In order to catch up with more advanced countries, low- and lower-middle income countries
need to diversify their economies and accelerate structural change. In view of multiple
market failures and huge capability gaps between local companies and their foreign
competitors, few experts question the need for industrial policies. But two major issues are
very much open to controversial debate:

First, what does “inclusive and sustainable industrial policy” mean in the context of low- and
lower-middle income countries? In many of these countries, the bulk of the workforce is
engaged in informal microenterprises; the share of reasonably productive and internationally
competitive firms and jobs (those usually targeted by industrial policies) tends to be very
small. What, then, can industrial policy do to deal with informality and small-scale productive
activities in an inclusive way? At the same time, an increasing number of low- and lowermiddle
income countries have adopted “green growth” strategies, but these are not yet well
aligned with their industrial development strategies. What does “green industrial policy” imply
for these countries? Do they have to set the course for a new type of resource-efficient
growth to avoid being locked into unsustainable growth paths, or should they first of all
exploit their growth potential to reduce poverty quickly, taking into account that their per
capita resource consumption is generally low?

Second, how much hope can we set in strategic industrial policies in environments where
public administration typically lacks resources and capabilities, and informal institutions are
deeply entrenched in public decision-making processes? Many developing countries do not
have established routines of evidence-based policy-making and also face a shortage of
adequately trained national analysts and programme implementers. This may lead to an
extensive dependency on international advisers, unrealistic strategic objectives, ad-hoc and
uninformed decision-making, and the deployment of inappropriate policy tools. Moreover,
public and private spheres of decision-making are never clearly separated, as in an ideal2
type Weberian welfare-oriented agency. Hence, clientelism and collusive behaviour are
hardly evitable, especially when policies target specific firms, sectors or regions. In such
conditions, attempts to correct market failures may actually lead to even worse outcomes. In
a nutshell, the countries that most urgently need industrial policies may be the least capable
of managing them well. While this dilemma is widely acknowledged, there is little agreement
on how to deal with it. Some scholars are hopeful, pointing to the fact that some of the most
successful economies started their industrial take-off despite weak governance; many Asian
countries created institutions for industrialization and growth and started improving their
governance only later. More pessimistic scholars show that selective policies are particularly
prone to political capture and may thereby “fuel” corruption and stabilize exclusive political
arrangements; hence, they argue for a certain minimum of transparency, accountability and
good public management practices before major selective interventions are made.