Theoretical Arguments
19.1 New Perspectives on Cold War Economic Theory: Adam Smith, David Ricardo, and Paul Samuelson Revisited
19.2 The Historical Roots of Industrial Policy Theory
19. 3 The Key to Wealth as Urban Synergies Created by Adding Value to Raw Materials under a Large Division of Labour: Giovanni Botero (1589)
19.4 Increasing Returns: From Antonio Serra (1613) to Alfred Marshall (1890) and Paul Krugman (19181)
19.5 How Economic Activities Differ,
Learning Curves, and the Sequencing of Technological Change
19.6 On the 'Quality' of Economic Activities: Barriers to Entry, Hierarchies of Skills, and Dynamic Imperfect Competition
19.7 Colonialism and Industrial Policy
19.8 The Marshall Plan and the Need to Rediscover the Economics of Industry, Trade, and Population Density
19.9 'Institutions': A Failed Attempt to Reverse the Arrows of Causality of Economic Development
19.10 When Industrial Policy Intuition Clashes With Ricardian Trade Theory
19.11 Nichification:An 'Industrial' Policy Strategy for Agriculture
19.12 What's New in the Present Industrial Policy Game?
19.13 Conclusion: Unrealistic Utopias that Boomerang as the Curse of Europe and the West
References
Chapter 20: Post-war American Industrial Policy: Market Myths and
Production Realities
20.1 I Introduction To The Economics Of Production And Strategic Policy Frameworks
20.2 The US Second World War Production-informed Policy Framework
20.3 Post-War Policymaking Legacy
20.4 The Japanese Economic Miracle: Rival Technology Management Paradigms
20.5 Production System Legacies: The North versus the South
20.5.1 The Manufacturing Belt
20.5.2 The Sun Belt
20.5.3 The Gun Belt
20.5.4 The Rust Belt
20.6 Neo-Liberalism And Dismantling The 'American System'
20.7 The Capability Triad As Policy Framework
20.8 Appendix: Major Contributors To The Capability And Innovation Perspective
Acknowledgements
References
Chapter 21: European Industrial Policy: A Comparative Perspective
21.1 Introduction
21.2 Industrial Policy: Definition and Taxonomy
21.3 Industrialization and Industrial Policy
21.3.1 The United Kingdom
21.3.2 Germany
21.3.3 France
21.3.4 Italy
21.4 Industrial Policy from 1945 to the Twenty-first Century
21.4.1 Italy
21.4.2 France
21.4.3 The United Kingdom
21.4.4 Germany
21.4.5 Finland
21.4.6 Ireland
21.5 New Industrial Policy at the Turn of the Century
21.5.1 Germany
21.5.2 The United Kingdom
21.5.3 Italy
21.5.4 France
21.6 Conclusions
References
Chapter 22: The European Union’s Industrial Policy
22.1 Introduction
22.2 The Evolution of EU Industrial Policy in a Nutshell
22.2.1 The Interventionist Phase (1950-80)
22.2.2 The Liberal Phase (1980-2005)
22.2.3 The Pragmatic Phase (Since 2005)
22.3 EU Industrial Policy Priorities: The Numbers
22.3.1 The Level Dimension: Industrial Policy Spending at EU and Member-state Levels
22.3.2 The Thematic Dimension: Priorities in Industrial Policy
22.3.3 The Country Dimension: Substantial Differences in Industrial Policy Expenditure
22.4 EU Industrial Policy Efforts in Light of the Major Challenges Ahead
22.4.1 The Technological/Innovation Challenge
22.4.2 The Emerging Markets Challenge
22.4.3 The Cohesion Challenge
22.4.4 The Environmental Challenge
22.5 Conclusions
22.6 Appendix
22.6.1 Member States and Country Groupings
22.6.2 Selection of EU Budget Items and Assignment to Industrial Policy Themes
22.6.2.1 Mapping of budget items in the MFF 2014-20 to the industrial policy themes
22.6.2.2 Mapping of thematic objectives in the ESIF to the industrial policy themes
22.6.2.3 Assumption made for the co-financing by member states of ESIF projects
References
Chapter 23: Diverse Tools of Industrial Policy in Korea: A Schumpeterian
and Capability-based View
23.1 Introduction
23.2 Technology Licensing for Absorptive Capacity
23.3 Infant Industry Protection by Tariffs and Entry Control
23.4 Public-Private Joint R&D
23.5 Concluding Remarks
Acknowledgements
References
Part V: Experiences in Emerging and Deveoping Countries
Chapter 24: Industrial Policy and Industrialization in South East Asia
24.1 Introduction
24.2 Theoretical Considerations
24.3 Import-substitution Policies
24.3.1 Indonesia
24.3.2 Malaysia
24.3.3 The Philippines
24.3.4 Thailand
24.3.5 Summary
24.4 Export-oriented Policies
24.4.1 Indonesia
24.4.2 Malaysia
24.4.3 The Philippines
24.4.4 Singapore
24.4.5 Thailand
24.4.6 Summary
24. 5 Industrialization And De -Industrialization
24.5.1 Indonesia
24.5.2 Malaysia
24.5.3 The Philippines
24.5.4 Singapore
24.5.5 Thailand
24.5.6 Summary
24.6 Technological Upgrading Initiatives
24.6.1 Indonesia
24.6.2 Malaysia
24.6.3 The Philippines
24.6.4 Singapore
24.6.5 Thailand
24.6.6 Summary
24.7 Cconclusions
References
Chapter 25: National Champions, Reforms, and Industrial Policy in China
25.1 Introduction
25.2 Industrial Policy, Big Business, and China's Economic Reforms
25.2.1 The Mainstream Transition Economics View
25.2.2 The State Capitalism View
25.2.3 The Late Industrialization and Developmental State View
25.3 Industrial Policy and the Rise of China's National Champions
25.3.1 The Rise of China's National Champions in Industrial Sectors
25.3.2 The Rise of China's National Champions in Finance
25.4 State-Business Relations And The Governance Of China'S National Champions
25.4.1 Government Capability and Learning
25.4.2 Enterprise Capability and Learning
25.4.3 Networked Hierarchy, Institutional Bridging, and Reciprocal Control
25. 5 International Competitiveness of China's National Champions
25.6 Concluding Remarks
References
Chapter 26: Industrial Policies in the Brics
26.1 Introduction
26.2 The Tradition of Industrial Policy in the Brics
26.3 To Brics or not to Brics
26.3.1 From Bric to Brics
26.3.2 Brics to Build an Economic Block?
26.3.3 Industrial Policy Coordination
26.4 The Challenge of Heterogeneous Industrial Performances
26.4.1 Contribution to Global Economic Activity
26.4.2 Structural Change and Capability Accumulation
26.4.2.1 Productive Capabilities
26.4.2.2 Innovation Capabilities
26.4.3 Integration through Trade and Investment
26.5 Brics and the 4IR
26.5.1 Collective Responses
26.5.1.1 Building Basic Framework Conditions
26.5.1.2 Fostering Demand and Adoption of 4IR Technologies
26.5.1.3 Strengthening Skills and Research Capabilities
26.6 The International Dimension
26.6.1 Africa in Focus
26.7 Conclusions
Acknowledgements
References
Chapter 27: Successes and Failures of Industrial Policy in Transition Economies of Europe and Asia
27.1 Introduction: Industrial Policy and Economic Diversification
27.2 Overview of Changes in the Structure of Economies in Post-Communist Countries
27.3 Structural Economic Transformation and Industrial Policy
27.4 Industrial Policy: Which Industries to Support?
27.5 Industrial Policy: What Tools to Use?
27.6 Industrial Policy in Resource-rich Countries
27.7 Innovation, Research, and Development
27.8 State versus Private Sector, Government, Private, and Foreign Investment
27.9 International Trade and Trade Policy
27.9.1 Trade Liberalization
27.9.2 Import Substitution versus Export Orientation
27.10 Conclusion
References
Chapter 28: Latin American Industrial Policies: A Comparative Perspective
28.1 Introduction
28.2 Tacitness, Localized Technical Change, and Structural Inertia
28.2.1 The Dynamics of Learning and Industrial Policy
28.2.2 The Links between Macroeconomic and Industrial Policies
28.3 Policies in a Comparative Perspective: Industrial Policy in the Different Phases of Latin American Development
28.3.1 Industrial Policy: From State-led Industrialization to the Washington Consensus
28.3.2 From State-led Industrialization to the Debt Crisis
28.3.3 The Washington Consensus Years
28.3.4 The Timid Return of Industrial Policy in the 2000s
28.4 Korea as a Benchmark
28.5 Stylized Facts: A Comparative View on Productivity and Specialization in Latin America
28.5.1 Phases of Convergence and Divergence
28.5.2 Structural Change and Convergence
28.6 Concluding Remarks
Acknowledgements
References
Chapter 29: Phases and Uneven Experiences in African Industrial Policy
29.1 Introduction
29.2 Limited Progress with Structural Transformation in Sub-Saharan Africa
29.3 Theoretical Perspective: Using Industrial Policy to Escape the Learning Trap
29.4 Import-substitution Industrial Policy: The Cement Sector in Nigeria and Ethiopia
29.5 Industrial Policy in Labour-intensive Export Manufactures: Apparel Exports in Ethiopia
29.6 Leapfrogging Manufacturing? Knowledge-based Services in Kenya and Rwanda
29.7 Combining Export-oriented and Import-replacement Policies: Automobiles and Apparel in South Africa
29.8 Conclusion
References
Chapter 30: The Political Economy of Industrialization and Industrial Policy in Africa, 1960‒2018
30.1 Introduction
30.2 Colonial Industrial Policy: The Birth of Import-substitution Industrialization
30.3 Import-substitution Industrialization in Africa: The Early Post-colonial Experience
30.4 The Political and Economic Objectives of Import-substitution Industrialization in Africa
30.5 Industrial Policies for Import-substitution Industrialization
30.6 Industrial Performance Under Import-substitution Industrialization
30.7 Resources- and Needs-based Basic Industry Policy: An Alternative Strategy?
30.8 Liberalization and Industrial Policy
30.9 Renewed Potential for Second- and Third-Stage Import-substitution Industrialization?
30.10 Towards an African Developmental State and Effective Industrial Policy?
30.11 Conclusion
References
Index of Names
General Index

