The Role of Government in Building Industrieal Competitiveness

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QEH Working Paper Series – QEHWPS111

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Working Paper Number 111 Reinventing industrial strategy: The role of government policy in building industrial competitiveness Sanjaya Lall 1 The paper reviews the nature of current globalization and the growing divergence in competitive performance in the developing world. It considers the case for industrial policy, contrasting the neoliberal with the structuralist approach. It argues that there is a valid case for selective interventions in overcoming the market and institutional failures in building the capabilities required for industrial development. It describes the strategies adopted by the Asian Tigers to build industrial competitiveness, and concludes with lessons for other developing countries. The kinds of industrial policy needed in the current setting are different from traditional industrialisation strategies, but globalization and technical change do not eliminate the need for intervention. On the contrary, given path dependence, cumulativeness and agglomeration economies, they increase it. There is a need to reconsider the rules of the game constraining the exercise of industrial policy, and for international assistance in designing and implementing appropriate policies.

October 2003

This paper was prepared for the G24 Intergovernmental Group on Monetary Affairs and Development. I am grateful to Larry Westphal for discussions and detailed comments on an earlier draft, to Robert Wade for sending me pre-publication copies of papers on the issues addressed here, and to Manuel Albaladejo for help with the data.

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QEH Working Paper Series – QEHWPS111
1. Introduction

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As liberalization and globalization gather pace, concern with industrial competitiveness is growing, not just in developing countries but also in mature industrial ones. But it is the former that face the most intense competitive pressures: many find that their enterprises are unable to cope with rigours of open markets – in exporting and in competing with imports – as they open their economies. Some countries are doing very well; the problem is that many are not. Diverging industrial competitiveness in the developing world is one of the basic causes of the growing disparities in income that are now a pervasive feature of the world scene. The immense potential that globalization offers for industrial growth is being tapped by a relatively small number of countries, while liberalization is driving the wedge deeper. Much of this is widely known. The Millennium Development Goals of the United Nations were conceived to deal with just such concerns. However, there is little consensus yet on what can be done to deal with them, particularly in the industrial sphere. What can poor countries do to strengthen their industrial competitiveness in the international economic setting? Should they persist with liberalization and hope that free market forces will stimulate growth and bring about greater convergence? Or is there a need to lo ok again at national and international policy? What, in sum, is the correct role of government in stimulating industrialization and using it as an engine for growth and structural transformation? There are essentially two approaches to the issue of policy: neoliberal and structuralist. The neoliberal approach is that the best strategy for all countries and in all situations is to liberalize – and not do much else. Integration into the international economy, with resource allocation driven by free markets, will let them realise their ‘natural’ comparative advantage. This will in turn optimize dynamic advantage and so yield the highest rate of sustainable growth attainable – no government intervention can improve upon this but will only serve to reduce welfare. In this approach, the only legitimate role for the state is to provide a stable macro-economy with clear rules of the game , open the economy fully to international product and factor flows, give a...
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