Industrial policies in low and lower middle income countries

Globalization exerts pressure on nation states to adapt their economic structures and increase the competitiveness of their main economic activities. Especially in times of financial and economic crisis, discussion centres on the role of the state in absorbing economic down-turn in the short term while enhancing competitiveness and economic growth in the long term.

Industrial policy may play a major role in coping with these challenges. However, while consensus is increasing about appropriate industrial policies for industrialised and newly industrialising countries, uncertainty prevails on what works in developing countries. Modern industrial policy is about participatory organisation of search and learning processes rather than top-down rules and subsidies. Still, interventions that influence the sectoral composition of an economy necessarily entail the risks of misallocation and political capture. The challenge is thus to carefully balance policies in a way that both market and government failures are minimised, which is particularly difficult for developing countries. On the one hand, they are normally characterised by low levels of diversification in the private sector; lack of competitiveness especially in knowledge-intensive industries with high value added, large shares of the work force in non-registered economic activities, inefficient production facilities and considerable productivity gaps, both within the domestic economy and vis-à-vis industrialized countries. On the other hand, developing countries often also lack strong, well-funded and accountable institutions and therefore face special risks of political capture.

Against this background, the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) conducts a comparative research project on “Industrial policy in low and lower-middle income countries”. The project comprises a general report on the scope of industrial policies in developing countries as well as field studies on ten country cases: Cambodia, Egypt, Ethiopia, Ghana, Mozambique, Namibia, Nigeria, Syria, Tunisia and Vietnam. The project aims at a better understanding of the prospects of success and the risks of industry policies in countries with differences in private sector development and governance efficiency.