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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



J´ 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



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

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



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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 Sö

. 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 J´ A O  G P



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

. 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

 

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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



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  

. 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 –



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. 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, –



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  

. 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)



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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, 



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  

. 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, ‒



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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 development’ 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 Economics (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.

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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 Development in Post-Conflict Countries (, with P. Fortunato), Climate Protection and Development (, with Frank Ackerman) and The Resistible Rise of Market Fundamentalism (, 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 Economics, Development and Change, Cambridge Journal of Regions, Economy and Society, Structural Change and Economic Dynamics, Oxford Review of Economic Policy, European 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 programme. Her research focuses on the financialization of the world economy and its various impacts—on firm behaviour, patterns of development, the shaping of economic 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 economics 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

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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  publications, 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 Globalisation (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 Commission for Latin America and the Caribbean (ECLAC). In , he was appointed codirector (with Giovanni Dosi and Joseph Stiglitz) of two task forces: Industrial Policy and Intellectual Property Rights Regimes for Development (Initiative for Policy Dialogue, Columbia University, New York). Amongst his broad interests are economic development and its relationship to production structure, productivity growth, international trade, and structural change. His work analyses the linkages between industrial policy, technology development and innovation, and their role in shaping development trajectories.

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Lisa De Propris is professor of regional economic development, University of Birmingham. 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

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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 Innovation 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 industrial policies, innovative and productive processes at firm and territorial levels, structural 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 Manufacturing Revolution: Perspectives on Digital Globalisation (, Edward Elgar) with Patrizio Bianchi. Michael A. Landesmann was scientific director of the Vienna Institute for International 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 Kingdom. 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

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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, coauthored with Deborah Winkler. He has served as a consultant to UNCTAD, ILO,

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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 International Studies (today the Korbel School), University of Denver; and Pok Rafeah chair, National University of Malaysia. He received the International Studies Association’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 positions at the United Nations and his native Colombia, including UN under-secretarygeneral 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 MassachusettsAmherst. 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

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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 Structuralism 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 organization at National University of Malaysia, and senior research fellow at UNUINTECH, 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 regulation 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,

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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 Competency 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 International 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, including the UNDP, UNRISD, UNCTAD, and the World Bank. Roman Stöllinger is a staff economist at the Vienna Institute for International Economic 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 University 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 Innsbruck 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.

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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 Presidential 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, including 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 Superiore 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.

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  .............................................................................................................

 .............................................................................................................

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  ......................................................................................................................

                                   

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 ,  , - ,   -

. A O  I P  D

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.. 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 economies 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 .

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, , ,  -

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 (especially 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 proponents 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 announcing 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 .

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     



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 remarkable 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 economists 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 development, 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 ‘mainstreaming’ 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

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, , ,  -

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 contemporary 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 commanded 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 ⁷ ⁸ ⁹

For instance, see For instance, see Chapters , , , and . For example, Naudé (), UNCTAD (). See also Mittelman (), Lee (), UNCTAD (). See Gereffi (). See also Chapters  and .

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     



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 maintenance 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. avocados, blueberries, poinsettia, or pelargonium seedlings) is very different from traditionally 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 ().

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, , ,  -

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 sustainable 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 .

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     



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

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.. Aims and Approaches No country has made the arduous journey from widespread rural poverty to postindustrial 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 productivity 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 recommendations 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 ().

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

, , ,  -

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 connections 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 complementarity. 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 introduced 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

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     



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 connections, 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 ‘contradictory’ 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 ().

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

, , ,  -

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 Fortunato (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 ) examines the greening of industrial policy, the shift to renewables, and the solutions offered by the circular economy.¹⁹ Case studies from advanced, emerging, and developing 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 production networks, and the importance of appreciating the spatial dimensions of industrial policy.

¹⁹ See Mathews ().

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     



.. 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 industrial 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 developing 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 performances and divergent industrial policies, despite the cooperation between them. Popov (Chapter ) considers the lessons from the evolution of industrialization and industrial policy outcomes among (post-communist) transition economies of Europe and Asia. Ocampo and Porcile (Chapter ) present a comparative review of macroeconomic and industrial policies of Latin American countries and the outcomes in terms

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

, , ,  -

of catch-up and economic transformation. Whitfield and Zalk’s (Chapter ) comparative 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 Perspective. 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-BeNamed-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 University 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 Development: 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 stcentury Capitalism. Cambridge: Cambridge University Press. Grabel, Ilene () ‘The Rebranding of Capital Controls in an Era of Productive Incoherence’, Review of International Political Economy (): –. Haggard, Stephan () Developmental States. Cambridge: Cambridge University Press.

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

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 Transformation. 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-industrialiseyes-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 Problems. New York: UN Department of Economic Affairs. Salazar-Xirinachs, José M., Irmgard Nübler, and Richard Kozul-Wright (eds) () Transforming 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 (): –.

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, , ,  -

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 Valuechain Perspective. Washington, DC: Centre for Technology Innovation, Brookings. World Bank () Trouble in the Making? The Future of Manufacturing-led Development. Washington, DC: World Bank.

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  ......................................................................................................................

                     

.............................................................................................................

 

. 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 policymakers 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.

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

 

(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 economic history. The recent proliferation of literature brings the divergent underlying perspectives to the fore. From a long-term, strategic perspective, industrial policy underpins structural transformation 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 transformation and wealth creation, in which manufacturing (and other dynamic, highproductivity, 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-ofpayment 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 .

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      



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 catchup 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.

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

 

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 productivity growth, and technological spillover, accompanied by shifts in demand, occupations, 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 fundamental structural change necessitates the development and expansion of a country’s productive capacity, namely, accumulation of various types of capabilities.¹¹ Nonetheless, 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, ).

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      



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 associated 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 underemployed 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 suggests 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 importsubstitution 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 contribution 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.

