Market-led explanation for successful industrial development
• Market-led development – Loosely associated with “Washington Consensus”– Long history
• Adam Smith’s Wealth of Nations (1776)
– Main claims• Minimal government
– Provide order, protect property rights, enforce contracts, provide basic infrastructure, provide basic education» Government should not finance or own firms» Government should not use taxes to manipulate firms’ behavior
• Free markets– Firms should be free to enter/exit the market – Prices should be free to reflect supply and demand
» Government should not provide subsidies
• Free trade– Goods should flow freely across borders
» Government should not employ tariff barriers, other obstacles to free trade
State-led explanation for successful industrial development
• State-led development – Loosely associated with “Beijing Consensus”– Long history
• Friedrich List’s, National System of Political Economy (1841)
– Main claims• State-led industrialization is key element in establishing an
independent national state and economy• Active government and industrial policy
– “Infant” industries require government assistance» Protection from competition» Assistance with capital accumulation» Assistance with technology acquisition
• Technocratic bureaucracy– Effective government assistance requires competent bureaucracy
» Historically conditioned, hard to build
Industrial policy
• Definition– “coordinated government action aimed at
directing production resources to domestic producers in certain industries to help them become more competitive (Tyson as cited by Stiglitz)”
– Shape a country’s relationship to the global economy
– Gereffi, p.23
– ISI and EOI are examples of industrial policies
Tools of industrial policy
• Tariffs to protect targeted industries• Tax holidays for targeted industries • Subsidized inputs (especially credit) for
targeted industries • State-owned enterprises in targeted industries • Exchange rate manipulation to favor targeted
industries
Technocratic bureaucracy
– Merit/skill-based recruitment technocrats, specialized state agencies
– Monitoring of technocratic performance– Performance-based rewards• Competitive salaries, performance-based promotion
– Insulation from direct societal pressures – Power to formulate and implement policy– Belief in bureaucratic mission