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

  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 inextricable 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 characteristic 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, manufacturing 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 differentiation. Kaldor () adds an important dimension, namely, the ‘scope for learningby-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).

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      



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 production linkage effects (see Hirschman, , among others). Historically, early industrialization 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 Agricultural 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 management (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.

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 

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. However, 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, : ).

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      



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 complementarity of export-led industrialization (ELI) and import-substitution industrialization (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 pressing 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 However, 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 (technological, 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 (: , ).

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

 

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, management services), and enforcing performance requirements, incentives, and restrictions. Akyüz () states that competition, imitation, demonstration effects, labour turnover, forward and backward linkages, and R&D activities are all drivers of technological 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 transformation reinforces the purpose of industrial policy and the strategic importance of exportled industrialization not only for small economies with a limited domestic market but also for those that enjoy a large domestic market. With manufacturing-led industrialization 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 characteristics 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.

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      



.. 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 innovation. 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 capacity 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’.

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

 

Two centuries later, the infant industry hypothesis remains part of the debate around industrial policy (Chang, ). This notion is related to the issue of comparative 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 climbing 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 ().

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      



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 productive 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 important 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 knowledge 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’.

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

 

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.

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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 interconnectedness. 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.

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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 catchup 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 essential 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 modernization 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, productivity 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.

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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. According 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 difficulties 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 highincome countries and those that did not.’ Similarly, according to Lin, ‘the middleincome 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).

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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. Emulation involves learning from others in the form of copying or imitation, adaptive innovation, or radical or new innovations. Learning requires an open system, interfirm 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. Successful 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 manufacturing 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 deindustrialization 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 deindustrialize. 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.

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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 accumulation of capital. Hirschman highlights that ‘the complementary effect of investment 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 symbiotic 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 comprehensive 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 networks, 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.

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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 development 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.

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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 infrastructure. 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 coordination 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, technology, 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.

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. T S   P  I P

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.. 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 fundamentalism which rejects government intervention as harmful. It advocates that governments 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 mechanisms 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

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

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 latelatecomers.

.. 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 ().

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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 privatesector 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 policymaking 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 governments 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 government 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 ().

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and state capacity (see, e.g. Kohli, ; Chang, ; Khan and Blankenburg, ). This is also true at the international level, where positions on environmental sustainability 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 incentives 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 perspective, potentially growth-enhancing rents can become growth reducing if the rentmanagement 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,

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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 investments, 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 considering 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 industrialization. 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

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based on structural transformation and economic catch-up perspectives, the recognition 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 neoliberal economists to design and apply industrial policies promoting structural transformation 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. Furthermore, 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

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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 executed 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 .

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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 highlights 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 formation 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

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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 importsubstitution 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 competition 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 manufacturing and agriculture, especially for late latecomers in the early stages of development. 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” agriculture, with high yields per acre and high productivity per man’ (Kaldor, : ). Kaldor thus argued that agriculture generates the initial demand for the manufacturing sector in the early stages of industrialization, before penetration of the international 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 elsewhere, should determine complementarities. Technological advances (in biotechnology, 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 ().

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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 economy 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 linkages, 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 urbanization 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 Handbook 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 ().

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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. Capabilities 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 machinery, 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.

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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 compatibility 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’ innovations, 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 decisions, 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 identified 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 technological capability, and those associated with building human capital and the education system, the development of physical infrastructure, and ensuring macroeconomic stability.

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

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 industrialization 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, including 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 infrastructure 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 macropolicies 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 transformation 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 maximize synergy with industrial policy, ensuring that exchange rates do not undermine exports, that domestic savings and investment are conducive to the expansion of

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

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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 bureaucracy, and continuous evaluation of its purpose and shortcomings during the implementation process. Instruments such as export discipline (linking incentives to exports to discipline firms and enhance international learning) and domestic rivalry (to ensure that incentives 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 planning 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’.

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

economies should develop by prioritizing key sectors rather than relying on comprehensive, 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 sophisticated 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, production 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 evidence 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 development and of crisis in the achievement of social and economic reform in Latin America’. See also Hirschman (, ). ⁶⁹ See also Oqubay (a, b).

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

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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 particularly 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 transformation 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 convergence 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’ (: ).

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

Since the  economic crisis three tendencies have surfaced which reflect the contemporary global political economy. First, emerging economic powers and significant players in international markets have pursued a pro-WTO trading system advocating 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, robotization, 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 technology MNCs undermines the roles of government and the rights of citizens.⁷² ‘Technological romanticizing’ or ‘technology hype’ advocates technological determinism, 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 characterized 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 .

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

 

growth and environmental sustainability are not mutually exclusive. Sustainable development 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 environmental 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’, Cambridge Journal of Regions, Economy and Society (): –.

⁷⁴ See also Mathews (a) Green Capitalism.

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      



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, Industrialisation 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 Accumulation. 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 Industrializing 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. Cambridge: Cambridge University Press. Lin, Justin Yifu () ‘The Latecomer Advantages and Disadvantages: A New Structural Economics Perspective’, in Martin Andersson and Tobias Axelsson (eds) Diverse Development Paths and Structural Transformation in Escape from Poverty. Oxford: Oxford University 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 (): –.

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

 

Lin, Justin Yifu and Volker Treichel () ‘Learning from China’s Rise to Escape the Middleincome 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 Transformation. 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 Transformation. 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.

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      



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

 

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  .............................................................................................................

  .............................................................................................................

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  ......................................................................................................................

               ,              ,      .............................................................................................................

´  

. 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 heterogeneity 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.

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

´  

that has been alternatively called both ‘dualism’ and ‘structural heterogeneity’. Avoiding 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 developing 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 industrialization 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 emphasized 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 context, 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 structural 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 ().

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 , ,   



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 simultaneous 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 economic 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 neoclassical 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).

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

´  

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 developed 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 determined 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 accompanied 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. ).

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 , ,   



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 middleand 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 production 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.

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

´  

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 underscored 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 characterized 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, particularly 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. ().

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 , ,   



. 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 macroeconomic 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 combinations’ 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 mesoeconomic 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

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

´  

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 opportunity 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, ).

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 , ,   



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 learningby-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 accumulated 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 mechanism 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 tradability, 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 (goodwill) 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 relations 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 summarizes 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, ).

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

´  

The cost and quality of the non-tradable inputs are particularly important in this regard. They contain specialized services, including knowledge, and logistic and marketing 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 competitiveness, 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 activities 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-valueadded.htm#access.

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 , ,   



.. 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 complementarities 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 experience that widens the technology gap vis-à-vis industrialized countries. A simple typology of different processes of structural transformation can be suggested (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 productivity 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.

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

´  

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

T G

G’ GDP growth

 . Productivity and GDP dynamics

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 , ,   



It must be emphasized that the technical progress function is not an aggregate production function. Rather, its positive slope implies that there is some underutilization 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 emphasized 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 balanceof-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 mesoeconomic 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 innovations 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 exchangeconstrained 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.

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

´  

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 foreignexchange-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 macroeconomic 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 (particularly 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 characterized 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.

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 , ,   



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 contributions.¹⁹ A major conclusion of this literature is that the factors underlying such longterm 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 commodityexporting 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.

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

´  

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 countercyclical (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 dependence, 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 ().

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 , ,   



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 noncommodity 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 profitability of those sectors highly volatile, reducing investment in structural diversification. Beyond the structural and macroeconomic vulnerabilities mentioned lie other vulnerabilities of a more political-economy or institutional character. In this regard, the literature on the ‘Dutch disease’ has emphasized the institutional effects of the rentierism 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 innovative 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. ).

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

´  

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 productivity 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 innovations, 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 development 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 Development Bank, in both of which China is playing a leading role. An extensive literature discusses the macroeconomic risks associated with crossborder 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

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 , ,   



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 liberalization 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 competitive 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 characterized 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.

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

´  

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 investment; (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 investment in innovative activities. The case studies analysed in Griffith-Jones and Ocampo () corroborate this: the role of KfW, the German development bank, in the development 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 hightech 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 ().

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 , ,   



instruments, such as guarantees, equity—including venture capital—and debt funds have been major innovations in this regard. Loan instruments continue to be important, 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, providing 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 development needs. These activities should be linked to strong development policies with structural change at their heart, they should have adequate support from macroeconomic 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 international 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 structural 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

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

´  

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 establishment 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 development 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 ().

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 , ,   



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 transformation 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 highproductivity 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 guaranteeing 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. Smoothing 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 unsustainable 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

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

´  

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 monetary policies may generate. During crises, they can create space for expansionary monetary policies while constraining capital flight as well as excessive exchangerate 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 particularly 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 widespread 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

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 , ,   



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 countercyclical 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.

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

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 , ,   



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 Economies: 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, Santiago: 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 (): –.

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

´  

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 SouthEastern 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: History 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.

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  ......................................................................................................................

                ,                ,              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 debatable. 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-

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

 ,  ,   

economic fabric of contemporary societies is starting to show fruitful complementarities 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, guideposts, 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

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 ,   ,  



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 problemsolving 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 cognitive 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.

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

 ,  ,   

.. 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 competence 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 development 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 technologies and adopt them to the local conditions. Microeconomic/micro-technological

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 ,   ,  



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 development 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 lateindustrializing 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 industrializers 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 fundamental 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 adjustment 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 separated 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

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

 ,  ,   

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 development 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 manufacturing 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 productivity 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.

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 ,   ,  



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 14 15 16 17 18 19 20

Food processing of agricultural products Other foodstuffs Beverages Tobacco Textiles Garments, footwear, etc. Leather, fur, feather, etc. Processing of timber, manuf. of wood, bamboo, etc. Furniture Paper and paper products Printing, reproduction of recording media Articles for culture, education, and sports Processing of petroleum, cokeries, nuclear fuel Raw chemical materials and chemical products Pharmaceuticals Chemical fibres Rubber Plastics Non-metallic mineral products Smelting and processing of ferrous metals Smelting and processing of non-ferrous metals Metal products General purpose machinery Special purpose machinery Transport equipment Electrical machinery and equipment Communication equipment, computers, etc. Measuring instruments and machinery Artwork and other

11.25 8.87 10.63 15.29 9.79 7.84 7.55 11.87

8.55 5.73 6.20 11.08 10.14 4.84 6.52 7.61

13.46 11.22 12.80 10.65 10.54 10.57 10.29 14.43

6.19 10.33 8.92 8.39 3.77 11.40

4.82 9.48 7.54 7.06 -1.61 10.44

10.40 11.75 8.17 10.03 6.36 11.85

8.94 10.31 8.80 5.83 12.76 13.86 12.45

10.64 12.05 7.01 6.43 9.86 12.68 13.73

7.53 8.85 9.39 6.24 14.71 14.14 12.64

5.44 15.40 16.23 12.67 9.51 5.64 9.62 10.01

7.84 13.76 13.09 11.64 8.84 8.37 9.46 9.32

4.32 15.72 15.13 13.05 9.32 3.30 9.57 12.70

9.98

8.73

10.66

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 39 40 41 42

Average 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 consequence, 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

Year 1998

1

China France Italy

Pr

Year 2002

0.1

1

China France Italy

Pr

Year 2006

China France Italy

Pr

0.1

0.1

0.01

0.01

0.01 0.001

0.001 0.001

(log) labour Productivity

(log) labour Productivity

–6 1

–4

–2

0

2

4

Year 1998

6

8

10

–6

1

China France Italy

Pr

0.0001

–4

–2

0

2

4

Year 2002

6

8

10

0.0001

–6

1

China France Italy

Pr

0.1

(log) labour Productivity

–4

–2

0

2

4

Year 2006

0.1

0.01

0.01

8

10

8

10

China France Italy

Pr

0.1

6

0.01 0.001

0.001

(log) labour Productivity

0.001

(log) labour Productivity

(log) labour Productivity

0.0001 –6

–4

–2

0

2

4

6

8

10

0.0001 –6

–4

–2

0

2

4

6

8

10

–6

–4

–2

0

2

4

6

 . 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

1

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 correlations 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 productivities 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 correlations 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).

NACE

Sector

China

Italy

France

1998 173 175 182 193 203 212 221 222 241 243 244 246 251 252 261 266 275 281 284 285 286 287 291 292 294 295 311

Finishing of textiles Carpets, rugs, and other textiles Apparel Footwear Wood products for construction Paper and paperboard Publishing Printing Production of basic chemicals Paints, varnishes, inks, mastics Pharma., med. chemicals, botanical products Other chemical products Rubber products Plastic products Glass and glass products Concrete, plaster, and cement Casting of metals Structural metal products Forging, pressing, stamping of metal Treatment and coating of metals Cutlery, tools, and general hardware Other fabricated metal products Machinery for prod. use of mech. power Other general purpose machinery Machine tools Other special purpose machinery Electric motors, generators, and transformers

2.772 1.672 1.052 1.062 1.477 1.475 3.873 2.559 2.547 1.312 1.707 1.436 1.587 1.614 1.696 2.084 1.113 1.290 1.981 1.113 1.554 1.337 2.041 1.756 2.530 2.177 1.570

China

Italy

France

2002 1.971 1.327 0.785 0.885 0.954 1.367 5.250 2.456 1.784 1.086 1.514 1.167 1.479 1.394 1.442 1.643 0.937 1.176 1.289 0.980 1.068 1.018 1.524 1.321 1.669 1.486 1.200

1.863 0.789 0.620 0.529 0.629 1.123 5.716 2.084 1.049 0.852 1.508 0.707 0.974 1.055 1.079 1.676 0.698 0.870 0.820 0.923 0.940 0.788 1.012 0.905 0.961 0.977 0.767

0.732 0.752 0.268 0.29 0.728 0.824 0.259 0.508 0.977 0.584 0.57 0.588 0.514 0.714 0.579 0.93 0.669 0.433 0.574 0.452 0.471 0.586 0.48 0.323 0.343 0.358 0.369

China

Italy

Francea

1.512 0.987 0.318 0.631 0.744 1.206 0.204 0.797 2.443 0.936 0.83 1.004 1.088 0.991 1.169 1.399 1.127 0.505 0.913 0.762 0.861 0.921 0.76 0.364 0.465 0.585 0.526

1.546 1.055 0.336 0.645 0.736 1.217 0.192 0.792 2.811 1.052 0.837 1.072 1.03 1.035 1.198 1.253 1.128 0.569 0.967 0.803 0.892 0.871 0.714 0.361 0.466 0.614 0.501

2006 0.755 0.775 0.276 0.331 0.734 0.901 0.19 0.566 1.045 0.544 0.623 0.628 0.588 0.795 0.594 0.847 0.815 0.481 0.695 0.515 0.584 0.626 0.491 0.315 0.391 0.337 0.452

0.694 0.688 0.226 0.288 0.763 0.988 0.117 0.562 1.153 0.57 0.656 0.636 0.495 0.818 0.742 0.965 0.734 0.455 0.618 0.467 0.559 0.566 0.408 0.272 0.289 0.332 0.397

1.228 0.891 0.318 0.488 0.773 1.025 0.229 0.700 2.081 0.946 0.666 0.973 0.951 0.969 0.996 1.365 0.886 0.547 0.77 0.673 0.734 0.818 0.674 0.372 0.425 0.520 0.510

(Continued)

OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi

Table 4.2 Median capital intensity (capital/output ratios) by sector, China, Italy, and France, 1998, 2002, and 2006

Table 4.2 Continued NACE

Sector

China

Italy

France

1998 312 316 343 361 366

Manuf. of electricity distribution and control equip Electrical equipment not e/where classified Parts for motor vehicles and their engines Furniture Manufacturing n.e.c. Mean Median

China

Italy

France

2002

China

Italy

Francea

2006

1.409

1.127

0.781

0.335

0.453

0.352

0.640

0.648

0.553

1.163 1.781 1.293 0.793 1.713 1.578

0.863 1.336 1.092 0.830 1.419 1.305

0.671 1.094 0.798 0.808 1.127 0.914

0.299 0.526 0.593 0.467 0.534 0.520

0.288 0.63 0.61 0.485 0.574 0.586

0.275 0.534 0.564 0.405 0.550 0.561

0.498 1.088 0.633 0.576 0.780 0.717

0.516 1.311 0.674 0.669 0.871 0.814

0.497 1.185 0.722 0.781 0.888 0.820

Note: aData for France in the last column are for 2004. OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi

Sources: Yu et al. (2015), CMM, INSEE (on France), and ISTAT-Micro 3 (on Italy).

OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi



 ,  ,    10

CIC 131 (1998)

In(VA/L)

5

0

–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 rightward 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 relatively 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 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 39 40 41 42

Food processing of agricultural products Other foodstuffs Beverages Tobacco Textiles Garments, footwear etc. Leather, fur, feather etc. Processing of timber, manuf. of wood, bamboo etc. Furniture Paper and paper products Printing, reproduction of recording media Articles for culture, education, and sports Processing of petroleum, cokeries, nuclear fuel Raw chemical materials and chemical products Pharmaceuticals Chemical fibres Rubber Plastics Non-metallic mineral products Smelting and pressing of ferrous metals Smelting and pressing of non-ferrous metals Metal products General purpose machinery Special purpose machinery Transport equipment Electrical machinery and equipment Communication equipment, computers etc. Measuring instruments and machinery Artwork and other

15.62 19.12 14.89 17.05 8.61 6.51 7.80 11.25 9.29 7.44 12.47 6.91 8.82 10.30 10.65 10.05 6.56 8.65 8.32 9.57 9.70 8.36 8.77 12.24 11.69 9.39 13.52 12.38 8.88

11.35 12.20 11.82 22.95 7.01 5.45 7.17 6.91 7.15 6.16 9.49 6.10 12.26 9.19 9.71 6.87 7.49 7.18 7.91 8.58 8.43 7.21 6.68 9.59 8.19 7.71 11.08 9.00 7.38

10.02 9.04 9.06 26.44 6.07 5.42 6.80 6.51 6.93 6.27 6.12 5.52 11.23 8.42 8.96 7.98 7.42 7.02 8.23 8.40 12.72 7.12 6.56 7.25 7.09 8.24 8.36 8.70 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 asymmetries 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 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 39 40 41 42

Food processing of agricultural products Other foodstuffs Beverages Tobacco Textiles Garments, footwear etc. Leather, fur, feather etc. Processing of timber, manuf. of wood, bamboo etc. Furniture Paper and paper products Printing, reproduction of recording media Articles for culture, education, and sports Processing of petroleum, cokeries, nuclear fuel Raw chemical materials and chemical products Pharmaceuticals Chemical fibres Rubber Plastics Non-metallic mineral products Smelting and pressing of ferrous metals Smelting and pressing of non-ferrous metals Metal products General purpose machinery Special purpose machinery Transport equipment Electrical machinery and equipment Communication equipment, computers etc. Measuring instruments and machinery Artwork and other

4.74 2.07 3.51 5.70 6.39 3.02 1.78 0.82 0.50 2.11 1.21 0.92 3.56 7.18 2.95 1.19 1.33 2.35 6.03 6.47 2.08 2.98 4.75 3.33 7.41 5.94 7.39 1.25 1.05

4.50 1.99 2.69 5.13 5.81 2.76 1.76 0.86 0.53 2.17 1.11 0.77 3.79 6.96 3.29 0.91 1.12 2.47 5.20 6.92 2.24 2.86 4.51 3.09 8.54 6.12 9.64 1.23 0.99

4.96 1.99 2.01 3.11 5.23 2.41 1.58 1.16 0.69 1.86 0.74 0.60 3.52 7.78 2.45 0.86 1.02 2.28 5.18 9.52 4.58 3.21 5.46 3.25 7.54 6.47 8.44 1.24 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 growth (%)

Intra (%)

Shift (%)

Total (%)

1998–2002

PT

Annual growth (%)

Intra (%)

Shift (%)

Total

2002–7 74.30

16.25

4.20

62.07 86.33 634.26 35.63 30.34 34.54 44.51

15.18 14.46 19.41 17.16 6.41 7.39 14.45

43.45 55.11 59.63

0.02

165.12

17.32

5.49

0.00

5.49

1.70 0.01 2.57 0.00 6.05 0.00 5.78 0.00 1.05 –0.91 0.73 –0.46 0.68 –0.06

1.71 62.07 128.80 2.57 86.33 174.04 6.05 634.26 1448.41 5.78 35.63 76.19 0.14 30.34 55.73 0.27 34.54 55.62 0.63 44.51 94.47

15.72 15.05 17.96 16.42 12.94 10.00 16.24

2.16 0.00 2.32 0.00 4.79 0.00 6.41 0.00 2.40 –0.56 1.22 –0.87 1.14 –0.42

2.16 2.32 4.79 6.41 1.85 0.36 0.72

7.65 19.23 18.29

0.22 –0.07 2.29 0.00 1.22 0.00

0.15 2.29 1.22

43.45 55.11 59.63

67.52 132.98 111.41

9.22 19.26 13.32

0.42 –0.67 2.77 0.00 0.95 0.00

–0.25 2.77 0.95

31.23

5.87

0.30 –0.27

0.03

31.23

53.91

11.54

0.65 -0.16

0.49

109.05 67.52

12.92 21.60

2.16 8.75

2.16 109.05 8.75 67.52

126.24 175.35

2.97 21.03

0.37 10.18

0.00 0.00

0.37 10.18

87.29 76.35 53.94 56.05 38.50 80.27

18.05 13.97 17.96 12.61 15.53 23.40

3.21 0.17 0.87 0.00 1.24 0.00 1.73 –0.03 4.96 0.00 8.70 0.00

3.38 0.87 1.24 1.70 4.96 8.70

150.83 158.49 98.40 85.31 108.60 208.33

11.56 15.73 12.78 8.76 23.05 21.01

2.21 0.00 0.92 0.00 0.92 0.00 1.43 –0.41 8.28 0.00 10.10 0.00

2.21 0.92 0.92 1.02 8.28 10.10

0.00 0.00

4.22

74.30

87.29 76.35 53.94 56.05 38.50 80.27

(Continued)

OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi

13 Food processing of agricultural 40.68 products 14 Other foodstuffs 35.26 15 Beverages 50.30 16 Tobacco 311.94 17 Textiles 18.91 18 Garments, footwear, etc. 23.66 19 Leather, fur, feather, etc. 25.97 20 Processing of timber, manuf. of 25.94 wood, bamboo, etc. 21 Furniture 32.34 22 Paper and paper products 27.27 23 Printing, reproduction of recording 30.45 media 24 Articles for culture, education, and 24.85 sport activity 25 Oil refining, coking, nuclear fuel 67.07 26 Raw chemical materials and 30.88 chemical products 27 Pharmaceuticals 44.94 28 Chemical fibres 45.25 29 Rubber 27.85 30 Plastics 34.86 31 Non-metallic mineral products 21.61 32 Smelting and processing of ferrous 34.62 metals

P0

CIC Sector

P0

PT

Annual growth (%)

Intra (%)

Shift (%)

Total (%)

1998–2002 33 Smelting and processing of nonferrous metals 34 Metal products 35 General purpose machinery 36 Special purpose machinery 37 Transport equipment 39 Electrical machinery and equipment 40 Communication equipment, computers, etc. 41 Measuring instruments and machinery 42 Artwork and other Whole manufacturing

P0

PT

Annual growth (%)

Intra (%)

Shift (%)

Total

2002–7

31.86

66.44

20.17

2.47

0.00

2.47

66.44

208.07

25.65

31.22 22.60 18.94 35.19 40.51

52.69 51.26 47.35 85.62 71.58

13.98 22.72 25.74 24.89 15.29

2.27 –0.04 6.01 0.00 4.73 0.00 11.35 0.00 5.13 0.14

2.22 6.01 4.73 11.35 5.26

52.69 51.26 47.35 85.62 71.58

78.37 145.54 144.79 202.69 116.70

68.28

123.44

15.96

7.53

9.51 123.44

31.29

58.45

16.91

1.21 –0.01

1.20

22.46 32.73

34.29 62.90

11.15 17.74

0.68 –0.25 0.43 99.89 0.21 100.00

1.98

4.70

0.01

4.70

8.26 23.21 25.05 18.81 10.27

1.52 –0.60 9.00 –0.10 6.01 0.00 11.73 0.00 4.30 –0.69

0.92 8.90 6.01 11.73 3.61

116.55

–1.14

–0.75 –0.05

–0.81

58.45

129.34

17.22

1.70 –0.06

1.63

34.29 62.90

74.24 126.15

16.71 14.93

1.25 0.00 1.25 104.58 –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

Table 4.5 Continued

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 productivity due to a large extent to structural change, that is, movements from lowproductivity 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 manufacturing 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 twodigit 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.

0

2

8

0

2

4

6

8

–4

–2

–6

–4

–2

exporter non-exporter

–6

exporter non-exporter

0

0

2

2

6

4

6

CIC 39 (2003)

4

CIC 37 (2003)

8

8

0.001 –8

0.01

0.1

1

0.001 –8

0.01

0.1

1

–4

–2

–6

–4

–2

exporter non-exporter

–6

exporter non-exporter

0

0

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2

6

4

6

CIC 39 (2007)

4

CIC 37 (2007)

8

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. ().

–2

0.001 –8

–4

0.001

–6

0.01

1

–8

0.01

–8

6

CIC 39 (1998)

4

0.1

exporter non-exporter

–2

0.1

1

–4

0.001

–6

0.001

–8

0.01

1

0.01

CIC 37 (1998)

0.1

exporter non-exporter

0.1

1

OUP CORRECTED PROOF – FINAL, 18/9/2020, SPi

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 HeckscherOhlin-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, CobbDouglas 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 catchingup 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 successful, 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, computers). 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 systematically 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, ). Similarly, 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 quasiexperiments and new estimation techniques has allowed the precise causal identification 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 accumulation 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-bydoing. 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 comparative 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 production, 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, eventually, 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, organizations, 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 policymaker 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 pathdependencies (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 accumulation’ (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, irrespective 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 capabilities. 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 distribution 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 development 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 traditional 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 countries. 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

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 ,   ,  



compared to China, but so also are other less developed Latin America countries, and even African countries are losing cost-based international (and domestic) competitiveness 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 international 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 PT  P 0 ¼

n n X X ðPiT  Pi0 ÞSi þ ðSTi  S0i ÞPi i¼1

ð1Þ

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 aggregate 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 PT P0 ¼

n X i¼1

Ci ¼

n X shift ðCiintra þ Ci Þ

ð2Þ

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

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

 ,  ,   

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, shift

Ck ¼ Ckintra þ Ck

¼ ðPkT  Pk0 ÞSk þ ðSTk  S0k ÞðPk  PJ Þ

Cj ¼ Cjintra ¼ ðPjT  Pj0 ÞSj

8j ∈ J

8k ∈ K

ð3Þ ð4Þ

with average labour productivity overall shrinking sectors and averaging over years X ðST  S0j ÞPj j∈J j X PJ ¼ : 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.

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 ,   ,  



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

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

 ,  ,   

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  ......................................................................................................................

                  

.............................................................................................................

 

. 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 mechanism, 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

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‘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 development 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; shortages 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 competitors. 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).

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  



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 realworld 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, ).

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 

Table 5.1 Policy hierarchy: industry support by alternative measures Rank

Policy measures

By-product distortions

1 2a 2b 3

Production subsidy Import tariff plus export subsidy Subsidy to inputs Import tariff

4

Import quotas

None Consumption distortion Factor intensity distortion Consumption distortion Anti-export bias 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 byproduct 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 conventional 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.

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  



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 significant is important, but the policy hierarchy approach alone cannot provide a definitive choice between alternatives. Their relative effectiveness and their costs of implementation and funding need also to be considered in a simple overall cost‒benefit comparison. 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 adjustment 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.

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

 

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 interventions 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 imposition 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 environment 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 lowering 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

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  



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 institutional development. They argue that while some of these measures individually may have positive effects, standard reform packages miss the key issue of dynamic entrepreneurship 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.

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

 

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 . . . Governments 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, administrative 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., ).

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  



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 intersectoral 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 nonneoclassical 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.

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

 

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 institutions, 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 government 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 compensated 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 mechanisms 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, ).

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  



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.

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

 

. 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 coordinating 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 specialization 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, ).

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  



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 captures. In practice, in terms of priority setting, given the high correlation between valueadded 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 endowments 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 comparative 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 competitiveness. 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.

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

 

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 industrialization 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 substitution 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 onesixth 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.

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  



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 planning 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 is in local currency and (WPj – aiWPi) is in P 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 exchange rate). If the DRC is expressed as a number, the net foreign exchange in P the denominator (WPj – aiWPi) should be converted to local currency at the shadow exchange rate and efficiency requires a ratio of below unity.

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

 

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 completely 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.

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  



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 highervalue 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 sophistication is required at the individual product level to assess when changing the composition 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.

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

 

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 disaggregate 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 specialization 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 discussion 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.

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  



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 inevitably 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 uncompetitive 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.’

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

 

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 selfdiscovery 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

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  



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 (Mazzucato and Kattel, Chapter  in this volume), still require some approximate comparison of benefits and costs. Experience suggests that industrial success requires a combination 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 application 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.

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 

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 Development 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 Industrial 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 Economic 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. –.

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

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  ......................................................................................................................

    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 businesses in industrial development which abstract the firms from the political economy

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   



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

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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.

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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, removing 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 development 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 organization 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 interindustry 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 produce 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.

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.. 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 development 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; however, 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.

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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 investments 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

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

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 uncertainty 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 cumulative 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

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being where performance rests on the ‘resources and experience of the parent concern, including not only managerial and technical personnel but also the indefinable advantage 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 developments 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 countries’ 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

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

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 disciplining mechanisms to ensure that the outcomes were in line with performance expectations (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

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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.

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one critical determinant. A major US study found substantial variations between different plants in the same firm, with four key factors explaining plant-level productivity: product competition; learning spillovers; education; and local business environment (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 positions 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 Commission (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 arrangements 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 asymmetries can be solidified into dominant positions that persist, the inequities they create become institutionalized, creating long-term problems in the performance of the

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 

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 highlighted 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 headto-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.

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.. 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 conditions 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 institutions 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 arrangements and configuration of interests are that support a given institutional configuration (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 development 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 evolution 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, ).

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 

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 transcends 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

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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 concentrated market structure and dominance of trade by large transnational corporations (UNCTAD, ). The implications of TNCs for industrial development and the design and implementation 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 international 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 transactioncosts 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 understanding 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

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 

of the firm in terms of firms’ productive resources, organizational capabilities, and competencies. The international competitiveness of business is determined to a significant 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 coordination 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,

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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 multipurpose (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 labourintensive 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.

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 

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 performance 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., ; Committee 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

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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 regulation 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-frameworkfor-the-digital-economy.html. ⁴ European Commission, Decision of  June , case AT.–Google Search (Shopping).

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 

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 thirdparty 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 interconnection 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 subcomponents 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/ cead/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).

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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 investments in productive capabilities, upgrading of capital equipment, and supply-chain integration remains essential. The significance of digital platforms which straddle communication, media, publishing, 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 transnational 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 implementation 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.

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

 

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 development of capabilities. It has been extended in terms of the ways in which power is understood and the internationalization of businesses. The implications of digitalization 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.

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   



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.

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   



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 Management’, 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 University 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 Perspectives (): –.

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  ......................................................................................................................

     .............................................................................................................

 ,  ,   

. 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 alternative ways of organizing production so that it is more democratic? Can industrial policy contribute to shifting power relations—internationally in favour of peripheral countries, 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

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    



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 structures 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 manufacturing 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 ().

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

 ,  ,   

. 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 mainstream 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 manufacturing 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 commodity 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 matters 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.

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    



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 endogenous 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 manufacturing, 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 fundamentally 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 industrialization.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.

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

 ,  ,   

.. 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 mechanization 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 dynamism 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 accumulation, we can then see the sector specificity of growth in a Marxist approach (see Tregenna, ).

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    



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 specificity 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 producing 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 conceptualizations 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 sectorspecific conception of growth. Marx’s concern is with the overall dynamics of accumulation 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

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

 ,  ,   

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 propertyless 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, highlights 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 industrialization 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 developed 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 ().

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    



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 economic 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 development 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’ (: ). Industrialization 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 conceptualization, specifically a lack of emphasis on class relations and dynamics in understanding 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 contradictions, 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

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

 ,  ,   

different dimensions of interdependencies between fractions of capital, industrial sectors, and the state. Their analysis involves economic and political scrutiny (including 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’ development (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 mainstream 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

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    



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, marginalization, 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 interconnections of the world capitalist system mean that the development of one affects the prospects for the development of others, with acute competition limiting the prospects 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 socializing 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

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

 ,  ,   

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 employment, 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

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    



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 governments 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 gasbased 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.’

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

 ,  ,   

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 unemployment 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 ..

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    



. 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, labourcentred co-operative approaches that focus on workers’ democracy in the local organization of production, and examples of industrial policy under participatory planning systems. There are very broad categorizations to organize our discussion, with considerable 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.

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

 ,  ,   

Statist models prioritized the development of productive forces over the development 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 industrialization, 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 centralization 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

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    



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 abundance. 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 compatibility 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 cooperatives of Spain’s Basque region. These local approaches stress the role of development 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/managers 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

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

 ,  ,   

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 operations, 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

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    



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 political 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 environments, 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 participation 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 development, 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, institutional 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 selfmanagement that replaced the enterprise in law. Individual BOALs then worked

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

 ,  ,   

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 deepening 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 Rectification 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, economic 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

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    



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 production, 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 development. 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 antecedents 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 understanding 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 production, is concerned with the capitalist basis of production, not primarily with industrial production. We have argued, therefore, that radical industrial policy foregrounds class

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

 ,  ,   

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 understanding 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 contradictions of the state are exploited and there is a concern with meeting basic social needs, maximizing employment-generating linkages, strengthening labour and democracy, 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 organization raises issues seemingly out of fashion in industrial policy circles and literature: the economic and social benefit of workplace democracy in terms of improved conditions 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

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    



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 industrial 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. Princeton, 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

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

 ,  ,   

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 SaadFilho (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 Production Systems: A Study of Kolkata, India’, Work and Occupations (): –. Blankenburg, Stephanie, Gabriel Palma, and Fiona Tregenna () ‘Structuralism’, in Lawrence 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 Longterm 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 Developmental 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. –.

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    



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 Perspective. 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 Perspectives (): –. 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 Perspectives’, 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 (): –.

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

 ,  ,   

Gerschenkron, Alexander () Economic Backwardness in Historical Perspective. Cambridge, 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 Offshoring 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//socialcollapse-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.

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    



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-thecontemporary-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 (): –.

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

 ,  ,   

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/ditccomd_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-warmingmust-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 (): –.

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  .............................................................................................................

   .............................................................................................................

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  ......................................................................................................................

                                            The Case of ASEAN .............................................................................................................

 .    

. R E I, T C  ASEAN I P

.................................................................................................................................. A decades of efforts to transform Southeast Asia into a resilient regional economy, the Association of Southeast Asian Nations (ASEAN)—a regional intergovernmental 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 competitiveness 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, Malaysia, 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.

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

 .    

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 components are traded without paying full import duties, have made South East Asia an attractive region for automotive manufacturing. ASEAN’s BBC scheme, first introduced 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, technological 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,

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     : 



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 competitiveness. 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 Economic 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 technological 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).

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

 .    

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 Cooperation (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 .

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     : 



 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 valueadded 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, : ).

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

 .    

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 compounded 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 developments. 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 collaboration (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

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     : 



was motivated by the political aim of weakening the potential spread of ideology even though contemporary developments may suggest otherwise. There is no official statement 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. Exportoriented 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 transformation 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 economies.¹² By the mid-s, manufacturing had become the primary source of economic 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 nonalignment 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.

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

 .    

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 improvement 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 production 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 cooperation 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.

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     : 



international production base, attract foreign direct investments, and expand the intraASEAN 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 standardized 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 economies 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 connectivity 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.

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

 .    

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, ).

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     : 



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 government 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 broadbased 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

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

 .    

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 implementation of the ASEAN Industrial Complementation Arrangement (AICA) in .²⁴ AICA allows for specialization in a narrower range of products by facilitating manufacturers 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 (BB) 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 BB, 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 investment 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 instrument, 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 requirements (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 controversy 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 Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which is the successor of the Trans-Pacific Partnership (TPP) after the US withdrawal (Sturgeon, Van Biesebroek, 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 enforcement 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 intellectual 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 ‘unicorns’ 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 interpretation 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 singlehandedly 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 international 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 Blueprint  was to strengthen and reinforce the characteristics of the ASEAN Economic 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 existing 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 cooperation 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 engagement 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 entrepreneurship 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 relatively 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 integration, however, it remains incoherent. The pace and quality of policy implementation 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 documented 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 development takes the form of information and experience sharing. More direct cooperation 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 property 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, particularly 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 coordinated 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 institutional 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, organizational, 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 manufacturers. 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 economies 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$ billion for Thailand from  to  (Phungtua, ). Indonesia and Thailand have made new commitments to place the auto industry at the centre of their national economic and development programmes. The government of Indonesia, for instance, has set a production target of  million vehicle units (from  million) and similarly the government of Thailand has increased its production target to  million vehicles (from  million) by .³⁶ Indonesia issued a presidential decree to restructure the country’s automotive industry away from traditional parts and components production to producing environmentally friendly and technologybased vehicles. The decree also outlined new initiatives for more R&D and investments in technology-based universities. The auto industry represents a small but growing sector. Recent figures show that the sector’s contribution to employment grew impressively from roughly , to , in Indonesia and similarly , to , in Thailand from  to  (UNIDO, ). The industry’s contribution to value-added per worker also showed a growth trend from US$, 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 production networks or global value chains. ³⁵ In North America, vehicle design, development, and specific parts and production are concentrated 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 capitalrich countries to emerging countries, providing better access to technology for production. 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 reenter 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 information, 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.

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

 .    

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 automotive 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 middleincome 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 productivity 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 improvements 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 analysis. 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.

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

 .    

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 programmes such as the ASEAN Industrial Joint Venture (AIJV) in , Brand-toBrand 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 cooperation, encouraging increased intra-ASEAN trade, FDI flows, and technological transfers. 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 production 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 domestic 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 competitive 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 valueadded 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 multinational firms. Stakeholders need to rethink regional industrial policies within the existing intricate web of global production. Policymakers should reconsider the aim of regional integration 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 valueadded trap’, or increased specialization in low value-added labour-intensive manufacturing. 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 upgrading 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’, Ritsumeikan International Affairs : –. Ariff, Mohammed and Hal Hill () Export-oriented Industrialisation: The ASEAN Experience. London: Routledge. ASEAN-Japan Center () ‘Global Value Chains in ASEAN: A Regional Perspective’, ASEAN Promotion Center on Trade, Investment, and Tourism. January.

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 .    

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 SouthEast 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 Upgrading 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 International 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.) Rethinking 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 Confrontation?’, 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 (): –.

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     : 



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 Challenges Ahead’. Center for Development Economics , Department of Economics, Williams College.

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

 .    

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 Mediumsized 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 (): –.

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     : 



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 Management (): –. 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.

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 .    

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 Development of the ASEAN Industrial Cooperation Arrangement’, Review of International Political Economy (): –.

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  ......................................................................................................................

                   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 industrial 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 development 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 balanceof-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, ). Moreover, the dependence on key imports at different stages of the development process— particularly technology, capital, and intermediate goods—highlights possible structural

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

 -   

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 conventional 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 industrialization 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. Conventional 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,

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    



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.

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

 -   

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 sophisticated 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 liberalization, 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 generations 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 underutilized 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, : ).

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    



While Smith’s observations have been obscured by conventional trade models, development economists and economic historians have long recognized that policymakers 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., ).

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

 -   

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 developing 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

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    



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 productivity 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.

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

 -   

Structural transformation can also proceed through the gradual process of moving towards higher value-added and more productive activities and the increasing sophistication of the goods produced. Empirical evidence has demonstrated that countries that have managed to upgrade their productive structures and export more sophisticated 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 transformation 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 (Hirschman, ). 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 linkages’), which may therefore expand public expenditure. The creation of such income linkages can strengthen the self-reinforcing aspect of industrialization through increasing 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

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    



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 industrialization 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 hyperglobalization marked by large flows of footloose capital and the reorganization of production around global value chains (GVCs). Advances in information and communication 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

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

 -   

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 concentrate 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 employment, and integrating into global trade. Accordingly, policymakers are increasingly turning to integration and upgrading in GVCs as a means of driving economic development 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 development 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.

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    



Digital manufacturing value chain with corrective policies

Traditional manufacturing value chain

R&D

Digital manufacturing value chain without corrective policies 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

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 -    GDP

2005 Distance from Final Demand

3.0

7500

2.5

Country

3.0

Bulgaria Brazil China Indonesia India Mexico Romania Russia Turkey

2.0

1.5

1.0 30

40

3000 6000 9000

2.5

Bulgaria Brazil China Indonesia India Mexico Romania Russia Turkey

2.0

1.5

1.0

50

30

Participation

40

50

Participation 2005–2011

Country

3.0

Distance from Final Demand

GDP

2011

2500 5000 Distance from Final Demand



Bulgaria Brazil China Indonesia India Mexico Romania Russia Turkey

2.5

2.0

1.5

Year 1.0 30

40

50

2005 2011

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 assembly 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.

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     GDP

2005

Country

1.5

1.0 1.0

1.5

2.0

2.5

9000

2.5

Bulgaria Brazil China Indonesia India Mexico Romania Russia Turkey

2.0

6000

Distance from Final Demand

Distance from Final Demand

2.5

3000

3.0

5000 7500

GDP

2011

2500

3.0

Country

2.0

1.5

1.0 1.0

3.0

Distance from primary factors of production

1.5

2.0

2.5

3.0

Bulgaria Brazil China Indonesia India Mexico Romania Russia Turkey

Distance from primary factors of production

2005-2011

Country

3.0

Distance from Final Demand



Bulgaria Brazil China Indonesia India Mexico Romania Russia Turkey

2.5

2.0

1.5

Year 1.0 1.0

1.5

2.0

2.5

3.0

2005 2011

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

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

 -   

Brazil—Sectoral Positioning (2005–2011) 4.0

Russia—Sectoral Positioning (2005–2011) 4.0

Year

Year

2007 2008

3.0

2009 2010 2011

2.5

Industry

2.0

Manufacturing Primary

1.5 2.0

2.5

3.0

2006

3.5

2007 2008

3.0

2009 2010 2011

2.5

Industry

2.0

Manufacturing Primary

1.5

Services 1.5

3.5

Services 1.5

2.0

2.5

3.0

3.5

Downstreamness

Downstreamness

India—Sectoral Positioning (2005–2011)

China—Sectoral Positioning (2005–2011)

4.0

Distance from Final Demand

2005

Distance from Final Demand

2006

3.5

4.0

Year

Year

2005 2006

3.5

2007 2008

3.0

2009 2010 2011

2.5

Industry

2.0

Manufacturing

2005

Distance from Final Demand

Distance from Final Demand

2005

2006

3.5

2007 2008

3.0

2009 2010 2011

2.5

Industry

2.0

Manufacturing

Primary

1.5

Services 1.5

2.0

2.5

3.0

Downstreamness

3.5

Primary

1.5

Services 1.5

2.0

2.5

3.0

3.5

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 fragmented into stages involving separate parts and components. Consequently, manufacturing 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.

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    



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 straightforward 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 middleincome countries, wider fragmentation does not have the same effects in low-income economies. This heterogeneity across income groups suggests that the level of economic 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—

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

 -   

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 commoditybased 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 distribution of those benefits. In developed countries, the concern is that low and mediumskilled 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,

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    



). 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 production 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 knowledge creation (running training programmes, using foreign-licensed technology, possessing 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 spillovers. 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 literature is that while participation of developing countries in GVCs has increased tremendously 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

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

 -   

Table 9.1 Uneven returns in the iPod value chain Function

Supplier

Gross margin

Operating margin

Return on assets

Controller chip Les firm Video chip Primary memory Battery Retailer Display Hard drive Assembly Distribution Minor memory Minor memory

Portal Player Apple Broadcom Samsung TDK Best Buy Toshiba-Matsushita Toshiba Inventec Appl. Ingram Micro Elpida Spansion

44.8 29.0 52.5 31.5 26.3 25.0 28.2 26.5 8.5 5.5 17.6 9.6

20.4 11.8 10.9 9.4 7.6 5.3 3.9 3.8 3.1 1.3 0.1 –14.2

19.1 16.6 9.8 10.3 4.8 9.6 1.8 1.7 6.1 3.1 –1.0 –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 productive 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).

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    



.. 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 activities, 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.

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

 -   

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 interventions 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. Meanwhile, 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 institutions. 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’

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    



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 importsubstituting 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

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

 -   

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 sophisticated 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 countries 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 contracts (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 sourcing 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 domestic capabilities through technical vocational education and training programmes).

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    



.. 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 integration. 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 development 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 therefore 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 distribution. Furthermore, given the size and the capacity constraints faced by many developing 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 environment conducive to GVC participation and that would make domestic firms competitive 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 complementarities, 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

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

 -   

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 characteristics that have been identified in the literature as critical to assessing the export structure of an economy and its potential to accelerate industrialization: the diversification of production, the level of sophistication of the exported products, and upgrading 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 labourintensive 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 economic arrangements.

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    

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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 Inclusive 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 Evidence’. 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 Rethinking 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.

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  ......................................................................................................................

  

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 . 

. 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 completion. 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

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  



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 industrialization 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

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

 . 

Per- W price in 2018 dollars 100

1976

1985 10 2003

2008

m = 28.5% 1 2015

0.1 1

10 historic prices (Maycock)

100

1,000

2019e 10,000 100,000 1,000,000 Cumulative capacity (MW)

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

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  



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.

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

 . 

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 labourintensive (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 instruments 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.

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  



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 industrializing 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.

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

 . 

successfully on global bond markets in March , raising US$ million in funds to be invested in green projects by Korean firms around the world, the idea has caught on in a big way. China in particular has taken to green bonds, viewing them as a way of tapping global capital markets to fund its green operations both at home and abroad (under the Belt and Road Initiative). Green bonds are diffusing to late latecomers around the world. The Bank Windhoek in Namibia, for example, issued a green bond in  targeted at renewable energy projects as well as at reducing carbon emissions from fossilfuel activities (a controversial aspect).⁹ The scale of green bond issuances continues to grow, reaching US$ 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 development 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 initiatives to work in driving green growth, or greening industrial policy?

. E I P/G G I  I  C

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.. 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/indiasgreen-shift-to-renewables-how-fast-is-it-happening/.

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   Yearly Addition in GW



Total Solar Capacity in GW

30

25

20

15

10

5

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 recognized 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.

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 . 

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 dangerously 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 AsiaPacific 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.

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  



40%

35%

30%

Proportion of the installed power capacity from WWS sources

25%

20%

15%

Proportion of 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 windturbine 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 windturbine giants like Goldwind were equipped with long credit lines by CDB, and leveraged latecomer technology to good effect to acquire new technologies like permanent magnet direct drive (PMDD), which facilitated the expansion of the windpower 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 overcapacity, 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

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

 . 

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 ().

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  



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.

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

 . 

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 ().

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  



. 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.’

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

 . 

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 advan